e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
|
|
|
(Mark One)
|
|
|
þ
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Quarterly Period Ended
March 31, 2006
|
OR
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the transition period
from to
|
Commission File Number:
001-15749
ALLIANCE DATA SYSTEMS
CORPORATION
(Exact Name of Registrant as
Specified in its Charter)
|
|
|
Delaware
|
|
31-1429215
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
17655 Waterview Parkway
Dallas, Texas 75252
(Address of Principal Executive
Office, Including Zip Code)
(972) 348-5100
(Registrants Telephone
Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which
Registered
|
|
Common Stock, par value
$0.01 per share
|
|
New York Stock Exchange
|
Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of Class)
Indicate by check mark whether the registrant: (1) has
filed all reports required by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of May 1, 2006, 81,212,893 shares of common stock
were outstanding.
ALLIANCE
DATA SYSTEMS CORPORATION
INDEX
2
PART I
|
|
Item 1.
|
Financial
Statements
|
ALLIANCE
DATA SYSTEMS CORPORATION
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands, except
|
|
|
|
per share amounts)
|
|
|
ASSETS
|
Cash and cash equivalents
|
|
$
|
143,213
|
|
|
$
|
256,828
|
|
Due from card associations
|
|
|
58,416
|
|
|
|
13,950
|
|
Trade receivables, less allowance
for doubtful accounts ($2,079 and $1,849 at December 31,
2005 and March 31, 2006, respectively)
|
|
|
203,883
|
|
|
|
195,814
|
|
Sellers interest and credit
card receivables, less allowance for doubtful accounts ($38,415
and $39,274 at December 31, 2005 and March 31, 2006,
respectively)
|
|
|
479,108
|
|
|
|
428,963
|
|
Deferred tax asset, net
|
|
|
70,221
|
|
|
|
70,221
|
|
Other current assets
|
|
|
87,612
|
|
|
|
102,738
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,042,453
|
|
|
|
1,068,514
|
|
Redemption settlement assets,
restricted
|
|
|
260,963
|
|
|
|
266,394
|
|
Property and equipment, net
|
|
|
162,972
|
|
|
|
169,927
|
|
Due from securitizations
|
|
|
271,256
|
|
|
|
223,662
|
|
Intangible assets, net
|
|
|
265,000
|
|
|
|
252,180
|
|
Goodwill
|
|
|
858,470
|
|
|
|
866,914
|
|
Other non-current assets
|
|
|
64,968
|
|
|
|
60,311
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,926,082
|
|
|
$
|
2,907,902
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Accounts payable
|
|
$
|
67,384
|
|
|
$
|
72,336
|
|
Accrued expenses
|
|
|
198,707
|
|
|
|
156,325
|
|
Merchant settlement obligations
|
|
|
127,038
|
|
|
|
97,335
|
|
Certificates of deposit
|
|
|
342,600
|
|
|
|
253,100
|
|
Credit facilities and other debt,
current
|
|
|
235,843
|
|
|
|
305,775
|
|
Other current liabilities
|
|
|
76,999
|
|
|
|
78,887
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,048,571
|
|
|
|
963,758
|
|
Deferred tax liability, net
|
|
|
62,847
|
|
|
|
59,662
|
|
Deferred revenue
|
|
|
610,533
|
|
|
|
618,786
|
|
Certificates of deposit
|
|
|
36,500
|
|
|
|
25,100
|
|
Long-term and other debt
|
|
|
222,001
|
|
|
|
257,194
|
|
Other liabilities
|
|
|
24,523
|
|
|
|
11,992
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
2,004,975
|
|
|
|
1,936,492
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.01 par
value; authorized 200,000 shares; issued 84,765 shares
and 85,449 shares at December 31, 2005 and
March 31, 2006, respectively
|
|
|
848
|
|
|
|
854
|
|
Unearned compensation
|
|
|
(14,504
|
)
|
|
|
|
|
Additional paid-in capital
|
|
|
743,545
|
|
|
|
753,138
|
|
Treasury stock, at cost
(4,360 shares and 5,030 shares at December 31,
2005 and March 31, 2006, respectively)
|
|
|
(154,952
|
)
|
|
|
(184,587
|
)
|
Retained earnings
|
|
|
338,081
|
|
|
|
394,502
|
|
Accumulated other comprehensive
income
|
|
|
8,089
|
|
|
|
7,503
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
921,107
|
|
|
|
971,410
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,926,082
|
|
|
$
|
2,907,902
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
3
ALLIANCE
DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands, except
|
|
|
|
per share amounts)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
Transaction
|
|
$
|
142,964
|
|
|
$
|
164,019
|
|
Redemption
|
|
|
62,667
|
|
|
|
78,948
|
|
Securitization income and finance
charges, net
|
|
|
114,464
|
|
|
|
160,879
|
|
Database marketing fees
|
|
|
44,870
|
|
|
|
54,289
|
|
Other revenue
|
|
|
10,910
|
|
|
|
19,096
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
375,875
|
|
|
|
477,231
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of operations (exclusive of
depreciation and amortization disclosed separately below)
|
|
|
264,157
|
|
|
|
330,319
|
|
General and administrative
|
|
|
24,299
|
|
|
|
19,966
|
|
Depreciation and other amortization
|
|
|
15,329
|
|
|
|
15,217
|
|
Amortization of purchased
intangibles
|
|
|
9,841
|
|
|
|
12,321
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
313,626
|
|
|
|
377,823
|
|
Operating income
|
|
|
62,249
|
|
|
|
99,408
|
|
Interest expense, net
|
|
|
2,761
|
|
|
|
8,537
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
59,488
|
|
|
|
90,871
|
|
Provision for income taxes
|
|
|
22,306
|
|
|
|
34,450
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37,182
|
|
|
$
|
56,421
|
|
|
|
|
|
|
|
|
|
|
Net income per
share basic
|
|
$
|
0.45
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Net income per
share diluted
|
|
$
|
0.43
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares basic
|
|
|
82,329
|
|
|
|
80,065
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares diluted
|
|
|
85,713
|
|
|
|
81,667
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
4
ALLIANCE
DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
37,182
|
|
|
$
|
56,421
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
10,339
|
|
|
|
12,053
|
|
Amortization
|
|
|
14,831
|
|
|
|
15,485
|
|
Deferred income taxes
|
|
|
(2,037
|
)
|
|
|
(3,294
|
)
|
Provision for doubtful accounts
|
|
|
648
|
|
|
|
3,557
|
|
Non-cash stock compensation
|
|
|
1,444
|
|
|
|
7,304
|
|
Change in operating assets and
liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
Change in trade accounts receivable
|
|
|
11,890
|
|
|
|
20,057
|
|
Change in merchant settlement
activity
|
|
|
(5,974
|
)
|
|
|
14,763
|
|
Change in other assets
|
|
|
6,324
|
|
|
|
(12,075
|
)
|
Change in accounts payable and
accrued expenses
|
|
|
(5,712
|
)
|
|
|
(32,334
|
)
|
Change in deferred revenue
|
|
|
6,045
|
|
|
|
10,935
|
|
Change in other liabilities
|
|
|
3,574
|
|
|
|
(19,664
|
)
|
Tax benefit of stock option
exercises
|
|
|
6,961
|
|
|
|
|
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
(4,412
|
)
|
Other
|
|
|
(4,856
|
)
|
|
|
1,980
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
80,659
|
|
|
|
70,776
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Change in redemption settlement
assets
|
|
|
(2,401
|
)
|
|
|
(6,156
|
)
|
Payments for acquired businesses,
net of cash acquired
|
|
|
(2,322
|
)
|
|
|
(36,124
|
)
|
Net decrease in sellers
interest and credit card receivables
|
|
|
53,584
|
|
|
|
56,269
|
|
Change in due from securitizations
|
|
|
46,064
|
|
|
|
52,170
|
|
Capital expenditures
|
|
|
(11,905
|
)
|
|
|
(20,397
|
)
|
Other
|
|
|
319
|
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing
activities
|
|
|
83,339
|
|
|
|
46,166
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Borrowings under debt agreements
|
|
|
163,575
|
|
|
|
465,323
|
|
Repayment of borrowings
|
|
|
(201,575
|
)
|
|
|
(359,000
|
)
|
Certificate of deposit issuances
|
|
|
|
|
|
|
20,000
|
|
Repayments of certificates of
deposits
|
|
|
(59,200
|
)
|
|
|
(120,900
|
)
|
Payment of capital lease
obligations
|
|
|
(1,890
|
)
|
|
|
(2,093
|
)
|
Excess tax benefits from
stock-based compensation
|
|
|
|
|
|
|
4,412
|
|
Proceeds from issuance of common
stock
|
|
|
7,527
|
|
|
|
14,544
|
|
Purchase of treasury shares
|
|
|
|
|
|
|
(25,633
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(91,563
|
)
|
|
|
(3,347
|
)
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(144
|
)
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
Change in cash and cash equivalents
|
|
|
72,291
|
|
|
|
113,615
|
|
Cash and cash equivalents at
beginning of period
|
|
|
84,409
|
|
|
|
143,213
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of period
|
|
$
|
156,700
|
|
|
$
|
256,828
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW
INFORMATION:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
2,903
|
|
|
$
|
8,081
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid, net of refunds
|
|
$
|
18,957
|
|
|
$
|
32,548
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited condensed consolidated
financial statements.
