AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 4, 2001
REGISTRATION NO. 333-94623
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 7
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
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 Identification
Incorporation or Organization) industrial classification 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)
--------------------------
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
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE ON OR AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
--------------------------
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 MAY 4, 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.
Our common stock has been approved for listing, subject to official notice of
issuance, on the New York Stock Exchange under the symbol "ADS."
SEE "RISK FACTORS" BEGINNING ON PAGE 7 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.
------------------------
BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
THE DATE OF THIS PROSPECTUS IS , 2001.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary................... 1
Risk Factors......................... 7
Special Note Regarding
Forward-Looking Statements......... 18
Use of Proceeds...................... 19
Dividend Policy...................... 19
Dilution............................. 20
Capitalization....................... 21
Unaudited Pro Forma Consolidated
Financial Information.............. 22
Selected Historical Consolidated
Financial and Operating
Information........................ 26
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............. 29
Business............................. 46
Management........................... 61
PAGE
----
Principal Stockholders............... 73
Certain Relationships and Related
Transactions....................... 76
Description of Capital Stock......... 80
Shares Eligible for Future Sale...... 83
Underwriting......................... 84
Legal Matters........................ 87
Experts.............................. 87
Where You Can Find More Information.. 87
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 transaction services, credit services and
marketing services to retail companies in North America. We focus on
facilitating and managing electronic transactions between our clients and their
customers through multiple distribution channels including in-store, catalog and
the Internet. Our credit and marketing services assist our clients in
identifying and acquiring new customers, as well as helping to increase the
loyalty and profitability of their existing customers.
We have a client base in excess of 300 companies, comprised mostly of
specialty retailers, petroleum retailers, supermarkets and financial services
companies. We generally have long-term relationships with our clients, with
contracts typically ranging from three to five years in duration. The Limited,
together with its retail affiliates, including Victoria's Secret Stores,
Victoria's Secret Catalogue, Express, Lane Bryant, Bath & Body Works, Lerner New
York, Henri Bendel and Structure, is our largest client, representing
approximately 25.3% of our 2000 consolidated revenue.
OUR PRODUCTS AND SERVICES
Our products and services are centered around three core
capabilities--Transaction Services, Credit Services and Marketing Services. We
have traditionally marketed and sold our products and services on a stand-alone
basis, but increasingly are marketing and selling them on a bundled and
integrated basis. Our products and services and target markets are listed below.
SEGMENT PRODUCTS AND SERVICES TARGET MARKETS
- ----------------------------- --------------------------------------- -------------------------
TRANSACTION SERVICES - Transaction Processing - Specialty Retail
- Network Services - Petroleum Retail
- Merchant Bankcard Services - Regulated and
- Account Processing and Servicing De-regulated Utility
- Card Processing - Mass Transit
- Billing and Payment Processing - Tollways
- Customer Care - Parking
CREDIT SERVICES - Private Label Receivables Financing - Specialty Retail
- Underwriting and Risk Management - Petroleum Retail
- Merchant Processing
- Receivables Funding
MARKETING SERVICES - Loyalty Programs - Specialty Retail
- Air Miles - Petroleum Retail
- One-to-One Loyalty - Supermarkets
- Database Marketing Services - Financial Services
- Enhancement Services - Regulated and
- Direct Marketing De-regulated Utility
1
OUR MARKET OPPORTUNITY AND GROWTH STRATEGY
Our services are applicable to the full spectrum of commerce opportunities
involving companies that sell products and services to individual consumers.
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 generates valuable
information on individual consumers and their purchasing preferences. Many
retailers, however, lack the economies of scale and core competencies necessary
to support their own transaction processing infrastructure or credit card or
database operations. In addition, we see an increasing acceptance by companies
to outsource the development and management of their marketing programs, such as
loyalty programs and database marketing services.
Our current strategy to capitalize on these opportunities includes:
- increasing the penetration of our products and services to existing
clients;
- expanding our client base in our existing market sectors;
- continuing to expand our services and capabilities to help our clients
succeed in multi-channel commerce; and
- considering focused, strategic acquisitions and alliances to enhance our
core capabilities or increase our scale.
OUR LIQUIDITY SOURCES
We finance our growth through cash from operations, issuing certificates of
deposit through our credit card bank subsidiary, a $100.0 million revolving loan
commitment and a securitization program. We utilize cash flow from operations,
certificates of deposit and the revolving loan commitment to finance our
operating activities and to fund credit enhancement and seller's interest in our
securitizations. We finance substantially all our private label credit card
receivables through a securitization program, which involves the packaging and
selling of both current and future receivable balances of private label credit
card accounts to a master trust. Our securitizations are treated as sales for
accounting purposes and, accordingly, securitized receivables are removed from
our balance sheet. We retain a residual interest in the trust that is commonly
referred to as an "interest only strip".
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 several complementary
portfolio and business acquisitions.
As of April 30, 2001, Welsh, Carson, Anderson & Stowe beneficially owned
approximately 74.3% of our common stock, and The Limited, through its wholly
owned subsidiary Limited Commerce Corp., beneficially owned approximately 25.3%
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 continued ownership of our common stock above minimum
thresholds.
Our corporate headquarters are located at 17655 Waterview Parkway, Dallas,
Texas 75252, and our telephone number is 972-348-5100.
2
THE OFFERING
Common stock offered......................... 13,000,000 shares
Common stock to be outstanding after the
offering................................... 70,936,136 shares
Use of proceeds.............................. We intend to use approximately
$100.8 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 April 30,
2001, these shares of Series A preferred stock were convertible into
10,273,990 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 up to:
- 4,351,105 shares that we may issue upon the exercise of stock options
outstanding as of April 30, 2001 at a weighted average exercise price of
$12.43 per share;
- 3,698,743 additional shares that we may issue under our stock option and
restricted stock plan;
- 1,500,000 shares that we may issue under our employee stock purchase plan;
and
- 1,950,000 additional shares that we may issue upon exercise of the
underwriters' over-allotment option.
3
SUMMARY CONSOLIDATED FINANCIAL DATA
In connection with your review of the summary consolidated financial data
you should consider the following information for a better understanding of the
data presented:
RECAST 1998. 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 to our results for 1999 and 2000, we have recast our
historical operating results to a calendar year basis for the year ended
December 31, 1998. In our opinion, the recast historical financial information
reflects all normal recurring adjustments necessary for a fair presentation of
such financial information.
QUARTERLY INFORMATION. The summary consolidated financial data for the
three months ended March 31, 2000 and 2001 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 three months ended March 31, 2001 are not necessarily indicative of results
for the full year.
PRO FORMA INFORMATION. We have also included unaudited pro forma
information for 2000. The data contained in the pro forma column give effect to
the Utilipro acquisition as if it had been consummated on January 1, 2000. The
supplemental pro forma loss per share data give effect to the conversion of all
outstanding Series A preferred shares 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 March 31, 2001. 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.
USE OF OPERATING EBITDA. 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 to monitor compliance with the
financial covenants in our amended credit agreement, such as debt-to-operating
EBITDA, interest coverage ratios and minimum operating EBITDA. We also use
operating EBITDA as an integral part of our internal reporting to measure the
performance and liquidity of our reportable segments. In addition, we believe
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.
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.
4
HISTORICAL PRO FORMA
----------------------------------------------------------------- ---------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) FOR THE
FOR THE THREE MONTHS THREE
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31, FOR THE YEAR MONTHS
------------------------------------- ------------------------- ENDED ENDED
ACTUAL DECEMBER 31, MARCH 31,
RECAST --------------------------------------------------- ------------- -----------
1998 1999 2000 2000 2001 2000 2001
----------- ---------- ---------- ----------- ----------- ------------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA
Total revenue................ $ 451,537 $ 583,082 $ 678,195 $ 165,547 $ 180,692 $695,927 $184,832
Cost of operations........... 360,875 466,856 547,985 134,571 143,258 572,605 147,275
General and administrative... 23,364 35,971 32,201 7,505 9,333 32,201 9,333
Depreciation and other
amortization............... 8,782 16,183 26,265 5,997 6,367 27,526 6,741
Amortization of purchased
intangibles................ 46,977 61,617 49,879 13,795 11,113 51,560 11,393
---------- ---------- ---------- ---------- ---------- -------- --------
Total expenses............. 439,998 580,627 656,330 161,868 170,071 683,892 174,742
---------- ---------- ---------- ---------- ---------- -------- --------
Operating income............. 11,539 2,455 21,865 3,679 10,621 12,035 10,090
Other non-operating
expense.................... -- -- 2,477 2,476 -- 2,477 --
Interest expense............. 29,295 42,785 38,870 8,776 9,635 40,642 9,930
Income tax expense
(benefit).................. (2,622) (6,538) 1,841 716 933 (2,162) 611
---------- ---------- ---------- ---------- ---------- -------- --------
Income (loss) from continuing
operations................. (15,134) (33,792) (21,323) (8,289) 53 (28,922) (451)
Income (loss) from
discontinued operations,
net of taxes............... (3,948) 7,688 -- -- -- -- --
Loss on disposal of
discontinued operations,
net of taxes............... -- (3,737) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- -------- --------
Net income (loss)............ $ (19,082) $ (29,841) $ (21,323) $ (8,289) $ 53 $(28,922) (451)
========== ========== ========== ========== ========== ======== ========
Loss per share from
continuing operations--
basic and diluted.......... $ (0.37) $ (0.78) $ (0.60) $ (0.21) $ (0.04) $ (0.76) $ (0.05)
Loss per share--basic and
diluted.................... $ (0.46) $ (0.70) $ (0.60) $ (0.21) $ (0.04) $ (0.76) $ (0.05)
Weighted average shares used
in computing per share
amounts--basic and
diluted.................... 41,308 47,498 47,538 47,529 47,568 47,538 47,568
Supplemental pro forma loss
per share from continuing
operations--basic and
diluted.................... $ (0.51) $ (0.01)
Supplemental pro forma loss
per share--basic and
diluted.................... $ (0.51) $ (0.01)
Weighted average shares used
in computing supplemental
pro forma per share
amounts--basic and
diluted.................... 56,936 56,966
OTHER FINANCIAL DATA
Calculation of Operating
EBITDA:
Operating income........... $ 11,539 $ 2,455 $ 21,865 $ 3,679 $ 10,621 $ 12,035 10,090
Depreciation and other
amortization............. 8,782 16,183 26,265 5,997 6,367 27,526 6,741
Amortization of purchased
intangibles.............. 46,977 61,617 49,879 13,795 11,113 51,560 11,393
---------- ---------- ---------- ---------- ---------- -------- --------
EBITDA................... 67,298 80,255 98,009 23,471 28,101 91,121 28,224
Plus change in deferred
revenue................ 20,729 91,149 40,845 10,794 13,244 40,845 13,244
Less change in redemption
settlement assets...... 11,838 63,472 18,357 3,337 6,163 18,357 6,163
---------- ---------- ---------- ---------- ---------- -------- --------
Operating EBITDA......... $ 76,189 $ 107,932 $ 120,497 $ 30,928 $ 35,182 $113,609 35,305
========== ========== ========== ========== ========== ======== ========
Operating EBITDA as a
percentage of revenue...... 16.9% 18.5% 17.8% 18.7% 19.5% 16.3% 19.1%
SEGMENT OPERATING DATA
Transactions processed....... 1,134,902 1,839,857 2,519,535 566,275 629,131
Statements generated......... 130,895 132,817 127,217 34,333 31,921
Average securitized
portfolio.................. $1,898,851 $2,004,827 $2,073,574 $2,139,647 $2,214,044
Credit sales................. $3,049,151 $3,132,520 $3,685,069 $ 755,114 $ 780,429
Air Miles reward miles
issued..................... 611,824 1,594,594 1,927,016 432,252 524,237
Air Miles reward miles
redeemed................... 158,281 529,327 781,823 162,312 192,023
5
AS OF MARCH 31,
AS OF DECEMBER 31, ---------------------------
------------------------------------ 2001 PRO FORMA
1998 1999 2000 2001 AS ADJUSTED
---------- ---------- ---------- ---------- --------------
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents................................. $ 47,036 $ 56,546 $ 116,941 $ 58,756 $ 111,353
Credit card receivables and seller's interest............. 139,458 150,804 137,865 125,013 125,013
Redemption settlement assets, restricted.................. 70,178 133,650 152,007 158,171 158,171
Intangibles and goodwill, net............................. 362,797 493,609 444,549 457,011 457,011
Total assets.............................................. 1,075,707 1,301,263 1,420,606 1,304,832 1,355,928
Deferred revenue--service and redemption.................. 158,192 249,341 290,186 303,430 303,430
Certificates of deposit and other receivables funding
debt.................................................... 147,984 116,900 139,400 119,700 119,700
Long-term and subordinated debt........................... 332,000 318,236 296,660 294,575 193,750
Total liabilities......................................... 780,902 921,791 1,058,215 952,609 851,784
Series A preferred stock.................................. -- 119,400 119,400 119,400 --
Total stockholders' equity................................ 294,805 260,072 242,991 232,823 504,144
6
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 GENERAL BUSINESS OPERATIONS
TEN CLIENTS WERE RESPONSIBLE FOR 63% OF OUR CONSOLIDATED REVENUES LAST YEAR, AND
THE LOSS OF ANY OF THESE CLIENTS COULD CAUSE A SIGNIFICANT DROP IN OUR
REVENUE.
We depend on a limited number of large clients for a significant portion of
our consolidated revenue. Our 10 largest clients were responsible for
approximately 63% of our consolidated revenue during the year ended
December 31, 2000, with The Limited and its retail affiliates representing
approximately 25% of our 2000 consolidated revenue. A decrease in revenue from
any of our significant clients for any reason, including a decrease in pricing
or activity, or a decision to either utilize another service provider or to no
longer outsource some or all of the services we provide, could have a material
adverse effect on our consolidated revenue.
TRANSACTION SERVICES. Our 10 largest clients in this segment were
responsible for approximately 71% of our Transaction Services revenue in 2000.
The Limited and its retail affiliates were the largest Transaction Services
client in 2000, representing approximately 28% of this segment's 2000 revenue,
and Brylane, our second largest Transaction Services client, was responsible for
approximately 10% of this segment's 2000 revenue. Equiva Services, LLC was
responsible for approximately 8% of this segment's 2000 revenue. Our contracts
with The Limited and its retail affiliates and Brylane expire in 2006, and our
contract with Equiva expires in December 2001.
We provide transaction processing services to Equiva which is the service
provider to Shell-branded locations in the United States. Equiva is one of our
10 largest clients both in the Transaction Services segment and on a
consolidated basis. 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. 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 from Equiva would be further
adversely affected.
CREDIT SERVICES. Our two largest clients in this segment were responsible
for approximately 80% of our Credit Services revenue in 2000. The Limited and
its retail affiliates were responsible for approximately 59%, and Brylane was
responsible for approximately 21%, of our Credit Services revenue in 2000. Our
contracts with these clients expire in 2006. The Limited is currently planning a
restructuring involving some of its retail affiliates. The proposed
restructuring would involve a sale of Lane Bryant and the integration of
Structure into the Express brand name as Express Men's. While we have a contract
with Lane Bryant through 2006, we cannot assure you that an acquirer of Lane
Bryant would assume the credit card processing agreement that we currently have
with Lane Bryant or that the acquirer would continue Lane Bryant's marketing
strategy of utilizing private label credit cards. The integration of Structure
into Express could lead to the closing of stores and the name change could
adversely impact credit sales causing lower revenues for our Credit Services
segment.
7
MARKETING SERVICES. Our 10 largest clients in this segment were responsible
for approximately 61% of our Marketing Services revenue in 2000. Bank of
Montreal, Canada Safeway and The Limited and its retail affiliates were the
three largest Marketing Services clients in 2000. The Bank of Montreal
represented approximately 27%, Canada Safeway represented approximately 10% and
The Limited and its retail affiliates represented approximately 7% of this
segment's 2000 revenue. Our contracts with The Bank of Montreal and Canada
Safeway expire in March 2002 and December 2002, respectively, and our contract
with The Limited expires in September 2003.
OUR LARGEST CLIENT, THE LIMITED, IS A SIGNIFICANT STOCKHOLDER, AND AS A RESULT
IT HAS THE ABILITY TO INFLUENCE OUR CORPORATE AFFAIRS IN A MANNER THAT COULD
BE INCONSISTENT WITH THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Eight of our clients are retail affiliates of Limited Commerce Corp., our
second largest stockholder and a wholly owned subsidiary of The Limited. The
Limited, together with its retail affiliates, is our largest client. Limited
Commerce Corp. beneficially owned approximately 25.3% of our common stock as of
April 30, 2001 and, through a stockholders agreement, has the right to designate
up to two members of our board of directors. As a significant stockholder with
board representation, 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.
The interests of The Limited may not be aligned with the interests of our
company or other stockholders. The Limited could use its influence as a major
client and large stockholder to negotiate contracts with us that have terms that
are more favorable to The Limited than could be obtained by unaffiliated
retailers. In addition, The Limited could use its influence and could act to
hinder our ability to enter into contracts with its competitors.
COMPETITION IN OUR INDUSTRY IS INTENSE AND WE EXPECT IT TO INTENSIFY.
The markets for our products and services are highly competitive, and we
expect competition to intensify in each of those markets. Many of our current
competitors have longer operating histories, stronger brand names and greater
financial, technical, marketing and other resources than we do. We cannot assure
you that we will be able to compete successfully against our current and
potential competitors nor can we be sure that we will be able to successfully
market our services at our current levels of profitability.
THE MARKETS FOR THE SERVICES THAT WE OFFER MAY FAIL TO EXPAND OR MAY CONTRACT
AND THIS COULD NEGATIVELY IMPACT OUR GROWTH AND PROFITABILITY.
Our growth and continued profitability rely on acceptance of the services
that we offer. If demand for transaction, credit or marketing services
decreases, the price of our common stock could fall and you could lose value in
your investment. Loyalty and database marketing strategies are relatively new to
retailers, 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. Additionally, downturns in the economy or the
performance of retailers may result in a decrease in the demand for our
marketing strategies. Any decrease in the demand for our services for the
reasons discussed above or other reasons could have a material adverse effect on
our growth and revenue.
WE CANNOT ASSURE YOU THAT WE WILL EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS,
REALIZE THEIR FULL BENEFITS OR SUCCESSFULLY MANAGE OUR COMBINED COMPANY, AND
FUTURE ACQUISITIONS MAY RESULT IN DILUTIVE EQUITY ISSUANCES OR INCREASES IN
DEBT.
If we are unable to successfully integrate any future acquisition, 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 any
8
future acquisition may divert management's attention from our core operations,
which could harm our ability to timely meet the needs of our customers and could
damage our relationships with key clients.
To finance future acquisitions, we may need to raise funds either by issuing
equity securities or incurring debt. If we issue additional equity securities,
such sales could reduce the current value of our stock by diluting the ownership
interest of our stockholders. If we incur additional debt, the related interest
expense may significantly reduce our profitability. Additionally, we are likely
to use purchase accounting for future acquisitions and the related amortization
expense associated with goodwill and purchased intangibles may significantly
reduce our profitability.
WE MAY FACE DAMAGES AS A RESULT OF LITIGATION IN CONNECTION WITH THE BANKRUPTCY
PROCEEDINGS OF ONE OF OUR FORMER CUSTOMERS, SERVICE MERCHANDISE, AND A CLASS
ACTION SUIT FILED ON BEHALF OF A GROUP OF WORLD FINANCIAL CARDHOLDERS.
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. 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.
Service Merchandise has not specified the amount of damages that it is seeking
and has asked that the amount of any such damages be determined at trial. 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
for 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. The plaintiff
group of cardholders has not specified the amount of damages that it is seeking.
The amount of such damages, if any, would be determined at trial. See
"Business--Legal Proceedings." Due to the uncertainty inherent in litigation, we
cannot provide assurance that an ultimate result against World Financial in
either of these actions would not have a material adverse effect on us.
FAILURE TO SAFEGUARD OUR DATABASES AND CONSUMER PRIVACY COULD AFFECT OUR
REPUTATION AMONG OUR CLIENTS AND THEIR CUSTOMERS AND MAY EXPOSE US TO LEGAL
CLAIMS FROM CONSUMERS.
An important feature of our marketing and credit services is our ability to
develop and maintain individual consumer profiles. As part of our Air Miles
reward miles program, database marketing program and private label program, we
maintain marketing databases containing information on consumers' account
transactions. 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 be affected. Security and privacy
concerns may cause consumers to resist providing the personal data necessary to
support our profiling capability. The use of our loyalty, database marketing or
private label programs could decline if any well-publicized compromise of
security occurred. Any public perception that we released consumer information
without authorization could subject us to legal claims from consumers and
adversely affect our client relationships.
LOSS OF DATA CENTER CAPACITY OR INTERRUPTION OF TELECOMMUNICATION LINKS COULD
AFFECT OUR ABILITY TO TIMELY MEET THE NEEDS OF OUR CLIENTS AND THEIR
CUSTOMERS.
Our ability to protect our data centers against damage from fire, power
loss, telecommunications failure and other disasters is critical. 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
damage to our data centers or any failure of our telecommunication links that
9
interrupts our operations could adversely affect our ability to meet our
clients' needs and their confidence in utilizing us for future services.
AS A RESULT OF OUR SIGNIFICANT CANADIAN OPERATIONS, OUR REPORTED RESULTS WILL BE
AFFECTED BY FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE U.S. AND CANADIAN
DOLLARS.
A significant portion of our Marketing Services revenue is derived from our
Loyalty Group operations in Canada, which transacts business in Canadian
dollars. Therefore, our reported results from quarter-to-quarter will be
affected by changes in the exchange rate between the U.S. and Canadian dollars
over the relevant periods.
OUR HEDGING ACTIVITY SUBJECTS US TO OFF-BALANCE SHEET 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 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. 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.
OUR FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS MAY HARM OUR COMPETITIVE
POSITION, AND LITIGATION TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS OR DEFEND
AGAINST THIRD-PARTY ALLEGATIONS OF INFRINGEMENT MAY BE COSTLY.
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 infringement of
our intellectual property rights or misappropriation 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 resources. Any claims from third
parties may also result in limitations on our ability to use the intellectual
property subject to these claims.
RISKS PARTICULAR TO TRANSACTION SERVICES
AN INABILITY TO FULLY AND EFFECTIVELY INTEGRATE THE RECENT ACQUISITIONS OF SPS
AND UTILIPRO IN OUR TRANSACTION SERVICES SEGMENT COULD RESULT IN INCREASED
COSTS WHILE DIVERTING MANAGEMENT'S ATTENTION FROM OUR CORE OPERATIONS, HARM
OUR ABILITY TO TIMELY MEET THE NEEDS OF OUR CLIENTS AND DAMAGE OUR
RELATIONSHIPS WITH THOSE CLIENTS.
We are currently in the process of integrating the network transaction
processing business of SPS Payment Systems, Inc. we acquired in July 1999, and
are beginning to integrate the Utilipro operating assets we acquired in February
2001. We expect the SPS integration process to continue through the
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second quarter of 2001 and the Utilipro integration process to continue through
the third quarter of 2001. Although the majority of the integration process of
migrating the SPS systems to an in-house processing environment has proceeded as
planned, there were a number of service disruptions that occurred in the first
quarter of 2001 which resulted in an inefficient routing of transactions and a
backlog of authorizations. We cannot assure you that we will be able to fully or
successfully integrate SPS or Utilipro in a timely manner or at all. If we are
unable to successfully integrate the Utilipro operations or successfully
complete the SPS integration, we may incur substantial costs and delays or other
operational, technical or financial problems, any of which could harm our
business and adversely affect the trading price of our common stock. In
addition, management's attention may be diverted from core operations which
could harm our ability to timely meet the needs of our clients and their
customers and damage our relationships with those clients.
WE ARE DEPENDENT UPON TRANSACTION NETWORK SOLUTIONS, INC., FORMERLY KNOWN AS
PSINET TRANSACTION SOLUTIONS, FOR DATA TRANSMISSION SERVICES AND POINT-OF-SALE
DIAL-UP TRANSMISSION SERVICES, AND ANY FAILURE OF TRANSACTION NETWORK
SOLUTIONS TO PROVIDE THESE SERVICES COULD SIGNIFICANTLY DISRUPT OUR NETWORK
SERVICES OR INCREASE OUR COSTS BY REQUIRING US TO OBTAIN DATA TRANSMISSION
SERVICES FROM ANOTHER SUPPLIER.
We are dependent on Transaction Network Solutions for data transmission
services and point-of-sale dial-up transmission services for our network
services business. On April 3, 2001, an investor group led by GTCR Golder
Rauner, LLC purchased Transaction Network Solutions from PSINet, Inc. PSINet has
been experiencing significant liquidity and cash flow shortfalls that require
the addition of substantial capital, the availability of which is uncertain. If
PSINet were to declare bankruptcy, it is possible that parties to the bankruptcy
proceeding could attempt to undo the sale of Transaction Network Solutions to
Golder Rauner and seek to reject our contract with Transaction Network
Solutions. In the event the sale is undone and our contract with Transaction
Network Solutions rejected, we would be forced to utilize our backup supplier or
another vendor for the contracted services. In the first half of 2001, we intend
to complete the migration of a large percentage of our data and point-of-sale
dial-up transmission needs for our network services business, representing a
quarter of the transactions we processed in 2000, to Transaction Network
Solutions. Given our dependence on Transaction Network Solutions, if it were to
fail to perform its obligations or its services were otherwise interrupted, for
financial or other reasons, we would have to transition the services to our
current backup supplier or to another supplier. If this were to occur, any new
contract we might enter into for the long-term provision of those services may
be at a price and on terms substantially less favorable to us than the terms of
our current arrangement.
IF A CARDHOLDER HAS A DISPUTE WITH A MERCHANT OR IF A CARDHOLDER IS A VICTIM OF
A FRAUDULENT TRANSACTION WITH A MERCHANT, WE MAY BE LIABLE FOR THE AMOUNT OF
ANY CHARGES RELATED TO SUCH DISPUTE OR TRANSACTION IN THE EVENT WE ARE NOT
REIMBURSED FOR SUCH CHARGES BY THE MERCHANT.
In our merchant bankcard services 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"
to the merchant the amount we originally credited to the merchant. We then
credit the amount of the transaction back to the cardholder's account. These
billing disputes or chargebacks typically relate to, among others:
- the cardholder's nonreceipt of merchandise or services;
- unauthorized use of a credit card; or
- general disputes between a cardholder and a merchant as to the quality of
the goods purchased or the services rendered by the merchant.
If we are unable to collect amounts charged back to a merchant's account, and if
the merchant refuses or is unable to reimburse us for the chargeback, we incur a
loss equal to the amount of the chargeback.
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We cannot assure you that we will not experience significant losses from
chargebacks in the future. Such significant losses could arise from merchant
bankruptcies or other reasons which reduce the likelihood that we will be
reimbursed for chargebacks. Any significant chargeback losses in a period would
have a material adverse effect on our profitability.
IF WE ARE REQUIRED TO PAY STATE TAXES ON TRANSACTIONS PROCESSING, IT COULD
NEGATIVELY IMPACT OUR PROFITABILITY.
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, these taxes would negatively impact our profitability.
RISKS PARTICULAR TO CREDIT SERVICES
IF WE ARE UNABLE TO SECURITIZE OUR CREDIT CARD RECEIVABLES DUE TO CHANGES IN THE
MARKET, THE UNAVAILABILITY OF CREDIT ENHANCEMENTS, AN EARLY AMORTIZATION EVENT
OR FOR OTHER REASONS, WE WOULD NOT BE ABLE TO FUND NEW CREDIT CARD
RECEIVABLES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR OPERATIONS AND
EARNINGS.
Since January 1996, we have sold substantially all of the credit card
receivables owned by our credit card bank, World Financial, to World Financial
Network Credit Card Master Trust as part of our securitization program. This
securitization program is the primary vehicle through which World Financial
finances our private label credit card receivables. If World Financial were not
able to regularly securitize the receivables it originates, our ability to grow
or even maintain our credit services business would be materially impaired.
World Financial's ability to effect securitization transactions is impacted
by the following factors, some of which are beyond our control:
- conditions in the securities markets in general and the asset-backed
securitization market in particular;
- conformity in the quality of credit card receivables to rating agency
requirements and changes in those requirements; and
- our ability to fund required overcollateralizations or credit
enhancements, which we routinely utilize in order to achieve better credit
ratings to lower our borrowing costs.
Once World Financial securitizes receivables, the agreement governing the
transaction contains covenants that address the receivables' performance and the
continued solvency of the retailer where the underlying sales were generated. In
the event one of those or other similar covenants is breached, an early
amortization event could be declared, in which case the trustee for the
securitization trust would retain World Financial's interest in the related
receivables, along with the excess interest income that would normally be paid
to World Financial, until such time as the securization investors are fully
repaid. The occurrence of an early amortization event would significantly limit,
or even negate, our ability to securitize additional receivables.
INCREASES IN NET CHARGE-OFFS BEYOND OUR EXPECTATIONS COULD HAVE A NEGATIVE
IMPACT ON OUR OPERATING INCOME AND PROFITABILITY; AS THE AVERAGE AGE OF OUR
SECURITIZED LOAN PORTFOLIO INCREASES, WE WILL LIKELY EXPERIENCE INCREASING
LEVELS OF DELINQUENCY AND LOAN LOSSES.
The primary risk associated with unsecured consumer lending is the risk of
default or bankruptcy of the borrower, resulting in the borrower's balance being
charged-off as uncollectible. We rely principally on the customer's
creditworthiness for repayment of the loan and therefore have no other recourse
for collection. We may not be able to successfully identify and evaluate the
creditworthiness of cardholders to minimize delinquencies and losses. An
increase in defaults or net charge-offs beyond historical levels will reduce the
net spread available to us from the securitization master trust and could
12
result in a reduction in finance charge income or a write-down of the interest
only strip. General economic factors, such as the rate of inflation,
unemployment levels and interest rates, may result in greater delinquencies that
lead to greater credit losses among consumers.
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 are affected by the credit risk of credit card
receivables and the average age of our various credit card account portfolios.
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
March 31, 2001, 19.2% of our securitized accounts and 38.6% of our securitized
loans were less than 24 months old. We believe that our credit card loan
portfolio will experience increasing levels of delinquency and loan losses as
the average age of our accounts increases. For the three months ended March 31,
2001, our securitized net charge-off ratio was 7.9% compared to 7.6% for the
three months ended March 31, 2000. Our securitized net charge-off ratio was 7.6%
for 2000 compared to 7.2% for 1999 and 7.8% for 1998. We believe that this ratio
will continue to fluctuate but generally rise over time as the average age of
our accounts increases. Also, we cannot assure you that our risk-based pricing
strategy can offset the negative impact on profitability caused by increases in
delinquencies and losses. 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 that we sell though securitizations.
CHANGES IN THE AMOUNT OF PREPAYMENTS AND DEFAULTS BY CARDHOLDERS ON CREDIT CARD
BALANCES MAY CAUSE A DECREASE IN THE ESTIMATED VALUE OF INTEREST ONLY STRIPS.
The estimated fair value of interest only strips depends upon the
anticipated cash flows of the related credit card receivables. A significant
factor affecting the 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. Other assumptions used in estimating the value of the interest only
strips 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 within our control. A decrease in interest rates could cause cardholder
prepayments to increase, thereby requiring a write down of the interest only
strips. If prepayments from cardholders or defaults by cardholders exceed our
estimates, we may be required to decrease the estimated value of the interest
only strips through a charge against earnings.
INTEREST RATE FLUCTUATIONS COULD SIGNIFICANTLY REDUCE THE AMOUNT WE REALIZE FROM
THE SPREAD BETWEEN THE YIELD ON OUR ASSETS AND OUR COST OF FUNDING.
An increase or decrease in market interest rates could have a negative
impact on the amount we realize from the 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. At March 31, 2001, approximately 9.2% of
our outstanding debt was subject to fixed rates with a weighted average interest
rate of 8.3%. An additional 55.3% of our outstanding debt at March 31, 2001 was
locked at an effective interest rate of 6.7% through interest rate swap
agreements and treasury locks with notional amounts totaling $1.5 billion.
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
$8.6 million. Conversely, a corresponding decrease in interest rates would
result in a comparable improvement to pretax income. The foregoing sensitivity
analysis is limited to the potential impact of an interest rate swing of 1.0% on
cash flows and fair values, and does not address default or credit risk.
13
WE EXPECT GROWTH IN OUR CREDIT SERVICES SEGMENT TO RESULT FROM NEW AND ACQUIRED
PRIVATE LABEL CARD PROGRAMS, WHOSE CREDIT CARD RECEIVABLE PERFORMANCE COULD
RESULT IN INCREASED PORTFOLIO LOSSES AND NEGATIVELY IMPACT OUR NET RETAINED
INTERESTS IN LOANS SECURITIZED.
We expect an important source of growth in our private label card operations
to come from the acquisition of existing private label programs and initiating
private label programs with retailers who do not currently offer a private label
card. 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 acquired and start-up programs, we cannot assure you
that the loss experience on acquired and start-up programs will be consistent
with our more established programs. The failure to successfully underwrite these
private label programs may result in defaults greater than our expectations and
could have a material adverse impact on us and the value of our net retained
interests in loans securitized.
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 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 profitability.
IF OUR BANK SUBSIDIARY FAILS TO MEET CREDIT CARD BANK CRITERIA, WE MAY BECOME
SUBJECT TO REGULATION UNDER THE BANK HOLDING COMPANY ACT, WHICH WOULD FORCE US
TO CEASE ALL OF OUR NON-BANKING BUSINESS ACTIVITIES AND THUS CAUSE A DRASTIC
REDUCTION IN OUR PROFITS AND REVENUE.
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 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 regulation under the Bank Holding Company Act. Being
deemed a bank holding company could 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.
14
While the consequences of being subject to regulation under the Bank Holding
Company Act would be severe, we believe that the risk of becoming subject to
such regulation is minimal as a result of the precautions we have taken in
structuring our business.
RISKS PARTICULAR TO MARKETING SERVICES
BECAUSE WE ARE DEPENDENT UPON AIR CANADA, THE DOMINANT DOMESTIC AIR CARRIER IN
CANADA, AS A SUPPLIER OF AIRLINE TICKETS FOR OUR AIR MILES REWARD MILES
PROGRAM, WE MAY NOT BE ABLE TO MEET THE NEEDS OF OUR COLLECTORS IF THE
CAPACITY MADE AVAILABLE TO US BY AIR CANADA IS INADEQUATE TO MEET OUR
COLLECTORS' DEMANDS.
Air Canada completed its acquisition of Canadian Airlines in July 2000 and
thereby solidified its position as the dominant Canadian domestic airline. 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
airline's operations will have on our ability to satisfy and retain active
collectors and sponsors of the Air Miles reward miles program.
The new supply agreement with Air Canada contains reductions in the
guarantee related to the number of tickets available at contractual rates on
certain routes after December 31, 2002. Once these capacity guarantees on
certain routes are reduced in 2003, we may be required to meet the demands of
collectors by purchasing tickets from other carriers. These tickets could be
more expensive than a comparable ticket under the Air Canada agreement, and the
routes offered by the other airlines may be inconvenient or undesirable to the
redeeming collectors. As a result, we may experience higher air travel
redemption costs in 2003 and 2004 than we are currently experiencing, while at
the same time collector satisfaction with the Air Miles reward miles program may
be adversely affected by requiring travel on other carriers on certain routes.
IF ACTUAL REDEMPTIONS BY COLLECTORS OF AIR MILES REWARD MILES ARE GREATER THAN
EXPECTED, OUR REVENUES AND PROFITABILITY COULD BE ADVERSELY AFFECTED.
A portion of our revenue is based on our estimate of the number of Air Miles
reward miles that will go unused by the collector base. The percentage of
unredeemed reward miles is known as "breakage" in the loyalty industry. While
our Air Miles reward miles currently do not expire, reward miles are not
redeemed by collectors for a number of reasons, including:
- loss of interest in the program or sponsors;
- collectors moving out of the program area; and
- death of a collector.
If actual redemptions are greater than our estimates, our revenues and
profitability could be adversely affected.
THE LOSS OF OUR MOST ACTIVE AIR MILES REWARD MILES COLLECTORS COULD NEGATIVELY
IMPACT OUR GROWTH AND PROFITABILITY.
Our most active Air Miles reward miles collectors represent a
disproportionately large percentage of our Air Miles reward program revenue.
Over the past year, we estimate that over half of the Air Miles reward program
revenues came from our most active Air Miles reward miles collectors. The loss
of a significant portion of these collectors, for any reason, could impact our
ability to generate significant revenue from sponsors and loyalty partners. The
continued attractiveness of our loyalty and
15
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.
LEGISLATION RELATING TO CONSUMER PRIVACY MAY AFFECT OUR ABILITY TO COLLECT DATA
THAT WE USE IN PROVIDING OUR MARKETING SERVICES, WHICH COULD NEGATIVELY AFFECT
OUR ABILITY TO SATISFY OUR CLIENTS' NEEDS.
The enactment of legislation or industry regulations arising from public
concern over consumer privacy issues could have a material adverse impact on our
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, makes it more
difficult to collect and use information that has been legally available and may
increase our costs of collecting some data. New regulations under this act that
take effect in July 2001 will give cardholders the ability to "opt out" of
having information generated by their credit card purchases shared with other
parties or the public. Our ability to gather and utilize this data will be
adversely affected if a significant percentage of the consumers whose purchasing
behavior we track elect to "opt out," thereby precluding us from using their
data. Once the regulations take effect, we will need to refrain from using data
generated by our existing cardholders and new cardholders until such cardholders
are given the opportunity to opt out.
Similarly, the Personal Information Protection and Electronic Documents Act
enacted in Canada requires organizations to obtain a consumer's consent to
collect, use or disclose personal information. Under this act, which took effect
on January 1, 2001, the nature of the required consent depends on the
sensitivity of the personal information, and the act permits personal
information to be used only for the purposes for which it was collected. The
Loyalty Group allows its customers to voluntarily "opt out" from either
promotional mail or electronic mail. Heightened consumer awareness of, and
concern about, privacy may encourage more customers to "opt out" at higher rates
than they have historically. This would mean that a reduced number of customers
would receive bonus mile offers and therefore would collect fewer Air Miles
reward miles.
RISKS RELATED TO OUR COMPANY
SOME OF OUR STOCKHOLDERS CURRENTLY OWN, AND AFTER THE OFFERING WILL CONTINUE TO
OWN, A SIGNIFICANT AMOUNT OF OUR COMMON STOCK. THESE STOCKHOLDERS MAY HAVE
INTERESTS THAT CONFLICT WITH YOURS AND WOULD BE ABLE TO CONTROL THE ELECTION
OF DIRECTORS AND THE APPROVAL OF SIGNIFICANT CORPORATE TRANSACTIONS, INCLUDING
A CHANGE IN CONTROL.
As of April 30, 2001, Limited Commerce Corp. and the affiliated entities of
Welsh, Carson, Anderson & Stowe in the aggregate beneficially owned
approximately 99.6% of our outstanding common stock and would have owned
approximately 81.4% of our common stock as of that date after giving pro forma
effect to this offering. Through a stockholders agreement, Limited Commerce
Corp. has the right to designate up to two members of our board of directors and
Welsh Carson has the ability to designate up to three members of our board of
directors. As a result, these stockholders are able to exercise significant
influence over, and in most cases control, matters requiring stockholder
approval, including the election of directors, changes to our charter documents
and significant corporate transactions. This concentration of ownership makes it
unlikely that any other holder or group of holders of common stock will be able
to affect the way we are managed or the direction of our business. Limited
Commerce Corp. and Welsh Carson may have interests that conflict with the
interests of our company or other stockholders. Their continued concentrated
ownership after the offering will make it impossible for another company to
acquire us and for you to receive any related takeover premium for your shares
unless they approve the acquisition.
16
DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD PREVENT A CHANGE OF CONTROL 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.
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 our common stock has been approved for listing, subject to
official notice of issuance, 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.
The stock market has experienced extreme price and volume fluctuations in
recent years that have significantly affected the quoted prices of the
securities of many companies, including companies in our industry. The changes
often appear to occur without regard to specific operating performance. The
price of our common stock could fluctuate based upon factors that have little or
nothing to do with our company and these fluctuations could materially reduce
our stock price.
FUTURE SALES OF OUR COMMON STOCK MAY ADVERSELY AFFECT OUR COMMON STOCK PRICE.
If a large number of shares of our common stock are sold in the open market
after this offering, the trading price of our common stock could decrease. In
addition, the sale of these shares could impair our ability to raise capital
through the sale of additional common stock. After this offering, we will have
an aggregate of 118,810,864 shares of our common stock authorized but unissued
and not reserved for specific purposes. In general, we may issue all of these
shares without any action or
17
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 70,936,136 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 57,936,136 shares, 72,013 shares will be freely transferable
and 57,864,123 shares will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act.
We have reserved 1,500,000 shares of common stock for issuance under our
employee stock purchase plan. We have also reserved 8,753,000 shares of our
common stock for issuance under our stock option and restricted stock plan, of
which 4,351,105 shares are issuable upon exercise of options granted as of
April 30, 2001, including options to purchase 1,731,787 shares exercisable as of
April 30, 2001 or that will become exercisable within 60 days after April 30,
2001. The sale of shares issued upon the exercise of currently outstanding stock
options could further dilute your investment in our common stock and adversely
affect our stock price.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. 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. Although we believe that the expectations reflected in the forward-looking
statements are reasonable, these forward-looking statements are subject to
risks, uncertainties and assumptions, including those discussed in "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. You should
specifically consider the factors identified under "Risk Factors" and elsewhere
in this prospectus which could cause actual results to differ before making an
investment decision.
18
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 13,000,000 shares of our
common stock in this offering will be approximately $153.4 million, or
$178.9 million if the underwriters exercise their over-allotment option in full,
assuming an initial public offering price of $13.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses. We intend to use the net proceeds as follows:
- approximately $100.8 million to repay debt outstanding under our
$330.0 million credit facility, which we entered into in July 1998,
consisting of approximately $90.8 million to repay in full the outstanding
balance of a term loan and $10.0 million to repay the outstanding balance
of the revolving loan commitment;
- approximately $668,000 to repurchase from JCP Telecom Systems, Inc. a
warrant for 167,084 shares of our common stock at an exercise price of
$9.00 per share; and
- the balance, approximately $51.9 million, for potential acquisitions and
general corporate purposes, including working capital and capital
expenditures.
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 U.S. government agencies.
The term loan and the revolving loan commitment to be repaid bear interest
at floating rates based on the prime rate, the Federal funds rate for a base
rate loan plus 50 basis points, or LIBOR plus the applicable Euro-dollar margin,
as selected by us from time to time. At March 31, 2001, the effective interest
rate on the term loan was 7.6% and the effective interest rate on the
outstanding amount of the revolving loan commitment was 9.1%. The term loan
matures in installments through July 25, 2003, and the revolving loan commitment
matures on July 25, 2003.
Although we are currently considering acquisition candidates in the
transaction services field and we continue to monitor and evaluate acquisition
opportunities on an ongoing basis, we have no present agreements, commitments or
understandings with respect to the acquisition of any business at this time. The
amounts and timing of our expenditures for general corporate purposes will vary
depending on a number of factors, including the amount of cash generated or used
by our operations, competitive and technological developments and the rate of
growth of our business. As a result, we will retain broad discretion in the
allocation of the net proceeds of this offering.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock, and we do
not anticipate paying any cash dividends on our common stock 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 on our common stock 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 common stockholders, nor can we authorize or
make any other distribution, payment or delivery of property or cash to our
common stockholders.
19
DILUTION
Our pro forma net deficit in tangible book value as of March 31, 2001 was
approximately $92.3 million, or approximately $1.59 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 underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value as of March 31, 2001 would have been approximately
$70.9 million, or $0.84 per share. This represents an immediate increase in pro
forma net tangible book value to existing stockholders attributable to new
investors of $2.43 per share and the immediate dilution of $12.16 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......................................... $(1.59)
Increase per share attributable to new investors.......... 2.43
------
Pro forma as adjusted net tangible book value per share
after the offering........................................ 0.84
------
Dilution per share to new investors......................... $12.16
======
The following table sets forth as of March 31, 2001, 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 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.......................... 57,936 81.7% $346,115 67.2% $ 5.97
New investors.................................. 13,000 18.3 169,000 32.8 13.00
------ ----- -------- -----
Total........................................ 70,936 100.0% $515,115 100.0%
====== ===== ======== =====
This table does not reflect shares issued upon the exercise of stock options
after March 31, 2001. As of March 31, 2001, there were outstanding options to
purchase a total of 4,384,576 shares of common stock at a weighted average
exercise price of $12.43 per share and 8,753,000 shares of common stock reserved
for issuance under our stock option and restricted stock plan. If all options
outstanding as of March 31, 2001 were exercised on the date of the closing of
the offering, new investors purchasing shares in this offering would suffer
dilution per share of $12.21.
20
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
March 31, 2001:
- 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
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.
AS OF MARCH 31, 2001
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash and cash equivalents................................... $ 58,756 $ 58,756 $111,353
======== ======== ========
Certificates of deposit..................................... $ 99,400 $ 99,400 $ 99,400
Current portion of term debt and revolving loan
commitment................................................ 44,125 44,125 4,125
-------- -------- --------
Total short-term debt..................................... $143,525 $143,525 $103,525
======== ======== ========
Long-term debt, excluding current portion:
Certificates of deposit................................... $ 20,300 $ 20,300 $ 20,300
Term debt................................................. 148,450 148,450 87,625
Subordinated notes........................................ 102,000 102,000 102,000
-------- -------- --------
Total long-term debt.................................... 270,750 270,750 209,925
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;
47,662 shares issued and outstanding, actual;
57,936 shares issued and outstanding, pro forma;
70,936 shares issued and outstanding, pro forma as
adjusted................................................ 477 580 710
Additional paid-in capital................................ 227,829 347,126 500,418
Retained earnings......................................... 16,423 16,423 14,923
Accumulated other comprehensive loss...................... (11,906) (11,906) (11,906)
-------- -------- --------
Total stockholders' equity.............................. 232,823 352,223 504,145
-------- -------- --------
Total capitalization.................................. $622,973 $622,973 $714,070
======== ======== ========
At the closing of this offering, as set forth in an agreement between us and
JCP Telecom Systems, Inc., a holder of a warrant to purchase 167,084 shares of
our common stock, we will purchase the unexercised warrant from JCP Telecom
Systems 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 JCP Telecom Systems at closing of approximately $668,000. There are
no other warrants outstanding to purchase our common stock.
We estimate that there will be 70,936,136 shares of common stock outstanding
immediately 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.
21
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information is
based on the historical financial statements of Alliance Data Systems
Corporation and Utilipro, Inc. 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 and Utilipro, Inc., 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 Utilipro
acquisition, accounted for under the purchase method of accounting, as if that
acquisition had been consummated on January 1, 2000.
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.
22
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------
PRO
ADSC UTILIPRO(1) ADJUSTMENTS FORMA
-------- ----------- -------------- --------
Total revenue........................................... $678,195 $ 17,732 $ -- $695,927
Cost of operations...................................... 547,985 24,620 -- 572,605
General and administrative.............................. 32,201 -- -- 32,201
Depreciation and other amortization..................... 26,265 1,261 -- 27,526
Amortization of purchased intangibles................... 49,879 -- 1,681 (2) 51,560
-------- -------- -------- --------
Total operating expenses.............................. 656,330 25,881 1,681 683,892
-------- -------- -------- --------
Operating income (loss)................................. 21,865 (8,149) (1,681) 12,035
Other non-operating expense............................. 2,477 -- -- 2,477
Interest expense........................................ 38,870 1,122 650 (3)(4) 40,642
Income tax expense (benefit)............................ 1,841 (3,539) (464)(5) (2,162)
-------- -------- -------- --------
Loss from continuing operations......................... $(21,323) $ (5,732) $ (1,867) $(28,922)
======== ======== ======== ========
Loss per share from continuing operations--basic and
diluted............................................... $ (0.60) $ (0.76)
======== ========
Weighted average shares used in computing per share
amounts--basic and diluted............................ 47,538 47,538
======== ========
See the accompanying notes on page 25.
23
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, 2001
-----------------------------------------------------------
ADSC UTILIPRO(1) SUBTOTAL ADJUSTMENTS PRO FORMA
-------- ----------- -------- ----------- ---------
Total revenue.................................. $180,692 $4,140 $184,832 $ -- $184,832
Cost of operations............................. 143,258 4,017 147,275 -- 147,275
General and administrative..................... 9,333 -- 9,333 -- 9,333
Depreciation and other amortization............ 6,367 374 6,741 -- 6,741
Amortization of purchased intangibles.......... 11,113 -- 11,113 280 (2) 11,393
-------- ------ -------- ----- --------
Total operating expenses..................... 170,071 4,391 174,462 280 174,742
-------- ------ -------- ----- --------
Operating income (loss)........................ 10,621 (251) 10,370 (280) 10,090
Interest expense............................... 9,635 437 10,072 (142)(3)(4) 9,930
Income tax benefit (expense)................... 933 (260) 673 (62)(5) 611
-------- ------ -------- ----- --------
Income (loss) from continuing operations....... $ 53 $ (428) $ (375) $ (76) $ (451)
======== ====== ======== ===== ========
Earnings (loss) per share from continuing
operations--basic and diluted................ $ (0.04) $ (0.05)
======== ========
Weighted average shares used in computing per
share amounts--basic......................... 47,568 47,568
======== ========
See the accompanying notes on page 25.
24
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statements of Operations for the year
ended December 31, 2000 and the three months ended March 31, 2001 reflect the
following adjustments:
(1) Represents operating activity for Utilipro for the year ended September 30,
2000 and the three months ended December 31, 2000. Prior to its acquisition
Utilipro had no significant transactions other than normal operations.
(2) Represents pro forma adjustments to goodwill and amortization of other
purchased intangibles' resulting from the preliminary purchase accounting
treatment of the Utilipro acquisition. The preliminary amortization period
for Utilipro is 10 years.
(3) Represents the elimination of interest expense from debt we are not assuming
as part of the acquisition.
(4) Represents the pro forma interest expense at an assumed 8.75% from the
incremental borrowing for the purchase price.
(5) Represents the tax effect of pro forma adjustments for the Utilipro
acquisition.
25
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. Full-year information is derived from financial statements that were
audited by Deloitte & Touche LLP. The selected consolidated financial data for
the three months ended March 31, 2000 and 2001 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 three months ended March 31, 2001 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 THREE MONTHS ENDED
FISCAL MARCH 31,
---------------------------------------------------------------------- ---------------------------
1996(1) 1997(2) 1998(3) 1999(4) 2000(5) 2000 2001
----------- ----------- ------------ ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
INCOME STATEMENT DATA
Total revenue............ $ 280,935 $ 353,399 $ 410,913 $ 583,082 $ 678,195 $ 165,547 $ 180,692
Cost of operations....... 221,511 273,145 335,804 466,856 547,985 134,571 143,258
General and
administrative
expenses............... 12,080 15,302 17,589 35,971 32,201 7,505 9,333
Depreciation and other
amortization........... 6,318 7,402 8,270 16,183 26,265 5,997 6,367
Amortization of purchased
intangibles............ 15,900 28,159 43,766 61,617 49,879 13,795 11,113
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating
expenses........... 255,809 324,008 405,429 580,627 656,330 161,868 170,071
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income......... 25,126 29,391 5,484 2,455 21,865 3,679 10,621
Other non-operating
expenses(6)............ -- -- -- -- 2,477 2,476 --
Interest expense......... 5,649 15,459 27,884 42,785 38,870 8,776 9,635
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing operations
before income taxes.... 19,477 13,932 (22,400) (40,330) (19,482) (7,573) 986
Income tax expense
(benefit).............. 5,704 5,236 (4,708) (6,538) 1,841 716 933
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) from
continuing
operations............. 13,773 8,696 (17,692) (33,792) (21,323) (8,289) 53
Income (loss) from
discontinued
operations, net of
taxes.................. (3,823) (8,247) (300) 7,688 -- -- --
Loss on disposal of
discontinued
operations, net of
taxes.................. -- -- -- (3,737) -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........ $ 9,950 $ 449 $ (17,992) $ (29,841) $ (21,323) $ (8,289) $ 53
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per share
from continuing
operations--basic and
diluted................ $ 0.38 $ 0.24 $ (0.42) $ (0.78) $ (0.60) $ (0.21) $ (0.04)
========== ========== ========== ========== ========== ========== ==========
Earnings (loss) per
share--basic and
diluted................ $ 0.27 $ 0.01 $ (0.43) $ (0.70) $ (0.60) $ (0.21) $ (0.04)
========== ========== ========== ========== ========== ========== ==========
Weighted average shares
used in computing per
share amounts--basic
and diluted............ 36,521 36,612 41,729 47,498 47,538 47,529 47,568
========== ========== ========== ========== ========== ========== ==========
26
FOR THE THREE MONTHS ENDED
FISCAL MARCH 31,
---------------------------------------------------------------------- ---------------------------
1996(1) 1997(2) 1998(3) 1999(4) 2000(5) 2000 2001
----------- ----------- ------------ ------------ ------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
OTHER FINANCIAL DATA
Calculation of operating
EBITDA:
Operating income....... $ 25,126 $ 29,391 $ 5,484 $ 2,455 $ 21,865 3,679 10,621
Depreciation and other
amortization......... 6,318 7,402 8,270 16,183 26,265 5,997 6,367
Amortization of
purchased
intangibles.......... 15,900 28,159 43,766 61,617 49,879 13,795 11,113
---------- ---------- ---------- ---------- ---------- ---------- ----------
EBITDA................. 47,344 64,952 57,520 80,255 98,009 23,471 28,101
Plus change in deferred
revenue.............. -- -- 20,729 91,149 40,845 10,794 13,244
Less change in
redemption settlement
assets............... -- -- 11,838 63,472 18,357 3,337 6,163
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating EBITDA(7)...... $ 47,344 $ 64,952 $ 66,411 $ 107,932 $ 120,497 $ 30,928 $ 35,182
========== ========== ========== ========== ========== ========== ==========
Operating EBITDA as a
percentage of
revenue................ 16.9% 18.4% 16.2% 18.5% 17.8% 18.7% 19.5%
Cash flows from operating
activities............. $ 67,696 $ (30,678) $ 9,311 $ 251,638 $ 87,183 $ 14,872 $ 10,997
Cash flows from investing
activities............. (148,721) (103,746) (145,386) (309,451) (24,457) 15,194 (37,175)
Cash flows from financing
activities............. 82,011 104,870 163,282 74,929 1,144 (18,351) (20,278)
SEGMENT OPERATING DATA
Transactions processed... 881,316 929,274 1,073,040 1,839,857 2,519,535 566,275 629,131
Statements
generated(8)........... 126,114 113,940 117,672 132,817 127,217 34,333 31,921
Average securitized
portfolio.............. $1,261,833 $1,615,196 $1,905,927 $2,004,827 $2,073,574 $2,139,647 $2,214,044
Credit sales............. $2,402,881 $3,001,029 $2,866,062 $3,132,520 $3,685,069 $ 755,114 $ 780,429
Air Miles reward miles
issued................. -- -- 611,824 1,594,594 1,927,016 432,252 524,237
Air Miles reward miles
redeemed............... -- -- 158,281 529,327 781,823 162,312 192,023
AS OF
-----------------------------------------------------------------------------------
FEBRUARY 1, JANUARY 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
1997 1998 1998 1999 2000 2001
----------- ----------- ------------ ------------ ------------ ----------
(AMOUNTS IN THOUSANDS)
BALANCE SHEET DATA
Cash and cash equivalents................ $ 50,149 $ 20,595 $ 47,036 $ 56,546 $ 116,941 $ 58,756
Credit card receivables and seller's
interest............................... 161,686 144,440 139,458 150,804 137,865 125,013
Redemption settlement assets,
restricted............................. -- -- 70,178 133,650 152,007 158,171
Intangibles and goodwill, net............ 103,261 93,909 362,797 493,609 444,549 457,011
Total assets............................. 498,355 619,901 1,091,008 1,301,263 1,420,606 1,304,832
Deferred revenue--service and
redemption............................. -- -- 158,192 249,341 290,186 303,430
Certificates of deposit and other
receivables funding debt............... 68,400 50,900 49,500 116,900 139,400 119,700
Short-term debt.......................... 80,811 82,800 98,484 -- -- --
Long-term and subordinated debt.......... 50,000 180,000 332,000 318,236 296,660 294,575
Total liabilities........................ 294,144 415,145 796,203 921,791 1,058,215 952,609
Series A preferred stock................. -- -- -- 119,400 119,400 119,400
Total stockholders' equity............... 204,211 204,756 294,805 260,072 242,991 232,823
27
- ------------------------------
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) Fiscal 2000 represents the operating results for the year ended
December 31, 2000.
(6) Other expenses represent 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 to monitor compliance with the financial covenants in our amended
credit agreement, such as debt-to-operating EBITDA, interest coverage ratios
and minimum operating EBITDA. We also use operating EBITDA as an integral
part of our internal reporting to measure the performance and liquidity of
our reportable segments. 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. 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 the cardholder and customer accounts we service.
28
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 significant acquisitions, each accounted for as a purchase, with the
results of operations of the acquired businesses included from their respective
closing dates:
- in July 1998, we acquired Loyalty Management Group Canada Inc.;
- in September 1998, we acquired Harmonic Systems Incorporated; and
- in July 1999, we acquired the network services business of SPS Payment
Systems, Inc., a wholly owned subsidiary of Associates First Capital
Corporation.
RECENT DEVELOPMENTS
Effective February 28, 2001, we acquired substantially all of the operating
assets of Utilipro, Inc., a subsidiary of AGL Resources, Inc., for
$20.3 million in cash. Utilipro is an account processing and servicing provider
to the de-regulated utility sector. Utilipro provides these services to three
clients serving approximately 500,000 utility customers.
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 1998 represents the 11 months ended
December 31, 1998, fiscal 1999 represents the year ended December 31, 1999 and
fiscal 2000 represents the year ended December 31, 2000. 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 recast basis for the
year ended December 31, 1998 compared to the year ended December 31, 1999.
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,
telecommunications, and equipment lease expense.
CREDIT SERVICES. We utilize a securitization program to finance
substantially all of the credit card receivables that we underwrite. Our
securitization trusts allow us to sell credit card receivables to the trusts on
a daily basis. As a result, our Credit Services segment derives its revenue from
the servicing fees and net financing income it receives from the securitization
trusts.
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 determination of
29
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.
Credit Services also receives merchant discount fees from clients, which are
determined based on a percentage of credit sales charged to our private label
card accounts.
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. Under this 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 redemption element and the service element.
- Redemption element: the redemption element is the larger of the two
components. For this component, we recognize revenue at the time an Air
Mile reward mile is redeemed, or, for those miles that we estimate will go
unredeemed by the collector base, known as "breakage," over the estimated
life of an Air Miles reward mile.
- Service element: For this component, which consists of direct marketing
and administrative services provided to sponsors, we recognize revenue
ratably over the estimated life of an Air Miles reward mile.
On certain of our contracts, a portion of the proceeds is 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 card
processing and servicing activities related to our Credit Services segment. For
this, our Transaction Services segment receives a fee equal to its direct costs
before corporate overhead plus a margin. The margin is based on current market
rates for similar services. This fee represents an operating cost to our Credit
Services segment and a corresponding revenue for Transaction Services.
