SECURITIES AND EXCHANGE COMMISSION CORPORATION (State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.) Large accelerated filer Cash and cash equivalents Trade receivables, less allowance for doubtful accounts ($5,256 and $6,736 at September 30, 2010 and December 31, 2009, respectively) Seller’s interest Credit card receivables: Credit card receivables—restricted for securitization investors Other credit card receivables Total credit card receivables Allowance for loan loss Credit card receivables, net Deferred tax asset, net Other current assets Redemption settlement assets, restricted Assets of discontinued operations Total current assets Property and equipment, net Due from securitizations Cash collateral, restricted Intangible assets, net Goodwill Other non-current assets Total assets Accounts payable Accrued expenses Certificates of deposit Asset-backed securities debt—owed to securitization investors Current debt Other current liabilities Deferred revenue Total current liabilities Deferred revenue Deferred tax liability, net Certificates of deposit Asset-backed securities debt—owed to securitization investors Long-term and other debt Other liabilities Total liabilities Stockholders’ equity: Common stock, $0.01 par value; authorized 200,000 shares; issued 92,746 shares and 91,121 shares at September 30, 2010 and December 31, 2009, respectively Additional paid-in capital Treasury stock, at cost (40,277 and 38,922 shares at September 30, 2010 and December 31, 2009, respectively) Retained earnings Accumulated other comprehensive loss Total stockholders’ equity Total liabilities and stockholders’ equity Revenues Transaction Redemption Securitization income Finance charges, net Database marketing fees and direct marketing services Other revenue Total revenue Operating expenses Cost of operations General and administrative Provision for loan loss Depreciation and other amortization Amortization of purchased intangibles Merger costs (reimbursements) Total operating expenses Operating income Interest expense: Securitization funding costs Interest expense on certificates of deposit Interest expense on long-term and other debt, net Total interest expense, net Income from continuing operations before income taxes Provision for income taxes Income from continuing operations Income (loss) from discontinued operations, net of taxes Net income Basic income (loss) per share: Income from continuing operations Income (loss) from discontinued operations Net income per share Diluted income (loss) per share: Income from continuing operations Income (loss) from discontinued operations Net income per share Weighted average shares: Basic Diluted CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization Deferred income taxes Provision for loan loss Non-cash stock compensation Fair value loss on interest-only strip Fair value loss on interest rate derivatives Amortization of discount on convertible senior notes Loss on the sale of assets 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 Proceeds from the sale of credit card receivable portfolios to the securitization trusts Excess tax benefits from stock-based compensation Other Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Change in redemption settlement assets Change in seller’s interest Change in credit card receivables Change in cash collateral, restricted Change in restricted cash Change in due from securitizations Capital expenditures Payments for acquired businesses, net of cash Proceeds from the sale of assets Other Net cash provided by (used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under debt agreements Repayment of borrowings Proceeds from issuance of convertible senior notes due 2014 Issuances of certificates of deposit Repayments of certificates of deposit Proceeds from asset-backed securities Maturities of asset-backed securities Payment of capital lease obligations Payment of deferred financing costs Excess tax benefits from stock-based compensation Proceeds from issuance of common stock Proceeds from issuance of warrants Payments for convertible note hedges Payments for prepaid forward contracts Purchase of treasury shares Net cash (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Change in cash and cash equivalents Cash effect on adoption of ASC 860 and ASC 810 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 February 28, 2011. With respect to information concerning principal geographic areas, revenues are attributed to respective countries based on the location of the subsidiary, which generally correlates with the location of the customer. ASU 2010-20 also requires enhanced disclosures for troubled debt restructurings (“TDR”), but the effective date of these disclosures was deferred. Numerator Income from continuing operations Income (loss) from discontinued operations, net of taxes Net income Denominator Weighted average shares, basic Weighted average effect of dilutive securities: Shares from assumed conversion of convertible senior notes Net effect of dilutive stock options and unvested restricted stock Denominator for diluted calculation Basic Income from continuing operations per share Income (loss) from discontinued operations per share Net income per share Diluted Income from continuing operations per share Income (loss) from discontinued operations per share Net income per share Other current assets Property and equipment Capitalized software Identifiable intangible assets Goodwill Non-current assets Total assets acquired Current liabilities Total liabilities assumed Net assets acquired Principal receivables Billed and accrued finance charges Other receivables Total credit card receivables Less credit card receivables—restricted for securitization investors Other credit card receivables Principal amount of credit card receivables 90 days or more past due delinquencies is presented in the table below: Balance at beginning of period Adoption of ASC 860 and ASC 810 Provision for loan loss Principal charge-offs, net of recoveries Balance at end of period life of an account. The following table reflects composition by obligor credit quality as of March 31, 2011: These fees are eliminated and therefore are not reflected in the unaudited condensed consolidated statements of income for the three months ended March 31, 2011 and 2010. Total credit card receivables—restricted for securitization investors Principal amount of credit card receivables—restricted for securitization investors, 90 days or more past due Net charge-offs of securitized principal Proceeds from collections reinvested in previous credit card securitizations Proceeds from new securitizations Proceeds from collections reinvested in revolving period transfers Servicing fees received(1) Cash and cash equivalents Government bonds Corporate bonds(1) Total Government bonds Corporate bonds Total Corporate bonds Total and extent to which fair value has been below cost basis, the financial condition of the security’s issuer, and the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the ability to hold the investments until maturity. As of Due in one year or less Due after one year through five years Total Finite Lived Assets Customer contracts and lists Premium on purchased credit card portfolios Collector database Customer database Noncompete agreements Tradenames Purchased data lists Indefinite Lived Assets Tradenames Total intangible assets Finite Lived Assets Customer contracts and lists Premium on purchased credit card portfolios Collector database Customer database Noncompete agreements Tradenames Purchased data lists Indefinite Lived Assets Tradenames Total intangible assets 7.0 years. December 31, 2009 Effects of foreign currency translation Goodwill acquired during the year September 30, 2010 Description Long-term and other debt: Credit facility Senior notes 2009 Term loan 2010 Term loan Convertible senior notes due 2013 Convertible senior notes due 2014 Capital lease obligations and other debt Less: current portion Long-term portion Certificates of deposit: Certificates of deposit Less: current portion Long-term portion Asset-backed securities debt—owed to securitization investors:(5) Fixed rate asset-backed term note securities Floating rate asset-backed term note securities Conduit asset-backed securities Total asset-backed securities—owed to securitization investors Less: current portion Long-term portion Interest rates include those for certain of the Company’s asset-backed securities – owed to securitization investors where floating rate debt is fixed through interest rate swap agreements. The interest rate for the floating rate debt is equal to the London Interbank Offered Rate (“LIBOR”) as defined in the respective agreements plus a margin of 0.1% to 2.5% as defined in the respective agreements. The weighted average interest rate of the fixed rate achieved through interest rate swap agreements is 4.16% at March 31, 2011. Advances under the term loan agreement, dated May 15, 2009 (the “2009 Term 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 highest of (a) Bank of Montreal’s prime rate; (b) the Federal funds rate plus 0.5%; and (c) LIBOR as defined in the 2009 Term Loan agreement plus 1.0%, in each case plus a margin of 2.0% to 3.0% based upon the Company’s senior leverage ratio as defined in the 2009 Term Loan agreement. The interest rate Advances under the term loan agreement, dated August 6, 2010 (the “2010 Term 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 highest of (a) Bank of Montreal’s prime rate; (b) the Federal funds rate plus 0.5%; and (c) The Company has other minor borrowings, primarily capital leases, with varying interest rates and maturities. Carrying amount of equity component Principal amount of liability component Unamortized discount Net carrying value of liability component If-converted value of common stock Interest expense calculated on contractual interest rate Amortization of discount on liability component Total interest expense on convertible senior notes Effective interest rate (annualized) Interest rate contracts not designated as hedging instruments Interest rate contracts not designated as hedging instruments Interest rate contracts not designated as hedging instruments For the three months ended September 30, 2010 Interest rate contracts not designated as hedging instruments For the nine months ended September 30, 2010 Interest rate contracts not designated as hedging instruments December 31, 2009 Cash proceeds Revenue recognized Other Effects of foreign currency translation September 30, 2010 Amounts recognized in the unaudited condensed consolidated balance sheets: Current liabilities Non-current liabilities Program Cost of operations General and administrative Total Net income Adoption of ASC 860 and ASC 810(1) Unrealized loss on securities available-for-sale Foreign currency translation adjustments(2) Total comprehensive income, net of tax These amounts related to Primarily related to the impact of changes in the Canadian currency exchange rate. Financial assets Cash and cash equivalents Trade receivables, net Seller’s interest Credit card receivables, net Redemption settlement assets, restricted Due from securitizations Cash collateral, restricted Financial liabilities Accounts payable Asset-backed securities debt—owed to securitization investors Debt, including certificates of deposit Derivative financial instruments herein:(Mark One)þ(Mark One)R QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2010March 31, 2011OR¨OR £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period fromto Delaware 31-1429215 Delaware31-1429215þR No ¨£þR No ¨£þR ¨£¨£ (Do not check if a smaller reporting company) ¨£¨£ No þRNovember 3, 2010, 51,995,538April 29, 2011, 51,022,398 shares of common stock were outstanding.PageNumberPart I: FINANCIAL INFORMATION Item 1. 3 3 34 45 56 Item 2. 3024 Item 3. 5033 Item 4. 34 50Part II: OTHER INFORMATION Part II: OTHER INFORMATION Item 1. 5235 Item 1A. 5235 Item 2. 5235 Item 3. 5235 Item 4. 5235 Item 5. 5235 Item 6. 5336 5538 September 30,
2010 December 31,
2009 (In thousands) ASSETS $ 391,226 $ 213,378 234,570 225,212 — 297,108 4,406,664 — 539,227 671,182 4,945,891 671,182 (514,296 ) (54,884 ) 4,431,595 616,298 340,208 197,455 112,437 201,427 495,499 574,004 18,028 34,623 6,023,563 2,359,505 162,758 165,012 — 775,570 205,359 216,953 332,033 316,597 1,214,569 1,166,275 192,214 225,755 $ 8,130,496 $ 5,225,667 LIABILITIES AND STOCKHOLDERS’ EQUITY $ 124,040 $ 103,891 132,105 128,012 452,400 772,500 885,509 — 262,751 51,963 92,345 88,716 1,013,116 984,930 2,962,266 2,130,012 167,733 161,216 106,804 140,712 514,400 692,500 2,476,315 — 1,666,881 1,730,389 190,330 98,062 8,084,729 4,952,891 927 911 1,302,604 1,235,669 (2,007,844 ) (1,931,102 ) 769,014 1,033,039 (18,934 ) (65,741 ) 45,767 272,776 $ 8,130,496 $ 5,225,667 (In thousands) ASSETS Cash and cash equivalents $ 300,362 $ 139,114 Trade receivables, less allowance for doubtful accounts ($3,731 and $4,350 at March 31, 2011 and December 31, 2010, respectively) 228,270 260,945 Credit card receivables: Credit card receivables – restricted for securitization investors 4,287,821 4,795,753 Other credit card receivables 576,739 560,670 Total credit card receivables 4,864,560 5,356,423 Allowance for loan loss (489,620 ) (518,069 ) Credit card receivables, net 4,374,940 4,838,354 Deferred tax asset, net 272,225 279,752 Other current assets 111,522 127,022 Redemption settlement assets, restricted 483,924 472,428 Assets of discontinued operations 8,721 11,920 Total current assets 5,779,964 6,129,535 Property and equipment, net 170,375 170,627 Deferred tax asset, net 47,725 46,218 Cash collateral, restricted 318,333 185,754 Intangible assets, net 302,048 314,391 Goodwill 1,228,982 1,221,823 Other non-current assets 182,023 203,804 Total assets $ 8,029,450 $ 8,272,152 LIABILITIES AND STOCKHOLDERS’ EQUITY Accounts payable $ 113,349 $ 121,856 Accrued expenses 119,965 168,578 Certificates of deposit 380,500 442,600 Asset-backed securities debt – owed to securitization investors 1,383,103 1,743,827 Current debt 1,074,372 255,679 Other current liabilities 102,409 85,179 Deferred revenue 1,053,931 1,044,469 Total current liabilities 4,227,629 3,862,188 Deferred revenue 184,405 176,773 Deferred tax liability, net 80,037 82,637 Certificates of deposit 450,200 416,500 Asset-backed securities debt – owed to securitization investors 1,916,315 1,916,315 Long-term and other debt 934,782 1,614,093 Other liabilities 185,089 180,552 Total liabilities 7,978,457 8,249,058 Commitments and contingencies (Note 16) Stockholders’ equity: Common stock, $0.01 par value; authorized, 200,000 shares; issued, 93,708 shares and 92,797 shares at March 31, 2011 and December 31, 2010, respectively 937 928 Additional paid-in capital 1,331,287 1,320,767 Treasury stock, at cost, 42,282 shares and 41,426 shares at March 31, 2011 and December 31, 2010, respectively (2,141,254 ) (2,079,819 ) Retained earnings 902,094 815,718 Accumulated other comprehensive loss (42,071 ) (34,500 ) Total stockholders’ equity 50,993 23,094 Total liabilities and stockholders’ equity $ 8,029,450 $ 8,272,152 Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands, except per share amounts) $ 68,150 $ 90,505 $ 214,092 $ 279,638 120,424 120,779 386,810 346,935 — 98,723 — 315,345 327,677 16,268 953,303 45,278 167,083 129,317 427,246 364,605 19,109 25,839 54,247 66,620 702,443 481,431 2,035,698 1,418,421 384,301 326,578 1,102,128 974,438 19,767 30,143 63,440 77,176 90,459 — 275,044 — 17,196 15,364 50,101 45,715 20,711 15,770 56,398 45,833 — 30 — (486 ) 532,434 387,885 1,547,111 1,142,676 170,009 93,546 488,587 275,745 43,026 — 128,251 — 7,317 6,616 23,519 19,800 33,776 31,947 98,903 84,157 84,119 38,563 250,673 103,957 85,890 54,983 237,914 171,788 32,831 9,666 90,881 55,035 53,059 45,317 147,033 116,753 — 479 — (13,666 ) $ 53,059 $ 45,796 $ 147,033 $ 103,087 $ 1.01 $ 0.86 $ 2.79 $ 2.05 — 0.01 — (0.24 ) $ 1.01 $ 0.87 $ 2.79 $ 1.81 $ 0.96 $ 0.82 $ 2.63 $ 2.01 — 0.01 — (0.23 ) $ 0.96 $ 0.83 $ 2.63 $ 1.78 52,584 52,841 52,743 56,946 55,218 55,136 55,820 57,959 2011 2010 (In thousands, except per share amounts) Revenues Transaction $ 76,771 $ 76,601 Redemption 149,760 138,677 Finance charges, net 342,142 306,357 Database marketing fees and direct marketing services 152,710 125,191 Other revenue 19,053 16,711 Total revenue 740,436 663,537 Operating expenses Cost of operations 404,525 361,003 Provision for loan loss 67,666 88,001 General and administrative 20,939 22,164 Depreciation and other amortization 16,754 16,325 Amortization of purchased intangibles 18,644 17,846 Total operating expenses 528,528 505,339 Operating income 211,908 158,198 Interest expense Securitization funding costs 30,986 41,619 Interest expense on certificates of deposit 5,693 7,527 Interest expense on long-term and other debt, net 34,780 33,560 Total interest expense, net 71,459 82,706 Income before income tax $ 140,449 $ 75,492 Provision for income taxes 54,073 28,838 Net income $ 86,376 $ 46,654 Basic income per share $ 1.69 $ 0.89 Diluted income per share $ 1.56 $ 0.84 Weighted average shares: Basic 51,122 52,441 Diluted 55,412 55,419 Nine Months Ended
