UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the Quarterly Period Ended September 30, 2007
OR
For the transition period from to
Commission File Number: 001-15749
ALLIANCE DATA SYSTEMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
(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
(Registrant’s 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
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 x No ¨
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):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
As November 2, 2007, 78,740,781 shares of common stock were outstanding.
INDEX
Part I:
Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006
Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2007 and 2006
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006
Notes to Condensed Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
Part II:
Legal Proceedings
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Submission of Matters to a Vote of Security Holders
Other Information
Exhibits
SIGNATURES
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PART I
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents
Due from card associations
Trade receivables, less allowance for doubtful accounts ($6,737 and $5,325 at September 30, 2007 and December 31, 2006, respectively)
Seller’s interest and credit card receivables, less allowance for doubtful accounts ($37,780 and $45,919 at September 30, 2007 and December 31, 2006, respectively)
Deferred tax asset, net
Other current assets
Total current assets
Redemption settlement assets, restricted
Property and equipment, net
Due from securitizations
Intangible assets, net
Goodwill
Other non-current assets
Total assets
Accounts payable
Accrued expenses
Merchant settlement obligations
Certificates of deposit
Credit facilities and other debt, current
Other current liabilities
Total current liabilities
Deferred tax liability, net
Deferred revenue
Long-term and other debt
Other liabilities
Total liabilities
Stockholders’ equity:
Common stock, $0.01 par value; authorized 200,000 shares; issued 87,756 shares and 86,872 shares at September 30, 2007 and December 31, 2006, respectively
Additional paid-in capital
Treasury stock, at cost (9,024 shares and 7,218 shares at September 30, 2007 and December 31, 2006, respectively)
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to unaudited condensed consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Revenues
Transaction
Redemption
Securitization income and finance charges, net
Database marketing and direct marketing fees
Other revenue
Total revenue
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
General and administrative
Depreciation and other amortization
Amortization of purchased intangibles
Impairment of long-lived assets
Merger costs
Total operating expenses
Operating income
Interest income
Interest expense
Income before income taxes
Provision for income taxes
Net income
Net income per share—basic
Net income per share—diluted
Weighted average shares—basic
Weighted average shares—diluted
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UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Deferred income taxes
Provision for doubtful accounts
Fair value gain on interest only strip
Stock compensation
Change in operating assets and liabilities, net of acquisitions:
Change in trade accounts receivable
Change in merchant settlement activity
Change in other assets
Change in accounts payable and accrued expenses
Change in deferred revenue
Change in other liabilities
Excess tax benefits from stock-based compensation
Purchase of credit card receivables
Proceeds from the sale of credit card receivable portfolios to the securitization trusts
Other
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in redemption settlement assets
Payments for acquired businesses, net of cash acquired
Net decrease (increase) in seller’s interest and credit card receivables
Change in due from securitizations
Capital expenditures
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements
Repayment of borrowings
Certificate of deposit issuances
Repayments of certificates of deposits
Payment of capital lease obligations
Payment of deferred financing costs
Proceeds from issuance of common stock
Purchase of treasury shares
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid
Income taxes paid, net of refunds
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
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 Company’s Annual Report filed on Form 10-K for the year ended December 31, 2006.
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, have been reclassified to conform to the current year presentation. Such reclassifications have no impact on previously reported net income.
2. PROPOSED MERGER
On May 17, 2007, the Company entered into an Agreement and Plan of Merger by and among Aladdin Holdco, Inc. (“Parent”), Aladdin Merger Sub, Inc. (“Merger Sub”) and the Company (the “Merger Agreement”). Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, and as a result the Company will continue as the surviving corporation and a wholly—owned subsidiary of Parent (the “Merger”). Parent is owned by an affiliate of The Blackstone Group. At the effective time of the Merger, each outstanding share of common stock of the Company (the “Common Stock”), other than shares owned by the Company, Parent, any subsidiary of the Company or Parent, or by any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law, will be cancelled and converted into the right to receive $81.75 in cash, without interest. In addition, the vesting and/or lapse of restrictions on substantially all stock options, restricted stock awards and restricted stock units will be accelerated at the effective time of the Merger and holders of such securities will receive consideration in accordance with the terms of the Merger Agreement. The Company will also accelerate the recognition of stock compensation expense resulting from the vesting of substantially all outstanding unvested stock options, restricted stock and restricted stock units in connection with the Merger.
Pending the receipt of regulatory approvals and the satisfaction of other customary closing conditions, the Merger is expected to close in the fourth quarter of 2007. The Company filed its definitive proxy statement and proxy supplement with the SEC on July 5, 2007 and July 30, 2007, respectively, soliciting stockholder approval of the Merger Agreement, which was approved at a special meeting of the Company’s stockholders on August 8, 2007. The Company filed its Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, notification
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
and report forms with the Federal Trade Commission and the Antitrust Division of the Department of Justice on June 1, 2007 and early termination of the applicable waiting period was granted on June 11, 2007. The Company filed a request for an advance ruling certificate (“ARC”) regarding the Merger under the Competition Act (Canada) with the Canadian Commissioner of Competition on June 1, 2007 and received an ARC on June 7, 2007. The Company filed a notification under the German Act against Restraints of Competition, as amended (the “German Competition Act”) with the German Federal Cartel Office (the “FCO”) on June 14, 2007. The waiting period under the German Competition Act expired on July 14, 2007. Parent filed the required notices with the Office of the Comptroller of the Currency (the “OCC”) on June 28, 2007. Parent also filed the required notices with the Federal Deposit Insurance Corporation (the “FDIC”) and the Utah Department of Financial Institutions (“UDFI”), in each case on July 2, 2007.
The Merger Agreement may be terminated under certain circumstances, including if the Company has received a superior proposal and the Company’s Board of Directors or the special committee of the Company’s Board of Directors (“the Special Committee”) has determined in good faith that the failure to terminate the Merger Agreement would reasonably be expected to be inconsistent with the fiduciary duties of the members of the Board of Directors or Special Committee and the Company otherwise complies with certain terms of the Merger Agreement. Upon the termination of the Merger Agreement, under specified circumstances, the Company will be required to reimburse Parent and Merger Sub for their transaction expenses up to $20.0 million and under specified circumstances, the Company will be required to pay Parent, or its designee, a termination fee of $170.0 million less any expenses previously reimbursed. Additionally, under specified circumstances, Parent will be required to pay the Company a termination fee of $170.0 million.
On October 15, 2007, Merger Sub commenced a tender offer (the “Tender Offer”) in respect of the Company’s $250.0 million aggregate principal amount 6.00% Senior Notes, Series A, due May 16, 2009 and the Company’s $250.0 million aggregate principal amount 6.14% Senior Notes, Series B, due May 16, 2011 (collectively, the “Notes”). The Tender Offer was conducted concurrently with a related consent solicitation (the “Consent Solicitation”) to amend the terms of the Notes and the related Note Purchase Agreement dated as of May 1, 2006 (the “Note Purchase Agreement”) to, among other things, eliminate substantially all of the restrictive covenants and certain events of default and modify or eliminate certain other provisions. On the same date, the Company commenced a cash offer (the “Prepayment Offer”) in respect of the Notes pursuant to the terms of the Note Purchase Agreement.