5
ALLIANCE
DATA SYSTEMS CORPORATION
FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements
included herein have been prepared by Alliance Data Systems
Corporation (ADSC or, including its wholly owned
subsidiaries, the Company), without audit, pursuant
to the rules and regulations of the Securities and Exchange
Commission (SEC). Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in
the United States of America (GAAP) have been
condensed or omitted pursuant to such rules and regulations.
However, the Company believes that the disclosures are adequate
to make the information presented not misleading. These
unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements
and the notes thereto included in the Companys Annual
Report filed on
Form 10-K/A
for the year ended December 31, 2005.
The unaudited condensed consolidated financial statements
included herein reflect all adjustments (consisting of normal,
recurring adjustments) which are, in the opinion of management,
necessary to state fairly the results for the interim periods
presented. The results of operations for the interim periods
presented are not necessarily indicative of the operating
results to be expected for any subsequent interim period or for
the fiscal year.
The preparation of financial statements in conformity with GAAP
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.
For purposes of comparability, certain prior period amounts,
including marketing service revenue, have been reclassified to
conform to the current year presentation. Such reclassifications
have no impact on previously reported net income.
|
|
2.
|
SHARES USED
IN COMPUTING NET INCOME PER SHARE
|
The following table sets forth the computation of basic and
diluted net income per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands, except per share
amounts)
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
Net income available to common
stockholders
|
|
$
|
37,182
|
|
|
$
|
56,421
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average shares, basic
|
|
|
82,329
|
|
|
|
80,065
|
|
Weighted average effect of
dilutive securities:
|
|
|
|
|
|
|
|
|
Net effect of unvested restricted
stock
|
|
|
370
|
|
|
|
224
|
|
Net effect of dilutive stock
options
|
|
|
3,014
|
|
|
|
1,378
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted calculation
|
|
|
85,713
|
|
|
|
81,667
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.45
|
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.43
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
6
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
In February 2006, the Company acquired Toronto-based iCom
Information & Communications, Inc. (ICOM),
a leading provider of targeted list, marketing data and
communications solutions for the pharmaceutical industry in
North America. Total consideration paid was approximately
$35.6 million as of the closing date, including
approximately $3.5 million which was placed in escrow for a
period of up to 18 months to satisfy potential working
capital adjustments and indemnification claims. As a result of
this acquisition, the Company acquired approximately
$10.8 million of customer contracts and $2.3 million
of capitalized software. The results of operations for ICOM have
been included since the date of acquisition and are reflected in
our Marketing Services segment.
In April 2006, the Company acquired DoubleClick Email Solutions,
one of the largest permission-based email marketing service
providers, with operations across North America, Europe and
Asia/Pacific. Total consideration paid was approximately
$90.0 million.
|
|
4.
|
INTANGIBLE
ASSETS AND GOODWILL
|
Intangible
Assets
Intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Net
|
|
|
Amortization Life and
Method
|
|
|
(in thousands)
|
|
|
|
|
Customer contracts and lists
|
|
$
|
254,511
|
|
|
$
|
(82,416
|
)
|
|
$
|
172,095
|
|
|
2-20 yearsstraight line
|
Premium on purchased credit card
portfolios
|
|
|
65,643
|
|
|
|
(16,680
|
)
|
|
|
48,963
|
|
|
5-10 yearsstraight
line
or accelerated
|
Collector database
|
|
|
59,934
|
|
|
|
(42,835
|
)
|
|
|
17,099
|
|
|
15%declining balance
|
Tradename
|
|
|
12,350
|
|
|
|
|
|
|
|
12,350
|
|
|
Indefinite life
|
Noncompete agreements
|
|
|
2,400
|
|
|
|
(1,590
|
)
|
|
|
810
|
|
|
3-5 yearsstraight line
|
Favorable lease
|
|
|
1,000
|
|
|
|
(137
|
)
|
|
|
863
|
|
|
4 yearsstraight line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
395,838
|
|
|
$
|
(143,658
|
)
|
|
$
|
252,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
Gross
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Assets
|
|
|
Amortization
|
|
|
Net
|
|
|
Amortization Life and
Method
|
|
|
(in thousands)
|
|
|
|
|
Customer contracts and lists
|
|
$
|
243,906
|
|
|
$
|
(73,766
|
)
|
|
$
|
170,140
|
|
|
2-20 yearsstraight line
|
Premium on purchased credit card
portfolios
|
|
|
77,529
|
|
|
|
(14,700
|
)
|
|
|
62,829
|
|
|
5-10 yearsstraight line
|
Collector database
|
|
|
60,186
|
|
|
|
(42,292
|
)
|
|
|
17,894
|
|
|
15%declining balance
|
Tradename
|
|
|
12,350
|
|
|
|
|
|
|
|
12,350
|
|
|
Indefinite life
|
Noncompete agreements
|
|
|
2,400
|
|
|
|
(1,545
|
)
|
|
|
855
|
|
|
3-5 yearsstraight line
|
Favorable lease
|
|
|
1,000
|
|
|
|
(68
|
)
|
|
|
932
|
|
|
4 yearsstraight line
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
397,371
|
|
|
$
|
(132,371
|
)
|
|
$
|
265,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
4.
|
INTANGIBLE
ASSETS AND GOODWILL (Continued)
|
Goodwill
The changes in the carrying amount of goodwill for the three
months ended March 31, 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Credit
|
|
|
Marketing
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
Total
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Beginning balance
|
|
$
|
335,419
|
|
|
$
|
|
|
|
$
|
523,051
|
|
|
$
|
858,470
|
|
Goodwill acquired during the period
|
|
|
|
|
|
|
|
|
|
|
9,850
|
|
|
|
9,850
|
|
Effects of foreign currency
translation
|
|
|
(44
|
)
|
|
|
|
|
|
|
(1,025
|
)
|
|
|
(1,069
|
)
|
Other, primarily final purchase
price adjustments
|
|
|
(452
|
)
|
|
|
|
|
|
|
115
|
|
|
|
(337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
334,923
|
|
|
$
|
|
|
|
$
|
531,991
|
|
|
$
|
866,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Certificates of deposit
|
|
$
|
379,100
|
|
|
$
|
278,200
|
|
Credit facilities
|
|
|
441,000
|
|
|
|
547,124
|
|
Other
|
|
|
16,844
|
|
|
|
15,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
836,944
|
|
|
|
841,169
|
|
Less: current portion
|
|
|
(578,443
|
)
|
|
|
(558,875
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
258,501
|
|
|
$
|
282,294
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2006, the certificates of deposit had
effective annual fixed rates ranging from 4.2% to 5.0%, and the
credit facilities had a weighted average interest rate of 6.0%.
During January 2006, the Company entered into an additional
credit agreement to increase its borrowing capacity by an
incremental $300.0 million. The principal amount of all
outstanding loans under this credit agreement, together with any
accrued but unpaid interest, are due and payable on
June 30, 2006, unless otherwise paid earlier pursuant to
the terms of the credit agreement. This credit agreement
includes usual and customary negative covenants for credit
agreements of this type. Payment of amounts due under this
credit agreement are secured by guaranties, pledges of the
ownership interests of certain of the Companys
subsidiaries and pledges of certain intercompany promissory
notes. On January 5, 2006, the Company borrowed
$300.0 million under this credit agreement, which it is
using for general corporate purposes, including other debt
repayment, repurchases of its common stock in connection with
its stock repurchase program, mergers and acquisitions, and
working capital expenditures. The Company anticipates
refinancing this facility prior to June 30, 2006.
On April 6, 2006, the Company amended its
364-day
facility to extend the maturity date from April 6, 2006 to
April 5, 2007.
8
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
A reconciliation of deferred revenue for the AIR MILES Reward
Program®
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
|
|
Service
|
|
|
Redemption
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
December 31, 2005
|
|
$
|
184,899
|
|
|
$
|
425,634
|
|
|
$
|
610,533
|
|
Cash proceeds
|
|
|
28,463
|
|
|
|
54,505
|
|
|
|
82,968
|
|
Revenue recognized
|
|
|
(24,544
|
)
|
|
|
(47,738
|
)
|
|
|
(72,282
|
)
|
Effects of foreign currency
translation
|
|
|
(820
|
)
|
|
|
(1,613
|
)
|
|
|
(2,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
$
|
187,998
|
|
|
$
|
430,788
|
|
|
$
|
618,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006, the Company has
utilized an effective tax rate of 37.9% to calculate its
provision for income taxes. In accordance with Accounting
Principles Board (APB) Opinion No. 28, Interim
Financial Reporting, this effective tax rate is the
Companys expected annual effective tax rate for calendar
year 2006 based on all known variables.
