<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 3, 2000
REGISTRATION NO. 333-94623
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
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)
<TABLE>
<S> <C> <C>
DELAWARE 7374 31-1429215
(State or Other Jurisdiction of (Primary standard (I.R.S. Employer
Incorporation or Organization) industrial classification Identification Number)
code number)
</TABLE>
--------------------------
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:
<TABLE>
<S> <C>
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
</TABLE>
--------------------------
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 3, 2000
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.
<PAGE>
PROSPECTUS
20,000,000 SHARES
[LOGO]
COMMON STOCK
------------------
This is an initial public offering of 20,000,000 shares of our common stock. We
anticipate the initial public offering price will be between $14.00 and $16.00
per share. We are selling all the shares offered under this prospectus.
We have applied to have our common stock listed on the New York Stock Exchange
under the symbol "ADD".
SEE "RISK FACTORS" BEGINNING ON PAGE 8 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.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------- -------------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to us............................ $ $
</TABLE>
The underwriters may purchase up to an additional 3,000,000 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
, 2000.
------------------------
BEAR, STEARNS & CO. INC. MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
THE DATE OF THIS PROSPECTUS IS , 2000.
<PAGE>
Inside front cover
- Half gatefold with a four colored schematic depicting a "multiple
transaction and communications points" process. The schematic
show's our client's customer; our client's distribution channel;
our process and our target markets including our logo.
The gatefold has the following test: "We provide electronic
transactions services, credit services and loyalty and database
marketing services. We help our clients manage their customer
relationships by:
- Facilitating transactions with their customers through multiple
channels including in-store, internet and catalog
- Assisting them in identifying and acquiring new customers
- Increasing both the loyalty and profitability of existing customers
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 8
Special Note Regarding
Forward-Looking Statements......... 20
Use of Proceeds...................... 21
Dividend Policy...................... 22
Dilution............................. 23
Capitalization....................... 24
Unaudited Pro Forma Consolidated
Financial Information.............. 25
Selected Historical Consolidated
Financial and Operating
Information........................ 29
</TABLE>
<TABLE>
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............. 31
Description of Our Business.......... 47
<CAPTION>
PAGE
----
<S> <C>
Management........................... 61
Principal Stockholders............... 71
Certain Relationships and Related
Transactions....................... 73
Description of Capital Stock......... 76
Shares Eligible for Future Sale...... 79
Underwriting......................... 80
Legal Matters........................ 82
Experts.............................. 82
Where You Can Find More Information.. 83
Index to Consolidated Financial
Statements......................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY CONTAINS BASIC INFORMATION ABOUT US AND THE OFFERING. BECAUSE
IT IS A SUMMARY, IT DOES NOT CONTAIN ALL THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY,
INCLUDING THE RISK FACTORS AND OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO
THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS.
OUR COMPANY
We are a leading provider of electronic transaction services, credit
services, and loyalty and database marketing services. We develop and execute
programs designed to help our clients target, acquire and retain loyal,
profitable customers. We create value for our clients by assisting them in
managing their customer relationships. Specifically we:
- facilitate transactions between our clients and their customers through
multiple channels including in store, Internet and catalog;
- assist our clients in identifying and acquiring new customers; and
- increase the loyalty and profitability of our clients' existing customers.
On a pro forma basis for our 1998 and 1999 acquisitions, our revenue for the
year ended December 31, 1999 was $663.6 million, representing a 9.4% increase
over pro forma calendar 1998, and our earnings from continuing operations before
interest expense, taxes, depreciation and amortization was $108.3 million,
representing a 12.1% increase over pro forma calendar 1998.
OUR MARKET OPPORTUNITY
Our services are applicable to the full spectrum of commerce opportunities
involving companies that sell products and services to individual consumers. We
currently target our service offerings to select market sectors, including
specialty retailers, petroleum retailers, supermarkets and financial services
providers, as well as companies in market sectors with rapidly evolving
electronic payment and customer management needs such as mass transit, tollways,
parking, and gas and electric utilities. Our client base of over 300 companies
includes the retail affiliates of The Limited, including Victoria's Secret,
Express, Lane Bryant and Structure, Equiva Services, LLC, which is the service
provider to Shell branded locations in the U.S., Canada Safeway, Brylane and
CITGO.
Common challenges to our clients are the rapid development of new
competitors and sales channels, the intensifying competition for customers and
the erosion of consumer brand loyalty. The Internet has accelerated these trends
by providing consumers with almost instant access to a multitude of competing
products and services without traveling to an actual store location. As a
result, companies are looking for tools to facilitate transactions and improve
customer communications across all channels.
Companies increasingly seek services that compile and analyze customer
purchasing behavior, enabling them to more effectively communicate with their
customers. The continuing shift to electronic payment systems, namely credit,
debit, stored value and pre-paid cards, generates highly valuable information on
individual consumers and their purchasing preferences, while the dramatic
proliferation of computer technology has enabled companies to capture, access
and use this information easily and almost instantaneously. Many retailers,
however, lack the economies of scale and core competencies necessary to support
their own transaction processing infrastructure and credit card programs,
including the extension of credit. In addition, many retailers seek to outsource
the development and management of loyalty programs and database marketing
services. We believe we are well-positioned to provide these services to meet
the evolving needs of our clients and potential clients.
1
<PAGE>
OUR PRODUCTS AND SERVICES
Our products and services are centered around three core
capabilities--Transaction Services, which represents 45.0% of our 1999 revenue,
Credit Services, which represents 30.8% of our 1999 revenue, and Loyalty and
Database Marketing Services, which represents 24.2% of our 1999 revenue.
<TABLE>
<CAPTION>
LOYALTY AND DATABASE
TRANSACTION SERVICES CREDIT SERVICES MARKETING SERVICES
- --------------------------------- ---------------------------- ---------------------------------
<S> <C> <C>
- - Transaction Processing - Underwriting - Loyalty Programs
- Network Services - Risk Management - Private Label Cards
- Bankcard Settlement - Air Miles-TM- reward program
- - Card Processing and Servicing - One-to-One Loyalty
- Account Processing - Database Marketing Services
- Billing and Payment - Direct Marketing
Processing
- Customer Care - Enhancement Services
</TABLE>
We market and sell our services on both a stand-alone and bundled basis. By
providing services that span our three core offerings, we believe we can become
a key element in our clients' success.
TRANSACTION SERVICES
Providing flexible, convenient, rapid customer payment options is
fundamental to customer satisfaction and retention. Through our predecessor
company, we have provided these services since 1983. We facilitate and manage
transactions between our clients and their customers through multiple
distribution channels, including in-store, catalog and the Internet, through our
state-of-the-art, highly scalable processing systems. Our services include
instantaneous authorizations, effective customer care, efficient payment
processing and billing services.
There were approximately 22 billion electronic payment transactions in 1997
in the U.S., and the number of transactions is projected to grow to nearly
63 billion by 2005. We are a leading provider of electronic transaction
services, ranked fourth in transaction volume according to the Faulkner and Gray
Card Industry 2000 report. On a pro forma basis for recent acquisitions, we
processed more than 2.1 billion transactions through 135,000 point of sale
terminals during 1999. Additionally, in 1999 we handled over 95 million customer
inquiries in our customer care centers and generated approximately
132.8 million statements. By fully integrating our transaction services with our
loyalty and database marketing services, we are able to execute more effective
customer acquisition and retention strategies for our clients. Our clients
within this segment are made up primarily of specialty retailers and petroleum
retailers.
CREDIT SERVICES
We have demonstrated to many of our existing clients that a private label
credit card is one of the most effective loyalty and marketing tools available.
As part of our service, we offer our clients the experience and flexibility to
provide a funding vehicle for private label credit card receivables. Through our
predecessor company, we have owned and managed private label receivables since
1986. This service appeals to those clients that choose to focus their financial
and operational resources on their core operations and prefer a single-source
integrated solution. Clients who utilize this service are predominantly
specialty retailers. As part of this service, we currently provide underwriting
and risk management services to 46 of our 49 private label card clients,
representing approximately 52.6 million cardholders and $2.2 billion of
receivables as of December 31, 1999. We finance substantially all our credit
card receivables through asset securitization transactions.
2
<PAGE>
LOYALTY AND DATABASE MARKETING SERVICES
Our clients are focused on targeting, acquiring and retaining loyal and
profitable customers. Since 1992 we have created and managed loyalty programs
that have successfully resulted in securing more frequent and sustained customer
purchasing. For example,
- we have demonstrated to many of our existing clients that a private label
credit card is one of the most effective loyalty and marketing tools
available. We manage 49 distinct programs for specialty and petroleum
retailers, representing 76.9 million cardholders with annual proprietary
credit sales in excess of $3.1 billion as of December 31, 1999. Our
private label programs can be further enhanced by our ability to provide
database marketing services, which enable us to capture unique and
proprietary item-level transaction data and use it to target customers.
- in Canada, we have developed and operate the Air Miles reward program,
which we believe to be the largest loyalty program in Canada. The program
has over 100 brand names represented by the program sponsors. Based upon
the most recent census data available, in 1999 our active participants
represented over 55% of all Canadian households. We have issued over six
billion Air Miles reward miles since the program's inception in 1992.
- we have also developed an on-line, electronic loyalty program that
recognizes, acknowledges and rewards customers at the point of sale. Using
the retailer's existing point-of-sale terminal or cash register and our
network services, we can capture points, communicate program status and
issue targeted awards at the point of sale.
Our loyalty programs provide our clients with tools to help drive customer
acquisitions and reward customer loyalty while providing us with the ability to
better understand the purchasing behavior of our clients' customers. As a result
of these programs and our marketing database programs, we have captured detailed
purchase information on approximately 60 million U.S. consumers and 6.1 million
Canadian households. By combining massive amounts of detailed data with our
proprietary data mining algorithms and our experience in developing and
executing marketing campaigns, we provide our clients with highly successful and
sophisticated targeted marketing solutions. Our clients within this segment are
specialty retailers, petroleum retailers, supermarkets and financial service
providers.
CLIENT CASE STUDY
Victoria's Secret provides an example of our intention and ability to
integrate our products and services to assist our clients in facilitating
transactions and communications with their customers, whether in its stores,
through catalogs or through Web sites. We provide transaction services, credit
services and database marketing services to Victoria's Secret. The Victoria's
Secret credit card that we issue allows us to capture customer name, address and
transaction data in any channel the consumer chooses to shop. We deliver the
information to our marketing database, which is supplemented with additional
data from Victoria's Secret as well as from external sources. This gives us a
detail-rich database that we, together with Victoria's Secret, use in developing
customer acquisition strategies and managing customer relationships. We also
utilize the information we collect and manage for the credit card program to
enhance the transaction services we provide to Victoria's Secret, which include
billing, payment processing and customer care.
3
<PAGE>
OUR STRATEGY
Our strategy is to become a critical component in our clients' success by
helping them build loyal customer relationships. We will do this by continuing
to build and enhance our consumer databases, our marketing capabilities and our
processing efficiencies to help improve our clients' relationships with their
customers. To execute this strategy we intend to:
- increase the penetration of products and services we provide to our
existing client base;
- expand our client base in our existing market sectors, including potential
geographic expansion;
- continue to expand our services and capabilities to help our clients
succeed in multi-channel commerce--in-store, catalog and Internet; and
- consider focused, strategic acquisitions and alliances to enhance our core
capabilities or increase our scale.
OUR HISTORY AND OWNERSHIP
We are the result of the 1996 merger of two entities acquired by Welsh,
Carson, Anderson and Stowe, which involved J.C. Penney's transaction services
business, BSI Business Services, Inc., and The Limited's credit card bank
operation, World Financial Network National Bank. Since then, we have made the
following acquisitions, each accounted for as a purchase, with the results of
operations of the acquired businesses included from the respective closing
dates:
- In November 1996, we acquired the private label portfolio of National City
Bank of Columbus, which consisted of approximately $370.0 million in
receivables and represented over 25 retailers in a broad range of
industries including soft goods, building materials, furniture and
electronics.
- In July 1998, we acquired Loyalty Management Group Canada Inc.
- In September 1998, we acquired Harmonic Systems Incorporated.
- In July 1999, we acquired the network services business of SPS Payment
Systems, Inc., a wholly-owned subsidiary of Associates First Capital
Corporation.
As of January 31, 2000, Welsh, Carson, Anderson & Stowe beneficially owned
73.7% of our common stock, and The Limited, through its wholly owned subsidiary
Limited Commerce Corp., beneficially owned approximately 25.8% of our common
stock. Welsh Carson has the right to designate up to three nominees for election
to our board of directors, and The Limited has the right to designate up to two
nominees. The Limited and its affiliates represented approximately 26.7% of our
1999 consolidated revenue.
------------------------
Our corporate headquarters are located at 17655 Waterview Parkway, Dallas,
Texas 75252, and our telephone number is 972-348-5100.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered......................... 20,000,000 shares
Common stock to be outstanding after the
offering................................... 76,881,518 shares
Use of proceeds.............................. We intend to use approximately
$222.4 million of the net proceeds from the
offering to retire outstanding debt, and the
remaining net proceeds for other general
corporate purposes, including working
capital. In the event that we identify
suitable acquisition candidates or investment
opportunities, we may also use a portion of
the net proceeds to acquire or invest in
complementary businesses, services or
products. We currently have no commitments or
agreements with respect to any acquisition or
investment transactions.
Proposed New York Stock Exchange symbol...... "ADD"
</TABLE>
Unless otherwise indicated, all information in this prospectus:
- gives effect to the 1-for-9 reverse stock split of our common stock to be
effected prior to consummation of this offering;
- reflects the conversion of all outstanding shares of our Series A
cumulative convertible preferred stock into an aggregate of
9,185,591 shares of common stock as of January 31, 2000; and
- reflects the exercise of all outstanding warrants for an aggregate of
167,084 shares of common stock.
The number of shares of common stock described as being outstanding after
this offering excludes the following:
- 2,354,000 shares that we may issue upon the exercise of stock options
outstanding at a weighted average exercise price of $9.50 per share;
- 498,813 additional stock options and shares that we may grant or issue
under our stock option and restricted stock purchase plan; and
- up to 3,000,000 additional shares that we may issue upon exercise of the
underwriters' over-allotment option.
5
<PAGE>
SUMMARY UNAUDITED CALENDAR YEAR AND PRO FORMA CONSOLIDATED FINANCIAL AND
OPERATING INFORMATION
Prior to December 31, 1998, our fiscal year was based on a 52/53-week fiscal
year ending on the Saturday closest to January 31. We have since changed our
fiscal year end to December 31. In order to provide a better basis of
comparison, we have recast our historical operating results to a calendar year
basis for the years ended December 31, 1997 and 1998. In our opinion, these
historical recast financial statements reflect all normal recurring adjustments
necessary for a fair presentation of such financial statements.
In addition to the historical recast financial information, we have included
the following unaudited pro forma information, which we derived from our
unaudited pro forma consolidated financial information included in this
prospectus. The data contained in the pro forma columns give effect to the
following completed acquisitions as if those acquisitions had been consummated
on January 1, 1998, in the case of the income statement and other financial
data, and on December 31, 1999, with respect to the balance sheet data:
- the acquisition of Loyalty Management Group Canada Inc. on July 24, 1998;
- the acquisition of Harmonic Systems Incorporated on September 15, 1998;
and
- the acquisition of the network transaction processing business of SPS
Payment Systems, Inc., a wholly-owned subsidiary of Associates First
Capital Corp., on July 1, 1999.
The supplemental pro forma loss per share gives effect to the conversion of
all outstanding shares of our Series A preferred stock and the exercise of all
outstanding warrants as if the conversion and the exercise had occured at the
beginning of the period. The pro forma as adjusted data give effect to this
offering as if it occured on December 31, 1999. The unaudited pro forma data do
not purport to present what our results of operations or financial position
would actually have been, or to project our results of operations or financial
position for any future period. You should read the following pro forma
information along with the information contained throughout this prospectus,
including the financial statements and the related notes that are included in
this prospectus.
The operating data include EBITDA, which is equal to operating income plus
depreciation and amortization. EBITDA is presented because we use our EBITDA
measure as an integral part of our internal reporting and performance evaluation
for senior management. In addition, 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. EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating income
or net income as an indicator of operating performance or to the statement of
cash flows as a measure of liquidity. In addition, EBITDA is not intended to
represent funds available for dividends, reinvestment or other discretionary
uses, and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles. The EBITDA measure presented in this prospectus may not be
comparable to similarly titled measures presented by other companies.
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PRO FORMA
------------------------
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------ FOR THE YEARS
ENDED
RECAST DECEMBER 31,
-------------------------- ------------------------
1997 1998 1999 1998 1999
---------- ---------- ---------- ----------- ----------
<CAPTION>
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue................................. $ 339,824 $ 474,933 $ 639,254 $ 606,462 $ 663,576
Operating expenses
Processing and servicing.................... 164,968 226,525 341,496 325,401 358,443
Salaries and employee benefits.............. 113,752 169,799 193,699 184,493 196,880
Depreciation and other amortization......... 8,904 8,782 16,183 10,035 16,183
Amortization of purchased intangibles....... 16,974 36,408 49,777 69,582 55,706
---------- ---------- ---------- ----------- ----------
Total operating expenses.................. 304,598 441,514 601,155 589,511 627,212
---------- ---------- ---------- ----------- ----------
Operating income.............................. 35,226 33,419 38,099 16,951 36,364
Interest expense.............................. 15,713 29,295 42,785 38,519 42,785
Income tax expense............................ 6,021 9,970 15,388 7,779 14,416
---------- ---------- ---------- ----------- ----------
Income (loss) from continuing operations...... 13,492 (5,846) (20,074) (29,347) (20,837)
Income (loss) from discontinued operations,
net of taxes................................ (5,635) (3,948) 7,688 (3,948) 7,688
Loss on disposal of discontinued operations,
net of taxes................................ -- -- (3,737) -- (3,737)
---------- ---------- ---------- ----------- ----------
Net income (loss)............................. $ 7,857 $ (9,794) $ (16,123) $ (33,295) $ (16,886)
========== ========== ========== =========== ==========
Earnings (loss) from continuing
operations--basic and diluted............... $ 0.37 $ (0.14) $ (0.49) $ (0.78) $ (0.59)
Earnings (loss) per share--basic and
diluted..................................... $ 0.21 $ (0.24) $ (0.41) $ (0.86) $ (0.54)
Weighted average shares used in computing per
share amounts--basic and diluted............ 36,612 41,308 47,498 46,969 47,498
Supplemental pro forma loss from continuing
operations--basic and diluted............... $ (0.52) $ (0.37)
Supplemental pro forma loss--basic and
diluted..................................... $ (0.59) $ (0.30)
Weighted average shares used in computing
supplemental pro forma per share amounts--
basic and diluted........................... 56,025 56,554
OTHER FINANCIAL DATA
EBITDA........................................ $ 61,104 $ 78,609 $ 104,059 $ 96,568 $ 108,253
EBITDA as a percentage of revenue............. 18.0% 16.6% 16.3% 15.9% 16.3%
SEGMENT OPERATING DATA
Air Miles reward miles issued................. -- 647,357 1,558,427 1,399,077 1,558,427
Transactions processed........................ 922,678 1,134,902 1,810,180 1,814,271 2,104,554
Statements generated.......................... 113,940 130,895 132,817 130,895 132,817
Securitized portfolio......................... $1,821,016 $2,135,340 $2,232,375 $ 2,135,340 $2,232,375
Credit sales.................................. $3,001,461 $3,049,151 $3,132,520 $ 3,049,151 $3,132,520
<CAPTION>
PRO
FORMA
AS OF DECEMBER 31, AS
------------------------------------------ PRO FORMA ADJUSTED
RECAST ----------- ----------
-------------------------- AS OF DECEMBER 31,
1997 1998 1999 1999
---------- ---------- ---------- ------------------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents..................... $ 29,304 $ 47,036 $ 56,546 $ 56,546 $ 108,050
Credit card receivables and seller's
interest.................................... 170,938 139,458 150,804 150,804 150,804
Intangibles and goodwill...................... 93,763 305,365 448,017 448,017 448,017
Total assets.................................. 596,277 1,010,119 1,185,069 1,185,069 1,231,293
Certificates of deposit....................... 40,300 49,500 116,900 116,900 116,900
Short-term debt............................... 148,000 98,484 -- -- --
Long-term and subordinated debt............... 117,673 332,000 318,236 318,236 86,236
Total liabilities............................. 386,104 701,980 775,513 775,513 543,513
Series A preferred stock...................... -- -- 119,400 119,400 --
Total stockholders' equity.................... 210,173 308,139 290,156 290,156 687,780
</TABLE>
7
<PAGE>
RISK FACTORS
BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISKS. THE RISKS DESCRIBED BELOW ARE NOT THE ONLY ONES THAT WE FACE.
ANY OF THE FOLLOWING RISKS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS,
FINANCIAL CONDITION AND OPERATING RESULTS. ADDITIONAL RISKS AND UNCERTAINTIES OF
WHICH WE ARE UNAWARE OR CURRENTLY BELIEVE ARE IMMATERIAL MAY ALSO IMPAIR OUR
BUSINESS OPERATIONS. THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE DUE TO
ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT IN OUR
COMMON STOCK. BEFORE MAKING AN INVESTMENT DECISION, YOU SHOULD ALSO READ THE
OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, INCLUDING OUR FINANCIAL
STATEMENTS AND THE RELATED NOTES.
RISKS RELATED TO OUR BUSINESS
THE FAILURE TO EFFECTIVELY INTEGRATE RECENT ACQUISITIONS COULD ADVERSELY AFFECT
OUR BUSINESS.
We are the result of the August 1996 merger of two entities acquired by our
largest stockholder, which involved 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 the August 1996 merger, we have made
several acquisitions, principally of Loyalty Management Group Canada Inc.,
Harmonic Systems Incorporated and the network transaction processing business of
SPS Payment Systems, Inc. We are currently in the process of integrating the
operations of the network transaction processing business of SPS Payment
Systems, Inc., acquired in July 1999. We expect this integration process to
continue through 2000. If we are unable to successfully integrate the SPS
operations or any other acquired businesses, we may incur substantial costs and
delays or other operational, technical or financial problems, any of which could
harm our business and impact the trading price of our common stock. In addition,
the failure to successfully integrate acquisitions may divert management's
attention from our existing business and could damage our relationships with key
clients and employees.
OUR BUSINESS IS DEPENDENT ON A SMALL NUMBER OF LARGE CLIENTS.
Our 10 largest clients were responsible for approximately 64.1% of our
consolidated revenues during the year ended December 31, 1999.
TRANSACTION SERVICES. Our 10 largest clients in this segment were
responsible for approximately 70.1% of our Transaction Services revenue in the
year ended December 31, 1999. The Limited and its retail affiliates were the
largest Transaction Services client in 1999, representing in excess of 10% of
this segment's 1999 revenue. Our contracts with The Limited and its retail
affiliates expire in 2006. We can give no assurance that these contracts will be
renewed on similar terms or at all.
CREDIT SERVICES. Our two largest clients in this segment were responsible
for 85.2% of our Credit Services revenue in the year ended December 31, 1999.
The Limited and its retail affiliates and Brylane were the largest Credit
Services clients in the year ended December 31, 1999. Our contracts with these
clients expire in 2006. We can give no assurance that these contracts will be
renewed on similar terms or at all.
LOYALTY AND DATABASE MARKETING SERVICES. Our 10 largest clients in this
segment were responsible for approximately 64.3% of our Loyalty and Database
Marketing Services revenue in the year ended December 31, 1999. Bank of Montreal
and Canada Safeway were the two largest Loyalty and Database Marketing Services
clients in the year ended December 31, 1999, each representing in excess of 10%
of this segment's 1999 revenue. Our contracts with these clients expire between
one and three years from now. We can give no assurance that these contracts will
be renewed on similar terms or at all.
A significant decrease in revenues attributable to any of our significant
clients could have a material adverse effect on our business, financial
condition and operating results in general, and those of the affected operating
segment, in particular. In addition, if any of our significant clients were
acquired and the client's new management team elected to phase-out or
discontinue the client's business relationship with us, we could suffer a
material adverse effect. This risk is particularly germane as many of our
significant clients are in market sectors such as petroleum, specialty retail,
supermarkets
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and financial services, which have recently experienced, and are experiencing,
fairly considerable consolidation.
A LARGE NUMBER OF OUR CLIENTS ARE AFFILIATES OF LIMITED COMMERCE CORP., ONE OF
OUR LARGEST PRINCIPAL STOCKHOLDERS.
A large number of our clients are affiliates of Limited Commerce Corp., a
wholly owned subsidiary of The Limited, which beneficially owned approximately
25.8% of our common stock as of January 31, 2000 and maintains two designees on
our board of directors. The Limited and its affiliates represented approximately
26.7% of our 1999 consolidated revenue. The Limited and its retail affiliates
were the largest Transaction Services client in 1999, and together with Brylane
were the largest Credit Services clients in 1999. As a significant stockholder,
The Limited, unlike our other clients, is able to exercise significant influence
over matters requiring stockholder approval, including the election of directors
and the approval of significant corporate transactions. In addition, The
Limited, through a stockholders agreement, has the right to maintain up to two
members of our board of directors, allowing The Limited to exercise influence
over matters requiring board approval.
THE PROFITABILITY OF OUR AIR MILES REWARD PROGRAM, WHICH ACCOUNTS FOR A
SUBSTANTIAL PORTION OF OUR REVENUE AND PROFITS, COULD BE MATERIALLY ADVERSELY
AFFECTED BY THE ACQUISITION AND POTENTIAL RESTRUCTURING OF CANADIAN AIRLINES.
Canadian Airlines is the major supplier of airline tickets that we issue to
collectors of Air Miles reward miles. Canadian Airlines has been acquired by a
company in which Air Canada has an interest. Air Canada has announced its
intention to merge the operations of Canadian Airlines with those of Air Canada.
We expect that this will result in effectively only one major Canadian domestic
air carrier for the foreseeable future. Consolidation of route structure between
the two airlines has already begun, resulting in the reduction of routes,
flights and seats offered by Canadian Airlines. We expect that this
consolidation will continue. Although we have a long term contract with Canadian
Airlines, we cannot predict what impact the acquisition of Canadian Airlines,
route consolidation and any eventual merger of operations will have on the
profitability of our Air Miles reward program. The reduction in available
routes, flights or seats under the contract for use in connection with Air Miles
reward miles redeemed could materially adversely affect the profitability of our
Air Miles reward program.
Canadian Airlines is also engaged in ongoing debt restructuring efforts.
Under applicable Canadian law if Canadian Airlines commences formal
restructuring proceedings, our supply of seats on Canadian Airlines flights
under our contract may be terminated, in which case our rights against Canadian
Airlines may be limited to an unsecured claim against Canadian Airlines in the
restructuring proceedings for the losses we suffer as a result. We have begun
negotiations with Canadian Airlines to determine whether mutually acceptable
adjustments may be made to our contract so that it will remain in full force
despite any restructuring proceedings and airline tickets will continue to be
available under the contract. Canadian Airlines has requested significant price
increases as a condition to reaching any agreement and as a result we do not
know whether an agreement can be reached.
Although our Air Miles reward miles can be redeemed for tickets on other
airlines as well as merchandise, approximately 50% of the Air Miles reward miles
redeemed during the year ended December 31, 1999 were used for airline tickets
on Canadian Airlines. Either termination of our supply of seats under our
contract with Canadian Airlines or a dramatic increase in our cost to purchase
airline tickets could materially adversely affect the profitability of the Air
Miles reward program.
We are seeking solutions that will enable us to continue to operate the Air
Miles reward program on an economic basis, however we can make no assurance that
we will be successful in finding a solution. We are unable to predict the extent
and cost of reducing the adverse consequences of the acquisition and potential
restructuring of Canadian Airlines or the outcome of any legal actions arising
from these circumstances.
Our Air Miles reward program accounted for approximately 25% of our revenues
for the fiscal year ended December 31, 1999. Although we cannot predict the
extent to which revenues or the profitability of the Air Miles reward program
would be adversely affected by a termination of the
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supply of seats under our contract with Canadian Airlines, reductions in
available routes, flights and seats or the increased cost of purchasing airline
tickets, we anticipate that a material loss of revenue could result if we are
not successful in achieving a solution to make Canadian domestic airline tickets
available to us on an economic basis. No assurance can be given as to whether we
will be successful in achieving an acceptable solution or as to the time period
that may be required to implement any proposed solution.
WE ARE SUBJECT TO INTENSE COMPETITION, AND WE EXPECT TO FACE INCREASED
COMPETITION IN THE FUTURE.
GENERAL. The markets for our products and services are highly competitive.
We compete with traditional and online marketing companies, credit card issuers
and data processing companies, as well as with current and potential in-house
operations of our clients. Many of our current and potential competitors have
greater resources than we do, which may impair our ability to compete. Many of
our current and potential competitors have longer operating histories, stronger
brand names and greater financial, technical, marketing and other resources than
we do. In addition, these companies may have existing relationships with our
potential clients and may be able to respond to changes in market dynamics and
technology faster than we can. We cannot assure you that we will be able to
compete successfully against our current and potential competitors. If we are
unable to compete successfully against our competitors, our business will
suffer.
TRANSACTION SERVICES. The payment processing industry is highly
competitive, especially among the five largest payment processors in the U.S.,
which processed approximately 14 billion transactions during 1998. On a pro
forma basis for recent acquisitions, we would have been the fourth largest
payment processor in the U.S., processing 2.1 billion transactions during 1999.
Such competition requires that we continue to invest resources in technological
developments and restricts the prices we can charge for certain services. The
market requires that payment processors provide advanced and efficient
technology, causing some financial institutions and other payment processors to
either leave the business or merge with other providers, resulting in
significant consolidation in the payment processing industry. Industry
consolidation has enabled a few of our competitors to gain access to significant
capital, management, marketing and technological resources that are equal to or
greater than ours. We cannot assure you that we will continue to be able to
compete successfully with such payment processors.
CREDIT SERVICES. We also face intense and increasing competition from
numerous financial services providers, some of which have greater resources than
we do. We compete against third party private label credit card issuers who may
offer lower discount fees and greater incentives to secure new business.
Additionally, our private label cards compete with other card payment types,
primarily general-purpose credit cards like Visa, MasterCard and American
Express, as well as cash, checks and debit cards.
LOYALTY AND DATABASE MARKETING SERVICES. As a provider of loyalty and
database marketing products and services, we generally compete with advertising
and other promotional and loyalty programs, both traditional and online, for a
portion of a client's total marketing budget. In addition, we compete against
internally developed products and services created by our existing and potential
clients. For each of our loyalty and database products and services, we expect
competition to intensify as more competitors enter our market. In addition, new
competitors with our Air Miles reward program may target our sponsors and reward
miles collectors as well as draw rewards from our rewards suppliers. Over the
past year, over half of the Air Miles reward program revenues came from the top
10-15% of our Air Miles reward miles collectors. The loss of these collectors
could impact our ability to generate significant revenue from sponsors and
loyalty partners. The continued attractiveness of our loyalty and rewards
programs will depend in large part on our ability to remain affiliated with
sponsors that are desirable to consumers and to offer rewards that are both
attainable and attractive to consumers. For our database marketing services, our
ability to continue collecting detailed transaction data on consumers is
critical in providing effective customer strategies for our clients.
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LOSS OF DATA CENTER CAPACITY OR INTERRUPTION OF TELECOMMUNICATION LINKS COULD
ADVERSELY AFFECT OUR BUSINESS.
Our ability to protect our data centers against damage from fire, power
loss, telecommunications failure and other disasters is critical to our future.
Our services depend on links to telecommunication providers. Any damage to our
data centers or any failure of our telecommunication links that causes
interruptions in our operations could have a material adverse effect on our
ability to meet our clients' requirements, which could adversely effect our
business, financial condition and operating results.
In order to provide many of our services, we must be able to store,
retrieve, process and manage large databases and periodically expand and upgrade
our capabilities. Any interruption or loss of these capabilities from a computer
malfunction or other reasons could have a material adverse effect on our
business, financial condition and operating results.
We are dependent on a major supplier for transport services to our
transaction processing business. Should there be disruption of the services it
provides to us, the disruption would require us to redirect service to another
provider. To do so would require manual intervention to all locations that are
impacted.
FAILURE TO SAFEGUARD OUR DATABASE AND CONSUMER PRIVACY COULD AFFECT OUR
REPUTATION AMONG OUR CLIENTS AND THEIR CUSTOMERS.
An important feature of our loyalty and marketing database programs and
credit services is our ability to develop and maintain individual consumer
profiles. As part of our reward miles redemption and credit services, we
maintain a marketing database containing information on consumers' account
balances. Although we have extensive security procedures, our databases may be
subject to unauthorized access. If we experience a security breach, the
integrity of our marketing databases could be affected. With respect to our
loyalty and database programs, security and privacy concerns may cause consumers
to resist providing the personal data necessary to support this profiling
capability. The use of our loyalty and database programs or credit services
could decline if any well-publicized compromise of security occurred. We could
also be subject to legal claims from consumers. Any public perception that we
released consumer information without authorization would adversely affect our
ability to attract and retain consumers.
THE FAILURE TO ACCURATELY ESTIMATE THE REDEMPTION OBLIGATION FOR OUR AIR MILES
REWARD PROGRAM COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
Our historical financial statements reflect our estimates of the future
payments to purchase rewards for free travel and other rewards relating to our
Air Miles reward program. If actual redemptions or reward costs are greater than
our estimates, our redemption obligation may be understated, and that could have
a material adverse effect on our business, financial condition and operating
results.
We use several components to estimate this future obligation, which is
recorded as a redemption obligation on our balance sheet. The most significant
component is our estimate of the number of Air Miles reward miles that will
ultimately be redeemed. 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.
A second component relates to the reward cost, which is based on the mix of
rewards anticipated to be provided. Although we believe that our estimation
process is reasonable in light of our analysis and our seven years of operating
experience with the Air Miles reward program, we cannot assure you that our
actual breakage rates or reward cost estimates will approximate our current
assumptions.
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FLUCTUATIONS IN THE TIMING OR QUANTITY OF REWARD MILES REDEEMED BY COLLECTORS
COULD INCREASE OUR NEED FOR WORKING CAPITAL.
We cannot control the timing of a collector's decision to redeem reward
miles or the quantity of reward miles redeemed. We could experience a need for
increased working capital to fund redemptions if collectors redeem Air Miles
reward miles at a rate that is more rapid than we anticipated, which could have
a material adverse effect on our business, financial condition and operating
results. We currently maintain cash, cash equivalents and securities in a
separate reserve account, which we believe are adequate to fund this obligation.
We currently invest some of these reserves in equity securities, and a loss of
principal from the investment of these reserves could affect our ability to fund
redemptions.
LITIGATION RELATING TO INTELLECTUAL PROPERTY RIGHTS COULD HARM OUR BUSINESS.
Third parties may infringe or misappropriate our trademarks or other
intellectual property rights, which could have a material adverse effect on our
business, financial condition or operating results. The actions we take to
protect our trademarks and other proprietary rights may not be adequate.
Litigation may be necessary to enforce our intellectual property rights, protect
our trade secrets or determine the validity and scope of the proprietary rights
of others. We cannot assure you that we will be able to prevent misappropriation
or infringement of our proprietary information. Any infringement or
misappropriation could harm any competitive advantage we currently derive or may
derive from our proprietary rights.
Third parties may assert infringement claims against us. Any claims and any
resulting litigation could subject us to significant liability for damages. An
adverse determination in any litigation of this type could require us to design
around a third party's patent or to license alternative technology from another
party. In addition, litigation is time-consuming and expensive to defend and
could result in the diversion of our time and attention. Any claims from third
parties may also result in limitations on our ability to use the intellectual
property subject to these claims.
DEFAULTS AND BANKRUPTCIES RELATED TO OUR CONSUMER UNSECURED LENDING COULD
ADVERSELY AFFECT US.
The primary risk associated with unsecured lending is the risk of default or
bankruptcy of consumers, resulting in accounts being charged-off as
uncollectible. In addition, general economic factors, such as the rate of
inflation, unemployment levels and interest rates, may result in greater
delinquencies and credit losses among consumers. We may not be able to
successfully identify and evaluate the creditworthiness of cardholders to
minimize delinquencies and losses. Also, we cannot assure you that our pricing
strategy can offset the negative impact on profitability caused by delinquencies
and losses. Increases in writeoffs could have a material adverse effect on our
business, financial condition and operating results.
AS THE AVERAGE AGE OF OUR LOAN PORTFOLIO INCREASES, WE WILL LIKELY EXPERIENCE
INCREASING OR FLUCTUATING LEVELS OF DELINQUENCY AND LOAN LOSSES.
In addition to being affected by general economic conditions and the success
of our collection and recovery efforts, our delinquency and net credit card
receivable charge-off rates at any point in time are affected by, among other
factors, the credit risk of credit card receivables and the average age of our
various credit card account portfolios. The credit risk of our credit card
receivables, in the aggregate, is impacted by the average age of our credit card
portfolio. The average age of credit card receivables affects the stability of
delinquency and loss rates of the portfolio in that delinquency and loss rates
typically increase as the average age of accounts in a credit card portfolio
increases. At December 31, 1999, 20.6% of securitized accounts and 38.1% of
securitized loans were less than 24 months old. Accordingly, we believe that our
loan portfolio will experience increasing or fluctuating levels of delinquency
and loan losses as the average age of our accounts increases. This trend is
already reflected in the change in our net charge-off ratio. The net charge-off
ratio reflects what percent of the average securitized receivables at the
beginning of each month in the period indicated consisted of principal losses
from cardholders unwilling or unable to pay their credit card balances, as well
as
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bankrupt and deceased cardholders, less current period recoveries. For the year
ended December 31, 1999, our securitized net charge-off ratio on an annualized
basis was 7.2% compared to 7.1% for fiscal 1998 and 8.3% for fiscal 1997. We
believe that this ratio will continue to fluctuate but generally rise over the
next year, and over future years, as the average age of our accounts increases.
Any material increases in delinquencies and losses beyond our expectations could
have a material adverse impact on us and the value of our net retained interests
in loans securitized.
BILLING DISPUTES BETWEEN A CARDHOLDER AND A MERCHANT AND FRAUDULENT TRANSACTIONS
SUBMITTED BY A MERCHANT INVOLVING ELECTRONIC PAYMENT CARDS SUCH AS CREDIT
CARDS, DEBIT CARDS OR STORED VALUE CARDS PRESENT RISKS TO OUR PROFITABILITY.
In our bank card processing business, when a billing dispute between a
cardholder and a merchant is resolved in favor of the cardholder, or, when a
card issuer detects fraudulent transactions submitted by a merchant, we charge
back the amount of the transaction to the merchant. We then credit the amount of
the transaction to the cardholder's account. These billing disputes or
chargebacks relate to, among others:
- nonreceipt of merchandise or services;
- unauthorized use of a credit card; and
- general disputes between a customer and a merchant as to the quality of
the goods purchased or the services rendered by the merchant.
If we or our clearing banks are unable to collect amounts charged back to a
merchant's account, and if the merchant refuses or is unable due to bankruptcy
or other reasons to reimburse us for the chargeback, we bear the loss for the
amount of the refund paid to the cardholder. Our contingent liability is greater
in certain industries, such as the direct response marketing industry, where the
cardholder is not present to provide a signature. We attempt to reduce our
exposure to such losses by performing initial and periodic credit reviews of our
merchant clients, by adjusting our rates based, in part, on the merchant's
credit risk, business and industry, and by requiring merchants to create escrow
accounts for the purpose of satisfying amounts charged back to the merchant. We
face chargeback risks with respect to the private label credit card programs we
fund that are similar to the risks we face in our bankcard processing programs.
We cannot assure you that we will not experience significant losses from
chargebacks in the future. Increases in chargebacks not paid by merchants could
have a material adverse effect on our business, financial condition and
operating results.
CHANGES IN ASSUMPTIONS OVER TIME, SUCH AS THE AMOUNT OF PREPAYMENTS FROM AND
DEFAULTS BY CARDHOLDERS, COULD REQUIRE A DECREASE IN THE ESTIMATED VALUE OF
THE INTEREST ONLY STRIPS, AND THE RESIDUAL INTEREST WE RETAIN IN THE CREDIT
CARD RECEIVABLES WE SELL IS ILLIQUID.
ASSUMPTIONS REGARDING FUTURE PREPAYMENTS AND DEFAULT ASSUMPTIONS ARE SUBJECT
TO VOLATILITY THAT COULD MATERIALLY AFFECT OPERATING RESULTS. We finance
substantially all our credit card receivables through asset securitization
transactions in which we sell our credit card receivables to a master trust
which holds the receivables as trustee for third-party investors. We retain the
right to service the receivables we sell. We maintain a residual interest in the
credit card receivables and retain an interest only strip representing the
present value of the right to the excess cash flows generated by the securitized
receivables. We calculate the gain on the sale of receivables and the value of
the interest only strips based on the present value of the anticipated cash flow
stream from the securitized receivables, which is the difference between
(1) interest and other fees paid by cardholders and (2) the sum of the
following:
- pass-through interest paid to third-party investors;
- trustee fees;
- servicing fees which we receive from the trust; and
- estimated loan portfolio losses.
A significant factor affecting the level of anticipated cash flows is the
rate at which the underlying principal of the securitized credit card
receivables is reduced. Prepayments represent principal reductions in excess of
the contractually scheduled reductions. Additional assumptions include
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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.
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 estimated balance sheet
value of the interest only strips through a charge against earnings.
THE RESIDUAL INTEREST WE RETAIN IN THE CREDIT CARD RECEIVABLES WE SELL IS
ILLIQUID. In addition, we cannot assure you that the interest only strips could
in fact be sold at their stated value on the balance sheet, if at all, due to
the lack of a known market for interest only strips.
We recognize a gain on sale in the period during which we sell the credit
card receivables, while we actually receive the cash payments we receive from
our pooling and servicing agreements and servicing fees from the trusts over the
lives of the receivables we sell. This difference in the timing of cash flows
could cause a cash shortfall, which could have a material adverse effect on our
financial condition.
WE DEPEND ON OUR ABILITY TO SELL AND SECURITIZE OUR CREDIT CARD RECEIVABLES TO
FUND NEW RECEIVABLES.
Since January 1996, we have used a program involving the sale and
securitization of our credit card receivables as our primary funding vehicle for
credit card receivables. A number of factors affect securitization transactions,
some of which are beyond our control, including:
- conditions in the securities markets in general;
- conditions in the asset-backed securitization market;
- conformity of credit card receivables to rating agency requirements and
changes in these requirements; and
- availability of credit enhancement.
These factors could adversely affect our ability to effect securitization
transactions or the benefits to us of securitization transactions, including the
value of our interest only strips or our ability to sell interest only strips or
portions of our interest in the receivables.
In addition, we have overcollateralized and maintained an interest in our
securitizations in order to achieve better credit ratings. Failure to obtain
acceptable credit ratings or more stringent credit enhancement requirements
could decrease the efficiency of or have an adverse effect on the timing of, or
our ability to effect, future securitizations. Securitization transactions
subject us to covenants such as receivables performance and the continued
solvency of private label program participants. If we do not satisfy these
covenants, an early amortization event could occur. In an early amortization
event, the trustee would hold our interest in the related receivables and excess
interest income until such time as the securization investors are fully repaid.
The occurrence of an early amortization event would significantly limit our
ability to securitize additional receivables.
All receivables held by the World Financial Network Credit Card Master Trust
III relate to Service Merchandise, which is in voluntary Chapter 11 bankruptcy.
This bankruptcy triggered an early amortization event. As of December 31, 1999,
this trust had a balance of $115.4 million in credit card receivables related to
this account, which together with excess interest income, is being held in the
trust until other holders of interests in the trust are fully repaid.
We intend to continue public securitizations of our credit card receivables.
The inability to securitize credit card receivables due to changes in the
market, the unavailability of credit enhancements, an early amortization event,
or any other circumstance or event would have a material adverse effect on our
business, financial condition and operating results.
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THE TRUST MAY TERMINATE OUR SERVICING RIGHTS.
Our pooling and servicing agreements related to our securitizations provide
that the trustee may terminate our servicing rights if we fail to perform our
servicing obligations to the certificate holders, such as the failure to make
payments to certificate holders. As of the date of this prospectus, no servicing
rights had been terminated. However, we cannot assure you that we will be able
to perform our servicing obligations and, if we are unable to perform servicing
obligations, that servicing rights will not be terminated. A termination of our
servicing rights would have a material adverse effect on our business, financial
conditions and operating results.
WE EXPECT GROWTH IN OUR CREDIT SERVICES SEGMENT RESULTING FROM NEW AND ACQUIRED
PRIVATE LABEL CARD PROGRAMS, WHOSE CREDIT CARD RECEIVABLE PERFORMANCE MAY NOT
BE CONSISTENT WITH THAT OF OUR EXISTING PROGRAMS.
An important source of growth in our private card operations is expected to
come from the acquisition of existing private label programs and from initiating
new private label programs at retailers that previously did not operate a
program. Although we believe our pricing and models for determining credit risk
are designed to evaluate the credit risk of existing programs and the credit
risk we are willing to assume for start-up programs, and we have demonstrated
our ability to integrate and operate private label programs, there can be no
assurance that the loss experience on newly acquired and start-up plans will be
consistent with our more established programs. The failure to successfully
underwrite these private label programs may result in increased portfolio losses
and reduce our profitability and could have a material adverse effect on our
business, financial condition and operating results.
INTEREST RATE FLUCTUATIONS IMPACT THE YIELD ON OUR ASSETS AND FUNDING EXPENSE.
An increase or decrease in market interest rates could have a negative
impact on the amount we realize from the net interest spread between the yield
on our assets and our cost of funding. A rise in market interest rates may
indirectly impact the payment performance of consumers or the value of, or
amount we could realize from sale of, interest only strips. We try to minimize
the impact of changes in market interest rates on our cash flow, asset value and
net income primarily by funding fixed rate assets with fixed rate funding
sources and by using interest-rate derivatives to match asset and liability
repricings. Nonetheless, changes in market interest rates may have a negative
impact on us.
OUR HEDGING ACTIVITY SUBJECTS US TO OFF-BALANCE SHEET RISK.
The interest rate swap and treasury lock agreements we use to reduce our
exposure to fluctuations in interest rates subject us to off-balance sheet risk.
These off-balance sheet financial instruments involve elements of credit and
interest rate risk in excess of the amount recognized on our balance sheet. Our
hedging policy subjects us to risks relating to the creditworthiness of the
commercial banks that we contract with in our hedging transactions. If one of
these banks cannot honor its obligations, we may suffer a loss. The purpose of
our hedging policy is to reduce the effect of interest rate fluctuations on our
results of operations. Therefore, while our hedging policy reduces our exposure
to losses resulting from unfavorable changes in interest rates, it also reduces
or eliminates our ability to profit from favorable changes in interest rates.
POSTAL RATE INCREASES COULD LEAD TO REDUCED VOLUME OF BUSINESS.
Postal rate increases have negatively impacted the direct marketing industry
during the past years. Any future increases may force us and our clients that
are direct mailers to mail fewer pieces and to target our and their prospects
more carefully. This response by direct mailers could decrease the amount of
processing services purchased from us, which could have a material adverse
effect on our business, financial condition and operating results.
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FLUCTUATIONS IN THE EXCHANGE RATES BETWEEN THE U.S. DOLLAR AND CANADIAN DOLLAR
MAY AFFECT OUR OPERATING RESULTS.
A large portion of our Loyalty and Database Marketing services revenue
relates to the Air Miles reward program and is in Canadian dollars. We are
exposed to fluctuations in the exchange rate between the U.S. dollar and the
Canadian dollar through our operations in Canada. Although we have entered into
cross-currency hedge transactions to fix the exchange rate on any Canadian debt
repayment due to a U.S. counter party, we do not hedge our U.S./Canadian
accounting translations. Significant changes in the exchange rate could have a
material adverse effect on our business, financial condition and operating
results.
IF OUR BANK SUBSIDIARY FAILS TO MEET CREDIT CARD BANK CRITERIA, WE MAY BECOME
SUBJECT TO REGULATION UNDER THE BANK HOLDING COMPANY ACT.
Our bank subsidiary, World Financial, is a limited purpose credit card bank.
The Bank Insurance Fund, which is administered by the Federal Deposit Insurance
Corporation, insures the deposits of World Financial. World Financial is subject
to regulation and examination by the Office of the Comptroller of the Currency,
its primary regulator, and is also subject to regulation by the Board of
Governors of the Federal Reserve System and the Federal Deposit Insurance
Corporation, as back-up regulators. World Financial is not a "bank" as defined
under the Bank Holding Company Act because it is in compliance with the
following requirements:
- it engages only in credit card operations;
- it does not accept demand deposits or deposits that the depositor may
withdraw by check or similar means for payment to third parties or others;
- it does not accept any savings or time deposits of less than $100,000,
except for deposits pledged as collateral for extensions of credit;
- it maintains only one office that accepts deposits; and
- it does not engage in the business of making commercial loans.
If World Financial failed to meet the credit card bank criteria described
above, World Financial would be a "bank" as defined by the Bank Holding Company
Act, subjecting us to the provisions, requirements and restrictions of the Bank
Holding Company Act as a bank holding company. We believe that becoming a bank
holding company would significantly harm us, as we could be required to either
divest any activities deemed to be non-banking activities or cease any
activities not permissible for a bank holding company and its affiliates.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO RETAIN KEY PERSONNEL.
Our future success is substantially dependent upon the continued services of
our senior management team. The loss of the services of any of our executive
officers could have a material adverse effect on our business. Many of our
executive officers have only been employed by us for a short time. We do not
currently have "key person" life insurance policies on any of our employees, and
we generally do not enter into employment agreements with our employees. Our
future success also depends on our ability to attract and retain highly
qualified personnel. The competition for qualified personnel in our markets is
intense, and we may be unable to attract or retain highly qualified personnel in
the future.
SOME OF OUR STOCKHOLDERS OWN A SIGNIFICANT AMOUNT OF OUR COMMON STOCK.
As of December 31, 1999, Limited Commerce Corp., a wholly owned subsidiary
of The Limited, and the affiliated entities of Welsh, Carson, Anderson & Stowe,
in the aggregate beneficially owned approximately 99.5% of our outstanding
common stock and would have owned 73.6% of our common stock as of that date
after giving pro forma effect to this offering. As a result, these stockholders
are able to exercise significant influence over, and in most cases control,
matters requiring stockholder approval, including the election of directors and
approval of significant corporate transactions. This
16
<PAGE>
concentration of ownership may also have the effect of delaying, preventing or
deterring a change in control that may otherwise be beneficial to you.
DELAWARE LAW AND OUR CHARTER DOCUMENTS COULD PREVENT A TAKEOVER THAT MIGHT BE
BENEFICIAL TO YOU.
Delaware law, as well as provisions of our certificate of incorporation and
bylaws, could discourage unsolicited proposals to acquire us, even though such
proposals may be beneficial to you. These provisions include:
- a board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms;
- our board's authority to issue shares of preferred stock without
stockholder approval; and
- provisions of Delaware law that restrict many business combinations and
provide that directors serving on staggered boards of directors, such as
ours, may be removed only for cause.
These provisions of our certificate of incorporation, bylaws and Delaware law
could discourage tender offers or other transactions that might otherwise result
in our stockholders receiving a premium over the market price for our common
stock.
THE FAILURE TO FAVORABLY NEGOTIATE AND INTEGRATE FUTURE ACQUISITIONS COULD
ADVERSELY AFFECT OUR BUSINESS.
We have made several acquisitions since August 1996, and we intend to
acquire additional complementary businesses as part of our growth strategy.
Although we may acquire additional businesses, we may not be able to
successfully integrate them in a timely manner or at all. If we are not able to
successfully integrate acquired businesses, we may incur substantial costs and
delays or other operational, technical or financial problems. In addition, the
failure to successfully integrate acquisitions may divert management's attention
from our existing business and may damage our relationships with key clients and
employees.
To finance future acquisitions, we may issue equity securities that could be
dilutive to our stockholders. We may also incur debt and additional amortization
expenses related to goodwill and other intangible assets in future acquisitions.
The interest expense related to this debt and additional amortization expense
may significantly reduce our profitability and could have a material adverse
effect on our business, financial condition and operating results.
RISKS RELATED TO OUR INDUSTRY
THE MARKETS FOR THE SERVICES THAT WE OFFER MAY FAIL TO EXPAND OR MAY CONTRACT.
Our growth and continued profitability relies on acceptance of the services
that we offer. If demand for loyalty and database marketing, transaction or
credit services decreases, the price of our common stock could fall and you
could lose value in your investment. The use of loyalty and database marketing
by retailers is in its early stages and we cannot guarantee that merchants will
continue to use these types of marketing strategies. Changes in technology may
enable merchants and retail companies to directly process transactions in a cost
efficient manner without the use of our services, which could have a material
adverse effect on our business, financial condition and operating results.
INDUSTRY RISKS RELATED TO CONSUMER CREDIT PRODUCTS COULD NEGATIVELY IMPACT US.
We face a number of risks associated with unsecured lending, including the
following:
- the risk that delinquencies and credit losses will increase because of
future economic downturns;
- the risk that an increasing number of consumers will default on the
payment of their outstanding balances or seek protection under bankruptcy
laws;
- the risk that fraud by cardholders and third parties will increase;
- the risk that increased criticism from consumer advocates and the media
could hurt consumer acceptance of our products; and
17
<PAGE>
- the risk of litigation, including class action litigation, challenging our
product terms, rates, disclosures, collections or other practices, under
state and Federal consumer protection statutes and other laws.
Our business, financial condition and operating results could be materially
adversely affected if any of these risks come to fruition.
LEGISLATION RELATING TO CONSUMER PRIVACY MAY AFFECT OUR ABILITY TO COLLECT DATA.
The enactment of legislation or industry regulations arising from public
concern over consumer privacy issues could have a material adverse impact on our
loyalty and database marketing services. Any such legislation or industry
regulations could place restrictions upon the collection and use of information
that is currently legally available, which could materially increase our cost of
collecting some data. Legislation or industry regulation could also prohibit us
from collecting or disseminating certain types of data, which could adversely
affect our ability to meet our clients' requirements.
In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act, which 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 could have a material adverse effect on our
business, financial condition and operating results.
The Clinton Administration is investigating further administrative action in
the area of privacy. In addition, Congress and a number of states are
considering further privacy legislation. It is possible that new privacy
protections will not be limited to financial institutions but could broadly
apply to the activities of all companies.
The Canadian federal government and Minister of Industry of Canada are
sponsoring comprehensive private sector privacy legislation that would apply to
organizations engaged in any commercial activities in Canada. Because the
legislation has government support, it will likely be enacted in the near term.
If enacted as currently proposed, it would enact into law 10 privacy principles
from the Canadian Standards Association's Model Privacy Code. The bill would
also require organizations to obtain consent to the collection, use or
disclosure of personal information. The nature of the required consent will
depend on the sensitivity of the personal information and will permit personal
information to be used only for the purposes for which it was collected. The
Province of Quebec has had similar privacy legislation applicable to the private
sector in that province since 1994, and other provinces are considering further
privacy legislation.
CURRENT AND PROPOSED REGULATION AND LEGISLATION RELATING TO OUR CREDIT SERVICES
COULD LIMIT OUR BUSINESS ACTIVITIES, PRODUCT OFFERINGS AND FEES CHARGED.
Various Federal and state laws and regulations significantly limit the
credit services activities in which we are permitted to engage. Such laws and
regulations, among other things, limit the fees and other charges that we can
impose on customers, limit or prescribe certain other terms of our products and
services, require specified disclosures to consumers, or require that we
maintain certain licenses, qualifications and capital requirements. 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
18
<PAGE>
material adverse effect on our ability to collect our receivables and generate
fees on the receivables, thereby adversely affecting our business, financial
condition and operating results.
STATE TAX ISSUES COULD HAVE A NEGATIVE EFFECT ON OUR BUSINESS.
Transaction processing companies may be subject to state taxation of certain
portions of their fees charged to merchants for their services. If we are
required to pay such taxes and are unable to pass this tax expense through to
our merchant clients, our business, financial condition and operating results
could be adversely affected.
LAWS AND REGULATIONS PERTAINING TO THE INTERNET MAY ADVERSELY AFFECT OUR
BUSINESS.
An increasing number of laws and regulations pertain to the Internet. These
laws and regulations relate to liability for information retrieved from or
transmitted over the Internet, on-line content regulation, user privacy,
taxation and the quality of products and services. Moreover, the applicability
to the Internet of existing laws governing intellectual property ownership and
infringement, copyright, trademark, trade secret, obscenity, libel, employment,
personal privacy and other issues is uncertain and developing. Any new law or
regulation pertaining to the Internet, or the application or interpretation of
existing laws, could decrease the demand for our promotional services, increase
our cost of doing business or otherwise have a material adverse effect on our
business, results of operations and financial condition.
RISKS RELATED TO THIS OFFERING
IF THE PRICE OF OUR COMMON STOCK FLUCTUATES SIGNIFICANTLY, YOUR INVESTMENT COULD
LOSE VALUE.
Prior to this offering, there has been no public market for our common
stock. Although we have applied to have our common stock listed on the New York
Stock Exchange, we cannot assure you that an active public market will develop
for our common stock or that our common stock will trade in the public market
subsequent to this offering at or above the initial public offering price. If an
active public market for our common stock does not develop, the trading price
and liquidity of our common stock will be materially and adversely affected.
Negotiations between us and the underwriters will determine the initial offering
price, which may not be indicative of the trading price for our common stock
after this offering. In addition, the stock market is subject to significant
price and volume fluctuations, and the price of our common stock could fluctuate
widely in response to several factors, including:
- our quarterly operating results;
- changes in our earnings estimates;
- additions or departures of key personnel;
- changes in the business, earnings estimates or market perceptions of our
competitors;
- changes in general market or economic conditions; and
- announcements of legislative or regulatory change.
WE HAVE A LARGE NUMBER OF SHARES THAT ARE ELIGIBLE FOR FUTURE SALE AND, IF THESE
SHARES ARE SOLD IN THE FUTURE, YOUR INVESTMENT WILL BE DILUTED.
If a large number of shares of our common stock are sold in the open market
after this offering, or the market perceives that such sales could occur, the
trading price of our common stock could decrease. After this offering, we will
have an aggregate of 115,622,721 shares of our common stock authorized but
unissued and not reserved for specific purposes. In general, we may issue all of
these
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<PAGE>
shares without any action or approval by our stockholders. We may pursue
acquisitions of competitors and related businesses and may issue shares of our
common stock in connection with these acquisitions.
Upon consummation of the offering, we will have 76,881,518 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 56,881,518 shares, 72,013 shares will be freely transferable
and 56,809,505 shares will be "restricted securities" as that term is defined in
Rule 144 under the Securities Act. Our executive officers, directors and our
principal stockholders have agreed that, subject to various limitations, for a
period of 180 days following the date of this prospectus, they will not, without
the prior written consent of Bear, Stearns & Co. Inc., offer, sell, or grant any
option to purchase or otherwise dispose of our common stock or any securities
convertible into or exchangeable for our common stock.
We have also reserved 2,966,667 shares of our common stock for issuance
under our stock option and restricted stock purchase plan, of which 2,354,000
are issuable upon exercise of options granted as of January 31, 2000, including
options to purchase 1,312,722 shares exercisable as of January 31, 2000 or that
will become exercisable within 60 days after such date. Any shares issued in
connection with the exercise of currently outstanding stock options or otherwise
would further dilute your investment in our common stock.
OUR MANAGEMENT'S BROAD DISCRETION IN THE USE OF THE PROCEEDS OF THIS OFFERING
MAY ADVERSELY AFFECT YOUR INVESTMENT.
Our management can spend a significant portion of the proceeds from this
offering in ways with which our stockholders may not agree. We intend to use
approximately $222.4 million of the net proceeds from the offering to retire
outstanding debt. We expect that the remaining net proceeds will be available
for general corporate purposes, including working capital. We may, however, also
use a portion of the net proceeds to acquire or invest in complementary
businesses, technologies, products or services, although we currently have no
commitments or agreements with respect to transactions of that type.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents included or incorporated by reference in
this prospectus may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Such statements may use words such as "anticipate,"
"believe," "estimate," "expect," "intend," "predict," "project" and similar
expressions as they relate to us or our management. When we make forward-looking
statements, we are basing them on our management's beliefs and assumptions,
using information currently available to us. These forward-looking statements
are subject to risks, uncertainties and assumptions, including but not limited
to, risks, uncertainties and assumptions discussed under the section "Risk
Factors" and elsewhere in this prospectus.
If one or more of these or other risks or uncertainties materialize, or if
our underlying assumptions prove to be incorrect, actual results may vary
materially from what we projected. Any forward-looking statements you read in
this prospectus reflect our current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to our
operations, results of operations, growth strategy and liquidity. All subsequent
written and oral forward-looking statements attributable to us or individuals
acting on our behalf are expressly qualified in their entirety by this
paragraph. You should specifically consider the factors identified under the
section "Risk Factors" and elsewhere in this prospectus which could cause actual
results to differ before making an investment decision.
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<PAGE>
USE OF PROCEEDS
The net proceeds from this offering will be approximately $282.0 million, or
$324.3 million if the underwriters exercise their over-allotment option in full,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses.
We anticipate amending our current credit agreement to maintain our current
borrowing capacity and to allow re-payment of the subordinated notes described
below. Following the repayment of $222.4 million of debt, as described below, we
expect to use the balance of the net proceeds for working capital and general
corporate purposes.
A portion of the net proceeds and funds available under our amended credit
agreement may be used to acquire or invest in complementary businesses,
technologies, products or services or to invest in geographic expansion.
Although we are not contemplating any specific acquisitions at this time and no
portion of the net proceeds has been allocated for any acquisition, we evaluate
acquisition opportunities on an ongoing basis. Our management will have broad
discretion in the application of the net proceeds. Pending use, we intend to
invest the net proceeds in short-term interest-bearing, investment-grade
instruments, certificates of deposit or direct or guaranteed obligations of
government agencies of the United States.
The following is a summary of the intended uses of proceeds from this
offering:
<TABLE>
<S> <C>
Prepayment of 10% Subordinated Note due October 25, 2005
issued to WCAS Capital Partners II, L.P................... $ 30,000,000
Prepayment of 10% Subordinated Note due October 25, 2005
issued to Limited Commerce Corp........................... 20,000,000
Prepayment of 10% Subordinated Note due September 15, 2008
issued to WCAS Capital Partners III, L.P.................. 52,000,000
Reduction of the outstanding term loan under our credit
agreement................................................. 120,360,500
Working capital............................................. 59,639,500
------------------------------
282,000,000
Estimated fees, commissions, underwriting discounts and
expenses
related to this offering.................................. 18,000,000
------------------------------
Total proceeds............................................ $ 300,000,000
==============================
</TABLE>
The obligations intended to be repaid, in full or in part, are more fully
described as follows:
- a 10% subordinated note issued to WCAS Capital Partners II, L.P., in the
principal amount of $30.0 million, and a 10% subordinated note issued to
the Limited Commerce Corp., in the principal amount of $20.0 million.
Principal on the notes is due on October 25, 2005 and interest is payable
semi-annually in arrears on each January 1 and July 1. The notes were
originally issued in January 1996 to finance, in part, the acquisition of
BSI Business Services, Inc., now known as ADS Alliance Data Systems, Inc.
- a 10% subordinated note issued to WCAS Capital Partners III, L.P. in the
principal amount of $52.0 million. Principal 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
note was originally issued in September 1998 to finance, in part, the
acquisition of Harmonic Systems Incorporated.
- a $330.0 million credit agreement entered into in July 1998 consisting of
a $130.0 million U.S. Term Loan, a $50.0 million Canadian A Term Loan and
a $50.0 million Canadian B Term Loan, and a $100.0 million revolving loan
commitment. The term loans and the revolving loan commitment are at a
daily floating rate equal to the sum of the Euro-dollar margin plus the
London Interbank Offered Rate applicable to the period for each
Euro-dollar loan. Principal is
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<PAGE>
payable annually. Interest is payable quarterly for the base rate loans
and payable on the last day of the Euro-dollar loan period for each
Euro-dollar loan. The U.S. Term Loan, the Canadian A Term Loan, and the
revolving loan commitment mature on July 25, 2003 and the Canadian B Term
Loan matures on July 25, 2005. Since July 1998 we have used approximately
$230.0 million of the term loans for general corporate purposes, including
working capital. We use drawings under the revolving loan commitment
throughout the year for general corporate purposes, including working
capital. We are currently amending this agreement.
DIVIDEND POLICY
We have never declared or paid any dividends on our common stock. We do not
anticipate paying any cash dividends in the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of the board of directors and will be dependent upon our
financial condition, operating results, capital requirements and other factors
that the board of directors deems relevant. In addition, under the terms of our
credit agreement, we cannot declare or pay dividends or return capital to our
stockholders, nor can we authorize or make any other distribution, payment or
delivery of property or cash to our stockholders.
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<PAGE>
DILUTION
Our pro forma net deficit in tangible book value as of December 31, 1999 was
approximately $38.5 million, or approximately $0.68 per share of common stock,
after giving effect to the conversion of all our outstanding shares of Series A
preferred stock into common stock and the exercise of all outstanding warrants
for 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 and the exercise of all
outstanding warrants for 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 20,000,000
shares of common stock in this offering at an assumed initial public offering
price of $15.00 per share and after deduction of the estimated underwriting
discounts and commissions and estimated offering expenses payable by us, our pro
forma net tangible book value as of December 31, 1999 would have been
approximately $239.8 million, or $3.12 per share. This represents an immediate
increase in pro forma net tangible book value to existing stockholders
attibutable to new investors of $3.88 per share and the immediate dilution of
$11.88 per share to new investors.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $15.00
Pro forma net deficit in tangible book value per share
before offering......................................... $(0.68)
Increase per share attributable to new investors.......... 3.80
------
Pro forma net tangible book value per share after the
offering.................................................. 3.12
------
Dilution per share to new investors......................... $11.88
======
</TABLE>
The following table sets forth as of December 31, 1999, after giving effect
to the conversion of all our outstanding shares of Series A preferred stock into
common stock and the exercise of all outstanding warrants for common stock, the
total consideration paid and the average price per share paid by our existing
stockholders and by new investors, before deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us at an
assumed initial public offering price of $15.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------- ------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------- -------- -------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders.......................... 56,882 74.0% $347,552 53.7% $ 6.11
New investors.................................. 20,000 26.0 300,000 46.3 15.00
------ ----- -------- -----
Total........................................ 76,882 100.0% $647,552 100.0%
====== ===== ======== =====
</TABLE>
This table assumes no options were exercised after December 31, 1999. As of
December 31, 1999, there were outstanding options to purchase a total of
2,354,000 shares of common stock at a weighted average exercise price of $9.50
per share and 2,966,667 shares of common stock reserved for issuance under our
stock option and restricted stock purchase plan. If all outstanding options were
exercised on the date of the closing of the offering, new investors purchasing
shares in this offering would suffer dilution per share of $11.97.
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<PAGE>
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
December 31, 1999 as follows:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all of our Series A
preferred stock into common stock and the exercise of all outstanding
warrants for common stock; and
- on a pro forma as adjusted basis to give effect to the sale of the
20,000,000 shares of our common stock offered by this prospectus at an
assumed initial public offering price of $15.00 per share and the
application of the net proceeds from the sale, having deducted estimated
underwriting discounts and commissions and estimated offering expenses.
You should read this table in conjunction with the consolidated financial
statements and related notes that are included or incorporated by reference in
this prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 56,546 $ 58,050 $117,690
======== ======== ========
Certificates of deposit..................................... $ 86,600 $ 86,600 $ 86,600
Short-term debt............................................. 31,625 31,625 4,125
-------- -------- --------
Total short-term debt..................................... $118,225 $118,225 $ 90,725
======== ======== ========
Long-term debt, excluding current portion:
Certificates of deposit................................... $ 30,300 $ 30,300 $ 30,300
Senior credit facility.................................... 184,611 184,611 91,751
Subordinated notes........................................ 102,000 102,000 --
Series A cumulative convertible preferred stock, $0.01 par
value; 120 shares authorized, issued and outstanding,
actual; none issued or outstanding, pro forma and as
adjusted.................................................. 119,400 -- --
Stockholders' equity:
Common stock, $0.01 par value; 66,667 shares authorized,
actual and pro forma; 200,000 shares authorized, as
adjusted; 47,529 shares issued and outstanding, actual;
56,881 shares issued and outstanding, pro forma; 76,881
shares issued and outstanding, as adjusted.............. 475 569 769
Additional paid-in capital................................ 226,174 346,984 628,784
Retained earnings......................................... 63,507 63,507 58,227
-------- -------- --------
Total stockholders' equity.............................. 290,156 411,060 687,780
-------- -------- --------
Total capitalization.................................. $726,467 $727,971 $809,831
======== ======== ========
</TABLE>
We expect there to be 76,881,518 shares of common stock outstanding after
this offering. In addition to the shares of common stock to be outstanding after
this offering, we may issue additional shares of common stock.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information is
based on the unaudited financial statements of Alliance Data Systems
Corporation, Loyalty Management Group Canada Inc., Harmonic Systems
Incorporated, and the network transaction processing business of SPS Payment
Systems, Inc. included elsewhere in this prospectus. The unaudited pro forma
adjustments are based upon certain assumptions that we believe are reasonable.
The unaudited pro forma consolidated financial information and accompanying
notes should be read in conjunction with the historical financial statements of
Alliance Data Systems Corporation, Loyalty Management Group Canada Inc.,
Harmonic Systems Incorporated and the network transaction processing business of
SPS Payment Systems, Inc., and the respective notes to those statements, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus.
The data contained in the pro forma columns give effect to the following
completed acquisitions, each accounted for under the purchase method of
accounting, as if those acquisitions had been consummated on January 1, 1998,
with respect to the income statement:
- the acquisition of Loyalty Management Group Canada Inc., effective
July 24, 1998;
- the acquisition of Harmonic Systems Incorporated, effective September 15,
1998; and
- the acquisition of the network transaction processing business of SPS
Payment Systems, Inc., effective July 1, 1999.
No pro forma balance sheet as of December 31, 1999 has been presented as
there is no difference between the historical and pro forma information as of
that date. 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.
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<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
CALENDAR YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------------------------
HARMONIC PRO
ADSC LOYALTY(1) SYSTEMS(1) SPS(1) SUBTOTAL ADJUSTMENTS FORMA
-------- ---------- ----------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenue...................... $474,933 $71,765 $12,090 $47,674 $606,462 $ -- $606,462
Operating expenses
Processing and servicing......... 226,525 51,288 16,328 31,260 325,401 -- 325,401
Salaries and employee benefits... 169,799 8,363 -- 6,331 184,493 -- 184,493
Depreciation and other
amortization................... 8,782 805 448 -- 10,035 -- 10,035
Amortization of purchased
intangibles.................... 36,408 2,020 -- -- 38,428 31,154 (2) 69,582
-------- ------- ------- ------- -------- -------- --------
Total operating expenses....... 441,514 62,476 16,776 37,591 558,357 31,154 589,511
-------- ------- ------- ------- -------- -------- --------
Operating income (loss)............ 33,419 9,289 (4,686) 10,083 48,105 (31,154) 16,951
Interest expense................... 29,295 203 221 -- 29,719 8,800 (3) 38,519
Income tax expense................. 9,970 4,878 -- 3,710 18,558 (10,779)(4) 7,779
-------- ------- ------- ------- -------- -------- --------
Income (loss) from continuing
operations....................... $ (5,846) $ 4,208 $(4,907) $ 6,373 $ (172) $(29,175) $(29,347)
======== ======= ======= ======= ======== ======== ========
Earnings (loss) per share from
continuing operations -- basic
and diluted...................... $ (0.14) $ (0.78)
======== ========
Weighted average shares used in
computing per share amounts --
basic and diluted................ 41,308 5,661 46,949
======== ======== ========
</TABLE>
See the accompanying notes on page 28.
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<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-------------------------------------------------------
PRO
ADSC SPS(1) SUBTOTAL ADJUSTMENTS FORMA
-------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Total revenue..................................... $639,254 $24,322 $663,576 $ -- $663,576
Operating expenses
Processing and servicing........................ 341,496 16,947 358,443 -- 358,443
Salaries and employee benefits.................. 193,699 3,181 196,880 -- 196,880
Depreciation and other amortization............. 16,183 -- 16,183 -- 16,183
Amortization of purchased intangibles........... 49,777 -- 49,777 5,929 (2) 55,706
-------- ------- -------- ------- --------
Total operating expenses........................ 601,155 20,128 621,283 5,929 627,212
-------- ------- -------- ------- --------
Operating income (loss)........................... 38,099 4,194 42,293 (5,929) 36,364
Interest expense.................................. 42,785 -- 42,785 -- 42,785
Income tax expense................................ 15,388 1,543 16,931 (2,515 )(4) 14,416
-------- ------- -------- ------- --------
Income (loss) from continuing operations.......... $(20,074) $ 2,651 $(17,423) $(4,957) $(20,837)
======== ======= ======== ======= ========
Earnings (loss) per share from continuing
operations--basic and diluted................... $ (0.49) $ (0.59)
======== ========
Weighted average shares used in computing per
share amounts--basic and diluted................ 47,498 47,498
======== ========
</TABLE>
See the accompanying notes on page 28.
27
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS)
The Unaudited Pro Forma Consolidated Statements of Operations for the two
years ended December 31, 1999 reflect the pro forma adjustments for the
acquisitions previously mentioned. The 1998 statements are presented on a recast
calendar-year basis so as to provide a better basis of comparison to the 1999
statements.
(1) Represents operating activity for each of the respective acquired businesses
for the periods set forth below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------
1998 1999
---------- ---------
<S> <C> <C>
Loyalty........................................... 7 months --
Harmonic Systems.................................. 9 months --
SPS............................................... 12 months 6 months
</TABLE>
(2) Represents pro forma adjustments to goodwill and other purchased intangibles
amortization in connection with the acquisitions as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Loyalty.................................................... $14,505 $ --
Harmonic Systems........................................... 4,792 --
SPS........................................................ 11,857 5,929
------- ------
$31,154 $5,929
======= ======
</TABLE>
We amortize goodwill over a 20 to 25 year life. We amortize other purchased
intangibles over a three to five year period.
(3) Represents pro forma adjustments to interest expense related to debt
incurred in connection with the Loyalty and Harmonic Systems acquisitions.
The interest expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Loyalty..................................................... $4,900
Harmonic Systems............................................ 3,900
------
$8,800
======
</TABLE>
(4) Represents the:
- tax effect of pro forma adjustments including amortization expense related
to the SPS acquisition but excluding amortization expense related to the
Loyalty and Harmonic Systems acquisitions; and
- recognition of tax expense for the acquired businesses which had not
recorded tax expense.
28
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
We are the result of a 1996 merger of two entities acquired by Welsh,
Carson, Anderson & Stowe, which involved J.C. Penney's transaction services
business, BSI Business Services, Inc., and The Limited's credit card bank
operation, World Financial. Prior to December 31, 1998, our fiscal year was
based on a 52/53 week fiscal year ending on the Saturday closest to January 31.
We have since changed our fiscal year end to December 31. The following table
sets forth our summary historical financial information for the periods ended
and as of the dates indicated. Fiscal 1996, fiscal 1997, fiscal 1998, and fiscal
1999 financial statements were audited by Deloitte & Touche LLP. Fiscal 1995
financial statements were audited by other auditors. 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.
<TABLE>
<CAPTION>
FISCAL
----------------------------------------------------
1995(1) 1996(2) 1997(3) 1998(4) 1999(5)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenue............................................... $178,385 $280,935 $353,399 $434,309 $639,254
Operating expenses
Processing and servicing................................ 84,883 132,663 161,360 209,013 341,496
Salaries and employee benefits.......................... 45,035 100,928 127,087 156,464 193,699
Depreciation and other amortization..................... 3,629 6,318 7,402 8,270 16,183
Amortization of purchased intangibles................... -- 14,371 19,061 34,321 49,777
-------- -------- -------- -------- --------
Total operating expenses.............................. 133,547 254,280 314,910 408,068 601,155
-------- -------- -------- -------- --------
Operating income............................................ 44,838 26,655 38,489 26,241 38,099
Interest expense............................................ -- 5,649 15,459 27,884 42,785
-------- -------- -------- -------- --------
Income (loss) from continuing operations before income
taxes..................................................... 44,838 21,006 23,030 (1,643) (4,686)
Income tax expense.......................................... 15,624 6,239 8,420 6,653 15,388
-------- -------- -------- -------- --------
Income (loss) from continuing operations.................... 29,214 14,767 14,610 (8,296) (20,074)
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)........................................... $ 29,214 $ 10,994 $ 6,363 $ (8,596) $(16,123)
======== ======== ======== ======== ========
Earnings (loss) from continuing operations--basic and
diluted................................................... $ 0.40 $ 0.40 $ (0.20) $ (0.49)
======== ======== ======== ========
Earnings (loss) per share--basic and diluted................ $ 0.30 $ 0.17 $ (0.21) $ (0.41)
======== ======== ======== ========
Weighted average shares used in computing per share
amounts--
basic and diluted......................................... 36,521 36,612 41,729 47,498
======== ======== ======== ========
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
FISCAL
---------------------------------------------------------------
1995(1) 1996(2) 1997(3) 1998(4) 1999(5)
----------- ---------- ---------- ---------- ----------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
EBITDA(6)..................................... $ 48,467 $ 47,344 $ 64,952 $ 68,832 $ 104,059
EBITDA as a percentage of revenue............. 27.2% 16.9% 18.4% 15.8% 16.3%
Cash flows from operating activities.......... 121,399 56,608 (30.7) 4,469 252,638
Cash flows from investing activities.......... 1,030,528 (137,633) (103.7) (140,534) (304,451)
Cash flows from financing activities.......... (1,122,425) 82,011 104,870 163,282 74,929
SEGMENT OPERATING DATA
Air Miles reward miles issued................. -- -- -- 647,357 1,558,427
Transactions processed........................ -- 881,316 929,274 1,073,040 1,810,180
Statements generated(7)....................... 100,240 126,114 113,940 117,672 132,817
Securitized portfolio(8)...................... $ 1,290,581 $1,685,622 $2,021,599 $2,135,340 $2,232,781
Credit sales.................................. $ 2,464,290 $2,902,881 $3,001,029 $2,866,062 $3,132,520
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------------------------------------
JANUARY 28, FEBRUARY 3, FEBRUARY 1, JANUARY 31, DECEMBER 31, DECEMBER 31,
1995 1996(9) 1997 1998 1998 1999
----------- ----------- ----------- ----------- ------------ ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents.......... $ 17,416 $ 46,918 $ 50,149 $ 20,595 $ 47,036 $ 56,546
Credit card receivables and
seller's interest................ 1,209,372 90,789 161,686 144,440 139,458 150,804
Intangibles and goodwill........... -- -- 104,790 104,536 305,365 448,017
Total assets....................... 1,281,960 225,272 499,349 626,809 1,010,119 1,185,069
Certificates of deposit............ 375,100 67,200 68,400 50,900 49,500 116,900
Short-term debt.................... 531,024 -- 80,811 82,800 98,484 --
Long-term and subordinated debt.... 215,000 -- 50,000 180,000 332,000 318,236
Total liabilities.................. 1,185,579 114,677 294,144 415,145 701,980 775,513
Series A preferred stock........... -- -- -- -- -- 119,400
Total stockholders' equity......... 96,381 110,595 205,205 211,664 308,139 290,156
</TABLE>
- ------------------------------
(1) Fiscal 1995 represents the operating results of World Financial Network
Holding Corporation for the 52 weeks ended February 3, 1996.
(2) Fiscal 1996 represents the operating results of World Financial Network
Holding Corporation and BSI Business Services, Inc. for the 52 weeks ended
February 1, 1997.
(3) Fiscal 1997 represents the operating results of the merged entities under
current management for the 53 weeks ended January 1, 1998 and Financial
Automation Limited for two months.
(4) Fiscal 1998 represents the operating results of the merged entities under
current management for the 11 months ended December 31, 1998, Loyalty for
five months, and Harmonic Systems for three months.
(5) Fiscal 1999 represents the operating results of the merged entities under
current management for the year ended December 31, 1999, and SPS for six
months.
(6) EBITDA is defined as operating income plus depreciation and amortization.
EBITDA is presented because management uses EBITDA as an integral part of
its internal reporting and performance evaluation for senior management. In
addition, 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.