USE OF EBITDA. We evaluate operating performance based on several factors
of which the primary financial measure is operating income plus depreciation and
amortization, or "EBITDA." 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. In addition, we use
operating EBITDA to monitor compliance with the financial covenants in our
amended credit agreement such as debt-to-operating EBITDA, interest coverage
ratios and minimum operating EBITDA. We also use operating EBITDA to measure the
performance and liquidity of our reportable segments. EBITDA and operating
EBITDA are 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 and
30
operating EBITDA are 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 and operating EBITDA
measures presented in this prospectus may not be comparable to similarly titled
measures presented by other companies.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 (UNAUDITED) COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2001 (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
---------------------- ------------------- -------------------
2000 2001 2000 2001 2000 2001
-------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............... $108,748 $118,168 $13,558 $14,512 $ 3,277 $ 4,540
Credit Services.................... 69,903 73,810 8,601 8,363 8,286 7,961
Marketing Services................. 39,451 44,291 1,312 5,226 (7,884) (1,880)
Other and eliminations............. (52,555) (55,577) -- -- -- --
-------- -------- ------- ------- ------- -------
Total............................ $165,547 $180,692 $23,471 $28,101 $ 3,679 $10,621
======== ======== ======= ======= ======= =======
THREE MONTHS ENDED MARCH 31,
------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
---------------------- ------------------- -------------------
2000 2001 2000 2001 2000 2001
-------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............... 65.7% 65.4% 12.5% 12.3% 3.0% 3.8%
Credit Services.................... 42.2 40.9 12.3 11.3 11.9 10.8
Marketing Services................. 23.8 24.5 3.3 11.8 (20.0) (4.2)
Other and eliminations............. (31.7) (30.8) -- -- -- --
-------- --------
Total............................ 100.0% 100.0% 14.2% 15.6% 2.2% 5.9%
======== ========
REVENUE. Total revenue increased $15.2 million, or 9.1%, to $180.7 million
for the three months ended March 31, 2001 from $165.5 million for the comparable
period in 2000. The increase was principally due to an 8.7% increase in
Transaction Services revenue, a 5.6% increase in Credit Services revenue and a
12.3% increase in Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$9.4 million, or 8.7%, due primarily to an increase in the number of
transactions processed. Revenue related to transactions processed
increased approximately $4.4 million as a result of an 11.1% increase in
the number of transactions processed with a significant portion of the
increase occurring among our large volume petroleum clients. Fees related
to account processing and servicing increased $6.3 million during the
three months ended March 31, 2001 over the comparable period in 2000 due
to increased inter-segment sales of $2.2 million during 2001 as a result
of increased account processing and servicing for our Credit Services
segment, which resulted from an increase in the number of private label
cardholders. The remaining portion of the increase resulted from sales
related to our utilities sector offset by a decrease in the number of
statements generated as a result of a lost client in the petroleum sector.
Our utilities sector benefited from the recently acquired Utilipro
business, which added approximately 500,000 customer accounts.
- CREDIT SERVICES. Credit Services revenue increased $3.9 million, or 5.6%,
due to increases in servicing fees and finance charges, net. Servicing fee
income increased by $1.0 million, or 8.8%, during the three months ended
March 31, 2001 over the comparable 2000 period due to an
31
increase in the average outstanding credit card receivables in the
securitization trust. Finance charge, net increased $3.7 million during
the three months ended March 31, 2001 over the comparable period in 2000
as a result of a 3.5% higher average outstanding securitized portfolio.
The yield remained relatively constant between the periods.
- MARKETING SERVICES. Marketing Services revenue increased $4.8 million, or
12.3%, primarily due to an increase in reward revenue related to an 18.3%
increase in the redemption of Air Miles reward miles. Additionally,
services revenue increased 3.4% as a result of a 21.3% increase in the
issuance of Air Miles reward miles and the recognition of deferred revenue
balances. As a result of the increased issuance activity, our deferred
revenue balance increased 4.6% to $303.4 million at March 31, 2001 from
the balance at December 31, 2000.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $10.5 million, or 7.4%, to $152.6 million during the
three months ended March 31, 2001 from $142.1 million during the comparable
period in 2000. Total EBITDA margin increased to 15.6% for the three months
ended March 31, 2001 from 14.2% for the comparable period in 2000. The increase
in EBITDA margin is due to an increase in the Marketing Services margin,
partially offset by a decrease in the Credit Services margin.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $8.5 million, or 8.9%, to
$103.7 million for the three months ended March 31, 2001 from
$95.2 million for the comparable period in 2000, and EBITDA margin
decreased to 12.3% for the three months ended March 31, 2001 from 12.5%
during the comparable period in 2000. The EBITDA margin decrease is
primarily related to increased overhead allocation, offset by improved
margins at the operating unit level.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $4.1 million, or 6.8%, to
$65.4 million for the three months ended March 31, 2001 from
$61.3 million for the comparable period in 2000, and EBITDA margin
decreased to 11.3% for the three months ended March 31, 2001 from 12.3%
during the comparable period in 2000. The decrease in EBITDA margin is the
result of increased processing costs from our Transaction Services segment
of $2.2 million associated with our larger securitized portfolio and the
decrease in yield on the securitized portfolio.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $1.0 million, or 2.4%, to
$39.1 million for the three months ended March 31, 2001 from
$38.1 million for the comparable period in 2000, and EBITDA margin
increased to 11.8% for the three months ended March 31, 2001 from 3.3% for
the comparable period in 2000. The EBITDA margin in the 2000 period was
adversely impacted by the $3.1 million in non-recurring redemption related
costs incurred as a result of the transition from Canadian Airlines to Air
Canada as a primary reward supplier following their merger. Normally, we
are able to purchase airline tickets at a contractually determined
discount. Prior to the Air Canada merger, 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. Prior to signing our supply agreement with Air Canada, our supply
of seats was constrained due to the reduction or elimination of some of
Canadian Airlines' routes. Based on our new supply agreement and other
factors, we do not anticipate incurring redemption costs in 2001 at a
level greater than what we have historically experienced. Excluding the
$3.1 million of additional redemption costs, EBITDA margin for the three
months ended March 31, 2000 would have been 11.2%.
- DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$2.3 million, or 11.7%, to $17.5 million for the three months ended March
31, 2001 from $19.8 million for the comparable period in 2000 due to
increases in capital expenditures in 2001. Amortization of purchased
intangibles decreased $2.7 million as a result of a decrease in
amortization expense.
32
OPERATING INCOME. Operating income increased $6.9 million, or 188.7%, to
$10.6 million for the three months ended March 31, 2001 from $3.7 million during
the comparable period in 2000. Operating income increased from revenue gains,
improved EBITDA margins and a decrease in depreciation and amortization.
INTEREST EXPENSE. Interest expense increased $0.9 million, or 9.8%, to
$9.7 million for the three months ended March 31, 2001 from $8.8 million for the
comparable period in 2000 due to an increase in average debt outstanding.
TAXES. Income tax expense increased $0.2 million, or 30.4%, to
$0.9 million for the three months ended March 31, 2001 from $0.7 million in 2000
due to an increase in taxable income.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant and database marketing fees, decreased $300,000, or
3.5%, to $9.6 million for the three months ended March 31, 2001 from
$9.9 million for the comparable period in 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1999 2000 1999 2000 1999 2000
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services............ $ 381,027 $ 437,980 $41,828 $54,764 $ 13,014 $ 13,017
Credit Services................. 247,824 268,183 29,803 25,318 17,743 24,059
Marketing Services.............. 138,310 178,214 8,624 17,927 (28,302) (15,211)
Other and eliminations.......... (184,079) (206,182) -- -- -- --
--------- --------- ------- ------- -------- --------
Total......................... $ 583,082 $ 678,195 $80,255 $98,009 $ 2,455 $ 21,865
========= ========= ======= ======= ======== ========
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1999 2000 1999 2000 1999 2000
--------- --------- -------- -------- -------- --------
Transaction Services............ 65.4% 64.6% 11.0% 12.5% 3.4% 3.0%
Credit Services................. 42.5 39.5 12.0 9.4 7.2 9.0
Marketing Services.............. 23.7 26.3 6.2 10.1 (20.5) (8.5)
Other and eliminations.......... (31.6) (30.4) -- -- -- --
--------- ---------
Total......................... 100.0% 100.0% 13.8% 14.5% 0.4% 3.2%
========= =========
REVENUE. Total revenue increased $95.1 million, or 16.3%, to
$678.2 million for 2000 from $583.1 million for 1999. The increase was due to a
14.9% increase in Transaction Services revenue, an 8.2% increase in Credit
Services revenue and a 28.9% increase in Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$57.0 million, or 14.9%, due primarily to an increase in the number of
transactions processed. Revenue related to transactions processed
increased approximately $30.0 million as a result of a 36.9% 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 in transactions processed occurred among the large volume
clients in the petroleum industry with a lower price per transaction. Fees
related to account processing and servicing increased $26.0 million during
2000 from 1999 primarily due to increased inter-segment sales of
33
$23.1 million during 2000 as a result of increased account processing and
servicing for our Credit Services segment due to an increase in the number
of private label cardholders. The remaining portion of the increase
resulted from new sales related to our utilities sector offset by a
decrease in the number of statements generated as a result of a lost
client in the petroleum sector.
- CREDIT SERVICES. Credit Services revenue increased $20.4 million, or
8.2%, due to increases in merchant discount fees, servicing fees and
finance charges, net. Servicing fee income increased by $3.5 million, or
10.4%, during 2000 due to an increase in the average outstanding balance
of the securitized credit card receivables we service. Finance charges,
net, increased $14.3 million, or 10.0%, during 2000 as a result of a 3.4%
higher average outstanding securitized portfolio. A liquidating portfolio
adversely impacted the average outstanding securitized portfolio.
Excluding the effect of the liquidating portfolio, the average outstanding
securitized portfolio would have grown by 11.7% in 2000. The net yield for
2000 was 45 basis points higher than in 1999. Private label merchant
discount fee income increased by $3.2 million, or 4.7%, during 2000 as a
result of increased charge volumes. This increase was offset by a change
in a specific program for one of our clients, where merchant discount fee
revenue from this client is now recorded as finance charge income.
- MARKETING SERVICES. Marketing Services revenue increased $39.9 million,
or 28.9%, primarily due to an increase in reward revenue related to a
39.2% increase in the redemption of Air Miles reward miles. Additionally,
services revenue increased 15.5% as a result of a 19.4% increase in the
number of Air Miles reward miles issued and the recognition of deferred
revenue balances. As a result of the increased issuance activity, our
deferred revenue balance increased 16.4% to $290.2 million at
December 31, 2000 from the balance at December 31, 1999.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $77.4 million, or 15.4%, to $580.2 million for 2000 from
$502.8 million for 1999. Total EBITDA margin increased to 14.5% for 2000 from
13.8% for 1999. 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 $44.0 million, or 13.0%, to
$383.2 million for 2000 from $339.2 million for 1999, and EBITDA margin
increased to 12.5% for 2000 from 11.0% for 1999. The increase in EBITDA
margin is primarily the result of operational efficiencies achieved in our
network business related to the SPS acquisition.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $24.9 million, or 11.4%, to
$242.9 million for 2000 from $218.0 million for 1999, and EBITDA margin
decreased to 9.4% for 2000 from 12.0% for 1999. The decrease in EBITDA
margin is the result of increased processing costs from our Transaction
Services segment of $22.1 million associated with a higher number of
private label cardholders. Additionally, the EBITDA margin was adversely
impacted by the previously mentioned change in a client's program. The new
program is financed off-balance sheet in a securitization trust, which
generates lower EBITDA margin than the previous program.
- MARKETING SERVICES. Marketing Services operating expenses, excluding
depreciation and amortization, increased $30.6 million, or 23.6%, to
$160.3 million for 2000 from $129.7 million for 1999, and EBITDA margin
increased to 10.1% for 2000 from 6.2% for 1999. The increase in the margin
is attributable to increased revenue and the leveraging of the marketing,
payroll and other operating costs in 2000. Non-redemption expenses
decreased to 47.8% of revenue for 2000 from 52.9% for 1999. The EBITDA
margin increase was offset by the approximate $7.0 million in
non-recurring redemption related costs as a result of the transition of
primary reward suppliers from Canadian Airlines to Air Canada following
their merger. Normally, we are able
34
to purchase airline tickets at a contractually determined discount. Prior
to the Air Canada merger, 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. Prior to signing our
supply agreement with Air Canada, our supply of seats was constrained due
to the reduction and/or elimination of some of Canadian Airlines' routes.
Based on our new supply agreement and other factors, we do not anticipate
incurring redemption costs in 2001 at a level greater than what we have
historically experienced. Excluding the $7.0 million of additional
redemption costs, EBITDA margin for 2000 would have been 14.0%.
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.
EBITDA margin for 1999 was affected by approximately $3.3 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
$1.7 million, or 2.2%, to $76.1 million for 2000 from $77.8 million for
1999 due to a decrease in amortization of purchased intangibles of
$11.7 million. This decrease resulted from 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 and an increase in capital expenditures in
1999, especially software development costs that have relatively short
amortization periods.
OPERATING INCOME. Operating income increased $19.4 million, or 776.0%, to
$21.9 million for 2000 from $2.5 million for 1999. Operating income increased
primarily from revenue gains with modest expansion of EBITDA margins and a
decrease in depreciation and amortization.
INTEREST EXPENSE. Interest expense decreased $3.9 million, or 9.1%, to
$38.9 million for 2000 from $42.8 million for 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.
TAXES. Income tax expense increased $8.3 million to a $1.8 million income
tax expense for 2000 from a $6.5 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 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 $100,000 to
$46.7 million for 2000 from $46.6 million for 1999. The increase was primarily
the result of increased database marketing fees offset by a small decrease in
merchant discount fees.
35
RECAST YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
Transaction Services........... $ 325,944 $ 381,027 $26,116 $ 41,828 $ (1,641) $ 13,014
Credit Services................ 242,377 247,824 37,841 29,803 25,041 17,743
Marketing Services............. 62,824 138,310 3,341 8,624 (11,861) (28,302)
Other and eliminations......... (179,608) (184,079) -- -- -- --
--------- --------- ------- -------- -------- --------
Total........................ $ 451,537 $ 583,082 $67,298 $ 80,255 $ 11,539 $ 2,455
========= ========= ======= ======== ======== ========
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
Transaction Services............ 72.2 % 65.4 % 8.0% 11.0% (0.5)% 3.4 %
Credit Services................. 53.7 42.5 15.6 12.0 10.3 7.2
Marketing Services.............. 13.9 23.7 5.3 6.2 (18.9) (20.5)
Other and eliminations.......... (39.8) (31.6) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 14.9% 13.8% 2.6 % 0.4 %
========= =========
REVENUE. Total revenue increased $131.6 million, or 29.1%, to
$583.1 million for 1999 from $451.5 million for 1998. The increase was
principally due to a 16.9% 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
$55.1 million, or 16.9%, 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 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 charges, net, increased
$600,000 during 1999. 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. Finance charges, net,
increased $16.8 million, or 13.5%, during 1999, excluding the
$16.2 million gain on sale of receivables, 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.
36
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $118.6 million, or 30.9%, to $502.8 million for 1999
from $384.2 million for 1998. Total EBITDA margin decreased to 13.8% for 1999
from 14.9% for 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 $39.4 million, or 13.1%, to
$339.2 million for 1999 from $299.8 million for 1998, and EBITDA margin
increased to 11.0% for 1999 from 8.0% for 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 6.6%, to
$218.0 million for 1999 from $204.5 million for 1998, and EBITDA margin
decreased to 12.0% for 1999 from 15.6% for 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 $70.2 million, or 118.0%, to
$129.7 million for 1999 from $59.5 million for 1998, and EBITDA margin
increased to 6.2% for 1999 from 5.3% 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 amortization increased
$22.0 million, or 39.4%, to $77.8 million for 1999 from $55.8 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 for 1998. Operating income decreased
primarily from a lower consolidated EBITDA 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 $3.9 million to $6.5 million for 1999
from $2.6 million for 1998 due to an increase in pre-tax loss.
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 for 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 discount and database marketing fees, increased
$3.4 million, or 7.9%, to $46.6 million for 1999 from $43.2 million for 1998.
The increase was primarily the result of increased merchant discount fees from
increased credit sales activity.
37
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........... $ 303,186 $ 381,027 $29,825 $ 41,828 $ 4,405 $ 13,014
Credit Services................ 212,663 247,824 24,297 29,803 12,883 17,743
Marketing Services............. 60,892 138,310 3,398 8,624 (11,804) (28,302)
Other and eliminations......... (165,828) (184,079) -- -- -- --
--------- --------- ------- -------- -------- --------
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........... 73.8 % 65.4 % 9.8% 11.0% 1.5 % 3.4 %
Credit Services................ 51.8 42.5 11.4 12.0 6.1 7.2
Marketing Services............. 14.8 23.7 5.6 6.2 (19.4) (20.5)
Other and eliminations......... (40.4) (31.6) -- -- -- --
--------- ---------
Total........................ 100.0 % 100.0 % 14.0% 13.8% 1.3 % 0.4 %
========= =========
REVENUE. Total revenue increased $172.2 million, or 41.9%, to
$583.1 million for fiscal 1999 from $410.9 million for fiscal 1998. The increase
was principally due to a 25.7% 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
$77.8 million, or 25.7%, due to the acquisitions of Harmonic Systems in
1998 and SPS in 1999. Fees related to servicing of private label credit
card statements increased $15.7 million during fiscal 1999 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 charges, net, increased
$22.6 million during fiscal 1999. 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.
38
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $149.4 million, or 42.3%, to $502.8 million during
fiscal 1999 from $353.4 million for 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 $65.8 million, or 24.1%, to
$339.2 million for fiscal 1999 from $273.4 million for fiscal 1998, and
EBITDA margin increased to 11.0% for fiscal 1999 from 9.8% 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 $29.6 million, or 15.7%, to
$218.0 million for fiscal 1999 from $188.4 million for fiscal 1998, and
EBITDA margin increased to 12.0% for fiscal 1999 from 11.4% 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 $72.2 million, or 125.6%, to
$129.7 million for fiscal 1999 from $57.5 million for fiscal 1998, and
EBITDA margin increased to 6.2% for fiscal 1999 from 5.6% 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.
- DEPRECIATION AND AMORTIZATION. Depreciation and 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 for
fiscal 1998 and fiscal 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 as the result of increased
inter-segment charges 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 fiscal 1999 from $4.7 million for fiscal 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 for 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 discount and database marketing fees, increased
$6.0 million, or 14.8%, to $46.6 million for fiscal 1999 from $40.6 million for
fiscal 1998. The increase was primarily the result of increased volume of credit
sales and database marketing fees.
39
ASSET QUALITY
Our delinquency and net charge-off rates 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 March 31, 2001, 19.2% of securitized accounts and 38.6%
of securitized loans were less than 24 months old. Accordingly, we believe that
our credit card portfolio will experience increasing levels of delinquency and
loan losses as the average age of our accounts increases.
DELINQUENCIES. 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 balance
and all related interest and other fees are charged off or paid. When an account
becomes delinquent, we print a message requesting payment on the cardholder's
billing statement. 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.
The following table presents the delinquency trends of our securitized
credit card portfolio:
DECEMBER 31, % OF DECEMBER 31, % OF DECEMBER 31,
1998 TOTAL 1999 TOTAL 2000
------------ -------- ------------- -------- -------------
(DOLLARS IN THOUSANDS)
Receivables outstanding................ $2,135,340 100% $2,232,375 100% $2,319,703
Loan balances contractually delinquent:
31 to 60 days........................ 52,581 2.5% 59,840 2.7% 62,040
61 to 90 days........................ 29,925 1.4 35,394 1.6 36,095
91 or more days...................... 53,885 2.5 60,025 2.7 64,473
---------- --- ---------- --- ----------
Total.............................. $ 136,391 6.4% $ 155,259 7.0% $ 162,608
========== === ========== === ==========
% OF MARCH 31, % OF
TOTAL 2001 TOTAL
-------- ---------- --------
(DOLLARS IN THOUSANDS)
Receivables outstanding................ 100% $2,145,500 100%
Loan balances contractually delinquent:
31 to 60 days........................ 2.7% 54,005 2.5%
61 to 90 days........................ 1.5 33,472 1.6
91 or more days...................... 2.8 62,125 2.9
--- ---------- ---
Total.............................. 7.0% $ 149,602 7.0%
=== ========== ===
NET CHARGE-OFFS. Net charge-offs comprise the principal amount of losses
from cardholders unwilling or unable to pay their account 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.
Average credit card portfolio outstanding represents the average balance of the
securitized receivables at the beginning of each month in the period indicated.
THREE MONTHS ENDED
FISCAL MARCH 31,
------------------------------------ -----------------------
1998 1999 2000 2000 2001
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
Average credit card portfolio
outstanding.............................. $1,905,927 $2,004,827 $2,073,574 $2,139,647 $2,214,044
Net charge-offs............................ 135,478 143,370 157,351 40,742 43,708
Net charge-offs as a percentage of average
loans outstanding (annualized)........... 7.8% 7.2% 7.6% 7.6% 7.9%
40
We believe, consistent with our statistical models and other credit
analyses, that our securitized net charge-off ratio will continue to fluctuate
but generally rise.
AGE OF PORTFOLIO. The following table sets forth, as of March 31, 2001, the
number of total accounts and amount of outstanding loans, based upon the age of
the securitized accounts:
PERCENTAGE
NUMBER OF PERCENTAGE OF BALANCES OF BALANCES
AGE SINCE ORIGINATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- --------- ------------- ----------- -----------
(AMOUNTS IN THOUSANDS)
0-5 Months...................................... 3,197 5.4% $ 278,967 13.0%
6-11 Months..................................... 2,724 4.6 188,839 8.8
12-17 Months.................................... 3,079 5.2 208,152 9.7
18-23 Months.................................... 2,368 4.0 150,213 7.0
24-35 Months.................................... 5,329 9.0 281,113 13.1
36+ Months...................................... 42,511 71.8 1,038,616 48.4
------ ----- ---------- -----
Total..................................... 59,208 100.0% $2,145,900 100.0%
====== ===== ========== =====
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. We generated cash flow from operating activities of
$11.0 million for the three months ended March 31, 2001 compared to
$14.9 million for the comparable period in 2000. We generated cash flow from
operating activities of $87.2 million for 2000 compared to $251.6 million for
1999 and $9.3 million for fiscal 1998. Operating cash flow in 2000 decreased
compared to 1999 primarily due to changes in working capital. Working capital
changes for 2000 were $54.2 million compared to $250.8 million in 1999. Working
capital in 1999 was positively influenced by a large decrease in trade accounts
receivable associated with a change in a specific program for one of our
clients, whereby the receivables were moved off-balance sheet to a
securitization trust. 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.
INVESTING ACTIVITIES. We utilized cash flow from investing activities of
$37.2 million for the three months ended March 31, 2001 compared to providing
$15.2 million for the comparable period in 2000. We utilized cash flow from
investing activities of $24.5 million for 2000 compared to $309.5 million for
1999 and $145.4 million for fiscal 1998. Three significant components of
investing activities are as follows:
- ACQUISITIONS. Net cash outlays for acquisitions for the three months ended
March 31, 2001 was $18.8 million compared to zero in the comparable period
in 2000. Net cash outlays for acquisitions in 2000 was zero compared to
$171.4 million for 1999 and $138.8 million for fiscal 1998.
- SECURITIZATIONS AND 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
March 31, 2001, we had over $2.1 billion of securitized credit card
receivables. 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 and their related performance.
During the period from November to January, we are required to maintain a
credit enhancement level of 6% as compared to 4% for the remainder of the
year. Accordingly, at December 31, we typically have our highest balance
of credit enhancement assets. We intend to utilize our securitization
program for the foreseeable future.
41
- RESERVE FUND. Redemption settlement assets on our balance sheet at
March 31, 2001 are related to a reserve fund we established in connection
with funding future redemptions by collectors under the Air Miles reward
program. We believe the reserve fund is sufficient to meet redemptions 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 was $18.8 million for the three
months ended March 31, 2001 compared to $18.4 million for the comparable period
in 2000. Net cash borrowings was $1.0 million for 2000 compared to net cash
payments on borrowings of $44.8 million for 1999 and net cash borrowings of
$56.2 million for fiscal 1998. Our financing activities relate primarily to
funding working capital requirements and the securitization program. We issued
$119.4 million of preferred stock to finance a portion of our acquisition of SPS
in 1999 and $107.0 million of common stock to fund a portion of our acquisition
of the Loyalty Group during fiscal 1998.
LIQUIDITY SOURCES. We have two main sources of liquidity to finance working
capital and securitization requirements: certificates of deposit and a credit
agreement.
CERTIFICATES OF DEPOSIT. We utilize certificates of deposit to finance the
operating activities of our credit card bank subsidiary, World Financial, and to
fund securitization requirements. Securitization requirements are generally in
the form of credit enhancements and interests in the principal balance of the
credit card receivables. 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 excess funding
deposits.
World Financial issues certificates of deposit in denominations of $100,000
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 March 31, 2001,
we had $119.7 million of certificates of deposit outstanding. World Financial is
limited in the amounts that it can dividend to us. Certificate of deposit
borrowings are subject to regulatory capital requirements.
CREDIT AGREEMENT. At March 31, 2001, we had $192.6 million outstanding
under our credit facility, consisting of $182.6 million of term loans and
$10.0 million under the revolving loan commitment. During 2000, the highest
outstanding balance on the revolving loan commitment was $69.0 million.
Approximately $34.0 million is due under our term loans on July 1, 2001. Of the
amount due on July 1, 2001, approximately $30.0 million relates to the term loan
that we will repay in full with the net proceeds from the offering. Interest on
our loans is generally payable quarterly. With the exception of a $44.0 million
term loan that matures on July 25, 2005, all of our other obligations under the
credit facility mature on July 25, 2003.
The credit facility prohibits us from borrowing in excess of four times our
operating EBITDA. Based on this covenant, our borrowing capacity at March 31,
2001 was approximately $500.0 million. With outstanding borrowings of
$414.5 million at that date, we had additional borrowing capacity of
$85.5 million under the revolver. In addition, we had $58.8 million of cash and
cash equivalents as of March 31, 2001.
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, the senior secured leverage ratio, adjusted consolidated
net worth and the interest coverage ratio.
Following the $100.8 million debt repayment with the proceeds of this
offering, we will record an extraordinary loss on early extinguishment of debt
of approximately $1.5 million, net of tax.
42
We believe that our current level of cash and financing capacity, along with
future cash flows from operations, will provide sufficient liquidity to meet the
needs of our existing businesses for the foreseeable future. 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.
ACQUISITION FINANCING. 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. Additionally, we issued
$107.0 million in common stock to fund the Loyalty acquisition.
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.
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 trigger 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.
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 March 31, 2001, World Financial's Tier 1 capital ratio
was 15.8%, total capital ratio was 16.0% and leverage ratio was 52.7%, and World
Financial was not subject to a capital directive order.
43
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our primary market risks include off-balance sheet risk, interest rate
risk, credit risk, foreign currency exchange rate risk and redemption reward
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
$161.8 million for 2000. Of this total, $38.9 million of the interest expense
for 2000 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 and treasury locks to mitigate our interest rate risk on a related
financial instrument or to 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 March 31, 2001, approximately 9.2% of our
outstanding debt was subject to fixed rates with a weighted average interest
rate of 8.3%. An additional 55.3% of our outstanding debt at March 31, 2001 was
locked at an effective interest rate of 6.7% 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 $8.6 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.
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.
44
REDEMPTION REWARD RISK. We are exposed to potentially increasing reward
costs associated primarily with travel rewards. To minimize the risk of rising
travel reward costs, we:
- have a supply agreement with Air Canada;
- are seeking new supply agreements with additional airlines in Canada;
- alter the total mix of rewards available to collectors with the
introduction of new merchandise rewards, which are typically lower cost
per Air Mile reward mile than air travel; and
- periodically adjust the number of miles required to redeem a reward.
RECENT ACCOUNTING PRONOUNCEMENTS
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 is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133, as amended and
interpreted, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, 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. If the derivative is designated in a fair-value
hedge, the changes in the fair value of the derivative and the hedged item will
be recognized in earnings. If the derivative is designated in a cash flow hedge,
changes in the fair value of the derivative will be recorded in other
comprehensive income and will be recognized in the income statement when the
hedged item affects earnings.
SFAS No. 133 defines new requirements for designation and documentation of
hedging relationships as well as ongoing effectiveness assessments in order to
use hedge accounting. For a derivative that does not qualify as a hedge, changes
in fair value will be recognized in earnings. In January 2001, we recorded
$882,000 in other comprehensive income as a cumulative translation adjustment
for derivatives designated in cash flow-type hedges prior to adopting SFAS
No. 133, primarily related to interest rate swaps.
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.
45
BUSINESS
GENERAL
We are a leading provider of transaction services, credit services and
marketing services to retail companies in North America. We focus on
facilitating and managing electronic transactions between our clients and their
customers through multiple distribution channels including in-store, catalog and
the Internet. Our credit and marketing services assist our clients in
identifying and acquiring new customers as well as helping to increase the
loyalty and profitability of their existing customers.
We target select market sectors that typically involve companies who sell
products and services to individual consumers. The market sectors include
specialty retailers, petroleum retailers, supermarkets and financial services
companies. Additionally, we target markets where there is an increasing
acceptance of electronic payments--mass transit, tollways and parking--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 the demand increases for products and services that help them
compete in a newly de-regulated market.
Our client base includes over 300 companies. We generally have long-term
relationships with our clients, with contracts typically ranging from three to
five years in duration. Our top five clients, based on their contribution to our
2000 consolidated revenue, are:
- the retail affiliates of The Limited, including Victoria's Secret Stores,
Victoria's Secret Catalogue, Express, Lane Bryant, Bath and 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.
OUR HISTORY
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.
In July 1998, we acquired The Loyalty Management Group Canada Inc., which
developed and operates the Air Miles reward miles program in Canada. The
acquisition expanded our Marketing Services capabilities to include loyalty
marketing. In September 1998, we acquired Harmonic Systems Incorporated, which
provides network services, on-line loyalty and stored value products to
specialty retailers. This acquisition enabled us to expand our transaction
services to include specialty retailers. In July 1999, we acquired the network
services business of SPS Payment Systems, Inc., a wholly owned subsidiary of
Associates First Capital Corporation. This acquisition increased our processing
scale and added an additional 180 clients, many in market sectors with an
increasing acceptance of electronic payments, such as mass transit, tollway and
parking.
PROGRAMS AND PRODUCTS
Our program and product offerings are centered around three core
offerings--Transaction Services, Credit Services and Marketing Services.
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TRANSACTION SERVICES
Transaction Services is our largest segment representing 49.5% of our 2000
revenue. Primary services within this segment are transaction processing,
representing 34.5% of this segment's 2000 revenue, and account processing and
servicing, representing 64.3% of this segment's 2000 revenue.
We facilitate and manage transactions between our clients and their
customers through our scalable processing systems. Our services include
transaction processing and account processing and servicing. Transaction
processing is the electronic authorization, capture and financial settlement of
sales transactions at the point of sale. Account processing and servicing is the
processing of consumer accounts--both private label credit card and utility
accounts; billing and payment processing; and the handling of customer service
and collection calls associated with those accounts. Through our predecessor
company, we have provided transaction services since 1983. Our clients within
this segment are made up of specialty retailers and petroleum retailers. Our
largest clients within this segment include The Limited and its retail
affiliates, representing approximately 28% of this segment's 2000 revenue, and
Brylane, representing approximately 10% of this segment's 2000 revenue.
TRANSACTION PROCESSING. We are a leading provider of transaction
processing, processing 2.5 billion transactions in 2000 through approximately
138,000 of our point-of-sale terminals. According to the Faulkner and Gray Card
Industry report, we were ranked fifth among third-party U.S. payment processors
in 1999. We believe that we are the largest transaction processor to the U.S.
retail petroleum industry, and we have a significant presence in the specialty
retail and transportation industries.
NETWORK SERVICES. We have built a network that enables us to process an
array of electronic payment types including credit card, debit card, prepaid
card, electronic benefits and fleet and check transactions. Our acquisitions of
Harmonic Systems and SPS's network transaction processing business have enabled
us to offer our existing products to new market segments, as well as provide
additional products to existing clients. In addition to authorization and
settlement of transactions, we also provide merchants with on-line, two-way mail
messaging between our clients and their individual locations by broadcasting and
receiving messages through their terminal devices. We provide clients with a
comprehensive help desk, operating 24 hours per day and seven days per week, as
well as terminal deployment and servicing.
MERCHANT BANKCARD SERVICES. Our merchant bankcard services include
financial settlement of MasterCard, Visa, Discover, American Express and other
electronic card transactions, including credit, debit and stored value cards.
Through our merchant bankcard services our clients can maintain their current
settlement provider or use us as a single processor to streamline their
end-to-end transaction processing.
ACCOUNT PROCESSING AND SERVICING. As reported in the Nilson Report, based
on the number of accounts on file we were the second largest outsourcer of
retail private label card programs in the United States in 1999, with
52.5 million accounts on file. We assist clients in issuing private label 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 Transaction Services
segment performs account processing and servicing for the Credit Services
segment in connection with that segment's private label card programs. These
intersegment services accounted for 47.1% of Transaction Services revenue in
2000. Our commercial card processing and servicing capabilities are specifically
designed to handle the unique requirements 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. We
47
also provide billing and payment processing and customer care services in new
markets, such as for regulated and de-regulated utility companies.
CARD PROCESSING. We have developed a proprietary private label credit card
system designed specifically for retailers with the flexibility to make changes
to accommodate our clients' specific needs. We have also built into the system
marketing tools to assist our clients in increasing sales. We utilize our Quick
Credit and On-Line Pre-Screen products to originate new private label credit
card accounts. We believe that these products provide an effective marketing
advantage over competing services.
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,
register devices or web sites.
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.
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 9.5 million new cards in
2000.
BILLING AND PAYMENT PROCESSING. We use 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 127.2 million statements in 2000. In addition, we also
process customer payments using image processing technology to maximize
efficiency. By doing so, we improve the funds availability for both our clients
and for those private label receivables that we own or securitize.
CUSTOMER CARE. Our customer care operations are influenced by our retail
heritage. We focus our training programs in all areas on achieving the highest
possible standards. We monitor our performance by conducting surveys with our
clients and their customers. We have over 5,000 call center seats in 11
locations, and we handled over 115 million customer inquiries in 2000. Our call
centers are equipped to handle phone, mail, fax and Internet inquiries. We also
provide collection activities on delinquent accounts to support our retail
private label credit card programs.
CREDIT SERVICES
Through our Credit Services segment we provide a program that allows our
clients to make private label credit cards available for their customers without
having to commit financial resources to the funding of the receivables. We are
able to finance and operate private label programs more effectively than a
typical retailer can operate a stand-alone program, as we are able to fund
receivables through our securitization program to achieve lower borrowing costs
while having the infrastructure to support a variety of portfolio types and a
large number of account holders.
Through World Financial, we underwrite the accounts and fund purchases at
45 private label credit clients, representing 56.2 million cardholders and
$2.1 billion of receivables as of March 31, 2001. Tracing back to our
predecessor company, we have experience and expertise in successfully managing
private label portfolios since 1986. Clients who utilize our credit services are
predominantly specialty retailers. Our largest clients within this segment
include The Limited and its retail affiliates, representing 59.2% of this
segment's 2000 revenue, and Brylane, representing 21.1% of this segment's 2000
revenue.
ACCOUNT UNDERWRITING AND RISK MANAGEMENT. We believe that an effective risk
management process is important in both account underwriting and servicing. We
use risk-based pricing in establishing
48
pricing arrangements with our clients. We also use a risk analysis in
establishing initial credit limits with cardholders. Because we process a large
number of credit applications each year, we use automated proprietary scoring
technology and verification procedures to process these applications. 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. Credit scoring is based on
several factors including delinquency history, number of recent credit inquiries
and the amount of credit used and available. We continuously validate, monitor
and maintain the scorecards, and we use resulting data to ensure optimal risk
performance.
We utilize the capabilities of our Marketing Services segment to develop and
execute new account acquisition strategies that support our underwriting
guidelines.
We monitor and control the quality of our portfolio on a continuous basis by
using behavioral scoring models to score each active account on its monthly
cycle date. The behavioral scoring models dynamically evaluate credit limit
assignments to determine whether credit limits should be increased, decreased or
maintained 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.
MERCHANT PROCESSING. We receive a merchant fee for processing each sales
transaction charged to a private label credit card program for which we provide
receivables funding. Processing includes authorization and settlement of the
funds to the retailer, net of our merchant discount fee.
RECEIVABLES FUNDING. We utilize a securitization program as our primary
funding vehicle for private label credit card receivables. Securitizations
involve the packaging and selling of both current and future receivable balances
of credit card accounts to a master trust. Our Transaction Services segment
retains rights to service the securitized accounts. Our securitizations are
treated as sales for accounting purposes and, accordingly, the receivable is
removed from the balance sheet. We retain an ownership interest in the
receivables, which is commonly referred to as a seller's interest, and a
residual interest in the trust, which is commonly referred to as an interest
only strip.
We securitize our receivables by selling them to a master trust. The master
trust funds itself by issuing publicly traded bonds or selling notes to
bank-sponsored multi-seller conduits who in turn issue commercial paper. The
bonds and notes represent undivided interests in all of the receivables in the
related master trust and may be split into separate series and classes that have
different terms or maturities. The different classes of an individual series are
structured to obtain specific credit ratings. Our seller's interest ranks
equally in the right to repayment of principal with the most senior bondholders.
Generally, each series involves an initial reinvestment period, which we
refer to as a revolving period, in which the principal payments on receivables
allocated to such series are returned to us and we reinvest in the trust new
receivables from customer accounts. After the revolving period ends, principal
payments allocated to the series are used to repay the investors. This period is
referred to as the controlled amortization period. We currently have one series
that has entered its controlled amortization period. The controlled amortization
period is determined by the agreements governing each series. All series set
forth early amortization events, which are deemed to occur if portfolio
collections, less net charge-offs for bad debt, financing costs and servicing
fees, drop below a minimum threshold. Because new receivables in designated
accounts cannot be funded by the trust while a series is in early amortization,
early amortization would require us to fund any new receivables or establish a
new securitization vehicle. We do not have any series in early amortization.
49
Each month, each series is allocated its share of finance charge collections
which is used to pay investors interest on their securities, to reimburse them
for their share of losses due to charge-offs and to pay their share of servicing
fees. Amounts remaining may be deposited in cash accounts of the trust as
additional protection for future losses. Once each of these obligations is fully
met, remaining finance charge collections, if any, are returned to us.
We also maintain flexibility in our current securitization program by
negotiating with bank-sponsored conduits. These conduits purchase an interest in
receivables arising in designated accounts. These transactions also feature a
revolving period in which principal payments on receivables allocated to the
conduits are returned to us and reinvested in new receivables. These agreements
also have early amortization triggers. Finance charge collections are used to
pay certain obligations, including servicing fees, interest on the principal
amount of the conduit's investment in the applicable receivables, and recouping
charge-offs. After such allocation, remaining finance charge collections, if
any, are returned to us.
INTEREST ONLY STRIP. We retain a residual interest in the receivables that
essentially represents an interest only strip. The fair value of the interest
only strip is determined by the present value of the anticipated cash flows over
the estimated outstanding period of the receivables. This anticipated excess
cash flow consists of the excess of finance charges and past-due fees net of the
sum of the return paid to bondholders, contractual servicing fees and credit
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 within our control.
A decrease in interest rates could cause cardholder prepayments to increase,
thereby requiring a write down in the rate 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.
MARKETING SERVICES
Our clients are focused on targeting, acquiring and retaining loyal and
profitable customers. We create and manage marketing programs that result in
securing more frequent and sustained customer purchasing. We utilize the
information gathered through our loyalty programs to help our clients design and
implement effective marketing programs. Our primary service for this segment is
the Air Miles reward miles program, representing 72.2% of this segment's 2000
revenue. Our clients within this segment are specialty retailers, petroleum
retailers, supermarkets and financial services providers. Our largest clients
are Bank of Montreal, representing approximately 26.8% of this segment's 2000
revenue, and Safeway Canada, representing approximately 10% of this segment's
2000 revenue.
AIR MILES REWARD MILES PROGRAM. We operate what we believe to be the
largest 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
miles 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 program
members or collectors can
50
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 miles program has enabled
sponsors to use this tool to 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
miles program:
- sponsors--our clients who enter the Air Miles reward miles program to
build their customers' loyalty and increased sales from those customers;
- collectors--customers of sponsors who enroll in the Air Miles reward miles
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 miles program and prospective sponsors to join
the Air Miles reward miles program. A sponsor enters into an agreement with us
to secure exclusive rights for its particular region and product or service
category, and to reward customers for changing their shopping behavior. Over a
number of years, we have been able to develop a membership, or a collector base,
of 6.5 million active collectors.
COLLECTORS
The major benefits of the Air Miles reward miles 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 miles program offers a reward structure that provides a
quick and easy way to earn a broad selection of travel, entertainment and other
lifestyle rewards 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, grocery and 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 to the
program.
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. We make payments to suppliers pursuant to the contractual supply
arrangement when a collector redeems the Air Miles reward miles.
DATABASE MARKETING SERVICES. We have built and manage a large database
containing information on approximately 85.7 million U.S. consumers. This
database contains nearly five years of purchase information as well as details
and results of marketing programs conducted over the last five years. In
51
addition, we provide database management services for our Air Miles reward miles
program. This database contains Air Miles collection information for over
6.5 million Canadian households and the results of marketing programs conducted
over the last seven years. Using this database, we have developed a suite of
data mining and profiling products that enable our clients to better understand
their customers and optimize opportunities for developing customer
relationships.
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. These services include
sourcing, promoting and fulfillment of products. These products do not compete
with the clients' merchandise offerings and include merchandise, travel clubs
and credit life insurance programs.
DIRECT MARKETING. 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, cash
register devices or web sites. We view this product as a competitive
advantage for 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 target a particular segment of
the customer base and promote specific products and services to them based
on customer profiles. 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.
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.
OUR MARKET OPPORTUNITY AND GROWTH STRATEGY
The increasing acceptance of electronic payment systems, including credit,
debit and stored value cards, generates transaction data on individual
consumers, while the dramatic proliferation of technology has enabled companies
to capture, access and easily use this information.
While companies recognize the 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 card operations,
including the extension of credit. In addition, many companies look externally
for the expertise to develop and manage their marketing services. Thus,
companies that provide the infrastructure to create, manage and facilitate
electronic payment systems can create a
52
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 will capitalize on our market opportunities by:
INCREASING THE PENETRATION OF OUR PRODUCTS AND SERVICES TO EXISTING
CLIENTS. We plan to further increase the number and types of products and
services we provide to our existing client base.
EXPANDING OUR CLIENT BASE IN OUR EXISTING MARKET SECTORS. We plan to
acquire new clients in our traditional markets by continuing to distinguish
ourselves as a provider of integrated transaction services, credit services
and marketing services. We will 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.
CONTINUING TO EXPAND OUR SERVICES AND CAPABILITIES TO HELP OUR CLIENTS
SUCCEED IN MULTI-CHANNEL COMMERCE. We plan to help our clients in all
channels they choose for distribution--whether in-store, catalog or the
Internet. Our current client base is comprised predominantly of traditional
storefront and catalog distribution channels. We can apply the systems and
marketing programs we have built to support our store and catalog clients
using the Internet.
CONSIDERING FOCUSED, STRATEGIC ACQUISITIONS AND ALLIANCES. As we
identify new opportunities or product gaps, we may consider focused
acquisitions and alliances to enhance our competencies or increase our
scale.
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
marketing services to Victoria's Secret. The Victoria's Secret private label
credit card that we issue allows us to capture a customer's name and address, as
well as transaction data in any channel the customer 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 that we collect and manage for the private label credit
card program to enhance our billing, payment processing and customer care
services.
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. 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.
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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 used in each segment of our business. 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 United States 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 United States and Canada. We believe that our trademarks are
important for our branding and corporate identification and marketing of our
services in each segment.
COMPETITION
The markets for our products and services are highly competitive. We compete
with data processing companies, credit card issuers and traditional and online
marketing companies, as well as with the in-house staffs of our current and
potential clients.
TRANSACTION SERVICES. The payment processing industry is highly
competitive, especially among the five largest payment processors in the United
States, which processed approximately 17.0 billion transactions during 1999. We
are a leading provider of transaction services, processing 2.5 billion
transactions in 2000 through approximately 138,000 of our point-of-sale
terminals. According to the Faulkner and Gray Card Industry report, we were
ranked fifth among U.S. payment processors in 1999. 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, detail-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. Our credit services business competes primarily with
financial institutions whose marketing focus has been on developing credit card
programs with large revolving balances. These competitors further drive 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.
MARKETING SERVICES. As a provider of marketing 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 marketing 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
54
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.
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 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 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 under the Gramm-Leach-Bliley Act that take effect in July 2001 will
give credit card customers the ability to opt out of having information
generated by their credit card purchases shared with other parties or the
public.
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. We have taken steps with the Air Miles reward miles program
to comply with the new law.
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 a consumer reporting agency under the Fair Credit
Reporting Act. If we were deemed to be a consumer
55
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 the
enforceability of such legislation, prior court decisions and the volume of
business we conduct in states that have passed this 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 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.
56
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 cumulatively in the last
two years and 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 March 31, 2001, World Financial's Tier 1 capital ratio
was 15.8%, total capital ratio was 16.0% and leverage ratio was 52.7%, 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
57
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 March 31, 2001,
World Financial was in full compliance with its 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 March 31, 2001, we had approximately 6,500 employees in the
United States, Canada and New Zealand.
58
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.
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 Merchandise
and 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. 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 asserting affirmative
defenses. We were granted leave by the Bankruptcy Court to file counterclaims
against both plaintiffs. Through these counterclaims, we are seeking to recover
from Service Merchandise and Service Credit various amounts, cumulatively
exceeding $30.0 million, that we contend are due and owing to us. Service
Merchandise and Service Credit Corp. filed a joint answer with affirmative
defenses on April 26, 2001. Neither Service Merchandise nor Service Credit Corp.
have specified the amount of damages that they are seeking from us but do claim,
among other things, that World Financial's conduct caused the plaintiffs to
suspend, and later terminate, the private label card program agreement. The
plaintiffs generally claim they suffered damages through unpaid amounts that
they allege World Financial owes them, lost sales and profits, the loss of the
economic benefits of the World Financial credit card program, and a loss of
enterprise value. 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. The plaintiffs
allege that World Financial, through such practices, has violated several
federal and Florida state consumer protection statutes and breached cardholder
contracts. The plaintiffs have not specified an amount of damages, but 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. World Financial believes these allegations are without
merit and intends to defend this matter vigorously.
59
PROPERTIES
The following table sets forth information with respect to our principal
facilities.
CURRENT
MONTHLY APPROXIMATE LEASE
BASE LEASE SQUARE EXPIRATION
LOCATION SEGMENT RENT FOOTAGE DATE
- -------- ---------------------------- ---------- ----------- ------------------
Northglenn, Colorado........ Transaction Services $ 37,104 65,000 August 31, 2007
Kennesaw, Georgia........... Transaction Services $ 22,560 20,068 October 8, 2006
Buffalo Grove, Illinois..... Transaction Services $ 35,669 24,320 February 29, 2010
Lenexa, Kansas.............. Transaction Services $ 45,244 65,000 January 31, 2008
Minneapolis, Minnesota...... Marketing Services and $ 31,997 28,442 August 31, 2004
Transaction Services
Voorhees, New Jersey........ Transaction Services $ 75,431 67,050 January 1, 2005
Columbus, Ohio.............. Transaction Services $ 36,536 103,161 January 31, 2008
Columbus, Ohio.............. Transaction Services and $ 74,928 100,800 May 31, 2006
Credit Services
Columbus, Ohio.............. Transaction Services $ 14,400 57,600 August 31, 2004
Columbus, Ohio.............. Marketing Services, $ 40,733 54,615 August 31, 2007
Transaction Services and
Credit Services
Reno, Ohio.................. Credit Services $ 11,128 12,140 April 30, 2002
Zanesville, Ohio............ Credit Services $ 5,850 5,400 April 1, 2006
Johnson City, Tennessee..... Transaction Services $ 44,925 45,000 October 19, 2010
Dallas, Texas............... Marketing Services and $ 114,228 114,419 November 30, 2009
Transaction Services
Dallas, Texas............... Transaction Services and $ 121,000 114,419 October 10, 2010
Credit Services
Dallas, Texas............... Marketing Services, $ 57,479 61,750 July 31, 2007
Transaction Services and
Credit Services
Dallas, Texas............... Transaction Services $ 18,224 72,897 April 30, 2006
San Antonio, Texas.......... Transaction Services $ 47,692 67,540 January 31, 2002
Mississauga, Ontario, $ 36,850 39,027 August 31, 2009
Canada.................... Marketing Services
Toronto, Ontario, Canada.... Marketing Services $ 228,700 137,411 September 16, 2007
Montreal, Quebec, $ 5,846 6,093
Canada.................... Marketing Services June 30, 2009
Calgary, Alberta, Canada.... Marketing Services $ 9,313 8,120 December 31, 2004
Auckland, New Zealand....... Transaction Services $ 12,041 11,700 September 13, 2005
---------- ---------
Total..................... $1,127,878 1,281,972
========== =========
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.
60
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth the name, age and positions of each of our
executive officers, business unit presidents and directors as of the date of
this prospectus:
NAME AGE POSITION
- ---- --------------------- ------------------------------------------
J. Michael Parks.......................... 50 Chairman of the Board of Directors,
Chief Executive Officer and President
Ivan M. Szeftel........................... 47 Executive Vice President and President,
Retail Credit Services
John W. Scullion.......................... 44 President and Chief Executive Officer,
The Loyalty Group
Michael A. Beltz.......................... 45 Executive Vice President and President,
Transaction Services Group
Edward J. 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......................... 48 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................. 34 Vice President, Tax
Bruce K. Anderson......................... 61 Director
Roger H. Ballou........................... 50 Director
Anthony J. deNicola....................... 36 Director
Daniel P. Finkelman....................... 45 Director
Kenneth R. Jensen......................... 57 Director
Robert A. Minicucci....................... 49 Director
Bruce A. Soll............................. 43 Director
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 M. 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 a director and 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.
61
JOHN W. 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 financial 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.
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 and then president of business development and
planning. He is responsible for transaction services, U.S. based marketing
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 J. 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 Corporation 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 human resources, facilities, legal
services, corporate communications and corporate marketing. 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, internal 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 Bachelor's 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.
62
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,
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.
ROGER H. BALLOU has served as a director since February 2001. Mr. Ballou has
been a self-employed consultant since October 2000. Before that time,
Mr. Ballou had served as chairman and chief executive officer of Global Vacation
Group, Inc. from April 1998 to September 2000. Prior to that, he was a senior
advisor for Thayer Capital Partners from September 1997 to April 1998. From
April 1995 to August 1997, he served as vice chairman and chief marketing
officer, then as president and chief operating officer, of Alamo
Rent-a-Car, Inc. Mr. Ballou is currently chairman of the U.S. National Tourism
Organization, and served as chairman of the Government Affairs Council from 1995
to 1997. Mr. Ballou is currently a director of American Medical Security Group,
Inc. Mr. Ballou holds a Bachelor's degree from the Wharton School of the
University of Pennsylvania and an MBA from the Tuck School of Business at
Dartmouth.
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 Corp. and
NTELOS Inc. 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.
KENNETH R. JENSEN became a director in February 2001. 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.
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.
63
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 eight members.
Kenneth R. Jensen and Roger H. Ballou were elected as independent directors in
February 2001, and we intend to designate one additional independent director
after 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............................. 2004 Anthony J. deNicola,
Bruce A. Soll,
Kenneth R. Jensen
Class II............................ 2002 Bruce K. Anderson,
Daniel P. Finkelman
Roger H. Ballou
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 board of directors presently has three committees, consisting of the
audit committee, the compensation committee and the capital budget committee.
The audit committee, which consists of Kenneth R. Jensen, Roger H. Ballou
and Anthony J. deNicola, will review the scope and approach of the annual audit,
our financial statements and related auditors' report and the auditors' comments
relative to the adequacy of our system of internal controls and financial
reporting. The audit committee will also recommend to our board of directors the
appointment of independent public accountants for the following year. In
accordance with New York Stock Exchange regulations, the members of the audit
committee are independent directors who are financially literate, at least one
of whom has significant experience in accounting or finance matters. Our audit
committee has adopted and will periodically review a written charter that will
specify the scope of its responsibilities.
The compensation committee, which consists of Robert A. Minicucci and
Daniel P. Finkelman and will include a third nonemployee director, 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 administer specific matters with
respect to our stock option plan.
The capital budget committee, which currently consists of Anthony J.
deNicola and Bruce A. 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 $1 million.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our board of directors or the compensation committee
made decisions relating to the compensation of Mr. Parks and the executive
officers reporting directly to him. During this time, 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
64
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 at an exercise price equal to the initial public offering price
or (2) a nonqualified stock option to purchase 28,500 shares of our common
stock, at an exercise price equal to the fair market value at the date of grant,
plus cash compensation of $15,000 annually, $1,000 for each board meeting
attended and $500 for each committee meeting attended. Non-employee directors
who are elected after this offering will make this choice of compensation
alternatives upon becoming directors and will receive the nonqualified stock
options on the date that they first become directors.
65
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for the
year ended December 31, 2000 for our chief executive officer, our four other
most highly compensated executive officers and one additional executive officer
who would have been one of our four most highly compensated executive officers
if he had continued to be employed with us as of December 31, 2000. These six
individuals are referred to as the named executive officers.
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
--------------------- --------------------------------------
SECURITIES
RESTRICTED UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY ($) BONUS(1) STOCK AWARDS($)(2) OPTIONS, SARS (#) COMPENSATION
- --------------------------- ---------- -------- ------------------ ----------------- --------------
J. Michael Parks....................... $475,000 $372,000 $1,800,000 230,000 $ 33,482
Chairman of the Board,
Chief Executive Officer and President
Ivan M. Szeftel........................ $335,000 $179,800 $ 525,000 80,000 $ 21,135
Executive Vice President and
President, Retail Credit Services
Michael A. Beltz....................... $260,000 $198,200 $ 525,000 80,000 $ 15,503
Executive Vice President and
President, Transaction Services Group
John W. Scullion(3).................... $255,104 $134,006 $ 525,000 80,000 $ 11,993
President and Chief Executive
Officer, The Loyalty Group
Edward K. Mims(4)...................... $214,077 $113,377 $ 525,000 80,000 $290,787
Executive Vice President
and Chief Financial Officer
James E. Anderson(5)................... $233,692 $117,500 $ 525,000 80,000 $ 17,176
Executive Vice President and
President, Utilities Services
- ------------------------
(1) Bonuses represent amounts earned by each executive officer during the
referenced year, although paid in the following year. Bonuses are determined
based upon the achievement of operating income, various financial and
operational objectives and individual objectives.
(2) Amounts in this column represent the value of the following
performance-based restricted stock awards issued in September 2000 at $15.00
per share: 120,000 shares to Mr. Parks and 35,000 shares to each of
Messrs. Szeftel, Beltz, Scullion, Mims and Anderson. The value of the
restricted stock awards, based upon an assumed initial public offering price
of $13.00 per share, is $1,560,000 for Mr. Parks and $455,000 for each of
Messrs. Szeftel, Beltz, Scullion, Mims and Anderson. 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 at the end of a five year period, but some
can vest on a more accelerated basis if certain annual EBITDA performance
targets are met. Twenty percent of each participant's award vested on
February 6, 2001 based on our EBITDA in 2000.
(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.
66
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 M. Szeftel............................... $11,580 $ 149 $ 9,406 $ -- $ --
Michael A. Beltz.............................. $ 9,980 $ 115 $ 5,408 $ -- $ --
John W. 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 M. 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 W. 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 $15.00 per
share.
(2) In accordance with SEC rules, the amounts shown on this table represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. These gains are based on the
assumed rates of stock appreciation of 5% and 10% compounded annually from
the date the respective options were granted to their expiration date and do
not reflect our estimates or projections of the future price of our common
stock. The gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with the exercise.
Actual gains, if any, on stock option exercises will depend on the future
performance of our common stock, the option holder's continued employment
through the option period, and the date on which the options are exercised.
(3) Under Mr. Mims' severance agreement, options that were vested as of the date
of his resignation may be exercised by Mr. Mims for a period of up to six
months after that date. One-third of Mr. Mims' unvested options will vest on
August 31, 2001 and be exercisable thereafter for a period of six months.
67
(4) Under Mr. Anderson's severance agreement, options that were vested as of the
date of his resignation may be exercised through February 2002. One-third of
Mr. Anderson's unvested options will vest on August 31, 2001 and be
exercisable thereafter for a period of six months.
OPTION EXERCISES IN LAST FISCAL YEAR
The following table sets forth certain information concerning all
unexercised options held by the named executive officers as of December 31,
2000. No options were exercised by the named executive officers during 2000.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT MONEY OPTIONS AT
FISCAL YEAR-END(#) FISCAL YEAR-END($)(1)
--------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ------------- -------------
J. Michael Parks.............................. 298,609 348,056 $1,175,686 $415,974
Ivan M. Szeftel............................... 61,111 152,222 $ 239,444 $273,889
Michael A. Beltz.............................. 72,221 141,110 $ 271,384 $216,941
John W. Scullion.............................. 41,667 121,666 $ 129,168 $129,165
Edward K. Mims(2)............................. 36,111 132,777 $ 131,944 $183,609
James E. Anderson(3).......................... 43,055 125,832 $ 159,720 $155,829
- ------------------------
(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. Mims' 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 2002. 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, all of which have vested.
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. Of these options,
options to purchase 41,666 shares are vested. Mr. Parks was also granted options
to purchase 230,000 shares of our common stock at an exercise price of $15.00
per share in 2000, none of which are vested. Additionally, Mr. Parks is entitled
to participate in our 401(k) and Retirement Savings Plan, our Incentive
Compensation Plan and any other employee benefits as provided to other senior
executives. Mr. Parks is entitled to 18 months base salary if terminated.
IVAN M. 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
68
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. Under the agreement, we
granted Mr. Szeftel options to purchase 111,111 shares of our common stock at an
exercise price of $9.00 per share. Of these options, options to purchase
83,332 shares have vested. Mr. Szeftel was also granted options to purchase
22,222 shares of our common stock at an exercise price of $9.90 per share in
1999. Of these options, options to purchase 5,556 shares are currently vested.
Mr. Szeftel was also granted options to purchase 80,000 shares of our common
stock at an exercise price of $15.00 per share in 2000, none of which are
vested. Mr. Szeftel is entitled to participate in our 401(k) and Retirement
Savings Plan, our 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 12 months base salary.
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 outplacement benefits,
reimbursement of continuing professional educational expenses and professional
fees through 2001. The severance agreement also provided that Mr. Mims was
entitled to a payment under the 2000 Incentive Compensation Plan, the amount of
which was later set at $113,377. 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 will vest on
August 31, 2001 and be exercisable thereafter for a period of six months.
Mr. Mims received a lump sum cash payment pursuant to restricted stock awards
that vested on February 6, 2001.
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 2002. One-third of Mr. Anderson's unvested options
will vest on August 31, 2001 and be exercisable thereafter for a period of six
months. Mr. Anderson received a lump sum cash payment pursuant to restricted
stock awards that vested on February 6, 2001.
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 2001. 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 March 31, 2001, there were 4,384,576 shares of common stock subject to
outstanding options at a weighted average exercise price of $12.43 per share.
Under the plan, we may grant incentive stock options to any person employed
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
69
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 March 31, 2001
performance-based restricted awards representing an aggregate of 570,000 shares
had been granted to 28 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. Our board of directors accepted the
2000 EBITDA results and accelerated vesting for 114,000 shares based on strong
contributions from management to our company in 2000.
We implemented a program whereby we make loans available to recipients of
restricted stock awards in amounts sufficient to cover any tax liability
resulting from the vesting of those awards. The amount that any participant can
borrow under the program is limited to 50% of the value of the vested shares.
Participants in the program are required to pledge their vested restricted
shares to us as collateral, until the loans are repaid.
The plan provides that our board of directors will administer the plan. Our
board of directors may delegate all or a portion of its authority under the plan
to the compensation committee. The board of directors or the compensation
committee may further delegate all or a portion of its authority under the plan
to our chief executive officer, except with respect to grants of options or
awards to officers and directors who are subject to Section 16(b) of the
Securities Exchange Act of 1934.
The plan gives our board of directors discretion to determine the vesting
provisions of each individual stock option. In the event of a change of control,
our plan provides that our board of directors 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. The normal 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 6,700 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
70
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 are eligible to participate.
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 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.
2001 INCENTIVE COMPENSATION PLAN
The Alliance Data Systems 2001 Incentive Compensation Plan provides an
opportunity for certain U.S. employees to be eligible for a cash bonus based on
achieving certain performance targets. To be eligible under the plan, employees
must meet certain eligibility requirements outlined in the plan document.
Under the plan, each participant has an incentive compensation target that
is expressed as a percentage of his or her annualized base salary as of
October 1, 2001. The participant's incentive compensation target is based on
various objectives that are weighted to reflect the participant's contribution
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, as well as associate satisfaction scores, and the individual
objectives are items of importance to us that the individual can impact. Our
executive committee
71
members and chairman have their incentive compensation target tied to our
operating income, revenue (either at the company level or at the business unit
level), and associate satisfaction. The amount of compensation a participant
receives depends on the percentage of objectives that were achieved. For all
objectives except associate satisfaction, 80% of the objectives must be achieved
before a participant is eligible for any payout and the maximum payout is equal
to 150% of the participant's incentive compensation target. For associate
satisfaction, 90% of the target must be achieved before a participant is
eligible for any payout, plus there must be improvement from the 2000 base score
before a participant is eligible for any payout.