The components of comprehensive income, net of tax effect, are
as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Net income
|
|
$
|
37,182
|
|
|
$
|
56,421
|
|
Unrealized loss on securities
available-for-sale
|
|
|
(232
|
)
|
|
|
(81
|
)
|
Foreign currency translation
adjustments(1)
|
|
|
(128
|
)
|
|
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
36,822
|
|
|
$
|
55,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Primarily related to the impact of changes in the Canadian
currency exchange rate. |
9
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Consistent with prior periods, the Company classifies its
businesses into three segments: Transaction Services, Credit
Services and Marketing Services.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction
|
|
|
Credit
|
|
|
Marketing
|
|
|
Other/
|
|
|
|
|
|
|
Services
|
|
|
Services
|
|
|
Services
|
|
|
Elimination
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Three months ended
March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
167,744
|
|
|
$
|
151,417
|
|
|
$
|
137,356
|
|
|
$
|
(80,642
|
)
|
|
$
|
375,875
|
|
Adjusted
EBITDA(1)
|
|
|
20,113
|
|
|
|
47,435
|
|
|
|
21,315
|
|
|
|
|
|
|
|
88,863
|
|
Depreciation and amortization
|
|
|
14,715
|
|
|
|
1,949
|
|
|
|
8,506
|
|
|
|
|
|
|
|
25,170
|
|
Stock compensation expense
|
|
|
481
|
|
|
|
481
|
|
|
|
482
|
|
|
|
|
|
|
|
1,444
|
|
Operating income
|
|
|
4,917
|
|
|
|
45,005
|
|
|
|
12,327
|
|
|
|
|
|
|
|
62,249
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,761
|
|
|
|
2,761
|
|
Income before income taxes
|
|
|
4,917
|
|
|
|
45,005
|
|
|
|
12,327
|
|
|
|
(2,761
|
)
|
|
|
59,488
|
|
Three months ended
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
191,692
|
|
|
$
|
199,131
|
|
|
$
|
176,542
|
|
|
$
|
(90,134
|
)
|
|
$
|
477,231
|
|
Adjusted
EBITDA(1)
|
|
|
28,626
|
|
|
|
78,769
|
|
|
|
26,855
|
|
|
|
|
|
|
|
134,250
|
|
Depreciation and amortization
|
|
|
13,546
|
|
|
|
2,531
|
|
|
|
11,461
|
|
|
|
|
|
|
|
27,538
|
|
Stock compensation expense
|
|
|
3,074
|
|
|
|
1,089
|
|
|
|
3,141
|
|
|
|
|
|
|
|
7,304
|
|
Operating income
|
|
|
12,006
|
|
|
|
75,149
|
|
|
|
12,253
|
|
|
|
|
|
|
|
99,408
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,537
|
|
|
|
8,537
|
|
Income before income taxes
|
|
|
12,006
|
|
|
|
75,149
|
|
|
|
12,253
|
|
|
|
(8,537
|
)
|
|
|
90,871
|
|
|
|
|
(1) |
|
Adjusted EBITDA is a non-GAAP financial measure equal to net
income, the most directly comparable GAAP financial measure,
plus stock compensation expense, provision for income taxes,
interest expense, net, depreciation and amortization. Adjusted
EBITDA is presented in accordance with Statement of Financial
Accounting Standards No. 131, Disclosures about Segments
of an Enterprise and Related Information (SFAS
No. 131) as it is the primary performance metric by
which senior management is evaluated. |
|
|
10.
|
STOCK-BASED
COMPENSATION
|
During the first quarter of 2006, the Company adopted the
provisions of, and accounted for stock-based compensation in
accordance with, Financial Accounting Standards Board
(FASB) SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS No. 123(R)) which supersedes APB
Opinion No. 25 Accounting for Stock Issued to
Employees (APB No. 25). Under the fair
value recognition provisions, stock-based compensation expense
is measured at the grant date based on the fair value of the
award and is recognized ratably over the requisite service
period. The Company elected the modified prospective method,
under which prior periods are not revised for comparative
purposes. The valuation provisions of SFAS No. 123(R)
apply to new grants and to grants that were outstanding as of
the effective date and are subsequently modified. Estimated
compensation for grants that were outstanding as of the
effective date will be recognized over the remaining service
period using the compensation expense estimated for the
SFAS No. 123 Accounting for Stock-Based
Compensation (SFAS No. 123) pro
forma disclosures, as adjusted for forfeitures.
10
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
10.
|
STOCK-BASED
COMPENSATION (Continued)
|
Total stock-based compensation expense recognized in the
Companys consolidated statements of income for the three
months ended March 31, 2005 and 2006 respectively, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cost of operations
|
|
$
|
|
|
|
$
|
6,207
|
|
General and administrative
|
|
|
1,444
|
|
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,444
|
|
|
$
|
7,304
|
|
|
|
|
|
|
|
|
|
|
As the amount of stock-based compensation expense recognized is
based on awards ultimately expected to vest, the amount
recognized in the Companys results of operations has been
reduced for estimated forfeitures. SFAS No. 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. Forfeitures were
estimated based on the Companys historical experience.
Prior to adoption, the Company accounted for forfeitures as they
occurred in accordance with APB No. 25. As a result of the
change in accounting principle, the Company recognized a
reduction of stock-based compensation expense of
$0.8 million, net of tax.
Prior to the adoption of SFAS No. 123(R), the Company
accounted for stock-based awards to employees using the
intrinsic value method in accordance with APB No. 25. Under
the intrinsic value method, no stock-based compensation expense
for employee stock options was recognized in the Companys
results of operations as the exercise price equaled the fair
market value of the underlying stock at the date of grant. In
accordance with the modified prospective transition method, the
Companys prior year financial statements have not been
restated to reflect the impact of the adoption of
SFAS No. 123(R). The following table sets forth the
pro forma amounts of net income and net income per share, for
the three months ended March 31, 2005, that would have
resulted if the Company had accounted for the stock-based awards
under the fair value recognition provisions of
SFAS No. 123:
|
|
|
|
|
|
|
March 31, 2005
|
|
|
|
(in thousands, except
|
|
|
|
per share amounts)
|
|
|
Net income, as reported
|
|
$
|
37,182
|
|
Add: Stock-based employee
compensation expense included in reported net income, net of
related tax effects
|
|
|
902
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
for all stock option awards, net of related tax effects
|
|
|
(3,926
|
)
|
|
|
|
|
|
Net income, pro forma
|
|
$
|
34,158
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
Basic-as reported
|
|
$
|
0.45
|
|
Basic-pro forma
|
|
$
|
0.41
|
|
Diluted-as reported
|
|
$
|
0.43
|
|
Diluted-pro forma
|
|
$
|
0.40
|
|
As of March 31, 2006, there was $71.7 million of
unrecognized expense, adjusted for estimated forfeitures,
related to non-vested, stock-based equity awards granted to
employees, which is expected to be recognized over a weighted
average period of approximately two years.
11
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
10.
|
STOCK-BASED
COMPENSATION (Continued)
|
Stock
Options
Stock option awards are granted with an exercise price equal to
the market price of the Companys stock. Options typically
vest ratably over three years and expire ten years after the
date of grant. The fair value of each option award is estimated
on the date of grant using a binomial lattice model. The
following table indicates the assumptions used in estimating
fair value for the three months ended March 31, 2005 and
March 31, 2006:
|
|
|
|
|
|
|
March 31,
|
|
|
2005
|
|
2006
|
|
Expected dividend yield
|
|
|
|
|
Risk-free interest rate
|
|
2.94%4.76%
|
|
4.53%4.65%
|
Expected life of options (years)
|
|
6.4
|
|
7.1
|
Assumed volatility
|
|
28.8%43.6%
|
|
31.9%37.0%
|
Weighted average grant date fair
value
|
|
$16.73
|
|
$18.33
|
The following table sets forth the summary of option activity
under the Companys stock option program for the three
months ended March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(options in thousands)
|
|
|
Balance at December 31,
2005
|
|
|
6,680
|
|
|
$
|
27.19
|
|
|
|
3,319
|
|
|
$
|
18.01
|
|
Granted
|
|
|
601
|
|
|
|
43.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(662
|
)
|
|
|
19.92
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(121
|
)
|
|
|
37.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
2006
|
|
|
6,498
|
|
|
$
|
29.28
|
|
|
|
3,581
|
|
|
$
|
22.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three
months ended March 31, 2006 was approximately
$16.8 million.
The following table summarizes information concerning both
outstanding and exercisable stock options at March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Contractual
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Range of Exercise
Prices
|
|
Options
|
|
|
Life (Years)
|
|
|
Exercise Price
|
|
|
Options
|
|
|
Exercise Price
|
|
|
|
(options in thousands)
|
|
|
$ 9.00 to $12.00
|
|
|
886
|
|
|
|
4.0
|
|
|
$
|
11.07
|
|
|
|
886
|
|
|
$
|
11.07
|
|
$12.01 to $15.00
|
|
|
900
|
|
|
|
4.9
|
|
|
$
|
14.95
|
|
|
|
900
|
|
|
$
|
14.95
|
|
$15.01 to $22.00
|
|
|
72
|
|
|
|
6.6
|
|
|
$
|
18.69
|
|
|
|
59
|
|
|
$
|
18.30
|
|
$22.01 to $29.00
|
|
|
918
|
|
|
|
7.2
|
|
|
$
|
24.18
|
|
|
|
508
|
|
|
$
|
24.15
|
|
$29.01 to $39.00
|
|
|
1,232
|
|
|
|
8.0
|
|
|
$
|
32.05
|
|
|
|
654
|
|
|
$
|
31.55
|
|
$39.01 to $47.00
|
|
|
2,490
|
|
|
|
9.1
|
|
|
$
|
41.76
|
|
|
|
574
|
|
|
$
|
41.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,498
|
|
|
|
|
|
|
|
|
|
|
|
3,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
|
|
10.
|
STOCK-BASED
COMPENSATION (Continued)
|
The aggregate intrinsic value of options outstanding and options
exercisable as of March 31, 2006 was approximately
$113.6 million and $84.6 million, respectively.