September 30, 2010 2009 (In thousands) $ 147,033 $ 103,087 106,499 91,649 24,044 48,168 275,044 44,252 33,996 43,353 — 2,207 5,443 — 48,914 37,243 — 18,018 (20,927 ) 13,231 — (18,907 ) 36,975 (22,683 ) 33,220 (68,583 ) 9,079 (2,731 ) 13,551 (20,526 ) — 53,240 (12,713 ) (7,425 ) (6,654 ) (7,471 ) 693,504 306,122 21,964 29,744 — (21,337 ) 273,925 (221,473 ) 12,530 85,068 24,064 (64,810 ) — (158,823 ) (48,296 ) (39,706 ) (117,000 ) — — 8,013 (3,032 ) 4,399 164,155 (378,925 ) 1,205,000 2,396,000 (1,089,549 ) (2,327,926 ) — 345,000 94,000 1,100,400 (592,200 ) (609,400 ) 833,126 — (1,157,235 ) — (17,272 ) (15,718 ) (3,025 ) (21,407 ) 12,713 7,425 31,848 23,780 — 30,050 — (80,765 ) — (74,872 ) (76,742 ) (417,774 ) (759,336 ) 354,793 (2,028 ) 10,720 96,295 292,710 81,553 — 213,378 156,911 $ 391,226 $ 449,621 $ 176,335 $ 58,579 $ 26,497 $ 53,890 2011 2010 (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 86,376 $ 46,654 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 35,398 34,171 Deferred income taxes 7,782 18,272 Provision for loan loss 67,666 88,001 Non-cash stock compensation 9,084 10,606 Fair value (gain) loss on interest-rate derivatives (9,892 ) 2,181 Amortization of discount on convertible senior notes 17,695 15,861 Change in operating assets and liabilities, net of acquisitions: Change in trade accounts receivable 14,434 26,819 Change in other assets 24,539 15,200 Change in accounts payable and accrued expenses (46,160 ) (15,849 ) Change in deferred revenue (16,375 ) (15,665 ) Change in other liabilities 30,521 (7,847 ) Excess tax benefits from stock-based compensation (9,473 ) (3,763 ) Other (1,207 ) (8,088 ) Net cash provided by operating activities 210,388 206,553 CASH FLOWS FROM INVESTING ACTIVITIES: Change in redemption settlement assets 4,410 7,097 Change in restricted cash 20,180 28,245 Change in credit card receivables 432,997 397,525 Purchase of credit card receivables (42,696 ) — Change in cash collateral, restricted (132,575 ) 26,211 Capital expenditures (18,631 ) (15,428 ) Investments in the stock of an investee (5,019 ) — Other (7 ) (528 ) Net cash provided by investing activities 258,659 443,122 CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under debt agreements 202,000 346,000 Repayments of borrowings (77,318 ) (288,155 ) Issuances of certificates of deposit 75,000 31,400 Repayments of certificates of deposit (103,400 ) (346,000 ) Borrowings from asset-backed securities 174,500 100,965 Repayments/maturities of asset-backed securities (535,224 ) (557,400 ) Payment of capital lease obligations (3,013 ) (5,753 ) Payment of deferred financing costs (730 ) (121 ) Excess tax benefits from stock-based compensation 9,473 3,763 Proceeds from issuance of common stock 12,509 6,639 Purchase of treasury shares (61,435 ) (14,520 ) Net cash used in financing activities (307,638 ) (723,182 ) Effect of exchange rate changes on cash and cash equivalents (161 ) (860 ) Change in cash and cash equivalents 161,248 (74,367 ) Cash effect on adoption of ASC 860 and ASC 810 — 81,553 Cash and cash equivalent at beginning of period 139,114 213,378 Cash and cash equivalents at end of period $ 300,362 $ 220,564 SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 54,594 $ 47,655 Income taxes paid (refund), net $ 31,692 $ (2,915 ) 2009,2010, filed with the SEC on March 1, 2010.certainfraud losses of $0.9 million have been reclassified from provision for loan loss to cost of operations in the prior period amounts have been reclassifiedfinancial statements to conform to the current year presentation. See Note 2, “Change in Accounting Principle,” for informationSuch reclassifications have no impact on previously reported net income. adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing,” and ASC 810, “Consolidation.”In the first quarter of 2010, the Company reorganized its segments with Private Label Services and Private Label Credit reflected as one segment. All prior year segment information has been restated to conform to the current presentation. In addition, the Company renamed its other two segments from Epsilon Marketing Services and Loyalty Services to “Epsilon” and “LoyaltyOne,” respectively.In February 2009, the Company sold the remainder of its utility services division, which was reflected as a discontinued operation. In November 2009, the Company terminated operations of its credit program for web and catalog retailer VENUE. Prior period information has been restated to reflect the termination of VENUE as a discontinued operation.2. CHANGE IN ACCOUNTING PRINCIPLEIn June 2009, the FASB issued guidance codified in ASC 860 related to accounting for transfers of financial assets and ASC 810 related to the consolidation of variable interest entities (“VIEs”). ASC 860 removed the concept of qualifying special purpose entity (“QSPE”) and eliminated the consolidation exemption that was then available for QSPEs. ASC 810 requires an initial evaluation as well as an ongoing assessment of the Company’s involvement in the activities of World Financial Network Credit Card Master Trust (“Master Trust”), World Financial Network Credit Card Master Note Trust (“Master Trust I”), World Financial Network Credit Card Master Note Trust II (“Master Trust II”) and World Financial Network Credit Card Master Trust III (“Master Trust III”) (collectively, the “WFN Trusts”), and World Financial Capital Credit Card Master Note Trust (the “WFC Trust”) and the Company’s rights or obligations to receive benefits or absorb losses of the trusts that could be potentially significant in order to determine whether those VIEs are required to be consolidated on the balanceALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)sheets of World Financial Network National Bank (“WFNNB”), World Financial Capital Bank (“WFCB”) or their affiliates, including ADSC.On January 1, 2010, the Company adopted ASC 860 and ASC 810 on a prospective basis, resulting in the consolidation of the WFN Trusts and the WFC Trust. Based on the carrying amounts of the WFN Trusts’ and the WFC Trust’s assets and liabilities as prescribed by ASC 810, the Company recorded an increase in assets of approximately $3.4 billion, including $0.5 billion to loan loss reserves, an increase in liabilities of approximately $3.7 billion and a $0.4 billion decrease in stockholders’ equity.After adoption, the Company’s consolidated statements of income no longer reflect securitization income, but instead reflect finance charges and certain other income associated with the securitized credit card receivables. Net charge-offs associated with credit card receivables impact the Company’s provision for loan loss reflected in the Company’s total operating expenses. Interest expense associated with debt issued from the WFN Trusts and the WFC Trust to third-party investors is reported in securitization funding costs. Additionally, the Company no longer records initial gains on new securitization activity since securitized credit card loans no longer receive sale accounting treatment, nor are there any gains or losses on the revaluation of the interest-only strip receivable, as that asset is not recognized in a transaction accounted for as a secured borrowing. Since the Company’s securitization transactions are accounted for under the new accounting rules as secured borrowings rather than asset sales, the cash flows from these transactions are presented as cash flows from financing activities rather than cash flows from operating or investing activities.The assets of the consolidated VIEs include certain credit card receivables, which are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include asset-backed secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.3. RECENT ACCOUNTING PRONOUNCEMENTSIn October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, “Multiple-Deliverable Revenue Arrangements,” which supersedes certain guidance in ASCAccounting Standards Codification (“ASC”) 605-25, “Revenue Recognition — Multiple-Element Arrangements,” and requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices (the relative-selling-price method). ASU 2009-13 eliminates the use of the residual method of allocation in which the undelivered element is measured at its estimated selling price and the delivered element is measured as the residual of the arrangement consideration, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue for an arrangement with multiple deliverables subject to ASU 2009-13. ASU 2009-13 will beis effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If theJanuary 1, 2011. The Company elects early adoption and the adoption is during an interim period, the Company will be requiredelected to applyadopt this ASU retrospectively fromprospectively. Revenue associated with the beginningservice element of the Company’s fiscal year. The Company can also electAIR MILES® Reward Program has historically been determined using the residual method. Based on the sponsor contracts expected to apply this ASU retrospectively for all periods presented. The Company is currently evaluating the impact thatbe signed, renewed or materially modified in 2011, the adoption of ASU 2009-13 will have on its consolidated financial statements.In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurementsdid not and Disclosures,” which amends ASC 820, “Fair Value Measurements and Disclosures,”is not expected to add separate disclosures about purchases, sales, issuances and settlements related to Level 3 measurements. The requirement to provide the Level 3 disclosures about purchases, sales, issuances and settlements will be effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for the separate Level 3 disclosures will only impact disclosures and will not have a material impact on the Company’s unaudited condensed consolidated financial statements.ALLIANCE DATA SYSTEMS CORPORATIONstatements for 2011. Should one of the AIR MILES Reward Program’s top five sponsors materially modify its agreement with the Company in 2011, it could significantly shift the allocation of deferred revenue between the service element and redemption element. This change in allocation between the deferred revenue elements could impact the timing of revenue recognition, as the redemption element is recognized as AIR MILES reward miles are redeemed while the service element is recognized on a pro-rata basis over the estimated life of an AIR MILES reward mile, or 42 months.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The adoption of ASU 2010-20 will only impactimpacted disclosures and willdid not have a material impact on the Company’s unaudited condensed consolidated financial statements. Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands, except per share amounts) $ 53,059 $ 45,317 $ 147,033 $ 116,753 — 479 — (13,666 ) $ 53,059 $ 45,796 $ 147,033 $ 103,087 52,584 52,841 52,743 56,946 1,454 788 1,785 — 1,180 1,507 1,292 1,013 55,218 55,136 55,820 57,959 $ 1.01 $ 0.86 $ 2.79 $ 2.05 — 0.01 — (0.24 ) $ 1.01 $ 0.87 $ 2.79 $ 1.81 $ 0.96 $ 0.82 $ 2.63 $ 2.01 — 0.01 — (0.23 ) $ 0.96 $ 0.83 $ 2.63 $ 1.78 Three Months Ended March 31, 2011 2010 Net Income $ 86,376 $ 46,654 Weighted average shares, basic 51,122 52,441 Weighted average effect of dilutive securities: Shares from assumed conversion of convertible senior notes 2,789 1,605 Shares from assumed conversion of convertible note warrants 633 — Net effect of dilutive stock options and unvested restricted stock 868 1,373 Denominator for diluted calculations 55,412 55,419 Basic net income per share $ 1.69 $ 0.89 Diluted net income per share $ 1.56 $ 0.84 For the three and nine months ended September 30, 2010 and 2009, theexcluded, in each case, 17.5 million warrants from the calculation of net income per share as the effect was anti-dilutive.During the second quarter of 2009, the Company entered intois also party to prepaid forward contracts to purchase 1,857,400 shares of its common stock for $74.9 million that are to be delivered over a settlement period in 2014. The number of shares to be delivered under the prepaid forward contracts is used to reduce weighted averageweighted-average basic and diluted shares outstanding.STATEMENTS—STATEMENTS — (Continued)5. ACQUISITIONOn July 1, 2010, the acquisition date, the Company completed the acquisition of the Direct Marketing Services and Database Marketing divisions of Equifax, Inc., (collectively, “DMS”). The total purchase price was $117.0 million. DMS provides proprietary data-driven, integrated marketing solutions through two complementary offers: database marketing and hosting, and data services, including U.S. consumer demographic information.The results of operations for DMS have been included since the date of acquisition and are reflected in the Company’s Epsilon segment. The goodwill resulting from the acquisition will be deductible for tax purposes.The following table summarizes the fair values of the assets acquired and liabilities assumed in the DMS acquisition as of the date of purchase: As of July 1,
2010 (In thousands) $ 893 2,290 4,800 67,600 43,874 165 119,622 2,622 2,622 $ 117,000 6.Beginning January 1, 2010, the credit card securitization trusts, the WFN Trusts and the WFC Trust, were consolidated on the balance sheets of WFNNB, WFCB or their affiliates, including ADSC, under ASC 860 and ASC 810. The WFN Trusts’ and the WFC Trust’s credit card receivables are reported in credit card receivables — restricted for securitization investors.The tables below present quantitativethe only portfolio segment or class of financing receivables. Quantitative information about the components of total credit card receivables and delinquencies: September 30,
2010 December 31,