On October 22, 2007, the Company entered into an amendment (the “Amendment”) in respect of the Notes with all of the Holders (as defined in the Note Purchase Agreement) providing for a mandatory prepayment of all of the Notes on the date that the Merger is consummated, provided that the Merger is consummated no later than January 1, 2008. The Notes shall be repaid at 100% of the principal amount plus accrued and unpaid interest to the date of prepayment and the Make-Whole Amount (as defined in the Note Purchase Agreement) as determined for the prepayment date in accordance with the terms of the Amendment. The obligation of the Company to prepay the Notes pursuant to the terms of the Amendment is subject to and conditioned upon the occurrence of the Merger and will be void and of no force and effect in the event that the Merger is abandoned or does not occur on or prior to January 1, 2008. In connection with the Amendment, on October 23, 2007, Merger Sub withdrew the Tender Offer and Consent Solicitation and the Company withdrew the Prepayment Offer. The early retirement of debt will result in the recognition of unamortized debt issuance costs as well as any premium charges associated with early retirement.
Parent has obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement, the proceeds of which, together with the available cash of the Company, will be sufficient for Parent to pay the aggregate Merger consideration and all related fees and expenses of the transactions contemplated by
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the Merger Agreement. Consummation of the Merger is not subject to a financing condition, but is subject to customary closing conditions, including the approval of the Company’s stockholders, which was received on August 8, 2007, and regulatory clearance. For more information regarding the Merger, see the Company’s definitive proxy statement and proxy supplement filed with the SEC on July 5, 2007 and July 30, 2007, respectively.
During the nine months ended September 30, 2007, the Company has recorded merger costs of approximately $8.3 million consisting of investment banking, legal, accounting and other costs associated with the Merger.
3. 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
September 30,
Nine Months Ended
Numerator
Net income available to common stockholders
Denominator
Weighted average shares, basic
Weighted average effect of dilutive securities:
Net effect of unvested restricted stock
Net effect of dilutive stock options
Denominator for diluted calculation
Basic
Net income per share
Diluted
4. ACQUISITIONS
On February 1, 2007, the Company completed the acquisition of Abacus, a division of DoubleClick Inc. Abacus is a leading provider of data, data management and analytical services for the retail and catalog industry, as well as other sectors. The Abacus acquisition complements, expands and strengthens Epsilon’s core offerings and provides additional scale to its data services, strategic database services and analytics offerings.
The acquisition of Abacus included specified assets of DoubleClick’s data division (“Purchased Assets”) and all of the outstanding equity interests of four DoubleClick entities. The consideration consisted of approximately $435.0 million plus other incremental costs as defined in the agreement for a total of approximately $439.3 million.
The results of operations for Abacus have been included since the date of acquisition and are reflected in our Marketing Services segment. The goodwill resulting from the acquisition of the Purchased Assets will be deductible for tax purposes.
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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the Abacus acquisition as of the date of purchase. The Company used a third-party for the valuation of the identifiable intangible assets.
As of
February 1,
2007
Current assets
Property, plant and equipment
Capitalized software
Identifiable intangible assets
Total assets acquired
Current liabilities
Total liabilities assumed
Net assets acquired
The following unaudited pro forma results of operations of the Company are presented as if the Abacus acquisition was completed as of the beginning of the periods being presented. The following unaudited pro forma financial information is not necessarily indicative of the actual results of operations that the Company would have experienced assuming the acquisition had been completed as of January 1, 2007 or 2006, respectively.
Basic net income per share
Diluted net income per share
5. IMPAIRMENT OF LONG-LIVED ASSETS
During the third quarter of 2007, the Company reviewed one of our utility services customer relationships and determined that certain long-lived assets, including internally developed software, certain customer relationship assets, and other assets, had been impaired. The Company recognized approximately $40.0 million as a non-cash asset write-down, with the impairment charge included in our Transaction services segment.
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6. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
Accumulated
Amortization
Amortization Life and Method
Finite Lived Assets
Customer contracts and lists
2-20 years—straight line
Premium on purchased credit card portfolios
5-10 years—straight line, accelerated
Collector database
30 years—15% declining balance
Customer databases
4-10 years—straight line
Noncompete agreements
2-5 years—straight line
Favorable lease
4 years—straight line
Tradenames
Purchased data lists
1-5 years—straight line, accelerated basis
Indefinite Lived Assets
Indefinite life
Total intangible assets
1 year—accelerated basis
As a result of the Abacus acquisition, the Company acquired $158.7 million of customer relationships and related databases with a weighted average life of approximately nine years, tradenames of $10.7 million with a weighted average life of 10 years and non-compete agreements of $0.4 million with a weighted average life of one and a half years.
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The changes in the carrying amount of goodwill for the nine months ended September 30, 2007 are as follows:
Marketing
Services
Credit
Beginning balance
Goodwill acquired during the period
Effects of foreign currency translation
Other, primarily final purchase price adjustments
Ending balance
7. DEBT
Debt consists of the following:
Senior notes
Bridge loan
Credit facilities
Less: current portion
Long-term portion
As of September 30, 2007, the certificates of deposit had effective annual fixed rates ranging from 5.4% to 5.7%, and the credit facilities had a weighted average interest rate of 5.9%.
Credit Facility and Bridge Loan
At the beginning of fiscal year 2007, the Company maintained one consolidated credit agreement that provides for a $540.0 million revolving credit facility with a U.S. $50.0 million sublimit for Canadian dollar borrowings and a $50.0 million sublimit for swing line loans (the “consolidated credit facility”). Additionally, the consolidated credit facility includes an uncommitted accordion feature of up to $210.0 million in the aggregate allowing for future incremental borrowings, subject to certain conditions. The consolidated credit facility is unsecured. Each of ADS Alliance Data Systems, Inc., Alliance Data Foreign Holdings, Inc., Epsilon Marketing Services, LLC and Epsilon Data Management, LLC are guarantors under the consolidated credit facility.
On March 30, 2007, the Company amended the consolidated credit facility to extend the lending commitments that were scheduled to terminate on September 29, 2011 to March 30, 2012. In addition, the amendment adjusts the Senior Leverage Ratio applicable to the various levels set forth in the consolidated credit facility and the margin applicable to Eurodollar loans to those reflected below.
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Advances under the consolidated credit facility are in the form of either base rate loans or eurodollar loans and may be denominated in U.S. dollars or Canadian dollars. The interest rate for base rate loans denominated in U.S. dollars fluctuates and is equal to the higher of (1) the Bank of Montreal’s prime rate and (2) the Federal funds rate plus 0.5%, in either case with no additional margin. The interest rate for base rate loans denominated in Canadian dollars fluctuates and is equal to the higher of (1) the Bank of Montreal’s prime rate for Canadian dollar loans and (2) the CDOR rate plus 1%, in either case with no additional margin. The interest rate for eurodollar loans denominated in U.S. or Canadian dollars fluctuates based on the rate at which deposits of U.S. dollars or Canadian dollars, respectively, in the London interbank market are quoted plus a margin of 0.4% to 0.8% based upon the Company’s Senior Leverage Ratio as defined in the consolidated credit facility.
Among other fees, the Company pays a facility fee of 0.1% to 0.2% per annum (due quarterly) on the aggregate commitments under the consolidated credit facility, whether used or unused, based upon the Company’s Senior Leverage Ratio as defined in the consolidated credit facility. The Company will also pay fees with respect to any letters of credit issued under the consolidated credit facility.
The consolidated credit facility includes usual and customary negative covenants for credit agreements of this type, including, but not limited to, restrictions on the Company’s ability, and in certain instances, its subsidiaries’ ability, to consolidate or merge; substantially change the nature of its business; sell, transfer or dispose of assets; create or incur indebtedness; create liens; pay dividends and repurchase stock; and make investments. The negative covenants are subject to certain exceptions, as specified in the consolidated credit facility. The consolidated credit facility also requires the Company to satisfy certain financial covenants, including maximum ratios of Total Capitalization and Senior Leverage as determined in accordance with the consolidated credit facility and a minimum ratio of Consolidated Operating EBITDA to Consolidated Interest Expense as determined in accordance with the consolidated credit facility.