EBITDA is not intended to be a performance measure that should be regarded
as an alternative to, or more meaningful than, either operating income or
net income as an indicator of operating performance or to the statement of
cash flows as a measure of liquidity. In addition, EBITDA is not intended to
represent funds available for dividends, reinvestment or other discretionary
uses, and should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles. The EBITDA measure presented in this prospectus may
not be comparable to similarly titled measures presented by other companies.
(7) Statements generated represents the number of billing statements generated
for both securitized cardholders and cardholders and customers serviced on
behalf of other clients.
(8) Securitized portfolio represents outstanding credit card receivables at the
end of the period that we have originated or purchased, and have been
securitized.
(9) Reduction of credit card receivables in fiscal 1995 is a result of
securitizing most of the credit card receivables off-balance sheet.
30
<PAGE>
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 and Stowe, which involved J.C.
Penney's transaction services business, BSI Business Services, Inc., and The
Limited's credit card bank operation, World Financial Network National Bank.
Since then, we have made the following acquisitions, each accounted for as a
purchase, with the results of operations of the acquired businesses included
from their respective closing dates:
- In November 1996, we acquired the private label portfolio of National City
Bank of Columbus, which consisted of approximately $370.0 million in
receivables and represented over 25 retailers in a broad range of
industries including soft goods, building materials, furniture and
electronics.
- In July 1998, we acquired Loyalty Management Group Canada Inc.
- In September 1998, we acquired Harmonic Systems Incorporated.
- In July 1999, we acquired the network services business of SPS Payment
Systems, Inc., a wholly-owned subsidiary of Associates First Capital
Corporation.
FISCAL YEAR
In order to have more consistent reporting periods, we changed our year end
to a calendar year end basis during 1998. Prior to December 31, 1998, we
operated on a 52/53 week fiscal year that ended on the Saturday nearest
January 31. Accordingly, fiscal 1997 represents the 53 weeks ended January 31,
1998, fiscal 1998 represents the 11 months ended December 31, 1998 and fiscal
1999 represents the year ended December 31, 1999. In addition to discussing the
results of operations on a historical basis, we are also providing a discussion
of our results of operations on a pro forma recast basis for the year ended
December 31, 1998 and on a pro forma basis for the year ended December 31, 1999.
REVENUE AND EXPENSES
Our three reportable segments derive substantially all of their revenue from
two principal sources. We receive fees for providing information and transaction
processing services and earn income from our private label credit card
receivables portfolio and securitization program.
TRANSACTION SERVICES. Our Transaction Services segment generates revenue
based on the number of transactions processed, statements mailed and customer
calls handled. Operating costs include salaries and employee benefits and
processing and servicing expense such as data processing, postage,
telecommunications and equipment lease expense.
CREDIT SERVICES. We securitize substantially all of our credit card
receivables that we underwrite. As a result, our Credit Services segment derives
its revenue from the servicing fees and net financing income it receives from
the securitization trusts and merchant fees from the processing of private label
credit cards for our private label clients. We record gains or losses on the
securitization of credit card receivables on the date of sale based on the
estimated fair value of assets retained and liabilities incurred in the sale.
Gains represent the present value of the anticipated cash flows we have retained
over the estimated outstanding period of the receivables. This 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
31
<PAGE>
fair value of the interest only strip, and as a result, such estimates could
materially change in the near term. Net financing charges include the gains on
securitizations and other income from securitizations. Operating expenses for
this segment include salaries and employee benefits and 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.
LOYALTY AND DATABASE MARKETING SERVICES. Our Loyalty and Database Marketing
Services segment generates the majority of its revenue from our Air Miles reward
miles program. Through this program, we charge sponsors a transaction fee for
managing each sponsor's membership rewards or loyalty program. In addition, 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 include salaries and employee benefits,
and processing and servicing expense, such as the estimated cost of fulfilling
future redemption costs of the Air Miles reward program, marketing, data
processing and postage.
INTER-SEGMENT SALES. Our Transaction Services segment performs servicing
activities related to our Credit Services segment. For this, Transaction
Services receives a fee equal to its direct costs before corporate overhead plus
a margin that it would charge an unrelated third party for similar functions.
This fee represents an expense to our Credit Services segment and a
corresponding revenue for Transaction Services.
USE OF EBITDA. We evaluate operating performance based on several factors
of which the primary financial measure is operating income plus depreciation and
amortization. EBITDA is presented because we use our EBITDA measure as an
integral part of our internal reporting and performance evaluation for senior
management. In addition, EBITDA eliminates the uneven effect across all segments
of considerable amounts of non-cash amortization of purchased intangibles
recognized in business combinations accounted for under the purchase method. We
believe that EBITDA is not intended to be a performance measure that should be
regarded as an alternative to, or more meaningful than, either operating income
or net income as an indicator of operating performance or to the statement of
cash flows as a measure of liquidity. In addition, EBITDA is not intended to
represent funds available for dividends, reinvestment or other discretionary
uses, and should not be considered in isolation or as a substitute for measures
of performance prepared in accordance with generally accepted accounting
principles. The EBITDA measure presented in this prospectus may not be
comparable to similarly titled measures presented by other companies.
32
<PAGE>
RESULTS OF OPERATIONS
RECAST YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) COMPARED TO THE YEAR ENDED
DECEMBER 31, 1999 (AUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ $ 308,050 $ 362,524 $ 8,683 $ 20,584 $(19,076) $(8,229)
Credit Services................. 242,377 247,824 54,175 46,124 50,711 42,840
Loyalty and Database Marketing
Services...................... 86,220 194,482 15,751 37,351 1,785 3,488
Other and eliminations.......... (161,713) (165,576) -- -- -- --
--------- --------- ------- -------- -------- -------
Total......................... $ 474,934 $ 639,254 $78,609 $104,059 $ 33,420 $38,099
========= ========= ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ 64.9 % 56.7 % 2.8% 5.6% (6.2)% (2.2)%
Credit Services................. 51.0 38.8 22.4 18.6 20.9 17.3
Loyalty and Database Marketing
Services...................... 18.2 30.4 18.3 19.2 2.1 1.8
Other and eliminations.......... (34.0) (25.9) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 16.6% 16.3% 7.0 % 6.0 %
========= =========
</TABLE>
REVENUE. Total revenue increased $164.3 million, or 34.6%, to
$639.3 million for the year ended December 31, 1999 from $474.9 million during
1998. The increase was principally due to a 17.7% increase in Transaction
Services revenue, a 2.2% increase in Credit Services revenue and a 125.6%
increase in Loyalty and Database Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$54.5 million, or 17.7%, due to the acquisitions of Harmonic Systems in
1998 and SPS in 1999. Fees related to servicing of private label credit
card statements increased $11.9 million during the year ended
December 31, 1999 over 1998 due to the following: 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. 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 2.3%,
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 average outstanding credit card receivables in the
securitization trust. Finance charge, net increased $600,000 during the
year ended December 31, 1999 over 1998. We recognized a $16.2 million gain
on sale of receivables during the year ended December 31, 1998 related to
the timing of two securitization transactions with no comparable
securitization transactions in 1999. Excess spread income increased 13.5%
during the year ended December 31, 1999 over 1998 as a result of a 4.6%
higher average outstanding securitized portfolio and an approximate 75
basis point increase in yield.
33
<PAGE>
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services revenue increased $108.3 million, or 125.6%, 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 $71.8 million. The remaining increase is primarily related
to an increase in Air Miles reward miles activity, which increased 11.4%
on a pro forma basis in 1999 compared to 1998. From the date of
acquisition through the remainder of 1998, we issued 647.4 million Air
Miles reward miles, compared to 1,558.4 million Air Miles reward miles
during the year ended December 31, 1999. The increase in Air Miles
activity is primarily related to an increase in the number of reward miles
collectors.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $138.9 million, or 35.0%, to $535.2 million during the
year ended December 31, 1999 from $396.3 million during 1998. Total EBITDA
margin decreased 0.3% to 16.3% for the year ended December 31, 1999 from 16.6%
for 1998. The decrease in EBITDA margin is due to a decrease in Credit Services
margins, partially offset by increases in Loyalty and Database Marketing
Services and Transaction Services margins.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $42.5 million, or 14.2%, to
$341.9 million for the year ended December 31, 1999 from $299.4 million
for 1998, and EBITDA margin increased to 5.6% for the year ended
December 31, 1999 from 2.8% during 1998. The EBITDA Margin increased due
to the newly acquired SPS Network services business which carries a higher
margin than the Company's historical processing business. Additionally,
the margin increased due to a shift in the mix of business to higher
margin card processing and servicing products.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $13.5 million, or 7.2%, to
$201.7 million for the year ended December 31, 1999 from $188.2 million
for 1998, and EBITDA margin decreased to 18.6% for the year ended
December 31, 1999 from 22.4% during 1998 due to the timing of a
$16.2 million gain on sale of receivables in 1998 related to the timing of
two securitization transactions with no comparable securitization
transactions in 1999.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services operating expenses, excluding depreciation and amortization,
increased $86.6 million, or 123.0%, to $157.1 million for the year ended
December 31, 1999 from $70.5 million for 1998, and EBITDA margin increased
to 19.2% for the year ended December 31, 1999 from 18.3% 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 other amortization
increased $7.4 million, or 84.1%, to $16.2 million for the year ended
December 31, 1999 from $8.8 million for 1998 due to increases in capital
expenditures in 1998 and 1999, especially software development costs that
have short amortization periods. Amortization of purchased intangibles
increased $13.4 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 increased $4.7 million, or 14.0%, to
$38.1 million for the year ended December 31, 1999 from $33.4 million during
1998. Operating income improved primarily from revenue gains offset by a
slightly lower margin and increased depreciation and amortization.
INTEREST EXPENSE. Interest expense increased $13.5 million, or 46.1%, to
$42.8 million for the year ended December 31, 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.
34
<PAGE>
TAXES. Our effective tax rate before non-deductible goodwill for the year
ended December 31, 1998 and 1999 was 47.3% and 47.2%, respectively.
DISCONTINUED OPERATIONS. During September 1999, we discontinued our
subscriber services business when a major customer 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 the year ended December 31, 1999, discontinued operations had income of
$7.7 million, net of income tax, compared to a loss of $3.9 million during 1998.
The difference is largely related to additional fees we received in connection
with services performed for the customer upon termination of its contract.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant, database and direct marketing fees, increased
$6.1 million, or 10.4%, to $64.1 million for the year ended December 31, 1999
from $58.0 million for 1998. The increase was primarily the result of increased
volume of credit card receivables, credit sales and statements generated.
PRO FORMA YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) COMPARED TO
PRO FORMA YEAR ENDED DECEMBER 31, 1999 (UNAUDITED)
The following is a comparison based on pro forma results as shown elsewhere
in this prospectus. The results are presented as if the Loyalty, Harmonic
Systems and SPS acquisitions had been consummated on January 1, 1998.
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ $ 367,814 $ 386,846 $14,528 $ 24,778 $(30,329) $(9,964)
Credit Services................. 242,377 247,824 54,175 46,124 50,711 42,840
Loyalty and Database Marketing
Services...................... 157,985 194,482 27,865 37,351 (3,431) 3,488
Other and eliminations.......... (161,713) (165,576) -- -- -- --
--------- --------- ------- -------- -------- -------
Total......................... $ 606,463 $ 663,576 $96,568 $108,253 $ 16,951 $36,364
========= ========= ======= ======== ======== =======
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ 60.6 % 58.3 % 3.9% 6.4% (8.3)% (2.6)%
Credit Services................. 40.0 37.3 22.4 18.6 20.9 17.3
Loyalty and Database Marketing
Services...................... 26.1 29.3 17.6 19.2 (2.1) 1.8
Other and eliminations.......... (26.7) (24.9) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 15.9% 16.3% 2.8 % 5.5 %
========= =========
</TABLE>
REVENUE. Total revenue increased $57.1 million, or 9.4%, to $663.6 million
for the year ended December 31, 1999 from $606.5 million for 1998. The increase
was principally due to a 23.1% increase in Loyalty and Database Marketing
Services revenue, a 5.2% increase in Transaction Services revenue and a 2.2%
increase in Credit Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$19.0 million, or 5.2%, due to an increase in the number of transactions
processed and statements generated, partially offset by a decrease in the
average price per transaction. Fees related to servicing of private label
credit
35
<PAGE>
card statements increased $11.9 million during the year ended
December 31, 1999 over 1998 due to the following: 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. The increase in the number of
private label credit card statements processed was due primarily to the
addition of new client programs and internal growth. The volume of
transactions processed increased 13.8% offset by a decrease in price per
transaction processed. The revenue for Transaction Services is affected by
a mix of transaction processing and card processing and servicing.
- CREDIT SERVICES. Credit Services revenue increased $5.4 million, or 2.2%,
due to increases in merchant and servicing fees and finance charge, net.
Merchant fee income increased $2.5 million, or 3.9%, due to a 2.7%
increase in credit sales on our private label credit cards. Additionally,
servicing fee income increased by $3.1 million, or 10.1%, during 1999 due
to an increase in the average outstanding credit card receivables in the
securitization trust. Finance charge, net increased $600,000 during the
year ended December 31, 1999 over 1998. We recognized a $16.2 million gain
on sale of receivables during the year ended December 31, 1998 related to
the timing of two securitization transactions with no comparable
securitization transactions in 1999. Excess spread income increased 13.5%
during the year ended December 31, 1999 over 1998 as a result of a 4.6%
higher average outstanding securitized portfolio and an approximate 75
basis point increase in yield.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services revenue increased $36.5 million, or 23.1%, mainly due to an
increase of approximately $27.5 million in Air Miles reward program
revenue, which was principally due to an 11.4% increase in the issuance of
Air Miles reward miles and an increase in revenue per Air Miles reward
mile issued. We issued 1.6 billion Air Miles reward miles during the year
ended December 31, 1999 compared to 1.4 billion Air Miles reward miles
during 1998. The increase in Air Miles activity is due to a 15.7% increase
in the average number of active collectors, partially offset by the loss
of a significant sponsor at the end of 1998. Other increases are related
to higher direct marketing fees during 1999 over 1998 as a result of an
increased number of campaigns for clients, mostly related to Loyalty
clients.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $45.4 million, or 9.0%, to $555.3 million for the year
ended December 31, 1999 from $509.9 million for 1998. Total EBITDA margin
increased to 16.3% for the year ended December 31, 1999 from 15.9% for the
comparable period in 1998. The increase in EBITDA margin is due to an increase
in Transaction Services margin, partially offset by decreases in Loyalty and
Database Marketing Services and Credit Services margins.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $8.8 million, or 2.5%, to
$362.1 million for the year ended December 31, 1999 from $353.3 million
for 1998, and EBITDA margin increased to 6.4% for the year ended
December 31, 1999 from 3.9% during 1998 partially due to a one-time
termination fee received from a client and due to an increase in the
higher margin card processing and servicing products.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, increased $13.5 million, or 7.2%, to
$201.7 million for the year ended December 31, 1999 from $188.2 million
for 1998, and EBITDA margin decreased to 18.6% for the year ended
December 31, 1999 from 22.4% for 1998 due to the timing of a
$16.2 million gain on sale of receivables in 1998 related to the timing of
two securitization transactions with no comparable securitization
transactions in 1999.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services operating expenses, excluding depreciation and amortization,
increased $27.0 million, or 20.8%, to
36
<PAGE>
$157.1 million for the year ended December 31, 1999 from $130.1 million
for 1998, and EBITDA margin increased to 19.2% for the year ended
December 31, 1999 from 17.6% for 1998. The increased margin is a result of
the increase in number of Air Miles reward miles issued partially offset
by $3.3 million of marketing and payroll costs associated with the
start-up of a new business-to-business loyalty program in Canada during
1999.
- DEPRECIATION AND AMORTIZATION. Depreciation and other amortization
increased $6.2 million, or 62.0%, to $16.2 million for the year ended
December 31, 1999 from $10.0 million for 1998 due to increases in capital
expenditures in 1998 and 1999, especially software development costs that
have short amortization periods. Amortization of purchased intangibles
decreased $13.9 million as a result of the expiration of intangibles
related to the former J.C. Penney business which were fully amortized.
OPERATING INCOME. Operating income increased $19.4 million, or 114.1%, to
$36.4 million for the year ended December 31, 1999 from $17.0 million for 1998.
Operating income increased as the result of revenue gains, improved margins and
reduced depreciation and amortization.
INTEREST EXPENSE. Interest expense increased $4.3 million, or 11.2%, to
$42.8 million for the year ended December 31, 1999 from $38.5 million for 1998
due to increased borrowings for acquisitions and operations.
TAXES. Our effective tax rate before non-deductible goodwill amortization
for the years ended December 31, 1998 and 1999 was 51.6% and 46.7%,
respectively.
DISCONTINUED OPERATIONS. During September 1999, we discontinued our
subscriber services business when a major customer 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 the year ended December 31, 1999, discontinued operations had income of
$7.7 million, net of income tax, compared to a loss of $3.9 million during 1998.
The difference is due to additional fees we received in connection with services
performed for the customer upon termination of its contract.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant, database and direct marketing fees, increased
$6.1 million, or 10.4%, to $64.1 million for the year ended December 31, 1999
from $58.0 million for 1998. The increase was primarily the result of increased
volume of credit card receivables, credit sales and statements generated.
37
<PAGE>
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.
<TABLE>
<CAPTION>
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction Services........... $ 286,605 $ 362,524 $13,621 $ 20,584 $(11,798) $ (8,229)
Credit Services................ 212,663 247,824 39,396 46,124 36,192 42,840
Loyalty and Database Marketing
Services..................... 84,288 194,482 15,815 37,351 1,847 3,488
Other and eliminations......... (149,247) (165,576) -- -- -- --
--------- --------- ------- -------- -------- --------
Total........................ $ 434,309 $ 639,254 $68,832 $104,059 $ 26,241 $ 38,099
========= ========= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING MARGIN
------------------------ ------------------- -------------------
1998 1999 1998 1999 1998 1999
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ 66.0 % 56.7 % 4.8% 5.6% (4.1)% (2.2)%
Credit Services................. 49.0 38.8 18.5 18.6 17.0 17.3
Loyalty and Database Marketing
Services...................... 19.4 30.4 18.8 19.2 2.2 1.8
Other and eliminations.......... (34.4) (25.9) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 15.8% 16.3% 6.0 % 6.0 %
========= =========
</TABLE>
REVENUE. Total revenue increased $204.9 million, or 47.2%, to
$639.3 million for fiscal 1999 from $434.3 million during fiscal 1998. The
increase was principally due to a 26.5% increase in Transaction Services
revenue, a 16.5% increase in Credit Services revenue and a 130.7% increase in
Loyalty and Database Marketing Services revenue as follows:
- TRANSACTION SERVICES. Transaction Services revenue increased
$75.9 million, or 26.5%, due to the acquisitions of Harmonic Systems in
1998 and SPS in 1999. Fees related to servicing of private label credit
card statements increased $15.7 million during the year ended
December 31, 1999 over 1998 due to the following: 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. The revenue for transaction
processing increased 52.7% mainly due to acquisition activity and by
fiscal 1998 being one month shorter 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. Additionally, servicing fee income
increased by $5.8 million, or 20.9%, during 1999 due to an increase in
average outstanding credit card receivables in the securitization trust
and fiscal 1998 being one month shorter. Finance charge, net increased
$22.7 million during the year ended December 31, 1999 over 1998. We
recognized a $7.2 million gain on sale of receivables during the year
ended December 31, 1998 related to the timing of a securitization
transaction with no comparable securitization transaction in 1999.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services revenue increased $110.2 million, or 130.7%, 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
38
<PAGE>
approximately $62.6 million. The remaining increase is primarily related
to an increase in Air Miles reward miles activity, which increased 11.4%
on a pro forma basis in 1999 compared to 1998, and fiscal 1998 being one
month shorter. From the date of acquisition through the remainder of 1998,
we issued 647.4 million Air Miles reward miles, compared to
1,558.4 million Air Miles reward miles during the year ended December 31,
1999. The increase in Air Miles activity is primarily related to an
increase in the number of reward miles collectors.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $169.7 million, or 46.4%, to $535.2 million during
fiscal 1999 from $365.5 million during fiscal 1998. Total EBITDA margin
increased 0.5% to 16.3% for fiscal 1999 from 15.8% for fiscal 1998. The increase
in EBITDA margin is due to an increase in Credit Services, Loyalty and Database
Marketing Services and Transaction Services margins.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $68.9 million, or 25.2%, to
$341.9 million for fiscal 1999 from $273.0 million in fiscal 1998, and
EBITDA margin increased to 5.6% for fiscal 1999 from 4.8% for fiscal 1998.
The EBITDA margin increased due to the newly acquired SPS Network services
business which carries a higher margin than the Company's 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 $28.4 million, or 16.4%, to
$201.7 million for fiscal 1999 from $173.3 million for fiscal 1998, and
EBITDA margin increased to 18.6% for fiscal 1999 from 18.5%. Fiscal 1998
includes a $7.2 million gain on sale of receivables in 1998 related to the
timing of a securitization transaction with no comparable securitization
transaction in 1999.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services operating expenses, excluding depreciation and amortization,
increased $88.6 million, or 129.3%, to $157.1 million for fiscal 1999 from
$68.5 million for fiscal 1998, and EBITDA margin increased to 19.2% for
fiscal 1999 from 18.8% 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
1999.
- DEPRECIATION AND AMORTIZATION. Depreciation and other amortization
increased $7.9 million, or 95.7%, to $16.2 million for fiscal 1999 from
$8.3 million for fiscal 1998 due to increases in capital expenditures in
1998 and 1999, especially software development costs that have short
amortization periods. Amortization of purchased intangibles increased
$15.5 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 increased $11.9 million, or 45.4%, to
$38.1 million for fiscal 1999 from $26.2 million during fiscal 1998. Operating
income improved primarily from revenue gains offset by a slightly lower margin
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 1998 due to an increase in
average debt associated with acquisitions and an increase in debt to fund
receivables.
TAXES. Our effective tax rate before non-deductible goodwill for fiscal
1998 and fiscal 1999 was 47.3% and 47.2%, respectively.
DISCONTINUED OPERATIONS. During September 1999, we discontinued our
subscriber services business when a major customer was acquired by a third
party. As a result of discontinuing our
39
<PAGE>
subscriber services, we recognized a loss of $3.7 million, net of income tax, on
disposal of discontinued operations. For fiscal 1999, discontinued operations
had income of $7.7 million, net of income tax, compared to a loss of $300,000
during fiscal 1998. The difference is largely related to additional fees we
received in connection with services performed for the customer upon termination
of its contract.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant, database and direct marketing fees, increased
$9.3 million, or 17.0%, to $64.1 million for the year ended December 31, 1999
from $54.8 million for fiscal 1998. The increase was primarily the result of
increased volume of credit card receivables, credit sales and statements
generated.
HISTORICAL ELEVEN MONTHS ENDED DECEMBER 31, 1998 (FISCAL 1998) COMPARED TO
HISTORICAL 52 WEEKS ENDED JANUARY 31, 1998 (FISCAL 1997)
Due to the change in our fiscal year, fiscal 1998 is one month shorter than
fiscal 1997.
<TABLE>
<CAPTION>
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
REVENUE EBITDA OPERATING INCOME
------------------------ ------------------- -------------------
1997 1998 1997 1998 1997 1998
--------- --------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ $ 256,730 $ 286,605 $27,146 $ 13,621 $ 3,713 $(11,798)
Credit Services................. 211,921 212,663 29,349 39,396 26,319 36,192
Loyalty and Database Marketing
Services...................... 23,348 84,288 8,457 15,815 8,457 1,847
Other and eliminations.......... (138,600) (149,247) -- -- -- --
--------- --------- ------- -------- ------- --------
Total......................... $ 353,399 $ 434,309 $64,952 $ 68,832 $38,489 $ 26,241
========= ========= ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL FISCAL PERIODS
--------------------------------------------------------------------
PERCENTAGE OF REVENUE EBITDA MARGIN OPERATING INCOME
------------------------ ------------------- -------------------
1997 1998 1997 1998 1997 1998
--------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Transaction Services............ 72.6 % 66.0 % 10.6% 4.8% 1.5% (4.1)%
Credit Services................. 60.0 49.0 13.8 18.6 12.4 17.0
Loyalty and Database Marketing
Services...................... 6.6 19.4 36.2 18.8 36.2 2.2
Other and eliminations.......... (39.2) (34.4) -- -- -- --
--------- ---------
Total......................... 100.0 % 100.0 % 18.4% 15.8% 10.9% 6.0 %
========= =========
</TABLE>
REVENUE. Total revenue increased $80.9 million, or 22.9%, to
$434.3 million for fiscal 1998 from $353.4 million in fiscal 1997. The increase
was principally due to a 261.0% increase in Loyalty and Database Marketing
Services revenue, a 11.6% increase in Transaction Services revenue and a 0.4%
increase in Credit Services revenue.
- TRANSACTION SERVICES. Transaction Services revenue increased
$29.9 million, or 11.6%, due partially to the effect of the acquisition of
Harmonic Systems in 1998. Revenue increased in fiscal 1998 relating to
servicing of private label credit card statements and network servicing by
$11.1 million due to a 15.5% increase in items processed, offset partially
by a reduction of transaction fee rates, and a 4.9% increase in statements
processed. Additionally, growth was provided by a $12.4 million increase
in servicing and processing of our private label credit card portfolio.
- CREDIT SERVICES. Credit Services revenue increased $742,000, or 0.4%, due
to increased merchant fee income, partially offset by a decrease in
finance charge income. Merchant fee income increased in fiscal 1998 due to
a 14.0% increase in cardholders and a 10% increase in merchant
40
<PAGE>
fee rates. Finance charge income decreased due to the shorter period in
fiscal 1998 and a $2.0 million decrease in gain on sale of receivables,
offset in part by an increase in card balances.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services revenue increased $60.9 million, or 261.0%, mainly due to the
acquisition of Loyalty in July 1998. Loyalty contributed approximately
$60.0 million in revenue for fiscal 1998. Growth in database marketing
fees of approximately $3.0 million during fiscal 1998 was offset by
decreases in enhancement services due to the shorter period in fiscal
1998.
OPERATING EXPENSES. Total operating expenses, excluding depreciation and
amortization, increased $77.1 million, or 26.7%, to $365.5 million during fiscal
1998 from $288.4 million in fiscal 1997. Total EBITDA margin decreased 2.6% to
15.8% for fiscal 1998 from 18.4% for fiscal 1997. The decrease in EBITDA margin
is due to decreases in Loyalty and Database Marketing Services and Transaction
Services margins, partially offset by an increase in Credit Services margin.
- TRANSACTION SERVICES. Transaction Services operating expenses, excluding
depreciation and amortization, increased $43.4 million, or 18.9%, to
$273.0 million in fiscal 1998 from $229.6 million in fiscal 1997, and
EBITDA margin decreased to 4.8% for fiscal 1998 from 10.6% for fiscal 1997
due to the acquisition of Harmonic Systems, which incurred an operating
loss in fiscal 1998.
- CREDIT SERVICES. Credit Services operating expenses, excluding
depreciation and amortization, decreased $9.3 million, or 5.1%, to
$173.3 million in fiscal 1998 from $182.6 million in fiscal 1997 due
primarily to fiscal 1998 being a shorter period. EBITDA margin increased
to 18.5% from 13.8% for fiscal 1997 due to a decrease in processing
expenses.
- LOYALTY AND DATABASE MARKETING SERVICES. Loyalty and Database Marketing
Services operating expenses, excluding depreciation and amortization,
increased $53.6 million, or 359.8%, to $68.5 million in fiscal 1998 from
$14.9 million in fiscal 1997, and EBITDA margin decreased to 18.8% for
fiscal 1998 from 36.2% for fiscal 1997 due to the acquisition of Loyalty.
The largest component of the increased expense is related to the estimated
redemption cost of the Air Miles reward program and payroll costs
associated with Loyalty.
- DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
$16.1 million, or 60.9%, to $42.6 million for fiscal 1998 from
$26.5 million for fiscal 1997 due to increased amortization of purchased
intangibles from the recent acquisitions in fiscal 1998 offset in part by
a shorter period in fiscal 1998.
OPERATING INCOME. Operating income decreased $12.3 million, or 31.8%, to
$26.2 million for fiscal 1998 from $38.5 million for fiscal 1997. The decrease
is the result of a shorter period, increased depreciation and amortization and a
decline in margins.
INTEREST EXPENSE. Interest expense increased $12.4 million, or 80.0%, to
$27.9 million for fiscal 1998 from $15.5 million for fiscal 1997 due to an
increased debt balance associated with fiscal 1998 acquisitions.
TAXES. Our effective tax rate, before non-deductible goodwill, for fiscal
1998 was 43.4%, an increase of 36.6% compared to fiscal 1997.
TRANSACTIONS WITH THE LIMITED. Revenue from The Limited and its affiliates,
which includes merchant, database and direct marketing fees, increased $1.7
million, or 3.2%, to $54.8 million for fiscal 1998 from $53.1 million for fiscal
1997. The increase is the result of increases in credit card receivables, credit
sales, and statements generated.
41
<PAGE>
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 looked to 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.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. We generated cash flow from operating activities of
$251.6 million during the year ended December 31, 1999, compared to $4.5 million
for fiscal 1998 and a cash outflow of $30.7 million for fiscal 1997. Operating
cash flow in fiscal 1998 increased due to a significant pay down of trade
receivables, and increased operating cash flows from Loyalty, offset by
increased interest expense. Our operating cash flow is seasonal with cash
utilization peaking at the end of December due to increased activity related to
the holidays. We utilize our operating cash flow for ongoing business operations
and to pay interest expense.
INVESTING ACTIVITIES. We used cash in investing activities of
$309.5 million during the year ended December 31, 1999, compared to $140.5
million for the year ended December 31, 1998 and $103.7 million for the year
ended December 31, 1997. Two significant components of investing activities have
been acquisitions and receivables funding.
- ACQUISITIONS. Net cash outlays for acquisitions in the year ended
December 31, 1999 totaled $171.4 million, compared to $134.0 million in
1998 and $716,000 for fiscal 1997.
- RECEIVABLES FUNDING. Another significant component of investing activity
is the funding and securitizing of our private label credit card
receivables. 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 December 31, 1999, we had over $2.2 billion
of credit card receivables outstanding under securitizations.
Securitizations require credit enhancements in the form of cash, spread
accounts and additional receivables. We intend to utilize our
securitization program for the foreseeable future. We used net cash of
$3.9 million during the year ended December 31, 1999, compared to
receiving $22.6 million during fiscal 1998 $289.5 million during fiscal
1997, to fund private label credit card receivables.
- Restricted cash and cash equivalents and securities available-for-sale on
our balance sheet at December 31, 1999 relate to a reserve fund we have
established in connection with the Air Miles reward program. The reserve
fund is maintained to fund redemptions of Air Miles reward miles from
collectors. We believe the reserve fund is sufficient to meet redemption
obligations for the foreseeable future. We currently intend to set aside a
portion of future transaction fees received to fund future redemption
obligations. Based on various factors, we may reduce the amount of the
reserve fund and utilize future cash flows and excess cash for general
corporate purposes.
FINANCING ACTIVITIES. Net cash payments on borrowings was $44.8 million in
the year ended December 31, 1999, compared to net borrowings of $56.2 million in
fiscal 1998 and $104.8 million in fiscal 1997. Our financing activities include
primarily net borrowings used to fund acquisitions and working capital. We
issued approximately $100.0 million of common stock to fund a portion of the
Loyalty acquisition during fiscal 1998.
42
<PAGE>
We issue certificates of deposit through our credit card bank subsidiary,
World Financial, which issues $100,000 certificates of deposit in various
maturities ranging between three months and two years and with effective annual
fixed rates ranging from 5.35% to 6.85%. As of December 31, 1999, we had
$116.9 million of certificates of deposit outstanding. We utilize certificates
of deposit to finance World Financial's operating activities and to fund credit
enhancement activity. World Financial is limited in the amounts that it can
dividend to us.
In July 1998 we entered into a $330.0 million credit agreement consisting of
a $130.0 million U.S. Term Loan, a $50.0 million Canadian A Term Loan and a
$50.0 million Canadian B Term Loan, and a $100.0 million revolving loan
commitment. The term loans and the revolving loan commitment are at a daily
floating rate equal to the sum of the Euro-dollar margin plus the London
Interbank Offered Rate applicable to the period for each Euro-dollar loan.
Principal is payable annually, and interest is payable quarterly for the base
rate loans and payable on the last day of the Euro-dollar loan period for each
Euro-dollar loan. The U.S. Term Loan, the Canadian A Term Loan and the revolving
loan commitment mature on July 25, 2003 and the Canadian B Term Loan matures on
July 25, 2005. We use the $100.0 million revolving loan commitment for general
corporate purposes. From mid-November to late January, we experience increased
needs for working capital due to the increased 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. During 1999, the
highest outstanding balance on the revolving loan commitment was $50.0 million.
As of December 31, 1999, there was no amount outstanding under the revolving
loan commitment.
We have incurred debt to finance our acquisitions. We have $102.0 million of
subordinated notes outstanding related to our August 1996 merger and our
acquisition of Harmonic Systems. These subordinated notes were issued to
affiliates of our stockholders, bear interest at 10% and are due between 2005
and 2008. To finance the Loyalty acquisition, we borrowed $100.0 million under
our credit agreement, consisting of a $50.0 million Canadian Term Loan with an
effective fixed interest rate of 8.99% and a $50.0 million Canadian Term Loan
with a floating rate of London Interbank Offered Rate plus the Euro-dollar
margin.
To fund the SPS acquisition, we used $50.0 million in working capital and
$120.0 million from the issuance of Series A preferred stock. The Series A
preferred stock has a 6% dividend rate payable at the discretion of our board of
directors or upon conversion.
The net proceeds from this offering will be approximately $282.0 million. We
intend to use the net proceeds to pay down debt of $222.4 million:
$102.0 million in subordinated notes and $120.4 million outstanding under our
Credit Facility. Following the repayment of the $222.4 million in debt, we will
record an extraordinary loss on early extinguishment of debt of between
approximately $4.0 million and $5.3 million, net of tax. We expect to use the
remaining $282.0 million of the net proceeds for working capital and general
corporate purposes.
We are amending our current credit agreement to allow us to maintain our
current borrowing capacity and re-pay the subordinated notes. A portion of the
net proceeds and funds available under our amended credit agreement may be used
to acquire or invest in complementary businesses, technologies, products or
services or to invest in geographic expansion. Although we are not contemplating
any specific acquisitions at this time and no portion of the net proceeds has
been allocated for any acquisition, we evaluate acquisition opportunities on an
ongoing basis. We anticipate that funds available under the amended credit
agreement will be subject to covenants, and we cannot assure you that the funds
required to complete future acquisitions will be available to us when needed. In
addition, no assurances can be given that the amended credit agreement will be
consummated on terms described herein or at all.
43
<PAGE>
We believe that our current level of cash and financing capacity, along with
future cash flows from operations, is sufficient to meet the needs of our
existing businesses. However, we may from time to time seek longer term
financing to support additional cash needs, reduce short-term borrowings or
raise funds for acquisitions.
REGULATORY MATTERS. World Financial is subject to various regulatory
capital requirements administered by the Office of the Comptroller of the
Currency. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's 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 December 31, 1999, World Financial's Tier 1 capital
ratio was 50.0%, total capital ratio was 51.0% and leverage ratio was 49.1%, and
World Financial was not subject to a capital directive order.
YEAR 2000
We expense our costs related to the year 2000 compliance efforts as
incurred. Our costs related to year 2000 compliance efforts totalled
approximately $7.0 million in each of fiscal 1998 and fiscal 1999. As of
December 31, 1999, our estimated aggregate costs to date for year 2000
compliance efforts totalled approximately $14.0 million. We do not anticipate
incurring additional costs related to year 2000 compliance.
MARKET RISK
Market risk is the risk of loss from adverse changes in market prices and
rates. Our primary market risks include interest rate risk, credit risk and
foreign currency exchange rate risk.
OFF-BALANCE SHEET RISK.
We are subject to off-balance sheet risk in the normal course of business
including commitments to extend credit and through financial instruments used to
reduce the interest rate sensitivity of our securitization transactions. We
enter into interest rate swap and treasury lock agreements in the management of
interest rate exposure. These off-balance sheet financial instruments involve
elements of credit and interest rate risk in excess of the amount recognized on
our balance sheet. These instruments also result in certain credit, market,
legal and operational risks. We have established credit policies for off-balance
sheet instruments consistent with those established for on-balance sheet
instruments.
INTEREST RATE RISK
Interest rate risk affects us directly in our lending and borrowing
activities. For the year ended December 31, 1999, our total interest expense was
approximately $148.0 million, $42.8 million of which
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was attributable to on-balance sheet indebtedness and the remainder of which was
attributable to our securitized credit card receivables which are financed
off-balance sheet. To manage our direct 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 may enter into derivative financial
instruments such as interest rate swaps, caps and treasury locks to mitigate our
interest rate risk on a related financial instrument or to effectively lock the
interest rate on a portion of our variable debt. We do not enter into derivative
or interest rate transactions for trading or other speculative purposes.
Approximately 10.5% of our outstanding debt was subject to fixed rates with a
weighted average interest rate of 7.55% at December 31, 1999. An additional
72.0% of our outstanding debt at December 31, 1999 was effectively locked at an
interest rate of 6.12% through interest rate swap agreements and treasury locks
with notional amounts totalling $1.8 billion. We regularly review our interest
rate exposure on outstanding borrowings in an effort to minimize the risk of
interest rate fluctuations. We do not have any other significant
market-sensitive financial instruments.
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 $4.0 million. Conversely, a corresponding decrease in
interest rates would result in a comparable improvement to pretax earnings. 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
consumers who shop in our client's stores or through their catalogs or Web
sites. Our credit risk relates to the risk that a consumer using the private
label credit cards that we issue will not repay their revolving credit card loan
balance. 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. dollar
and the Canadian dollar through our operations in Canada. Although we have
entered into cross currency hedges to fix the exchange rate on any Canadian debt
repayment due to a U.S. counter party, we do not hedge our net investment
exposure in our Canadian subsidiary.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities", which
establishes accounting and reporting standards for derivative instruments and
for hedging activities, and requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133", which deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. Adoption of SFAS No. 137 is not
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<PAGE>
anticipated to materially impact our consolidated results of operations or
financial condition but may require recognition of derivative instruments on the
consolidated balance sheet and will require revised disclosures in the notes to
the consolidated financial statements.
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<PAGE>
DESCRIPTION OF OUR BUSINESS
GENERAL
We are a leading provider of electronic transaction services, credit
services, and loyalty and database marketing services. We develop and execute
programs designed to help our clients target, acquire and retain loyal,
profitable customers. We create value for our clients by assisting them in
managing their customer relationships. Specifically we:
- facilitate transactions between our clients and their customers through
multiple channels including in-store, Internet and catalog;
- assist our clients in identifying and acquiring new customers; and
- increase the loyalty and profitability of our clients' existing customers.
Our services are applicable to the full spectrum of commerce opportunities
involving companies that sell products and services to individual consumers. We
currently target our service offerings to select market sectors, including
specialty retailers, petroleum retailers, supermarkets and financial services
providers, as well as companies in market sectors with rapidly evolving
electronic payment and customer management needs such as mass transit, tollways,
parking, and gas and electric utilities. Our client base of over 300 companies
includes the retail affiliates of The Limited, including Victoria's Secret,
Express, Lane Bryant and Structure, Equiva Services, LLC, which is the service
provider to Shell branded locations in the U.S., Canada Safeway, Brylane and
CITGO.
We market and sell our service offerings on both a stand-alone and bundled
basis. Our products and services are centered around three core
offerings--Transaction Services, Credit Services and Loyalty and Database
Marketing Services.
<TABLE>
<CAPTION>
LOYALTY AND DATABASE
TRANSACTION SERVICES CREDIT SERVICES MARKETING SERVICES
- ------------------------------ ------------------------------ ------------------------------
<S> <C> <C>
- - Transaction Processing - Underwriting - Loyalty Programs
- Network Services - Risk Management - Private Label Cards
- Bankcard Settlement - Air Miles reward program
- - Card Processing and - One-to-One Loyalty
Servicing
- Account Processing - Database Marketing Services
- Billing and Payment Processing - Direct Marketing
- Customer Care - Enhancement Services
</TABLE>
INDUSTRY DYNAMICS
The growing demand for integrated marketing solutions targeting consumers
has been fueled by rapid development of new competitors and sales channels,
intensifying competition for customers and an erosion of consumer brand loyalty.
The Internet has accelerated these trends by providing consumers with almost
instant access to a multitude of competing products and services without
traveling to an actual store location. As a result, companies are looking for
tools aimed at retaining existing customers as well as identifying and targeting
new groups of potential customers through any or all distribution channels.
Companies increasingly seek services that compile and analyze customer
purchasing behavior, enabling businesses to more effectively communicate with
their customers. The continuing shift to electronic payment systems, namely
credit, debit, stored value and prepaid cards, generates highly valuable
information on individual consumers and their purchasing preferences, while the
dramatic proliferation of computer technology has enabled companies to capture,
access and use this information easily and almost instantaneously. However, many
retailers lack the economies of scale and core competencies necessary to support
their own transaction processing infrastructure and credit card
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<PAGE>
programs, including the extension of credit. In addition, many retailers seek to
outsource the development and management of loyalty programs and database
marketing services. Thus, companies that provide the infrastructure to create,
manage and facilitate electronic payment systems can create a database of
valuable information on the purchasing behavior of consumers that is critical
for developing more targeted and effective marketing programs. For example, the
use of private label credit cards creates an opportunity for retailers to
strengthen consumer brand loyalty by encouraging repeat purchases through
discounts and other special promotions.
We believe that in today's competitive economy, retailers will find an
increasing need to differentiate their products and services from those of their
competitors through comprehensive, innovative marketing strategies. These
strategies will likely use technology to analyze and predict consumer behavior
and to provide the information necessary to execute direct marketing and
promotional campaigns more effectively to existing and potential customers.
STRATEGY AND OPPORTUNITIES FOR GROWTH
Our strategy is to become a critical component in our clients' success by
helping them build loyal customer relationships. We will do this by continuing
to build and enhance our consumer databases, marketing capabilities and
processing efficiencies to help improve our clients' relationships with their
customers. To execute this strategy we intend to:
INCREASE THE PENETRATION OF PRODUCTS AND SERVICES WE PROVIDE TO OUR EXISTING
CLIENT BASE. We plan to further increase the number and types of products and
services we provide to our existing client base with a focus on loyalty and
database services.
EXPAND OUR CLIENT BASE IN EXISTING MARKET SECTORS, INCLUDING POTENTIAL
GEOGRAPHIC EXPANSION. We plan to acquire new clients in our traditional markets
by continuing to distinguish ourselves as a provider of customer relationship
management solutions. We will further benefit by what we believe will be a
continued trend toward outsourcing as our existing clients and potential new
clients have increasing needs for new technology and new skill sets. As
retailers continue to search for the tools to increase loyal, profitable
customer relationships, we believe that our integrated and comprehensive
offering of loyalty and database marketing services and transaction processing
services will appeal to retailers, including e-commerce businesses, faced with
increasing competition and decreasing profit margins.
CONTINUE TO EXPAND OUR SERVICES AND CAPABILITIES TO HELP OUR CLIENTS SUCCEED
IN MULTI-CHANNEL COMMERCE. We plan to help our clients be successful in all
channels they choose for distribution--whether in-store, catalog or the
Internet. Our current client base is predominantly traditional store front and
catalog-based retailers. However, our clients recognize the importance of using
the Internet as an additional distribution channel. We can apply the systems and
marketing programs we have built to support our store and catalog clients using
the Internet. As an added benefit we believe our private label credit card
system provides additional protection against fraud. Our vision is to provide
our clients with a comprehensive view of each customer across all distribution
channels and to utilize this information to execute direct marketing programs
through multiple distribution channels.
CONSIDER FOCUSED, STRATEGIC ACQUISITIONS AND ALLIANCES TO ENHANCE OUR CORE
CAPABILITIES OR INCREASE OUR SCALE. As we identify new opportunities or product
gaps, we may consider focused acquisitions and alliances to enhance our
competencies or increase our scale.
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PROGRAMS AND PRODUCTS
Our program and product offerings are centered around three core
offerings--Transaction Services, Credit Services and Loyalty and Database
Marketing Services.
TRANSACTION SERVICES
Effectively managing critical interactions with customers is required to
conduct everyday business--whether the business involves store, catalog or
Internet commerce. Our services include instantaneous authorizations, effective
customer care, efficient payment processing and billing services. By fully
integrating our transaction services with our loyalty and database marketing
services, we are able to execute more effective customer acquisition and
retention strategies for our clients. Our clients within this segment are made
up primarily of specialty retailers and petroleum retailers.
TRANSACTION PROCESSING. We are a leading provider of electronic transaction
services, ranked fourth in transaction volume, on a pro forma basis, according
to the Faulkner and Gray Card Industry 2000 report. On a pro forma basis for
recent acquisitions, we processed more than 2.1 billion transactions through
135,000 point of sale terminals during 1999. We believe we are the largest
transaction processor to the retail petroleum industry and we have a significant
presence in the specialty retail and transportation industries.
NETWORK SERVICES. We have built a fast and highly reliable network that
enables us to process all electronic payment types including credit card, debit
card, prepaid card, electronic benefits and fleet and check transactions. Our
recent acquisition of the network transaction processing business of SPS, has
enabled us to offer our existing products to new market segments as well as
provide additional products to existing clients. The network services we provide
include authorization, data capture and financial settlement of transactions. We
also provide merchants with on-line, two-way mail messaging that allows our
clients to improve communications with their individual locations by
broadcasting and receiving messages through their terminal devices. We support
our clients with a comprehensive help desk, operating 24 hours per day and seven
days per week, as well as terminal deployment and servicing.
We are one of the leaders in delivering new applications at the
point-of-sale, including video and audio electronic frequency and loyalty
programs, instant credit applications, and transponder and radio frequency
payment devices. We are active participants in establishing industry
point-of-sale standards.
MERCHANT BANKING SERVICES. Our merchant banking services include fast and
accurate financial settlement of MasterCard, Visa, Discover, American Express
and other electronic card transactions, including credit, debit and stored value
cards. By providing merchant banking services, we offer our clients the
flexibility to maintain their current settlement provider or to streamline their
end-to-end transaction processing with one provider. The merchant banking
services we provide also include daily deposit verification and accounting
reports.
CARDHOLDER PROCESSING AND SERVICING. As reported in the Faulkner & Gray
Card Industry 2000 report, we were the second largest outsourcer of retail
private label card programs in the U.S. in 1998, with 57 million accounts on
file. We assist clients in issuing credit cards branded with the retailer's name
or logo that can be used by customers at the client's store locations. We also
provide service and maintenance to our clients' private label card programs and
can assist our clients in acquiring, retaining and managing valuable repeat
customers. Our commercial card processing and servicing capabilities are
specifically designed to handle the unique requirements 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.
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ACCOUNT PROCESSING. We have developed a proprietary credit card system
designed specifically for retailers that offers significant flexibility in
processing accounts. We are able to make changes to accommodate our clients'
specific needs easily and quickly. We have also built into the system marketing
tools to assist our clients in increasing sales. Customer service screens have
prompts that, based on information from our client and the private label card
program, direct the customer service representative to extend a promotional
message. We also provide credit card production services in a secured
environment, embossing 9.7 million new cards in 1999.
CUSTOMER CARE. Our retail heritage lies at the core of our culture and is
evident in our customer care operations. We answer calls in an average of eight
seconds, approximately 12 seconds faster than the industry average. We focus our
training programs in all areas on achieving the highest possible standards. We
monitor our performance by conducting cardholder and store employee surveys. We
have over 5,000 call center seats in 12 locations, handling over 95 million
customer inquiries in 1999. Our call centers are equipped to handle phone, mail,
fax and Internet inquiries. We also provide collection activities to support our
retail private label programs, where we demonstrate our merchant mentality in
our approach to maintaining the customer relationship, within reasonable
parameters, even when charge privileges have been suspended.
BILLING AND PAYMENT PROCESSING. We use highly automated technology for bill
preparation, printing and mailing. Comingling statements, presorting and bar
coding allow us to take advantage of postal discounts. In 1999, we generated
approximately 132.8 million statements on behalf of our clients. In addition, we
also process cardholder remittances using state-of-the-art technology to
maximize efficiency. By doing so, we can improve the funds availability for both
our clients and for those private label receivables that we own or securitize.
CREDIT SERVICES
We have demonstrated to many of our existing clients that a private label
credit card is one of the most effective loyalty and marketing tools available.
Through World Financial, we offer our clients the experience and flexibility to
provide a funding vehicle for credit card receivables. This service appeals to
those clients that choose to focus their financial and operational resources on
their core operations and prefer a single-source integrated solution. As part of
this service, we currently provide underwriting and risk management services to
46 of our 49 private label credit card clients, representing 52.6 million
cardholders and $2.2 billion of receivables as of December 31, 1999. Tracing
back to our predecessor company, we have gained significant experience and
expertise in successfully managing private label portfolios since 1986. During
November 1996, we acquired an approximate $370.0 million private label portfolio
for $414.0 million. During 1999, we purchased approximately $32.0 million in
private label portfolios for $33.8 million. Our Credit Services segment provides
underwriting, risk management and fraud prevention services. Clients who use
this service are predominantly specialty retailers.
ACCOUNT UNDERWRITING AND CREDIT GUIDELINES. Our underwriting process
involves the purchase of credit bureau information for each credit applicant. We
obtain a credit report from one of the major credit bureaus based on the
applicant's mailing address and the perceived strength of each credit bureau in
that geographic region. The initial credit evaluation process uses one of our
six proprietary scorecards that have been refined to reflect performance of the
various retail programs. The scorecards are continuously validated, monitored
and maintained and the resulting data is used to ensure optimal risk
performance.
RISK MANAGEMENT. We monitor and control the quality of our portfolio by
using behavioral scoring models to score each active account on its monthly
cycle date. The behavioral scoring models dynamically evaluate credit limit
assignments to determine whether or not credit limits should be increased,
decreased or maintained and to establish pricing on fees based on the credit
worthiness of the individual cardholder. Our proprietary scoring models consider
such factors as how long the
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<PAGE>
account has been on file, credit utilization, shopping patterns and trends,
payment history and account delinquency.
DELINQUENCY AND COLLECTIONS PROCEDURES. We consider an account delinquent
if the minimum payment due is not received by the billing due date. At that
time, we give the account a status of 30 days delinquent. Under current
policies, we print a message requesting payment on a consumer cardholder's
billing statement after a scheduled payment has been missed. After an account
becomes 30 days past due, a proprietary collection scoring algorithm system
automatically scores the risk of the account rolling to a more delinquent
status. The collection system then assigns a collection strategy to the account
based on the collection score and account balance. The strategy dictates the
contact schedule and collections priority for the account. Using these
procedures helps us improve our collection efforts. 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.
LOYALTY AND DATABASE MARKETING SERVICES
Our clients are focused on targeting, acquiring and retaining loyal and
profitable customers. We create and manage loyalty programs that have
successfully resulted in securing more frequent and sustained customer
purchasing. Our loyalty programs include private label cards, the Air Miles
reward program and one-to-one loyalty. We utilize the information and knowledge
gathered through our loyalty programs to help our clients design and implement
effective marketing programs. Our clients within this segment are specialty
retailers, petroleum retailers, supermarkets and financial service providers.
PRIVATE LABEL CARDS. We have demonstrated to our clients that a private
label credit card can be one of the most effective loyalty and marketing tools
available. By providing a program that has meaningful benefits to the customer,
we can assist the retailer in strengthening its relationship with the customer.
Our experience indicates that long-term, retail card customers typically remain
more loyal to the retailer than general purpose users, both in the number of
visits to the retail establishment and the amount spent per visit. With our
integrated marketing tools, we can quantify the value of the retail card
customer for our clients. Additionally, our private label programs can be
further enhanced by our database marketing services that enable us to capture
item-level transaction data that is used to enhance communications with
customers and create successful customer relationship management strategies,
such as targeted promotions and cross-selling opportunities.
AIR MILES REWARD PROGRAM. In Canada, we operate what we believe to be the
largest loyalty program in Canada, where a wide variety of sponsors participate.
This program, marketed under the Air Miles brand name, enables consumers to earn
Air Miles reward miles as they shop across a range of retailers and other
sponsors participating in the Air Miles reward program. The program has over 100
brand names represented by the program sponsors, including Shell Canada, Canada
Safeway, Amex Bank of Canada (American Express), Bank of Montreal, Goodyear
Canada and A&P Canada. Air Miles reward miles collectors can redeem reward miles
for products and services such as plane tickets, gift certificates for
groceries, movie and theater tickets, and free long distance phone calls, among
others. We make these reward opportunities available through over 130 rewards
suppliers, including the Toronto Blue Jays, Marine Land, A&P Canada and Canadian
Airlines. The Air Miles reward program has enabled sponsors to use this tool to
effectively increase revenues by bringing new customers to the sponsor,
retaining existing customers and increasing the amount spent by all customers.
Based upon the most recent census data available, in 1999 our active
participants represented over 55% of all Canadian households. We have issued
over six billion Air Miles reward miles since the program's inception in 1992.
We have evaluated the creation of a similar loyalty program in the U.S.
Because of the significant funding requirements to establish such a program, we
have decided not to pursue the program. Our
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existing stockholders have decided to pursue the program through a separate
company called U.S. Loyalty Corp., which they will fund. We will not have any
ownership interest in U.S. Loyalty Corp. We intend to provide various services
including management support, accounting, transaction processing, data
processing and marketing services for U.S. Loyalty Corp. under various
agreements that we plan to enter into with U.S. Loyalty Corp. prior to this
offering. We contemplate that such agreements will include a management
agreement, an employee lease agreement, a processing agreement and a royalty
agreement. Under the royalty agreement, we will enable U.S. Loyalty Corp. to use
the Air Miles brand and business concept in the United States.
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 the card which prominently displays their brand and can only be used at
their locations.
DATABASE MARKETING SERVICES. We have built and manage a massive database
containing information on approximately 60 million U.S. consumers and
6.1 million Canadian households. Through these databases we have developed a
suite of data mining and profiling products that enable our clients to better
understand their customers and aim their marketing dollars toward the optimum
opportunities for developing customer relationships. We use marketing databases
to assist our clients in predicting, analyzing and targeting their customers'
buying patterns. Our U.S. consumer database contains nearly four years of
purchase information on approximately 30% of the adult population, as well as
details and results of marketing programs conducted over the last four years.
We develop and execute programs designed to acquire and retain customers. We
provide total program management using direct mail, telemarketing, in-store and
on-line marketing strategies. Our services include strategy development,
creative services, production and mailshop coordination. Selected programs
include:
- QUICK CREDIT. The cornerstone of our ability to cost effectively acquire
customers for our clients is our "Quick Credit" product, which allows us
to quickly process new applications at point-of-sale terminals or cash
register devices. We view this product as a competitive advantage to our
private label card processing and servicing.
- SMART STATEMENTS. Through our Smart Statement capabilities, we have
transformed the traditional billing statement into a powerful marketing
tool by targeting individual customers with billing statements that
contain personalized messages. Additionally, we can promote to small,
specially defined groups of the customer base to cross-sell specific
products and services. Additionally, our "smart insert" function allows us
to insert for each group a specific incentive or coupon into the
statement.
- ON-LINE PRE-SCREEN. For catalog clients we can offer a pre-approved card
by soliciting customers when they place an order over the phone. The
product, which works similarly to Quick Credit, enables us to extend a
credit offer to a catalog customer at the completion of the order process.
ENHANCEMENT SERVICES. We develop programs designed to maintain active
customers while generating new revenue streams for our clients by cross selling
products and services to their existing customers. Services include sourcing,
promoting and fulfillment of products. These products are non-competitive with
the clients' merchandise offering and include merchandise, travel clubs and
credit life insurance programs.
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ASSET QUALITY
We securitize substantially all of the credit card receivables that we
underwrite. As of December 31, 1999, we had $29.8 million of credit card
receivables that had not been securitized. Our delinquency and net credit card
receivable charge-off rates at any point in time reflect, among other factors,
the credit risk of credit card receivables, the average age of our various
credit card account portfolios, the success of our collection and recovery
efforts, and general economic conditions. The average age of our credit card
portfolio affects the stability of delinquency and loss rates of the portfolio.
We continue to focus our resources on refining our credit underwriting standards
for new accounts, and on collections and post charge-off recovery efforts to
minimize net losses. At December 31, 1999, 20.6% of securitized accounts and
38.1% of securitized loans were less than 24 months old. Accordingly, we believe
that our loan portfolio will experience increasing or fluctuating levels of
delinquency and loan losses as the average age of our accounts increases.
This trend is reflected in the change in our net charge-off ratio. For the
year ended December 31, 1999, our securitized net charge-off ratio on a
annualized basis was 7.2% compared to 7.1% for fiscal 1998, and 8.3% for fiscal
1997. We believe, consistent with our statistical models and other credit
analyses, that this rate will continue to fluctuate but generally rise over the
next year.
Our strategy for managing credit card receivable losses consists of credit
line management and customer purchase authorizations. We further manage credit
card receivable losses through the offering of credit lines which are generally
lower than is currently standard in the industry. We continually manage
individual accounts and their related credit lines using various marketing,
credit and other management processes in order to continue to maximize the
profitability of accounts.
DELINQUENCIES. Delinquencies not only have the potential to affect earnings
in the form of net loan losses, but are also costly in terms of the personnel
and other resources dedicated to their resolution. A credit card account is
contractually delinquent if we do not receive the minimum payment by the
specified due date on the cardholder's statement. It is our policy to continue
to accrue interest and fee income on all credit card accounts, except in limited
circumstances, until the account and all related loans, interest and other fees
are charged off. The following table presents the delinquency trends of our
credit card loan portfolio on a securitized basis:
<TABLE>
<CAPTION>
JANUARY 31, % OF DECEMBER 31, % OF DECEMBER 31, % OF
1998 TOTAL 1998 TOTAL 1999 TOTAL
----------- -------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Receivables outstanding............................ $2,021,599 100.0% $2,135,340 100.0% $2,232,375 100.0%
Loans contractually delinquent:
31 to 60 days.................................... 62,663 3.1% 52,581 2.5 59,840 2.7
61 to 90 days.................................... 33,010 1.6% 29,925 1.4 35,394 1.6
91 or more days.................................. 50,312 2.5% 53,885 2.5 60,025 2.7
---------- ----- ---------- ----- ---------- -----
Total.......................................... $ 145,985 7.2% $ 136,391 6.4% $ 155,259 7.0%
========== ===== ========== ===== ========== =====
</TABLE>
The above numbers reflect the continued seasoning of our securitized loan
portfolio. We intend to continue to focus our resources on our collection
efforts to minimize the negative impact to net loan losses that results from
increased delinquency levels.
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NET CHARGE-OFFS. Net charge-offs include the principal amount of losses
from cardholders unwilling or unable to pay their credit card balances, as well
as bankrupt and deceased cardholders, less current period recoveries. Net
charge-offs exclude accrued finance charges and fees. The following table
presents our net charge-offs for the periods indicated on a securitized basis:
<TABLE>
<CAPTION>
FISCAL
-----------------------------------
1997 1998 1999
--------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Average loans outstanding(1).............................. 1,615,196 $1,905,927 $2,004,827
Net charge-offs........................................... 133,515 135,478 143,370
Net charge-offs as a percentage of average loans
outstanding............................................. 8.3% 7.1% 7.2%
</TABLE>
- ------------------------
(1) Average loans outstanding is the average of the securitized receivables at
the beginning of each month in the period indicated.
AGE OF PORTFOLIO. The following table sets forth, as of December 31, 1999,
the number of total accounts and amount of outstanding loans, based upon the age
of the securitized accounts:
<TABLE>
<CAPTION>
PERCENTAGE
NUMBER OF PERCENTAGE OF LOANS OF LOANS
AGE SINCE ORIGINATION ACCOUNTS ACCOUNTS OUTSTANDING OUTSTANDING
- --------------------- --------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
0-5 Months...................................... 3,452 5.7% $274,946 12.3%
6-11 Months..................................... 2,830 4.7 197,485 8.8
12-17 Months.................................... 3,289 5.5 213,265 9.6
18-23 Months.................................... 2,813 4.7 164,034 7.4
24-35 Months.................................... 6,044 10.1 290,775 13.0
36+ Months...................................... 41,624 69.3 1,091,870 48.9
------ ------ ------- ------
Total....................................... 60,052 100.0% 2,$232,375 100.0%
====== ====== ======= ======
</TABLE>
SAFEGUARDS TO OUR BUSINESS
DISASTER AND CONTINGENCY PLANNING. We have a number of safeguards to
protect us from the risks we face as a business and as an industry. Given the
significant amount of data that we manage, much of which is real-time data to
support our clients' commerce initiatives, we have established redundant
facilities for our data centers. We operate two data processing centers. In the
event we experience an outage in one of our two data centers, we can move all
processing to the other data center. Additionally, we have contracted with a
third party to provide disaster and contingency planning in the event that both
data centers experience an outage.
PROTECTION OF INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. We rely
on a combination of copyright, trade secret and trademark laws, confidentiality
procedures, contractual provisions and other similar measures to protect our
proprietary information and technology. We do not currently hold any patents nor
do we have any patent applications pending.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our technology, documentation and other proprietary
information. Despite the efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain the use of our products or
technology that we consider proprietary and third parties may attempt to develop
similar technology independently. We pursue registration and protection of our
trademarks primarily in the U.S. and Canada, although we do seek protection
elsewhere in selected key markets. Effective protection of intellectual property
rights may be unavailable or limited in some countries. The laws of some
countries do not protect our proprietary rights to the same extent as in the
U.S. and Canada.
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COMPETITION
The markets for our products and services are highly competitive. We compete
with traditional and online marketing companies, credit card issuers and data
processing companies, as well as with the in-house staffs of our current and
potential clients.
LOYALTY AND DATABASE MARKETING SERVICES. As a provider of loyalty and
database marketing products and services, we generally compete with advertising
and other promotional and loyalty programs, both traditional and online, for a
portion of a client's total marketing budget. In addition, we compete against
internally developed products and services created by our existing and potential
clients. For each of our loyalty and database products and services, we expect
competition to intensify as more competitors enter our market. In addition, new
competitors with our Air Miles reward program may target our sponsors and reward
miles collectors as well as draw rewards from our rewards suppliers. Our ability
to generate significant revenue from clients and loyalty partners will depend on
our ability to differentiate ourselves through the products and services we
provide and the attractiveness of our loyalty and rewards programs to consumers.
The continued attractiveness of our loyalty and rewards programs will depend in
large part on our ability to remain affiliated with sponsors that are desirable
to consumers and to offer rewards that are both attainable and attractive to
consumers. Intensifying competition will make it more difficult for us to do
this. For our database marketing services, our ability to continue to capture
detailed transaction data on consumers is critical in providing effective
customer relationship management strategies for our clients.
TRANSACTION SERVICES. The payment processing industry is highly
competitive, especially among the five largest payment processors in the U.S.,
which processed approximately 14 billion transactions during 1998. On a pro
forma basis for recent acquisitions, we would have been the fourth largest
payment processor in the U.S., processing 2.1 billion transactions during 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, customer rich data and
high transaction volumes. Our focus on specific market sectors allows us to
develop and deliver solutions targeted to the needs of these sectors. This focus
is consistent with our marketing strategy for all products and services.
Additionally, we believe we effectively distinguish ourselves from other payment
processors by providing solutions that help our clients leverage investments
they have made in their payment systems by using these systems for electronic
marketing programs.
CREDIT SERVICES. Within our Credit Services business, our competition
consists primarily of financial institutions whose marketing focus has been on
developing credit card programs with large revolving balances. Our competition
further drives their businesses by cross selling their other financial products
to their cardholders. Our focus has been on targeting retailers that understand
the competitive advantage of developing loyal customers. Typically these
retailers have customers that make more frequent and smaller transactions. This
results in the effective capture of detail-rich data within our database
marketing services, allowing us to mine and analyze this data to develop
successful customer relationship management strategies for our clients.
As an issuer of private label credit cards, we compete with other card
payment types, primarily general-purpose credit cards like Visa, MasterCard and
American Express, as well as cash, checks and debit cards.
REGULATION
PRIVACY LEGISLATION. The enactment of legislation or industry regulations
arising from public concern over consumer privacy issues could have a material
adverse impact on our loyalty and database marketing services. Restrictions
could be placed upon the collection and use of information, in which case our
cost of collecting some kinds of data might be materially increased. Legislation
or industry regulation could also prohibit us from collecting or disseminating
certain types of data, which could adversely affect our ability to meet our
clients' expectations.
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In November 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act, which 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 could have a material adverse effect on our
business, financial condition and operating results.
The Clinton Administration is investigating further administrative action in
the area of privacy. In addition, Congress and a number of states are
considering further privacy legislation. It is possible that new privacy
protections will not be limited to financial institutions but could broadly
apply to the activities of all companies.
The Canadian federal government and Minister of Industry of Canada are
sponsoring comprehensive private sector privacy legislation that would apply to
organizations engaged in any commercial activities in Canada. Because the
legislation has government support, it will likely be enacted in the near term.
If enacted as currently proposed, it would enact into law 10 privacy principles
from the Canadian Standards Association's Model Privacy Code. The bill would
also require organizations to obtain consent to the collection, use or
disclosure of personal information. The nature of the required consent will
depend on the sensitivity of the personal information and will permit personal
information to be used only for the purposes for which it was collected. The
Province of Quebec has had similar privacy legislation applicable to the private
sector in that province since 1994 and other provinces are considering further
privacy legislation.
FAIR CREDIT REPORTING ACT. The Fair Credit Reporting Act regulates consumer
reporting agencies. Under this Act, an entity risks becoming a consumer
reporting agency if it furnishes consumer reports to third parties. A consumer
report is a communication of information which bears on a consumer's
creditworthiness, credit capacity, credit standing or certain other
characteristics and which is collected or used or expected to be used to
determine the consumer's eligibility for credit, insurance, employment or
certain other purposes. The Fair Credit Reporting Act explicitly excludes from
the definition of consumer report a report containing information solely as to
transactions or experiences between the consumer and the entity making the
report. An entity may share consumer reports with any of its affiliates so long
as that entity provides consumers with an appropriate disclosure and an
opportunity to opt out of this affiliate sharing.
Our objective is to conduct our operations in a manner that would fall
outside the definition of consumer reporting agency under the Fair Credit
Reporting Act. If we were deemed to be a consumer reporting agency, however, we
would be subject to a number of complex and burdensome regulatory requirements
and restrictions. These restrictions could have a significant adverse economic
impact on us.
INTERSTATE TAXATION. Several states have passed legislation that attempts
to tax the income from interstate financial activities, including credit cards,
derived from accounts held by local state residents. We believe that this
legislation will not materially affect us. Our belief is based upon current
interpretations of the enforceability of such legislation, prior court decisions
and the volume of business we conduct in states that have passed legislation.
REGULATION OF THE BANK. World Financial is a limited purpose credit card
bank chartered as a national banking association and a member of the Federal
Reserve System. The Bank Insurance Fund, which is administered by the Federal
Deposit Insurance Corporation, insures the deposits of World Financial. World
Financial is subject to regulation and examination by the Office of the
Comptroller of the Currency, its primary regulator, and is also subject to
regulation by the Board of Governors of the Federal Reserve System and the
Federal Deposit Insurance Corporation, as back-up regulators. World
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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 or others;
- 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.
DIVIDENDS AND TRANSFERS OF FUNDS. Federal law limits the extent to which
World Financial can finance or otherwise supply funds to us and our affiliates
through dividends, loans or otherwise. These limitations include:
- minimum regulatory capital requirements; and
- restrictions concerning the payment of dividends out of net profits or
surplus and Sections 23A and 23B of the Federal Reserve Act governing
transactions between a bank and its affiliates.
In general, Federal law prohibits a national bank such as World Financial
from making dividend distributions on common stock if the dividend would exceed
currently available undistributed profits. In addition, World Financial must get
prior approval from the Office of the Comptroller of the Currency for a dividend
if the distribution would exceed current year net income combined with retained
earnings from the prior two years less dividends paid in the current fiscal
year. World Financial cannot make a dividend payment if the distribution would
cause it to fail to meet applicable capital adequacy standards.
COMPTROLLER OF THE CURRENCY
SAFETY AND SOUNDNESS. The Federal Deposit Insurance Corporation Improvement
Act of 1991 requires banking agencies to prescribe certain non-capital standards
for safety and soundness relating generally to operations and management, asset
quality and executive compensation. The Improvement Act also provides that
regulatory action may be taken against a bank that does not meet such standards.
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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 captial
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 December 31, 1999, World Financial's Tier 1 capital
ratio was 50.0%, total capital ratio was 51.0% and leverage ratio was 49.1%, 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 declines 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.
The evaluation will be made as a part of the institution'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 Federal Deposit Insurance Corporation will incur a loss in respect of
that institution. The Federal Deposit Insurance Corporation has adopted a 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 Federal Deposit Insurance
Corporation 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 determined by the Federal Deposit Insurance
Corporation, 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 under 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 of certain alleged violations of
such 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.
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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 December 31,
1999, World Financial had met its minimum responsibilities under the Act.
CONSUMER AND DEBTOR PROTECTION LAWS. From time to time legislation has been
proposed in Congress to limit interest rates and fees that could be charged on
credit card accounts or otherwise restrict practices of credit card issuers. If
this or similar legislation is proposed and adopted, our ability to collect on
account balances or maintain previous levels of finance charges and other fees
could be adversely affected. Additionally, changes have been proposed to the
Federal bankruptcy laws. Changes in Federal bankruptcy laws and any changes to
state debtor relief and collection laws could adversely affect us if these
changes result in, among other things, accounts being charged off as
uncollectible and additional administrative expenses. It is unclear at this time
whether and in what form any legislation will be adopted or, if adopted, what
its impact on us would be. Congress may in the future consider other legislation
that would materially affect the credit card and related fee-based services
industries.
Existing laws and regulations may permit class action lawsuits on behalf of
customers in the event of violations of applicable laws, and these lawsuits can
be very expensive to defend, even without any violation. If a class action were
determined adversely, it might have a material adverse effect on us.
EMPLOYEES
As of December 31, 1999, we employed approximately 5,200 people in the U.S.,
Canada and New Zealand.
LEGAL PROCEEDINGS
From time to time, we are involved in various claims and lawsuits incidental
to our business, including claims and lawsuits alleging breaches of contractual
obligations. A breach of contract claim was filed against us in July 1999 by
Service Merchandise, Inc. in U.S. Bankruptcy Court for the Middle District of
Tennessee. Service Merchandise is in voluntary Chapter 11 bankruptcy and alleges
that World Financial breached its contractual obligation by changing its
underwriting standards for newly created credit card accounts, causing Service
Merchandise to suspend performance under the agreement and subsequently to
terminate it. Service Merchandise also alleged violations of various provisions
of the U.S. Bankruptcy Code.
In December 1999, the Bankruptcy Court dismissed Service Merchandise's
complaint for lack of standing. In February 2000, Service Merchandise and its
non-bankrupt subsidiary, Service Corp., filed an amended complaint. The amended
complaint again alleges that World Financial breached various contractual
provisions by unilaterally revising the credit standards applicable to existing
cardholders and withholding monthly program payments from provisions of the U.S.
Bankruptcy Code. Alleged damages have not been specified. As of December 31,
1999, we had a balance of $115.4 million in credit card receivables related to
the Service Merchandise agreement. We believe this suit is without merit and we
intend to defend it vigorously. Although the outcome of this matter is
undetermined, we do not believe that this will have a material adverse effect on
our business, financial condition or operating results.
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PROPERTIES
The following table sets forth information with respect to our principal
facilities.
<TABLE>
<CAPTION>
CURRENT APPROXIMATE
MONTHLY SQUARE
LOCATION SEGMENT LEASE RATE FOOTAGE
- -------- ---------------------------- -------------------------- -----------
<S> <C> <C> <C>
Northglenn, Colorado........ Transaction Services $ 37,104 65,000
Buffalo Grove, Illinois..... Transaction Services $ 35,399 24,136
Lenexa, Kansas.............. Transaction Services $ 45,244 65,000
Mission, Kansas............. Transaction Services $ 14,107 40,019
Minneapolis, Minnesota...... Loyalty and Database $ 4,386 3,105
Marketing Services and
Transaction Services
Minneapolis, Minnesota...... Loyalty and Database $ 31,997 28,442
Marketing Services and
Transaction Services
Voorhees, New Jersey........ Transaction Services $ 75, 431 67,050
Columbus, Ohio.............. Transaction Services $ 36,536 103,161
Columbus, Ohio.............. Transaction Services and $ 69,407 100,800
Credit Services
Columbus, Ohio.............. Transaction Services $ 14,400 57,600
Columbus, Ohio.............. Loyalty and Database $ 40,733 54,615
Marketing Services,
Transaction Services and
Credit Services
Columbus, Ohio.............. Transaction Services and $ 25,535 32,255
Credit Services
Columbus, Ohio.............. Loyalty and Database $ 10,820 39,951
Marketing Services,
Transaction Services and
Credit Services
Marietta, Ohio.............. Credit Services $ 5,200 6,240
Gray, Tennessee............. Transaction Services $ 2,500 1,930
Dallas, Texas............... Loyalty and Database $ 114,228 114,419
Marketing Services and
Transaction Services
Dallas, Texas............... Loyalty and Database $ 57,479 61,750
Marketing Services,
Transaction Services and
Credit Services
Dallas, Texas............... Transaction Services $ 18,224 72,897
San Antonio, Texas.......... Transaction Services $ 47,692 67,540
Mississauga, Ontario, $ 42,500 40,000
Canada.................... Loyalty and Database
Marketing Services
Toronto, Ontario, Canada.... Loyalty and Database $ 81,492 91,534
Marketing Services
Montreal, Quebec, $ 3,125 5,000
Canada.................... Loyalty and Database
Marketing Services
Calgary, Alberta, Canada.... Loyalty and Database $ 9,066 8,059
Marketing Services
Auckland, New Zealand....... Transaction Services $ 12,041 11,700
-------------------------- ----------
Total..................... $ 834,646 1,162,203
========================== ==========
<CAPTION>
LEASE
EXPIRATION
LOCATION DATE
- -------- ------------------------------------
<S> <C>
Northglenn, Colorado........ August 31, 2007
Buffalo Grove, Illinois..... February 29, 2010
Lenexa, Kansas.............. January 31, 2008
Mission, Kansas............. June 30, 2000
Minneapolis, Minnesota...... August 31, 2004
Minneapolis, Minnesota...... August 31, 2004
Voorhees, New Jersey........ January 1, 2005
Columbus, Ohio.............. January 31, 2008
Columbus, Ohio.............. January 25, 2001
Columbus, Ohio.............. August 31, 2004
Columbus, Ohio.............. August 31, 2007
Columbus, Ohio.............. August 31, 2007
Columbus, Ohio.............. August 31, 2002
Marietta, Ohio.............. April 30, 2000
Gray, Tennessee............. November 14, 2000
Dallas, Texas............... November 30, 2009
Dallas, Texas............... July 31, 2007
Dallas, Texas............... April 30, 2006
San Antonio, Texas.......... January 31, 2002
Mississauga, Ontario, August 31, 2009
Canada....................
Toronto, Ontario, Canada.... September 16, 2007
Montreal, Quebec,
Canada.................... June 30, 2009
Calgary, Alberta, Canada.... December 31, 2004
Auckland, New Zealand....... September 13, 2005
Total.....................
</TABLE>
We recently signed an amendment to the lease for one of our properties in
Dallas, Texas. The amendment provides for the construction and lease of an
expansion building adjacent to one of our existing buildings. We expect the
expansion building to be completed in October 2000. 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.
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MANAGEMENT
The following table sets forth the name, age and positions of each of our
executive officers, business unit presidents and directors as of December 31,
1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
J. Michael Parks.......................... 49 Chairman of the Board of Directors, Chief
Executive Officer and President
Ivan Szeftel.............................. 46 Executive Vice President and President,
Retail Credit Services
John Scullion............................. 42 President and Chief Executive Officer, The
Loyalty Group
Ronald G. Carter.......................... 48 Executive Vice President and President,
Network Services
James E. Anderson......................... 45 Executive Vice President and President,
Utilities Services
Michael A. Beltz.......................... 44 Executive Vice President and President,
Business Development and Planning
Edward K. Mims............................ 50 Executive Vice President and Chief
Financial Officer
Dwayne H. Tucker.......................... 43 Senior Vice President, Human Resources and
Administration
Steven T. Walensky........................ 42 Senior Vice President, Chief Information
Officer
Robert P. Armiak.......................... 38 Vice President and Treasurer
Michael D. Kubic.......................... 44 Vice President, Corporate Controller and
Chief Accounting Officer
Carolyn S. Melvin......................... 46 Vice President, Secretary and General
Counsel
Richard E. Schumacher, Jr................. 32 Vice President, Tax
Bruce K. Anderson......................... 59 Director
Anthony J. deNicola....................... 35 Director
Daniel P. Finkelman....................... 44 Director
Robert A. Minicucci....................... 47 Director
Bruce A. Soll............................. 42 Director
</TABLE>
J. MICHAEL PARKS, chairman of the board of directors, chief executive
officer and president, joined us in March 1997. Before joining us, Mr. Parks was
president of First Data Resources, the credit card processing and billing
division of First Data Corporation, from December 1993 to July 1994. Mr. Parks
joined First Data Corporation in July 1976 where he gained increased
responsibility for sales, service, operations and profit and loss management
during his 18 years of service. Mr. Parks holds a Bachelor's degree from the
University of Kansas.
IVAN SZEFTEL, executive vice president and president of our Retail Services
business unit, joined us in May 1998. Before joining us, he served as chief
operating officer of Forman Mills, Inc. from November 1996 to April 1998. Prior
to that, he served as executive vice president and chief financial officer of
Charming Shoppes, Inc. from November 1981 to February 1996. Mr. Szeftel holds
Bachelor's and post graduate degrees from the University of Cape Town and is a
Certified Public Accountant in the State of Pennsylvania.
JOHN SCULLION, president and chief executive officer of Loyalty Management
Group Canada Inc., joined The Loyalty Group in October 1993. Prior to becoming
president, he served as chief operating officer for The Loyalty Group. Prior to
that, he served as chief financial officer of The Rider Group from
September 1988 to October 1993. Mr. Scullion holds a Bachelor's degree from the
University of Toronto.
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RONALD G. CARTER, executive vice president and president of our Network
Services business unit, joined us in February 1998. Before joining us, he served
as president of BuyPass Corporation, the network services division of Concord
EFS, Inc., from June 1995 to February 1998. Prior to BuyPass Corporation, he
held positions at First Data Corporation from August 1992 to January 1995.
Mr. Carter holds a Bachelor's degree from the University of Tulsa.
JAMES E. ANDERSON, executive vice president and president of our Utilities
Services business unit, joined us in May 1997. Before joining us, he was
employed from November 1985 to March 1997 by First Data Corporation, serving in
various leadership capacities, the most recent of which was executive vice
president bankcard services. He holds a Bachelor's degree from the University of
Iowa and a Master's degree from National University.
MICHAEL A. BELTZ, executive vice president and president of business
development and planning, joined us in May 1997. He is responsible for database
marketing services, new market identification, corporate product development and
marketing, acquisitions and strategic planning. 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 K. MIMS, executive vice president and chief financial officer, joined
us in February 1998. Before joining us, he had served as executive vice
president and chief financial officer of Vidpro International Inc. from
May 1997 to February 1998. Prior to that, he had served as executive vice
president and chief financial officer of Comerica Bank--Texas from October 1983
to March 1997. He holds a Bachelor's degree from Southern Methodist University
and is a Certified Public Accountant in the State of Texas.
DWAYNE H. TUCKER, senior vice president of human resources and
administration, joined us in June 1999. He is responsible for recruitment,
organization development, training, facilities and corporate communications.
Before joining us, he served as vice president of human resources for Northwest
Airlines from February 1998 to February 1999 and as senior vice president of
human resources for First Data Corporation from March 1990 to February 1998.
Mr. Tucker holds a Bachelor's degree from Tennessee State University.
STEVEN T. WALENSKY, senior vice president and chief information officer,
joined us in July 1998. He is responsible for the 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 located in Kansas City, Missouri.
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.
CAROLYN S. MELVIN, vice president of Legal Services, general counsel and
secretary, joined us in September 1995 as vice president, general counsel and
secretary of World Financial. She is responsible for legal, audit and
compliance. Before joining us, she served as vice president and counsel for
National City Corporation from December 1982 until September 1995. Ms. Melvin
holds a B.A. degree from Dickinson College and a J.D. from Ohio State University
College of Law.