EMPLOYEE STOCK PURCHASE PLAN
We adopted the Alliance Data Systems Corporation and its Subsidiaries
Employee Stock Purchase Plan in February 2001. We intend for the plan to qualify
under section 423 of the Internal Revenue Code. The plan permits 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 has 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.
72
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of April 30, 2001 by:
(1) each person who is known by us to own beneficially more than 5% of our
common stock;
(2) each current director;
(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 57,936,136 shares of our
common stock outstanding on April 30, 2001, and 70,936,136 shares of our common
stock outstanding immediately after 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) ......................... 43,025,608 74.3% 60.7%
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Limited Commerce Corp. ..................................... 14,663,376 25.3% 20.7%
Three Limited Parkway
Columbus, Ohio 43230
J. Michael Parks(3)......................................... 398,998 * *
Ivan M. Szeftel(4).......................................... 101,443 * *
Michael A. Beltz(5)......................................... 112,553 * *
John W. Scullion(6)......................................... 69,500 * *
Edward K. Mims(7)........................................... 58,331 * *
James E. Anderson(8)........................................ 65,275 * *
Bruce K. Anderson(9)........................................ 358,085 * *
Anthony J. deNicola(9)...................................... 34,373 * *
Robert A. Minicucci(9)...................................... 118,147 * *
Roger H. Ballou............................................. -- * *
Daniel P. Finkelman......................................... -- * *
Kenneth R. Jensen........................................... -- * *
Bruce A. Soll............................................... -- * *
All directors and executive officers as a group
(20 individuals)(10)...................................... 1,463,824 2.5% 2.1%
- ------------------------
* 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
73
convertible within 60 days of April 30, 2001, 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 10,273,990 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, 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,
- 102,630 shares of common stock held by Thomas E. McInerney,
- 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,
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- 10,101 shares of common stock held by Rudolph Rupert, and
- 2,525 shares of common stock held by D. Scott Mackesy.
(3) Includes options to purchase 374,998 shares of common stock which are
exercisable within 60 days of April 30, 2001.
(4) Includes options to purchase 94,443 shares of common stock which are
exercisable within 60 days of April 30, 2001.
(5) Includes options to purchase 105,553 shares of common stock which are
exercisable within 60 days of April 30, 2001.
(6) Includes options to purchase 62,500 shares of common stock which are
exercisable within 60 days of April 30, 2001.
(7) Includes options to purchase 58,331 shares of common stock which are
exercisable within 60 days of April 30, 2001.
(8) Includes options to purchase 65,275 shares of common stock which are
exercisable within 60 days of April 30, 2001.
(9) The number of shares beneficially owned by Messrs. Bruce K. Anderson,
deNicola and Minicucci includes 112,046, 10,696 and 37,096 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 877,618 shares of common stock
which are exercisable within 60 days of April 30, 2001 held by Messrs.
Parks, Szeftel, Beltz, Mims, James E. Anderson, Armiak, Heffernan, Kubic,
Melvin, Schumacher, Scullion, Tucker and Walensky and 159,839 shares
issuable upon conversion of Series A preferred stock.
75
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 April 30, 2001. 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. As of April 30, 2001, these preferred
shares were convertible into 10,273,990 shares of common stock, assuming an
initial public offering price of $13.00 per share. Upon consummation of the
offering, all of the outstanding shares of Series A preferred stock will be
converted into shares of 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., one of our wholly
owned subsidiaries.
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, which now operates as part of ADS
Alliance Data Systems. 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.
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 25.3% of our common
stock as of April 30, 2001. 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 designate two members of 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, Henri Bendel, Victoria's
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Secret Catalogue, Victoria's Secret Stores, Lerner New York, Lane Bryant and
Express. Many of these affiliates 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 December 31, 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. World Financial is obligated to issue credit cards
to any customer of a Limited affiliate who applies for a credit card, meets
World Financial's credit standards, and agrees to the terms and conditions of
World Financial's standard form of credit card agreement. World Financial is
allowed to change its applicable credit standards and standard form of credit
card agreement with the consent of the relevant Limited affiliate. Furthermore,
these agreements obligate World Financial to consider, in good faith, requests
by a Limited affiliate for variances from World Financial's credit standards and
standard form of credit agreement. 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 for special
programs and reimbursement of certain costs.
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 any third party 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, with the revenue to be
shared between World Financial, The Limited and its affiliated businesses as
agreed on a program by program basis.
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 Stores,
Lerner New York, Lane Bryant and Express, and to provide database marketing
services. Under the agreement, ADS has the right to sell data provided to ADS by
affiliates of The Limited under the agreement, subject to the privacy policies
of The Limited and Intimate Brands and their consent. 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 expires
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 $40.6 million during fiscal 1998, $46.6 million during 1999 and
$46.7 million during 2000.
77
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.
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 at any time after the consummation of this initial public offering,
subject to the 180-day lock-up agreement these entities have entered into in
connection with this 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 United States
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. Instead, stockholders have independently funded 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.
The stockholders of U.S. Loyalty Corp. include Welsh Carson, Limited
Commerce Corp. and our officers and directors who received stock in U.S. Loyalty
as a result of their participation in funding U.S. Loyalty Corp. Robert A.
Minicucci, who is a stockholder and one of our directors, is a director,
78
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.
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 MARCH 31, 2001
------------ ------------------------------
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 --
79
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 70,936,136 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
shares of our common stock, 129,063,864 of which will be unissued, and
20,000,000 shares of preferred stock available for our
80
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 plan and 1,500,000 shares have been
reserved for issuance under our employee stock purchase plan.
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
and restricted stock plan and our employee stock purchase 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.
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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.
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; and
- 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.
82
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 April 30, 2001, principal stockholders held 57,733,984 shares,
representing 99.6% of the outstanding shares of our common stock. Immediately
after this offering, we will have 70,936,136 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 57,936,136 shares, 72,013 shares will be freely transferable and
57,864,123 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 57,640,717 shares of our common stock and options to
purchase approximately 2,819,635 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, the underwriters, in their
sole discretion, may release any of these stockholders from the lock-up
agreements prior to expiration of the 180-day period 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 three months 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 and restricted stock 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 and restricted stock
plan. This registration statement would permit the resale of shares issued under
the stock option and restricted stock plan and the employee stock purchase 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 Corporation 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 Corporation......................
----------
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.
84
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 57,640,717 shares of our common stock, and options
to purchase approximately 2,819,635 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 will be determined by negotiation between us and the
representatives of the underwriters. Among the factors to be considered in these
negotiations will be:
- 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.
Our common stock has been approved for listing, subject to official notice
of issuance, 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 or, with regard to sales made in
Canada, through accounts at Merrill Lynch Canada Inc., in accordance with their
procedures for opening accounts and effecting transactions 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 Corporation, is making a prospectus in electronic format
available on its Internet Web site. The
85
underwriters have agreed to allocate shares to CSFBDIRECT Inc. for sale to its
qualified brokerage account 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 or endorsed by us or any underwriter in such capacity and should not be
relied on by prospective investors.
STABILIZATION AND OTHER TRANSACTIONS. In connection with the offering, the
underwriters may engage in stabilizing transactions, over-allotment
transactions, syndicate covering transactions and penalty bids.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum price.
- Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short position or a naked short position. In a covered short
position, the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising their over-allotment option and/or purchasing shares in the
open market.
- Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the
over-allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the position
can only be closed out by buying shares in the open market. A naked short
position is more likely to be created if the underwriters are concerned
that there could be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who
purchase in the offering.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by the
syndicate member is purchased in a stabilizing or syndicate covering
transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may have the effect of raising or maintaining the market price of our common
stock or preventing or retarding a decline in the market price of the common
stock. As a result, the price of our common stock may be higher than the price
that might otherwise exist in the open market. 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 at least 1.1 million shares outstanding and a minimum public market
value of $60.0 million.
86
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, 1999 and 2000 and for the eleven months
ended December 31, 1998 and the years ended December 31, 1999 and 2000, 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 and have been so included in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
The consolidated financial statements of Utilipro, Inc. and subsidiaries as
of September 30, 1999 and September 30, 2000 and for the years ended
September 30, 1999 and September 30, 2000, 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 report
of such firm given upon their authority as experts in accounting and auditing.
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.
87
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 eleven months
ended December 31, 1998 and the years ended December 31,
1999 and 2000............................................. F-3
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-4
Consolidated Statements of Stockholders' Equity for the
eleven months ended December 31, 1998 and the years ended
December 31, 1999 and 2000................................ F-5
Consolidated Statements of Cash Flows for the eleven months
ended December 31, 1998 and the years ended December 31,
1999 and 2000............................................. F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Condensed Consolidated Statements of Operations
for the three months ended March 31, 2000 and 2001........ F-31
Consolidated Balance Sheets as of December 31, 2000
(audited) and March 31, 2001 (unaudited).................. F-32
Unaudited Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 2000 and 2001........ F-33
Notes to Unaudited Condensed Consolidated Financial
Statements................................................ F-34
UTILIPRO, INC. AND SUBSIDIARIES
Independent Auditors' Report................................ F-37
Consolidated Balance Sheets as of September 30, 1999 and
2000 and December 31, 2000 (unaudited).................... F-38
Consolidated Statements of Operations for the years ended
September 30, 1999 and 2000
and the three months ended December 31, 1999 and 2000
(unaudited)............................................... F-39
Consolidated Statements of Stockholders' Equity for the
years ended September 30, 1999 and 2000 and the three
months ended December 31, 2000 (unaudited)................ F-40
Consolidated Statements of Cash Flows for the years ended
September 30, 1999 and 2000
and the three months ended December 31, 1999 and 2000
(unaudited)............................................... F-41
Notes to Consolidated 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, 1999 and 2000, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the eleven months ended December 31, 1998 and the years ended
December 31, 1999 and 2000. Our audits also include the financial statement
schedule listed in the Index at Item 16. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on the financial statements and the
financial statement schedule 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, 1999 and 2000, 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. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
February 2, 2001 (February 28, 2001 as to Note 21)
F-2
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
11 MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ------------------ ------------------
Revenues
Transaction and marketing services....... $264,928 $368,026 $415,792
Redemption revenue....................... 17,000 59,017 87,509
Financing charges, net................... 119,352 141,947 156,349
Other income............................. 9,633 14,092 18,545
-------- -------- --------
Total revenue........................ 410,913 583,082 678,195
-------- -------- --------
Operating expenses
Cost of operations....................... 335,804 466,856 547,985
General and administrative............... 17,589 35,971 32,201
Depreciation and other amortization...... 8,270 16,183 26,265
Amortization of purchased intangibles.... 43,766 61,617 49,879
-------- -------- --------
Total operating expenses............. 405,429 580,627 656,330
-------- -------- --------
Operating income............................. 5,484 2,455 21,865
Other non-operating expense.................. -- -- 2,477
Interest expense............................. 27,884 42,785 38,870
-------- -------- --------
Loss from continuing operations before income
taxes...................................... (22,400) (40,330) (19,482)
Income tax expense (benefit)................. (4,708) (6,538) 1,841
-------- -------- --------
Loss from continuing operations.............. (17,692) (33,792) (21,323)
Income (loss) from discontinued operations,
net of income taxes........................ (300) 7,688 --
Loss on disposal of discontinued operations,
net of income taxes........................ -- (3,737) --
-------- -------- --------
Net loss..................................... $(17,992) $(29,841) $(21,323)
======== ======== ========
Loss per share from continuing
operations--basic and diluted.............. $ (0.42) $ (0.78) $ (0.60)
======== ======== ========
Loss per share--basic and diluted............ $ (0.43) $ (0.70) $ (0.60)
======== ======== ========
Weighted average shares--basic and diluted... 41,729 47,498 47,538
======== ======== ========
See accompanying notes to consolidated financial statements.
F-3
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
ASSETS
Cash and cash equivalents................................... $ 56,546 $ 116,941
Due from card associations.................................. 44,919 125,083
Trade receivables less allowance for doubtful accounts
($1,079
and $3,876 at December 31, 1999 and 2000, respectively)... 46,724 86,153
Credit card receivables and seller's interest less allowance
for
doubtful accounts ($3,657 and $3,657 at December 31, 1999
and 2000, respectively)................................... 150,804 137,865
Deferred tax asset, net..................................... 26,416 22,365
Other current assets........................................ 45,209 35,368
---------- ----------
Total current assets................................ 370,618 523,775
Redemption settlement assets, restricted.................... 133,650 152,007
Property and equipment, net................................. 89,231 92,178
Deferred tax asset, net..................................... 38,201 55,366
Other non-current assets.................................... 31,470 18,753
Due from securitizations.................................... 144,484 133,978
Intangible assets and goodwill, net......................... 493,609 444,549
---------- ----------
Total assets........................................ $1,301,263 $1,420,606
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable............................................ $ 55,921 $ 63,570
Accrued expenses............................................ 75,646 80,547
Merchant settlement obligations............................. 61,674 149,271
Other liabilities........................................... 11,321 36,725
Debt, current portion....................................... 118,225 161,725
---------- ----------
Total current liabilities........................... 322,787 491,838
Other liabilities........................................... 32,752 1,856
Deferred revenue--service................................... 84,474 88,931
Deferred revenue--redemption................................ 164,867 201,255
Long-term and subordinated debt............................. 316,911 274,335
---------- ----------
Total liabilities................................... 921,791 1,058,215
---------- ----------
Commitments and contingencies
Series A cumulative convertible preferred stock, $0.01 par
value;
120 shares authorized, issued and outstanding............. 119,400 119,400
Stockholders' equity:
Common stock, $0.01 par value; authorized 66,667 shares
(December 31, 1999), and 200,000 shares (December 31,
2000),
issued and outstanding, 47,529 shares (December 31, 1999)
and 47,545 shares (December 31, 2000)..................... 475 475
Additional paid-in capital.................................. 226,174 226,323
Retained earnings........................................... 37,693 16,370
Accumulated other comprehensive income (loss)............... (4,270) (177)
---------- ----------
Total stockholders' equity.......................... 260,072 242,991
---------- ----------
Total liabilities and stockholders' equity.......... $1,301,263 $1,420,606
========== ==========
See accompanying notes to consolidated financial statements.
F-4
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) LOSS EQUITY
-------- -------- ---------- -------- ------------- ------------- -------------
JANUARY 31, 1998............ 36,619 $ 366 $118,864 $ 85,526 $ -- $204,756
Net loss.................... (17,992) $(17,992) (17,992)
Other comprehensive
income, 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
income.................... 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
Net loss.................... (21,323) $(21,323) (21,323)
Other comprehensive
income, net of tax:
Unrealized gain on
securities available
for sale, net......... 3,774 3,774 3,774
Foreign currency
translation
adjustments........... 319 319 319
-------
Other comprehensive
income.................... 4,093
--------
Total comprehensive loss.... $(17,230)
========
Common stock issued......... 16 -- 149 149
------- ------ -------- -------- ------- --------
DECEMBER 31, 2000........... 47,545 $ 475 $226,323 $ 16,370 $ (177) $242,991
======= ====== ======== ======== ======= ========
See accompanying notes to consolidated financial statements.
F-5
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
11 MONTHS
ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations................ $ (17,692) $ (33,792) $ (21,323)
Adjustments to reconcile loss from continuing
operations to net cash provided by operating
activities:
Income (loss) from discontinued operations..... (300) 7,688 --
Loss on disposal of discontinued operations.... -- (3,737) --
Depreciation and amortization.................. 52,036 77,800 76,144
Deferred income taxes.......................... (12,372) (37,600) (13,114)
Impairment of assets........................... 4,000 -- --
Accretion of deferred income................... (9,395) (5,950) (5,967)
Provision (credit) for doubtful accounts....... (3,383) (3,540) (2,797)
Change in operating assets and liabilities, net
of acquisitions:
Change in trade accounts receivables......... (20,868) 81,276 (43,845)
Change in merchant settlement activity....... -- 10,480 17,148
Change in other assets....................... (16,686) 33,449 20,056
Change in accounts payable and accrued
expenses................................... 6,076 37,187 12,550
Change in deferred revenue................... 15,520 91,149 40,845
Change in other liabilities.................. 12,099 11,621 475
Other operating activities................... 276 (14,393) 7,011
--------- --------- ---------
Net cash provided by operating
activities............................... 9,311 251,638 87,183
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in redemption settlement assets....... (14,704) (63,976) (18,357)
Purchase of credit card receivables............ -- (33,817) --
Change in due from securitizations............. 5,470 (26,404) 14,280
Net cash paid for corporate acquisition........ (138,825) (171,423) --
Proceeds from sale of credit card receivable
portfolios................................... 94,091 -- --
Change in seller's interest.................... (76,975) 22,471 12,703
Capital expenditures........................... (14,443) (36,302) (33,083)
--------- --------- ---------
Net cash used in investing activities...... (145,386) (309,451) (24,457)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements............... 382,043 249,625 148,546
Repayment of borrowings........................ (325,803) (294,473) (147,551)
Proceeds from issuance of preferred stock...... -- 119,400 --
Proceeds from issuance of common stock......... 107,042 377 149
--------- --------- ---------
Net cash provided by financing
activities............................... 163,282 74,929 1,144
--------- --------- ---------
Effect of exchange rate changes.................. (766) (7,606) (3,475)
--------- --------- ---------
Change in cash and cash equivalents.............. 26,441 9,510 60,395
Cash and cash equivalents at beginning of
period......................................... 20,595 47,036 56,546
--------- --------- ---------
Cash and cash equivalents at end of period....... $ 47,036 $ 56,546 $ 116,941
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.................................. $ 33,695 $ 43,215 $ 38,078
========= ========= =========
Income taxes paid.............................. $ 12,406 $ 25,242 $ 14,498
========= ========= =========
See accompanying notes to consolidated financial statements.
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
transaction services, credit services and marketing services in the United
States and Canada. The Company facilitates and manages transactions between its
clients and their customers through multiple distribution channels including
in-store, catalog and the Internet. Through the Credit Services and Marketing
Services segments, the Company assists its clients in identifying and acquiring
new customers, and helps to increase the loyalty and profitability of its
clients' 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
account processing and servicing, such as card processing, billing and payment
processing and customer care. Credit Services provides private label receivables
financing. 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 1998 represents the 11 months ended December 31, 1998,
fiscal 1999 represents the year ended December 31, 1999 and fiscal 2000
represents the year ended December 31, 2000.
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 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.
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.
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,
F-7
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACQUISITIONS (CONTINUED)
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.
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.
DUE FROM CARD ASSOCIATIONS AND MERCHANT SETTLEMENT OBLIGATIONS--Due from
card associations and merchant settlement obligations result from the Company's
network servicing and associated settlement activities. Due from card
associations is generated from credit card transactions, such as Mastercard,
Visa and American Express, at merchant locations. The Company records
corresponding settlement obligations for amounts payable to merchants.
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.
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.
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
TRANSACTION AND MARKETING SERVICES--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.
F-8
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
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 $(3.4 million),
$(3.7 million) and $(4.9 million) and related interest expense of $8.4 million,
$10.4 million and $6.2 million for fiscal 1998, 1999 and 2000, 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.
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. 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.
F-9
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
The following table sets forth the computation of basic and diluted net loss
per share for the periods indicated (in thousands, except per share data):
FISCAL
------------------------------
1998 1999 2000
-------- -------- --------
NUMERATOR
Loss from continuing operations........................... $(17,692) $(33,792) $(21,323)
Preferred stock dividends................................. -- (3,377) (7,200)
-------- -------- --------
Loss from continuing operations available to common
stockholders............................................ (17,692) (37,169) (28,523)
Income (loss) from discontinued operations................ (300) 7,688 --
Loss on disposal of discontinued operations............... -- (3,737) --
-------- -------- --------
Net loss available to common stockholders................. $(17,992) $(33,218) $(28,523)
======== ======== ========
DENOMINATOR
Weighted average shares................................... 41,729 47,498 47,538
Weighted average effect of dilutive securities:
Net effect of dilutive stock options.................... -- -- --
Net effect of dilutive stock warrants................... -- -- --
-------- -------- --------
Denominator for diluted calculation....................... 41,729 47,498 47,538
======== ======== ========
Loss per share from continuing operations--basic and
diluted................................................... $ (0.42) $ (0.78) $ (0.60)
Income (loss) per share from discontinued operations--basic
and diluted............................................... (0.01) 0.08 --
-------- -------- --------
Net loss per share--basic and diluted....................... $ (0.43) $ (0.70) $ (0.60)
======== ======== ========
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.
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
F-10
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
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, 1999 and 2000, the related amount
payable to counterparties was $1.5 million and $1.4 million, respectively.
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
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.
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 is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended and interpreted,
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, 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. If the derivative is designated in a fair-value hedge, the
changes in the fair value of the derivative and the hedged item will be
recognized in earnings. If the derivative is designated in a cash flow hedge,
changes in the fair value of the derivative will be recorded in other
comprehensive income ("OCI") and will be recognized in the income statement when
the hedged item affects earnings. SFAS No. 133 defines new requirements for
designation and documentation of hedging
F-11
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
relationships as well as ongoing effectiveness assessments in order to use hedge
accounting. For a derivative that does not qualify as a hedge, changes in fair
value will be recognized in earnings. In January 2001 the Company recorded
$882,000 in OCI as a cumulative translation adjustment for derivatives
designated in cash flow-type hedges prior to adopting SFAS No. 133, primarily
related to interest rate swaps.
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 redemption
settlement assets, which are carried at fair value, are as follows:
DECEMBER 31, 1999 DECEMBER 31, 2000
-------------------------------------------- -------------------------------------------
UNREALIZED UNREALIZED
------------------- -------------------
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
-------- -------- -------- ----------- -------- -------- -------- ----------
(IN THOUSANDS)
Cash and cash
equivalents............ $ 69,571 $ -- $ -- $ 69,571 $115,309 $-- $ -- $115,309
Government............... 29,981 -- (1,368) 28,613 16,278 35 (457) 15,856
Corporate................ 11,884 9 (540) 11,353 21,134 18 (355) 20,797
Equity securities........ 25,385 3,171 (4,443) 24,113 35 10 -- 45
-------- ------ ------- -------- -------- --- ----- --------
Total.................... $136,821 $3,180 $(6,351) $133,650 $152,756 $63 $(812) $152,007
======== ====== ======= ======== ======== === ===== ========
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Software development and conversion costs............... $ 55,156 $ 75,450
Computer equipment and purchased software............... 28,236 30,131
Furniture and fixtures.................................. 40,632 47,127
Leasehold improvements.................................. 31,593 34,455
Construction in progress................................ 6,624 4,542
-------- --------
Total................................................. 162,241 191,705
Accumulated depreciation................................ (73,010) (99,527)
-------- --------
Property and equipment, net............................. $ 89,231 $ 92,178
======== ========
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.
F-13
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES
The Company regularly securitizes its credit card receivables. 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. We currently have one series that has entered its controlled
amortization period. We do not have any series in early amortization. The
receivables associated with the customer accounts 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
2001 and 2003.
"Due from securitizations" consists of spread deposits, I/O strips and
excess funding deposits as shown in the table below:
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Spread deposits......................................... $104,222 $100,807
I/O strips.............................................. 20,289 33,171
Excess funding deposits................................. 19,973 --
-------- --------
$144,484 $133,978
======== ========
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 one collateral type, private label credit cards.
F-14
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES (CONTINUED)
At December 31, 2000, key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10 percent and
20 percent adverse changes in the assumptions are as follows:
IMPACT ON FAIR VALUE IMPACT ON FAIR VALUE
ASSUMPTION OF 10% CHANGE OF 20% CHANGE
---------- ---------------------- --------------------
(DOLLARS IN THOUSANDS)
Fair value of retained interest............... $ 31,971
Weighted average life......................... 7 months
Discount rate................................. 14.0% $ 998 $ 1,112
Expected yield, net of dilution............... 21.6% 14,729 25,089
Interest expense.............................. 7.0% 4,648 8,272
Net charge-offs rate.......................... 7.0% 5,620 10,234
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another,
which might magnify or counteract the sensitivities.
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 weighted average life of the underlying
securities and the discount rate. The discount rate is based on a risk adjusted
rate paid on the series. 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,
2000.
The table below summarizes certain cash flows received from and paid to
securitization trusts:
FISCAL
-------------------
1999 2000
-------- --------
(IN MILLIONS)
Proceeds from collections reinvested in previous credit
card securitizations................................... $4,070.0 $4,235.7
======== ========
Servicing fees received.................................. $ 37.4 $ 39.6
======== ========
Other cash flows received on retained interests.......... $ 124.1 $ 146.8
======== ========
F-15
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES (CONTINUED)
The table below presents quantitative information about the components of
total credit card receivables managed, delinquencies and net charge-offs:
AT DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN MILLIONS)
Total principal of credit card receivables managed...... $2,258.6 $2,331.0
Less credit card receivables securitized................ 2,232.4 2,319.7
-------- --------
Credit card receivables held............................ $ 26.2 $ 11.3
======== ========
Principal amount of credit card receivables 90 days or
more past due......................................... $ 60.0 $ 64.5
======== ========
YEAR ENDED
DECEMBER 31,
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
Net charge-offs......................................... $143,370 $157,351
======== ========
The Company is required to maintain minimum interests ranging from 3% to 6%
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.
6. INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill consist of the following:
AMORTIZATION LIFE
DECEMBER 31, AND METHOD
--------------------- --------------------------
1999 2000
--------- ---------
(IN THOUSANDS)
Premium on purchased 3 years--straight line
credit card portfolio... $ 38,536 $ 1,936
Customer contracts and 3-20 years--straight line
lists................... 46,700 46,700
Noncompete agreement...... 2,300 2,300 5 years--straight line
Goodwill.................. 411,009 407,833 20-25 years--straight line
Deferred incentives....... 11,086 10,753 27 months--straight line
Sponsor contracts......... 39,495 38,306 5 years--declining balance
Collector database........ 48,503 47,043 15%--declining balance
--------- ---------
Total................... 597,629 554,871
Accumulated
amortization............ (104,020) (110,322)
--------- ---------
Intangible assets and
goodwill, net........... $ 493,609 $ 444,549
========= =========
F-16
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEFERRED REVENUE
A reconciliation of deferred revenue--service, and deferred
revenue--redemption, for the Air Miles program is as follows:
FISCAL
-------------------
1999 2000
-------- --------
(IN THOUSANDS)
DEFERRED REVENUE--SERVICE
Beginning balance..................................... $ 64,609 $ 84,474
Cash proceeds......................................... 51,916 55,091
Revenue recognized.................................... (36,409) (47,098)
Other................................................. 4,358 (3,536)
-------- --------
Ending balance........................................ $ 84,474 $ 88,931
======== ========
DEFERRED REVENUE--REDEMPTION
Beginning balance..................................... $ 93,583 $164,867
Cash proceeds......................................... 94,620 90,889
Revenue recognized.................................... (30,911) (49,597)
Other................................................. 7,575 (4,904)
-------- --------
Ending balance........................................ $164,867 $201,255
======== ========
The Company currently estimates breakage to be one-third of miles issued.
8. DEBT
Debt consists of the following:
DECEMBER 31,
---------------------
1999 2000
--------- ---------
(IN THOUSANDS)
Certificates of deposit............................... $ 116,900 $ 139,400
Subordinated notes.................................... 102,000 102,000
Credit agreement...................................... 120,361 92,910
Term loans............................................ 95,875 91,750
Line of credit........................................ -- 10,000
--------- ---------
435,136 436,060
Less: current portion................................. (118,225) (161,725)
--------- ---------
Long term portion..................................... $ 316,911 $ 274,335
========= =========
CERTIFICATES OF DEPOSIT--Terms of the certificates of deposit range from
three months to 24 months with annual interest rates ranging from 5.4% to 6.9%
at December 31, 1999 and from 5.5% to 7.5% at December 31, 2000. Interest is
paid monthly and at maturity.
SUBORDINATED NOTES--The Company has outstanding subordinated notes with its
two largest stockholders in the aggregate principal amount of $50.0 million.
Such notes bear interest at 10% payable semiannually. These notes were issued at
an aggregate discount of approximately $3.6 million, and such discount is
accreted into interest expense using the effective rate of approximately 12%
over
F-17
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
the life of the notes. The notes are to be repaid on October 25, 2005. The
Company may, at its option, prepay the notes at their 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 8.0% and 8.8% at December 31, 1999 and 2000, 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.
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 8.1% and 9.3%, respectively,
at December 31, 2000.
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. The effective interest rate was 10.6% at
December 31, 2000.
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.
F-18
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. DEBT (CONTINUED)
Debt at December 31, 2000 matures as follows (in thousands):
2001.............................................. $161,725
2002.............................................. 67,925
2003.............................................. 59,410
2004.............................................. 1,000
2005.............................................. 94,000
Thereafter........................................ 52,000
--------
$436,060
========
9. INCOME TAXES
The Company files a consolidated Federal income tax return. Components of
the provision (credit) for income taxes are as follows:
FISCAL
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
CURRENT
Federal...................................... $ 5,789 $ 18,827 $ (1,100)
State........................................ 98 483 2,424
Foreign...................................... 1,777 9,610 13,631
-------- -------- --------
Total current.............................. 7,664 28,920 14,955
-------- -------- --------
DEFERRED
Federal...................................... (4,839) (15,081) 7,227
State........................................ (808) 1,182 (669)
Foreign...................................... (6,725) (21,559) (19,672)
-------- -------- --------
Total deferred............................. (12,372) (35,458) (13,114)
-------- -------- --------
Tax (benefit) expense related to continuing
operations................................... (4,708) (6,538) 1,841
Tax (benefit) expense related to discontinued
operations................................... (159) 2,127 --
-------- -------- --------
Total income tax provision (benefit)........... $ (4,867) $ (4,411) $ 1,841
======== ======== ========
F-19
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
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
------------------------------
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Expected (benefit) expense at statutory rate..... $(7,840) $(14,115) $(6,819)
Increase (decrease) in income taxes resulting
from:
State and foreign income taxes................. 63 296 1,552
Non-deductible foreign losses.................. 832 623 1,339
Non-deductible acquired goodwill and other
intangibles.................................. 2,134 11,254 3,187
Change in valuation allowance.................. -- (3,266) 2,635
Other--net..................................... 103 (1,330) (53)
------- -------- -------
Total........................................ $(4,708) $ (6,538) $ 1,841
======= ======== =======
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
----------------------
1999 2000
---------- ---------
(IN THOUSANDS)
DEFERRED TAX ASSETS
Deferred income.................................... $13,410 $ 9,506
Deferred revenue................................... 23,299 42,955
Allowance for doubtful accounts.................... 1,405 2,380
Intangible assets.................................. 20,008 18,506
Net operating loss carryforwards................... 11,966 13,458
Depreciation....................................... 2,875 3,046
Discontinued operations............................ 2,186 826
Other.............................................. 3,935 5,836
------- -------
Total deferred tax assets........................ 79,084 96,513
------- -------
DEFERRED TAX LIABILITIES
Servicing rights................................... 8,120 10,990
Accrued expenses................................... 468 (400)
Other.............................................. 348 26
------- -------
Total deferred tax liabilities................... 8,936 10,616
------- -------
Net deferred tax asset......................... 70,148 85,897
Valuation allowance................................ (5,531) (8,166)
------- -------
Net deferred tax asset............................. $64,617 $77,731
======= =======
F-20
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
At December 31, 2000, the Company had approximately $15.6 million of Federal
net operating loss carryforwards, which expire at various times through 2013. In
addition, the Company has approximately $196 million of state net operating loss
carryforwards, which expire at various times through 2016. 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 2000, the Company increased the
valuation allowance by $2.6 million. 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.
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, 2000 were approximately $11.0 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.
During March 2000, the stockholders approved an increase in the number of
authorized shares from 66,666,667 shares to 200,000,000 shares.
F-21
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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"), as
amended and restated. 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.
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
------------------------------
1998 1999 2000
-------- -------- --------
Expected dividend yield............................. -- -- --
Risk-free interest rate............................. 6.0% 7.0% 7.0%
Expected life of options (years).................... 4.0 yrs 4.0 yrs 4.0 yrs
Assumed volatility.................................. 0.01% 0.01% 0.01%
Weighted average fair value......................... $ 2.79 $ 2.43 $ 6.68
The following table summarizes stock option activity under the Plan:
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
BALANCE AT JANUARY 31, 1998....................... 1,156 $ 9.00
Granted......................................... 912 9.45
Exercised....................................... (57) 9.00
Cancelled....................................... (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
Granted......................................... 2,648 14.98
Exercised....................................... (17) 9.09
Cancelled....................................... (96) 10.39
-----
BALANCE AT DECEMBER 31, 2000...................... 4,883 $12.45
===== ======
The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 2000 (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 $12.00 2,257 7.39 $ 9.52 1,232 $9.31
$12.01 to $15.00 2,626 9.68 $15.00 -- --
F-22
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STOCK COMPENSATION PLANS (CONTINUED)
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 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
------------------------------
1998 1999 2000
-------- -------- --------
Pro forma net income (loss).................... $(18,629) $(30,331) $(25,708)
======== ======== ========
Basic and diluted pro forma earnings per
share........................................ $ (0.45) $ (0.71) $ (0.69)
======== ======== ========
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
$53.4 million at December 31, 2000, 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, 2000 are (in thousands):
YEAR:
- -----
2001.............................................. $ 38,846
2002.............................................. 23,570
2003.............................................. 14,595
2004.............................................. 11,707
2005.............................................. 9,775
Thereafter........................................ 29,320
--------
Total............................................. $127,813
========
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, 2000, WFNNB's Tier 1 capital ratio was 14.1%,
total capital ratio was 14.4% and leverage ratio was 44.8%, 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, 2000, WFNNB had approximately 29.2 million active
accountholders, having an unused line of credit averaging $673 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, 2000, 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
-----------------------------------------------------------
1999 2000
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
FINANCIAL ASSETS
Cash and cash equivalents................ $ 56,546 $ 56,546 $116,941 $116,941
Redemption settlement assets............. 133,650 133,650 152,007 152,007
Trade receivables........................ 69,085 69,085 115,727 115,727
Credit card receivables and seller's
interest, net.......................... 150,804 150,804 137,865 137,865
Due from securitizations................. 144,484 144,484 133,978 133,978
FINANCIAL LIABILITIES
Accounts payable......................... 55,921 55,921 63,570 63,570
Debt..................................... 435,136 447,861 436,060 427,125
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
Interest swaps............................. $725,000 $ (6,083) $351,750 $ (5,478)
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.
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 an interest rate swap
agreement with J.P. Morgan Company ("Morgan") with a notional amount totaling
$200.0 million. This interest rate swap effectively changed WFNNB's interest
rate exposure on $200.0 million of securitized credit card receivables to a
fixed rate of approximately 6.72%. 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, $60 million at
December 31, 2000, 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. One of the interest rate swaps effectively changed
Loyalty's interest rate exposure on $50 million of notes payable (decreasing
with principal payments) from a variable rate based on Canadian Bankers
Acceptance to a fixed rate of 9.3%. The other interest rate swap effectively
changed Loyalty's interest rate exposure on $50 million of notes payable
(decreasing with principal payments) from a variable rate based on Canadian
Bankers Acceptance to a variable rate based on LIBOR. The following briefly
outlines the terms of each swap agreement:
FIXED/VARIABLE FIXED/VARIABLE
NOTIONAL AMOUNT SWAP PERIOD RATE RECEIVED RATE PAID
- ----------------------- --------------------------------------- ------------------------ ------------------------
$200,000,000........... May 15, 1997 through May 15, 2004 USD-LIBOR-BBA 6.720%
$60,000,000............ January 30, 1998 through March 15, 2003 5.67% USD-LIBOR-BBA
$43,750,000............ October 26, 1998 through July 25, 2003 USD-LIBOR-BBA+2.00% CAD-BA-CDOR+2.26%
$48,000,000............ October 26, 1998 through July 25, 2005 USD-LIBOR-BBA+3.25% 9.265%
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,
-------------------
1999 2000
BALANCE SHEETS -------- --------
(IN THOUSANDS)
Assets:
Cash and cash equivalents................................... $ -- $ 7
Investment in subsidiaries.................................. 350,285 351,270
Loans to subsidiaries....................................... 181,750 274,750
Receivables from subsidiaries............................... 66,179
Trade receivables........................................... -- --
Other....................................................... 12,867 3,976
-------- --------
Total assets.............................................. $611,081 $630,003
======== ========
Liabilities:
Long-term and subordinated debt............................. $222,361 $195,975
Borrowings from subsidiaries................................ -- 6,659
Other....................................................... 10,432 6,180
-------- --------
Total liabilities......................................... 232,793 208,814
Stockholders' equity........................................ 378,288 421,189
-------- --------
Total liabilities and stockholders' equity................ $611,081 $630,003
======== ========
FISCAL
------------------------------
1998 1999 2000
STATEMENTS OF INCOME -------- -------- --------
(IN THOUSANDS)
Interest from loans to subsidiaries......................... $17,907 $23,962 $24,648
Dividends from subsidiary................................... -- 40,000 32,000
Processing and servicing fees............................... 4,457 3,404 --
Other income................................................ 156 149 --
------- ------- -------
Total revenue............................................. 22,520 67,515 56,648
Interest expense............................................ 21,165 25,981 24,296
Other expense............................................... 153 256 970
------- ------- -------
Total expense............................................. 21,318 26,237 25,266
------- ------- -------
Income before income taxes.................................. 1,202 41,278 31,382
Income tax expense.......................................... 486 720 540
------- ------- -------
Net income.................................................. $ 716 $40,558 $30,842
======= ======= =======
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
---------------------------------
1998 1999 2000
STATEMENTS OF CASH FLOWS --------- --------- ---------
(IN THOUSANDS)
Net cash provided by (used in) operating activities......... $ (78,260) $ 115,555 $ 99,338
Investing activities:
Net cash paid for corporate acquisitions.................... (151,500) (169,322) 10,925
Loans to subsidiaries....................................... -- -- (93,000)
--------- --------- ---------
Net cash used in investing activities....................... (151,500) (169,322) (82,075)
Financing Activities:
Borrowings from subsidiaries................................ 17,490 41,331 --
Issuance of long-term and subordinated debt................. 327,159 320,624 391,000
Repayment of long-term and subordinated debt................ (221,676) (428,854) (408,405)
Net proceeds from preferred stock........................... -- 119,400 --
Net proceeds from issuances of common stock................. 107,042 377 149
--------- --------- ---------
Net cash provided by (used in) financing activities......... 230,015 52,878 (17,256)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 255 (889) 7
Cash and cash equivalents at beginning of period............ 634 889 --
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 889 $ -- $ 7
========= ========= =========
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; and Executive Vice Presidents. 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. The margin is based on
F-28
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. SEGMENT INFORMATION (CONTINUED)
current market rates for similar services. 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 1998 ----------- -------- --------- ----------- --------
(IN THOUSANDS)
Revenues................................ $303,186 $212,663 $ 60,892 $(165,828) $410,913
Depreciation and amortization........... 25,419 11,763 14,854 -- 52,036
Operating profit........................ 4,405 12,883 (11,804) -- 5,484
TRANSACTION CREDIT MARKETING OTHER/
SERVICES SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1999 ----------- -------- --------- ----------- --------
(IN THOUSANDS)
Revenues................................. $381,027 $247,824 $138,310 $(184,079) $583,082
Depreciation and amortization............ 28,814 12,060 36,926 -- 77,800
Operating profit......................... 13,014 17,743 (28,302) -- 2,455
TRANSACTION CREDIT MARKETING OTHER/
SERVICES SERVICES SERVICES ELIMINATION TOTAL
FISCAL 2000 ----------- -------- --------- ----------- --------
(IN THOUSANDS)
Revenues................................. $437,980 $268,183 $178,214 $(206,182) $678,195
Depreciation and amortization............ 41,747 1,259 33,138 -- 76,144
Operating profit......................... 13,017 24,059 (15,211) -- 21,865
Information concerning principal geographic areas is as follows:
UNITED STATES REST OF WORLD(1) TOTAL
------------- ---------------- ----------
(IN THOUSANDS)
Revenues
Fiscal 1998......................... $367,588 $ 43,325 $ 410,913
Fiscal 1999......................... 467,629 115,453 583,082
Fiscal 2000......................... 518,839 159,356 678,195
Total assets
December 31, 1999................... 834,838 466,425 1,301,263
December 31, 2000................... 936,849 483,757 1,420,606
- ------------------------
(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 and a database marketing agreement with several affiliates
of The Limited. The Company has received fees from The Limited and its
affiliates of $40.6 million for fiscal 1998, $46.6 million for fiscal 1999, and
$46.7 million for fiscal 2000.
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 had revenues of approximately $44.9 million and
$43.1 million in fiscal 1998 and 1999, respectively. The net assets of the
business were immaterial.
21. SUBSEQUENT EVENTS
Effective February 28, 2001, the Company acquired substantially all of the
operating assets of Utilipro, Inc., a subsidiary of AGL Resources, Inc., for
$20.3 million in cash. Utilipro is an account processing and servicing provider
to the deregulated utility sector. Utilipro provides these services to three
clients serving approximately 500,000 customers.
F-30
INDEPENDENT AUDITORS' REPORT
Board of Directors of Utilipro, Inc.:
We have audited the accompanying consolidated balance sheets of
Utilipro, Inc. and subsidiaries (the "Company") as of September 30, 1999 and
2000, and the related consolidated statements of operations and comprehensive
loss, changes in stockholders' equity, and cash flows for the years then ended.
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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of September 30, 1999 and 2000, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Atlanta, Georgia
February 28, 2001
F-37
UTILIPRO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
-------------------------- DECEMBER 31,
1999 2000 2000
----------- ------------ -------------
(UNAUDITED)
ASSETS
Cash.................................................. $ 194,405 $ 270,190 $ 521,101
Accounts receivable--affiliate........................ 1,537,259 5,843,621 1,981,022
Accounts receivable--nonaffiliates, net of allowance
for doubtful accounts of $957,226, $3,311,590 and
$3,505,387 at September 30, 1999 and 2000 and
December 31, 2000, respectively..................... 1,372,044 500,000 500,000
Prepaid expenses and other current assets............. 114,943 283,391 225,764
Current deferred tax asset............................ 575,253 1,316,590 1,360,848
----------- ------------ -----------
Total current assets.............................. 3,793,904 8,213,792 4,588,735
Property and equipment, net........................... 3,770,395 3,443,606 3,485,298
Deferred tax asset.................................... 170,962 136,227
Tax receivable from affiliate......................... 1,073,960 3,508,565 3,758,374
Other assets.......................................... 68,444 118,716 118,716
----------- ------------ -----------
$ 8,706,703 $ 15,455,641 $12,087,350
=========== ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable...................................... $ 1,648,602 $ 313,935 $ 405,154
Accrued salaries and benefits......................... 763,745 673,631 241,643
Other accrued expenses................................ 314,976 1,729,330 691,305
Notes payable to affiliates........................... 4,162,011 16,104,399 14,787,159
Current portion of long-term debt..................... 420,825 850,488 705,171
----------- ------------ -----------
Total current liabilities......................... 7,310,159 19,671,783 16,830,432
Long-term debt........................................ 574,351 1,067,256 968,891
Deferred tax liability................................ 191,848 -- --
----------- ------------ -----------
Total liabilities................................. 8,076,358 20,739,039 17,799,323
----------- ------------ -----------
Commitments and contingencies (Notes 3, 8 and 9)
Redeemable Preferred Stock, Series A Convertible,
$1.00 par value 4,200,000 shares authorized, 700,000
issued and outstanding.............................. 700,000 700,000 700,000
Stockholders' equity (deficit):
Common stock, $1.00 par value, 10,000,000 shares
authorized, 123,529 shares issued and outstanding as
of September 30, 1999 and 62,999 shares issued and
outstanding as of September 30, 2000 and
December 31, 2000 (unaudited)....................... 123,529 62,999 62,999
Additional paid-in capital............................ 3,500,000 3,378,940 3,378,940
Accumulated other comprehensive loss.................. (109) -- --
Accumulated deficit................................... (3,693,075) (9,425,337) (9,853,912)
----------- ------------ -----------
Total stockholders' equity (deficit).............. (69,655) (5,983,398) (6,411,973)
----------- ------------ -----------
Total liabilities and stockholders' equity........ $ 8,706,703 $ 15,455,641 $12,087,350
=========== ============ ===========
See accompanying notes to consolidated financial statements.
F-38
UTILIPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
----------------------------- ---------------------------
1999 2000 1999 2000
----------- ------------ ----------- ----------
(UNAUDITED)
Revenues
Affiliate............................ $ 5,289,008 $ 13,648,089 $ 1,830,195 $4,048,323
Nonaffiliate......................... 3,310,702 4,083,554 1,161,433 91,952
----------- ------------ ----------- ----------
Total revenues..................... 8,599,710 17,731,643 2,991,628 4,140,275
----------- ------------ ----------- ----------
Expenses
Payroll and employee benefits........ 5,686,438 12,158,138 2,329,458 2,039,523
Other operating expenses............. 6,992,762 12,654,070 2,588,909 1,982,309
Depreciation......................... 638,794 1,260,697 273,675 373,989
----------- ------------ ----------- ----------
Total expenses..................... 13,317,994 26,072,905 5,192,042 4,395,821
----------- ------------ ----------- ----------
Operating loss......................... (4,718,284) (8,341,262) (2,200,414) (255,546)
Interest expense....................... 103,242 1,121,671 182,083 437,243
Other income, net...................... (58,639) (191,919) (70,491) (4,883)
----------- ------------ ----------- ----------
Loss before income taxes............... (4,762,887) (9,271,014) (2,312,006) (687,906)
Income tax benefit..................... 1,842,285 3,538,752 887,500 259,331
----------- ------------ ----------- ----------
Net loss............................... $(2,920,602) $ (5,732,262) $(1,424,506) $ (428,575)
=========== ============ =========== ==========
Foreign currency translation
adjustment........................... (109) 109 -- --
----------- ------------ ----------- ----------
Comprehensive loss..................... $(2,920,711) $ (5,732,153) $(1,424,506) $ (428,575)
=========== ============ =========== ==========
See accompanying notes to consolidated financial statements.
F-39
UTILIPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ACCUMULATED
---------------------- ADDITIONAL OTHER
SHARES PAID-IN COMPREHENSIVE ACCUMULATED
OUTSTANDING AMOUNT CAPITAL (LOSS) DEFICIT TOTAL
----------- -------- ---------- ------------- ----------- -----------
September 30, 1998............... 123,529 $123,529 $ 700,000 $ -- $ (772,473) $ 51,056
Capital contribution........... 2,800,000 2,800,000
Foreign currency translation
adjustment................... (109) (109)
Net loss....................... (2,920,602) (2,920,602)
------- -------- ---------- ----- ----------- -----------
September 30, 1999............... 123,529 123,529 3,500,000 (109) (3,693,075) (69,655)
Repurchase of common stock..... (60,530) (60,530) (121,060) (181,590)
Foreign currency translation
adjustment................... 109 109
Net loss......................... (5,732,262) (5,732,262)
------- -------- ---------- ----- ----------- -----------
September 30, 2000............... 62,999 62,999 3,378,940 -- (9,425,337) (5,983,398)
Net loss (unaudited)........... (428,575) (428,575)
------- -------- ---------- ----- ----------- -----------
December 31, 2000 (unaudited).... 62,999 $ 62,999 $3,378,940 $ -- $(9,853,912) $(6,411,973)
======= ======== ========== ===== =========== ===========
See accompanying notes to consolidated financial statements.
F-40
UTILIPRO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
-------------------------- ------------------------
1999 2000 1999 2000
----------- ------------ ----------- ----------
(UNAUDITED)
OPERATING ACTIVITIES:
Net loss................................. $(2,920,602) $ (5,732,262) $(1,424,506) $ (428,575)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................... 638,794 1,260,697 273,675 373,989
Bad debt expense....................... 957,226 2,354,364
Deferred taxes......................... (424,928) (1,104,147) (105,817) (259,332)
Changes in assets and liabilities:
Accounts receivable.................... (3,505,233) (5,788,682) (536,779) 3,862,599
Prepaid expenses and other current
assets................................. (11,506) (168,448) (326,489) 57,627
Other assets........................... (61,327) (50,272)
Accounts payable and accrued
expenses............................... 2,220,155 (10,427) 267,185 (1,378,794)
Tax receivable from affiliate.......... (626,856) (2,434,605) -- --
----------- ------------ ----------- ----------
Net cash used in operating
activities........................... (3,734,277) (11,673,782) (1,852,731) 2,227,514
----------- ------------ ----------- ----------
INVESTING ACTIVITY--Capital expenditures... (2,785,163) (933,799) (207,255) (415,681)
----------- ------------ ----------- ----------
FINANCING ACTIVITIES
Increases in note payable to affiliate... 4,162,011 11,942,388 1,713,398 (1,317,240)
Borrowings on long-term debt............. -- 1,798,940 368,115 --
Payments on long-term debt............... (298,852) (876,372) -- (243,682)
Common stock repurchase.................. -- (181,590) -- --
Capital contribution..................... 2,800,000 -- -- --
----------- ------------ ----------- ----------
Net cash provided by financing
activities........................... 6,663,159 12,683,366 2,081,513 (1,560,922)
----------- ------------ ----------- ----------
INCREASE IN CASH........................... 143,719 75,785 21,527 250,911
CASH:
Beginning of period...................... 50,686 194,405 194,405 270,190
----------- ------------ ----------- ----------
End of period............................ $ 194,405 $ 270,190 $ 215,932 $ 521,101
=========== ============ =========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Interest paid............................ -- $ 350,694 -- $ 318,288
=========== ============ =========== ==========
NONCASH ACTIVITY
Property, plant, and equipment acquired
under capital leases..................... $ 1,099,137 $ 2,028,013 $ 1,799,245 $ --
=========== ============ =========== ==========
See accompanying notes to consolidated financial statements.
F-41
UTILIPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
The accompanying consolidated financial statements include the accounts of
Utilipro, Inc. and its wholly owned subsidiaries, which are collectively
referred to as the "Company." All significant intercompany accounts and
transactions have been eliminated.
The Company engages in the sale of integrated customer care solutions and
billing services to energy marketers. The Company was formed on June 17, 1997
and on December 10, 1997 AGL Investments, Inc. ("AGL Investments"), a wholly
owned subsidiary of AGL Resources, Inc. ("AGL Resources"), acquired 700,000
shares of the Company's convertible preferred stock. The Company is based in
Atlanta, Georgia.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL DATA (UNAUDITED)--The financial statements as of
December 31, 2000 and for the three months ended December 31, 1999 and 2000 are
unaudited. In the opinion of management, these financial statements reflect all
adjustments necessary for a fair presentation of the financial statements for
such periods. These adjustments consist of normal, recurring items. The results
of operations for the three months ended December 31, 2000 are not necessarily
indicative of the results of operations that may be expected for the full year.
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 amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
PROPERTY AND EQUIPMENT--Purchases of property and equipment are recorded at
cost. Depreciation on property is computed on a straight-line basis using the
following estimated useful lives:
Computer and telecommunications equipment................... 5 years
Computer software........................................... 4 to 5 years
Furniture and fixtures...................................... 5 to 7 years
Leasehold improvements...................................... The life of the lease
IMPAIRMENT OF LONG-LIVED ASSETS--The Company reviews long-lived assets and
certain intangibles for impairment when events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable and any
impairment losses are reported in the period in which the recognition criteria
are first applied based on the fair value of the asset.
INCOME TAXES--Deferred tax assets and liabilities are recorded for all
significant temporary differences between the carrying amounts and the tax bases
of assets and liabilities. The operating results of the Company are included in
the consolidated federal income tax return of AGL Resources and income taxes are
allocated to the Company for the tax effects of its income and deductions
included in the consolidated return.
DERIVATIVE INSTRUMENTS--In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133, as
amended by SFAS No. 138, ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND
CERTAIN HEDGING ACTIVITIES, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. It
F-42
UTILIPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires that an entity record all derivatives as either assets or liabilities
in the balance sheet measured at fair value. The Company adopted SFAS No. 133 on
October 1, 2000. The impact of the adoption of SFAS No. 133 on the Company's
consolidated financial statements at October 1, 2000 was immaterial.
REVENUE RECOGNITION--The Company recognizes revenues using the accrual
method. As services are performed, they are billed to the Company's customers
and recorded as revenue.
RECLASSIFICATIONS--Certain prior year amounts have been reclassified for
comparative purposes. Those reclassifications did not affect consolidated net
loss for the years presented.
3. CONCENTRATION OF CREDIT RISK
At September 30, 2000, one nonaffiliated customer comprised all of the
Company's accounts receivable--nonaffiliates, and at September 30, 1999, three
nonaffiliated customers comprised 73%, 12%, and 11%, respectively of the
Company's accounts receivable--non-affiliate balance. For the year ended
September 30, 2000, no nonaffiliate customer represented more than 10% of
nonaffiliate revenues. For the year ended September 30, 1999, three
nonaffiliated customers comprised 24%, 8%, and 4% of nonaffiliate revenues,
respectively.
On October 26, 1999, Peachtree Natural Gas, LLC ("Peachtree"), one of the
Company's nonaffiliated customers, filed for bankruptcy protection under
Chapter 11 of the United States Bankruptcy Code. As of the date of Peachtree's
bankruptcy filing, Peachtree owed the Company $2,063,769. The amount owed to the
Company as of September 30, 2000 was fully reserved for in the accompanying
balance sheet.
4. PROPERTY AND EQUIPMENT
Property and equipment are as follows:
AS OF
SEPTEMBER 30,
------------------------
1999 2000
---------- -----------
Computer and telecommunications equipment................... $3,347,907 $ 3,425,108
Computer software........................................... 697,350 1,215,750
Furniture and fixtures...................................... 350,056 385,323
Leasehold improvements...................................... 65,034 341,044
---------- -----------
4,460,347 5,367,225
Accumulated depreciation.................................... (689,952) (1,923,619)
---------- -----------
$3,770,395 $ 3,443,606
========== ===========
5. LONG-TERM DEBT
Long-term debt as of September 30, 1999 and 2000 consists of capital lease
obligations related to computer equipment, telephone equipment, and computer
software with interest rates of 8%, maturing at various dates through 2003. The
cost of the assets recorded under the capital lease obligations is $3,151,765.
Accumulated amortization related to assets recorded under capital leases is
$242,026 and
F-43
UTILIPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
$490,441 at September 30, 1999 and 2000, respectively. The balance of the
capital lease obligations as of September 30, 1999 and 2000 was $995,176 and
$1,917,744, respectively.
Total aggregate minimum lease payments under capital leases at
September 30, 2000 are as follows:
2001........................................................ $1,008,682
2002........................................................ 1,114,684
2003........................................................ 35,472
----------
2,158,838
Less: amounts representing interest......................... (241,094)
----------
$1,917,744
==========
6. INCOME TAXES
The components of income tax benefit are as follows:
YEAR ENDED
SEPTEMBER 30,
-----------------------
1999 2000
---------- ----------
Current:
Federal................................................... $1,209,957 $2,078,320
State..................................................... 207,400 356,285
---------- ----------
1,417,357 2,434,605
Deferred:
Federal................................................... 362,749 942,564
State..................................................... 62,179 161,583
---------- ----------
424,928 1,104,147
---------- ----------
Income tax benefit.......................................... $1,842,285 $3,538,752
========== ==========
The reconciliation of the Company's effective tax rate to the statutory tax
rate is as follows:
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1999 2000
------------------------- -------------------------
RATE AMOUNT RATE AMOUNT
-------- ----------- -------- -----------
Computed tax expense benefit................. 35.0% $(1,667,059) 35.0% $(3,244,894)
State taxes, net of federal benefit.......... 3.7 (175,226) 3.6 (336,614)
Other........................................ (0.4) 42,756
---- ----------- ---- -----------
Income tax benefit........................... 38.7% $(1,842,285) 38.2% $(3,538,752)
==== =========== ==== ===========
F-44
UTILIPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
On a pro forma basis, had the Company used the separate return basis for its
income tax provision, no income tax benefit would have been recorded in the
years ended September 30, 1999 and 2000.
The tax effects of temporary differences comprising the net deferred tax
asset are as follows (a valuation reserve was not considered necessary):
AS OF SEPTEMBER 30,
----------------------
1999 2000
--------- ----------
Allowance for doubtful accounts............................. $ 370,255 $1,280,899
Property.................................................... (191,848) 131,138
Accrued bonus and vacation.................................. 185,658 35,691
Other....................................................... 19,340 39,824
--------- ----------
Net deferred tax asset...................................... $ 383,405 $1,487,552
========= ==========
7. STOCKHOLDERS' EQUITY
On December 10, 1997, Utilipro entered into a Series A Convertible Preferred
Stock Purchase Agreement whereby 700,000 shares of Convertible Series A
Preferred Stock ("Preferred Stock") were issued to AGL Investments for $700,000.
Concurrently with the issuance of the Preferred Stock, 123,529 shares of common
stock were issued to certain shareholders. The Preferred Stock is convertible
into common stock at the option of AGL Investments at a conversion price of $1
per share. Furthermore, AGL Investments has the option to require the Company to
redeem any or all outstanding shares of the Preferred Stock on December 10, 2004
at an amount equal to the sum of the original purchase price per share plus any
declared and accrued but unpaid dividends on the shares. If the Company fails to
redeem the Preferred Stock on December 10, 2004, the conversion price of the
Preferred Stock will decrease at the rate of 10% per quarter. As of September
30, 1999 and 2000, no dividends had been declared.
During the year ended September 30, 2000, the Company acquired common stock
held by two shareholders. The shares, which were acquired for $181,590, were
retired.
On May 22, 1998, the Company entered into a Capital Contribution Agreement
with AGL Resources whereby AGL Investments agreed to contribute up to a maximum
of $3,500,000 in additional capital to the Company. As of September 30, 2000,
AGL Investments had contributed $3,500,000 in additional capital.
8. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES--The Company leases certain buildings and equipment under
noncancelable operating leases which expire at various dates through 2006.
F-45
UTILIPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule of future minimum lease payments under operating
leases as of September 30, 2000:
2001........................................................ $1,407,130
2002........................................................ 1,229,051
2003........................................................ 801,158
2004........................................................ 572,214
2005........................................................ 319,959
Thereafter.................................................. 354,306
----------
$4,683,818
==========
Rent expense for the years ended September 30, 1999 and 2000 was $418,052
and $1,418,324, respectively.
9. LITIGATION
During the year ended September 30, 2000, Peachtree commenced litigation
against the Company seeking damages in excess of $50 million as a result of an
alleged breach of contract by the Company. If the Company were to suffer an
adverse outcome in this litigation, it could have a material adverse effect on
the Company's consolidated financial statements. While management believes that
the Company has valid defenses to this litigation, management cannot predict the
outcome of the litigation.
The Company is involved in litigation arising in the normal course of
business. Management believes that the ultimate resolution of that litigation
will not have a material adverse effect on the Company's consolidated financial
statements.
10. RELATED PARTY TRANSACTIONS
ACCOUNTS RECEIVABLE-AFFILIATE--Accounts receivable-affiliate at
September 30, 1999 and 2000 of $1,537,259 and $5,843,621, respectively, consists
of amounts due from SouthStar Energy Services, LLC ("SouthStar"), a joint
venture in which AGL Resources is a member, for services rendered by the
Company.
REVENUE-AFFILIATE--Revenue-affiliate consists of revenue from SouthStar for
services rendered by the Company.
TAX RECEIVABLE FROM AFFILIATE--The receivable from affiliate at
September 30, 1999 and 2000 of $1,073,960 and $3,508,565, respectively, consists
primarily of amounts due from AGL Resources for income tax benefits.
NOTES PAYABLE TO AFFILIATE--The notes payable to affiliates at
September 30, 1999 of $4,162,000 included $2,947,000 owed to AGL Investments and
$1,215,000 owed to AGL Propane, Inc., a wholly owned subsidiary of AGL
Resources Inc. in accordance with a Note Agreement dated April 16, 1999 (the
"AGL Propane Note"). Interest accrues at rates from 8.075% to 8.105% annually
with a maturity date of June 1, 2000. The AGL Propane Note was repaid during the
year ended September 30, 2000.
F-46
UTILIPRO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The amount payable to AGL Investments is pursuant to a Note Agreement dated
August 13, 1999, as amended (the "Original AGL Investments Note"), with interest
accruing at LIBOR plus 250 basis points. The Company and AGL Investments entered
into a Note Agreement dated January 1, 2000, with interest accruing at LIBOR
plus 300 basis points, whereby the outstanding balance as of January 1, 2000 of
the Original AGL Investments Note was refinanced. During the year ended
September 30, 1999, interest rates ranged from 7.7% to 7.9%. During the year
ended September 30, 2000, interest rates ranged from 8.8% to 9.7%. At
September 30, 2000, notes payable to AGL Investments totaled $16,104,399.