The consolidated credit facility also includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, a change of control of the Company, material money judgments and failure to maintain subsidiary guarantees.
On January 24, 2007, the Company entered into a credit facility, (the “bridge loan”) which provides for loans up to $400.0 million. At the closing of the bridge loan, the Company borrowed $300.0 million for general corporate purposes including the repayment of debt and the financing of permitted acquisitions. The bridge loan includes an uncommitted accordion feature of up to $100.0 million allowing for future borrowings, subject to certain conditions. The bridge loan is unsecured. Each of ADS Alliance Data Systems, Inc., Alliance Data Foreign Holdings, Inc., Epsilon Marketing Services, LLC and Epsilon Data Management, LLC are guarantors under the bridge loan. On July 6, 2007, the Company amended its bridge loan to extend the maturity date from July 24, 2007 to December 31, 2007.
Advances under the bridge loan are in the form of either base rate loans or eurodollar loans. The interest rate for base rate loans fluctuates and is equal to the higher of (1) the Bank of Montreal’s prime rate and (2) the Federal funds rate plus 0.5%, in either case with no additional margin. The interest rate for eurodollar loans fluctuates based on the London interbank offered rate plus a margin of 0.6% to 1.2% based upon our Senior Leverage Ratio as defined in the bridge loan.
The bridge loan contains usual and customary negative covenants for transactions of this type, including, but not limited to, restrictions on the Company’s ability, and in certain instances, its subsidiaries’ ability, to consolidate or merge; substantially change the nature of its business; sell, transfer or dispose of assets; create or incur indebtedness; create liens; pay dividends and repurchase stock; and make investments. The negative
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covenants are subject to certain exceptions, as specified in the bridge loan. The bridge loan also requires the Company to satisfy certain financial covenants, including maximum ratios of Total Capitalization and Senior Leverage as determined in accordance with the bridge loan and a minimum ratio of Consolidated Operating EBITDA to Consolidated Interest Expense as determined in accordance with the bridge loan.
The bridge loan must be prepaid prior to the scheduled maturity date if the Company or any of its subsidiaries issues any debt or equity securities, subject to certain exceptions.
The bridge loan also includes customary events of default, including, among other things, payment default, covenant default, breach of representation or warranty, bankruptcy, cross-default, material ERISA events, a change of control, material money judgments and failure to maintain subsidiary guarantees.
The Company plans to repay in full and terminate the credit facility and the bridge loan upon closing of the Merger described in Note 2 with the proceeds of the equity and debt financing commitments obtained by Parent and Merger Sub. For more information regarding the Merger, see the Company’s definitive proxy statement and proxy supplement filed with the SEC on July 5, 2007 and July 30, 2007, respectively.
Senior Notes
On May 16, 2006, the Company entered into a senior note purchase agreement and issued and sold $250.0 million aggregate principal amount of 6.00% Series A Notes due May 16, 2009 and $250.0 million aggregate principal amount of 6.14% Series B Notes due May 16, 2011. The Series A and Series B Notes will accrue interest on the unpaid balance thereof at the rate of 6.00% and 6.14% per annum, respectively, from May 16, 2006, payable semiannually, on May 16 and November 16 in each year, commencing with November 16, 2006, until the principal has become due and payable. The note purchase agreement includes usual and customary negative covenants and events of default for transactions of this type. The senior notes are unsecured. The payment obligations under the senior notes are guaranteed by certain of the Company’s existing and future subsidiaries, originally ADS Alliance Data Systems, Inc. Due to their status as guarantors under the consolidated credit facility and pursuant to a Joinder to Subsidiary Guaranty dated as of September 29, 2006, three additional subsidiaries of the Company became guarantors of the senior notes, including Alliance Data Foreign Holdings, Inc., Epsilon Marketing Services, LLC and Epsilon Data Management, LLC.
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8. STOCK-BASED COMPENSATION
Total stock-based compensation expense recognized in the Company’s consolidated statements of income for the three and nine months ended September 30, 2007 and 2006 respectively, is as follows:
Cost of operations
Total
During the third quarter of 2007, the vesting provisions of 133,772 shares of restricted stock and stock options issued to 29 employees were modified. The service conditions of these awards were accelerated in connection with the anticipation of termination and the termination of these employees. The terms were modified such that should the Merger, as discussed in Note 2, be completed before the Merger Agreement expires or is otherwise terminated, the employee would then receive the consideration as set forth in the Merger Agreement. As a result of the modification, the Company recorded incremental stock-based compensation expense of approximately $5.6 million.
As discussed in Note 2, vesting of substantially all of the Company’s stock options, restricted stock awards, and restricted stock units will be accelerated upon closing of the Merger. In February 2006, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. FAS 123(R)-4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow for Cash Settlement upon Occurrence of a Contingent Event” (“FSP FAS 123(R)-4”). FASB Staff Position FSP FAS 123(R)-4 amends SFAS No. 123(R) to require evaluation of the probability of occurrence of a contingent cash settlement event in determining whether the underlying options or similar instruments issued as employee compensation should be classified as liabilities or equity. On the date the contingent event becomes probable of occurring the award must be recognized as a liability. On that date, the company recognizes a share-based liability equal to the portion of the award attributed to past service and any provision for accelerated vesting, multiplied by the fair value of the award on that date. The Merger described in Note 2 is the contingent event which would result in cash settlement of the Company’s outstanding stock options, restricted stock and restricted stock units. The Company does not believe the Merger is considered probable under FSP FAS 123(R)-4 as of September 30, 2007, due to the existence of certain unfulfilled conditions, including receipt of regulatory approvals that must be satisfied before the Merger is consummated.
In addition, in accordance with the terms of the Merger Agreement, as of June 29, 2007, the Alliance Data Employee Stock Purchase Plan was closed to further contributions.
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9. DEFERRED REVENUE
A reconciliation of deferred revenue for the AIR MILES® Reward Program is as follows:
December 31, 2006
Cash proceeds
Revenue recognized
September 30, 2007
10. INCOME TAXES
For the three and nine months ended September 30, 2007, the Company has utilized an effective tax rate of 40.1% and 39.0%, respectively, to calculate its provision for income taxes. Legislation was enacted in various states during the three months ended September 30, 2007 that impacted the effective tax rate. In accordance with Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting, the Company’s expected annual effective tax rate for calendar year 2007 based on all known variables is estimated to be approximately 38.9% excluding the effect of the change in tax laws.
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes, an interpretation of statement of Financial Accounting Standards No. 109. As a result of the implementation of FIN No. 48, the Company recognized approximately a $9 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to retained earnings.
As of September 30, 2007, the Company has unrecognized tax benefits of approximately $82 million, of which $28 million relate to taxes and $18 million relate to potential interest and penalties. These unrecognized tax benefits, if recognized at some point in the future, would favorably impact the effective tax rate by approximately $35 million. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. For the three and nine months ended September 30, 2007, the Company recognized approximately $0.5 million and $2.7 million, respectively, in potential interest and penalties with respect to unrecognized tax benefits.
The Company files income tax returns in the United States Federal jurisdiction and in many state and foreign jurisdictions. With few exceptions, the tax returns filed by the Company are no longer subject to United States Federal or state and local income tax examinations for years before 2004 and are no longer subject to foreign income tax examinations by tax authorities for years before 2003.
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11. COMPREHENSIVE INCOME
The components of comprehensive income, net of tax effect, are as follows:
Unrealized loss on securities available-for-sale
Foreign currency translation adjustments
Total comprehensive income
12. SEGMENT INFORMATION
Consistent with prior periods, the Company classifies its businesses into three segments: Marketing Services, Credit Services and Transaction Services.