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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, practice
management and was in the national tax practice serving the banking and
financial services industry. Mr. Schumacher holds a Bachelor's degree from Ohio
State University and a Master's from Capital University Law and Graduate School
and is a Certified Public Accountant in the State of Ohio.
BRUCE K. ANDERSON has served as a director since our merger in August 1996.
Since March 1979, he has been a partner and co-founder of the investment firm,
Welsh, Carson, Anderson and 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.
ANTHONY J. DENICOLA has served as a director since our merger in
August 1996. Mr. deNicola is a partner with Welsh, Carson, Anderson and Stowe,
joining the firm in April 1994. Prior to that, he spent four years with William
Blair & Company, financing middle market buy-outs from July 1990 to February
1994. Mr. deNicola is currently a director of Centennial Cellular Corporation.
He holds a Bachelor's degree from DePauw University and an MBA from Harvard
Business School.
DANIEL P. FINKELMAN has served as a director since January 1998.
Mr. Finkelman is senior vice president of The Limited, Inc. and is responsible
for all brand and business planning for that specialty retailer. He has been
employed with The Limited since August 1996. Before joining The Limited, he was
self-employed as a consultant from February 1996 to August 1996 and he served as
executive vice president of marketing for Cardinal Health, Inc. from May 1994 to
February 1996. Prior to that, he was a partner with McKinsey & Company where he
was co-leader of the firm's marketing practice, focusing on loyalty and customer
relationship management. Mr. Finkelman holds a Bachelor's degree from Grinnell
College and graduated as a Baker Scholar at Harvard Business School.
ROBERT A. MINICUCCI has served as a director since our merger in
August 1996. Mr. Minicucci is a partner with Welsh, Carson, Anderson and Stowe,
joining the firm in August 1993. Before joining Welsh, Carson, Anderson and
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.
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<PAGE>
CLASSES OF BOARD OF DIRECTORS
Our certificate of incorporation authorizes there to be between six and 12
directors. Our board of directors currently consists of six members and we
intend to designate three additional independent directors before consummation
of this offering. Our board is divided into three classes that serve staggered
three-year terms, as follows:
<TABLE>
<CAPTION>
CLASS EXPIRATION OF TERM MEMBERS
- ----- ------------------ -----------------------
<S> <C> <C>
Class I............................. 2000 Anthony J. deNicola,
Bruce A. Soll
Class II............................ 2001 Bruce K. Anderson,
Daniel P. Finkelman
Class III........................... 2002 Robert A. Minicucci,
J. Michael Parks
</TABLE>
Any additional directorships resulting from an increase in the number of
directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the directors. There are no
family relationships among any of our directors, executive officers or division
presidents.
COMMITTEES OF THE BOARD OF DIRECTORS
Our full board of directors has fulfilled the function of an audit committee
and compensation committee for the last fiscal year. Upon the consummation of
this offering, our board of directors will establish an audit committee, a
compensation committee and an executive committee.
The audit committee, which will consist of , and
, will review the scope and approach of the annual audit, our annual
financial statements and related auditors' report and the auditors' comments
relative to the adequacy of our system of internal controls and accounting
systems. The audit committee will also recommend to our board of directors the
appointment of independent public accountants for the following year. The audit
committee will consist of at least three members, all of whom will be
financially literate and will be independent directors. has significant
experience in [ACCOUNTING/FINANCE] matters. Our audit committee will adopt and
periodically review a written charter that will specify the scope of its
responsibilities.
The compensation committee, which will consist of ,
and , will review management compensation levels and provide
recommendations to our board of directors regarding salaries and other
compensation for our executive officers, including bonuses and incentive plans,
and will administer our stock option plan.
The executive committee, which will consist of , and
, will have the power and authority of our board of directors to
manage our affairs between meetings. The executive committee will also regularly
review significant corporate matters and recommend action as appropriate to our
board of directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, our board of directors as a whole made decisions
relating to the compensation of Michael Parks and the executive officers
reporting directly to him. During this time, Mr. Parks participated in all
discussions concerning compensation of the executive officers reporting directly
to him, except that Mr. Parks was excluded from discussions regarding his own
compensation. None of our executive officers served as a member of the board of
directors or the compensation committee of any entity that has one or more
executive officers serving on our board of directors or on the compensation
committee of our board of directors.
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<PAGE>
DIRECTOR COMPENSATION
Our directors do not currently receive compensation for their services as
members of the board of directors. Non-employee directors currently participate
in our stock option and restricted stock purchase plan. 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.
Upon consummation of this offering, non-employee directors will receive
$1,000 for attending each board meeting and $500 for each committee meeting. In
addition, non-employee directors will receive an annual grant of options to
purchase 6,500 shares of our common stock. Non-employee directors can also
choose to receive their compensation solely in stock options consisting of an
annual grant of options to purchase 11,000 shares of our common stock. In
addition, newly elected non-employee directors will receive a one-time grant of
options to purchase 9,000 shares of our common stock.
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation for
each of the last three fiscal years for our chief executive officer and our four
other most highly compensated executive officers during 1999. These five
individuals are referred to as the named executive officers.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
---------------------- -----------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS(1) OPTIONS, SARS (#) COMPENSATION
- --------------------------- -------- ---------- --------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
J. Michael Parks(2)........................... 1999
Chairman of the Board, 1998 $ 475,000 $ 440,000 -- $ 18,773
Chief Executive Officer and President 1997 $ 395,833 $ 160,000 333,333 $ 61,474
Ivan Szeftel(3)............................... 1999
President, Retail Credit Services 1998 $ 192,115 $ 155,833 111,111 $ 29,430
Michael A. Beltz(4)........................... 1999
Executive Vice President and President, 1998 $ 250,000 $ 220,000 66,666 $ 6,448
Business Development and Planning 1997 $ 163,141 $ 125,000 44,444 $ 64,112
Edward K. Mims(5)............................. 1999
Executive Vice President 1998 $ 189,231 $ 123,750 55,555 $ 4,294
and Chief Financial Officer
James E. Anderson(6).......................... 1999
Executive Vice President and 1998 $ 202,500 $ 112,063 27,777 $ 5,770
President, Utilities Services 1997 $ 126,667 $ 70,000 27,777 $ 47,315
</TABLE>
- --------------------------
(1) Bonuses represent amounts earned by each executive officer during the
referenced year, although paid in the following year. We historically pay
bonuses each March for the prior year.
(2) Mr. Parks has been employed with us since March 1997.
(3) Mr. Szeftel has been employed with us since May 1998.
(4) Mr. Beltz has been employed with us since May 1997.
(5) Mr. Mims has been employed with us since February 1998.
(6) Mr. Anderson has been employed with us since May 1997.
65
<PAGE>
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,
relocation expenses and sign-on bonuses as follows:
<TABLE>
<CAPTION>
LIFE INSURANCE SIGN-ON
YEAR 401(K) PLAN PREMIUMS SERP RELOCATION BONUS
-------- ----------- -------------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Parks......................... 1999 -- --
1998 $10,743 $180 $7,850 -- --
1997 $ 3,829 180 -- $57,465 --
Ivan Szeftel............................. 1999 --
1998 $ 4,286 $144 -- -- $25,000
Michael A. Beltz......................... 1999 -- --
1998 $ 4,375 $120 -- $ 1,953 --
1997 -- $120 -- $63,992 --
Edward K. Mims........................... 1999 -- --
1998 $ 4,186 $108 -- -- --
James E. Anderson........................ 1999 -- --
1998 $ 4,100 $ 91 -- $ 1,578 --
1997 -- $ 91 -- $47,224 --
</TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information concerning option grants
made to the named executive officers during 1999 pursuant to our stock option
plan.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE VALUE
PERCENTAGE OF AT ASSUMED ANNUAL RATES
NUMBER OF TOTAL OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES IN EXERCISE TERM ($)(2)
OPTIONS FISCAL PRICE EXPIRATION ---------------------------
GRANTED(#) YEAR(1) ($/SH) DATE 5% 10%
---------- ------------- -------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Michael Parks.............. 83,333 13.1% $9.90 2/1/2008 $518,838 $1,314,838
Ivan Szeftel.................. 22,222 3.5% $9.90 2/1/2008 $138,357 $ 350,623
Michael A. Beltz.............. 22,222 3.5% $9.90 2/1/2008 $138,357 $ 350,623
Edward K. Mims................ 33,333 5.2% $9.90 2/1/2008 $207,535 $ 525,935
James E. Anderson............. 33,333 5.2% $9.90 2/1/2008 $207,535 $ 525,935
</TABLE>
- ------------------------
(1) In 1999, we granted options to purchase a total of 492,444 shares of common
stock at an exercise price of $9.90 per share and options to purchase a
total of 146,111 shares of common stock at an exercise price of $11.25 per
share.
(2) In accordance with the rules of the SEC, 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.
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<PAGE>
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,
1999. No options were exercised during 1999.
<TABLE>
<CAPTION>
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
- ---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
J. Michael Parks.............................. 298,611 118,054 $1,772,910 $652,080
Ivan Szeftel.................................. 61,111 72,221 361,661 418,338
Michael A. Beltz.............................. 72,222 61,111 415,821 339,166
Edward K. Mims................................ 36,111 52,777 204,155 289,174
James E. Anderson............................. 43,056 45,832 245,825 247,498
</TABLE>
- ------------------------
(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 $15.00 per share.
EMPLOYMENT 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
letter 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. During the term of this agreement, Mr. Parks will receive a minimum
base salary of $475,000. Mr. Parks is entitled to an incentive bonus of $400,000
based on the achievement of our annual financial goals. Under the agreement,
Mr. Parks was granted options to purchase 333,332 shares of our common stock at
an exercise price of $9.00 per share. Of these shares, 277,778 shares have
vested by Mr. Parks' third year anniversary with us. The remaining 55,554 shares
vest annually over four years based upon the achievement of corporate
performance goals. Additionally, Mr. Parks was granted options to purchase
83,333 shares of our common stock at an exercise price of $9.90 in 1999, of
which options to purchase 20,833 shares of our common stock are currently
vested. Additionally, Mr. Parks is entitled to participate in our 401(k) and
Retirement Savings Plan, our 1999 Incentive Compensation Plan and any other
employee benefits as provided to other senior executives.
IVAN SZEFTEL. Mr. Szeftel entered into an employment agreement dated
May 4, 1998 to serve as the president of our retail services division. During
the remaining term of his agreement, Mr. Szeftel is entitled to receive a
minimum base salary of $325,000, subject to increases based on annual reviews.
Mr. Szeftel is entitled to an incentive bonus of $200,000 based on the
achievement of our annual financial goals. In addition, we granted Mr. Szeftel
options to purchase 111,111 shares of our common stock at an exercise price of
$9.00 per share. Mr. Szeftel was granted options to purchase 22,222 shares of
our common stock at an exercise price of $9.90 in 1999, of which options to
purchase 5,555 shares of our common stock are currently vested. Mr. Szeftel is
entitled to participate in our 401(k) and Retirement Savings Plan, our 1999
Incentive Compensation Plan and any other employee benefits as provided to other
senior executives.
The employment agreement provides severance payments to Mr. Szeftel if we
terminate his employment without cause or if Mr. Szeftel terminates his
employment for good reason. In such cases, Mr. Szeftel will be entitled to six
months base salary if terminated in his first year, nine months base salary if
terminated in his second year and 12 months base salary if terminated after his
second year.
67
<PAGE>
STOCK OPTION AND RESTRICTED STOCK PURCHASE PLAN
We adopted the Alliance Data Systems Corporation and its Subsidiaries Stock
Option and Restricted Stock Purchase Plan in August 1996. This plan provides for
grants of incentive stock options, nonqualified stock options and awards to
selected employees, officers, directors and other persons performing services
for us or any of our subsidiaries. A total of 2,966,667 shares of common stock
have been reserved for issuance pursuant to the plan. As of January 31, 1999,
there were 2,354,000 shares of common stock subject to options previously
granted at a weighted average exercise price of $9.50 per share.
Incentive stock options may be granted to any person, including a director
or officer, employed on a full-time basis by us or any of our subsidiaries.
Nonqualified stock options and awards may be granted 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.
The exercise price for incentive stock options granted under the plan may
not be less than 100% of the fair market value of the common stock on the option
grant date. If an incentive stock option is granted to an employee who owns more
than 10% of our common stock, the exercise price of that option may not be less
than 110% of the fair market value of the common stock on the option grant date.
The exercise price for nonqualified stock options granted under the plan may be
equal to, more than or less than 100% of the fair market value of the common
stock on the option grant date.
The plan gives the compensation committee or the board of directors the sole
discretion to determine the vesting provisions for each individual award.
Options issued prior to final approval of the amended plan vest on a common
vesting date, which is the first day of February. The normal vesting provision
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. Options terminate on the tenth anniversary of the
date of grant. However, if we meet the annual operating income goal as
determined by our board of directors, vesting can be accelerated. Our board of
directors designates a percentage of the 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.
Options issued after final approval of the amended plan will vest in thirds
over a three-year period commencing on the first anniversary of the date of
grant. On the date of the public offering, all exempt employees will receive a
one-time grant of options, ranging from amounts of 100 to 1,000 shares.
Restricted stock may be sold to directors, employees and consultants at
various prices, but not below par value, and may be made subject to restrictions
such as the participant's continued employment or the satisfaction of
performance targets. In general, restricted stock may not be sold or transferred
until the restrictions are removed or expire. We may repurchase restricted stock
from a participant at the original purchase price if the conditions or
restrictions are not met.
The compensation committee of our board of directors administers the plan
with respect to members of our executive committee and determines the pool of
shares available to other participants. Our chairman of the board and chief
executive officer is responsible for making individual determinations regarding
awards to those participants.
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, as amended, so that contributions made by employees or by us to
the plan, and income earned on these contributions, are not taxable to employees
until withdrawn from the plan. The plan covers U.S. employees of ADS Alliance
Data Systems, Inc., our wholly-owned subsidiary, and any other subsidiary or
affiliated organization that adopts this plan. We and all of our U.S.
subsidiaries are currently covered under the
68
<PAGE>
plan. All employees who either (1) have been employed for at least one year and
are at least 21 years old or (2) are at least 45 years old and are scheduled to
work at least 1,000 hours in the plan year are eligible to participate.
Effective January 1, 2000, all employees who are at least 21 years old and who
we have employed for at least six months and who have worked at least 500 hours
will be 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 or earlier if the participating employee retires
at age 65, becomes disabled, dies or is terminated. 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 always 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.
2000 INCENTIVE COMPENSATION PLAN
The Alliance Data Systems 2000 Incentive Compensation Plan provides an
opportunity for certain U.S. employees to be eligible for a cash bonus based on
achieving certain objectives. To be eligible under the plan, employees must meet
certain eligibility requirements and be selected by the compensation committee.
Under the plan, each participant has an incentive compensation target that
is expressed as a percent of annual base earnings. The participant's incentive
compensation target is based on various objectives that are weighted to reflect
the participant's contributions to company, business unit and individual goals,
which are established at the beginning of the plan year. The company objective
is based on our operating income, the business unit objective is based on
financial and operational
69
<PAGE>
objectives and the individual objectives are items of importance to us that the
individual can impact. The amount of compensation a participant receives depends
on the percentage of objectives that were achieved. Eighty percent of the
objectives must be achieved before a participant is eligible for any payout. The
maximum payout is equal to 150% of the participant's incentive compensation
target.
PERFORMANCE BASED RESTRICTED STOCK PLAN
Upon consummation of this offering, a performance based restricted stock
plan will be implemented for the chief executive officer, his or her direct
reports, and approximately 22 other officers. Shares issued under this plan will
not vest unless specific performance measures, yet to be determined and agreed
upon by our board of directors, are met. These performance measures will include
a return on stockholder equity and EBITDA performance. Meeting only threshold
performance will cause 40% of the shares to vest, meeting target performance
will vest 80% of the shares, and exceeding performance will allow 100% of the
shares to vest. Cumulative vesting over the performance period, targeted to be
three to five years, will be allowed so that at the end of the performance
period, if performance warrants, the shares could still be 100% vested.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of January 31, 2000 by:
(1) each person who is known by us to own beneficially more than 5% of our
common stock;
(2) each current director;
(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 56,881,518 shares of our
common stock outstanding on January 31, 2000, and 76,881,518 shares of our
common stock outstanding after completion of this offering, both of which
reflect the conversion of all outstanding shares of Series A preferred stock
into common shares and the exercise of all outstanding warrants.
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY
OWNED(1)
SHARES BENEFICIALLY -------------------
OWNED BEFORE AND BEFORE AFTER
NAME OF BENEFICIAL OWNER AFTER OFFERING(1) OFFERING OFFERING
- ------------------------ ------------------- -------- --------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe(2) ......................... 41,937,219 73.7% 54.5%
320 Park Avenue, Suite 2500
New York, New York 10022-6815
Limited Commerce Corp. ..................................... 14,663,370 25.8 19.1%
Three Limited Parkway
Columbus, Ohio 43230
J. Michael Parks(3)......................................... 298,611 * *
Ivan Szeftel(4)............................................. 61,111 * *
Michael A. Beltz(5)......................................... 72,222 * *
Edward K. Mims(6)........................................... 36,111 * *
James E. Anderson(7)........................................ 43,055 * *
Bruce K. Anderson(8)........................................ 346,215 * *
Anthony J. deNicola(8)...................................... 33,240 * *
Robert A. Minicucci(8)...................................... 114,217 * *
All directors and executive officers as a group
(18 individuals)(9)....................................... 1,149,083 2.0% 1.5%
</TABLE>
- ------------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the SEC's rules. In
computing percentage ownership of each person, shares of common stock
subject to options, warrants or convertible preferred stock held by that
person that are currently exercisable or convertible, or exercisable or
convertible within 60 days of January 31, 2000, are deemed to be
beneficially owned. These shares, however, are not deemed outstanding for
the purpose of computing the percentage ownership of each other person.
(2) Includes 9,185,591 shares issuable upon conversion of Series A preferred
stock owned of record by WCAS VIII L.P., WCAS Information Partners, L.P. and
20 other individuals. Also includes
- 5,555,550 shares of common stock held by Welsh, Carson, Anderson & Stowe
VI, L.P.,
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<PAGE>
- 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,
- 1,078,494 shares of common stock held by individual partners of Welsh,
Carson.
(3) Represents options to purchase 298,611 shares of common stock which are
exercisable within 60 days of January 31, 2000.
(4) Represents options to purchase 61,111 shares of common stock which are
exercisable within 60 days of January 31, 2000.
(5) Represents options to purchase 72,222 shares of common stock which are
exercisable within 60 days of January 31, 2000.
(6) Represents options to purchase 36,111 shares of common stock which are
exercisable within 60 days of January 31, 2000.
(7) Represents options to purchase 43,055 shares of common stock which are
exercisable within 60 days of January 31, 2000.
(8) The number of shares beneficially owned by Mr. Anderson includes
100,176 shares issuable upon conversion of Series A preferred stock. The
number of shares beneficially owned by Mr. deNicola includes 9,563 shares
issuable upon conversion of Series A preferred stock. The number of shares
beneficially owned by Mr. Minicucci includes 33,166 shares issuable upon
conversion of Series A preferred stock. Each of Bruce K. Anderson, Anthony
J. deNicola and Robert A. 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.
(9) Includes options to purchase an aggregate of 655,411 shares of common stock
which are exercisable within 60 days of January 31, 2000 held by Messrs.
Parks, Szeftel, Beltz, Mims and Anderson, and 142,905 shares issuable upon
conversion of Series A preferred stock.
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<PAGE>
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 other individuals who are limited partners of
the Welsh Carson limited partnerships beneficially owned approximately 73.7% of
our outstanding common stock as of January 31, 2000. The individual partners of
the Welsh Carson limited partnerships include Bruce K. Anderson, Anthony J.
deNicola and Robert A. Minicucci, each of whom is a member of our board of
directors.
In July 1999, we sold 120,000 shares of Series A preferred stock to Welsh,
Carson, Anderson & Stowe VIII, L.P., WCAS Information Partners, L.P. and 20
individuals who are partners of some or all of the Welsh Carson limited
partnerships for an aggregate purchase price of $120.0 million. The preferred
shares were issued to finance, in part, the acquisition of the network services
business of SPS Payment Systems, Inc. Prior to the completion of this offering,
these preferred shares will be converted into an aggregate of 9,185,591 shares
of our common stock.
In July 1998, we sold 10,101,010 shares of common stock to Welsh, Carson,
Anderson & Stowe VIII, L.P., Welsh, Carson, Anderson & Stowe VII, L.P., WCAS
Information Partners, L.P., and 16 other 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. at a value of $9.90 per share as consideration for WCAS
Capital Partners II, L.P. extending the maturity of a 10% subordinated note we
issued to it in January 1996 in the principal amount of $30.0 million and
originally due January 24, 2002. Principal on the note is due on October 25,
2005 and interest is payable semi-annually in arrears on each January 1 and
July 1. The note was originally issued to finance, in part, the acquisition of
BSI Business Services, Inc., now known as ADS Alliance Data Systems, Inc. This
note will be paid in full with the proceeds of this offering.
In September 1998, we issued 655,555 shares of common stock to WCAS Capital
Partners III, L.P. and issued a 10% subordinated note to WCAS Capital Partners
III, L.P. in the principal amount of $52.0 million to finance, in part, the
acquisition of Harmonic Systems Incorporated. Principal on the note is due in
two equal installments on September 15, 2007 and September 15, 2008. Interest is
payable semi-annually in arrears on each March 15 and September 15. This note
will be paid in full with the proceeds of this offering.
We paid Welsh, Carson, Anderson & Stowe $2.0 million in fiscal 1998 and $1.2
million in fiscal 1999 for investment banking services rendered in connection
with our acquisitions.
TRANSACTIONS WITH THE LIMITED
Limited Commerce Corp. beneficially owned approximately 25.8% of our common
stock as of January 31, 2000. Limited Commerce Corp. is owned by
Structure, Inc., which is owned by The Limited, Inc. Therefore, The
Limited, Inc., a significant customer of ours, indirectly owns one of our
principal stockholders. Pursuant to a stockholders agreement with Welsh Carson
and Limited Commerce Corp., Limited Commerce Corp. has the right to maintain two
designees on our board of directors until the completion of this offering.
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 different retail and catalog
affiliates that operate under different names, including Bath & Body Works, The
Limited Stores, Structure, Victoria's Secret Catalogue, Victoria's Secret Store,
Lerner New York, Lane Bryant and Express. Many of these affiliates
73
<PAGE>
have entered into credit card processing agreements with World Financial, and
these affiliates of The Limited represented approximately 50% of our credit card
receivables as of December 31, 1999.
Pursuant to these credit card processing agreements, World Financial
provides credit card processing services and issues private label credit cards
on behalf of the businesses. Under these agreements, World Financial pays the
business an amount equal to the amount charged by the business's customers using
the private label credit card issued by World Financial, less a discount, which
varies among agreements. World Financial assumes the credit risk for these
credit card transactions. Payments are also made to World Financial from the
businesses relating to credit card issuance and processing.
Most of these credit card processing agreements were entered into in 1996
and expire in 2006. These agreements give the businesses various termination
rights, including the ability to terminate these contracts under certain
circumstances after the first six years if World Financial is unable to remain
competitive with independent third parties that provide similar services.
In general, World Financial owns information relating to the holders of
credit cards issued under these agreements, but World Financial is prohibited
from disclosing information about these holders to third parties that the
Limited determines competes with The Limited or its affiliated businesses. World
Financial is also prohibited from providing marketing services to competitors of
The Limited or its affiliated businesses as determined by The Limited. World
Financial may provide marketing services to other third parties that are not
competitors of The Limited or its affiliated businesses, but it must share
revenue from these services with The Limited and its affiliated businesses.
We periodically enter into agreements with various retail affiliates of The
Limited to provide database marketing programs and projects. These agreements
are generally short-term in nature, ranging from three to six months.
We received total revenues directly from The Limited and its retail
affiliates of $53.1 million during fiscal 1997, $54.8 million during fiscal 1998
and $64.1 million during fiscal 1999.
In August 1998, we sold 20,202 shares of common stock to Limited Commerce
Corp. at a value of $9.90 per share as consideration for Limited Commerce Corp.
extending the maturity of a 10% subordinated note we issued in January 1996 to
WCAS Capital Partners II, L.P., which sold the note to Limited Commerce Corp.
The note is in the principal amount of $20.0 million and was originally due
January 24, 2002. Principal on the note is due on October 25, 2005 and interest
is payable semi-annually in arrears on each January 1 and July 1. The note was
originally issued to finance, in part, the acquisition of BSI Business
Services, Inc., now known as ADS Alliance Data Systems, Inc. This note will be
paid in full with the proceeds of this offering.
The Limited guarantees World Financial's lease obligations under a lease for
a 100,800 square foot facility in Columbus, Ohio. The lease expires in January
2001 and the current monthly lease rate is $69,407.
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.
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<PAGE>
Under the new stockholders agreement, the Welsh Carson affiliates and
Limited Commerce Corp. will have two demand registration rights and "piggyback"
registration rights. The demand rights will enable the Welsh Carson affiliates
and Limited Commerce Corp. to require us to register their shares with the SEC
under the Securities Act at any time after the consummation of this initial
public offering. Piggyback rights will allow the Welsh Carson affiliates and
Limited Commerce Corp. to register the shares of our common stock that they
purchased along with any shares that we register with the SEC. These
registration rights are subject to conditions and limitations, including the
right of the underwriters of an offering to limit the number of shares.
Under the new stockholders agreement, the size of our board of directors is
set at nine. Welsh Carson has the right to designate up to three nominees for
election to the board of directors as long as it owns more than 20% of our
common stock. Limited Commerce Corp. has the right to designate up to two of the
members as long as it owns more than 10% of our common stock and one of the
members as long as it owns between 5% and 10% of our common stock.
U.S. LOYALTY PROGRAM
We have evaluated the creation of a loyalty program in the U.S. similar to
our Canadian Air Miles reward program. Because of the significant funding
requirements to establish such a program, we have decided not to pursue the
program. Our existing stockholders have decided to pursue the program through a
separate company called U.S. Loyalty Corp., which they will fund. We will not
have any ownership interest in U.S. Loyalty Corp.
We intend to provide various services including management support,
accounting, transaction processing, data processing and marketing services for
U.S. Loyalty Corp. under various agreements that we plan to enter into with U.S.
Loyalty Corp. prior to this offering. We contemplate that such agreements will
include a management agreement, an employee lease agreement, a processing
agreement, and a royalty agreement. Under the royalty agreement, we will allow
U.S. Loyalty Corp. to use the Air Miles brand and business concept in the United
States.
The stockholders of U.S. Loyalty Corp. include Welsh Carson and Limited
Commerce Corp. as well as our directors and officers who have options to
purchase shares of our common stock. Robert A. Minicucci, who is a stockholder
and one of our directors, is the sole director, only officer and a stockholder
of U.S. Loyalty Corp.
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.
The notes accrue interest at the rate of 10% per annum and interest is payable
quarterly or upon demand.
<TABLE>
<CAPTION>
AMOUNT OF PRINCIPAL
OUTSTANDING AS OF
CREDIT LINE DECEMBER 31, 1999
------------ -------------------
<S> <C> <C>
World Financial Network National Bank note.................. $100,000,000 $ --
ADS Alliance Data Systems, Inc. note........................ 200,000,000 120,000,000
Alliance Data Systems (New Zealand) Limited note............ 11,250,000 9,750,000
Harmonic Systems Incorporated note.......................... 62,000,000 52,000,000
Loyalty Management Group Canada Inc. note................... 20,000,000 --
</TABLE>
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<PAGE>
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 76,881,518 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 second amended and restated certificate of
incorporation and our second amended and restated bylaws.
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.
EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon consummation of the offering there will be 200,000,000 authorized but
unissued shares of our common stock and 20,000,000 shares of preferred stock
available for our future issuance without stockholder approval. Of the shares of
common stock available for future issuance, 2,966,667 shares have been reserved
for issuance under our stock option and restricted stock purchase plan.
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<PAGE>
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 plans.
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
and may discourage 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 the classification of our board of
directors and such other provisions generally increase 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, by action at a meeting or by written consent, may elect a successor
to fill any vacancies or newly created directorships.
MEETINGS OF STOCKHOLDERS. Our bylaws provide that annual meetings of our
stockholders may take place at the time and place established by our board of
directors, provided that the date is not more than 120 days after the end of our
fiscal year. A special meeting of our stockholders may be called by our board of
directors or our chief executive officer and will be called by our chief
executive officer or secretary upon written request by a majority of our board
of directors.
ADVANCE NOTICE PROVISIONS. Our bylaws provide that nominations for
directors may not be made by stockholders at any annual or special meeting
thereof unless the stockholder intending to make a nomination notifies us of its
intention a specified number of days in advance of the meeting and furnishes to
us certain information regarding itself and the intended nominee. Our bylaws
also require a stockholder to provide to our secretary advance notice of
business to be brought by such stockholder before any annual or special meeting
of our stockholders, as well as certain information regarding the stockholder
and any material interest the stockholder may have in the proposed business.
These provisions could delay stockholder actions that are favored by the holders
of a majority of our outstanding stock until the next stockholders' meeting.
AMENDMENT OF THE BYLAWS. Our bylaws may be altered, amended, repealed or
replaced by our board of directors or our stockholders at any annual or regular
meeting, or at any special meeting if notice of the alteration, amendment,
repeal or replacement is given in the notice of the meeting.
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<PAGE>
DELAWARE ANTI-TAKEOVER LAW. We are subject to the provisions of
Section 203 of the Delaware General Corporation Law regulating corporate
takeovers. This section prevents certain Delaware corporations, under certain
circumstances, from engaging in a "business combination" with:
- a stockholder who owns 15% or more of our outstanding voting stock
(otherwise known as an "interested stockholder"),
- an affiliate of an interested stockholder, or
- an associate of an interested stockholder,
for three years following the date that the stockholder became an "interested
stockholder." A "business combination" includes a merger or sale of more than
10% of our assets.
However, the above provisions of Section 203 do not apply if:
- our board approves the transaction that made the stockholder an
"interested stockholder," prior to the date of that transaction;
- after the completion of the transaction that resulted in the stockholder
becoming an "interested stockholder," that stockholder owned at least 85%
of our voting stock outstanding at the time the transaction commenced,
excluding shares owned by our officers and directors; or
- on or subsequent to the date of the transaction, the business combination
is approved by our board and authorized at a meeting of our stockholders
by an affirmative vote of at least two-thirds of the outstanding voting
stock not owned by the "interested stockholder."
This statute could prohibit or delay mergers or other change in control
attempts, and thus may discourage attempts to acquire us.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of fiduciary
duty as a director, to the fullest extent permitted by Delaware Law.
Our certificate of incorporation and bylaws provide that:
- we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by applicable law;
- we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law, subject to very limited exceptions.
Prior to the consummation of this offering, we intend to obtain directors'
and officers' insurance for our directors, officers and some employees for
specified liabilities.
The limitation of liability and indemnification provisions in our
certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against directors for breach of their fiduciary duty. They
may also have the effect of reducing the likelihood of derivative litigation
against directors and officers, even though an action of this kind, if
successful, might otherwise benefit us and our stockholders. Furthermore, a
stockholders' investment may be adversely affected to the extent we pay the
costs of settlement and damage awards against directors and officers pursuant to
these indemnification provisions. However, we believe that these indemnification
provisions are necessary to attract and retain qualified directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is EquiServe Trust
Company, N.A.
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<PAGE>
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 January 31, 2000, principal stockholders held 56,600,595 shares,
representing 99.5% of the outstanding shares of our common stock. After this
offering, we will have 76,881,518 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
56,881,518 shares, 72,013 shares will be freely transferable and 56,809,505
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.
Subject to the lock-up agreements described below and the provisions of
Rule 144 and 144(k), additional shares will be available for sale in
the public market.
LOCK-UP AGREEMENTS
Our officers, directors and other stockholders who hold in the aggregate
shares of our common stock and holders of options to purchase
shares of our common stock which vest and are exercisable within the next
days, have agreed not to sell or otherwise dispose of any shares of our
common stock for a period of 180 days after the date of this prospectus, without
the prior written consent of Bear, Stearns & Co. Inc. The underwriters do not
intend to release the executive officers, directors or other stockholders,
including Welsh, Carson and Limited Commerce Corp., from the lock-up agreements;
however, any of these stockholders could be released from the lock-up agreements
prior to expiration without notice.
RULE 144
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned restricted shares for at
least one year following the later of the date of the acquisition of such shares
from the issuer or from an affiliate of the issuer would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
- 1% of the number of shares of our common stock then outstanding,
approximately shares immediately after this offering; or
- the average weekly trading volume of our common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to such
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 an affiliate of
us at any time during the 90 days preceding a sale, and who has beneficially
owned the shares proposed to be sold for at least two years following the later
of the date of the acquisition of such shares from the issuer or an affiliate of
the issuer, is entitled to sell such shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
RULE 701
In general, under Rule 701, any of our employees or directors who purchase
shares from us in connection with our stock option plan or other written
agreements are eligible to resell these shares 90 days after the date of this
offering in reliance on Rule 144, without compliance with certain restrictions
contained in Rule 144, including the holding period.
We intend to file registration statements to register shares of common stock
reserved for issuance under our stock option plan. These registration statements
will permit the resale of shares issued under these plans by non-affiliates in
the public market without restriction, subject to the lock-up agreements.
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<PAGE>
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 Donaldson, Lufkin & Jenrette Securities 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:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ----------- ----------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Merrill Lynch, Pierce Fenner & Smith,
Incorporated.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Total.................................................. 20,000,000
</TABLE>
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 3,000,000 additional shares of common stock to cover over-allotments, if
any, at the initial public offering price less the underwriting discount, each
as set forth on the cover page of this prospectus. If the underwriters exercise
this option in whole or in part, each of the underwriters will be severally
committed, subject to certain conditions, to purchase these additional shares of
common stock in proportion to their respective purchase commitments as indicated
in the preceding table and we will be obligated to sell these additional shares
to the underwriters. The underwriters may exercise this option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered by this prospectus. These additional shares will be sold by the
underwriters on the same terms as those on which the shares offered by this
prospectus are being sold.
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UNDERWRITING COMPENSATION. The following table summarizes the compensation
to be paid to the underwriters by us in connection with this offering:
<TABLE>
<CAPTION>
TOTAL
------------------------------------------
WITHOUT EXERCISE OF WITH EXERCISE OF THE
THE OVER-ALLOTMENT OVER-ALLOTMENT
PER SHARE OPTION OPTION
--------- ------------------- --------------------
<S> <C> <C> <C>
Underwriting discounts...........
</TABLE>
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 officers and other
stockholders, including Welsh, Carson and Limited Commerce Corp., holding an
aggregate of shares of our common stock have agreed not to sell or offer
to sell or otherwise dispose of any shares of our common stock, subject to
certain exceptions, for a period of 180 days after the date of this prospectus,
without the prior written consent of Bear, Stearns & Co. Inc. The underwriters
do not intend to release the executive officers, directors or other
stockholders, including Welsh, Carson and Limited Commerce Corp., from the
lock-up agreements; however, any of these stockholders could be released from
the lock-up agreements prior to expiration without notice.
DETERMINATION OF OFFERING PRICE. Prior to this offering, there has been no
market for our common stock. Accordingly, the initial public offering price for
the common stock was determined by negotiation between us and the
representatives of the underwriters. Among the factors considered in these
negotiations were:
- the results of our operations in recent periods;
- our financial condition;
- estimates of our future prospects and of the prospects for the industry in
which we compete;
- an assessment of our management;
- the general state of the securities markets at the time of this offering;
and
- the prices of similar securities of companies considered comparable to us.
We intend to apply to have our common stock listed on the New York Stock
Exchange under the symbol "ADD". 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 1,000,000 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 Bear, Stearns & Co. Inc., Merrill Lynch, Pierce Fenner & Smith
Incorporated or Donaldson, Lufkin & Jenrette Securities Corporation in
accordance with their respective procedures for opening accounts and transacting
in securities. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares offered
in this offering.
PROSPECTUS IN ELECTRONIC FORMAT. A prospectus in electronic format is being
made available on an Internet Website maintained by . In addition, all
dealers purchasing shares from in the offering have agreed to make an
electronic version of this prospectus available on Web sites
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<PAGE>
maintained by them. We have agreed, upon request by a person who received our
prospectus in electronic format, to deliver a prospectus in paper format to such
person. Purchases of shares through are to be made through an account at
in accordance with 's procedures for opening an account and
transacting in securities.
STABILIZATION AND OTHER TRANSACTIONS. In order to facilitate this offering,
persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of the common stock during and
after this offering, including over-allotment, stabilizing and short-covering
transactions and the imposition of penalty bids. Specifically, the underwriters
may over-allot or otherwise create a short position in the common stock for
their own account by selling more shares of common stock than have been sold to
them by us. The underwriters may elect to cover this short position by
purchasing shares of common stock in the open market or by exercising the
over-allotment option granted to the underwriters. In addition, the underwriters
may stabilize or maintain the price of the common stock by bidding for or
purchasing shares of common stock in the open market and may impose penalty
bids, under which selling concessions allowed to syndicate members or other
broker-dealers participating in this offering are reclaimed if shares of common
stock previously distributed in this offering are repurchased in connection with
stabilization transactions or otherwise. The effect of these transactions may be
to stabilize or maintain the market price at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
affect the price of the common stock to the extent that it discourages resales.
No representation is made as to the magnitude or effect of these stabilization
transactions. These transactions may be effected on the New York Stock Exchange
or otherwise and, if commenced, may be discontinued at any time.
NYSE UNDERTAKING. Bear, Stearns & Co. Inc., on behalf of the underwriters,
has undertaken with the New York Stock Exchange to meet the New York Stock
Exchange distribution standards of 2,000 round lot holders with 100 shares or
more, with 1.1 million shares outstanding and a minimum public market value of
$60.0 million.
LEGAL MATTERS
The validity of the shares of our common stock offered hereby will be passed
upon for us by Akin, Gump, Strauss, Hauer & Feld, L.L.P. Legal matters in
connection with this offering will be passed upon for the underwriters by
Gibson, Dunn & Crutcher LLP, Los Angeles, California.
EXPERTS
The consolidated financial statements of Alliance Data Systems Corporation
and subsidiaries as of December 31, 1998 and 1999 and for the year ended
December 31, 1999, eleven months ended December 31, 1998, and 53 week period
ended January 31, 1998 included in this prospectus 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 financial statements of SPS Network Services for the six months ended
June 30, 1999 and the year ended December 31, 1998 included in this prospectus
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.
Ernst & Young LLP, independent auditors, have audited the consolidated
financial statements of Loyalty Management Group Canada Inc. as of April 30,
1997 and 1998, and for each of the two years in the period ended April 30, 1998,
as set forth in their report. We have included these financial statements in
this prospectus and elsewhere in the registration statement in reliance on Ernst
& Young LLP's report, given on their authority as experts in accounting and
auditing.
82
<PAGE>
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.
83
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
ALLIANCE DATA SYSTEMS CORPORATION AND SUBSIDIARIES
Report of Independent Auditors.............................. F-2
Consolidated Statements of Operations for the fifty-three
weeks ended January 31, 1998, the eleven months ended
December 31, 1998 and the year ended December 31, 1999.... F-3
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-4
Consolidated Statements of Stockholders' Equity for the
fifty-three weeks ended January 31, 1998, the eleven
months ended December 31, 1998 and the year ended
December 31, 1999......................................... F-5
Consolidated Statements of Cash Flows for the fifty-three
weeks ended January 31, 1998, the eleven months ended
December 31, 1998 and the year ended December 31, 1999.... F-6
Notes to Consolidated Financial Statements.................. F-7
SPS NETWORK SERVICES
Report of Independent Auditors.............................. F-30
Statements of Income for the year ended December 31, 1998
and the six months ended June 30, 1999.................... F-31
Statements of Changes in Net Assets for the year ended
December 31, 1998 and the six months ended June 30,
1999...................................................... F-32
Statements of Cash Flows for the year ended December 31,
1998 and the six months ended June 30, 1999............... F-33
Notes to Financial Statements............................... F-34
LOYALTY MANAGEMENT GROUP CANADA INC. AND SUBSIDIARY
Report of Independent Auditors.............................. F-35
Consolidated Balance Sheets as of April 30, 1997 and 1998... F-36
Consolidated Statements of Operations and Retained Earnings
(Deficit) for the two years ended April 30, 1997 and
1998...................................................... F-37
Consolidated Statements of Cash Flows for the two years
ended April 30, 1997 and 1998............................. F-38
Notes to Consolidated Financial Statements.................. F-39
</TABLE>
F-1
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Stockholders of
Alliance Data Systems Corporation
We have audited the accompanying consolidated balance sheets of Alliance
Data Systems Corporation and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for the 53 weeks ended January 31, 1998, the eleven months ended
December 31, 1998 and the year ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the companies as of
December 31, 1998 and 1999 and the results of their operations and their cash
flows for the respective stated periods in conformity with accounting principles
generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 1, 2000
F-2
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
53 WEEKS 11 MONTHS
ENDED ENDED YEAR ENDED
JANUARY 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
---------------- ----------------- ------------------
<S> <C> <C> <C>
Revenues
Processing and servicing fees............. $225,504 $306,366 $483,179
Financing charges, net.................... 127,007 119,352 141,947
Other income.............................. 888 8,591 14,128
-------- -------- --------
Total revenue......................... 353,399 434,309 639,254
-------- -------- --------
Operating expenses
Processing and servicing.................. 161,360 209,013 341,496
Salaries and employee benefit............. 127,087 156,464 193,699
Depreciation and other amortization....... 7,402 8,270 16,183
Amortization of purchased intangibles..... 19,061 34,321 49,777
-------- -------- --------
Total operating expenses.............. 314,910 408,068 601,155
-------- -------- --------
Operating income.............................. 38,489 26,241 38,099
Interest expense.............................. 15,459 27,884 42,785
-------- -------- --------
Income (loss) from continuing operations
before income taxes......................... 23,030 (1,643) (4,686)
Income tax expense............................ 8,420 6,653 15,388
-------- -------- --------
Income (loss) from continuing operations...... 14,610 (8,296) (20,074)
Income (loss) from discontinued operations,
net of income taxes......................... (8,247) (300) 7,688
Loss on disposal of discontinued operations... -- -- (3,737)
-------- -------- --------
Net income (loss)............................. $ 6,363 $ (8,596) $(16,123)
======== ======== ========
Earnings (loss) from continuing operations per
share--basic and diluted.................... $ 0.40 $ (0.20) $ (0.49)
======== ======== ========
Earnings (loss) per share--basic and
diluted..................................... $ 0.17 $ (0.21) $ (0.41)
======== ======== ========
Weighted average shares--basic and diluted.... 36,612 41,729 47,498
======== ======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, 1999
---------------------------
PRO FORMA
DECEMBER 31, STOCKHOLDERS'
1998 ACTUAL EQUITY
------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 47,036 $ 56,546
Restricted cash and cash equivalents...................... 17,909 69,571
Securities available-for-sale............................. 52,269 64,079
Trade receivables less allowance for doubtful accounts
($3,576 and $1,079 at December 31, 1998 and 1999,
respectively)........................................... 143,286 69,085
Credit card receivables and seller's interest less
allowance for doubtful accounts ($4,888 and $3,657 at
December 31, 1998 and 1999, respectively)............... 139,458 150,804
Deferred tax asset, net................................... 3,051 26,416
Other current assets...................................... 51,551 30,250
----------- -----------
Total current assets.............................. 454,560 466,751
Property and equipment, net............................... 66,339 89,231
Deferred tax asset, net................................... 14,949 5,116
Other non-current assets.................................. 47,462 31,470
Due from securitizations.................................. 121,442 144,484
Intangible assets and goodwill, net....................... 305,365 448,017
----------- -----------
Total assets...................................... $ 1,010,117 $ 1,185,069
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable.......................................... $ 44,327 $ 83,976
Accrued expenses.......................................... 58,590 75,646
Deferred income........................................... 17,733 25,805
Debt, current portion..................................... 148,149 118,225
----------- -----------
Total current liabilities......................... 268,799 303,652
Deferred income and other liabilities..................... 21,131 32,752
Redemption obligation..................................... 80,213 122,198
Long-term and subordinated debt........................... 331,835 316,911
----------- -----------
Total liabilities................................. 701,978 775,513
----------- -----------
Commitments and contingencies
Series A cumulative convertible preferred stock, $0.01 par
value; 120 shares authorized and issued; pro forma--none
outstanding............................................. -- 119,400 $ --
Common stock, $0.01 par value; authorized 50,000 shares
(December 31, 1998), and 66,667 shares (December 31,
1999), issued 47,487 shares (December 31, 1998) and
47,529 shares (December 31, 1999)....................... 475 475 567
Additional paid-in capital................................ 225,797 226,174 345,482
Retained earnings......................................... 83,838 67,715 67,715
Accumulated other comprehensive loss...................... (1,971) (4,208) (4,208)
----------- ----------- -----------
Total stockholders' equity........................ 308,139 290,156 $ 409,556
----------- ----------- ===========
Total liabilities and stockholders' equity........ $ 1,010,117 $ 1,185,069
=========== ===========
</TABLE>
See accompanying notes
F-4
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL TOTAL
PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS LOSS LOSS EQUITY
-------- -------- ---------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
FEBRUARY 1, 1997............. 36,608 $ 366 $118,768 $86,071 $ -- $205,205
Net income................... 6,363 6,363
Common stock issued.......... 11 96
------- ------ -------- ------- ------- --------
JANUARY 31, 1998............. 36,619 366 118,864 92,434 -- 211,664
Net loss..................... (8,596) $ (8,596) (8,596)
Other comprehensive loss,
net of tax:
Unrealized gains on
securities
available-for-sale,
net.................... 1,207 1,207 1,207
Foreign currency
translation
adjustments............ (3,178) (3,178) (3,178)
-------
Other comprehensive loss..... (1,971)
--------
Total comprehensive loss..... $(10,567)
========
Common stock issued.......... 10,868 109 106,933 107,042
------- ------ -------- ------- ------- --------
DECEMBER 31, 1998............ 47,487 475 225,797 83,838 (1,971) 308,139
Net loss..................... (16,123) $(16,123) (16,123)
Other comprehensive loss,
net of tax:
Unrealized loss on
securities
available-for-sale,
net.................... (4,684) (4,684) (4,684)
Foreign currency
translation
adjustments............ 2,447 2,447 2,447
-------
Other comprehensive loss..... (2,237)
--------
Total comprehensive loss..... $(18,360)
========
Common stock issued.......... 42 -- 377 377
------- ------ -------- ------- ------- --------
DECEMBER 31, 1999............ 47,529 $ 475 $226,174 $67,715 $(4,208) $290,156
======= ====== ======== ======= ======= ========
</TABLE>
See accompanying notes
F-5
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
53 WEEKS 11 MONTHS
ENDED ENDED YEAR ENDED
JANUARY 31, 1998 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) from continuing operations......... $ 14,610 $ (8,296) $ (20,074)
Adjustments to reconcile income (loss) from
continuing operations to net cash provided by
operating activities:
Income (loss) from discontinued operations....... (8,247) (300) 7,688
Loss on disposal of discontinued operations...... -- -- (3,737)
Depreciation and amortization.................... 26,463 43,093 65,960
Provision for doubtful accounts.................. (294) (3,383) (3,540)
Change in operating assets:
Deferred income taxes.......................... (1,413) (1,011) (13,532)
Impairment of assets........................... -- 4,000 --
Accretion of deferred income................... (5,934) (9,395) (5,950)
Change in trade accounts receivables........... (75,876) (20,868) 81,276
Change in accounts payable and accrued
expenses..................................... 15,393 6,076 47,667
Change in other assets......................... 1,659 (17,546) 38,207
Change in redemption obligation................ -- -- 41,985
Other operating activity....................... -- -- (9,955)
Change in other liabilities.................... 2,961 12,099 25,643
--------- --------- ---------
Net cash provided by (used in) operating
activities................................. (30,678) 4,469 251,638
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities........................... -- (14,704) (12,314)
Increase in restricted cash and cash
equivalents.................................... -- -- (51,662)
Purchase of credit card receivables.............. (344,464) -- (33,817)
Change in due from securitizations............... (46,456) 5,470 (26,404)
Net cash paid for corporate acquisition.......... (716) (133,973) (171,423)
Change in intangible assets...................... (8,715) -- --
Proceeds from sale of credit card receivable
portfolios..................................... -- 94,091 --
Proceeds from securitization..................... 321,831 -- --
Change in seller's interest...................... 14,130 (76,975) 22,471
Capital expenditures............................. (39,356) (14,443) (36,302)
--------- --------- ---------
Net cash used in investing activities........ (103,746) (140,534) (309,451)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements................. 582,497 382,043 249,625
Repayment of borrowings.......................... (477,723) (325,803) (294,473)
Proceeds from issuance of preferred stock........ -- -- 119,400
Proceeds from issuance of common stock........... 96 107,042 377
--------- --------- ---------
Net cash provided by financing activities.... 104,870 163,282 74,929
--------- --------- ---------
Effect of exchange rate changes.................... -- (776) (7,606)
--------- --------- ---------
Change in cash and cash equivalents................ (29,554) 26,441 9,510
Cash and cash equivalents at beginning of period... 50,149 20,595 47,036
--------- --------- ---------
Cash and cash equivalents at end of period......... $ 20,595 $ 47,036 $ 56,546
========= ========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Interest paid.................................... $ 21,669 $ 33,695 $ 43,215
========= ========= =========
Income taxes paid................................ $ 8,466 $ 12,406 $ 25,242
========= ========= =========
</TABLE>
See accompanying notes
F-6
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACQUISITIONS
DESCRIPTION OF THE BUSINESS--Alliance Data Systems Corporation ("ADSC" or,
including its wholly-owned subsidiaries, the "Company") is a leading provider of
electronic transaction services, credit services and loyalty and database
marketing services. The Company develops and executes programs designed to help
its clients target, acquire and retain loyal, profitable customers. The Company
creates value for its clients by assisting them in managing their customer
relationships. Specifically we: (1) facilitating transactions between its
clients and their customers through multiple distribution channels;
(2) assisting its clients in identifying and acquiring new customers; and
(3) increasing the loyalty and profitability of existing customers.
The Company operates in three reportable segments: Loyalty and Database
Marketing Services, Transaction Services and Credit Services. Loyalty and
Database Marketing Services provides a membership rewards program for multiple
sponsors and marketing services to its customers by way of providing processing
services for loyalty and rewards programs, data mining and database tools and
reports. Transaction Services encompasses transaction processing, including
network services and bank card settlement and card processing and servicing,
such as account processing, billing and payment processing and customer care.
Credit Services provides underwriting and risk management services. Credit
Services generally securitizes the credit card receivables that it underwrites
from its private label programs.
BASIS OF PRESENTATION--During fiscal 1998, the Company changed its year end
to a calendar year end basis. Prior to December 31, 1998, the Company had a
52/53 week fiscal year that ended on the Saturday nearest January 31.
Accordingly, fiscal 1997 represents the 53 weeks ended January 31, 1998, fiscal
1998 represents the 11 months ended December 31, 1998, and fiscal 1999
represents the year ended December 31, 1999.
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 entities under common control. Prior to the merger, WFNHC and
BSH were under common ownership and common management. Subsequent to the merger,
WFNHC changed its name to Alliance Data Systems Corporation and BSI changed its
name to ADS Alliance Data Systems, Inc. ("ADSI").
In November 1997, the Company formed a wholly-owned subsidiary, Alliance
Data Systems (New Zealand) Limited ("ADSNZ"), to acquire the stock of Financial
Automation Limited and Financial Automation Marketing Limited (collectively,
"FAL") for approximately $10.5 million, financed through working capital. The
acquisition was accounted for using the purchase method of accounting, and the
excess purchase price over the fair value of the net identifiable assets
acquired, approximately $2.8 million, was allocated to goodwill and is being
amortized over 20 years using a straight-line basis. The results of operations
of FAL have been included in the consolidated financial statements since
November 1997. FAL developed and markets a proprietary fleet management tracking
system to companies worldwide.
In July 1998, the Company acquired the stock of Loyalty Management Group
Canada, Inc. ("Loyalty") for approximately $183.0 million of net cash financed
through a capital infusion of $100.0 million from stockholders and a bank loan
of $100.0 million. The acquisition was accounted for using the purchase method
of accounting, and the excess purchase price over the fair value of the net
identifiable assets acquired, approximately $104.0 million, was allocated to
goodwill and is being
F-7
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACQUISITIONS (CONTINUED)
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. HSI provides
retail chains with private data communications networks for the transmission of
electronic data between their stores, a merchant's corporate data center and
third party information service providers.
In July 1999, the Company acquired the network services business of SPS
Payment Systems, Inc. ("SPS"), a wholly-owned subsidiary of Associates First
Capital Corporation, for approximately $170.0 million, which was financed by
$120.0 million of Series A Cumulative Convertible Preferred Stock and
$50.0 million of working capital. This transaction was accounted for using the
purchase method of accounting, and the excess purchase price over the fair value
of the net identifiable assets, approximately $142.5 million, was allocated to
goodwill and other intangibles and is being amortized over periods ranging from
three to 25 years using a straight-line basis. The results of operations of SPS
have been included in the consolidated financial statements since July 1999.
SUPPLEMENTARY UNAUDITED PRO FORMA INFORMATION
Unaudited pro forma information for the Company is presented below as if the
Loyalty, the HSI and the SPS acquisitions had occurred at the beginning of
fiscal 1998 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FISCAL
-------------------
1998 1999
-------- --------
<S> <C> <C>
Revenue............................................... $592,816 $663,576
Net loss.............................................. $(28,522) $(16,886)
Earnings per share.................................... $ (0.69) $ (0.36)
Weighted average number of shares..................... 41,729 47,498
</TABLE>
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.
RESTRICTED CASH AND CASH EQUIVALENTS--Restricted cash and cash equivalents
relate to a reserve fund for the Air Miles reward program. The reserve fund is
maintained to fund redemptions of Air Miles reward miles from collectors.
SECURITIES AVAILABLE-FOR-SALE--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. 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. These securities relate to the reserve
fund for the Air Miles reward miles program and are restricted to funding of the
redemption obligation.
F-8
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
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 for credit enhancements, 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.
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 convert 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 range from three to 20
years.
REVENUE RECOGNITION POLICY--The Company derives substantially all of its
revenue from two principal sources. The Company receives fees for providing
information and transaction processing services to sponsors. It also earns
financing income from its credit card receivables and securitization program.
PROCESSING AND SERVICING FEES--The Company earns fees from sponsors by
charging for participation in its loyalty program, thus allowing several
sponsors to operate under a common membership rewards program. The Company is
paid for these services on a per transaction basis, subject to certain sponsor-
guaranteed minimums. Revenue is recognized upon completion of the related
transaction, provided that there are no remaining significant obligations to be
performed. Revenue from other processing and servicing fees is recognized as
such services are performed.
FINANCING CHARGES, NET--Financing charges, net, represents gains and losses
on securitization of credit card receivables and interest income on seller's
interest less a provision (credit) for doubtful accounts of $(0.3 million),
$(3.4 million) and $(3.7 million) and related interest expense of $9.4 million,
$8.4 million and $10.4 million for fiscal 1997, 1998 and 1999, respectively.
The Company records gains or losses on the securitization of credit card
receivables on the date of sale based on the estimated fair value of assets sold
and retained and liabilities incurred in the sale. Gains represent the present
value of estimated future cash flows the Company has retained over the estimated
outstanding period of the receivables. This excess cash flow essentially
represents an interest only ("I/O") strip, consisting of the excess of finance
charges and past-due fees over the sum of the return paid to certificate holders
and credit losses. The I/O strip is carried at fair value, with changes in the
fair value reported as a component of cumulative other comprehensive income. The
I/O strip is amortized over the life of the credit card receivables. Certain
estimates inherent in the determination of fair value of the I/O strip are
influenced by factors outside the Company's control and, as a result, such
estimates could materially change in the near term. The gains on securitizations
and other income from securitizations are included in finance charges, net.
REDEMPTION OBLIGATION--The Company accrues a liability for its estimated
future redemption obligations at the time it recognizes the related revenue. The
redemption obligation represents the estimated costs associated with the
Company's obligation to redeem outstanding Air Miles reward miles, which may be
converted by enrolled collectors into various free travel or other free
merchandise. The Company is liable for purchasing the rewards provided to
collectors, if and when such members
F-9
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
seek to redeem accumulated Air Miles reward miles upon reaching required
redemption thresholds. The redemption obligation is determined based on two
factors: the number of Air Miles reward miles that are expected to be redeemed
and the weighted average cost of rewards. The estimated number of Air Miles
reward miles that are expected to be redeemed is based on the Company's
historical business experience, patterns of usage and other factors. The
weighted average cost of rewards is based on the mix of rewards anticipated to
be redeemed and the incremental cost of providing free travel and merchandise.
These redemption obligation estimates are evaluated and adjusted quarterly. Any
adjustments resulting from such evaluations are included in the results of
operations for the periods in which the evaluations are completed.
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.
MARKETING--The Company expenses marketing costs as incurred.
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.
The following table sets forth the computation of basic and diluted net
income (loss) per share for the periods indicated (in thousands, except per
share data):
<TABLE>
<CAPTION>
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
NUMERATOR
Income (loss) from continuing operations.................. $ 14,610 $ (8,296) $(20,074)
Preferred stock dividends................................. -- -- (3,377)
-------- -------- --------
Income (loss) from continuing operations available to
common stockholders..................................... 14,610 (8,296) (23,451)
Income (loss) from discontinued operations................ (8,247) (300) 7,688
Loss on disposal of discontinued operations............... -- -- (3,737)
-------- -------- --------
Net income (loss) available to common stockholders........ $ 6,363 $ (8,596) $(19,500)
======== ======== ========
DENOMINATOR
Weighted average shares................................... 36,612 41,729 47,498
Weighted average effect of dilutive securities:
Net effect of dilutive stock options.................... -- -- --
Net effect of dilutive stock warrants................... -- -- --
-------- -------- --------
Denominator for diluted calculation....................... 36,612 41,729 47,498
======== ======== ========
Income (loss) from continuing operations--basic and
diluted................................................... $ 0.40 $ (0.20) $ (0.49)
Income (loss) from discontinued operations--basic and
diluted................................................... (0.23) (0.01) 0.08
-------- -------- --------
Net income (loss) per share--basic and diluted.............. $ 0.17 $ (0.21) $ (0.41)
======== ======== ========
</TABLE>
F-10
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
Pro forma basic and diluted loss from continuing operations for the year
ended December 31, 1999 of $0.36 per share is computed by dividing the net loss
attributable to common stockholders by the sum of the weighted average number of
shares of common stock outstanding giving effect to the conversion of all
outstanding shares of the Series A preferred stock into 8,888,889 shares of
common stock as if the conversion had occurred at the beginning of the period.
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported 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 accumulated in
a separate component of stockholders' equity.
INCOME TAXES--Deferred income taxes are provided for differences arising in
the timing of income and expenses for financial reporting and for income tax
purposes using the asset/liability method of accounting. Under this method,
deferred income taxes are recognized for the future tax consequences
attributable to the differences between the financial statements' carrying
amounts of existing assets and liabilities and their respective tax bases, using
enacted tax rates.
LONG-LIVED ASSETS--Long-lived assets, goodwill and other intangible assets
are evaluated for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets or intangibles may not be
recoverable. Recoverability is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS--The nature and composition of some
of the Company's assets and liabilities and off-balance sheet items expose the
Company to interest rate risk. To mitigate this risk, the Company enters into
interest rate swap agreements. All of the Company's interest rate swaps are
designated and effective as hedges of specific existing or anticipated assets,
liabilities or off-balance sheet items. The Company's foreign currency
denominated assets and liabilities expose it to foreign currency exchange rate
risk. The Company has entered into cross-currency hedges to fix the exchange
rate on Canadian debt. The Company does not hedge its net investment in its
Canadian subsidiary. The Company does not hold or issue derivative financial
instruments for trading purposes.
Swap agreements involve the periodic exchange of payments over the life of
the agreements. Amounts to be paid or received are recorded on an accrual basis
as an adjustment to the related income or expense of the item to which the
agreements are designated. As of December 31, 1998, the related amount
receivable from counterparties was $1.7 million. As of December 31, 1999, the
related amount payable to counterparties was $1.5 million. Changes in the fair
value of interest rate swaps are not reflected in the accompanying financial
statements where designated to existing or anticipated assets, liabilities or
off-balance sheet items and where swaps effectively modify or reduce interest
rate sensitivity.
F-11
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT POLICIES (CONTINUED)
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 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.
SEGMENT INFORMATION--Effective December 31, 1998, the Company adopted SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information".
The new rules establish revised standards for public companies relating to the
reporting of financial and descriptive information about their operating
segments in financial statements. The Company did not previously report segment
information.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1998, the FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
establishes accounting and reporting standards for derivative instruments and
for hedging activities, and requires companies to recognize all derivatives as
either assets or liabilities in the balance sheet and measure such instruments
at fair value. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133" which deferred the effective date of SFAS No. 133 to
fiscal years beginning after June 15, 2000. Adoption of this statement is not
anticipated to materially impact the Company's results of operations, but may
require revised balance sheet classifications and will require revised
disclosures in the notes to the consolidated financial statements.
RECLASSIFICATIONS--For purposes of comparability, certain prior period
amounts have been reclassified to conform with the current year presentation.
PRO FORMA STOCKHOLDERS' EQUITY--If the offering contemplated by this
prospectus is consummated, all of the Series A cumulative convertible preferred
stock outstanding at the closing date will be converted into shares of common
stock. The unaudited pro forma stockholders' equity as of December 31, 1999
reflects the conversion of all outstanding convertible preferred stock at
December 31, 1999 into 9,139,020 shares of common stock.
F-12
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are primarily used to settle the Company's
redemption obligation under its Air Miles reward program in Canada. These
securities are primarily denominated in Canadian dollars. Realized gains and
losses from the sale of investment securities were not material. The principal
components of securities available-for-sale, which are carried at fair value,
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------------------------------- -------------------------------------------
UNREALIZED UNREALIZED
------------------- -------------------
COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE
-------- -------- -------- ----------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed income securities:
Government............. $19,951 $ 554 $ (82) $20,423 $29,981 $ -- $(1,368) $28,613
Corporate.............. 10,162 200 (300) 10,062 11,884 9 (540) 11,353
Equity securities........ 22,420 1,508 (2,144) 21,784 25,385 3,171 (4,443) 24,113
------- ------ ------- ------- ------- ------ ------- -------
Total.................... $52,533 $2,262 $(2,526) $52,269 $67,250 $3,180 $(6,351) $64,079
======= ====== ======= ======= ======= ====== ======= =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Software development and conversion costs............... $ 50,556 $ 55,156
Computer equipment and purchased software............... 13,649 23,127
Furniture and fixtures.................................. 40,197 45,741
Leasehold improvements.................................. 28,253 31,593
Construction in progress................................ 2,586 6,624
-------- --------
Total................................................. 135,241 162,241
Accumulated depreciation................................ (68,902) (73,010)
-------- --------
Property and equipment, net............................. $ 66,339 $ 89,231
======== ========
</TABLE>
During fiscal 1998, the Company recorded an impairment of $4.0 million on
computer equipment and software related to the Loyalty and Database Marketing
Services segment. The related computer equipment and software was deemed by
management to be inadequate. The related charge is included in processing and
servicing expenses in the consolidated statements of operations.
5. SECURITIZATION OF CREDIT CARD RECEIVABLES
The Company regularly securitizes its credit card receivables. During fiscal
1997, fiscal 1998 and fiscal 1999, the Company securitized $4.2 billion,
$3.9 billion and $4.1 billion, respectively, of credit card receivables. The
total amount of securitized credit card receivables outstanding as of
December 31, 1998 and 1999 was $2.0 billion and $2.2 billion, respectively,
maturing from 1999 to 2003. As of December 31, 1998 and 1999, seller's interest
consisted of $139.1 million and $121.9 million, respectively.
F-13
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES (CONTINUED)
During the initial period of a securitization reinvestment period, the
Company generally retains principal collections in exchange for the transfer of
additional credit card receivables into the securitized pool of assets. During
the amortization or accumulation period of a securitization, the investors'
share of principal collections (in certain cases, up to a maximum specified
amount each month) is either distributed each month to the investors or held in
an account until it accumulates to the total amount, at which time it is paid to
the investors in a lump sum. One of the Company's securitization trusts has
entered an early amortization period as a result of a private label customer
entering bankruptcy proceedings. The receivables associated with the customer
are in a different trust from all of the Company's other receivables; therefore,
those proceedings will not affect the other trusts. The Company's outstanding
securitizations are scheduled to begin their amortization or accumulation
periods at various times between 2000 and 2003.
"Due from securitizations" consists of spread deposits, I/O strips and
excess funding deposits as shown in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Spread deposits......................................... $ 82,875 104,222
I/O strips.............................................. 21,967 20,289
Excess funding deposits................................. 16,600 19,973
-------- --------
$121,442 $144,484
======== ========
</TABLE>
The spread deposits, I/O strips and excess funding deposit 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, and used the
following assumptions to determine fair value at December 31, 1999:
<TABLE>
<S> <C>
Discount rate.................................... 14.0%
Collected yield.................................. 20.1% - 25.2%
Interest expense................................. 6.94%
Credit losses rate............................... 7.3% - 9.8%
Dilution (prepayment) ratio...................... 1.6% to 2.8%
Weighted average life............................ 8 months
</TABLE>
F-14
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. SECURITIZATION OF CREDIT CARD RECEIVABLES (CONTINUED)
Spread deposits, carried at estimated fair value, represent interest earning
deposits that are held by a trustee or agent and are used to absorb losses
related to securitized credit card receivables should they exceed the available
net cash flows arising from the securitized credit card receivables. The fair
value of spread deposits is based on the maturity date of the respected series,
ranging from 4 months to 3 years and 4 months, and the discount rate. The
discount rate is based on a risk adjusted rate paid on the series less the
interest rate earned by the Company on the spread deposits and ranges from 2.1%
to 4.0%. The amount required to be deposited is 3.25% of credit card receivables
in the trust, other than with respect to the trust in early amortization, for
which all excess funds are required to be deposited. Spread deposits are
generally released proportionately as investors are repaid, although some spread
deposits are released only when investors have been paid in full. None of these
spread deposits were required to be used to cover losses on securitized credit
card receivables in the three-year period ended December 31, 1999.
The Company is required to maintain minimum interests ranging from 4% to 7%
of the securitized credit card receivables. This requirement is met through
seller's interest, and is supplemented through the excess funding deposits.
Excess funding deposits represent cash amounts deposited with the trustee of the
securitizations.
6. INTANGIBLE ASSETS AND GOODWILL
Intangible assets and goodwill consist of the following:
<TABLE>
<CAPTION>
AMORTIZATION LIFE
DECEMBER 31, AND METHOD
------------------- ---------------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Premium on purchased credit 15 years--straight line
card portfolio........... $ 37,539 $ 38,536
Customer contracts and 3-20 years--straight line
lists.................... 27,000 46,700
Noncompete agreement....... 19,000 2,300 5 years--straight line
Goodwill................... 174,338 333,154 20-25 years--straight line
Deferred incentives........ 10,454 11,086 27 months--straight line
Sponsor contracts.......... 37,244 39,495 5 years--declining balance
Collector database......... 45,738 48,503 15%--declining balance
-------- --------
Total.................... 351,313 519,774
Accumulated amortization... (45,948) (71,757)
-------- --------
Intangible assets and
goodwill, net............ $305,365 $448,017
======== ========
</TABLE>
F-15
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1999
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Certificates of deposit............................... $ 49,500 $ 116,900
Revolving credit loan agreement....................... 98,484 --
Subordinated notes.................................... 102,000 102,000
Credit agreement...................................... 130,000 120,361
Term loans............................................ 100,000 95,875
--------- ---------
479,984 435,136
Less: current portion................................. (148,149) (118,225)
--------- ---------
Long term portion..................................... $ 331,835 $(316,911)
========= =========
</TABLE>
CERTIFICATES OF DEPOSIT--Terms of the certificates of deposit range from
three months to 24 months with annual interest rates ranging from 5.1% to 5.9%
at December 31, 1998 and from 5.4% to 6.9% at December 31, 1999. Interest is
paid monthly and at maturity.
REVOLVING CREDIT LOAN AGREEMENT--In fiscal 1996, in connection with the
Company's purchase of certain trade receivables, the Company entered into a
revolving credit loan agreement that provided for revolving credit loans of up
to $100.0 million, with interest at a variable rate (5.75% at December 31,
1998). The loan was repaid in December 1999 and this credit agreement has since
expired.
SUBORDINATED NOTES--The Company has outstanding a subordinated note with an
affiliate in the principal amount of $50.0 million. Such note bears interest at
10% payable semiannually. This note was issued at a discount of approximately
$3.6 million, and such discount is accreted into interest expense using the
effective rate of approximately 12% over the life of the note. The note is to be
repaid on October 25, 2005. The Company may, at its option, prepay the note at
its face amount.
The Company has outstanding a subordinated note with an affiliate in the
principal amount of $52.0 million. Such note bears interest at 10% payable
semi-annually. This note was issued at a discount of approximately
$6.5 million, and such discount is accreted into interest expense using the
effective rate of approximately 12% over the life of the note. The discount was
issued in the form of 5.9 million shares of common stock issued to the
affiliate. The note is to be repaid in two equal installments in September 2007
and September 2008. The Company may, at its option, prepay the note at its face
amount.
CREDIT AGREEMENT--In fiscal 1997, the Company entered into a credit
agreement to borrow $130.0 million. Funds borrowed under this facility bear
interest at the higher of (i) the prime rate for such day or (ii) the sum of 1/2
of 1% plus the Federal funds rate for a base rate loan or (iii) the sum of the
Euro-dollar margin plus the LIBOR rate applicable to such period for each
Euro-dollar loan. Interest is payable quarterly in arrears. The effective
interest rates were 7.94% and 8.0% at December 31, 1998 and 1999, respectively.
The credit agreement is payable 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 note is collateralized by the assets of
the Company.
F-16
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
TERM LOANS--The Company has outstanding two separate term loan facilities
each in the amount of $50.0 million. The first term loan is payable in four
separate annual installments of $3.1 million commencing July 30, 1999 with a
final lump sum payment of $37.5 million due July 25, 2003. The second term loan
is payable in six separate annual installments of $1.0 million commencing
July 30, 1999 with a final lump sum payment of $44.0 million due July 25, 2005.
Both loans bear interest at the higher of (i) the prime rate for such day or
(ii) the sum of 1/2 of 1% plus the Federal funds rate for a base rate loan or
(iii) the sum of Euro-dollar margin plus the LIBOR rate applicable to such
period for each Euro-dollar loan. Interest is payable quarterly in arrears. The
effective interest rates on the two term loans were 7.07% and 8.995%,
respectively, at December 31, 1999.
LINE OF CREDIT--The Company has available borrowings under a line of credit
agreement of $100.0 million. The line of credit bears interest at the higher of
(i) the prime rate for such day, or (ii) the sum of 1/2 of 1% plus the Federal
funds rate for a base rate loan or (iii) the sum of Euro-dollar margin plus the
LIBOR rate applicable to such period for each Euro-dollar loan. The agreement
matures on July 25, 2003. There were no amounts outstanding on the line of
credit at December 31, 1998 or 1999.
Any outstanding balances, including interest, related to the credit
agreement will become payable immediately if the Company consummates a public
offering of equity securities. The Company has agreed to comply with certain
covenants as part of all non-subordinated debt agreements.
Debt at December 31, 1999 matures as follows (in thousands):
<TABLE>
<S> <C>
2000.............................................. $118,225
2001.............................................. 64,425
2002.............................................. 44,125
2003.............................................. 78,861
2004.............................................. 1,000
Thereafter........................................ 128,500
--------
$435,136
========
</TABLE>
F-17
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES
The Company files a consolidated Federal income tax return. Components of
the provision (credit) for income taxes are as follows:
<TABLE>
<CAPTION>
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT
Federal........................................ $ 9,464 $ 5,789 $18,827
State.......................................... 347 98 483
Foreign........................................ 22 1,777 9,610
------- ------- -------
Total current................................ 9,833 7,664 28,920
------- ------- -------
DEFERRED
Federal........................................ (1,021) (1,843) (12,009)
State.......................................... (392) (808) 1,182
Foreign........................................ 1,640 (2,705)
------- ------- -------
Total deferred............................... (1,413) (1,011) (13,532)
------- ------- -------
8,420 6,653 15,388
Tax (benefit) expense related to discontinued
operations..................................... (4,440) (159) 2,127
------- ------- -------
Total income tax provision..................... $ 3,980 $ 6,494 $17,515
======= ======= =======
</TABLE>
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 before income taxes is as follows:
<TABLE>
<CAPTION>
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Expected (benefit) expense at statutory rate....... $8,061 $ (575) $(1,640)
Increase/(decrease) in income taxes resulting from:
State and foreign income taxes................... 225 63 296
Non-deductible foreign losses.................... 159 832 623
Non-deductible acquired goodwill and other
intangibles.................................... -- 5,944 18,846
Credit to valuation allowance related to state
net operating losses........................... -- -- (3,266)
Other--net....................................... (25) 389 529
------ ------ -------
Total.......................................... $8,420 $6,653 $15,388
====== ====== =======
</TABLE>
F-18
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS
Deferred income.................................... $ 5,424 $13,410
Allowance for doubtful accounts.................... 2,733 1,405
Intangible assets.................................. 10,762 10,221
Estimated loss on contracts........................ 1,841 --
Net operating loss carryforwards................... 10,553 11,966
Depreciation....................................... 1,800 2,875
Discontinued operations............................ -- 2,186
Other.............................................. 3,708 3,936
------- -------
Total deferred tax assets........................ 36,821 45,999
------- -------
DEFERRED TAX LIABILITIES
Servicing rights................................... 7,771 8,120
Accrued expenses................................... 1,283 468
Other.............................................. 970 348
------- -------
Total deferred tax liabilities................... 10,024 8,936
------- -------
Valuation allowance................................ (8,797) (5,531)
------- -------
Net deferred tax asset............................. $18,000 $31,532
======= =======
</TABLE>
F-19
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. INCOME TAXES (CONTINUED)
At December 31, 1999, the Company had approximately $18.8 million of Federal
net operating losses ("NOL's"), which expire at various times through 2013. In
addition, the Company has approximately $139.9 million of state NOL's, which
expire at various times through 2015. The utilization of the Federal NOL's are
subject to limitations under Section 382 of the Internal Revenue Code on account
of changes in the equity ownership. NOL's for both financial reporting and tax
reporting purposes are subject to a valuation allowance established for the tax
benenfit associated with their respective unrealizable federal and state NOL's.
In 1999, $7.3 million of the valuation allowance was reversed as a result of
final regulations issued by the Internal Revenue Service in June 1999. The
Company increased the valuation allowance by $4.0 million in 1999. The valuation
allowance relates primarily to state NOL's and reduces deferred tax assets to an
amount that represents management's best estimate of the amount of such deferred
tax assets that more likely than not will be realized.
9. 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, which are
described in more detail in the agreement:
- 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%.
- Each share is convertible into common shares at a conversion rate of
$13.50, 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.
10. STOCKHOLDERS' EQUITY
In connection with an acquisition, the Company issued stock purchase
warrants to purchase up to 1.5 million shares of the Company's common stock at
$1.00 per share which expires in January 2008. The warrants and any stock issued
upon exercise of the warrants contain or will contain transfer restrictions. The
value of the stock purchase warrants was included in the acquisition purchase
price.
During July 1999, the stockholders approved an increase in the number of
authorized shares from 50,000,000 shares to 66,666,667 shares.
11. STOCK COMPENSATION PLANS
Certain of the Company's employees have been granted stock options under the
Company's Stock Option and Restricted Stock Purchase Plan (the "Plan"). The
purpose of the Plan is to benefit and advance the interests of the Company by
rewarding certain key employees for their contributions to the
F-20
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Expected dividend yield............................. -- -- --
Risk-free interest rate............................. 6.0% 6.0% 7.0%
Expected life of options (years).................... 4.0 yrs 4.0 yrs 4.0 yrs
Assumed volatility.................................. 1.0% 1.0% 1.0%
</TABLE>
The weighted average fair value of each option as of the grant date was
0.21, 0.31 and 0.27 in fiscal 1997, fiscal 1998, and fiscal 1999, respectively.
The Black Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE
OUTSTANDING EXERCISE PRICE
------------ -----------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
BALANCE AT FEBRUARY 1, 1997....................... 640 $ 9.00
Granted......................................... 597 9.00
Exercised....................................... (16) 9.00
Canceled........................................ (65) 9.00
-----
BALANCE AT JANUARY 31, 1998....................... 1,156 9.00
Granted......................................... 912 9.45
Exercised....................................... (57) 9.00
Canceled........................................ (194) 9.00
-----
BALANCE AT DECEMBER 31, 1998...................... 1,817 9.18
Granted......................................... 639 10.17
Exercised....................................... (42) 9.00
Cancelled....................................... (66) 9.09
-----
BALANCE AT DECEMBER 31, 1999...................... 2,348 9.45
=====
</TABLE>
F-21
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable stock options at December 31, 1999 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------- -------------------------
REMAINING WEIGHTED WEIGHTED
RANGE OF EXERCISE CONTRACTUAL AVERAGE AVERAGE
PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
- ----------------- -------- ------------ -------------- -------- --------------
<S> <C> <C> <C> <C> <C>
$9.00 to $11.25 2,348 8.34 9.45 1,311 9.30
</TABLE>
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):
<TABLE>
<CAPTION>
FISCAL
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Pro forma net income (loss)...................... $6,228 $(9,233) $(16,515)
====== ======= ========
Basic pro forma earnings per share............... $ 0.17 $ (0.22) $ (0.35)
====== ======= ========
Diluted pro forma earnings per share............. $ 0.17 $ (0.22) $ (0.35)
====== ======= ========
</TABLE>
12. EMPLOYEE BENEFIT PLANS
The Company sponsors separate defined contribution pension plans for 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.
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into certain contractual arrangements that result in
a fee being billed to the sponsors upon redemption of Air Miles reward miles.
The Company has obtained revolving letters of credit from certain of these
sponsors that expire at various dates. These letters of credit total
$44.4 million at December 31, 1999, which exceeds the estimated amount of the
obligation to provide travel and other rewards.
The Company leases certain office facilities and equipment under
noncancellable operating leases and is generally responsible for property taxes
and insurance. Future annual minimum rental payments
F-22
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
required under noncancellable operating leases, some of which contain renewal
options, as of December 31, 1999 are (in thousands):
<TABLE>
<CAPTION>
YEAR:
- -----
<S> <C>
2000.............................................. $ 53,002
2001.............................................. 49,496
2002.............................................. 28,887
2003.............................................. 12,009
2004.............................................. 10,056
Thereafter........................................ 34,076
--------
Total............................................. $187,526
========
</TABLE>
World Financial Network National Bank ("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 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 captial ratio
of at least six percent, a total capital ratio of at least 10 percent and a
leverage ratio of at least five percent and not be subject to a capital
directive order. An "adequately capitalized" institution must have a Tier 1
capital ratio of at least four percent, a total capital ratio of at least eight
percent and a leverage ratio of at least four percent, but three percent is
allowed in some cases. Under these guidelines, WFNNB is considered well
capitalized. As of December 31, 1999, WFNNB's Tier 1 capital ratio was 50.0,
total capital ratio was 51.0 and leverage ratio was 49.1, and WFNNB was not
subject to a capital directive order.
Holders of credit cards issued by the Company have available lines of
credit, which vary by accountholder, that can be used for purchases of
merchandise offered for sale by clients of the Company. These lines of credit
represent elements of risk in excess of the amount recognized in the financial
statements. The lines of credit are subject to change or cancellation by the
Company. As of December 31, 1999, WFNNB had approximately 24.0 million active
accountholders, having an unused line of credit averaging $684 per account.
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.
F-23
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The estimated fair values of the
Company's financial instruments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER
---------------------------- ----------------------------
CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents................ $ 47,036 $ 47,036 $ 56,546 $ 56,546
Restricted cash and cash equivalents..... 17,909 17,909 69,571 69,571
Securities available-for-sale............ 52,269 52,269 64,079 64,079
Trade receivables........................ 143,286 143,286 69,085 69,085
Credit card receivables and seller's
interest, net.......................... 139,458 139,458 150,804 150,804
Due from securitizations................. 121,442 121,442 144,484 144,484
FINANCIAL LIABILITIES
Accounts payable......................... 44,327 44,327 83,976 83,976
Long-term and subordinated debt.......... 479,984 491,192 435,136 447,861
<CAPTION>
NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Interest swaps............................. $900,000 $(14,148) $725,000 $ (6,083)
</TABLE>
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.