Restricted
Stock
During the first quarter of 2006, the Company has awarded both
time-based and performance-based restricted stock units. Fair
value of the restricted stock is estimated on the date of grant.
In accordance with SFAS No. 123(R), the Company will
recognize the estimated stock-based compensation expense, net of
estimated forfeitures; over the applicable service period.
Time-based restricted stock awards typically vest ratably over a
three year period. Performance-based restricted stock awards
vest if specified performance measures tied to the
Companys financial performance are met. Additionally, the
vesting provisions of 86,314 performance-based restricted stock
unit awards issued in 2006 to eight employees were modified in
March 2006. The vesting provisions, which were dependent on the
Companys cash earnings per share (EPS) growth
as compared to the S&P 500 EPS growth rate, were modified
such that under the new terms, the vesting provisions are
dependent on the Companys
year-over-year
cash EPS growth. The number of shares that vest may range from 0
to 200%. A minimum cash EPS growth rate of 10% is necessary for
the minimum 50% vesting, 18% cash EPS growth for a 100% vesting,
and 36% cash EPS growth (or more) for a maximum 200% vesting.
The modification had no impact on the fair value of the award;
however, it did result in a change in estimate of the most
likely outcome of the number of shares to vest. The incremental
stock-based compensation expense recorded as a result in the
change in estimate was not material at March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-
|
|
|
Time-
|
|
|
|
|
|
|
Based
|
|
|
Based
|
|
|
Total
|
|
|
Balance at December 31,
2005
|
|
|
|
|
|
|
469,840
|
|
|
|
469,840
|
|
Shares granted
|
|
|
242,015
|
|
|
|
513,647
|
|
|
|
755,662
|
|
Shares vested
|
|
|
(8,100
|
)
|
|
|
(20,553
|
)
|
|
|
(28,653
|
)
|
Shares cancelled
|
|
|
(6,847
|
)
|
|
|
(8,771
|
)
|
|
|
(15,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31,
2006
|
|
|
227,068
|
|
|
|
954,163
|
|
|
|
1,181,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average grant-date fair value per share was $43.65
for restricted stock awards granted during the three months
ended March 31, 2006.
Employee
Stock Purchase Plan
The Company has an Amended and Restated Employee Stock Purchase
Plan (the ESPP), which provides for three month
offering periods, commencing on the first trading day of each
calendar quarter and ending on the last trading day of each
calendar quarter. The purchase price of the common stock is 85%
of the fair market value of shares on the applicable purchase
date as determined by averaging the high and low trading prices
of the last trading day of each quarter. An employee may elect
to pay the purchase price of such common stock through payroll
deductions. The maximum number of shares that were reserved for
issuance under the ESPP is 1,500,000 shares, subject to
adjustment as provided in the ESPP. Effective July 1, 2005,
employees are required to hold any stock purchased through the
ESPP for 180 days prior to any sale or withdrawal of
shares. In accordance with SFAS No. 123(R), the
Company has recorded compensation expense for the difference
between the fair value of the stock and the purchase price of
the stock.
13
ALLIANCE
DATA SYSTEMS CORPORATION
NOTES TO
UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
In April 2006, World Financial Network Credit Card Master
Note Trust issued $395.0 million of Class A
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.13% per year and that will mature in
April 2013, $18.8 million of Class M
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.21% per year that will mature in
April 2013, $23.8 million of Class B
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.35% per year that will mature in
April 2013 and $62.5 million of Class C
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.60% per year that will mature in
April 2013.
The notes are rated AAA through BBB, or its equivalent, by each
of Standard and Poors, Moodys, and Fitch Ratings. In
connection with the transaction, World Financial Network Credit
Card Master Note Trust also entered into interest rate
swaps that effectively fix the interest rate on the notes
starting at 5.53% over the seven-year term of the interest rate
swaps.
14
|
|
Item 2.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with the
unaudited condensed consolidated financial statements and
related notes thereto presented in this quarterly report and the
notes thereto included in our Annual Report filed on
Form 10-K/A
for the year ended December 31, 2005.
Quarter
in Review Highlights
Our first quarter 2006 results included the following
significant new and renewed agreements with significant clients
and continued selective execution of our acquisition strategy:
|
|
|
|
|
In January 2006, we signed a long-term agreement to provide
customer care and comprehensive billing and marketing management
services to Green Mountain Energy Company, one of the
nations leading retail providers of cleaner electricity
products.
|
|
|
|
In January 2006, we signed a multi-year renewal agreement with
Canada Safeway to continue our partnership in the Companys
Canadian AIR MILES Reward Program. As one of our top-ten
clients, Canada Safeway has been a partner in our loyalty and
marketing program since its inception in 1992.
|
|
|
|
In February 2006, we signed a multi-year agreement to provide
billing and customer care services to WPS Resources Corporation,
an energy holding company whose subsidiaries provide electric
and natural gas utility service primarily to Michigan and
Minnesota consumers.
|
|
|
|
In February 2006, we acquired iCom Information &
Communications, Inc. (ICOM), a leading provider of
targeted list, marketing data and communication solutions for
the pharmaceutical industry in North America.
|
|
|
|
In February 2006, we signed a long-term agreement to provide a
co-brand credit card program and database marketing services to
New York & Company, a leading specialty retailer of
womens fashions and accessories.
|
|
|
|
In March 2006, we signed a multi-year agreement with Citibank,
Inc. to provide a comprehensive loyalty solution to support
Citis points-based customer rewards program, the Thank You
Networksm.
|
|
|
|
In March 2006, we signed a contract renewal to continue to
provide a comprehensive private-label credit card solution to
the United Retail Group, Inc., a leading high-growth specialty
retailer of plus-size womens fashion apparel.
|
Critical
Accounting Policies and Estimates
There have been no material changes to our critical accounting
policies and estimates from the information provided in
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations included in
our Annual Report on
Form 10-K/A
for the year ended December 31, 2005.
Use of
Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure equal to net
income, the most directly comparable GAAP financial measure,
plus stock compensation expense, provision for income taxes,
interest expense, net, depreciation and other amortization and
amortization of purchased intangibles. Operating EBITDA is a
non-GAAP financial measure equal to adjusted EBITDA plus the
change in deferred revenue less the change in redemption
settlement assets. We have presented operating EBITDA because we
use the financial measure as part of our monitoring of
compliance with the financial covenants in our credit
facilities. For the three months ended March 31, 2006,
senior
debt-to-operating
EBITDA was 1.2x compared to a maximum ratio of 2.5x permitted in
our credit facilities and operating EBITDA to interest expense
was 17.9x compared to a minimum ratio of 3.5x permitted in our
credit facilities. As discussed in more detail in the liquidity
section of Managements Discussion and Analysis of
Financial Condition and Results of Operations, our credit
facilities together with cash flow from operations are the two
main sources of funding for our acquisition
15
strategy and for our future working capital needs and capital
expenditures. As of March 31, 2006, we had borrowings of
$547.1 million outstanding under these credit facilities
and had approximately $267.9 million in unused borrowing
capacity. During January 2006, we increased our borrowing
capacity by an incremental $300.0 million through entering
into an additional credit agreement. We were in compliance with
our covenants at March 31, 2006, and we expect to be in
compliance with these covenants under these credit facilities
during the year ending December 31, 2006.
We use adjusted EBITDA as an integral part of our internal
reporting to measure the performance of our reportable segments
and to evaluate the performance of our senior management.
Adjusted EBITDA is considered an important indicator of the
operational strength of our businesses. Adjusted EBITDA
eliminates the uneven effect across all business segments of
considerable amounts of non-cash depreciation of tangible assets
and amortization of certain intangible assets that were
recognized in business combinations. A limitation of this
measure, however, is that it does not reflect the periodic costs
of certain capitalized tangible and intangible assets used in
generating revenues in our businesses. Management evaluates the
costs of such tangible and intangible assets, the impact of
related impairments, as well as asset sales through other
financial measures, such as capital expenditures, investment
spending and return on capital. Adjusted EBITDA also eliminates
the non-cash effect of stock compensation expense. Stock
compensation expense is not included in the measurement of
segment adjusted EBITDA provided to the chief operating decision
maker for purposes of assessing segment performance and decision
making with respect to resource allocations. Therefore, we
believe that adjusted EBITDA provides useful information to our
investors regarding our performance and overall results of
operations. Adjusted EBITDA and operating EBITDA are not
intended to be performance measures 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 cash flows from operating activities as a measure of
liquidity. In addition, adjusted EBITDA and operating EBITDA are
not intended to represent funds available for dividends,
reinvestment or other discretionary uses, and should not be
considered in isolation or as a substitute for measures of
performance prepared in accordance with GAAP. The adjusted
EBITDA and operating EBITDA measures presented in this
Form 10-Q
may not be comparable to similarly titled measures presented by
other companies, and may not be identical to corresponding
measures used in our various agreements.