Three months ended September 30, 2007
Adjusted EBITDA(1)
Stock compensation expense
Merger and other costs(2)
Interest expense, net
Income (loss) before income taxes
Three months ended September 30, 2006
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Nine months ended September 30, 2007
Nine months ended September 30, 2006
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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 audited consolidated financial statements and related notes thereto included in our Annual Report filed on Form 10-K for the year ended December 31, 2006.
Proposed Merger
On May 17, 2007, we entered into an Agreement and Plan of Merger by and among Aladdin Holdco, Inc. (“Parent”), Aladdin Merger Sub, Inc. (“Merger Sub”) and the Company (the “Merger Agreement”). Under the terms of the Merger Agreement, Merger Sub will be merged with and into the Company, and as a result the Company will continue as the surviving corporation and a wholly-owned subsidiary of Parent (the “Merger”). Parent is owned by an affiliate of The Blackstone Group. At the effective time of the Merger, each outstanding share of common stock of the Company, other than shares owned by the Company, Parent, any subsidiary of the Company or Parent, or by any stockholders who are entitled to and who properly exercise appraisal rights under Delaware law, will be cancelled and converted into the right to receive $81.75 in cash, without interest. In addition, the vesting and/or lapse of restrictions on substantially all stock options, restricted stock awards and restricted stock units will be accelerated at the effective time of the Merger and holders of such securities will receive consideration in accordance with the terms of the Merger Agreement. The Company will also accelerate the recognition of stock compensation expense resulting from the vesting of substantially all outstanding unvested stock options, restricted stock and restricted stock units in connection with the Merger.
Pending the receipt of regulatory approvals and the satisfaction of other customary closing conditions, the Merger is expected to close in the fourth quarter of 2007. We filed our definitive proxy statement and proxy supplement with the SEC on July 5, 2007 and July 30, 2007, respectively, soliciting stockholder approval of the Merger Agreement, which was approved at a special meeting of our stockholders on August 8, 2007. We filed our Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, notification and report forms with the Federal Trade Commission and the Antitrust Division of the Department of Justice on June 1, 2007 and early termination of the applicable waiting period was granted on June 11, 2007. We filed a request for an advance ruling certificate, ARC, regarding the Merger under the Competition Act (Canada) with the Canadian Commissioner of Competition on June 1, 2007 and received an ARC on June 7, 2007. We filed a notification under the German Act against Restraints of Competition, as amended with the German Federal Cartel Office on June 14, 2007. The waiting period under the German Competition Act expired on July 14, 2007. Parent filed the required notices with the Office of the Comptroller of the Currency on June 28, 2007. Parent also filed the required notices with the Federal Deposit Insurance Corporation and the Utah Department of Financial Institutions, in each case on July 2, 2007.
Year in Review Highlights
Our nine months ended September 30, 2007 results included the following new and renewed agreements with significant clients and continued selective execution of our acquisition strategy:
In February 2007, we announced the signing of a multi-year agreement with Newfoundland and Labrador Liquor Corporation to participate as a sponsor in our Canadian AIR MILES Reward Program.
In February 2007, we announced the signing of a multi-year agreement with Redcats USA to provide integrated credit and marketing services including co-brand credit card services to supplement Redcats USA’s existing private label credit card programs as well as providing co-brand credit card services for a new Redcats USA client, The Sportsman’s Guide.
In February 2007, we completed the acquisition of Abacus, a division of DoubleClick Inc. and a leading provider of data, data management and analytical services for the retail and catalog industry, as well as other sectors.
In March 2007, we announced the signing of a multi-year agreement with Pinellas County Utilities, a municipal water utility providing water and wastewater services to more than 110,000 residential and
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commercial accounts, to implement a new customer information system and provide ongoing services, including application management and hosting, as well as bill print and mail services.
In April 2007, we announced the signing of a multi-year agreement with Orchard Supply Hardware LLC, a regional home-improvement retailer, to provide commercial and consumer private label credit card services.
In April 2007, we announced the signing of a multi-year renewal agreement with Goodyear Canada, a leading tire company, to continue as a sponsor in our Canadian AIR MILES Reward Program.
In May 2007, we announced the signing of a multi-year renewal with Truckee Meadows Water Authority, a municipal water utility providing water to more than 92,000 residential and commercial accounts, representing 330,000 end-use residential and commercial customers, to provide a full customer care solution, including customer information systems application hosting and management, call center operations, online customer care, bill print and mail, remittance processing and collection services.
In May 2007, we announced the signing of a multi-year agreement with Gardner-White, a top 100 U.S. multi-channel furniture retailer of high-quality, affordable home furnishings, to provide private label credit card services.
In June 2007, we announced the signing of a multi-year agreement with Roins Financial Services Limited, a leading insurance company, in which its affiliates Royal & SunAlliance and Johnson Inc. will become national sponsors in our Canadian AIR MILES Reward Program.
In June 2007, we announced the signing of a multi-year renewal agreement with A&P Canada, a leading grocer, to continue as a sponsor in our Canadian AIR MILES Reward Program.
In June 2007, we announced the signing of a multi-year agreement with Fortunoff, a leading retailer of fine jewelry, home furnishings and seasonal items, to provide integrated credit and marketing services including co-brand credit card services to supplement their existing private label credit card program.
In July 2007, we announced the signing of a multi-year renewal agreement with Forzani Group Ltd., Canada’s largest national sporting goods retailer, to continue as a sponsor in our Canadian AIR MILES Reward Program. Collectors may earn points at four of Forzani’s brands including Sport Chek, Coast Mountain Sports, Sports Experts and Hockey Experts.
In August 2007, we announced the signing of a multi-year renewal agreement with the Katz Group Canada Ltd., a leading retail pharmacy network in Canada, to continue the relationship of its Rexall/Pharma Plus pharmacies as a sponsor in our Canadian AIR MILES Reward Program.
In September 2007, we announced the signing of a multi-year agreement with Williams-Sonoma, Inc. to launch a private label credit card program for West Elm, a modern, high-quality furniture and home accessories retailer, and to continue providing private label credit card services for the Pottery Barn brands.
In September 2007, we announced the signing of a multi-year agreement with Tesco Stores Limited to provide permission-based email marketing solutions and services to Tesco.com. Tesco Stores Limited is a leading retailer in the United Kingdom, and has operations in Europe, North America and Asia.
In September 2007, we announced the signing of a multi-year agreement with the RONA, a Canadian distributor and retailer of hardware, home renovation and gardening products, to expand its relationship as a sponsor in our Canadian AIR MILES Reward Program.
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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, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in our 10-K for the fiscal year ended December 31, 2006, except as follows:
We account for uncertain tax positions in accordance with FIN No. 48. The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding, income tax laws and regulations can change over time. As such, changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 10 to the unaudited condensed consolidated financial statements, “Income Taxes” included in this report, for additional detail on our tax positions.
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, amortization of purchased intangibles, and merger costs. Operating EBITDA is a non—GAAP financial measure equal to adjusted EBITDA plus the change in deferred revenue plus the change in redemption settlement assets. We have presented operating EBITDA because we use the financial measure to monitor compliance with financial covenants in our credit facilities and our senior note agreements. For the nine months ended September 30, 2007, senior debt-to-operating EBITDA was 1.4x compared to a maximum ratio of 2.75x permitted in our credit facilities and in our senior note agreements. Operating EBITDA to interest expense was 9.6x compared to a minimum ratio of 3.5x permitted in our credit facilities and 3.0x permitted in our senior note agreements. As discussed in more detail in the liquidity section of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our credit facilities and cash flows from operations have historically been the two main sources of funding for our acquisition strategy and for our future working capital needs and capital expenditures. As of September 30, 2007, we had borrowings of $484.0 million outstanding under the credit facilities, $500.0 million under our senior notes, and had $354.0 million in unused borrowing capacity. We were in compliance with our covenants at September 30, 2007, and we expect to be in compliance with these covenants during the year ended December 31, 2007.