SECURITIES AVAILABLE-FOR-SALE--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.
F-24
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. FINANCIAL INSTRUMENTS (CONTINUED)
LONG-TERM AND SUBORDINATED DEBT--The fair value was estimated based on the
current rates available to the Company for debt with similar remaining
maturities.
INTEREST SWAPS--The fair value was estimated based on the cost to the
Company to terminate the agreements.
15. INTEREST SWAPS
INTEREST SWAPS--In March 1997, WFNNB entered into three interest rate swap
agreements with JP Morgan Company ("Morgan") with notional amounts totaling
$500.0 million. These interest rate swaps effectively change WFNNB's interest
rate exposure on $300.0 million and $200.0 million of securitized credit card
receivables to a fixed rate of approximately 6.34% and 6.72%, respectively. On
January 30, 1998, WFNNB entered into an interest rate swap agreement with Morgan
with a notional amount of $300.0 million. This interest rate swap effectively
changed WFNNB's interest rate exposure on $300.0 million of securitized accounts
receivable to a variable rate based on LIBOR. The notional amount of the swap,
$125 million at December 31, 1999, will decrease with a corresponding decrease
of the related securitized credit card receivables. In October 1998, Loyalty
entered into two cross-currency interest rate swap agreements with Morgan with
notional amounts totaling $100.0 million. The interest rate swaps effectively
changed Loyalty's interest rate exposure on $50.0 million and $50.0 million of
notes payable to a variable rate based on Canadian Bankers Acceptance and to a
fixed rate of 7.07% and 8.995%, respectively. The following briefly outlines the
terms of each swap agreement:
<TABLE>
<CAPTION>
FIXED/VARIABLE FIXED/VARIABLE
NOTIONAL AMOUNT SWAP PERIOD RATE RECEIVED RATE PAID
- ----------------------- --------------------------------------- ------------------------ ------------------------
<S> <C> <C> <C>
$250,000,000........... March 10, 1997 through March 10, 2000 USD-CP-H.15 6.340%
$50,000,000............ March 10, 1997 through March 10, 2000 USD-LIBOR-BBA 6.345%
$200,000,000........... May 15, 1997 through May 15, 2004 USD-LIBOR-BBA 6.720%
$125,000,000........... January 30, 1998 through March 15, 2003 5.67% USD-LIBOR-BBA
$50,000,000............ October 26, 1998 through July 25, 2003 USD-LIBOR-BBA+1.75% CAD-BA-CDOR+1.99%
$50,000,000............ October 26, 1998 through July 25, 2005 USD-LIBOR-BBA+3.0% 8.995%
</TABLE>
DEFERRED INCOME--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-25
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT ONLY FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
(PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
BALANCE SHEETS -------- --------
(IN THOUSANDS)
<S> <C> <C>
Assets:
Cash and cash equivalents................................... $ 889 $ --
Investment in subsidiaries.................................. 191,872 362,194
Loans to subsidiaries....................................... 271,750 181,750
Receivables from subsidiaries............................... -- 66,179
Trade receivables........................................... 97,635 --
Other....................................................... 23,151 12,867
-------- --------
Total assets.............................................. $585,297 $622,990
======== ========
Liabilities:
Long-term and subordinated debt............................. $330,600 $222,361
Borrowings from subsidiaries................................ 17,510 --
Other....................................................... 7,324 10,432
-------- --------
Total liabilities......................................... 355,434 232,793
Stockholders' equity........................................ 229,863 390,197
-------- --------
Total liabilities and stockholders' equity................ $585,297 $622,990
======== ========
</TABLE>
<TABLE>
<CAPTION>
FISCAL
------------------------------
1997 1998 1999
STATEMENTS OF INCOME -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest from loans to subsidiaries......................... $3,578 $17,907 $23,962
Dividends from subsidiary................................... -- -- 40,000
Processing and servicing fees............................... 695 4,457 3,404
Other income................................................ 240 156 149
------ ------- -------
Total revenue............................................. 4,513 22,520 67,515
Interest expense............................................ 1,945 21,165 25,981
Other expense............................................... 17 153 256
------ ------- -------
Total expense............................................. 1,962 21,318 26,237
------ ------- -------
Income before income taxes.................................. 2,551 1,202 41,278
Income tax expense.......................................... 848 486 720
------ ------- -------
Net income.................................................. $1,703 $ 716 $40,558
====== ======= =======
</TABLE>
Note: Alliance Data Systems Corporation accounts for its investments in
subsidiaries under the cost method.
F-26
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. PARENT ONLY FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
FISCAL
---------------------------------
1997 1998 1999
STATEMENTS OF CASH FLOWS --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net cash provided by (used in) operating activities......... $ (59,919) $ 25,720 $ 115,555
Investing activities:
Net cash paid for corporate acquisitions.................... (3,250) (151,500) (169,322)
Loans to subsidiaries....................................... (137,669) -- --
--------- --------- ---------
Net cash used for investing activities...................... (140,919) (151,500) (169,322)
Financing Activities:
Borrowings from subsidiaries................................ -- 17,510 41,331
Issuance of long-term and subordinated debt................. 421,998 327,159 320,624
Repayment of long-term and subordinated debt................ (220,626) (221,676) (428,854)
Net proceeds from preferred stock........................... -- -- 119,400
Net proceeds from issuances of common stock................. 96 107,042 377
--------- --------- ---------
Net cash provided by (used for) financing activities........ 201,468 230,015 52,878
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 630 107,869 (889)
Cash and cash equivalents at beginning of period............ 4 634 889
--------- --------- ---------
Cash and cash equivalents at end of period.................. $ 634 $ 889 $ --
========= ========= =========
</TABLE>
17. SEGMENT INFORMATION
Operating segments are defined by SFAS 131 as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision making group is the Executive Committee, which consists
of the Chairman of the Board and Chief Executive Officer, Presidents of the
divisions; Executive Vice Presidents; and certain other officers. The operating
segments are reviewed separately because each operating segment represents a
strategic business unit that generally offers different products and serves
different markets.
The accounting policies of the operating segments are generally the same as
those described in the summary of significant accounting policies. Corporate
overhead is allocated to the segments based on a percentage of the segment's
revenues. Interest expense and income taxes are not allocated to the segments in
the computation of segment operating profit for internal evaluation purposes.
Transaction Services performs servicing activities related to Credit Services.
For this, Transaction Services receives a fee equal to its direct costs before
corporate overhead allocation plus a margin that it would charge an
F-27
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED)
unrelated third party for similar functions. Revenues are attributed to
geographic areas based on the location of the unit processing the underlying
transactions.
<TABLE>
<CAPTION>
LOYALTY AND
DATABASE TRANSACTION CREDIT OTHER/
MARKETING SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1997 ----------- ----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $23,348 $256,730 $211,921 $(138,600) $353,399
Depreciation and amortization........... -- 4,323 2,966 19,174 26,463
Operating profit........................ 8,393 22,886 26,384 (19,174) 38,489
</TABLE>
<TABLE>
<CAPTION>
LOYALTY AND
DATABASE TRANSACTION CREDIT OTHER/
MARKETING SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1998 ----------- ----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $ 84,288 $286,605 $212,663 $(149,247) $434,309
Depreciation and amortization........... 13,968 6,818 3,204 18,601 42,591
Operating profit........................ 1,847 6,804 36,191 (18,601) 26,241
</TABLE>
<TABLE>
<CAPTION>
LOYALTY AND
DATABASE TRANSACTION CREDIT OTHER/
MARKETING SERVICES SERVICES ELIMINATION TOTAL
FISCAL 1999 ----------- ----------- -------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues................................ $194,482 $362,524 $247,824 $(165,576) $639,254
Depreciation and amortization........... 33,863 20,335 3,284 8,478 65,960
Operating profit........................ 3,488 249 42,755 (8,393) 38,099
</TABLE>
Information concerning principal geographic areas is as follows:
<TABLE>
<CAPTION>
UNITED STATES REST OF WORLD(1) TOTAL
------------- ---------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Fiscal 1997......................... $352,975 $ 424 $ 353,399
Fiscal 1998......................... 367,588 66,721 434,309
Fiscal 1999......................... 467,629 171,625 639,254
Total assets
December 31, 1998................... 318,397 308,412 626,809
December 31, 1999................... 819,394 365,675 1,185,069
</TABLE>
- ------------------------
(1) Primarily consists of Canada following the Loyalty acquisition in
July 1998.
18. 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-28
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. RELATED PARTY TRANSACTIONS (CONTINUED)
- The Company sold 10.1 million shares of common stock to WCAS in
July 1998, 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.
- The Company sold 30,303 shares of common stock to WCAS and 20,202 shares
of common stock to The Limited, in August 1998, for an aggregate purchase
price of $300,000, with $200,000 to The Limited.
- 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 & Anderson $2.0 million in fiscal
1998 and $1.2 million in fiscal 1999 for fees related to acquisitions.
The other significant stockholder of the Company, The Limited (through
affiliates), is a significant customer. The Company has entered into credit card
processing agreements with several affiliates of The Limited. The Company has
received fees from The Limited and its affiliates of $53.1 million for fiscal
1997, $54.8 million for fiscal 1998 and $64.1 million for fiscal 1999.
19. DISCONTINUED OPERATIONS
During September 1999, the Board of Directors decided to discontinue the
Company's subscriber services business when the Company a major customer was
acquired by a third party. The business is expected to wind down by second
quarter 2000. The business had revenues of approximately $27.4 million,
$44.9 million, $43.1 million in fiscal 1997, 1998 and 1999, respectively. The
net assets of the business were immaterial.
20. SUBSEQUENT EVENTS
On March 1, 2000, the Company's Board of Director and stockholders approved
a change in number of authorized shares of common stock to 200,000,000, and
approved a 1-for-9 reverse stock split. Such change in authorized shares and
stock split became effective March 1, 2000. All per share data in the financial
statements have been restated to give effect to the reverse stock split.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Alliance Data Systems Corporation
We have audited the accompanying statements of income, changes in net assets and
cash flows of SPS Network Services for the year ended December 31, 1998 and for
the six months ended June 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the results of operations and cash flows of SPS Network Services for
the year ended December 31, 1998 and the six months ended June 30, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Columbus, Ohio
March 1, 2000
F-30
<PAGE>
SPS NETWORK SERVICES
STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1998 1999
------------ --------------
<S> <C> <C>
Processing and servicing fees............................... $ 47,674 $24,322
Operating expenses:
Processing and servicing.................................. 31,260 16,947
Salaries and employee benefits............................ 6,331 3,181
-------- -------
Total operating expenses............................ 37,591 20,128
-------- -------
Net income before income taxes.............................. 10,083 4,194
Income taxes................................................ 3,711 1,543
-------- -------
Net income.................................................. $ 6,372 $ 2,651
======== =======
</TABLE>
See accompanying notes.
F-31
<PAGE>
SPS NETWORK SERVICES
STATEMENTS OF CHANGES IN NET ASSETS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
------------------ --------------
<S> <C> <C>
Net assets at beginning of period........................... $ 9,074,428 $10,092,862
Net income.................................................. 6,372,419 2,650,430
Distribution of net income to parent........................ (5,353,985) (4,094,706)
----------- -----------
Net assets at end of period................................. $10,092,862 $ 8,648,586
=========== ===========
</TABLE>
See accompanying notes.
F-32
<PAGE>
SPS NETWORK SERVICES
STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1998 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $6,372.419 $2,650,430
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 394,880 205,035
Change in accounts receivable............................. (1,434,519) (336,379)
Change in other assets.................................... 103,021 (54,224)
Change in other liabilities............................... 56,243 1,708,169
---------- ----------
Net cash provided by operating activities............... 5,492,044 4,173,031
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (138,059) (78,325)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distribution to parent.................................... (5,353,985) (4,094,706)
---------- ----------
Change in cash and cash at end of period.................... $ 0 $ 0
========== ==========
</TABLE>
See accompanying notes.
F-33
<PAGE>
SPS NETWORK SERVICES
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS
SPS Network Services (the "Company") provides a range of technology
outsourcing services including the processing of credit and debit card
transactions in the United States.
On July 1, 1999, the Company was purchased by Alliance Data Systems
Corporation ("ADSC"). The Company is a wholly owned subsidiary of ADSC.
Prior to July 1, 1999, the Company provided network services for SPS Payment
Systems, Inc., a wholly-owned subsidiary of Associates First Capital
Corporation ("Associates").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
PROCESSING AND SERVICE FEES--Processing and service revenues include fees
from transaction processing services which are recognized as such services
are performed.
3. INCOME TAXES
Prior to July 1, 1999 the Company was included in the consolidated tax
returns of Associates. Associates allocated income tax expense to the
Company based on its proportionate share of the consolidated federal tax
return. There was no deferred tax provision or benefit in 1998 or for the
six months ended June 30, 1999.
A reconciliation of recorded income tax expense to the expected expense
computed by applying the federal statutory rate of 35% to income before
income taxes for 1998 and the six months ended June 30, 1999 is as follows
(in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
1998 JUNE 30, 1999
-------- --------------
<S> <C> <C>
Expected expense at statutory rate...................... $3,529 $1,468
Other................................................... 182 75
------ ------
Total............................................... $3,711 $1,543
====== ======
</TABLE>
F-34
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
Loyalty Management Group Canada Inc.
We have audited the consolidated balance sheets of Loyalty Management Group
Canada Inc. as at April 30, 1997 and April 30, 1998 and the consolidated
statements of operations and retained earnings (deficit) 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 generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at April 30,
1997 and April 30, 1998 and the results of its operations and its cash flows for
the years then ended in accordance with accounting principles generally accepted
in Canada.
<TABLE>
<S> <C>
Toronto, Canada /s/ Ernst & Young LLP
June 12, 1998, except as to Ernst & Young LLP
Note 14, which is as at Chartered Accountants
January 12, 2000
</TABLE>
F-35
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
CONSOLIDATED BALANCE SHEETS
(CANADIAN DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF APRIL 30,
-------------------
1997 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $11,371 $ 10,691
Trade receivables........................................... 15,269 20,841
Prepaid expenses and deposits............................... 236 1,261
------- --------
Total current assets...................................... 26,876 32,793
Restricted marketable securities and cash................... 46,002 76,613
Deferred financing costs, net............................... 1,615 --
Furniture, fixtures and equipment, net...................... 2,745 6,170
Deferred income taxes....................................... 400 560
Goodwill, net............................................... 11,254 9,917
------- --------
Total assets.............................................. $88,892 $126,053
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
Accounts payable and accrued liabilities.................... $12,801 $ 18,597
Income taxes payable........................................ 3,878 4,355
Deferred revenue and deposits............................... 2,938 4,804
Due to related parties...................................... 307 412
Current portion of leasehold inducement..................... -- 184
Current portion of term loan payable........................ 3,750 --
------- --------
Total current liabilities................................. 23,674 28,352
Redemption obligation....................................... 60,237 90,555
Leasehold inducement........................................ -- 1,539
Term loan payable........................................... 6,563 --
------- --------
Total liabilities......................................... 90,474 120,446
------- --------
Capital stock; 1,434,464 authorized common shares; 1,189,542
issued common shares...................................... 730 730
Retained earnings (deficit)................................. (2,312) 4,877
------- --------
Total shareholders' equity (deficiency)................... (1,582) 5,607
------- --------
Total liabilities and shareholders' equity (deficiency)... $88,892 $126,053
======= ========
</TABLE>
See accompanying notes
F-36
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(CANADIAN DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
REVENUES
Air Miles revenue........................................... $ 91,393 $143,723
Other income................................................ 6,248 9,492
-------- --------
Total revenues............................................ 97,641 153,215
-------- --------
OPERATING EXPENSES
Program operations.......................................... 73,142 119,331
General and administrative.................................. 9,380 12,518
Marketing................................................... 5,094 2,742
Amortization of goodwill.................................... 1,337 1,337
Amortization of deferred financing costs.................... 669 1,615
-------- --------
Total operating expenses.................................. 89,622 137,543
-------- --------
Operating income............................................ 8,019 15,672
Interest expense............................................ 1,130 718
-------- --------
Income before income taxes.................................. 6,889 14,954
-------- --------
Income tax expense.......................................... 3,500 7,765
-------- --------
Net income for the year..................................... 3,389 7,189
Deficit, beginning of year.................................. (5,701) (2,312)
-------- --------
Retained earnings (deficit), end of year.................... $ (2,312) $ 4,877
======== ========
</TABLE>
See accompanying notes
F-37
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CANADIAN DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------
1997 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 3,389 $ 7,189
Add (deduct) items not affecting cash:
Depreciation and amortization............................. 3,679 4,715
Deferred income taxes..................................... (400) (160)
Increase in redemption obligation......................... 12,930 30,318
Net change in non-cash working capital balances related to
operations................................................ 1,323 1,647
-------- --------
20,921 43,709
Increase in restricted marketable securities and cash....... (10,639) (30,611)
-------- --------
Cash provided by operating activities....................... 10,282 13,098
-------- --------
INVESTING ACTIVITIES
Capital expenditures........................................ (1,587) (5,188)
-------- --------
Cash used in investing activities........................... (1,587) (5,188)
-------- --------
FINANCING ACTIVITIES
Repayment of term loan payable.............................. (4,688) (10,313)
Leasehold inducement........................................ -- 1,723
-------- --------
Cash used in financing activities........................... (4,688) (8,590)
-------- --------
Net increase (decrease) in cash during the year............. 4,007 (680)
Cash and cash equivalents, beginning of year................ 7,364 11,371
-------- --------
Cash and cash equivalents, end of year...................... $ 11,371 $ 10,691
======== ========
Supplementary cash flow information:
Interest paid............................................... $ 1,130 $ 718
======== ========
Income taxes paid........................................... $ 20 $ 7,450
======== ========
</TABLE>
See accompanying notes
F-38
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(CANADIAN DOLLARS IN THOUSANDS)
1. THE COMPANY
Loyalty Management Group Canada Inc. (the "Company") was incorporated under
the laws of Ontario on May 23, 1990, and operates under the registered trademark
name of The Loyalty Group. Its business is to design, develop, market and manage
loyalty programs (the "programs") in Canada.
The Company's program, the Air Miles reward program, was launched in
March 1992 and provides travel and other awards to participating consumers and
businesses ("collectors") for purchases of products and services marketed by
sponsors. The Company provides these awards through a subsidiary company under
long-term exclusive arrangements with suppliers, including major airlines,
certain hotels and other ancillary reward-related businesses.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The consolidated financial statements of the Company are prepared in
accordance with Canadian generally accepted accounting principles ("GAAP").
Significant differences between U.S. and Canadian GAAP are discussed in
Note 14.
BASIS OF CONSOLIDATION
The consolidated financial statements of the Company include the assets,
liabilities and results of operations of its wholly-owned subsidiary, LMG Travel
Services Limited.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and short-term investments with
original maturities of less than 90 days.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation and amortization. Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Office equipment and furniture.............................. 20%
Computers and telephone equipment........................... 33%
Leasehold improvements...................................... 10%
</TABLE>
GOODWILL
Goodwill acquired is amortized on a straight-line basis over its expected
life of ten years.
On an ongoing basis, the Company determines whether there has been a
permanent impairment in unamortized goodwill based on an estimation of
undiscounted long-term cash flow of the operations. To date, no such impairment
has been incurred.
F-39
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASEHOLD INDUCEMENTS
Leasehold inducements received upon the Company's move to new premises have
been deferred in the accounts and are being amortized over the ten-year term of
the lease.
INCOME TAXES
The Company follows the deferral method of accounting for income taxes.
Accordingly, the provision for income taxes reflects the income tax effects of
timing differences between amounts claimed for income tax purposes and amounts
deducted for accounting purposes. The benefits resulting therefrom are shown as
deferred income taxes.
REVENUE RECOGNITION
The Company records revenue for Air Miles reward miles issued through
sponsors to collectors, and provides for the cost of estimated redemptions by
collectors in the year during which the Air Miles reward miles are issued.
Other revenue consists primarily of ancillary revenue derived from operation
of the program and is recorded when the services are rendered.
REDEMPTION OBLIGATION
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes.
The redemption obligation is estimated as the cost of providing travel and
other awards to collectors and related redemption service expenses required to
redeem Air Miles reward miles in the future based on management's best estimate
of the Air Miles reward miles currently issued that will ultimately be redeemed.
These estimates are revised periodically to reflect current expectations of
future redemption costs. Significant changes in future conditions or assumptions
could require a material change in the estimated amount of the redemption
obligation. The redemption obligation is expected to be partially discharged in
the following year in the amount of approximately $25.0 million due to
redemptions by collectors and the same amount of cash is expected to be drawn
from the restricted cash account to fund these payments. Due to significant
uncertainty in the estimation of the amount and the timing of redemption
activity, no current portion of the respective asset and liability are set out
in the consolidated balance sheet.
RESTRICTED MARKETABLE SECURITIES AND CASH
In order to receive program awards, collectors must collect a specified
number of Air Miles reward miles to qualify for a particular award. Currently,
Air Miles reward miles in collector accounts which are active have no expiration
date. As such, demand for redemption is expected to occur over a considerable
period of time. This timing difference results in the availability of liquid
assets, a portion of which must be segregated to satisfy expected future
redemption costs under the terms of agreements with the Company's suppliers and
sponsors ("restricted cash"). The Company funds a segregated
F-40
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN DOLLARS IN THOUSANDS)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
investment account with a portion of amounts paid by sponsors for Air Miles
reward miles. These amounts, which earn investment income, are maintained under
the terms of agreements with a trust company entered into in December 1992.
FINANCIAL INSTRUMENTS
The carrying amounts in the consolidated financial statements for cash,
accounts receivable, accounts payable and accrued liabilities and deferred
revenue and deposits approximate fair values due to the immediate or short-term
maturities of these financial instruments.
The fair values of short-term investments and marketable securities are
recorded at quoted market value which is considered to be the closing market
price at year end.
3. CASH AND CASH EQUIVALENTS
Included in cash and cash equivalents are short-term investments as follows:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Short-term investments................................... $3,501 $3,505 $1,493 $1,500
====== ====== ====== ======
</TABLE>
4. RESTRICTED MARKETABLE SECURITIES AND CASH
Restricted marketable securities and cash consist of the following:
<TABLE>
<CAPTION>
1997 1998
--------------------- ---------------------
COST FAIR VALUE COST FAIR VALUE
-------- ---------- -------- ----------
<S> <C> <C> <C> <C>
Cash on hand........................................... $11,756 $11,756 $11,909 $11,909
Short-term deposits--treasury bills, bankers'
acceptances, corporate paper......................... 15,462 15,523 14,695 14,695
Fixed income securities--government.................... 17,075 17,332 22,394 22,414
Fixed income securities--corporate..................... 1,709 1,767 4,978 4,915
Equity................................................. -- -- 22,637 22,399
------- ------- ------- -------
$46,002 $46,378 $76,613 $76,332
======= ======= ======= =======
</TABLE>
F-41
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN DOLLARS IN THOUSANDS)
5. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Office equipment and furniture............................. $1,941 $ 2,963
Computer equipment......................................... 2,429 3,494
Telephone equipment........................................ 948 1,546
Leasehold improvements..................................... 730 2,508
------ -------
6,048 10,511
Less accumulated depreciation and amortization............. 3,303 4,341
------ -------
$2,745 $ 6,170
====== =======
</TABLE>
6. GOODWILL
On October 2, 1995, a financial restructuring took place involving the
purchase of the minority interest in the Company. The transaction was accounted
for under the purchase method of accounting and resulted in goodwill
approximately equal to the cash consideration paid.
Goodwill consists of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Goodwill.................................................. $13,371 $13,371
Less accumulated amortization............................. 2,117 3,454
------- -------
$11,254 $ 9,917
======= =======
</TABLE>
7. RELATED PARTY TRANSACTIONS
Amounts due to related parties represent amounts due to a shareholder and
its subsidiaries. These amounts are non-interest bearing and due on demand.
Transactions with these related parties are recorded on a fair value basis.
During the year, transactions with related parties were as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Royalty expense paid to subsidiaries of a shareholder....... $957 $1,501
Management fees paid to a shareholder....................... 120 120
</TABLE>
8. CAPITAL STOCK
The Company has approved stock options to management totalling 234,774
shares, 209,207 of which were granted as of April 30, 1997 and 234,774 of which
were granted as of April 30, 1998. The options are exercisable under certain
terms and conditions at a nominal price and expire on January 6, 2003.
F-42
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN DOLLARS IN THOUSANDS)
9. INCOME TAXES
A reconciliation of the combined basic federal and provincial income tax
rate to the related effective rate is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Combined basic Canadian federal and provincial income tax
rate...................................................... 44.6% 44.6%
Non-deductible amortization of goodwill..................... 8.8 4.0
Other....................................................... (1.7) 3.3
---- ----
Effective income tax rate................................... 51.7% 51.9%
==== ====
</TABLE>
10. LEASE COMMITMENTS
Future minimum annual rental payments required under non-cancelable
operating leases are as follows:
<TABLE>
<S> <C>
1999........................................................ $1,615
2000........................................................ 1,418
2001........................................................ 1,337
2002........................................................ 1,303
2003 and thereafter......................................... 7,245
</TABLE>
The Company is also committed to its share of operating costs with respect
to office leases.
11. MARKETING AND PROGRAM OPERATIONS EXPENSES
Under the terms of contracts with certain sponsors, the Company is able to
recover a specified amount of Air Miles reward program marketing expenses.
Marketing expenses are presented net of these cost recoveries which amounted to
$2.1 million during 1997 and $3.6 million during 1998. Program operations
expenses are also presented net of cost recoveries which are received by the
Reward Services department to offset the costs of processing redemptions. Total
cost recoveries amount to $6.2 million in 1997 and $9.6 million in 1998.
12. CONTRACTUAL COMMITMENTS
The Company has entered into certain contractual arrangements that result in
an obligation to provide travel and other awards upon redemption of Air Miles
reward miles for a fee to be billed upon redemption to certain sponsors. The
Company has obtained revolving letters of credit from certain of these sponsors
that expire at various dates. The amounts of these letters of credit total
$106.4 million, which exceeds the estimated amount of the fees to be received
from these sponsors.
13. COMPARATIVE CONSOLIDATED FINANCIAL STATEMENTS
The comparative consolidated financial statements have been reclassified
from statements previously presented to conform to the presentation of the 1998
consolidated financial statements.
F-43
<PAGE>
LOYALTY MANAGEMENT GROUP CANADA INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(CANADIAN DOLLARS IN THOUSANDS)
14. DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES
Significant differences between U.S. and Canadian GAAP for these
consolidated financial statements are as follows:
(i) Under Canadian GAAP, restricted marketable securities and cash are carried
at cost. Under U.S. GAAP, restricted marketable securities and cash are
carried at fair value with the resulting difference between cost and fair
value being recorded as a separate component of equity, net of tax. The
differences as of April 30, 1997 and 1998 would not be material to the
balance sheets or shareholders' equity (deficit).
(ii) Other differences between Canadian and U.S. GAAP are immaterial.
F-44
<PAGE>
Inside back cover
Includes an example of our "Smart Statement" and our logo
<PAGE>
- -------------------------------------------------------
- -------------------------------------------------------
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
------------------------
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 8
Special Note Regarding Forward-Looking
Statements................................... 20
Use of Proceeds................................ 21
Dividend Policy................................ 22
Dilution....................................... 23
Capitalization................................. 24
Unaudited Pro Forma Consolidated Financial
Information.................................. 25
Selected Historical Consolidated Financial and
Operating Information........................ 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 31
Description of our Business.................... 47
Management..................................... 61
Principal Stockholders......................... 71
Certain Relationships and Related
Transactions................................. 73
Description of Capital Stock................... 76
Shares Eligible for Future Sale................ 79
Underwriting................................... 80
Legal Matters.................................. 82
Experts........................................ 82
Where You Can Find More Information............ 83
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------------
Dealer Prospectus Delivery Obligation:
Until , 2000 (25 days after the date of this prospectus), all
dealers that buy, sell or trade these shares of common stock, whether or not
participating in this offering, may be required to deliver a prospectus. This is
in addition to the dealers' obligations to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------
- -------------------------------------------------------
[LOGO]
20,000,000 SHARES
COMMON STOCK
---------------------
PROSPECTUS
---------------------
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
, 2000
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
- -------------------------------------------------------
<PAGE>
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.
<TABLE>
<S> <C>
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............................
Legal fees and expenses....................................
Accounting fees and expenses...............................
Blue sky fees and expenses................................. 5,000
Miscellaneous..............................................
--------
Total.................................................... $ *
========
</TABLE>
- ------------------------
* To be completed by amendment
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
II-1
<PAGE>
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 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 1997, Alliance Data Systems Corporation has issued and sold
the following unregistered securities:
(1) In July 1998, 9,634,265 shares of common stock were sold to various
Welsh, Carson, Anderson & Stowe limited partnerships and a total of
466,744 shares of common stock were sold to a total of 16 individuals
who are partners of some or all of the Welsh Carson limited
partnerships for $100.0 million to finance, in part, the acquisition of
all of the outstanding capital stock of the Loyalty Management Group
Canada Inc.
(2) In August 1998, 30,303 shares of common stock were sold to WCAS Capital
Partners II, L.P. at a value of $9.90 per share as consideration for
extending the maturity on a 10% subordinated note, issued to WCAS
Capital Partners II, originally due January 24, 2002 to October 25,
2005 and 20,202 shares were sold to Limited Commerce Corp. at a value
of $9.90 per share as consideration for extending the maturity on a 10%
subordinated note, issued to Limited Commerce Corp., originally due
January 24, 2002 to October 25, 2005.
(3) In September 1998, 655,555 shares of common stock were sold to WCAS
Capital Partners III, LP to finance, in part, the acquisition of
Harmonic Systems Incorporated.
(4) In July 1999, a total of 120,000 shares of Series A preferred stock
were sold to Welsh, Carson, Anderson & Stowe VIII, L.P., WCAS
Information Partners, L.P. and 20 individuals who are also partners of
some or all of the Welsh Carson limited partnerships for $120 million.
The shares of Series A preferred stock were issued to finance, in part,
the acquisition of the network transaction processing business of
SPS Payment Systems, Inc.
(5) Since February 1997, Alliance Data Systems Corporation has granted
stock options to purchase shares of its common stock under its stock
option plan covering an aggregate of 2,354,000 shares, at exercise
prices ranging from $9.00 to $11.25 per share. Since February 1997,
Alliance Data Systems Corporation has issued 16,354 shares of Alliance
Data Systems Corporation's common stock pursuant to the exercise of
stock options. Since February 1997, 41,423 stock options have lapsed
without being exercised.
II-2
<PAGE>
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
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ------- --------
<C> <S>
+1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Merger, dated as of August 30, 1996,
by and between Business Services Holdings, Inc. and World
Financial Network Holding Corporation.
*2.2 Agreement and Plan of Merger, dated as of August 14, 1998,
by and among Alliance Data Systems Corporation, HSI
Acquisition Corp., and Harmonic Systems Incorporated.
*2.3 Stock Purchase Agreement, dated June 8, 1998, by and between
SPS Payment Systems, Inc., Alliance Data Systems
Corporation, SPS Commercial Services, Inc., and ADS
Network Services, Inc., amended July 12, 1999.
**2.4 Agreement for the Purchase of all the Shares of Loyalty
Management Group Canada Inc., June 26, 1998, by and
between Air Miles International Group B.V., certain other
shareholders and option holders and Alliance Data Systems
Corporation as amended July 14, 1998.
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Second Amended and Restated Bylaws of the Registrant.
4 Specimen Certificate for shares of Common Stock of the
Registrant.
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
**10.1 Credit Card Processing Agreement between World Financial
Network National Bank, Bath and Body Works, Inc. and
Tri-State Factoring, Inc., dated January 31, 1996.
**10.2 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Catalogue, Inc.,
and Far West Factoring Inc., dated January 31, 1996
(assigned by Victoria's Secret Catalogue, Inc. to
Victoria's Secret Catalogue, LLC, May 2, 1998).
**10.3 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Stores, Inc., and
Lone Mountain Factoring, Inc., dated January 31, 1996.
**10.4 Credit Card Processing Agreement between World Financial
Network National Bank, Lerner New York, Inc., and Nevada
Receivable Factoring, Inc., dated January 31, 1996.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ------- --------
<C> <S>
**10.5 Credit Card Processing Agreement between World Financial
Network National Bank, Express, Inc., and Retail
Factoring, Inc., dated January 31, 1996.
**10.6 Credit Card Processing Agreement between World Financial
Network National Bank, The Limited Stores, Inc., and
American Receivable Factoring, Inc., dated January 31,
1996.
**10.7 Credit Card Processing Agreement between World Financial
Network National Bank, Structure, Inc., and Mountain
Factoring, Inc., dated January 31, 1996.
**10.8 Credit Card Processing Agreement between World Financial
Network National Bank, Lane Bryant, Inc., and Sierra
Nevada Factoring, dated January 31, 1996, and amended
August 4, 1998 and September 12, 1999.
**10.9 Credit Card Processing Agreement between World Financial
Network National Bank, Henri Bendel, Inc., and Western
Factoring, Inc., dated January 31, 1996 and amended
May 13, 1998.
**10.10 Supplier Agreement between Canadian Airlines International
Ltd. and Loyalty Management Group Canada Inc., dated March
15, 1996, as amended.
*10.11 Lease between Deerfield and Weiland Office Building, L.L.C.
and ADS Alliance Data Systems, Inc., dated July 30, 1999.
*10.12 Indenture of Sublease between J.C. Penney Company, Inc. and
BSI Business Services, Inc., dated January 11, 1996.
10.13 Build-to-Suit Net Lease between Opus South Corporation and
ADS Alliance Data Systems, Inc., dated January 29, 1998,
as amended.
*10.14 Industrial Lease Agreement between CIBC Development
Corporation and Loyalty Management Group Canada Inc.,
dated October 19, 1998, amended January 26, 1999.
*10.15 Lease between YCC Limited and London Life Insurance Company
and Loyalty Management Group Canada Inc. dated May 28,
1997 and amended June 19, 1997 and January 15, 1998.
*10.16 Deed of Lease between Boswell International Marine (PTE)
Limited and Financial Automation Limited, dated August 3,
1999.
*10.17 Office Lease between Office City, Inc. and World Financial
Network National Bank, dated December 24, 1986, and
amended January 19, 1987, May 11, 1988, August 4, 1989 and
August 18, 1999.
*10.18 Lease Agreement by and between Continental Acquisitions,
Inc. and World Financial Network National Bank, dated July
2, 1990, and amended September 11, 1990, November 16, 1990
and February 18, 1991.
*10.19 Lease Agreement by and between Americana Parkway Warehouse
Limited and World Financial Network National Bank, dated
June 28, 1994.
*10.20 Lease Agreement by and between Morrison Taylor II, Ltd. and
ADS Alliance Data Systems, Inc., dated June 18, 1998, and
amended June 18, 1998.
*10.21 Lease Agreement between Morrison Taylor, Ltd. and ADS
Alliance Data Systems, Inc. dated July 1, 1997, and
amended June 18, 1998.
*10.22 Commercial Lease Agreement between Waterview Parkway, L.P.
and ADS Alliance Data Systems, Inc., dated July 16, 1997.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ------- --------
<C> <S>
*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 Alliance Data Systems Corporation Stock Option and
Restricted Stock Purchase Plan, as amended.
*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.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBITS
- ------- --------
<C> <S>
*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.
*21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP with regard to Alliance
Data Systems Corporation and SPS Network Services.
23.2 Consent of Ernst & Young LLP with regard to Loyalty
Management Group Canada Inc.
23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
*24 Power of Attorney (included on the signature page hereto)
27 Financial Data Schedule (included in SEC-filed copy only).
</TABLE>
- ------------------------
* Previously filed.
** Portions of Exhibit have been omitted and filed separately with the
commission pursuant to a request for confidential treatment.
+ To be filed by amendment.
(b) Financial Statement Schedules
None.
II-6
<PAGE>
ITEM 17--UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
II-7
<PAGE>
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 March 3, 2000.
<TABLE>
<S> <C>
ALLIANCE DATA SYSTEMS CORPORATION
By: /s/ J. MICHAEL PARKS
--------------------------------------------
J. Michael Parks
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
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 March 3, 2000:
<TABLE>
<CAPTION>
NAME TITLE
---- -----
<C> <S>
/s/ J. MICHAEL PARKS Chairman of the Board, Chief Executive Officer
------------------------------------------- and President
J. Michael Parks (principal executive officer)
/s/ EDWARD K. MIMS Executive Vice President,
------------------------------------------- Chief Financial Officer
Edward K. Mims (principal financial officer)
* Corporate Controller and
------------------------------------------- Chief Accounting Officer
Michael D. Kubic (principal accounting officer)
*
------------------------------------------- Director
Bruce K. Anderson
*
------------------------------------------- Director
Anthony J. deNicola
*
------------------------------------------- Director
Daniel P. Finkelman
*
------------------------------------------- Director
Robert A. Minicucci
*
------------------------------------------- Director
Bruce A. Soll
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
* By: /s/ J. MICHAEL PARKS
-------------------------------------
J. Michael Parks
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
+1 Form of Underwriting Agreement.
*2.1 Agreement and Plan of Merger, dated as of August 30, 1996,
by and between Business Services Holdings, Inc. and World
Financial Network Holding Corporation.
*2.2 Agreement and Plan of Merger, dated as of August 14, 1998,
by and among Alliance Data Systems Corporation, HSI
Acquisition Corp., and Harmonic Systems Incorporated.
*2.3 Stock Purchase Agreement, dated June 8, 1998, by and between
SPS Payment Systems, Inc., Alliance Data Systems
Corporation, SPS Commercial Services, Inc., and ADS
Network Services, Inc., amended July 12, 1999.
**2.4 Agreement for the Purchase of all the Shares of Loyalty
Management Group Canada Inc., June 26, 1998, by and
between Air Miles International Group B.V., certain other
shareholders and option holders and Alliance Data Systems
Corporation as amended July 14, 1998.
3.1 Second Amended and Restated Certificate of Incorporation of
the Registrant.
3.2 Second Amended and Restated Bylaws of the Registrant.
4 Specimen Certificate for shares of Common Stock of the
Registrant.
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
**10.1 Credit Card Processing Agreement between World Financial
Network National Bank, Bath and Body Works, Inc. and
Tri-State Factoring, Inc., dated January 31, 1996.
**10.2 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Catalogue, Inc.,
and Far West Factoring Inc., dated January 31, 1996
(assigned by Victoria's Secret Catalogue, Inc. to
Victoria's Secret Catalogue, LLC, May 2, 1998).
**10.3 Credit Card Processing Agreement between World Financial
Network National Bank, Victoria's Secret Stores, Inc., and
Lone Mountain Factoring, Inc., dated January 31, 1996.
**10.4 Credit Card Processing Agreement between World Financial
Network National Bank, Lerner New York, Inc., and Nevada
Receivable Factoring, Inc., dated January 31, 1996.
**10.5 Credit Card Processing Agreement between World Financial
Network National Bank, Express, Inc., and Retail
Factoring, Inc., dated January 31, 1996.
**10.6 Credit Card Processing Agreement between World Financial
Network National Bank, The Limited Stores, Inc., and
American Receivable Factoring, Inc., dated January 31,
1996.
**10.7 Credit Card Processing Agreement between World Financial
Network National Bank, Structure, Inc., and Mountain
Factoring, Inc., dated January 31, 1996.
**10.8 Credit Card Processing Agreement between World Financial
Network National Bank, Lane Bryant, Inc., and Sierra
Nevada Factoring, dated January 31, 1996, and amended
August 4, 1998 and September 12, 1999.
**10.9 Credit Card Processing Agreement between World Financial
Network National Bank, Henri Bendel, Inc., and Western
Factoring, Inc., dated January 31, 1996 and amended
May 13, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
**10.10 Supplier Agreement between Canadian Airlines International
Ltd. and Loyalty Management Group Canada Inc., dated March
15, 1996, as amended.
*10.11 Lease between Deerfield and Weiland Office Building, L.L.C.
and ADS Alliance Data Systems, Inc., dated July 30, 1999.
*10.12 Indenture of Sublease between J.C. Penney Company, Inc. and
BSI Business Services, Inc., dated January 11, 1996.
10.13 Build-to-Suit Net Lease between Opus South Corporation and
ADS Alliance Data Systems, Inc., dated January 29, 1998.
*10.14 Industrial Lease Agreement between CIBC Development
Corporation and Loyalty Management Group Canada Inc.,
dated October 19, 1998, amended January 26, 1999.
*10.15 Lease between YCC Limited and London Life Insurance Company
and Loyalty Management Group Canada Inc. dated May 28,
1997 and amended June 19, 1997 and January 15, 1998.
*10.16 Deed of Lease between Boswell International Marine (PTE)
Limited and Financial Automation Limited, dated August 3,
1999.
*10.17 Office Lease between Office City, Inc. and World Financial
Network National Bank, dated December 24, 1986, and
amended January 19, 1987, May 11, 1988, August 4, 1989 and
August 18, 1999.
*10.18 Lease Agreement by and between Continental Acquisitions,
Inc. and World Financial Network National Bank, dated July
2, 1990, and amended September 11, 1990, November 16, 1990
and February 18, 1991.
*10.19 Lease Agreement by and between Americana Parkway Warehouse
Limited and World Financial Network National Bank, dated
June 28, 1994.
*10.20 Lease Agreement by and between Morrison Taylor II, Ltd. and
ADS Alliance Data Systems, Inc., dated June 18, 1998, and
amended June 18, 1998.
*10.21 Lease Agreement between Morrison Taylor, Ltd. and ADS
Alliance Data Systems, Inc. dated July 1, 1997, and
amended June 18, 1998.
*10.22 Commercial Lease Agreement between Waterview Parkway, L.P.
and ADS Alliance Data Systems, Inc., dated July 16, 1997.
*10.23 Preferred Stock Purchase Agreement by and between Alliance
Data Systems Corporation and several persons named in
Schedule I thereto, dated July 12, 1999.
*10.24 Amended and Restated Stockholder Agreement, by and between
World Financial Network Holding Corporation, Limited
Commerce Corp., Welsh, Carson, Anderson, and Stowe VII,
L.P., and the several other investors named in Annex 1
thereto dated August 30, 1996, and amended July 24, 1998,
August 31, 1998 and July 12, 1999.
*10.25 Securities Purchase Agreement, by and between Business
Services Holdings, Inc., and the several purchasers named
in Schedule 1 and Schedule II thereto, dated January 24,
1996, and amended August 31, 1998.
*10.26 Common Stock Purchase Agreement between Alliance Data
Systems Corporation and Welsh, Carson, Anderson, and Stowe
VII, L.P., Welsh, Carson, Anderson, and Stowe VIII, L.P.,
and the persons named in Schedule I thereto, dated July
24, 1998.
*10.27 Securities Purchase Agreement between Alliance Data Systems
Corporation and WCAS Capital Partners III, L.P., dated
September 15, 1998.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*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 Alliance Data Systems Corporation Stock Option and
Restricted Stock Purchase Plan, as amended.
*10.35 Form of Alliance Data Systems Corporation Incentive Stock
Option Agreement.
*10.36 Form of Alliance Data Systems Corporation Non-Qualified
Stock Option Agreement.
*10.37 Form of Alliance Data Systems Corporation Confidentiality
and Non-Solicitation Agreement.
*10.38 Alliance Data Systems Corporation 1999 Incentive
Compensation Plan.
*10.39 Letter employment agreement with J. Michael Parks, dated
February 19, 1997.
*10.40 Letter employment agreement with Ivan Szeftel, dated May 4,
1998.
*10.41 Registration Rights Agreement dated as of January 24, 1996
between Business Services Holdings, Inc. and Welsh Carson,
Andersen, and Stowe VII, L.P., WCAS Information Partners,
L.P., WCA Management Corporation, Patrick J. Welsh,
Russell L. Carson, Bruce K. Anderson, Richard H. Stowe,
Andrew M. Paul, Thomas E. McInerney, Laura VanBuren, James
B. Hoover, Robert A. Minicucci, Anthony J. deNicola, and
David Bellet.
*10.42 Securities Purchase Agreement, dated as of August 30, 1996,
by and among World Financial Network Holding Corporation,
Limited Commerce Corp., and several persons named in
Schedules I and II thereto, and WCAS Capital Partners II,
L.P., as amended August 31, 1998.
*10.43 Amended and Restated License to Use the Air Miles Trade
Marks in Canada, dated as of July 24, 1998, by and between
Air Miles International Holdings N.V. and Loyalty
Management Group Canada Inc.
*10.44 Amended and Restated License to Use and Exploit the Air
Miles Scheme in Canada, dated July 24, 1998, by and
between Air Miles International Trading B.V. and Loyalty
Management Group Canada Inc.
*10.45 License to Use the Air Miles Trademarks in the United
States, dated as of July 24, 1998, by and between Air
Miles International Holdings N.V. and Loyalty Management
Group Canada Inc.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
*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.
*21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP with regard to Alliance
Data Systems Corporation and SPS Network Services.
23.2 Consent of Ernst & Young LLP with regard to Loyalty
Management Group Canada Inc.
23.3 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in its opinion filed as Exhibit 5 hereto).
*24 Power of Attorney (included on the signature page hereto)
27 Financial Data Schedule (included in SEC-filed copy only).
</TABLE>
- ------------------------
* Previously filed.
** Portions of Exhibit have been omitted and filed separately with the
commission pursuant to a request for confidential treatment.
+ To be filed by amendment.
<PAGE>
Exhibit 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
ALLIANCE DATA SYSTEMS CORPORATION
ALLIANCE DATA SYSTEMS CORPORATION, a corporation organized and
existing under the laws of the State of Delaware (the "Corporation"), hereby
certifies as follows:
1. The name of the Corporation is Alliance Data Systems Corporation.
2. The Corporation was originally incorporated under the name
"Limited Marketing Services, Inc.", the original Certificate of Incorporation
of the Corporation was filed with the Secretary of State of the State of
Delaware on February 23, 1995, and the Restated Certificate of Incorporation
of the Corporation was filed with the Secretary of State of the State of
Delaware on July 12, 1999.
3. This Second Amended and Restated Certificate of Incorporation
restates and integrates and further amends the provisions of the Restated
Certificate of Incorporation of the Corporation and was duly authorized by
written consent of the requisite percentage of stockholders of the
Corporation, after having been declared advisable by the Board of Directors
of the Corporation (the "Board of Directors"), all in accordance with the
provisions of Sections 141, 228, 242 and 245 of the General Corporation Law
of the State of Delaware.
4. The Certificate of Incorporation of the Corporation, as amended
and restated herein, shall, upon the effective date of this Second Amended
and Restated Certificate of Incorporation, read as follows:
ARTICLE I
The name of the Corporation is Alliance Data Systems Corporation.
ARTICLE II
The purpose for which the Corporation is organized is the transaction
of any or all lawful acts and activities for which corporations may be
incorporated under the General Corporation Law of the State of Delaware.
ARTICLE III
Effective as of the close of business on the date of filing this
Second Amended and Restated Certificate of Incorporation (the "Effective
Time"), such filing shall effect a one for
<PAGE>
nine reverse stock split. As of the Effective Time, each nine (9) issued and
outstanding shares of previously authorized common stock, $.01 par value per
share, of the Corporation (the "Old Common Stock"), shall thereby and
thereupon be combined into one (1) validly issued, fully paid and
nonassessable share of common stock, par value $.01 per share, of the
Corporation (the "Common Stock"). Each certificate that theretofore
represented shares of Old Common Stock shall thereafter represent that number
of shares of Common Stock into which the shares of Old Common Stock
represented by such certificate shall be combined; provided, however, that
each person holding of record a stock certificate or certificates that
represented shares of Old Common Stock shall receive, upon surrender of such
certificate or certificates, a new certificate or certificates evidencing and
representing the number of shares of Common Stock to which such person is
entitled, and provided further that the Corporation shall not issue
fractional shares with respect to the combination. To the extent a
stockholder holds a number of shares of Old Common Stock not evenly divisible
by nine (9), such stockholder will receive cash for each fractional interest
resulting from such division in an amount equal to $1.67 per 1/9th new share.
Following the reverse stock split, the total number of shares of all
classes of capital stock which the Corporation shall have authority to issue
is 220,000,000 consisting of:
(i) 200,000,000 shares of Common Stock, and
(ii) 20,000,000 shares of preferred stock, $.01 par value
per share, of which 120,000 shares of Series A Preferred Stock
have been designated.
The Board of Directors may determine the powers, designations,
preferences and relative, participating, optional or other special rights,
including voting rights, and the qualifications, limitations or restrictions
thereof, of each class of capital stock and of each series within any such
class and may increase or decrease the number of shares within each such
class or series; provided, however, that the Board of Directors may not
decrease the number of shares within a class or series to less than the
number of shares within such class or series that are then issued and may not
increase the number of shares within a series above the total number of
authorized shares of the applicable class for which the powers, designations,
preferences and rights have not otherwise been set forth herein.
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations and restrictions
in respect of the Common Stock and the Series A Preferred Stock of the
Corporation.
A. COMMON STOCK.
1. GENERAL. The voting, dividend and liquidation rights of the
holders of the Common Stock are subject to and qualified by the rights of the
holders of any series of preferred stock.
2. VOTING. Each holder of Common Stock is entitled to one vote
for each share of Common Stock held by such holder with respect to each
matter submitted to the stockholders of the Corporation for a vote at a
meeting of stockholders of the Corporation or by written consent in lieu of a
meeting. There shall be no cumulative voting.
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3. DIVIDENDS. Dividends may be declared and paid on the Common
Stock from funds lawfully available therefor as and when determined by the
Board of Directors and subject to any dividend rights of any then outstanding
shares of any series of preferred stock
4. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will
be entitled to receive all assets of the Corporation available for
distribution to its stockholders, subject to the rights of any then
outstanding shares of any series of preferred stock.
B. SERIES A PREFERRED STOCK
1. DIVIDENDS.
(a) Beginning on the date of issuance of the Series A Preferred
Stock (the "Issue Date"), each holder of outstanding shares of Series A
Preferred Stock shall be entitled to receive cash dividends on each share
of Series A Preferred Stock held by such holder at a per annum rate of
six percent (6%) on the sum of (x) One Thousand Dollars ($1,000) PLUS
(y) any and all accrued but theretofore unpaid dividends in respect of
such share (the amounts referred to in (x) and (y), collectively, the
"Per Share Preference Amount"). Dividends hereunder shall accrue daily
based on a year of 365 days and compounded quarterly. From and after the
Issue Date, all Dividends shall be cumulative, whether or not earned or
declared by the Board of Directors and whether or not there are any funds
of the Corporation legally available for the payment of dividends, and
shall be paid quarterly in arrears on the first Business Day of each
January, April, July and October beginning in October 1999 (each a
"Dividend Payment Date"); PROVIDED, that with respect to any Dividend
Payment Date, the Board of Directors may elect not to pay cash dividends
on the Series A Preferred Stock, in which case, the amount of any unpaid
dividends shall be considered an unpaid dividend arrearage until paid in
full in cash (I.E., such amount shall be added to the Preference Amount
in effect immediately prior to such Dividend Payment Date); PROVIDED,
FURTHER, that with respect to any Dividend Payment Date, no dividends
shall be paid to the extent payment thereof would result in a breach of
or default under any debt agreement to which the Corporation is a party
on the applicable Dividend Payment Date, in which case, the amount of any
unpaid dividends shall be considered an unpaid dividend arrearage until
paid in full in cash (I.E., such amount shall be added to the Per Share
Preference Amount in effect immediately prior to such Dividend Payment
Date). The Board of Directors may fix in advance a record date for the
determination of holders of shares of Series A Preferred Stock entitled
to receive a dividend hereunder, which record date shall be no more than
thirty (30) and no less than ten (10) days prior to the date fixed for
payment thereof.
(b) In no event, so long as any shares of Series A Preferred
Stock shall remain outstanding, whether accomplished directly or
indirectly through another corporation or entity controlled by the
Corporation, shall any dividend whatsoever be declared or paid upon, nor
shall any distribution be made upon, any Common Stock, other than a
dividend or distribution payable in shares of Common Stock, nor shall any
shares of Common Stock be purchased or redeemed by the Corporation, nor
shall any moneys be paid to or made available for a sinking fund for the
purchase or redemption of any Common Stock,
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unless, in each such case (other than in the case of repurchase by the
Corporation of shares of Common Stock pursuant to the terms of any
employment agreement, stock restriction agreement, stock purchase
agreement, stock option agreement or similar arrangement between the
Corporation and any employee, director, consultant or group thereof, none
of which shall be restricted), full cumulative dividends on the Series A
Preferred Stock through the most recent Dividend Payment Date shall have
been declared and paid and any arrears in the redemption of the Series A
Preferred Stock shall have been satisfied.
2. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation (each a "Liquidation"), the
holders of shares of Series A Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, before any payment shall be made to the
holders of Common Stock or any other class or series of capital stock of
the Corporation by reason of their ownership thereof, in respect of each
outstanding share of Series A Preferred Stock then held by such holder,
an amount equal to the then Per Share Preference Amount. If upon any
such Liquidation the remaining assets of the Corporation available for
distribution to its stockholders shall be insufficient to pay the holders
of shares of Series A Preferred Stock the full amount to which they shall
be entitled under this Second Amended and Restated Certificate of
Incorporation, the holders of shares of Series A Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of
the Corporation in proportion to the respective amounts which would
otherwise be payable in respect of the shares held by them upon such
distribution if all amounts payable on or with respect to such shares
were paid in full.
(b) After the payment of all preferential amounts required to
be paid to the holders of Series A Preferred Stock upon the Liquidation,
the holders of shares of Common Stock then outstanding shall share in any
distribution of the remaining assets and funds of the Corporation.
(c) Except as provided in (d) below, neither the merger or
consolidation of the Corporation into or with any other corporation, nor
the sale of all or substantially all the assets of the Corporation, shall
be deemed to be a Liquidation for purposes of this Section 2.
(d) A Sale of the Corporation (as hereinafter defined) shall be
deemed to be a Liquidation for purposes of this Section 2 if (x) holders
of shares of Common Stock shall be entitled to receive in connection with
such Sale of the Corporation per share consideration in an amount which
is less than the then Conversion Price (as hereinafter defined) and (y) a
majority of the then outstanding shares of Series A Preferred Stock
(voting as a single class) so elect (such election to be made within 20
days of the delivery of the notice required by Section 7(n)(B) in respect
of such Sale of the Corporation), in which case the holders of
outstanding shares of Series A Preferred Stock shall be entitled to
receive, upon the closing of such transaction, the amount payable to such
holders pursuant to (a) above. If no such notice is given, the
provisions of Section 8 shall apply
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and the consummation of such Sale of the Corporation shall be deemed to
be a Mandatory Conversion Event. The amount "per share consideration"
payable to holders of Common Stock in connection with any Sale of the
Corporation shall be the cash or the value of the property, rights or
securities distributed to such holders of Common Stock by the acquiring
person, firm or other entity as determined in good faith by the Board of
Directors. For purposes of this Section 2(d), a "Sale of the
Corporation" shall mean (i) the merger or consolidation of the
Corporation into or with another corporation (other than a merger or
consolidation in which if the holders of capital stock of the Corporation
immediately prior to such merger or consolidation continue to hold a
majority of the voting power of the capital stock of the surviving
corporation), or (ii) the sale, lease, transfer or disposition of all or
substantially all the assets of the Corporation.
3. VOTING.
(a) The holders of shares of Series A Preferred Stock (and any
other class or series of stock entitled to vote together as one class
with the Common Stock) shall be entitled to vote as a single class (on an
as-converted basis) with the holders of Common Stock on each matter
submitted to the stockholders of the Corporation for a vote.
(b) Notwithstanding anything herein to the contrary, the shares
of Series A Preferred Stock to be issued to Welsh, Carson, Anderson &
Stowe VIII, L.P. (the "Restricted Stockholder"), pursuant to the
Preferred Stock Purchase Agreement dated as of July 12, 1999 among the
Corporation, the Restricted Stockholder and the other purchasers
signatory thereto, shall not entitle the Restricted Stockholder to have
any voting rights, including any rights to vote for the directors of the
Corporation, except as may be required by applicable law, until the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976 shall have expired or shall have been terminated with respect to the
acquisition by such Restricted Stockholder of each shares of Series A
Preferred Stock.
4. RESTRICTIONS. So long as any shares of Series A Preferred
Stock remain outstanding, except where the vote or written consent of the
holders of a greater number of shares of the Corporation is required by law
or by this Second Amended and Restated Certificate of Incorporation, and in
addition to any other vote required by law, the Corporation shall not,
without the consent of the holders of a majority of the outstanding shares of
Series A Preferred Stock voting together as a single class, either given by
affirmative vote in person or by proxy at a meeting duly called and held for
that purpose or by written consent in lieu of a meeting, by amendment of this
Second Amended and Restated Certificate of Incorporation, by resolution of
the Board of Directors, or by consolidation of the Corporation with, or
merger of the Corporation with or into another entity, or in any other manner:
(i) amend, alter or repeal any provision of, or add any
provision to this Second Amended and Restated Certificate of
Incorporation and/or its Bylaws if such action would adversely
alter or affect the preferences, powers, privileges and/or special
or relative rights of, or restrictions provided for the benefit
of, holders of Series A Preferred Stock;
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(ii) increase or decrease the authorized number of shares
of Series A Preferred Stock or decrease the authorized number of
shares of Common Stock;
(iii) authorize the issuance of, increase the authorized
number of, or issue, shares of (or securities convertible or
exercisable into or exchangeable for) any class or series of the
Corporation's capital stock the terms of which provide that shares
of such class or series rank senior to or on parity with shares of
Series A Preferred Stock with respect to dividends, redemptions or
distributions of cash or other assets of the Corporation,
including, without limitation, with respect to distributions upon
Liquidation;
(iv) authorize the issuance of or issue any securities of
the Corporation if the issuance of such securities would give rise
to an adjustment to the then Conversion Price pursuant to
Section 7(f)(iv) of this Article III;
(v) reclassify any shares of capital stock of the
Corporation into shares of (or securities convertible or
exercisable into or exchangeable for) any class or series of the
Corporation's capital stock the terms of which provide that shares
of such class or series rank senior to or on parity with shares of
Series A Preferred Stock with respect to dividends, redemptions or
distributions of cash or other assets of the Corporation,
including, without limitation, with respect to distributions upon
Liquidation;
(vi) amend, alter or repeal any provision of this
Section 4; or
(vii) agree to do any of the foregoing.
5. REDEMPTION.
(a) All issued and outstanding shares of Series A Preferred
Stock shall be redeemed at a per share redemption price (the "Redemption
Price") equal to the then Per Share Preference Amount on July 12, 2007
(the "Redemption Date").
(b) At least 30 days (and not more than 60 days) prior to the
Redemption Date, written notice shall be mailed, by first class or
registered mail, postage prepaid, to each holder of record of Series A
Preferred Stock to be redeemed, at his, her or its address last shown on
the records of the transfer agent of the Series A Preferred Stock (or the
records of the Corporation, if it serves as its own transfer agent),
notifying such holder of the upcoming redemption of such shares,
specifying the Redemption Date and the Redemption Price and calling upon
such holder to surrender to the Corporation, in the manner and at the
place designated, his, her or its certificate or certificates
representing the shares to be redeemed (such notice is hereafter referred
to as the "Redemption Notice"). On or prior to the Redemption Date, each
holder of Series A Preferred Stock to be redeemed shall surrender his,
her or its certificate or certificates representing such shares to the
Corporation, in the manner and at the place designated in the Redemption
Notice, and against such surrender the Redemption Price of such shares
shall be paid to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. From and after the
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Redemption Date, unless there shall have been a default in payment of the
Redemption Price, all rights of the holders of the shares of Series A
Preferred Stock designated for redemption in the Redemption Notice as
holders of such shares of Series A Preferred Stock of the Corporation
(except the right to receive the Redemption Price without interest
against surrender of their certificate or certificates) shall cease with
respect to such shares, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever.
(c) If the funds of the Corporation legally available for
redemption of Series A Preferred Stock on the Redemption Date are
insufficient to redeem the number of shares of Series A Preferred Stock
required under this Section 5 to be redeemed on such date, those funds
that are legally available will be used to redeem the maximum possible
number of such shares of Series A Preferred Stock ratably on the basis of
the number of shares of Series A Preferred Stock that would be redeemed
on such date if the funds of the Corporation legally available therefor
had been sufficient to redeem all shares of Series A Preferred Stock
required to be redeemed on such date. At any time thereafter when
additional funds of the Corporation become legally available for the
redemption of Series A Preferred Stock, such funds will be promptly used
to redeem the balance of the shares which the Corporation was theretofore
obligated to redeem, ratably on the basis set forth in the preceding
sentence.
6. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased, redeemed or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition
thereof and the number of authorized shares of Series A Preferred Stock shall
be reduced accordingly.
7. OPTIONAL CONVERSION. The holders of the Series A Preferred
Stock shall have conversion rights as follows (the "Conversion Rights"):
(a) Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the
Issue Date, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the then Per Share Preference
Amount by the Conversion Price (as defined below).
(b) The conversion price at which shares of Common Stock shall
be deliverable upon conversion of Series A Preferred Stock without the
payment of additional consideration by the holder thereof (the
"Conversion Price") shall initially be $1.50 per share. The initial
Conversion Price (and, accordingly, the rate at which shares of Series A
Preferred Stock may be converted into shares of Common Stock) shall be
subject to adjustment as provided below.
(c) Subject to timely receipt of the notice required by
Section 7(n), in the event of a liquidation, dissolution or winding-up of
the Corporation, the Conversion Rights shall terminate at the close of
business on the first full day preceding the date fixed for the payment
of any amounts distributable on such liquidation, dissolution or
winding-up of the Corporation to the holders of Series A Preferred Stock
pursuant to Section 2(a).
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(d) FRACTIONAL SHARES. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock. In lieu
of any fractional shares to which the holder would otherwise be entitled,
the Corporation shall pay cash equal to such fraction multiplied by the
fair market value of a share of Common Stock (as determined in good faith
by the Board of Directors).
(e) MECHANICS OF CONVERSION.
(i) In order for a holder of Series A Preferred Stock to
convert shares of Series A Preferred Stock into shares of Common
Stock, such holder shall surrender the certificate or certificates
for such shares of Series A Preferred Stock at the office of the
transfer agent for the Series A Preferred Stock (or at the
principal office of the Corporation if the Corporation serves as
its own transfer agent), together with written notice that such
holder irrevocably elects to convert all or any number of the
shares of the Series A Preferred Stock represented by such
certificate or certificates. Such notice shall state such
holder's name or the names of the nominees in which such holder
wishes the certificate or certificates for shares of Common Stock
to be issued. If required by the Corporation, certificates
surrendered for conversion shall be endorsed or accompanied by a
written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered
holder or his or its attorney duly authorized in writing. The
date of receipt of such certificates and notice by the transfer
agent (or by the Corporation if the Corporation serves as its own
transfer agent) shall be the conversion date ("Conversion Date").
The Corporation shall, as soon as practicable after the Conversion
Date (and in any event within five business days after the
Conversion Date) issue and deliver at such office to such holder
of Series A Preferred Stock, or to his or its nominees, a
certificate or certificates for the number of shares of Common
Stock to which such holder shall be entitled, together with cash
in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the Series A
Preferred Stock shall be outstanding, reserve and keep available
out of its authorized but unissued stock, for the purpose of
effecting the conversion of the Series A Preferred Stock, such
number of its duly authorized shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all
outstanding Series A Preferred Stock and all other outstanding
Options (as hereinafter defined) and Convertible Securities (as
hereinafter defined). Before taking any action which would cause
an adjustment reducing the Conversion Price below the then par
value of the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock, the Corporation will take any lawful
corporate action which may, in the opinion of its counsel, be
necessary in order that the Corporation may validly and legally
issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
(iii) All shares of Series A Preferred Stock that shall
have been surrendered for conversion as herein provided shall no
longer be deemed to be outstanding and all rights with respect to
such shares, including the rights, if any,
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to receive notices and to vote, shall immediately cease and
terminate on the Conversion Date, except only the right of the
holders thereof to receive shares of Common Stock in exchange
therefor. Such conversion shall be deemed to have been made at
the close of business on the Conversion Date, and the person
entitled to receive the shares of Common Stock shall be treated
for all purposes as having become the record holder of such shares
of Common Stock at such time.
(f) ADJUSTMENTS TO CONVERSION PRICE FOR DILUTING ISSUES.
(i) SPECIAL DEFINITIONS. As used herein, the following
definitions shall apply.
(A) "OPTION" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire
Common Stock or Convertible Securities.
(B) "CONVERTIBLE SECURITIES" shall mean any
evidence of indebtedness, shares or other securities
directly or indirectly convertible into or exchangeable for
Common Stock.
(C) "ADDITIONAL SHARES OF COMMON STOCK" shall
mean all shares of Common Stock issued (or, pursuant to
Subsection 7(d)(iii) below, deemed to be issued ) by the
Corporation after the Issue Date, other than shares of
Common Stock issued or issuable:
(I) upon conversion of shares of Series A
Preferred Stock;
(II) upon exercise of the Stock Purchase
Warrant originally dated January 24, 1996 and
currently registered in the name of JCP Telecom
Systems, Inc., a Delaware corporation (as in effect
on the date hereof);
(III) as a dividend or distribution of
Series A Preferred Stock, or
(IV) to employees, officers, directors or
consultants of the Corporation pursuant to any plan
adopted by, or agreed to or approved by the Board of
Directors.
(ii) NO ADJUSTMENT OF CONVERSION PRICE. No adjustment in
the number of shares of Common Stock into which the Series A
Preferred Stock is convertible shall be made pursuant to
Subsection 7(f)(iv), by adjustment in the Conversion Price: (a)
unless the consideration per share (determined pursuant to
Subsection 7(f)(v)) for an Additional Share of Common Stock issued
or deemed to be issued by the Corporation is less than the
Conversion Price in effect on the date of, and immediately prior
to, the issue of such Additional Shares, or (b) if prior to such
issuance, the Corporation receives written notice from the holders
of
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at least 80% of the then outstanding shares of Series A Preferred
Stock agreeing that no such adjustments shall made as the result
of the issuance of Additional Shares of Common Stock.
(iii) ISSUANCE OF SECURITIES DEEMED ISSUE OF ADDITIONAL
SHARES OF COMMON STOCK. For purposes of this Subsection 7(f), if
the Corporation at any time or from time to time after the Issue
Date shall issue any Options or Convertible Securities or shall
fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares of Common Stock (as
set forth in the instrument relating thereto without regard to any
provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case
of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have bee fixed, as of
the close of business on such record date, PROVIDED that
Additional Shares of Common Stock shall not be deemed to have been
issued unless the consideration per share (determined pursuant to
Subsection 7(f)(v) hereof) of such Additional Shares of Common
Stock would be less than the Conversion Price in effect on the
date of and immediately prior to such issue, or such record date,
as the case may be, PROVIDED FURTHER that in any such case in
which Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the Conversion Price
shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of
such Options or conversion or exchange of such Convertible
Securities;
(B) If such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise,
for any increase in the consideration payable to the
Corporation, or decrease in the number of shares of Common
Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming
effective, be recomputed to reflect such increase or
decrease insofar as it affects such Options or the rights
of conversion or exchange under such Convertible
Securities.
(C) No readjustment pursuant to clause (B) above
shall have the effect of increasing the Conversion Price to
an amount which exceeds the lower of (i) such Conversion
Price on the original adjustment date, or (ii) the
Conversion Price that would have resulted had such original
adjustment not been made but all other required adjustments
had been made in respect of issuances of Additional Shares
of Common Stock between the original adjustment date and
such readjustment date:
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(D) Notwithstanding clause (B) above, upon the
expiration or termination of any unexercised Option, the
Conversion Price shall not be readjusted, but the
Additional Shares of Common Stock deemed issued as the
result of the original issue of such Option shall not be
deemed issued for the purposes of any subsequent adjustment
of the Conversion Price; and
(E) In the event of any increase in the number of
share of Common Stock issuable upon the exercise,
conversion or exchange of any Option or Convertible
Security, including, but not limited to, an increase
resulting from the antidilution provisions thereof, the
Conversion Price then in effect shall forthwith be
readjusted to such Conversion Price as would have been
obtained had the adjustment (if any) which was made upon
the issuance of such Option or Convertible Security not
exercised or converted prior to such increase been made
upon the basis of such increased number of shares, but no
further adjustment shall be made for the actual issuance of
Common Stock upon the exercise or conversion of any such
Option or Convertible Security; PROVIDED that if the event
giving rise to such increase in the number of shares
issuable in respect of such Option or Convertible Security
would also, independent of this subsection (E), give rise
to an adjustment to the Conversion Price pursuant to this
Section 7(f), the Conversion Price shall not be adjusted
pursuant to both this subsection (E) and such other
provision, but rather, the Conversion Price will be
adjusted pursuant to either this subsection (E) or such
other provision, the provision which results in a lower
post-adjustment Conversion Price to control.
(iv) ADJUSTMENT OF CONVERSION PRICE UPON ISSUANCE OF
ADDITIONAL SHARES OF COMMON STOCK. In the event the Corporation
shall at any time after the Issue Date issue Additional Shares of
Common Stock (including Additional Shares of Common Stock deemed
to be issued pursuant to Subsection 7(f)(iii), but excluding
shares issued upon a stock split or combination as provided in
Subsection 7(g) or as a dividend or distribution as provided in
Subsection 7(h)), without consideration or for a consideration per
share less than the Conversion Price in effect on the date of and
immediately prior to such issue, then and in such event, the
Conversion Price shall be reduced, concurrently with such issue,
to a price (calculated to the nearest cent) determined by
multiplying such Conversion Price by a fraction, (A) the numerator
of which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issuance or deemed issuance
plus (2) the number of shares of Common Stock which the aggregate
consideration received by the Corporation for the total number of
Additional Shares of Common Stock so issued or deemed issued would
purchase at such Conversion Price; and (B) the denominator of
which shall be (1) the number of shares of Common Stock
outstanding immediately prior to such issuance or deemed issuance
plus (2) the number of such Additional Shares of Common Stock so
issued or deemed issued; PROVIDED that, immediately after any
Additional Shares of Common Stock are deemed issued pursuant to
Subsection 7(f)(iv), then
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such Additional Shares of Common Stock shall be deemed to be
outstanding for all subsequent applications of this Subsection
7(f)(iv). Notwithstanding the foregoing, the Conversion Price
shall not be so reduced at such time if the amount of such
reduction would be an amount less than $.01, but any such amount
shall be carried forward and reduction with respect thereto made
at the time of and together with any subsequent reduction which,
together with such amount and any other amount or amounts so
carried forward, shall aggregate $.01 or more.
(v) DETERMINATION OF CONSIDERATION. For purposes of
this Subsection 7(f), the consideration received by the
Corporation for the issue of any Additional Shares of Common Stock
shall be computed as follows:
(A) CASH AND PROPERTY: Such consideration shall:
(I) insofar as it consists of each, be
computed at the aggregate of cash received by the
Corporation, excluding amounts paid or payable for
accrued interest or accrued dividends;
(II) insofar as it consists of property
other than cash, be computed at the fair market
value thereof at the time of such issue, as
determined in good faith by the Board of Directors;
and
(III) in the event Additional Shares of
Common Stock are issued together with other shares
or securities or other assets of the Corporation for
consideration which covers both, be the proportion
of such consideration so received, computed as
provided in clauses (I) and (II) above, as
determined in good faith by the Board of Directors.
(B) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been
issued pursuant to Subsection 7(f)(iii), relating to
Options and Convertible Securities, shall be determined by
dividing:
(I) the total amount, if any, received or
receivable by the Corporation as consideration for
the issue of such Options or Convertible Securities,
plus the minimum aggregate amount of additional
consideration (as set forth in the instruments
relating thereto, without regard to any provision
contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon
the exercise of such Options or the conversion or
exchange of such Convertible Securities, or in the
case of Options for Convertible Securities and the
conversion or exchange of such Convertible
Securities, by
(II) the maximum number of shares of Common
Stock (as set forth in the instruments relating
thereto, without regard to any provision contained
therein for a subsequent adjustment of
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such number) issuable upon the exercise of such
Options or the conversion or exchange of such
Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such
Options for Convertible Securities and the
conversion or exchange of such Convertible
Securities.
(g) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the
Corporation shall at any time or from time to time after the Issue Date
effect a subdivision (through a stock split or otherwise) of the
outstanding Common Stock, the Conversion Price then in effect immediately
before the subdivision shall be proportionately decreased. If the
Corporation shall at any time or from time to time after the Issue Date
combine (through a reverse stock split or otherwise) the outstanding
shares of Common Stock, the Conversion Price then in effect immediately
before the combination shall be proportionately increased. Any
adjustment under this paragraph shall become effective at the close of
business on the date the subdivision or combination becomes effective.
(h) ADJUSTMENT FOR CERTAIN DISTRIBUTIONS. In the event the
Corporation at any time, or from time to time, after the Issue Date shall
make or issue, or fix a record date for the determination of holders of
Common Stock entitled to receive, a distribution payable in additional
shares of Common Stock, then and in each such event the Conversion Price
then in effect shall be decreased as of the time of such issuance or, in
the event such a record date shall have been fixed, as of the close of
business on such record date, by multiplying the Conversion Price, as the
case may be, then in effect by a fraction:
(i) the numerator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to
the time of such issuance or the close of business on such record
date, and
(ii) the denominator of which shall be the total number
of shares of Common Stock issued and outstanding immediately prior
to the time of such issuance or the close of business on such
record date plus the number of shares of Common Stock issuable in
payment of such dividend or distribution;
PROVIDED, HOWEVER, if such record date shall have been fixed and such
dividend is not fully paid or if such distribution is not fully made on
the date fixed therefor, the Conversion Price shall be recomputed
accordingly as of the close of business on such record date and
thereafter the Conversion Price shall be adjusted pursuant to this
paragraph as of the time and to the extent of actual payment of such
dividends or distributions.
(i) ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. In the
event the Corporation at any time or from time to time after the Issue
Date shall make or issue, or fix a record date for the determination of
holders of Common Stock entitled to receive, a dividend or other
distribution payable in securities of the Corporation other than shares
of Common Stock, then and in each such event provision shall be made so
that the holders of Series A Preferred Stock shall receive, upon
conversion thereof, in addition to the
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number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation that they would have received had their
Series A Preferred Stock been converted into Common Stock on the date of
such event and had they thereafter, during the period from the date of
such event to and including the actual conversion date, retained such
securities receivable by them as aforesaid during such period giving
application to all adjustments called for during such period, under this
paragraph with respect to the rights of the holders of the Series A
Preferred Stock.
(j) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE, OR SUBSTITUTION.
If the Common Stock issuable upon the conversion of the Series A
Preferred Stock shall be changed into the same or a different number of
shares of any class or classes of stock, whether by capital
reorganization, reclassification, or otherwise, then and in each such
event the holder of each such share of Series A Preferred Stock shall
have the right thereafter to convert such share into the kind and amount
of shares of stock and other securities and property receivable upon such
reorganization, reclassification, or other change, by holders of the
number of shares of Common Stock into which such shares of Series A
Preferred Stock were convertible immediately prior to such
reorganization, reclassification, or change, all subject to further
adjustment as provided herein.
(k) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In case of
any consolidation or merger of the Corporation with or into another
corporation (other than a Sale of the Corporation), each share of
Series A Preferred Stock shall thereafter be convertible into the kind
and amount of shares of stock or other securities or property to which a
holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series A Preferred Stock would have
been entitled upon such consolidation, merger or sale; and, in such case,
appropriate adjustment (as determined in good faith by the Board of
Directors) shall be made in the application of the provisions in this
Section 7 set forth with respect to the rights and interest thereafter of
the holders of the Series A Preferred Stock, to the end that the
provisions set forth in this Section 7 (including provisions with respect
to changes in and other adjustments of the Conversion Price) shall
thereafter be applicable, as nearly as reasonably may be, in relation to
any shares of stock or other property thereafter deliverable upon the
conversion of the Series A Preferred Stock.
(l) NO IMPAIRMENT. The Corporation will not, by amendment of
this Second Amended and Restated Certificate of Incorporation or through
any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms
to be observed or performed hereunder by the Corporation, but will at all
times in good faith assist in the carrying out of all the provisions of
this Section 7 and in the taking of all such action as may be necessary
or appropriate in order to protect the Conversion Rights of the holders
of the Series A Preferred Stock against impairment.
(m) CERTIFICATE AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this
Section 7, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of Series A Preferred Stock a certificate setting
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forth such adjustment or readjustment and showing in detail the facts
upon which such adjustment or readjustment is based. The Corporation
shall, upon the written request at any time of any holder of Series A
Preferred Stock, furnish or cause to be furnished to such holder a
similar certificate setting forth (i) such adjustments and readjustments,
(ii) the Conversion Price then in effect, and (iii) the number of shares
of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of the Series A Preferred Stock.
(n) NOTICE OF RECORD DATE. In the event:
(i) that the Corporation declares a dividend (or any
other distribution) on its Common Stock (whether payable in debt
or equity securities of the Corporation or cash or other property
of the Corporation);
(ii) that the Corporation subdivides or combines its
outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock of the
Corporation (other than a subdivision or combination of its
outstanding shares of Common Stock or a stock dividend or stock
distribution thereon), or of any consolidation or merger of the
Corporation into or with another corporation, or of the sale of
all or substantially all of the assets of the Corporation;
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation
then the Corporation shall cause to be filed at its principal office or
at the office of the transfer agent of the Series A Preferred Stock at
their last addresses as shown on the records of the Corporation or such
transfer agent, at least fifteen days prior to the record date specified
in (A) below or thirty days before the date specified in (B) below, a
notice stating
(A) the record date of such dividend,
distribution, subdivision or combination, or, if a record
is not to be taken, the date as of which the holders of
Common Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be
determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or
winding up is expected to become effective, and the date as
of which it is expected that holders of Common Stock of
record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon
such reclassification, consolidation, merger, sale,
dissolution or winding up.
8. MANDATORY CONVERSION.
(a) Immediately prior to, and subject to the consummation (the
date of such consummation, the "Mandatory Conversion Date") of:
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(1) any underwritten public offering of equity
securities of the Corporation pursuant to an effective
registration statement under the Securities Act of 1933, as
amended, covering the offer and sale of equity securities for the
account of the Corporation in which the aggregate net proceeds to
the Corporation equal or exceed $75,000,000 (a "Qualified Public
Offering") or
(2) a Sale of the Corporation other than a Sale of the
Corporation which is treated at the election of the holders of the
Series A Preferred Stock as a Liquidation pursuant to Section
2(d),
each outstanding share of Series A Preferred Stock shall automatically be
converted into that number of fully paid and nonassessable shares of
Common Stock as is determined by dividing the then Per Share Preference
Amount by (A) in the case of (1) above, the lower of (x) then effective
Conversion Price and (y) the price at which shares of Common Stock are
sold to the public in such Qualified Public Offering and (B) in the case
of (2) above, then effective Conversion Price.
(b) All holders of record of shares of Series A Preferred Stock
will be given written notice of the Mandatory Conversion Date and the
place designated for mandatory conversion of all such shares of Series A
Preferred Stock pursuant to this Section 8. Such notice will be sent by
first class or registered mail, postage prepaid, to each record holder of
Series A Preferred Stock at such holder's address last shown on the
records of the transfer agent for the Series A Preferred Stock (or the
records of the Corporation, if it serves as its own transfer agent).
Upon receipt of such notice, each holder of shares of Series A Preferred
Stock shall surrender his, her or its certificate or certificates for all
such shares to the Corporation at the place designated in such notice,
and shall thereafter receive certificates for the number of shares of
Common Stock to which such holder is entitled pursuant to this Section 8.
On the Mandatory Conversion Date, all rights with respect to the Series A
Preferred Stock so converted, including the rights, if any, to receive
notices and vote, will terminate, except only the rights of the holders
thereof, upon surrender of their certificate or certificates therefor, to
receive certificates for the number of shares of Common Stock into which
such Series A Preferred Stock has been converted. If so required by the
Corporation, certificates surrendered for conversion shall be endorsed or
accompanied by written instrument or instruments of transfer, in form
satisfactory to the Corporation, duly executed by the registered holder
or by his, her or its attorney duly authorized in writing. As soon as
practicable after the Mandatory Conversion Date and the surrender of the
certificate or certificates for Series A Preferred Stock, the Corporation
shall cause to be issued and delivered to such holder, or on his, her or
its written order, a certificate or certificates for the number of full
shares of Common Stock issuable on such conversion in accordance with the
provisions hereof and cash in respect of any fraction of a share of
Common Stock otherwise issuable upon such conversion (the amount of which
shall be determined in the manner described in Section 7(d)).