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Net income
|
|
$
|
37,182
|
|
|
$
|
56,421
|
|
Stock compensation expense
|
|
|
1,444
|
|
|
|
7,304
|
|
Provision for income taxes
|
|
|
22,306
|
|
|
|
34,450
|
|
Interest expense, net
|
|
|
2,761
|
|
|
|
8,537
|
|
Depreciation and other amortization
|
|
|
15,329
|
|
|
|
15,217
|
|
Amortization of purchased
intangibles
|
|
|
9,841
|
|
|
|
12,321
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
|
88,863
|
|
|
|
134,250
|
|
Change in deferred revenue
|
|
|
2,712
|
|
|
|
8,253
|
|
Less change in redemption
settlement assets
|
|
|
(312
|
)
|
|
|
(5,431
|
)
|
|
|
|
|
|
|
|
|
|
Operating EBITDA
|
|
$
|
91,263
|
|
|
$
|
137,072
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: |
Change in deferred revenue and redemption settlement assets are
affected by fluctuations in foreign exchange rates. Change in
redemption settlement assets is also affected by transfers of
cash.
|
16
Results
of Operations
Three
months ended March 31, 2005 compared to the three months
ended March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2005
|
|
|
2006
|
|
|
$
|
|
|
%
|
|
|
|
(in thousands, except
percentages)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
$
|
167,744
|
|
|
$
|
191,692
|
|
|
$
|
23,948
|
|
|
|
14.3
|
%
|
Credit Services
|
|
|
151,417
|
|
|
|
199,131
|
|
|
|
47,714
|
|
|
|
31.5
|
|
Marketing Services
|
|
|
137,356
|
|
|
|
176,542
|
|
|
|
39,186
|
|
|
|
28.5
|
|
Other/Eliminations
|
|
|
(80,642
|
)
|
|
|
(90,134
|
)
|
|
|
(9,492
|
)
|
|
|
11.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
375,875
|
|
|
$
|
477,231
|
|
|
$
|
101,356
|
|
|
|
27.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
$
|
20,113
|
|
|
$
|
28,626
|
|
|
$
|
8,513
|
|
|
|
42.3
|
%
|
Credit Services
|
|
|
47,435
|
|
|
|
78,769
|
|
|
|
31,334
|
|
|
|
66.1
|
|
Marketing Services
|
|
|
21,315
|
|
|
|
26,855
|
|
|
|
5,540
|
|
|
|
26.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,863
|
|
|
$
|
134,250
|
|
|
$
|
45,387
|
|
|
|
51.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
$
|
481
|
|
|
$
|
3,074
|
|
|
$
|
2,593
|
|
|
|
539.1
|
%
|
Credit Services
|
|
|
481
|
|
|
|
1,089
|
|
|
|
608
|
|
|
|
126.4
|
|
Marketing Services
|
|
|
482
|
|
|
|
3,141
|
|
|
|
2,659
|
|
|
|
551.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,444
|
|
|
$
|
7,304
|
|
|
$
|
5,860
|
|
|
|
405.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
$
|
14,715
|
|
|
$
|
13,546
|
|
|
$
|
(1,169
|
)
|
|
|
(7.9
|
)%
|
Credit Services
|
|
|
1,949
|
|
|
|
2,531
|
|
|
|
582
|
|
|
|
29.9
|
|
Marketing Services
|
|
|
8,506
|
|
|
|
11,461
|
|
|
|
2,955
|
|
|
|
34.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
25,170
|
|
|
$
|
27,538
|
|
|
$
|
2,368
|
|
|
|
9.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
$
|
4,917
|
|
|
$
|
12,006
|
|
|
$
|
7,089
|
|
|
|
144.2
|
%
|
Credit Services
|
|
|
45,005
|
|
|
|
75,149
|
|
|
|
30,144
|
|
|
|
67.0
|
|
Marketing Services
|
|
|
12,327
|
|
|
|
12,253
|
|
|
|
(74
|
)
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,249
|
|
|
$
|
99,408
|
|
|
$
|
37,159
|
|
|
|
59.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
margin(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services
|
|
|
12.0
|
%
|
|
|
14.9
|
%
|
|
|
2.9
|
%
|
|
|
|
|
Credit Services
|
|
|
31.3
|
|
|
|
39.6
|
|
|
|
8.3
|
|
|
|
|
|
Marketing Services
|
|
|
15.5
|
|
|
|
15.2
|
|
|
|
(0.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
23.6
|
%
|
|
|
28.1
|
%
|
|
|
4.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statements generated
|
|
|
47,077
|
|
|
|
51,860
|
|
|
|
4,783
|
|
|
|
10.2
|
%
|
Credit Sales
|
|
$
|
1,339,222
|
|
|
$
|
1,494,090
|
|
|
$
|
154,868
|
|
|
|
11.6
|
%
|
Average managed receivables
|
|
$
|
3,137,368
|
|
|
$
|
3,581,879
|
|
|
$
|
444,511
|
|
|
|
14.2
|
%
|
AIR MILES reward miles issued
|
|
|
710,762
|
|
|
|
856,434
|
|
|
|
145,672
|
|
|
|
20.5
|
%
|
AIR MILES reward miles redeemed
|
|
|
459,647
|
|
|
|
554,311
|
|
|
|
94,664
|
|
|
|
20.6
|
%
|
|
|
|
(1) |
|
Adjusted EBITDA margin is adjusted EBITDA divided by revenue.
Management uses adjusted EBITDA margin to analyze the operating
performance of the segments and the impact revenue growth has on
operating expenses. |
17
Revenue. Total revenue increased
$101.3 million, or 27%, to $477.2 million for the
three months ended March 31, 2006 from $375.9 million
for the comparable period in 2005. The increase was due to a
14.3% increase in Transaction Services revenue, a 31.5% increase
in Credit Services revenue, and a 28.5% increase in Marketing
Services revenue as follows:
|
|
|
|
|
Transaction Services. Transaction Services
revenue increased $23.9 million, or 14.3%, primarily due to
a 10.2% increase in statements generated from the Companys
private label and utility businesses. The private label business
increase was the result of a ramp up of clients signed during
2005. Revenue for utility services was positively impacted by
the migration of various services for two of our significant
clients.
|
|
|
|
Credit Services. Credit Services revenue
increased $47.7 million, or 31.5%, primarily due to a 40.5%
increase in securitization income. Securitization income and
finance charges, net increased $46.3 million primarily as a
result of the following:
|
|
|
|
|
|
a 14.2% increase in our average managed receivables,
|
|
|
|
an approximate 650 basis point improvement in the excess
spread, and
|
|
|
|
an approximate 40 basis point improvement in cost of funds.
|
Excess spread, which represents interest and late fees collected
from cardholders, other trust related fees, fair value changes
related to the interest-only strips and charge-offs, increased
due to lower charge-offs and higher collected fees from
cardholders. Recently enacted bankruptcy reform legislation
caused a sharp increase in credit losses in the fourth quarter
of 2005 and an offsetting benefit in the first quarter of this
year.
|
|
|
|
|
Marketing Services. Marketing Services revenue
increased $39.2 million, or 28.5%, due to growth in the AIR
MILES Reward Program and the recent Epsilon Interactive and ICOM
acquisitions. AIR MILES Reward Program growth was driven
primarily by an increase in redemption revenue of
$16.3 million related to a 20.6% increase in the redemption
of AIR MILES reward miles. Issuance revenue increased
$3.9 million primarily related to growth in issuances of
AIR MILES reward miles in recent years from the roll out of
major national programs. Correspondingly, our deferred revenue
balance increased 1.4% to $618.8 million at March 31,
2006 from $610.5 million at March 31, 2005 due to a
20.5% increase in AIR MILES reward miles issued during the three
months ended March 31, 2006 over the comparable period in
2005, and changes in foreign currency exchange rates. Changes in
the exchange rate of the Canadian dollar accounted for
approximately $6.9 million of the revenue increase.
Database marketing fees increased by $9.7 million primarily
related to Epsilon, and their recent acquisition of Epsilon
Interactive.
|
Operating Expenses. Total operating expenses,
excluding depreciation, amortization and stock compensation
expense, increased $56.0 million, or 19.5%, to
$343.0 million during the three months ended March 31,
2006 from $287.0 million during the comparable period in
2005. Total adjusted EBITDA margin increased to 28.1% for the
three months ended March 31, 2006 from 23.6% for the
comparable period in 2005 due to increased margins across
Transaction Services and Credit Services, offset by a slight
decrease in margin for Marketing Services.
|
|
|
|
|
Transaction Services. Transaction Services
operating expenses, excluding depreciation, amortization and
stock compensation expense, increased $15.4 million, or
10.5%, to $163.0 million for the three months ended
March 31, 2006 from $147.6 million for the comparable
period in 2005, and adjusted EBITDA margin increased to 14.9%
for the three months ended March 31, 2006 from 12.0% during
the comparable period in 2005. The increase in adjusted EBITDA
margin was primarily the result of increases in revenue driven
by a 10.2% increase in the segments key driver, statements
generated, and lower corporate overhead.
|
|
|
|
Credit Services. Credit Services operating
expenses, excluding depreciation, amortization and stock
compensation expense, increased $16.4 million, or 15.8%, to
$120.4 million for the three months ended
|
18
|
|
|
|
|
March 31, 2006 from $104.0 million for the comparable
period in 2005, and adjusted EBITDA margin increased to 39.6%
for the three months ended March 31, 2006 from 31.3% for
the same period in 2005. The increased margin is the result of
favorable revenue trends from an increase in our average managed
receivables, lower cost of funds and lower net charge-offs.