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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 Quarterly Report on 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.
Merger and other costs
Adjusted EBITDA
Operating EBITDA
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Results of Operations
Three months ended September 30, 2007 compared to the three months ended September 30, 2006
Revenue:
Marketing Services
Credit Services
Transaction Services
Other/Eliminations
Adjusted EBITDA:
Stock compensation expense:
Depreciation and amortization:
Operating expenses(1):
Operating income:
Adjusted EBITDA margin(2):
Segment operating data:
Statements generated
Credit sales
Average managed receivables
AIR MILES reward miles issued
AIR MILES reward miles redeemed
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Revenue. Total revenue increased $68.9 million, or 13.6%, to $575.5 million for the three months ended September 30, 2007 from $506.6 million for the comparable period in 2006. The increase was due to a 24.8% increase in Marketing Services revenue and an 11.6% increase in Credit Services revenue, offset by a 2.8% decrease in Transaction Services revenue as follows:
Marketing Services. Revenue increased $54.3 million, or 24.8%, due to a combination of strong organic growth and acquisitions completed over the past twelve months. AIR MILES Reward Program growth was driven primarily by an increase in redemption revenue of $13.9 million related to a 6.4% increase in the redemption of AIR MILES reward miles. Issuance revenue increased $5.4 million primarily due to growth in issuances of AIR MILES reward miles in recent years from the roll-out of major national programs, combined with overall firm pricing and expanded commitments from existing sponsors. Within our revenue increase, changes in the exchange rate of the Canadian dollar had a $9.5 million positive impact on revenue for the AIR MILES Reward Program. Database and direct marketing fees revenue increased approximately $34.3 million primarily due to the acquisition of Abacus as well as organic growth within Epsilon’s database marketing services division, but was offset by declines in Epsilon’s strategic marketing and consulting services division from lower volumes and a reduction of services provided to one of our clients.
Credit Services. Revenue increased $21.1 million, or 11.6%, primarily due to a 15.1% increase in securitization income and finance charges, net. Securitization income and finance charges, net increased $21.5 million, which includes an increase related to the valuation of the interest only strip of $16.1 million. The increase was primarily as a result of an 8.3% increase in our average managed receivables, an increase in collected yield and a nominal improvement in the cost of funds. In addition, we had a decrease in merchant discount fees primarily as a result of a change in mix of fees received from merchants compared to fees received from cardholders.
Transaction Services. Revenue decreased $5.4 million, or 2.8%, primarily as a result of attrition in the merchant services business as well as pricing concessions and a decline in consulting services provided by the utility services business.
Operating Expenses.For purposes of the discussion below, total operating expenses excludes stock compensation expense, depreciation expense, amortization expense, impairment charges, merger and other costs. Total operating expenses increased $28.9 million, or 7.7%, to $402.7 million during the three months ended September 30, 2007 from $373.8 million during the comparable period in 2006. Total adjusted EBITDA margin increased to 30.0% for the three months ended September 30, 2007 from 26.2% for the comparable period in 2006 due to increased adjusted EBITDA margins across Marketing Services and Credit Services and offset by a decline in adjusted EBITDA margin for Transaction Services.
Marketing Services. Operating expenses, as defined, increased $30.7 million, or 17.7%, to $204.2 million for the three months ended September 30, 2007 from $173.5 million for the comparable period in 2006, and adjusted EBITDA margin increased to 25.2% for the three months ended September 30, 2007 compared to 20.6% for the same period in 2006. Increases in operating expenses were primarily attributable to the acquisition of Abacus, and higher volume-driven redemption costs in our AIR MILES Reward Program. Changes in the exchange rate of the Canadian dollar had a $7.1 million impact on operating expenses for the AIR MILES Reward Program. The increase in adjusted EBITDA margin was due to the growth of the AIR MILES business and the impact of the Abacus acquisition.
Credit Services. Operating expenses, as defined, increased $1.1 million, or 0.9%, to $121.4 million for the three months ended September 30, 2007 from $120.3 million for the comparable period in 2006, and adjusted EBITDA margin increased to 40.0% for the three months ended September 30, 2007 from 33.7% for the same period in 2006. The increase in adjusted EBITDA margin is the result of growth in our average managed receivables and an increase in collected yield. The adjusted EBITDA margins also benefited from increased staffing levels in our call centers and customer relationship areas since those costs were borne by the Transaction Services segment.
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Transaction Services. Operating expenses, as defined, decreased $1.9 million, or 1.1%, to $167.1 million for the three months ended September 30, 2007 from $168.9 million for the comparable period in 2006, and adjusted EBITDA margin decreased to 12.1% for the three months ended September 30, 2007 from 13.6% during the comparable period in 2006. Operating expenses decreased due to lower revenue volume in utility services and merchant services and reduced corporate overhead offset in part by higher expenses in our private label retail services business for increased staffing levels in our call centers and customer relationship areas. Adjusted EBITDA margin decreased primarily due to the incremental private label business expenses.
Stock compensation expense. Stock compensation expense increased $5.8 million, or 50.1 %, to $17.4 million for the three months ended September 30, 2007 from $11.6 million for the comparable period in 2006. The increase in expense was primarily the result of $5.6 million in additional compensation due to the acceleration of certain equity based awards and incremental expenses associated with additional issuances of restricted stock.
Depreciation and Amortization. Depreciation and amortization increased $11.0 million, or 34.3%, to $43.0 million for the three months ended September 30, 2007 from $32.0 million for the comparable period in 2006 primarily due to a $6.1 million increase in the amortization of purchased intangibles related to recent acquisitions and an increase of $4.9 million in depreciation and other amortization which has also been impacted by recent acquisitions and capital expenditures.
Merger and other costs. In the second quarter of 2007, we entered into the Merger Agreement with an affiliate of The Blackstone Group which we expect to close in the fourth quarter of 2007. Costs associated with the Merger were approximately $2.1 million for the three months ended September 30, 2007 and include investment banking, legal and accounting costs. In addition, we incurred $3.9 million in compensation charges related to certain departing corporate executives.
Impairment of long-lived assets. In the third quarter of 2007, we determined that certain long-lived assets, including internally developed software, certain customer relationship assets, and other assets, had been impaired. We recognized $40.0 million as a non-cash asset write-down, with the impairment charge included in our Transaction services segment.
Operating Income. Operating income decreased $22.7 million, or 25.5%, to $66.5 million for the three months ended September 30, 2007 from $89.2 million during the comparable period in 2006. Operating income decreased due to the revenue and expense factors discussed above.
Interest Income. Interest income increased $1.3 million, or 80.4%, to $2.9 million for the three months ended September 30, 2007 from $1.6 million for the comparable period in 2006 due to higher average balances of our short term cash investments, as well as an increase in the yield earned on the short term cash investments.
Interest Expense. Interest expense increased $8.5 million, or 69.1%, to $20.7 million for the three months ended September 30, 2007 from $12.3 million for the comparable period in 2006. Core debt interest expense increased $7.8 million primarily as a result of additional borrowings to fund recent acquisitions and our stock repurchase program. Interest on our certificates of deposit remained relatively flat.
Taxes. Income tax expense decreased $10.3 million to $19.5 million for the three months ended September 30, 2007 from $29.8 million for the comparable period in 2006 due to a decrease in taxable income. Our effective tax rate increased to 40.1% for the three months ended September 30, 2007 as compared to 37.9% for the comparable period in 2006, primarily due to a decrease in taxable income in certain jurisdictions and changes in legislation enacted in various states.