(c) All certificates evidencing shares of Series A Preferred
Stock which are required to be surrendered for conversion in accordance
with the provisions hereof shall, from and after the Mandatory Conversion
Date, be deemed to have been retired and
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canceled and the shares of Series A Preferred Stock represented thereby
shall, from and after the Mandatory Conversion Date, be deemed for all
purposes to have been converted into that number of fully paid and
nonassessable shares of Common Stock into which such shares of Series A
Preferred Stock are then convertible in accordance with this Section 8,
notwithstanding the failure of the holder or holders thereof to surrender
such certificates on or prior to such date.
ARTICLE IV
The street address of the registered office of the corporation is
Corporate Trust Center, 1209 Orange Street in the City of Wilmington, County of
New Castle, and the name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE V
1. Election of directors at an annual or special meeting of
stockholders need not be by written ballot unless the bylaws of the Corporation
shall provide otherwise.
2. The Board of Directors shall be divided into three classes,
designated Class I, Class II, and Class III. The number of directors in each
class shall be the whole number contained in the quotient arrived at by dividing
the authorized number of directors by three, and if a fraction is also contained
in such quotient, then if such fraction is one-third, the extra director shall
be a member of Class I, and if the fraction is two-thirds, one of the extra
directors shall be a member of Class I and the other shall be a member of Class
II. The term of the initial Class I directors shall terminate on the date of
the 2001 annual meeting; the term of the initial Class II directors shall
terminate on the date of the 2002 annual meeting; and the term of the initial
Class III directors shall terminate on the date of the 2003 annual meeting. At
each succeeding annual meeting of stockholders beginning in 2001, successors to
the class of directors whose term expires at that annual meeting shall be
elected for a three-year term. Notwithstanding the foregoing formula
provisions, in the event that, as a result of any change in the authorized
number of directors, the number of directors in any class would differ from the
number allocated to that class under the formula provided in this ARTICLE V
immediately prior to such change, the following rules shall govern:
(a) each director then serving as such shall nevertheless
continue as a director of the class of which such director is a member
until the expiration of his current term, or his prior death, resignation
or removal;
(b) at each subsequent election of directors, even if the
number of directors in the class whose term of office then expires is
less than the number then allocated to that class under said formula, the
number of directors then elected for membership in that class shall not
be greater than the number of directors in that class whose term of
office then expires, unless and to the extent that the aggregate number
of directors then elected plus the number of directors in all classes
then duly continuing in office does not exceed the then authorized number
of directors of the Corporation;
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(c) at each subsequent election of directors, if the number of
directors in the class whose term of office then expires exceeds the
number then allocated to that class under said formula, the Board of
Directors shall designate one or more of the directorships then being
elected as directors of another class or classes in which the number of
directors then serving is less than the number then allocated to such
other class or classes under said formula;
(d) in the event of the death, resignation or removal of any
director who is a member of a class in which the number of directors
serving immediately preceding the creation of such vacancy exceeded the
number then allocated to that class under said formula, the Board of
Directors shall designate the vacancy thus created as a vacancy in
another class in which the number of directors then serving is less than
the number then allocated to such other class under said formula;
(e) In the event of any increase in the authorized number of
directors, the newly created directorships resulting from such increase
shall be apportioned by the Board of Directors to such class or classes
as shall, so far as possible, bring the composition of each of the
classes into conformity with the formula in this ARTICLE V, as it applies
to the number of directors authorized immediately following such
increase; and
(f) designation of directorships or vacancies into other
classes and apportionments of newly created directorships to classes by
the Board of Directors under the foregoing items (c), (d) and (e) shall,
so far as possible, be effected so that the class whose term of office is
due to expire next following such designation or apportionment shall
contain the full number of directors then allocated to said class under
said formula. Notwithstanding any of the foregoing provisions of this
ARTICLE V, each director shall serve until his successor is elected and
qualified or until his death, resignation or removal.
3. The number of directors of the Corporation shall not be less
than six nor more than twelve, the exact number of directors to be such
number as may be set from time to time within the limits set forth above by
resolution adopted by affirmative vote of a majority of the Board of
Directors.
4. Any director may be removed at any annual or special
stockholders' meeting upon the affirmative vote of the holders of more than
50 percent of the outstanding shares of voting stock of the Corporation at
that time entitled to vote thereon; provided, however, that such director may
be removed only for cause and shall receive a copy of the charges against
him, delivered to him personally or by mail at his last known address at
least ten days prior to the date of the stockholders' meeting.
5. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to adopt the bylaws
of the Corporation, to amend or repeal the bylaws or to adopt new bylaws,
subject to any limitations that may be contained in such bylaws.
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ARTICLE VI
To the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended, a director
of the Corporation shall not be liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. Any repeal
or amendment of this ARTICLE VI by the stockholders of the Corporation or by
changes in applicable law shall, to the extent permitted by applicable law,
be prospective only, and shall not adversely affect any limitation on the
personal liability of any director of the Corporation at the time of such
repeal or amendment.
ARTICLE VII
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative or
investigative, any appeal in such an action, suit or proceeding and any
inquiry or investigation that could lead to such an action, suit or
proceeding (whether or not by or in the right of the Corporation), by reason
of the fact that such person is or was a director, officer, employee or agent
of the Corporation or is or was serving at the request of the Corporation as
a director, officer, partner, venturer, proprietor, trustee, employee, agent
or similar functionary of another corporation, partnership, joint venture,
sole proprietorship, trust, nonprofit entity, employee benefit plan or other
enterprise, against all judgments, penalties (including excise and similar
taxes), fines, settlements and expenses (including attorneys' fees and court
costs) actually and reasonably incurred by such person in connection with
such action, suit or proceeding to the fullest extent permitted by any
applicable law, and such indemnity shall inure to the benefit of the heirs,
executors and administrators of any such person so indemnified pursuant to
this ARTICLE VII. The right to indemnification under this ARTICLE VII shall
be a contract right and shall include, with respect to directors and
officers, the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its disposition; provided,
however, that, if the General Corporation Law of the State of Delaware
requires, the payment of such expenses incurred by a director or officer in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such
director or officer, to repay all amounts so advanced if it shall ultimately
be determined that such director or officer is not entitled to be indemnified
under this ARTICLE VII or otherwise. The Corporation may, by action of its
Board of Directors, pay such expenses incurred by employees and agents of the
Corporation upon such terms as the Board of Directors deems appropriate. The
indemnification and advancement of expenses provided by, or granted pursuant
to, this ARTICLE VII shall not be deemed exclusive of any other right to
which those seeking indemnification may be entitled under any law, bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both
as to action in such person's official capacity and as to action in another
capacity while holding such office. Any repeal or amendment of this ARTICLE
VII by the stockholders of the Corporation or by changes in applicable law
shall, to the extent permitted by applicable law, be prospective only, and
not adversely affect the indemnification of any person who may be indemnified
at the time of such repeal or amendment.
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ARTICLE VIII
No contract or other transaction between the Corporation and any other
Corporation and no other acts of the Corporation with relation to any other
corporation shall, in the absence of fraud, in any way be invalidated or
otherwise affected by the fact that any one or more of the directors or
officers of the Corporation are pecuniarily or otherwise interested in, or
are directors or officers of, such other corporation. Any director or
officer of the Corporation individually, or any firm or association of which
any director or officer may be a member, may be a party to, or may be
pecuniarily or otherwise interested in, any contract or transaction of the
Corporation, provided that the fact that such person individually or as a
member of such firm or association is such a party or is so interested shall
be disclosed or shall have been known to the Board of Directors or a majority
of such members thereof as shall be present at any meeting of the Board of
Directors at which action upon any such contract or transaction shall be
taken; and any director of the Corporation who is also a director or officer
of such other corporation or who is such a party or so interested may be
counted in determining the existence of a quorum at any meeting of the Board
of Directors during which any such contract or transaction shall be
authorized and may vote thereat to authorize any such contract or
transaction, with like force and effect as if such person were not such a
director or officer of such other corporation or not so interested. Any
director of the Corporation may vote upon any contract or any other
transaction between the Corporation and any subsidiary or affiliated
corporation without regard to the fact that such person is also a director or
officer of such subsidiary or affiliated corporation.
Any contract, transaction or act of the Corporation or of the
directors that shall be ratified at any annual meeting of the stockholders of
the Corporation, or at any special meeting of the stockholders of the
corporation, or at any special meeting called for such purpose, shall,
insofar as permitted by law, be as valid and as binding as though ratified by
every stockholder of the Corporation; provided, however, that any failure of
the stockholders to approve or ratify any such contract, transaction or act,
when and if submitted, shall not be deemed in any way to invalidate the same
or deprive the Corporation, its directors, officers or employees, of its or
their right to proceed with such contract, transaction or act.
Subject to any express agreement that may from time to time be in
effect, any stockholder, director or officer of the Corporation may carry on
and conduct in such person's own right and for such person's own personal
account, or as a partner in any partnership, or as a joint venturer in any
joint venture, or as an officer, director or stockholder of any corporation,
or as a participant in any syndicate, pool, trust or association, any
business that competes with the business of the Corporation and shall be free
in all such capacities to make investments in any kind of property in which
the Corporation may make investments.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Corporation has caused this Second Amended and
Restated Certificate of Incorporation to be duly signed by J. Michael Parks,
its Chairman of the Board and Chief Executive Officer, who hereby
acknowledges under penalties of perjury that the facts herein stated are true
and this Second Amended and Restated Certificate of Incorporation is the act
and the deed of the Corporation, this ___ day of _____________, 2000.
ALLIANCE DATA SYSTEMS CORPORATION
By:
-----------------------------------------
J. Michael Parks
Chairman of the Board and Chief Executive
Officer
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SECOND AMENDED AND RESTATED BYLAWS
OF
ALLIANCE DATA SYSTEMS CORPORATION
A DELAWARE CORPORATION
(THE "COMPANY")
(ADOPTED AS OF JANUARY 4, 2000)
<PAGE>
SECOND AMENDED AND RESTATED BYLAWS
OF
ALLIANCE DATA SYSTEMS CORPORATION
ARTICLE I
OFFICES
Section 1.1 REGISTERED OFFICE. The registered office of the Company
within the State of Delaware shall be located at either (i) the principal place
of business of the Company in the State of Delaware or (ii) the office of the
corporation or individual acting as the Company's registered agent in Delaware.
Section 1.2 ADDITIONAL OFFICES. The Company may, in addition to its
registered office in the State of Delaware, have such other offices and places
of business, both within and without the State of Delaware, as the Board of
Directors of the Company (the "Board") may from time to time determine or as the
business and affairs of the Company may require.
ARTICLE II
STOCKHOLDERS MEETINGS
Section 2.1 ANNUAL MEETINGS. Annual meetings of stockholders shall be
held at a place and time on any weekday that is not a holiday and that is not
more than 120 days after the end of the fiscal year of the Company 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.
Section 2.2 SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by law or by the
certificate of incorporation, (i) may be called by the chairman of the board or
the president and (ii) shall be called by the president or the secretary at the
written request of a majority of the Board. Such request shall state the
purpose or purposes of the proposed meeting. At a special meeting of
stockholders, only such business shall be conducted as shall be specified in the
notice of meeting.
Section 2.3 NOTICES. Written notice of each stockholders meeting
stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote thereat by or at the direction of the officer
calling such meeting not less than ten nor more than sixty days before the date
of the meeting. If said notice is for a stockholders meeting other than an
annual meeting, it shall in addition state the purpose or purposes for which
said meeting is called, and the business transacted at such meeting shall be
limited to the matters so stated in said notice and any matters reasonably
related thereto.
Section 2.4 QUORUM. The presence at a stockholders meeting of the
holders, present in person or represented by proxy, of capital stock of the
Company representing a majority of the
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votes of all capital stock of the Company entitled to vote thereat shall
constitute a quorum at such meeting for the transaction of business except as
otherwise provided by law, the certificate of incorporation or these Bylaws.
If a quorum shall not be present or represented at any meeting of the
stockholders, a majority of the stockholders entitled to vote thereat,
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such reconvened
meeting at which a quorum shall be present or represented, any business may
be transacted that might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the reconvened meeting, a notice
of said meeting shall be given to each stockholder entitled to vote at said
meeting. The stockholders present at a duly convened meeting may continue to
transact business until adjournment, notwithstanding the withdrawal of enough
stockholders to leave less than a quorum.
Section 2.5 ADVANCE NOTICE OF SHAREHOLDER PROPOSALS. In order to
properly submit any business to a meeting of stockholders, a stockholder must
give timely notice in writing to the secretary of the Company. To be considered
timely, a stockholder's notice must be delivered either in person or by United
States certified mail, postage prepaid, and received at the principal executive
offices of the Company (a) not less than 120 days nor more than 150 days before
the first anniversary date of the Company's proxy statement in connection with
the last annual meeting of stockholders, or (b) if no annual meeting was held in
the previous year, or if the date of the applicable annual meeting has been
changed by more than 30 days from the date contemplated at the time of the
previous year's proxy statement, or if the stockholder proposal is for a special
meeting, not less than a reasonable time, as determined by the Board, prior to
the date of the applicable meeting. The secretary of the Company shall deliver
any stockholder proposals and nominations received in a timely manner for review
by the Board or a committee designated by the Board. A stockholder's notice to
submit business to a meeting of stockholders shall set forth (i) the name and
address of the stockholder, (ii) the class and number of shares of stock
beneficially owned by such stockholder, (iii) the name in which such shares are
registered on the stock transfer books of the Company, (iv) a representation
that the stockholder intends to appear at the meeting in person or by proxy to
submit the business specified in such notice, (v) any material interest of the
stockholder in the business to be submitted, and (vi) a brief description of the
business desired to be submitted to the annual meeting, including the complete
text of any resolutions to be presented at the annual meeting, and the reasons
for conducting such business at the annual meeting. In addition, the
stockholder making such proposal shall promptly provide any other information
reasonably requested by the Company. Notwithstanding the foregoing prvisions of
this Section 2.5, a stockholder who seeks to have any proposal included in the
Company's proxy statement shall comply with the requirements of Regulation 14A
under the Securities Exchange Act of 1934, as amended.
Section 2.6 VOTING OF SHARES.
Section 2.6.1 VOTING LISTS. The officer or agent who has charge of
the stock ledger of the Company shall prepare, at least ten days and no
more than sixty days before every meeting of stockholders, a complete list
of the stockholders entitled to vote thereat arranged in alphabetical order
and showing the address and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of
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any such stockholder, for any purpose germane to the meeting, during
ordinary business hours for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or,
if not so specified, at the place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any
stockholder who is present. The original stock transfer books shall be
prima facie evidence as to who are the stockholders entitled to examine
such list or transfer books or to vote at any meeting of stockholders.
Failure to comply with the requirements of this section shall not affect
the validity of any action taken at said meeting.
Section 2.6.2 VOTES PER SHARE. Unless otherwise provided in the
certificate of incorporation, each stockholder shall be entitled to one
vote in person or by proxy at every stockholders meeting for each share of
capital stock held by such stockholder.
Section 2.6.3 PROXIES. Every stockholder entitled to vote at a
meeting or to express consent or dissent without a meeting or a
stockholder's duly authorized attorney-in-fact may authorize another person
or persons to act for him by proxy. Each proxy shall be in writing,
executed by the stockholder giving the proxy or by his duly authorized
attorney. No proxy shall be voted on or after three years from its date,
unless the proxy provides for a longer period. Unless and until voted,
every proxy shall be revocable at the pleasure of the person who executed
it, or his legal representatives or assigns, except in those cases where an
irrevocable proxy permitted by statute has been given.
Section 2.6.4 REQUIRED VOTE. When a quorum is present at any
meeting, the vote of the holders, present in person or represented by
proxy, of capital stock of the Company representing a majority of the votes
of all capital stock of the Company entitled to vote thereat shall decide
any question brought before such meeting, unless the question is one upon
which, by express provision of law or the certificate of incorporation or
these Bylaws, a different vote is required, in which case such express
provision shall govern and control the decision of such question.
Section 2.6.5 CONSENTS IN LIEU OF MEETING. Any action required to be
or that may be taken at any meeting of stockholders may be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that
would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. Prompt,
written notice of the action taken by means of any such consent which is
other than unanimous shall be given to those stockholders who have not
consented in writing.
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ARTICLE III
DIRECTORS
Section 3.1 POWERS. The business of the Company shall be managed by or
under the direction of the Board, which may exercise all such powers of the
Company and do all such lawful acts and things as are not by law, the
certificate of incorporation or these Bylaws directed or required to be
exercised or done by the stockholders. Directors need not be stockholders or
residents of the State of Delaware.
Section 3.2 NUMBER. The number of directors constituting the Board
shall not be less than six nor more than twelve, the exact number of directors
to be such number as may be set from time to time within the limits set forth
above by resolution adopted by affirmative vote of a majority of the Board.
Section 3.3 ELECTION. Directors shall be elected by the stockholders by
plurality vote at an annual stockholders meeting as provided in the certificate
of incorporation, except as hereinafter provided. The directors shall be
divided into three classes as provided in the certificate of incorporation.
Each director, including a director elected to fill a vacancy, shall hold office
until the expiration of the term for which elected and until a successor has
been elected and qualified. No decrease in the number of directors shall have
the effect of shortening the term of any incumbent director.
Section 3.4 NOMINATION. Nominations for the election of directors may
be made by the Board or by any stockholder entitled to vote for the election of
directors. Such nominations, if not made by the Board, shall be made by notice
in writing, delivered or mailed by first class United States mail, postage
prepaid, to the secretary of the Company not less than 14 days nor more than 50
days prior to any meeting of the stockholders called for the election of
directors; provided, however, that if less than 21 days' notice of the meeting
is given to stockholders, such written notice shall be delivered or mailed, as
prescribed, to the secretary of the Company not later than the close of the
seventh day following the day on which notice of the meeting was mailed to
stockholders. Each such notice shall set forth (i) the name and address of the
nominating stockholder (ii) the name, age, business address and, if known,
residence address of each nominee proposed in such notice, (iii) the principal
occupation or employment of each such nominee, and (iv) the number of shares of
stock of the Company which are beneficially owned by each such nominee, (v) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors or is otherwise required by
the rules and regulations of the Securities and Exchange Commission promulgated
under the Securities Exchange Act of 1934, as amended, (vi) the written consent
of such person to be named in the proxy statement as a nominee and to serve as a
director if elected and (f) a description of all arrangements or understandings
between such stockholder and each nominee and any other person or persons
(naming such person or persons) pursuant to which the nomination or nominations
are to be made by such stockholder. Notice of nominations which are proposed by
the Board shall be given on behalf of the Board by the chairman of the meeting.
The chairman of the meeting may, if the facts warrant, determine and declare to
the meeting that a nomination wasnot made in accordance with the foregoing
procedure, and if the chairman should so determine, the chairman shall so
declare to the meeting and the defective nomination shall be disregarded.
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Section 3.5 VACANCIES. Vacancies and newly-created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, though less than a quorum, or by
a sole remaining director, and the directors so chosen shall hold office until
their successors are duly elected and qualified. If there are no directors in
office, then an election of directors may be held in the manner provided by law.
If, at the time of filling any vacancy or any newly-created directorship, the
directors then in office shall constitute less than a majority of the whole
Board (as constituted immediately prior to any such increase), the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly-created directorships, or to replace
the directors chosen by the directors then in office. No decrease in the size
of the Board shall serve to shorten the term of an incumbent director.
Section 3.6. REMOVAL. Unless otherwise restricted by law, the
certificate of incorporation or these Bylaws, any director may be removed at any
annual or special stockholders' meeting upon the affirmative vote of the holders
of a majority of the outstanding shares of voting stock of the Company at that
time entitled to vote thereon; provided, however, that such director may be
removed only for cause and shall receive a copy of the charges against him,
delivered to him personally or by mail at his last known address at least 10
days prior to the date of the stockholders' meeting.
Section 3.7 COMPENSATION. Unless otherwise restricted by the
certificate of incorporation or these Bylaws, the Board shall have the authority
to fix the compensation of directors. The directors may be reimbursed their
expenses, if any, of attendance at each meeting of the Board and may be paid
either a fixed sum for attendance at each meeting of the Board or a stated
salary as director. No such payment shall preclude any director from serving
the Company in any other capacity and receiving compensation therefor. Members
of committees of the Board may be allowed like compensation for attending
committee meetings.
ARTICLE IV
BOARD MEETINGS
Section 4.1 ANNUAL MEETINGS. The Board shall meet as soon as
practicable after the adjournment of each annual stockholders meeting at the
place of the stockholders meeting. No notice to the directors shall be
necessary to legally convene this meeting, provided a quorum is present.
Section 4.2 REGULAR MEETINGS. Regularly scheduled, periodic meetings of
the Board may be held without notice at such times and places as shall from time
to time be determined by resolution of the Board and communicated to all
directors.
Section 4.3 SPECIAL MEETINGS. Special meetings of the Board (i) may be
called by the chairman of the board or president and (ii) shall be called by the
president or secretary on the written request of two directors or the sole
director, as the case may be. Notice of each special meeting of the Board shall
be given, either personally or as hereinafter provided, to each director
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at least 24 hours before the meeting if such notice is delivered personally
or by means of telephone, telegram, telex or facsimile transmission and
delivery; two days before the meeting if such notice is delivered by a
recognized express delivery service; and three days before the meeting if
such notice is delivered through the United States mail. Any and all
business that may be transacted at a regular meeting of the Board may be
transacted at a special meeting. Except as may be otherwise expressly
provided by law, the certificate of incorporation or these Bylaws, neither
the business to be transacted at, nor the purpose of, any special meeting
need be specified in the notice or waiver of notice of such meeting.
Section 4.4 QUORUM; REQUIRED VOTE. A majority of the directors shall
constitute a quorum for the transaction of business at any meeting of the Board,
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the Board, except as may be otherwise
specifically provided by law, the certificate of incorporation or these Bylaws.
If a quorum shall not be present at any meeting, a majority of the directors
present may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum is present.
Section 4.5 CONSENT IN LIEU OF MEETING. Unless otherwise restricted by
the certificate of incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board or any committee thereof may
be taken without a meeting, if all members of the Board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the Board or committee.
ARTICLE V
COMMITTEES OF DIRECTORS
Section 5.1 ESTABLISHMENT; STANDING COMMITTEES. The Board may by
resolution establish, name or dissolve one or more committees, each committee to
consist of one or more of the directors. Each committee shall keep regular
minutes of its meetings and report the same to the Board when required. There
shall exist the following standing committees, which committees shall have and
may exercise the following powers and authority:
Section 5.1.1 AUDIT COMMITTEE. The Audit Committee shall from time
to time, but no less than two times per year, meet to review and monitor
the financial and cost accounting practices and procedures of the Company
and all of its subsidiaries and to report its findings and recommendations
to the Board for final action. The Audit Committee shall not be empowered
to approve any corporate action of whatever kind or nature, and the
recommendations of the Audit Committee shall not be binding on the Board,
except when, pursuant to the provisions of Section 5.2 hereof, such power
and authority have been specifically delegated to such committee by the
Board by resolution. In addition to the foregoing, the specific duties of
the Audit Committee shall be determined by the Board by resolution.
Section 5.1.2 COMPENSATION COMMITTEE. The Compensation Committee
shall from time to time meet to review the various compensation plans,
policies and practices of the Company and all of its subsidiaries and to
report its findings and recommendations
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to the Board for final action. The Compensation Committee shall not be
empowered to approve any corporate action of whatever kind or nature,
and the recommendations of the Compensation Committee shall not be
binding on the Board, except when, pursuant to the provisions of Section
5.2 hereof, such power and authority have been specifically delegated to
such committee by the Board by resolution. In addition to the
foregoing, the specific duties of the Compensation Committee shall be
determined by the Board by resolution.
Section 5.2 AVAILABLE POWERS. Any committee established pursuant to
Section 5.1 hereof, including the Audit Committee and the Compensation
Committee, but only to the extent provided in the resolution of the Board
establishing such committee or otherwise delegating specific power and authority
to such committee and as limited by law, the certificate of incorporation and
these Bylaws, shall have and may exercise all of the powers and authority of the
Board in the management of the business and affairs of the Company, and may
authorize the seal of the Company to be affixed to all papers that may require
it. Without limiting the foregoing, such committee may, but only to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board as provided in Section 151(a) of the General
Corporation Law of the State of Delaware, fix any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Company or the conversion into, or the exchange of such shares
for, shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Company.
Section 5.3 UNAVAILABLE POWERS. No committee of the Board shall have
the power or authority to (1) approve or adopt, or recommend to the
stockholders, any action or matter expressly required by the General Corporation
Law of the State of Delaware to be submitted to stockholders for approval or (2)
adopt, amend or repeal any provision in these Bylaws.
Section 5.4 ALTERNATE MEMBERS. The Board may designate one or more
directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of such committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not the
member or members constitute a quorum, may unanimously appoint another member of
the Board to act at the meeting in the place of any such absent or disqualified
member.
Section 5.5 PROCEDURES. Time, place and notice, if any, of meetings of
a committee shall be determined by such committee. At meetings of a committee,
a majority of the number of members designated by the Board shall constitute a
quorum for the transaction of business. The act of a majority of the members
present at any meeting at which a quorum is present shall be the act of the
committee, except as otherwise specifically provided by law, the certificate of
incorporation or these Bylaws. If a quorum is not present at a meeting of a
committee, the members present may adjourn the meeting from time to time,
without notice other than an announcement at the meeting, until a quorum is
present.
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ARTICLE VI
OFFICERS
Section 6.1 ELECTED OFFICERS. The Board shall elect a chairman of the
Board, a treasurer and a secretary (collectively, the "Required Officers")
having the respective duties enumerated below and may elect such other officers
having the titles and duties set forth below that are not reserved for the
Required Officers or such other titles and duties as the Board may by resolution
from time to time establish:
Section 6.1.1 CHAIRMAN OF THE BOARD. The chairman of the board shall
be the ranking chief executive officer of the Company, shall have general
supervision of the affairs of the Company and general control of all of its
business and shall see that all orders and resolutions of the Board are
carried into effect. The chairman of the board, or in his or her absence,
the president, shall preside when present at all meetings of the
shareholders and the Board. The chairman of the board may execute bonds,
mortgages and other contracts requiring a seal under the seal of the
Company, except where required or permitted by law to be otherwise signed
and executed and except where the signing and execution thereof shall be
expressly delegated by the Board to some other officer or agent of the
Company. The chairman of the board may delegate all or any of his or her
powers or duties to the president, if and to the extent deemed by the
chairman of the board to be desirable or appropriate.
Section 6.1.2 PRESIDENT. The president shall be the chief operating
officer of the Company and shall, subject to the supervision of the
chairman of the board and the Board, have general management and control of
the day-to-day business operations of the Company. The president shall put
into operation the business policies of the Company as determined by the
chairman of the board and the Board and as communicated to him or her by
such officer and bodies. The president shall make recommendations to the
chairman of the board on all matters that would normally be reserved for
the final executive responsibility of the chairman of the board. In the
absence of the chairman of the board or in the event of his or her
inability or refusal to act, the president shall perform the duties and
exercise the powers of the chairman of the board.
Section 6.1.3 VICE PRESIDENTS. In the absence of the president or in
the event of the president's inability or refusal to act, the vice
president (or in the event there be more than one vice president, the vice
presidents in the order designated by the Board, or in the absence of any
designation, then in the order of their election or appointment) shall
perform the duties of the president, and when so acting, shall have all the
powers of and be subject to all the restrictions upon the president. The
vice presidents shall perform such other duties and have such other powers
as the Board may from time to time prescribe.
Section 6.1.4 SECRETARY. The secretary shall attend all meetings of
the stockholders, the Board and (as required) committees of the Board and
shall record all the proceedings of such meetings in books to be kept for
that purpose. The secretary shall give, or cause to be given, notice of
all meetings of the stockholders and special meetings of the Board and
shall perform such other duties as may be prescribed by the Board or the
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president. The secretary shall have custody of the corporate seal of the
Company and the secretary, or an assistant secretary, shall have authority
to affix the same to any instrument requiring it, and when so affixed, it
may be attested by his or her signature or by the signature of such
assistant secretary. The Board may give general authority to any other
officer to affix the seal of the Company and to attest the affixing thereof
by his or her signature.
Section 6.1.5 ASSISTANT SECRETARIES. The assistant secretary, or if
there be more than one, the assistant secretaries in the order determined
by the Board (or if there be no such determination, then in the order of
their election or appointment) shall, in the absence of the secretary or in
the event of his or her inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties
and have such other powers as the Board may from time to time prescribe.
Section 6.1.6 TREASURER. Unless the Board by resolution otherwise
provides, the treasurer shall be the chief accounting and financial officer
of the Company. The treasurer shall have the custody of the corporate
funds and securities, shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Company and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Company in such depositories as may be designated by the Board. The
treasurer shall disburse the funds of the Company as may be ordered by the
Board, taking proper vouchers for such disbursements, and shall render to
the president and the Board, at its regular meetings, or when the Board so
requires, an account of all his or her transactions as treasurer and of the
financial condition of the Company.
Section 6.1.7 ASSISTANT TREASURERS. The assistant treasurer, or if
there shall be more than one, the assistant treasurers in the order
determined by the Board (or if there be no such determination, then in the
order of their election or appointment) shall, in the absence of the
treasurer or in the event of his or her inability or refusal to act,
perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the Board may from
time to time prescribe.
Section 6.1.8 DIVISIONAL OFFICERS. Each division of the Company, if
any, may have a president, secretary, treasurer or controller and one or
more vice presidents, assistant secretaries, assistant treasurers and other
assistant officers. Any number of such offices may be held by the same
person. Such divisional officers will be appointed by, report to and serve
at the pleasure of the Board and such other officers that the Board may
place in authority over them. The officers of each division shall have
such authority with respect to the business and affairs of that division as
may be granted from time to time by the Board, and in the regular course of
business of such division may sign contracts and other documents in the
name of the division where so authorized; provided that in no case and
under no circumstances shall an officer of one division have authority to
bind any other division of the Company except as necessary in the pursuit
of the normal and usual business of the division of which he or she is an
officer.
Section 6.2 ELECTION. All elected officers shall serve until their
successors are duly elected and qualified or until their earlier death,
resignation or removal from office.
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Section 6.3 APPOINTED OFFICERS. The Board may also appoint or delegate
the power to appoint such other officers, assistant officers and agents, and may
also remove such officers and agents or delegate the power to remove same, as it
shall from time to time deem necessary, and the titles and duties of such
appointed officers may be as described in Section 6.1 hereof for elected
officers; provided that the officers and any officer possessing authority over
or responsibility for any functions of the Board shall be elected officers.
Section 6.4 MULTIPLE OFFICEHOLDERS; STOCKHOLDER AND DIRECTOR OFFICERS.
Any number of offices may be held by the same person, unless the certificate of
incorporation or these Bylaws otherwise provide. Officers need not be
stockholders or residents of the State of Delaware. Officers, such as the
chairman of the board, possessing authority over or responsibility for any
function of the Board must be directors.
Section 6.5 COMPENSATION; VACANCIES. The compensation of elected
officers shall be set by the Board. The Board shall also fill any vacancy in an
elected office. The compensation of appointed officers and the filling of
vacancies in appointed offices may be delegated by the Board to the same extent
as permitted by these Bylaws for the initial filling of such offices.
Section 6.6 ADDITIONAL POWERS AND DUTIES. In addition to the foregoing
especially enumerated powers and duties, the several elected and appointed
officers of the Company shall perform such other duties and exercise such
further powers as may be provided by law, the certificate of incorporation or
these Bylaws or as the Board may from time to time determine or as may be
assigned to them by any competent committee or superior officer.
Section 6.7 REMOVAL. Any officer may be removed, either with or without
cause, by a majority of the directors at the time in office, at any regular or
special meeting of the Board.
ARTICLE VII
SHARE CERTIFICATES
Section 7.1 ENTITLEMENT TO CERTIFICATES. Every holder of the capital
stock of the Company, unless and to the extent the Board by resolution provides
that any or all classes or series of stock shall be uncertificated, shall be
entitled to have a certificate, in such form as is approved by the Board and
conforms with applicable law, certifying the number of shares owned by such
holder.
Section 7.2 MULTIPLE CLASSES OF STOCK. If the Company shall be
authorized to issue more than one class of capital stock or more than one series
of any class, a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualification, limitations or restrictions of such preferences
and/or rights shall, unless the Board shall by resolution provide that such
class or series of stock shall be uncertificated, be set forth in full or
summarized on the face or back of the certificate that the Company shall issue
to represent such class or series of stock; provided that, to the extent allowed
by law, in lieu of such statement, the face or back of such certificate may
state that the Company will furnish a copy of such statement without charge to
each requesting stockholder.
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Section 7.3 SIGNATURES. Each certificate representing capital stock of
the Company shall be signed by or in the name of the Company by (1) the chairman
of the board, the president or a vice president; and (2) the treasurer, an
assistant treasurer, the secretary or an assistant secretary of the Company.
The signatures of the officers of the Company may be facsimiles. In case any
officer who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to hold such office before such certificate is
issued, it may be issued by the Company with the same effect as if he or she
held such office on the date of issue.
Section 7.4 ISSUANCE AND PAYMENT. Subject to the provisions of law, the
certificate of incorporation or these Bylaws, shares may be issued for such
consideration and to such persons as the Board may determine from time to time.
Shares may not be issued until the full amount of the consideration has been
paid, unless upon the face or back of each certificate issued to represent any
partly paid shares of capital stock there shall have been set forth the total
amount of the consideration to be paid therefor and the amount paid thereon up
to and including the time said certificate is issued.
Section 7.5 LOST CERTIFICATES. The Board may direct a new certificate
or certificates to be issued in place of any certificate or certificates
theretofore issued by the Company alleged to have been lost, stolen or destroyed
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or such owner's legal
representative, to advertise the same in such manner as it shall require and/or
to give the Company a bond in such sum as it may direct as indemnity against any
claim that may be made against the Company with respect to the certificate
alleged to have been lost, stolen or destroyed.
Section 7.6 TRANSFER OF STOCK. Upon surrender to the Company or its
transfer agent, if any, of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignation or authority to transfer and of
the payment of all taxes applicable to the transfer of said shares, the Company
shall be obligated to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books; provided,
however, that the Company shall not be so obligated unless such transfer was
made in compliance with applicable state and federal securities laws.
Section 7.7 REGISTERED STOCKHOLDERS. The Company shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, vote and be held liable for calls and
assessments and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any person other than such
registered owner, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
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ARTICLE VIII
INDEMNIFICATION
Section 8.1 GENERAL. The Company shall indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company), by
reason of the fact that the person is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if the
person acted in good faith and in a manner the person reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which the person reasonably believed to be
in or not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, have reasonable cause to believe that his or her
conduct was unlawful.
Section 8.2 ACTIONS BY OR IN THE RIGHT OF THE COMPANY. The Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action or suit by or in the right
of the Company to procure a judgment in its favor by reason of the fact that the
person is or was a director, officer, employee or agent of the Company, or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture or trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by the person in connection with the defense or settlement of such
action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the Company
and except that no indemnification shall be made in respect of any claim, issue
or matter as to which such person shall have been adjudged to be liable to the
Company unless and only to the extent that the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the Court of Chancery or such other court shall deem proper.
Section 8.3 INDEMNIFICATION AGAINST EXPENSES. To the extent that a
present or former director or officer of the Company has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
Sections 8.1 and 8.2 hereof, or in defense of any claim, issue or matter
therein, such person shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Section 8.4 BOARD DETERMINATIONS. Any indemnification under Sections
8.1 and 8.2 hereof (unless ordered by a court) shall be made by the Company only
as authorized in the specific case upon a determination that indemnification of
the present or former director, officer, employee or agent is proper in the
circumstances because the person has met the applicable standard of conduct set
forth in Sections 8.1 and 8.2 hereof. Such determination shall be made,
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with respect to a person who is a director or officer at the time of such
determination, (1) by a majority vote of the directors who were not parties
to such action, suit or proceeding, even though less than a quorum, or (2) by
a committee of such directors designated by majority vote of such directors,
even though less than a quorum, or (3) if there are no such disinterested
directors or if such directors so direct, by independent legal counsel in a
written opinion, or (4) by the stockholders.
Section 8.5 ADVANCEMENT OF EXPENSES. Expenses including attorneys' fees
incurred by an officer or director in defending a civil or criminal action, suit
or proceeding may be paid by the Company in advance of the final disposition of
such action, suit or proceeding upon receipt of an undertaking by or on behalf
of such director or officer to repay such amount if it shall ultimately be
determined that such person is not entitled to be indemnified by the Company as
authorized by law or in this section. Such expenses incurred by former
directors and officers or other employees and agents may be so paid upon such
terms and conditions, if any, as the Company deems appropriate.
Section 8.6 NONEXCLUSIVE. The indemnification and advancement of
expenses provided by, or granted pursuant to, this section shall not be deemed
exclusive of any other rights to which any director, officer, employee or agent
of the Company seeking indemnification or advancement of expenses may be
entitled under any other bylaw, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in such person's official capacity and
as to action in another capacity while holding such office, and shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent of the Company and shall
inure to the benefit of the heirs, executors and administrators of such a
person.
Section 8.7 INSURANCE. The Company may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against such person
and incurred by such person in any such capacity or arising out of such person's
status as such, whether or not the Company would have the power to indemnify
such person against such liability under the provisions of applicable statutes,
the certificate of incorporation or this section.
Section 8.8 CERTAIN DEFINITIONS. For purposes of this Section 8.8, (a)
references to "the Company" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger that, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under the provisions
of this section with respect to the resulting or surviving corporation as such
person would have with respect to such constituent corporation if its separate
existence had continued; (b) references to "other enterprises" shall include
employee benefit plans; (c) references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and (d)
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references to "serving at the request of the Company" shall include any service
as a director, officer, employee or agent of the Company that imposes duties on,
or involves services by, such director, officer, employee or agent with respect
to any employee benefit plan, its participants, or beneficiaries; and a person
who acted in good faith and in a manner such person reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Company" as referred to in this section.
Section 8.9 CHANGE IN GOVERNING LAW. In the event of any amendment or
addition to Section 145 of the General Corporation Law of the State of Delaware
or the addition of any other section to such law that limits indemnification
rights thereunder, the Company shall, to the extent permitted by the General
Corporation Law of the State of Delaware, indemnify to the fullest extent
authorized or permitted hereunder, any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(including an action by or in the right of the Company), by reason of the fact
that he or she is or was a director, officer, employee or agent of the Company,
or is or was serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him or her in
connection with such action, suit or proceeding.
ARTICLE IX
INTERESTED DIRECTORS, OFFICERS AND STOCKHOLDERS
Section 9.1 VALIDITY. Any contract or other transaction between the
Company and any of its directors, officers or stockholders (or any corporation
or firm in which any of them are directly or indirectly interested) shall be
valid for all purposes notwithstanding the presence of such director, officer or
stockholder at the meeting authorizing such contract or transaction, or his or
her participation or vote in such meeting or authorization.
Section 9.2 DISCLOSURE; APPROVAL. The foregoing shall, however, apply
only if the material facts of the relationship or the interests of each such
director, officer or stockholder are known or disclosed:
(A) to the Board and it nevertheless in good faith authorizes or
ratifies the contract or transaction by a majority of the directors
present, each such interested director to be counted in determining whether
a quorum is present but not in calculating the majority necessary to carry
the vote; or
(B) to the stockholders and they nevertheless in good faith authorize
or ratify the contract or transaction by a majority of the shares present,
each such interested person to be counted for quorum and voting purposes.
Section 9.3 NONEXCLUSIVE. This provision shall not be construed to
invalidate any contract or transaction that would be valid in the absence of
this provision.
15
<PAGE>
ARTICLE X
MISCELLANEOUS
Section 10.1 PLACE OF MEETINGS. All stockholders, directors and
committee meetings shall be held at such place or places, within or without the
State of Delaware, as shall be designated from time to time by the Board or such
committee and stated in the notices thereof. If no such place is so designated,
said meetings shall be held at the principal business office of the Company.
Section 10.2 FIXING RECORD DATES.
(a) In order that the Company may determine the
stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board may fix, in
advance, a record date, which shall not precede the date upon which
the resolution fixing the record date is adopted by the Board, and
which record date shall not be more than sixty nor less than ten
days prior to any such action. If no record date is fixed by the
Board, the record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day notice is given
or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board may fix a new record
date for the adjourned meeting.
(b) In order that the Company may determine the
stockholders entitled to consent to corporate action in writing
without a meeting, the Board may fix a record date, which record
date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board, and which date shall not
be more than ten days after the date upon which the resolution
fixing the record date is adopted by the Board. If no record date
has been fixed by the Board, the record date for determining
stockholders entitled to consent to corporate action in writing
without a meeting, when no prior action by the Board is otherwise
required, shall be the first date on which a signed written consent
setting forth the action taken or proposed to be taken is delivered
to the Company by delivery to its registered office in the State of
Delaware, its principal place of business, or an officer or agent
of the Company having custody of the book in which proceedings of
meetings of stockholders are recorded. Delivery made to the
Company's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has
been fixed by the Board and prior action by the Board is required,
the record date for determining stockholders entitled to consent to
corporate action in writing without a meeting shall be at the close
of business on the day on which the Board adopts the resolution
taking such prior action.
(c) In order that the Company may determine the
stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders
entitled to exercise any rights in respect of any change,
16
<PAGE>
conversion or exchange of stock, or for the purpose of any other
lawful action, the Board may fix a record date, which record date
shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more
than sixty days prior to such action. If no record date is fixed,
the record date for determining stockholders for any such purpose
shall be at the close of business on the day on which the Board
adopts the resolution relating thereto.
Section 10.3 MEANS OF GIVING NOTICE. Whenever under applicable law, the
certificate of incorporation or these Bylaws, notice is required to be given to
any director or stockholder, such notice may be given in writing and delivered
personally, through the United States mail, by a recognized express delivery
service (such as Federal Express) or by means of telegram, telex or facsimile
transmission, addressed to such director or stockholder at his or her address or
telex or facsimile transmission number, as the case may be, appearing on the
records of the Company, with postage and fees thereon prepaid. Such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail or with an express delivery service or when transmitted, as
the case may be. Notice of any meeting of the Board may be given to a director
by telephone and shall be deemed to be given when actually received by the
director.
Section 10.4 WAIVER OF NOTICE. Whenever any notice is required to be
given under applicable law, the certificate of incorporation or these Bylaws, a
written waiver of such notice, signed before or after the date of such meeting
by the person or persons entitled to said notice, shall be deemed equivalent to
such required notice. All such waivers shall be filed with the corporate
records. Attendance at a meeting shall constitute a waiver of notice of such
meeting, except where a person attends for the express purpose of objecting to
the transaction of any business on the ground that the meeting is not lawfully
called or convened.
Section 10.5 ATTENDANCE VIA COMMUNICATIONS EQUIPMENT. Unless otherwise
restricted by applicable law, the certificate of incorporation or these Bylaws,
members of the Board, any committee thereof or the stockholders may hold a
meeting by means of conference telephone or other communications equipment by
means of which all persons participating in the meeting can effectively
communicate with each other. Such participation in a meeting shall constitute
presence in person at the meeting, except where a person participates in the
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting is not lawfully called or convened.
Section 10.6 DIVIDENDS. Dividends on the capital stock of the Company,
paid in cash, property or securities of the Company and as may be limited by
applicable law and applicable provisions of the certificate of incorporation (if
any), may be declared by the Board at any regular or special meeting.
Section 10.7 RESERVES. Before payment of any dividend, there may be set
aside out of any funds of the Company available for dividends such sum or sums
as the Board from time to time, in its absolute discretion, determines proper as
a reserve or reserves to meet contingencies, for equalizing dividends, for
repairing or maintaining any property of the Company or for such other purpose
as the Board shall determine to be in the best interest of the Company; and the
Board may modify or abolish any such reserve in the manner in which it was
created.
17
<PAGE>
Section 10.8 REPORTS TO STOCKHOLDERS. The Board shall present at each
annual meeting of stockholders, and at any special meeting of stockholders when
called for by vote of the stockholders, a statement of the business and
condition of the Company.
Section 10.9 CONTRACTS AND NEGOTIABLE INSTRUMENTS. Except as otherwise
provided by applicable law or these Bylaws, any contract or other instrument
relative to the business of the Company may be executed and delivered in the
name of the Company and on its behalf by the chairman of the board or the
president; and the Board may authorize any other officer or agent of the Company
to enter into any contract or execute and deliver any contract in the name and
on behalf of the Company, and such authority may be general or confined to
specific instances as the Board may by resolution determine. All bills, notes,
checks or other instruments for the payment of money shall be signed or
countersigned by such officer, officers, agent or agents and in such manner as
are permitted by these Bylaws and/or as, from time to time, may be prescribed by
resolution (whether general or special) of the Board. Unless authorized so to
do by these Bylaws or by the Board, no officer, agent or employee shall have any
power or authority to bind the Company by any contract or engagement, or to
pledge its credit, or to render it liable pecuniarily for any purpose or to any
amount.
Section 10.10 FISCAL YEAR. The fiscal year of the Company shall be fixed
by resolution of the Board.
Section 10.11 SEAL. The seal of the Company shall be in such form as
shall from time to time be adopted by the Board. The seal may be used by
causing it or a facsimile thereof to be impressed, affixed or otherwise
reproduced.
Section 10.12 BOOKS AND RECORDS. The Company shall keep correct and
complete books and records of account and shall keep minutes of the proceedings
of its stockholders, Board and committees and shall keep at its registered
office or principal place of business, or at the office of its transfer agent or
registrar, a record of its stockholders, giving the names and addresses of all
stockholders and the number and class of the shares held by each.
Section 10.13 RESIGNATION. Any director, committee member, officer or
agent may resign by giving written notice to the chairman of the board, the
president or the secretary. The resignation shall take effect at the time
specified therein, or immediately if no time is specified. Unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 10.14 SURETY BONDS. Such officers and agents of the Company (if
any) as the president or the Board may direct, from time to time, shall be
bonded for the faithful performance of their duties and for the restoration to
the Company, in case of their death, resignation, retirement, disqualification
or removal from office, of all books, papers, vouchers, money and other property
of whatever kind in their possession or under their control belonging to the
Company, in such amounts and by such surety companies as the president or the
Board may determine. The premiums on such bonds shall be paid by the Company
and the bonds so furnished shall be in the custody of the Secretary.
18
<PAGE>
Section 10.15 PROXIES IN RESPECT OF SECURITIES OF OTHER CORPORATIONS. The
chairman of the board, the president, any vice president or the secretary may
from time to time appoint an attorney or attorneys or an agent or agents for the
Company to exercise, in the name and on behalf of the Company, the powers and
rights that the Company may have as the holder of stock or other securities in
any other corporation to vote or consent in respect of such stock or other
securities, and the chairman of the board, the president, any vice president or
the secretary may instruct the person or persons so appointed as to the manner
of exercising such powers and rights; and the chairman of the board, the
president, any vice president or the secretary may execute or cause to be
executed, in the name and on behalf of the Company and under its corporate seal
or otherwise, all such written proxies or other instruments as he or she may
deem necessary or proper in order that the Company may exercise such powers and
rights.
Section 10.16 AMENDMENTS. These Bylaws may be altered, amended, repealed
or replaced by the stockholders, or by the Board when such power is conferred
upon the Board by the certificate of incorporation, at any annual stockholders
meeting or annual or regular meeting of the Board, or at any special meeting of
the stockholders or of the Board if notice of such alteration, amendment, repeal
or replacement is contained in the notice of such special meeting. If the power
to adopt, amend, repeal or replace these Bylaws is conferred upon the Board by
the certificate of incorporation, the power of the stockholders to so adopt,
amend, repeal or replace these Bylaws shall not be divested or limited thereby.
19
<PAGE>
<TABLE>
<S> <C>
BELINDA 2.25.99 H-65380 ETHER 32 RM
- ------------------- -----------------------
COMMON STOCK
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE PAR VALUE $.01
- ------------------- -----------------------
NUMBER SHARES
[PHOTO]
C
- ------------------- -----------------------
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 018581 10 8
NEW YORK, NY OR BOSTON, MA SEE REVERSE FOR CERTAIN DEFINITIONS
ALLIANCE DATA SYSTEMS CORPORATION
--------------------------------------------------------------------------------
THIS CERTIFIES THAT
IS THE OWNER OF
--------------------------------------------------------------------------------
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
[LOGO] ALLIANCE DATA SYSTEMS CORPORATION transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender of
A L L I A N C E this Certificate properly endorsed. This Certificate and the shares represented
DATA SYSTEMS hereby are issued and shall be subject to all the provisions of the Certificate
of Incorporation of the Corporation, as now or hereafter amended, to all of which
the holder hereof by acceptance hereof assents. This Certificate is not valid
unless countersigned by the Transfer Agent and registered by the Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
DATED COUNTERSIGNED AND REGISTERED:
EQUISERVE TRUST COMPANY, N.A.
TRANSFER AGENT
AND REGISTRAR
BY:
- ----------------------- CHIEF EXECUTIVE OFFICER SECRETARY -----------------------
AND PRESIDENT AUTHORIZED SIGNATURE AMERICAN BANK NOTE
COMPANY
- ----------------------- -----------------------
</TABLE>
<PAGE>
ALLIANCE DATA SYSTEMS CORPORATION
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH STOCKHOLDER WHO SO
REQUESTS THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF OF
THE CORPORATION, AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH
PREFERENCES AND/OR RIGHTS. SUCH REQUEST SHOULD BE MADE TO THE CORPORATION OR
TO THE TRANSFER AGENT.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-_____________ Custodian _______________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act________________________
in common (State)
Additional abbreviations may also be used though not in the above list.
For value received, _______________________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
| |
|_____________________________________|__________________________________________________________________
_________________________________________________________________________________________________________
_________________________________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE
_________________________________________________________________________________________________________
__________________________________________________________________________________________________ Shares
of the capital stock represented by the within Certificate, and do hereby irrevocably constitute
and appoint
_________________________________________________________________________________________________________
Attorney to transfer the said stock on the books of the within-named Corporation with full power of
substitution in the premises.
Dated_______________________
X___________________________________________
(SIGNATURE)
NOTICE:
THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRE-
SPOND WITH THE NAME(S)
AS WRITTEN UPON THE --- >
FACE OF THE CERTIFICATE
IN EVERY PARTICULAR
WITHOUT ALTERATION OR
ENLARGEMENT OR ANY
CHANGE WHATEVER.
X___________________________________________
(SIGNATURE)
____________________________________________
| |
| THE SIGNATURE(S) SHOULD BE GUARANTEED BY |
| AN ELIGIBLE GUARANTOR INSTITUTION (BANKS,|
| STOCKBROKERS, SAVINGS AND LOAN ASSOCIA- |
| TIONS AND CREDIT UNIONS WITH MEMBERSHIP |
| IN AN APPROVED SIGNATURE GUARANTEE MEDAL-|
| LION PROGRAM), PURSUANT TO S.E.C. RULE |
| 17Ad-15. |
|__________________________________________|
| |
| SIGNATURE(S) GUARANTEED BY: |
| |
| |
| |
| |
| |
| |
| |
| |
| |
| |
|__________________________________________|
____________________________________________ ______________________________________________________
| AMERICAN BANK NOTE COMPANY | | PRODUCTION COORDINATOR: BELINDA BECK: 215-764-8619 |
| 55TH AND SANSOM STREET | | PROOF OF FEBRUARY 23, 2000 |
| PHILADELPHIA, PA 19139 | | ALLIANCE DATA SYSTEMS CORPORATION |
| (215) 764-8600 | | H 65380 bk |
|------------------------------------------| |----------------------------------------------------|
| SALES: M. GARRETT: 214-823-2700 | | OPERATOR: JW |
|------------------------------------------| |----------------------------------------------------|
|/ HOME 15 / LIVE JOBS / A / ALLIANCE 65380| | NEW |
|__________________________________________| |____________________________________________________|
</TABLE>
<PAGE>
[LETTERHEAD]
March 3, 2000
Alliance Data Systems Corporation
17655 Waterview Parkway
Dallas, Texas 75252
Ladies and Gentlemen:
We have acted as counsel to Alliance Data Systems Corporation, a
Delaware corporation (the "COMPANY"), in connection with the proposed public
offering of up to 20,000,000 shares of the Company's Common Stock, par value
$0.01 per share (the "COMMON STOCK"), as described in Registration Statement
No. 333-94623 on Form S-1 (the "REGISTRATION STATEMENT") filed with the
Securities and Exchange Commission.
We have, as counsel, examined originals or certified copies of such
corporate records of the Company, certificates and other documents and
reviewed such questions of law as we have deemed necessary, relevant or
appropriate to enable us to render the opinions listed below. In rendering
such opinions, we have assumed the genuineness of all signatures and the
authenticity of all documents examined by us. As to various questions of
fact material to such opinions, we have relied upon representations of the
Company.
Based upon such examination and representations, we advise you that,
in our opinion:
A. The shares of Common Stock that are to be sold and delivered by
the Company as contemplated by the Underwriting Agreement (the "UNDERWRITING
AGREEMENT"), the form of which is filed as Exhibit 1 to the Registration
Statement, have been duly authorized by the Company.
B. The shares of Common Stock that are to be sold and delivered by
the Company as contemplated by the Underwriting Agreement will, when issued
and delivered in accordance with the terms of the Underwriting Agreement, be
validly issued, fully paid and non-assessable.
<PAGE>
Alliance Data Systems Corporation
March 3, 2000
Page 2
We consent to the filing of this opinion as Exhibit 5 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus contained therein.
Sincerely,
/s/ Akin, Gump, Strauss, Hauer & Feld, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
<PAGE>
BUILD-TO-SUIT NET LEASE
BETWEEN
OPUS SOUTH CORPORATION
AS LANDLORD
AND
ADS ALLIANCE DATA SYSTEMS, INC.,
AS TENANT
JANUARY ___, 1998
<PAGE>
BUILD-TO-SUIT NET LEASE
THIS BUILD-TO-SUIT NET LEASE ("LEASE") is entered into as of January __,
1998 by and between the Landlord and Tenant identified in SECTION 1.1.
1. DEFINITIONS AND EXHIBITS
1.1 DEFINITIONS. In this Lease, the following defined terms have the
meanings set forth for them below or in the section of this Lease indicated
below:
"ADA" means the Americans with Disabilities Act, as amended from time to
time.
"ADDITIONAL RENT" means all amounts required to be paid by Tenant
under this Lease in addition to Basic Rent including, without limitation,
Taxes and insurance premiums.
"AFFILIATES" means, with respect to any party, any entities or
individuals that control, are controlled by or are under common control
with such party, together with its and their respective partners,
venturers, directors, officers, shareholders, trustees, trustors,
beneficiaries, agents, employees and spouses.
"ALLOWANCE" has the meaning set forth in SECTION 3.10.
"APPROVED EXPANSION BASE BUILDING PLANS" has the meaning set forth
in SECTION 18(b).
"APPROVED EXPANSION COSTS" has the meaning set forth in SECTION
18(d).
"APPROVED EXPANSION LEASEHOLD IMPROVEMENTS PLANS" has the meaning
set forth in SECTION 18(c).
"APPROVED EXPANSION RENTABLE SQUARE FEET" has the meaning set
forth in SECTION 18(f).
"APPROVED ORIGINAL BASE BUILDING PLANS" has the meaning set forth
in SECTION 3.2.
"APPROVED ORIGINAL LEASEHOLD IMPROVEMENTS PLANS" has the meaning
set forth in SECTION 3.3.
"APPROVED ORIGINAL RENTABLE SQUARE FEET" has the meaning set forth
in SECTION 3.6.
"APPROVED TENANT'S COSTS" has the meaning set forth in SECTION
3.4.
"BASIC RENT" means the Original Basic Rent and, if applicable, the
Expansion Basic Rent.
"BUILDING" means the Original Building and the Expansion Building.
1
<PAGE>
"CORE BUILDING SYSTEMS" means the items delineated on EXHIBIT K.
"DEADLINE EXTENSION" has the meaning set forth in SECTION 3.2.
"ENVIRONMENTAL LAWS" means the Resource Conservation and Recovery
Act, 42 U.S.C. Section 6901 ET SEQ., the Comprehensive Environmental
Response, Compensation and Liability Act, U.S.C. Section 9601 ET SEQ.
(including the so-called "Superfund" amendments thereto), any other
applicable Laws governing or pertaining to any hazardous substances,
hazardous wastes, chemicals or other materials, including, without
limitation, asbestos, polychlorinated biphenyls, radon, petroleum and any
derivative thereof or any common law theory based on nuisance or strict
liability.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 15.2.
"EXPANSION BASE BUILDING" has the meaning set forth in SECTION
18(a).
"EXPANSION BASE BUILDING PLANS" has the meaning set forth in
SECTION 18(b).
"EXPANSION BASIC RENT" has the meaning set forth in SECTION
18(j)(II)(B).
"EXPANSION BUILDING" has the meaning set forth in SECTION 18(a).
"EXPANSION CHANGE ORDER" has the meaning set forth in SECTION
18(e).
"EXPANSION COMMENCEMENT DATE" has the meaning set forth in SECTION
18(j)(I).
"EXPANSION COSTS" means the actual amount of those costs described
on EXHIBIT J which Landlord incurs in connection with the construction of
the Expansion Building. Expansion Costs specifically do not include any
acquisition or carrying costs for any portion of the Land, it being
understood that those costs are included in the Original Basic Rent for
the Original Premises. Landlord and Tenant further agree that Expansion
Costs will include (a) the cost of general conditions and insurance, not
to exceed three percent (3%) of the cost of the construction work,
excluding soft costs, (b) overhead, not to exceed three percent (3%) of
the cost of the construction work, excluding soft costs and the general
conditions and insurance and (c) a general contractor's fee payable to
Landlord in an amount equal to five percent (5%) of the construction
work, excluding soft costs and overhead.
"EXPANSION LEASEHOLD IMPROVEMENTS" has the meaning set forth in
SECTION 18(a).
"EXPANSION LEASEHOLD IMPROVEMENTS PLANS" has the meaning set forth
in SECTION 18(c).
"EXPANSION PUNCH LIST" has the meaning set forth in SECTION 18(h).
"FAIR MARKET RENT" has the meaning set forth in SECTION 2.5.
"FINAL COMPLETION" means that all Landlord's Original Work or
Landlord's Expansion Work, as the case may be, has been fully and finally
completed.
"FINANCED AMOUNT" has the meaning set forth in SECTION 3.10.
2
<PAGE>
"FIRST RENEWAL TERM" has the meaning set forth in SECTION 2.5.
"FIRST STAGE COMPLETION" means that Landlord's Original Work on
the first floor of the Original Building has been Substantially
Completed and the first floor of the Original Building is ready for and
can be occupied by Tenant.
"FORCE MAJEURE" means any delays due to strikes, riots, acts of
God, war, or any other causes of any kind whatsoever which are beyond the
control of Landlord or Tenant at any time during the term of this Lease,
it being agreed that the inability to perform financial obligations
(including, without limitation, paying the Basic Rent and other charges
due under this Lease), shortages of labor or materials, and governmental
laws, rules or restrictions shall not constitute events beyond the
reasonable control of Landlord or Tenant.
"GUARANTOR" means Alliance Data Systems Corporation, a Delaware
corporation, but the term "GUARANTOR" means any then-existing guarantor
of Tenant's obligations under this Lease pursuant to a guaranty agreement
substantially similar to the form attached to this Lease as EXHIBIT G or
another form reasonably acceptable to Landlord.
"HAZARDOUS SUBSTANCE" means any substance, chemical or material
declared to be, or regulated as, hazardous or toxic under any
Environmental Law or the presence of which may give rise to liability
under any Environmental Law.
"IMPROVEMENTS" means the Building, the Leasehold Improvements, and
any other structures, pavement, landscaping, lighting fixtures or other
improvements now or later constructed or installed upon the Land.
"INTEREST RATE" means the prime interest rate (as published from
time to time by THE WALL STREET JOURNAL, and with any changes in such
rate to be effective on the date such change is published) plus 5% per
annum, but if such rate exceeds the maximum interest rate permitted by
law, such rate will be reduced to the highest rate allowed by law under
the circumstances.
"LAND" means the real property located on Waterview Parkway in the
City of Dallas, Collin County, Texas (including all of its appurtenant
rights and easements) and legally described on EXHIBIT A.
"LANDLORD" means Opus South Corporation, a Florida corporation.
"LANDLORD'S EXPANSION WORK" has the meaning set forth in SECTION
18(a).
"LANDLORD'S NOTICE ADDRESS" means:
12225 Greenville Avenue
Suite 900
Dallas, Texas 75243-9363
Telecopy: (972) 669-2216
with a copy to:
700 Opus Center
9900 Bren Road East
3
<PAGE>
Minnetonka, Minnesota 55343
Attention: Legal Department
Telecopy: (612) 936-9808
"LANDLORD'S ORIGINAL WORK" means the construction and installation
of the Original Base Building and the Original Leasehold Improvements.
"LANDLORD'S RENT ADDRESS" means:
5401 Corporate Woods Drive
Suite 100
Pensacola, Florida 32504
"LANDLORD'S REPRESENTATIVE" means Lamar Lawson.
"LAWS" means any and all present or future federal, state or local
laws, statutes, ordinances, rules, regulations or orders of any and all
governmental or quasi-governmental authorities having jurisdiction.
"LEASEHOLD IMPROVEMENTS" means the Original Leasehold Improvements
and the Expansion Leasehold Improvements.
"ORIGINAL BASE BUILDING" means those portions of the Original
Building and the associated site Improvements on the Land (such as
driveways, parking areas, landscaping and exterior lighting) that are
specified on EXHIBIT B and are identified with an asterisk (*) on EXHIBIT
C under the column "Base Building Core & Shell".
"ORIGINAL BASE BUILDING PLANS" has the meaning set forth in
SECTION 3.2.
"ORIGINAL BASIC RENT" means the rent payable according to SECTION
4.1.
"ORIGINAL BUILDING" means the building containing approximately
114,419 rentable square feet to be constructed by Landlord for Tenant
upon the Land according to SECTION 3 and includes both the Original Base
Building and the Original Leasehold Improvements.
"ORIGINAL CHANGE ORDER" has the meaning set forth in SECTION 3.5.
"ORIGINAL COMMENCEMENT DATE" means the first day of the Term,
which will be the Third Stage Completion Date, unless the Original
Commencement Date is extended according to SECTION 3.6.
"ORIGINAL LEASEHOLD IMPROVEMENTS" means all leasehold improvements
and installations, in addition to the Original Base Building, that are to
be constructed or installed by Landlord for Tenant according to
SECTION 3, and which are identified with an asterisk (*) on EXHIBIT C
under the column "Tenant Improvement".
"ORIGINAL LEASEHOLD IMPROVEMENTS PLANS" means construction plans
and specifications for the Original Leasehold Improvements.
"ORIGINAL PREMISES" means the Land and the Original Building.
4
<PAGE>
"ORIGINAL PUNCH LIST" has the meaning set forth in SECTION 3.8.
"ORIGINAL TERM" means the period between the Original Commencement
Date and the Expiration Date.
"PERMITTED EXPANSION FORCE MAJEURE DELAYS" has the meaning set
forth in SECTION 18(g).
" PERMITTED ORIGINAL FORCE MAJEURE DELAYS" has the meaning set
forth in SECTION 3.7.
"PLAN APPROVAL DELAY" has the meaning set forth in SECTION 3.2 AND
SECTION 3.3.
"PREMISES" means the Land and all then-existing Improvements.
"PROJECTED EXPANSION COMPLETION DATE" has the meaning set forth in
SECTION 18(f).
"RELEASE CONDITIONS" means all of the following conditions have
been met: (a) the assignee of this Lease or sublessee of all of the
Premises has a net worth (excluding goodwill) of at least $75 million,
(b) if such assignee or sublessee is a subsidiary of any entity, Tenant
has obtained and delivered to Landlord a guaranty by such parent entity
of the assignee or sublessee's obligations under this Lease, and (c) in
the event Tenant subleases the entire Premises (it being understood and
agreed that this condition does not apply in the case of an assignment),
Tenant has obtained and delivered to Landlord a written agreement from
such sublessee assuming the obligations of Tenant under this Lease from
and after the effective date of such sublease.
"RENEWAL NOTICE" has the meaning set forth in SECTION 2.5.
"RENEWAL NOTICE DATE" has the meaning set forth in SECTION 2.5.
"RENEWAL TERM" has the meaning set forth in SECTION 2.5.
"RENT" means Basic Rent, Expansion Basic Rent (if applicable), and
all Additional Rent.
"RENTABLE SQUARE FEET" means the standard for "Rentable Area" as
promulgated by the Building Owners and Managers Association International
and approved by the American National Standards Institute, Inc. on June
7, 1996 (reference number ANSI/BOMA Z65.1-1996).
"REPORT" has the meaning set forth in SECTION 6.3(c).
"SECOND RENEWAL TERM" has the meaning set forth in SECTION 2.5.
"SECOND STAGE COMPLETION" means that the Landlord's Original Work
on the first floor and the second floor of the Original Building has
been Substantially Completed and the first floor and second floor of the
Original Building are ready for occupancy and can be occupied by Tenant.
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"SUBSTANTIALLY COMPLETED" or "SUBSTANTIAL COMPLETION" or
"SUBSTANTIALLY COMPLETE" means that the applicable portion of the
Premises is broom clean, free of construction tools and materials, and
Landlord's Original Work has been completed according to the Approved
Original Base Building Plans and the Approved Original Leasehold
Improvements Plans or Landlord's Expansion Work has been completed
according to the Approved Expansion Base Building Plans and the Approved
Expansion Leasehold Improvements Plans, as the case may be, with only
minor punch list items that will not interfere to more than a minor
extent with Tenant's use and enjoyment of the Premises remaining to be
completed or corrected pursuant to the terms of this Lease; that an
unconditional certificate of occupancy for the applicable portion of the
Premises has been issued (unless the issuance thereof is conditioned upon
any work or installations the responsibility of which is not included
within Landlord's Original Work or Landlord's Expansion Work, as the
case may be) and not suspended or revoked or amended in a manner that
would prevent Tenant from occupying the applicable portion of the
Premises for the purposes for which they were designed; and that all
utilities called for in the Approved Original Base Building Plans or
Approved Expansion Base Building Plans, as the case may be, or the
Approved Original Leasehold Improvements Plans or the Approved Expansion
Leasehold Improvements Plans, as the case may be, are installed and
operable with all hook-up, tap or similar fees paid.
"TAXES" means, subject to the terms of SECTION 5.3 below, all ad
valorem real and personal property taxes and assessments, special or
otherwise, levied upon or with respect to the Premises, the personal
property used in operating the Premises, and the rents and additional
charges payable by Tenant according to this Lease, and imposed by any
taxing authority having jurisdiction; and all taxes, levies and charges
which may be assessed, levied or imposed in replacement of, or in
addition to, all or any part of ad valorem real or personal property
taxes or assessments as revenue sources, and which in whole or in part
are measured or calculated by or based upon the Premises, the leasehold
estate of Landlord or Tenant in and to the Premises, or the rents and
other charges payable by Tenant according to this Lease. Taxes will not
include any net income, franchise, inheritance or similar taxes of
Landlord.
"TAX YEAR" means a 12-month period for which Taxes are assessed.
"TENANT" means ADS Alliance Data Systems, Inc., a Delaware
corporation.
"TENANT'S COST" means the total cost of preparing the Original
Leasehold Improvements Plans, obtaining all necessary permits for, and
constructing and installing, the Original Leasehold Improvements in the
Original Base Building, and providing any required services during
construction of the Original Leasehold Improvements (such as electricity
and other utilities and refuse removal). Landlord and Tenant agree that
Tenant's Cost will include (a) the cost of general conditions and
insurance, not to exceed three percent (3%) of the cost of the
construction work, excluding soft costs, (b) overhead, not to exceed
three percent (3%) of the cost of the construction work, excluding soft
costs and the general conditions and insurance and (c) a general
contractor's fee payable to Landlord in an amount equal to five percent
(5%) of the construction work, excluding soft costs and overhead.
"TENANT'S COST PROPOSAL" has the meaning set forth in SECTION 3.9.
"TENANT'S EXPANSION COST PROPOSAL" has the meaning set forth in
SECTION 18(d).
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"TENANT ORIGINAL DELAY" has the meaning set forth in SECTION 3.7.
"TENANT EXPANSION DELAY" has the meaning set forth in SECTION
18(g).
"TENANT'S NOTICE ADDRESS" means,
for notices given before the Original Commencement
Date:
5001 Spring Valley Road
Dallas, Texas 75244
Attention: Mr. Robert S. Murphy
Telecopy: (972) 960-5275
with a copy at the same time to:
4590 East Broad Street
Columbus, Ohio 43213
Attention: General Counsel
Telecopy: (614) 863-5965
and
Harriet Anne Tabb
Tabb & Associates
8333 Douglas Avenue
Suite 1250
Dallas, Texas 75225
and for notices given after the Original
Commencement Date:
Tenant's address at the Premises, with a copy at the
same time to:
4590 East Broad Street
Columbus, Ohio 43213
Attention: General Counsel
and
Harriet Anne Tabb
Tabb & Associates
8333 Douglas Avenue
Suite 1250
Dallas, Texas 75225
"TENANT'S REPRESENTATIVE" means Robert S. Murphy.
"TERM" means the duration of this Lease, which will be
approximately 11 years beginning on the Original Commencement Date and
ending on the "EXPIRATION DATE" (as defined below), unless terminated
earlier or extended further as provided in this Lease. The "EXPIRATION
DATE" means (i) if the Original Commencement Date is the first day of a
month, the 11-year anniversary of the day immediately preceding the
Original Commencement
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Date; or (ii) if the Original Commencement Date is not the first day
of a month, the 11-year anniversary of the last day of the month in
which the Original Commencement Date occurs. The Term will also
include any exercised Renewal Term.
"THIRD STAGE COMPLETION" means that all of Landlord's Original
Work in the Original Building is Substantially Completed and all of the
Original Building is ready for and can be occupied by Tenant.
1.2 EXHIBITS. The Exhibits listed below are attached to and
incorporated in this Lease. In the event of any inconsistency between such
Exhibits and the terms and provisions of this Lease, the terms and provisions of
the Exhibits will control, but the terms of this Lease may specifically modify
the exhibits. The Exhibits to this Lease are:
Exhibit A - Legal Description of the Land
Exhibit B - Base Building Specifications (including
Building Elevation, Site Plan, Floor Plan and
Building Specifications)
Exhibit C - Base Building/Tenant Matrix
Exhibit D - Matters Affecting Landlord's Title
Exhibit E - Memorandum of Lease
Exhibit F - NDA
Exhibit G - Lease Guaranty
Exhibit H - 2-Story Plan
Exhibit I - 3-Story Plan
Exhibit J - Expansion Cost Summary
Exhibit K - Core Building Systems
2. GRANT OF LEASE; RENEWAL OPTIONS
2.1 DEMISE. Subject to the terms, covenants, conditions and
provisions of this Lease, Landlord leases to Tenant and Tenant leases from
Landlord the Premises for the Term.
2.2 QUIET ENJOYMENT. Landlord covenants that Tenant, upon paying the
Basic Rent and Additional Rent and performing all other obligations of Tenant
under this Lease, will have quiet and peaceful possession of the Premises during
the Term, and such possession will not be disturbed by Landlord or anyone
claiming by, through or under Landlord. Upon Landlord's acquisition of the
Land, Landlord will own the Land in fee simple, subject only to the matters set
forth on EXHIBIT D. Landlord hereby represents and warrants that the execution
of this Lease, the construction of the Original Building, and the construction
of the Expansion Building will not violate the terms of any of the items
described on EXHIBIT D and that Landlord has received or will receive all
approvals necessary for the construction of the Original Building and the
Expansion Building.
2.3 LANDLORD AND TENANT COVENANTS. Landlord covenants to observe and
perform all of the terms, covenants and conditions applicable to Landlord in
this Lease. Tenant covenants to pay the Rent when due, and to observe and
perform all of the terms, covenants and conditions applicable to Tenant in this
Lease.
2.4 MEMORANDUM OF LEASE. Promptly after execution of this Lease,
Landlord and Tenant will execute and acknowledge a recordable memorandum of
lease on the form attached as EXHIBIT E, which memorandum must be recorded
immediately after the deed into Landlord (i.e., with no intervening document).
After the occurrence of the Original Commencement Date, either party will, upon
the other's request, execute and acknowledge a recordable memorandum setting
forth
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the date on which the Original Commencement Date occurred and the date on
which the Expiration Date is scheduled to occur.
2.5 TENANT'S RENEWAL OPTIONS. Subject to the terms and provisions of
this SECTION 2.5, Tenant, at its option, may extend the Original Term of this
Lease for one five-year period at the end of the Original Term (the "FIRST
RENEWAL TERM") and, if Tenant exercises its option with respect to the First
Renewal Term, for an additional five-year period at the end of the First Renewal
Term (the "SECOND RENEWAL TERM"). The First Renewal Term and the Second Renewal
Term are individually referred to herein as a "RENEWAL TERM." To exercise each
such option, Tenant must deliver written notice of the exercise thereof (a
"RENEWAL NOTICE") to Landlord no later than nine months prior to the expiration
of (i) the Original Term, in the case of Tenant's option with respect to the
First Renewal Term, or (ii) the First Renewal Term, in the case of Tenant's
option with respect to the Second Renewal Term. The dates by which Tenant is
required to deliver its Renewal Notices will each be referred to hereinafter as
a "RENEWAL NOTICE DATE." If Tenant fails to give its Renewal Notice with
respect to either Renewal Term by the applicable Renewal Notice Date, such
Renewal Notice Date will be extended until the first to occur of (A) the 15th
day after Landlord gives Tenant notice that Tenant has failed to exercise its
option with respect to the subject Renewal Term; or (B) the last day of the
then-current Term. Landlord and Tenant agree that once Tenant has delivered a
Renewal Notice, both parties will be responsible for their respective
obligations under this Lease for the subject Renewal Term, regardless of the
outcome of the Basic Rent determination for such Renewal Term as described
below. During each Renewal Term, all of the terms and provisions of this Lease
will apply, except that after the Second Renewal Term there will be no further
right of renewal, and except that the Basic Rent payable for each month of the
First Renewal Term will be 90% of the "FAIR MARKET RENT" (as defined below), but
in no event less than 100%, or more than 118%, of the monthly Basic Rent payable
during the last year of the initial Term, and the Basic Rent payable for each
month of the Second Renewal Term will be 90% of the Fair Market Rent, but in no
event less than 100%, or more than 118%, of the monthly Basic Rent payable
during the last year of the First Renewal Term. As used herein, "FAIR MARKET
RENT" will mean an amount of rent per month equal to the prevailing monthly rent
then being obtained by landlords of premises comparable to the Land and the Base
Building and the Expansion Base Building, if appropriate (I.E., the Premises,
but excluding the Original Leasehold Improvements, the Expansion Leasehold
Improvements, and any subsequent Improvements made by Tenant) in the Dallas,
Texas metropolitan area (or that such landlords would then be able to obtain)
under leases of premises comparable to the Land and the Base Building and the
Expansion Base Building, if appropriate, for terms comparable to the subject
Renewal Term. Landlord and Tenant will, for a period of 30 days from and after
the subject Renewal Notice Date, meet with each other and negotiate in good
faith to agree upon the then-current Fair Market Rent (using the criteria set
forth above) acceptable to both parties. If the parties are unable to agree
upon the Fair Market Rent during such 30-day period, then, within seven days
after such 30-day period expires, Landlord and Tenant will each appoint a
certified MAI appraiser who has at least five years' full-time commercial
appraisal experience in the Dallas, Texas market. If one party fails to so
appoint an appraiser within such seven-day period, the determination of the Fair
Market Rent by the one appraiser who was timely appointed by the other party
will be binding on both parties. The appraisers will, within 30 days of their
appointment, submit their determinations of the Fair Market Rent to both
parties. If the difference between the two determinations is 10% or less of the
higher appraisal, then the average between the two determinations will be the
Fair Market Rent. If the difference between the two determinations is greater
than 10% of the higher thereof, then within 10 days of the date the second
determination is submitted to the parties, the two appraisers will designate a
third appraiser who must also meet the qualifications described above and,
further, must not have previously acted for either party in any capacity. The
sole responsibility of the third appraiser will be to determine which of the
determinations made by the first two appraisers is more accurate. The third
appraiser will
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have no right to propose a middle ground or any modifications to either of
the prior determinations made by the first appraisers. The third appraiser's
choice will be submitted to the parties within 20 days after his or her
selection. Such determination will bind both parties, and the determination
of the Fair Market Rent made by one of the first two appraisers and selected
by the third appraiser as the more accurate will be the Fair Market Rent.
All appraisers will be instructed, in making their required determinations,
to use the criteria as to the Fair Market Rent set forth above. Each party
will pay the fees and expenses of the appraiser selected by it, and they will
pay equal shares of the fees and expenses of the third appraiser. Tenant
will have no right to extend the Term and a Renewal Notice will be
ineffective if an Event of Default exists at the time such notice is given or
at the commencement of the subject Renewal Term. Any termination of this
Lease terminates all rights under this SECTION 2.5.
3. CONSTRUCTION; DELIVERY AND ACCEPTANCE OF PREMISES
3.1 LANDLORD'S CONSTRUCTION OBLIGATIONS. Subject to and in accordance
with the provisions of this SECTION 3, Landlord will (i) at
Landlord's sole cost and expense, design (consistent with the
terms of EXHIBIT B and EXHIBIT C), construct and install the
Original Base Building on the Land in accordance with the Approved
Original Base Building Plans (as defined below); and (ii) subject
to the provisions of SECTION 3.5, construct and install the
Original Leasehold Improvements in accordance with the Approved
Original Leasehold Improvements Plans (as defined below).
Landlord must perform the Landlord's Original Work in a good and
workmanlike manner, using new materials, and in accordance with
all applicable laws, ordinances, rules, and regulations,
including, without limitation, ADA and all applicable
environmental laws, as interpreted and enforced by the
governmental bodies having jurisdiction thereof at the time of
construction.
3.2 ORIGINAL BASE BUILDING PLANS. On or before January 15, 1998,
Landlord delivered to Tenant preliminary plans and specifications for the Base
Building (the "ORIGINAL BASE BUILDING PLANS"), which plans are described as
follows: Shell Building Plans for Alliance Data Systems - Corporate
Headquarters, Dallas, Texas (dated 1/15/98) and Specifications for Alliance Data
Systems - Corporate Headquarters, Dallas, Texas (dated 1/14/98). Landlord
acknowledges that Tenant responded to such delivery within five (5) business
days. The specifications attached as EXHIBIT B are the Original Base Building
Plans described above and although there are not yet any Approved Original Base
Building Plans, neither have any Plan Approval Delays, Tenant Original Delays,
or Deadline Extensions accrued during the period before lease execution. The
revised preliminary Original Base Building Plans are due from Landlord on
January 29, 1998. Within five (5) business days after Tenant receives such
revised preliminary Original Base Building Plans, Tenant will either approve the
same in writing or notify Landlord in writing of Tenant's objections to the
revised preliminary Original Base Building Plans and how the revised preliminary
Original Base Building Plans must be changed in order to make them acceptable to
Tenant. Each day following the fifth (5th) business day after the revised
preliminary Original Base Building Plans are submitted to Tenant until Tenant
either approves them or delivers a notice of objections to Landlord will be a
day of Tenant Original Delay (as that term is defined in SECTION 3.7 hereof).