2009 (In millions) $ 4,705.4 $ 5,332.8 203.0 155.7 37.5 21.0 4,945.9 5,509.5 4,406.7 4,838.3 $ 539.2 $ 671.2 $ 130.5 $ 157.4 ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (In thousands) Principal receivables $ 4,642,290 $ 5,116,111 Billed and accrued finance charges 191,423 214,643 Other receivables 30,847 25,669 Total credit card receivables 4,864,560 5,356,423 Less credit card receivables – restricted for securitization investors 4,287,821 4,795,753 Other credit card receivables $ 576,739 $ 560,670 Principal amount of credit card receivables 90 days or more past due $ 109,953 $ 130,538 lossesloss at a level that is adequate to absorb probable losses inherent in credit card receivables. The allowance for loan loss covers forecasted uncollectable principal as well as unpaid interest and fees. In estimating the inherentallowance covering principal loan losses, for the credit card portfolio, management utilizes a migration analysis of delinquent and current credit card receivables. Migration analysis is a technique used to estimate the likelihood that a credit card receivable will progress through the various stages of delinquency and to charge-off. The migration analysis considers uncollectible principal,In estimating the allowance covering uncollectable interest and fees, reflected in credit card receivables. In determining the proper level of the allowance for loan loss, management utilizes historical charge-off trends. Management also considers factors that may impact loan loss experience, including seasoning, loan volume and amounts, payment rates and forecasting uncertainties.loss or when reserves are acquired as partloss. Principal charge-offs, net of a business or portfolio acquisition. When credit card receivables are charged off, principal amounts of credit card receivables outstandingrecoveries, are deducted from the allowance, and subsequent recoveries of such amounts increase the allowance. The Company considers uncollectible interest and fees in assessing the adequacy of the allowance for loan loss; however,while unpaid interest and fees are reversed against finance charges, net.Changesnet upon charge-off. (In thousands) Balance at beginning of period $ 518,069 $ 54,884 Adoption of ASC 860 and ASC 810 — 523,950 Provision for loan loss 67,666 88,001 Recoveries 25,866 21,738 Principal charge-offs (123,896 ) (144,004 ) Other 1,915 — Balance at end of period $ 489,620 $ 544,569 Three Months Ended March 31, 2011 2010 (In thousands, except percentages) $ 4,968,459 $ 5,185,147 98,030 122,266 7.9 % 9.4 % (In thousands, except percentages) Receivables outstanding – principal $ 4,642,290 100 % $ 5,116,111 100 % Principal receivables balances contractually delinquent: 31 to 60 days 68,180 1.5 % 87,252 1.7 % 61 to 90 days 50,477 1.1 59,564 1.2 91 or more days 109,953 2.3 130,538 2.5 Total $ 228,610 4.9 % $ 277,354 5.4 % loss onloss. Credit card receivables for which temporary hardship and permanent concessions were granted comprised less than 3% of the Company’s total credit card receivables at each of March 31, 2011 and December 31, 2010.Age Since Origination Number of Active Accounts with Balances Percentage of Active Accounts with Balances Percentage of Receivables Outstanding (In thousands, except percentages) 0-12 Months 2,703 23.4 % $ 876,492 18.9 % 13-24 Months 1,578 13.7 654,138 14.1 25-36 Months 1,174 10.2 522,678 11.3 37-48 Months 965 8.3 419,685 9.0 49-60 Months 830 7.2 364,228 7.8 Over 60 Months 4,297 37.2 1,805,069 38.9 Total 11,547 100.0 % $ 4,642,290 100.0 % nine months ended September 30, 2010 and the year ended December 31, 2009 were as follows: September 30,
2010 December 31,
2009 (In thousands) $ 54,884 $ 38,124 523,950 — 272,259 52,259 (336,797 ) (35,499 ) $ 514,296 $ 54,884 The provision for loan loss expense was $90.5 million and $275.0 million for the three and nine months ended September 30, 2010, respectively, which includes $0.9 million and $2.8 millionpurpose of credit card fraud losses, respectively. The provision for loan loss expense was $16.4 million and $35.9 million for the three and nine months ended September 30, 2009, respectively, formonitoring the Company’s on-balance sheetobligor credit card receivables. These amounts were netted against securitization incomequality. The proprietary scoring model is used as a tool in 2009.Net charge-offsthe underwriting process and for making credit decisions. The proprietary scoring model is based on historical data and requires various assumptions about future performance. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of principal receivables were $102.1 million and $99.6 million foran account becoming 90 or more days past due at any time within the three months ended September 30, 2010 and 2009, respectively, and $336.8 million and $297.2 million fornext 12 months. Obligor credit quality is monitored at least monthly during the nine months ended September 30, 2010 and 2009, respectively.Probability of an Account Becoming 90 or More Days Past Due or Becoming Charged off (within the next 12 months) Total Principal Receivables Outstanding Percentage of Principal Receivables Outstanding (In thousands, except percentages) No Score $ 88,576 1.9 % 27.1% and higher 274,777 5.9 17.1% - 27.0% 453,154 9.8 12.6% - 17.0% 557,762 12.0 3.7% - 12.6% 1,916,149 41.3 1.9% - 3.7% 895,608 19.3 Lower than 1.9% 456,264 9.8 Total $ 4,642,290 100.0 % tothrough its credit card securitization trusts, consisting of World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust, World Financial Network Credit Card Master Note Trust II and World Financial Network Credit Card Master Trust III (collectively, the WFN Trusts“WFN Trusts”), and the WFC Trust.World Financial Capital Credit Card Master Note Trust (the “WFC Trust”). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments, and charge-off uncollectibleuncollectable receivables.STATEMENTS—STATEMENTS — (Continued) September 30,
2010 December 31,
2009 (In millions) $ 4,406.7 $ 4,838.3 $ 117.6 $ 148.2 Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In millions) $ 91.5 $ 89.9 $ 297.5 $ 270.8 During (In thousands) Total credit card receivables – restricted for securitization investors $ 4,287,821 $ 4,795,753 Principal amount of credit card receivables – restricted for securitization investors, 90 days or more past due $ 99,293 $ 117,594 Three Months Ended March 31, 2011 2010 (In thousands) $ 87,303 $ 108,109 initial phase of a securitization reinvestment period, the Company generally retains principal collections in exchange for the transfer of additionalCompany’s wholly-owned subsidiaries, acquired an existing private label credit card receivablesportfolio of J.Jill and entered into the securitized poola multi-year agreement to provide private label credit card services. The total purchase price was approximately $42.7 million, which was comprised of assets. During the amortization or accumulation period of a securitization, the investors’ share of principal collections (in certain cases, up to a maximum specified amount each month) is either distributed to the investors or held in an account until it accumulates to the total amount due, at which time it is paid to the investors in a lump sum.The table below summarizes certain cash flows received from and paid to the securitization trusts when transfers$37.9 million of credit card receivables toand $4.8 million of intangible assets and are included in the securitization trusts were treatedunaudited condensed consolidated balance sheets as sales prior to the adoption of ASC 860 and ASC 810: Three Months Ended
September 30, 2009 Nine Months Ended
September 30, 2009 (In millions) $ 849.2 $ 3,133.4 1,081.4 2,150.0 1,491.6 4,672.2 17.3 53.6 (1)Upon adoption of ASC 860, these fees were eliminated with the consolidation of the WFN Trusts and the WFC Trust, and therefore not reflected in the unaudited condensed consolidated statements of income as of September 30, 2010.ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)7.March 31, 2011.® Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. These assets are primarily denominated in Canadian dollars. Realized gains and losses from the sale of investment securities were not material. The principal components of redemption settlement assets, which are carried at fair value, are as follows: September 30, 2010 December 31, 2009 Cost Unrealized
Gains Unrealized
Losses Fair Value Cost Unrealized
Gains Unrealized
Losses Fair Value (In thousands) $ 34,502 $ — $ — $ 34,502 $ 71,641 $ — $ — $ 71,641 35,084 1,016 (7 ) 36,093 41,026 1,205 — 42,231 417,740 7,545 (381 ) 424,904 453,447 8,473 (1,788 ) 460,132 $ 487,326 $ 8,561 $ (388 ) $ 495,499 $ 566,114 $ 9,678 $ (1,788 ) $ 574,004 March 31, 2011 December 31, 2010 Cost Unrealized Losses Cost (In thousands) Cash and cash equivalents $ 60,578 $ — $ — $ 60,578 $ 74,612 $ — $ — $ 74,612 Government bonds 15,755 168 — 15,923 15,235 161 (34 ) 15,362 407,053 2,487 (2,117 ) 407,423 380,605 3,212 (1,363 ) 382,454 Total $ 483,386 $ 2,655 $ (2,117 ) $ 483,924 $ 470,452 $ 3,373 $ (1,397 ) $ 472,428 (1) Included in corporate bonds atAt each of March 31, 2011 and December 31, 2009 is an investment2010, LoyaltyOne® had investments in retained interests in the WFN Trusts with a fair value of $73.9$64.9 million. Upon adoption of ASC 860, theseThese amounts wereare eliminated with the consolidation of the WFN Trusts, and therefore not reflected in the unaudited condensed consolidated balance sheetfinancial statements and notes thereof as of September 30,March 31, 2011 and December 31, 2010.September 30, 2010March 31, 2011 and December 31, 2009,2010, aggregated by investment category and the length of time that individual securities have been in a continuous loss position: Less than 12 months September 30, 2010
12 Months or Greater Total Fair
Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses (In thousands) $ 9,780 $ (7 ) $ — $ — $ 9,780 $ (7 ) 53,792 (381 ) — — 53,792 (381 ) $ 63,572 $ (388 ) $ — $ — $ 63,572 $ (388 ) Less than 12 months December 31, 2009
12 Months or Greater Total Fair
Value Unrealized
Losses Fair Value Unrealized
Losses Fair Value Unrealized
Losses (In thousands) $ 98,448 $ (1,646 ) $ 7,705 $ (142 ) $ 106,153 $ (1,788 ) $ 98,448 $ (1,646 ) $ 7,705 $ (142 ) $ 106,153 $ (1,788 ) Less than 12 months Total Fair Value Fair Value Fair Value (In thousands) Government bonds $ — $ — $ — $ — $ — $ — Corporate bonds 181,770 (2,112 ) 10,612 (5 ) 192,382 (2,117 ) Total $ 181,770 $ (2,112 ) $ 10,612 $ (5 ) $ 192,382 $ (2,117 ) Less than 12 months Total Fair Value Fair Value Fair Value (In thousands) Government bonds $ 10,119 $ (34 ) $ — $ — $ 10,119 $ (34 ) Corporate bonds 128,349 (1,363 ) — — 128,349 (1,363 ) Total $ 138,468 $ (1,397 ) $ — $ — $ 138,468 $ (1,397 ) ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)September 30, 2010,March 31, 2011, the Company does not consider the investments to be other-than-temporarily impaired.September 30, 2010March 31, 2011 by contractual maturity are as follows: Amortized
Cost Estimated
Fair Value (In thousands) $ 160,888 $ 161,738 326,438 333,761 $ 487,326 $ 495,499 (In thousands) Due in one year or less $ 102,402 $ 102,336 Due after one year through five years 380,984 381,588 Total $ 483,386 $ 483,924 8. INTANGIBLE ASSETS AND GOODWILLIndexIntangible AssetsIntangible assets consist of the following: September 30, 2010 Amortization Life and Method Gross
Assets Accumulated
Amortization Net (In thousands) $ 236,228 $ (142,022 ) $ 94,206 5-10 years—straight line 151,431 (58,162 ) 93,269 3-10 years—straight line, accelerated 68,024 (58,809 ) 9,215 30 years—15% declining balance 175,430 (70,930 ) 104,500 4-10 years—straight line 2,839 (2,351 ) 488 2-5 years—straight line 14,156 (4,711 ) 9,445 4-10 years—straight line 19,824 (11,264 ) 8,560 1-5 years—straight line, accelerated $ 667,932 $ (348,249 ) $ 319,683 12,350 — 12,350 Indefinite life $ 680,282 $ (348,249 ) $ 332,033 STATEMENTS—STATEMENTS — (Continued) December 31, 2009 Amortization Life and Method Gross
Assets Accumulated
Amortization Net (In thousands) $ 186,428 $ (121,540 ) $ 64,888 5-10 years—straight line 155,227 (46,936 ) 108,291 3-10 years—straight line, accelerated 66,541 (56,316 ) 10,225 30 years—15% declining balance 160,564 (57,043 ) 103,521 4-10 years—straight line 2,522 (1,986 ) 536 3-5 years—straight line 11,658 (3,674 ) 7,984 4-10 years—straight line 17,178 (8,376 ) 8,802 1-5 years—straight line, accelerated $ 600,118 $ (295,871 ) $ 304,247 12,350 — 12,350 Indefinite life $ 612,468 $ (295,871 ) $ 316,597 March 31, 2011 Net Amortization Life and Method (In thousands) Finite Lived Assets Customer contracts and lists $ 200,245 $ (119,127 ) $ 81,118 5-10 years—straight line Premium on purchased credit card portfolios 156,203 (68,035 ) 88,168 3-10 years—straight line, accelerated Collector database 72,150 (63,146 ) 9,004 30 years—15% declining balance Customer database 175,526 (81,194 ) 94,332 4-10 years—straight line Noncompete agreements 1,083 (787 ) 296 2-3 years—straight line Tradenames 14,197 (5,438 ) 8,759 5-10 years—straight line Purchased data lists 21,380 (13,359 ) 8,021 1-5 years—straight line, accelerated $ 640,784 $ (351,086 ) $ 289,698 Indefinite Lived Assets Tradenames 12,350 — 12,350 Indefinite life Total intangible assets $ 653,134 $ (351,086 ) $ 302,048 December 31, 2010 Net Amortization Life and Method (In thousands) Finite Lived Assets Customer contracts and lists $ 211,413 $ (123,932 ) $ 87,481 5-10 years—straight line Premium on purchased credit card portfolios �� 151,430 (63,115 ) 88,315 3-10 years—straight line, accelerated Collector database 70,211 (61,075 ) 9,136 30 years—15% declining balance Customer database 175,397 (76,002 ) 99,395 4-10 years—straight line Noncompete agreements 1,062 (668 ) 394 2-3 years—straight line Tradenames 14,169 (5,070 ) 9,099 5-10 years—straight line Purchased data lists 20,506 (12,285 ) 8,221 1-5 years—straight line, accelerated $ 644,188 $ (342,147 ) $ 302,041 Indefinite Lived Assets Tradenames 12,350 — 12,350 Indefinite life Total intangible assets $ 656,538 $ (342,147 ) $ 314,391 of DMS, the Company acquired $67.6$4.8 million of intangible assets. These assets included $49.8consisting of a customer relationship of $2.6 million and a marketing relationship of customer relationships, $15.0$2.2 million, of customer databases, $2.5 million of trade names and $0.3 million for noncompete agreements. These assetswhich are being amortized, in each case, over a weighted average life of 7.7 years, 4.0 years, 10.0 years and 2.0 years, respectively. See Note 5, “Acquisition,” for more information on DMS.ninethree months ended September 30, 2010March 31, 2011 are as follows: LoyaltyOne Epsilon Private Label
Services and
Credit Corporate/
Other Total (In thousands) $ 234,613 $ 669,930 $ 261,732 $ — $ 1,166,275 4,979 (559 ) — — 4,420 — 43,874 — — 43,874 $ 239,592 $ 713,245 $ 261,732 $ — $ 1,214,569 LoyaltyOne Private Label Services and Credit Total (In thousands) December 31, 2010 $ 246,930 $ 713,161 $ 261,732 $ — $ 1,221,823 Effects of foreign currency translation 6,507 652 — — 7,159 March 31, 2011 $ 253,437 $ 713,813 $ 261,732 $ — $ 1,228,982 STATEMENTS—STATEMENTS — (Continued)9. September 30,
2010 December 31,