Margin growth also came from leveraging existing infrastructure.
|
|
|
|
|
|
Marketing Services. Marketing Services
operating expenses, excluding depreciation, amortization and
stock compensation expense, increased $33.7 million, or
29.0%, to $149.7 million for the three months ended
March 31, 2006 from $116.0 million for the comparable
period in 2005, and adjusted EBITDA margin decreased to 15.2%
for the three months ended March 31, 2006 from 15.5% for
the comparable period in 2005. The decrease in adjusted EBITDA
margin is partially attributable to an increase in marketing
expenses for the three months ended March 31, 2006 as a
result of a change in timing of approximately $2.0 million
of marketing activities compared to prior year.
|
|
|
|
Stock compensation expense. Stock compensation
expense was $7.3 million for the three months ended
March 31, 2006 compared to $1.4 million for the
comparable period in 2005 due to the Companys adoption of
SFAS No. 123(R).
|
|
|
|
Depreciation and Amortization. Depreciation
and amortization increased $2.4 million, or 9.4%, to
$27.5 million for the three months ended March 31,
2006 from $25.2 million for the comparable period in 2005
primarily due to a $2.5 million increase in the
amortization of purchased intangibles slightly offset by a
decrease of $0.1 million in depreciation and other
amortization.
|
Operating Income. Operating income increased
$37.2 million, or 59.7%, to $99.4 million for the
three months ended March 31, 2006 from $62.2 million
during the comparable period in 2005. Operating income increased
due to the revenue and expense factors discussed above.
Interest Expense. Interest expense increased
$5.7 million, or 209.2%, to $8.5 million for the three
months ended March 31, 2006 from $2.8 million for the
comparable period in 2005. Interest on certificates of deposit
increased $3.2 million due to an increase in on-balance
sheet receivables of approximately $250 million. Core debt
interest expense increased $3.4 million as a result of our
stock repurchase program and the acquisition of ICOM.
Taxes. Income tax expense increased
$12.1 million to $34.4 million for the three months
ended March 31, 2006 from $22.3 million in 2005 due to
an increase in taxable income. Our effective tax rate increased
to 37.9% in 2006 compared to 37.5% in 2005.
19
Asset
Quality
Our delinquency and net charge-off rates reflect, among other
factors, the credit risk of our private label credit card
receivables, the average age of our various private label credit
card account portfolios, the success of our collection and
recovery efforts, and general economic conditions. The average
age of our private label 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.
An older private label credit card portfolio generally drives a
more stable performance in the portfolio. At March 31,
2006, 58.5% of securitized accounts with balances and 62.4% of
securitized receivables were for accounts with origination dates
greater than 24 months old.
Delinquencies. A credit card account is
contractually delinquent if we do not receive the minimum
payment by the specified due date on the cardholders
statement. It is our policy to continue to accrue interest and
fee income on all credit card accounts, except in limited
circumstances, until the account balance and all related
interest and other fees are charged off or paid beyond
90 days delinquent. When an account becomes delinquent, we
print a message on the cardholders billing statement
requesting payment. After an account becomes 30 days past
due, a proprietary collection scoring algorithm automatically
scores the risk of the account rolling to a more delinquent
status. The collection system then recommends a collection
strategy for the past due account based on the collection score
and account balance and dictates the contact schedule and
collections priority for the account. If we are unable to make a
collection after exhausting all in-house efforts, we engage
collection agencies and outside attorneys to continue those
efforts.
The following table presents the delinquency trends of our
managed credit card portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
% of
|
|
|
March 31,
|
|
|
% of
|
|
|
|
2005
|
|
|
total
|
|
|
2006
|
|
|
total
|
|
|
|
(dollars in thousands)
|
|
|
Receivables outstanding
|
|
$
|
3,714,548
|
|
|
|
100.0
|
%
|
|
$
|
3,452,824
|
|
|
|
100.0
|
%
|
Receivables balances contractually
delinquent:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 to 60 days
|
|
|
59,018
|
|
|
|
1.6
|
|
|
|
49,551
|
|
|
|
1.4
|
|
61 to 90 days
|
|
|
35,342
|
|
|
|
1.0
|
|
|
|
33,433
|
|
|
|
1.0
|
|
91 or more days
|
|
|
69,343
|
|
|
|
1.9
|
|
|
|
68,854
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
163,703
|
|
|
|
4.4
|
%
|
|
$
|
151,838
|
|
|
|
4.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Charge-Offs. Net charge-offs comprise the
principal amount of losses from cardholders unwilling or unable
to pay their account balances, as well as bankrupt and deceased
cardholders, less current period recoveries. Net charge-offs
exclude accrued finance charges and fees. The following table
presents our net charge-offs for the periods indicated on a
managed basis. Average managed receivables represents the
average balance of the cardholder receivables at the beginning
of each month in the period indicated.
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(dollars in thousands)
|
|
|
Average managed receivables
|
|
$
|
3,137,368
|
|
|
$
|
3,581,879
|
|
Net charge-offs
|
|
|
46,471
|
|
|
|
37,037
|
|
Net charge-offs as a percentage of
average managed receivables (annualized)
|
|
|
5.9
|
%
|
|
|
4.1
|
%
|
20
Liquidity
and Capital Resources
Operating Activities. We have
historically generated cash flows from operations, although that
amount may vary based on fluctuations in working capital and the
timing of merchant settlement activity. Our operating cash flow
is seasonal, with cash utilization peaking at the end of
December due to increased activity in our Credit Services
segment related to holiday retail sales.
|
|
|
|
|
|
|
|
|
|
|
Three months ended March
31,
|
|
|
|
2005
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Cash provided by operating
activities before change in merchant settlement activity
|
|
$
|
86,633
|
|
|
$
|
56,013
|
|
Net change in merchant settlement
activity
|
|
|
(5,974
|
)
|
|
|
14,763
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating
activities
|
|
$
|
80,659
|
|
|
$
|
70,776
|
|
|
|
|
|
|
|
|
|
|
We generated cash flow from operating activities before changes
in merchant settlement activity of $56.0 million for the
three months ended March 31, 2006 as compared to
$86.6 million for the comparable period in 2005. The
decrease in operating cash flows before changes in merchant
settlement activity is related to unfavorable working capital
movements offset in part by improved operating results for the
three months ended March 31, 2006. Merchant settlement
activity fluctuates significantly depending on the day in which
the quarter ends. We utilize our cash flow from operations for
ongoing business operations, acquisitions and capital
expenditures.
Investing Activities. Cash provided by
investing activities was $46.2 million for the three months
ended March 31, 2006 compared to $83.3 million of cash
provided for the comparable period in 2005. Significant
components of investing activities are as follows:
|
|
|
|
|
Acquisitions. Cash outlays, net of cash
received, for acquisitions for the three months ended
March 31, 2006 was $36.1 million compared to
$2.3 million for the comparable period in 2005. The outlay
for acquisitions in 2006 relates primarily to the purchase of
ICOM, a leading provider of targeted list, marketing data and
communications solutions for the pharmaceutical industries in
North America.
|
|
|
|
Securitizations and Receivables Funding. We
generally fund all private label credit card receivables through
a securitization program that provides us with both liquidity
and lower borrowing costs. As of March 31, 2006, we had
over $3.1 billion of securitized credit card receivables.
Securitizations require credit enhancements in the form of cash,
spread accounts and additional receivables. The credit
enhancement is partially funded through the use of certificates
of deposit issued through our subsidiary, World Financial
Network National Bank. Cash flow from securitization activity
was $108.4 million for the three months ended
March 31, 2006 and $99.6 million for the comparable
period in 2005. We intend to utilize our securitization program
for the foreseeable future.
|
|
|
|
Capital Expenditures. Our capital expenditures
for the three months ended March 31, 2006 were
$20.4 million compared to $11.9 million for the
comparable period in 2005. We anticipate capital expenditures to
be approximately 5% of annual revenue for the foreseeable future.
|
Financing Activities. Cash used by
financing activities was $3.3 million for the three months
ended March 31, 2006 compared to a use of cash of
$91.6 million in the comparable period in 2005. Our
financing activities during the three months ended
March 31, 2006 relate primarily to borrowings and
repayments of debt and the repurchase of 670,200 shares of
our common stock and the issuance and repayment of certificates
of deposit.
Liquidity Sources. In addition to cash
generated from operating activities, we have four main sources
of liquidity: securitization program, certificates of deposit
issued by World Financial Network National Bank and World
Financial Capital Bank, our credit facilities and issuances of
equity securities. We believe that internally generated funds
and existing sources of liquidity are sufficient to meet current
and anticipated financing requirements during the next
12 months.
21
Securitization Program and Off-Balance Sheet
Transactions. Since January 1996, we have sold,
sometimes through WFN Credit Company, LLC and WFN Funding
Company II, LLC, substantially all of the credit card
receivables owned by our credit card bank subsidiary, World
Financial Network National Bank, to World Financial Network
Credit Card Master Trust, World Financial Network Credit Card
Master Note Trust, World Financial Network Credit Card
Master Trust II and World Financial Network Credit Card
Master Trust III, which we refer to as the WFN Trusts, as
part of our securitization program. This securitization program
is the primary vehicle through which we finance our private
label credit card receivables.
In April 2006, World Financial Network Credit Card Master
Note Trust issued $395.0 million of Class A
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.13% per year and that will mature in
April 2013, $18.8 million of Class M
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.21% per year that will mature in
April 2013, $23.8 million of Class B
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.35% per year that will mature in
April 2013 and $62.5 million of Class C
Series 2006-A
asset backed notes that have an interest rate not to exceed
one-month LIBOR plus 0.60% per year that will mature in
April 2013.