Within five (5) business days after Landlord's receipt of Tenant's notice of
objections, Landlord will cause its architect to prepare revised Original Base
Building Plans according to such notice and submit the revised Original Base
Building Plans to Tenant. In any review, Tenant cannot object to any aspect of
the proposed Original Base Building Plans if (i) subject to the next-succeeding
sentence, such objection would require material deviations from the terms of
EXHIBIT B AND EXHIBIT C attached to this Lease, or (ii) such objection was not
included within any of the previous objections made by Tenant to the Original
Base Building Plans, unless the item objected to was not included in any of the
previous
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versions of the Original Base Building Plans or such item was so included,
but has been affected by a subsequent change to the Original Base Building
Plans. However, it is understood and agreed that Tenant has the right to
select the following items, even if such items are not consistent with the
guidelines detailed in the Base Building Specifications attached as EXHIBIT
B, as long as such items are available to comply with the schedule of
construction of the Original Building: exterior brick, glass, and metal
frames; restroom finishes (including, without limitation, ceramic tile and
toilet partitions); lobby finishes; elevator cab finishes; landscaping; and
common area interior finishes, doors and hardware. Upon submittal to Tenant
of the revised Original Base Building Plans, and upon submittal of any
further revisions, the procedures described above will be repeated until
Landlord and Tenant have reached agreement. Once they have reached
agreement, Landlord must promptly prepare permit-ready Original Base Building
Plans and submit them to Tenant for Tenant's approval. The only grounds upon
which Tenant can object to such permit-ready Original Base Building Plans is
that they materially differ from the final approved preliminary Original Base
Building Plans. Tenant's failure to respond to Landlord's submission within
five (5) business days after Landlord delivers such permit-ready Original
Base Building Plans to Tenant constitutes Tenant's approval of such
permit-ready Original Base Building Plans. The final permit-ready Original
Base Building Plans, as approved by Landlord and Tenant, constitute the
"APPROVED ORIGINAL BASE BUILDING PLANS" under this Lease. Each day following
March 1, 1998, that the Approved Original Base Building Plans have not been
approved by Landlord and Tenant for any reason other than Landlord's failure
to perform or respond as required by this SECTION 3.2 shall constitute a
"PLAN APPROVAL DELAY". Each day that Landlord does not perform or respond as
required by this SECTION 3.2 will extend such March 1, 1998 deadline by one
(1) day and will constitute a day of "DEADLINE EXTENSION."
3.3 LEASEHOLD IMPROVEMENT PLANS. On or before April 6, 1998
(extended by one (1) day for each day of Deadline Extension), Tenant will
cause its architect to prepare and deliver to Landlord preliminary plans and
specifications for the Original Leasehold Improvements (the "ORIGINAL
LEASEHOLD IMPROVEMENTS PLANS"). While these preliminary plans and
specifications are not required to be permit-ready, they must show sufficient
detail concerning all aspects of the Original Leasehold Improvements Plans so
that making them permit-ready is only a matter of incorporating technical
details. Each day following April 6, 1998 (extended by one (1) day for each
day of Deadline Extension), until Tenant delivers the preliminary Original
Leasehold Improvements Plans will be a day of Plan Approval Delay. Within
five (5) business days after receipt of the preliminary Leasehold Improvement
Plans, Landlord will either approve the same in writing or notify Tenant in
writing of Landlord's objections to the preliminary Original Leasehold
Improvements Plans and how the preliminary Original Leasehold Improvements
Plans must be changed in order to make them acceptable to Landlord. Landlord
can only object to the preliminary Original Leasehold Improvements Plans on
the grounds that they would adversely affect the structural integrity of the
Original Base Building or materially modify any portion of the Core Building
Systems and cannot object in any subsequent review to any matter not raised
in a preceding review, unless the item objected to was not included in any of
the previous versions of the Original Leasehold Improvements Plans or such
item was so included, but has been affected by a subsequent change to the
Original Leasehold Improvements Plans. However, under all circumstances,
Tenant has the right to select the following items as they apply to the
Original Leasehold Improvements, but only as long as such items are available
to comply with the schedule of construction of the Original Building:
exterior brick, glass, and metal frames; restroom finishes (including,
without limitation, ceramic tile and toilet partitions); lobby finishes;
elevator cab finishes; landscaping; and common area interior finishes, doors
and hardware. If Landlord fails to respond in the manner set forth above
within five (5) business days after the date Tenant delivers the preliminary
Original Leasehold Improvements Plans to Landlord or objects to the
preliminary Original Leasehold Improvements Plans on any grounds other than
those set forth in this SECTION 3.3, then Landlord will be
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conclusively deemed to have approved the preliminary Original Leasehold
Improvements Plans. Within five (5) business days after Tenant's receipt of
Landlord's notice of objections (if such objections meet the requirements set
forth above), Tenant will cause its architect to prepare revised Original
Leasehold Improvements Plans according to such notice and submit the revised
Original Leasehold Improvements Plans to Landlord. Upon submittal to
Landlord of the revised Original Leasehold Improvements Plans, and upon
submittal of any further revisions, the procedures described above will be
repeated until Landlord and Tenant have reached agreement. Once they have
reached agreement, Tenant must promptly prepare permit-ready Original
Leasehold Improvements Plans to Landlord for Landlord's approval. The only
grounds upon which Landlord can object to such permit-ready Original
Leasehold Improvements Plans is that they materially differ from the final
approved Original Leasehold Improvements Plans. Landlord's failure to
respond to Tenant's submissions within five (5) business days after Tenant
delivers such permit-ready Original Leasehold Improvements Plans to Landlord
constitutes Landlord's approval of such permit-ready Original Leasehold
Improvements Plans. The permit-ready Original Leasehold Improvements Plans,
as finally approved, are referred to in this Lease as the "APPROVED LEASEHOLD
IMPROVEMENTS PLANS." Each day following April 20, 1998 (extended by one (1)
day for each day of Deadline Extension), that the Approved Original
Leasehold Improvements Plans have not been approved by Landlord and Tenant
for any reason other than Landlord's failure to perform or respond as
required by this SECTION 3.3 shall constitute a Plan Approval Delay. Each
day that Landlord does not perform or respond as required by this SECTION 3.3
will constitute a day of Deadline Extension.
3.4 TENANT'S COST PROPOSAL. At such time as Landlord and Tenant
have approved the Approved Original Leasehold Improvements Plans (and in any
event within fifteen (15) days thereafter), Landlord will (i) obtain at least
three bids for each of the major trades that will be involved in the
construction of the Original Leasehold Improvements (with Landlord agreeing
to solicit and consider bids from subcontractors selected by Tenant), unless
less than three qualified subcontractors exist for a given trade, in which
case Landlord will obtain a bid from all qualified subcontractors of such
trade; (ii) using the lowest qualified bid (which, in order to be qualified,
must fully comply with all bid requirements, including but not limited to any
time requirements specified) from each of the bids so received (unless (a)
Landlord advises Tenant in writing within five (5) business days after the
bids are received that Landlord believes the lowest bidder will be unable to
perform the work upon which it has bid in a timely manner or to the quality
required by Tenant, giving written evidence of its reasons for such belief,
it being understood and agreed that if Landlord fails to so notify Tenant
within such five (5) business day period, Landlord will be deemed to have
waived any objection to any subcontractor, and (b) Tenant has consented to
the use of a bidder other than the lowest bidder, which consent Tenant will
not unreasonably withhold and which consent shall be deemed granted unless
Tenant expressly denies such consent by written notice to Landlord within 3
business days after Landlord's notice of objection to the subcontractor),
prepare a proposed budget for all items to be included in Tenant's Cost
("TENANT'S COST PROPOSAL"); and (iii) submit copies of all bids and the
Tenant's Cost Proposal to Tenant for Tenant's review and approval. Tenant, at
Tenant's option, may either approve the Tenant's Cost Proposal in writing, or
elect to eliminate or revise one or more items of Original Leasehold
Improvements shown on the Original Leasehold Improvements Plans, or request
additional bids so as to reduce the costs shown in the Tenant's Cost
Proposal. Tenant may then approve in writing the reduced Tenant's Cost
Proposal (based on revised Original Leasehold Improvements Plans (which will
be deemed the Approved Original Leasehold Improvements Plans for all purposes
under this Lease) prepared by Tenant's architect or revised bids, as the case
may be). However, each business day following May 1, 1998 (extended by one
(1) day for each day of Deadline Extension) until the day on which Landlord
has received Tenant's written approval of the Tenant's Cost Proposal will be
a day of Plan Approval Delay. The Tenant's Cost Proposal, as finally
approved, is referred to in this Lease as the "APPROVED TENANT'S COSTS."
Each day that Landlord does not perform or respond as required by
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this SECTION 3.4 will constitute a day of Deadline Extension.
3.5 ORIGINAL CHANGE ORDERS. Tenant's Representative may request
and authorize changes in the Landlord's Original Work as long as such
changes (i) are consistent with the scope of Landlord's Original Work, and
(ii) do not affect the Original Base Building or any portion of the Core
Building Systems. All other changes will be subject to Landlord's prior
written approval, which approval Landlord cannot unreasonably withhold,
delay, or condition. Within five (5) business days after Tenant requests a
change in the Landlord's Original Work and prior to commencing any change,
Landlord will prepare and deliver to Tenant, for Tenant's approval, a change
order ("ORIGINAL CHANGE ORDER") identifying the total cost or savings of such
change, which will include associated architectural, engineering and
construction contractor's fees, and the total time that will be added to or
subtracted from the construction schedule by such change. Once Landlord
delivers an Original Change Order to Tenant for Tenant's approval, Tenant
must either affirmatively approve or disapprove of the Original Change Order
within three (3) business days following Tenant's receipt of the Original
Change Order. In the event Tenant fails to respond within the three (3)
business day period, then each day thereafter that Tenant fails to respond
shall be a Tenant Original Delay. Alternatively, Landlord may deliver to
Tenant, within the same five (5) business day period, an estimate of the time
and costs to be expended in calculating the Original Change Order. In the
event Tenant does not respond or fails to affirmatively authorize Landlord to
proceed on the third (3rd) business day following Tenant's receipt of such
estimate, then it shall be conclusively deemed that Tenant withdrew its
request for any change in Landlord's Original Work. If Tenant authorizes
Landlord to proceed with calculating the cost of the Original Change Order,
then Tenant shall be responsible for all reasonable costs associated
therewith (and pay same to Landlord within 30 days following Landlord's
written request) and any delay in connection with such calculation shall be a
Tenant Original Delay, whether or not Tenant ultimately approves the Original
Change Order.
3.6 DELIVERY OF POSSESSION. Landlord acknowledges and agrees that
Tenant is terminating an existing lease on a specific date in reliance upon
Landlord's commitment to deliver the Original Building to Tenant in
accordance with the schedule set forth below, subject only to Plan Approval
Delays (as defined in SECTIONS 3.2 AND 3.3 above), Tenant Original Delays
(as defined in SECTION 3.7 below) and Permitted Original Force Majeure
Delays (as defined in SECTION 3.7 below), which exceed, when taken together,
ten (10) days:
First Stage Completion: August 31, 1998
Second Stage Completion: September 10, 1998
Third Stage Completion: September 20, 1998
Final Completion: Thirty (30) days after Original Punch List
delivery
Therefore, Landlord must deliver the Original Building to Tenant in accordance
with the foregoing schedule as such scheduled dates have been delayed due to
Plan Approval Delays, Tenant Original Delays and Permitted Original Force
Majeure Delays which exceed, when taken together, ten (10) days only, it being
understood and agreed that such dates cannot be extended for any reason other
than Plan Approval Delays, Tenant Original Delays and Permitted Original Force
Majeure Delays which exceed, when taken together, ten (10) days. If Landlord is
unable to deliver possession of the Original Building in accordance with the
foregoing schedule, as it may be extended, (i) the Original Commencement Date
will be extended automatically by one day for each day of the period after the
Third Stage Completion Date to the day on which Landlord tenders possession of
the Original Building to Tenant with Landlord's Original Work Substantially
Completed, less any portion of that period attributable to Tenant Original
Delays; and (ii) Landlord will pay Tenant, as liquidated damages, an amount
equal to $2,000.00 per day for each day after August 31, 1998 (as such date may
be extended) that the First Stage Completion has not occurred; and (iii) if the
First Stage
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Completion has occurred, Landlord will pay to Tenant, as liquidated damages,
$2,000.00 per day for each day after September 10, 1998 (as such date may be
extended) that the Second State Completion has not occurred; and (iv)
Landlord will pay to Tenant, as liquidated damages, $4,000.00 per day for
each day after September 20, 1998 (as such date may be extended) to the day
upon which Landlord tenders possession of the Original Building to Tenant
with Landlord's Original Work Substantially Completed; and (v) if Landlord
has Substantially Completed the Original Building, Landlord will pay to
Tenant $500.00 per day for each day after the thirtieth day after Tenant
delivers the Original Punch List to Landlord that the Final Completion has
not occurred; and (vi) if Landlord does not tender possession of the Original
Building to Tenant with the Landlord's Original Work Substantially Completed
on or before December 1, 1998 (plus any period of delay caused by Plan
Approval Delays, Tenant Original Delays or Permitted Force Majeure Delay
which exceed, when taken together, ten (10) days), Tenant will have the right
to terminate this Lease by delivering written notice of termination to
Landlord not more than 30 days after such deadline date. Upon a termination
under clause (vi) above, each party will, upon the other's request, execute
and deliver an agreement in recordable form containing a release and
surrender of all right, title and interest in and to this Lease; neither
Landlord nor Tenant will have any further obligations to each other,
including, without limitation, any obligations to pay for work previously
performed in the Original Building through the date of such termination
except as set forth in this sentence; all improvements to the Premises will
become and remain the property of Landlord; and Landlord will refund to
Tenant any sums paid to Landlord by Tenant in connection with this Lease,
including, without limitation, any payments to Landlord of portions of
Tenant's Cost and pay to Tenant the amounts that have accrued under clauses
(ii) through (v) above. Such postponement of the commencement of the Term,
payment of liquidated damages and termination and refund right will be in
full settlement of all claims that Tenant might otherwise have against
Landlord by reason of Landlord's failure to have complied with the schedule
set forth above. If Landlord delivers possession of the Original Building
with the Landlord's Original Work Substantially Completed prior to the dates
specified in the schedule set forth above, then Tenant may either accept such
delivery (in which case such date will be the Original Commencement Date
hereunder) or may refuse to accept delivery until any date selected by Tenant
that is no later than the dates specified in the schedule set forth above.
Within sixty (60) days after the Original Commencement Date, Landlord will
provide to Tenant a complete set of as-built drawings of Landlord's Original
Work and manuals for all equipment incorporated into the Improvements as a
part of Landlord's Original Work. Landlord and Tenant have sixty (60) days
after Landlord notifies Tenant that the Original Building has been
Substantially Completed in which to remeasure the Original Building, but
after the expiration of such sixty (60) day period, neither Tenant nor
Landlord may remeasure the Original Building. Landlord and Tenant agree that
provided the Original Building is otherwise Substantially Completed, a
variance in the size of the Original Building (as the same may change due to
any Original Change Order) by more or less than one percent (1%) shall be
permitted and shall have no effect on the Original Building being
Substantially Completed, nor on the calculation of the Original Basic Rent,
Allowance or Financed Amount. In the absence of such remeasurement or the
right to do so, it shall be conclusively deemed that the Original Building
contains 114,419 Rentable Square Feet (subject to any approved revisions to
the Approved Original Base Building Plans, with the final Rentable Square
Feet as shown in the Approved Original Base Building Plans being sometimes
referred to as the "APPROVED ORIGINAL RENTABLE SQUARE FEET"). If Tenant does
timely elect to remeasure the Original Building, and the variance is greater
than one percent (1%) but less than two percent (2%), the variance shall be
permitted and have no affect on the Original Building being Substantially
Completed, but (A) the Basic Rent (as provided in SECTION 4.1) will be
adjusted to be $5.95 per Rentable Square Foot under clause (a) of SECTION
4.1, $11.98 per Rentable Square Foot under clause (b) of SECTION 4.1 and
$13.45 per Rentable Square Foot under clause (c) of SECTION 4.1, (B) the
Allowance (as provided in SECTION 3.10) will be adjusted to be $20.00 per
Rentable Square Foot and (C) the Financed Amount (as provided in SECTION
3.10) will be adjusted to be $5.00 per Rentable Square Foot. If the
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Original Building contains more than 102% of the Approved Original Rentable
Square Feet, then the Allowance and Financed Amount will be adjusted based on
the actual amount of square feet in the Original Building, but all other
amounts will be calculated as if the Original Building contains 102% of the
Approved Original Rentable Square Feet. If the Original Building contains
less than 98% of the Approved Original Rentable Square Feet, then Landlord
must make all alterations necessary to increase the size of the Original
Building to at least 98% of the Approved Original Rentable Square Feet and
the Original Building will be deemed to be not Substantially Complete. If, in
such event, Tenant fails to terminate this Lease pursuant to SECTION 3.6(VI)
above, then Tenant will be deemed to have accepted the size of the Original
Building and the Original Building will be deemed to have been Substantially
Complete on the day Landlord delivered the Original Building to Tenant with
Landlord's Original Work (other than the area of the Original Building)
Substantially Complete. In such event, the Allowance and Financed Amount will
be calculated based on Approved Original Rentable Square Feet, but all other
amounts will be calculated on the actual size of the Original Building.
3.7 PLAN APPROVAL DELAYS, TENANT ORIGINAL DELAYS AND PERMITTED
ORIGINAL FORCE MAJEURE DELAYS. As provided in SECTION 3.6, the Term of this
Lease (and therefore Tenant's obligation for the payment of Rent) will not
commence until Landlord has Substantially Completed Landlord's Original Work;
provided, however, that if Landlord is delayed in causing Landlord's Original
Work to be Substantially Completed as a result of: (a) any Plan Approval
Delays described in SECTIONS 3.2 AND 3.3, (b) any Tenant Original Delays
described in SECTIONS 3.2, 3.3, 3.4 AND 3.5, or any Original Change Orders or
changes in any drawings, plans or specifications requested by Tenant or any
other act or omission of Tenant or Tenant's architects, engineers,
constructors or subcontractors, all of which will be deemed to be delays
caused by Tenant (with each individual occurrence constituting a "TENANT
ORIGINAL DELAY" and the cumulative occurrences constituting "TENANT ORIGINAL
DELAYS"), or (c) force majeure delays with such force majeure delays being
referred to in this Lease as "PERMITTED ORIGINAL FORCE MAJEURE DELAYS"),
then, if such delays exceed, in total, ten (10) days, the Original
Commencement Date will only be extended under SECTION 3.6 until the date on
which Landlord would have Substantially Completed the performance of
Landlord's Original Work but for such delays. The aggregate delays described
in this SECTION 3.7 will be reduced by the number of days deducted from the
construction schedule on account of Original Change Orders. As a condition to
claiming a Permitted Original Force Majeure Delay or a Tenant Original Delay,
the day of delay must have otherwise been a day upon which Landlord intended
to work on the item affected by the delay and Landlord must advise Tenant of
the circumstances giving rise to the claim within ten (10) business days
after they arise, the estimated cost that Tenant can pay at that time to
effect any available remedy to eliminate or reduce such delay (for example,
overtime work), and the cumulative total number of Permitted Original Force
Majeure Delays, Tenant Original Delays, and Plan Approval Delays through the
date of each event. If the number of Permitted Original Force Majeure Delays
exceeds ninety (90) days then Tenant may terminate this Lease by written
notice to Landlord at any time before the Original Commencement Date
actually occurs and in such event Landlord must return to Tenant all amounts
previously paid by Tenant and must pay Tenant $350,000.00, but will not be
required to make any payment of liquidated damages under SECTION 3.6 of this
Lease (and if Landlord has done so, Landlord will be permitted to offset the
amount so paid against the $350,000.00 due to Tenant). If, under such
circumstances, Tenant does not terminate this Lease as set forth above, then
the maximum amount Landlord would be required to pay to Tenant as liquidated
damages under SECTION 3.6 above would be $350,000.00.
3.8 ORIGINAL PUNCH LIST. Tenant's taking possession of any
portion of the Original Building will be conclusive evidence that such
portion of the Original Building was in good order and satisfactory
condition, and that all of Landlord's Original Work in or to such portion of
the Original Building was satisfactorily completed, when Tenant took
possession, except as to any patent defects
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or uncompleted items identified on a punch list (the "ORIGINAL PUNCH LIST")
prepared by Tenant's Representative after an inspection of the Original
Building by both Tenant's Representative and Landlord's Representative
(unless Landlord's Representative fails to attend an inspection scheduled by
Tenant's Representative, with Tenant acknowledging that Tenant's
Representative must cooperate with Landlord's Representative in attempting to
establish a mutually-acceptable date and time of inspection) made within
thirty (30) days after Tenant takes possession, and except as to any latent
defects in Landlord's Original Work. Landlord will not be responsible for
any items of damage caused by Tenant, its agents, independent contractors or
suppliers, except that in connection with Tenant's "phased" move-in to the
Original Building, Landlord must repair damage caused by Tenant as part of
its move-in and cannot claim such damage and repair constitutes any form of
permitted delay, unless caused by Tenant's gross negligence or wilful
misconduct. No promises to construct, alter, remodel or improve the Original
Building, and no representations concerning the condition of the Original
Building, have been made by Landlord to Tenant other than as may be expressly
stated in this Lease.
3.9 REPRESENTATIVES. Landlord appoints Landlord's Representative
to act for Landlord in all matters covered by this SECTION 3. Tenant
appoints Tenant's Representative to act for Tenant in all matters covered by
this SECTION 3. All inquiries, requests, instructions, authorizations and
other communications with respect to the matters covered by this SECTION 3
will be made to Landlord's Representative or Tenant's Representative, as the
case may be. Tenant will not make any inquiries of or requests to, and will
not give any instructions or authorizations to, any other employee or agent
of Landlord, including Landlord's architect, engineers and contractors or any
of their agents or employees, with regard to matters covered by this SECTION
3. Either party may change its representative at any time by three days'
prior written notice to the other party.
3.10 PAYMENT OF TENANT'S COST. Landlord and Tenant acknowledge that
the Basic Rent has been computed based on Landlord's allowance of
$2,288,380.00 (the "ALLOWANCE") towards the cost of the Original Leasehold
Improvements. To the extent the Approved Tenant's Costs (as increased or
decreased by Original Change Orders): (A) are less than the Allowance, the
"savings" will be credited to the next installment(s) of Original Basic Rent
due after such determination, (B) exceed the Allowance, Tenant will pay such
excess to Landlord as herein required. Any such excess sums owing by Tenant
to Landlord pursuant to this SECTION 3.10 (up to a maximum of an amount equal
to $572,095.00 (the "FINANCED AMOUNT") shall be paid by Tenant to Landlord in
monthly installments, amortized over the remaining months of the initial
11-year term of this Lease at a rate of nine percent (9%) per annum, with the
Original Basic Rent to be increased by an amount equal to such amortized
installments. Landlord and Tenant will, upon request of the other, promptly
enter into an amendment to this Lease to evidence the increase in the
Original Basic Rent. Any such excess sums owing by Tenant to Landlord
pursuant to this SECTION 3.10 in excess of the Financed Amount shall be paid
by Tenant to Landlord within thirty (30) days following the determination of
the sum due to Landlord by Tenant and delivery to Tenant of supporting
documentation of the entire amount paid. Tenant will own all of the Original
Leasehold Improvements until the end of the Term, at which time the Original
Leasehold Improvements will become Landlord's property in accordance with
SECTION 14.1. During the Term, Tenant may, in its sole discretion, remove or
replace any of the personal property, equipment, trade fixtures or movable
partitions owned by Tenant and placed or installed in the Premises at
Tenant's expense. Subject to SECTION 10.1, Tenant may also remove or replace
the Original Leasehold Improvements. Landlord warrants that the Original
Base Building and Original Leasehold Improvements will be free of all
defects in design, materials or construction for a period of one year from
the Original Commencement Date.
3.11 REASONABLENESS AND GOOD FAITH STANDARD. Landlord and Tenant
acknowledge that they must work together cooperatively in order to design the
Original Building and therefore
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agree to act reasonably and in good faith in such design process.
40 RENT
4.1 BASIC RENT AND ORIGINAL BASIC RENT. Commencing on the
Original Commencement Date and then throughout the Term, Tenant agrees to pay
Landlord Basic Rent according to the following provisions. Basic Rent
throughout the Term will be payable in monthly installments, in advance, on
or before the first day of each and every month during the Term. The
Original Basic Rent is in the amount of (a) during the portion of the Term
beginning on the Original Commencement Date and ending on the first
anniversary of the last day of the month preceding the month in which the
Original Commencement Date occurs, $56,732.75 per month; (b) during the
portion of the Term beginning on the second anniversary of the first day of
the month in which the Original Commencement Date occurs and ending on the
last day of the month preceding the sixth anniversary of the Original
Commencement Date, $114,228.30 per month; (c) during the portion of the Term
beginning on the sixth anniversary of the first day of the month in which the
Original Commencement Date occurs to the Expiration Date of the initial
Term, $128,244.62 per month; and (d) during each Renewal Term with respect to
which Tenant exercises its option, the amount per month determined pursuant
to SECTION 2.5. However, if the Term commences on other than the first day
of a month or ends on other than the last day of a month, Basic Rent for such
month will be appropriately prorated.
4.2 NET LEASE. Neither Landlord nor Tenant will be required to pay
any costs or expenses or provide any services in connection with the Premises
except as expressly provided in this Lease.
4.3 TERMS OF PAYMENT. All Rent will be paid to Landlord in lawful
money of the United States of America, at Landlord's Rent Address or to such
other person or at such other place as Landlord may from time to time
designate in writing, without notice or demand and without right of
deduction, abatement or setoff, except as otherwise expressly provided in
this Lease. Tenant's covenants to pay Basic Rent and Additional Rent are
independent of any other covenant, condition, provision or agreement
contained in this Lease; provided, however, that the foregoing statement
cannot be deemed in any way to limit Tenant's rights and remedies set forth
elsewhere in this Lease.
4.4 LATE PAYMENTS. Any payment of Rent which is not received
within five days after it is due will be subject to a late charge equal to 5%
of the unpaid payment, or $100.00, whichever is greater. This amount is in
compensation of Landlord's additional cost of processing late payments. In
addition, any Rent which is not paid within five days after it is due will
accrue interest at the Interest Rate from the date on which it was due until
the date on which it is paid in full with accrued interest.
4.5 RIGHT TO ACCEPT PAYMENTS. No receipt by Landlord of an amount
less than Tenant's full amount due will be deemed to be other than payment "on
account," nor will any endorsement or statement on any check or any accompanying
letter effect or evidence an accord and satisfaction. Landlord may accept such
check or payment without prejudice to Landlord's right to recover the
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balance or pursue any right of Landlord. No payments by Tenant to Landlord
after the expiration or other termination of the Term, or after the giving of
any notice (other than a demand for payment of money) by Landlord to Tenant,
will reinstate, continue or extend the Term or make ineffective any notice
given to Tenant prior to such payment. After notice or commencement of a
suit, or after final judgment granting Landlord possession of the Premises,
Landlord may receive and collect any sums of Rent due under this Lease, and
such receipt will not void any notice or in any manner affect any pending
suit or any judgment obtained. Any amounts received by Landlord may be
allocated to any specific amounts due from Tenant to Landlord as Landlord
determines.
50 TAXES
5.1 PAYMENT OF TAXES. Except as provided in SECTION 5.3 and
SECTION 5.4 below, Tenant will pay before delinquency, directly to the taxing
authority, all Taxes which accrue during or are attributable to any part of
the Term. Within 10 days after Landlord's written request, Tenant will
provide Landlord with evidence of Tenant's payment of Taxes for the most
recent Tax Year for which Taxes have been paid. Landlord will use reasonable
efforts to have the real property tax notices and bills issued directly to
Tenant, but if Landlord is unable to do so, Landlord will promptly (and in
any event with fifteen (15) days after Landlord's receipt thereof) forward
all such notices and bills directly to the address to which Landlord is then
required to send notices to Tenant.
5.2 PRORATION AT BEGINNING AND END OF TERM. If the Term begins on
other than the first day of a Tax Year or if the Term expires or otherwise
terminates on other than the last day of a Tax Year, Taxes for the Tax Year
in which the Term begins or ends, as the case may be, will be prorated
between Landlord and Tenant, based on the most recent levy and most recent
assessment. Such proration will be subsequently adjusted when the actual
bills become available for Taxes for the Tax Year for which Taxes were
prorated. The parties' obligations under this SECTION 5 will survive the
expiration of the Term or other termination of this Lease.
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5.3 SPECIAL ASSESSMENTS. Tenant will pay, as Taxes, all special
assessments and other like impositions; provided, however, that Tenant may
pay in installments any such special assessments or like impositions that may
be so paid according to applicable Laws and, in such event, Tenant will only
be required to pay those installments of any such assessments or impositions
that are assessed or imposed for periods of time within the Term and with
proration, as provided above, of any installment due period at the beginning
or end of the Term that covers a period of time that includes both a portion
of the Term and an additional period either before or after the Term. The
Premises are not now, and Landlord will take no action to cause or permit the
Premises on the Original Commencement Date to be, located in a special
improvement district or otherwise subject to special assessments. Landlord
will not consent to the inclusion of the Premises in a special improvement
district or other district that would subject the Premises to special
assessments without Tenant's prior written approval and without giving Tenant
the right and sufficient notice to allow Tenant to object to the inclusion in
Landlord's name and on Landlord's behalf.
5.4 TAX CONTESTS. Tenant will have the right to contest any Taxes
payable by Tenant; provided, however, that Tenant will make timely payment of
the contested Taxes notwithstanding the pendency of any such contest unless
applicable Laws permit the withholding of payment without delinquency, in
which case Tenant may withhold payment of the contested Taxes until such time
as payment thereof (or of such Taxes as the same may be reduced by such
contest) is required to be made by applicable Laws in order to avoid
delinquency. Tenant will notify Landlord within five business days of the
commencement of any such contest. So long as Tenant complies with the terms
of this SECTION 5.4, Tenant will have the right, in connection with any such
contest, at its sole expense, to institute and prosecute, in good faith and
with due diligence and in Landlord's name if necessary, any appropriate
proceedings, and Landlord will, at Tenant's expense, fully cooperate with
Tenant's efforts to contest any such Taxes or special assessments.
60 USE, OCCUPANCY AND COMPLIANCE
6.1 USE. Tenant may use the Premises for any and all uses and
purposes that are from time to time permitted by Laws. Tenant will not keep
anything on or about the Premises which would
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invalidate any insurance policy required to be carried on the Premises by
Tenant pursuant to this Lease. Tenant will not cause or permit to exist any
public or private nuisance on or about the Premises.
6.2 COMPLIANCE. On the Original Commencement Date, the Premises
will comply with all Laws applicable to their use and occupancy for the
purposes for which they were designed. Tenant will comply with all Laws
applicable to the use and occupancy of the Premises during the Term and will
keep and maintain the Premises in compliance with all applicable Laws.
Tenant will have the right, however, to contest or challenge by appropriate
proceedings the enforceability of any Law or its applicability to the
Premises or the use or occupancy thereof by Tenant so long as Tenant
diligently prosecutes the contest or challenge to completion and, in the
event Tenant loses the contest or challenge, thereafter abides by and
conforms to such Law. In the event of Tenant's challenge or contest of such
Law, Tenant may elect not to comply with such Law during such challenge or
contest; provided, however, that such election not to comply will not result
in any material risk of forfeiture of Landlord's interest in the Premises.
Tenant will indemnify and hold Landlord harmless from and against all claims,
damages or judgments resulting from any such election not to comply.
6.3 HAZARDOUS SUBSTANCES.
(a) TENANT'S COVENANTS. Tenant will not allow any Hazardous
Substance to be located on the Premises and will not conduct or authorize
the use, generation, transportation, storage, treatment or disposal at
the Premises of any Hazardous Substance other than in quantities
incidental to the conduct of Tenant's business in the Premises and in
compliance with Environmental Laws; provided, however, nothing herein
contained will permit Tenant to allow any so-called "acutely hazardous,"
"ultra-hazardous," "imminently hazardous chemical substance or mixture"
or comparable Hazardous Substance to be located on or about the Premises.
If the presence, release, threat of release, placement on or in the
Premises or the generation, transportation, storage, treatment or
disposal at the Premises of any Hazardous Substance as a result of
Tenant's use or occupancy of the Premises (i) gives rise to liability
(including, but not limited to, a response action, remedial action or
removal action) under Environmental Laws; (ii) causes a significant
public health effect; or (iii) pollutes or threatens to pollute the
environment, Tenant will promptly take any and all remedial and removal
action necessary to clean up the Premises and mitigate exposure to
liability arising from the Hazardous Substance, whether or not required
by Laws.
(b) TENANT'S INDEMNITY. Tenant will indemnify, defend and hold
Landlord harmless from and against all damages, costs, losses, expenses
(including, without limitation, actual attorneys' fees and engineering
fees) arising from or attributable to (i) the existence of any Hazardous
Substance at the Premises as a result of the acts of Tenant or its
agents, employees or contractors or Tenant's use and occupancy of the
Premises, and (ii) any breach by Tenant of any of its covenants contained
in this SECTION 6.3.
(c) LANDLORD'S REPRESENTATION AND INDEMNITY. Landlord has
delivered to Tenant copies of all studies in Landlord's possession
concerning the presence of Hazardous Substances on the Premises and will
promptly furnish Tenant with a copy of any additional such study that
Landlord obtains on or within two months after the Original Commencement
Date. Landlord represents to Tenant that, to Landlord's current actual
knowledge (without any investigation other than as described in Phase I
Environmental Site Assessment; 10.32 Acres of Undeveloped Land, Waterview
Parkway, Dallas, Texas, Terracon Project No. 54975133, December 31, 1997,
Prepared for Opus South Corporation, 12225 Greenville
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Avenue, #900, Dallas, Texas 75243 and prepared by Terracon
Environmental, Inc., Dallas, Texas (the "REPORT") and subject to all
matters reflected or referenced thereon), there are no Hazardous
Substances present on the Premises as of the date of this Lease in any
manner or quantity that violates any Environmental Laws. Landlord
will indemnify, defend and hold Tenant harmless from and against all
damages, costs, losses, expenses (including, without limitation,
actual attorneys' fees and engineering fees) arising from or
attributable to (i) the existence of any Hazardous Substance at the
Premises as a result of the acts of Landlord or its agents, employees
or contractors, and (ii) any breach by Landlord of its representation
contained in this SECTION 6.3.
(d) SURVIVAL. The parties' obligations under this SECTION
6.3 will survive the expiration of the Term or other termination of
this Lease.
6.4 AMERICANS WITH DISABILITIES ACT. Landlord will be obligated to
design and construct the Original Base Building and, if applicable, the
Expansion Base Building in accordance with the ADA and Texas Accessibility
Standards and if Landlord fails to do so, Landlord will have the continuing
obligation to cause the Original Base Building and, if applicable, the
Expansion Base Building to meet such requirement. Subject to the terms of
the preceding sentence, Tenant will, at its expense, cause the Premises and
the operation of any business within the Premises to comply with the ADA, and
if Tenant fails to maintain the Premises in compliance with the ADA, Landlord
will have the right, but not the obligation, at Tenant's expense, to enter
the Premises and cause the Premises to comply with the ADA; and Tenant will
indemnify, defend and hold Landlord harmless from and against any and all
costs, claims and liabilities, including, without limitation, attorneys' fees
and court costs, arising from or related to Tenant's failure to maintain the
Premises in compliance with the ADA; provided, however, Landlord will cause
the Original Base Building and, if applicable, the Expansion Base Building to
be designed and constructed in accordance with the "ADA Guidelines for
Buildings and Facilities" attached as "Appendix A" to the rules and
regulations implementing the ADA, as the same are interpreted as of the date
Landlord submits its complete application for a building permit for such
construction, and provided, further, that any such obligation of Landlord
will be subject to and based upon Tenant's representations concerning
Tenant's status as a "Public Accommodation" and concerning the location of
any "area of primary function." Without limiting the generality of the
foregoing, if work is performed by, through or under Tenant after the
Original Commencement Date, Tenant will, at Tenant's expense, cause such work
to be designed and constructed in compliance with the ADA, and Tenant will be
responsible for (i) the cost of any work required as a result of (A) Tenant
or an assignee or subtenant being deemed a "Public Accommodation" or the
Premises being deemed a "Place of Public Accommodation," or (B) such work
being deemed to affect an "Area of Primary Function" (as such terms are
defined in the ADA); and (ii) the cost of the installation or implementation
of any "Auxiliary Aid" required under the ADA as a result of the operation of
any business within the Premises.
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6.5 SIGNS. Tenant may erect, maintain or replace from time to time
upon the Premises at Tenant's cost all signs that Tenant deems appropriate to
the conduct of its business, including, without limitation, pylon signs,
monument signs, roof signs, banners, signage on the exterior of the Building or
glass surfaces of the windows and doors of the Building, provided that all of
such signs and signage are in compliance with applicable Laws. Landlord will,
at Tenant's expense, cooperate and assist Tenant in obtaining any permits for
signage, including variances from Laws.
70 UTILITIES
7.1 PAYMENT; INTERRUPTION OF SERVICES. Landlord will cause all
utilities described in the Approved Original Base Building Plans and Approved
Original Leasehold Improvements Plans and, if applicable, the Approved
Expansion Base Building Plans and the Approved Expansion Leasehold Improvements
Plans to be brought to the applicable portion of the Premises and hooked-up, and
will pay the applicable tap, hook-up or similar fees. Tenant will pay for all
electricity, gas, water, sewer or other utility service provided to the Premises
from and after the Original Commencement Date. Landlord will not be liable in
damages or otherwise, nor will there be an abatement of Rent, if the furnishing
by any supplier of any utility service or other service to the Premises is
interrupted or impaired by fire, accident, riot, strike, act of God, the making
of necessary repairs or improvements, or by any causes beyond Landlord's
reasonable control.
7.2 HVAC. From and after the Original Commencement Date, Tenant will
pay the cost for all heating, air conditioning and ventilation service provided
to the Premises, including the cost of maintenance, repair and replacement of
same. Tenant may maintain a preventative maintenance contract on the HVAC units
in the Premises, which contract will provide for periodic maintenance in
accordance with the manufacturer's specifications, or Tenant may perform such
preventative maintenance itself. In the event Tenant fails to maintain such
preventative maintenance contract or to perform such preventative maintenance
itself, Landlord, at its option and after giving Tenant notice
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and an opportunity to cure pursuant to SECTION 15.2, may arrange for such a
preventative maintenance contract for the HVAC units, in which event the cost
of such preventative HVAC maintenance will be billed directly to Tenant and
will be paid within 10 days of receipt of invoice therefor.
80 REPAIRS AND MAINTENANCE
8.1 TENANT'S OBLIGATIONS. Tenant will, at its expense (a)
maintain, replace and repair all of the Premises (including, without
limitation, all non-structural components of the walls, all flooring,
ceilings and fixtures, all windows, window fittings and sashes, all interior
and exterior doors, and all paved and landscaped areas on the Land), except
those portions the maintenance of which is expressly Landlord's responsibility
pursuant to SECTION 8.2, in a good, clean, safe, orderly and sanitary
condition, ordinary wear and tear excepted; (b) keep the Premises free of
insects, rodents, vermin and other pests; (c) repair and maintain all
heating, ventilating and air conditioning equipment that serves the Premises
and all utility systems, lines, conduits and appurtenances thereto that serve
the Premises; (d) keep any garbage, trash, rubbish or refuse removed on a
regular basis and temporarily stored on the Premises in accordance with local
Laws; and (e) provide such janitorial services to the Building and such snow
and ice removal from the paved areas on the Land as may be required by Laws
or otherwise necessary for the operation of Tenant's business.
8.2 LANDLORD'S OBLIGATIONS. Landlord will, at its expense
(a) maintain, replace and repair the roof and structural elements of the
Building (including the foundations, structural components of the walls and
structural columns and beams) and all utility lines and facilities serving the
Premises that extend beyond the exterior walls of the Building in good
condition, ordinary wear and tear excepted; and (b) make all capital repairs and
replacements (but not ordinary maintenance and repairs) required to keep the
driveways and parking areas on the Land in good condition, ordinary wear and
tear excepted (including such resurfacing thereof as may from time to time be
necessary and any restriping required in connection with such resurfacing);
provided however, that subject to the penultimate sentence of SECTION 3.8, if
the need for any such repair is caused by (i) Tenant or anyone claiming by or
through Tenant; or (ii) the installation or removal of Tenant's property,
regardless of fault or by whom such damage is caused (unless caused by Landlord,
its agents, contractors, servants, employees or licensees), then, in any such
case, subject to SECTION 9.4, Tenant agrees to reimburse Landlord for all costs
and expenses incurred by Landlord with respect to such repair. Landlord will
commence repairs it is required to do hereunder as soon as reasonably
practicable after receiving written notice from Tenant of the necessity of such
repairs.
8.3 LANDLORD'S RIGHT OF ENTRY. For purposes of performing Landlord's
obligations under SECTION 8.2, or performing any of Tenant's obligations under
SECTION 8.1 that Tenant fails to perform within the cure period provided in
SECTION 15.2, or to inspect the Premises, Landlord may enter the
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Premises upon reasonable prior notice to Tenant (except in cases of actual or
suspected emergency, in which case no prior notice will be required) without
liability to Tenant for any loss or damage incurred as a result of such entry
(excluding, subject to SECTION 9.4, any damage to Tenant's personal property
or equipment caused by the negligence of Landlord or its agents, employees or
contractors), provided that Landlord will take reasonable steps in connection
with such entry to minimize any disruption to Tenant's business or its use of
the Premises.
90 INSURANCE, WAIVERS AND INDEMNITY
9.1 PROPERTY INSURANCE. Landlord will throughout the Term, provide
and maintain a "special form" insurance policy (including fire and standard
extended coverage perils, leakage from fire protective devices and other
water damage) covering loss or damage to the Improvements (including, without
limitation, the Original Base Building, the Original Leasehold Improvements,
the Expansion Base Building, and the Expansion Leasehold Improvements, and
any alterations made to the Premises from time to time) on a full replacement
cost basis, excluding excavations, footings and foundations and providing for
a deductible of no greater than $10,000.00 (unless Landlord can obtain a
smaller deductible and Tenant approves of such deductible and the increased
cost in such insurance arising from such smaller deductible). Tenant agrees
to pay Landlord, as Additional Rent, Landlord's cost of maintaining such
insurance, said payments to be made to Landlord within ten (10) days after
Landlord presents Tenant a statement setting forth the amount due, together
with reasonable supporting documentation. In the event of a casualty, Tenant
shall pay to Landlord the lesser of the amount of the deductible or the full
amount of the loss in the case of a loss in an amount less than the
deductible, subject in both cases, to the $10,000.00 limit set forth above,
in respect of any insured loss, which payment shall be treated in the same
manner as insurance proceeds. Tenant will provide and maintain throughout
the Term, at its expense, such property insurance covering Tenant's
machinery, equipment, furniture, fixtures, personal property (including also
property under the care, custody, or control of Tenant) and business
interests which may be located in, upon or about the Premises in such amounts
as Tenant may from time to time deem prudent. All of such property policies
will permit Tenant's waiver of claims against Landlord under SECTION 9.4 for
matters covered thereby.
9.2 LIABILITY AND OTHER INSURANCE. Tenant will throughout the Term,
at its expense as Additional Rent, provide and maintain the following insurance,
in the amounts specified below:
(a) bodily injury and property damage liability insurance, with
a combined single occurrence limit of not less than $5,000,000.00; such
insurance will be on a commercial general liability form including,
without limitation, personal injury and assumed contractual liability for
the performance by Tenant of the indemnity agreements set forth in
SECTION 9.5; Landlord and its mortgagee will be named as an additional
insureds in the policy providing such liability insurance, which will
include cross liability and severability of interests clauses
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or endorsements; unless otherwise approved in writing by Landlord, such
policy will have a deductible of $5,000.00 or less and will not have a
retention or self-insurance provision;
(b) worker's compensation insurance insuring against and
satisfying Tenant's obligations and liabilities under the worker's
compensation laws of the State of Texas and employers' liability
insurance in the limit of $100,000/500,000/100,000 (provided that Tenant
may self-insure this obligation pursuant to a program of self-insurance);
and
(c) if Tenant operates owned, hired or nonowned vehicles on the
Premises, comprehensive automobile liability will be carried at a limit
of liability not less than $1,000,000.00 combined bodily injury and
property damage.
9.3 GENERAL INSURANCE REQUIREMENTS. All insurance required to be
maintained by Landlord and Tenant pursuant to SECTIONS 9.1 AND 9.2 will be
maintained with insurors licensed to do business in the State of Texas and
having a Best's Key Rating of at least A-:XII. Tenant and Landlord will each
file with the other, on or before the Original Commencement Date and at least 10
days before the expiration date of expiring policies, such copies of either
current policies or certificates as may be reasonably required to establish that
the insurance coverage required by SECTIONS 9.1 AND 9.2 is in effect from time
to time and that the insuror(s) have agreed to give the other party at least 30
days notice prior to any cancellation of, or material modification to, the
required coverage. Landlord and Tenant will cooperate with each other in the
collection of any insurance proceeds which may be payable in the event of any
loss, including the execution and delivery of any proof of loss or other actions
required to effect recovery. All commercial general liability and property
policies maintained by Tenant will be written as primary policies, not
contributing with and not supplemental to any coverage that Landlord may carry.
9.4 WAIVERS. Except to the extent caused by the willful or negligent
act or omission or breach of this Lease by Landlord, its agents or employees or
anyone else for whom Landlord is legally responsible, Landlord and its
Affiliates will not be liable or in any way responsible for, and Tenant waives
all claims against Landlord and its Affiliates for, any loss, injury or damage
suffered by Tenant or others relating to (a) loss or theft of, or damage to,
property of Tenant or others; (b) injury or damage to persons or property
resulting from fire, explosion, falling plaster, escaping steam or gas,
electricity, water, rain or snow, or leaks from any part of the Improvements or
from any pipes, appliances or plumbing, or from dampness; or (c) damage caused
by persons on or about the Premises, or caused by the public or by construction
of any private or public work. Provided that Landlord maintains the insurance
required to be maintained by Landlord pursuant to SECTION 9.1, Landlord and its
Affiliates will not be liable or in any way responsible to Tenant for, and
Tenant waives all claims against Landlord and its Affiliates for, any loss,
injury or damage that is insured under SECTION 9.1 or required to be insured by
Tenant under SECTION 9.1. Provided that Tenant maintains the insurance required
to be maintained by Tenant pursuant to SECTION 9.1, Tenant and its Affiliates
will not be liable or in any way responsible to Landlord for, and Landlord
waives all claims against Tenant and its Affiliates for, any loss, injury or
damage that is insured by Tenant under SECTION 9.1.
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9.5 INDEMNITY. Except to the extent caused by the willful or
negligent act or omission or breach of this Lease by Landlord, its agents or
employees or anyone else for whom Landlord is legally responsible, Tenant
will indemnify and hold Landlord harmless from and against any and all
liability, loss, claims, demands, damages or expenses (including reasonable
attorneys' fees) due to or arising out of any accident or occurrence on or
about the Premises during the Term (including, without limitation, accidents
or occurrences resulting in injury, death, property damage or theft) or any
willful or negligent act or omission of or breach of this Lease by Tenant or
anyone for whom Tenant is legally responsible.
100 ALTERATIONS; MECHANICS' LIENS
10.1 ALTERATIONS. Tenant will not make any modifications,
improvements, alterations, additions or installations in or to the Premises
that affect the Original Building's structural systems, the Expansion
Building's structural systems, or the Core Building Systems, or that will
cost more than $50,000.00 per building, without Landlord's prior written
consent, which consent will not be unreasonably withheld. Tenant will notify
Landlord prior to making any modifications, improvements, alterations,
additions or installations in or to the Premises (referred to in this section
as the "work"), regardless of whether Landlord's consent is required in
connection with such work. Along with any request for Landlord's consent and
at least 15 days before commencement of any work or delivery of any materials
to be used in any work to the Premises, Tenant will furnish Landlord with
plans and specifications, estimated commencement and completion dates, the
name and address of Tenant's general contractor, and the necessary permits
and licenses. Landlord will have the right to post notices of
non-responsibility or similar notices on the Premises in order to protect the
Premises against any liens resulting from such work. Tenant agrees to
indemnify, defend and hold Landlord harmless from any and all claims and
liabilities of any kind and description which may arise out of or be
connected in any way with such work. Tenant will pay the cost of all such
work, and also the cost of painting, restoring or repairing the Premises
occasioned by such work. Upon completion of the work, Tenant will furnish
Landlord with contractor's affidavits that include full and final waivers of
liens and receipts for all amounts due for labor and materials. In the case
of any work that required Landlord's consent, Tenant will also provide
Landlord with as-built plans and specifications of the Premises as altered by
such work. All work will comply with all insurance requirements and all
applicable Laws (including, without limitation, the ADA) and will be
constructed in a good and workmanlike manner, using materials of first-class
quality and free and clear of all liens or claims therefor. Tenant will
permit Landlord to inspect construction operations in connection with any
such work. Landlord's approval of any plans for any modifications,
improvements, alterations, additions or installations proposed by Tenant will
not constitute a representation that the same will comply with
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Laws or be fit for any particular purpose; such approval will merely
constitute Landlord's consent to construct or install the same in the
Premises.
10.2 MECHANICS' LIENS. Tenant will not permit any mechanic's lien or
other lien to be filed against the Premises by reason of any work performed by
or for, or material furnished to, Tenant (including, without limitation, any
work undertaken by Tenant pursuant to SECTION 10.1). If any such lien is filed
at any time against the Premises, Tenant will cause the same to be discharged of
record (including by bonding) within 10 days after the date of filing the same.
If Tenant fails to discharge any such lien within such period, then, in addition
to any other right or remedy of Landlord, after 10 days prior written notice to
Tenant, Landlord may, but will not be obligated to, discharge the same by paying
to the claimant the amount claimed to be due or by procuring the discharge of
such lien as to the Premises by deposit in the court having jurisdiction of such
lien, the foreclosure thereof or other proceedings with respect thereto, of a
cash sum sufficient to secure the discharge of the same, or by the deposit of a
bond or other security with such court sufficient in form, content and amount to
procure the discharge of such lien, or in such other manner as is now or may in
the future be provided by present or future Laws for the discharge of such lien
as a lien against the Premises. Any amount paid by Landlord, or the value of
any deposit so made by Landlord, together with all costs, fees and expenses in
connection therewith (including reasonable attorney's fees of Landlord),
together with interest thereon at the Interest Rate, will be repaid by Tenant to
Landlord on demand
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by Landlord and if unpaid may be treated as Additional Rent. Notwithstanding
the foregoing, if Tenant desires to contest any such lien, Tenant may do so
provided that, within 10 days after Tenant learns of the filing thereof,
Tenant notifies Landlord of Tenant's intention to do so and, until such time
as Tenant causes such lien to be removed by the payment thereof or by bonding
over such lien in the manner provided by law or posting with Landlord such
security as Landlord may reasonably request to provide funds with which
Landlord may discharge such lien in the event Tenant is unsuccessful in its
contest and then fails to discharge such lien. Tenant will indemnify and
defend Landlord against and save Landlord and te Premises harmless from all
losses, costs, damages, expenses, liabilities, suits, penalties, claims,
demands and obligations, including, without limitation, reasonable attorney's
fees resulting from the assertion, filing, foreclosure or other legal
proceedings with respect to any such mechanic's lien or other lien.
110 ASSIGNMENT AND SUBLETTING
11.1 NOTICE AND CONSENT. Tenant may, upon notice to Landlord but
without obtaining Landlord's consent, assign this Lease or sublet all or any
portion of the Premises to any of Tenant's Affiliates. Tenant will not,
however, assign this Lease or sublet all or any portion of the Premises to any
assignee or subtenant that is not one of Tenant's Affiliates without first
obtaining Landlord's written consent, which consent will not be unreasonably
withheld, conditioned or delayed. It is not reasonable for Landlord to withhold
its consent to an otherwise acceptable assignee or sublessee on the grounds that
Tenant and its guarantor would or could be released from liability as a result
of such assignment or sublease or on the grounds that such assignee or sublessee
would be entitled to exercise the expansion right set forth in SECTION 18 below,
it being understood and agreed that Landlord's recapture remedy described below
is sufficient. If Tenant desires to effect an assignment or subletting that
will require Landlord's consent, Tenant will seek such written consent of
Landlord by a written request therefor, setting forth the date (which will not
be less than 30 days after date of Tenant's notice) on which Tenant desires to
assign this Lease or to sublet all or any portion of the Premises, the name and
address of the proposed assignee or sublessee and its proposed use of the
Premises, copies of the proposed assignee's or subtenant's financial statements
(or, if not available, any other information in Tenant's possession concerning
the proposed assignee's or
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subtenant's financial condition and business), and the proposed form of
assignment or sublease. If Landlord does not withhold its consent in
writing, stating the reason for withholding such consent, within twenty (20)
days after Tenant submits the documentation required by the terms of the
preceding sentence, then Landlord will be deemed to have approved of such
assignment or subletting. If it would be unreasonable for Landlord to
withhold, condition or delay its consent, but Landlord for whatever reason
does not wish an assignment or subletting of the entire Premises to be
consummated, Landlord's sole and exclusive right in such situation shall be
to terminate this Lease by written notice to Tenant, which notice must
specify a termination date no earlier than sixty (60) days after the date of
such notice and no later than one hundred twenty (120) days after the date of
such notice. Such termination notice must be given within twenty (20) days
after the date upon which Tenant requests Landlord's consent to such
assignment or subletting. If such termination notice is not given within
such twenty (20)-day period of time, then Landlord shall be deemed to have
consented to such assignment or subletting.
11.2 DEEMED ASSIGNMENTS. Any change in the partners or members of
Tenant (except to any of Tenant's Affiliates), if Tenant is a partnership or
limited liability company, or, if Tenant is a corporation, any transfer of
any or all of the shares of stock of Tenant (except to any of Tenant's
Affiliates), resulting in a change in the identity of the person or persons
owning a majority of equity interests in Tenant as of the date of this Lease,
will be deemed to be an assignment within the meaning of this SECTION 11.
However, a transfer of the stock or partnership or membership interests of
Tenant if Tenant is a publicly held entity whose equity interests are traded
on a national stock exchange, or in an initial public offering, will not
constitute an assignment requiring Landlord's consent pursuant to this
SECTION 11. A transfer of interests in Tenant's parent entity does not
constitute a violation of this SECTION 11.2.
11.3 GENERAL PROVISIONS. No subletting or assignment by Tenant
hereunder, regardless of whether the same requires Landlord's consent, will
release or discharge Tenant of or from any liability, whether past, present or
future, under this Lease, and Tenant will continue fully liable hereunder.
Notwithstanding the foregoing, in the event the Release Conditions, as defined
above, are met, then Tenant and Guarantor will be automatically released from
all obligations arising under this Lease from and after the date of such
assignment or sublease and Landlord agrees to execute an agreement confirming
such release within ten (10) days after requested to do so by Tenant or
Guarantor, or both, although execution of such document will not be necessary
for such release to be effective. The sublessee or assignee will agree to
comply with and be bound by all of the terms,
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covenants, conditions, provisions and agreements of this Lease to the extent
of the space sublet or assigned from and after the date of such assignment or
subletting, and Tenant will deliver to Landlord promptly after execution an
executed copy of each such sublease or assignment and such an agreement of
compliance by each such sublessee or assignee. Consent by Landlord to any
assignment of this Lease or to any subletting of the Premises will not be a
waiver of Landlord's rights under this section as to any subsequent
assignment or subletting. Any sale, assignment, mortgage, transfer or
subletting of this Lease which is not in compliance with the provisions of
this SECTION 11 will be of no effect and void. Landlord will not assign its
interest in this Lease before the Original Commencement Date. After the
Original Commencement Date, Landlord's right to assign its interest in this
Lease will remain unqualified. Landlord may charge Tenant up to $1,000.00
for attorneys' fees and administrative expenses incident to a review of any
documentation related to any proposed assignment or subletting by Tenant.
120 CASUALTY
12.1 LANDLORD'S OBLIGATIONS.
(a) Subject to subsections (b) and (c) below, in the event the
Improvements shall be damaged by fire or other casualty, Landlord shall,
at its own expense, cause such damage to be repaired, and the Rent shall
be abated from the date of the occurrence of such fire or other casualty
until such repair work is completed.
(b) Subject to subsection (c) below, if a fire or other
casualty occurs during the last two (2) years of the Term of this Lease
and (A) the cost of repairing or restoring the Improvements to their
condition existing prior to such casualty, as determined by an architect
or contractor selected by Landlord and reasonably approved by Tenant, is
equal to or greater than 75% of the market value of the Improvements
immediately preceding such casualty, as determined by an appraiser
selected by Landlord and reasonably approved by Tenant or (B)
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the time required to repair and restore the Improvements to their
condition existing prior to such casualty, using a reasonable
construction schedule as determined by an architect or contractor
selected by Landlord and reasonably approved by Tenant, will exceed 180
days from the commencement of repairs and restoration, then either
Landlord or Tenant may, at its option, elect to terminate this Lease by
giving the other written notice of termination within thirty (30) days
from the date of such occurrence. In such event, the proceeds of
insurance will belong to the party carrying such insurance, Tenant will
not be required to pay the deductible, and the Rent shall abate
completely from and after the date of the occurrence of such fire or
other casualty.
(c) Notwithstanding the foregoing, in the event that the
Improvements shall be damaged by any casualty not covered by Landlord's
insurance as required by SECTION 9.1, Landlord shall have the option to
terminate this Lease by notice to Tenant within sixty (60) days of the
occurrence; provided, that Tenant may nullify Landlord's notice of
termination in such case by notifying Landlord within ten (10) days
thereafter that Tenant will make available to Landlord funds sufficient
to cover the uninsured damage and making arrangements reasonably
satisfactory to Landlord to make such funds available to Landlord as
needed. If Tenant makes such funds available to Landlord, Landlord shall
have no obligation to repay such funds to Tenant any time or in any
manner.
12.2 TIME FOR REPAIRS. In the event of partial damage to the
Improvements, Landlord shall advise Tenant in writing within thirty (30) days of
the occurrence the time that Landlord estimates will be required to repair or
restore the Improvements, using a reasonable construction schedule. If Landlord
is obligated to repair or to restore the Improvements damaged by fire other
casualty, Landlord shall commence to repair any such damage or to restore the
Improvements as soon as reasonably possible (and in any event, within sixty (60)
days after the date of such occurrence) and shall diligently pursue completion
of such repairs or restoration. In the event Landlord does not complete such
repairs within the time period specified in such estimate (as extended by one
(1) day of each day of each day of delay after the tenth (10th) day of delay due
to force majeure), then Landlord must pay to Tenant $2,000 per day for the
period of time after the date specified in such estimate until Landlord
completes such repairs. If Landlord does not complete such repairs within one
hundred eighty (180) days after commencement of such repairs and restoration,
then Tenant may also terminate this Lease by written notice to Landlord at any
time before Landlord completes such repairs. In such event, Landlord and Tenant
will have no further obligations to each other except that Landlord must return
all Basic Rent and other charges paid by Tenant for the period after the
occurrence of such event and must pay to Tenant the amounts accruing under this
SECTION 12.2 for Landlord's failure to complete such repairs and Tenant will not
be required to pay the deductible to Landlord.
13. EMINENT DOMAIN
13.1 TERMINATION. If the whole of the Premises is taken by any public
authority under the power of eminent domain, this Lease will terminate as of the
day possession is taken by such public authority. If more than 30% of the floor
area of the Building is taken, or if so much of the Land is taken that Tenant is
permanently deprived of the use of more than 30% of the parking spaces
previously available on the Land (and such spaces cannot be reconstructed on the
remaining Land or any adjacent land acquired by Landlord for that purpose within
90 days after Tenant is so deprived of such use), by any public authority under
the power of eminent domain, then Tenant may, by notice to Landlord, terminate
this Lease as of the day possession is taken by such public authority. In case
of any such termination, Landlord will make a pro rata refund of any prepaid
Rent.
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13.2 RESTORATION; AWARD. Anything in this SECTION 13 to the contrary
notwithstanding, in the event of a partial condemnation of the Premises where
this Lease is not terminated, (i) Landlord will, at its sole cost and expense,
restore the Premises (other than any alterations or improvements installed by
Tenant) to a complete architectural unit (but Landlord's restoration obligations
will be limited to restoration and repair of the Original Building and, if
applicable, the Expansion Building, including all sitework), and (ii) the Basic
Rent provided for herein during the period from and after the date of delivery
of possession pursuant to such proceedings to the termination of this Lease will
be reduced to a sum equal to the product of the Basic Rent provided for herein
multiplied by a fraction, the numerator of which is the area of the Premises
remaining after such taking and after the same has been restored to a complete
architectural unit, and the denominator of which is the area of the Premises
prior to such taking. In the event of any such taking or purchase in lieu
thereof and neither Landlord nor Tenant terminates this Lease, Landlord shall be
entitled to receive the entire price or award from any such taking or private
purchase in lieu thereof without any payment to Tenant, and Tenant hereby
assigns to Landlord Tenant's interest, if any, in such award. If this Lease
terminates for any reason, then Landlord and Tenant may prosecute their claims
in any condemnation proceedings for the value of their respective interest.
Landlord shall be entitled to the condemnation award attributable to the real
property and improvements and Tenant shall be entitled to the condemnation award
for the taking of its personalty (store fixtures and equipment), relocation
expenses, goodwill, loss of business and any other award not related to the
value of the real property and improvements, but shall not be entitled to make a
claim for the leasehold improvements or the leasehold estate.
14. END OF TERM
14.1 SURRENDER. On the last day of the Term, or on the sooner
termination thereof, Tenant will peaceably surrender the Premises in good
condition and repair (ordinary wear and tear and damage by casualty excepted),
consistent with Tenant's duty to make repairs as herein provided. Tenant will
give written notice to Landlord at least 30 days prior to vacating the Premises
for the express purpose of arranging a meeting with Landlord for a joint
inspection of the Premises. On or before the last day of the Term, or the date
of sooner termination thereof, Tenant may, at its sole cost and expense, remove
all of its property and trade fixtures and equipment from the Premises and
repair all damage to the Premises caused by such removal. All property not
removed will be deemed abandoned. Tenant hereby appoints Landlord its agent to
remove all property of Tenant not so removed from the Premises upon termination
of this Lease and to cause its transportation and storage for Tenant's benefit,
all at the sole cost and risk of Tenant, and Landlord will not be liable for
damage, theft, misappropriation or loss thereof, nor will Landlord be liable in
any manner in respect thereto. Tenant will reimburse Landlord upon demand for
any expenses incurred by Landlord with respect to removal, transportation or
storage of abandoned property and with respect to restoring such Premises to
good order, condition and repair. All Leasehold Improvements and any other
modifications, improvements, alterations, additions and fixtures, other than
Tenant's trade fixtures and equipment, which have been made or installed by
either Landlord or Tenant upon the Premises, will become the property of
Landlord on the last day of the Term or sooner termination thereof and will be
surrendered with the Premises as a part thereof. Tenant will promptly surrender
all keys for the Premises to Landlord at the place then fixed for the payment of
Rent and will inform Landlord of combinations on any vaults, locks and safes
left on the Premises.
14.2 HOLDING OVER. In the event Tenant remains in possession of the
Premises after expiration of this Lease without Landlord's consent, Tenant will
be deemed to be occupying the Premises without claim of right, and Tenant will
indemnify Landlord against loss or liability resulting from delay by Tenant in
surrendering the Premises, including, without limitation, claims made by any
succeeding tenants founded on such delay and any attorneys' fees resulting
therefrom. In addition,
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if Tenant remains in possession of the Premises after expiration of this
Lease without a written agreement with Landlord as to (i) the amount Rent to
be paid for such occupancy, Tenant will pay a charge for each day of
occupancy in an amount equal to 150% of the Basic Rent (on a daily basis)
payable immediately prior to such expiration, plus 100% of all Additional
Rent (also on a daily basis); or (ii) the duration of Tenant's holdover
tenancy, Tenant will be deemed a tenant at sufferance.
15. DEFAULTS AND REMEDIES
15.1 GENERAL. All rights and remedies of Landlord and Tenant
enumerated in this Lease are cumulative and are not intended to be exclusive of
any other remedies or means of redress at law or in equity to which either party
may be lawfully entitled in case of any breach or threatened breach by the other
party of any provision of this Lease. The failure of either party to insist in
any one or more cases upon the strict performance of any of the covenants of
this Lease or to exercise any option herein contained will not be construed as a
waiver or relinquishment for the future of such covenant or option. A receipt
by Landlord of Rent with knowledge of the breach of any covenant hereof (other
than breach of the obligation to pay the portion of such Rent paid) will not be
deemed a waiver of such breach, and no waiver by either party of any provisions
of this Lease will be deemed to have been made unless expressed in writing and
signed by such party. Each party agrees to pay, upon demand, all of the other
party's costs, charges and expenses, including the reasonable fees and
out-of-pocket expenses of counsel, agents, and others retained, incurred in
successfully enforcing the other party's obligations under this Lease.
15.2 EVENTS OF DEFAULT. Each of the following events will constitute
an "EVENT OF DEFAULT" under this Lease:
(a) FAILURE TO PAY RENT. Tenant fails to pay Basic Rent or any
other Rent payable by Tenant under the terms of this Lease when due, and
such failure continues for 10 days after notice from Landlord to Tenant
of such failure (provided that, with respect to monthly installments of
Basic Rent, Tenant will only be entitled to two notices of such failure
during any calendar year and if, after two such notices are given in any
calendar year, Tenant fails, during such calendar year, to pay any
further monthly installment of Basic Rent when due, such failure will
constitute an Event of Default hereunder without any further notice from
Landlord or additional cure period).
(b) FAILURE TO PERFORM OTHER OBLIGATIONS. Tenant breaches or
fails to comply with any provision of this Lease applicable to Tenant
other than a covenant to pay Rent, and such breach or noncompliance
continues for a period of 30 days after notice thereof from Landlord to
Tenant; or, if such breach or noncompliance cannot be reasonably cured
within such 30-day period, Tenant does not commence to cure such breach
or noncompliance within such 30-day period or, after commencing to cure
such breach or noncompliance, does not thereafter diligently pursue such
cure in good faith to completion.
(c) EXECUTION AND ATTACHMENT AGAINST TENANT. Tenant's interest
under this Lease or in the Premises is taken upon execution or by other
process of law directed against Tenant, or is subject to any attachment
by any creditor or claimant against Tenant and such attachment is not
discharged or disposed of within 60 days after levy.
(d) BANKRUPTCY OR RELATED PROCEEDINGS. Tenant files a petition
in bankruptcy or insolvency, or for reorganization or arrangement under
any bankruptcy or insolvency Laws, or voluntarily takes advantage of any
such Laws by answer or otherwise, or dissolves or
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makes a general assignment for the benefit of creditors, or involuntary
proceedings under any such Laws or for the dissolution of Tenant are
instituted against Tenant, or a receiver or trustee is appointed for the
Premises or for all or substantially all of Tenant's property, and such
involuntary proceedings are not dismissed or such receivership or
trusteeship vacated within 60 days after such institution or appointment.
15.3 LANDLORD'S REMEDIES. Time is of the essence. If any Event of
Default occurs, Landlord will have the right, at Landlord's election, then or at
any later time, to exercise any one or more of the following remedies:
(a) CURE BY LANDLORD. Landlord may, at Landlord's option but
without obligation to do so, and without releasing Tenant from any
obligations under this Lease, make any payment or take any action as
Landlord deems necessary or desirable to cure any Event of Default in
such manner and to such extent as Landlord in good faith deems necessary
or desirable. Tenant will pay Landlord, upon demand, all reasonable
advances, costs and expenses of Landlord in connection with making any
such payment or taking any such action, including reasonable attorney's
fees, together with interest at the Interest Rate, from the date of
payment of any such advances, costs and expenses by Landlord.
(b) TERMINATION OF LEASE AND DAMAGES. Landlord may terminate
this Lease, effective at such time as may be specified by notice to
Tenant, and demand (and, if such demand is refused, recover) possession
of the Premises from Tenant. In such event, Landlord will be entitled to
recover from Tenant, as damages for loss of the bargain and not as a
penalty, an aggregate sum equal to (i) all unpaid Basic Rent and other
Rent for any period prior to the termination date of this Lease
(including interest from the due date to the date of the award at the
Interest Rate); plus (ii) the present value at the time of termination
(calculated by discounting on a monthly basis at a discount rate equal to
the rate payable on U.S. Treasury securities offered at the time of award
having a maturity closest to the date on which the Term would have
expired but for such termination) of the amount, if any, by which (A) the
aggregate of the Basic Rent and all other Rent payable by Tenant under
this Lease that would have accrued for the balance of the Term after
termination, exceeds (B) the amount of such Basic Rent and other Rent
which could reasonably be recovered by reletting the Premises for the
remainder of the Term at the then-current fair rental value; plus (iii)
interest on the amount described in (ii) above from the termination date
to the date of the award at the Interest Rate.
(c) REPOSSESSION AND RELETTING. Landlord may reenter and take
possession of all or any part of the Premises, without additional demand
or notice unless required by applicable Laws, and repossess the same and
expel Tenant and any party claiming by, through or under Tenant, and
remove the effects of both using such force for such purposes as may be
necessary, without being liable for prosecution for such action or being
deemed guilty of any manner of trespass, and without prejudice to any
remedies for arrears of Rent or right to bring any proceeding for breach
of covenants or conditions. No such reentry or taking possession of the
Premises by Landlord will be construed as an election by Landlord to
terminate this Lease unless a notice of such intention is given to
Tenant. No notice from Landlord or notice given under a forcible entry
and detainer statute or similar Laws will constitute an election by
Landlord to terminate this Lease unless such notice specifically so
states. Landlord reserves the right, following any reentry or reletting,
to exercise its right to terminate this Lease by giving Tenant such
notice, in which event this Lease will terminate as specified in such
notice. After recovering possession of the Premises, Landlord will use
reasonable efforts to relet the Premises on commercially reasonable terms
and conditions.
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Landlord may collect and receive the rents for such reletting.
Landlord may apply the same first to the payment of such expenses as
Landlord may have incurred in recovering possession of the Premises,
including attorneys' fees and expenses for putting the same into good
order and condition (but specifically excluding the cost of any lease
commission or the cost of preparing or altering the same for
re-rental), and then to the fulfillment of the covenants of Tenant
hereunder. Any such reletting herein provided for may be for the
remainder of the Term or any renewal term of this Lease, as originally
granted, or for a longer or shorter period; Landlord will have the
right to change the character and use made of the Premises, and
Landlord will not be required to accept any substitute tenant offered
by Tenant or to observe any instructions given by Tenant about
reletting. Regardless of Landlord's recovery of possession of the
Premises, so long as this Lease is not terminated Tenant will continue
to pay (and Landlord may recover, if Tenant fails to do so), on the
dates specified in this Lease, the Basic Rent and other Rent which
would be payable if such repossession had not occurred, less a credit
for the net amounts, if any, actually received by Landlord through any
reletting of the Premises as long as Landlord gives Tenant at least
thirty (30) days' notice of the net amount due (which notice Landlord
may change from time to time as the facts change). Tenant will have
thirty (30) days after receipt of notice from Landlord of any other
amount due in which to pay such amount.
(d) BANKRUPTCY RELIEF. Nothing contained in this Lease will
limit or prejudice Landlord's right to prove and obtain as liquidated
damages in any bankruptcy, insolvency, receivership, reorganization or
dissolution proceeding, an amount equal to the maximum allowable by any
Laws governing such proceeding in effect at the time when such damages
are to be proved, whether or not such amount be greater, equal or less
than the amounts recoverable, either as damages or Rent, under this
Lease.
15.4 LANDLORD'S DEFAULT; TENANT'S REMEDIES. If, during the Term,
Landlord defaults in fulfilling any of its covenants, obligations or agreements
set forth in this Lease, Tenant may give Landlord notice of such default and, if
at the expiration of 30 days after delivery of such notice, such default
continues to exist, or in the event of a default which cannot with due diligence
be cured within a period of 30 days, if Landlord fails to proceed promptly after
the delivery of such notice and with all due diligence to commence to cure the
same and thereafter to prosecute the curing of such default with all due
diligence to completion as soon as reasonably possible, then Tenant will be
entitled to exercise any right or remedy available to Tenant at law or in equity
by reason of such default, except to the extent expressly waived or limited by
the terms of this Lease, and, provided that Tenant stated in such notice of
default to Landlord that Tenant intended to effect its self-help and offset
rights under this SECTION 15.4, Tenant may proceed to cure Landlord's default
and offset the amount reasonably expended by Tenant in doing so, plus interest
thereon at the Interest Rate from the date incurred to the date offset, against
the next accruing amounts of Basic Rent due hereunder; provided, however, in no
event may Tenant offset against any monthly installment of Basic Rent an amount
exceeding 25% of such installment and if such monthly offset is less than the
total amount of Tenant's expenses which are allowable for offset, the remaining
balance thereof may be carried forward and offset against future installments of
Basic Rent (but never more than 25% of any month's Basic Rent); provided further
that, if the balance of the Term will not allow full recovery of the offset
amount at the rate of 25% of each installment of Basic Rent, Tenant may amortize
the full offset over the balance of the remaining monthly installments of Basic
Rent, even if the monthly amortized offsets are in excess of 25% of those
installments. Notwithstanding the foregoing, however, if Tenant has been
notified of the name and address of any mortgagee, ground lessor, trust deed
holder, and/or sale-leaseback lessor of Landlord's interest in the Premises,
then Tenant will not exercise any remedy as a result of Landlord's default
unless and until Tenant has given any such mortgagee,
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ground lessor, trust deed holder and/or sale-leaseback lessor, by registered
or certified mail, a copy of any notice of default served upon Landlord
simultaneously with the delivery of notice to Landlord.
15.5 DISCLAIMER OF LANDLORD'S LIEN. Landlord disclaims and waives any
statutory or common law lien (excluding, however, any judgment lien) on the
Leasehold Improvements or any personal property of Tenant in or on the Premises.
16. SUBORDINATION
16.1 SUBORDINATION, NONDISTURBANCE AND ATTORNMENT. This Lease will
be subject and subordinate to any mortgage, deed of trust, ground lease or
sale-leaseback now placed upon the Premises by Landlord, and to amendments,
renewals and extensions thereof. Landlord must obtain from any holder of any
mortgage, deed of trust, ground lease, or sale-leaseback interest which has
priority over this Lease at the time of execution of this Lease and recording
of the Memorandum of Lease a Non-disturbance Agreement on the form attached
to this Lease as EXHIBIT F or such other form as is acceptable to Tenant (an
"NDA") and if Landlord does not do so before the Original Commencement Date,
all Rent will be forgiven from the Original Commencement Date through the
date that Landlord delivers such NDA, executed by such holder and Landlord,
to Tenant. Tenant agrees to subordinate this Lease to any mortgage, deed of
trust, ground lease, or sale-leaseback interest placed upon the Premises by
Landlord after the Original Commencement Date and to any amendments,
renewals, and extensions thereof upon the condition that the holder of the
instrument to which this Lease is subordinated has given Tenant an NDA upon
the form attached as EXHIBIT F or such other form as is acceptable to Tenant.
16.2 OPTION TO MAKE LEASE SUPERIOR. Notwithstanding anything contained
in SECTION 16.1, in the event the holder of any mortgage, deed of trust, ground
lease or sale-leaseback instrument at any time elects to have this Lease
constitute a prior and superior lien to its mortgage, deed of trust, ground
lease or sale-leaseback instrument, then, and in such event, upon any such
holder or Landlord notifying Tenant to that effect in writing, this Lease in its
entirety will be deemed prior and superior in lien to such mortgage, deed of
trust, ground lease or sale-leaseback instrument, whether this Lease is dated
prior to or subsequent to the date of such mortgage, deed of trust, ground lease
or sale-leaseback instrument.
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17. MISCELLANEOUS
17.1 BROKERS. Landlord and Tenant represent and warrant that no
broker or agent negotiated or was instrumental in negotiating or consummating
this Lease except Peterson Realty Group. Neither party knows of any other
real estate broker or agent who is or might be entitled to a commission or
compensation in connection with this Lease. Landlord will pay any and all
fees, commissions or other compensation payable to Peterson Realty Group.
Tenant and Landlord will indemnify and hold each other harmless from all
damages paid or incurred by the other resulting from any claims asserted
against either party by brokers or agents claiming through the other party
(other than Peterson Realty Group, who will be paid by Landlord as provided
above).
17.2 ESTOPPEL CERTIFICATES. Landlord and Tenant agree, from time to
time, upon not less than 10 days' prior written request by the other party, to
deliver to the other party a statement in writing certifying (i) this Lease is
unmodified and in full force and effect (or if there have been modifications,
that this Lease as modified is in full force and effect and stating the
modifications); (ii) the dates to which Basic Rent and other Rent have been
paid; (iii) the other party is not in default in any provision of this Lease or,
if in default, the nature thereof specified in detail; (iv) the amount of
monthly Basic Rent currently payable by Tenant; (v) the amount of any prepaid
Rent; (vi) that Tenant has taken possession of the Original Premises (if Tenant
has in fact done so) and that Landlord has performed all of its obligations
under SECTION 3 with respect to the design, construction and installation of the
Original Base Building and the Original Leasehold Improvements, or if there are
any such obligations remaining to be performed, specifying the same in detail;
(vii) if applicable, that Tenant has taken possession of the Expansion Building
(if Tenant has in fact done so) and that Landlord has performed all of its
obligations under SECTION 18 with respect to the design, construction and
installation of the Expansion Base Building and the Expansion Leasehold
Improvements, or if there are any such obligations remaining to be performed,
specifying the same in detail; and (viii) such other matters as may be
reasonably requested by the requesting party or any mortgagee or prospective
purchaser of the Premises.
17.3 NOTICES. All notices required or permitted under this Lease must
be in writing and will only be deemed properly given and received (i) when
actually given and received, if delivered in person to a party who acknowledges
receipt in writing or, for purposes of notice pursuant to SECTION 3, if
transmitted by telecopier; or (ii) one business day after deposit with a private
courier or overnight delivery service, if such courier or service obtains a
written acknowledgment of receipt; or (iii) three business days after deposit in
the United States mails, certified or registered mail with return receipt
requested and postage prepaid. All such notices must be transmitted by one of
the methods described above to the party to receive the notice at, in the case
of notices to Landlord, Landlord's Notice Address, and in the case of notices to
Tenant, the applicable Tenant's Notice Address, or, in either case, at such
other address(es) as either party may notify the other of according to this
SECTION 17.3.
17.4 ACTIONS BY AGENTS. All rights and remedies of Landlord and Tenant
under this Lease or that may be provided by law may be executed by the
applicable party in its own name, individually, or in the name of its agent, and
all legal proceedings for the enforcement of any such rights or remedies,
including those set forth in SECTION 15, may be commenced and prosecuted to
final judgment and execution by the applicable party in its own name or in the
name of its agent. The applicable party will, upon the other's request, provide
written evidence of the authority of any agent of Landlord to act on Landlord's
behalf.
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17.5 SEVERABILITY; GOVERNING LAW. If any term or provision of this
Lease is to any extent held invalid or unenforceable, the remaining terms and
provisions of this Lease will not be affected thereby, but each term and
provision of this Lease will be valid and enforced to the fullest extent
permitted by law. This Lease will be construed and enforced in accordance with
the laws of the State of Texas.
17.6 TRANSFERS OF LANDLORD'S INTEREST. The term "LANDLORD" as used in
this Lease, so far as covenants or obligations on the part of Landlord are
concerned, will be limited to mean and include only the owner or owners of the
Premises at the time in question, and in the event of any transfer or conveyance
after the Original Commencement Date, the then-grantor will be automatically
freed and released from all personal liability accruing from and after the date
of such transfer or conveyance as respects the performance of any covenant or
obligation on the part of Landlord contained in this Lease to be performed, it
being intended hereby that the covenants and obligations contained in this Lease
on the part of Landlord will be binding, subject to SECTION 17.11, on the
then-Landlord only during and in respect to its period of ownership. In the
event of a sale or conveyance by Landlord of the Premises after the Original
Commencement Date, the same will operate to release Landlord from any future
liability upon any of the covenants or conditions herein contained and in such
event Tenant agrees to look solely to the responsibility of the successor in
interest of Landlord in and to this Lease. This Lease will not be affected by
any such sale or conveyance, and Tenant agrees to attorn to the purchaser or
grantee, which will be obligated on this Lease only so long as it is the owner
of Landlord's interest in and to this Lease. In the event Landlord sells or
otherwise transfers the Premises, Tenant will be entitled to pay all Rent and
other amounts due under the terms of this Lease to Landlord at Landlord's last
known address unless and until Tenant receives written notice from Landlord
authorizing Tenant to pay such amounts to the new owner of the Premises and a
written assumption by such new owner of all Landlord's duties and obligations
under this Lease which arise after the transfer.
17.7 HEADINGS. The marginal or topical headings of the several
sections are for convenience only and do not define, limit or construe the
contents of such sections.