Interest expense recognized during the years ended September 30, 1999 and 2000
was $47,011 and $882,822, respectively. Accrued and unpaid interest at
September 30, 1999 and 2000 was $47,011 and $532,128, respectively.
11. SUBSEQUENT EVENTS
In January 2001, the Company acquired and retired all of the outstanding
common stock held by the Company's minority shareholder for $188,997. As a
result, all of the capital stock of the Company is now held by AGL Investments.
On February 28, 2001, the Company extinguished its capital lease obligations
in the amount of $2,094,999.
Effective February 28, 2001, Alliance Data Systems, Inc. purchased from AGL
Investments the property and equipment and assumed certain working capital
related liabilities of the Company.
F-47
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- -------------------------------------------------------
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................................... 7
Special Note Regarding Forward-Looking
Statements................................... 18
Use of Proceeds................................ 19
Dividend Policy................................ 19
Dilution....................................... 20
Capitalization................................. 21
Unaudited Pro Forma Consolidated Financial
Information.................................. 22
Selected Historical Consolidated Financial and
Operating Information........................ 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 29
Business....................................... 46
Management..................................... 61
Principal Stockholders......................... 73
Certain Relationships and Related
Transactions................................. 76
Description of Capital Stock................... 80
Shares Eligible for Future Sale................ 83
Underwriting................................... 84
Legal Matters.................................. 87
Experts........................................ 87
Where You Can Find More Information............ 87
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.
- -------------------------------------------------------
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[LOGO]
13,000,000 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
, 2001
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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. Alliance Data Systems Corporation's
Certificate of Incorporation also provides that, to the fullest extent
II-1
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 issued to WCAS
Capital Partners III, LP at a value of $9.90 per share 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.
Since October 1996, Alliance Data Systems Corporation has granted stock
options to purchase shares of its common stock under its stock option and
restricted stock plan covering an aggregate of 5,441,909 shares, at exercise
prices ranging from $9.00 to $15.00 per share. Since January 1998 Alliance Data
Systems Corporation has issued 133,152 shares of Alliance Data Systems
Corporation's common stock pursuant to the exercise of stock options. Since
October 1996, 957,652 stock options have lapsed without being exercised. As of
March 31, 2001, performance-based restricted awards representing an aggregate of
699,000 shares had been granted under the stock option and restricted stock
plan, 129,000 of which have been forfeited.
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.
*2.5 Asset Purchase Agreement by and between Utilipro, Inc., AGL
Resources, Inc., and Alliance Data Systems Corporation,
dated as of February 12, 2001, as amended March 2, 2001.
*3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.
*3.2 Second Amended and Restated Bylaws of the Registrant.
3.3 First Amendment to the 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.
II-3
EXHIBIT
NO. EXHIBITS
- ------- --------
*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.
*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 Alliance Data Systems Corporation and its Subsidiaries
Employee Stock Purchase Plan.
*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.
II-4
EXHIBIT
NO. EXHIBITS
- ------- --------
*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.
*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.
II-5
EXHIBIT
NO. EXHIBITS
- ------- --------
*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.
*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.
II-6
EXHIBIT
NO. EXHIBITS
- ------- --------
*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 Fourth Amendment to Lease, made effective as of June 1,
2000, by and between Partners at Brooksedge and ADS
Alliance Data Systems, Inc.
+10.56 Supplier Agreement between Loyalty Management Group Canada
and Air Canada dated as of April 24, 2000.
*10.57 Lease between 1815 LLC and ADS Alliance Data Systems, Inc.,
dated as of February 7, 2001.
*10.58 First Amendment to Lease between Deerfield & Weiland Office
Building, L.L.C. and ADS Alliance Data Systems, Inc.,
dated as of June 27, 2000.
10.59 Lease Agreement by and between Barrett Business Center, LCC
and Utilipro, Inc., dated May 13, 1999, as amended
November 1, 1999.
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP with regard to Alliance
Data Systems Corporation.
*23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
23.3 Consent of Deloitte & Touche LLP with regard to
Utilipro, Inc.
*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.
(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
II-7
(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-8
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 May 4, 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 May 4, 2001:
NAME TITLE
---- -----
/s/ J. MICHAEL PARKS Chairman of the Board, Chief Executive Officer
------------------------------------------- and President
J. Michael Parks (principal executive officer)
/s/ EDWARD J. HEFFERNAN Executive Vice President and Chief Financial
------------------------------------------- Officer
Edward J. Heffernan (principal financial officer)
* Vice President, Corporate Controller and
------------------------------------------- Chief Accounting Officer
Michael D. Kubic (principal accounting officer)
*
------------------------------------------- Director
Bruce K. Anderson
*
------------------------------------------- Director
Roger H. Ballou
*
------------------------------------------- Director
Anthony J. deNicola
*
------------------------------------------- Director
Daniel P. Finkelman
*
------------------------------------------- Director
Kenneth R. Jensen
*
------------------------------------------- Director
Robert A. Minicucci
*
------------------------------------------- Director
Bruce A. Soll
*By: /s/ J. MICHAEL PARKS
--------------------------------------
J. Michael Parks
ATTORNEY-IN-FACT
II-9
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:
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
Year ended December 31, 2000................. 1,079 3,565 (768) 3,876
Allowance for Doubtful Accounts--Credit Card
receivables:
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
Year ended December 31, 2000................. 3,657 13,828 (13,828) 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.
*2.5 Asset Purchase Agreement by and between Utilipro, Inc., AGL
Resources, Inc., and Alliance Data Systems Corporation,
dated as of February 12, 2001, as amended March 2, 2001.
*3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.
*3.2 Second Amended and Restated Bylaws of the Registrant.
3.3 First Amendment to the 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.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*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 Alliance Data Systems Corporation and its Subsidiaries
Employee Stock Purchase Plan.
*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.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*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 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.
EXHIBIT
NO. DESCRIPTION
- ------- -----------
*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 Fourth Amendment to Lease, made effective as of June 1,
2000, by and between Partners at Brooksedge and ADS
Alliance Data Systems, Inc.
+10.56 Supplier Agreement between Loyalty Management Group Canada
and Air Canada dated as of April 24, 2000.
*10.57 Lease between 1815 LLC and ADS Alliance Data Systems, Inc.,
dated as of February 7, 2001.
*10.58 First Amendment to Lease between Deerfield & Weiland Office
Building, L.L.C. and ADS Alliance Data Systems, Inc.,
dated as of June 27, 2000.
10.59 Lease Agreement by and between Barrett Business Center, LCC
and Utilipro, Inc., dated May 13, 1999, as amended
November 1, 1999.
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP with regards to Alliance
Data Systems Corporation.
*23.2 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
23.3 Consent of Deloitte & Touche LLP with regard to
Utilipro, Inc.
*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.
EXHIBIT 1
13,000,000 SHARES OF COMMON STOCK
ALLIANCE DATA SYSTEMS CORPORATION
UNDERWRITING AGREEMENT
May __, 2001
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
CREDIT SUISSE FIRST BOSTON CORPORATION
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
Alliance Data Systems Corporation, a corporation organized and existing
under the laws of the State of Delaware (the "COMPANY"), proposes, subject to
the terms and conditions stated herein, to issue and sell to the several
underwriters named in Schedule I hereto (the "UNDERWRITERS") an aggregate of
13,000,000 shares (the "FIRM SHARES") of its common stock, par value $0.01 per
share (the "COMMON STOCK") and, for the sole purpose of covering over-allotments
in connection with the sale of the Firm Shares, at the option of the
Underwriters, up to an additional 1,950,000 shares (the "ADDITIONAL SHARES") of
Common Stock. The Firm Shares and any Additional Shares purchased by the
Underwriters are referred to herein as the "SHARES". The Shares are more fully
described in the Registration Statement referred to below.
The Company and the Underwriters agree that up to 650,000 Shares to be
purchased by the Underwriters (the "RESERVED SHARES") shall be reserved for sale
by Merrill Lynch & Co. ("MERRILL LYNCH") to certain eligible employees and
persons having business relationships with the Company, as part of the
distribution of the Shares by the Underwriters, subject to the terms of this
Agreement, the applicable rules, regulations and interpretations of the National
Association of Securities Dealers, Inc. (the "NASD") and all other applicable
laws, rules and regulations. To the extent that such Reserved Shares are not
orally confirmed for purchase by such eligible employees and persons having
business relationships with the Company by the end of the first business day
after the date of this Agreement, such Reserved Shares may be offered to the
public as part of the public offering contemplated hereby.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement, and has filed amendments
thereto, on Form S-1 (No. 333-94623), for the registration of the Shares under
the Securities Act of 1933, as amended (the "ACT"). Such registration statement,
including the prospectus, financial statements and schedules, exhibits and all
other documents filed as a part thereof, as amended at the time of effectiveness
of the registration statement, including any information deemed to be a part
thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A
or Rule 434 of the Rules and Regulations of the Commission under the Act (the
"REGULATIONS"), and any additional registration statement increasing the size of
the offering filed pursuant to Rule 462(b) of the Regulations with respect to
the Shares ("462(b) REGISTRATION STATEMENT"), is herein called the "REGISTRATION
STATEMENT," and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations or filed as part of the Registration
Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is
required, is herein called the "PROSPECTUS." The term "PRELIMINARY PROSPECTUS"
as used herein means a preliminary prospectus as described in Rule 430 of the
Regulations.
(b) At the time of the effectiveness of the Registration
Statement or any 462(b) Registration Statement or the effectiveness of any
post-effective amendment to the Registration Statement, when the Prospectus is
first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the
Regulations, when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing Date, if any
(as hereinafter respectively defined), the Registration Statement, any 462(b)
Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and do not or will not
contain an untrue statement of a material fact and do not or will not omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration Statement, not
misleading and (ii) in the case of the Prospectus, in light of the circumstances
under which they were made, not misleading, and the Prospectus, any preliminary
prospectus and any supplement thereto or prospectus wrapper prepared in
connection therewith, at their respective times of issuance and at the Closing
Date, complied and will comply in all material respects with any applicable laws
or regulations of foreign jurisdictions in which the Prospectus and such
preliminary prospectus, as amended or supplemented, if applicable, are
distributed in connection with the offer and sale of Reserved Shares. When any
related preliminary prospectus was first filed with the Commission (whether
filed as part of the registration statement for the registration of the Shares
or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when
any amendment thereof or supplement thereto was first filed with the Commission,
such preliminary prospectus and any amendments thereof and supplements thereto
complied in all material respects with the applicable provisions of the Act and
the Regulations and did not contain an untrue statement of a material fact and
did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and warranty is
made in this subsection (b), however, with respect to any information contained
in or omitted from the Registration Statement or the Prospectus or any related
preliminary prospectus or any amendment thereof or supplement
2
thereto in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of any Underwriter through you as
herein stated expressly for use in connection with the preparation thereof.
If Rule 434 is used, the Company will comply with the requirements of Rule 434.
(c) Deloitte & Touche LLP, who have certified the financial
statements and supporting schedules included in the Registration Statement, are
independent public accountants as required by the Act and the Regulations.
(d) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, except as disclosed or
specifically contemplated therein, there has been no material adverse change or
any development involving a prospective material adverse change in the business,
properties, operations, condition (financial or other) or results of operations
of the Company and its subsidiaries taken as a whole, whether or not arising
from transactions in the ordinary course of business (a "MATERIAL ADVERSE
EFFECT"), and since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, neither the Company nor any of its
subsidiaries has incurred or undertaken any liabilities or obligations, direct
or contingent, which are material to the Company and its subsidiaries taken as a
whole, except for liabilities or obligations which are reflected in the
Registration Statement and the Prospectus.
(e) This Agreement and the transactions contemplated herein
have been duly authorized by all necessary corporate action on the part of the
Company, and this Agreement has been duly and validly executed and delivered by
the Company and constitutes the valid and binding agreement of the Company,
enforceable against it in accordance with its terms, subject to any bankruptcy
or other law affecting the enforcement of creditors rights generally and any
general principles of equity.
(f) The execution and delivery of this Agreement by the
Company and the performance of this Agreement by the Company and the
consummation of the transactions contemplated hereby will not (i) conflict with
or result in a breach of any of the terms and provisions of, or constitute a
default (or an event which with notice or lapse of time, or both, would
constitute a default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, any indenture, mortgage, deed of trust, agreement,
instrument, franchise, license or permit to which the Company or any of its
subsidiaries is a party or by which any of such corporations or their respective
properties or assets may be bound and which is material to the business of the
Company or its subsidiaries or (ii) violate or conflict with any provision of
the certificate of incorporation, bylaws or other organizational documents of
the Company or any of its subsidiaries or any judgment, decree, order, statute,
rule or regulation of any court or any public, governmental or regulatory agency
or body having jurisdiction over the Company or any of its subsidiaries or any
of their respective properties, assets or businesses. No consent, approval,
authorization, order, registration, filing, qualification, license or permit of
or with any court or any public, governmental or regulatory agency or body
having jurisdiction over the Company or any of its subsidiaries or any of their
respective properties, assets or businesses is required for the execution,
delivery and performance of this Agreement by the Company or the consummation of
the transactions contemplated hereby, including the issuance, sale and delivery
of the Shares to
3
be issued, sold and delivered by the Company hereunder, except (A) the
registration under the Act of the Shares, (B) such consents, approvals,
authorizations, orders, registrations, filings, qualifications, licenses and
permits as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the Underwriters,
(C) such as have been obtained under the laws and regulations of jurisdictions
outside the United States in which the Reserved Shares are offered and (D)
those which have been duly obtained at or prior to the Closing Date.
(g) None of the Company or its subsidiaries is in violation or
default of any provision of its certificate of incorporation or bylaws, or other
organizational documents, and is not in breach of or default with respect to any
provision of any agreement, judgment, decree, order, mortgage, deed of trust,
lease, franchise, license, indenture, permit or other instrument to which it is
a party or by which it or any of its properties are bound except as would not
reasonably be expected to result in a Material Adverse Effect; and there does
not exist any state of facts which constitutes an event of default on the part
of the Company or its subsidiaries nor, to the Company's knowledge, any other
party as defined in such documents or which, with notice or lapse of time or
both, would constitute such an event of default except as would not reasonably
be expected to result in a Material Adverse Effect.
(h) All of the outstanding shares of Common Stock are duly
authorized and validly issued, fully paid and nonassessable, were issued in
compliance with federal and state securities laws and the Delaware General
Corporation Law and were not issued and are not now in violation of or subject
to any preemptive rights. The Shares have been duly authorized for issuance and
sale to the Underwriters and, when issued, delivered and paid for in accordance
with this Agreement, will be validly issued, fully paid and nonassessable, and
will not have been issued in violation of or be subject to any preemptive
rights. The Company had, as of March 31, 2001, an authorized and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
The Common Stock conforms, and when issued, delivered and paid for in accordance
with this Agreement, the Firm Shares and the Additional Shares will conform, to
the descriptions thereof contained in the Registration Statement and the
Prospectus. Except as disclosed in or specifically contemplated by the
Prospectus, the Company has no outstanding options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option and other stock plans or arrangements, and the options or other rights
granted and exercised thereunder, set forth in the Prospectus accurately and
fairly presents in all material respects the information required to be shown
with respect to such plans, arrangements, options and rights. The Company has
all requisite corporate power to enter into and perform its obligations under
this Agreement. No further approval or authority of the stockholders or the
Board of Directors of the Company will be required for the issuance and sale of
the Shares to be sold by the Company to the Underwriters as contemplated herein.
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign corporation in
each jurisdiction in which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business makes such
4
qualification necessary, except for those failures to be so qualified or in good
standing which will not in the aggregate have a Material Adverse Effect. Each of
the Company and its subsidiaries has all requisite corporate power and
authority, and all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and operate its
properties and conduct its business as now being conducted and as described in
the Registration Statement and the Prospectus, and no such consent, approval,
authorization, order, registration, qualification, license or permit contains a
materially burdensome restriction not disclosed as required by the Act or the
Regulations in the Registration Statement and the Prospectus; and, to the
knowledge of the Company, the Company has not received any notice of a
proceeding instituted in any jurisdiction revoking, limiting or curtailing, or
seeking to revoke, limit or curtail, such power and authority or qualification
which, either singly or in the aggregate, could have a Material Adverse Effect.
Other than its ownership of all of the outstanding capital stock or other equity
interests of each of the entities set forth on Schedule II hereto, the Company
does not own or control, either directly or indirectly, any corporation,
partnership, limited liability company, association or other entity. All of the
issued shares of capital stock of each of the entities listed on Schedule II
hereto have been duly authorized and validly issued, are fully paid and
non-assessable and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, equitable claims or other adverse claims,
except for liens under the Company's Amended and Restated Credit Agreement,
dated July 24, 1998, as amended.
(j) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any of its
subsidiaries is subject or which is pending or, to the knowledge of the Company,
threatened against the Company or any of its subsidiaries which might result in
a Material Adverse Effect or which is required to be disclosed in the
Registration Statement and the Prospectus. There are no statutes or regulations
that are required to be described in the Registration Statement or Prospectus
that are not described as required by the Act or the Regulations. There are no
contracts or other documents required to be described in the Registration
Statement or to be filed as exhibits to the Registration Statement which have
not been described or filed as required by the Act or the Regulations. The
contracts so described in the Prospectus are in full force and effect on the
date hereof.
(k) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which constitutes or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Shares.
(l) The consolidated financial statements, including the notes
thereto, and supporting schedules included in the Registration Statement and the
Prospectus present fairly the consolidated financial position of the Company and
its subsidiaries as of the dates indicated and the results of their operations,
stockholders' equity and cash flows for the periods specified; said financial
statements have been prepared in conformity with generally accepted accounting
principles ("GAAP") applied on a consistent basis throughout the periods
involved; and the supporting schedules included in the Registration Statement,
if any, present fairly in accordance with GAAP the information required to be
stated therein. Pro forma financial information included in the Prospectus under
the captions "Summary Consolidated Financial Data" and
5
"Unaudited Pro Forma Consolidated Financial Information" has been prepared in
accordance with the applicable requirements of Rules 11-01 and 11-02 of
Regulation S-X under the Act, and the necessary pro forma adjustments have
been properly applied to the historical amounts in the compilation of such
information, and, in the opinion of the Company, the assumptions used in the
preparation thereof are reasonable and the adjustments used therein are
appropriate to give effect to the transactions and circumstances referred to
therein. Except as included in the Registration Statement, no other financial
statements or schedules are required by Form S-1 to be included in the
Registration Statement.
(m) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company because of the filing of the Registration Statement or otherwise in
connection with the sale of the Shares contemplated hereby. All holders of any
such rights to the registration of securities of the Company have duly and
validly waived all such rights in writing prior to the date hereof.
(n) None of the Company or any of its subsidiaries is, and
upon consummation of the transactions contemplated hereby and at all times up to
and including the application of net proceeds as described in the Prospectus
none of such entities will be, subject to registration as an "investment
company" under the Investment Company Act of 1940, as amended.
(o) The Company and its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances that
(i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with GAAP and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(p) Each of the Company and its subsidiaries has good and
marketable title to all the properties and assets reflected as owned by them in
the financial statements hereinabove described (or elsewhere in the Registration
Statement or Prospectus), subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except (i) those, if any, reflected in such financial
statements (or elsewhere in the Registration Statement or the Prospectus) or
(ii) those which would not, singly or in the aggregate, have a Material Adverse
Effect. Each of the Company and its subsidiaries holds its leased properties
under valid and binding leases, with such exceptions as would not have a
Material Adverse Effect. Except as disclosed in the Prospectus, the Company and
its subsidiaries own or lease all such properties as are necessary to their
operations as now conducted or as proposed to be conducted.
(q) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, except as disclosed or
specifically contemplated therein, (i) neither the Company nor any of its
subsidiaries has entered into any material agreement or other transaction which
is not in the ordinary course of business; (ii) the Company has not purchased
any of its outstanding capital stock, nor declared, paid or otherwise made any
dividend or distribution of any kind on its capital stock other than dividends
accruing to the holders of the
6
Company's Series A Cumulative Convertible Preferred Stock, $0.01 par value
per share (the "SERIES A PREFERRED STOCK"); (iii) neither the Company nor any
of its subsidiaries has sustained any material loss or interference with its
business or properties from fire, flood, windstorm, accident or other
calamity, whether or not covered by insurance; (iv) neither the Company nor
any of its subsidiaries is in default in the payment of principal or interest
on any outstanding debt obligations; and (v) there has not been any change in
the capital stock (other than upon the sale of the Common Stock hereunder,
upon the conversion of Series A Preferred Stock and upon the exercise of
options or warrants described in the Registration Statement) or indebtedness
material to the Company.
(r) The Company has acquired on commercially reasonable terms
sufficient trademarks, trade names, patent rights, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), licenses, approvals and
governmental authorizations necessary to carry on its business as now conducted
and as proposed to be conducted in the Prospectus, except where the failure to
own or possess such rights, either singly or in the aggregate, would not
reasonably be expected to have a Material Adverse Effect; and (i) the Company
has no knowledge of any infringement by it of trademark, trade name rights,
patent rights, copyrights, licenses, trade secret or other similar rights of
others and (ii), to the Company's knowledge, there is no claim being made
against the Company regarding trademark, trade name, patent, copyright, license,
trade secret or other infringement which would, in either case, whether singly
or in the aggregate, reasonably be expected to have a Material Adverse Effect,
nor is the Company aware of any reasonable grounds for the same.
(s) Each of the Company and its subsidiaries has filed all
federal, state and local income tax returns or extensions therefor which have
been required to be filed and has paid or accrued all taxes required to be paid
and any other assessment, fine or penalty levied against it, to the extent that
any of the foregoing is due and payable, except, in all cases, for any such tax,
assessment, fine or penalty that is being contested in good faith. The Company
has no knowledge of any tax deficiency which has been or might be asserted or
threatened against the Company which would reasonably be expected to result in a
Material Adverse Effect.
(t) The Company has not distributed and will not distribute
prior to the Closing Date any offering material in connection with the offering
and sale of the Shares and the Reserved Shares other than the Prospectus, the
Registration Statement and correspondence in connection with the Reserved Share
program, in substantially the form as filed supplementally by the Company with
the Commission, and the other materials permitted by the Act.
(u) The Company and its subsidiaries maintain insurance of the
types and in the amounts generally deemed reasonable and customary for their
respective businesses and all other risks customarily insured against, all of
which insurance is in full force and effect. None of the Company nor any of its
subsidiaries has been refused any insurance coverage sought or applied for; and
the Company has no reason to believe that it and its subsidiaries will not be
able to renew its existing insurance coverage as and when such coverage expires
or to obtain similar coverage from similar insurers as may be necessary to
continue their respective businesses.
7
(v) Neither the Company, any of its subsidiaries nor, to the
Company's knowledge, any of its employees or agents has at any time during the
last five years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of law or (ii)
made any payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other than
payments required or permitted by the laws of the United States of any
jurisdiction thereof.
(w) No labor disturbance by the employees of the Company or
any of its subsidiaries exists or, to the knowledge of the Company, is
threatened; and the Company is not aware of any existing or threatened labor
disturbance by the employees of any of its or its subsidiaries' principal
suppliers, vendors or original equipment manufacturers that would reasonably be
expected to result in a Material Adverse Effect. No collective bargaining
agreement exists with any of the Company's or its subsidiaries' employees and,
to the Company's knowledge, no such agreement is imminent.
(x) The Common Stock has been approved for listing on the New
York Stock Exchange, subject to official notice of issuance.
(y) Except as set forth in the Registration Statement and
Prospectus, (i) the Company and its subsidiaries are in compliance with all
rules, laws and regulations relating to the use, treatment, storage and disposal
of toxic substances and protection of health or the environment ("ENVIRONMENTAL
LAWS") which are applicable to their respective business, (ii) neither the
Company nor any of its subsidiaries has received notice from any governmental
authority or third party of an asserted claim under Environmental Laws which,
under Regulation S-K, is required to be disclosed in the Registration Statement
and the Prospectus, (iii) the Company and its subsidiaries will not be required
to make future material capital expenditures to comply with Environmental Laws,
(iv) no property which is owned, leased or occupied by the Company or one of its
subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended (42 U.S.C. Section 9601, et seq.) ("CERCLA"), or otherwise
designated as a contaminated site under applicable state or local law, (v)
neither the Company nor any of its subsidiaries has disposed of any
"hazardous substances" as defined by CERCLA on any property which is or was
owned, leased or occupied by the Company or one of its subsidiaries; (vi)
neither the Company nor any of its subsidiaries has disposed or arranged for
disposal of any "hazardous substances" as defined by CERCLA on any third
party property, except as would not, either singly or in the aggregate, have
a Material Adverse Effect; and (vii) neither the Company nor any of its
subsidiaries has agreed to assume, undertake or provide indemnification for
any liability of any other person under any Environmental Law, including any
obligation for cleanup or remedial action.
(z) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the executive
officers or directors of the Company or any of the members of the families of
any of them of the sort required to be disclosed in the Registration Statement
and Prospectus, except as disclosed therein. No relationship, direct or
indirect, exists between or among the Company or any of its subsidiaries on the
one hand, and the directors, officers, stockholders, customers or suppliers of
the Company or its subsidiaries, on the other hand, which is required to be
described in the Prospectus which is not so described.
8
(aa) The Company has not offered, or caused the Underwriters
to offer, Shares to any person pursuant to the Reserved Share program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company or its subsidiaries to alter the customer's or supplier's level or type
of business with the Company or its subsidiaries, or (ii) a trade journalist or
publication to write or publish favorable information about the Company or its
business.
(bb) Each of the Company and its subsidiaries is in compliance
in all material respects with all presently applicable provisions of the
Employee Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no "reportable
event" (as defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company or any of its subsidiaries would have
any liability.
(cc) The deposit accounts and investment certificates of World
Financial Network National Bank, a wholly owned subsidiary of the Company (the
"BANK"), are duly and adequately insured by the Federal Deposit Insurance
Corporation (the "FDIC") to the full extent of FDIC insurance limits. No charge,
investigation or proceeding for the termination or revocation of the Bank's
charter, good standing or FDIC insurance is pending or, to the best knowledge of
the Company, threatened.
(dd) Neither the Company nor the Bank is subject to any order
of the Federal Reserve Board (the "FEDERAL RESERVE"), the FDIC, the Office of
the Comptroller or the Currency (the "OCC") or any state or foreign banking
departments with jurisdiction over the Bank or its operations, nor is the
Company or the Bank subject to any agreement or consent related to compliance
with banking laws and regulations with, or board resolution adopted at the
instigation of, any such regulatory authorities. The Bank has conducted and is
conducting its business so as to comply in all material respects with all
applicable federal, foreign and state laws, rules, regulations, decisions,
directives and orders of the Federal Reserve, the FDIC, the OCC and any state or
foreign banking departments with jurisdiction over the Bank or its operations.
No material charge, investigation or proceeding with respect to, or relating to,
the Bank is pending or, to the best knowledge of the Company, threatened, by or
before any regulatory, administrative or governmental agency, body or authority.
(ee) The Bank is in compliance with all applicable capital
requirements. The Bank is "well capitalized" as defined in FDIC regulations,
with capital ratios as set forth in the Registration Statement and the
Prospectus.
(ff) Neither the Company nor any of its subsidiaries is a
"bank holding company" within the meaning of the Bank Holding Company Act of
1956, as amended.
(gg) Except as would not reasonably be expected to have a
Material Adverse Effect, whether singly or in the aggregate, the credit card
accounts (the "ACCOUNTS") originated by the Bank, whether securitized by the
Bank or retained as seller's interest for the Bank's own account, have been
created, maintained by the Bank and serviced in compliance with applicable
federal and state laws and regulations and the standard policies and procedures
of the Bank relating to the administration of the Accounts including, but not
limited to, the solicitation,
9
credit approval, processing, servicing, collection and other administration
and management of the Accounts, as such policies and procedures may have been
modified from time to time.
(hh) The interest rates, fees and charges in connection with
the Accounts comply in all material respects with applicable federal and state
laws and regulations and, except as would not reasonably be expected to have a
Material Adverse Effect, whether singly or in the aggregate, with each agreement
between the Bank and a cardholder containing the terms and conditions of the
Account.
(ii) All applications for Accounts have been conducted and
evaluated and applicants notified in a manner which is in compliance, in all
material respects, with all provisions of the Equal Credit Opportunity Act and
its implementing regulations, as amended. All disclosures made in connection
with the Accounts are and have been in compliance, in all material respects,
with the provisions of the Consumer Credit Protection Act and its implementing
regulations, as amended.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to issue and sell to the Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the Company, at
a purchase price per share of $_______, the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule I hereto plus any
additional number of Shares which such Underwriter may become obligated to
purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Shares shall be made at the office of Gibson, Dunn &
Crutcher LLP, 200 Park Avenue, 48th Floor, New York, New York, or at such other
place as shall be agreed upon by Bear, Stearns & Co. Inc. ("BEAR STEARNS") and
the Company, at 10:00 A.M. on the third or fourth business day (as permitted
under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")) (unless postponed in accordance with the provisions of Section
9 hereof) following the date of the effectiveness of the Registration Statement
(or, if the Company has elected to rely upon Rule 430A of the Regulations, the
third or fourth business day (as permitted under Rule 15c6-1 under the Exchange
Act) after the determination of the initial public offering price of the
Shares), or such other time not later than ten business days after such date as
shall be agreed upon by Bear Stearns and the Company (such time and date of
payment and delivery being herein called the "CLOSING DATE"). Payment shall be
made to the Company by wire transfer in same day funds, against delivery to you
for the respective accounts of the Underwriters of certificates for the Shares
to be purchased by them. Certificates for the Firm Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Closing Date. The Company
will permit you to examine and package such certificates for delivery at least
one full business day prior to the Closing Date. If you so elect, delivery of
the Firm Shares may be made by credit through full fast transfer to the accounts
at The Depository Trust Company designated by you.
10
(c) In addition, the Company hereby grants to the Underwriters
the option to purchase up to 1,950,000 Additional Shares at the same purchase
price per share to be paid by the Underwriters to the Company for the Firm
Shares as set forth in this Section 2, for the sole purpose of covering
over-allotments in the sale of Firm Shares by the Underwriters. This option may
be exercised from time to time and at any time, in whole or in part, on or
before the 30th day following the date of the Prospectus, by written notice by
Bear Stearns to the Company. Such notice shall set forth the aggregate number of
Additional Shares as to which the option is being exercised and the date and
time, as reasonably determined by Bear Stearns, when the Additional Shares are
to be delivered (such date and time being herein sometimes referred to as the
"ADDITIONAL CLOSING Date"); PROVIDED, HOWEVER, that, unless otherwise agreed to
by Bear Stearns and the Company, the Additional Closing Date shall not be
earlier than the Closing Date or earlier than the second full business day after
the date on which the option shall have been exercised nor later than the eighth
full business day after the date on which the option shall have been exercised
(unless such time and date are postponed in accordance with the provisions of
Section 9 hereof). Certificates for the Additional Shares shall be registered in
such name or names and in such authorized denominations as you may request in
writing at least two full business days prior to the Additional Closing Date.
The Company will permit you to examine and package such certificates for
delivery at least one full business day prior to the Additional Closing Date. If
you so elect, delivery of any Additional Shares may be made by credit through
full fast transfer to the accounts at The Depository Trust Company designated by
you.
The number of Additional Shares to be sold to each Underwriter shall
be the number which bears the same ratio to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to 13,000,000, subject,
however, to such adjustments to eliminate any fractional shares as Bear
Stearns in its sole discretion shall make.
Payment for the Additional Shares shall be made by wire transfer in
same day funds at the offices of Gibson, Dunn & Crutcher LLP, 200 Park
Avenue, 48th Floor, New York, New York, or such other location as may be
mutually acceptable, upon delivery of the certificates for the Additional
Shares to you for the respective accounts of the Underwriters.
3. OFFERING. Upon the Company's authorization of the release
of the Firm Shares, the Underwriters propose to offer the Shares for sale to the
public upon the terms set forth in the Prospectus.
4. COVENANTS OF THE COMPANY. The Company covenants and agrees
with the Underwriters that:
(a) The Company will use its best efforts to cause any
amendments to the Registration Statement to become effective as promptly as
possible, and if Rule 430A is used or the filing of the Prospectus is otherwise
required under Rule 424(b) or Rule 434, the Company will file the Prospectus
(properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule
434 within the prescribed time period and will provide evidence satisfactory to
you of such timely filing. If the Company elects to rely on Rule 434, the
Company will prepare and file a term sheet that complies with the requirements
of Rule 434.
11
The Company will notify you immediately (and, if requested by
you, will confirm such notice in writing) (i) when the Registration Statement
and any amendments thereto (including any post-effective amendments) become
effective, (ii) of any request by the Commission for any amendment of or
supplement to the Registration Statement or the Prospectus or for any
additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of the initiation, or the threatening, of
any proceedings therefor, (v) of the receipt of any comments from the
Commission and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time,
the Company will make every reasonable effort to prevent the issuance of any
such stop order and, if issued, to obtain the lifting of such order as soon
as possible. The Company will not file any amendment to the Registration
Statement or any amendment of or supplement to the Prospectus (including the
prospectus required to be filed pursuant to Rule 424(b) or Rule 434 of the
Regulations) that differs from the prospectus on file at the time of the
effectiveness of the Registration Statement before or after the effective
date of the Registration Statement to which you shall reasonably object in
writing after being timely furnished in advance a copy thereof.
(b) If at any time when a prospectus relating to the Shares is
required to be delivered under the Act any event shall have occurred as a result
of which the Prospectus as then amended or supplemented would, in the judgment
of the Underwriters or the Company, include an untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, or if it shall be necessary at any
time to amend or supplement the Prospectus or Registration Statement to comply
with the Act or the Regulations, the Company will notify you promptly and
prepare and file with the Commission an appropriate amendment or supplement (in
form and substance reasonably satisfactory to you) which will correct such
statement or omission and will use its best efforts to have any amendment to the
Registration Statement declared effective as soon as possible.
(c) The Company will promptly deliver to you four signed
copies of the Registration Statement, including exhibits and all amendments
thereto, and the Company will promptly deliver to each of the Underwriters such
number of copies of any preliminary prospectus, the Prospectus, the Registration
Statement and all amendments of and supplements to such documents, if any, as
you may reasonably request. The Company will use its reasonable best efforts to
cause to be delivered to the Underwriters, in New York City or such other
locations in the United States as directed by the Underwriters, by 2:00 p.m. New
York City time on the business day next succeeding the date of this Agreement,
copies of the Prospectus in such quantities as you may reasonably request.
(d) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time of effectiveness of the Registration
Statement, to qualify the Shares for offering and sale under the securities laws
relating to the offering or sale of the Shares of such jurisdictions (foreign
and domestic) as you may designate and to maintain such
12
qualification in effect for so long as required for the distribution thereof;
except that in no event shall the Company be obligated in connection therewith
to qualify as a foreign corporation or to execute a general consent to service
of process.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to you as soon
as practicable, but not later than 45 days after the end of its fiscal quarter
in which the first anniversary date of the effective date of the Registration
Statement occurs, an earnings statement (in form complying with the provisions
of Rule 158 of the Regulations) covering a period of at least 12 consecutive
months beginning after the effective date of the Registration Statement.
(f) During the period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of Bear
Stearns, issue, sell, offer or agree to sell, grant any option for the sale of,
pledge, make any short sale or maintain any short position, establish or
maintain a "put equivalent position" (within the meaning of Rule 16a-1(h) under
the Exchange Act), enter into any swap, derivative transaction or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock (whether any such transaction is
to be settled by delivery of Common Stock, other securities, cash or other
consideration) or otherwise dispose of, any Common Stock (or any securities
convertible into, exercisable for or exchangeable for Common Stock) or interest
therein of the Company, and the Company will obtain the written undertaking, the
form of which shall be subject to the approval of Bear Stearns, of each of its
executive officers and directors and such of its stockholders and other officers
as have been heretofore designated by you and listed on Schedule III attached
hereto not to engage in any similar transactions on their own behalf. The
foregoing sentence shall not apply to (i) the Shares to be sold hereunder, (ii)
the issuance by the Company of shares of Common Stock upon the exercise of
options or warrants or the conversion of a security outstanding on the date
hereof which is described in the Registration Statement or the Prospectus or
(iii) the grant of options or share purchase rights by the Company pursuant to
the option plans described in the Registration Statement or Prospectus,
provided, such options are not exercisable for 180 days after the date of the
Prospectus, or if such options are exercisable within such period, such options
are subject to lockup provisions substantially the same as those set forth in
this Section 4(f). The Company further agrees that, with respect to any and all
Common Stock that is pledged to the Company or is otherwise delivered to the
Company for a similar purpose, if such Common Stock is subject to the lockup
contemplated by this Section 4(f), such Common Stock when acquired by the
Company due to the foreclosure by the Company or other similar action with
respect to such Common Stock shall continue to be governed by, and the Company
shall comply with, the lockup provision that applied to the pledgee or other
person from whom the Company acquired such Common Stock.
(g) During a period of three years from the effective date of
the Registration Statement, the Company will furnish or make available to you
copies of (i) all reports to its stockholders; and (ii) all reports, financial
statements and proxy or information statements filed by the Company with the
Commission or any national securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
13
(i) The Company will use its best efforts to cause the Shares
to be listed on the New York Stock Exchange.
(j) The Company will comply with Rule 463 of the Regulations.
(k) The Company hereby agrees that it will ensure that the
Reserved Shares will be restricted as required by the NASD or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. Merrill Lynch will notify the
Company as to which persons will need to be so restricted. At the request of the
Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Shares, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(l) The Company shall cause to be prepared and delivered, at
its expense, within one business day from the effective date of this Agreement,
to the Underwriters an "electronic Prospectus" to be used by the Underwriters in
connection with the offering and sale of the Shares. As used herein, the term
"ELECTRONIC PROSPECTUS" means a form of Prospectus, and any amendment or
supplement thereto, that meets each of the following conditions: (i) it shall be
encoded in an electronic format, reasonably satisfactory to Bear Stearns, that
may be transmitted electronically by Bear Stearns and the other Underwriters to
offerees and purchasers of the Shares for at least during the period when the
Prospectus is required to be delivered under the Act or the Exchange Act (the
"PROSPECTUS DELIVERY PERIOD"); (ii) it shall disclose the same information as
the paper Prospectus and Prospectus filed pursuant to EDGAR, except to the
extent that graphic and image material cannot be disseminated electronically, in
which case such graphic and image material shall be replaced in the electronic
Prospectus with a fair and accurate narrative description or tabular
representation of such material, as appropriate; and (iii) it shall be in or
convertible into a paper format or an electronic format, reasonably satisfactory
to Bear Stearns, that will allow investors to store and have continuously ready
access to the Prospectus at any future time, without charge to investors (other
than any fee charged for subscription to the system as a whole and for on-line
time). Such electronic Prospectus may consist of a Rule 434 preliminary
prospectus, together with the applicable term sheet, provided that it otherwise
satisfies the format and conditions described in the immediately preceding
sentence. The Company hereby confirms that it has included or will include in
the Prospectus filed pursuant to EDGAR or otherwise with the Commission and in
the Registration Statement at the time it was declared effective an undertaking
that, upon receipt of a request by an investor or his or her representative
within the Prospectus Delivery Period, the Company shall transmit or cause to be
transmitted promptly, without charge, a paper copy of the Prospectus.
5. PAYMENT OF EXPENSES. Whether or not the transactions
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (i) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereof
(including all exhibits thereto), any preliminary prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation, fees and
expenses of the Company's
14
accountants and counsel), the underwriting documents (including this
Agreement, the Agreement Among Underwriters and the Master Selling Agreement)
and all other documents related to the public offering of the Shares
(including those supplied to the Underwriters in quantities as hereinabove
stated), (ii) the issuance, transfer and delivery of the Shares to the
Underwriters, including any transfer or other taxes payable thereon, (iii)
the qualification of the Shares under state or foreign securities or Blue Sky
laws, including the costs of printing and mailing a preliminary and final
"Blue Sky Survey" and the fees of counsel for the Underwriters and such
counsel's disbursements in relation thereto, (iv) listing of the Shares on
the New York Stock Exchange, (v) filing fees of the Commission and the
National Association of Securities Dealers, Inc.; (vi) the cost of printing
certificates representing the Shares; (vii) the cost and charges of any
transfer agent or registrar and (viii) all costs and expenses of the
Underwriters, including the fees and disbursements of counsel for the
Underwriters with respect to the Reserved Share program, incurred by the
Underwriters in connection with the Reserved Share program, and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters
in connection with the Reserved Share program.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the Underwriters to purchase and pay for the Firm Shares and the Additional
Shares, as provided herein, shall be subject to the accuracy of the
representations and warranties of the Company herein contained, as of the date
hereof and as of the Closing Date (for purposes of this Section 6, "CLOSING
DATE" shall refer to the Closing Date for the Firm Shares and any Additional
Closing Date, if different, for the Additional Shares), to the absence from any
certificates, opinions, written statements or letters furnished to you or to
Gibson, Dunn & Crutcher LLP ("UNDERWRITERS' COUNSEL") pursuant to this Section 6
of any misstatement or omission, to the performance by the Company of its
obligations hereunder, and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:30 P.M., New York City time, on the date of this Agreement, or at
such later time and date as shall have been consented to in writing by you; if
the Company shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission in a
timely fashion in accordance with Section 4(a) hereof; and, at or prior to the
Closing Date no stop order suspending the effectiveness of the Registration
Statement or any post-effective amendment thereof shall have been issued and no
proceedings therefor shall have been initiated or threatened by the Commission.
(b) At the Closing Date you shall have received the opinion of
Akin, Gump, Strauss, Hauer & Feld, L.L.P., counsel for the Company, dated the
Closing Date addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) Each of the Company and its subsidiaries is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation. Each of the Company and its
subsidiaries is duly qualified and in good standing as a foreign
corporation in each jurisdiction listed on Schedule II attached
hereto. Each of the Company and its subsidiaries has all requisite
corporate power to own, lease and license its respective properties
and conduct its business as now being conducted and as
15
described in the Registration Statement and the Prospectus, and,
with respect to the Company, to enter into the Underwriting
Agreement. All of the issued and outstanding capital stock of each
subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable and were not issued in violation of
preemptive rights granted under such subsidiary's certificate of
organization or under the corporate laws of the jurisdiction of its
incorporation and are owned directly or indirectly by the Company,
free and clear of any lien, encumbrance, claim, security interest,
restriction on transfer, stockholders' agreement, voting trust or
other defect of title whatsoever, except for liens under the
Company's Amended and Restated Credit Agreement, dated July 24, 1998,
as amended. Except as disclosed in or specifically contemplated by
the Prospectus, to the knowledge of such counsel, the Company has no
outstanding options to purchase, or any preemptive rights or other
rights to subscribe for or to purchase, any securities or
obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations.
(ii) The authorized capital stock of the Company (including
the Common Stock) as of December 31, 2000 conforms to the
description thereof set forth in the Registration Statement and the
Prospectus. All of the outstanding shares of Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable
and were not issued in violation of any preemptive rights created
under the Company's certificate of incorporation or under the
Delaware General Corporation Law. The Shares to be delivered on the
Closing Date have been duly authorized and, when issued and
delivered by the Company in accordance with this Agreement, will be
validly issued, fully paid and nonassessable and will not have been
issued in violation of or subject to any preemptive rights created
under the Company's certificate of incorporation or under the
Delaware General Corporation Law. The Common Stock, the Firm Shares
and the Additional Shares conform to the descriptions thereof
contained in the Registration Statement and the Prospectus.
(iii) The Shares have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance.
(iv) The execution and delivery of this Agreement by the
Company has been duly authorized by all necessary corporate action
on the part of the Company, and this Agreement has been duly and
validly executed and delivered by the Company.
(v) To the knowledge of such counsel, there is no litigation
or governmental or other action, suit, proceeding or investigation
before any court or before or by any public, regulatory or governmental
agency or body pending or threatened against, or involving the
properties or business of, the Company or any of its subsidiaries,
which is of a character required to be disclosed in the Registration
Statement and the Prospectus which has not been properly disclosed
therein.
(vi) The execution and delivery of this Agreement by the
Company do not and the performance of this Agreement by the Company
and the consummation of the transactions contemplated hereby by the
Company will not (A) conflict with or result in a breach of any of the
terms and provisions of, or constitute a default (or an event which
16
with notice or lapse of time, or both, would constitute a default)
under, or result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, any material agreement, instrument,
franchise, license or permit known to such counsel to which the Company
or any of its subsidiaries is a party or by which any of such
corporations or their respective properties or assets may be bound or
(B) violate or conflict with any provision of the certificate of
incorporation or bylaws of the Company or any of its subsidiaries, or,
to the best knowledge of such counsel, any judgment, decree, order,
statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or any
of its subsidiaries or any of their respective properties or assets,
except that such counsel shall express no opinion in clause (A) above
with respect to breaches or violations of or defaults under any
covenant, restriction or provision with respect to financial ratios, or
tests, or any aspect of the financial condition or results of
operations of any party.
(vii) No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental, or regulatory agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their respective properties or assets is required for the execution,
delivery and performance of this Agreement by the Company or the
consummation of the transactions contemplated hereby, except for (1)
such as may be required under any foreign securities laws, including
such as have been obtained under the laws and regulations of
jurisdictions outside the United States in which the Reserved Shares
are offered, or state securities or Blue Sky laws in connection with
the purchase and distribution of the Shares by the Underwriters (as
to which such counsel need express no opinion) and (2) such as have
been made or obtained under the Act, (3) the clearance of the
offering by the NASD and (4) such consents, approvals, authorizations
and orders as have been duly obtained on or prior to the date hereof
and are in full force and effect.
(viii) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or
incorporated by reference therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations.
(ix) The Registration Statement is effective under the Act,
and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any
post-effective amendment thereof has been issued by the Commission
and no proceedings therefor have been initiated or threatened by the
Commission and all filings required by Rule 424(b) of the
Regulations have been made in the manner and within the time period
required thereby.
(x) The Company is not in violation or default of its
certificate of incorporation or bylaws, and to the best of such
counsel's knowledge, is not in breach of or default of any agreement,
judgment, decree, order, mortgage, deed of trust, lease, franchise,
license, indenture, permit or other instrument to which it is a party
or by which it or any of its properties are bound except as would not
have a Material Adverse Effect;
17
and to the best of such counsel's knowledge, there does not exist
any state of facts which constitutes an event of default on the part
of the Company as defined in such documents or which, with notice or
lapse of time or both, would constitute such an event of default
except as would not have a Material Adverse Effect.
(xi) To the knowledge of such counsel, there are no
contracts or other documents required to be described in the
Registration Statement or to be filed as exhibits to the
Registration Statement or by the Regulations which have not been
accurately and completely described or filed as required.
(xii) The statements (i) in the Prospectus under the captions:
(a) Risk Factors--If our bank subsidiary fails to meet
credit card bank criteria, we may become subject to regulation
under the Bank Holding Company Act, which would force us to
cease all of our non-banking business activities and thus
cause a drastic reduction in our profits and revenue,
(b) Risk Factors--Delaware law and our charter
documents could prevent a change of control that might be
beneficial to you,
(c) Risk Factors--Legislation relating to consumer
privacy may affect our ability to collect data that we use in
providing our marketing services, which could negatively
affect our ability to satisfy our clients' needs,
(d) Risk Factors--Current and proposed regulation and
legislation relating to our credit services could limit our
business activities, product offerings and fees charged,
(e) Risk Factors--We may face damages as a result of
litigation in connection with the bankruptcy proceedings of
one of our former customers, Service Merchandise, and a class
action suit filed on behalf of a group of World Financial
cardholders,
(f) Business--Regulation,
(g) Business--Legal Proceedings,
(h) Management--Employment, Severance and
Indemnification Agreements,
(i) Management--Amended and Restated Stock Option and
Restricted Stock Plan,
(j) Management--Alliance Data Systems 401(k) and
Retirement Savings Plan,
(k) Management--Supplemental Executive Retirement Plan,
(l) Management--2000 Incentive Compensation Plan,
(m) Management--Employee Stock Purchase Plan,
(n) Certain Relationships and Related Transactions--
Transactions with Welsh, Carson, Anderson & Stowe,
18
(o) Certain Relationships and Related
Transactions--Transactions with The Limited,
(p) Certain Relationships and Related
Transactions--Stockholders Agreement with Welsh Carson and The
Limited,
(q) Description of Capital Stock and
(r) Shares Eligible for Future Sale, and
(ii) in Item 14 and Item 15 of Part II of the Registration
Statement, insofar as such statements constitute a summary of the legal
matters, documents or proceedings referred to therein, fairly present,
in all material respects, the information called for with respect to
such legal matters, documents and proceedings.
(xiii) The form of certificate used to evidence the
Shares is in due and proper form and complies in all material respects
with all applicable statutory requirements under the laws of the State
of Delaware.
(xiv) The Company has duly authorized and reserved a
number of shares of Common Stock for issuance upon the exercise of
options under the Company's Stock Option Plan which is not less than
the number of options issuable under such plan, as of the Closing Date.
(xv) Other than as described in the Prospectus, no
stockholder of the Company or any other person has any preemptive right
of first refusal or other similar right to subscribe for or purchase
securities of the Company (i) arising by operation of the certificate
of incorporation or bylaws of the Company or the general corporation
law of the State of Delaware or (ii) arising from any contract or
agreement filed as an exhibit to the Registration Statement (including
without limitation any transaction document entered into in connection
with any of the Company's preferred stock financings) or otherwise
known to such counsel.
(xvi) In addition, such opinion shall also contain a
statement that such counsel has participated in conferences with
officers and representatives of the Company, representatives of the
independent public accountants for the Company and the Underwriters at
which the contents and the Prospectus and related matters were
discussed and, no facts have come to the attention of such counsel
which would lead such counsel to believe that either the Registration
Statement at the time it became effective (including the information
deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or
any amendment thereof made prior to the Closing Date as of the date of
such amendment, contained an untrue statement of a material fact or
omitted to state any material fact required to be stated therein or
necessary to make the statements therein not misleading or that the
Prospectus as of its date (or any amendment thereof or supplement
thereto made prior to the Closing Date as of the date of such amendment
or supplement) and as of the Closing Date contained or contains an
untrue statement of a material fact or omitted or omits to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading (it
19
being understood that such counsel need express no belief or opinion
with respect to the financial statements and schedules and other
financial data included or incorporated by reference therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and its subsidiaries, provided that
copies of any such statements or certificates shall be delivered to
Underwriters' Counsel.
(c) All proceedings taken in connection with the sale of the
Firm Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to you and to Underwriters' Counsel, and the
Underwriters shall have received from said Underwriters' Counsel a favorable
opinion, dated as of the Closing Date with respect to the issuance and sale of
the Shares, the Registration Statement and the Prospectus and such other related
matters as you may reasonably require, and the Company shall have furnished to
Underwriters' Counsel such documents as they request for the purpose of enabling
them to pass upon such matters.
(d) At the Closing Date you shall have received a certificate
of the Company executed on its behalf by its Chief Executive Officer and Chief
Financial Officer, dated the Closing Date to the effect that (i) the condition
set forth in subsection (a) of this Section 6 has been satisfied, (ii) as of the
date hereof and as of the Closing Date the representations and warranties of the
Company set forth in Section 1 hereof are accurate, (iii) as of the Closing Date
the obligations of the Company to be performed hereunder on or prior thereto
have been duly performed and (iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, the
Company and its subsidiaries have not sustained any material loss or
interference with their respective businesses or properties from fire, flood,
hurricane, accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, and there has
not been any material adverse change, or any development involving a prospective
material adverse change, in the properties, operations, condition (financial or
otherwise), or results of operations of the Company as presently conducted or as
proposed to be conducted and its subsidiaries taken as a whole, except in each
case as described in or contemplated by the Prospectus.
(e) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter, from Deloitte & Touche LLP, independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date, addressed to the Underwriters and in form
and substance reasonably satisfactory to you, to the effect that: (i) they are
independent certified public accountants with respect to the Company within the
meaning of the Act and the Regulations and stating that the answer to Item 10 of
the Registration Statement is correct insofar as it relates to them; (ii)
stating that, in their opinion, the
20
financial statements and schedules of the Company included in the
Registration Statement and the Prospectus and covered by their opinion
therein comply as to form in all material respects with the applicable
accounting requirements of the Act and the applicable published rules and
regulations of the Commission thereunder; (iii) on the basis of procedures
consisting of a reading of the latest available unaudited interim
consolidated financial statements of the Company, and its subsidiaries, a
reading of the minutes of meetings and consents of the stockholders and
boards of directors of the Company and its subsidiaries and the committees of
such boards subsequent to December 31, 2000, inquiries of officers and other
employees of the Company and its subsidiaries who have responsibility for
financial and accounting matters of the Company and its subsidiaries with
respect to transactions and events subsequent to December 31, 2000 and other
specified procedures and inquiries to a date not more than five days prior to
the date of such letter, nothing has come to their attention that would cause
them to believe that: (A) the unaudited consolidated financial statements and
schedules of the Company presented in the Registration Statement and the
Prospectus do not comply as to form in all material respects with the
applicable accounting requirements of the Act and, if applicable, the
Exchange Act and the applicable published rules and regulations of the
Commission thereunder or that such unaudited consolidated financial
statements are not fairly presented in conformity with GAAP applied on a
basis substantially consistent with that of the audited consolidated
financial statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to December 31, 2000
there were, as of the date of the most recent available monthly consolidated
financial statements of the Company and its subsidiaries, if any, and as of a
specified date not more than five days prior to the date of such letter, any
changes in the capital stock or long-term indebtedness of the Company or any
decrease in the net current assets or stockholders' equity of the Company, in
each case as compared with the amounts shown in the most recent balance sheet
presented in the Registration Statement and the Prospectus, except for
changes or decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in such letter or
(C) that during the period from January 1, 2001 to the date of the most
recent available monthly consolidated financial statements of the Company and
its subsidiaries, if any, and to a specified date not more than five days
prior to the date of such letter, there was any decrease, as compared with
the corresponding period in the prior fiscal year, in total revenues, or
total or per share net income, except for decreases which the Registration
Statement and the Prospectus disclose have occurred or may occur or which are
set forth in such letter; and (iv) stating that they have compared specific
dollar amounts, numbers of shares, percentages of revenues and earnings, and
other financial information pertaining to the Company and its subsidiaries
set forth in the Registration Statement and the Prospectus, which have been
specified by you prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages, and information may be derived from the
general accounting and financial records of the Company and its subsidiaries
or from schedules furnished by the Company, and excluding any questions
requiring an interpretation by legal counsel, with the results obtained from
the application of specified readings, inquiries, and other appropriate
procedures specified by you set forth in such letter, and found them to be in
agreement. In addition, such letter shall state that the pro forma financial
information and the historical recast financial information included in the
Registration Statement and the Prospectus comply as to form in all material
respects with the applicable accounting requirements of the Act, including
Rule 11-02 of Regulation S-X, and that the pro forma adjustments have been
properly applied to historical amounts in the compilation of such pro forma
financial information.
21
(f) Prior to the Closing Date the Company shall have furnished
to you such further information, certificates and documents as you may
reasonably request.
(g) You shall have received from each person who is a director
or officer of the Company, and each stockholder as has been heretofore
designated by you and listed on Schedule III hereto, an agreement, in the form
set forth on Schedule IV hereto, to the effect that such person will not,
directly or indirectly, without the prior written consent of Bear Stearns, on
behalf of the Underwriters, issue, sell, offer or agree to sell, grant any
option for the sale of, pledge, make any short sale or maintain any short
position, establish or maintain a "put equivalent position" (within the meaning
of Rule 16a-1(h) under the Exchange Act), enter into any swap, derivative
transaction or other arrangement that transfers to another, in whole or in part,
any of the economic consequences of ownership of the Common Stock (whether any
such transaction is to be settled by delivery of Common Stock, other securities,
cash or other consideration) or otherwise dispose of, any Common Stock (or any
securities convertible into, exercisable for or exchangeable for Common Stock)
or interest therein of the Company or of any of its subsidiaries, other than the
transfer by the stockholder of any Common Stock to any member of the
stockholder's immediate family, or to a revocable trust for the benefit of the
stockholder or any member of the stockholder's immediate family, provided that
any such member or transferee agrees to be bound by all of the terms and
conditions contained in such agreement, for a period of 180 days after the date
of the Prospectus.
(h) At the Closing Date, the Shares shall have been approved
for listing on the New York Stock Exchange upon official notice of issuance.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by you at, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
canceled by you at, or at any time prior to, the Additional Closing Date.
Notice of such cancellation shall be given to the Company in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
otherwise, insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as originally filed
or any amendment
22
thereof, or any related preliminary prospectus or the Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that the Company will not be liable in any such case to
the extent, but only to the extent, that any such loss, liability, claim,
damage or expense arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any Underwriter through you expressly for use
therein; and PROVIDED, FURTHER, that this indemnity agreement with respect to
any preliminary prospectus shall not inure to the benefit of any Underwriter
from whom the person asserting any such losses, liabilities, claims, damages
or expenses purchased Shares, or any person controlling such Underwriter, if
a copy of the Prospectus (as then amended or supplemented if the Company
shall have furnished any such amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if such is
required by law, at or prior to the written confirmation of the sale of such
Shares to such person and if the Prospectus (as so amended or supplemented)
would have corrected the defect giving rise to such loss, liability, claim,
damage or expense or (ii)(A) the violation of any applicable laws or
regulations of foreign jurisdictions where Reserved Shares have been offered
and (B) any untrue statement or alleged untrue statement of a material fact
included in the supplement or prospectus wrapper material distributed in
Canada or New Zealand in connection with the reservation and sale of the
Reserved Shares to participants in the Reserved Share program, or the
omission or alleged omission therefrom of a material fact necessary to make
the statements therein, when considered in conjunction with the Prospectus or
preliminary prospectus, not misleading. This indemnity agreement will be in
addition to any liability which the Company may otherwise have including
under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, and each other person, if any, who controls the Company or any of its
subsidiaries within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement for the registration of the Shares, as originally filed
or any amendment thereof, or any related preliminary prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
you expressly for use therein; PROVIDED, HOWEVER, that in no case shall any
Underwriter be liable or responsible for any amount in excess of the
23
underwriting discount applicable to the Shares purchased by such Underwriter
hereunder. This indemnity will be in addition to any liability which any
Underwriter may otherwise have including under this Agreement. The Company
acknowledges that the statements set forth in the last two paragraphs of the
cover page and under the captions "Underwriting--Public Offering Price and
Dealers Concession," "Underwriting--Discretionary Accounts,"
"Underwriting--Prospectus in Electronic Format," "Underwriting--Stabilization
and Other Transactions" and "Underwriting--NYSE Undertaking" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the registration statement relating to the
Shares as originally filed or in any amendment thereof, any related preliminary
prospectus or the Prospectus or in any amendment thereof or supplement thereto,
as the case may be.
(c) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but the
failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 to the extent the indemnifying
party is not materially prejudiced as a result thereof and in any event shall
not relieve it from any liability that such indemnifying party may have
otherwise than on account of this indemnity agreement). In case any such action
is brought against any indemnified party, and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice delivered
to the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of such indemnified party or parties unless (i) the employment of
such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or
additional to those available to one or all of the indemnifying parties (in
which case the indemnifying parties shall not have the right to direct the
defense of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; PROVIDED, HOWEVER, that such consent was not
unreasonably withheld.
(d) In connection with the offer and sale of the Reserved
Shares, the Company agrees, promptly upon a request in writing to indemnify and
hold harmless the Underwriters from and against any and all losses, liabilities,
claims, damages and expenses incurred by them as a result of the failure of
participants in the Reserved Share program to pay for and accept delivery of
Reserved Shares which, by the end of the first business day following the date
of this Agreement, were subject to a properly confirmed agreement to purchase.
24
8. CONTRIBUTION. In order to provide for contribution in
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company and its
subsidiaries any contribution received by the Company or its subsidiaries from
persons, other than the Underwriters, who may also be liable for contribution,
including persons who control the Company within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, officers of the Company who signed
the Registration Statement and directors of the Company) as incurred to which
the Company and one or more of the Underwriters may be subject, in such
proportions as is appropriate to reflect the relative benefits received by the
Company, on the one hand, and the Underwriters, on the other hand, from the
offering of the Shares or, if such allocation is not permitted by applicable law
or indemnification is not available as a result of the indemnifying party not
having received notice as provided in Section 7 hereof, in such proportion as is
appropriate to reflect not only the relative benefits referred to above but also
the relative fault of the Company, on the one hand, and the Underwriters, on the
other hand, in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Underwriters shall be deemed to be in the same proportion as (x) the
total proceeds from the offering (net of underwriting discounts and commissions
but before deducting expenses) received by the Company and (y) the underwriting
discounts and commissions received by the Underwriters, respectively, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Company, on the one hand, and of the Underwriters, on the other
hand, shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
or the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contribution pursuant to this Section 8 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above.