2009 Maturity Interest Rate (In thousands) $ 370,000 $ 487,000 March 2012 (1) 250,000 250,000 May 2011 6.14% 161,000 161,000 March 2012 (2) 236,000 — March 2012 (3) 647,111 612,058 August 2013 1.75% 252,730 238,869 May 2014 4.75% 12,791 33,425 Various – Oct 2010 –Jul 2013(4) 5.20% to 8.10%(4) 1,929,632 1,782,352 (262,751 ) (51,963 ) $ 1,666,881 $ 1,730,389 $ 966,800 $ 1,465,000 One year to five years 0.50% to 5.25% (452,400 ) (772,500 ) $ 514,400 $ 692,500 $ 1,772,815 $ — Various –Nov 2011 – Jun 2015 3.79% to 7.00% 1,153,500 — Various – Sept 2011 – Apr 2013 0.39% to 2.76%(6) 435,509 — Various – Jun 2011 – Sept 2011 1.85% to 2.66% 3,361,824 — (885,509 ) — $ 2,476,315 $ — Description Maturity Interest Rate (Dollars in thousands) Certificates of deposit: Certificates of deposit $ 830,700 $ 859,100 Six months to five years 0.30% to 5.25% Less: current portion (380,500 ) (442,600 ) Long-term portion $ 450,200 $ 416,500 Asset-backed securities debt – owed to securitization investors: Fixed rate asset-backed term note securities $ 1,772,815 $ 1,772,815 Various - Nov 2011 – Jun 2015 3.79% to 7.00% Floating rate asset-backed term note securities 1,153,500 1,153,500 Various - Sept 2011 – Apr 2013 (1) Conduit asset-backed securities 373,103 733,827 Various - Jun 2011 – Sept 2011 1.51% to 2.60% Total asset-backed securities – owed to securitization investors 3,299,418 3,660,142 Less: current portion (1,383,103 ) (1,743,827 ) Long-term portion $ 1,916,315 $ 1,916,315 Long-term and other debt: Credit facility $ 426,000 $ 300,000 March 2012 (2) Series B senior notes 250,000 250,000 May 2011 6.14% 2009 term loan 161,000 161,000 March 2012 (3) 2010 term loan 236,000 236,000 March 2012 (4) Convertible senior notes due 2013 671,931 659,371 August 2013 1.75% Convertible senior notes due 2014 262,822 257,687 May 2014 4.75% Capital lease obligations and other debt 1,401 5,714 Total long-term and other debt 2,009,154 1,869,772 Less: current portion (1,074,372 ) (255,679 ) Long-term portion $ 934,782 $ 1,614,093 (1) (2) The Company maintains a $750.0 million unsecured revolving credit facility (the “Credit Facility,”) where advances are in the form of either base rate loans or Eurodollar loans and may be denominated in Canadian dollars, subject to a sublimit, or U.S. dollars. The interest rate for base loans is the higher of (a) the Bank of Montreal’s prime rate, (b) the Federal funds rate plus 0.5%, and (c) the quoted London Interbank Offered Rate (“LIBOR”)LIBOR as defined in the credit agreement plus 1.0%. 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 Credit Facility. Total availability under the Credit Facility at September 30, 2010March 31, 2011 was $380.0$324.0 million. At September 30, 2010,March 31, 2011, the weighted average interest rate was 0.76%1.02%.(2)(3)the quotedALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)offor Eurodollar loans fluctuates based on the rate at which deposits of U.S. dollars in the London interbank market are quoted plus a margin of 3.0% to 4.0% based on the Company’s senior leverage ratio as defined in the 2009 Term Loan. At September 30, 2010,March 31, 2011, the weighted average interest rate was 3.26%3.25%.(3)(4)the quoted LIBOR as defined in the 2010 Term Loan agreement plus 1.0%, in each case plus a margin of 1.5% to 2.5% based upon the Company’s senior leverage ratio as defined in the 2010 Term Loan agreement. The interest rate offor Eurodollar loans fluctuates based on the rate at which deposits of U.S. dollars in the London interbank market are quoted plus a margin of 2.5% to 3.5% based on the Company’s senior leverage ratio as defined in the 2010 Term Loan. At September 30, 2010,March 31, 2011, the weighted average interest rate was 2.76%.(4)(5)(5)Upon adoption of ASC 860 and ASC 810, the Company consolidated the WFN Trusts and the WFC Trust and the related asset-backed securities debt. See Note 2, “Change in Accounting Principle,” for more information on the adoption of ASC 860 and ASC 810.(6)Interest rates include those for certain of the Company’s asset-backed securities—owed to securitization investors where floating rate debt is fixed through interest rate swap agreements. The weighted average interest rate of the fixed rate achieved through interest rate swap agreements is 4.45% at September 30, 2010.As of September 30, 2010,financial covenants.Credit FacilityIndexIn June 2010, the Company amended its Credit Facility to clarify the application of ASC 860 and ASC 810 with respect to the calculation of covenant compliance.2009 Term LoanIn June 2010, the Company amended its 2009 Term Loan to clarify the application of ASC 860 and ASC 810 with respect to the calculation of covenant compliance. In addition, the amendment removed the prepayments that were required beginning June 30, 2010 and now provides that principal payments be paid at maturity, March 30, 2012.2010 Term LoanOn August 6, 2010, the Company, as borrower, and ADS Alliance Data Systems, Inc., ADS Foreign Holdings, Inc., Alliance Data Foreign Holdings, Inc., Epsilon Marketing Services, LLC and Epsilon Data Management, LLC, as guarantors, entered into a term loan agreement with Bank of Montreal, as administrative agent, and various other agents and banks. The 2010 Term Loan is unsecured. Amounts borrowed under the 2010 Term Loan are scheduled to mature on March 30, 2012.The 2010 Term Loan contains usual and customary negative covenants, which are subject to certain specified exceptions. The 2010 Term Loan also requires the Company to satisfy certain financial covenants, including maximum ratios of total leverage and senior leverage and a minimum ratio of consolidated operating EBITDA to consolidated interest expense, each as determined in accordance with the 2010 Term Loan.As of September 30, 2010, total borrowings under the 2010 Term Loan were $236.0 million.STATEMENTS—STATEMENTS — (Continued) September 30,
2010 December 31,
2009 (In thousands) $ 368,678 $ 368,678 $ 1,150,000 $ 1,150,000 (250,159 ) (299,073 ) $ 899,841 $ 850,927 $ 1,142,583 $ 1,130,852 (In thousands) Carrying amount of equity component $ 368,678 $ 368,678 Principal amount of liability component $ 1,150,000 $ 1,150,000 Unamortized discount (215,247 ) (232,942 ) Net carrying value of liability component $ 934,753 $ 917,058 If-converted value of common stock $ 1,503,776 $ 1,243,605 3.12.6 years.and nine months ended September 30,March 31, 2011 and 2010 and 2009 is as follows: Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands) $ 7,619 $ 7,619 $ 22,856 $ 15,937 16,752 15,019 48,914 37,243 $ 24,371 $ 22,638 $ 71,770 $ 53,180 11.0 % 11.0 % 11.0 % 11.0 % Asset-backed Securities—Owed to Securitization InvestorsAn asset-backed security is a security whose value and income payments are derived from and collateralized (or “backed”) by a specified pool of underlying assets. The sale of the pool of underlying assets to general investors is accomplished through a securitization process.The Company regularly sells its credit card receivables to its securitization trusts, the WFN Trusts and the WFC Trust. Beginning January 1, 2010, the WFN Trusts and the WFC Trust were consolidated on the balance sheets of the Company, under ASC 860 and ASC 810. See Note 2, “Change in Accounting Principle,” for more information on the adoption of ASC 860 and ASC 810. The liabilities of the consolidated VIEs include asset-backed securities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.Asset-backed Term NotesIn March 2010, Master Trust II issued $100.8 million of term asset-backed securities to investors. The offering consisted of $65.0 million of Class A Series 2010-1 asset-backed notes that have a fixed interest rate of 4.2% per year, $9.8 million of Class M Series 2010-1 asset-backed notes that have a fixed interest rate ofALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)5.3% per year, $6.6 million of Class B Series 2010-1 asset-backed notes that have a fixed interest rate of 6.3% per year, $11.6 million of Class C Series 2010-1 asset-backed notes that have a fixed interest rate of 7.0% per year and $7.8 million of Class D Series 2010-1 zero-coupon notes which were retained by the Company. The Class A notes will mature in November 2012, the Class M notes will mature in December 2012, the Class B notes will mature in January 2013, the Class C notes will mature in February 2013 and the Class D notes will mature in March 2013. With the consolidation of the WFN Trusts, the Class D Series 2010-1 notes are eliminated from the unaudited condensed consolidated financial statements.On July 8, 2010, Master Trust I issued $450.0 million of term asset-backed securities to investors in a public offering. The offering consisted of $355.5 million of Class A Series 2010-A asset-backed notes that have a fixed interest rate of 3.96% per year, $16.9 million of Class M Series 2010-A asset-backed notes that have a fixed interest rate of 5.2% per year, $21.4 million of Class B Series 2010-A asset-backed notes that have a fixed interest rate of 6.75% per year and $56.2 million of Class C Series 2010-A asset-backed notes that have a fixed interest rate of 5.0% per year. The Class A, Class M, Class B and Class C notes will all mature in June 2015. The Class C Series 2010-A notes were retained by the Company. With the consolidation of the WFN Trusts, the Class C Series 2010-A notes are eliminated from the unaudited condensed consolidated financial statements.Conduit FacilitiesDuring the first quarter of 2010, the Company renewed its $550.0 million 2009-VFC1 conduit facility under Master Trust III, extending the maturity to September 30, 2011.During the second quarter of 2010, the Company renewed its $1.2 billion 2009-VFN conduit facility under Master Trust I, extending the maturity to June 23, 2011, and its $275.0 million 2009-VFN conduit facility under the WFC Trust, extending the maturity to June 3, 2011. Three Months Ended March 31, 2011 2010 (Dollars in thousands) Interest expense calculated on contractual interest rate $ 7,619 $ 7,619 Amortization of discount on liability component 17,695 15,861 Total interest expense on convertible senior notes $ 25,314 $ 23,480 Effective interest rate (annualized) 11.0 % 11.0 % have enteredenter into derivative financial instruments, which include both interest rate swaps and an interest rate cap, to mitigate their interest rate risk on a related financial instrument or to lock the interest rate on a portion of their variable asset-backed securities debt.Effective January 1, 2010, the derivative financial instruments of the credit card securitization trusts were consolidated on the Company’s balance sheets under ASC 860 and ASC 810. fixedvariable rate amounts from counterparties in exchange for the Company making variablefixed rate payments over the life of the agreement without the exchange of the underlying notional amount. These interest rate contracts are not designated as hedges. Such contracts are not speculative and are used to manage interest rate risk, but do not meet the specific hedge accounting requirements of ASC 815, “Derivatives and Hedging.”September 30,March 31, 2011 and December 31, 2010 in the unaudited condensed consolidated balance sheets: Notional Amount
(in thousands) Weighted
Average Years
to Maturity $ 1,153,500 1.98 ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Balance Sheet Location Fair Value
(in thousands) Other current liabilities $ 6,624 Other liabilities $ 77,375 March 31, 2011 December 31, 2010 Notional Amount Weighted Average Years to Maturity Notional Amount Weighted Average Years to Maturity (Dollars in thousands) Interest rate contracts not designated as hedging instruments $ 1,153,500 1.48 $ 1,153,500 1.72 March 31, 2011 December 31, 2010 Fair Value Fair Value (In thousands) Interest rate contracts not designated as hedging instruments Other current liabilities $ 2,595 Other current liabilities $ 4,574 Interest rate contracts not designated as hedging instruments Other liabilities $ 57,344 Other liabilities $ 65,257 tables identifytable summarizes activity related to and identifies the classificationlocation of the Company’s outstanding interest rate contracts for the three and nine months ended September 30,March 31, 2011 and March 31, 2010 recognized in the unaudited condensed consolidated statements of income: Income Statement Location Loss on
Derivative
Contracts
(in thousands) Securitization funding costs $ 59 Income Statement Location Loss on
Derivative
Contracts
(in thousands) Securitization funding costs $ 5,443 March 31, 2011 March 31, 2010 Income Statement Location Gain on Derivative Contracts Income Statement Location Loss on Derivative Contracts (In thousands) Interest rate contracts not designated as hedging instruments Securitization funding costs $ 9,892 Securitization funding costs $ 2,181 andwho maintain certain minimum credit criteria established by the Company. At September 30, 2010,March 31, 2011, the Company does not maintain any derivative contracts subject to master agreements that would require the Company to post collateral or that contain any credit-risk related contingent features. The Company has provisions in certain of the master agreements that require counterparties to post collateral to the Company when their credit ratings fall below certain thresholds. At September 30, 2010,March 31, 2011, these thresholds were not breached and no amounts were held as collateral by the Company.10.proceedsproceeds from the issuance of AIR MILES reward miles into two components as follows: •· •·ishas been determined using the residual method in accordance with ASC 605-25.ASU 2009-13. It is initially deferred and then amortized pro rata over the estimated life of an AIR MILES reward mile. With the adoption of ASU 2009-13, the residual method will no longer be utilized for new sponsor agreements entered into on or after January 1, 2011 or existing sponsor agreements that are materially modified subsequent to that date; for these agreements, the Company will measure the service element at its estimated selling price.ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) Deferred Revenue Service Redemption Total (In thousands) $ 306,336 $ 839,810 $ 1,146,146 136,088 359,749 495,837 (126,637 ) (364,684 ) (491,321 ) — 4,564 4,564 6,898 18,725 25,623 $ 322,685 $ 858,164 $ 1,180,849 $ 154,952 $ 858,164 $ 1,013,116 $ 167,733 $ — $ 167,733 11. Deferred Revenue Service Redemption Total (In thousands) December 31, 2010 $ 339,514 $ 881,728 $ 1,221,242 Cash proceeds 51,787 119,169 170,956 Revenue recognized (47,125 ) (140,650 ) (187,775 ) Other — 451 451 Effects of foreign currency translation 9,453 24,009 33,462 March 31, 2011 $ 353,629 $ 884,707 $ 1,238,336 Amounts recognized in the unaudited condensed consolidated balance sheets: Current liabilities $ 169,224 $ 884,707 $ 1,053,931 Non-current liabilities $ 184,405 $ — $ 184,405 ProgramsJanuary 27,September 13, 2010, the Company’s Board of Directors authorized a stock repurchase program (“Prior Repurchase Program”) to acquire up to $275.1 million of the Company’s common stock through December 31, 2010. On September 13, 2010, the Company’s Board of Directors authorized a new stock repurchase program, replacing the Prior Repurchase Program, to acquire up to $400.0 million of the Company’s outstanding common stock from September 13, 2010 through December 31, 2011, subject to any restrictions pursuant to the terms of the Company’s credit agreements or otherwise.and nine months ended September 30, 2010,March 31, 2011, the Company acquired a total of 897,986856,363 shares and 1,354,486 shares, respectively, of its common stock for $50.9$61.4 million. As of March 31, 2011, the Company has $266.6 million and $76.7 million, respectively. All shares were acquired prior to September 13, 2010 andavailable under the Prior Repurchase Program.Stock Compensation PlansOn March 31, 2005, the Company’s Board of Directors adopted the 2005 long-term incentive plan, which was subsequently approved by the Company’s stockholders on June 7, 2005 and became effective July 1, 2005. This plan reserved 4,750,000 shares of common stock for grants of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, restricted stock units and other performance-based awards to selected officers, employees, non-employee directors and consultants performing services for the Company or its affiliates. On September 24, 2009, the Company’s Board of Directors amended the 2005 long term incentive plan to provide that, in addition to settlement in shares of the Company’s common stock or other securities, equity awards may be settled in cash. No more grants may be made from the 2005 long-term incentive plan, which expired on June 30, 2010.On March 25, 2010, the Company’s Board of Directors adopted the 2010 Omnibus Incentive Plan, which was subsequently approved by the Company’s stockholders on June 8, 2010, became effective July 1, 2010 and expires on June 30, 2015. This plan reserves 3,000,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards toALLIANCE DATA SYSTEMS CORPORATIONrepurchase program.NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)selected officers, employees, non-employee directors and consultants performing services for the Company or its affiliates, with only employees being eligible to receive incentive stock options.and nine months ended September 30,March 31, 2011 and 2010 and 2009 is as follows: Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands) $ 6,598 $ 7,315 $ 18,801 $ 23,466 4,377 7,293 15,195 19,799 $ 10,975 $ 14,608 $ 33,996 $ 43,265 There was no stock-based compensation expense related to discontinued operations for the three and nine months ended September 30, 2010 and for Three Months Ended March 31, 2011 2010 (In thousands) Cost of operations $ 5,903 $ 5,895 General and administrative 3,181 4,711 Total $ 9,084 $ 10,606 September 30, 2009. For the nine months ended September 30, 2009, stock-based compensation expense for the Company’s discontinued operations was approximately $0.1 million. This amount is included in the loss from discontinued operations in the unaudited condensed consolidated statements of income.During the nine months ended September 30, 2010,March 31, 2011, the Company awarded 477,329405,746 performance-based restricted stock units with a weighted average grant date fair value per share of $57.15$83.30 as determined on the date of grant. The performance restriction on the awards will lapse upon determination by the Board of Directors or the Compensation Committee of the Board of Directors that the Company’s core earnings per share growthbefore taxes for the period from January 1, 20102011 to December 31, 20102011 met certain pre-defined vesting criteria that permit a range from 50% to 150% of such performance-based restricted stock units to vest. Upon such determination, the restrictions will lapse with respect to 33% of the award on February 22, 2011,21, 2012, an additional 33% of the award on February 22, 201221, 2013 and the final 34% of the award on February 22, 2013,21, 2014, provided that the participant is employed by the Company on each such vesting date.ninethree months ended September 30, 2010,March 31, 2011, the Company awarded 201,639105,927 service-based restricted stock units with a weighted average grant date fair value per share of $60.37$83.07 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant meetsis employed by the service conditionCompany on each such vesting date.In March 2009, the Company determined that it was no longer probable that the specified performance measures associated with certain performance-based restricted stock units would be achieved. As a result, 1,242,098 performance-based restricted stock units granted during 2008 and in January 2009, having a weighted-average grant date fair value of $56.43 per share, are not expected to vest. The Company has not recognized stock-based compensation expense related to those awards no longer expected to vest.ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)12. Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands) $ 53,059 $ 45,796 $ 147,033 $ 103,087 — — 55,881 — (1,535 ) (5,678 ) (3,283 ) (35,126 ) (3,909 ) (2,908 ) (5,791 ) 6,217 $ 47,615 $ 37,210 $ 193,840 $ 74,178 Three Months Ended March 31, 2011 2010 (In thousands) Net income $ 86,376 $ 46,654 — 55,881 Unrealized loss on securities available-for-sale (4,428 ) (5,701 ) (3,144 ) (7,638 ) Total comprehensive income, net of tax $ 78,804 $ 89,196 (1) unrealized losses associated with retained interests in the WFN Trusts and the WFC Trust which were classified as available-for-sale. These amounts were previously reflected in accumulated other comprehensive income. Effective January 1, 2010, uponUpon the adoption of ASC 860, “Transfers and Servicing,” and ASC 810, “Consolidation,” which was effective January 1, 2010, these interests and related accumulated other comprehensive income have been reclassified, derecognized or eliminated upon consolidation of the WFN Trusts and the WFC Trust.(2) 13. September 30, 2010 December 31, 2009 Carrying
Amount Fair Value Carrying
Amount Fair Value (In thousands) $ 391,226 $ 391,226 $ 213,378 $ 213,378 234,570 234,570 225,212 225,212 — — 297,108 297,108 4,431,595 4,431,595 616,298 616,298 495,499 495,499 574,004 574,004 — — 775,570 775,570 205,359 205,359 216,953 216,953 124,040 124,040 103,891 103,891 3,361,824 3,427,074 — — 2,896,432 3,073,214 3,247,352 3,408,039 83,999 83,999 — — March 31, 2011 December 31, 2010 (In thousands) Financial assets Cash and cash equivalents $ 300,362 $ 300,362 $ 139,114 $ 139,114 Trade receivables, net 228,270 228,270 260,945 260,945 Credit card receivables, net 4,374,940 4,374,940 4,838,354 4,838,354 Redemption settlement assets, restricted 483,924 483,924 472,428 472,428 Cash collateral, restricted 318,333 318,333 185,754 185,754 Other investment securities 85,122 85,122 104,916 104,916 Financial liabilities Accounts payable 113,349 113,349 121,856 121,856 Certificates of deposit 830,700 855,365 859,100 883,405 Asset-backed securities debt – owed to securitization investors 3,299,418 3,353,227 3,660,142 3,711,263 Long-term and other debt 2,009,154 2,713,578 1,869,772 2,393,124 Derivative financial instruments 59,939 59,939 69,831 69,831 STATEMENTS—STATEMENTS — (Continued)September30,March 31, 2011 and December 31, 2010herein:payable—payable — The carrying amount approximates fair value due to the short maturity.Fair The fair value for securities is based on quoted market prices for the same or similar securities.debt—debt – owed to securitization investors—The fair value is estimated based on the current rates available to the Company for similar debt instruments with similar remaining maturities.Debt, including certificates of depositLong-term and other debt —The fair value is estimated based on the current rates available to the Company for similar debt instruments with similar remaining maturities.Fair Value of Assets and Liabilities Held at December 31, 2009The following techniques and assumptions were used by the Company in estimating fair values of financial instruments which were subsequently reclassified, derecognized or eliminated upon consolidation of the WFN Trusts and the WFC Trust as a result of the adoption of ASC 860 and ASC 810 as disclosed herein:Seller’s interest—Seller’s interest was carried at an allocated carrying amount based on their fair value. The Company determined the fair value of its seller’s interest through discounted cash flow models. The estimated cash flows used included assumptions related to rates of payments and defaults, which reflected economic and other relevant conditions. The discount rate used was based on an interest rate curve that was observable in the market place plus an unobservable credit spread. With the consolidation of the WFN Trusts and the WFC Trust on January 1, 2010, seller’s interest has been eliminated.Due from securitizations—The retained interest and interest-only strips were recorded at their fair value. The Company used a valuation model that calculated the present value of estimated future cash flows for each asset which incorporated the Company’s own estimates of assumptions market participants used in determining fair value, including estimates of payment rates, defaults, net charge-offs, discount rates and contractual interest and fees. With the consolidation of the WFN Trusts and the WFC Trust on January 1, 2010, due from securitizations has been derecognized or eliminated.Level 1, defined as observable inputs such as quoted prices in active markets;ALLIANCE DATA SYSTEMS CORPORATIONNOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
| · | Level 1, defined as observable inputs such as quoted prices in active markets; |
| · | Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and |
| · | Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions. |
| Balance at September 30, 2010 | Fair Value Measurements at September 30, 2010 Using | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| (In thousands) | ||||||||||||||||
Government bonds(1) | $ | 36,093 | $ | — | $ | 36,093 | $ | — | ||||||||
Corporate bonds(1) | 424,904 | 210,367 | 214,537 | — | ||||||||||||
Other available-for-sale securities(2) | 83,758 | 64,746 | 19,012 | — | ||||||||||||
Cash collateral, restricted | 205,359 | — | 37,530 | 167,829 | ||||||||||||
Total assets measured at fair value | $ | 750,114 | $ | 275,113 | $ | 307,172 | $ | 167,829 | ||||||||
Derivative financial instruments(3) | $ | 83,999 | $ | — | $ | 83,999 | $ | — | ||||||||
Total liabilities measured at fair value | $ | 83,999 | $ | — | $ | 83,999 | $ | — | ||||||||
| Balance at December 31, 2009 | Fair Value Measurements at December 31, 2009 Using | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| (In thousands) | ||||||||||||||||
Government bonds(1) | $ | 42,231 | $ | 16,676 | $ | 25,555 | $ | — | ||||||||
Corporate bonds(1) | 460,132 | 308,668 | 77,598 | 73,866 | ||||||||||||
Other available-for-sale securities(2) | 105,064 | 95,300 | 9,764 | — | ||||||||||||
Seller’s interest | 297,108 | — | — | 297,108 | ||||||||||||
Due from securitizations | 775,570 | — | — | 775,570 | ||||||||||||
Cash collateral, restricted | 216,953 | — | 10,275 | 206,678 | ||||||||||||
Total assets measured at fair value | $ | 1,897,058 | $ | 420,644 | $ | 123,192 | $ | 1,353,222 | ||||||||
Fair Value Measurements at March 31, 2011 Using | ||||||||||||||||
Balance at March 31, 2011 | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
Government bonds (1) | $ | 15,923 | $ | — | $ | 15,923 | $ | — | ||||||||
Corporate bonds (1) | 407,423 | 99,345 | 308,078 | — | ||||||||||||
| Cash collateral, restricted | 318,333 | — | 139,000 | 179,333 | ||||||||||||
Other investment securities (2) | 85,122 | 67,508 | 17,614 | — | ||||||||||||
| Total assets measured at fair value | $ | 826,801 | $ | 166,853 | $ | 480,615 | $ | 179,333 | ||||||||
Derivative financial instruments (3) | $ | 59,939 | $ | — | $ | 59,939 | $ | — | ||||||||
| Total liabilities measured at fair value | $ | 59,939 | $ | — | $ | 59,939 | $ | — | ||||||||
Fair Value Measurements at December 31, 2010 Using | ||||||||||||||||
Balance at December 31, 2010 | Level 1 | Level 2 | Level 3 | |||||||||||||
| (In thousands) | ||||||||||||||||
Government bonds (1) | $ | 15,362 | $ | — | $ | 15,362 | $ | — | ||||||||
Corporate bonds (1) | 382,454 | 164,706 | 217,748 | — | ||||||||||||
| Cash collateral, restricted | 185,754 | — | — | 185,754 | ||||||||||||
Other investment securities (2) | 104,916 | 86,881 | 18,035 | — | ||||||||||||
| Total assets measured at fair value | $ | 688,486 | $ | 251,587 | $ | 251,145 | $ | 185,754 | ||||||||
Derivative financial instruments (3) | $ | 69,831 | $ | — | $ | 69,831 | $ | — | ||||||||
| Total liabilities measured at fair value | $ | 69,831 | $ | — | $ | 69,831 | $ | — | ||||||||
| (1) | Amounts are included in redemption settlement assets in the unaudited condensed consolidated balance sheets. |
| (2) | Amounts are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. |
| (3) | Amounts are included in other current liabilities and other liabilities in the unaudited condensed consolidated balance sheets. |
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| Corporate Bonds | Seller’s Interest | Due from Securitizations | Cash Collateral, Restricted | |||||||||||||
| (In thousands) | ||||||||||||||||
June 30, 2010 | $ | — | $ | — | $ | — | $ | 171,790 | ||||||||
Total gains (realized or unrealized) | ||||||||||||||||
Included in earnings | — | — | — | 473 | ||||||||||||
Included in other comprehensive income | — | — | — | — | ||||||||||||
Purchases, sales, issuances and settlements | — | — | — | (4,434 | ) | |||||||||||
Transfers in or out of Level 3 | — | — | — | — | ||||||||||||
September 30, 2010 | $ | — | $ | — | $ | — | $ | 167,829 | ||||||||
Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2010 | $ | — | $ | — | $ | — | $ | 473 | ||||||||
| Corporate Bonds | Seller’s Interest | Due from Securitizations | Cash Collateral, Restricted | |||||||||||||
| (In thousands) | ||||||||||||||||
December 31, 2009 | $ | 73,866 | $ | 297,108 | $ | 775,570 | $ | 206,678 | ||||||||
Adoption of ASC 860 and ASC 810 | (73,866 | ) | (297,108 | ) | (775,570 | ) | — | |||||||||
Total gains (realized or unrealized) | ||||||||||||||||
Included in earnings | — | — | — | 143 | ||||||||||||
Included in other comprehensive income | — | — | — | — | ||||||||||||
Purchases, sales, issuances and settlements | — | — | — | (38,992 | ) | |||||||||||
Transfers in or out of Level 3 | — | — | — | — | ||||||||||||
September 30, 2010 | $ | — | $ | — | $ | — | $ | 167,829 | ||||||||
Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2010 | $ | — | $ | — | $ | — | $ | 143 | ||||||||
| Corporate Bonds | Seller’s Interest | Due from Securitizations | Cash Collateral, Restricted | |||||||||||||
| (In thousands) | ||||||||||||||||
June 30, 2009 | $ | 83,559 | $ | 183,673 | $ | 531,386 | $ | 189,668 | ||||||||
Total (losses) gains (realized or unrealized) | ||||||||||||||||
Included in earnings | — | (816 | ) | 1,427 | 85 | |||||||||||
Included in other comprehensive income | 14,129 | — | (23,838 | ) | — | |||||||||||
Purchases, sales, issuances and settlements | — | 28,635 | 23,553 | (4,222 | ) | |||||||||||
Transfers in or out of Level 3 | — | — | — | — | ||||||||||||
September 30, 2009 | $ | 97,688 | $ | 211,492 | $ | 532,528 | $ | 185,531 | ||||||||
Losses for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2009 | $ | — | $ | — | $ | (3,578 | ) | $ | — | |||||||
2010:
| Cash Collateral, Restricted | ||||
| (In thousands) | ||||
| December 31, 2010 | $ | 185,754 | ||
| Total gains (realized or unrealized): | ||||
| Included in earnings | 332 | |||
| Purchases | 2,291 | |||
| Settlements | (9,044 | ) | ||
| Transfers in or out of Level 3 | — | |||
| March 31, 2011 | $ | 179,333 | ||
| Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at March 31, 2011 | $ | 332 | ||
| Corporate Bonds | Seller’s Interest | Due from Securitizations | Cash Collateral, Restricted | |||||||||||||
| (In thousands) | ||||||||||||||||
December 31, 2008 | $ | 28,625 | $ | 182,428 | $ | 428,853 | $ | 175,384 | ||||||||
Total (losses) gains (realized or unrealized) | ||||||||||||||||
Included in earnings | — | 7,727 | (9,149 | ) | 556 | |||||||||||
Included in other comprehensive income | 4,506 | — | (54,125 | ) | — | |||||||||||
Purchases, sales, issuances and settlements | 64,557 | 21,337 | 166,949 | 9,591 | ||||||||||||
Transfers in or out of Level 3 | — | — | — | — | ||||||||||||
September 30, 2009 | $ | 97,688 | $ | 211,492 | $ | 532,528 | $ | 185,531 | ||||||||
Losses for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at September 30, 2009 | $ | — | $ | — | $ | (8,868 | ) | $ | — | |||||||
Corporate Bonds | Seller’s Interest | Due from Securitizations | Cash Collateral, Restricted | |||||||||||||
| (In thousands) | ||||||||||||||||
| December 31, 2009 | $ | 73,866 | $ | 297,108 | $ | 775,570 | $ | 206,678 | ||||||||
| Adoption of ASC 860 and ASC 810 | (73,866 | ) | (297,108 | ) | (775,570 | ) | — | |||||||||
| Total gains (realized or unrealized): | ||||||||||||||||
| Included in earnings | — | — | — | 33 | ||||||||||||
| Purchases, sales, issuances and settlements | — | — | — | (23,011 | ) | |||||||||||
| Transfers in or out of Level 3 | — | — | — | — | ||||||||||||
| March 31, 2010 | $ | — | $ | — | $ | — | $ | 183,700 | ||||||||
| Gains for the period included in earnings attributable to the change in unrealized gains or losses related to assets still held at March 31, 2010 | $ | — | $ | — | $ | — | $ | 33 | ||||||||
14.
For the three and nine months ended September 30, 2009, the Company’s effective tax rate was 17.6% and 32.0%, respectively. During the third quarter of 2009, the Company recognized an $11.7 million tax benefit related to previously established tax reserves to cover various uncertain tax positions, which were no longer necessary due to a United States Tax Court decision, statute of limitations expirations and other factors. The Company’s 2009 effective tax rate without regard to the $11.7 million tax benefit remained 38.8%.
On January 1, 2010, the Company’s deferred tax asset increased by approximately $197.2 million as a result of the adoption of ASC 860 and ASC 810.
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
15.
In the first quarter of 2010, the Company reorganized its segments with Private Label Services and Private Label Credit reflected as one segment. All prior year segment information has been restated to conform to the current presentation. In addition, the Company renamed its other two segments from Epsilon Marketing Services and Loyalty Services to “Epsilon” and “LoyaltyOne,” respectively.