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Nine months ended September 30, 2007 compared to the nine months ended September 30, 2006
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Revenue. Total revenue increased $214.2 million, or 14.5%, to $1,688.5 million for the nine months ended September 30, 2007 from $1,474.3 million for the comparable period in 2006. The increase was due to a 27.2% increase in Marketing Services revenue and an 11.1% increase in Credit Services revenue, offset by a 1.3% decrease in Transaction Services revenue as follows:
Marketing Services. Revenue increased $164.1 million, or 27.2%, due to a combination of strong organic growth and acquisitions completed over the past twelve months. AIR MILES Reward Program growth was driven primarily by an increase in redemption revenue of $41.5 million related to a 12.9% increase in the redemption of AIR MILES reward miles. Issuance revenue increased $11.2 million primarily related to growth in issuances of AIR MILES reward miles in recent years from the roll out of major national programs. Within our revenue increase, changes in the exchange rate of the Canadian dollar had a $10.6 million positive impact on revenue for the AIR MILES Reward Program. Database and direct marketing fees revenue increased by $106.2 million primarily related to Epsilon’ s recent acquisitions of DoubleClick Email Solutions and Abacus as well as organic growth within Epsilon’s database marketing services division, but was offset by declines in Epsilon’s strategic marketing and consulting services division from lower volumes and a reduction of services provided to one of our clients.
Credit Services. Revenue increased $61.8 million, or 11.1%, primarily due to a 14.1% increase in securitization income and finance charges, net. Securitization income and finance charges, net increased $62.6 million, which includes an increase related to the valuation of the interest only strip of $29.9 million. The increase was primarily as a result of an 8.7% increase in our average managed receivables and an increase in collected yield. In addition, we had a decrease in merchant discount fees primarily as a result of a change in mix of fees received from merchants compared to fees received from cardholders.
Transaction Services. Revenue decreased $7.4 million, or 1.3%, as a result of attrition and pricing concessions in our merchant services business and a decline in consulting services provided by the utility services business.
Operating Expenses. For purposes of the discussion below, total operating expenses excludes stock compensation expense, depreciation expense, amortization expense, impairment charges, merger costs and other costs. Total operating expenses increased $123.9 million, or 11.5%, to $1,203.4 million during the nine months ended September 30, 2007 from $1,079.6 million during the comparable period in 2006. Adjusted EBITDA margin increased to 28.7% for the nine months ended September 30, 2007 from 26.8% for the comparable period in 2006 due to increased adjusted EBITDA margins across Marketing Services and Credit Services, offset by a decrease in adjusted EBITDA margin for Transaction Services.
Marketing Services. Operating expenses, as defined, increased $108.5 million, or 22.0%, to $602.9 million for the nine months ended September 30, 2007 from $494.4 million for the comparable period in 2006, and adjusted EBITDA margin increased to 21.5% for the nine months ended September 30, 2007 from 18.1% for the comparable period in 2006. Increases in operating expenses were primarily attributable to the acquisition of the Epsilon businesses, as discussed above. Changes in the exchange rate of the Canadian dollar had a $7.8 million impact on operating expenses for the AIR MILES Reward Program. The increase in adjusted EBITDA margin was due to the growth of the AIR MILES business and the impact of the Abacus acquisition.
Credit Services. Operating expenses, as defined, increased $8.7 million, or 2.4%, to $366.5 million for the nine months ended September 30, 2007 from $357.7 million for the comparable period in 2006, and adjusted EBITDA margin increased to 40.8% for the nine months ended September 30, 2007 from 35.8% for the comparable period in 2006. The increased adjusted EBITDA margin is the result of favorable revenue trends from an increase in our average managed receivables and an increase in collected yield. The adjusted EBITDA margin also benefited from increased staffing levels in our call centers and customer relationship areas as those costs were borne by the Transaction Services segment.
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Transaction Services. Operating expenses, as defined, increased $10.8 million, or 2.2%, to $505.7 million for the nine months ended September 30, 2007 from $494.8 million for the comparable period in 2006, and adjusted EBITDA margin decreased to 11.8% for the nine months ended September 30, 2007 from 14.8% during the comparable period in 2006. Operating expenses increased due to higher expenses in our private label retail services business for increased staffing levels in our call centers and customer relationship areas. Adjusted EBITDA margin decreased primarily due to the incremental private label business expenses.
Stock compensation expense. Stock compensation expense increased $9.9 million, or 31.5%, to $41.4 million for the nine months ended September 30, 2007 from $31.5 million for the comparable period in 2006. The increase was due in part to the true up of certain estimates, including forfeitures upon the adoption of SFAS No. 123(R) in 2006, of approximately $3.6 million, $5.6 million in additional compensation due to the acceleration of certain equity based awards and incremental expenses associated with additional issuances of restricted stock.
Depreciation and Amortization. Depreciation and amortization increased $34.1 million, or 37.3%, to $125.5 million for the nine months ended September 30, 2007 from $91.4 million for the comparable period in 2006 primarily due to a $18.7 million increase in the amortization of purchased intangibles related to recent acquisitions and an increase of $15.4 million in depreciation and other amortization related in part to recent acquisitions as well as 2006 capital expenditures.
Merger and other costs. In the second quarter of 2007, we entered into the Merger Agreement with an affiliate of The Blackstone Group which we expect to close in the fourth quarter of 2007. Costs associated with the Merger were approximately $8.3 million for the nine months ended September 30, 2007 and include investment banking, legal and accounting costs. In addition, we incurred $3.9 million in compensation charges related to certain departing corporate executives.
Operating Income. Operating income decreased $5.8 million, or 2.1%, to $266.0 million for the nine months ended September 30, 2007 from $271.8 million during the comparable period in 2006. Operating income decreased due to the revenue and expense factors discussed above.
Interest Income. Interest income increased $3.1 million, or 66.7%, to $7.8 million for the nine months ended September 30, 2007 from $4.7 million for the comparable period in 2006 due to higher average balances of our short term cash investments, as well as an increase in the yield earned on the short term cash investments.
Interest Expense. Interest expense increased $26.5 million, or 78.2%, to $60.4 million for the nine months ended September 30, 2007 from $33.9 million for the comparable period in 2006. Interest expense on core debt, which includes the credit facilities and senior notes, increased $26.5 million as a result of additional borrowings to fund our recent acquisitions and our stock repurchase program as well as an increase in interest rates from the comparable period in 2006. Interest on our certificates of deposit remained relatively flat.
Taxes. Income tax expense decreased $9.4 million to $83.2 million for the nine months ended September 30, 2007 from $92.6 million in 2006 due to a decrease in taxable income. Our effective tax rate increased to 39.0% for the nine months ended September 30, 2007 compared to 38.2% in 2006, primarily due to a decrease in taxable income in certain jurisdictions and changes in legislation enacted in various states.
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
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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 September 30, 2007, 59.0% of securitized accounts with balances and 62.2% of securitized receivables were for accounts with origination dates greater than 24 months old, as compared to 57.4% and 60.8%, respectively, at September 30, 2006.
Delinquencies. A credit card account is contractually delinquent if we do not receive the minimum payment by the specified due date on the cardholder’s statement. It is our policy to continue to accrue interest and fee income on all credit card accounts, except in limited circumstances, until the account balance and all related interest and other fees are charged off or paid beyond 90 days delinquent. When an account becomes delinquent, we print a message on the cardholder’s 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. Delinquency rates subsequent to the 2005 bankruptcy reform legislation have generally risen as it has become more difficult to file for bankruptcy protection under the law.
The following table presents the delinquency trends of our managed credit card portfolio:
%
of total
Receivables outstanding
Receivables balances contractually delinquent:
31 to 60 days
61 to 90 days
91 or more days
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 represent the average balance of the cardholder receivables at the beginning of each month in the period indicated.