Notwithstanding the provisions of this Section 8, (i) in no
case shall any Underwriter be liable or responsible for any amount in excess of
the underwriting discount applicable to the Shares purchased by such Underwriter
hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. Notwithstanding
the provisions of this Section 8 and the preceding sentence, no Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the Shares underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages that such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. For purposes of this
Section 8, each person, if any, who controls an Underwriter within the meaning
25
of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the
same rights to contribution as such Underwriter, and each person, if any, who
controls the Company within the meaning of Section 15 of the Act or Section
20(a) of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 8. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
PROVIDED, HOWEVER, that such consent was not unreasonably withheld. The
Underwriters' respective obligations to contribute pursuant to this Section 8
are several in proportion to the number of Firm Shares set forth opposite their
respective names in Schedule I hereto and not joint.
9. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares with respect to which such default relates
do not (after giving effect to arrangements, if any, made by you pursuant to
subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares
or Additional Shares, to which the default relates shall be purchased by the
non-defaulting Underwriters in proportion to the respective proportions which
the numbers of Firm Shares set forth opposite their respective names in Schedule
I hereto bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, you may in your
discretion arrange for yourself or for another party or parties (including any
non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm
Shares or Additional Shares, as the case may be, to which such default relates
on the terms contained herein. In the event that within 5 calendar days after
such a default you do not arrange for the purchase of the Firm Shares or
Additional Shares, as the case may be, to which such default relates as provided
in this Section 9, this Agreement or, in the case of a default with respect to
the Additional Shares, the obligations of the Underwriters to purchase and of
the Company to sell the Additional Shares shall thereupon terminate, without
liability on the part of the Company with respect thereto (except in each case
as provided in Section 5, 7(a) and 8 hereof) or the Underwriters, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as aforesaid,
you or the Company shall have the right to postpone the Closing Date or
Additional Closing Date, as the case may be for a period, not exceeding five
business days, in order to effect whatever changes may thereby be made necessary
in the
26
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the
opinion of Underwriters' Counsel, may thereby be made necessary or advisable.
The term "UNDERWRITER" as used in this Agreement shall include any party
substituted under this Section 9 with like effect as if it had originally
been a party to this Agreement with respect to such Firm Shares and
Additional Shares.
10. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All
representations and warranties, covenants and agreements of the Underwriters
and the Company contained in this Agreement, including the agreements
contained in Section 5, the indemnity agreements contained in Section 7 and
the contribution agreements contained in Section 8, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter or any controlling person thereof or by or on
behalf of the Company, any of its officers and directors (including any
person who, with his or her consent, is named in the Registration Statement
as about to become, and does become, a director of the Company) or any
controlling person thereof, and shall survive delivery of and payment for the
Shares to and by the Underwriters. The representations contained in Section 1
and the agreements contained in Sections 5, 7, 8 and 11(d) hereof shall
survive the termination of this Agreement, including termination pursuant to
Section 9 or 11 hereof.
11. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
(a) This Agreement shall become effective, upon the later of
when (i) you and the Company shall have received notification of the
effectiveness of the Registration Statement or (ii) the execution of this
Agreement. If either the initial public offering price or the purchase price per
Share has not been agreed upon prior to 5:00 P.M., New York City time, on the
fifth full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability to the
Company or the Underwriters except as herein expressly provided. Until this
Agreement becomes effective as aforesaid, it may be terminated by the Company by
notifying you or by you notifying the Company. Notwithstanding the foregoing,
the provisions of this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at
all times be in full force and effect.
(b) You shall have the right to terminate this Agreement at
any time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (A) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general; or (B) if trading on the New York or American Stock Exchanges or the
Nasdaq National Market System shall have been suspended, or minimum or maximum
prices for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York or American Stock Exchanges
or the Nasdaq National Market System by such entities or by order of the
Commission or any other governmental authority having jurisdiction; or (C) if a
banking moratorium has been declared by a state or federal authority or if any
new restriction materially adversely affecting the distribution of the Firm
Shares or the Additional Shares, as the case may be, shall have become
effective; or (D) (i) if the United States becomes engaged in hostilities or
there is an escalation of hostilities involving the United States or there is a
27
declaration of a national emergency or war by the United States or (ii) if there
shall have been such change in political, financial or economic conditions if
the effect of any such event in (i) or (ii) as in your judgment makes it
impracticable or inadvisable to proceed with the offering, sale and delivery of
the Firm Shares or the Additional Shares, as the case may be, on the terms
contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11
shall be by telephone, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof, the
Company will, subject to demand by you, reimburse the Underwriters for all
out-of-pocket expenses (including the fees and expenses of their counsel),
incurred by the Underwriters in connection herewith.
12. NOTICES. All communications hereunder, except as may be
otherwise specifically provided herein, shall be in writing and , if sent to any
Underwriter, shall be mailed, delivered, or telexed or faxed and confirmed in
writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, NY 10167, Attention: Syndicate Department, with a copy to Gibson, Dunn &
Crutcher LLP, Attention: Kenneth M. Doran, 333 S. Grand Avenue, Los Angeles, CA
90071; if sent to the Company, shall be mailed, delivered, or telexed or faxed
and confirmed in writing to the Company, 17655 Waterview Parkway, Dallas, TX
75252, Attention: J. Michael Parks, with a copy to Akin, Gump, Strauss, Hauer &
Feld, L.L.P., Attention: Terry M. Schpok, P.C., 1700 Pacific Avenue, Suite 4100,
Dallas, TX 75201.
13. PARTIES. This Agreement shall inure solely to the benefit of,
and shall be binding upon, the Underwriters and the Company and the
controlling persons, directors, officers, employees and agents referred to in
Sections 7 and 8, and their respective successors and assigns, and no other
person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not
include a purchaser, in its capacity as such, of Shares from any of the
Underwriters.
14. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, but without
regard to principles of conflicts of law.
15. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be an original and all of which together shall constitute
one and the same instrument.
16. HEADINGS. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
28
If the foregoing correctly sets forth the understanding
between you and the Company, please so indicate in the space provided below
for that purpose, whereupon this letter shall constitute a binding agreement
among us.
Very truly yours,
ALLIANCE DATA SYSTEMS CORPORATION
By:
-------------------------------------
Name:
Title:
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
CREDIT SUISSE FIRST BOSTON CORPORATION
By:
---------------------------
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
29
SCHEDULE I
NUMBER OF FIRM
NAME OF UNDERWRITER SHARES TO BE PURCHASED
- ------------------- ----------------------
Bear, Stearns & Co. Inc.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Credit Suisse First Boston Corporation
Total 13,000,000
======================
SCHEDULE II
DIRECT AND INDIRECT SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------
JURISDICTION OF JURISDICTIONS WHERE
SUBSIDIARY NAME OWNERSHIP INCORPORATION QUALIFIED TO DO BUSINESS
- ----------------------------------------------------------------------------------------------------------------------------------
ADS Alliance Data Systems, Inc. 100% Delaware Alabama, Arizona, Arkansas, California, Colorado,
Connecticut, District of Columbia, Florida, Georgia,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,
Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Nevada, New Hampshire, New
Jersey, New Mexico, New York, North Carolina, North
Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South
Carolina, South Dakota, Tennessee, Texas, Utah,
Vermont, Virginia, Washington, West Virginia,
Wisconsin, Wyoming
- ----------------------------------------------------------------------------------------------------------------------------------
Harmonic Technology Licensing, Inc. 100% Minnesota None
- ----------------------------------------------------------------------------------------------------------------------------------
Alliance Recovery Management, Inc. 100% Delaware None
- ----------------------------------------------------------------------------------------------------------------------------------
World Financial Network National Bank 100% National Banking None
Association
- ----------------------------------------------------------------------------------------------------------------------------------
WFN Credit Company, LLC 100% Delaware None
- ----------------------------------------------------------------------------------------------------------------------------------
Alliance Data Systems (New Zealand) 100% New Zealand None
Limited
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Automation Limited 100% New Zealand None
- ----------------------------------------------------------------------------------------------------------------------------------
Financial Automation Marketing 100% New Zealand None
Limited
- ----------------------------------------------------------------------------------------------------------------------------------
Loyalty Management Group Canada, Inc. 100% Ontario, Canada Toronto, Quebec, Alberta, British Columbia
- ----------------------------------------------------------------------------------------------------------------------------------
LMG Travel Services Ltd 100% Ontario, Canada None
- ----------------------------------------------------------------------------------------------------------------------------------
ADS Reinsurance Ltd. 100% Bermuda None
- ----------------------------------------------------------------------------------------------------------------------------------
ADS Commercial Services, Inc. 100% Delaware California, Illinois, Michigan, Nevada, North Dakota,
Tennessee, Vermont
- ----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE III
PERSONS TO ENTER INTO LOCK-UP AGREEMENTS
- ----------------------------------------------------------------
- ----------------------------------------------------------------
1% AND GREATER HOLDERS (AND RELATED ENTITIES)
- ----------------------------------------------------------------
WCAS VII L.P.
- ----------------------------------------------------------------
Limited Commerce Corp.
- ----------------------------------------------------------------
WCAS VIII L.P.
- ----------------------------------------------------------------
Welsh Carson Anderson & Stowe VI L.P.
- ----------------------------------------------------------------
WCAS Capital Partners III L.P.
- ----------------------------------------------------------------
WCAS Capital Partners II L.P.
- ----------------------------------------------------------------
WCAS Information Partners L.P.
- ----------------------------------------------------------------
OFFICERS
- ----------------------------------------------------------------
J. Michael Parks
- ----------------------------------------------------------------
Ivan Szeftel
- ----------------------------------------------------------------
John Scullion
- ----------------------------------------------------------------
Michael A. Beltz
- ----------------------------------------------------------------
Edward Heffernan
- ----------------------------------------------------------------
Dwayne H. Tucker
- ----------------------------------------------------------------
Steven T. Walensky
- ----------------------------------------------------------------
Carolyn S. Melvin
- ----------------------------------------------------------------
Robert P. Armiak
- ----------------------------------------------------------------
Michael D. Kubic
- ----------------------------------------------------------------
Richard E. Schumacher, Jr.
- ----------------------------------------------------------------
DIRECTORS
- ----------------------------------------------------------------
Bruce K. Anderson
- ----------------------------------------------------------------
Roger Ballou
- ----------------------------------------------------------------
Anthony J. deNicola
- ----------------------------------------------------------------
Daniel P. Finkelman
- ----------------------------------------------------------------
Kenneth R. Jensen
- ----------------------------------------------------------------
Robert A. Minicucci
- ----------------------------------------------------------------
Bruce A. Soll
- ----------------------------------------------------------------
III-1
- ----------------------------------------------------------------
OTHER INDIVIDUALS (RELATED TO WC)
- ----------------------------------------------------------------
Russell L. Carson
- ----------------------------------------------------------------
Patrick J. Welsh
- ----------------------------------------------------------------
Thomas E. McInernay
- ----------------------------------------------------------------
Andrew M. Paul
- ----------------------------------------------------------------
OTHER ADS OPTIONHOLDERS
- ----------------------------------------------------------------
Daniel Groomes
- ----------------------------------------------------------------
Bryan Pearson
- ----------------------------------------------------------------
Bruce McClary
- ----------------------------------------------------------------
John Tomsho
- ----------------------------------------------------------------
Bruce Kerr
- ----------------------------------------------------------------
John Wright
- ----------------------------------------------------------------
Frank Kersanty
- ----------------------------------------------------------------
Joseph P. Rochford
- ----------------------------------------------------------------
Pieto Satriano
- ----------------------------------------------------------------
James B. Sullivan
- ----------------------------------------------------------------
Robert W. Trammell
- ----------------------------------------------------------------
Sidney Pinhas
- ----------------------------------------------------------------
David L. Judy
- ----------------------------------------------------------------
Theodore J. Palesky
- ----------------------------------------------------------------
William Salamy
- ----------------------------------------------------------------
Gerald Schaefer
- ----------------------------------------------------------------
Lori Russell
- ----------------------------------------------------------------
Patrick Cummiskey
- ----------------------------------------------------------------
John Jackson
- ----------------------------------------------------------------
Walter Roberts III
- ----------------------------------------------------------------
Gavin Welbourne
- ----------------------------------------------------------------
Craig Underwood
- ----------------------------------------------------------------
OTHER STOCKHOLDERS
- ----------------------------------------------------------------
- ----------------------------------------------------------------
- ----------------------------------------------------------------
Richard H. Stowe
- ----------------------------------------------------------------
Bruce Turkett
- ----------------------------------------------------------------
III-2
SCHEDULE IV
FORM OF LOCK-UP AGREEMENT
_________ __, 2001
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
CREDIT SUISSE FIRST BOSTON CORPORATION
as Representatives of the
several Underwriters
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Re: ALLIANCE DATA SYSTEMS CORPORATION
Ladies and Gentlemen:
In consideration of the agreement of the several Underwriters (the
"UNDERWRITING AGREEMENT"), for which Bear, Stearns & Co. Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated and Credit Suisse First Boston Corporation
intend to act as Representatives, to underwrite a proposed public offering (the
"OFFERING") of shares of common stock (the "COMMON STOCK") of Alliance Data
Systems Corporation, a corporation organized under the laws of the State of
Delaware (the "COMPANY"), as contemplated by a registration statement filed with
the Securities and Exchange Commission on Form S-1, the undersigned hereby (i)
agrees that the undersigned will not, directly or indirectly, during a period of
one hundred eighty (180) days from the date of the final prospectus for the
Offering (the "LOCK-UP PERIOD"), without the prior written consent of Bear,
Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option for
the sale of, pledge, make any short sale or maintain any short position,
establish or maintain a "put equivalent position" (within the meaning of Rule
16a-1(h) under the Securities Exchange Act of 1934, as amended), enter into any
swap, derivative transaction or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the Common
Stock (whether any such transaction is to be settled by delivery of Common
Stock, other securities, cash or other consideration) or otherwise dispose of,
any Common Stock (or any securities convertible into, exercisable for or
exchangeable for Common Stock) or interest therein of the Company or of any of
its subsidiaries, other than the transfer by the undersigned of any Common Stock
to [any member of the undersigned's immediate family or to a revocable trust for
the benefit of the undersigned or any member of the undersigned's immediate
family, provided that any such transferee agrees to be bound by such conditions]
[any affiliate of Limited Commerce Corp. that is wholly owned, directly or
indirectly, by The Limited, Inc.], and (ii) authorizes the Company during the
Lock-Up Period to cause the transfer agent to decline to transfer and/or to note
stop transfer restrictions on the transfer books and records of the Company with
respect to any shares of Common Stock and any
IV-1
securities convertible into or exercisable or exchangeable for Common Stock
for which the undersigned is the record holder and, in the case of any such
share or securities for which the undersigned is the beneficial but not the
record holder, agrees to cause the record holder to cause the transfer agent
to decline to transfer and/or to note stop transfer restrictions on such
books and records with respect to such shares or securities.
The undersigned further agrees, from the date hereof until the end of
the Lock-Up Period, that the undersigned will not exercise and will waive his,
her or its rights, if any, to require the Company to register its Common Stock
and to receive notice thereof.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to enter into the agreements set forth herein, and
that, upon request, the undersigned will execute any additional documents
necessary in connection with enforcement hereof. It is further understood that,
if either the Underwriting Agreement is not executed or does not become
effective, or if the Underwriting Agreement (other than the provisions thereof
which survive termination) shall terminate or be terminated prior to payment for
and delivery of the Common Stock, the undersigned will be immediately released
without any further action on their or its part from their or its obligations
under this letter agreement. Any obligations of the undersigned shall be binding
upon the successors and assigns of the undersigned.
Very truly yours,
---------------------------------------
Name:
IV-2
EXHIBIT 3.3
FIRST AMENDMENT TO THE
SECOND AMENDED AND RESTATED BYLAWS
OF ALLIANCE DATA SYSTEMS CORPORATION
Section 2.1 of the Amended and Restated Bylaws of Alliance Data Systems
Corporation is amended and restated to read in its entirety as follows:
Section 2.1 ANNUAL MEETINGS. Annual meetings of stockholders
shall be held on such date, at such time and at such place as shall be
designated by the Board and stated in the notice of the meeting, at
which the stockholders shall elect the directors of the Company and
transact such other business as may properly be brought before the
meeting.
EXHIBIT 10.34
AMENDED AND RESTATED
ALLIANCE DATA SYSTEMS CORPORATION AND ITS SUBSIDIARIES
STOCK OPTION AND RESTRICTED STOCK PLAN
Effective April 25, 2001
AMENDED AND RESTATED
ALLIANCE DATA SYSTEMS CORPORATION AND ITS SUBSIDIARIES
STOCK OPTION AND RESTRICTED STOCK PLAN
Section 1. PURPOSE. The purpose of the Amended and Restated Alliance
Data Systems Corporation and its Subsidiaries Stock Option and Restricted
Stock Plan (the "Plan") is to promote the interests of Alliance Data Systems
Corporation, a Delaware corporation (the "Company"), and any Subsidiary
thereof and the interest of the Company's stockholders by providing an
opportunity to stockholders and selected employees, officers, directors and
other persons performing services for the Company or any Subsidiary thereof
as of the date of the adoption of the Plan or at any time thereafter to
purchase Common Stock of the Company. By encouraging such stock ownership,
the Company seeks to attract, retain and motivate such employees and other
persons and to encourage such employees and other persons to devote their
best efforts to the business and financial success of the Company. It is
intended that this purpose will be effected by the granting of "non-qualified
stock options" and/or "incentive stock options" to acquire the Common Stock
of the Company and/or by the granting of rights to purchase or receive (upon
satisfaction of certain conditions) the Common Stock of the Company on a
"restricted stock" basis. Under the Plan, the Committee shall have the
authority (in its sole discretion) to grant "incentive stock options" within
the meaning of Section 422(b) of the Code, "non-qualified stock options" as
described in Treasury Regulation Section 1.83-7 or any successor regulation
thereto, or "restricted stock" awards.
The Plan is an amendment and restatement of the Alliance Data Systems
Corporation and its Subsidiaries Stock Option and Restated Stock Purchase
Plan (the "Prior Plan"). All Options and Awards granted prior to the
Effective Date hereof shall be deemed granted pursuant to the terms of the
Prior Plan (except to the extent provisions of this Plan are expressly made
applicable). Options and Awards granted prior to the Effective Date may be
granted only to the extent shares are available for issuance under the terms
of the Prior Plan. As of the Effective Date all Options and Awards granted
shall be granted under the terms and limitations of this Plan.
Section 2. DEFINITIONS. For purposes of the Plan, the following terms
used herein shall have the following meanings, unless a different meaning is
clearly required by the context:
2.1 "Award" shall mean an award of (i) the right to purchase
Common Stock granted under the provisions of Section 7 of the Plan or (ii) a
grant of Common Stock subject to specified restrictions.
2.2 "Board of Directors" shall mean the Board of Directors of
the Company.
2.3 "Cause" shall mean either the failure to perform in a
competent manner or the willful failure to perform the assigned duties of
one's position, as determined by the Company in its sole discretion.
2.4 "Change of Control Value" means, for the purposes of
Section 8, the amount determined in Clause (i), (ii) or (iii), whichever is
applicable, as follows: (i) the per share price offered to stockholders of
the Company in any merger, consolidation, sale of assets or
1
dissolution transaction, (ii) the price per share offered to stockholders of
the Company in any tender offer or exchange offer whereby a Corporate Change
takes place or (iii) if a Corporate Change occurs other than as described in
Clause (i) or Clause (ii), the Fair Market Value per share determined by the
Committee as of the date determined by the Committee to be the date of
cancellation and surrender of an Option or Award. If the consideration
offered to stockholders of the Company in any transaction described in this
definition or Section 8 consists of anything other than cash, the Committee
shall determine the fair cash equivalent of the portion of the consideration
offered which is other than cash.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as
amended, and the Treasury Regulations promulgated thereunder.
2.6 "Committee" shall mean the Board of Directors or a
delegate, as provided for in Section 5 hereof.
2.7 "Common Stock" shall mean the Common Stock, $0.01 par
value, of the Company.
2.8 "Corporate Change" mans one of the following events: (i)
the merger, consolidation or other reorganization of the Company in which the
outstanding Common Stock is converted into or exchanged for a different class
of securities of the Company, a class of securities of any other issuer
(except a direct or indirect wholly owned subsidiary of the Company), cash or
other property, (ii) the sale, lease or exchange of all or substantially all
of the assets of the Company to any other corporation or entity (except a
direct or indirect wholly owned subsidiary of the Company), (iii) the
adoption by the stockholders of the Company of a plan of liquidation and
dissolution, (iv) the acquisition (other than any acquisition pursuant to any
other clause of this definition) by any person or entity, including without
limitation a "group" as contemplated by Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended (whether or not such Act is then applicable
to the Company), of beneficial ownership, as contemplated by such Section, of
more than twenty percent (20%) (based on voting power) of the Company's
outstanding capital stock, or (v) as a result of or in connection with a
contested election of directors, the persons who were the directors of the
Company before such election shall cease to constitute a majority of the
Board of Directors.
2.9 "Eligible Optionee" shall mean, with respect to a
Non-Qualified Option and/or Award, any stockholder of the Company, and any
person employed by, or performing services for, the Company or any Parent or
Subsidiary of the Company including, without limitation, directors and
officers of the Company and employees of any stockholder of the Company that
is performing services for the Company.
2.10 "Employee" shall mean, with respect to an ISO, any
person, including, without limitation, an officer or director of the Company,
who, at the time an ISO is granted to such person hereunder, is employed on a
full-time basis by the Company or any Parent or Subsidiary of the Company.
2.11 "Effective Date" shall mean the date established by the
Board of Directors in connection with its adoption of the Plan, provided the
Plan is approved by the requisite
2
proportion of the stockholders of the Company within twelve (12) months after
adoption by the Board of Directors. Options and Awards may be granted under
the Plan prior to such approval by stockholders, provided that Options and
Awards may not vest or be exercised prior to such approval and all such
Options and Awards shall expire if the stockholders fail to timely approve
the Plan.
2.12 "Excluded Group" shall mean the group including (a) the
Executive (as defined in Section 5.1), (b) any person who is included in the
Executive Committee, (c) any person with respect to his or her compensation
as a director; and (d) any Insider.
2.13 "Fair Market Value" shall mean, with respect to Grants
on the date of the initial public offering of the Company, the opening value
on the New York Stock Exchange, and thereafter the average of the high and
low prices on the New York Stock Exchange during the trading hours of the New
York Stock Exchange. Prior to the initial public offering, the Committee
shall make a good faith determination of the Fair Market Value of the Company.
2.14 "Grant" shall mean an Award or an Option.
2.15 "Insider" shall mean all officers and directors of the
Company (and its affiliates) who are subject to Section 16b of the Securities
Exchange Act of 1934, as amended.
2.16 "ISO" shall mean an Option that constitutes an incentive
stock option under Section 422(b) of the Code.
2.17 "Non-Qualified Option" shall mean an Option granted to a
Participant pursuant to the Plan that is intended to be, and qualifies as, a
"non-qualified stock option" as described in Treasury Regulation Section
1.83-7 or any successor regulation thereto and that shall not constitute or
be treated as an ISO.
2.18 "Option" shall mean any ISO or Non-Qualified Option
granted to an Employee or Eligible Optionee pursuant to the Plan.
2.19 "Participant" shall mean any Employee or Eligible
Optionee to whom an Award and/or an Option is granted under the Plan.
2.20 "Parent" of the Company shall have the meaning set forth
in Section 424(e) of the Code.
2.21 "Percentile within the Standard & Poor 500" shall mean
the percentile determined by taking every company that was in the Standard &
Poor 500 for the entire measurement period for the Performance Based
Restricted Stock, that continues to be publicly traded at the end of the
measurement period and ranking their cumulative total shareholder return at
the end of the measurement period.
2.22 "Performance Based Restricted Stock" means an Award of
Common Stock subject to specified restrictions that cause such Common Stock
to vest upon attainment of specified financial goals by the Company.
3
2.23 "Pooling Transaction" means an acquisition of the
Company in a transaction which is intended to be treated as a "pooling of
interests" under generally accepted accounting principles.
2.24 "Retired" or "Retirement" shall mean that a Participant
has attained at least age 60 and completed at least 60 months of service with
the Company, a Parent or a Subsidiary. The Participant shall receive credit
for his first and last month of service with the Company, Parent or a
Subsidiary without regard to whether he was actually employed by the Company
or Parent, or a Subsidiary on every day of the month.
2.25 "Subsidiary" of the Company shall have the meaning set
forth in Section 424(f) of the Code.
Section 3. ELIGIBILITY. Awards and/or Options may be granted to any
Employee or Eligible Optionee; provided however, that an ISO may only be
granted to an Employee. The Committee shall have the sole authority to select
the persons to whom Awards and/or Options are to be granted hereunder, and to
determine whether a person is to be granted a Non-Qualified Option, an ISO or
an Award or any combination thereof; provided that the granting of
Performance Based Restricted Stock Awards will be upon the recommendation of
the Chief Executive Officer of the Company for approval by a committee of
members of the Board of Directors as described in Section 5.1. No person
shall have any right to participate in the Plan unless selected for
participation by the Committee. Any person selected by the Committee for
participation during any one period will not by virtue of such participation
have the right to be selected as a Participant for any other period.
Section 4. COMMON STOCK SUBJECT TO THE PLAN.
4.1 NUMBER OF SHARES. The total number of shares of Common
Stock for which Options and/or Awards may be granted under the Plan shall not
exceed in the aggregate eight million seven hundred fifty-three thousand
shares (8,753,000) of Common Stock (subject to adjustment as provided in
Section 8 hereof); provided, however, that all shares issued or to be issued
pursuant to Options or Awards granted under the Prior Plan shall be counted
against such aggregate share limit. The maximum number shares of Common Stock
for which Options or Awards can be granted to an individual in a calendar
year is four million (4,000,000); provided, however, that the maximum number
of shares of Common Stock that may be granted as a Performance Based Stock
Award to any one individual in a single year is 150,000.
4.2 REISSUANCE. The shares of Common Stock that may be
subject to Options and/or Awards granted under the Plan may be either
authorized and unissued shares or shares reacquired at any time and now or
hereafter held as treasury stock as the Committee may determine. In the event
that an outstanding Option expires or is terminated for any reason, the
shares allocable to the unexercised portion of such Option may again be
subject to an Option and/or Award granted under the Plan. If any shares of
Common Stock issued or sold pursuant to an Award or the exercise of an Option
shall have been repurchased by the Company, then such shares may again be
subject to an Option and/or Award granted under the Plan.
4
4.3 SPECIAL ISO LIMITATIONS.
(a) The aggregate Fair Market Value (determined as of the
date an ISO is granted) of the shares of Common Stock with respect to which
ISOs are exercisable for the first time by an Employee during any calendar
year (under all incentive stock option plans of the Company or any Parent or
Subsidiary of the Company) shall not exceed $100,000.
(b) If any Option intended to be an ISO fails to qualify
as such, it shall be treated as a Non-Qualified Option.
(c) No ISO shall be granted to an Employee who, at the
time the ISO is granted, owns (actually or constructively under the
provisions of Section 424(d) of the Code) stock possessing more than 10% of
the total combined voting power of all classes of stock of the Company or any
Parent or Subsidiary of the Company, unless (i) the option price is at least
110% of the Fair Market Value (determination as of the time the ISO is
granted) of the shares of Common Stock subject to the ISO and (ii) the ISO by
its terms is not exercisable more than five years from the date it is granted.
4.4 LIMITATIONS NOT APPLICABLE TO NON-QUALIFIED OPTIONS OR
AWARDS. Notwithstanding any other provision of the Plan, the provisions of
Section 4.3(a) and (b) shall not apply, nor shall be construed to apply, to
any Non-Qualified Option or Award granted under the Plan.
Section 5. Administration of the Plan
5.1 ADMINISTRATION. The Plan shall be administered by the
Board of Directors; provided, however, that the Board of Directors may,
subject to the other express provisions of the Plan, delegate all or a
portion of its responsibilities and authority under the Plan to a committee
consisting of no less than three members of the Board of Directors. Any such
committee shall act by a majority of its members at the time in office and
eligible to vote on a particular matter, and such action may be taken either
by a vote at a meeting (including, without limitation, a telephone
conference) or in writing without a meeting. The Board of Directors may
remove any member of such a committee at any time, and a member of such a
committee may resign upon notice to the Board of Directors. Either the Board
of Directors or such a committee may further delegate all or a portion of its
responsibilities and authority under the Plan to the Chief Executive Officer
of the Company; provided, however, that the Chief Executive Officer shall not
have, or be delegated, any authority with respect to the grant of Options or
Awards to Insiders. Subject to the provisions of this Section 5.1, the Board
of Directors shall be responsible for making all determinations with respect
to (i) all matters under the Plan pertaining to (a) Participants who are
members of the Executive Committee of the Company (the "Executive Committee")
which shall include for purposes of the Plan all Participants who are subject
to Code Section 162(m) and (b) members of the Excluded Group, and (ii) the
number of shares available under the Plan for Options. The Committee shall be
responsible for and make all determinations with respect to Award grants to
Participants who are not members of the Excluded Group. Notwithstanding the
foregoing, the Chief Executive Officer of the Company (the "Executive") shall
have the authority, be responsible for, make all determinations with respect
to and constitute the Committee for all matters under the Plan pertaining to
Participants
5
who are not members of the Excluded Group other than (i) the making of Plan
amendments, and (ii) Performance Based Restricted Stock Awards. References
herein to the "Committee" shall mean the Board of Directors, any committee
described in this Section 5.1 and the Chief Executive Officer to the extent
of any responsibilities or authority assigned or delegated to any of them
under or pursuant to the Plan. The provisions of this Section 5.1 shall also
govern Options and Awards granted under the Prior Plan.
5.2 Grant of Options/Awards.
(a) OPTIONS. Except as provided in Subsection (c)
hereunder, the Committee shall have the sole authority and discretion under
the Plan (i) to select the Employees and Eligible Optionees who are to be
granted Options hereunder; (ii) to designate whether any Option to be granted
hereunder is to be an ISO or a Non-Qualified Option; (iii) to establish the
number of shares of Common Stock that may be subject to each Option; (iv) to
determine the time and the conditions subject to which Options may be
exercised in whole or in part; (v) to determine the amount (not less than the
par value per share) and the form of the consideration that may be used to
purchase shares of Common Stock upon exercise of any Option (including,
without limitation, the circumstances under which issued and outstanding
shares of Common Stock that have been held by a Participant for at least six
months may be used by the Participant to exercise an Option); (vi) to impose
restrictions and/or conditions with respect to shares of Common Stock
acquired upon exercise of an Option; (vii) to determine the circumstances
under which shares of Common Stock acquired upon exercise of any Option may
be subject to repurchase by the Company; (viii) to determine the
circumstances and conditions subject to which shares acquired upon exercise
of an Option may be sold or otherwise transferred, including, without
limitation, the circumstances and conditions subject to which a proposed sale
of shares of Common Stock acquired upon exercise of an Option may be subject
to the Company's right of first refusal (as well as the terms and conditions
of any such right of first refusal); (ix) to establish a vesting provision
for any Option relating to the time when (or the circumstances under which)
the Option may be exercised by a Participant, including, without limitation,
vesting provisions that may be contingent upon (A) the Company's meeting
specified financial goals, (B) a Corporate Change of the Company or (C) the
occurrence of other specified events; (x) to accelerate the time when
outstanding Options may be exercised, including, without limitation,
accelerations to a date or dates within six months of the date of grant;
provided, however, that the exercise of any ISOs may be "accelerated" solely
within the meaning of Section 424(h) of the Code; and (xi) to establish any
other terms, restrictions and/or conditions applicable to any Option not
inconsistent with the provisions of the Plan. For purposes of this
subsection, an Option shall be deemed granted on the date the Committee
selects an individual to be an Optionee, determine the number of Shares to be
issued pursuant to such Option, and specify the terms and conditions of such
Option. Notwithstanding the general discretionary nature of the grant of
Options hereunder, (i) every exempt employee within the meaning of the Fair
Labor Standards Act may receive a Grant on the date of the initial public
offering of the Company, with an exercise price equal to the Fair Market
Value of the Common Stock on the date of Grant, and (ii) every individual who
has accepted an offer of employment with the Company as an exempt employee
within the meaning of the Fair Labor Standards Act and who first performs an
hour of service with the Company within thirty (30) days of the initial
public offering of the Company may receive a Grant with an exercise price
equal to the Fair Market
6
Value of the Common Stock on the date such employee first performs an hour of
service with the Company.
(b) AWARDS. Subject to Section 3 and Section 5.1, the
Committee shall have the sole authority and discretion under the Plan (i) to
select the Employees and Eligible Optionees who are to be granted Awards
hereunder; (ii) to determine the consideration (which may be cash, property
or services rendered) to be paid by a Participant to acquire shares of Common
Stock pursuant to an Award, which amount may be equal to, more than or less
than 100% of the Fair Market Value of such shares on the date the Award is
granted (but in no event less than the par value of such shares); (iii) to
determine the time or times, and the conditions subject to which, Awards may
be made; (iv) to determine the time or times and the conditions subject to
which the shares of Common Stock subject to an Award are to become vested
and/or no longer subject to repurchase by the Company; (v) to establish
transfer restrictions and the terms and conditions on which any such transfer
restrictions with respect to shares of Common Stock acquired pursuant to an
Award shall lapse; (vi) to establish vesting provisions with respect to any
shares of Common Stock subject to an Award, including, without limitation,
vesting provisions which may be contingent upon (A) the Company's meeting
financial goals specified by the Committee, (B) a Corporate Change with
respect to the Company or (C) the occurrence of other specified events; (vii)
to determine the circumstances under which shares of Common Stock acquired
pursuant to an Award may be subject to repurchase by the Company; (viii) to
determine the circumstances and conditions subject to which any shares of
Common Stock acquired pursuant to an Award may be sold or otherwise
transferred, including, without limitations, the circumstances and conditions
subject to which a proposed sale of shares of Common Stock acquired pursuant
to an Award may be subject to the Company's right of first refusal (as well
as the terms and conditions of any such right of first refusal); (ix) to
determine the form of consideration that may be used to purchase shares of
Common Stock pursuant to an Award (including, without limitation, the
circumstances under which issued and outstanding shares of Common Stock that
have been held by a Participant for at least six months may be used by the
Participant to purchase the Common Stock subject to an Award); (x) to
accelerate the time at which any or all restrictions imposed with respect to
any shares of Common Stock subject to an Award will lapse, including, without
limitation, accelerations to a date or dates within six months of the date of
grant; and (xi) to establish any other terms, restrictions and/or conditions
applicable to any Award not inconsistent with the provisions of the Plan.
(c) FORMULA AWARDS. Subject to the provisions below, each
non-employee member of the Board of Directors on the date of the initial
public offering of the Company shall receive a Non-Qualified Option for
42,000 shares of Common Stock, with an exercise price equal to the Fair
Market Value of a share of Common Stock on the date of the initial public
offering of the Company; provided, however, that, notwithstanding the
foregoing, if such director has elected in writing, on a form provided by the
Committee, by the date of the initial public offering of the Company to
receive his director compensation from the Company in the form of cash and
Non-Qualified Options the aforementioned Non-Qualified Option shall be for
28,500 shares instead of 42,000 shares of Common Stock. Subject to the
provisions below, every individual who becomes a non-employee member of the
Board of Directors after the initial public offering shall receive on the
date he becomes such a director a Non-Qualified Option for 42,000 shares of
Common Stock, with an exercise price equal to the Fair Market Value of a
share of Common Stock on such date; provided, however, that notwithstanding
the foregoing, if
7
such director has elected in writing, on a form provided by the Committee, by
the date he becomes such a director to receive all of his director
compensation from the Company in the form of cash and Non-Qualified Options,
the aforementioned Non-Qualified Option shall be for 28,500 shares instead of
42,000 shares of Common Stock.
A non-employee director receiving a formula Grant under
this Section 5.2(c) shall not be precluded from receiving additional Grants
under the Plan.
The vesting schedule and other terms of the Grants to
directors under this Section 5.2(c) shall be set forth in agreements with the
directors.
(d) BONA FIDE OFFER TO PURCHASE SHARES. This subsection
shall lapse and be of no further force or effect upon completion of an
initial public offering of the Common Stock of the Company. If a Participant
shall at any time prior to the date on which an underwritten public offering
of the Company's Common Stock, registered under the Securities Act of 1933,
as amended (a "Public Offering"), desire to sell all or any of the Common
Stock acquired by the Participant pursuant to an Option or an Award ("Plan
Shares") and obtains a bona fide written offer which Participant desires to
accept (referred to in this Section as the "Offer") to purchase all, or a
portion of the Participant's Plan Shares the Participant shall transmit
copies of the Offer to the Company within five (5) business days after
Participant's receipt of the Offer. Except as provided below, prior to a
Public Offering a Participant may sell Plan Shares only for cash. The Offer
shall set forth its date, the proposed price per share of Common Stock, the
number of shares of Common Stock being sold, and the other terms and
conditions upon which the purchase is proposed to be made, as well as the
name and address of the prospective purchaser. Transmittal of the Offer to
the Company by Participant shall constitute an offer by Participant to sell
all of the Plan Shares which are subject to the Offer to the Company at a
price equal to the cash consideration plus the Fair Market Value of the
non-cash consideration specified in the Offer for such Common Stock (the
"Purchase Price") and upon the other terms set forth in the Offer, except as
hereinafter provided. For a period of sixty (60) days after the submission of
the Offer to the Company, the Company shall have the option, exercisable by
notice to Participant, to accept Participant's offer as to all, but not less
than all, of the Plan Shares that are the subject of the Offer. If the
Company does not exercise its option to purchase within the specified 60 day
period or if the Company waives, in writing, the 60 day period, the
Participant may then, and only then, accept the offer from the prospective
purchaser. Any sale of Plan Stock which occurs without complying with the
provisions of this Section 5.2(d) is null and void.
(e) PERFORMANCE BASED RESTRICTED STOCK. The measurement
period for the financial goals that are part of any Performance Based
Restricted Stock Awards will be five complete fiscal years. Such Awards will
be made at the beginning of the measurement period; provided, however, that
notwithstanding the foregoing, Participants who are hired within the first
two years of a measurement period may be granted such an Award with such
modifications as are deemed appropriate by the Committee.
5.3 INTERPRETATION. The Committee shall be authorized to
interpret the Plan and may, from time to time, adopt such rules and
regulations, not inconsistent with the provisions of the Plan, as it may deem
advisable to carry out the purposes of the Plan.
8
5.4 FINALITY. The interpretation and construction by the
Committee of any provision of the Plan, any Grant, or any factual matter
pertaining thereto under or any agreement evidencing any such Grant shall be
final and conclusive upon all parties.
5.5 EXPENSES, ETC. All expenses and liabilities incurred by
the Committee in the administration of the Plan shall be borne by the
Company. The Committee may employ attorneys, consultants, accountants or
other persons in connection with the administration of the Plan. The Company,
and its officers and directors, shall be entitled to rely upon the advice,
opinions or valuations of any such persons. No member of the Committee shall
be liable for any action, determination or interpretation taken or made in
good faith with respect to the Plan or any Option and/or Award granted
hereunder.
5.6 AUTHORITY OF THE BOARD OF DIRECTORS. Notwithstanding any
provision of this Plan to the contrary, the Board of Directors may
independently exercise any and all powers of the Committee or the Executive
or allocate their respective responsibilities to others under the Plan,
including retaining any of them for itself, with respect to any and all
aspects of the Plan in the sole discretion of the Board of Directors. The
Committee and the Executive shall have no authority or obligation with
respect to any matters in connection with the Plan over which the Board of
Directors chooses to act.
Section 6. TERMS AND CONDITIONS OF OPTIONS.
6.1 ISOs. The terms and conditions of each ISO granted under
the Plan shall be specified by the Committee and shall be set forth in a
written ISO agreement between the Company and the Participant in such form as
the Committee shall approve. The terms and conditions of each ISO shall be
such that each ISO issued hereunder shall constitute and shall be treated as
an "incentive stock option" as defined in Section 422(b) of the Code. The
terms and conditions of any ISO granted hereunder need not be identical to
those of any other ISO granted hereunder. If any portion of an Option
designated as an ISO is determined for any reason not to qualify as an
incentive stock option within the meaning of Section 422 of the Code, such
Option shall be treated as a Non-Qualified Option for all purposes under the
provisions of the Plan.
The terms and conditions of each ISO shall include the
following:
(a) The option price shall be fixed by the Committee but
shall in no event be less than 100% (or 110% in the case of an Employee
referred to in Section 4.3(c) hereof) of the Fair Market Value of the shares
of Common Stock subject to the ISO on the date the ISO is granted.
(b) ISOs, by their terms, shall not be transferable otherwise
than by will or the laws of descent and distribution, and, during a
Participant's lifetime, an ISO shall be exercisable only by the Participant
or by the guardian or legal representative of the Participant acting in a
fiduciary capacity on behalf of the Participant under state law and court
supervision. The Committee may in its discretion, require a Participant's
guardian or legal representative to supply it with such evidence as the
Committee deems necessary to establish the authority of the guardian or legal
representative to act on behalf of the Participant.
9
(c) The Committee shall fix the term of all ISOs granted
pursuant to the Plan (including, without limitation, the date on which such
ISO shall expire and terminate); provided, however, that such term shall in
no event exceed ten years from the date on which such ISO is granted (or, in
the case of an ISO granted to an Employee referred to in Section 4.3(c)
hereof, such term shall in no event exceed five years from the date on which
such ISO is granted). Each ISO shall be exercisable in such amount or
amounts, under such conditions and at such times or intervals or in such
installments as shall be determined by the Committee in its sole discretion;
provided, however, that, subject to Section 5.2(a)(x) hereof, in no event
shall any ISO be granted to any director or officer of the Company or an
affiliate who is an Insider that is exercisable, in whole or in part, prior
to the date that is six months after the date such ISO is granted to such
director or officer.
(d) To the extent that the Company or any Parent or
Subsidiary of the Company is required to withhold any Federal, state or local
taxes (including FICA) in respect of any compensation income realized by any
Participant as a result of the exercise of an ISO (if any) a "disqualifying
disposition" of any shares of Common Stock acquired upon exercise of an ISO
granted hereunder, the Company shall deduct from any payments of any kind
otherwise due to such Participant the aggregate amount of such minimum
Federal, state or local taxes required to be so withheld or, if such payments
are insufficient to satisfy such Federal, state or local taxes required to be
withheld, such Participant will be required to pay to the Company, or make
other arrangements satisfactory to the Company regarding payment to the
Company of, the aggregate amount of any such taxes. All matters with respect
to the total amount of taxes to be withheld in respect of any such
compensation income shall be determined by the Committee, in its sole
discretion. If the Committee determines that withholding for FICA purposes is
required upon exercise of an ISO, it will withhold in accordance with this
subsection. In order to effect the withholding described in this subsection
on a disqualifying disposition, the Optionee shall, within ten (10) days of
such disposition, notify the Company in writing as provided in Section 18
hereof.
(e) In the sole discretion of the Committee the terms and
conditions of any ISO may include any or all of the following provisions:
(i) In the event that the Company or any Parent or
Subsidiary of the Company terminates a Participant's employment for Cause,
the unexercised portion of any ISO held by such Participant at that time may
only be exercised within one month after the date on which the Participant
ceased to be so employed, and only to the extent that the Participant could
have otherwise exercised such ISO as of the date on which he ceased to be so
employed. In the event that a Participant terminates his employment with the
Company or any Parent or Subsidiary of the Company, for any reason whatsoever
other than as a result of his death or "disability" (within the meaning of
Section 22(e)(3) of the Code), the unexercised portion of any ISO held by
such person shall cease to be exercisable after his termination date. For
purposes of this subsection, a Participant who transfers to a Subsidiary or
Parent shall not be regarded as having terminated employment, but if a
Subsidiary is sold, exchanged or otherwise disposed of by the Company, a
Participant who continues in the employ of the Subsidiary shall be regarded
as having terminated his or her employment.
10
Notwithstanding the foregoing and anything else herein to
the contrary, if the Committee determines, after full consideration of the
facts presented on behalf of the Company and the Participant, that the
Participant has been engaged in disloyalty to the Company or any of its
affiliates, including, without limitation, fraud, embezzlement, theft,
commission of a felony or proven dishonesty in the course of his employment
or service, or has disclosed trade secrets or confidential information of the
Company or of an affiliate, any unexercised ISO previously granted to the
Participant shall terminate immediately and the Participant shall forfeit all
shares of Common Stock for which the Company has not yet delivered the share
certificates upon refund by the Company of the option price. The Company may
also withhold delivery of share certificates pending the resolution of any
inquiry that could lead to a finding resulting in a forfeiture.
(ii) In the event a Participant shall cease to be employed
by the Company or any Parent or Subsidiary of the Company on a full-time
basis as a result of the termination of such Participant's employment by such
entity other than for Cause or as a result of his death or "disability"
(within the meaning of Section 22(e)(3) of the Code), the unexercised portion
of any ISO held by such Participant at that time may only be exercised within
three (3) months after the date on which the Participant ceased to be so
employed, and only to the extent that the Participant could have otherwise
exercised such ISO as of the date on which he ceased to be so employed. The
foregoing notwithstanding, however if the Participant's cessation of
employment pursuant to this Section 6.1(e)(ii) is by reason of the
Participant's Retirement, "one year" shall be substituted for "three (3)"
months in the preceding sentence, except that the Participant shall not be
entitled to treat any portion of an Option as an ISO if it is exercised more
than three (3) months after Participant's cessation of employment by reason
of Retirement.
(iii) In the event a Participant shall cease to be employed
by the Company or any Parent or Subsidiary of the Company on a full-time
basis by reason of his "disability" (within the meaning of Section 22(e)(3)
of the Code), the unexercised portion of any ISO held by such Participant at
that time may only be exercised within one year after the date on which the
Participant ceased to be so employed, and only to the extent that the
Participant could have otherwise exercised such ISO as of the date on which
he ceased to be so employed.
(iv) In the event a Participant shall die while in the
employ of the Company or a Parent or Subsidiary of the Company (or within a
period of one month after ceasing to be an Employee for any reason other than
his "disability" (within the meaning of Section 22(e)(3) of the Code) or
within a period of one year after ceasing to be an Employee by reason of such
"disability"), the unexercised portion of any ISO held by such Participant at
the time of his death may only be exercised within one year after the date of
such Participant's death, and only to the extent that the Participant could
have otherwise exercised such ISO at the time of his death. In such event,
such ISO may be exercised by the executor or administrator of the
Participant's estate or by any person or persons who shall have acquired the
ISO directly from the Participant by bequest or inheritance or, if the
Committee so provides, by the person or persons designated by the Participant
as a beneficiary hereunder.
6.2 NON-QUALIFIED OPTIONS. The terms and conditions of each
Non-Qualified Option granted under the Plan shall be specified by the
Committee, in its sole discretion, and shall be set forth in a written
Non-Qualified Option agreement between the Company and the
11
Participant in such form as the Committee shall approve. The terms and
conditions of each Non-Qualified Option will be such (and each Non-Qualified
Option agreement shall expressly so state) that each Non-Qualified Option
issued hereunder shall not constitute nor be treated as an "incentive stock
option" as defined in Section 422(b) of the Code, but will be a
"non-qualified stock option" for Federal, state and local income tax
purposes. The terms and conditions of any Non-Qualified Option granted
hereunder need not be identical to those of any other Non-Qualified Option
granted hereunder.
The terms and conditions of each Non-Qualified Option
agreement shall include the following:
(a) The option (exercise) price shall be fixed by the
Committee and may be equal to, more than or less than 100% of the Fair Market
Value of the shares of Common Stock subject to the Non-Qualified Option on
the date such Non-Qualified Option is granted.
(b) The Committee shall fix the term of all Non-Qualified
Options granted pursuant to the Plan (including, without limitation, the date
on which such Non-Qualified Option shall expire and terminate). Such term may
be more than ten years from the date on which such Non-Qualified Option is
granted. Each Non-Qualified Option shall be exercisable in such amount or
amounts, under such conditions (including, without limitation, provisions
governing the rights to exercise such Non-Qualified Option), and at such
times or intervals or in such installments as shall be determined by the
Committee in its sole discretion; provided, however, that, subject to Section
5.2(a)(x) hereof, in no event shall any Non-Qualified Option be granted to
any director or officer of the Company or an affiliate who is an Insider that
is exercisable, in whole or in part, prior to the date that is six months
after the date such Non-Qualified Option is granted to such director or
officer.
(c) Except as otherwise provided in this Section 6.2(c), no
Non-Qualified Option shall be transferable otherwise than by will or the laws
of descent and distribution, and during a Participant's lifetime a
Non-Qualified Option shall be exercisable only by the Participant or by the
guardian or legal representative of the Participant acting in a fiduciary
capacity on behalf of the Participant under state law and court supervision.
The Committee may in its discretion, require a Participant's guardian or
legal representative to supply it with such evidence as the Committee deems
necessary to establish the authority of the guardian or legal representative
to act on behalf of the Participant. Notwithstanding the foregoing, a
Non-Qualified Option shall be transferable pursuant to a "domestic relations
order" as defined in the Code or Title I of the Employee Retirement Income
Security Act, or the rules thereunder, and also shall be transferable,
without payment of consideration, to (a) immediate family members of the
holder (I.E., optionee, spouse or former spouse, parents, issue including
adopted and "step" issue, or siblings), (b) trusts for the benefit of
immediate family members, (c) partnerships whose only partners are such
family members, and (d) to any other transferee permitted by a rule adopted
by the Committee in an individual case. Any transferee will be subject to all
of the conditions set forth in the Non-Qualified Option prior to its transfer.
(d) To the extent that the Company is required to withhold
any Federal, state or local taxes in respect of any compensation income
realized by any Participant in respect of any Non-Qualified Option granted
hereunder or in respect of any shares of Common Stock
12
acquired upon exercise of a Non-Qualified Option, the Company shall deduct
from any payments of any kind otherwise due to such Participant the aggregate
minimum amount of such Federal, state or local taxes required to be so
withheld or, if such payments are insufficient to satisfy such Federal, state
or local taxes, or if no such payments are due or to become due to such
Participant, then, such Participant will be required to pay to the Company,
or make other arrangements satisfactory to the Company regarding payment to
the Company of the aggregate amount of any such taxes. All matters with
respect to the total amount of taxes to be withheld in respect of any such
compensation income shall be determined by the Board of Directors, in its
sole discretion.
(e) In the sole discretion of the Committee the terms and
conditions of any Non-Qualified Option may include provisions similar to any
of the provisions set forth in Subsection 6.1(e) hereof.
Section 7. TERMS AND CONDITIONS OF AWARDS. The terms and conditions of
each Award granted under the Plan shall be specified by the Committee, in its
sole discretion, and shall be set forth in a written agreement between the
Participant and the Company, in such form as the Committee shall approve. The
terms and provisions of any Award granted hereunder need not be identical to
those of any other Award granted hereunder.
(a) The consideration (which may be cash, property or
services rendered) to be paid by a Participant to acquire the shares of
Common Stock pursuant to an Award shall be fixed by the Committee and may be
equal to, more than or less than 100% of the Fair Market Value of the shares
of Common Stock subject to the Award on the date the Award is granted (but in
no event less than the par value of such shares).
(b) Each Award shall contain such vesting provisions, such
transfer restrictions and such other restrictions and conditions as the
Committee, in its sole discretion, may determine, including, without
limitation, the circumstances under which the Company shall have the right
and option to repurchase shares of Common Stock acquired pursuant to an
Award; provided, however, that, subject to Section 5.2(b)(x) hereof, in no
event shall any portion of any Award be granted to an officer or director of
the Company or an affiliate who is an Insider that is exercisable, in whole
or in part, prior to the date that is six months after the date such Award
(or portion thereof) is granted to such director or officer.
(c) Stock certificates representing Common Stock acquired
pursuant to an Award shall bear a legend referring to any restrictions
imposed on such Stock and such other matters as the Committee may determine.
(d) To the extent that the Company or any Parent or
Subsidiary is required to withhold any Federal, state or local taxes
(including FICA) in respect of any compensation income realized by the
Participant in respect of any compensation income realized by the Participant
in respect of an Award granted hereunder, in respect of any shares acquired
pursuant to an Award, or in respect of the vesting of any such shares of
Common Stock, then the Company shall deduct from any payments of any kind
otherwise due to such Participant the aggregate amount of such minimum
Federal, state or local taxes required to be so withheld, or if such payments
are insufficient to satisfy such Federal, state or local taxes, or if no such
payments are due or to become due to such Participant, then such Participant
will be required to pay to the
13
Company, or make other arrangements satisfactory to the Company regarding
payment to the Company of, the aggregate amount of any such taxes. All
matters with respect to the total amount of taxes to be withheld in respect
of any such compensation income shall be determined by the Committee, in its
sole discretion.
Section 8. RECAPITALIZATION OR REORGANIZATION.
(a) Except as hereinafter otherwise provided, Options and
Awards and any agreements evidencing Options and Awards shall be subject to
adjustment by the Committee at its discretion as to the number and price of
shares of Common Stock or other consideration subject to Options or Awards in
the event of changes in the outstanding Common Stock by reason of stock
dividends, stock splits, reverse stock-splits, recapitalizations,
reorganizations, mergers, consolidations, combinations, exchanges or other
relevant changes in capitalization occurring after the date of the grant of
any Options or Awards.
(b) The existence of the Plan and the Options or Awards
granted hereunder shall not affect in any way the right or power of the Board
of Directors or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business, any merger or consolidation of the
Company, any issue of debt or equity securities having any priority or
preference with respect to or affecting Common Stock or the rights thereof,
the dissolution or liquidation of the Company or any sale, lease, exchange or
other disposition of all or any part of its assets or business or any other
corporate act or proceeding.
(c) The shares with respect to which Options and Awards may
be granted are shares of Common Stock as presently constituted, but if, and
whenever, prior to the expiration of an Option or Award theretofore granted,
the Company shall effect a subdivision or consolidation or the payment of a
stock dividend on Common Stock without receipt of consideration by the
Company, the number of shares of Common Stock subject to an Award or with
respect to which Options may thereafter be exercised (i) in the event of an
increase in the number of outstanding shares shall be proportionately
increased and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares
shall be proportionately reduced, and the purchase price per share shall be
proportionately increased.
(d) If the Company recapitalizes or otherwise changes its
capital structure, thereafter upon any exercise of an Option theretofore
granted the Optionee shall be entitled to purchase under such Option, in lieu
of the number of shares of Common Stock as to which such Option shall then be
exercisable, the number and class of shares of stock and securities and the
cash and other property to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to such
recapitalization, the Optionee had been the holder of record of the number of
shares of Common Stock then covered by such Option.
(e) In the event of a Corporate Change, then no later than
(i) two business days prior to any Corporate Change referenced in Clause (i),
(ii), (iii) or (v) of the definition thereof or (ii) ten business days after
any Corporate Change referenced in Clause (iv) of the definition thereof, the
Committee, acting in its sole discretion without the consent or approval of
14
any Optionee, shall act to effect one or more of the following alternatives
with respect to outstanding Options which acts may vary among individual
Optionees, may vary among Options held by individual Optionees and, with
respect to acts taken pursuant to Clause (i) above, may be contingent upon
effectuation of the Corporate Change; (A) accelerate the time at which
Options then outstanding may be exercised so that such Options may be
exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Committee, after which
specified date all unexercised Options and all rights of Optionees thereunder
shall terminate; (B) require the mandatory surrender to the Company by
selected Optionees of some or all of the outstanding Options held by such
Optionees (irrespective of whether such Options are then exercisable under
the provisions of the Plan) as of a date (before or after such Corporate
Change) specified by the Committee, in which event the Committee shall
thereupon cancel such Options and pay to each Optionee an amount of cash per
share equal to the excess, if any, of the Change of Control Value of the
shares subject to such Option over the exercise price(s) under such Options
for such shares; (C) make such adjustments to Options then outstanding as the
Committee deems appropriate to reflect such Corporate Change (provided,
however, that the Committee may determine in its sole discretion that no
adjustment is necessary to Options then outstanding); (D) provide that
thereafter upon any exercise of an Option theretofore granted the Optionee
shall be entitled to purchase under such Option, in lieu of the number of
shares of Common Stock as to which such Option shall then be exercisable, the
number and class of shares of stock or other securities or property
(including, without limitation, cash) to which the Optionee would have been
entitled pursuant to the terms of the agreement of merger, consolidation or
sale of assets or plan of liquidation and dissolution if, immediately prior
to such merger, consolidation or sale of assets or any distribution in
liquidation and dissolution of the Company, the Optionee had been the holder
of record of the number of shares of Common Stock then covered by such
Option; or (E) provide, if so negotiated by the Company, for the assumption
of the Options by the surviving entity in any Corporate Change.
(f) Plan provisions to the contrary notwithstanding, with
respect to any Awards outstanding at the time a Corporate Change occurs, the
Committee may, in its discretion, provide (i) for full vesting of all Common
Stock awarded to the Participants pursuant to such Awards as of the date of
such Corporate Change and (ii) that all restrictions applicable to such Award
shall terminate as of such date.
Section 9. EFFECT OF THE PLAN ON EMPLOYMENT RELATIONSHIP. Neither the
Plan nor any Option and/or Award granted hereunder to a Participant shall be
construed as conferring upon such Participant any right to continue in the
employ of (or otherwise provide services to) the Company or any Subsidiary or
Parent thereof, or limit in any respect the right of the Company or any
Subsidiary or Parent thereof to terminate such Participant's employment or
other relationship with the Company or any Subsidiary or Parent, as the case
may be, at any time.
Section 10. AMENDMENT OF THE PLAN. The Board of Directors may amend the
Plan from time to time as it deems desirable; provided, however, that (i)
without the approval of the holders of a majority of the outstanding capital
stock of the Company entitled to vote thereon or consent thereto, the Board
of Directors may not amend, the Plan (x) to increase (except for increases
due to adjustments in accordance with Section 8 hereof) the aggregate number
of shares of Common Stock for which Options and/or Awards may be granted
hereunder, (y) to decrease the minimum exercise price specified by the Plan
in respect of ISOs or (z) to change the class of Employees
15
eligible to receive ISOs under the Plan and (ii) without the approval of the
Participant or Participants adversely effected, the Board of Directors may
not amend the Plan in a manner that has an adverse effect on the vested
rights of any Participant under any Award or Option theretofore granted under
the Plan. Notwithstanding the foregoing, a committee described in Section 5.1
hereof may make any technical or clerical changes to the Plan, and the Board
may also delegate to such a committee the right to amend the Plan, or any
other responsibility with respect to the Plan, in any respect not described
in Section 10(i) above.
Section 11. AMENDMENT OF AN AWARD OR OPTION. Subject to provisions of
the Plan, the Committee shall have the right to amend any Option or Award
issued to a Participant, subject to the Participant's written consent, in the
event such amendment is not favorable to the Participant or if such amendment
has the effect of changing an ISO to a Non-Qualified Option; provided,
however, that the consent of the Participant shall not be required for any
amendment made pursuant to Section 5.2(a)(x) or Section 5.2(b)(x). In
elaboration of the foregoing, a Participant is not required to consent to the
deemed acceleration of an ISO, unless such deemed acceleration would cause
the ISO to be treated as a Non-Qualified Option or otherwise have adverse
income tax consequences.
Section 12. TERMINATION OF THE PLAN. The Board of Directors may
terminate the Plan at any time. Unless the Plan shall theretofore have been
terminated by the Board of Directors, the Plan shall terminate ten years
after the Effective Date. No Grant may be made hereunder after termination of
the Plan. The termination or amendment of the Plan shall not alter or impair
any rights or obligations under any Option and/or Award theretofore granted
under the Plan.
Section 13. AWARDS TO FOREIGN NATIONALS AND EMPLOYEES OUTSIDE THE UNITED
STATES. To the extent the Committee deems it necessary, appropriate or
desirable to comply with foreign law or practice and to further the purpose
of this Plan, the Committee may, without amending the Plan, (i) establish
rules applicable to Grants to Participants who are foreign nationals or are
employed outside the United States, or both, including rules that differ from
those set forth in the Plan, and (ii) make Grants to such Participants in
accordance with those rules.