17.8 COMPLETE AGREEMENT; MODIFICATION. All of the representations and
obligations of the parties are contained in this Lease and no modification,
waiver or amendment of this Lease or of any of its conditions or provisions will
be binding upon a party unless in writing signed by such party.
17.9 NO OFFER. The submission of this document for examination does
not constitute an offer to lease, or a reservation of, or option for, the
Premises. This document becomes effective and binding only upon the execution
and delivery hereof by the proper officer of Landlord and by Tenant.
17.10 SURVIVAL. All obligations of Tenant hereunder not fully performed
as of the expiration or earlier termination of the Term will survive the
expiration or earlier termination of the Term, including, without limitation,
all payment obligations with respect to Taxes and all obligations concerning the
condition of the Premises.
17.11 LIMITATION ON LANDLORD'S LIABILITY. Tenant agrees to look solely
to Landlord's interest in the Premises for the recovery of any judgment from
Landlord, it being agreed that Landlord, and if Landlord is a partnership, its
partners whether general or limited, and if Landlord is a corporation, its
directors, officers or shareholders, and if Landlord is a limited liability
company, its managers or members, will never be personally liable for any such
judgment.
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17.12 AUTHORITY. Tenant will furnish to Landlord and Landlord will
furnish to Tenant, promptly upon demand, a corporate resolution, proof of due
authorization of partners, or other appropriate documentation reasonably
requested by the other party evidencing the due authorization of Tenant or
Landlord, as the case may be, to enter into this Lease.
17.13 NO PARTNERSHIP. This Lease will not be deemed or construed to
create or establish any relationship or partnership or joint venture or similar
relationship or arrangement between Landlord and Tenant hereunder.
17.14 FORCE MAJEURE. Whenever a period of time is herein prescribed
for action to be taken by either party, such party will not be liable or
responsible for, and there will be excluded from the computation of any such
period of time, any delays due to force majeure.
17.15 FINANCIAL STATEMENTS. Tenant acknowledges that it has provided
Landlord with its financial statement as a material inducement to Landlord's
agreement to lease the Premises to Tenant, and that Landlord has relied on the
accuracy of such financial statement in entering into this Lease. Tenant
represents and warrants that the information contained in such financial
statement is true, complete and correct in all material aspects. Within 10 days
from request by Landlord, Tenant will make available to Landlord or to any
prospective purchaser or lender of the Premises, audited financial statements of
Tenant or any guarantor, provided, that Landlord or any such prospective
purchaser or lender agrees to maintain such statements in confidence, and
provided further that if audited financial statements of Tenant are not
available at the time of such request, Tenant may deliver unaudited statements
prepared in accordance with generally accepted accounting principles
consistently applied and certified to be true and correct by Tenant's chief
financial officer.
17.16 BINDING EFFECT. The covenants and agreements herein contained
will bind and inure to the benefit of Landlord and its successors and assigns,
and Tenant and its permitted successors and assigns. All obligations of each
party constituting Tenant hereunder will be the joint and several obligations of
each such party.
17.17 LEASE GUARANTY. Tenant covenants and agrees to cause Guarantor to
execute and deliver to Landlord a Lease Guaranty in form and substance as that
which is attached hereto as EXHIBIT G. In the event a fully executed original
of the Lease Guaranty is not provided to Landlord within three (3) days
following the date of this Lease, then Landlord may, at its option and as its
sole and exclusive remedy, terminate this Lease.
17.18 CORPORATE AUTHORITY. Contemporaneous with the execution of this
Lease, Tenant shall provide to Landlord the following:
(a) A copy of Tenant's Good Standing, or similar certificate,
issued by the Secretary of State of the State of Tenant's incorporation;
(b) Evidence that Tenant is qualified to do business in the
State wherein the Land is located; and
(c) A copy of the appropriate corporate resolutions, certified
by the secretary or the assistant secretary of the Tenant, evidencing the
authorization of the Tenant to execute this Lease.
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In the event a guaranty agreement is executed with respect to this Lease,
Tenant shall additionally provide to Landlord, contemporaneous with the
execution of this Lease, the items listed above for the guarantor.
18. EXPANSION OPTION. Landlord hereby grants to Tenant the right to expand
the Improvements on the Land in accordance with the terms of this SECTION 18.
Such expansion right is a continuing right that expires on the Expiration Date,
and inures solely to the benefit of (A) Tenant, Tenant's corporate successors
and assigns (including, without limitation, any person or entity that acquires
Tenant), and (B) any assignee of this Lease (including, without limitation,
Tenant's Affiliates) to whom Tenant assigns such right unless Landlord is
entitled to and recaptures the Premises in accordance with the terms of SECTION
11.1 above and their corporate successors and assigns (with all such persons or
entities being deemed included in the term "TENANT"). Tenant cannot assign this
expansion option to any person or entity other than an assignee of this Lease.
Tenant cannot exercise this expansion option (Y) if an Event of Default has
occurred and is ongoing, or (Z) if neither Tenant nor its guarantor has a net
worth (excluding goodwill) greater than or equal to $75 million at the time
Tenant (or its assignee, as the case may be) exercises such expansion option.
(a) In the event Tenant wishes to exercise this right, Tenant
must notify Landlord of such fact, which notice must specify that Tenant
wishes to go forward with the expansion pursuant to the specifications of
EXHIBIT H to this Lease (the "2-STORY PLAN") or the specifications of
EXHIBIT I to this Lease (the "3-STORY PLAN"). The building shell for the
building that Tenant elects to have constructed is referred to in this
Lease as the "EXPANSION BASE BUILDING" and the Tenant improvements to the
Expansion Base Building are referred to as the "EXPANSION LEASEHOLD
IMPROVEMENTS." The Expansion Base Building and the Expansion Leasehold
Improvements are collectively referred to as the "EXPANSION BUILDING" and
the work of constructing the Expansion Building is referred to as
"LANDLORD'S EXPANSION WORK".
(b) On or before thirty (30) days after Tenant delivers such
notice to Landlord, Landlord will cause its architect to prepare and
deliver to Tenant preliminary plans and specifications for the Expansion
Base Building (the "EXPANSION BASE BUILDING PLANS"), which plans must be
based on an exterior appearance substantially similar to the Original
Base Building. While these preliminary plans and specifications are not
required to be permit-ready, they must contain a site plan, floor plan,
one-quarter inch (0.25") scale core building plans, elevations of the
Expansion Base Building and a riser diagram of the mechanical, electrical
and plumbing systems. Within five (5) business days after Tenant
receives such preliminary Expansion Base Building Plans, Tenant will
either approve the same in writing or notify Landlord in writing of
Tenant's objections to the preliminary Expansion Base Building Plans and
how the preliminary Expansion Base Building Plans must be changed in
order to make them acceptable to Tenant. Each business day following the
fifth (5th) business day after the preliminary Expansion Base Building
Plans are submitted to Tenant until Tenant either approves them or
delivers a notice of objections to Landlord will be a day of Tenant
Expansion Delay. Within five (5) business days after Landlord's receipt
of Tenant's notice of objections, Landlord will cause its architect to
prepare revised Expansion Base Building Plans according to such notice
and submit the revised Expansion Base Building Plans to Tenant. In any
review, Tenant cannot object to any aspect of the proposed Expansion Base
Building Plans (i) if such objection would require material deviations
from the terms of EXHIBIT H or EXHIBIT I attached to this Lease, as the
case may be, or (ii) such objection was not included within any of the
previous objections made by Tenant to the Expansion Base Building Plans
unless the item objected to was not included in any of the previous
versions of the Expansion Base Building Plans or such item was so
included, but has been affected by a subsequent change to the Expansion
Base Building Plans. However, it is understood
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and agreed that Tenant has the right to select the following items,
even if such items are not consistent with the guidelines detailed in
the Base Building Specifications attached as EXHIBIT B or with the
same items in the Original Building , as long as they are available to
comply with the schedule for construction of the Expansion Building:
exterior brick, glass, and metal frames; restroom finishes (including,
without limitation, ceramic tile and toilet partitions); lobby
finishes; elevator cab finishes; landscaping; and common area interior
finishes, doors and hardware. Upon submittal to Tenant of the revised
Expansion Base Building Plans, and upon submittal of any further
revisions, the procedures described above will be repeated until
Landlord and Tenant have reached agreement. Once they have reached
agreement, Landlord must promptly prepare permit-ready Expansion Base
Building Plans and submit them to Tenant for Tenant's approval. The
only grounds upon which Tenant can object to such permit-ready
Expansion Base Building Plans is that they materially differ from the
final approved preliminary Expansion Base Building Plans. Tenant's
failure to respond to Landlord's submission within five (5) business
days after Landlord delivers such permit-ready Expansion Base Building
Plans to Tenant constitutes Tenant's approval of such permit-ready
Expansion Base Building Plans. The final permit-ready Expansion Base
Building Plans, as approved by Landlord and Tenant, constitute the
"APPROVED EXPANSION BASE BUILDING PLANS" under this Lease.
(c) On or before seventy-five (75) days after Landlord and
Tenant have approved the Approved Expansion Base Building Plans, Tenant
will cause its architect to prepare and deliver to Landlord preliminary
plans and specifications for the Expansion Leasehold Improvements (the
"EXPANSION LEASEHOLD IMPROVEMENTS PLANS"). While these preliminary plans
and specifications are not required to be permit-ready, they must show
sufficient detail concerning all aspects of the Expansion Leasehold
Improvements so that making them permit-ready is only a matter of
incorporating technical details. Each day following the expiration of
such seventy-five (75)-day period until Tenant delivers the preliminary
Expansion Leasehold Improvements Plans will be a day of Expansion Tenant
Delay. Within five (5) business days after receipt of the preliminary
Expansion Leasehold Improvements Plans, Landlord will either approve the
same in writing or notify Tenant in writing of Landlord's objections to
the preliminary Expansion Leasehold Improvements Plans and how the
preliminary Expansion Leasehold Improvements Plans must be changed in
order to make them acceptable to Landlord. Landlord can only object to
the preliminary Expansion Leasehold Improvements Plans on the grounds
that they would adversely affect the structural integrity of the
Expansion Base Building or materially modify any portion of the Core
Building Systems of the Expansion Base Building and cannot object in any
subsequent review to any matter not raised in a preceding review, unless
the item objected to was not included in any of the previous versions of
the Expansion Leasehold Improvements Plans or such item was so included,
but has been affected by a subsequent change to the Expansion Leasehold
Improvements Plans. However, under all circumstances, Tenant has the
right to select the following items as they apply to the Expansion
Leasehold Improvements, but only as long as such items are available to
comply with the schedule of construction of the Expansion Building:
exterior brick, glass, and metal frames; restroom finishes (including,
without limitation, ceramic tile and toilet partitions); lobby finishes;
elevator cab finishes; landscaping; and common area interior finishes,
doors and hardware. If Landlord fails to respond in the manner set forth
above within five (5) business days after the date Tenant delivers the
preliminary Expansion Leasehold Improvements Plans to Landlord or objects
to the preliminary Expansion Leasehold Improvements Plans on any grounds
other than those set forth in the immediately-preceding sentence, then
Landlord will be conclusively deemed to have approved the preliminary
Expansion Leasehold Improvements Plans. Within five (5) business days
after Tenant's receipt of Landlord's notice of objections (if such
objections
41
<PAGE>
meet the requirements set forth above), Tenant will cause its
architect to prepare revised Expansion Leasehold Improvements Plans
according to such notice and submit the revised Expansion Leasehold
Improvements Plans to Landlord. Upon submittal to Landlord of the
revised Expansion Leasehold Improvements Plans, and upon submittal of
any further revisions, the procedures described above will be repeated
until Landlord and Tenant have reached agreement. Once they have
reached agreement, Tenant must promptly prepare permit-ready Expansion
Leasehold Improvements Plans and submit them to Landlord for
Landlord's approval. The only grounds upon which Landlord can object
to such permit-ready Expansion Leasehold Improvements Plans is that
they materially differ from the final approved Expansion Leasehold
Improvements Plans. Landlord's failure to respond to Tenant's
submissions within five (5) business days after Tenant delivers such
permit-ready Expansion Leasehold Improvements Plans to Landlord
constitutes Landlord's approval of such permit-ready Expansion
Leasehold Improvements Plans. The permit-ready Expansion Leasehold
Improvements Plans, as finally approved, are referred to in this Lease
as the "APPROVED EXPANSION LEASEHOLD IMPROVEMENTS PLANS."
(d) At such time as Landlord and Tenant have approved the
Approved Expansion Leasehold Improvements Plans (and in any event within
fifteen (15) days thereafter), Landlord will (i) obtain at least three
bids for each of the major trades that will be involved in the
construction of the Expansion Building, unless less than three qualified
subcontractors exist for a given trade, in which case Landlord will
obtain a bid from all qualified subcontractors of such trade (with
Landlord agreeing to solicit and consider bids from subcontractors
selected by Tenant); (ii) using the lowest qualified bid (which, in order
to be qualified, must fully comply with all bid requirements, including
but not limited to any time requirements specified) from each of the bids
so received, prepare a proposed budget for all items to be included in
Expansion Costs ("TENANT'S EXPANSION COST PROPOSAL"); and (iii) submit
copies of all bids, the Tenant's Expansion Cost Proposal, and the
Expansion Basic Rent that Tenant would be required to pay based on the
costs set forth in the Tenant's Expansion Cost Proposal to Tenant for
Tenant's review and approval. Tenant, at Tenant's option, may either
approve Tenant's Expansion Cost Proposal in writing, or elect to
eliminate or revise one or more items of Expansion Building shown on the
Approved Expansion Base Building Plans or the Approved Expansion
Leasehold Improvements Plans, or request additional bids so as to reduce
the costs shown in the Tenant's Expansion Cost Proposal. Tenant may then
approve in writing the reduced Tenant's Expansion Cost Proposal (based on
revised Approved Expansion Base Building Plans or Approved Expansion
Leasehold Improvements Plans prepared by Tenant's architect or revised
bids, as the case may be, which will then be deemed the Approved
Expansion Base Building Plans and the Approved Expansion Leasehold
Improvements Plans for all purposes under this Lease). However, each day
following the fifth (5th) business day after Tenant's receipt of Tenant's
Expansion Cost Proposal until the day on which Landlord has received
Tenant's written approval of Tenant's Expansion Cost Proposal will be a
day of Expansion Tenant Delay. The Tenant's Expansion Cost Proposal, as
finally approved, is referred to in this Lease as the "APPROVED EXPANSION
COSTS."
(e) Tenant's Representative may request and authorize changes
in Landlord's Expansion Work as long as such changes (i) are consistent
with the scope of Landlord's Expansion Work, and (ii) do not affect the
Expansion Base Building or any portion of the Core Building Systems
relating to the Expansion Base Building. All other changes will be
subject to Landlord's prior written approval, which approval Landlord
cannot unreasonably withhold, delay, or condition. Within five (5)
business days after Tenant requests a change in Landlord's Expansion
Work and prior to commencing any change, Landlord will prepare and
42
<PAGE>
deliver to Tenant, for Tenant's approval, a change order ("EXPANSION
CHANGE ORDER") identifying the total cost or savings of such change,
which will include associated architectural, engineering and construction
contractor's fees, and the total time that will be added to or subtracted
from the construction schedule by such change. Once Landlord delivers
an Expansion Change Order to Tenant for Tenant's approval, Tenant must
either affirmatively approve or disapprove of the Expansion Change Order
within three (3) business days following Tenant's receipt of the
Expansion Change Order. In the event Tenant fails to respond within the
three (3) business day period, then each day thereafter that Tenant fails
to respond shall be a Tenant Expansion Delay. Alternatively, Landlord
may deliver to Tenant, within the same five (5) business day period, an
estimate of the time and costs to be expended in calculating the
Expansion Change Order. In the event Tenant does not respond or fails to
affirmatively authorize Landlord to proceed on the third (3rd) business
day following Tenant's receipt of such estimate, then it shall be
conclusively deemed that Tenant withdrew its request for any change in
Landlord's Expansion Work. If Tenant authorizes Landlord to proceed with
calculating the cost of the Expansion Change Order, then Tenant shall be
responsible for all reasonable costs associated therewith (and pay same
to Landlord within 30 days following Landlord's written request) and any
delay in connection with such calculation shall be an Expansion Tenant
Delay, whether or not Tenant ultimately approves the Expansion Change
Order.
(f) Landlord must deliver the Expansion Building to Tenant,
with Landlord's Expansion Work Substantially Completed, on or before two
hundred ten (210) days after Landlord and Tenant approve the Approved
Expansion Leasehold Improvements Plans (the "PROJECTED EXPANSION
COMPLETION DATE"), as such date has been delayed due to any Tenant
Expansion Delays and Permitted Expansion Force Majeure Delays only, it
being understood and agreed that such date cannot be extended for any
reason other than Tenant Expansion Delays and Permitted Expansion Force
Majeure Delays. If Landlord is unable to deliver possession of the
Expansion Building, with Landlord's Expansion Work Substantially
Completed by the Projected Expansion Completion Date, as it may be
extended, (i) the Expansion Commencement Date (as that term is defined in
SECTION 18(j)(I) below) will be extended automatically by one day for
each day of the period after the Projected Expansion Completion Date to
the day on which Landlord tenders possession of the Expansion Building to
Tenant with Landlord's Expansion Work Substantially Completed, less any
portion of that period attributable to Tenant Expansion Delays; and
(ii) Landlord will pay Tenant, as liquidated damages, an amount equal to
$2,000.00 per day for each day after such Projected Expansion Completion
Date (as it may be extended) until Landlord tenders possession of the
Expansion Building to Tenant with Landlord's Expansion Work Substantially
Completed and, if Landlord has tendered the Expansion Building to Tenant
with Landlord's Expansion Work Substantially Complete, Landlord will pay
to Tenant, as liquidated damages, $500.00 per day after the thirtieth
(30th) day after Tenant delivers the Expansion Punch List to Landlord
until Final Completion of Landlord's Expansion Work; and (iv) if Landlord
does not tender possession of the Expansion Building to Tenant with the
Landlord's Expansion Work Substantially Completed on or before two
hundred seventy (270) days after Landlord and Tenant approve the Approved
Expansion Leasehold Improvements Plans (plus any period of delay caused
by Tenant Expansion Delays or Permitted Expansion Force Majeure Delay),
Tenant will have the right to terminate this Lease by delivering written
notice of termination to Landlord not more than 30 days after such
deadline date. Upon a termination under clause (iv) above, each party
will, upon the other's request, execute and deliver an agreement in
recordable form containing a release and surrender of all right, title
and interest in and to this Lease; neither Landlord nor Tenant will have
any further obligations to each other, including, without limitation, any
obligations to pay for work previously performed in the Expansion
Building or
43
<PAGE>
the Premises, except as set forth in this sentence; all Improvements
to the Original Building and the Expansion Building will become and
remain the property of Landlord; and Landlord will refund to Tenant
any sums paid to Landlord by Tenant in connection with this Lease,
including, without limitation, any payments to Landlord of portions of
Tenant's Expansion Cost and pay to Tenant the amounts that have
accrued under clause (ii) above. Such postponement of the Expansion
Commencement Date, payment of liquidated damages and termination and
refund right will be in full settlement of all claims that Tenant
might otherwise have against Landlord by reason of Landlord's failure
to have Substantially Completed its obligations by the Projected
Expansion Completion Date (as it may be extended). If Landlord
delivers possession of the Expansion Building with the Landlord's
Expansion Work Substantially Completed prior to the Projected
Expansion Completion Date, then Tenant may either accept such delivery
(in which case such date will be the Expansion Commencement Date
hereunder) or may refuse to accept delivery until any date selected by
Tenant that is no later than the Projected Expansion Completion Date
(as it may be extended). Within sixty (60) days after the Expansion
Commencement Date, Landlord will provide to Tenant a complete set of
as-built drawings of Landlord's Expansion Work and manuals for all
equipment incorporated into the Improvements as a part of Landlord's
Expansion Work. Landlord and Tenant have sixty (60) days after
Landlord notifies Tenant that the Expansion Building has been
Substantially Completed in which to remeasure the Expansion Building,
but after the expiration of such sixty (60) day period, neither
Landlord nor Tenant may remeasure the Expansion Building. The final
Rentable Square Feet as shown in the Approved Expansion Base Building
Plans are sometimes referred to as the "APPROVED EXPANSION RENTABLE
SQUARE FEET". In the absence of such remeasurement or the right to do
so, it shall be conclusively deemed that the Expansion Building
contains the Approved Expansion Rentable Square Feet. If Tenant
timely elects to remeasure the Expansion Building, and the variance is
greater than one percent (1%) but less than two percent (2%), the
variance shall be permitted and have no effect on the Expansion
Building being Substantially Completed, but the Expansion Basic Rent
for the Expansion Building and all other amounts calculated based on
the area of the Expansion Building will be modified accordingly. If
the Expansion Building contains more than 102% of the Approved
Expansion Rentable Square Feet, all amounts will be calculated as if
the Expansion Building contains 102% of the Approved Expansion
Rentable Square Feet. If the Expansion Building contains less than
98% of the Approved Expansion Rentable Square Feet, then Landlord must
make all alterations necessary to increase the size of the Expansion
Building to at least 98% of the Approved Expansion Rentable Square
Feet, and the Expansion Building will not be deemed to be
Substantially Completed. If, under such circumstances, Tenant fails
to terminate this Lease pursuant to the termination right set forth in
SECTION 18(f)(iv) above, then Tenant will be deemed to have accepted
the size of the Expansion Building and the Expansion Building will be
deemed to have been Substantially Completed on the day Landlord
delivered the Expansion Building to Tenant with the Landlord's
Expansion Work (other than the area of the Expansion Building)
Substantially Complete. In such event, all amounts will be calculated
on the actual size of the Expansion Building.
(g) As provided in SECTION 18(j)(I) , the Expansion
Commencement Date (and therefore Tenant's obligation for the payment of
Expansion Basic Rent) will not commence until Landlord has Substantially
Completed Landlord's Expansion Work; provided, however, that if Landlord
is delayed in causing Landlord's Expansion Work to be Substantially
Completed as a result of: (a) any Change Orders or changes in any
drawings, plans or specifications requested by Tenant (with each
individual occurrence constituting a "TENANT EXPANSION DELAY" and the
cumulative occurrences constituting TENANT EXPANSION DELAYS"), or (b)
force majeure delays (with such force majeure delays being referred to in
this Lease as "PERMITTED EXPANSION FORCE MAJEURE DELAYS"), then, if such
delays exceed ten (10) days, the
44
<PAGE>
Expansion Commencement Date will only be extended under SECTION 18(f)
until the date on which Landlord would have Substantially Completed
the performance of such work but for such delays. As a condition to
claiming a Permitted Expansion Force Majeure Delay or a Tenant
Expansion Delay, the day of delay must have otherwise been a day upon
which Landlord intended to work on the item affected by the delay and
Landlord must advise Tenant of the circumstances giving rise to the
claim within ten (10) business days after they arise, the estimated
cost that Tenant can pay as that time to effect any available remedy
to eliminate or reduce such delay (for example, overtime work), the
cumulative total number of Permitted Expansion Force Majeure Delays
and Tenant Expansion Delays through the date of each event.
(h) Landlord must perform the Landlord's Expansion Work in
accordance with the Approved Expansion Base Building Plans and the
Approved Expansion Leasehold Improvements Plans and in a good and
workmanlike manner, using new materials, and in accordance with all
applicable laws, ordinances, rules, and regulations, including without
limitation, ADA (as it exists at the time) and all applicable
environmental laws as interpreted and enforced by the governmental bodies
having jurisdiction thereof at the time of construction. Tenant's taking
possession of any portion of the Expansion Building will be conclusive
evidence that such portion of the Expansion Building was in good order
and satisfactory condition, and that all of Landlord's Expansion Work in
or to such portion of the Expansion Building was satisfactorily
completed, when Tenant took possession, except as to any patent defects
or uncompleted items identified on a punch list (the "EXPANSION PUNCH
LIST") prepared by Tenant's Representative after an inspection of the
Expansion Building by both Tenant's Representative and Landlord's
Representative (unless Landlord's Representative fails to attend an
inspection scheduled by Tenant's Representative, with Tenant
acknowledging that Tenant's Representative must cooperate with Landlord's
Representative in attempting to establish a mutually-acceptable date and
time of inspection) made within thirty (30) days after Tenant takes
possession, and except as to any latent defects in Landlord's Expansion
Work. Landlord will not be responsible for any items of damage caused by
Tenant, its agents, independent contractors or suppliers. No promises to
construct, alter, remodel or improve the Expansion Building, and no
representations concerning the condition of the Expansion Building, have
been made by Landlord to Tenant other than as may be expressly stated in
this Lease.
(i) Landlord appoints Landlord's Representative to act for
Landlord in all matters covered by this SECTION 18. Tenant appoints
Tenant's Representative to act for Tenant in all matters covered by this
SECTION 18. All inquiries, requests, instructions, authorizations and
other communications with respect to the matters covered by this
SECTION 18 will be made to Landlord's Representative or Tenant's
Representative, as the case may be. Tenant will not make any inquiries
of or requests to, and will not give any instructions or authorizations
to, any other employee or agent of Landlord, including Landlord's
architect, engineers and contractors or any of their agents or employees,
with regard to matters covered by this SECTION 18. Either party may
change its representative at any time by three days' prior written notice
to the other party. Landlord and Tenant acknowledge that they must work
together cooperatively in order to design the Expansion Building and
therefore agree to act reasonably and in good faith in such design
process
(j) Upon Tenant's approval of the Tenant's Expansion Cost
Proposal, this Lease will automatically be amended as follows (with
Landlord and Tenant each agreeing to execute a written agreement
confirming these amendments upon delivery of such an amendment to such
party by the other party):
45
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(I) The Term of this Lease will be extended so that it
ends on the day before the tenth (10th) anniversary of the
date of Substantial Completion of the Expansion Building
(the "EXPANSION COMMENCEMENT DATE"). The options to extend
the Term of this Lease granted in SECTION 2.5 above will
remain in full force and effect and may be exercised at the
end of the Term of this Lease, as so extended, subject to
the notice and other requirements of SECTION 2.5. Any
exercise of the option to extend will apply to and include
both the Original Building and the Expansion Building.
(II) The Basic Rent will be as follows:
(A) for the Original Building, the Original Basic
Rent will be the same as provided in SECTION
4.1 above for the number of years which
represents the balance of the Original Term
as defined in SECTION 1.1 above. Thereafter,
the Original Basic Rent will increase on the
first day after the original expiration date
of the Original Term to an amount equal to
one hundred twelve and one-half percent
(112.5%) of the Original Basic Rent in effect
for the immediately preceding period and will
increase every fifth (5th) anniversary of the
original expiration date of the Original Term
through the end of the then-existing initial
term (i.e., excluding the renewal terms) to
an amount equal to one hundred twelve and
one-half percent (112.5%) of the Original
Basic Rent in effect for the immediately
preceding period. For example, if the
Original Basic Rent were $128,244.62 per
month, then for the period beginning on the
day after the original expiration date of the
Original Term and extending for the lesser of
five (5) years or the date of the expiration
of the then-existing initial term, the Basic
Rent would be $144,275.19.
(B) for the Expansion Building, the monthly rent
(the "EXPANSION BASIC RENT") will be equal to
the amount determined by multiplying the
Expansion Costs (up to or equal to the
Approved Expansion Costs) by 11.4% and then
dividing the result thus obtained by twelve
(12).
IN WITNESS WHEREOF, the parties have executed this Lease as of the date
first set forth above.
LANDLORD: TENANT:
OPUS SOUTH CORPORATION, a ADS ALLIANCE DATA SYSTEMS, INC., a
Florida corporation Delaware corporation
By: _____________________________ By: ________________________________
Neil J. Rauenhorst, President Its: _____________________________
46
<PAGE>
And: ________________________________
Its: ________________________________
STATE OF __________________________)
) ss.
COUNTY OF _________________________)
The foregoing instrument was acknowledged before me this _____ day of
January, 1998 by Neil J. Rauenhorst as President of Opus South Corporation, a
Texas corporation.
Witness my hand and official seal.
________________________________
Notary Public
My commission expires: _________________________________
STATE OF __________________________)
) ss.
COUNTY OF _________________________)
The foregoing instrument was acknowledged before me this _____ day of
January, 1998 by _______________________________ as ____________________________
and ________________________________________ as ____________________________ of
ADS Alliance Data Systems, Inc., a Delaware corporation.
Witness my hand and official seal.
________________________________
Notary Public
My commission expires: _________________________________
47
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
BEING a parcel or tract of land situated in the City of Dallas, Collin County,
Texas, and being part of the John Clay Survey, Abstract 223, and being part of
Phase I, U.T.D. Synergy Park, an Industrial Addition to the City of Dallas,
filed for record in Cabinet F, Page 483 and 484 of the Deed Records of Collin
County, Texas; and being part of the tract of land conveyed to the Board of
Regents, the University of Texas System as recorded in Volume 835, Page 713 of
the Deed Records of Collin County, Texas, and being more particularly described
as follows:
BEGINNING at an Iron rod on the west right of way line of Waterview Parkway (120
feet wide) and the northeast corner of the Smith/Allen Matuschka - One Tract and
the southEAST corner of the herein described tract;
THENCE South 90 degrees 00 minutes 00 seconds West a distance of 700.39 feet
following the north line of the Smith/Allen Matuschka - One tract to an iron rod
found for corner, said iron rod being in the easterly line of Texas A & M
University System tract;
THENCE North 00 degrees 12 minutes 12 seconds West a distance of 642.68 feet
following the east line of the Texas A & M System tract to the intersection with
the southwest corner of the Intervoice tract and an iron rod found for corner;
THENCE North 90 degrees 00 minutes 00 seconds East a distance of 700.39 feet
following the south line of the Intervoice tract to an iron rod found for corner
in the westerly right of way line of Waterview Parkway, said point being the
southeast corner of the Intervoice tract;
THENCE South 00 degrees 12 minutes 12 seconds East, a distance of 642.68 feet
following the westerly right of way line of Waterview Parkway to the Point of
Beginning and containing 450,125 square feet or 10.3334 acres, more or less.
<PAGE>
EXHIBIT B
BASE BUILDING SPECIFICATIONS
<PAGE>
EXHIBIT C
BASE BUILDING/TENANT MATRIX
<PAGE>
EXHIBIT D
MATTERS AFFECTING LANDLORD'S TITLE
1. Restrictive covenants recorded in Volume 1959, Page 755, Land Records of
Collin County, Texas.
2. Restrictive covenants recorded in Volume 2007, Page 475, Land Records of
Collin County, Texas.
3. 12.5' water main easement granted by Board of Regents of the University
of Texas Systems to City of Richardson, filed 03/25/77, recorded in
Volume 1042, Page 840, Deed Records of Collin County, Texas, and as shown
on survey of BSM Engineers, Inc., certified to by Arthur F. Beck,
R.P.L.S. #2130, dated 12/19/97, And as shown on plat recorded in Volume
F, Page 483, Map Records of Collin County, Texas.
4. Easement granted by Board of Regents of the University of Texas Systems
to Dallas Power & Light Company and Southwestern Bell Telephone Company,
recorded in Volume 1444, Page 555, Land Records of Collin County, Texas,
and as shown on survey of BSM Engineers, Inc., certified to by Arthur P.
Beck, R.P.L.S. #2130, dated 12/19/97, And as shown on plat recorded in
Volume F, Page 483, Map Records of Collin County, Texas.
5. Easement granted by Board of Regents of the University of Texas Systems
to City of Dallas, filed 04/09/86, recorded in Volume 2343, page 314,
Land Records of Collin County, Texas, and as shown on survey of BSM
Engineers, Inc., certified to by Arthur F. Beck, R.P.L.S. #2130, dated
12/19/97.
6. Easement granted by Board of Regents of the University of Texas Systems
to Texas Utilities Electric Company, filed 10/06/97, cc#97-0084664, Land
Records of Collin County, Texas, and as shown on survey of BSM Engineers,
Inc., certified to by Arthur F. Beck, R.P.L.S. #2130, dated 12/19/97.
<PAGE>
EXHIBIT E
MEMORANDUM OF LEASE
This Memorandum of Lease is dated as of January ___, 1998 and is by and between
Opus South Corporation, a Florida corporation ("LANDLORD") and ADS Alliance Data
Systems, Inc., a Delaware corporation ("TENANT").
R E C I T A L S
(7) Landlord is the owner of that certain property described on EXHIBIT A
attached to and made a part of this Memorandum of Lease for all purposes
(the "PROPERTY").
(8) Effective as of the same date as the date of this Memorandum of Lease,
Landlord and Tenant entered into that certain Build-to-Suit Net Lease
(the "LEASE") covering the entire Property.
(9) Tenant and Landlord wish to record this Memorandum of Lease in order to
evidence the existence of the Lease.
I N F O R M A T I O N
(1) PRIMARY TERM: Tenant has leased the entire Property from Landlord for a
period of approximately 11 years commencing on the date set forth in the
Lease and ending on the Expiration Date, as defined in the Lease.
(2) RENEWAL OPTIONS: Tenant has two (2) five (5)-year renewal options, as
more fully set forth in the Lease.
(3) INITIAL CONSTRUCTION: Landlord has covenanted and agreed to construct a
building on the Property for Tenant within the time periods and in
accordance with the terms of the Lease.
(4) EXPANSION OPTION: During the initial 11-year term, Tenant has the right
to require that Landlord construct an additional building for Tenant, as
more fully set forth in the Lease.
(5) QUIET POSSESSION: Landlord has covenanted and agreed that Tenant will
have quiet and peaceful possession of the Property during the entire term
of the Lease, and such possession will not be disturbed by Landlord or
anyone claiming by, through or under Landlord.
(6) INTERPRETATION. Landlord and Tenant have entered into this Memorandum
of Lease in order that third parties may have notice of the existence of
the Lease and some of its specific provisions. This Memorandum of Lease
is not a complete summary of the Lease, all of the terms, covenants, and
conditions of
<PAGE>
which are made apart of this Memorandum of Lease as though fully set
forth in this Memorandum of Lease. This Memorandum of Lease is not
intended to amend, modify, or otherwise change the terms and conditions
of the Lease. In the event of a conflict between this Memorandum of
Lease and the Lease, the Lease controls.
<TABLE>
<CAPTION>
LANDLORD: TENANT:
<S> <C>
OPUS SOUTH CORPORATION, a ADS ALLIANCE DATA SYSTEMS, INC., a
Florida corporation Delaware corporation
By: _____________________________ By: ______________________
Neil J. Rauenhorst, President Its: ______________________
And: ______________________
Its: ______________________
</TABLE>
STATE OF _________________________ )
) ss.
COUNTY OF ________________________ )
The foregoing instrument was acknowledged before me this _____ day of
__________________, 1998 by Neil J. Rauenhorst as President of Opus South
Corporation, a Texas corporation.
Witness my hand and official seal.
____________________________
Notary Public
My commission expires: ______________________________________________
STATE OF _________________________ )
) ss.
COUNTY OF ________________________ )
The foregoing instrument was acknowledged before me this _____ day of
__________________, 1998 by _______________________________ as ______________
and ________________________________________ as _____________________________
of ADS Alliance Data Systems, Inc., a Delaware corporation.
Witness my hand and official seal.
<PAGE>
_____________________________
Notary Public
My commission expires: _______________________________________________
EXHIBIT F
NDA
<PAGE>
EXHIBIT G
LEASE GUARANTY
THIS LEASE GUARANTY (this "GUARANTY") is given by ALLIANCE DATA
SYSTEMS CORPORATION, a Delaware corporation ("GUARANTOR"), to OPUS SOUTH
CORPORATION, a Florida corporation ("LANDLORD"), with respect to that certain
Build-to-Suit Net Lease dated January __, 1998 (the "LEASE") by and between
Landlord and ADS Alliance Data Systems, Inc., a Delaware corporation
("TENANT"), under which Tenant has leased from Landlord the land in
Richardson, Texas that is legally described on EXHIBIT A attached hereto and
all improvements thereon.
In order to induce Landlord to execute the Lease and for other good
and valuable consideration, the receipt and sufficiency of which Guarantor
acknowledges, Guarantor promises and agrees as follows:
1. Guarantor absolutely, unconditionally and irrevocably
guarantees the payment and performance of, and agrees to pay and perform as a
primary obligor, all of Tenant's covenants, obligations, liabilities and
duties (including, without limitation, payment of rent and all other amounts
required to be paid by Tenant) under the Lease (the "GUARANTEED
OBLIGATIONS"), as if Guarantor had executed the Lease as Tenant.
2. Guarantor's obligations under this Guaranty are primary and
independent of Tenant's obligations. Guarantor agrees that Landlord will not
be required first to enforce against Tenant or any other person any
Guaranteed Obligations before seeking enforcement against Guarantor.
Landlord may bring and maintain an action against Guarantor to enforce any
Guaranteed Obligations without joining Tenant or any other person (including,
without limitation, any other guarantor) in such action. Landlord may,
however, join Guarantor in any action commenced by Landlord against Tenant to
enforce any Guaranteed Obligations and Guarantor waives any demand by
Landlord or any prior action by Landlord against Tenant.
3. Guarantor's obligations under this Guaranty will remain in full
force and effect and will not be affected in any way by: (a) any
forbearance, indulgence, compromise, settlement or variation of terms which
may be extended to Tenant by Landlord; (b) any alteration of the Lease by the
parties, whether prior or subsequent to Lease execution; (c) any renewal,
extension, modification or amendment of the Lease; (d) any subletting of the
premises demised under the Lease or any assignment of Tenant's interest in
the Lease; (e) any termination of the Lease to the extent that Tenant remains
liable under the Lease after such termination; or (f) the release by Landlord
of any party (other than Guarantor) obligated for the Guaranteed Obligations
or Landlord's acquisition, release, return or misapplication of any other
collateral (including, without limitation, any other guaranties) given now or
later as additional security for the Guaranteed Obligations. Guarantor
waives notice of any of the above and agrees that Guarantor will remain
liable for the Guaranteed Obligations as they may be so altered, renewed,
<PAGE>
extended, modified, amended or assigned. Guarantor also waives notice of
acceptance of this Guaranty and all other notices in connection with this
Guaranty or the Guaranteed Obligations, including notices of default by
Tenant under the Lease, and waives diligence, presentment and suit by
Landlord in the enforcement of any Guaranteed Obligations.
4. Guarantor's obligations under this Guaranty will remain in full
force and effect and will not be affected in any way by: (a) the release or
discharge of Tenant in any insolvency, receivership, bankruptcy or other
proceedings; (b) the impairment, limitation or modification of the liability
of Tenant or the estate of Tenant in bankruptcy, or of any remedy for the
enforcement of Tenant's liability under the Lease, resulting from the
operation of any present or future provision of the Federal Bankruptcy Code
or other statute or from the decision in any court; (c) the rejection or
disaffirmance of the Lease in any such proceeding; or (d) Tenant's
dissolution or other termination or any disability or other defense of Tenant.
5. Guarantor agrees to pay the reasonable attorneys' fees and
expenses incurred by Landlord in successfully enforcing Guarantor's
obligations under this Guaranty in any action or proceeding to which Landlord
is a party. In any action brought under this Guaranty, Guarantor submits to
the jurisdiction to the courts of the State of Texas, and to venue in the
District Court of Dallas County, Texas.
6. This Guaranty will be binding on Guarantor and its successors
and assigns and will inure to the benefit of Landlord and its successors and
assigns.
7. Notwithstanding anything to the contrary set forth elsewhere in
this Guaranty, in the event the Release Conditions, as defined in the Lease,
are met, then Guarantor will automatically be released from its obligations
under this Guaranty effective as of the date of such assignment or
subletting, and (b) Guarantor will at all times be entitled to assert as a
defense to any obligation under this Guaranty that Tenant has a defense to
the guaranteed obligation under the terms of the Lease.
Executed this _____ day of January, 1998.
GUARANTOR:
ATTEST: ALLIANCE DATA SYSTEMS CORPORATION,
a Delaware corporation
By: ______________________________ By:__________________________________
<PAGE>
EXHIBIT H
2-STORY PLAN
<PAGE>
EXHIBIT I
3-STORY PLAN
<PAGE>
EXHIBIT J
EXPANSION COST SUMMARY
SCHEDULE OF COST FOR THE EXPANSION BUILDING
OPTION B NO LAND
<TABLE>
<S> <C> <C>
LAND:
SOIL TEST ___
ENVIRONMENTAL ___
TITLE FEE ___
SUB-TOTAL FOR LAND ___
BUILDING:
BASE BUILDING ___
SITE DEVELOPMENT ___
TENANT IMPROVEMENTS ___
DESIGN FEE ___
SUB-TOTAL FOR BUILDING ___
DEVELOPMENT:
BROKER FEE (Market) ___
LEGAL ___
DEVELOPMENT
(5% of total project cost) ___
CONTINGENCY ___
CONSTRUCTION INTEREST ___
BANK FEES ___
SUB-TOTAL FOR DEVELOPMENT ___
TOTAL PROJECT COST: ___
RENT CALCULATION:
EXPANSION COSTS X 11.4%-RENT ___
TOTAL RENT ___
</TABLE>
<PAGE>
EXHIBIT K
CORE BUILDING SYSTEMS
- -- Foundation System
- -- Structural Framing System
- -- Core Plumbing Systems
- -- Exterior Envelope Back-up System (Framing, Sheathing, and Insulation)
- -- Roofing System
- -- Core Building Fire Sprinkler System
- -- Core Plumbing HVAC System (Central plant, main supply loop ductwork;
perimeter zone boxes, and interior VAV boxes and controls)
- -- Electrical System (Wiring of all base building HVAC equipment,
elevators, exterior lighting, main switchgear, distribution to electrical
panel boards on each floor, and lighting of interior common areas with
exit and emergency lighting as required by code)
- -- Minimum Code Requirements (Stairs, Restroom Count, and Elevators)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. DEFINITIONS AND EXHIBITS. . . . . . . . . . . . . . . . . . . . . . .1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . .1
1.2 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2 GRANT OF LEASE; RENEWAL OPTIONS . . . . . . . . . . . . . . . . . . .8
2.1 Demise . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
2.2 Quiet Enjoyment. . . . . . . . . . . . . . . . . . . . . . . .8
2.3 Landlord and Tenant Covenants. . . . . . . . . . . . . . . . .8
2.4 Memorandum of Lease. . . . . . . . . . . . . . . . . . . . . .9
2.5 Tenant's Renewal Options . . . . . . . . . . . . . . . . . . .9
3. CONSTRUCTION; DELIVERY AND ACCEPTANCE OF PREMISES . . . . . . . . . 10
3.1 Landlord's Construction Obligations. . . . . . . . . . . . . 10
3.2 Original Base Building Plans . . . . . . . . . . . . . . . 10
3.3 Leasehold Improvement Plans . . . . . . . . . . . . . . . . 11
3.4 Tenant's Cost Proposal . . . . . . . . . . . . . . . . . . . 12
3.5 Original Change Orders . . . . . . . . . . . . . . . . . . . 13
3.6 Delivery of Possession . . . . . . . . . . . . . . . . . . . 13
3.7 Plan Approval Delays, Tenant Original Delays and Permitted
Original Force Majeure Delays . . . . . . . . . . . . . . . 15
3.8 Original Punch List . . . . . . . . . . . . . . . . . . . . 16
3.9 Representatives . . . . . . . . . . . . . . . . . . . . . . 16
3.10 Payment of Tenant's Cost . . . . . . . . . . . . . . . . . . 16
3.11 Reasonableness and Good Faith Standard . . . . . . . . . . . 17
4. RENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.1 Basic Rent and Original Basic Rent . . . . . . . . . . . . . 17
4.2 Net Lease. . . . . . . . . . . . . . . . . . . . . . . . . . 17
4.3 Terms of Payment . . . . . . . . . . . . . . . . . . . . . . 17
4.4 Late Payments. . . . . . . . . . . . . . . . . . . . . . . . 18
4.5 Right to Accept Payments . . . . . . . . . . . . . . . . . . 18
5. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
5.1 Payment of Taxes . . . . . . . . . . . . . . . . . . . . . . 18
5.2 Proration at Beginning and End of Term . . . . . . . . . . . 18
5.3 Special Assessments. . . . . . . . . . . . . . . . . . . . . 18
5.4 Tax Contests . . . . . . . . . . . . . . . . . . . . . . . . 19
6. USE, OCCUPANCY AND COMPLIANCE . . . . . . . . . . . . . . . . . . . 19
6.1 Use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.2 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . 19
6.3 Hazardous Substances . . . . . . . . . . . . . . . . . . . . 20
6.4 Americans With Disabilities Act. . . . . . . . . . . . . . . 21
6.5 Signs. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
7. UTILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>
7.1 Payment; Interruption of Services. . . . . . . . . . . . . . 21
7.2 HVAC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
8. REPAIRS AND MAINTENANCE . . . . . . . . . . . . . . . . . . . . . . 22
8.1 Tenant's Obligations . . . . . . . . . . . . . . . . . . . . 22
8.2 Landlord's Obligations . . . . . . . . . . . . . . . . . . . 22
8.3 Landlord's Right of Entry. . . . . . . . . . . . . . . . . . 22
9. INSURANCE, WAIVERS AND INDEMNITY. . . . . . . . . . . . . . . . . . 23
9.1 Property Insurance . . . . . . . . . . . . . . . . . . . . . 23
9.2 Liability and Other Insurance. . . . . . . . . . . . . . . . 23
9.3 General Insurance Requirements . . . . . . . . . . . . . . . 24
9.4 Waivers. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
9.5 Indemnity. . . . . . . . . . . . . . . . . . . . . . . . . . 24
10. ALTERATIONS; MECHANICS' LIENS . . . . . . . . . . . . . . . . . . . 25
10.1 Alterations. . . . . . . . . . . . . . . . . . . . . . . . . 25
10.2 Mechanics' Liens . . . . . . . . . . . . . . . . . . . . . . 25
11. ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . . . . . . . . 26
11.1 Notice and Consent . . . . . . . . . . . . . . . . . . . . . 26
11.2 Deemed Assignments . . . . . . . . . . . . . . . . . . . . . 26
11.3 General Provisions . . . . . . . . . . . . . . . . . . . . . 27
12. CASUALTY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
12.1 Landlord's Obligation . . . . . . . . . . . . . . . . . . . 27
12.2 Time for Repairs . . . . . . . . . . . . . . . . . . . . . . 28
13. EMINENT DOMAIN. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
13.1 Termination. . . . . . . . . . . . . . . . . . . . . . . . . 28
13.2 Restoration; Award . . . . . . . . . . . . . . . . . . . . . 28
14. END OF TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
14.1 Surrender. . . . . . . . . . . . . . . . . . . . . . . . . . 29
14.2 Holding Over . . . . . . . . . . . . . . . . . . . . . . . . 29
15. DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 30
15.1 General. . . . . . . . . . . . . . . . . . . . . . . . . . . 30
15.2 Events of Default. . . . . . . . . . . . . . . . . . . . . . 30
15.3 Landlord's Remedies. . . . . . . . . . . . . . . . . . . . . 31
15.4 Landlord's Default; Tenant's Remedies. . . . . . . . . . . . 32
15.5 Disclaimer of Landlord's Lien . . . . . . . . . . . . . . . 33
16. SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
16.1 Subordination, Nondisturbance and Attornment . . . . . . . . 33
16.2 Option to Make Lease Superior. . . . . . . . . . . . . . . . 33
E-2
<PAGE>
17. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
17.1 Brokers. . . . . . . . . . . . . . . . . . . . . . . . . . . 33
17.2 Estoppel Certificates. . . . . . . . . . . . . . . . . . . . 33
17.3 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
17.4 Actions by Agent . . . . . . . . . . . . . . . . . . . . . . 34
17.5 Severability; Governing Law. . . . . . . . . . . . . . . . . 34
17.6 Transfers of Landlord's Interest . . . . . . . . . . . . . . 34
17.7 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . 35
17.8 Complete Agreement; Modification . . . . . . . . . . . . . . 35
17.9 No Offer . . . . . . . . . . . . . . . . . . . . . . . . . . 35
17.10 Survival . . . . . . . . . . . . . . . . . . . . . . . . . . 35
17.11 Limitation on Landlord's Liability . . . . . . . . . . . . . 35
17.12 Authority. . . . . . . . . . . . . . . . . . . . . . . . . . 35
17.13 No Partnership . . . . . . . . . . . . . . . . . . . . . . . 35
17.14 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . 35
17.15 Financial Statements . . . . . . . . . . . . . . . . . . . . 36
17.16 Binding Effect . . . . . . . . . . . . . . . . . . . . . . . 36
17.17 Lease Guaranty. . . . . . . . . . . . . . . . . . . . . . . 36
17.18 Corporate Authority. . . . . . . . . . . . . . . . . . . . 36
18. EXPANSION OPTION. . . . . . . . . . . . . . . . . . . . . . . . . . 37
Exhibit A - Legal Description of the Land
Exhibit B - Base Building Specifications (including
Original Building Elevation, Site Plan,
Floor Plan and Original Building
Specifications)
Exhibit C - Base Building /Tenant Matrix
Exhibit D - Matters Affecting Landlord's Title
Exhibit E - Memorandum of Lease
Exhibit F - NDA
Exhibit G - Lease Guaranty
Exhibit H - 2-Story Plan
Exhibit I - 3-Story Plan
Exhibit J - Expansion Cost Summary
Exhibit K - Core Building Systems
</TABLE>
E-2
<PAGE>
FINAL AGREEMENT CONCERNING RENT COMMENCEMENT AND
CONSTRUCTION COSTS AND LIQUIDATED DAMAGES
This Final Agreement Concerning Rent Commencement and Construction Costs and
Liquidated Damages (this "AGREEMENT") is executed by and between Oaklawn
Alliance, L.L.C., a Delaware limited liability company ("LANDLORD") and ADS
Alliance Data Systems, Inc., a Delaware corporation ("TENANT") and is effective
as of the last day accompanying the signature of Original Landlord, Landlord,
and Tenant below. Original Landlord, Guarantor, and Mortgagee (all as defined
below) are executing this Agreement for the purposes indicated in this
Agreement.
R E C I T A L S
A. Effective as of January 29, 1998, Opus South Corporation, a Florida
corporation ("ORIGINAL LANDLORD") and Tenant entered into that certain
Build-To-Suit Net Lease (the "LEASE") covering certain property located in
the City of Dallas, Collin County, Texas (the "LAND").
B. The Lease was guaranteed by Alliance Data Systems Corporation, a Delaware
corporation ("GUARANTOR") pursuant to the terms of that certain Lease
Guaranty dated the same date as the Lease (the "GUARANTY").
C. A Memorandum of Lease was executed the same day as the Lease and recorded
on January 30, 1998 in Volume 4091, Page 1447 of the real property records
of Collin County, Texas.
D. Original Landlord, Tenant, and NationsBank, N.A., a national banking
association ("MORTGAGEE") entered into that certain Subordination,
Non-disturbance and Attornment Agreement dated April 3, 1998 and recorded
on April 7, 1998 under Volume 4138, Page 1032 of the real property records
of Collin County, Texas.
E. Under the terms of the Lease, Original Landlord, as the Landlord under the
Lease, was required to construct for Tenant the Original Base Building (as
defined in the Lease) on the Land. Under the terms of the Lease, Tenant
had to pay for certain cost overruns and Original Landlord, as the Landlord
under the Lease, had to pay certain liquidated damages in the event that
construction of the Original Base Building was not completed on or before
certain dates. The Land together with the Original Base Building is
referred to in this Agreement as the "DEMISED PREMISES."
F. On December 3, 1998, Original Landlord transferred the Demised Premises to
Landlord.
G. Original Landlord, Landlord, and Tenant have been working together to
establish the Original Commencement Date under the Lease, the amount of any
cost overruns for which Tenant is
<PAGE>
obligated to pay Landlord, and the amount of any liquidated damages due to
Tenant for late delivery. The purpose of this Agreement is to memorialize
their understanding.
AGREEMENTS
NOW, THEREFORE, for and in consideration of the matters set forth in the
Recitals and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, Original Landlord, Landlord, and Tenant hereby
agree as follows:
1. ORIGINAL COMMENCEMENT DATE: The Original Commencement Date of the Lease is
November 4, 1998. As provided in Section 1.1 of the Lease, the Term
expires at midnight on November 30, 2009, unless sooner terminated or
unless renewed or extended as set forth in the Lease.
2. OVERRUN AMOUNT AND LIQUIDATED AMOUNT: The amount of cost overruns for
which Tenant is responsible is $263,575.00 (the "OVERRUN AMOUNT") and the
amount of liquidated damages to which Tenant is entitled is $125,500.00
(the "LIQUIDATED AMOUNT").
3. PARTIES TO WHOM PAYMENT OF THE OVERRUN AMOUNT AND THE LIQUIDATED AMOUNT ARE
DUE: Original Landlord performed the construction work and so Original
Landlord believes that Original Landlord is entitled to receive the Overrun
Amount. Landlord hereby agrees that Original Landlord is entitled to
receive the Overrun Amount. Since Original Landlord is receiving the
Overrun Amount, Landlord believes that Original Landlord should pay Tenant
the Liquidated Amount. Tenant is willing to accept the Liquidated Amount
from Original Landlord, but such agreement to allow Original Landlord to do
so does not in any way release Landlord from the obligation to do so unless
and until Tenant actually receives the full amount of the Liquidated
Amount. If for any reason Original Landlord does not pay the full amount
of the Liquidated Amount within the time period specified in PARAGRAPH 4
below, then the obligation to pay the Liquidated Amount will constitute a
joint and several obligation of Original Landlord and Landlord and Tenant
will be entitled to demand payment from both of them and to offset the
amount due to Tenant from all Rent and other amounts accruing under the
Lease.
4. TIMING OF PAYMENT OF THE OVERRUN AMOUNT AND THE LIQUIDATED AMOUNT: Original
Landlord and Tenant hereby covenant and agree that on or before Friday, May
28, 1999, they will each present the other with a check drawn on
immediately-available funds in the amount due to the other, so that Tenant
will present Original Landlord with a check for $263,575.00 and Original
Landlord will present Tenant with a check in the amount of $125,500.00.
5. LANDLORD'S REPRESENTATIONS, WARRANTIES, AND RELEASES: Landlord hereby (a)
confirms, represents, and warrants to Tenant that Tenant is to pay the
Overrun Amount to Original Landlord and not Landlord, and (b) releases
Tenant from any and all claims that Landlord
2
<PAGE>
might have against Tenant under the Lease for payment of the Cost Overrun,
payment for any other cost overruns, and payment of Basic Rent, other
payments which are due on a regular monthly basis charges, Taxes, and
insurance premiums (with the exception of insurance premiums which were
billed in March, 1999, about which Landlord and Tenant are currently in
disagreement), IF, AND ONLY IF, SUCH CLAIMS AROSE ON OR BEFORE THE DATE OF
THIS AGREEMENT but whether or not such claims are now known or anticipated
(collectively, "CLAIMS" and individually, a "CLAIM"). Landlord
acknowledges that there is no additional promise or agreement in
consideration of this release. Landlord expressly acknowledges and agrees
that such release is a contractual undertaking and that the agreements
concerning payment settles any and all Claims by Landlord against Tenant in
connection with the Lease. This release is binding upon Landlord and the
heirs, executors, administrators, personal representatives, successors, and
assigns of Landlord and inures to the benefit of Tenant.
6. ORIGINAL LANDLORD'S REPRESENTATIONS, WARRANTIES, AND RELEASES: Original
Landlord is executing this Agreement in order to (a) confirm, represent,
and warrant to Tenant that Tenant is to pay the Overrun Amount to Original
Landlord and not Landlord, (b) confirm, represent, and warrant that
Original Landlord will pay the Liquidated Amount to Tenant as and when due
under the terms of PARAGRAPH 4 above, and (c) release Tenant from any and
all claims, OTHER THAN THE CLAIM FOR THE COST OVERRUN, that Original
Landlord might have against Tenant under the Lease for payment of Basic
Rent and other charges, including without limitation, Taxes and insurance
premiums, whether such claims now exist or hereafter arise and whether or
not such claims are now known or anticipated (collectively, "CLAIMS" and
individually, a "CLAIM"). Original Landlord acknowledges that there is no
additional promise or agreement in consideration of this release. Original
Landlord expressly acknowledges and agrees that such release is a
contractual undertaking and that the agreements concerning payment settles
any and all Claims by Original Landlord against Tenant in connection with
the Lease. This release is binding upon Original Landlord and the heirs,
executors, administrators, personal representatives, successors, and
assigns of Original Landlord and inures to the benefit of Tenant.
7. TENANT'S RELEASES: Tenant hereby releases Original Landlord and Landlord
from any and all claims that Tenant might have against Original Landlord
and Landlord for payment of any liquidated damages under Section 3.6 of the
Lease OTHER THAN the Liquidated Amount.
8. ESTABLISHMENT OF THE NUMBER OF RENTABLE SQUARE FEET IN THE ORIGINAL
BUILDING: Landlord and Tenant hereby confirm that the Original Building
contains 114,419 Rentable Square Feet.
9. RATIFICATION AND CONFIRMATION OF THE LEASE: Landlord and Tenant hereby
ratify and confirm that they are bound by all of the terms of the Lease,
including, without limitation, the terms of Section 18 of the Lease.
Landlord further acknowledges that any claims which Tenant might have under
the Lease concerning the Original Base Building and Original Leasehold
Improvements constitute claims against Landlord even though Landlord was
not the
3
<PAGE>
Landlord at the time the Original Base Building and the Original Leasehold
Improvements were constructed and even though Tenant is obligated to pay
the Cost Overrun to Original Landlord.
10. GUARANTOR'S EXECUTION: Guarantor is executing this Agreement for the
purpose of confirming that the execution and delivery of this Agreement
does not in any way terminate or limit Guarantor's obligations under the
Guaranty.
11. MORTGAGEE'S EXECUTION: Mortgagee is executing this Agreement for the
purpose of evidencing its consent to and agreement that if Mortgagee
becomes the Landlord under the Lease, Mortgagee will be bound by the terms
and provisions of this Agreement; provided, however, that under no
circumstances is Mortgagee obligated to pay the Liquidated Amount to
Tenant.
12. COUNTERPARTS: This Agreement may be executed in multiple counterparts, all
of which, when taken together, will constitute one (1) original.
LANDLORD: OAKLAWN ALLIANCE, L.L.C.,
a Delaware limited liability company
By: /s/ Neil Rauenhorst
--------------------------------------
Name: Neil Rauenhorst
--------------------------------------
Title: President & CEO
--------------------------------------
Date of Signature: 5/28/99
--------------------------
TENANT: ADS ALLIANCE DATA SYSTEMS INC.,
a Delaware corporation
By: /s/ James E. Anderson
--------------------------------------
Name: James E. Anderson
--------------------------------------
Title: Exec. V.P. & CEO
--------------------------------------
Date of Signature: 6-14-99
--------------------------
4
<PAGE>
ORIGINAL LANDLORD: OPUS SOUTH CORPORATION,
a Florida corporation
By: /s/ Neil Rauenhorst
--------------------------------------
Name: Neil Rauenhorst
--------------------------------------
Title: President & CEO
--------------------------------------
Date of Signature: 5/28/99
--------------------------
GUARANTOR: ALLIANCE DATA SYSTEMS CORPORATION,
a Delaware corporation
By: /s/ James E. Anderson
--------------------------------------
Name: James E. Anderson
--------------------------------------
Title: Exec. V.P. & CEO
--------------------------------------
Date of Signature: 6-14-99
--------------------------
MORTGAGEE: NATIONSBANK, N.A.,
a national banking association
By: /s/ Charles S. Flint
--------------------------------------
Name: Charles S. Flint
--------------------------------------
Title: Senior Vice President
--------------------------------------
Date of Signature: 5/28/99
--------------------------
5
<PAGE>
FIRST AMENDMENT TO BUILD-TO-SUIT NET LEASE
This First Amendment to Build-to-Suit Net Lease (this "FIRST AMENDMENT") is
executed by and between Oaklawn Alliance, L.L.C., a Delaware limited
liability company ("LANDLORD") and ADS Alliance Data Systems, Inc., a
Delaware corporation ("TENANT") and is effective as of the last day
accompanying the signature of Landlord and Tenant below. Guarantor and
Mortgagee (both as defined below) are executing this First Amendment for the
purposes indicated in this First Amendment.
R E C I T A L S
A. Effective as of January 29, 1998, Opus South Corporation, a Florida
corporation ("ORIGINAL LANDLORD") and Tenant entered into that certain
Build-To-Suit Net Lease (the "LEASE") covering certain property located
in the City of Dallas, Collin County, Texas (the "LAND"). The Land
together with the Original Base Building (as defined in the Lease) is
referred to in this First Amendment as the "PREMISES".
B. The Lease was guaranteed by Alliance Data Systems Corporation, a Delaware
corporation ("GUARANTOR") pursuant to the terms of that certain Lease
Guaranty dated the same date as the Lease (the "GUARANTY").
C. A Memorandum of Lease was executed the same day as the Lease and recorded
on January 30, 1998 in Volume 4091, Page 1447 of the real property records
of Collin County, Texas.
D. Original Landlord, Tenant, and NationsBank, N.A., a national banking
association ("MORTGAGEE") entered into that certain Subordination,
Non-disturbance and Attornment Agreement dated April 3, 1998 and recorded
on April 7, 1998 at Volume 4138, Page 1032 of the real property records of
Collin County, Texas (the "SNDA").
E. On December 3, 1998, Original Landlord transferred the Premises to
Landlord.
F. Landlord and Tenant wish to amend the Lease in matters concerning
assignment and subletting and construction of a second building. The
purpose of this First Amendment is to set forth the agreement of Landlord
and Tenant in such regard.
A G R E E M E N T S
NOW, THEREFORE, for and in consideration of the matters set forth in the
Recitals and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby
agree as fellows:
1. DEFINED TERMS:
a. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"AMORTIZED AMOUNT" means the lesser of (a) the excess of the
actual cost of the Expansion Leasehold Improvements over the
Expansion Leasehold Improvements Allowance (as that term is
defined below), or (b) an amount determined by multiplying $5.00
by the number of Rentable Square Feet in the Expansion Building
(subject to the terms of SECTION 18(f) below).
<PAGE>
b. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"AMORTIZATION INCREASE AMOUNT" is an amount determined by
amortizing, at a rate of nine percent (9%) per annum, the
Amortized Amount over the number of months in the Lease Term
beginning with the month next succeeding the month in which
Tenant must deliver to Landlord Tenant's Election Notice
(as that term is defined below) and ending on the last day
of the Lease Term.
c. Landlord and Tenant hereby amend the definition of "Approved Expansion
Base Building Plans" in Section 1.1 of the Lease by deleting it in its
entirety and replacing it with the following:
"APPROVED EXPANSION BASE BUILDING AND GARAGE PLANS" has the
meaning set forth in SECTION 18(b).
d. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"EXPANSION ALLOWANCE" is the sum of the Expansion Leasehold
Improvements Allowance and the Parking Garage Allowance.
e. Landlord and Tenant hereby amend the definition of "Expansion Base
Building Plans" in Section 1.1 of the Lease by deleting it in its
entirety and replacing it with the following:
"EXPANSION BASE BUILDING AND GARAGE PLANS" has the meaning set
forth in SECTION 18(b).
f. Landlord and Tenant hereby amend the definition of "Expansion Costs"
in Section 1.1 of the Lease by deleting it in its entirety and
replacing it with the following:
"EXPANSION COSTS" means the total cost of preparing the Expansion
Leasehold Improvement Plans and the Garage Plans, obtaining all
permits for, and constructing and installing, the Expansion
Leasehold Improvements (in the Expansion Base Building) and the
Parking Garage, and providing any services during construction of
the Expansion Leasehold Improvements and the Parking Garage (such
as electricity and other utilities and refuse removal), but
specifically excluding any acquisition or carrying costs for any
portion of the Land, it being understood that those costs are
included in the Original Basic Rent for the Original Premises..
Landlord and Tenant further agree that Expansion Costs will cover
(a) the cost of general conditions and insurance, not to exceed
three percent (3%) of the cost of the construction work,
excluding soft costs, (b) overhead, not to exceed three percent
(3%) of the cost of the construction work, excluding soft costs
and the general conditions and insurance and (c) a general
contractor's fee payable to Landlord in an
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amount equal to five percent (5%) of the construction work,
excluding soft costs and overhead.
g. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"EXPANSION DEADLINE EXTENSION" has the meaning set forth in
SECTION 18(b).
h. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"EXPANSION LEASEHOLD IMPROVEMENTS ALLOWANCE" is an amount
determined by multiplying the Rentable Square Feet in the
Expansion Building (subject to the terms of SECTION 18(f)
below) by $20.00.
i. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"EXPANSION PLAN APPROVAL DELAY" has the meaning set forth in
SECTION 18(b).
j. Landlord and Tenant hereby amend the definition of "Landlord's Notice
Address" in Section 1.1 of the Lease by deleting it in its entirety
and replacing it with the following:
"LANDLORD'S NOTICE ADDRESS" means:
Oaklawn Alliance, L.L.C.
Attn: Lamb E. Lawson
12225 Greenville Avenue, Suite 900
Dallas, Texas 75240
With Copy To:
Opus South Corporation
Attn: Neil J. Rauenhorst
4200 West Cypress Street, Suite 444
Tampa, Florida 33607
With Copy To:
Opus Corporation
Attn: Legal Department
10350 Bren Road West
Minnetonka, Minnesota 55343
With Copy To:
Andrews & Barth, P.C.
8235 Douglas Avenue, Suite 1120
Dallas, Texas 75225
Attn: Stanley K. Barth
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l. Landlord and Tenant hereby amend the definition of "Landlord's Rent
Address" in Section 1.1 of the Lease by deleting it in its entirety
and replacing it with the following:
"LANDLORD'S RENT ADDRESS" means:
Oaklawn Alliance, L.L.C.
c/o Opus South Management Corporation
4200 West Cypress Street
Suite 445
Tampa, Florida 33607
m. Landlord and Tenant hereby amend Section 1.1 of the Lease to add
the following definition:
"PARKING GARAGE" has the meaning set forth in SECTION 18(a).
n. Landlord and Tenant hereby amend Section 1.1 of the Lease to add the
following definition:
"PARKING GARAGE ALLOWANCE" means $1,477,963.00.
o. Landlord and Tenant hereby amend the definition of "Release
Conditions" in Section 1.1 of the Lease by deleting it in its
entirety and replacing it with the following:
"RELEASE CONDITIONS" means all of the following conditions
have been met:
(a) the assignee of this Lease or sublessee of either all
of the Original Building or all of the Expansion Building,
as the case may be, meets ONE of the following standards:
(i) has a net worth (excluding goodwill) of at least
$75 million.
(ii) all of the following are true: (A) such assignee
or sublessee has experienced during each of the
three (3) periods of twelve (12) months each which
immediately precede the effective date of such
assignment or subletting (with each such twelve
(12)-month period being referred to as a "COMPARISON
YEAR") EBTDA (as defined below) equal or greater than
an amount equal to five (5) times the annual
obligation in Basic Rent of the portion of the
Premises covered by such assignment or subletting (the
"ANNUAL EBTDA REQUIREMENT"), (B) such assignee or
sublessee meets the Annualization Standard (also as
defined below) for the three (3) month period
immediately preceding the effective date of such
assignment or subletting (which period of time is
referred to as the "BASE PERIOD" and the equivalent
periods
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of time during each of the three (3) immediately-
preceding Comparison Years is referred to as the
"COMPARISON PERIODS"), and (C) such assignee or
sublessee certifies to Landlord in writing that it
has not taken or allowed and does not, as of the
effective date of such assignment or subletting,
intend to take or allow any action which would
constitute an Event of Default under SUBSECTION
15.2(c) or SUBSECTION 15.2(d) of this Lease. The
term "EBTDA" means Earnings before Taxes,
Depreciation, and Amortization. The term
"ANNUALIZATION STANDARD" means that (i) each of the
three (3) Comparison Periods is analyzed to see what
proportion of the EBTDA for the Comparison Year is
applicable to such Comparison Period, (ii) the
proportional amounts for each of the Comparison
Periods are averaged (the "BASE COMPARISON
AVERAGE"), and (iii) the EBTDA for the Base Period
is greater than or equal to the Annual EBTDA
Requirement for the twelve (12)-month period ending
on the last day of the Base Period multiplied by the
Base Comparison Average. So, for example, if the
annual obligation in Basic Rent of the portion of
the Premises covered by such assignment or
subletting were $1.5 million, then the proposed
assignee or sublessee would need to have had an
EBTDA in each of the immediately preceding three (3)
twelve (12) month periods equal to $7.5 million. In
addition, if the Base Period were January, February,
and March of a particular year, then the Comparison
Periods would be the same months during each of the
three (3) immediately-preceding twelve (12) month
periods. If the EBTDA for the first, second, and
third Comparison Periods were thirty percent (30%),
twenty-eight percent (28%), add thirty two percent
(32%), respectively, of their respective annual
EBTDA, then the average of the three would be thirty
percent (30%) and the EBTDA for the Base Period
would, under such example, need to be at least $2.25
million.
(iii) satisfies some other commercially reasonable
alternative measurement proposed by Tenant and approved
by Landlord, which approval cannot be unreasonably
withheld, conditioned, or delayed.
(b) if such assignee or sublessee is a subsidiary of any
entity, Tenant has obtained and delivered to Landlord a
guaranty by such parent entity of the assignee's or
sublessee's obligations under this Lease, which guaranty
agreement must be substantially similar to the form attached
to this Lease as EXHIBIT G or another form reasonably
acceptable to Landlord, and
(c) in the event Tenant subleases either all of the
Original Building or all of the Expansion Building, or
both (it being
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understood and agreed that this condition does not apply
in the case of an assignment), Tenant has obtained and
delivered to Landlord a written agreement for the express
benefit of Landlord from such sublessee assuming the
obligations of Tenant under this Lease relating to or
arising out of the use and occupancy of the Original
Building or the Expansion Building, or both, as the case
may be, from and after the effective date of such
sublease; however, in the event such sublessee expressly
assumes less than all such obligations, the release will
apply to the obligations which are assumed by such
sublessee in writing for the express benefit of Landlord,
but not to the ones that are not so assumed.
p. Landlord and Tenant hereby amend the definition of "Substantially
Completed", "Substantial Completion" and "Substantially Complete" in
Section 1.1 of the Lease by deleting it in its entirety and replacing
it with the following:
"SUBSTANTIALLY COMPLETED" or "SUBSTANTIAL COMPLETION" or
"SUBSTANTIALLY COMPLETE" means that (i) the applicable portion
of the Premises is broom clean, free of construction tools and
materials, and Landlord's Original Work has been completed
according to the Approved Original Base Building Plans and the
Approved Original Leasehold Improvements Plans or Landlord's
Expansion Work has been completed according to the Approved
Expansion Base Building and Garage Plans and the Approved
Expansion Leasehold Improvements Plans, as the case may be,
with only minor punch list items that will not interfere to
more than a minor extent with Tenant's use and enjoyment of
the Original Building, the Expansion Building, or the Parking
Garage (herein referred to as "PUNCH LIST ITEMS") remaining to
be completed or corrected pursuant to the terms of this Lease;
(ii) a certificate of occupancy for the entire Original
Building, Expansion Building, and Parking Garage (which
certificate of occupancy may only be conditioned upon final
installation of landscaping or completion of any Punch List
Item so long as such condition to the issuance of the
certificate of occupancy does not adversely affect Tenant's
occupancy and operation of its business activities within the
Original Building, Expansion Building, and Parking Garage) has
been issued or, alternatively, if certificates of occupancy
are obtained for less than the entirety of the applicable
portion of the Original Building, Expansion Building, and
Parking Garage, then certificates of occupancy have been
issued for all portions of the Original Building, Expansion
Building, and Parking Garage; provided, however, that if the
only condition to the issuance of any certificate of occupancy
is the performance of work that TENANT is required to perform
under this Lease, then such certificate of occupancy will be
deemed issued for all purposes under this Lease; and (iii)
that all utilities called for in the Approved Original Base
Building Plans or Approved Expansion Base Building and Garage
Plans, as the case may be, or the Approved Original Leasehold
Improvements Plans or the Approved Expansion Leasehold
Improvements Plans, as the case may be, are installed and
operable with all hook-up, tap or similar fees paid. For the
purpose of resolving any disagreement between Landlord and
Tenant as to whether or not any item relating to the Expansion
Building and the Parking
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<PAGE>
Garage constitutes a Punch List Item as set forth in item (i)
above, on or before May 15, 2000, Landlord and Tenant will
each appoint a licensed architect who has had at least five
(5) years' full-time commercial architectural experience in
the Dallas, Texas market and provide written notice to the
other party identifying the name, address and telephone number
of the architect so appointed. If no objection is made as to
the qualifications of the architect so identified within five
(5) BUSINESS days following such notice (it being agreed that
any objection shall be limited to whether or not the architect
has had at least five (5) years' full-time commercial
architectural experience), then any objection to such
architect based on qualifications shall be waived, and it
shall be conclusively deemed that such architect meets the
qualifications set forth herein. Each architect so appointed
will be instructed to (i) contact the other architect and,
together with the other architect, select, by no later than
June 1, 2000, a third architect meeting the qualifications set
forth above which architect must not have acted for either
Landlord or Tenant (or any parent, affiliate, or subsidiary of
Landlord or Tenant) in any capacity, and (ii) once selected,
provide written notice to Landlord and Tenant of the name,
address and telephone number of the third architect. Either
Landlord or Tenant may raise an objection as to the
qualification of the third architect (it being agreed that any
objection shall be limited to whether or not the architect has
had at least five (5) years' full-time commercial
architectural experience and whether or not the architect has
actedLor either Landlord or Tenant or any parent, affiliate,
or subsidiary of Landlord or Tenant), but such objection shall
be waived unless expressed in writing to the other party
within five (5) BUSINESS days after the third architect is
identified in writing to the Landlord or Tenant, as the case
may be. In the event either Landlord or Tenant fails to
appoint a qualified architect by May 15, 2000, and such
failure continues for a period of three (3) BUSINESS days
following written notice from the other party stating such
failure, the determination of Punch List Items (should there
be a disagreement between Landlord and Tenant) shall be made
by the architect timely appointed by the other party. If both
architects are timely appointed, then their mutually agreed
determination as to Punch List Items shall be binding. If the
two (2) architects do not agree within three (3) BUSINESS days
following the date both are notified in writing that Landlord
and Tenant were unable to agree as to the Punch List Items,
the determination as to any Punch List Items for which there
has not been agreement shall be made by the third architect
within two (2) BUSINESS days following the date Landlord,
Tenant, or either of the first two (2) architects notifies the
third architect in writing of the items to which the first two
(2) architects could not reach agreement as whether or not
same constitute a Punch List Item, and such determination by
the third architect shall be binding on both parties. Each
architect shall be instructed to determine which items
constitute Punch List Items according to generally accepted
standards and criteria in the Dallas, Texas market. Each party
will pay the fees and expenses of the architect appointed by
such party, and they will pay equal shares of the fees and
expenses of the third architect. For the purpose of item (i)
above, the date of completion will not be delayed or affected
by the process of determining what constitutes a Punch List
Item (although the date of completion will be delayed by
Landlord's failure to perform an item that
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is determined during the process of determining Punch List
Items to NOT be a Punch List Item because it is more than a
minor item that will not interfere to more than a minor extent
with Tenant's use and enjoyment of the Original Building, the
Expansion Building, or the Parking Garage).
2. LIST OF EXHIBITS: Landlord and Tenant hereby amend Section 1.2 of the Lease
to delete Exhibit "I" and Exhibit "J" from the list of exhibits.
3. ASSIGNMENT AND SUBLETTING: Landlord and Tenant hereby amend Section 11.3
of the Lease by deleting it in its entirety and replacing it with the
following:
GENERAL PROVISIONS. Subject to the other terms and conditions
of this SECTION 11.3, no subletting or assignment by Tenant
hereunder, regardless of whether the same requires Landlord's
consent, will release or discharge Tenant of or from any liability,
whether past, present or future, under this Lease, and Tenant will
continue fully liable hereunder. Notwithstanding the foregoing, (i)
in the event Tenant assigns this Lease in its entirety or subleases
the entire Premises and the Release Conditions, as defined above,
are met, then Tenant and Guarantor will be automatically released
from all obligations arising under this Lease from and after the
date of such assignment or sublease (in the case of a sublease,
such release shall be limited to the obligations of Tenant under
this Lease which such sublessee assumes in writing for the benefit
of Landlord), and (ii) in the event Tenant subleases either all of
the Original Building or all of the Expansion Building and the
Release Conditions, as defined above, are met as to such Building,
then (a) this Lease will automatically be amended so as to be two
(2) leases, one for each Building, with all of the terms and
provisions of this Lease being divided accordingly as provided in
SECTION 19 of this Lease and the sublease will be deemed to be as
to the entire lease for the Building which is subleased, and (b)
Tenant and Guarantor will be automatically released from all
obligations arising under the lease for the Building which is sub
leased from and after the date of such sublease (in the case of a
sublease, such release shall be limited to the obligations of
Tenant under this Lease which such sublessee assumes in writing for
the benefit of Landlord). In any circumstances in which Tenant and
Guarantor are released from liability or in which this Lease is
divided into two (2) leases, Landlord, Tenant and Guarantor agree
to execute an agreement confirming such release or division (or
both) within ten (10) days after requested in writing to do so,
although execution of such document will not be necessary for such
release or division, or both, to be effective. The sublessee or
assignee will agree to comply with and be bound by all of the
terms, covenants, conditions, provisions and agreements of this
Lease to the extent of the space sublet or assigned from and after
the date of such assignment or subletting, and Tenant will deliver
to Landlord promptly after execution an executed copy of each such
sublease or assignment and such an agreement of compliance by each
such sublessee or assignee. Consent by Landlord to any assignment
of this Lease or to any subletting of the Premises will not be a
waiver of Landlord's rights under this SECTION 11 as to any
subsequent assignment or subletting. Any sale, assignment,
mortgage, transfer or subletting of this Lease which is not in
compliance with the provisions of this SECTION 11 will be of no
effect and void. Landlord's right to assign its interest in this
Lease is unqualified. Landlord may charge Tenant up to $1,000.00
for attorneys' fees and
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administrative expenses incident to a review of any documentation
related to any proposed assignment or subletting by Tenant.
4. CONSTRUCTION OF EXPANSION BUILDING AND PARKING GARAGE: Landlord and Tenant
hereby amend Section 18 of the Lease by deleting it in its entirety and
replacing it with the Section 18 attached to this First Amendment as
EXHIBIT "A."
5. FURTHER LEASE AMENDMENT. Landlord and Tenant hereby amend the Lease to add
the following as a new Section 19 thereto:
19. FURTHER AMENDMENT. In the event (i) pursuant to SECTION 11.3
of this Lease, this Lease is divided into two (2) leases, (ii) this
Lease is terminated by Tenant, as to the Expansion Building only,
pursuant to SECTION 18(f) of this Lease, or (iii) this Lease is
terminated, as to the Expansion Building only, pursuant to
SECTION 18(i) I of this Lease, then this Lease will be automatically
amended as follows:
(a) So as to be two (2) leases, one (l) being for the
Original Building and that portion of the Land identified as
"Tract 1" on EXHIBIT "H" attached hereto; and the other being
for the Expansion Building and that portion of the Land
identified as "Tract 2" on EXHIBIT "H" attached hereto.
(b) The tenants and occupants respecting the Original
Building and the Expansion Building, together with their
employees, agents, customers, guests and invitees will have
the non-exclusive right, in common with each other, to use the
Parking Garage and to use all common areas (hereinafter
referred to as the "COMMON AREAS") such as landscaped areas,
driveways, walkways, entrance ramps and similar areas intended
for common use but existing outside the Original Building and
the Expansion Building (Landlord will, upon written request of
the tenant(s) occupying a majority of the space within either
of the two (2) buildings, designate a half of the surface
parking spaces and half of the spaces in the Parking Garage in
closest proximity to each building for exclusive use by the
occupants of such building, using the division of the Land set
forth on EXHIBIT "H" as a guide). Upon written request of the
tenant(s) occupying a majority of the space within either of
the two (2) buildings, Landlord will be responsible for
enforcing the exclusive nature of such parking as fellows: (i)
Landlord will arrange (through the use of stickers or other
similar device) for the cars entitled to park in each parking
area to be separately and easily identified by area in which
they are entitled to park, (ii) Landlord will ticket each car
which is improperly parked and each tenant of the buildings
agrees that it will be obligated to pay the parking charges
imposed against its employees or occupants of its space, and
(iii) if any tenant(s) occupying a majority of the space
within either of the two (2) buildings advises Landlord that
the ticketing arrangement has not substantially solved the
problem of improper parking, then Landlord will tow cars which
are improperly parked. Landlord will have no enforcement
obligations respecting the parking of cars except as set forth
in the immediately-preceding run-on sentence.