LoyaltyOne includes the Company’s Canadian AIR MILES Reward Program;
Epsilon provides integrated direct marketing solutions that combine database marketing technology and analytics with a broad range of direct marketing services; and
| · | LoyaltyOne includes the Company’s Canadian AIR MILES Reward Program; |
Private Label Services and Credit provides risk management solutions, account origination, funding, transaction processing, customer care and collections services for the Company’s private label retail credit card programs.
| · | Epsilon provides integrated direct marketing solutions that combine database marketing technology and analytics with a broad range of direct marketing services; and |
| · | Private Label Services and Credit provides risk management solutions, account origination, funding, transaction processing, customer care and collections services for the Company’s private label retail credit card programs. |
Three Months Ended September 30, 2010 | LoyaltyOne | Epsilon | Private Label Services and Credit | Corporate/ Other | Eliminations | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Revenues | $ | 184,411 | $ | 170,468 | $ | 349,642 | $ | 357 | $ | (2,435 | ) | $ | 702,443 | |||||||||||
Adjusted EBITDA(1) | 46,478 | 44,091 | 143,894 | (13,988 | ) | (1,584 | ) | 218,891 | ||||||||||||||||
Depreciation and amortization | 5,827 | 21,473 | 8,892 | 1,715 | — | 37,907 | ||||||||||||||||||
Stock compensation expense | 2,514 | 2,305 | 1,779 | 4,377 | — | 10,975 | ||||||||||||||||||
Operating income (loss) | 38,137 | 20,313 | 133,223 | (20,080 | ) | (1,584 | ) | 170,009 | ||||||||||||||||
Interest expense, net | — | — | — | 84,119 | — | 84,119 | ||||||||||||||||||
Income (loss) from continuing operations before income taxes | 38,137 | 20,313 | 133,223 | (104,199 | ) | (1,584 | ) | 85,890 | ||||||||||||||||
Three Months Ended September 30, 2009 | LoyaltyOne | Epsilon | Private Label Services and Credit | Corporate/ Other | Eliminations | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Revenues | $ | 177,008 | $ | 131,926 | $ | 166,982 | $ | 5,515 | $ | — | $ | 481,431 | ||||||||||||
Adjusted EBITDA(1) | 53,186 | 35,196 | 67,845 | (16,061 | ) | — | 140,166 | |||||||||||||||||
Depreciation and amortization | 5,966 | 18,003 | 5,809 | 1,356 | — | 31,134 | ||||||||||||||||||
Stock compensation expense | 3,847 | 1,705 | 1,763 | 7,293 | — | 14,608 | ||||||||||||||||||
Merger and other costs(2) | — | — | — | 878 | — | 878 | ||||||||||||||||||
Operating income (loss) | 43,373 | 15,488 | 60,273 | (25,588 | ) | — | 93,546 | |||||||||||||||||
Interest expense, net | — | — | — | 38,563 | — | 38,563 | ||||||||||||||||||
Income (loss) from continuing operations before income taxes | 43,373 | 15,488 | 60,273 | (64,151 | ) | — | 54,983 | |||||||||||||||||
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Nine Months Ended September 30, 2010 | LoyaltyOne | Epsilon | Private Label Services and Credit | Corporate/ Other | Eliminations | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Revenues | $ | 575,612 | $ | 433,799 | $ | 1,032,106 | $ | 1,510 | $ | (7,329 | ) | $ | 2,035,698 | |||||||||||
Adjusted EBITDA(1) | 158,731 | 102,654 | 416,878 | (44,171 | ) | (5,010 | ) | 629,082 | ||||||||||||||||
Depreciation and amortization | 18,111 | 57,565 | 25,913 | 4,910 | — | 106,499 | ||||||||||||||||||
Stock compensation expense | 7,042 | 6,441 | 5,318 | 15,195 | — | 33,996 | ||||||||||||||||||
Operating income (loss) | 133,578 | 38,648 | 385,647 | (64,276 | ) | (5,010 | ) | 488,587 | ||||||||||||||||
Interest expense, net | — | — | — | 250,673 | — | 250,673 | ||||||||||||||||||
Income (loss) from continuing operations before income taxes | 133,578 | 38,648 | 385,647 | (314,949 | ) | (5,010 | ) | 237,914 | ||||||||||||||||
Nine Months Ended September 30, 2009 | LoyaltyOne | Epsilon | Private Label Services and Credit | Corporate/ Other | Eliminations | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
Revenues | $ | 504,985 | $ | 372,495 | $ | 512,960 | $ | 27,981 | $ | — | $ | 1,418,421 | ||||||||||||
Adjusted EBITDA(1) | 146,419 | 87,717 | 216,314 | (36,002 | ) | — | 414,448 | |||||||||||||||||
Depreciation and amortization | 15,877 | 51,835 | 17,740 | 6,096 | — | 91,548 | ||||||||||||||||||
Stock compensation expense | 10,128 | 6,930 | 6,394 | 19,813 | — | 43,265 | ||||||||||||||||||
Merger and other costs(2) | — | — | — | 3,890 | — | 3,890 | ||||||||||||||||||
Operating income (loss) | 120,414 | 28,952 | 192,180 | (65,801 | ) | — | 275,745 | |||||||||||||||||
Interest expense, net | — | — | — | 103,957 | — | 103,957 | ||||||||||||||||||
Income (loss) from continuing operations before income taxes | 120,414 | 28,952 | 192,180 | (169,758 | ) | — | 171,788 | |||||||||||||||||
| Three Months Ended March 31, 2011 | LoyaltyOne | Epsilon | Private Label Services and Credit | Corporate/ Other | Eliminations | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | 217,674 | $ | 155,684 | $ | 368,910 | $ | 357 | $ | (2,189 | ) | $ | 740,436 | |||||||||||
Adjusted EBITDA (1) | 58,251 | 33,666 | 183,330 | (17,403 | ) | (1,454 | ) | 256,390 | ||||||||||||||||
| Depreciation and amortization | 5,183 | 19,899 | 9,010 | 1,306 | — | 35,398 | ||||||||||||||||||
| Stock compensation expense | 1,967 | 2,293 | 1,644 | 3,180 | — | 9,084 | ||||||||||||||||||
| Operating income (loss) | 51,101 | 11,474 | 172,676 | (21,889 | ) | (1,454 | ) | 211,908 | ||||||||||||||||
| Interest expense, net | — | — | — | 71,459 | — | 71,459 | ||||||||||||||||||
| Income (loss) before income taxes | 51,101 | 11,474 | 172,676 | (93,348 | ) | (1,454 | ) | 140,449 | ||||||||||||||||
| Three Months Ended March 31, 2010 | LoyaltyOne | Epsilon | Private Label Services and Credit | Corporate/ Other | Eliminations | Total | ||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Revenues | $ | 199,670 | $ | 126,307 | $ | 339,204 | $ | 765 | $ | (2,409 | ) | $ | 663,537 | |||||||||||
Adjusted EBITDA (1) | 53,587 | 27,286 | 139,755 | (15,940 | ) | (1,713 | ) | 202,975 | ||||||||||||||||
| Depreciation and amortization | 6,137 | 18,016 | 8,489 | 1,529 | — | 34,171 | ||||||||||||||||||
| Stock compensation expense | 2,163 | 1,970 | 1,762 | 4,711 | — | 10,606 | ||||||||||||||||||
| Operating income (loss) | 45,287 | 7,300 | 129,504 | (22,180 | ) | (1,713 | ) | 158,198 | ||||||||||||||||
| Interest expense, net | — | — | — | 82,706 | — | 82,706 | ||||||||||||||||||
| Income (loss) before income taxes | 45,287 | 7,300 | 129,504 | (104,886 | ) | (1,713 | ) | 75,492 | ||||||||||||||||
| (1) | Adjusted EBITDA is a non-GAAP financial measure equal to net income, |
|
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
16.
In February 2009, the Company completed the sale of the remainder of its utility services business, including the termination of a services agreement and the resolution of certain contractual disputes, to a former utility client.
| September 30, 2010 | December 31, 2009 | |||||||
| (In thousands) | ||||||||
Assets: | ||||||||
Credit card receivables, net | $ | 18,028 | $ | 34,623 | ||||
Assets of discontinued operations | $ | 18,028 | $ | 34,623 | ||||
The following table summarizes the operating results of the discontinued operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2010 | 2009 | 2010 | 2009 | |||||||||||||
| (In thousands) | ||||||||||||||||
Revenue | $ | — | $ | 1,755 | $ | — | $ | 10,089 | ||||||||
Income (loss) before provision for income taxes | — | 744 | — | (20,898 | ) | |||||||||||
(Provision) benefit from income taxes | — | (265 | ) | — | 7,232 | |||||||||||
Income (loss) from discontinued operations | $ | — | $ | 479 | $ | — | $ | (13,666 | ) | |||||||
March 31, 2011 | December 31, 2010 | |||||||
| (In thousands) | ||||||||
Assets: | ||||||||
| Credit card receivables, net | $ | 8,721 | $ | 11,920 | ||||
| Assets of discontinued operations | $ | 8,721 | $ | 11,920 | ||||
On July 15, 2010, the Office of the Comptroller of the Currency (“OCC”) approved an application filed by the Company’s credit card services bank subsidiary, WFNNB, to change the location of the bank to Wilmington, Delaware through the merger of the bank with an interim banking association organized under the laws of the United States and located in Wilmington, Delaware. WFNNB is a national banking association and a limited purpose credit card bank and is regulated, supervised, and examined by the OCC, its primary regulator. WFNNB is also subject to regulation by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. Neither the name of the bank nor any of its assets, liabilities or contemplated business purposes will change as a result of the merger. The merger was completed in August 2010.
18.
| · | elimination of $74 million in redemption settlement assets for those interests retained in the WFN Trusts, |
| · | elimination of $775 million in retained interests classified in due from securitizations, |
| · | consolidation of $4.1 billion in credit card receivables, and |
| · | consolidation of $3.7 billion in asset-backed securities. |
eliminationsecond quarter of $775 million in retained interests classified in due from securitizations,
consolidation of $4.1 billion in credit card receivables, and
consolidation of $3.7 billion in asset-backed securities.
In31, 2011, revenue increased 11.6% to $740.4 million and adjusted EBITDA increased 26.3% to $256.4 million as compared to the prior year period as each of the three segments had solid operating results.
Yeartraditional levels. We expect issuance growth to be in Review Highlights
Our resultsthe mid-single digits for the first nine monthsremainder of 2010 included the following new and renewed agreements:
In January 2010, we announced the signing of a multi-year expansion agreement with New York & Company, a specialty retail apparel chain, to provide a comprehensive database marketing solution that includes customer data management, campaign management, reporting and strategic consulting and analytics services.
In February 2010, we announced the signing of multi-year agreements with Kraft Foods Inc. to provide a comprehensive direct-to-consumer marketing solution, including database and data management, consumer data integration, permission-based email marketing services, multi-channel campaign management and interactive web services.
|
In February 2010, we announced the signing of a new multi-year agreement with Dallas-based La Quinta to provide permission-based email marketing services. In addition, La Quinta also renewed its existing agreement for Epsilon’s ongoing support and management of La Quinta’s frequent guest program.
In March 2010, we announced that Vision Electronics, an AIR MILES Reward Program sponsor since 2007, had signedreward miles redeemed during the three months ended March 31, 2011 increased 10.7% compared to the prior year quarter due to increased travel rewards, as collectors took advantage of the ability to book flights on-line, a multi-year renewal agreement.
In March 2010, our private label credit card banking subsidiary, World Financial Network National Bank, or WFNNB, issued $100.8 millioncapability launched in the fourth quarter of asset-backed securities2010. Recent modifications to investors.
In March 2010, WFNNB completed the renewal of its $550.0 million conduit facility.
In April 2010, we announced the signing of a new 5-year contract with the Liquor Control Board of Ontario, a top-10 AIR MILES Reward Program sponsor and a sponsor since 1998.
In May 2010, we announced that Pharmasave Atlantic, an Atlantic Canadian pharmacy retailer and an AIR MILES Reward Program sponsor since 1995, signed a multi-year renewal agreement.
In May 2010, we announced the signing of a multi-year agreement with Whirlpool Canada LP, one of Canada’s leading marketers and supplier of home appliances, as a sponsor in our AIR MILES Reward Program.
In June 2010, we announced that Washington, D.C.-based AARP has signed a multi-year renewal agreement to provide data and database marketing services in support of AARP’s member acquisition program.
In June 2010, we announced a new sponsor agreement coinciding with an innovative energy conversation campaign with the Ontario Power Authority, representing an expansion of the AIR MILES Reward Program, which were completed in the energy sector.
In June 2010, WFNNB completedordinary course to manage the program and the ultimate redemption rate, also contributed to the increase in redemptions during the first quarter of 2011. We expect redemption growth to moderate and trend to low single-digit year-over-year increases for the remainder of 2011.
In July 2010, we completedoutlook for Epsilon’s business remains strong as the segment continues to benefit from client wins and the acquisition of the Direct Marketing Services and Database Marketing divisions of Equifax, Inc., collectively, DMS. DMS, provides proprietary data-driven, integratedmade in July 2010. DMS continues to meet expectations as it is contributing not only to data product offerings but also to developing our on-line capabilities.
In July 2010, we announced the signingliquidity, capital resources or results of a multi-year renewal agreement with New York, N.Y.-based JPMorgan Chase, providing digital marketing services in support of JPMorgan Chase’s Credit Card Services group.
In July 2010, WFNNB issued $450.0 million of asset-backed securities to investors.
In July 2010,
In August 2010, we announcedservices, and advanced analytics to perform data-driven customer acquisition and retention campaigns. The purchase price is approximately $345 million plus a working capital adjustment. We expect it to be slightly accretive to earnings per share in 2011 and anticipate that the Manitoba Liquor Control Commission, an AIR MILES Reward Program sponsor since 1998, signed a multi-year renewal agreement.
In August 2010, we entered into a new term loan agreement with Bank of Montreal and various other agents. At closing, we borrowed $221.0 million. In September 2010, we exercised the option to increase and borrowed an additional $15.0 million.
In August 2010, WFNNB completed its charter relocation from Columbus, Ohio to Wilmington, Delaware, providing additional flexibilitythis acquisition will close in the managementsecond quarter of our credit card programs going forward.
In August 2010, we announced
In August 2010, we announced the signing of a multi-year agreement with David’s Bridal, Inc., parent company of Priscilla of Boston and a leading retailer of bridal and special occasion attire, to provide private label credit card services.
In September 2010,
In September 2010, we announced the signing of a new multi-year agreement with MyPoints.com, an online loyalty marketing service, to provide co-brandprivate label credit card services.
In September
In September 2010, we announcedyear as the signing of an expansion agreement with leading specialty retailer Chico’seconomy continues to provide data overlay services.