Section 14. GOVERNING LAW. To the extent not preempted by Federal law
the Plan, and all agreements thereunder, shall be construed in accordance
with and governed by the laws of the State of Texas, without regard to its
conflicts of law principles.
Section 15. INDEMNIFICATION. Each person who constitutes, or has been a
member of, the Committee, or of the Board of Directors, shall be indemnified
and held harmless by the Company, Parent, or Subsidiary as applicable against
and from any loss, cost, liability or expense that may be imposed upon or
reasonably incurred by such person in connection with or resulting from any
claim, action, suit or proceeding to which such person may be a party or in
which such person may be involved by reason of any action taken or failure to
act under the Plan and against and from any and all amounts paid by such
person in a suit, a settlement approved by the Company, or paid by such
person in satisfaction of any judgment in any such action, suit, or
Proceeding against such person, except in relationship to matters as to which
it shall be adjudged in such action, suit or proceeding, that the director or
Committee or Committee member is liable for gross negligence or willful
misconduct in the performance of his or her duties, provided such person
shall give the Company, Parent or Subsidiary, as applicable, an opportunity,
at its own
16
expense, to handle and defend the same before such person undertakes to
handle or defend it. The foregoing right of indemnification shall not be
exclusive of any rights of indemnification to which such person may be
entitled under the Company's Articles of Incorporation or by-laws, as a
matter of law, or otherwise, or any other power that the Company may have to
indemnify them or hold them harmless.
Section 16. SUCCESSORS. All obligations of the Company under the Plan or
an Agreement with respect to Grants hereunder shall be binding upon any
successor to the Company, whether the existence of such successor is the
result of a direct or indirect purchase of all or substantially all of the
business and/or assets of the Company, or of a merger, consolidation, or
otherwise.
Section 17. EFFECT UPON OTHER COMPENSATION. Nothing contained herein
shall preclude the Company, Parent or any Subsidiary from adopting other or
additional compensation arrangements for its employees or directors. The
effect under any other benefit plan of the Company, Parent, or any Subsidiary
of an inclusion in income by virtue of a Grant hereunder shall be determined
under such other plan.
Section 18. NOTICE. Notice to the Company pursuant to the Plan shall be
deemed given if in writing including, without limitation, facsimile or any
other communication transmitted to the general counsel of the Company. Notice
to the Grantee or Grantee's estate, if applicable, shall be given by
registered mail to such person's last known address.
Section 19. DELIVERY OF THE PLAN. A copy of this Plan shall be delivered
to the Secretary of the Company and shall be shown by him to each eligible
person making reasonable inquiry concerning it.
Section 20. POOLING TRANSACTION. Notwithstanding anything contained
herein to the contrary, in the event of Corporate Change which is also
intended to constitute a Pooling Transaction, the Committee is authorized and
directed to take such actions, if any, as are specifically recommended by an
independent accounting firm retained by the Company to the extent reasonably
necessary in order to assure that the Pooling Transaction will qualify as
such.
Section 21. GOVERNMENT APPROVALS. Each Grant is subject to the
requirement that, if at any time, the Committee determines in its sole
discretion, that the consent or approval of any governmental regulatory body
is necessary or desirable as a condition of, or in connection with, a Grant
or the issuance of Shares hereunder, no Grant shall be made or Shares issued,
in whole or in part, unless such consent or approval has been effected or
obtained free of conditions as acceptable to the Committee.
17
EXHIBIT 10.56
PORTIONS OF THIS AGREEMENT HAVE BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT
SUPPLIER AGREEMENT
BETWEEN
LOYALTY MANAGEMENT GROUP CANADA INC.
and
AIR CANADA
Dated as of April 24, 2000
TABLE OF CONTENTS
PAGE
ARTICLE 1 RIGHT TO PURCHASE..............................................................................1
1.1 Right to Purchase..............................................................................1
1.2 Capacity.......................................................................................2
1.3 Capacity Guarantee.............................................................................3
1.4 Insufficient Capacity..........................................................................4
1.5 Other Requirements.............................................................................4
1.6 Treatment of Passengers Holding Tickets........................................................4
1.7 Reports and Audits.............................................................................5
1.8 Protection of Program..........................................................................5
1.9 Determination of **** Routes and **** Routes...................................................5
ARTICLE 2 FARES..........................................................................................6
2.1 Special Fares..................................................................................6
2.2 Additional Payment.............................................................................6
ARTICLE 3 TERM...........................................................................................7
3.1 Term...........................................................................................7
3.2 Breach.........................................................................................7
3.3 **** Sponsor...................................................................................7
3.4 Post-Termination Rights........................................................................7
ARTICLE 4 CONFIDENTIALITY AND TRADE-MARKS................................................................8
4.1 Confidentiality................................................................................8
4.2 Announcements..................................................................................9
4.3 Trade-Marks....................................................................................9
ARTICLE 5 WARRANTIES AND CCAA PAYMENT...................................................................10
5.1 Warranties....................................................................................10
5.2 Indemnity.....................................................................................10
5.3 CCAA Process and Payment......................................................................11
ARTICLE 6 GENERAL.......................................................................................11
6.1 Entire Agreement..............................................................................11
6.2 Unconditional Obligation......................................................................11
6.3 Release.......................................................................................11
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-i-
TABLE OF CONTENTS
(CONTINUED)
6.4 Injunction....................................................................................11
6.5 Severability and Time of Essence..............................................................12
6.6 Governing Law.................................................................................12
6.7 Costs and Expenses............................................................................12
6.8 Waiver........................................................................................12
6.9 Successors and Assigns........................................................................12
6.10 Counterparts..................................................................................13
SCHEDULE A - Definitions and Interpretation
SCHEDULE B - Special Fares
SCHEDULE C - Reservations, Commissions and Travel Restrictions
SCHEDULE D - Other Commitments
SCHEDULE E - Job Description for LMGC Ombudsman
SCHEDULE F - LMGC News Release
SCHEDULE G - **** Routes
SCHEDULE H - LMGC Projections
SCHEDULE I - ****
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-ii-
SUPPLIER AGREEMENT
THIS AGREEMENT is made as of April 24, 2000 between LOYALTY
MANAGEMENT GROUP CANADA INC. and AIR CANADA.
WHEREAS LMGC wishes to purchase airline tickets from Airline,
and Airline has agreed to sell airline tickets to LMGC, subject to and in
accordance with the terms of this Agreement;
AND WHEREAS terms used herein have the meanings set forth in
Schedule A hereto and the principals of interpretation set out therein apply to
this Agreement;
NOW THEREFORE, in consideration of the premises and the mutual
promises and covenants hereinafter set forth, the parties now agree as follows:
ARTICLE 1
RIGHT TO PURCHASE
1.1 RIGHT TO PURCHASE.
(a) Starting on May 1, 2000 and thereafter throughout the Term, LMGC
shall have the right to buy Special Tickets from Airline and each Regional
Airline, and Airline will make available, and either cause each of the Regional
Airlines to make available or obtain itself from each such Regional Airline and
make available, for purchase by LMGC, Special Tickets, at the Special Fares and
otherwise on the terms and conditions hereof. Airline shall also use its best
efforts to cause CAI (so long as it is not a Regional Airline (and as a result,
subject to the previous sentence)) to comply with the terms of this Agreement in
all respects (including supplying Special Tickets for Airline Seats at the
Special Fares) as if it were a Regional Airline. Any reference herein to the
purchase by LMGC of Special Tickets or Airline Seats includes any such purchase
by any Subsidiary of LMGC (including LMG Travel) and Airline agrees that any
such Subsidiary may purchase Special Tickets hereunder at the Special Fares.
(b) During the Initial Period (but subject to Section 1.2), LMGC may
purchase Special Tickets at the Special Fares for any Airline Seats offered by
Airline or any Regional Airline. During the Additional Period, however, LMGC
may only purchase Special Tickets at the Special Fares for itineraries which
(i) include a **** Route or (ii) do not include a **** Route because of the
exclusion set out in Schedule I where the segment from Schedule I is part of a
larger itinerary that does not have other **** as described in Section 1.9(b).
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-2-
1.2 CAPACITY.
(a) Except as otherwise provided herein, during the Initial Period
LMGC shall (and shall be entitled to) book Special Tickets in **** Class and
shall be entitled to the priority currently associated therewith (not to be
lower than that available to any other Person booking into **** Class). Except
as otherwise provided herein, during the Additional Period LMGC shall (and
shall be entitled to) book Special Tickets in a class to be designated by
Airline which may, but need not be, **** Class, and which will satisfy the
requirements for the Additional Period set out herein (the "Other Class").
(b) Airline agrees to load and maintain the Special Fares in ****
Class during the Initial Period and in the Other Class during the Additional
Period, and make such Special Fares accessible in SABRE throughout the Term
and to give LMGC and LMG Travel (and no one else outside of Airline or a
Regional Airline) access to such fares. No other Person or entity entitled to
book into **** Class at any time will have greater rights thereto or to the
capacity provided thereby, than LMGC. Airline represents and warrants to LMGC
that the following statements regarding **** Class are now true and covenants
that such statements will be true (subject to Section 1.2(c) below) throughout
the Term: (i) **** Class is loaded such that it is accessible in SABRE and can
be viewed by LMGC within SABRE, (ii) it is available on every route of Airline
and all Regional Airlines, (iii) it is always initially set to more than ****
on each existing route, (iv) it regularly provides an initial availability for
a route when set of at least **** percent of the seats available on the route,
excluding business class or superior seats, including first class; (v) there
are no partitions in such class that would affect LMGC and block bookings are
only permitted in such class on an infrequent basis; and (vi) the class is
intended for **** and similar Persons, including, as of the date hereof, ****
which currently books tickets only into such class, and certain public fares
such as youth, student and similar fares. The parties have discussed LMGC's
current and projected needs and flight patterns for Airline Seats and a
description of such needs is attached as Schedule H hereto. Airline confirms
that it is its expectation that LMGC's rights to book into **** Class as
contemplated hereby will generally satisfy those needs during the Initial
Period, although it gives no warranty as to availability on specific flights
or routes, and LMGC confirms that it is its expectation that it will book to
its forecasts, as reflected in Schedule H, during the Initial Period, although
it gives no warranty as to what actual levels of bookings will be. If,
notwithstanding the **** and **** capacity guarantees set out in Section 1.3,
LMGC determines that, for a period of at least 60 days during the Initial
Period, it is generally not able to meet such needs in respect of itineraries
commencing on or after September 1, 2000, it may notify Airline thereof and in
such event Airline will determine and implement some other approach that will
enable such needs to be generally met, including, if required to resolve the
issue, allowing LMGC to book into some other class or creating a separate
booking class for LMGC to book into during the Initial Period.
(c) If at any time or from time to time during the Initial Period,
Airline changes its booking classes so that **** Class no longer exists or
makes any material changes to the parameters associated with such class,
Airline shall designate another booking class into which LMGC shall be
entitled to book Special Tickets and which will provide LMGC with
substantially the same
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
- 3 -
parameters as described in Section 1.2(b). For purposes hereof, any such
replacement class shall thereafter be referred to as "**** Class".
(d) The parties will meet annually to review the concept of LMGC being
permitted access to the capacity provided from time to time by Airline under
"web specials" made available on Airline's web site. Such access would be
provided in order to permit LMGC to assist Airline in utilizing such capacity,
by issuing Special Tickets therefrom to its Collectors. The price payable by
LMGC for any Airline Seats booked therefrom shall not be any greater than the
applicable Special Fare at such time, but any such Airline Seats shall be
subject to the same conditions as provided in the relevant web special. Airline
will allow LMGC reasonable access on such basis to book Special Tickets from at
least one such web special during the Initial Period, but otherwise Airline has
no obligation to provide LMGC such access. LMGC's rights under this Section
1.2(c) are in addition to, and not in limitation of, its capacity entitlements
under the balance of this Section 1.3.
1.3 CAPACITY GUARANTEE.
(a) The provisions of Sections 1.3(b) and (c) below shall apply only in
respect of itineraries booked by LMGC for the period on or after September 1,
2000 and LMGC acknowledges that Airline cannot commit to such capacity
guarantees for itineraries prior thereto. Airline shall however use its
commercially reasonable best efforts to ensure that LMGC's needs for capacity
are satisfied in respect of itineraries prior thereto.
(b) Subject to Section 1.3(a), Airline shall ensure that, at all
times during the Term, for each **** day period which commences at least ****
days after such time, the total of:
(i) all Airline Seats of Airline and each Regional
Airline on each **** Route which are available to be
booked by LMGC at the Special Fares on flights
departing in such **** day period, plus
(ii) all Airline Seats of Airline and each Regional
Airline on such **** Route which at such time have
been booked by LMGC at the Special Fares for
flights departing in such **** day period,
is at least **** of the aggregate Airline Seats offered by Airline and the
Regional Airlines for such **** day period on such **** Route.
(c) In addition, but again subject to Section 1.3(a), Airline shall
also ensure that, at all times during the Term, for each **** day period which
commences at least **** days after such time, the total of:
(i) all Airline Seats of Airline and each Regional
Airline on each **** Route, and on each **** Route
shown in Schedule I, which are available to be
booked by LMGC at the Special Fares on flights
departing in such **** day period, plus
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-4-
(ii) all Airline Seats of Airline and each Regional
Airline on such **** Route or such **** Route, as
applicable, which at such time have been booked by
LMGC at the Special Fares for flights departing in
such **** day period,
is at least **** of the aggregate Airline Seats offered by Airline and the
Regional Airlines for such **** day period on such **** Route or such ****
Route, as applicable. For greater certainty, LMGC acknowledges that during the
Additional Period it can only purchase Special Tickets at the Special Fares
for the purposes described in the second sentence of Section 1.1(b) and
accordingly the capacity guarantee set out in this Section 1.3(c) only applies
during the Additional Period with respect to itineraries that meet those
requirements.
1.4 INSUFFICIENT CAPACITY. If at any time LMGC, acting reasonably,
determines (whether from reviewing the reports Airline provides under Section
1.7, from a review of SABRE or otherwise) that the capacity made available to
LMGC on a **** Route or **** Route with respect to a particular **** day
period that has not been completed does not comply with Section 1.3, LMGC may
notify Airline thereof. If Airline has not remedied the situation to the
reasonable satisfaction of LMGC within 72 hours thereafter, LMGC shall be
entitled to book Special Tickets on such **** Route or **** Route, as
applicable, in any other economy booking classes in order to ensure that it
has the capacity required under Section 1.3 with respect to such **** day
period, and the fares payable by LMGC for such Special Tickets shall still be
the Special Fares. Similarly, if at any time LMGC determines that it was not
provided sufficient capacity on a **** Route or **** Route with respect to any
particular **** day period that has then been completed, it may notify Airline
thereof. If Airline has not remedied the situation to the reasonable
satisfaction of LMGC within 72 hours thereafter, LMGC shall be entitled, for
the **** day period thereafter and in addition to the capacity otherwise
provided hereunder on such **** Route or **** Route, as applicable, to book
additional Airline Seats at the Special Fares in any other economy booking
classes in a number sufficient to make up the deficiency for that particular
**** day period. In selecting other classes to look to for purposes of this
Section 1.4, LMGC shall review the available classes in order of priority,
starting with the lowest priority as advised to LMGC from time to time by
Airline in writing. If, as a result of booking Special Tickets in any such
other class for which the Special Fares have not been loaded, LMGC pays an
amount therefor greater than the Special Fares, Airline shall promptly make
any required adjustments in connection therewith.
1.5 OTHER REQUIREMENTS. Airline shall, and shall ensure that each
Regional Airline shall, comply with Schedule D hereto. In addition, the terms
of this Agreement will be subject to the reservations, commissions, travel,
ticket use and other procedures and requirements as set forth in Schedule C
hereto.
1.6 TREATMENT OF PASSENGERS HOLDING TICKETS. Except as described in
Schedule C, Airline shall, and shall ensure that each Regional Airline shall,
treat and serve each passenger holding a Special Ticket in the same manner as
each other economy passenger of Airline or such Regional Airline, as
applicable, including as to loading priorities, entitlement to denied
boarding
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-5-
compensation, flight cancellation compensation, baggage limits, or any
disruption or compensation, all in accordance with applicable industry
tariffs and conditions of carriage.
1.7 REPORTS AND AUDITS. On or before the 15th day of each month
during the Term, Airline shall provide LMGC with a report in mutually agreed
upon form showing both projected and historical data and, at a minimum,
showing, for at least each of the three months immediately thereafter, (i)
those routes for which there is no availability to LMGC in such month, (ii)
those routes for which there is low and rapidly diminishing capacity to LMGC
in such month, and (iii) those routes for which there is sufficient capacity
to LMGC in such month. Availability for this purpose shall be determined by
availability in the class or classes into which LMGC is then booking
hereunder and based on the aggregate number of Airline Seat available on such
routes during such month. LMGC shall have the right, on reasonable notice to
Airline and during normal business hours and no more than twice each calendar
year, to engage an independent third party to audit Airline's records in
order to confirm the accuracy of such reports, and in each case the cost of
such audit shall be paid by LMGC unless any such audit reveals that the
capacity shown to be available to LMGC in a report was incorrect by more than
5%, in which case Airline shall pay the cost of such audit.
1.8 PROTECTION OF PROGRAM. Title to the Program, AMRM and all rights
represented thereby or related thereto, are reserved at all times to LMGC.
LMGC may determine, in its sole discretion, the duration, form, scope and
content of the Program and may effect termination, addition, deletion or
other modification or change thereof or thereto as it may, in its sole
discretion, determine. For greater certainty, this Section 1.8 is not
intended to give LMGC the right to change the Program in a manner that would
reduce its obligations hereunder.
1.9 DETERMINATION OF **** ROUTES AND **** ROUTES.
(a) On each January 1 during the Term, Schedule G setting out the
**** Routes shall be deemed amended to consist of each **** Route in respect
of which no Air Carrier (other than Airline, CAI or any Regional Airline of
either) provides **** (whether or not ****) **** service as of the November 15
immediately prior thereto utilizing planes with seating capacity for at least
**** passengers.
(b) On each January 1 during the Term, Schedule I shall be deemed
amended to consist of each **** Route in respect of which an Air Carrier
(other than Airline, CAI or any Regional Airline of either) provides ****
(whether or not ****) **** service as of the November 15 immediately prior
thereto utilizing planes with seating capacity for at least **** passengers.
(c) If at any time the parties are unable to agree by December 15th
of any year, for purposes of Section 1.9(a) or (b) above, as to the ****
Routes to be described in Schedule G or the **** Routes to be described in
Schedule I, either party may refer the matter to confidential and binding
arbitration under the ARBITRATIONS ACT (Ontario) before a single arbitrator
who shall be instructed to provide his or her determination as soon as
possible. The cost thereof shall be split equally between the parties. In the
event of such a referral, the applicable schedule
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-6-
shall only be amended under this Section 1.9 on the date of such
determination, and such determination shall be final and binding for purposes
of this Section 1.9.
ARTICLE 2
FARES
2.1 SPECIAL FARES.
(a) The Special Fares as of May 1, 2000 are as set out in Part 1 of
Schedule B. On January 1, 2001, the Special Fares will be adjusted with
respect to all Special Tickets purchased on or after that date to the amounts
set out in Part 2 of Schedule B. On ****, the Special Fares will be adjusted
with respect to all Special Tickets purchased on or after that date to the
amounts set out in Part 3 of Schedule B. Provided Airline has paid to LMGC
**** as contemplated in Section 5.3, (i) on **** the Special Fares will be
adjusted with respect to all Special Tickets purchased on or after that date
to the amounts set out in Part 4 of Schedule B, and (ii) on **** the Special
Fares will be adjusted with respect to all Special Tickets purchased on or
after that date to the amounts set out in Part 5 of Schedule B. If for any
reason whatsoever (including the CCAA Plan not being approved or no amounts
being distributed to unsecured creditors thereunder by December 31, 2000),
Airline has not paid LMGC **** as contemplated in Section 5.3 by December 31,
2000, the price increases contemplated for **** and **** shall not take place
but shall be replaced by a **** price increase from the amounts set out in
Part 3 of Schedule B on each such date.
(b) For each Special Ticket purchased by LMGC hereunder, LMGC shall pay
Airline the applicable Special Fare. The Special Fares exclude any applicable
transportation tax, excess baggage charges, airport taxes, federal inspection
fees, passenger facility charges, departure taxes, GST, sales, transfer or use
taxes, or any similar taxes, levies or charges, or any other ancillary duties
and charges (collectively, "Additional Charges") and LMGC shall either pay or
cause its Collectors to pay to Airline any applicable Additional Charges.
Infants (i.e. under 2 years old) who do not occupy a separate Airline Seat shall
be carried free of charge, except for any applicable Additional Charges and
except as otherwise required by applicable law or by regulations or policies
applicable to the airline industry.
2.2 ADDITIONAL PAYMENT. As soon as possible, but in any event by July
1, 2000, Airline shall dedicate at least one employee exclusively for the
purpose of fulfilling the responsibilities and having the job position and
qualifications described in Schedule E hereto. In consideration of Airline
fulfilling such responsibility, LMGC shall, within 30 days of such person
being hired, pay to Airline an amount (which shall apply in respect of the
period from the date of hire up to and including December 31, 2000) determined
based on pro rating **** over the period left in the 2000 calendar year from
the date of such hire. Within 30 days following commencement of each
subsequent calendar year during the Term, LMGC shall pay an additional **** to
Airline. The amount so paid by LMGC shall be applied on account of the salary
due to such individual and other related expenses of Airline in connection
therewith. If the Term ends part way through any calendar year, Airline shall
provide LMGC with a proportionate rebate of the amount so paid. In addition,
if at any time such position remains vacant during a calendar year for more
than 60 days in aggregate or such individual fails to fulfil
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-7-
the responsibilities set out in Schedule E, LMGC shall also be entitled to a
proportionate rebate of the amount paid based on the total period during
which such position remained vacant or during which such individual so failed
to fulfil such responsibilities.
ARTICLE 3
TERM
3.1 TERM. This Agreement shall be come into effect as of May 1, 2000
and shall continue in full force and effect thereafter until December 31,
2004, at which time this Agreement shall terminate, provided that Airline
shall still be bound to honour any Special Tickets purchased hereunder on or
prior to the termination date which have a travel date which occurs
thereafter and shall comply with Section 1.6 in connection therewith
notwithstanding such termination.
3.2 BREACH. If either party hereto fails to (i) pay any amounts when
due and payable hereunder, and such failure continues for a period of fifteen
Business Days after written notice of such failure referring to this Section
3.2 is given to such party by the other party; (ii) comply with Section 4.3
and such failure continues for a period of fifteen days after written notice
of such failure referring to this Section 3.2 is given by the other party, or
(iii) observe or perform any of its other obligations under this Agreement
and such failure continues for a period of thirty days after written notice
of such failure referring to this Section 3.2 is given by the other party,
then without prejudice to any other rights or remedies the other party may
have, this Agreement may be terminated by the other party by notice to the
defaulting party so long as such failure is still continuing at the time of
giving such notice.
3.3 **** SPONSOR. If at any time LMGC permits Collectors to redeem
AMRM earned from a **** Sponsor, or from **** as a conversion reward under the
**** program operated by **** or any similar points conversion program
hereafter introduced by ****, in either case for Airline Seats purchased
hereunder at the Special Fares, Airline may notify LMGC thereof in writing
referring to this Section 3.3 and demand that such practice cease. If such
practice is still continuing 15 days after receipt by LMGC of such notice,
Airline may terminate this Agreement on not less than 90 days written notice
to LMGC, provided that such notice must be given no later than 90 days
following the expiry of such 15 day period. In addition, LMGC agrees that, if
at any time **** wishes to offer AMRM as a redemption option under any points
conversion program which is promoted by reference to the fact that points
earned thereunder can be redeemed for flights on Air Canada, LMGC shall use
all reasonable efforts to persuade **** not to proceed therewith. Airline
acknowledges, however, that LMGC may not have the right to force **** not to
proceed with any such program and shall have no liability if **** does proceed
therewith.
3.4 POST-TERMINATION RIGHTS. Notwithstanding any termination of this
Agreement, the parties shall continue to be liable for all financial and
other monetary obligations respectively incurred by each of them pursuant to
this Agreement prior to such termination until the time each of such
obligations shall have been fully satisfied, and exercise by either party of
its right to terminate under any provision of this Agreement will not affect
or impair its right to enforce its
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-8-
other rights or remedies under this Agreement. All obligations of each party
that have accrued before termination or that are of a continuing nature will
survive termination.
ARTICLE 4
CONFIDENTIALITY AND TRADE-MARKS
4.1 CONFIDENTIALITY.
(a) Throughout the Term and for a period of 5 years following the
termination of this Agreement, each party will, and will cause each of its
Representatives (as defined below) to, hold in strictest confidence and not
use in any manner whatsoever and only disclose to those of its Representatives
who have a need to know same for purposes of this Agreement, any Confidential
Information (as defined below) of the other party, whether provided before or
after the date of this Agreement, including any Confidential Information
provided by LMGC to Airline in connection with Airline's initial determination
of whether to enter into this Agreement; provided that the foregoing will not
apply (i) to use by LMGC of its data base; (ii) where disclosure of
Confidential Information is required by law or in order to enforce rights
under or in connection with this Agreement or the subject matter hereof; (iii)
where the Confidential Information which has been disclosed had already ceased
to be confidential through no fault of the disclosing party or its
Representatives; (iv) to disclosure by LMGC of any terms of this Agreement to
its or its Affiliates' actual or prospective financiers or investors or
otherwise in connection with a financing, including disclosing to any
underwriter, potential purchasers of LMGC's or any of its Affiliate's shares
or business and including their respective counsel, or (v) to disclosure by
Airline to CAI, unless the CCAA Plan is not approved in which case Airline may
not thereafter disclose Confidential Information of LMGC to CAI unless
otherwise permitted hereunder. In addition, LMGC may disclose, on a
confidential basis, the term of this Agreement, the existence of price
increases hereunder and the percentage amount thereof (but not the actual
fares), the confidentiality restrictions, termination events and provisions
relating to **** Sponsors and **** to existing, future or prospective Sponsors
or suppliers, and Airline may disclose, on a confidential basis, the term of
this Agreement, the existence of price increases hereunder and the aggregate
percentage amount thereof (but not the actual fares), the confidentiality
restrictions, termination events and provisions relating to **** Sponsors and
**** to ****.
(b) "Confidential Information" of a party means all information and
documents, whether on paper, in computer readable format or otherwise, relating
to such party's business, which is or is treated by such party as being of a
confidential nature (and is known or should have been known by the other party
hereto as being of a confidential nature or being so treated) and has been or is
from time to time made known to or is otherwise learned by the other party or
any of its Representatives as a result of the relationship hereunder, including
the terms (but not the existence) of this Agreement (including the pricing
hereunder). In the case of LMGC, its Confidential Information will also include
all information disclosed to or otherwise learned by Airline concerning the
Program, the terms (including pricing) of the Terminated Supplier Agreement and
the Short Term CAI Supplier Agreement and the existence or substance of and the
background to any discussions among CAI, Airline and/or LMGC with regards to the
subject
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-9-
matter hereof and termination of the Terminated Supplier Agreement, whether
before or after the date hereof. "Representative" means, with respect to any
party, any of its directors, officers or employees or outside auditors,
lawyers or advertising or p.r. agencies, but for greater certainty, not any
other outside consultants or agencies.
(c) If any party is served with a subpoena or other legal process or
other governmental request requiring the production or disclosure of any
Confidential Information, or for any other reason believes that it is required
by law to disclose any Confidential Information of the other party, then that
party will, before complying, promptly notify the other party and use all
reasonable efforts to permit the other party a reasonable period of time to
intervene and contest disclosure or production, and will in any event use all
reasonable efforts to ensure confidential treatment of such Confidential
Information if so disclosed.
4.2 ANNOUNCEMENTS. Airline acknowledges that LMGC intends to issue a
news release forthwith after execution hereof substantially in the form
attached as Schedule F, and consents thereto. Subject thereto, neither party
shall issue any news releases in respect of the entering into of this
Agreement or the background thereto, without the prior written consent of the
other party, which consent shall not be unreasonably withheld. In addition,
but subject to the exceptions as to confidentiality set forth in clauses (i)
through (v) of Section 4.1(a), throughout the Term (i) Airline will refrain,
and will use all reasonable efforts to ensure that its Representatives (as
defined in Section 4.1) refrain, from making statements to third parties,
including the press or regulatory authorities, which denigrate or otherwise
refer in an unfavourable manner to the Program or its features or the
business relationship between the parties, or otherwise having discussions to
such effect with any third parties, and (ii) LMGC will refrain, and will use
all reasonable efforts to ensure that its Representatives (as defined in
Section 4.1) refrain, from making statements to third parties, including the
press, or regulatory authorities which denigrate or otherwise refer in an
unfavourable manner to Airline or its business or the business relationship
between the parties, or otherwise having discussions to such effect with any
third parties.
4.3 TRADE-MARKS.
(a) Except as otherwise provided herein or as required by law,
neither LMGC nor Airline shall use any logo or trade-mark of the other without
the prior written permission of the other. In addition, during the Initial
Period, LMGC may use the name "Air Canada" in advertising or promotional
material for purposes of identifying to current, future or potential
Collectors or Sponsors the availability of Airline Seats from Airline as a
redemption option and subject to the following restrictions (which, in the
case of clauses (i) and (ii), shall not apply to displays on web sites): (i)
the Air Canada name will not appear on the same page as the name of **** or
****, (ii) it will appear only together with the name of another supplier to
the Program, and (iii) LMGC will not permit **** or **** to use such name in
their marketing or promotional materials relating to the Program. LMGC may not
use such name in such materials during the Additional Period, except as
otherwise required by law. For greater certainty, however, the foregoing
restrictions shall not prohibit LMGC telephone agents or other representatives
from using the name "Air Canada" when discussing availability or bookings for
flights with Collectors, and other uses in connection with travel, (e.g.
itinerary and tickets). In
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-10-
addition, nothing contained herein shall affect LMGC's rights to use
trade-marks or logos of CAI in accordance with LMGC's current practices. Upon
implementation of the CCAA Plan or any transfer of any of CAI's logos or
trade-marks (including the names "Canadian" or "Canadian Airlines") to
Airline or any Affiliate of Airline, Airline will ensure that LMGC continues
to have the right to use CAI's logos and trade-marks (including the names
"Canadian" or "Canadian Airlines") in accordance with its current practice,
but only for so long as they continue to be used by either CAI or Airline or
any Affiliate thereof.
(b) Notwithstanding the permission to use the name Air Canada as set
forth in Section 4.3(a), Airline shall have the right to examine and to approve
or disapprove in advance the contents and appearance of any advertising or
promotional materials proposed to be used by LMGC which incorporate such name,
but (i) Airline shall not unreasonably withhold or delay its approval of such
materials, (ii) it shall in any event provide its decision as soon as possible
and not later than 7 days after request therefor from LMGC, and (iii) upon
providing any approval, no further approval will be required for subsequent
materials which have the same or a substantially similar approach to the display
of such name.
(c) Neither party shall have any liability for any breach of this
Section 4.3 unless such breach continues for a period of fifteen days after
written notice thereof referring to this Section 4.3 is given to such party by
the other party demanding that such breach cease, and in any event, the maximum
aggregate liability of either party for any breach of, or otherwise in
connection with, this Section 4.3, whether on one or more than one occasion, is
****.
ARTICLE 5
WARRANTIES AND CCAA PAYMENT
5.1 WARRANTIES. Each of the parties hereto represents and warrants
to the other party, that (i) the entering into, execution and delivery of
this Agreement and the performance of its obligations hereunder have been
duly and validly authorized and approved by all necessary corporate action on
its part, (ii) no consent or approval of any other Person or of any court is
required to the entry into, execution or delivery of this Agreement or to the
performance of its obligations hereunder, except such as have been obtained,
(iii) this Agreement has been validly executed and delivered by such party,
and is a valid and legally binding obligation of such party enforceable
against such party in accordance with its terms, subject to usual exceptions
regarding bankruptcy and other laws affecting creditors rights generally and
those with respect to specific performance and injunction, and (iv) there are
no outstanding claims, litigation, arbitrations, investigations or other
proceedings existing or, to the knowledge of each party, pending or
threatened which would enjoin, restrict or prohibit performance by such party
of its obligations hereunder.
5.2 INDEMNITY. Each party shall indemnify and hold the other party
(and in the case of LMGC, any of its Subsidiaries who purchase tickets
hereunder) and their respective directors, officers, employees and agents
harmless from and against any and all losses, claims, damages, liabilities,
costs, fees and other expenses whatsoever (including legal fees on a
solicitor and his own client basis) suffered or incurred by the other party
which arise from or are caused by the non-performance or improper performance
of any obligations of such first party hereunder, or
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-11-
any breach or untruth of any of its representations or warranties contained
herein, or, in the case of the indemnity in favour of LMGC, any liability of
Airline or any Regional Airline to any Person for any injuries or damages
which result from the provision or sale of any air transportation or related
services and/or merchandise by or through Airline or any Regional Airline, to
such Person.
5.3 CCAA PROCESS AND PAYMENT. The parties acknowledge that, by
Assignment dated as of the date hereof, LMGC has assigned the Claim to
Airline. In consideration of such assignment and the price increases
contemplated hereby for **** and ****, Airline shall pay to LMGC, within five
Business Days following distribution or payment of any amounts in respect of
the Claim, ****. Without limiting Section 6.2, Airline's obligation to pay
such amount is absolute and unconditional and applies notwithstanding any of
the matters referred to in Section 6.2. If Airline fails to pay such amount to
LMGC when due, then, without prejudice to any other rights or remedies LMGC
may have, LMGC may set off such amount against any amounts otherwise payable
hereunder to Airline, and Airline shall pay interest to LMGC from the due date
of such payment until such payment is made in full at **** per annum.
ARTICLE 6
GENERAL
6.1 ENTIRE AGREEMENT. This Agreement together with the Assignment
between the parties of even date contains the entire agreement between the
parties relating to the subject matter hereof and supersedes all previous
agreements, understandings or arrangements, verbal or written, relating
thereto. This Agreement may only be modified, superseded or amended by an
agreement or modification in writing signed by both of the parties hereto.
6.2 UNCONDITIONAL OBLIGATION. Airline's obligation to comply
herewith and provide Airline Seats to LMGC at the Special Fares and otherwise
as contemplated thereby, is an independent obligation of Airline which shall
apply notwithstanding any matter or thing affecting CAI, including any
reorganization, bankruptcy, receivership or other proceeding affecting CAI
and including the current proceedings under the CCAA affecting CAI (the "CCAA
Proceedings"), the treatment of CAI's obligations in the CCAA Proceedings,
the success or lack of success of the CCAA Proceedings, the treatment of the
Claim in the CCAA Proceedings, whether or not the Claim is disputed by any
other Person or Airline has the right to vote or receive distributions of the
Claim in the CCAA Proceedings, and regardless of the amount of any recovery
in respect of the Claim.
6.3 RELEASE. LMGC and Airline each release each other and their
respective Affiliates, other than, for greater certainty, CAI, from all
costs, damages and liability in connection with any matters which have
occurred prior to the date of this Agreement with respect to the Terminated
Supplier Agreement or any matter relating thereto.
6.4 INJUNCTION. Airline acknowledges that a breach of its
obligations under any of Sections 1.1, 1.2, 1.3, 1.4, 1.6, 1.7, 4.1, 4.2 or
4.3 and LMGC acknowledges that a breach of any of its obligations under
Sections 4.1, 4.2 or 4.3, will cause irreparable harm to the other party for
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-12-
which money damages alone will provide inadequate compensation. Accordingly,
the parties agree that injunctive relief to prevent any such breaches or a
mandatory order or specific performance requiring continued performance of
the provisions in question, as applicable, is appropriate and necessary to
prevent the continuation of such a breach.
6.5 SEVERABILITY AND TIME OF ESSENCE. If any provision of this
Agreement is held by a court of competent jurisdiction or by any governmental
agency or authority to be invalid, such holding shall not have the effect of
invalidating the other provisions of this Agreement which shall nevertheless
remain binding and effective between the parties. Time is of the essence
hereof.
6.6 GOVERNING LAW. This Agreement shall be construed under and
governed by the laws of the Province of Ontario and the laws of Canada
applicable therein. The Parties hereto attorn to the non-exclusive
jurisdiction of the courts of Ontario.
6.7 COSTS AND EXPENSES. Airline shall pay all reasonable
out-of-pocket costs and expenses, including legal costs and expenses on a
solicitor and his own client basis, incurred by LMGC in connection with the
negotiation and documentation of the transactions contemplated in this
Agreement, the Terminated Supplier Agreement and/or the Short Term CAI
Supplier Agreement as well as those incurred by LMGC in connection with the
insolvency proceedings relating to CAI, including those incurred in
anticipation thereof and/or to protect LMGC's interests in connection
therewith, the whole up to a maximum of **** plus GST, but in any event, not
including any such costs or expenses incurred by LMGC prior to December 31,
1999. Subject to the following proviso, Airline shall make such payment
promptly following receipt of copies of invoices therefor, provided that LMGC
need not provide Airline with the detail from LMGC of the work performed in
connection with such invoices including daily work entries, provided further
that Airline need not make such payment earlier than the first to occur of (i)
five Business Days following distribution or payment of any amounts in respect
of the Claim, and (ii) July 15, 2000.
6.8 WAIVER. Any term or condition of this Agreement may be waived at
any time by the party which is entitled to the benefit thereof, but such
waiver shall only be effective if evidenced by a writing signed by such
party. A waiver on one occasion shall not be deemed to be a waiver of the
same or of any other breach on any other occasion. Any previous waiver,
forbearance, or course of dealing will not affect the right of either party
to require strict performance of any provision of this Agreement.
6.9 SUCCESSORS AND ASSIGNS. Neither party may assign its rights or
obligations hereunder without the prior written consent of the other, except
that either party may, without consent, assign its rights hereunder (i) to any
Affiliate either as part of a bona fide corporate reorganization, or a sale of
all or substantially all of its assets, but no such assignment shall relieve
such party from its obligations hereunder, and (ii) by way of security to any
financier; provided that if any **** or **** enforces upon any such security
provided by LMGC and operates the Program on its own for more than one month,
Airline may, on not less than 20 Business Days prior notice to such **** or
**** sent no later than four weeks after the end of such month, elect to
terminate this Agreement, in which event, this
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-13-
Agreement shall terminate at the end of the period specified in any such
notice if, at the end of such period, such **** or **** is still so operating
the Program.
6.10 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original and all of
which taken together shall be deemed to constitute one and the same
instrument. Counterparts may be executed either in original or faxed form and
the parties hereto adopt any signatures received by a receiving fax machine
as original signatures of the parties; provided, however, that any party
providing its signature in such manner shall promptly forward to the other
party an original of the signed copy of this Agreement which was so faxed.
IN WITNESS WHEROF the parties have executed this Agreement as
of the date and year first above written.
LOYALTY MANAGEMENT GROUP CANADA INC.
By: /s/ John Scullion
------------------------------------
Name: John Scullion
------------------------------------
Title: President & Chief Executive Officer
------------------------------------
AIR CANADA
By: /s/ Calvin Bovinescu
------------------------------------
Name: Calvin Bovinescu
------------------------------------
Title: Executive Vice President
Corporate Development & Strategy
------------------------------------
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
SCHEDULE A
DEFINITIONS AND INTERPRETATION
In this Agreement (including the recitals hereto), the
following terms shall have the following meanings:
"ADDITIONAL PERIOD" means the period from and including January 1, 2003 to and
including December 31, 2004.
"AFFILIATE" has the meaning set out in the CANADA BUSINESS CORPORATIONS ACT.
"AGREEMENT" means this Agreement including the Schedules to this Agreement all
as amended or supplemented from time to time.
"AIR CARRIER" means an airline or air carrier, or a Person which otherwise
engages in the business of carrying passengers by air.
"AIRLINE" means Air Canada, its successors and permitted assigns.
"AIRLINE SEATS" means seats for travel on flights for any City Pair Served as
operated by Airline or any Regional Airline.
**** means ****
"AMRM" means AIR MILES-TM- reward miles.
"BUSINESS DAY" means any day on which banks are open for business in Montreal,
Quebec and Toronto, Ontario, excluding Saturdays, Sundays and statutory holidays
in those cities.
"CCAA" means the COMPANIES CREDITORS ARRANGEMENT ACT.
"CCAA PLAN" means the proposed plan of compromise and arrangement of Canadian
Airlines Corporation and CAI, intended to be filed with the Court of Queens
Bench of Alberta on April 25, 2000, or any subsequent plan of compromise and
arrangement issued by either or both of such Persons in connection with the CCAA
Proceedings.
"CCAA PROCEEDINGS" has the meaning set out in Section 6.2.
"CAI" means Canadian Airlines International Ltd., its successors and permitted
assigns.
"CITY PAIR" means two cities or other locations between which any Air Carrier
offers scheduled service, whether domestic or international and whether or not
non-stop or direct.
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-2-
"CITY PAIRS SERVED" means all City Pairs for which Airline or any Regional
Airline (or any combination thereof) has, at the time in question, scheduled
service, whether domestic or international.
"CLAIM" means the claim of LMGC and its subsidiaries against CAI assigned by
LMGC to Airline.
"COLLECTOR" means any Person who is registered with LMGC as a collector of AMRM.
"**** SPONSOR" means, subject to the following sentence, any Sponsor which is
(i) a ****, or (ii) a Person whose principal business is the issuance of ****
to individuals who do not buy goods or services from such Person or its
Affiliates or franchisees. In any event, however, "**** Sponsor" shall not
include **** or **** or any successors thereto (whether by amalgamation,
purchase of assets or otherwise) or replacements (in whole or in part) thereof
as a Sponsor.
"INITIAL PERIOD" means the period from the date hereof to and including December
31, 2002.
"LMGC" means Loyalty Management Group Canada Inc., its successors and permitted
assigns.
"LMG TRAVEL" means LMG Travel Services Limited and its successors.
"**** ROUTE" means (i) any two cities or other locations in Canada between
which Airline or any Regional Airline has non-stop scheduled service, so long
as at least one of the two cities or other locations is not a **** (but in any
event not including any City Pair Served described in Schedule I hereto, as
such Schedule may be amended from time to time in accordance with Section
1.9), and (ii) any **** Route.
"OTHER CLASS" has the meaning set out in Section 1.2(a).
"PERSON" includes an individual and his or her legal representatives, a
corporation, a partnership, a trust, an unincorporated organization, the
government of a country or any political subdivision thereof, or any agency or
department of any such government.
"PROGRAM" means the AIR MILES-TM- program established by LMGC in Canada.
"REGIONAL AIRLINES" means, at any time, each Affiliate of Airline which, at such
time, is an Air Carrier, including for greater certainty, any Air Carrier which
hereafter becomes an Affiliate of Airline (effective as of the date it becomes
an Affiliate of Airline). Without limiting the foregoing, if the CCAA Plan is
approved, CAI shall be deemed to be a Regional Airline, whether or not it is
then an Affiliate of Airline.
"**** ROUTES" means each of the City Pairs Served described in Schedule G
hereto, as such Schedule may be amended from time to time in accordance with
Section 1.9.
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
-3-
"SHORT TERM CAI SUPPLIER AGREEMENT" means the letter agreement made as of the
date hereof between LMGC and CAI providing for the termination of the Terminated
Supplier Agreement and a new short term supplier arrangement between LMGC and
CAI.
"SPECIAL FARES" means the fares set out in Schedule B.
"SPECIAL TICKETS" means tickets (including electronic tickets) for Airline Seats
issued to passengers in connection with the Program.
"SPONSOR" means any Person granted a licence by LMGC or otherwise permitted by
LMGC to issue or arrange for the issuance of AMRM.
"SUBSIDIARY" has the meaning set out in the CANADA BUSINESS CORPORATIONS ACT.
"TERM" means the period from the date hereof to the date this Agreement
terminates.
"TERMINATED SUPPLIER AGREEMENT" means the Supplier Agreement made as of March
15, 1995 between LMGC and CAI, as amended.
"****" means each of ****, ****, ****, ****, ****, ****, ****, ****, ****,
****, **** and ****, and in each case, their regional airports (such as ****
in respect of **** and **** in respect of ****).
"**** ROUTES" means any two cities or other locations between which Airline or
any Regional Airline has non-stop scheduled service, so long as both such
cities or other locations are ****.
"**** CLASS" means the booking class maintained by Airline currently in the
**** of its yield management hierarchy and designated as "**** class", or in
the case of any Regional Airline which utilizes different booking classes, a
booking class that is comparable in all material respects with **** Class, and
in either event, any replacement class therefor established hereunder from
time to time.
The division of this Agreement into Articles and Sections, the
insertion of headings, and the provision of any table of contents are for
convenience of reference only and shall not affect the construction or
interpretation of this Agreement. Unless the context requires otherwise, (i)
words importing the singular include the plural and vice versa and words
importing gender include all genders, and (ii) references in this Agreement to
Sections or Schedules are to Sections or Schedules of this Agreement. Except as
otherwise expressly provided in the Agreement, all dollar amounts referred to in
this Agreement are stated in Canadian dollars. In this Agreement, "including"
means "including, without limitation" and "includes" means "includes without
limitation".
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
SCHEDULE B
SPECIAL FARES
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
PART 1 PART 2 PART 3 PART 4 PART 5
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
2000 2001 2002 2003 2004
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
PEAK OFF PEAK PEAK OFF PEAK PEAK OFF PEAK PEAK OFF PEAK PEAK OFF PEAK
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Domestic SH **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
MH **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
LH **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
Transborder SH **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
MH **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
LH **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
International **** **** **** **** **** **** **** **** **** ****
- ---------------- --- ------ -------- ------ -------- ------ -------- ------ -------- ------ --------
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
- 2 -
Minimum charge for a Peak Period Flight is **** and for an Off-Peak Period
Flight is ****.
For purposes hereof, a flight is "Off Peak" where the first leg of the
outbound flight departs after **** and before **** (or before **** for
bookings made during the Additional Period), excluding any outbound departures
during the period **** to **** inclusive. All other flights are "Peak".
For purposes hereof: (i) an "SH" or "Short Haul Flight" is any flight (other
than an International Flight) of **** miles (based on round trip mileage);
(ii) a "MH" or "Medium Haul Flight" is any flight of (other than an
International Flight) of **** miles (based on round trip mileage); (iii) a
"LH" or "Long Haul Flight" is any flight (other than an International Flight)
of **** or more miles (based on round trip mileage); (iv) a "domestic flight"
is any flight with both origin and destination within Canada, (v) a
"transborder flight" is any flight with an origin within either Canada or the
continental United States to a destination within either Canada or the
continental United States, other than a domestic flight and (vi) an
"International Flight" is any flight which entails flying over the Atlantic or
Pacific Oceans (including any flights to Hawaii, Mexico, Central and South
America) and any other flight which does not have both an origin and a
destination within Canada or the continental United States.
Round trip mileage will be as shown in the SABRE Reservation System, and will be
based on the distance between origin and destination points, regardless of the
segments flown from origin to destination.
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
SCHEDULE C
RESERVATIONS, COMMISSIONS AND TRAVEL RESTRICTIONS
1. Reservations, which must include round trip travel, must be made at
least 14 days, but not more than 330 days, prior to planned departure
date.
2. The return trip must be booked at the time a reservation is made for
the outbound segment.
3. All round trip travel must be completed not later than 315 days after
the date of reservation.
4. No blackout dates will be applicable for booking.
5. All travel must be on a round trip or an open jaw trip basis.
6. Each Special Ticket, which will not include en route stopovers, must
include a Saturday night stayover at destination.
7. Airline shall pay LMGC (or LMG Travel) commissions in respect of sales
of all tickets (including tickets for companion seats, but not
including Special Tickets purchased hereunder at the Special Fares) on
the basis of Airline's standard commission agreement for each calendar
year during the Term. LMGC shall not however be entitled to any
override in connection with sales of Special Tickets or companion
tickets, but shall be entitled to standard travel agency override for
sale of other tickets, including all sales by Extra Miles Travel.
8. All Special Tickets and Special Fares are subject to the tariff
restrictions and Warsaw Convention Limitations, as applicable, with
respect to (but only with respect to) limits of compensation for,
damage to Persons or property.
The restrictions in clauses 1, 3, 5 and 6 shall not apply to tickets purchased
under web specials as contemplated in Section 1.2(c).
SCHEDULE D
OTHER COMMITMENTS
1. Gold Collectors shall receive a discount of 10% off the cost of any
companion tickets purchased through LMGC or any of its Subsidiaries, up
to a maximum of **** return trips each calendar year. For purposes
hereof, a companion ticket means a ticket purchased in conjunction with
the purchase of, and having the same itinerary as, a Special Ticket.
2. During each 12 month period in the Initial Period, Airline shall make
available to LMGC, up to **** return trip Airline Seats, either on
Airline's or a Regional Airline's flights, as selected by LMGC, to be
used in connection with the Canadian Special Olympics. Such Airline Seats
shall be made available to LMGC at the Special Fares. These seats
are subject to regular availability of inventory as per this Agreement and
use thereof by LMGC shall be included in determining bookings made by
LMGC for purposes of Section 1.3 (b) and (c).
3. During each 12 month period in the Initial Period, Airline shall provide
LMGC with **** return trips on City Pairs Served, either on Airline's or a
Regional Airline's flights, to be used in connection with LMGC's Sponsor
activities. Ten such return trips shall be provided to LMGC at no cost to
LMGC and **** such return trips shall be provided to LMGC at a cost
equivalent to AD 75. LMGC and Airline shall mutually agree to the
destinations chosen for such return trips.
4. Airline shall make available to LMGC not less than **** AD's (AD 75's)
(return trip) for each 12 month period of the Term, of which no less than
**** shall be **** Class and the balance shall be **** Class.
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
SCHEDULE E
JOB DESCRIPTION FOR LMGC OMBUDSMAN
OBJECTIVE
To maximize the inventory made available to LMGC under this Agreement.
TASKS
o Liasing between LMGC and Air Canada Revenue Management.
o Reporting availability on Air Canada to LMGC.
o Reporting bookings made on Air Canada to LMGC.
o Trouble-shooting specific capacity issues with Air Canada Revenue
Management.
o Advising and reporting to LMGC of Air Canada's schedule and capacity
planning.
o Identifying capacity opportunities for LMGC.
o Implementing web specials and other potential marketing opportunities
for LMGC at Air Canada.
AIR MILES CONTACT
o Speak with Reward Services at LMGC at least once a week.
o Meet with Reward Services at LMGC at least quarterly, at LMGC offices
in Toronto.
QUALIFICATIONS
Minimum 3 years experience at Air Canada or Canadian Airlines in
revenue management, planning or financial analysis (if possible).
SCHEDULE F
LMGC NEWS RELEASE
FOR IMMEDIATE RELEASE
AIR MILES PROGRAM REACHES AGREEMENT WITH AIR CANADA
COLLECTORS CAN NOW FLY ON CANADIAN AIRLINES AND AIR CANADA
TORONTO, Ontario - April 26, 2000 - The Loyalty Group, operator of the AIR MILES
Reward Program, today announced it has reached an agreement with Canadian
Airlines and Air Canada that will allow it to offer reward flights on both
airlines to AIR MILES Collectors across Canada.
"We are thrilled to be able to continue to offer travel on Canadian Airlines to
our 11 million AIR MILES Collectors, and we welcome Air Canada as a new airline
supplier to the AIR MILES Reward Program," said John Scullion, President and
Chief Executive Officer, The Loyalty Group. "Canadian Airlines has always been a
valued supplier to the Program, and we now look forward to extending that
partnership with Air Canada," he added.
AIR MILES Collectors can continue to redeem their reward miles and book
domestic flights on Canadian Airlines and international flights on our four
other airline partners: American Airlines, KLM, Northwest Airlines and United
Airlines. Collectors can redeem their reward miles for Air Canada flights
beginning in May 2000.
Terms of the agreement are confidential and will not be disclosed. The Loyalty
Group's claim in connection with Canadian Airlines' restructuring plan has been
assigned to Air Canada as part of the new agreement with Air Canada.
The Loyalty Group launched the AIR MILES Reward Program in March 1992,
offering Canadians the opportunity to collect AIR MILES reward miles while
shopping for everyday goods and services. There are over 100 participating
Sponsors across Canada representing over 12,000 retail locations. In addition
to free flights, AIR MILES reward miles can be exchanged for over 100
different rewards from movie passes to attractions to merchandise like
electronics, watches and toys.
For further information, contact:
John Wright
Senior Vice President
The Loyalty Group
(416) 228-6614
SCHEDULE G
**** ROUTES
****
****
****
****
****
****
****
****
****
****
****
****
****
****
****
****
****
****
****
o The above list is non-directional.
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
SCHEDULE H
LMGC PROJECTIONS
Year 2000* - **** round trip Special Tickets
Year 2001 - **** round trip Special Tickets
Year 2002 - **** round trip Special Tickets
*full year
All numbers include the additional **** seats from Schedule D - Section 2.
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
SCHEDULE I
****
[TO BE MUTUALLY AGREED UPON BY PARTIES]
**** PORTIONS OMITTED AND FILED SEPARATELY WITH THE COMMISSION PURSUANT TO A
REQUEST FOR CONFIDENTIAL TREATMENT.
- 1 -
EXHIBIT 10.59
February 9, 2000
Mr. Michael Foley
Utilipro, Inc.
5660 New Northside Drive
Suite 350
Atlanta, Georgia 30328
Re: Utilipro, Inc.
Extra Tenant Improvement Costs
Dear Mr. Foley:
Pursuant to the Lease and at the request of the Tenant, Landlord has agreed and
provided to Tenant and additional tenant improvement allowance ("Additional TI")
for the build out of the premises in the amount of $77,108.00. This amount will
be fully amortized at an annual rate of 13% and to be payable each month for 48
months, beginning January, 2000.
Enclosed you will find an invoice for the amortized monthly amount for January
and February 2000. Beginning March 2000, this additional TI amount will be
reflected on your monthly rental statement.
If you should have any further questions or need additional information, please
do not hesitate to call me at 770-514-9793.
Sincerely,
Carol A. Kratsas
Pope & Land Enterprises, Inc.
cc: Mason Zimmerman
Accounting
Enclosure
Pope & Land Enterprises, Inc.
3225 Cumberland Blvd., FAXED
Suite 400
Atlanta, Georgia 30339
Date: February 9, 2000
Mr. Michael Foley
Utilipro, Inc. Invoice # TI 1/2000
5660 New Northside Drive
Suite 350
Atlanta, Georgia 30328
EXTRA AMORTIZED
TENANT IMPROVEMENT
DESCRIPTION AMOUNT
Total Extra amortized Tenant Improvement
$77,108.00 amortized over 4 years at 13% / yr=$2,068.61 / mo.
January 2000 $2,068.61
February 2000 $2,068.61
---------
TOTAL $4,137.22
Please Note: This is in addition to the tenant improvement charges that you
are currently paying
MAKE Barret Business Center
CHECK
TO
R Pope & Land Enterprise, Inc.
E T 3225 Cumberland Blvd.,
M O Suite 400
I Atlanta, Georgia 30339
T
FIRST AMENDMENT TO LEASE
This First Amendment to Lease ("First Amendment") is entered into by
and between BARRETT BUSINESS CENTER, LLC., a Georgia limited liability company
(hereinafter referred to as "Landlord"), and UTILIPRO, INC. (hereinafter
referred to as "Tenant"), as of November 1, 1999.
WITNESSETH:
WHEREAS, Landlord and Tenant entered into that certain Lease having an
effective date of May 13, 1999, concerning approximately 21,000 rentable square
feet of office space in 100 Barrett Business Center, 2015 Vaughn Road, Kennesaw,
Cobb County, Georgia 30144 as more particularly described therein ("Lease");
WHEREAS, the parties hereto desire to amend the Lease to precisely set
the square footage of the Premises, as defined in the Lease, at 20,068 rentable
square feet, and to amend other terms and conditions as set forth in the Lease;
NOW THEREFORE, for and in consideration of the premises, Ten Dollars
($10.00) in hand paid, and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. The preamble herein set forth is hereby incorporated herein by
reference as if totally set forth herein.
2. The Lease is hereby amended by deleting "21,000 rentable
square feet" in Article 1, Section 1.1-A, and substituting in
lieu therefore "20,068 rentable square feet."
3. The Lease is hereby amended by deleting "sixty-eight percent
(68%)" as contained in Article 1, Section 1.1 1. and
substitute in lieu therefor "sixty-four and 81 / 100 percent
(64.81%)".
4. The Lease is hereby amended by adding the following new
paragraph to Article 1, Section 1.1-K:
"In addition to the Base Rent (including any Net Rent
Escalation) and Additional Rent, Tenant shall pay monthly to
Landlord as additional rent for repayment of additional tenant
improvement allowance over and above the amount provided for
in Paragraph 2, Section 2.01 of Exhibit "B" the amount of Two
Thousand Sixty-Eight and 62/100 Dollars ($2,068.62), which
payment shall commence with the rent payment which is due
November 1, 1999, and shall continue thereafter on the first
day of each succeeding month during the remaining Term of the
Lease."
5. The Lease is hereby amended by deleting in their entirety the
first two sentences as contained in Article 6, Section 6.1 (A)
and by deleting the last sentence in its entirety as contained
in Article 6, Section 6.1 (B).
1
6. The Lease is hereby amended by adding the following new
paragraph to Article 8, Section 8.2:
"Notwithstanding the aforesaid paragraph, and without limiting
the generality of the foregoing, Tenant shall, during the Term
of the Lease, obtain and keep current during the Lease Term a
service maintenance contract on the HVAC System serving the
Premises, at the Tenant's sole cost and expense. The contract
shall be between Tenant and a dealer-authorized company
reasonably acceptable to Landlord, and shall at a minimum
provide for an equipment check and tune-up service each spring
and fall, and filter and lubrication service every three
months. A copy of said contract shall be provided to Landlord,
as well as any modification, extension, renewal or replacement
thereof"
7. The Lease shall remain in full force and effect except as
hereby amended, and the Landlord and Tenant hereby ratify,
affirm, and confirm the terms of the Lease, as hereby amended.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First
Amendment to be executed under seal by their respective duly authorized
officers as of the date and year first above written.
LANDLORD:
BARRETT BUSINESS CENTER, LLC, a Georgia
limited liability company
BY: AMLI LAND DEVELOPMENT-I
LIMITED PARTNERSHIP, an Illinois
limited partnership,
Managing Member
By: Amli Realty Co., a Delaware
corporation, its sole general partner
By: /s/ PHILIP N. TAGUE
------------------------------------
Philip N. Tague, Executive Vice
President
(CORPORATE SEAL)
[SIGNATURES ON FOLLOWING PAGE
2
TENANT:
UTILIPRO, INC.
By: /s/ ILLEGILBE
-----------------------------------
Title: CHAIRMAN
--------------------------------
Attest:
--------------------------------
Title:
--------------------------------
(CORPORATE SEAL)
3
- ------------------------------------------------------------------
LEASE FOR BARRETT BUSINESS CENTER
BUILDING 100
- ------------------------------------------------------------------
LEASE AGREEMENT
BARRETT BUSINESS CENTER
KENNESAW, GEORGIA
BY AND BETWEEN
BARRETT BUSINESS CENTER, LLC
A GEORGIA LIMITED LIABILITY COMPANY
AND
UTILIPRO, INC.
("TENANT")
DATED: MAY 13, 1999
--------------------------------------
1
LEASE AGREEMENT
THIS LEASE AGREEMENT (this "LEASE") is made and entered into as of the
__ day of _________, 1999 by and between BARRETT BUSINESS CENTER, LLC, a Georgia
limited liability company ("LANDLORD"), and UTILIPRO, INC., a Georgia
corporation ("TENANT"), upon all the terms set forth in this Lease and in all
exhibits and riders hereto, to each and all of which terms Landlord and Tenant
hereby mutually agree, and in consideration of One Dollar ($1.00) and other
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and of the rents, agreements and benefits flowing between the
parties hereto, as follows:
ARTICLE 1. BASIC LEASE INFORMATION AND CERTAIN DEFINITIONS.
SECTION 1.01 Each reference in this Lease to information and
definitions contained in the Basic Lease Information and Certain Definitions and
each use of the terms capitalized and defined in this Section shall be deemed to
refer to, and shall have the respective meaning set forth in, this Section.
A. Premises: Approximately 21,000 rentable square feet located in the
Building, as identified on the floor plan attached hereto as
EXHIBIT "A".