The notes are rated AAA through BBB, or its equivalent, by each
of Standard and Poors, Moodys, and Fitch Ratings. In
connection with the transaction, World Financial Network Credit
Card Master Note Trust also entered into interest rate
swaps that effectively fix the interest rate on the notes
starting at 5.53% over the seven-year term of the interest rate
swaps.
As of March 31, 2006, the WFN Trusts had over
$3.1 billion of securitized credit card receivables.
Securitizations require credit enhancements in the form of cash,
spread deposits and additional receivables. The credit
enhancement is principally based on the outstanding balances of
the series issued by the WFN Trusts and by the performance of
the private label credit cards in the securitization trust.
During the period from November to January, the WFN Trusts are
required to maintain a credit enhancement level of between 6%
and 10% of securitized credit card receivables. Certain of the
WFN Trusts are required to maintain a level of between 4% and 9%
for the remainder of the year.
If World Financial Network National Bank were not able to
regularly securitize the receivables it originates, our ability
to grow or even maintain our credit services business would be
materially impaired as we would be severely limited in our
financing ability. World Financial Network National Banks
ability to effect securitization transactions is impacted by the
following factors, some of which are beyond our control:
|
|
|
|
|
conditions in the securities markets in general and the
asset-backed securitization market in particular; and
|
|
|
|
conformity in the quality of credit card receivables to rating
agency requirements and changes in those requirements; and
|
|
|
|
our ability to fund required over collateralizations or credit
enhancements, which we routinely utilize in order to achieve
better credit ratings to lower our borrowing costs.
|
We believe that the conditions to securitize private label
receivables are favorable for us. We plan to continue using our
securitization program as our primary financing vehicle.
Once World Financial Network National Bank securitizes
receivables, the agreement governing the transaction contains
covenants that address the receivables performance and the
continued solvency of the retailer where the underlying sales
were generated. In the event one of those or other similar
covenants is breached, an early amortization event could be
declared, in which case the trustee for the securitization trust
would retain World Financial Network National Banks
interest in the related receivables, along with the excess
interest income that would normally be paid to World Financial
Network National Bank, until such time as the securitization
investors are fully repaid. The occurrence of an early
amortization event would significantly limit, or even negate,
our ability to securitize additional receivables.
Certificates of Deposit. We utilize
certificates of deposit to finance the operating activities and
fund securitization enhancement requirements of our credit card
bank subsidiaries, World Financial Network
22
National Bank and World Financial Capital Bank. World Financial
Network National Bank and World Financial Capital Bank issue
certificates of deposit in denominations of $100,000 in various
maturities ranging between three months and two years and with
effective annual fixed rates ranging from 4.2% to 5.0%. As of
March 31, 2006, we had $278.2 million of certificates
of deposit outstanding. Certificate of deposit borrowings are
subject to regulatory capital requirements.
Credit Facilities. During January 2006, the
Company entered into an additional credit agreement to increase
its borrowing capacity by an incremental $300.0 million.
The principal amount of all outstanding loans under this credit
agreement, together with any accrued but unpaid interest, are
due and payable on June 30, 2006, unless otherwise paid
earlier pursuant to the terms of the credit agreement. This
credit agreement includes usual and customary negative covenants
for credit agreements of this type. Payment of amounts due under
this credit agreement are secured by guaranties, pledges of the
ownership interests of certain of the Companys
subsidiaries and pledges of certain intercompany promissory
notes. On January 5, 2006, the Company borrowed
$300.0 million under this credit agreement, which it is
using for general corporate purposes, including other debt
repayment, repurchases of its common stock in connection with
its stock repurchase program, mergers and acquisitions, and
working capital expenditures. The Company anticipates
refinancing this facility prior to June 30, 2006. On
April 6, 2006, the Company amended its
364-day
facility to extend the maturity date from April 6, 2006 to
April 5, 2007.
Advances under all four of our credit facilities are in the form
of either base rate loans or Eurodollar loans. The interest rate
on base rate loans fluctuates based upon the higher of
(1) the interest rate announced by the administrative agent
as its prime rate and (2) the Federal funds
rate plus 0.5%, in each case with no additional margin. The
interest rate on Eurodollar loans fluctuates based upon the rate
at which Eurodollar deposits in the London interbank market are
quoted plus a margin of 0.5% to 1.0% based upon the ratio of
total debt under the credit facilities to consolidated Operating
EBITDA, as each term is defined in the credit facilities. All of
our credit facilities are secured by pledges of stock of certain
of the Companys subsidiaries and pledges of certain
intercompany promissory notes.
At March 31, 2006, we had borrowings of $547.1 million
outstanding under our other three credit facilities (with an
average interest rate of 6.0%), no letters of credit
outstanding, and we had available unused borrowing capacity of
approximately $267.9 million. These credit facilities limit
our aggregate outstanding letters of credit to
$50.0 million.
The Company utilizes its credit facilities and excess cash flows
from operations to support its acquisition strategy and to fund
working capital and capital expenditures. The Company was in
compliance with its covenants under our credit facilities at
March 31, 2006.
23
Recent
Accounting Pronouncements
In February 2006, the FASB issued Statement of Financial
Accounting Standards No. 155
(SFAS No. 155), Accounting for
Certain Hybrid Financial Instruments which amends
Statement of Financial Accounting Standards No. 133
(SFAS No. 133), Accounting for
Derivative Instruments and Hedging Activities and
Statement of Financial Accounting Standards No. 140
(SFAS No. 140), Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. SFAS No. 155 simplifies the
accounting for certain derivatives embedded in other financial
instruments by allowing them to be accounted for as a whole if
the holder elects to account for the whole instrument on a fair
value basis. SFAS No. 155 also clarifies and amends
certain other provisions of SFAS No. 133 and
SFAS No. 140. SFAS No. 155 is effective for
all financial instruments acquired, issued or subject to a
remeasurement event occurring in fiscal years beginning after
September 15, 2006. Earlier adoption is permitted, provided
we have not yet issued financial statements, including for
interim periods, for that fiscal year. We do not expect the
adoption of SFAS No. 155 to have a material impact on
our consolidated financial position, results of operations or
cash flows.
In March 2006, the FASB issued SFAS No. 156,
Accounting for Servicing of Financial Assets
(SFAS No. 156). SFAS No. 156
amends SFAS No. 140 with respect to the accounting for
separately-recognized servicing assets and liabilities.
SFAS No. 156 addresses the recognition and measurement
of separately-recognized servicing assets and liabilities and
provides an approach to simplify efforts to obtain hedge-like
(offset) accounting. The standard is effective for fiscal years
beginning after September 15, 2006. Earlier adoption is
permitted, provided we have not yet issued financial statements,
including for interim periods, for that fiscal year. We do not
expect the adoption of SFAS No. 156 to have a material
impact on our consolidated financial position, results of
operations or cash flows.
24
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Market
Risk
There has been no material change from our Annual Report on
Form 10-K/A
for the year ended December 31, 2005 related to our
exposure to market risk from off-balance sheet risk, interest
rate risk, credit risk, and redemption reward risk.
Foreign Currency Exchange Risk. We are exposed
to fluctuations in the exchange rate between the U.S. and the
Canadian dollar through our significant Canadian operations. We
do not hedge our net investment exposure in our Canadian
subsidiary.
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
As of March 31, 2006, we carried out an evaluation, under
the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to
Rule 13a-15
of the Securities Exchange Act of 1934. Based upon that
evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that as of March 31, 2006, our disclosure
controls and procedures are effective. Disclosure controls and
procedures are controls and procedures designed to ensure that
information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in the SECs rules and forms and include controls
and procedures designed to ensure that information we are
required to disclose in such reports is accumulated and
communicated to management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Our evaluation of and conclusion on the effectiveness of
internal control over financial reporting as of
December 31, 2005 did not include the internal controls of
Epsilon Interactive and ICOM because of the timing of these
acquisitions, which were completed in September 2005 and
February 2006, respectively. As of December 31, 2005, these
entities constituted $147.7 million of total assets and an
immaterial amount of revenues and net income for the year then
ended. In the fourth quarter of 2006, we will expand our
evaluation of the effectiveness of the internal controls over
financial reporting to include Epsilon Interactive. As part of
our integration of Epsilon Interactive, we are in the process of
converting their legacy general ledger platform to the platform
used by our existing business units.
There have been no changes in our internal control over
financial reporting that occurred during our last fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
FORWARD-LOOKING
STATEMENTS
This
Form 10-Q
and the documents incorporated by reference herein contain
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. 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
managements beliefs and assumptions, using information
currently available to us. Although we believe that the
expectations reflected in the forward-looking statements are
reasonable, these forward-looking statements are subject to
risks, uncertainties and assumptions, including those discussed
in the Risk Factors section in our Annual Report on
Form 10-K/A
for the year ended December 31, 2005.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we
projected. Any forward-looking statements contained in this
quarterly report 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. We have no
intention, and disclaim any obligation, to update or revise any
forward-looking statements, whether as a result of new
information, future results or otherwise.
25
PART II
|
|
Item 1.
|
Legal
Proceedings.
|
From time to time, we are involved in various claims and
lawsuits arising in the ordinary course of our business that we
believe will not have a material adverse affect on our business
or financial condition, including claims and lawsuits alleging
breaches of contractual obligations.