2010. statements for 2011. Should one of the AIR MILES Reward Program’s top five sponsors materially modify its agreement with us in 2011, it could significantly shift the allocation of deferred revenue between the service element and redemption element. This change in allocation between the deferred revenue elements could impact the timing of revenue recognition, as the redemption element is recognized as AIR MILES reward miles are redeemed while the service element is recognized on a pro-rata basis over the estimated life of an AIR MILES reward mile, or 42 months. Income from continuing operations Stock compensation expense Provision for income taxes Interest expense, net Merger and other costs(1) Depreciation and other amortization Amortization of purchased intangibles Adjusted EBITDA Revenue: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Eliminations Total Adjusted EBITDA(1): LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Eliminations Total Stock compensation expense: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Total Depreciation and amortization: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Total Operating income from continuing operations: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Eliminations Total Adjusted EBITDA margin(2): LoyaltyOne Epsilon Private Label Services and Credit Total Segment operating data: Private Label statements generated Credit sales Average credit card receivables AIR MILES reward miles issued AIR MILES reward miles redeemed Adjusted EBITDA is equal to net income, Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on operating expenses. : Revenue: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Eliminations Total Adjusted EBITDA(1): LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Eliminations Total Stock compensation expense: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Total Depreciation and amortization: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Total Operating income from continuing operations: LoyaltyOne Epsilon Private Label Services and Credit Corporate/Other Eliminations Total Adjusted EBITDA margin(2): LoyaltyOne Epsilon Private Label Services and Credit Total Segment operating data: Private Label statements generated Credit sales Average credit card receivables AIR MILES reward miles issued AIR MILES reward miles redeemed increases in the number of AIR Miles reward miles redeemed were offset in part by a net decrease of approximately CAD $13.4 million in amortized revenue related to the conversion of a certain split-fee to non-split fee program. Depreciation and other Adjusted EBITDA. For purposes of the discussion below, adjusted EBITDA is equal to net income Receivables outstanding—principal Principal receivables balances contractually delinquent: 31 to 60 days 61 to 90 days 91 or more days Total Average credit card receivables Net charge-offs of principal receivables Net charge-offs as a percentage of average credit card receivables (annualized) Financing Activities. Cash used in financing activities was main bank subsidiary, WFNNB, were 15%, 14% and 16%, respectively, at March 31, 2011. months, including the repayment of the $250.0 million of our Series B senior notes due May 16, 2011. markets at the time. Term notes Conduit facilities(1) Total(2) Amount represents borrowing capacity, not outstanding borrowings. As of concluded that as of DMS beginning in July 2011. Period During 2010: July 1-31 August 1-31 September 1-12 September 13-30 Total During the period represented by the table, /s/ other than those noted below with the adoption of Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 860, “Transfers and Servicing,” and ASC 810, “Consolidation,” 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 Annual Report filed on Form 10-K for the fiscal year ended December 31, 2009.Effective January 1, 2010, our seller’s interest, interest-only strips and retained interest, which were recorded at estimated fair value, have been reclassified, derecognized or eliminated upon adoption of ASC 860 and ASC 810. Additionally, with the consolidation of World Financial Network Credit Card Master Trust, or Master Trust, World Financial Network Credit Card Master Note Trust, or Master Trust I, World Financial Network Credit Card Master Note Trust II, or Master Trust II, and World Financial Network Credit Card Master Trust III, or Master Trust III, or collectively, the WFN Trusts, and the World Financial Capital Credit Card Master Note Trust, or the WFC Trust, the estimate for the allowance for loan loss has become a critical accounting estimate.Management evaluates its allowance for loan loss monthly for adequacy. The allowance is maintained through an adjustment to the provision for loan loss. In estimating the inherent loan losses in the credit card portfolio, we utilize a migration analysis of delinquent and current credit card receivables. Migration analysis is a technique used to estimate the likelihood that a credit card receivable will progress through the various stages of delinquency and to charge-off. The migration analysis considers uncollectible principal, interest and fees reflected in credit card receivables. In determining the proper level of the allowance for loan loss, management also considers factors that may impact loan loss experience, including seasoning, loan volume and amounts, payment rates and forecasting uncertainties.will beis effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early adoption is permitted. If we elect early adoption and the adoption is during an interim period, we will be requiredJanuary 1, 2011. We elected to applyadopt this ASU retrospectively fromprospectively. Revenue associated with the beginningservice element of our fiscal year. We can also electAIR MILES Reward Program has historically been determined using the residual method. Based on the sponsor contracts expected to apply this ASU retrospectively for all periods presented. We are currently evaluating the impact thatbe signed, renewed or materially modified in 2011, the adoption of ASU 2009-13 will have on our consolidated financial statements.In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurementsdid not and Disclosures,” which amends ASC 820, “Fair Value Measurements and Disclosures,”is not expected to add separate disclosures about purchases, sales, issuances and settlements related to Level 3 measurements. The requirement to provide the Level 3 disclosures about purchases, sales, issuances and settlements will be effective for interim and annual periods beginning after December 15, 2010. The adoption of ASU 2010-06 for the separate Level 3 disclosures will only impact disclosures and will not have a material impact on our unaudited condensed consolidated financial statements.new and amended disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010. The adoption of ASU 2010-20 will only impactimpacted disclosures and willdid not have a material impact on our consolidated financial statements.Accounting Treatment for SecuritizationsWe have consolidated the credit card securitization trusts used in our securitization transactions, as the WFN Trusts and the WFC Trust were no longer exempt from consolidation effective January 1, 2010, upon our adoption of ASC 860 and ASC 810.At adoption, we added approximately $3.4 billion of assets, including a $0.5 billion addition to loan loss reserves, and approximately $3.7 billion of liabilities to our unaudited condensed consolidated balance sheets.financial statements. ASU 2010-20 also requires enhanced disclosures for troubled debt restructurings, or TDR, but the effective date of these disclosures was deferred.impactASU provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a TDR by clarifying the existing guidance on whether (1) the creditor has granted a concession and (2) whether the debtor is experiencing financial difficulties. The amendments in the ASU will be effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the new accountingannual period of adoption. Early adoption is permitted. For purposes of measuring impairment of receivables that are newly considered impaired as a result of this ASU, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. In addition, the ASU will also require additional disclosures about TDR activities along with the disclosures required by ASU 2010-20 but were previously deferred in the period of adoption. We do not expect the adoption of this statement to have a material impact on our financial condition, results of operations, or cash flows.reductionnon-GAAP financial measure equal to stockholders’ equity of $0.4 billion. The adoption required a full consolidation ofnet income, the securitization trusts in accordance withmost directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP.Subsequent to January 1, 2010, our unaudited condensed consolidated statements of income no longer reflect securitization income, but instead reflect finance charges and certain other income associated with the securitized credit card receivables. Net charge-offs associated with credit card receivables impact our provision for loan loss reflected in our total operating expenses. Interest expense associated with debt issued from the trusts to third-party investors is reported in securitization funding costs. Additionally, we no longer record initial gains on new securitization activity since securitized credit card loans no longer receive sale accounting treatment, nor are there any gains or losses on the revaluation of the interest-only strip receivable, as that asset is not recognized in a transaction accounted for as a secured borrowing. Since our securitization transactions are accounted for under the new accounting rules as secured borrowings rather than asset sales, the cash flows from these transactions are presented as cash flows from financing activities rather than cash flows from operating or investing activities.Regulatory MattersThe new Federal Reserve Board guidelines on late fees that can be charged by financial institutions became effective on August 22, 2010. In anticipation of the late fee guidelines, we modified cardholder terms to offset the impact of any decline in average late fees charged. The final guidelines had less impact than initially expected as they provide for: (1) a $25 maximum late fee compared to our original expectation of $20, and (2) late fees to be charged in excess of the $25 maximum for repeat offenses within a six month period. In response to the final guidelines, we have changed minimum payments and modified late fee structures effective for billing cycles beginning in November 2010.On July 15, 2010, the Office of the Comptroller of the Currency, or OCC, approved an application filed by our credit card services bank subsidiary, WFNNB, to change the location of the bank to Wilmington, Delaware through the merger of the bank with an interim banking association organized under the laws of the United States and located in Wilmington, Delaware. WFNNB is a national banking association and a limited purpose credit card bank and is regulated, supervised and examined by the OCC, its primary regulator. WFNNB is also subject to regulation by the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation. Neither the name of the bank nor any of its assets, liabilities or contemplated business purposes will change as a result of the merger. The merger was completed in August 2010.On September 27, 2010, the Board of the Federal Deposit Insurance Corporation adopted new safe harbors relating to the treatment of securitizations in receivership or conservatorship. The new safe harbor rules include a grandfathering provision that we believe will allow the credit card securitization trusts used in our securitization program to continue to benefit from the protections under the safe harbor to the same extent as prior securitizations issued by those trusts. Therefore we do not expect the adoption of the new rule to adversely affect our ability to securitize our receivables. However, because the new safe harbors were recently adopted, participants in the securitization market, including investors in asset-backed securities and the rating agencies that rate our asset-backed securities, are continuing to evaluate the effect of the new safe harbors.OutlookWe expect double-digit growth in both consolidated revenue and consolidated adjusted EBITDA for the fourth quarter. Private Label Services and Credit and Epsilon are expected to provide positive revenue growth and adjusted EBITDA growth, while LoyaltyOne is expected to provide positive revenue growth but a decline in adjusted EBITDA.LoyaltyOneLoyaltyOne is expected to report a decline in adjusted EBITDA primarily due to the run-off of deferred revenue related to the conversion of a certain split fee to non-split fee program that began in May 2008. In conjunction with this conversion, we changed our estimate of breakage from one-third to 28%. The change in estimate had no impact on the total redemption liability, but reduced the amount of deferred breakage within the redemption liability that is expected to be recognized over the expected life of the mile.The deferred revenue associated with the conversion of a split fee sponsor to a non-split fee sponsor was recognized as AIR MILES reward miles were redeemed and was fully amortized in the third quarter of 2010. Comparatively, revenue associated with breakage is recognized ratably over the estimated life of a mile. Although our deferred breakage element continues to build, the growth rate has been impacted by weak AIR MILES reward miles issuance in the later part of 2009 and 2010. We believe this will negatively impact our redemption revenue. Based on AIR MILES reward miles issuance forecasts, the negative impact of this timing issue should moderate by mid-2011.While we believe that the AIR MILES Reward Program tends to be resilient during economic swings, macroeconomic factors, such as the overall health of the Canadian economy, may impact collector behavior. Therefore, we could experience an impact to our sponsor mix resulting in lower-priced miles being issued, which could impact our operating margins. In the latter part of 2008 and 2009, we started to see a shift in the sponsor mix, and given the deferred nature of our revenue recognition, this impact is expected to be reflected in our results of operations for the second half of 2010. In 2010, we have seen a slight positive shift in sponsor mix.AIR MILES reward miles issued during the third quarter of 2010 decreased 3.9% compared to the third quarter of 2009 due to reduced promotional activity in the grocer sector and generally flat consumer credit card spending compared to the prior corresponding quarter. Growth in credit card spending was sluggish as a result of less buoyant consumer spending brought on by the slowing the economic recovery in Canada.LoyaltyOne also has a partnership interest in an entity operating a Brazilian coalition loyalty program. The initial phase is currently in progress and a further planned investment of up to $15.0 million in the initiative is dependent on the success of the initial phase and the timing of the phased program rollout. The program is in the process of securing long-term agreements with select major sponsors, while preparing for a national rollout with them in early 2011.EpsilonWe believe that the outlook for Epsilon’s business remains strong as the major offerings continue to demonstrate positive momentum, with expected growth of 20% in revenue and adjusted EBITDA in the fourth quarter of 2010 as compared to the fourth quarter of 2009. Specifically, the database/digital businesses continue to benefit from strong new client wins, producing a solid implementation stream throughout 2010. We also believe that Abacus’ continued growth demonstrates a return to stability in retail and catalog marketing budgets. This trend suggests a positive economic outlook from these key verticals, which we expect will reinforce the value of data-driven ROI-based marketing strategies in the overall marketing mix.Finally, the DMS acquisition has been integrated into our Epsilon segment. DMS provides proprietary data-driven, integrated marketing solutions through two complementary offerings: database marketing and hosting,and data services, including U.S. consumer demographic information. The DMS acquisition is not expected to materially benefit earnings in 2010, but is expected to be accretive to earnings in 2011.Private Label Services and CreditFor the third quarter of 2010, credit trends were positive with principal charge-offs at 8.3% of average total receivables, improving from 9.4% for the third quarter of 2009. Charge-off rates continue to trend lower as, due to the length of severity of the economic downturn, there is no longer a direct correlation between loan loss rates and unemployment levels. Delinquency rates, a good predictor of future losses, improved slightly to 6.1% of principal receivables at September 30, 2010 from 6.2% at September 30, 2009. Delinquency rates continue to trend downward on a seasonally adjusted basis. However, the September 2010 delinquency rate was 10 to 20 basis points higher than predicted by normal seasonality. We believe that the changes incorporated in cardholder terms during 2010, including raising annual percentage rates in March and increasing minimum payments from $10 to $20 in June, have resulted in two small increases that are working their way through the delinquency rate. Finally, cardholder spending has slowed from the first half of 2010. For the third quarter of 2010, credit sales increased 7.2%, driven primarily by new credit card portfolios.For the fourth quarter of 2010, average receivable balances are expected to be flat year-over-year as new programs anniversary. The provision for loan loss will increase during the fourth quarter from the third quarter of 2010 due to the seasonal buildup in credit card receivables and will exceed actual loan loss charge-offs.Use of Non-GAAP Financial MeasuresAdjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable GAAP, financial measure, plus stock compensation expense, provision for income taxes, interest expense, net, merger and other costs, depreciation and other amortization and amortization of purchased intangibles.measuresmeasure 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. Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands) $ 53,059 $ 45,317 $ 147,033 $ 116,753 10,975 14,608 33,996 43,265 32,831 9,666 90,881 55,035 84,119 38,563 250,673 103,957 — 878 — 3,890 17,196 15,364 50,101 45,715 20,711 15,770 56,398 45,833 $ 218,891 $ 140,166 $ 629,082 $ 414,448 (1)Represents investment banking, legal and accounting costs directly associated with the proposed merger with an affiliate of The Blackstone Group. Other costs represent compensation charges related to the departure of certain employees resulting from cost saving initiatives and other non-routine costs associated with the disposition of certain businesses. For the Three Months Ended March 31, 2011 2010 (In thousands) Net income $ 86,376 $ 46,654 Stock compensation expense 9,084 10,606 Provision for income taxes 54,073 28,838 Interest expense, net 71,459 82,706 Depreciation and other amortization 16,754 16,325 Amortization of purchased intangibles 18,644 17,846 Adjusted EBITDA $ 256,390 $ 202,975 Continuing OperationsSeptember 30, 2010March 31, 2011 compared to the three months ended September 30, 2009 Three Months Ended