B. Building: The building known as Building 100 Barrett Business Center,
_________________, Kennesaw, Georgia ___________.
C. Land: That certain parcel of land upon which the Building is located.
D. Project: The Land and all improvements thereon, including the Building,
the Parking Facilities, known as Barrett Business Center.
E. Commencement Date: As set forth in Section 3.1 hereof.
F. Term: Seven (7) years, commencing on the Commencement Date. [THE
WORD "TERM" SHALL ALSO INCLUDE ANY RENEWAL TERM UNLESS THE
"INITIAL 7 YEAR TERM" IS SPECIFIED.]
G. Renewal Term: As set forth in EXHIBIT "C" hereof.
H. Net Rentable Area
of the Building: Approximately 30,964 square feet.
I. Tenant's Share: Approximately sixty-eight percent (68%) representing the
ratio that the Net Rentable Area of the Premises
1
bears to the Net Rentable Area of the Building, subject
to adjustment pursuant to the express terns hereof.
J. Rent: The Base Rent and the Additional Rent.
K. Base Rent: The initial Base Rent rate per square foot of the Net
Rentable Area of the Premises is:
Base Rent/RSF Net Rent Taxes Insurance CAM Total Rent
Year 1 $11.50 .75 .07 .40 $12.72
L. Net Rent Escalation: The Net Rent rate per square foot of Net Rentable Area of
the Premises shall be increased at the expiration of each
twelve (12) month period of the Term by three percent (3%)
of the Net Rent rate applicable during the then expiring
twelve (12) month period.
M. Additional Rent: The Additional Rent shall be all other sums due and payable
by Tenant under the Lease, including, but not limited to,
Tenant's Share of Operating Costs over the Base Year 2000.
N. Base Year: The Base Year for purposes of calculating Tenant's Share of
Operating Costs is 2000.
O. Tenant's Permitted Uses: Tenant may use the Premises only for general office purposes
for the conduct of Tenant's business.
P. Security Deposit: Amount equal to first month's rent paid simultaneously with
the execution of this Lease, to be held by Landlord as
security until the expiration of the Term as set forth in
Section 21.13 hereof.
Q. Tenant Improvement Allowance: $25.00/RSF, as set forth in Paragraph 2 of Exhibit "B".
R. Broker(s): Tenant's Broker: Carter & Associates, L.L.C.
Landlord's Broker: Pope & Land Enterprises, Inc.
S. Landlord's Address for Notice: Barrett Business Center, LLC
c/o Pope & Land Enterprises, Inc.
3225 Cumberland Circle NW, Ste. 400
Atlanta, Georgia 30339
Attention: Mr. H. Mason Zimmerman
2
WITH A COPY TO:
Wilson Brock & Irby, L.L.C.
Overlook I, Suite 700
2849 Paces Ferry Road
Atlanta, Georgia 30339
Attention: Lethco H. Brock, Jr., Esq.
T. Landlord's Address for Barrett Business Center, LLC
Payment: c/o Pope & Land Enterprises, Inc.
3225 Cumberland Circle, NW, Ste. 400
Atlanta, Georgia 30339
Attention Accounting Dept.
U. Tenant's Address for Notice:
UTILIPRO, INC.
c/o Mr. Michael Foley
5665 New Northside Drive, Suite 350
Atlanta, Georgia 30328
WITH A COPY TO:
Aitkens & Aitkens, P.C.
c/o Mr. Robert G. Aitkens
1827 Powers Ferry Road
Building One, Suite 100
Atlanta, Georgia 30339
WITH A COPY TO:
Carter & Associates, L.L.C.
c/o Mr. Richard W. Courts, IV
1275 Peachtree Street, NE
Atlanta, Georgia 30367-1801
ARTICLE 2. PREMISES; COMMON AREAS. Subject to the terms hereof,
Landlord hereby leases the Premises to Tenant, and Tenant hereby rents and
hires the Premises from Landlord, for the Term. During the Term, Tenant shall
have the right to use, in common with others and in accordance with this Lease
and the Rules and Regulations, the Common Areas. "Common Areas" shall mean all
areas, spaces, facilities and equipment (whether or not located within the
Building, made available by Landlord for the common and joint use of Landlord,
Tenant and others designated by Landlord using or occupying space in the
Building, including but not limited to, tunnels, walkways, sidewalks and
driveways necessary for access to the Building, Building lobbies, landscaped
areas, public corridors, public rest rooms, Building stairs, elevators open to
the public, service elevators (provided that such service elevators shall be
available only for tenants of the Building and others designated by Landlord),
drinking fountains and any such other areas and facilities as are designated
by Landlord from time to time as Common Areas. "Service Corridors" shall mean
all loading docks, loading areas and ail
3
corridors that are not open to the public but which are available for use by
Tenant and others designated by Landlord. "Service Areas" shall mean areas,
spaces, facilities and equipment serving the Building (whether or not located
within the Building) but to which Tenant and other occupants of the Building
will not have access, including, but not limited to mechanical, telephone,
electrical and similar rooms and air and water refrigeration equipment. Tenant
is hereby granted a non-exclusive right to use the Common Areas and Service
Corridors during the term of this Lease for their intended purposes, in common
with others designated by Landlord, subject to the terms and conditions of
this Lease, including, without limitation, the Rules and Regulations. The
Building, Common Areas, Service Corridors and Service Areas will be at all
times under the exclusive control, management and operation of the Landlord.
Tenant agrees and acknowledges that the Premises (whether consisting of less
than one floor or consisting of one or more full floors within the Building)
do not include, and Landlord hereby expressly reserves for its sole and
exclusive use, any and all mechanical, electrical, telephone and similar
rooms, janitor closets, elevator, pipe and other vertical shafts and ducts,
flues, stairwells, any area above the acoustical ceiling and any other areas
not specifically shown on EXHIBIT "A" as being part of the Premises.
Notwithstanding anything to the contrary contained herein, Landlord shall have
the unrestricted right to make changes to or to reconfigure all portions of
the Project (excluding the Premises, except for structural elements and load
bearing elements within the Premises), including, without limitation, the
Common Areas, in Landlord's reasonable discretion (provided that any such
reconfiguration will be in conformity with the overall quality of the
Project), and Landlord shall have the right to close, from time to time, the
Common Areas and other portions of the Project for such temporary periods as
Landlord deems legally sufficient to evidence Landlord's ownership and control
thereof and to prevent any claim of adverse possession by, or any implied or
actual dedication to, the public or any party other than Landlord.
ARTICLE 3. TERM; COMMENCEMENT DATE; DELIVERY AND ACCEPTANCE OF
PREMISES.
SECTION 3.01 The Commencement Date shall be October 8, 1999. Landlord
shall deliver the Premises to Tenant on or before May 8, 1999, ("Delivery
Date"). Tenant shall begin paying Rent on the Commencement Date and between
the Delivery Date and Commencement Date Tenant shall not pay any Rent.
SECTION 3.02 Landlord at its sole cost and expense shall cause the
Leasehold Improvements to be constructed and installed, and the Premises to be
delivered to Tenant, pursuant to the terms of EXHIBIT "B".
ARTICLE 4. RENT.
SECTION 4.01 Tenant shall pay to Landlord, without notice, demand, or
deduction in lawful money of the United States of America, at Landlord's Address
for Payment, or at such other place as Landlord shall designate in writing from
time to time: (a) the Base Rent in equal monthly installments, in advance, on or
before the fifth day of each calendar month during the Term; and (b) the
Additional Rent, at the respective times required hereunder. The first monthly
installment of Base Rent hereof shall be paid in advance on the date of Tenant's
execution of this Lease and applied to the first installment of Base Rent coming
due under this Lease. Payment shall begin on the Commencement Date; provided
however, that if either the Commencement
4
Date or the expiration of the Term falls on a date other than the first day of
a calendar month, the Rent due for such fractional month shall be prorated on
a per diem basis between Landlord and Tenant so as to charge Tenant only for
the portion of such fractional month failing within the Term. Tenant's
covenant to pay Rent hereunder is independent of any other covenant,
condition, provision or agreement herein contained. All installments of Rent
past due more than two (2) times in any twelve (12) month period shall be
subject to a late charge of five percent (5%) of the past due amounts. If
Tenant's rental payment is past due more than (10) times throughout the Term
(and in any event if the Rent is more than 30 days late), the Base Rent and
past due amounts shall bare additional interest until paid at a rate per annum
(the "Interest Rate") equal to eighteen percent (18%). The late charge is
intended to reimburse Landlord for administrative costs incurred by Landlord
as a result of Tenant's late payment, and is not a penalty.
SECTION 4.02 On the first annual anniversary of the Commencement
Date, and on each and every annual anniversary of the Commencement Date
thereafter during the Term, the Base Rent shall be increased a specified in
SECTION 1.1(L).
SECTION 4.03 As used in this Lease, the term "LEASE YEAR" shall mean
a calendar year during the Term, except that the first Lease Year shall be the
period commencing on the Commencement Date and expiring upon the expiration of
the calendar year in which the commencement Date occurs and the final Lease
Year shall expire upon the expiration of the. Term. If the first or final
Lease Year is less than twelve (12) months, all prorations shall be based upon
a 365 day year.
ARTICLE 5. OPERATING COSTS.
SECTION 5.01 Tenant shall pay to Landlord, on a per square foot
basis, as Additional Rent, for each calendar year or fractional calendar year
during the Term, the amount ("TENANT'S OPERATING COSTS PAYMENT"), if any,
that Tenant's Share of Operating Costs exceeds Base Year Operating Costs.
Tenant's Operating Costs Payment shall be calculated and paid as follows:
A. For each calendar year during the Term, commencing January 1,
2000, not less than thirty (30) days prior to the commencement of such
calendar year, Landlord shall furnish Tenant with an itemized statement
("LANDLORD'S OPERATING COSTS ESTIMATE") setting forth Landlord's reasonable
estimate of Operating Costs for the forthcoming year and Tenant's Share of
Operating Costs in excess of the Base Year Operating Costs. On the first day
of each calendar month during such year, Tenant shall pay to Landlord
one-twelfth (1/12th) of Tenant's Operating Costs Payment. If for any reason
Landlord has not provided Tenant with Landlord's Operating Costs Estimate on
the first day of January of any year during the Term, then (a) until Tenant is
given Landlord's Operating Costs Estimate, Tenant shall continue to pay to
Landlord the sum, if any, payable by Tenant for the preceding year, and (b)
promptly after Landlord's Operating Costs Estimate is furnished to Tenant, (i)
if there shall be a deficiency, Tenant shall pay the amount thereof to
Landlord within thirty (30) days after the delivery of Landlord's Operating
Costs Estimate, or (ii) if there shall have been an overpayment, Landlord
shall apply such overpayment as a credit against the next accruing monthly
installment(s) of Additional Rent due from Tenant under this Section 5.1, and
(iii) on the first day of the calendar month following the month in which
Landlord's Operating Costs Estimate is given to Tenant and on the first day of
each calendar month throughout the remainder of such year, Tenant shall pay to
Landlord an
5
amount equal to one-twelfth (1/12th) of Tenant's Operating Costs Payment.
Landlord shall have the right from time to time during any year but not more
than twice annually to notify Tenant in writing of any reasonable change in
Landlord's Operating Costs Estimate, in which event the monthly installment of
Tenant's Operating Costs Payment payable for each of the remaining months of
the year shall be adjusted to reflect the amount shown in such notice, which
adjustment of such monthly installment shall be effective on the first day of
the month following Landlord's giving of such notice.
B. For each calendar year during the Term commencing with January 1,
2001, within ninety (90) days following the end of the previous calendar year,
Landlord shall furnish Tenant with a statement of the actual Operating Costs,
and Tenant's Share of actual Operating Costs in excess of the Base Year
Operating Costs for the preceding year. Within thirty (30) days after
Landlord's giving of such statement, Tenant shall make a lump sum payment to
Landlord in the amount, if any, by which Tenant's Operating Costs Payment for
such preceding year as shown on Landlord's statements exceeds the aggregate of
the monthly installments of Tenant's Operating Cost Payment paid during such
preceding year. If Tenant's Operating Costs Payment, as shown on Landlord's
statement, is less than the aggregate of the monthly installments of Tenant's
Operating Costs Payment actually paid by Tenant during such preceding year,
then Landlord shall apply such amount to the next accruing installment(s) of
Base Rent and Additional Rent due from Tenant under this SECTION 5.1. until
fully credited to Tenant.
SECTION 5.02
A. "OPERATING COSTS" shall mean all direct costs, expenses and
disbursements of every kind and nature (computed on the accrual basis and in
accordance with generally accepted accounting principles and sound management
principles consistently applied) incurred or paid in connection with the
ownership, management, operation, repair and maintenance of the Project, and
an equitable pro rata share of such costs, expenses and disbursements related
to certain common areas or improvements located or to be located in the
Project. Operating Costs shall include, but not be limited to, the following:
(i) wages, salaries, and other compensation payable to all on and off-site
employees of Landlord directly involved with the operation of the Project, and
Landlord's managing agent engaged either full or part time in the operation,
management, or access control of the Project and payroll taxes, social
security taxes, unemployment insurance taxes, and insurance costs relating to
such employees, all reasonably allocated based upon the time such employees or
agents are engaged directly in providing such services; (ii) the cost of all
supplies, tools, equipment, uniforms and materials used in the operation,
management, maintenance and access control of the Building or the Land; (iii)
the cost of all common area utilities, including but not limited to the cost
of electricity, telephone (voice/data), gas, water, sewer services and power
for heating, lighting, air conditioning and ventilating; (iv) the cost of all
maintenance and service agreements and the equipment therein, including but
not limited to security service, window cleaning, landscaping maintenance and
reasonable and customary landscaping replacement; (v) the cost of repairs and
general maintenance to the improved Land; (vi) costs of all repairs,
alterations, additions, changes, and replacements required by any law or any
governmental regulation that are not required as of the date hereof by such
law or regulation as presently interpreted and enforced, which items shall not
include structural changes, regardless of whether such costs when incurred,
are classified as capital expenditures (to the extent that any of the
foregoing costs should be capitalized in accordance with generally
6
accepted accounting principles), such costs shall be amortized over the lesser
of (i) their respective useful lives or (ii) the reasonably estimated payback
period, which are (a) for the purpose of promoting safety, (b) reducing
Operating Expenses, or (c) required by applicable law, ordinance, code, rule
or regulation of a governmental authority and not required by same as
interpreted and enforced as of the date of this Lease; (viii) the premiums of
all insurance, including casualty, rental abatement and liability insurance
applicable to the Project; (ix) the cost of trash and garbage removal, vermin
extermination, and snow, ice and debris removal; (x) the cost of legal and
accounting services incurred by Landlord in connection with the management,
maintenance, operation and repair of the Project, excluding Landlord's general
accounting, such as partnership statements and tax returns, and excluding
legal expenses arising out of the negotiation of any lease affecting the
Project and the enforcement of the provisions of any lease affecting the
Project; (xi) the direct cost of operating the management office for the
Project, including the cost of office supplies, telephone expenses and rent;
(xii) and Taxes.
B. "TAXES" shall mean all taxes, assessments and government charges
levied or assessed with respect to the Project, whether federal, state, county
or municipal and whether they be by taxing districts or authorities presently
taxing the Project or by others subsequently created or otherwise, and any
other taxes and assessments attributable to the Project or its operation (and
the costs of contesting any of the same), including community improvement
district taxes and/or assessments and business license taxes and fees, and any
assessments imposed on personal property of Landlord, excluding, however, the
following: (i) taxes and assessments imposed on the personal property of the
tenants of the Project; (ii) taxes imposed on the leasehold improvements of
tenants of the Project (but only if and to the extent the applicable taxing
authority separately assesses the leasehold improvements of all tenants of the
Project); (iii) federal, state and local taxes on income; (iv) death taxes;
(v) franchise, gift, transfer, excise, capital stock, succession, estate and
inheritance taxes; (vi) any taxes (other than business licenses taxes and
fees) imposes or measured on or by the income of Landlord from the operation
of the Project; and (vii) any fines, penalties or increased interest charged
due to Landlord's failure to pay taxes and assessments in a timely fashion. If
at any time during the Lease term, the present method of taxation or
assessment shall be changed such that as a substitute for or in addition to
the whole or any part of the taxes, assessments, levies, impositions or
charges now levied, assessed or imposed on real estate and the improvements
thereon, taxes, assessments, levies, impositions or charges shall be levied,
assessed and/or imposed wholly or partially as a capital levy or otherwise on
the rents received from the Project or the rents reserved herein or any part
thereof, then such substitute or additional taxes, assessments, levies,
impositions or charges to the extent so levied, assessed or imposed, shall be
paid by Tenant to the extent attributable to the Rent payable hereunder by
Tenant or reserved herein. It is agreed by Tenant that Tenant will be
responsible for ad valorem taxes on its personal property, and Tenant will be
responsible for ad valorem taxes on the value of the leasehold improvements in
the Premises (but only if and to the extent the taxing authority separately
assesses the leasehold improvements of all tenants of the Project). In the
event Landlord receives a refund of Taxes attributable to Taxes during the
Term for which Tenant paid its Tenant's Share, Landlord shall pay to Tenant by
a credit against Rent an equitable portion of such refund (less any costs
incurred or paid by Landlord in connection with obtaining such refund) to
Tenant based on the portion of such taxes previously paid by Tenant, or in the
event the Lease has expired through the Term, then in that event Landlord
shall reimburse Tenant any such refund of Taxes in the form of a cash payment.
7
C. "OPERATING COSTS" shall not include the following: (a) specific
costs for any capital repairs, capital replacements or capital improvements,
except as provided herein; (b) expenses for which Landlord is reimbursed or
indemnified (either by an insurer, condemnor, tenant, warrantor or otherwise)
to the extent of funds received by Landlord, or, in the event Landlord fails
to maintain the insurance required to be maintained by Landlord hereunder, to
the extent of funds that Landlord could reasonably have expected to recover
under such required insurance as reimbursement for such expenses; (c) expenses
incurred in leasing or procuring tenants (including lease commissions,
advertising expenses, and expenses of renovating or otherwise preparing space
for occupancy by tenants); (d) interest or amortization payments on any
mortgages; (e) net base rents under ground leases; (f) costs specifically
billed to and paid by specific tenants in addition to such tenants' pro rata
share of Operating Costs; (g) any amounts for depreciation or amortization,
except as permitted herein; (h) the cost of any interior painting or
decorating, other than in Common Areas or areas generally open to the public;
(i) the cost of any sculpture, painting or other objects of art; (j) any
political or charitable contributions; (k) the cost of enforcing any leases
and other expenses incurred in connection with negotiations or disputes with
tenants, other occupants, or prospective tenants; (l) legal fees or other
professional or consulting fees except general accounting for the Project (but
not accounting related to the preparation or filing of income tax returns or
responding to income tax audits); (m) any cost incurred by Landlord in order
to comply with governmental laws, ordinances, codes, rules or regulations to
the extent such compliance action is presently required by such laws,
ordinances, codes, rules, or regulations as interpreted and enforced as of the
date hereof; or (n) any cost associated with any building other than the
Building. There shall be no duplication of costs.
D. Notwithstanding anything to the contrary contained herein, and in
addition to the costs and charges contemplated by this SECTION 5.2, in the
event that any cost or item that is included within the term "Operating Cost"
is attributable to, or supplied primarily for the benefit of, Tenant, then
Landlord reserves the right to charge such cost directly to Tenant and
increase Tenant's Share of Operating Costs by such amount. Any such amount
shall be due and payable by Tenant hereunder as Additional Rent within thirty
(30) days of written notice from Landlord specifying the amount of such
additional costs and the reasons for attributing them directly to Tenant.
SECTION 5.03 INTENTIONALLY DELETED
SECTION 5.04 Tenant and Landlord agree that the components of common
area maintenance ("CAM") shall be as follows: parking lot clean-up,
landscaping, maintenance, periodic services, allocation of basic periodic
maintenance of Vaughn Pond, signage maintenance, common area electrical, and
irrigation.
ARTICLE 6. SERVICES OF LANDLORD.
SECTION 6.01 Provided there exists no event of default on behalf of
Tenant, Landlord agrees to furnish or cause to be furnished to the Premises,
the following services, subject to all other provisions of this Lease:
A. HEAT AND AIR CONDITIONING: Landlord shall cause to be furnished
seasonable air conditioning and heating during Business Hours, at such
temperatures and in such amounts as is
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customary in buildings of comparable size, quality and in the general vicinity
of the Building, with such adjustments as Landlord reasonably deems necessary
for the comfortable occupancy of the Premises, subject to any governmental
requirements, ordinances, rules, regulations, guidelines or standards relating
to, among other things, energy conservation. Upon reasonable notice, Landlord
shall make available, at Tenant's expense, after hours heat or air
conditioning. The heating, air conditioning and ventilation system shall have
the capability of maintaining 35% relative humidity at 78 degrees F. during
the summer season and at 72 degrees F. during the winter season and of
providing 20 cubic feet per minute of ventilation per person at an occupancy
density not exceeding seven persons for each 1,000 rentable square feet of the
Building.
B. ELECTRICITY. Landlord shall cause to be furnished to the common
area of the Building electric current for Building standard lighting. Tenant
shall not use electric current in excess of the capacity of the feeders or
lines to the Building or the risers or wiring installation of the Building or
the Premises. Tenant shall be responsible for the cost of all electric service
to the Premises which shall be metered separately. Landlord shall be
responsible for all Building standard fluorescent bulb replacement in all
areas and all incandescent bulb replacement in Building standard exit signs,
public areas, toilet and restroom areas and stairwells.
C. WATER. Landlord shall cause to be furnished water for drinking,
cleaning and lavatory purposes only.
D. JANITORIAL SERVICES. Tenant, at its sole cost and expense, shall
provide its own janitorial services to the Premises.
SECTION 6.02 No interruption or stoppage of the services referred to
in this ARTICLE 6 within Landlord's reasonable control, including, without
limitation, utilities, shall make Landlord liable in any respect for damages
to any person, property or business, or be construed as an eviction of Tenant,
or entitle Tenant to any abatement of Rent or other relief from any of
Tenant's obligations under this Lease, unless such failure shall persist due
to Landlord's gross negligence or willful misconduct and/or wrongful
misconduct for an unreasonable time or forty-eight (48) hours after receipt of
written notice of such failure is given to Landlord by Tenant, whichever comes
first. Landlord's obligation to furnish electrical and other utility services
shall he subject to the rules and regulations of the supplier of such
electricity or other utility services and the rules and regulations of any
municipal or other governmental authority regulating the business of providing
electricity and other utility services. Notwithstanding the above, Landlord
shall use reasonable efforts to remedy any interruption or stoppage of the
services referred to in this Article 6.
ARTICLE 7. ASSIGNMENT AND SUBLETTING. Neither Tenant nor its legal
representatives or successors in interest shall, by operation of law or
otherwise, assign, mortgage, pledge, encumber or otherwise transfer this Lease
or any portion thereof, or the interest of Tenant under this Lease, or enter any
sublease with respect to the Premises, or any portion thereof, without the prior
written consent of Landlord which consent shall not be unreasonably withheld
conditioned or delayed except when the Landlord has available comparable sized
space to be leased in the Building. The Premises or any part thereof shall not
be occupied or used for any purpose by anyone other than Tenant, without
Tenant's obtaining in each instance the prior
9
written consent of Landlord, which consent shall not be unreasonably withheld,
conditioned or delayed. No acceptance by Landlord of any Rent or any other sum
of money from any assignee, subtenant or other transferee shall be deemed to
constitute Landlord's consent to any assignment, sublease, mortgage, pledge,
encumbrance or other transfer. Tenant acknowledges and agrees that any consent
by Landlord pursuant to this ARTICLE 7 shall not be deemed to be a consent to
any subsequent assignment, sublease, mortgage, pledge, encumbrance or any
other agreement or other action to which Landlord's consent is required,
whether or not such consent by Landlord shall expressly limit the application
thereof to the consent then being given. In no event whatsoever shall Tenant
sublet, assign or otherwise endeavor to transfer any interest of Tenant in
this Lease to any other tenant of space in the Building. Any attempted
assignment or sublease (except as hereinafter provided) by Tenant in violation
of the terms and provisions of this Article 7 shall be void and shall
constitute a material breach of this Lease. In no event shall any assignment,
subletting, mortgage, pledge, encumbrance or other transfer, whether or not
with Landlord's consent, relieve Tenant of its primary liability under this
Lease for the entire Term, and Tenant shall in no way be released from the
full and complete performance of all the terms hereof. Subletting or
assignment rental rates shall not be less than the then current fair market
rental rates (including components thereof for the term, tenant improvements,
lease commissions and concessions) for similar space in similar projects in
the Northwest Atlanta market, provided that Landlord has unleased space in the
Project. Landlord and Tenant shall split 50/50 all such rental in excess of
the Rent payable by Tenant hereunder net of any costs associated with such
sublease or assignment including Tenant Improvements, commissions, legal fees
and other concessions.
If Landlord provides Tenant prior written consent to assign or
sublease all or any portion of the Premises to a non-affiliated entity or
independent third party, Landlord shall, at its option, have the right to
terminate Tenant's Lease as to such portion of the Premises by providing
Tenant notice of such termination within five (5) days of providing Tenant
such written consent. Tenant agrees to surrender the Premises in accordance
with Article 17 hereof and failure by Tenant to comply with Article 17 hereof
shall give rise to a default under this Lease and Landlord shall have the
right to exercise any and all remedies provided in this Lease and at law or in
equity.
Notwithstanding anything hereinabove contained, provided that Tenant
is not in default under the Lease and gives Landlord written notice, Tenant
shall have the right to sublet or assign all or part of the Premises without
Landlord's prior consent to any and all affiliates, subsidiaries, sister
companies or any entity in which Tenant or Tenant's parent company has a
controlling interest, or parent of Tenant. For non-affiliated entities,
Landlord shall not unreasonably withhold, condition or delay the approval of
any proposed sublease, so long as the sublessee's use of the Premises and
creditworthiness is the same or better than Tenant's at the execution of this
Lease. Tenant's foregoing rights of sublease shall apply to the Initial Term
and any Renewal Terms.
ARTICLE 8. REPAIRS, MAINTENANCE.
SECTION 8.01 Tenant shall, at Tenant's sole cost and expense, (i)
maintain and keep the interior of the Premises (including, but not limited to,
all fixtures, walls, ceilings, floors, doors, interior windows and equipment
which are a part of the Premises) in good repair and condition,
10
(ii) repair or replace any damage or injury done to the Building or any other
part of the Project caused by Tenant, Tenant's agents, employees, licensees,
invitees or visitors or resulting from a breach of its obligations under this
SECTION 8.1 or SECTION 8.2 or (iii) indemnify and hold Landlord harmless from
any and all costs, expenses (including reasonable attorneys' fees), claims
and causes of action arising from or incurred by and/or asserted in
connection with such maintenance, repairs, replacements, damage or injury or
Tenant's breach of its obligations under this SECTION 8.1 or SECTION 8.2. It
is hereby understood and agreed that this provision shall not eliminate
Landlord's obligation with respect to latent defects in and around the
Building or Premises for a one (1) year period commencing on the Delivery
Date. All repairs and replacements performed by or on behalf of Tenant shall
be performed in a good and workmanlike manner and in accordance with the
standards applicable to alterations or improvements performed by Tenant.
Tenant shall continue to pay Rent, without abatement, during any period that
repairs or replacements are performed or required to be performed by Tenant
under this SECTION 8.1 or SECTION 8.2. In the event Tenant fails after 30
days written notice from Landlord, and in the reasonable judgment of Landlord
to maintain the Premises in good order, condition and repair, ordinary wear
and tear expected, or otherwise satisfy its repair and replacement
obligations under this SECTION 8.1 or SECTION 8.2, Landlord shall, after
thirty (30) days prior written notice to Tenant, have the right to perform
such maintenance, repairs and replacements at Tenant's expense, but with
Tenant's written agreement to the cost estimate, which written agreement of
Tenant will not unreasonably be withheld by Tenant. Tenant shall pay to
Landlord on demand any such cost or expense incurred by Landlord, together
with interest thereon at the Interest Rate from the date of demand until paid.
SECTION 8.02 All Repairs made by Tenant pursuant to SECTION 8.1
shall be performed in a good and workmanlike manner by contractors or other
repair personnel selected by Tenant, which contractors and repair personnel
are approved in advance, in writing, by Landlord, which approval will not
unreasonably be withheld by Landlord, provided, however, that neither Tenant
nor its contractors or repair personnel shall be permitted to do any work
affecting (i) the structural components of the Building, or (ii) the heating,
ventilation, air conditioning system, the electrical system, any mechanical
system, the plumbing system, the fire/life/safety system, or any other system
of the Building (collectively the "SYSTEMS"). In no event shall such work be
done for Landlord's account or in a manner which allows any liens to be filed
against the Project, or any portion thereof. To the extent any repairs
involve the making of alterations to the Premises, Tenant shall comply with
the provisions of ARTICLE 9.
SECTION 8.03 Subject to ARTICLES 13 AND 14 hereof, Landlord shall
maintain, or cause to be maintained, the Common Areas, including but not
limited to, the Building entrance and parking areas and the grounds
surrounding and adjacent to the Building, the roof, foundation, the
structural soundness of the exterior structural walls of the Building, the
exterior Building glass, the heating, air conditioning and ventilation
system(s) installed by Landlord and serving the Premises, and the plumbing
and electrical systems serving the Premises in good repair, ordinary wear and
tear excepted.
ARTICLE 9. ALTERATIONS.
SECTION 9.01 Tenant shall not make any alterations to the Premises
without first obtaining Landlord's written consent thereto, which consent may
not be unreasonably withheld,
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conditioned or delayed. Notwithstanding the foregoing, in the event any such
proposed alteration would, in the reasonable judgment of Landlord, affect any
structural components of the Building or any of the Systems, Landlord may
withhold its consent to any such alteration in its sole discretion. Without
in any way limiting Landlord's consent rights, Landlord shall not be required
to give its consent until (a) Landlord is satisfied that the contractor or
person proposed by Tenant to make such alterations (the "CONTRACTOR"), and
the insurance coverage to be provided by Contractor in connection with the
work, are reasonably acceptable to Landlord, (b) Landlord approves final and
complete plans and specifications for the work and (c) the appropriate
governmental agency has approved the plans and specifications for such work.
Upon Tenant's receipt of written approval from Landlord and any required
approval of any mortgagee or lessor of Landlord and any such governmental
agency, and upon Tenant's payment to Landlord of any fees charged by any
mortgagee or lessor of Landlord for such review and approval, Tenant shall
have the right to proceed with the construction of all approved alterations,
but only so long as such alterations are made by the Contractor reasonably
acceptable to Landlord in strict compliance with the plans and specifications
so approved by Landlord and with the provisions of this ARTICLE 9. All
alterations shall be made at Tenant's sole cost and expense. Tenant shall
keep the Project, the Building and the Premises and Landlord's interest
therein free from any liens arising from any work performed, materials
furnished, or obligations incurred by, or on behalf of, Tenant (other than by
Landlord pursuant to this Lease). Notice is hereby given that neither
Landlord nor any mortgagee or lessor of Landlord shall be liable for any
labor or materials furnished to Tenant except as famished to Tenant by
Landlord pursuant to this Lease. If any lien is filed for such work or
materials, such lien shall encumber only Tenant's interest in leasehold
improvements on the Premises. Within ten (10) business days after Tenant
learns of the filing of any such lien, Tenant shall notify Landlord of such
lien and shall either discharge and cancel such lien of record or post a bond
sufficient under the laws of the State of Georgia to cover the amount of the
lien claim plus any penalties, interest, attorney's fees, court costs, and
other legal expenses in connection with such lien. If Tenant fails to so
discharge or bond over such lien within twenty (20) days after the earlier of
Tenant becoming aware of such lien or written demand from Landlord, Landlord
shall have the right, at Landlord's option, to pay the full amount of such
lien without inquiry into the validity thereof, and Landlord shall be
promptly reimbursed by Tenant, as Additional Rent, for all amounts so paid by
Landlord, including expenses, interest, and attorneys' fees.
SECTION 9.02 All construction, alterations and repair work done by
or for Tenant shall: (a) be performed in such a manner as to maintain
harmonious labor relations; (b) not adversely affect any structural component
of the Building or any of the Systems or the safety of the Project, the
Building or the Premises; (c) comply with all building, safety, fire,
plumbing, electrical, and other codes and governmental and insurance
requirements, including, without limitation, ADA requirements; (d) not result
in any usage in excess of building standard of water, electricity, gas, or
other utilities or of heating, ventilating or air-conditioning (either during
or after such work) unless prior written arrangements satisfactory to
Landlord are made with respect thereto: (e) be completed promptly and in a
good and workmanlike manner; and (f) not unreasonably disturb Landlord or
other tenants in the Building. After completion of any alterations to the
Premises, Tenant will deliver to Landlord a copy of "as built" plans and
specifications depicting and describing such alterations.
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SECTION 9.03 Landlord hereby reserves the right and at all times
shall have the right to repair, change, redecorate, alter, improve, modify,
renovate, enclose or make additions to any part of the Project (including
structural elements and load bearing elements within the Premises) and to
enclose and/or change the arrangement and/or location of driveways or parking
areas or landscaping or other Common Areas all without being held guilty of
an actual or constructive eviction of Tenant or breach of the implied
warranty of suitability or of any term of this Lease and without an abatement
of Rent. Without in any way limiting the generality of the foregoing
Landlord's rights shall include, but not limited to the right to perform, or
cause the performance of, the following: (i) construct scaffolding and other
structures and perform all work and other activities associated with such
changes, alterations, improvements, modifications, renovations, and/or
additions; (ii) repair, change, renovate, remodel, alter, improve, modify or
make additions to the arrangement, appearance, location and/or size of
entrances or passageways, doors, and doorways, corridors, elevators, elevator
lobbies, stairs, toilets or other Common Areas or Service Areas; (iii)
temporarily close any Common Area and/or temporarily suspend Building
services and facilities in connection with any repairs, changes, alterations,
modifications, renovations or additions to any part of the Building; (iv)
repair, change, alter or improve plumbing, pipes and conduits located in the
Building, including without limitation, those located within the Premises,
the Common Areas, the Service Corridors or the Service Areas; and (v) repair,
change, modify, alter, improve, renovate or make additions to the structural
components of the Building or the Systems, or any portion thereof. When
exercising the rights herein, Landlord will use good faith efforts not to
interfere with Tenant's use and occupancy of the Premises.
ARTICLE 10. USE AND COMPLIANCE WITH LAWS.
SECTION 10.01 The Premises shall be used only for executive and
administrative offices for the conduct of Tenant's business limited to the
uses specifically set forth in SECTION 1.1.(o) and for no other purposes
whatsoever. Tenant shall use and maintain the Premises in a clean, careful,
safe, lawful and proper manner and shall not allow within the Premises, any
offensive noise, odor, conduct or private or public nuisance or permit
Tenant's employees, agents, licensees or invitees to create a public or
private nuisance or act in a disorderly manner within the Building or in the
Project. Any statement as to the particular nature of the business to be
conducted by Tenant in the Premises and uses to be made thereof by Tenant as
set forth in SECTION 1.1(o) hereof shall not constitute a representation or
warranty by Landlord that such business or uses are lawful or permissible
under any certificate or occupancy for the Premises or the .Building or are
otherwise permitted by law. Landlord does, however, represent that any
certificate of occupancy issued with respect to the Premises shall allow use
for executive and administrative offices.
SECTION 10.02 Tenant shall, at Tenant's sole expense, (a) comply
with all laws, orders, ordinances, and regulations of federal, state, county,
and municipal authorities having jurisdiction over the Premises, that are
applicable to the Premises because of Tenant's particular type of use being
made in the Premises, including, without limitation, the Americans With
Disabilities Act ("ADA") and any similar law enacted by the state in which
the Premises is located, (b) comply with any directive, order or citation
made pursuant to law by any public officer requiring abatement of any
nuisance caused by the activities of Tenant or which imposes upon Landlord or
Tenant any duty or obligation arising from conditions which have been created
by or at the request or insistence of Tenant, or required by reason of a
breach of any of Tenant's
13
obligations hereunder or by or through other fault of Tenant, (c) comply with
all customary insurance requirements applicable to the Premises and (d)
indemnify and hold Landlord harmless from any loss, cost or claim or expenses
which Landlord incurs or suffers by reason of Tenant's failure to comply with
its obligations under clauses (a), (b) or (c) above. If Tenant receives
notice of any such directive, order citation or of any violation of any law,
order, ordinance, regulation or any insurance requirement, Tenant shall
promptly notify Landlord in writing of such alleged violation and furnish
Landlord with a copy of such notice.
SECTION 10.03 Tenant shall not use or permit the use of the Premises
or any portion of the Project for the storage, treatment, use, production or
disposal of any hazardous substances or hazardous waste (as those terms are
defined under CERCLA or RCRA or any other applicable federal, state or local
environmental protection laws, ordinances, codes, rules or regulations) other
than those which might be incidental to and commonly used in general
executive administrative offices and which are stored or used in accordance
with all applicable laws, rules and regulations. Tenant does hereby indemnify
and hold Landlord harmless from and against any and all damage to any
property or injury to or death of any person as a result of Tenant's
violation of the foregoing provision. Tenant's indemnity shall include the
obligation to reimburse Landlord for any and all costs and expenses
(including reasonable attorneys' fees) incurred by Landlord, its agents or
employees as a result of Tenant's violation. Landlord has provided to Tenant
a copy of any environmental reports with respect to the Building in
Landlord's possession as of the date hereof. Landlord does not represent or
warrant to Tenant that the findings disclosed in any such reports) are
correct. Landlord does not have any other actual knowledge concerning the
presence of hazardous waste or hazardous substances in the Building.
ARTICLE 11. DEFAULT AND REMEDIES.
SECTION 11.01 The occurrence of any of the events described below
shall constitute a default by Tenant under this Lease.
A. FAILURE TO PAY RENT. The failure by Tenant to make payment of
Rent to Landlord when due, and such failure shall continue for a period of
five (5) days after written notice to Tenant from Landlord that such payment
was not made when due. Landlord shall not be required to give written notice
to Tenant of non-payment of Rent more than two (2) times per Lease Year.
B. FAILURE TO PERFORM. Except for a failure covered by Section
11.1(A), any failure by Tenant to observe and perform any provision of this
Lease to be observed or performed by Tenant, and such failure is not cured
within thirty (30) days after written notice of such failure to Tenant from
Landlord and in the event any failure cannot be cured within said thirty (30)
day period and provided that Tenant is diligently and continuously pursuing
the cure of such default, Tenant shall have an additional period of time to
cure such failure, but not to exceed a total of thirty (30) more days. In the
event the time to cure such default will require more than the aforesaid
total of sixty (60) days, and provided Tenant has been and is continuously
pursuing the cute of such default and Tenant and Landlord agree for an
additional time period to cure such default, which agreement by Landlord
shall not be unreasonable conditioned, Tenant shall be granted additional
time to cure but not to exceed a total of more than one hundred eighty (180)
days.
14
C. BANKRUPTCY, INSOLVENCY, ETC. If Tenant (i) cannot meet its
obligations as they become due, (ii) becomes or is declared insolvent
according to any law, (iii) makes a transfer in fraud of creditors according
to any applicable law, (iv) assigns or conveys all or a substantial portion
of its property for the benefit of creditors or (v) files a petition for
relief under the Federal Bankruptcy Code or any other present or future
federal or state insolvency, bankruptcy or similar law (collectively,
"applicable bankruptcy law"); a receiver or trustee is appointed for Tenant
or its property, the interest of Tenant under this Lease is levied on under
execution or under other legal process; any involuntary petition is filed
against Tenant under applicable bankruptcy law, or any action is taken to
reorganize or modify Tenant's capital structure if Tenant be a corporation or
other entity (provided that no such levy, execution, legal process or
petition filed against Tenant shall constitute a breach of this Lease if
Tenant shall vigorously contest the same by appropriate proceedings and shall
remove or vacate the same within ninety (90) days from the date of its
creation, service or filing).
D. ABANDONMENT. The abandonment or vacating of the Premises by
Tenant, which shall be conclusively presumed if Tenant is absent from the
Premises for eight (8) consecutive months or more or if Tenant shall fail to
move into or take possession of the Premises within ten (10) days after the
date on which Rent is to commence under the terms of this Lease.
E. DISSOLUTION OR LIQUIDATION. If Tenant is a corporation or
partnership, Tenant dissolves or liquidates or otherwise fails to maintain
its corporate or partnership structure, as applicable.
F. UNPERMITTED ASSIGNMENT AT SUBLEASE. If Tenant makes or attempts
to make an un-permitted assignment of this Lease or sublease of all or any
portion of the Premises.
SECTION 11.02 Upon the occurrence of any default by Tenant specified
in SECTION 11.1 hereof, Landlord, at its option, may in addition to all other
rights and remedies provided herein or at law or in equity, exercise one or
more of the remedies set forth below:
A. TERMINATION. Landlord may terminate this Lease by written notice
to Tenant in which event Tenant shall immediately surrender the Premises to
Landlord and if Tenant fails to do so, Landlord may without prejudice to any
other remedy which it may have for possession or arrearages in Rent, enter
upon and take possession of the Premises and expel or remove Tenant and any
other person who may be occupying said Premises or any part thereof, without
being liable for prosecution or any claim of damages therefor. Upon any such
termination, Tenant shall be and remain liable for all obligations of Tenant
arising or accruing under this Lease prior to the time of termination and, in
addition thereto, for the damages provided for in SECTION 11.2(D) hereof.
B. TERMINATE POSSESSION. Landlord may terminate Tenant's right of
possession (but not this Lease), by written notice to Tenant specifying the
date of termination in such notice, and, on or after such date, enter upon
and take possession of Premises and expel or remove Tenant and any other
person who may be occupying said Premises or any part thereof, by entry,
dispossessory suit or otherwise, without thereby releasing Tenant from any
liability hereunder, without terminating this Lease, and without being liable
for prosecution of any claim of damages therefor, and, if Landlord so elects,
make such alterations, redecorations and repairs as, in
15
Landlord's reasonable judgment, may be necessary to relet the Premises, and
Landlord may, but shall be under no obligation to do so, relet the Premises
or any portion thereof in Landlord's or Tenant's name, but for the account of
Tenant, for such term or terms (which may be for a term extending beyond the
Least term under this Lease) and at such rental or rentals and upon such
other terms and conditions as Landlord in its sole discretion may deem
advisable, with or without advertisement or by private negotiations, and
receive the rent therefor. Upon each such reletting, all rentals and other
sums received by Landlord from such reletting shall be applied, first, to the
payment of any indebtedness other than Rent due hereunder from Tenant to
Landlord, second, to the payment of any costs and expenses of such reletting
actually incurred by Landlord, including lease assumptions, reasonable
brokerage fees and attorneys' fees and the costs of any alterations; repairs,
redecorations and restorations; third, to the payment of Rent and other
charges due and unpaid hereunder; and the residue, if any, shall be held by
Landlord and applied in payment of future Rent as the same may become due and
payable hereunder or shall be paid to Tenant to the extent (and only to the
extent) provided in the third following sentence. If such rentals and other
sums received from such reletting during any month are less than the amount
of Rent to be paid during that month by Tenant hereunder, Tenant shall pay
such deficiency to Landlord. Such deficiency shall be calculated and paid
monthly. If such rentals and the sums received from such reletting during any
month shall be more than the amount of Rent to be paid during that month by
Tenant hereunder, Tenant shall have no right to, and shall receive no credit
for, the excess; provided, however, if any such excess shall exist at such
time as this Lease shall terminate, after application of such rentals and
sums received from reletting in the manner hereinabove set forth, such excess
shall be paid to Tenant. No such reentry or taking of possession of the
Premises by Landlord (whether through entry, dispossessory suit or otherwise)
shall be construed as an election on Landlord's part to terminate this Lease
unless a written notice of such termination be given to Tenant.
Notwithstanding any such reletting without termination, Landlord may at any
time elect by written notice to Tenant to terminate this Lease for such
previous event of default
C. ENTRY. Landlord may enter upon the Premises, without being liable
for prosecution or any claim of damages therefor, and do whatever Tenant is
obligated to do under the terms of this Lease, and Tenant agrees to reimburse
Landlord on demand for any expenses including, without limitation, reasonable
attorneys' fees, which Landlord may actually incur in thus effecting
compliance with Tenant's obligations under this Lease and Tenant further
agrees that Landlord shall not be liable for any damages resulting to Tenant
from such action.
D. ACCELERATION. If this Lease is terminated by Landlord as a result
of the occurrence of an event of default, Landlord may declare to be due and
payable immediately the excess of (a) the entire amount of Rent and other
charges and assessments which in Landlord's reasonable determination would
become due and payable during the remainder of the Lease term (determined as
though the Lease has not been terminated) discounted to present value by
using a discount factor of eight percent (8%) over (b) the then fair market
rental value of the Premises for the remainder of the Lease term discounted
to present value by using a discount factor of eight percent (8%) per annum.
Upon the acceleration of such amounts, Tenant agrees to pay the same at once,
in addition to all Rent and other charges, costs and assessments due as
provided in SECTION 11.2(B) hereof, at Landlord's address as provided herein.
If Landlord exercises its rights under this SECTION 11.2(D), Landlord and
Tenant agree that the payment of the aforesaid accelerated amount shall not
constitute a penalty or forfeiture but shall constitute liquidated damages
for Tenant's failure to comply with the terms and provisions of this Lease
(Landlord
16
and Tenant agreeing that Landlord's actual damages in such event are
impossible to ascertain and that the amount set forth above is a reasonable
estimate thereof).
E. SELF-HELP. Landlord may, at its option, without waiving or
releasing Tenant from obligations of Tenant, make any such payment or perform
any such other act on behalf of Tenant. All sums so paid by Landlord, or
incurred by Landlord in effecting such performance or other act, and all
necessary incidental costs, together with interest thereon at the Interest
Rate, from the date of such payment by Landlord, shall be payable to Landlord
on demand. Tenant covenants to pay any such sums, and Landlord shall have (in
addition to any other right or remedy of Landlord) the same rights and
remedies in the event of the non-payment thereof by Tenant as in the case of
default by Tenant in the payment of Rent.
F. CUMULATIVE REMEDIES. No right or remedy herein conferred upon or
reserved to Landlord is intended to be exclusive of any other right or remedy
and each and every right and remedy shall be cumulative and in addition to
any other right or remedy given hereunder or now or hereafter existing at law
or in equity or by statute. In addition to the other remedies provided in
this Lease, Landlord shall be entitled, to the extent permitted by applicable
law, to injunctive relief in case of the violation, or attempted or
threatened violation, of any of the covenants, agreements, conditions or
provisions of this Lease, or to a decree compelling performance of any of the
covenants, agreements, conditions or provisions of this 1 ease, or to any
other remedy allowed to Landlord at law or is equity.
ARTICLE 12. INSURANCE.
SECTION 12.01 Tenant covenants and agrees that from and after the
date of delivery of the Premises from Landlord to Tenant, Tenant will carry
and maintain, at its sole cost and expense, the following insurance:
A. PUBLIC LIABILITY INSURANCE. General Comprehensive Public
Liability Insurance covering the Premises and Tenant's use thereof against
claims for personal or bodily injury or death or property damage occurring
upon, in or about the Premises (including contractual, indemnity and
liability coverage to cover Tenant's indemnities set forth herein), such
insurance to insure both Tenant and, as additional named insureds, Landlord
and its subsidiaries, directors, agents and employees and the property
manager, and to afford protection to the limit of not less than $1,000,000.00
combined single limit or such higher limits as Landlord may require from time
to time during the Term, on an occurrence basis, in respect to injury or
death to any number of persons and broad form property damage arising out of
any one (1) occurrence, operations hazard, owner's protective coverage,
contractual liability, with a cross liability clause and a severability of
interests clause to cover Tenant's indemnities set forth herein, with a
deductible acceptable to Landlord. This insurance coverage shall extend to
any liability of Tenant arising our of the indemnities provided for in this
Lease.
B. PROPERTY INSURANCE. Property insurance on all-risk extended
coverage basis (including coverage against fire, wind, tornado, vandalism,
malicious mischief, water damage and sprinkler leakage) covering all
fixtures, equipment and personalty located in the Premises, in an amount not
less than one hundred percent (100%) of full replacement cost thereof. Such
policy will be written in the names of Tenant, Landlord and any other parties
reasonably
17
designated by Landlord from time to time, as their respective interests may
appear. The property insurance may, with the consent of the Landlord, provide
for a reasonable deductible.
C. WORKERS COMPENSATION INSURANCE. Worker's compensation insurance
insuring against and satisfying Tenant's obligations and liabilities under
the worker's compensation laws of the State of Georgia.
D. EMPLOYERS LIABILITY INSURANCE. Employer's liability insurance in
an amount not less than $500,000.00.
E. BUILDER'S RISK INSURANCE. In the event Tenant performs any
repairs or alterations in the Premises and Builder's Risk insurance on an
"All Risk" basis (including collapse) on a completed value (non-reporting)
form for full replacement value covering all work incorporated in the
Building and all materials and equipment in or about the Premises.
SECTION 12.02 All such insurance will be issued and underwritten by
companies reasonably acceptable to Landlord and will contain endorsements
that (a) such insurance may not lapse with respect to Landlord or property
manager or be canceled or amended with respect to Landlord or property
manager without the insurance company giving Landlord and property manager at
least thirty (30) days prior written notice of such lapse, cancellation or
amendment, (b) Tenant will be solely responsible for payment of premiums, (c)
in the event of payment of any loss covered by such policy, Landlord or
Landlord's designees will be paid first by the insurance company for
Landlord's loss and (d) Tenant's insurance is primary in the event of
overlapping coverage which may be carried by Landlord. Tenant shall deliver
to Landlord duplicate originals of all policies of insurance required by
SECTION 12.1 hereof or this SECTION 12.2 or duty executed originals of the
certificates of such insurance evidencing in-force coverage on or before the
Commencement Date. Further, Tenant shall deliver to Landlord renewals thereof
at least thirty (30) days prior to the expiration of the respective policy
terms.
SECTION 12.03 Tenant shall not knowingly conduct or permit to be
conducted in the Premises any activity, or place any equipment in or about
the Premises or the Building, which will invalidate the insurance coverage in
effect or increase the rate of casualty insurance or other insurance on the
Premises or the Building, and Tenant shall comply with all customary
requirements and regulations of Landlord's casualty and liability insurer. If
any invalidation of coverage or increase in the rate of casualty insurance or
other insurance occurs or is threatened by any insurance company due to any
act or omission by Tenant, or its agents, employees, representatives, or
contractors, such statement or threat shall be conclusive evidence that the
increase in such rate is due to the act of Tenant or the contents or
equipment in or about the Premises, and, as a result thereof, Tenant shall be
liable for such increase and such amount shall be considered Additional Rent
payable with the next monthly installment of Base Rent due under this Lease.
In no event shall Tenant introduce or permit to be kept on the Premises or
brought into the Building any dangerous, noxious, radioactive or explosive
substance.
SECTION 12.04 Landlord covenants and agrees that from and after the
date of delivery of the Premises from Landlord to Tenant, Landlord will carry
and maintain the following insurance, the cost of which shall be included in
Operating Costs:
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A. PUBLIC LIABILITY INSURANCE. General Comprehensive Public
Liability Insurance covering the Common Areas against claims for personal or
bodily injury or death or property damage occurring upon, in or about the
Common Areas (including contractual, indemnity and liability coverage to
cover Landlord's indemnities set forth herein), such insurance to afford
protection to the limit of not less than $3,000,000 combined single limit or
such higher limits as Landlord may elect, at its option, to carry from time
to time, on an occurrence basis, in respect to injury or death to any number
of persons and broad form property damage arising out of any one (1)
occurrence, operations hazard, owner's protective coverage, contractual
liability, with a cross liability clause and a severability of interests
clause to cover Landlord's indemnities set forth herein, with a commercially
reasonable deductible. This insurance coverage shall extend to any liability
of Landlord arising out of the indemnities provided for in this Lease.
B. PROPERTY INSURANCE. Property insurance on all-risk extended
coverage basis (including coverage against fire, wind, tornado, vandalism,
malicious mischief, water damage and sprinkler leakage) covering the Building
in an amount not less than ninety-five percent (95%) of full replacement cost
thereof, subject to a commercially reasonable deductible.
C. OTHER INSURANCE. Such other insurance as Landlord may elect, at
its option, to carry and maintain from time to time.
SECTION 12.05 Landlord and Tenant each hereby waive any right of
subrogation and right of recovery or cause of action for injury or loss to
the extent that such injury or loss is covered by fire, extended coverage,
"All Risk" or similar policies covering real property or personal property
required to be obtained and maintained hereunder (or which would have been
covered if the party claiming such right of subrogation or recovery or cause
of action had carried the insurance required by this Lease) or covered by any
other insurance maintained by the waiving party. Written notice of the terms
of the above mutual waivers shall be given to the insurance carriers of
Landlord and Tenant and the parties' insurance policies shall be properly
endorsed, if necessary, to prevent the invalidation of said policies by
reason of such waivers.
ARTICLE 13. DAMAGE BY FIRE OR OTHER CASUALTY.
SECTION 13.01 If the Building or any portion thereof is damaged or
destroyed by any casualty, to the extent that, in Landlord's reasonable
judgment, (a) repair of such damage or destruction would not be economically
feasible, or (b) the damage or destruction to the Building cannot be repaired
within one hundred twenty (120) days after the date of such damage or
destruction, or (c) if the proceeds from the insurance remaining after any
required payment to any mortgagee or lessor of Landlord are insufficient to
repair such damage or destruction, Landlord shall have the right, at
Landlord's option, to terminate this Lease by giving Tenant notice of such
termination, within thirty (30) days after the date of such damage or
destruction. In the event that all or substantially all of the Premises is
damaged or destroyed by any casualty and such damage or destruction cannot,
with reasonable efforts, be restored within one hundred twenty (120) days
after the date of such casualty in order to avoid such damage or destruction
causing all or a substantial portion of the Premises to be unusable by Tenant
for the uses permitted hereunder in which Tenant was engaged at the Premises
immediately prior to such casualty, and Tenant or Landlord, as the case may
be, shows such fact to the other party to a degree of certainty reasonably
acceptable to such other party, either Landlord or Tenant may
19
terminate this Lease by delivering written notice thereof to the other within
thirty (30) business days after the date of the damage or destruction.
SECTION 13.02 If the Premises or any portion thereof is damaged or
destroyed by any casualty against which Tenant is required to be insured
hereunder, and if, in Landlord's reasonable opinion, the Premises cannot be
rebuilt or made fit for Tenant's purposes within ninety (90) days after the
date of such damage or destruction, or if the proceeds from the insurance
Landlord or Tenant is required to maintain hereunder (or the amount of
proceeds which would be available if the non-terminating party were carrying
the insurance required of such party hereunder) are insufficient to repair
such damage or destruction, then either Landlord or Tenant shall have the
right, at the option of either party, to terminate this Lease by giving the
other written notice within thirty (30) days after such damage or destruction.
SECTION 13.03 In the event of partial destruction or damage to the
Building or the Premises which is not subject to SECTION 13.3 or 13.2 hereof,
or which is subject to SECTION 13.1 or 13.2 but the applicable party (or
parties) does not elect to terminate the Lease, which partial destruction or
damage renders the Premises partially but not wholly untenantable, this Lease
shall not terminate and Rent shall be abated in proportion to the area of the
Premises which, in Landlord's reasonable opinion, cannot be used or occupied
by Tenant as a result of such casualty. Landlord shall in such event, within
a reasonable time after the date of such destruction or damage, subject to
force majeure or to delays caused by Tenant and to the extent and
availability of insurance proceeds, restore the Premises to substantially the
same condition as existed prior to such partial damage or destruction,
provided that, Tenant shall pay to Landlord Tenant's insurance proceeds as
required in SECTION 13.4. In no event shall Rent abate or shall any
termination occur if damage to or destruction of the Premises is the result
of the negligence or willful act of Tenant, or Tenant's agents, employees,
representatives, contractors, successors, assigns, licensees or invitees.
SECTION 13.04 Landlord shall have no liability to Tenant for
inconvenience, loss of business, or annoyance arising from any repair of any
portion of the Premises or the Building under this Article. If Landlord is
required by this Lease or by any mortgagee or lessor of Landlord to repair of
if Landlord undertakes to repair, Tenant shall pay to Landlord that amount of
Tenant's insurance proceeds (or the amount which would have been received by
Tenant if Tenant was carrying the insurance required by this Lease) which
insures such damage that Landlord is obligated to repair as a contribution
towards such repair, and Landlord shall use reasonable efforts to have such
repairs made promptly and in a manner which will not unnecessarily interfere
with Tenant's occupancy. In the event that Tenant collects any insurance
proceeds (or would have the right to collect such proceeds if Tenant had been
carrying the insurance policies required by this Lease) on account of damage
or destruction to the Leasehold Improvements, and such Leasehold Improvements
are not restored or repaired, either in whole or in part, then Tenant shall
pay to Landlord an equitable portion of such insurance proceeds (or those
that would have been payable to Tenant had it been carrying the insurance
policies required by this Lease) based on the ratio between the amount that
Tenant expended in connection with such Leasehold Improvements and the amount
contributed by Landlord thereto pursuant to the other terms hereof. The terms
of the foregoing sentence shall survive the termination or expiration of the
Term of this Lease.
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SECTION 13.05 In the event of termination of this Lease pursuant to
SECTION 13.1 or 13.2, then all Rent shall be apportioned and paid to the date
on which possession is relinquished or the date of such damage, whichever
last occurs, and Tenant shall immediately vacate the Premises according to
such notice of termination; provided, however, that those provisions of this
Lease which are designated to cover matters of termination and the period
thereafter shall survive the termination hereof.
ARTICLE 14. CONDEMNATION.
SECTION 14.01 In the event the whole or substantially the whole of
the Building or the Premises are taken or condemned by eminent domain or by
any conveyance in lieu thereof (such taking, condemnation or conveyance in
lieu thereof being hereinafter referred to as "condemnation"), the Term shall
cease and this Lease shall terminate on the earlier of the date the
condemning authority takes possession or the date title vests in the
condemning authority. In the event that all or substantially all of the
Premises is temporarily taken by eminent domain and such taking causes all or
a substantial portion of the Premises to be unusable by Tenant for a period
of ninety (90) consecutive days for the uses permitted hereunder in which
Tenant was engaged at the Premises immediately prior to such temporary
taking, and Tenant or Landlord, as the case may be, shows such fact to the
other party to a degree of certainty reasonably acceptable to such other
party, either Landlord or Tenant may terminate this Lease by delivering
written notice thereof to the other within ten (10) business days after the
taking, condemnation or sale in lieu thereof. During periods when Tenant is
still under the terms of the Lease during possession by eminent domain by the
condemning authority, Rent to be paid shall be adjusted on a fair and
equitable basis under the circumstances.
SECTION 14.02 In the event any portion of the Building shall be
taken by condemnation (whether or not such taking includes any portion of the
Premises), which taking, in Landlord's reasonable and good faith judgment, is
such that the Building cannot be restored in an economically feasible manner
for use substantially as originally designed, then Landlord shall have the
right, at Landlord's option, to terminate this Lease, effective as of the
date specified by Landlord in a written notice of termination from Landlord
to Tenant.
SECTION 14.03 In the event of termination of this Lease pursuant to
the provisions of SECTION 14.1 or 14.2, the Rent shall be apportioned as of
such date of termination; provided, however, that those provisions of this
Lease which are designated to cover matters of termination and the period
thereafter shall survive the termination hereof.
SECTION 14.04 All compensation awarded or paid upon a condemnation
of any portion of the Project shall belong to and be the property of Landlord
without participation by Tenant. Nothing herein shall be construed, however,
to preclude Tenant from prosecuting any claim directly against the condemning
authority for loss of business, loss of good will, moving expenses, damage
to, and cost of removal of, trade fixtures, furniture and other personal
property belonging to Tenant; provided, however, that Tenant shall make no
claim which shall diminish or adversely affect any award claimed or received
by Landlord.
SECTION 14.05 If any portion of the Project other than the Building
is taken by condemnation or if the temporary use or occupancy of all or any
part of the Premises shall be
21
taken by condemnation during the Term, this Lease shall be and remain
unaffected by such condemnation, and Tenant shall continue to pay in full the
Rent payable hereunder. In the event of any such temporary taking for use or
occupancy of all or any part of the Premises, Tenant shall be entitled to
appear, claim, prove and receive the portion of the award for such taking
that represents compensation for use or occupancy of the Premises during the
remainder of the Term (provided that for purposes of determining such award,
any Renewal Term shall be included in the "Term" only if Tenant has exercised
its right thereto prior to such temporary taking), and Landlord shall be
entitled to appear, claim, prove and receive the portion of the award that
represents the cost of restoration of the Premises and the use or occupancy
of the Premises after the end of the Term. In the event of any such
condemnation of any portion of the Project other than the Building, Landlord
shall be entitled to appear, claim, prove and receive all of that award.