Net charge-offs
Net charge-offs as a percentage of average managed receivables (annualized)
The net charge-off rate during 2006 was impacted by abnormally low credit losses resulting from the enactment of bankruptcy reform legislation during the fourth quarter of 2005. Although we continue to benefit
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from the impact of the legislation in our 2007 results, the impact is significantly less than in 2006. Credit losses through September 30, 2007 have remained under the Company’s 6 percent target. Based on favorable delinquency trends, the Company expects credit quality to remain stable for the foreseeable future.
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.
Cash provided by operating activities before changes in credit card portfolios and merchant settlement activity
Net change in credit card portfolio activity
Net change in merchant settlement activity
Cash provided by operating activities
We generated cash flow from operating activities before changes in credit card portfolios and merchant settlement activity of $334.3 million for the nine months ended September 30, 2007 as compared to $255.0 million for the comparable period in 2006. The increase in operating cash flows before changes in merchant settlement and credit card portfolio activity is related to an increase in net income as adjusted for non-cash charges, for the nine months ended September 30, 2007. 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 used in investing activities was $520.8 million for the nine months ended September 30, 2007 compared to $202.0 million for the comparable period in 2006. Significant components of investing activities are as follows:
Acquisitions. Cash outlays, net of cash received, for acquisitions for the nine months ended September 30, 2007 was $438.2 million compared to $133.1 million for the comparable period in 2006. In 2007, the cash outlay relates primarily to the acquisition of Abacus. In 2006, the cash outlay primarily relates to the acquisition of ICOM and DoubleClick Email Solutions.
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 September 30, 2007, we had over $3.5 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 and on-balance sheet credit card activity was $21.3 million for the nine months ended September 30, 2007 and $20.1 million for the comparable period in 2006. We intend to utilize our securitization program for the foreseeable future.
Capital Expenditures. Our capital expenditures for the nine months ended September 30, 2007 were $78.7 million compared to $72.2 million for the comparable period in 2006. We anticipate capital expenditures to be approximately 5% of annual revenue for the foreseeable future.
Financing Activities. Cash provided by financing activities was $182.2 million for the nine months ended September 30, 2007 compared to cash used of $151.4 million in the comparable period in 2006. Our financing
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activities during the nine months ended September 30, 2007 relate primarily to borrowings and repayments of debt, the repurchase of 1,805,800 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 working capital needs, capital expenditures, and other business requirements excluding the Merger for at least the next 12 months. If the Merger is consummated, we expect it will have a significant impact on liquidity and capital resources. Parent and Merger Sub have obtained equity and debt financing commitments for the transactions contemplated by the Merger Agreement, the proceeds of which, together with the available cash, will be sufficient for Parent and Merger Sub to pay the aggregate merger consideration and all related fees and expenses of the transactions contemplated by the Merger Agreement.
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.
As of September 30, 2007, the WFN Trusts had over $3.5 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.
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 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 5.4% to 5.7%. As of September 30, 2007, we had $312.0 million of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.
Credit Facilities. On January 24, 2007, we entered into a credit facility that provides for loans in a maximum amount of $400.0 million, or the bridge loan. At the closing of the bridge loan, we borrowed $300.0 million for general corporate purposes including the repayment of debt and the financing of permitted acquisitions. The bridge loan includes an uncommitted accordion feature of up to $100.0 million allowing for future borrowings, subject to certain conditions. On July 6, 2007, we amended the bridge loan to extend the maturity date from July 24, 2007 to December 31, 2007.
In March 2007, we amended our Credit Agreement dated September 29, 2006. The amendment extended the lending commitments under the agreement which were scheduled to terminate on September 29, 2011 to March 30, 2012. In addition, the amendment adjusts the Senior Leverage Ratio applicable to the various levels set forth in the agreement and the margin applicable to Eurodollar loans. After giving effect to the amendment,
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the interest rate for Eurodollar loans denominated in U.S. or Canadian Dollars fluctuates based on the rate at which deposits of U.S. Dollars or Canadian Dollars, respectively, in the London interbank market are quoted plus a margin of 0.4% to 0.8% based upon the Senior Leverage Ratio as defined in the agreement. We paid an amendment fee equal to 0.05% of each bank’s commitment under the agreement.
At September 30, 2007, we had borrowings of $484.0 million outstanding under our credit facilities (with a weighted average interest rate of 5.9%), $2.0 million in letters of credit outstanding, and we had available unused borrowing capacity of approximately $354.0 million. These credit facilities limit our aggregate outstanding letters of credit to $50.0 million. Additional details regarding our credit facilities are set forth in Note 7 to our unaudited condensed consolidated financial statements, “Debt”, under the caption “Credit Facility and Bridge Loan.” We were in compliance with the covenants under our credit facilities at September 30, 2007.
On October 22, 2007, we amended the note purchase agreement governing our senior notes to provide for a mandatory prepayment upon the closing of the Merger and we plan to pay off and terminate each of our credit facilities upon the closing of the Merger, each as described in Note 2.
We utilize our credit facilities and excess cash flows from operations to support our acquisition strategy and to fund working capital and capital expenditures. However, we will incur significant indebtedness in order to complete the Merger and our future financing needs will be materially impacted by the Merger. Future indebtedness may impose various restrictions and covenants on us that could limit our ability to respond to market conditions or take advantage of business opportunities. Following the Merger, our ability to fund working capital, capital expenditures, debt service, strategic acquisitions, and other investments will depend on our ability to generate cash flows from operations, which is subject to general economic, financial, competitive, regulatory and other factors that are not within our control.
Recent Accounting Pronouncements
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 establishes a new definition of fair value as well as a fair value hierarchy that prioritizes the information used to develop the assumptions, and requires new disclosures of assets and liabilities measured at fair value based on their level in the hierarchy. The standard is effective for fiscal years beginning after November 15, 2007. We are currently in the process of evaluating the effect that the adoption of SFAS No. 157 will have on our consolidated financial position, results of operations and cash flows.
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “Establishing the Fair Value Option for Financial Assets and Liabilities” (“SFAS No. 159”), to permit all entities to choose to elect to measure eligible financial instruments at fair value. SFAS No. 159 applies to fiscal years beginning after November 15, 2007, with early adoption permitted for an entity that has also elected to apply the provisions of SFAS No. 157. An entity is prohibited from retrospectively applying SFAS No. 159, unless it chooses early adoption. We are currently in the process of evaluating the effect that the adoption of SFAS No. 159 will have on our consolidated financial position, results of operations and cash flows.
Market Risk
There has been no material change from our Annual Report on Form 10-K for the year ended December 31, 2006 related to our exposure to market risk from off-balance sheet risk, interest rate risk, credit risk, foreign currency exchange risk and redemption reward risk.
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Evaluation
As of September 30, 2007, 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 September 30, 2007, 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 SEC’s 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, 2006 did not include the internal controls of ICOM, DoubleClick Email Solutions, CPC or Abacus because of the timing of these acquisitions, which were completed in February 2006, April 2006, October 2006, and February 2007, respectively. As of December 31, 2006, these entities constituted $254.5 million of total assets, $96.4 million of revenues and $6.5 million of net income for the year then ended.
During the third quarter of 2007, we completed the process of converting Abacus’ legacy general ledger platform to the platform utilized by the majority of our business units. There have been no other 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 management’s beliefs and assumptions, using information currently available to us. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these forward-looking statements are subject to risks, uncertainties and assumptions, including those discussed in this report, the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2006, and in Item 1A in each of our Quarterly Reports on Form 10-Q for each quarterly period subsequent to our most recent Form 10-K.
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.