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(c) The Landlord will be responsible for the maintenance,
replacement and repair of the Parking Garage (including the
structural elements thereof and all Common Areas, including,
without limitation, all parking areas and landscaping.
(d) All costs and expenses borne by Landlord which would
have been borne by Tenant had this Lease not been divided in
two will be allocated one-half (1/2) to the Original Building
and one-half (1/2) to the Expansion Building. Such costs and
expenses include, but are not limited to, (i) Taxes (with
Landlord paying the Taxes directly to the taxing authority and
the tenants paying Landlord their pro rata share within thirty
(30) days following receipt of Landlord's invoice with
supporting documents), (ii) the costs and expenses related to
maintenance, replacement, and repair of the Parking Garage
(excluding the structural, elements of the Parking Garage,
which shall be Landlord's obligation and not subject to
reimbursement), (iii) the costs and expenses related to the
Common Areas, including, without limitation, all parking areas
and landscaping, and (iv) the costs and expenses of monitoring
the enforcing the exclusive parking arrangement as described
in SECTION 19(b) above. The tenants of the Original Building
and the Expansion Building must pay their share of such
amounts within thirty (30) days following receipt of
Landlord's invoice with supporting documentation, or,
alternatively, Landlord may estimate the tenants'
proportionate share of such costs and expenses, in which event
the tenants will pay such estimated sums monthly, with
Landlord providing supporting documentation and
reconciliations annually.
Landlord, Tenant and Guarantor agree to cooperate and negotiate in
good faith with diligent efforts to cause a proper amendment to be
executed addressing the matters set forth above and any additional
matters that might be proper in order to effect the intents and
purposes of dividing this Lease into two (2) leases.
6. AMENDMENT OF MEMORANDUM OF LEASE: Landlord and Tenant hereby agree to
execute the First Amendment to the Memorandum of Lease attached to this
First Amendment as EXHIBIT "B."
7. EXHIBITS: Landlord and Tenant hereby amend the Exhibits to the Lease as
follows:
a. Exhibit "H" of the Lease by deleting it in its entirety and
replacing it with EXHIBIT "H" attached to and made apart of this
First Amendment for all purposes (it being understood and agreed
that there are no Exhibits "C," "D," "E," "F," or "G" to this
First Amendment).
b. Landlord and Tenant hereby amend Exhibit "I" of the Lease by
deleting it in its entirety (so that there will be no Exhibit "I"
to the Lease at all).
c. Landlord and Tenant hereby amend Exhibit "J" of the Lease by
deleting it in its entirety (so that there will be no Exhibit "J"
to the Lease at all).
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Guarantor will be automatically released from all obligations
arising under the Lease from and after the date of such assignment
or sublease (which, in the case of a sublease, such release shall
be limited to the obligations of Tenant under this Lease from and
after the date of such sublease which are assumed by such sublessee
in writing for the express benefit of Landlord), and (ii) in the
event Tenant subleases either all of the Original Building or all
of the Expansion Building and the Release Conditions, as defined in
the Lease, are met as to such Building, then (a) the Lease will
automatically be amended so as to be two (2) leases, one for each
Building, with all of the terms and provisions of the Lease being
divided accordingly and the sublease will be deemed to be as to the
entire lease for the Building which is subleased, and (b) Guarantor
will be automatically released from all obligations arising under
the lease for the Building which is subleased from and after the
date of such sublease to the extent such sublessee assumes, in
writing for the expressed benefit of Landlord, the obligations of
Tenant under this Lease from and after the date of such sublease.
In any circumstances in which Guarantor is released from liability
or in which the Lease is divided into two (2) leases, Landlord
agrees to execute an agreement confirming such release or division
(or both) within ten (10) days after requested in writing to do so,
although execution of such document will not be necessary for such
release or division to be effective. Guarantor will at all times be
entitled to assert as a defense to any obligation under this
Guaranty that Tenant has a defense to the guaranteed obligation
under the terms of the Lease.
9. GUARANTOR'S EXECUTION: Guarantor is executing this First Amendment for the
purpose of confirming (i) that the execution and delivery of this First
Amendment does not in any way terminate or limit Guarantor's obligations
under the Guaranty and (ii) that the Lease Guaranty is amended as provided
in Section 7 of this First Amendment.
10. MORTGAGEE'S EXECUTION: Mortgagee is executing this First Amendment for
the purpose of evidencing its consent to and agreement that if Mortgagee
becomes the Landlord under the Lease, Mortgagee will be bound by the
terms and provisions of this First Amendment.
11. COUNTERPARTS: This Agreement may be executed in multiple counterparts,
all of which, when taken together, will constitute one (1) original.
LANDLORD: OAKLAWN ALLIANCE, L.L.C.,
a Delaware limited liability company
By: /s/ Neil Rauenhorst
----------------------------------
Name: Neil Rauenhorst
-------------------------------
Title: President & CEO
------------------------------
Date of Signature: January 14, 2000
------------------
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TENANT: ADS ALLIANCE DATA SYSTEMS, NC.,
a Delaware corporation
By: /s/ Dwayne H. Tucker
----------------------------------
Name: Dwayne H. Tucker
-------------------------------
Title: Senior Vice President
------------------------------
Date of Signature: 1/7/00
------------------
GUARANTOR: ALLIANCE DATA SYSTEMS CORPORATION, a Delaware
corporation
By: /s/ Dwayne H. Tucker
----------------------------------
Name: Dwayne H. Tucker
-------------------------------
Title: Senior Vice President
------------------------------
Date of Signature: 1/7/00
------------------
MORTGAGEE: BANK OF AMERICA, N.A.,
a national banking association (successor to
NationsBank, N.A.)
By: /s/ Charles S. Flint
----------------------------------
Name: Charles S. Flint
-------------------------------
Title: Senior Vice President
------------------------------
Date of Signature: 2/16/00
------------------
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EXHIBIT "A"
18. EXPANSION OPTION.
(a) Landlord hereby covenants and agrees to construct the
following buildings on the Land: (i) an office building and surrounding
Common Areas (as that term is defined below) which is substantially
similar to the Original Building, in the location specified on EXHIBIT
"H" to this Lease (the "EXPANSION BASE BUILDING"), (ii) Tenant
Improvements to the Expansion Base Building, subject to the terms of
this SECTION 18 (the "EXPANSION LEASEHOLD IMPROVEMENTS"), and (iii) a
198-space parking garage, subject to the terms of this SECTION 18 (the
"PARKING GARAGE"), which Parking Garage, as well as all of the other
portions of the Common Areas, shall be used solely by the occupants of
the Original Building and the Expansion Base Building, and their
respective employees and guests. The Expansion Base Building and the
Expansion Leasehold Improvements are collectively referred to as the
"EXPANSION BUILDING" and the work of constructing the Expansion Building
(including, without limitation, the Common Areas, as defined below) and
the Parking Garage are referred to as "LANDLORD'S EXPANSION WORK."
(b) On or before January 10, 2000, Landlord will cause its
architect to prepare and deliver to Tenant preliminary plans and
specifications for the Expansion Base Building and the -Parking Garage
(the "EXPANSION BASE BUILDING AND GARAGE PLANS"), which plans must be
based on an exterior appearance substantially similar to the Original
Base Building. While these preliminary plans and specifications are not
required to be permit-ready, they must contain a site plan, floor plan,
one-quarter inch (0.25") scale core building plans, elevations of the
Expansion Base Building and the Parking Garage, and a riser diagram of
the mechanical, electrical and plumbing systems. Within four (4)
BUSINESS days after Tenant receives such preliminary Expansion Base
Building and Garage Plans, Tenant will either approve the same in
writing or notify Landlord in writing of Tenant's objections to the
preliminary Expansion Base Building and Garage Plans and how the
preliminary Expansion Base Building and Garage Plans must be changed in
order to make them acceptable to Tenant. Each BUSINESS day following the
fourth (4th) BUSINESS day after the preliminary Expansion Base Building
and Garage Plans are submitted to Tenant until Tenant either approves
them or delivers a notice of objections to Landlord will be a day of
Tenant Expansion Delay. Within four (4) BUSINESS days after Landlord's
receipt of Tenant's notice of objections, Landlord will cause its
architect to prepare revised Expansion Base Building and Garage Plans in
accordance with such notice and submit the revised Expansion Base
Building and Garage Plans to Tenant. In any review, Tenant cannot object
to any aspect of the proposed Expansion Base Building and Garage Plans
(i) if such objection would require material deviations from the final
plans for the Original Building, other than the following deviations:
there will be one (1) loading dock instead of two (2) loading docks; the
location of the trash area must be changed to a location designated by
Tenant in order to accommodate the parking structure, and, at Tenant's
election and, subject to Landlord being able to obtain all required
permits and approvals from applicable governmental authorities,
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Tenant may require that there be a permanent covered walkway between the
Original Building or the Expansion Building and the Parking Garage, at a
location designated by Tenant (Tenant hereby acknowledging that the
design and construction of such covered walkways will need to be
adjusted if located within any fire lane in order to accommodate the
passage of emergency vehicles under the cover), or (ii) such objection
was not included within any of the previous objections made by Tenant to
the Expansion Base Building and Garage Plans unless the item objected to
was not included in any of the previous versions of the Expansion Base
Building and Garage Plans or such item was so included, but has been
affected by a subsequent change to the Expansion Base Building and
Garage Plans. However, it is understood and agreed that Tenant has the
right to select the following items, even if such items are not
consistent with the same items in the Original Building, as long as they
are available to comply with the schedule for construction of the
Expansion Building and the Parking Garage: restroom finishes (including,
without limitation, ceramic tile and toilet partitions); lobby finishes;
elevator cab finishes; landscaping; and common area interior finishes,
doors and hardware. Upon submission to Tenant of the revised Expansion
Base Building and Garage Plans, and upon submission of any further
revisions, the procedures described above will be repeated until
Landlord and Tenant have reached agreement. Once they have reached
agreement, Landlord must promptly prepare permit-ready Expansion Base
Building and Garage Plans and submit them to Tenant for Tenant's
approval. The only grounds upon which Tenant can object to such
permit-ready Expansion Base Building and Garage Plans is that they
materially differ from the final approved preliminary Expansion Base
Building and Garage Plans. Tenant's failure to respond to Landlord's
submission within four (4) BUSINESS days after Landlord delivers such
permit-ready Expansion Base Building and Garage Plans to Tenant
constitutes Tenant's approval of such permit-ready Expansion Base
Building and Garage Plans. The final permit-ready Expansion Base
Building and Garage Plans, as approved by Landlord and Tenant,
constitute the "APPROVED EXPANSION BASE BUILDING AND GARAGE PLANS" under
this Lease. Each day following February 15, 2000 (as extended by one day
for each day of Expansion Deadline Extension), that the Approved
Expansion Base Building and Garage Plans have not been approved by
Landlord and Tenant for any reason other than Landlord's failure to
perform or respond as required by this SECTION 18(b) shall constitute an
"EXPANSION PLAN APPROVAL DELAY". Each day that Landlord does not perform
or respond as required by this SECTION 18(b) will extend the February 15,
2000 deadline by one (1) day and will constitute a day of "EXPANSION
DEADLINE EXTENSION".
(c) On or before March 1, 2000, Tenant will cause its architect to
prepare and deliver to Landlord preliminary plans and specifications for
the Expansion Leasehold Improvements (the "EXPANSION LEASEHOLD
IMPROVEMENTS PLANS"). While these preliminary plans and specifications
are not required to be permit-ready, they must show sufficient detail
concerning all aspects of the Expansion Leasehold Improvements so that
making them permit-ready is only a matter of incorporating technical
details. Each day following March 1, 2000 until Tenant delivers the
preliminary Expansion Leasehold Improvements Plans will be a day of
Tenant Expansion Delay. Within four (4) BUSINESS days after receipt of
the
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preliminary Expansion Leasehold Improvements Plans, Landlord will either
approve the same in writing or notify Tenant in writing of Landlord's
objections to the preliminary Expansion Leasehold Improvements Plans and
how the preliminary Expansion Leasehold Improvements Plans must be
changed in order to make them acceptable to Landlord. Landlord can only
object to the preliminary Expansion Leasehold Improvements Plans on the
grounds that they would adversely affect the structural integrity of the
Expansion Base Building or materially modify any portion of the Core
Building Systems of the Expansion Base Building and cannot object in any
subsequent review to any matter not raised in a preceding review, unless
the item objected to was not included in any of the previous versions of
the Expansion Leasehold Improvements Plans or such item was so included,
but has been affected by a subsequent change to the Expansion Leasehold
Improvements Plans. However, under all circumstances, Tenant has the
right to select the following items as they apply to the Expansion
Leasehold Improvements, but only as long as such items are available to
comply with the schedule of construction of the Expansion Building:
restroom finishes (including, without limitation, ceramic tile and
toilet partitions); lobby finishes; elevator cab finishes; landscaping;
and common area interior finishes, doors and hardware. If Landlord fails
to respond in the manner set forth above within four (4) BUSINESS days
after the date Tenant delivers the preliminary Expansion Leasehold
Improvements Plans to Landlord or objects to the preliminary Expansion
Leasehold Improvements Plans on any grounds other than those set forth
in the immediately-preceding sentence, then Landlord will be
conclusively deemed to have approved the preliminary Expansion Leasehold
Improvements Plans. Within four (4) BUSINESS days after Tenant's receipt
of Landlord's notice of objections (if such objections meet the
requirements set forth above), Tenant will cause its architect to
prepare revised Expansion Leasehold Improvements Plans according to such
notice and submit the revised Expansion Leasehold Improvements Plans to
Landlord. Upon submission to Landlord of the revised Expansion Leasehold
Improvements Plans, and upon submission of any further revisions, the
procedure& described above will be repeated until Landlord and Tenant
have reached agreement. Once they have reached agreement, Tenant must
promptly prepare permit-ready Expansion Leasehold Improvements Plans and
submit them to Landlord for Landlord's approval. The only grounds upon
which Landlord can object to such permit-ready Expansion Leasehold
Improvements Plans is that they materially differ from the final
approved Expansion Leasehold Improvements Plans. Landlord's failure to
respond to Tenant's submissions within four (4) BUSINESS days after
Tenant delivers such permit-ready Expansion Leasehold Improvements Plans
to Landlord constitutes Landlord's approval of such permit-ready
Expansion Leasehold Improvements Plans. The permit-ready Expansion
Leasehold Improvements Plans, as finally approved, are referred to in
this Lease as the "APPROVED EXPANSION LEASEHOLD IMPROVEMENTS PLANS."
Each day following March 15, 2000 (extended one (1) day for each day of
Expansion Deadline Extension), that the Approved Extension Leasehold
Improvement Plans have not been approved by Landlord and Tenant for any
reason other than Landlord's failure to perform or respond as required
by this SECTION 18(c) shall constitute an Extension Plan Approval Delay.
Each day Landlord does not perform or respond as required by this
SECTION 18(c) will constitute a day of Expansion Deadline Extension.
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(d) At such time as Landlord and Tenant have approved the Approved
Expansion Base Building and Garage Plans and the Approved Expansion
Leasehold Improvements Plans (and in any event within ten (10) days
thereafter), Landlord will (i) obtain at least three bids for each of
the major trades that will be involved in the construction of the
Parking Garage and the Leasehold Improvements, unless less than three
qualified subcontractors exist for a given trade, in which case Landlord
will obtain a bid from all qualified subcontractors of such trade (with
Landlord agreeing to solicit and consider bids from qualified
subcontractors selected by Tenant); (ii) using the lowest qualified bid
(which, in order to be qualified, must fully comply with all bid
requirements, including but not limited to any time requirements
specified) from each of the bids so received, prepare a proposed budget
for all items to be included in Expansion Costs ("TENANT'S EXPANSION
COST PROPOSAL"); and (iii) submit copies of all bids and the Tenant's
Expansion Cost Proposal to Tenant for Tenant's review and approval.
Tenant, at Tenant's option, may either approve Tenant's Expansion Cost
Proposal in writing, or elect to eliminate or revise one or more items
of the Parking Garage and the Expansion Leasehold Improvements shown on
the Approved Expansion Base Building and Garage Plans or the Approved
Expansion Leasehold Improvements Plans, or request additional bids so as
to reduce the costs shown in the Tenant's Expansion Cost Proposal.
Tenant may then approve in writing the reduced Tenant's Expansion Cost
Proposal (based on revised Approved Expansion Base Building and Garage
Plans or Approved Expansion Leasehold Improvements Plans prepared by
Tenant's architect or revised bids, as the case may be, which will then
be deemed the Approved Expansion Base Building and Garage Plans and the
Approved Expansion Leasehold Improvements Plans for all purposes under
this Lease). However, each day following the fourth (4th) BUSINESS day
after Tenant's receipt of Tenant's Expansion Cost Proposal until the day
on which Landlord has received Tenant's written approval of Tenant's
Expansion Cost Proposal will be a day of Tenant Expansion Delay. The
Tenant's Expansion Cost Proposal, as finally approved, is referred to in
this Lease as the "APPROVED EXPANSION COSTS."
(e) Tenant's Representative may request and authorize changes in
the Parking Garage and the Expansion Leasehold Improvements as long as
such changes (i) are consistent with the scope of Landlord's Expansion
Work, and (ii) do not affect any portion of the Core Building Systems
relating to the Expansion Base Building. All other changes will be
subject to Landlord's prior written approval, which approval Landlord
cannot unreasonably withhold, delay, or condition. If Tenant wishes to
request such a change to the Parking Garage or the Expansion Leasehold
Improvements, then Tenant must deliver to Landlord written notice of the
requested change and within four (4) BUSINESS days after Tenant delivers
such request to Landlord and prior to commencing any change, Landlord
will prepare and deliver to Tenant, for Tenant's approval, a change
order ("EXPANSION CHANGE ORDER") identifying the total cost or savings
of such change, which will include associated architectural, engineering
and construction contractor's fees, and the total time that will be
added to or subtracted from the construction schedule by such change.
Once Landlord delivers an Expansion Change Order to Tenant for Tenant's
approval, Tenant must either affirmatively approve or disapprove of the
Expansion Change Order within three (3) BUSINESS days following Tenant's
receipt of the
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Expansion Change Order. In the event Tenant fails to respond within the
three (3) BUSINESS day period, then each day thereafter that Tenant
fails to respond shall be a Tenant Expansion Delay. Alternatively,
Landlord may deliver to Tenant, within the same four (4) BUSINESS day
period, an estimate of the time and costs to be expended in calculating
the Expansion Change Order. In the event Tenant does not respond or
fails to affirmatively authorize Landlord to proceed on the third (3rd)
BUSINESS day following Tenant's receipt of such estimate, then it shall
be conclusively deemed that Tenant withdrew its request for such change
in the Parking Garage or the Expansion Leasehold Improvements. If Tenant
authorizes Landlord to proceed with calculating the cost of the
Expansion Change Order, then Tenant shall be responsible for all
reasonable costs associated therewith (and pay same to Landlord within
30 days following Landlord's written request) and any reasonable delay
in connection with such calculation shall be an Tenant Expansion Delay,
whether or not Tenant ultimately approves the Expansion Change Order.
(f) Landlord must deliver the Expansion Building to Tenant, with
Landlord's Expansion Work Substantially Completed, on or before October
11, 2000 (the "PROJECTED EXPANSION COMPLETION DATE"), as such date has
been delayed due to any Tenant Expansion Delays, Expansion Plan Approval
Delays and Permitted Expansion Force Majeure Delays only, it being
understood and agreed that such date cannot be extended for any reason
other than Tenant Expansion Delays, Expansion Plan Approval Delays and
Permitted Expansion Force Majeure Delays. If Landlord fails to deliver
possession of the Expansion Building and Parking Garage, with Landlord's
Expansion Work Substantially Completed by the Projected Expansion
Completion Date, as it may be extended, (i) the Expansion Commencement
Date (as that term is defined in SECTION 18(j)(I) below) will be
extended automatically by one day for each day of the period after the
Projected Expansion Completion Date to the day on which Landlord tenders
possession of the Expansion Building and Parking Garage to Tenant with
Landlord's Expansion Work Substantially Completed, less any portion of
that period attributable to Tenant Expansion Delays; and (ii) Landlord
will pay Tenant, as liquidated damages, an amount equal to $250,000.00
per month (pro-rated and payable on a weekly basis beginning on the day
after the Projected Expansion Completion Date, as it may be extended, so
that a delay for a partial week will constitute a delay for an entire
week) for each day after such Projected Expansion Completion Date (as it
may be extended) until Landlord tenders possession of the Expansion
Building and Parking Garage to Tenant with Landlord's Expansion Work
Substantially Completed; provided, however, that in no event can such
liquidated damages exceed a total of $250,000.00, and (iii) if Landlord
has tendered the Expansion Building and Parking Garage to Tenant with
Landlord's Expansion Work Substantially Completed, Landlord will pay to
Tenant, as liquidated damages, $500.00 per day after the forty-fifth
(45th) day (which date shall be extended due to force majeure provided
that Landlord diligently prosecutes the completion of the Expansion
Punch List) after Tenant delivers the Expansion Punch List to Landlord
until Final Completion of Landlord's Expansion Work; and (iv) if
Landlord does not tender possession of the Expansion Building and
Parking Garage to Tenant with the Landlord's Expansion Work
Substantially Completed on or before sixty (60) days after the Projected
Expansion Completion Date (as it may be extended), Tenant
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will have the right to terminate this Lease, as to the Expansion
Building only (and any rights and obligations respecting the Parking
Garage which are incidental to the Expansion Building), by delivering
written notice of termination to Landlord not more than thirty (30) days
after such deadline date. Upon a termination under clause "(iv)" above,
each party will, upon the other's request, execute and deliver an
agreement in recordable form containing a release and surrender of all
right, title and interest in and to this Lease as to the Expansion
Building only; neither Landlord nor Tenant will have any further
obligations to each other, including, without limitation, any
obligations on Tenant's part to pay for work previously performed in the
Expansion Building and Parking Garage, except as set forth in this
sentence; all Improvements to the Expansion Building will become and
remain the property of Landlord; and Landlord will refund to Tenant any
sums paid to Landlord by Tenant in connection with this Lease relating
to the EXPANSION BUILDING AND PARKING GARAGE ONLY, including, without
limitation, any payments to Landlord of portions of Tenant's Expansion
Cost and pay to Tenant the amounts that have accrued under clause "(ii)"
above. Such postponement of the Expansion Commencement Date, payment of
liquidated damages and termination and refund right will be in full
settlement of all claims that Tenant might otherwise have against
Landlord by reason of Landlord's failure to have Substantially Completed
its obligations by the Projected Expansion Completion Date (as it may be
extended). If Landlord delivers possession of the Expansion Building and
Parking Garage with the Landlord's Expansion Work Substantially
Completed prior to the Projected Expansion Completion Date, then Tenant
may either accept such delivery (in which case such date will be the
Expansion Commencement Date hereunder) or may refuse to accept delivery
until any date selected by Tenant that is no later than the Projected
Expansion Completion Date (as it may be extended). Within sixty (60)
days after the Expansion Commencement Date, Landlord will provide to
Tenant a complete set of as-built drawings of Landlord's Expansion Work
and manuals for all equipment incorporated into the Improvements as a
part of Landlord's Expansion Work. Landlord and Tenant have sixty (60)
days after Landlord notifies Tenant that The Expansion Building has been
Substantially Completed in which to remeasure the Expansion Building,
but after the expiration of such sixty (60) day period, neither Landlord
nor Tenant may remeasure the Expansion Building. The final Rentable
Square Feet as shown in the Approved Expansion Base Building Plans are
sometimes referred to as the "APPROVED EXPANSION RENTABLE SQUARE FEET."
In the absence of such remeasurement or the right to do so, it shall be
conclusively deemed that the Expansion Building contains the Approved
Expansion Rentable Square Feet. If Tenant timely elects to remeasure the
Expansion Building, and the variance is greater than one percent (1%)
but less than two percent (2%), the variance shall be permitted and have
no effect on the Expansion Building being Substantially Completed, but
the Expansion Basic Rent for the Expansion Building and all other
amounts calculated based on the area of the Expansion Building will be
modified accordingly. If the Expansion Building contains more than 102%
of the Approved Expansion Rentable Square Feet, all amounts will be
calculated as if the Expansion Building contains 102% of the Approved
Expansion Rentable Square Feet. If the Expansion Building contains less
than 98% of the Approved Expansion Rentable Square Feet, then Landlord
must make all alterations necessary to increase the size of the
Expansion Building to at least 98% of the Approved Expansion Rentable
Square Feet, and the Expansion Building will not be
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deemed to be Substantially Completed until Landlord does so. If Landlord
fails to do so and Tenant fails to terminate this Lease pursuant to the
termination right set forth in SECTION 18(f)(iv) above, then Tenant will
be deemed to have accepted the size of the Expansion Building and the
Expansion Building will be deemed to have been Substantially Completed
on the day Landlord delivered the Expansion Building to Tenant with the
Landlord's Expansion Work (other than the area of the Expansion
Building) Substantially Complete. In such event, all amounts Will be
calculated on the actual size of the Expansion Building.
(g) As provided in SECTION 18(j)(I), the Expansion Commencement
Date (and therefore Tenant's obligation for the payment of Expansion
Basic Rent) will not commence until Landlord has Substantially Completed
Landlord's Expansion Work; provided, however, that if Landlord is
delayed in causing Landlord's Expansion Work to be Substantially
Completed as a result of: (a) any Expansion Approval Delays, (b) any
Change Orders or changes in any drawings, plans or specifications
requested by Tenant (with each individual occurrence constituting a
"TENANT EXPANSION DELAY" and the cumulative occurrences constituting
"TENANT EXPANSION DELAYS"), or (c) force majeure delays (with such force
majeure delays being referred to in this Lease as "PERMITTED EXPANSION
FORCE MAJEURE DELAYS"), then, if such delays exceed ten (10) days, the
Expansion Commencement Date will only be extended under SECTION 18(f)
until the date on which Landlord would have Substantially Completed the
performance of such work but for such delays. As a condition to claiming
a Permitted Expansion Force Majeure Delay or a Tenant Expansion Delay,
the day of delay must have otherwise been a day upon which Landlord
intended to work on the item affected by the delay and was prevented
from doing so by such force majeure and Landlord must advise Tenant of
the circumstances giving rise to the claim within ten (10) BUSINESS days
after they arise, the estimated cost that Tenant can pay as that time to
effect any available remedy to eliminate or reduce such delay (for
example, overtime work), the cumulative total number of Permitted
Expansion Force Majeure Delays and Tenant Expansion Delays through the
date of each event.
(h) Landlord must perform the Landlord's Expansion Work in
substantial accordance with the Approved Expansion Base Building and
Garage Plans and the Approved Expansion Leasehold Improvements Plans and
in a good and workmanlike manner, using new materials, and in accordance
with all applicable laws, ordinances, rules, and regulations, including
without limitation, ADA and the Texas Accessibility Act (as they exist
and are interpreted and enforced at the time) and all applicable
environmental laws as interpreted and enforced by the governmental
bodies having jurisdiction thereof at the time of construction. Tenant's
taking possession of any portion of the Expansion Building will be
conclusive evidence that such portion of the Expansion Building was in
good order and satisfactory condition, and that all of Landlord's
Expansion Work in or to such portion of the Expansion Building was
Substantially Completed, when Tenant took possession, except as to any
patent defects or uncompleted items in the Expansion Building
(including, without limitation, the Common Areas, including all
landscaped) and the Parking Garage identified on a punch list (the
"EXPANSION PUNCH LIST") prepared by Tenant's Representative after an
inspection of the Expansion Building (including, without limitation, the
Common Areas, including all
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landscaped areas) and the Parking Garage by both Tenant's Representative
and Landlord's Representative (unless Landlord's Representative fails to
attend an inspection scheduled by Tenant's Representative, with Tenant
acknowledging that Tenant's Representative must cooperate with
Landlord's Representative in attempting to establish a
mutually-acceptable date and time of inspection) made within thirty (30)
days after Tenant takes possession, and except as to any latent defects
in Landlord's Expansion Work. Landlord will not be responsible for any
items of damage caused by Tenant, its agents, independent contractors or
suppliers. No promises to construct, alter, remodel or improve the
Expansion Building, and no representations concerning the condition of
the Expansion Building, have been made by Landlord to Tenant other than
as may be expressly stated in this Lease.
(i) Landlord appoints Landlord's Representative to act for
Landlord in all matters covered by this SECTION 18. Tenant appoints
Tenant's Representative to act for Tenant in all matters covered by this
SECTION 18. All inquiries, requests, instructions, authorizations and
other communications with respect to the matters covered by this SECTION
18 will be made to Landlord's Representative or Tenant's Representative,
as the case may be. Tenant will not make any inquiries of or requests
to, and will not give any instructions or authorizations to, any other
employee or agent of Landlord, including Landlord's architect, engineers
and contractors or any of their agents or employees, with regard to
matters covered by this SECTION 18. Either party may change its
representative at any time by three days' prior written notice to the
other party. Landlord and Tenant acknowledge that they must work
together cooperatively in order to design the Expansion Building and the
Parking Garage and therefore agree to act reasonably and in good faith
in such design process
(j) Upon Tenant's approval of the Tenant's Expansion Cost Proposal,
this Lease will automatically be amended as follows (with Landlord and
Tenant each agreeing to execute a written agreement confirming these
amendments upon delivery of such an amendment to such party by the other
party):
(I) The Term of this Lease will be extended so that it ends on the
day before the tenth (10th) anniversary of the date of Substantial Completion
of the Expansion Building and the Parking Garage (the "EXPANSION COMMENCEMENT
DATE"). The options to extend the Term of this Lease granted in SECTION 2.5
above will remain in full force and effect and may be exercised at the end of
the Term of this Lease, as so extended, subject to the notice and other
requirements of SECTION 2.5. Any exercise of the option to extend will apply
to and include both the Original Building and the Expansion Building as well
as the continuing rights relating to the Parking Garage, unless the Original
Building and the Expansion Building have been divided into two (2) leases, as
contemplated by the terms of ARTICLE 19 below, in which case each tenant of
each such building may exercise or not exercise the options to extend as to
its own building. Notwithstanding the foregoing, Tenant may, at any time
after the end of the seventh (7th) anniversary of the Expansion Commencement
Date, terminate this Lease AS TO THE EXPANSION BUILDING ONLY (and any rights
and obligations respecting the surface parking areas and the Parking Garage
incidental to the Expansion Building) by giving Landlord written notice of
such decision to terminate, which notice must specify a termination date
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(the "TERMINATION DATE") no earlier than nine (9) months after the date of
such notice and must be accompanied by a payment equal to nine (9) months of
Expansion Base Rent (the "TERMINATION PENALTY"), which amount is not a
prepayment of rent, it being understood and agreed that Tenant must continue
to pay Expansion Base Rent through the Termination Date. On the Termination
Date, (i) Tenant must pay to Landlord an amount equal to the unamortized
portion of any brokerage commission paid by Landlord in connection with the
Expansion Building and one-half (1/2) of the unamortized portion of the cost
of the Expansion Leasehold Improvements for which Landlord paid and was not
reimbursed by Tenant, it being understood and agreed that the amortization
period is ten (10) years, and (ii) Landlord must refund to Tenant any amounts
Tenant has paid for periods after the Termination Date and must pay to Tenant
any other amounts that might be due from Landlord to Tenant. The parties may
offset these amounts instead of exchanging checks. From and after the
Termination Date, Landlord and Tenant will have no obligation to each other
concerning the Expansion Building (and any rights or obligations respecting
the surface parking areas and the Parking Garage which are incidental to the
Expansion Building) or the Parking Garage, except for obligations which arose
before or on the Termination Date and except for the obligations which accrue
to Tenant as the tenant of the Original Building.
(II) The Basic Rent will be as follows:
(A) for the Original Building, the Original Basic Rent will
be the same as provided in SECTION 4.1 above for the number of
years which represents the balance of the Original Term as defined
in SECTION 1.1 above. Thereafter, the Original Basic Rent will
increase on the first day after the original expiration date of the
Original Term to an amount equal to one hundred twelve and one-half
percent (112.5%) of the Original Basic Rent in effect for the
immediately preceding period. For example, if the Original Basic
Rent were $128,244.62 per month, then for the period beginning on
the day after the original expiration date of the Original Term and
extending through the then-existing initial term, the Basic Rent
would be $144,275.19.
(B) for the Expansion Building, the monthly rent (the
"EXPANSION BASIC RENT") will be equal to the amount determined by
multiplying the amount specified below by the number of Rentable
Square Feet in the Expansion Building (subject to the terms of
SECTION 18(f) above) and then dividing the result thus obtained
by twelve (12):
Months 1 through and including 60: $11.88
Months 61 through and including the
end of the primary term: $13.30
(III) To require that within ninety (90) days after the Final
Completion of the Expansion Building and the Parking Garage, Landlord must
prepare and deliver to Tenant a package (the "COST INFORMATION PACKAGE")
containing all of the following (a)
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a statement setting forth the actual cost of the Parking Garage and the
actual cost of the Expansion Leasehold Improvements, (b) reasonable
supporting documentation evidencing the amounts set forth in the
statement of actual costs, and (c) a calculation of the Amortization
Increase Amount. If Landlord does not send the Cost Information Package
to Tenant within such ninety (90) day period, then Landlord will
conclusively be deemed to have waived its right to claim that it should
be reimbursed for any excess of the actual cost of the Parking Garage
and the Expansion Leasehold Improvements over the Expansion Allowance.
(A) If the Cost Information Package shows that the actual
cost of the Parking Garage and the Expansion Leasehold Improvements
was less than the Expansion Allowance, then Landlord must deliver
payment of the excess of the Expansion Allowance over the actual
cost of the Parking Garage and the Expansion Leasehold Improvements
at the same time as Landlord delivers the Cost Information Package
to Tenant.
(B) If the Cost Information Package shows that the actual
cost of the Parking Garage and the Expansion Leasehold Improvements
was greater than the Expansion Allowance, then (i) as to the
Parking Garage, Tenant must deliver to Landlord an amount equal to
the lesser of (a) the amount by which the cost of the Parking
Garage exceeded the Parking Garage Allowance, or (b) the amount by
which the total cost of the Parking Garage and the Leasehold
Improvements exceeded the Expansion Allowance, and (ii) as to the
excess, if any, of the payment made under "(i)" above, over the
total amount by which the cost of the Parking Garage and the
Leasehold Improvements exceeded the Expansion Allowance, Tenant
must deliver to Landlord a written notice (such notice is referred
to as "TENANT'S ELECTION NOTICE") that (i) Tenant has elected to
pay such excess amount to Landlord, which notice must be
accompanied by a payment of such amount, or (ii) that Tenant has
elected to increase the Basic Rent for the Expansion Building by
the Amortization Increase Amount and to pay the unamortized portion
of any such excess to Landlord, which notice must be accompanied by
a payment of such unamortized amount.
Tenant is entitled at any time, upon five (5) days written notice to
Landlord, to investigate Landlord's books and records concerning the
Expansion Building (including, without limitation, the Expansion Leasehold
Improvements) and the Parking Garage and Landlord's calculation of the
Amortization Increase Amount. If Tenant's investigation shows that any such
amounts or calculations in the Cost Information Package were incorrect, then
Tenant may notify Landlord of such fact and if Landlord would have owed
Tenant any amount under this Lease had the corrected amount or calculation
been included in the original Cost Information Package or if the amount of
the Amortized Amount or the Amortization Increase Amount would have been less
haft the correct amount been included in the Cost Information Package, then
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Landlord must deliver to Tenant the amount which Landlord underpaid to Tenant
or the amount Tenant overpaid to Landlord, or both, as the case may be, plus,
but only if the amount which Landlord underpaid to Tenant is more than five
percent (5%) of The total amount owed by Landlord to Tenant, the reasonable
costs and expenses of such investigation (not to exceed $1,000) within thirty
(30) days after Tenant delivers notice to Landlord of the results of Tenant's
investigation.
-23-
<PAGE>
EXHIBIT "B"
FIRST AMENDMENT TO MEMORANDUM OF LEASE
This First Amendment to Memorandum of Lease (this "FIRST AMENDMENT") is dated as
of January___, 2000 and is by and between Oaklawn Alliance L.L.C., a Delaware
limited liability company ("LANDLORD") and ADS Alliance Data Systems, Inc., a
Delaware corporation ("TENANT").
RECITALS
A. On January 29, 1998, Opus South Corporation, a Florida corporation ("OPUS")
and Tenant entered into that certain Build-to-Suit Net Lease (the
"LEASE")covering the property described on EXHIBIT A attached to and made a
part of this First Amendment for all purposes (the "PROPERTY").
B. On January 30, 1998, a Memorandum of Lease was recorded in Volume 4091,
Page 1447 of the real property records of Collin County, Texas.
C. On December 3, 1998, Opus transferred the Property and the Lease to
Landlord.
D. Tenant has exercised the Expansion Option referenced in the Lease and the
Memorandum of Lease and Landlord and Tenant have entered into that certain
First Amendment to Build-to-Suit Net Lease (the "FIRST LEASE AMENDMENT")
evidencing their agreement concerning such exercise. The purpose of this
First Amendment is to give notice of such amendment of the Lease.
INFORMATION
5. PRIMARY TERM: The Primary Term of the Lease has been changed so that it
ends on the day before the tenth (10th anniversary of the date of
Substantial Completion of the Expansion Building and the Parking Garage
(as those terms are defined in the First Lease Amendment).
6. NOTICE AND INTERPRETATION: Tenant and Landlord wish to record this First
Amendment in order to evidence the existence of the First Lease
Amendment. This First Amendment is not a complete summary of the First
Lease Amendment, all of the terms, covenants, and conditions of which
are made apart of this First Amendment as though fully set forth in this
First Amendment. This First Amendment is not intended to amend, modify,
or otherwise change the terms and conditions of the Lease, as amended by
the First Lease Amendment. In the event of a conflict between this First
Amendment and the Lease, as amended by the First Lease Amendment, the
Lease, as so amended, controls.
-23-
<PAGE>
LANDLORD: TENANT:
OAKLAWN ALLIANCE, L.L.C., ADS ALLIANCE DATA SYSTEMS, INC.,
a Delaware limited liability company a Delaware corporation
By: By:
------------------------------- --------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
And
By:
------------------------------
Name:
----------------------------
Title:
----------------------------
STATE OF )
COUNTY OF )
The foregoing instrument was acknowledged before me this _____ day of
__________________, 2000 by_______________, __________________ of Oaklawn
Alliance, L.L.C., a Delaware limited liability company.
Witness my hand and official seal.
Notary Public
-------------------------
My commission expires:
----------------
STATE OF )
COUNTY OF )
The foregoing instrument was acknowledged before me this _____ day of_____,
2000 by ________________________________ as _______________________ and
_________________________________ as ____________________________ of ADS
Alliance Data Systems, Inc., a Delaware corporation.
Witness my hand and official seal.
Notary Public
-------------------------
My commission expires:
----------------
-24-
<PAGE>
EXHIBIT A
LEGAL DESCRIPTION OF THE LAND
BEING a parcel or tract of land situated in the City of Dallas, Collin
County, Texas, and being pad of the John Clay Survey, Abstract 223, and being
pad of Phase I, U.T.D. Synergy Park, an Industrial Addition to the City of
Dallas, filed for record in Cabinet F, Page 483 and 484 of the Deed Records
of Collin County, Texas; and being pad of the tract of land conveyed to the
Board of Regents, the University of Texas System as recorded in Volume 835,
Page 713 of the Deed Records of Collin County, Texas, and being more
particularly described as follows:
BEGINNING at an Iron rod on the west right of way line of Waterview Parkway
(120 feet wide) and the northeast corner of the Smith/Allen Matuschka - One
Tract and the southEAST corner of the herein described tract;
THENCE South 90 degrees 00 minutes 00 seconds West a distance of 700.39 feet
following the north line of the Smith/Allen Matuschka - One tract to an iron
rod found for corner, said iron rod being in the easterly line of Texas A & M
University System tract;
THENCE North 00 degrees 12 minutes 12 seconds West a distance of 642.68 feet
following the east line of the Texas A & M System tract to the intersection
with the southwest corner of the Intervoice tract and an iron rod found for
corner;
THENCE North 90 degrees 00 minutes 00 seconds East a distance of 700.39 feet
following the south line of the Intervoice tract to an iron rod found for
corner in the westerly right of way line of Waterview Parkway, said point
being the southeast corner of the Intervoice tract;
THENCE South 00 degrees 12 minutes 12 seconds East, a distance of 642.68 feet
following the westerly right of way line of Waterview Parkway to the Point of
Beginning and containing 450,125 square feet or 10.3334 acres, more or less.
-25-
<PAGE>
EXHIBIT "H"
[Description to come]
<PAGE>
EXHIBIT 10.47
ALLIANCE DATA SYSTEMS, INC.
RETAINER AGREEMENT
[CUSTOMER]-FALL [YEAR] SEASON
The following represents the proposed Retainer Agreement (the "Agreement")
between Alliance Data Systems, Inc. ("Alliance Data") and [CUSTOMER]
("Customer") for the Fall [YEAR] season, consisting of [AUGUST ____ THROUGH
JANUARY _____]. Customer and Alliance Data have agreed that Alliance Data will
execute certain database marketing programs defined below during the Fall [YEAR]
Season for the benefit of Customer.
ANALYTICAL RESOURCES PROVIDED BY ALLIANCE DATA
As part of the Agreement, Alliance Data commits to providing the following
resources as an Account Team to Customer during the Fall [YEAR] season:
Account Manager 100%
Senior Analyst 100%
Analyst 100%
Analyst 100%
Analyst 50%
SERVICES INCLUDED IN THE RETAINER FEE
- - Strategic and tactical consulting
- - Database program development, implementation, analysis, and management
- - Segmentation model building using CHAID techniques
- - Coordination of database programs with Alliance Data MIS, Credit Marketing
Projects Group, and Portfolio, plus Epsilon and outside vendors (as defined
in programs)
- - Account administration, including billing, budgeting, maintenance of
account documentation, and ad-hoc pricing
- - Data processing (tape production, CPU time)
<PAGE>
SERVICES INCLUDED IN THE RETAINER FEE (CONTINUED)
- - Flexibility Clause:
In an effort to be responsive to Customer's changing business needs,
the Alliance Data Account Team can work on new, higher priority
projects outside of those described in this Agreement below as a trade
to existing, lower priority projects. Or, Customer can request
additional Analysts be added to the team to support the extra projects
with 30 days notice. Alliance Data will propose the experience level of
the Analyst to be added and the increase in retainer fee.
SERVICES EXCLUDED FROM THE RETAINER FEE
OTHER ALLIANCE DATA AGREEMENTS
- - Fixed cost of the database updates and maintenance
- - Credit program services provided by Alliance Data's Credit Marketing
Projects Group, except for the execution of standard Gold upgrades.
ADDITIONAL PRODUCTS AND SERVICES
These products and services can be purchased at Customer's request.
- - Alliance Data's Portrait TM consumer profile product
- - Demographic and Lifestyle overlays of the Customer subset
- - Building statistical models (utilizing regression or neural network
modeling techniques), outside those proposed below.
- - Execution of surveys and tabulation of results
- - Prospecting list acquisition and processing expenses
- - Insert coordination
DATABASE MARKETING FALL [YEAR] PROGRAMS
Exhibit 1 illustrates the Database marketing programs scheduled to be performed
by Alliance Data for Customer during the Fall [YEAR] season as part of this
Agreement.
2
<PAGE>
RETAINER FEE FOR THE FALL [YEAR] SEASON
Alliance Data's charge for the retainer team of one account manager, one senior
analyst, plus two and a half analysts is $________. Alliance Data will bill
Customer the base fee of $________ on the 15th of each month beginning August
15, _____ through December 15, _____, with the sixth and final bill to be
submitted on January 15, _____ totaling $_______. Payment is due within thirty
(30) days of the invoice date.
EFFECTIVE DATES
Upon receipt of written sign off below, Alliance Data will assign an a account
team to be retained by Customer for the Fall season from August ___, _____
through January ___, _____. A renewal retainer proposal for the Spring _____
Season will be submitted to Customer by ____________.
CUSTOMER
Date:
- ------------------------------- ---------------
(Vice President Marketing)
Date:
- ------------------------------- ---------------
(Chief Financial Officer)
ALLIANCE DATA SYSTEMS
Date:
- ------------------------------- ---------------
(Director, Database Marketing Analysis & Modeling)
3
<PAGE>
[CUSTOMER] FALL [YEAR]
SAMPLE DATABASE MARKETING PROGRAMS
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
PROGRAM TIMING TYPE CIRCULATION
--------------------------------------------------------------------------------------------------------------------
DIRECT MAIL
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fall Preview Private Sale 8/22-23 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Venezia Event 8/29-31 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
One Day Sale 9/20-21 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Fall Sale 10/11 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Fashion Mailer (#1) Test 10/24-25 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Private Sale 11/15 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Fashion Mailer (#2) Test 11/28-29 Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Two Day Sale 12/12-13 TBD
--------------------------------------------------------------------------------------------------------------------
Repetitive Fashion Test 9/20-21, 10/11, 11/15, Strategy, Selection, Analysis TBD
& 12/12-13
--------------------------------------------------------------------------------------------------------------------
New Store Announcements August - Tape Selections (11) TBD
January
--------------------------------------------------------------------------------------------------------------------
CREDIT *
--------------------------------------------------------------------------------------------------------------------
$0 Balance Newsletter (#1) August Strategy, Database Tape TBD
Selection, Analysis
--------------------------------------------------------------------------------------------------------------------
Merchandise Insert October Analysis TBD
--------------------------------------------------------------------------------------------------------------------
Gold Upgrade (Welcome Kit) October Database Tape Selection TBD
--------------------------------------------------------------------------------------------------------------------
Miss You / Thank You October Strategy, Selection, Analysis TBD
--------------------------------------------------------------------------------------------------------------------
$0 Balance Newsletter (#2) November Strategy, Database Tape TBD
Selection, Analysis
--------------------------------------------------------------------------------------------------------------------
Holiday Card Insert December Analysis TBD
--------------------------------------------------------------------------------------------------------------------
OTHER
--------------------------------------------------------------------------------------------------------------------
Season Strategic Planning
--------------------------------------------------------------------------------------------------------------------
Trend Reports Qualitative Analysis October
--------------------------------------------------------------------------------------------------------------------
Quarterly Business Analysis August, November
--------------------------------------------------------------------------------------------------------------------
Season Results Recap September
--------------------------------------------------------------------------------------------------------------------
Competitive Data On-going
--------------------------------------------------------------------------------------------------------------------
Develop Incremental Sales Model October-November
--------------------------------------------------------------------------------------------------------------------
</TABLE>
* Database marketing retainer does NOT cover Alliance Data Credit Marketing
Projects Group's support of Credit related programs. Credit Marketing
Projects' services for credit systems coordination, quality checking program
implementation will be covered under a separate agreement.
4
<PAGE>
Exhibit 10.48
BUSINESS SOLUTIONS MASTER AGREEMENT
BETWEEN
----------------
AND
ADS ALLIANCE DATA SYSTEMS, INC.
<PAGE>
BUSINESS SOLUTIONS MASTER AGREEMENT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
SECTION 1 Definitions.................................................................................1
SECTION 2 Services....................................................................................1
SECTION 3 Commencement Date and Implementation........................................................2
SECTION 4 Software and Data...........................................................................2
SECTION 5 Ownership Rights of Parties.................................................................3
SECTION 6 Term........................................................................................3
SECTION 7 Default and Termination.....................................................................3
SECTION 8 Fees........................................................................................4
SECTION 9 Third Party Service Providers...............................................................4
SECTION 10 Liability and Indemnification...............................................................5
SECTION 11 Confidentiality.............................................................................5
SECTION 12 Representations, Warranties and Covenants...................................................7
SECTION 13 Miscellaneous...............................................................................8
SCHEDULES:
SCHEDULE 1 DEFINITIONS................................................................................13
SCHEDULE 2 SAMPLE PROJECT SCHEDULE....................................................................15
</TABLE>
i
<PAGE>
BUSINESS SOLUTIONS MASTER AGREEMENT
This Business Solutions Master Agreement (the "Agreement") dated the
_____ day of __________, 1999 between ADS Alliance Data Systems, Inc. ("ADS"), a
Delaware Corporation, with an office at 800 TechCenter Drive, Gahanna, Ohio
43230 and ___________________________ ("Customer"), a __________ Corporation,
with its principal executive office at
___________________________________________.
W I T N E S S E T H:
WHEREAS, Customer wishes to utilize ADS' database marketing and
consulting ("Business Solutions") services for the benefit of Customer's retail
business; and
WHEREAS, ADS desires to provide such Business Solutions services to
Customer, as Customer may request from time to time:
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, ADS and Customer agree as follows:
1. DEFINITIONS. Capitalized terms in this Agreement shall have that
meaning set forth on Schedule 1, unless the context dictates otherwise.
2. SERVICES.
2.1 PROJECT SCHEDULES. Customer may from time to time request that
ADS provide certain Business Solutions services to Customer.
Each time Customer requests services from ADS, Customer and
ADS shall execute a project schedule describing the services
(the "Services") to be provided by ADS, in a form similar to
the Sample Project Schedule set forth in Schedule 2 (each
referred to herein as a "Project Schedule" and referred to
collectively herein as the "Project Schedules"). ADS will
provide to Customer the Services described in each Project
Schedule executed, from time to time, by the Parties pursuant
to this Agreement. Each Project Schedule shall set forth
therein all of the specific services to be provided by ADS and
the terms, conditions and fees relating to such Services and
shall incorporate the terms and provisions of this Agreement
by reference. Unless a Project Schedule expressly provides
otherwise, it shall be governed by the terms and conditions
described herein. In the event of a conflict between the
provisions of this Agreement and a Project Schedule, the terms
of the Project Schedule shall prevail.
2.2 CHANGES TO SERVICES. In the event Customer desires any changes
or additions to the Services, Customer will provide ADS with
written notice of such request and ADS will advise Customer
within five (5) Business Days for existing services and ten
(10) Business Days for new developmental services whether or
not ADS will develop and implement such changes and/or
additions, and if so, the estimated costs and time frame for
such development and implementation, as well as any
<PAGE>
fees or charges for such changes or additions. Customer shall
then advise ADS in writing whether or not to proceed with such
changes or additions.
2.3 USE OF SUBCONTRACTORS. ADS may, with Customer's prior written
consent which shall not be unreasonably withheld, subcontract
portions of the Services from time to time throughout the Term
of this Agreement.
2.4 EXCLUSIVITY/RIGHT OF FIRST REFUSAL AND SERVICING OF NEW
BUSINESS. During the Term of this Agreement, ADS will have the
right of first refusal for any new database marketing and
customer relationship management services desired by Customer,
before Customer engages any third party to perform such
services.
3. COMMENCEMENT DATE AND IMPLEMENTATION. ADS shall use its best efforts to
provide the Services to Customer according to the implementation
schedule set forth in the Project Schedule, or such other dates as the
Parties mutually agree upon in writing.However, in no event shall ADS
be liable in any manner or be required to compensate Customer for any
delay in performance under this Agreement or a Project Schedule, caused
by Customer, any third party or as a result of a Force Majeure event in
Section 13.2, and such delay shall not be deemed a default under this
Agreement or a Project Schedule. Each party shall be liable to the
other party for any reasonable costs actually incurred by the other
party as a result of a delay in the implementation (as specified and
mutually agreed to in the program design for each service) which delay
is caused solely by the other party.
4. SOFTWARE AND DATA.
4.1 SOFTWARE AND TECHNOLOGY OWNERSHIP. All software or other
technology owned, developed by or licensed to ADS (including,
but not limited to, software or other technology developed by
or licensed to ADS in response to Customer's request or to
accommodate Customer's special requirements) will remain the
exclusive property of ADS, regardless of whether or not
Customer is required to pay ADS for such software or
technology development. Nothing in this Agreement shall be
deemed to convey a proprietary interest to Customer or to any
party other than ADS in any of the software, hardware or
technology used or provided by ADS to permit or facilitate
Customer's use of the Services, or in any of the derivative
works thereof.
4.2 DATA ENTRY AND TRANSMISSION. Customer shall be responsible for
inputting and/or transmitting certain data for processing by
ADS. ADS shall not be responsible for errors in the Services
to the extent such errors result from Customer's error in
inputting and/or transmitting data or Customer's failure to
follow ADS' standards and procedures. ADS shall be entitled to
rely upon information submitted by Customer. In the event ADS
re-runs any reports for Customer due to errors by Customer in
inputting and/or transmitting data, Customer shall bear the
costs of any such re-runs.
2
<PAGE>
4.3 ADS INTELLECTUAL PROPRIETARY PROPERTY. The following shall be
deemed intellectual proprietary ADS property: ADS' Marketing
Database System and design, and ADS' unique segmentation
designs (i.e., incremental sales models) and products (i.e.,
Portrait).
5. OWNERSHIP RIGHTS OF PARTIES. Neither Party will, as a result of this
Agreement and all Project Schedules, or of performance hereunder or
thereunder, acquire any property or other right, claim or interest,
including any patent right or copyright interest, in any of the
information systems, processors, equipment, computer software, data,
intellectual property, service marks or trademarks of the other.
6. TERM. This Agreement will be effective as of the date of this Agreement
set forth on page 1 (the "Effective Date") and will continue until
terminated pursuant to Section 7).
7. DEFAULT AND TERMINATION.
7.1 DEFAULT UNDER A PROJECT SCHEDULE. In the event that a Party
materially fails to perform any of its obligations under a
Project Schedule, the other Party may give the defaulting
Party Notice of such failure. The defaulting Party shall
within ten (10) Business Days of receipt of such Notice remedy
the failure specified therein. In the event the defaulting
Party fails to remedy a failure under a Project Schedule
within such ten (10) Business Days or, for those failures
which cannot reasonably be cured within ten (10) Business
Days, fails to promptly commence curing such failure and
proceed with all due diligence to substantially cure the same,
then the other Party may give a termination Notice to the
defaulting Party and may terminate the Project Schedule.
7.2 DEFAULT UNDER THIS AGREEMENT. In the event that a Party
materially fails to perform any of its obligations under this
Agreement, the other Party may give the defaulting Party
Notice of such failure. The defaulting Party shall within
thirty (30) days of receipt of such Notice remedy the failure
specified therein. In the event the defaulting Party fails to
remedy a failure under this Agreement within such thirty (30)
days or, for those failures which cannot reasonably be cured
within thirty (30) days, fails to promptly commence curing
such failure and proceed with all due diligence to
substantially cure the same, the other Party may give a
termination Notice to the defaulting party and may terminate
this Agreement.
7.3 EVENT OF BANKRUPTCY. If an Event of Bankruptcy shall have
occurred with respect to either Party, the other Party may
give a termination Notice to the bankrupt Party and may
terminate this Agreement.
7.4 TERMINATION FOR CONVENIENCE BY EITHER PARTY. Either Party may
terminate this Agreement at any time by giving__________ days
prior written Notice to the other Party. Such Notice shall set
forth the date of termination.
3
<PAGE>
7.5 EFFECT OF TERMINATION.
7.5.1 TERMINATION BY CUSTOMER. Upon termination of this
Agreement by Customer pursuant to this Section 7, ADS
shall, at Customer's option, either, (a) immediately
cease work in respect of all Project Schedules, or
(b) conclude any work in progress in an efficient and
professional manner and assemble and deliver to
Customer any Work Product after completion thereof.
7.5.2 TERMINATION BY ADS. Upon termination of this
Agreement by ADS pursuant to this Section 7, ADS will
make every effort to conclude any work in progress in
an efficient and professional manner within the
thirty (30) days after notice, ADS will assemble and
deliver to Customer any Work Product after completion
thereof.
7.5.3 PAYMENT FOR SERVICES RENDERED. Upon termination of a
Project Schedule or this Agreement for any reason
Customer shall pay ADS for all Services performed
through (i) the date of such termination, or (ii) if
ADS concludes any work in progress after termination
of this Agreement the date such work in progress is
concluded.
8. FEES.
8.1 PAYMENT OF FEES. Customer shall pay to ADS the fees set forth
in each applicable Project Schedule according to the payment
provisions set forth in such Project Schedule.
8.2 TAXES. Customer will be responsible for payment of all sales,
use, excise, and value-added taxes, or taxes of a similar
nature, imposed by the United States, any state or local
government, or other taxing authority, on the Services being
paid for by Customer hereunder.
9. THIRD PARTY SERVICE PROVIDERS. Customer may obtain from third party
providers certain services related to and to augment or supplement the
Services. Customer may select and retain such third party providers and
will notify ADS of any change in third party providers or in the level
or nature of services provided thereby, to the extent such services
affect the Services. ADS shall have no responsibility to remedy a third
party provider's failure to provide services to Customer and if such
failure adversely affects ADS' ability to provide the Services, ADS
shall be excused from the performance of the Services or their
performance in accordance with the Service Levels, to the extent that
the Services are affected by such failure until the third party
provider or a successor chosen by Customer corrects the failure. If and
to the extent a change in Customer's third party service provider
results in actual and unavoidable costs or expenses to ADS, Customer
shall reimburse ADS for such costs and expenses incurred.
4
<PAGE>
10. LIABILITY AND INDEMNIFICATION.
10.1 NO WARRANTIES. EXCEPT AS PROVIDED HEREIN, THERE ARE NO EXPRESS
OR IMPLIED WARRANTIES, INCLUDING THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE,
RESPECTING THE SERVICES AND/OR OTHER PRODUCTS SOLD OR PROVIDED
BY ADS PURSUANT TO THIS AGREEMENT AND ALL PROJECT SCHEDULES.
THE REMEDIES SET FORTH IN THIS SECTION WITH RESPECT TO SUCH
SERVICES ARE THE SOLE REMEDIES RELATING TO ADS' LIABILITY TO
CUSTOMER FOR MONEY DAMAGES.
10.2 CUSTOMER'S INDEMNIFICATION. Customer shall indemnify and hold
harmless ADS and its Indemnitees from and against cost, loss,
liability, damage, judgment, cause of action, claim, expense,
penalty or fine, including, but not limited to, reasonable
attorneys' fees, sustained by ADS and its Indemnitees by way
of suit, claim, settlement (which shall require ADS' consent,
which shall not be unreasonably withheld) or otherwise, in a
private, third party or governmental suit, arising out of,
alleged to arise out of, or in connection with the Services
provided for in this Agreement and all Project Schedules,
provided that any and all such cost, loss, liability, damage,
judgment, cause of action, claim, expense, penalty or fine is
the result of the gross negligence or willful misconduct of
Customer, its officers, directors, or employees.
10.3 ADS' INDEMNIFICATION. ADS shall indemnify and hold harmless
Customer and its Indemnitees from and against cost, loss,
liability, damage, judgment, cause of action, claim, expense,
penalty or fine, including, but not limited to, reasonable
attorneys' fees, sustained by Customer and its Indemnitees by
way of suit, claim, settlement (which shall require Customer`s
consent, which shall not be unreasonably withheld) or
otherwise, in a private, third party or governmental suit,
arising out of, alleged to arise out of, or in connection with
the Services provided for in this Agreement and all Project
Schedules, that any and all such cost, loss, liability,
damage, judgment, cause of action, claim, expense, penalty or
fine is the result of the gross negligence or willful
misconduct of ADS, its officers, directors or employees.
11. CONFIDENTIALITY.
11.1 OBLIGATIONS OF THE PARTIES. Neither party shall disclose any
information not of a public nature concerning the business or
properties of the other Party which it learns as a result of
negotiating or implementing this Agreement and all Project
Schedules, including, without limitation, the terms and
conditions of this Agreement and the Project Schedules, trade
secrets, business and financial information, source codes,
business methods, procedures, know-how and other information
of every kind that relates to the business of either Party,
except to the extent disclosure is required by applicable law,
is necessary for the performance
5
<PAGE>
of the disclosing Party's obligation under this Agreement, or
is agreed to in writing by the other Party; provided that (i)
prior to disclosing any confidential information to any third
party, the Party making the disclosure shall give Notice to
the other Party of the nature of such disclosure and of the
fact that such disclosure will be made, and (ii) prior to
filing a copy of this Agreement and/or the Project Schedules
with any governmental authority or agency, the filing Party
will consult with the other Party with respect to such filing
and shall redact such portions of this Agreement and/or the
Project Schedules which the other Party requests be redacted,
unless, in the filing Party's reasonable judgment based on the
advice of its counsel (which advice shall have been discussed
with counsel to the other Party), the filing Party concludes
that such request is inconsistent with the filing Party's
obligations under applicable laws. Neither Party shall acquire
any property or other right, claim or interest, including any
patent right or copyright interest, in any of the systems,
procedures, processes, equipment, computer programs and/or
information of the other Party by virtue of this Agreement or
the Project Schedules. Neither Party shall use the other
Party's name for advertising or promotional purposes without
such other Party's written consent.
11.2 EXCEPTIONS. The obligations of this Section, shall not apply
to any information:
a) which is generally known to the trade or to the
public at the time of such disclosure; or
b) which becomes generally known to the trade or the
public subsequent to the time of such disclosure;
provided, however, that such general knowledge is not
the result of a disclosure in violation of this
Section; or
c) which is obtained by a Party from a source other than
the other Party, without breach of this Agreement or
any other obligation of confidentiality or secrecy
owed to such other Party or any other person or
organization; or
d) which is independently conceived and developed by the
disclosing Party and proven by the disclosing Party
through tangible evidence not to have been developed
as a result of a disclosure of information to the
disclosing Party, or any other person or organization
which has entered into a confidential arrangement
with the non-disclosing Party.
11.3 DISCLOSURE. If any disclosure is made pursuant to the
provisions of this Section, to any parent company, subsidiary,
affiliate or non-governmental third party, the disclosing
Party shall be responsible for ensuring that such parent,
subsidiary, affiliate or non-governmental third party keeps
all such information in confidence and that any
non-governmental third party executes a confidentiality
agreement provided by the non-disclosing Party. Each Party
covenants that at all times it shall have in place procedures
designed to assure that each of its employees who is given
access to the other Party's confidential information shall
protect the
6
<PAGE>
privacy of such information. Each Party acknowledges that any
breach of the confidentiality provisions of this Agreement by
it will result in irreparable damage to the other Party and
therefore in addition to any other remedy that may be afforded
by law any breach or threatened breach of the confidentiality
provisions of this Agreement may be prohibited by restraining
order, injunction or other equitable remedies of any court.
The provisions of this Section will survive termination or
expiration of this Agreement.
12. REPRESENTATIONS, WARRANTIES AND COVENANTS.
12.1 CUSTOMER'S REPRESENTATIONS, WARRANTIES AND COVENANTS. Customer
represents, warrants and covenants the following:
12.1.1 COMPLIANCE WITH LAWS. Customer shall comply with all
applicable laws and regulations, whether federal,
state or local, in the performance of its business
and its obligations hereunder. Customer acknowledges
and agrees that Customer is solely responsible for
monitoring legal developments applicable to its
business and the Services requested by Customer, and
for interpreting and determining the requirements for
compliance with all applicable state and federal
laws. ADS shall be entitled to rely upon, without
verification, any and all information, data and
instructions at any time submitted to ADS by Customer
having to do with Customer or the Services, and ADS
shall have no responsibility or liability whatsoever
with respect to such information, data and
instructions.
12.1.2 DULY ORGANIZED. Customer is a corporation duly
organized, validly existing and in good standing
under the laws of the state of__________ . Customer
has performed all necessary corporate action to have
the appropriate authority to enter into this
Agreement and to comply with its provisions. Customer
will not, by entering into this Agreement, be in
default of any obligations pursuant to any other
agreements to which Customer is a party.
12.2 ADS' REPRESENTATIONS, WARRANTIES AND COVENANTS. ADS represents,
warrants and covenants the following:
12.2.1 COMPLIANCE WITH LAWS. ADS shall comply with all
applicable laws and regulations, whether federal,
state or local, in the performance of its business
and of its obligations hereunder.
12.2.2 DULY ORGANIZED. ADS is a corporation duly organized,
validly existing and in good standing under the laws
of the state of Delaware. ADS has performed all
necessary corporate action to have the appropriate
authority to enter into this Agreement and to comply
with its provisions. ADS will
7
<PAGE>
not, by entering into this Agreement, be in default
of any obligations pursuant to any other agreements
to which ADS is a party.
12.3 YEAR 2000 COMPLIANCE.
12.3.1 ADS' COMPLIANCE. ADS shall use commercially
reasonable efforts to ensure that software or systems
proprietary to ADS and used in the performance of the
Services hereunder shall be Year 2000 Compliant.
However, ADS shall not be responsible for (1)
software or system failures based on improvements,
enhancements, modifications or updates to, and any
inaccuracies, delays, interruptions, or errors caused
by any software or systems that are not proprietary
to ADS; (2) any inaccuracies, delays, interruptions
or errors occurring as a result of incorrect data or
data from other systems, software, hardware,
processes or third parties provided in a format that
is inconsistent with the format and protocols
established for the ADS software and systems
including date data in two-digit format, even if such
data is required for the operation of the software or
systems; and (3) any inaccuracies, delays,
interruptions or errors occurring, at no fault of
ADS, as a result of incorrect data or data from
telecommunication systems.
12.3.2 CUSTOMER'S COMPLIANCE. Customer shall use
commercially reasonable efforts to ensure that
software or systems proprietary to Customer and used
by Customer in connection with its business shall be
Year 2000 Compliant. However, Customer shall not be
responsible for (1) software or system failures based
on improvements, enhancements, modifications or
updates to, and any inaccuracies, delays,
interruptions, or errors caused by any software or
systems that are not proprietary to Customer; (2) any
inaccuracies, delays, interruptions or errors
occurring as a result of incorrect data or data from
other systems, software, hardware, processes or third
parties provided in a format that is inconsistent
with the format and protocols established for the
Customer software and systems including date data in
two-digit format, even if such data is required for
the operation of the software or systems; and (3) any
inaccuracies, delays, interruptions or errors
occurring, at no fault of Customer, as a result of
incorrect data or data from telecommunication
systems.
13. MISCELLANEOUS.
13.1 ASSIGNMENT. This Agreement shall be binding on the Parties and
their respective successors and assigns.
13.2 FORCE MAJEURE. Neither Party will be responsible for any
failure or delay in performance of its obligations under this
Agreement or any Project Schedules because of circumstances
beyond its control, including, but not limited to, acts of
God, flood, criminal acts, fire, riot, computer viruses,
computer hackers, accident,
8
<PAGE>
strikes or work stoppage, embargo, sabotage, inability to
obtain material, equipment or phone lines, government action
(including any laws, ordinances, regulations or the like which
restrict or prohibit the providing of the Services
contemplated by this Agreement), and other causes whether or
not of the same class or kind as specifically named above. In
the event a Party is unable to substantially perform its
obligations for any of the reasons described in this
Subsection, it will notify the other Party promptly of its
inability so to perform, and if the inability continues for
more than ninety (90) consecutive days, the Party so notified
may then terminate this Agreement forthwith. This provision
shall not, however, release the Party unable to perform from
using its best efforts to avoid or remove such circumstance
and such Party unable to perform shall continue performance
hereunder with the utmost dispatch whenever such causes are
removed.
13.3 NOTICES. All Notices pursuant to this Agreement must be in
writing and shall be deemed given when mailed by certified or
registered mail, return receipt requested, or sent by
receipted courier service, or delivered personally, to the
party concerned at the following address:
If to ADS:
ADS Alliance Data Systems, Inc.
800 TechCenter Drive
Gahanna, Ohio 43230
Attention: Director, Business Solutions
With a copy to: Attention: General Counsel
If to Customer:
----------------------------
----------------------------
----------------------------
Attention:
------------------
Either Party may change the address to which Notices and
communications will be sent by written Notice to the other
Party, provided that any Notice of change of address shall be
effective only upon receipt.
13.4 INTEGRATION OF PRIOR AGREEMENTS AND AMENDMENTS. This
Agreement, including its Project Schedules, constitutes the
entire agreement and understanding between the Parties and
merges all prior discussions between them, and supersedes all
prior agreements and understandings, relating to its subject
matter. This Agreement may not be amended or modified except
in writing signed by both Parties.
13.5 HEADINGS. The table of contents and headings given to the
sections and paragraphs of this Agreement are for convenience
of reference and are not to be used to interpret this
Agreement.
9
<PAGE>
13.6 SEVERABILITY. In the event that one or more provisions of this
Agreement or of any Project Schedule is held invalid, illegal
or unenforceable in any respect or on the basis of any
particular circumstances or in other jurisdictions, the
validity, legality and enforceability of such provision or
provisions under other circumstances or in other jurisdictions
and the remaining provisions will not in any way be affected
or impaired, unless the declaration of the invalidity,
illegality or unenforceability of such provision or provisions
substantially frustrates the continued performance by, or
entitlement to benefits of, either Party, in which case this
Agreement may be terminated by the affected party, without
penalty.
13.7 WAIVER. No failure or delay on the part of either Party in
exercising any power or right under this Agreement shall be
deemed to be a waiver, nor does any single or partial exercise
of any power or right preclude any other or further exercise,
or the exercise of any other power or right. No waiver by a
Party of any provision of this Agreement, or of any breach or
default, is effective unless in writing and signed by the
Party against whom the waiver is to be enforced.
13.8 APPLICABLE LAW. THIS AGREEMENT AND THE PROJECT SCHEDULES SHALL
BE GOVERNED BY AND CONSTRUED ACCORDING TO THE INTERNAL LAWS OF
THE STATE OF OHIO, REGARDLESS OF THE DICTATES OF OHIO
CONFLICTS LAW, AND THE PARTIES HEREBY SUBMIT TO EXCLUSIVE
JURISDICTION AND VENUE IN THE UNITED STATES FEDERAL DISTRICT
COURT FOR THE EASTERN DISTRICT OF OHIO, OR IN A STATE COURT
WITH COMPETENT JURISDICTION IN OHIO.
13.9 SURVIVAL. No termination of this Agreement or a Project
Schedule shall in any way affect or impair the powers,
obligations, duties, rights, indemnities, liabilities,
covenants or warranties and/or representations of the Parties
with respect to times and/or events occurring prior to such
termination, including the obligation to make payments arising
prior to the termination date. No powers, obligations, duties,
rights, indemnities, liabilities, covenants, warranties and/or
representations of the Parties with respect to times and/or
events occurring after termination shall survive termination
except for the following Sections: Section 4, Section 5,
Subsection 7.5, Section 8, Section 10 and Section 11.
13.10 MUTUAL DRAFTING. This Agreement is the joint product of ADS
and Customer and each provision hereof has been subject to
mutual consultation, negotiation and agreement of ADS and
Customer, and shall not be construed for or against any Party
hereto.
13.11 INDEPENDENT CONTRACTOR. The Parties hereby declare and agree
that ADS is engaged in an independent business, and shall
perform its obligations under this Agreement as an independent
contractor; that any of ADS' personnel performing the Services
hereunder are agents, employees, affiliates, or subcontractors
of ADS and are not agents, employees, affiliates, or
subcontractors of Customer; that ADS
10
<PAGE>
has and hereby retains the right to exercise full control of
and supervision over the performance of ADS' obligations
hereunder and full control over the employment, direction,
compensation and discharge of any and all of the ADS' agents,
employees, affiliates, or subcontractors, including compliance
with workers' compensation, unemployment, disability
insurance, social security, withholding and all other federal,
state and local laws, rules and regulations governing such
matters; that ADS shall be responsible for ADS' own acts and
those of ADS' agents, employees, affiliates, and
subcontractors; and that except as expressly set forth in this
Agreement, ADS does not undertake by this Agreement or
otherwise to perform any obligation of Customer, whether
regulatory or contractual, or to assume any responsibility for
Customer's business or operations.
13.12 NO THIRD PARTY BENEFICIARIES. The provisions of this Agreement
are for the benefit of the Parties hereto and not for any
other person or entity.
13.13 ORDER OF PRECEDENCE. In the event of any conflict or
inconsistency between or among the provisions of this
Agreement and a Project Schedule, the provisions of the
Project Schedule shall control; provided that the Agreement
and Project Schedules shall be interpreted so as to give
effect to all provisions in both to the extent reasonably
practicable. In the event of a conflict between any Project
Schedules, the terms of the latest dated Project Schedule
shall prevail.
13.14 COUNTERPARTS. This Agreement may be executed in several
counterparts all of which taken together shall constitute one
single agreement between the Parties.
13.15 CONSENTS, APPROVALS AND REQUESTS. All consents and approvals
to be given by either Party under this Agreement and the
Project Schedules shall not be unreasonably withheld and each
Party shall make only reasonable requests under this Agreement
and the Project Schedules.
11
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement by their
duly authorized officers as of the day and year first above written.
ADS Alliance Data Systems, Inc.
-----------------------------------------
(Customer)
By: By:
- ------------------------------- --------------------------------------
Title: Title:
------------------------- -----------------------------------
Print Name: Print Name:
--------------------- ------------------------------
<PAGE>
SCHEDULE 1 - DEFINITIONS
"ADS" means ADS Alliance Data Systems, Inc.
"Affiliate" means any wholly-owned subsidiary or parent company of Customer or
ADS or any other entity of which a majority is owned by Customer or ADS or by
the same entity owning Customer or ADS.
"Business Day" means any calendar day other than Saturday or Sunday and
excluding holidays then currently recognized by ADS. All times referenced in
this Agreement will be Eastern Time unless otherwise noted.
"Customer" means_____________________________________.
"Event of Bankruptcy" means, with respect to any Party, the occurrence of any of
the following events: (a) a decree or order, by a governmental authority having
jurisdiction, is entered with respect to such Party and is not vacated,
discharged, stayed or bonded within 60 days after the date of entry thereof, (i)
for relief in respect of such Party pursuant to the Bankruptcy Code, (ii)
appointing a custodian, receiver, liquidator, assignee, trustee, or sequestrator
(or similar official) of such Party or of any substantial part of its
properties, or (iii) ordering the winding-up or liquidation of the affairs of
such Party, or (b) a Person other than such Party files a petition seeking the
institution of any proceedings specified in clauses (a)(i), (ii) or (iii) in
respect of such Party, and such petition shall not be discharged or dismissed
within 60 days after the date of filing thereof, or (c) such Person (i) files a
petition seeking relief pursuant to the Bankruptcy Code, (ii) consents to the
institution of proceedings pursuant thereto or to the filing of any such
petition or to the appointment of or taking possession by a custodian, receiver,
liquidator, assignee, trustee or sequestrator (or similar official) of such
Party or of any substantial part of its properties, or the winding up or
liquidation of its affairs, or (iii) takes corporate action in furtherance of
any such action.
"Indemnitee" shall mean a Party's parent, affiliates, subsidiaries and their
respective directors, officers, employees, agents, successors, shareholders and
assigns.
"Notice" means a formal communication related to, or required under any of the
provisions of this Agreement and given in accordance with the provisions of
Subsection 13.3 of the Agreement.
"Party" means either ADS or Customer.
"Parties" means ADS and Customer.
"Person" means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, institution,
public benefit corporation, entity or Governmental Authority.
"Project Schedule (s)" shall have that meaning set forth in the recitals.
13
<PAGE>
"Services" shall have that meaning set forth in Subsection 2.1.
"Work Product" means all written reports and other documentation prepared by ADS
for Customer in connection with the Services.
14
<PAGE>
SCHEDULE 2 - SAMPLE PROJECT SCHEDULE
TO BUSINESS SOLUTIONS MASTER AGREEMENT
This Project Schedule (the "Project Schedule") is entered into between ADS
Alliance Data Systems, Inc. ("ADS") and________________("Customer").
WHEREAS, ADS and Customer have entered into a Business Solutions
Master Agreement dated___________ , 1999 (the "Agreement"), pursuant to which
the Parties contemplated execution of certain Project Schedules setting forth
the Services to be provided by ADS:
NOW, THEREFORE, ADS and Customer agree as follows:
1. DEFINITIONS. Any capitalized term not defined herein shall have the
meaning provided in the Agreement.
2. INCORPORATION OF AGREEMENT. The Parties agree that all of the terms of
the Agreement, except as specifically provided in this Project
Schedule, shall apply to this Project Schedule and are incorporated
herein.
3. EFFECTIVE DATE. The effective date of this Project Schedule shall be
the season, consisting of__________ through__________ , 1999.
4. SERVICES. ADS shall provide Customer with the following Services:
5. IMPLEMENTATION SCHEDULE. The Services shall be provided as set forth
below:
CUSTOMER SPRING 1999
<TABLE>
<CAPTION>
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
PROGRAM TIMING SCOPE CIRCULATION PROJECT PRICE RETURN PRICE
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
- --------------------- ------------------ ------------------- ------------------ ------------------- ------------------
</TABLE>
6. FEES. Customer shall pay the following fees for the Services:
A base Retainer fee of $__________ to retain an ADS Business Solutions
account team to provide the Services described above. In addition, the
actual and reasonable costs for shipping and travel expenses incurred
by ADS during implementation of the Services will be directly passed
through to Customer.
ADS will bill Customer the base fee in__________ ( ) installments of
$__________ each together with any incurred shipping and travel
pass-through expenses on the 15th of each
15
<PAGE>
month beginning__________ , 1999 and continuing through__________ ,
1999. Payment is due within thirty (30) days of the invoice date.
If this retainer schedule is not signed by Customer and returned to the
Alliance Data Business Solutions Director prior to__________ , 1999,
Customer shall not receive the Retainer Price, and the Project Price
listed in the Implementation Schedule above shall apply for all
projects provided by ADS.
7. AVAILABLE PRODUCTS NOT COVERED IN THIS SCHEDULE:
8. PROJECT REPORTING. For retainer projects involving results reporting,
ADS will provide immediate results for the overall campaign, exclusive
of test panels, within ten (10) to fourteen (14) Business Days
(depending upon the last day of the promotion) after the conclusion of
the promotion period.
Spring 1999 delivery timelines will be used as a benchmark for Fall
1999 delivery timelines. The program design for each project will
specify the expected delivery date for immediate results. At the end of
the season, ADS will deliver to Customer a report which highlights the
actual delivery of each program.
9. CONFLICTS. In the event of any conflict or inconsistency between or
among the provisions of this Agreement and a Project Schedule, the
provisions of the Project Schedule shall control; provided that the
Agreement and Project Schedules shall be interpreted so as to give
effect to all provisions in both to the extent reasonably practicable.
In the event of a conflict between any Project Schedules, the terms of
the latest dated Project Schedule shall prevail.
IN WITNESS WHEREOF, the parties have executed this Project Schedule by
their duly authorized officers as of the date(s) set forth below.
ADS Alliance Data Systems, Inc.
---------------------------
(Customer)
By: By:
------------------------- ------------------------
Name: Name:
----------------------- ----------------------
Title: Title:
---------------------- ---------------------
Date: Date:
----------------------- ----------------------
16
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-94623 of Alliance Data Systems Corporation and Subsidiaries of our
report dated March 1, 2000 and of our report dated March 1, 2000 (relating to
the financial statements of SPS Network Services), appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Historical Consolidated Financial and Operating Information" and "Experts" in
such Prospectus.
DELOITTE & TOUCHE LLP
Columbus, Ohio
March 1, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated June 12, 1998 (except note 14 which is as at
January 12, 2000) to the shareholders of the company, with respect to the
consolidated financial statements of Loyalty Management Group Canada Inc. as at
April 30, 1998 and 1997 and for each of the years then ended, included in this
Amendment No. 1 to the Registration Statement No. 333-94623 on Form S-1 dated
March 1, 2000 and related Prospectus of Alliance Data Systems Corporation for
the registration of its common shares.
<TABLE>
<S> <C>
Toronto, Canada Ernst & Young LLP
March 2, 2000 Chartered Accountants
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 126,117
<SECURITIES> 64,079
<RECEIVABLES> 219,889
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 466,751
<PP&E> 89,231
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,185,069
<CURRENT-LIABILITIES> 286,152
<BONDS> 0
119,400
0
<COMMON> 475
<OTHER-SE> 290,156
<TOTAL-LIABILITY-AND-EQUITY> 1,185,069
<SALES> 0
<TOTAL-REVENUES> 639,254
<CGS> 0
<TOTAL-COSTS> 601,155
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 42,785
<INCOME-PRETAX> (4,686)
<INCOME-TAX> 15,388
<INCOME-CONTINUING> (20,074)
<DISCONTINUED> 3,951
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (16,123)
<EPS-BASIC> (0.49)
<EPS-DILUTED> (0.49)
</TABLE>