ARTICLE 15. INDEMNIFICATION. Tenant hereby waives all claims against
Landlord for damage to any property or injury to, or death of, any person in,
upon, or about the Project, including the Premises, except that Landlord will
indemnify and hold Tenant harmless from such claims to the extent caused by or
arising from the gross negligence or willful and/or wrongful misconduct of
Landlord or its agents, employees or contractors in, upon, or about the Project.
Tenant shall and hereby agrees to, indemnify and hold Landlord harmless from any
damage to any property or injury to, or death of, any person that occurs in the
Premises by Tenant, its agents, employees, representatives, contractors,
successors, assigns, licensees. The provisions of this ARTICLE 15 shall survive
the expiration of the term hereof or termination of this Lease with respect to
any damage, loss, injury, or death occurring as a result of events occurring or
circumstances existing before such expiration or termination. Without limiting
the generality of the foregoing, Landlord shall not be liable for any injury to
persons or property resulting from the condition or design of, or any defect in,
the Building or the Systems, except that Landlord will indemnify and hold Tenant
harmless from such claims to the extent caused by or arising from the gross
negligence or willful or wrongful misconduct of Landlord or its agents,
employees or contractors, nor shall Landlord be liable for any damage or loss
caused by other tenants, occupants or persons in the Building, the Project or
the business park in which the Building is located. Tenant, for itself and its
agents, employees, representatives, contractors, successors, assigns, invitees
and licensees, expressly assumes all risks of injury or damage to person or
property, whether proximate or remote, resulting from the gross negligence or
willful and wrongful misconduct of Tenant and its agents, employees,
representatives, contractors, successors, assigns, invitees and licensees.
ARTICLE 16. SUBORDINATION AND ESTOPPEL CERTIFICATES.
SECTION 16.01 This Lease and all rights of Tenant hereunder are subject
and subordinate to all underlying leases now or hereafter in existence, and to
any supplements, amendments, modifications, and extensions of such leases
heretofore or hereafter made and to any deeds to secure debt, mortgages, or
other security instruments which now or hereafter cover all or any portion of
the Project or any interest of Landlord therein, and to any advances made on the
security thereof, and to any increases, renewals, modifications, consolidations,
replacements, and extensions of any of such mortgages. Within twenty (20) days
after Landlord's written request, Tenant shall execute, acknowledge, and deliver
to Landlord any further instruments and certificates evidencing such
subordination as Landlord, and any mortgagee or lessor of Landlord shall
reasonably require, and if Tenant fails to so execute, acknowledge and deliver
such
22
instruments within twenty (20) days after Landlord's request, Landlord is
hereby empowered to do so in Tenant's name and on Tenant's behalf. Tenant
hereby irrevocably appoints Landlord as Tenant's agent and attorney-in-fact
for the purpose of executing, acknowledging, and delivering any such
instruments and certificates. Upon Tenant's written request, Landlord agrees
to use its reasonable efforts to obtain from any mortgagee or lessor of
Landlord a non-disturbance agreement for Tenant's benefit, in the form
attached hereto as Schedule I and incorporated herein by reference.
SECTION 16.02 Any mortgagee or lessor of Landlord shall have the right
at any time to subordinate any such mortgage or underlying lease to this Lease,
or to any of the provisions hereof, on such terms and subject to such conditions
as such mortgagee or lessor of Landlord may consider appropriate in its
discretion. At any time, before or after the institution of any proceedings for
the foreclosure of any such mortgage, or the sale of the Building under any such
mortgage, or the termination of any underlying lease, Tenant shall, upon request
of such mortgagee or any person or entities succeeding to the interest of such
mortgagee or the purchaser at any foreclosure sale ("Successor Landlord"),
automatically become the tenant of the Successor Landlord, without change in and
subject to the terms or other provisions of this Lease.
SECTION 16.03 Tenant shall from time to time, within ten (10) business
days after request from Landlord, or from any mortgagee or lessor of Landlord,
execute, acknowledge and deliver in recordable form a certificate then furnished
by Landlord certifying, to the extent true, that this Lease is in full force and
effect and unmodified (or, if there have been modifications, that the same is in
full force and effect as modified and stating the modifications); that the Tetra
has commenced and the full amount of the Rent then accruing hereunder; the date
to which the Rent has been paid; that Tenant has accepted possession of the
Premises and that any improvements required by the terms of this Lease to be
made by Landlord have been completed to the satisfaction of Tenant; the amount,
if any, that Tenant has paid to Landlord as a Security Deposit; that no Rent
under this Lease has been paid more than thirty (30) days in advance of its due
date; that Tenant, as of the date of such certificate, has no charge, lien, or
claim of offset under this Lease or otherwise against Rent or other charges due
or to become due hereunder; that, to the knowledge of Tenant, Landlord is not
then in default under this Lease; and such other matters as may be reasonably
requested by Landlord or any mortgagee or lessor of Landlord. Any such
certificate may be relied upon by Landlord, any Successor Landlord, or any
mortgagee or lessor of Landlord. Landlord agrees periodically to furnish, when
reasonably requested in writing by Tenant, certificates signed by Landlord
containing information similar to the foregoing information. If Tenant fails to
timely execute, acknowledge and deliver such certificate within ten (10)
business days after Landlord's request, then the information set forth in such
certificate so furnished by Landlord shall be deemed true and correct, and
Landlord is hereby empowered to so execute, acknowledge and deliver such
certificate in Tenant's name and on Tenant's behalf, and Tenant hereby
irrevocably appoints Landlord as Tenant's agent and attorney-in-fact for the
purpose of executing, acknowledging, and delivering any such certificate.
ARTICLE 17. SURRENDER OF THE PREMISES.
SECTION 17.01 Upon the expiration of the Term or earlier termination of
this Lease, or upon any re-entry of the Premises by Landlord without terminating
this Lease pursuant to the terms hereof, Tenant at Tenant's sole cost and
expense, shall peacefully vacate and surrender the
23
Premises to Landlord in good order, broom clean and in the same condition as
at the beginning of the Term or as the Premises may thereafter have been
improved by Landlord or Tenant (provided that Tenant's improvements were made
with Landlord's consent without the condition that such improvements be
removed upon surrender), reasonable use and ordinary wear and tear thereof
and repairs which are Landlord's obligations under this Lease excepted, and
also excepting loss by fire and other casualty and loss or damage caused by
the negligent act or willful misconduct of Landlord, and Tenant shall remove
all of Tenant's Property and such other property as is contemplated by
SECTION 17.2 hereof and turn over all keys for the Premises to Landlord.
Should Tenant continue to hold the Premises after the expiration of the Term
or earlier termination of this Lease beyond a period of sixty (60) days from
either of the aforesaid dates, then from the sixty-first (61st) day through
and including the one hundred twentieth (120th) day such holding over, unless
otherwise agreed to by Landlord in writing, shall constitute and be construed
as a tenancy at sufferance at monthly installments of Base Rent equal to one
hundred fifty percent (150%) of the monthly portion of Base Rent in effect as
of the date of such expiration or earlier termination, and from the one
hundred twenty-first (121st)day through and including the one hundred eightieth
(180th) day at monthly installments of Base Rent equal to one hundred
seventy-five percent (175%) of the monthly portion of Base Rent and for the
one hundred eighty-first (181st) day and thereafter at monthly installments
of Base Rent equal to two hundred percent (200%) of the monthly portion of
Base Rent, and subject to all of the other terms, charges and expenses set
forth herein (including the payment of Tenant's Operating Costs Payment)
except any right to renew this Lease or to expand the Premises or any right
to additional services. The provisions of this ARTICLE 17 shall survive the
expiration of the Term or earlier termination of this Lease.
SECTION 17.02 All Leasehold Improvements, alterations and other
physical additions made to or installed by or for Tenant in the Premises shall
be and remain Landlord's property (except for Tenant's furniture, personal
property, and movable trade fixtures) and shall not be removed without
Landlord's written consent. Tenant agrees to remove, at its sole cost and
expense, all of Tenant's furniture, personal property, and movable trade
fixtures, and, if directed to or permitted to do so by Landlord in writing, all,
or any part of, the Leasehold Improvements, alterations and other physical
additions made by or on behalf of Tenant to the Premises on or before the
Expiration of the Term or any earlier date of termination of this Lease. Tenant
shall repair, or promptly reimburse Landlord for the cost of repairing all
damage done to the Premises or the Building by such removal. Any Leasehold
Improvements, alterations or physical additions made by or on behalf of Tenant
which Landlord does not direct or permit Tenant to remove at any time during or
at the end of the Term shall become the property of Landlord at the end of the
Term without any payment to Tenant. If Tenant fails to remove any of Tenant's
furniture, personal property or movable trade fixtures by the Expiration of the
Term or any sooner date of termination of the Lease or, if Tenant fails to
remove any Leasehold Improvements, alterations and other physical additions made
by or on behalf of Tenant to the Premises which Landlord has in writing directed
Tenant to remove (including without limitation, all cabling and wiring for
computer systems, telephones and the like whether located above the finished
ceiling or underneath the floor), Landlord shall have the right, on the fifth
(5th) business day after Landlord's delivery of written notice (of its intent to
dispose of such abandoned property) to Tenant to deem such property abandoned by
Tenant and to remove, store, sell, discard or otherwise deal with or dispose of
such abandoned property in a commercially reasonable manner. Tenant shall be
liable for all costs of such disposition of Tenant's abandoned property,
24
and Landlord shall have no liability to Tenant in any respect regarding such
property of Tenant. Notwithstanding anything contained herein, Tenant shall
be allowed to remove the back-up power generator installed on the land
surrounding the Building. The provisions of this SECTION 17.2 shall survive
the expiration or any earlier termination of this Lease.
ARTICLE 18. BROKERAGE. Tenant and Landlord each represent and warrant
to the other that it has not entered into any agreement with, or otherwise had
any dealings with, any broker or agent in connection with the negotiation or
execution of this Lease which could form the basis of any claim by any such
broker or agent for a brokerage fee or commission, finder's fee, or any other
compensation of any kind or nature in connection herewith, other than with
Brokers, and each party shall, and hereby agrees to, indemnify and hold the
other harmless from all costs (including court costs, investigation costs, and
attorneys' fees), expenses, or liability for commissions or other compensation
claimed by any broker or agent with respect to this Lease which arise out of any
agreement or dealings, or alleged agreement or dealings, between the
indemnifying party and any such agent or broker, other than with Brokers. This
provision shall survive the expiration or earlier termination of this Lease.
Landlord shall pay a commission to Pope & Land Enterprises, Inc. ("LANDLORD'S
BROKER") in accordance with a separate written agreement with Landlord's Broker
and shall pay a commission to Carter & Associates, L.L.C. ("TENANT'S BROKER") in
accordance with the terms thereof or of a separate written agreement between
Landlord and Tenant's Broker. All brokers, including Brokers, shall be required
to execute and deliver lien waivers as a condition of payment. The parties
hereto acknowledge that Landlord's Broker is acting a agent for Landlord in this
transaction and that Tenant's Broker is acting as agent for Tenant in this
transaction.
ARTICLE 19. NOTICES. All notices, consents, demands, requests,
documents, or other communications (other than payment of Rent) required or
permitted hereunder (collectively, "Notices") shall be deemed given, one (1)
Business Day after deposited for delivery by air or next-day express courier
(with signed receipts) to the other party, or on the third Business Day after
deposit in the United States mail, postage prepaid, certified, return receipt
requested, except for notice of change of address which shall be deemed given
only upon actual receipt. Notices may be given by facsimile, so long as a copy
is provided otherwise in accordance with the terms hereof. The time period for
any action or response to any notice shall begin upon actual receipt of such
notice (with receipt of a facsimile copy not constituting receipt for purposes
of commencing any such period), with rejection or other refusal, or inability to
deliver, being deemed receipt. The addresses of the parties for notices shall be
the addresses set forth in ARTICLE 1 hereof, or such other address subsequently
specified by each party in notices given pursuant to this ARTICLE 19. In the
event that Tenant specifies the Premises as its address for notices in
accordance with the preceding sentence, then notices delivered to the Premises
(and tacked thereto if Tenant is not in occupancy thereof at the time of
delivery), whether or not Tenant is in occupancy thereof, shall be deemed to
have been effectively given in accordance with the terms of this Lease.
ARTICLE 20. BANKRUPTCY. Tenant acknowledges that this Lease is a lease
of nonresidential real property and therefore agrees that Tenant, as the debtor
in possession, or the trustee for Tenant (collectively the "Trustee") in any
proceeding under Title 11 of the United States Bankruptcy Code relating to
Bankruptcy, as amended (the "Bankruptcy Code"), shall not
25
seek or request any extension of time to assume or reject this Lease or to
perform any obligations of this Lease which arise from or after the order of
relief.
A. If the Trustee proposes to assume or to assign this Lease or sublet
the Premises (or any portion thereof) to any person which shall have made a
bonafide offer to accept an assignment of this Lease or a subletting on terms
acceptable to the Trustee, the Trustee shall give Landlord, and lessors and
mortgagees of Landlord of which Tenant has notice, written notice setting forth
name and address of such person and the terms and conditions of such offer, no
later than twenty (20) days after receipt of such offer, but in any event no
later than ten (10) days prior to the date on which the Trustee makes
application to the Bankruptcy Court for authority and approval to enter into
such assumption and assignment or subletting. Landlord shall have the prior
right and option, to be exercised by written notice to the Trustee given at any
time prior to the effective date of such proposed assignment or subletting, to
accept an assignment of this Lease or subletting of the Premises upon the same
terms and conditions and for the same consideration, if any, as the bonafide
offer made by such person, less any brokerage commissions which may be payable
out of the consideration to be paid by such person for the assignment or
subletting of this Lease. Any person or entity to which this Lease is assigned
pursuant to the provisions of the Bankruptcy Code shall be deemed, without
further act or deed, to have assumed all of the obligations arising under this
Lease and each of the conditions and provisions hereof on and after the date of
such assignment. Any such assignee shall, upon the request of Landlord,
forthwith execute and deliver to Landlord an instrument, in form and substance
acceptable to Landlord, confirming such assumption.
B. The Trustee shall have the right to assume Tenant's rights and
obligations under this Lease only if the Trustee: (a) promptly cures or provides
adequate assurance that the Trustee will promptly cure any default under the
Lease; (b) compensates or provides adequate assurance that the Trustee will
promptly compensate Landlord for any actual pecuniary loss incurred by Landlord
as a result of Tenant's default under this Lease; and (c) provides adequate
assurance of future performance under the Lease. Adequate assurance of future
performance by the proposed assignee shall include, as a minimum, that: (i) the
Trustee or any proposed assignee of the Lease shall deliver to Landlord a
security deposit in an amount equal to at least three (3) months' Rent accruing
under the Lease; (ii) any proposed assignee of the Lease shall provide to
Landlord an audited financial statement, dated no earlier than six (6) months
prior to the effective date of such proposed assignment or sublease with no
material change therein as of the effective date, which financial statement
shall show the proposed assignee to have a net worth equal to at least twelve
(12) months' Rent accruing under the Lease, or, in the alternative, the proposed
assignee shall provide a guarantor of such proposed assignee's obligations under
the Lease, which guarantor shall provide an audited financial statement meeting
the requirements of (ii) above and shall execute and deliver to Landlord a
guaranty agreement in form and substance acceptable to Landlord; and (iii) any
proposed assignee shall grant to Landlord a security interest in favor of
Landlord in all furniture, fixtures, and other personal property to be used by
such proposed assignee in the Premises. All payments required of Tenant under
this Lease, whether or not expressly denominated as such in this Lease, shall
constitute rent for the purposes of Title 11 of the Bankruptcy Code.
C. The parties agree that for the purposes of the Bankruptcy Code
relating to (a) the obligation of the Trustee to provide adequate assurance that
the Trustee will "promptly" cure
26
defaults and compensate Landlord for actual pecuniary loss, the word
"promptly" shall mean that cure of defaults and compensation will occur no
later than sixty (60) days following the filing of any motion or application
to assume this Lease; and (b) the obligation of the Trustee to compensate or
to provide adequate assurance that the Trustee will promptly compensate
Landlord for "actual pecuniary loss," the term "actual pecuniary Loss" shall
mean, in addition to any other provisions contained herein relating to
Landlord's damages upon default, payments of Rent, including interest at the
Interest Rate on all unpaid Rent, all attorneys' fees and all related costs
of Landlord incurred in connection with any default of Tenant in connection
with Tenant's bankruptcy proceedings.
ARTICLE 21. MISCELLANEOUS.
SECTION 21.01 PROFESSIONAL FEES. In any action or proceeding brought by
either party against the other under this Lease, the prevailing party shall be
entitled to recover from the other party its reasonable professional fees for
attorneys, appraisers and accountants, its investigation costs, and any other
legal expenses and court costs actually incurred by the prevailing party in such
action or proceeding.
SECTION 21.02 SEVERABILITY, HEADINGS. Every agreement contained in this
Lease is, and shall be construed as, a separate and independent agreement. If
any term of this Lease or the application thereof to any person or circumstances
shall be invalid or unenforceable, the remaining agreements contained in this
Lease shall not be affected. The article headings contained in this Lease are
for convenience only and shall not enlarge or limit the scope or meaning of the
various and several articles hereof. Words in the singular number shall be held
to include the plural, unless the context otherwise requires.
SECTION 21.03 NON-MERCER. There shall be no merger of this Lease with
any ground leasehold interest or the fee estate in the Project or any part
thereof by reason of the fact that the same person may acquire or hold, directly
or indirectly, this Lease or any interest in this Lease as well as any ground
leasehold interest or fee estate.
SECTION 21.04 LANDLORD'S LIABILITY. Anything contained in this Lease to
the contrary notwithstanding, Tenant agrees that Tenant shall look solely to the
estate and property of Landlord in the Building (and the actual rents received
by Landlord from the Building from and after the date of any money judgment
against Landlord) for the collection of any judgment or other judicial process
requiring the payment of money by Landlord. In no event shall either Landlord or
any partners, shareholders, or other principals of Landlord, or any officers or
employees of Landlord be personally responsible or liable for the payment of any
such judgment or process, and, subject to the preceding sentence, the assets of
any such party or persons shall not be subject to levy, execution or other
judicial process for the satisfaction thereof. The term "Landlord", as used in
this Lease, so far as covenants or obligations on the part of Landlord are
concerned, shall be limited to mean and include only the owner or owners, at the
time in question, of the fee title to, or a lessee's interest in a ground lease
of, the Land or the Building. In the event of any assignment, conveyance or
other transfer of any such title or interest (each of which may be effected
without Tenant's consent), Landlord herein named (and in case of any subsequent
transfers or conveyances, the then grantor) shall be automatically freed and
relieved from and after the date of such transfer, assignment or conveyance of
all liability as respects the
27
performance of any covenants or obligations on the part of Landlord contained
in this Lease thereafter to be performed.
SECTION 21.05 FORCE MAJEURE. Whenever a period of time is herein
prescribed for action to be taken by Landlord or Tenant, Landlord or Tenant
shall not be liable or responsible for, and there shall be excluded from the
computation for any such period of time, any delays due to force majeure, which
term shall include strikes, riots, acts of God, shortages of labor or materials,
war, governmental approvals, laws, regulations, or restrictions or any other
cause of any kind whatsoever which is beyond the reasonable control of Landlord
or Tenant, as the case may be. Force Majeure shall not excuse or delay Tenant's
obligation to pay Rent or any other amount due under this lease.
SECTION 21.06 SUCCESSORS AND ASSIGNS. All agreements and covenants
herein contained shall be binding upon the respective heirs, personal
representatives, successors and assigns of the parties hereto. If there be more
than one Tenant, the obligations hereunder imposed upon Tenant shall be joint
and several. If there is a guarantor of Tenant's obligations hereunder, Tenant's
obligations shall be joint and several obligations of Tenant and such guarantor,
and Landlord need not first proceed against Tenant hereunder before proceeding
against such guarantor, and any such guarantor shall not be released from its
guarantee for any reason, including any amendment of this Lease, any forbearance
by Landlord or waiver of any of Landlord's rights, the failure to give Tenant or
such guarantor any notices, or the release of any party liable for the payment
or performance of Tenant's obligations hereunder. Notwithstanding the foregoing,
nothing contained in the SECTION 21.6 shall be deemed to override ARTICLE 7.
SECTION 21.07 TENANT'S AUTHORITY. If Tenant signs as a corporation,
execution hereof shall constitute a representation and warranty by Tenant that
Tenant is a duly organized and existing corporation, that Tenant has been and is
qualified to do business in the State of Georgia and in good standing with the
State of Georgia, that the corporation has full right and authority to enter
into this Lease, and that all persons signing on behalf of the corporation were
authorized to do so by appropriate corporate action. If Tenant signs as a
partnership, trust, or other legal entity, execution hereof shall constitute a
representation and warranty by Tenant that Tenant has complied with all
applicable laws, rules, and governmental regulations relative to Tenant's right
to do business in the State of Georgia, that such entity has the full right and
authority to enter into this Lease, and that all persons signing on behalf of
Tenant were authorized to do so by any and all necessary or appropriate
partnership, trust, or other legal entity.
SECTION 21.08 GOVERNING LAW. This Lease shall be governed by and
construed under the laws of the State of Georgia.
SECTION 21.09 TIME OF ESSENCE. Time is of the essence of this Lease.
SECTION 21.10 NO ESTATE. The Lease shall create the relationship of
landlord and tenant only between Landlord and Tenant and no estate shall pass
out of Landlord. Tenant shall have only an usufruct, not subject to levy and
sale and assignable in whole or in part by Tenant (except as expressly provided
herein).
28
SECTION 21.11 EXHIBITS. Each of the exhibits attached hereto, and each
of the terms and provisions set forth therein, are hereby incorporated herein,
and shall be deemed to be a part of this Lease as if fully set forth herein.
SECTION 21.12 LANDLORD'S RIGHT TO INSPECT. Landlord shall retain
duplicate keys to all doors of the Premises. Tenant shall provide Landlord with
new keys should Tenant receive Landlord's consent to change the locks. Landlord
shall have the right to enter the Premises at reasonable hours and upon
reasonable prior notice (or, in the event of an emergency or at any time that an
event of default on the part of Tenant is outstanding, at any hour and without
notice ) for any reasonable purpose, including, without limitation, the
following purposes: (a) to exhibit the same to present or prospective
mortgagees, lessors or purchasers during the Term and to prospective tenants
during the last year of the Term; (b) to inspect the Premises; (c) to confirm
that Tenant is complying with all off Tenant's covenants and obligations under
this Lease; (d) to clean or make repairs required of Landlord under the terms of
this lease; (e) to make repairs to areas adjoining the Premises; and (f) to
repair and service utility lines or other components of the Building. Landlord
shall not be liable to Tenant for the exercise of Landlord's rights under this
SECTION 21.12 and Tenant hereby waives any claims for damages for any injury,
inconvenience or interference with Tenant's business, any loss of occupancy or
quiet enjoyment of the Premises, and any other loss occasioned thereby.
SECTION 21.13 SECURITY DEPOSIT. Concurrently with its execution and
delivery to Landlord of this Lease, Tenant shall deliver to Landlord the
Security Deposit in the amount set forth in SECTION 1.1 hereof. Tenant's
Security Deposit shall be held by Landlord, without liability for interest
except to the extent required by law, as security for the performance of
Tenant's obligations under this Lease. Unless required by applicable law,
Landlord shall not be required to keep the Security Deposit segregated from
other funds of Landlord. Tenant shall not assign or in any way encumber the
Security Deposit. Upon the occurrence of any event of default by Tenant,
Landlord shall have the right, without prejudice to any other remedy, to use the
Security Deposit, or portions thereof, to the extent necessary to pay any
arrearage in Rent, and any other damage, injury or expense. Following any such
application of all or any portion of the Security Deposit, Tenant shall pay
Landlord, within ten (10) days after written demand, the amount so applied in
order to restore the Security Deposit to its original amount. If Tenant is not
in default at the expiration of the term of this Lease or the termination of
this Lease, any remaining balance of the Security Deposit shall be returned to
Tenant, provided that Tenant timely surrenders the Premises without damage and
otherwise in accordance with ARTICLE 17 hereof. If Landlord transfers an
interest in the Premises during the Term, Landlord may assign the Security
Deposit to the transferee, and, in such event, Landlord shall thereafter have no
further liability to Tenant to Tenant for the Security Deposit.
SECTION 21.14 OBSERVANCE OF RULES AND REGULATIONS. Subject to the other
terms hereof, Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully and comply strictly with all Rules and
Regulations (herein so called) attached to this Lease as EXHIBIT "D", as such
Rules and Regulations may be changed from time to time. Landlord shall at all
times have the right to make reasonable changes in and additions to such new
Rules and Regulations, provided Landlord gives Tenant prior written notice of
such changes and provided that such new rules and regulations or changes in
existing rules and regulations do not materially adversely limit the rights of
Tenant set forth in the Lease.
29
SECTION 21.15 PARKING. The parking area available to Tenant, its
employees, customers and agent shall be free and designated on a non-exclusive,
unreserved basis for all Project tenants (including Tenant) and their respective
employees, customers, invitees and visitors. Parking and delivery areas for all
vehicles shall be in accordance with parking regulations established from time
to time by Landlord, with which Tenant agrees to conform. Tenant shall only
permit parking by its employees, customers and agents of automobiles in such
designated parking areas. Tenant shall have unreserved surface parking spaces at
a ratio equal to five (5) spaces per 1,000 rentable square feet of occupied
space. Landlord, at its option may elect to require that the vehicles parked in
such designated parking spaces that are attributable to Tenant and its
employees, or otherwise parked therein, display a permit or other means of
identification to be issued by Landlord, and in such event, Tenant shall cause
such vehicles attributable to Tenant and its employees to display such permit
while parked in such designated parking spaces. Notwithstanding the foregoing,
Landlord reserves the right to designate certain portions of the parking areas
on a reserved, exclusive basis, including, without limitation, for handicapped,
vans, visitors, cycles, other reserved, courier and loading purposes.
SECTION 21.16 QUIET ENJOYMENT. Landlord covenants and agrees that, so
long as Tenant is not in default hereunder, Landlord shall not interfere with
Tenant's quiet and peaceful possession of the Premises and of the Common Areas.
SECTION 21.17 SPECIAL STIPULATIONS. Attached hereto as Exhibit "C" and
incorporated herein by reference are Special Stipulations to this Lease.
SECTION 21.18 ENTIRE AGREEMENT; AMENDMENTS. This Lease and the Exhibits
and Riders attached hereto set forth the entire agreement between the parties
and cancel all prior negotiations, arrangements, brochures, agreements, and
understandings, if any, between Landlord and Tenant regarding the subject matter
of this Lease, it being acknowledged that any such negotiations, arrangements,
brochures, agreements, and understandings have been fully incorporated herein
and this Lease is a full and final integration of the agreement of the parties
hereto, including without limitation, all such prior negotiations, arrangements,
brochures, agreements, and understandings. Neither Landlord nor Landlord's
agents or brokers have made any representations or promises with respect to the
Premises, the Building, the Parking Facilities, the Land, or any other portions
of the Project except as herein expressly set forth and all reliance with
respect to any representations or promises is based solely on those contained
herein. No rights, easements, or licenses are acquired by Tenant under this
Lease by implication or otherwise except as, and unless, expressly set forth in
this Lease. No amendment or modification of this Lease shall be binding or valid
unless expressed in writing executed by both parties hereto.
ARTICLE 22. OTHER DEFINITIONS. When used in this Lease, the terms set
forth herein below shall have the following meanings: (a) "BUSINESS DAYS" or
"BUSINESS DAYS" shall mean Monday through Friday (except for Holidays); (b)
"HOLIDAYS" shall mean those holidays designated by Landlord; (c) the word "DAY"
or "DAYS" shall refer to calendar days, except where "Business Days" or
"business days" are specified; (d) the words "HEREIN", "HEREOF", "HEREBY",
"HEREUNDER" and words of similar import shall be construed to refer to this
Lease as a whole and not to any particular Article or Section thereof unless
expressly so stated; (e) the words "INCLUDE" and "INCLUDING" shall be construed
as if followed by the phrase "without being
30
limited to"; (f) a "REPAIR" shall be deemed to include such rebuilding
replacement and restoration as may be necessary to achieve and maintain good
working order and condition; and (g) the phrase "TERMINATION OF THIS LEASE"
and words of like import includes the expiration of the Term or the
cancellation of this Lease pursuant to any of the provisions of this Lease or
to law (upon the termination of this Lease, the Term shall end at 11:59 p.m.
on the date of termination as if such date were the Expiration of the Term,
and neither party shall have any further obligation or liability to the other
after such termination except (i) as shall be expressly provided for in this
Lease and (ii) for such obligations as by their nature or under the
circumstances can only be, or by the provisions of this Lease, may be,
performed after such termination and, in any event, unless expressly
otherwise provided in this Lease, any liability for a payment (which shall be
apportioned as of the date of such termination) which shall have accrued to
or with respect to any period ending at the time of termination shall survive
the termination of this Lease); (h) the phrase "TERMS OF THIS LEASE" and
words of like import shall be deemed to include all terms, covenants,
conditions, provisions, obligations, limitations, restrictions, reservations
and agreements contained in this Lease; (i) the word "TENANT" shall be deemed
to include Tenant's successors and assigns and any and all occupants of the
Premises permitted by Landlord and claiming by, through or under Tenant; (j)
the word "YEAR" shall mean a calendar year, except where "Lease Year" is
specified; and (k) "BUSINESS HOURS" shall mean 6:00 AM to 8:00 PM Monday
through Saturday and 6:00 AM to 3:00 PM on Sunday or as Tenant may change by
providing notice to Landlord from time to time throughout the Term of this
Lease.
ARTICLE 23. RESTRICTIVE COVENANTS. Landlord has advised Tenant that the
Project shall be subjected to the Barrett Master Declaration of Restrictive
Covenants and Design Guidelines and any sub-association that may be established
under said Barrett Master Declaration.
ARTICLE 24. BUILD-OUT OF REMAINDER OF BUILDING. Landlord has advised
Tenant that the Building consists of 30,964 square feet and that portions of the
Building are presently unleased. Tenant acknowledges that Landlord shall have
the unrestricted right to build out the unleased portions of the Building for a
single tenant or for multiple tenants and to do all that is necessary in the
build-out of the unleased portions of the Building for a single tenant or
multiple tenants.
ARTICLE 25. ASSIGNABILITY. Landlord shall have the absolute and
unrestricted right to assign this Lease to a third party entity, and upon such
absolute assignment, Landlord shall be released of any and all obligations,
duties and liabilities hereunder.
31
IN WITNESS WHEREOF, Landlord and Tenant have set their hands and seals
hereunto and have caused this Lease to be executed by duly authorized officials
thereof, as of the day and year set forth on the cover page hereof.
LANDLORD:
BARRETT BUSINESS CENTER, LLC
By: Amli Land Development - I Limited
Partnership, an Illinois limited
partnership, Managing Member
By: Amli Realty Co., a Delaware corporation,
General Partner
By: /s/ PHILIP N. TAGUE
-------------------------------------------
Title: EXEC. V.P.
----------------------------------------
[CORPORATE SEAL]
Date Execute by Landlord:
MAY 17, 1999
- ------------------------
TENANT:
UTILIPRO, INC
Date Executed by Tenant: By: /s/ ILLEGIBLE
-------------------------------------------
MAY 13, 1999
- ------------------------
Mr. Michael R. Foley
President & CEO
Attest: /s/ ILLEGIBLE
------------------------------------------
Name: JOHN D. FRENCH
-----------------------------------------
Title: V.P. SALES
----------------------------------------
[CORPORATE SEAL]
EXHIBIT "A"
FLOOR PLAN OF THE PREMISES
EXHIBIT "B"
LEASEHOLD IMPROVEMENTS
PARAGRAPH 1. CONSTRUCTION; PAYMENT. 1.01 Tenant shall cause the
Leasehold Improvements to be constructed and installed in a good and workmanlike
manner and in substantial accordance with final plans and specifications, as
approved by Landlord and Tenant, to be prepared by Tenant's architect and
submitted to Landlord by _______________, which plans and specifications shall
be in accordance with the preliminary plans and specifications furnished to
Landlord as of the date hereof and shall be subject to Landlord's and Tenant's
approval (the "Working Drawings and Specifications"). Landlord shall have three
(3) days from receipt to return comments to Tenant of Working Drawings and
Specifications. All plans and specifications prepared for Tenant's space by
Tenant or Tenant's architect(s) or engineer(s) shall be reviewed by Landlord's
architect, Hendrick & Assoc., and Landlord's engineers, Sedki & Russ Engineers
and/or B&A Consulting Engineers, at Landlord's sole cost and expense. The
Working Drawings and Specifications may only be modified by a written change
order executed by Tenant and Landlord.
1.02 Unless otherwise agreed to in writing by Landlord and Tenant, all
work involved in the construction and installation of the Leasehold Improvements
shall be carried out under the sole discretion of Tenant, subject to Landlord's
inspection and approval. Tenant shall cooperate with Landlord and Landlord's
architect, contractors, employees, agents and other persons in order to promote
the efficient and expeditious completion of such work.
1.03 (a) Subject to Landlord's payment of the Tenant Improvement
Allowance, Tenant shall be further responsible for payment of the following: (i)
all costs, including professional fees, of Landlord's architect, space planner,
and other professionals for the review and preparation of the Working Drawings
and Specifications or any change order thereto; and (ii) all costs to complete
the construction and installation of the Leasehold Improvements, including but
not limited to the cost of all labor and materials supplied to construct,
install and complete the Leasehold Improvements, including but not limited to
the cost of any changes made in the Leasehold Improvements, and the contractor's
profit and overhead expenses.
(b) Tenant shall pay, upon substantial completion of the Leasehold
Improvements, the amount by which the costs paid or incurred in connection with
the Leasehold Improvements or otherwise required to be paid hereunder by Tenant
exceed the Tenant Improvement Allowance on the Additional TI (as that term is
hereinafter defined) if so requested by Tenant.
(c) Tenant agrees that in the event it fails to make any required
payment required in the EXHIBIT "B" in a timely manner, including, but not
limited to, those payments due under subsection (b) above, Landlord, in addition
to any and all other remedies allowed it by law or equity, shall have the rights
and remedies against Tenant as Landlord would upon the occurrence of an event of
default of payment of Rent under this Lease.
PARAGRAPH 2. TENANT IMPROVEMENT ALLOWANCE. 2.01 Landlord shall
contribute an amount equal to $25.00 RSF inclusive of all design fees and
construction costs of
the Leasehold Improvements (the "TENANT IMPROVEMENT ALLOWANCE"), which
includes the costs paid or incurred in connection with the design of the
Leasehold Improvements. The Building shall be in an "AS IS", "SHELL"
condition. The Tenant Improvement Allowance shall be used for the actual
costs of constructing the Leasehold Improvements as such costs are incurred.
Tenant shall be responsible for the payment of, and shall pay when due, any
costs related to the Leasehold Improvements in excess of the Tenant
Improvement Allowance and the Additional TI as applicable.
Based upon the Working Drawings and Specifications, Tenant shall build
Leasehold Improvements with the Tenant Improvement Allowance. In the event that
Tenant, shall in any way change the Working Drawings and Specifications, all
cost and expenses, including design costs, construction costs and material costs
over and above the Tenant Improvement Allowance shall be borne by Tenant and
Tenant shall pay to Landlord any and all additional costs.
At the request of Tenant, Landlord shall provide to Tenant up to $5.00
RSF as additional tenant improvement allowance ("Additional TI") for the build
out of the Premises. The Additional TI shall be fully amortized under the
Initial Term of the Lease at an annual rate of ten percent (10%) and shall be
payable each month during the Term of the Lease with the Base Rent.
In the event the full amount of Tenant Improvement Allowance is not
used for the build out of the Premises, Tenant shall receive a credit against
the Base Rent for the unused portion of the Tenant Improvement Allowance.
2.02 The Tenant Improvement Allowance and the Additional TI shall be
used for the costs described in Section 2.01 hereof in accordance with the
Working Drawings and Specifications. Tenant, no more than twice a month, shall
deliver to Landlord a draw request in an AIA form for all or a portion of the
Tenant Improvement Allowance and/or the Additional TI for the Leasehold
Improvements made and to be paid for under such draw request. Such draw request
shall be accompanied by the following:
1. A narrative description of the Leasehold Improvements made and
constructed for which payment is being requested and the amount of such
payment;
2. Copies of invoices evidencing the amount to be paid;
3. Certification of Tenant's Architect and Tenant that such interim work
has been performed and is in compliance with the Work Drawings and
Specifications;
4. Progress lien releases from the Tenant's general contractor and any
subcontractors whose invoices are included;
5. Certificate for Tenant that Tenant has paid to Tenant's general
contractor and any other parties amounts due and previously requested
in prior draw requests and funded by Landlord; and
6. Any other documentation, including any approvals required by Landlord's
construction lender, including but not limited to, inspection reports
from Landlord's construction lender, as may be reasonably required by
Landlord's construction lender (such a request, an "Interim
Construction Draw").
The invoices included in the Interim Construction Draw shall reflect a
retainage amount of at least ten percent (10%) of hard costs. Prior to the
payment or partial payment of the Interim
Construction Draw, Landlord or its agent (including Landlord's construction
lender or the Construction lender's agent) shall have the right to inspect
the Leasehold Improvements constructed for which payment is being requested
under the Interim Construction Draw and to approve or disapprove such interim
work and Interim Draw Request. If such interim work and Interim Construction
Draw Request are disapproved, Landlord and Tenant will use all reasonable
effort to agree upon the means of remedying the defects in the interim work
and/or any discrepancies in the Interim Draw Request. Landlord shall pay such
Interim Construction Draw within thirty (30) days of receipt of the Interim
Construction Draw, up to, but not to exceed, the maximum amount equal to the
sum of the Tenant Improvement Allowance and the Additional TIA. Such payment
shall be made to the Tenant and such third parties to whom payment is due as
designated in the Interim Construction Draw. Provided that the Interim
Construction Draw is complete with all required documentation, has been
approved by Landlord and the interim work has been approved by Landlord and
has been constructed in accordance with the Working Drawings and Specifications,
should Landlord fail to timely pay the Interim Construction Draw and should
Tenant be called on to pay the amounts requested in such Interim Construction
Draw, Tenant shall be entitled (but not obligated) to pay same and to be
reimbursed for same by Landlord. All monies expended by Tenant in payment of
such invoices shall be due and payable by Landlord immediately, and shall
bear interest at the rate of ten percent (10%) per annum until paid.
At any time after the Leasehold Improvements have been substantially
completed, Tenant shall be entitled to make a final draw on the Tenant
Improvement Allowance and the Additional TIA. Such request shall be required to
meet all of the conditions and requirements for an Interim Construction Draw,
except that (i) the narrative shall only be required to described the work done
since the last Interim Construction Draw, (ii) no hold back for retainage shall
be required, and (iii) all lien releases shall be final lien releases. In
addition to the aforesaid, Tenant shall deliver (i) certificate of substantial
completion from Tenant's Architect and accepted by Tenant; (ii) a tenant
estoppel certificate; (iii) a final certificate of occupancy; and (iv) final
affidavit and certification from the general contractor. Landlord shall pay such
final draw within thirty (30) days of receipt of the final draw up to, but not
to exceed the maximum amount equal to the sum of Tenant Improvement Allowance
and the Additional TIA. Such payment shall be made jointly to the Tenant and to
such third parties to whom payment is due as designated in the final draw.
Provided that the final draw is complete with all required documentation, has
been approved by Landlord and the work has been approved by Landlord and has
been constructed in accordance with the Working Drawings and Specifications,
should Landlord fail to timely pay the final draw and should Tenant be called on
to pay the amounts requested in such final draw, Tenant shall be entitled (but
not obligated) to pay same and to be reimbursed for same by Landlord. All monies
expended by Tenant in payment of such invoices shall be due and payable by
Landlord immediately, and shall bear interest at the rate of ten percent (10%)
per annum until paid.
In addition to the covenants, agreements and rights created under
Article 9 , Section 9.1, Tenant hereby indemnifies and agrees to hold Landlord
harmless for any and all liabilities, damages, actions, causes of action, injury
to property or person (including death to person), mechanics and materialmen
liens, including reasonable attorney fees and expenses incurred, arising out of,
directly or indirectly, for the construction of the Leasehold Improvements.
PARAGRAPH 3. DELAYS. 3.01 Tenant shall use its reasonable efforts to
cause the Leasehold Improvements to be substantially completed by October 1,
1999 (the "TARGET COMPLETION DATE").
3.02 If the Leasehold Improvements have not been substantially
completed by the Target Completion Date, the Commencement Date shall be deemed
to occur on the Target Completion Date, notwithstanding that the Leasehold
Improvements were not substantially completed as of such date.
3.03 If the Leasehold Improvements have not been substantially
completed by the Target Completion, this Lease shall not be void or voidable,
the Commencement Date shall occur as stated herein.
EXHIBIT "C"
SPECIAL STIPULATIONS
RELOCATION:
Landlord shall not have the right to relocate Tenant to other space
without Tenant's consent, which consent may be withheld.
WARRANTY COVERAGE:
Any and all warranties which Landlord should obtain and which are
assignable or run to successors and assigns, for equipment, including but not
limited to fixtures located in, on or providing services to the Premises
presently or in the future shall otherwise benefit Tenant.
CONSTRUCTION PERIOD:
In the event Tenant shall lease now or in the future additional space
in the Building, Tenant shall not be obligated to pay rent for a period of time
not to exceed sixty (60) days from the date of delivery of the additional
premises to the Tenant for tenant improvement construction.
BACK UP POWER:
Tenant shall have access to the Building and the immediate land around
the Building for the purpose of installing a backup power supply in an area and
manner approved by Landlord, which shall not be unreasonably withheld,
conditioned or delayed and subject to the covenants, restrictions, rules,
regulations and guidelines of Barrett Master Declaration of Restrictive
Covenants and Design Guidelines.
RENEWAL TERM:
Provided that Tenant is not in default under this Lease and has
fulfilled all of its obligations hereunder and has given Landlord written notice
at least one hundred eighty (180) days prior to the expiration of the Initial 7
year Term and the First Renewal Term of its exercise of the hereinafter renewal
right of the Premises, Tenant shall have the right to renew this Lease for an
additional one (1) five (5) year period ("First Renewal Term") upon the
expiration of the Initial 7 year Term and the right to renew the Lease for an
additional one (1) five (5) year period ("Second Renewal Term") beginning at the
expiration of the First Renewal Term under the same terms and conditions
contained in the Lease, except that the Rent for the First Renewal Term or
Second Renewal Term shall be ninety-five percent (95%) of the then "Fair Market
Value" applicable to the Building, as mutually agreed between Landlord and
Tenant. The term "Fair Market Value" shall mean the value that a third-party
tenant would pay upon leasing space similar to the Premises in a comparable
office building taking into consideration such factors as the amount of net
rentable area leased; the length of the lease in question; tenant improvement
allowances being quoted for new tenants of comparable quality; increases or
decreases in Base Rent over the term of the Lease that are being included in the
comparable leases in comparable buildings for comparable spaces; appropriate
inducements and concessions then being included
in said comparable leases for preparation of comparable space, including but
not limited to so-called free or abated rents; the location and quality of
the Project as compared to comparable office buildings; and the credit
standing of Tenant. Upon receipt of written notice from Tenant to Landlord of
Tenant's desire to renew the Lease, Landlord and Tenant shall negotiate in
good faith to reach an agreement on "Fair Market Value" for the Premises for
the First Renewal Term or Second Renewal Term.
If Tenant and Landlord are unable to reach an agreement acting in good
faith on a "Fair Market Value" for the Premises within sixty (60) days after
Tenant has exercised its renewal option, Landlord shall advise Tenant, in
writing, of Landlord's determination of Fair Market Value. Within thirty (30)
days of receipt of Landlord's determination of Fair Market Value, Tenant shall
advise Landlord in writing, of Tenant's acceptance or rejection of Landlord's
determination. Failure to accept or reject within the allotted time period shall
be deemed an acceptance of Landlord's determination by Tenant. If Tenant rejects
Landlord's determination, then Tenant shall, within Tenant's written notice to
Landlord, inform Landlord of Tenant's election to enter into binding arbitration
or to cease negotiations with Landlord at which time this option to renew shall
be forfeited and neither party shall have any continuing obligation to the other
with respect to the Premises. If Tenant elects to arbitrate then said written
notice to Landlord shall specify its selection of a real estate appraiser, who
shall act on Tenant's behalf in the determination of Fair Market Value. Within
ten (10) days of Landlord's receipt of Tenant's notice, Landlord shall designate
a real estate appraiser to represent Landlord in the determination of Fair
Market Value. Within ten (10) days of the selection of Landlord's appraiser, the
two appraisers shall render a joint written determination of the Fair Market
Value. If the two appraisers are unable to agree upon a joint written
determination of Fair Market Value within said ten (10) days period then each
appraiser shall render his or her own written determination of Fair Market Value
and the two appraisers shall select a third appraiser within the ten (10) day
period. The third appraiser shall then select one of the determinations of the
original two appraisers without modification or qualification. All appraisers
selected in accordance with this option shall have at least five (5) years prior
experience in the Metropolitan Atlanta commercial leasing market and shall be
members for the Georgia Association of Realtors, the American Institute of Real
Estate Appraisers, or similar professional organization. The results of the
arbitration proceeding shall be binding upon the parties hereto. Each party
shall bear the expense of its own appraiser and shall share the expense of the
third appraiser if necessary.
RIGHT OF FIRST REFUSAL:
Tenant shall have an on-going "First Right of First Refusal" ("First
Right") to lease any and all space in the Building that becomes available during
the Term, First Renewal Term and Second Renewal Term of this Lease under the
following terms and conditions: (i) upon written notice to Tenant by the
Landlord that additional space is available, which notice shall specify the
space, that Landlord has a letter of intent from a bona fide third-party
prospect, the square footage of the space, the length of the term, the economic
and financial terms, and any other key business terms as Landlord feel
appropriate to include in such written notice, Tenant shall either accept and
agree to lease such additional space within ten (10) days of such notice or
reject the right to lease such additional space within said ten (10) days and
failure by Tenant to respond to Landlord in writing to such notice within said
ten (10) days shall be deemed a rejection by Tenant to lease such additional
space; (ii) rental of the additional space shall be under the terms
set forth in the aforesaid written notice; and (iii) Tenant shall enter into
an amendment to the Lease for such additional space with Landlord within
thirty (30) days of Tenant's agreement to lease such additional space.
In the event there exists no third party tenant and Tenant wishes to
lease any and all additional space in the Building then Landlord and Tenant
shall in good faith negotiate a "Fair Market Value" lease rate (as "Fair Market
Value" is defined in the "Renewal Term" section above) for the applicable space.
If Tenant and Landlord are unable to reach an agreement on a "Fair
Market Value" for the additional space within sixty (60) days after Tenant has
exercised its First Right, Landlord shall advise Tenant, in writing, of
Landlord's determination of Fair Market Value. Within thirty (30) days of
receipt of Landlord's determination of Fair Market Value, Tenant shall advise
Landlord in writing, of Tenant's acceptance or rejection of Landlord's
determination. Failure to accept or reject within the allotted time period shall
be deemed an acceptance of Landlord's determination by Tenant. If Tenant rejects
Landlord's determination, then Tenant shall, within Tenant's written notice to
Landlord, inform Landlord of Tenant's election to enter into binding arbitration
or to cease negotiations with Landlord. If Tenant elects to arbitrate then said
written notice to landlord shall specify its selection of a real estate
appraiser, who shall act on Tenant's behalf in the determination of Fair Market
Value. Within ten (10) days of Landlord's receipt of Tenant's notice, Landlord
shall designate a real estate appraiser to represent Landlord in the
determination of Fair Market Value. Within ten (10) days of the selection of
Landlord's appraiser, the two appraisers shall render a joint written
determination of the Fair Market Value. If the two appraisers are unable to
agree upon a joint written determination of Fair Market Value within said ten
(10) days period then each appraiser shall render his or her own written
determination of Fair Market Value and the two appraisers shall select a third
appraiser within the ten (10) day period. The third appraiser shall then select
one of the determinations of the original two appraisers without modification or
qualification. All appraisers selected in accordance with this option shall have
at least five (5) years prior experience in the Metropolitan Atlanta commercial
leasing market and shall be members for the Georgia Association of Realtors, the
American Institute of Real Estate Appraisers, or similar professional
organization. The results of the arbitration proceeding shall be binding upon
the parties hereto. Each party shall bear the expense of its own appraiser and
shall share the expense of the third appraiser if necessary.
The First Right as provided in this paragraph shall commence on August
7,1999, but not before said date.
RIGHT OF FIRST OFFER:
Subject to the rights to the space held by other tenants in the
Building, upon written notice to Tenant by Landlord of the availability of space
in the 100 Building, the Tenant shall have ten (10) days from receipt of such
notice to either accept and agree to lease such additional space or reject the
right to lease such additional space. The failure by the Tenant to respond in
writing to Landlord's notice within said ten (10) day period shall be deemed a
rejection by Tenant to lease such additional space. In the event that Tenant
elects to lease tile additional space offered, the minimum amount of space to be
leased shall be 5,000 rentable square feet, having a
minimum term of three (3) years with a termination date being co-terminus
with the termination date of this Lease, at the then current market rental
rate, and under substantially the same terms and conditions as contained in
this Lease, including adjusted tenant allowance for tenant improvements.
LANDLORD LIEN RIGHTS:
Notwithstanding anything contained herein, in the event of a default
under the Lease and Landlord exercises its remedies under the Lease or at law or
equity, Landlord's lien rights shall only be applicable to Leasehold
Improvements funded by the Tenant Improvement Allowance and Additional TI, and
shall not be applicable to Tenant's furniture, fixtures, equipment or
receivables.
SIGNAGE:
Tenant shall have the right to place its logo, at its sole expense, on
the Building monument sign, which logo shall be subject to Landlord's approval,
which approval will not unreasonably be withheld, subject to the Barrett Master
Declaration of Restrictive Covenants and Design Guidelines and all governmental
ordinances. So long as Tenant has a majority of the space in the Building
leased, Tenant shall have the exclusive right to the signage on the Building
monument sign.
PATIO:
Subject to Landlord's approval of location, size and design and the
Barrett Master Declaration of Restrictive Covenants and Design Guidelines,
Tenant shall have the right to construct, at Tenant's expense, a seating patio.
EXHIBIT "D"
RULES AND REGULATIONS
1. No sign, picture, advertisement or notice visible from the exterior
of the Premises shall be installed, affixed, inscribed, painted or otherwise
displayed by Tenant on or in any part of the Premises or the Building unless the
same is first approved by Landlord. Any such sign, picture, advertisement or
notice approved by Landlord shall be painted or installed for Tenant at Tenant's
cost by Landlord or by a party approved by Landlord. No awnings, blinds, shades
or screens shall be attached to or hung in, or used in connection with any
window or door of, the Premises without the prior consent of the Landlord,
including approval by the Landlord of the quality, type, design, color and
manner of attachment.
2. Tenant agrees that its use of electrical current shall never exceed
the capacity of existing feeders, risers or wiring installation.
3. Business machines and mechanical equipment belonging to Tenant that
cause noise and/or vibration that may be transmitted to the structure of the
Building or to any leased space so as to be objectionable to Landlord or any
other tenants in the Building shall be placed and maintained by Tenant, at
Tenant's expense, in setting of cork, rubber, or spring type nose and/or
vibration eliminators sufficient to eliminate vibration and/or noise.
4. The Premises shall not be used for storage of merchandise held for
retail sale to the general public. Tenant shall not do or permit to be done in
or about the Premises or the Building anything which shall increase the rate of
insurance on said Building or obstruct or interfere with the rights of other
tenants of Landlord or annoy them in any way, including, but not limited to,
using any musical instrument or making loud or unseemly noises. The Premises
shall not be used for sleeping or lodging. No cooking or related activities
shall be done or permitted by Tenant in the Premises except with permission of
Landlord. Tenant will be permitted to use for its own employees within the
Premises a small microwave oven and Underwriters' Laboratory approved new
equipment for brewing coffee, tea, hot chocolate and similar beverages, provided
that such use is in accordance with all applicable federal, state, county and
city laws, codes, ordinances, rules and regulations and all applicable insurance
requirements. No vending machines of any kind will be installed, permitted or
used on any part of the Premises without the prior consent of Landlord. No part
of said Building or Premises shall be used for gambling, immoral or other
unlawful purposes. Tenant shall not permit the sale of any alcoholic beverage
from or in the Building or the Premises without the prior written consent of the
Landlord. No area outside of the Premises shall be used for storage purposes at
any time. With respect to multiple-tenant floors of the Building, each tenant
thereof shall cause any doors between corridors, any elevator lobby doors and
any stairwell or stairway doors on such floor to be kept closed.
5. No birds or animals of any kind shall be brought into the Building
(other than trained seeing-eye dogs required to be used by the visually
impaired). No bicycles or motorcycles (or other motorized vehicles of any kind)
shall be brought into the Building.
6. The sidewalks, entrances, passages, corridors, halls, elevators, and
stairways in the Building shall not be obstructed by Tenant or permitted by
Tenant to be used for any purposes other than those for which same were intended
as ingress and egress. No windows, floors or skylights that reflect or admit
light into the Building shall be covered or obstructed by Tenant. Toilets, wash
basins and sinks, or any other plumbing fixture or appliance, shall not be used
for any purpose other than those for which they were constructed, and no
sweeping, rubbish, or other obstructing or improper substances shall be thrown
or placed therein. The cost of repairing any stoppage or damage resulting to any
such fixtures or appliances from misuse on the part of Tenant or any person in
the Building at the invitation or with the permission of Tenant shall be paid by
Tenant. Any damage resulting to any such item, or to heating apparatus, from
misuse by Tenant or any such person shall be borne by Tenant.
7. Only one key for each office in the Premises will be furnished
Tenant without charge. Landlord may make a reasonable charge for any additional
keys. No additional lock, latch or bolt of any kind shall be placed upon any
door nor shall any changes be made in existing locks without the prior written
consent of Landlord, and Tenant shall in each case furnish Landlord with a key
for any such lock. At expiration of the term of the Lease or the termination of
the Lease, Tenant shall return to Landlord all keys furnished to Tenant by
Landlord, or otherwise procured by Tenant, and in the event of loss of any keys
so furnished, Tenant shall pay to Landlord the replacement cost thereof.
8. Landlord shall have the right to prescribe the weight, position and
manner of installation of heavy articles such as safes, machines and other
equipment brought into the Building. No safes, furniture, boxes, large parcels
or other kind of freight shall be taken to or from the Premises or allowed in
any elevator, hall or corridor except at times allowed by Landlord. Tenant shall
make prior arrangements with Landlord for use of the freight elevator for the
purpose of transporting such articles and such articles may be taken in or out
of said Building only by using such freight elevator and only during such hours
as may be arranged with and designated by Landlord. The persons employed to move
the same must be approved by Landlord. In no event shall any weight be placed
upon any floor by Tenant so as to exceed the design conditions of the floors at
the applicable location.
9. Tenant shall not permit any gases, liquids or odors to be produced
upon or permeate from the Premises, and Tenant shall not permit any flammable,
combustible or explosive fluid, chemical or substance to be brought into the
Building.
10. Every person, including Tenant, its employees and visitors,
entering and leaving the Building may be questioned by a watchman as to that
person's business therein and may be required to sign such person's name on a
form provided by Landlord for registering such person; provided, however, except
for emergencies or other circumstances requiring same in Landlord's reasonable
judgment, such procedures shall not be required during Business Hours. Landlord
may also implement a card access security system to control access. Landlord
shall not be liable for excluding any person from the Building, or for admission
of any person to the Building at any time, or for damages or loss from theft
resulting therefrom to any person, including Tenant. All deliveries must be made
via the service entrance and service elevators during Business Hours or as
otherwise directed or scheduled by Landlord, and Landlord's prior written
approval must be obtained for any other deliveries.
Landlord shall not be responsible for any loss, theft, mysterious
disappearance of or damage to, any property, however occurring.
11. No connection shall be made to the electric wires or gas or
electric fixtures, without the prior written consent on each such occasion by
Landlord. All glass, locks and trimmings in or upon the doors and windows of the
Premises shall be kept whole by Tenant and in good repair. Tenant shall not
injure, overload or deface the Building, the woodwork or the walls of the
Premises, nor permit upon the Premises any noisome, noxious, noisy or offensive
business.
12. If Tenant desires wiring for additional telephone service, or a
bell or buzzer system, or for any other purpose, such wiring shall be done by
the electrician of the Landlord, and no other person shall be permitted by
Tenant to do any such work except with the prior written permission of Landlord.
No boring or cutting for wiring or for any other purpose shall be done unless
first approved in writing by Landlord.
13. Tenant and any person parking a vehicle (including, without
limitation, a bicycle) in connection with visiting the Building, or otherwise
parking a vehicle at Tenant's invitation or with-the permission of Tenant, shall
observe and obey all parking and traffic regulations imposed by Landlord. All
vehicles shall be parked only in areas designated therefor by Landlord. Tenant
shall not permit any such vehicle to be parked overnight or to display any form
of advertising, including, without limitation, "for sale" signs or any
advertising of services, products, or any enterprise. Landlord shall be entitled
to cause any vehicle parked in violation of these Rules and Regulations or other
parking and traffic regulations imposed by Landlord either to be towed at the
vehicle owner's sole cost and express or to attach to the vehicle a "boot" or
other immobilizing device and require said owner to pay a fee for the removal
thereof.
14. Canvassing, peddling, soliciting and distribution of handbills or
any other written materials in the Building are prohibited, and Tenant shall
cooperate to prevent same.
15. Landlord shall not have the right to change the name of the
Building and to change the street address of the Building, provided that in the
case of a change in the street address, Landlord shall give Tenant not less than
120 days' prior notice of the change, unless the change is required by
governmental authority.
16. Landlord may waive any one or more of these Rules and Regulations
for the benefit of Landlord or of any particular tenant, but no such waiver by
Landlord shall be construed as a waiver of such Rules and Regulations in favor
of any other tenant, nor prevent Landlord from thereafter enforcing any such
Rules and Regulations against any or all of the other tenants of the Building.
17. These Rules and Regulations are supplemental to, and shall not be
construed in any way as modifying or amending, in whole or in part, the terms,
covenants, agreements and conditions of any lease of any premises in the
Building.
18. Landlord reserves the right to enforce the restrictions and
limitations contained in the Lease, to make such other reasonable Rules and
Regulations as in its judgment may from
time to time be desirable for the safety, care and cleanliness of the
Building, the management thereof, or the preservation of good order therein.
LIST OF SUBSIDIARIES
OF
ALLIANCE DATA SYSTEMS CORPORATION
STATE &
NAME OF DIRECT SUBSIDIARY DATE OF INC. DOING BUSINESS AS
- ------------------------- ------------ -----------------
ADS ALLIANCE DATA SYSTEMS, INC. DELAWARE ADS ALLIANCE DATA S
4/22/83
WORLD FINANCIAL NETWORK NATIONAL BANK FEDERAL CHARTER WORLD FINANCIAL NET
5/1/89
ALLIANCE DATA SYSTEMS (NEW ZEALAND) LIMITED NEW ZEALAND ALLIANCE DATA SYSTE
1/7/97 LIMITED
LOYALTY MANAGEMENT GROUP CANADA, INC. TORONTO, CANADA LOYALTY MANAGEMENT
AMALGAMATED 7/24/98
ADS REINSURANCE LTD. BERMUDA ADS REINSURANCE LT
11/26/98
ADS COMMERCIAL SERVICES, INC. DELAWARE ADS COMMERCIAL SER
1/18/95
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 7 to Registration Statement
No. 333-94623 of Alliance Data Systems Corporation and Subsidiaries of our
report dated February 2, 2001 (February 28, 2001 as to Note 21) appearing in the
Prospectus, which is part of this Registration Statement, and to the references
to us under the headings "Selected Historical Consolidated Financial and
Operating Information" and "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Columbus, Ohio
May 4, 2001
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 7 to Registration Statement No.
333-94623 of Alliance Data Systems Corporation of our report dated February 28,
2001 relating to the consolidated financial statements of Utilipro, Inc. and
Subsidiaries as of September 30, 1999 and 2000 and the years then ended,
appearing in the Prospectus, which is part of this Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Atlanta, Georgia
May 4, 2001