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PART II
We are aware of litigation arising from what were originally four lawsuits filed against the Company and its directors in connection with the Merger. On May 18, 2007, Sherryl Halpern filed a putative class action (cause no. 07-04689) on behalf of Company stockholders in the 68th Judicial District of Dallas County, Texas against the Company, all of its directors and Blackstone (the “Halpern Petition”). On May 21, 2007, Levy Investments, Ltd. (“Levy”) filed a purported derivative lawsuit (cause no. 219-01742-07) on behalf of the Company in the 219th Judicial District of Collin County, Texas against all of the Company’s directors and Blackstone (the “Levy Petition”) (this suit was subsequently transferred to the 296th Judicial District of Collin County, Texas and assumed the cause no. 296-01742-07). On May 29, 2007, Linda Levine filed a putative class action (cause no. 07-05009) on behalf of Company stockholders in the 192nd Judicial District of Dallas County, Texas against the Company and all of its directors (the “Levine Petition”). On May 31, 2007, the J&V Charitable Remainder Trust filed a putative class action (cause no. 07-05127-F) on behalf of Company stockholders in the 116th Judicial District of Dallas County, Texas against the Company, all of its directors and Blackstone (the “J&V Petition”).
The three putative class actions were consolidated in the 68th Judicial District Court of Dallas County, Texas under the caption In re Alliance Data Corp. Class Action Litigation, No. 07-04689. On July 16, 2007, a consolidated class action petition was filed seeking a declaration that the action was a proper class action, an order preliminarily and permanently enjoining the Merger, a declaration that the director defendants breached their fiduciary duties and an award of fees, expenses and costs. The Company and its directors filed general denials in response to the putative class actions.
The derivative action filed by Levy was voluntarily dismissed and refiled in Dallas County (cause no. 07-06794), and was subsequently transferred to the 68th Judicial District Court. On July 18, 2007, Levy filed an amended derivative petition seeking an injunction preventing consummation of the Merger, an order directing the director defendants to exercise their fiduciary duties to obtain a transaction beneficial to the Company and its stockholders, a declaration that the Merger Agreement was entered into in breach of the director defendants’ fiduciary duties and is unlawful and unenforceable, an order rescinding the Merger Agreement, the imposition of a constructive trust upon any benefits improperly received by the director defendants and an award of costs and disbursements, including reasonable attorneys’ and experts’ fees. On July 24, 2007, the Company and its directors filed their Motion to Abate, Plea to the Jurisdiction and Special Exceptions to the derivative action.
On July 12, 2007, class plaintiffs filed a motion to enjoin the scheduled August 8, 2007 special meeting of stockholders at which stockholders would be asked to vote to adopt the Merger Agreement. On July 20, 2007, Levy filed a motion reflecting its similar demand. On July 27, 2007, the Company and its directors filed an opposition brief to both motions. The Company continued to deny all of the allegations in the consolidated class action petition and the amended derivative petition, contended that the asserted claims were baseless and strongly believed that its disclosures in the Company’s definitive proxy statement filed with the SEC on July 5, 2007 were appropriate and adequate under applicable law. Nevertheless, in order to lessen the risk of any delay of the closing of the Merger as a result of the litigation, the Company made available to its stockholders certain additional information in connection with the Merger, which was filed with the SEC on July 27, 2007 and subsequently mailed to stockholders on or about July 28, 2007 (the “Proxy Supplement”). Class action and derivative plaintiffs subsequently withdrew their motions to enjoin the August 8, 2007 special meeting of stockholders.
Subsequently, on August 7, 2007, Levy filed an Application for Attorneys’ Fees, stating that the substantive issues in the case had been resolved and seeking $750,000 in attorney’s fees. Levy alleges that its lawsuit caused the Company to issue the Proxy Supplement, which, Levy contends, contained material disclosures critical to the stockholders’ assessment of the fairness of the Merger. The fee application was originally set for hearing on September 17, 2007, but was continued at Levy’s request and has been rescheduled for November 15, 2007. The Company and its directors filed their opposition to Levy’s application on Friday, October 12, 2007 (and an amended opposition on Tuesday, October 16, correcting a printing error). Levy filed a Second Amended Petition
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and Amended Application for Attorney’s Fees on October 25, 2007, purporting to replace Levy Investments with Yona Levy as plaintiff. The Company and its directors filed a Motion to Strike and Plea to the Jurisdiction on November 2 asking the court to strike the October 25 pleadings and dismiss Levy’s lawsuit which is scheduled to be heard on November 15, 2007.
On August 14, 2007, class plaintiffs filed a Second Amended Petition, in which they withdrew all prior claims but added a claim for an equitable award of attorney’s fees. Similar to Levy, class plaintiffs allege that their lawsuits caused the Company to issue the Proxy Supplement, and that the supplement constitutes a benefit to the Company, its directors and stockholders, for which class plaintiffs’ attorneys should be compensated. The Company and its directors filed Special Exceptions challenging class plaintiffs’ entitlement to attorney’s fees on Friday, October 12, 2007 which is scheduled to be heard on November 15, 2007. The Court has scheduled a hearing on November 12, 2007 to consider a dismissal for want of prosecution.
The Company denies that class plaintiffs are entitled to legal fees under applicable law. The Company also denies that Levy is entitled to attorney’s fees and denies that Levy had standing to bring a derivative lawsuit. The Company contends that the disclosures in the definitive proxy were appropriate and adequate, and that the Company made the Proxy Supplement available to stockholders solely to lessen the risk of any delay of the closing of the Merger as a result of the litigation. The Company denies that the Proxy Supplement contained any material disclosures or constituted any benefit to the Company, its directors or its stockholders.
In addition, form 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 our contractual obligations.
There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2006 and our Quarterly Report on Form 10-Q for the period ended June 30, 2007.
During 2005 and 2006 our Board of Directors authorized three stock repurchase programs to acquire up to an aggregate of $900.0 million of our outstanding common stock through December 2008, as more fully described in the footnote to the table below. As of September 30, 2007, we had repurchased 8,605,552 shares of our common stock for approximately $403.3 million under these programs. The following table presents information with respect to those purchases of our common stock made during the three months ended September 30, 2007:
Period
Total Number
of Shares
Purchased(1)
Average Price
Paid per Share
Total Number of
Shares Purchased asPart of Publicly Announced
Plans or Programs
Approximate Dollar Value of
Shares that May Yet Be
Purchased
Under the Plans or
Programs(2)(3)
During 2007:
July
August
September
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On August 8, 2007, our stockholders, voting at a special meeting of the Company’s stockholders (“Special Meeting”), adopted the Agreement and Plan of Merger, dated as of May 17, 2007, by and among Aladdin Holdco, Inc., Aladdin Merger Sub, Inc. and the Company.
A total of 59,975,594 of our shares of common stock were present or represented by proxy at the Special Meeting, representing approximately 76% of our shares outstanding as of July 2, 2007, the record date set for the Special Meeting. The results of the tabulation of the votes cast at the Special Meeting are as follows:
Proposal 1. To adopt the Agreement and Plan of Merger, dated as of May 17, 2007, among Alliance Data Systems Corporation, Aladdin Holdco, Inc. and Aladdin Merger Sub, Inc., as may be amended from time to time.
For:
Against:
Abstain:
Proposal 2. If necessary or appropriate, to adopt a proposal to adjourn the special meeting to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the Merger Agreement.
(a) None.
(b) None
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(a) Exhibits:
EXHIBIT INDEX
Description
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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.
/s/ EDWARD J. HEFFERNAN
Edward J. Heffernan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ MICHAEL D. KUBIC
Michael D. Kubic
Senior Vice President and Corporate Controller
(Principal Accounting Officer)
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