There have been no material changes to the Risk Factors
previously disclosed in our Annual Report on
Form 10-K/A
for the year ended December 31, 2005.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
On June 8, 2005, our Board of Directors authorized a stock
repurchase program to acquire up to an aggregate of
$80.0 million of our outstanding common stock through June
2006. On October 27, 2005, our Board of Directors
authorized a new stock repurchase program to acquire up to an
additional $220.0 million of our outstanding common stock
through October 2006. As of March 31, 2006, we have
repurchased 4,612,300 shares of our common stock for
approximately $178.4 million under these programs.
Additionally, the administrator of our 401(k) and Retirement
Savings Plan purchased shares of our common stock for the
benefit of the employees who participated in that portion of the
plan during the first quarter of 2006.
The following table presents information with respect to those
purchases of our common stock made during the three months ended
March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximate Dollar Value of
|
|
|
|
Total Number
|
|
|
|
|
|
Total Number of Shares
Purchased
|
|
|
Shares that May Yet Be
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
as Part of Publicly Announced
|
|
|
Purchased
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Plans or
Programs(1)(2)
|
|
|
Under the Plans or
Programs(1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
During 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January
|
|
|
38,248
|
|
|
$
|
39.05
|
|
|
|
36,500
|
|
|
$
|
149.8
|
|
February
|
|
|
233,814
|
|
|
|
43.45
|
|
|
|
231,100
|
|
|
|
139.7
|
|
March
|
|
|
406,180
|
|
|
|
45.13
|
|
|
|
402,600
|
|
|
|
121.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
678,242
|
|
|
$
|
44.21
|
|
|
|
670,200
|
|
|
$
|
121.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On June 8, 2005, our Board of Directors authorized a stock
repurchase program to acquire up to an aggregate of
$80.0 million of our outstanding common stock through June
2006. On October 27, 2005, our Board of Directors
authorized a new stock repurchase program to acquire up to an
additional $220.0 million of our outstanding common stock
through October 2006. |
|
(2) |
|
Debt covenants in our credit facilities restrict the amount of
funds that we have available for repurchases of our common stock
in any calendar year. |
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None
|
|
Item 5.
|
Other
Information.
|
(a) On April 6, 2006, the Company amended its
364-day
facility to extend the maturity date from April 6, 2006 to
April 5, 2007. (b) None
26
(a) Exhibits:
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated
Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit No. 3.1 to our Registration Statement
on
Form S-1
filed with the SEC on March 3, 2000, File
No. 333-94623).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws
of the Registrant (incorporated by reference to Exhibit
No. 3.2 to our Registration Statement on
Form S-1
filed with the SEC on March 3, 2000, File
No. 333-94623).
|
|
3
|
.3
|
|
First Amendment to the Second
Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit No. 3.3 to our Registration Statement
on
Form S-1
filed with the SEC on May 4, 2001, File
No. 333-94623).
|
|
3
|
.4
|
|
Second Amendment to the Second
Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit No. 3.4 to our Annual Report on
Form 10-K,
filed with the SEC on April 1, 2002, File No. 001-15749).
|
|
4
|
|
|
Specimen Certificate for shares of
Common Stock of the Registrant (incorporated by reference to
Exhibit No. 4 to our Quarterly Report on
Form 10-Q
filed with the SEC on August 8, 2003, File No. 001-15749).
|
|
+10
|
.1
|
|
Form of Restricted Stock Unit
Award for the CEO and EC members under the 2005 Long Term
Incentive Plan, as amended (incorporated by reference to Exhibit
No. 99.1 to our Current Report on
Form 8-K
filed with the SEC on April 4, 2006, File No. 001-15749).
|
|
*10
|
.2
|
|
Sixth Amendment to Credit
Agreement
(364-Day),
dated as of April 6, 2006, by and among Alliance Data
Systems Corporation, the Guarantors party thereto, the Banks
party thereto, and Harris N.A, as Administrative Agent and
Letter of Credit Issuer.
|
|
10
|
.3
|
|
Credit Agreement, dated as of
January 3, 2006, by and among the Company, ADS Alliance
Data Systems, Inc., as Guarantor, the Banks party thereto, and
Harris N.A., as Administrative Agent and Lead Arranger
(incorporated by reference to Exhibit 99.1 to our Current
Report on
Form 8-K
filed with the SEC on January 9, 2006, File No. 001-15749).
|
|
10
|
.4
|
|
First Amendment to Pledge
Agreement, dated as of January 3, 2006, by and among the
Company, ADS Alliance Data Systems, Inc., and Harris N.A.
(incorporated by reference to Exhibit 99.2 to our Current
Report on
Form 8-K
filed with the SEC on January 9, 2006, File No. 001-15749).
|
|
10
|
.5
|
|
First Amendment to Intercreditor
and Collateral Agency Agreement, dated as of January 3,
2006, by and among the Company, ADS Alliance Data Systems, Inc.,
Harris N.A., and the other parties thereto (incorporated by
reference to Exhibit 99.3 to our Current Report on
Form 8-K
filed with the SEC on January 9, 2006, File No. 001-15749).
|
|
*31
|
.1
|
|
Certification of Chief Executive
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14
(a) promulgated under the Securities Exchange Act of 1934,
as amended.
|
|
*31
|
.2
|
|
Certification of Chief Financial
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended.
|
|
*32
|
.1
|
|
Certification of Chief Executive
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as
amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
|
|
*32
|
.2
|
|
Certification of Chief Financial
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as
amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
|
|
|
|
* |
|
Filed herewith |
|
+ |
|
Management contract, compensatory plan or arrangement |
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
ALLIANCE DATA SYSTEMS CORPORATION
|
|
|
|
By:
|
/s/ Edward
J. Heffernan
|
Edward J. Heffernan
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Date: May 5, 2006
Michael D. Kubic
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
Date: May 5, 2006
28
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
3
|
.1
|
|
Second Amended and Restated
Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit No. 3.1 to our Registration Statement
on
Form S-1
filed with the SEC on March 3, 2000, File
No. 333-94623).
|
|
3
|
.2
|
|
Second Amended and Restated Bylaws
of the Registrant (incorporated by reference to Exhibit
No. 3.2 to our Registration Statement on
Form S-1
filed with the SEC on March 3, 2000, File
No. 333-94623).
|
|
3
|
.3
|
|
First Amendment to the Second
Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit No. 3.3 to our Registration Statement
on
Form S-1
filed with the SEC on May 4, 2001, File
No. 333-94623).
|
|
3
|
.4
|
|
Second Amendment to the Second
Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit No. 3.4 to our Annual Report on
Form 10-K,
filed with the SEC on April 1, 2002, File No. 001-15749).
|
|
4
|
|
|
Specimen Certificate for shares of
Common Stock of the Registrant (incorporated by reference to
Exhibit No. 4 to our Quarterly Report on
Form 10-Q
filed with the SEC on August 8, 2003, File No. 001-15749).
|
|
+10
|
.1
|
|
Form of Restricted Stock Unit
Award for the CEO and EC members under the 2005 Long Term
Incentive Plan, as amended (incorporated by reference to Exhibit
No. 99.1 to our Current Report on
Form 8-K
filed with the SEC on April 4, 2006, File No. 001-15749).
|
|
*10
|
.2
|
|
Sixth Amendment to Credit
Agreement
(364-Day),
dated as of April 6, 2006, by and among Alliance Data
Systems Corporation, the Guarantors party thereto, the Banks
party thereto, and Harris N.A, as Administrative Agent and
Letter of Credit Issuer.
|
|
10
|
.3
|
|
Credit Agreement, dated as of
January 3, 2006, by and among the Company, ADS Alliance
Data Systems, Inc., as Guarantor, the Banks party thereto, and
Harris N.A., as Administrative Agent and Lead Arranger
(incorporated by reference to Exhibit 99.1 to our Current
Report on
Form 8-K
filed with the SEC on January 9, 2006, File No. 001-15749).
|
|
10
|
.4
|
|
First Amendment to Pledge
Agreement, dated as of January 3, 2006, by and among the
Company, ADS Alliance Data Systems, Inc., and Harris N.A.
(incorporated by reference to Exhibit 99.2 to our Current
Report on
Form 8-K
filed with the SEC on January 9, 2006, File No. 001-15749).
|
|
10
|
.5
|
|
First Amendment to Intercreditor
and Collateral Agency Agreement, dated as of January 3,
2006, by and among the Company, ADS Alliance Data Systems, Inc.,
Harris N.A., and the other parties thereto (incorporated by
reference to Exhibit 99.3 to our Current Report on
Form 8-K
filed with the SEC on January 9, 2006, File No. 001-15749).
|
|
*31
|
.1
|
|
Certification of Chief Executive
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14
(a) promulgated under the Securities Exchange Act of 1934,
as amended.
|
|
*31
|
.2
|
|
Certification of Chief Financial
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14(a)
promulgated under the Securities Exchange Act of 1934, as
amended.
|
|
*32
|
.1
|
|
Certification of Chief Executive
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as
amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
|
|
*32
|
.2
|
|
Certification of Chief Financial
Officer of Alliance Data Systems Corporation pursuant to
Rule 13a-14(b)
promulgated under the Securities Exchange Act of 1934, as
amended, and Section 1350 of Chapter 63 of
Title 18 of the United States Code.
|
|
|
|
* |
|
Filed herewith |
|
+ |
|
Management contract, compensatory plan or arrangement |
29