September 30, Change 2010 2009 $ % (In thousands, except percentages) $ 184,411 $ 177,008 $ 7,403 4.2 % 170,468 131,926 38,542 29.2 349,642 166,982 182,660 109.4 357 5,515 (5,158 ) (93.5 ) (2,435 ) — (2,435 ) NM * $ 702,443 $ 481,431 $ 221,012 45.9 % $ 46,478 $ 53,186 $ (6,708 ) (12.6 )% 44,091 35,196 8,895 25.3 143,894 67,845 76,049 112.1 (13,988 ) (16,061 ) 2,073 (12.9 ) (1,584 ) — (1,584 ) NM * $ 218,891 $ 140,166 $ 78,725 56.2 % $ 2,514 $ 3,847 $ (1,333 ) (34.7 )% 2,305 1,705 600 35.2 1,779 1,763 16 0.9 4,377 7,293 (2,916 ) (40.0 ) $ 10,975 $ 14,608 $ (3,633 ) (24.9 )% $ 5,827 $ 5,966 $ (139 ) (2.3 )% 21,473 18,003 3,470 19.3 8,892 5,809 3,083 53.1 1,715 1,356 359 26.5 $ 37,907 $ 31,134 $ 6,773 21.8 % $ 38,137 $ 43,373 $ (5,236 ) (12.1 )% 20,313 15,488 4,825 31.2 133,223 60,273 72,950 121.0 (20,080 ) (25,588 ) 5,508 (21.5 ) (1,584 ) — (1,584 ) NM * $ 170,009 $ 93,546 $ 76,463 81.7 % 25.2 % 30.0 % (4.8 )% 25.9 26.7 (0.8 ) 41.2 40.6 0.6 31.2 % 29.1 % 2.1 % 34,827 31,064 3,763 12.1 % $ 2,046,490 $ 1,909,165 $ 137,325 7.2 % $ 4,909,977 $ 4,217,159 $ 692,818 16.4 % 1,124,363 1,169,492 (45,129 ) (3.9 )% 844,509 777,422 67,087 8.6 % Three Months Ended March 31, Change 2011 2010 $ % (In thousands, except percentages) Revenue: LoyaltyOne $ 217,674 $ 199,670 $ 18,004 9.0 % Epsilon 155,684 126,307 29,377 23.3 Private Label Services and Credit 368,910 339,204 29,706 8.8 Corporate/Other 357 765 (408 ) (53.3 ) Eliminations (2,189 ) (2,409 ) 220 nm * Total $ 740,436 $ 663,537 $ 76,899 11.6 % LoyaltyOne $ 58,251 $ 53,587 $ 4,664 8.7 % Epsilon 33,666 27,286 6,380 23.4 Private Label Services and Credit 183,330 139,755 43,575 31.2 Corporate/Other (17,403 ) (15,940 ) (1,463 ) 9.2 Eliminations (1,454 ) (1,713 ) 259 nm * Total $ 256,390 $ 202,975 $ 53,415 26.3 % Stock compensation expense: LoyaltyOne $ 1,967 $ 2,163 $ (196 ) (9.1 )% Epsilon 2,293 1,970 323 16.4 Private Label Services and Credit 1,644 1,762 (118 ) (6.7 ) Corporate/Other 3,180 4,711 (1,531 ) (32.5 ) Total $ 9,084 $ 10,606 $ (1,522 ) (14.4 )% Depreciation and amortization: LoyaltyOne $ 5,183 $ 6,137 $ (954 ) (15.5 )% Epsilon 19,899 18,016 1,883 10.5 Private Label Services and Credit 9,010 8,489 521 6.1 Corporate/Other 1,306 1,529 (223 ) (14.6 ) Total $ 35,398 $ 34,171 $ 1,227 3.6 % Operating income: LoyaltyOne $ 51,101 $ 45,287 $ 5,814 12.8 % Epsilon 11,474 7,300 4,174 57.2 Private Label Services and Credit 172,676 129,504 43,172 33.3 Corporate/Other (21,889 ) (22,180 ) 291 (1.3 ) Eliminations (1,454 ) (1,713 ) 259 nm * Total $ 211,908 $ 158,198 $ 53,710 34.0 % LoyaltyOne 26.8 % 26.8 % — % Epsilon 21.6 21.6 — Private Label Services and Credit 49.7 41.2 8.5 Total 34.6 % 30.6 % 4.0 % Segment operating data: Private label statements generated 34,746 36,241 (1,495 ) (4.1 )% Credit sales $ 1,953,699 $ 1,852,730 $ 100,969 5.4 % Average credit card receivables $ 4,968,459 $ 5,185,147 $ (216,688 ) (4.2 )% AIR MILES reward miles issued 1,110,538 1,037,679 72,859 7.0 % AIR MILES reward miles redeemed 988,645 893,153 95,492 10.7 % (1) from continuing operations, plus stock compensation expense, provision for income taxes, interest expense, net, mergerdepreciation and other costs, depreciationamortization, and amortization.amortization of purchased intangibles. For a reconciliation of adjusted EBITDA to net income, from continuing operations, the most directly comparable GAAP financial measure, see “Use of Non-GAAP Financial Measures” included in this report.(2) * Not MeaningfulmeaningfulResults:Results$221.0$76.9 million, or 45.9%11.6%, to $702.4$740.4 million for the three months ended September 30, 2010March 31, 2011 from $481.4$663.5 million for the comparable period in 2009.three months ended March 31, 2010. The net increase was due to the following:•Transaction. Revenue decreased $22.4 million, or 24.7%, to $68.2 million for the three months ended September 30, 2010 due to several factors:elimination of servicing fees of $17.3fromor 0.2%, to $76.8 million for the credit card securitization trusts, as a result of the adoption of ASC 860 and ASC 810. In its capacity as a servicer, each of our respective banks earns a fee from the credit card securitization trusts to service and administer its receivables, collect payments, and charge-off uncollectible receivables. Upon consolidation of the credit card securitization trusts, this fee was eliminated; anda decline in merchant fees, which are transaction fees chargedthree months ended March 31, 2011 due primarily to the retailer, of $15.5 million attributable to increases in royalty payments to our retail clients, as well as a decline in fees earned from our deferred programs.These declines were offset in part by increased milesmile issuance fees, of $5.4or service element revenue, increased $5.8 million due in part to a favorable foreign currency exchange rate. The average foreign currency exchange rate for the current year period increased to $0.96 as compared to $0.91 in the prior year period. Issuance fees in local currency (Canadian dollars) increased CAD $3.5 million dueand to growth in the number of AIR MILES reward miles issued in the prior periods. Our issuance fees, which consist of fees for marketing and administrative services provided to sponsors, are recognized pro rata over the estimated life of an AIR MILES reward mile. Additionally, debt cancellation premiums paid by our credit card holders increased $5.4 million due to higher volumes.•Redemption. Revenue decreased $0.4 million, or 0.3%, to $120.4 million for the three months ended September 30, 2010. Redemption revenue in local currency (Canadian dollars) decreased approximately CAD $7.4 million. Redemption revenue was negatively impacted by a decline in the run-off of deferred revenue related to the conversion of a certain split-fee to non-split fee program of CAD $18.4 million. This decrease was offset by an increase in redemption revenue of CAD $11.0 million, consistent with the increase in AIR MILES reward miles redeemed of 8.6%.•Securitization income. Securitization income decreased $98.7 million. Upon adoption of ASC 860 and ASC 810 and the consolidation of the credit card securitization trusts, securitization income is no longer reflected. Amounts that were previously included in this financial statement line item are now reflected in finance charges, net in our unaudited condensed consolidated statements of income.•Finance charges, net. Revenue increased $311.4 million to $327.7 million for the three months ended September 30, 2010. On a conformed presentation, adjusting 2009 securitization income for securitization funding costs and credit losses, revenue increased $78.2 million. The increase was a result of continued positive trends in average receivable balances of 16.4% and an increase in our gross yield of approximately 200 basis points from the comparable period.•Database marketing fees and direct marketing. Revenue increased $37.8 million, or 29.2%, to $167.1 million for the three months ended September 30, 2010. The database/digital businesses continue to build from recent client signings and expansion of services to existing clients, increasing 23.3% for the three months ended September 30, 2010. The positive trends in our catalog business are continuing as our large catalog coalition database, Abacus, achieved solid revenue growth of 10.7% during the third quarter of 2010 as the data sector continued to show positive momentum. Additionally, the recent DMS acquisition added $12.6 million in revenue.•Other revenue. Revenue decreased $6.7 million, or 26.0%, to $19.1 million for the three months ended September 30, 2010. Included in the third quarter of 2009 was revenue from the sale of certain licenses in conjunction with an outsourcing agreement. Additionally, investment revenue of $1.6 million frominvestments held by LoyaltyOne in the credit card securitization trusts was eliminated due to their consolidation in 2010 upon adoption of ASC 860 and ASC 810. These decreases were offset in part by additional consulting revenue at LoyaltyOne.Cost of operations. Cost of operations increased $57.7 million, or 17.7%, to $384.3 million for the three months ended September 30, 2010. The increase was driven by the following:higher payroll and benefit costs at Epsilon of $16.2 million and Private Label Services and Credit of $6.7 million, respectively, due to the DMS acquisition, the addition of a customer call center with the Charming Shoppes acquisition, and to support overall growth;increased data processing costs at Epsilon of $5.8 million from new database builds coming online and the assumption of expenses related to the DMS acquisition;increases in the cost of redemptions for the AIR MILES Reward Program of $6.4 million, driven by the increase in average foreign currency exchange rates. The cost of redemptions for the AIR MILES Reward Program in local currency increased CAD $1.6 million, in part from increased redemptions; andcredit card related expenses such as marketing, stationary and supplies and postage rose $8.2 million in the current period as compared to the prior year period due to higher volumes and changes in cardholder terms.General and administrative. General and administrative expenses decreased $10.4 million, or 34.4%, to $19.8 million for the three months ended September 30, 2010. The decrease was driven by costs associated with the sale of certain licenses incurred in the third quarter of 2009 along with a decrease in medical and benefit costs.Provision for loan loss. Provision for loan loss was $90.5 million for the three months ended September 30, 2010. In 2009, net losses were netted against securitization income. On a conformed presentation, provision for loan loss decreased $9.1 million as compared to the prior year period net losses of $99.6 million. The decrease was a result of continued declines in the loss rate.Depreciation and other amortization. Depreciation and other amortization increased $1.8 million, or 11.9%, to $17.2 million for the three months ended September 30, 2010 due to additional capital expenditures placed in service.Amortization of purchased intangibles. Amortization of purchased intangibles increased $4.9 million, or 31.3%, to $20.7 million for the three months ended September 30, 2010. The increase was primarily related to the amortization of $2.1 million associated with the intangible assets acquired in the Charming Shoppes acquisition in October 2009 and $2.7 million associated with the intangible assets acquired in the DMS acquisition in July 2010.Interest expense. Total interest expense, net increased $45.5 million, or 118.1%, to $84.1 million for the three months ended September 30, 2010 from $38.6 million for the comparable period in 2009. The increase was due to the following:•Securitization funding costs. Securitization funding costs were $43.0 million for the three months ended September 30, 2010. In 2009, these costs were netted against securitization income and totaled $34.9 million. In 2010, with the consolidation of the WFN Trusts and the WFC Trust, amounts are now reflected as an expense. The increase in these costs from 2009 relates to increased borrowings due to the growth in the portfolio and the amortization of securitization fees.•Interest expense on certificates of deposit. Interest expense on certificates of deposit increased $0.7 million to $7.3 million for the three months ended September 30, 2010 from $6.6 million for the comparable period in 2009 due to an increase in the average balance offset by a decline in the interest rate.•Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net increased $1.9 million, to $33.8 million for the three months ended September 30, 2010 from $31.9 million for the comparable period in 2009. The increase in interest expense is related to an increase in the amortization of the discount associated with our convertible senior notes.Merger costs (reimbursements). In 2010, there were no merger costs or reimbursements. During the three months ended September 30, 2009, we incurred minimal legal costs associated with our proposed merger with an affiliate of The Blackstone Group. We do not expect any future costs associated with the proposed merger.Taxes. Income tax expense increased $23.1 million to $32.8 million for the three months ended September 30, 2010 from $9.7 million for the comparable period in 2009. In 2009, we recognized an $11.7 million tax benefit related to previously established tax reserves to cover various uncertain tax positions, which were no longer necessary during the period ended September 30, 2009. The remaining increase was due in part to an increase in taxable income, offset by a decline in our effective tax rate to 38.2% as compared to 38.8%, exclusive of the tax benefit recognized.Income (loss) from discontinued operations. In 2010, there were no gains or losses associated with discontinued operations. Income from discontinued operations, net of taxes, of $0.5 million in the three months ended September 30, 2009 related to the terminated operations of our credit program for web and catalog retailer VENUE.Segment Revenue and Adjusted EBITDA:Revenue. Total revenue increased $221.0 million, or 45.9%, to $702.4 million for the three months ended September 30, 2010 from $481.4 million for the comparable period in 2009. The increase was due to the following:•LoyaltyOne. Revenue increased $7.4 million, or 4.2%, to $184.4 million for the three months ended September 30, 2010 due to a favorable foreign currency exchange rate. In local currency (Canadian), revenue declined CAD $4.6 million, as increases in issuance revenue of CAD $3.5 million were offset by declines in redemption revenue of CAD $7.4 million. Although redemptions increased 8.6%, increasing redemption revenue by CAD $11.0 million in total redemption revenue decreased as a result of a decline in the run-off of deferred revenue of CAD $18.4 million related to the conversion of a certain split-fee to non-split fee program.•Epsilon. Revenue increased $38.5 million, or 29.2%, to $170.5 million for the three months ended September 30, 2010. The database/digital businesses continued their trend of double-digit revenue growth increasing 23.3%. These businesses have benefited from the number of signings in 2009 which has continued into 2010. The remaining portion of Epsilon consists primarily of its data business, which includes the large catalog coalition database, Abacus. Abacus achieved solid revenue growth of 10.7% during the third quarter of 2010 continuing the positive trend from the first half of 2010. Additionally, the data business was enhanced by the DMS acquisition, as it added $12.6 million in revenue.•Private Label Services and Credit. Revenue increased $182.7 million, or 109.4%, to $349.6 million for the three months ended September 30, 2010. On a conformed presentation, adjusting 2009 revenue for securitization funding costs and credit losses, revenue increased $48.1 million, or 16.0% due to growth in our average receivable balances which increased 16.4%, and an increase in gross yield of approximately 200 basis points. This was offset in part by a reduction in transaction revenue, attributable to increases in royalty payments to our retail clients, as well as a decline in fees earned from our deferred programs.•Corporate/Other. Revenue decreased $5.2 million to $0.4 million for the three months ended September 30, 2010 resulting primarily from the third quarter 2009 sale of certain licenses in conjunction with an outsourcing agreement.Adjusted EBITDA. For purposes of the discussion below, adjusted EBITDA is equal to income from continuing operations plus stock compensation expense, provision for income taxes, interest expense, net, merger and other costs, depreciation and amortization. Adjusted EBITDA increased $78.7 million, or 56.2%, to $218.9 million for the three months ended September 30, 2010 from $140.2 million for the comparable period in 2009. The increase was due to the following:•LoyaltyOne. Adjusted EBITDA decreased $6.7 million, or 12.6%, to $46.5 million and adjusted EBITDA margin decreased to 25.2% for the three months ended September 30, 2010 compared to 30.0% in the same period in 2009. The decrease in 2010 was primarily due to the run-off of deferred revenue associated with the conversion of a split-fee sponsor to a non-split fee sponsor which was offset in part by increased margins on cost of AIR MILES reward miles redeemed.•Epsilon. Adjusted EBITDA increased $8.9 million, or 25.3%, to $44.1 million, but adjusted EBITDA margin decreased to 25.9% for the three months ended September 30, 2010 compared to 26.7% in the same period in 2009. This was driven by double digit revenue growth offset by increases in payroll costs to support this growth, as well as expenses assumed with the DMS acquisition.•Private Label Services and Credit. Adjusted EBITDA increased $76.0 million, or 112.1%, to $143.9 million for the three months ended September 30, 2010 while adjusted EBITDA margin increased to 41.2% for the three months ended September 30, 2010 compared to 40.6% in the same period in 2009. On a conformed presentation, adjusting 2009 for securitization funding costs, adjusted EBITDA increased $41.1 million, or 40.0%, and adjusted EBITDA margin increased to 41.2% from 34.1%. Adjusted EBITDA and adjusted EBITDA margin were positively impacted due to growth in our average receivable balances which increased 16.4% from 2009, improvement in our gross yield, and an improvement in credit losses as compared to the prior year.•Corporate/Other. Adjusted EBITDA increased $2.1 million to a loss of $14.0 million for the three months ended September 30, 2010, primarily related to a decline in payroll and benefits and a general reduction of overall expenses.Results of Continuing OperationsNine months ended September 30, 2010 compared to the nine months ended September 30, 2009 Nine Months Ended
September 30, Change 2010 2009 $ % (In thousands, except percentages) $ 575,612 $ 504,985 $ 70,627 14.0 % 433,799 372,495 61,304 16.5 1,032,106 512,960 519,146 101.2 1,510 27,981 (26,471 ) (94.6 ) (7,329 ) — (7,329 ) NM * $ 2,035,698 $ 1,418,421 $ 617,277 43.5 % $ 158,731 $ 146,419 $ 12,312 8.4 % 102,654 87,717 14,937 17.0 416,878 216,314 200,564 92.7 (44,171 ) (36,002 ) (8,169 ) 22.7 (5,010 ) — (5,010 ) NM * $ 629,082 $ 414,448 $ 214,634 51.8 % $ 7,042 $ 10,128 $ (3,086 ) (30.5 )% 6,441 6,930 (489 ) (7.1 ) 5,318 6,394 (1,076 ) (16.8 ) 15,195 19,813 (4,618 ) (23.3 ) $ 33,996 $ 43,265 $ (9,269 ) (21.4 )% $ 18,111 $ 15,877 $ 2,234 14.1 % 57,565 51,835 5,730 11.1 25,913 17,740 8,173 46.1 4,910 6,096 (1,186 ) (19.5 ) $ 106,499 $ 91,548 $ 14,951 16.3 % $ 133,578 $ 120,414 $ 13,164 10.9 % 38,648 28,952 9,696 33.5 385,647 192,180 193,467 100.7 (64,276 ) (65,801 ) 1,525 (2.3 ) (5,010 ) — (5,010 ) NM * $ 488,587 $ 275,745 $ 212,842 77.2 % 27.6 % 29.0 % (1.4 )% 23.7 23.5 0.2 40.4 42.2 (1.8 ) 30.9 % 29.2 % 1.7 % 106,627 94,086 12,541 13.3 % $ 6,119,733 $ 5,401,527 $ 718,206 13.3 % $ 5,029,052 $ 4,197,426 $ 831,626 19.8 % 3,327,131 3,278,290 48,841 1.5 % 2,538,773 2,321,387 217,386 9.4 % (1)Adjusted EBITDA is equal to income from continuing operations, plus stock compensation expense, provision for income taxes, interest expense, net, merger and other costs, depreciation and amortization. For a reconciliation of adjusted EBITDA to income from continuing operations, the most directly comparable GAAP financial measure, see “Use of Non-GAAP Financial Measures” included in this report.(2)Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on operating expenses.*Not MeaningfulConsolidated Operating Results:Revenue. Total revenue increased $617.3 million, or 43.5%, to $2.04 billion for the nine months ended September 30, 2010 from $1.42 billion for the comparable period in 2009. The increase was due to the following:•Transaction. Revenue decreased $65.5 million, or 23.4%, to $214.1 million for the nine months ended September 30, 2010 due to the following factors:elimination of servicing fees of $53.6 million from the credit card securitization trusts, as a result of the adoption of ASC 860 and ASC 810. In its capacity as a servicer, each of our respective banks earns a fee from the credit card securitization trusts, to service and administer its receivables, collect payments, and charge-off uncollectible receivables. Upon consolidation of the credit card securitization trusts, this fee was eliminated;a decrease in merchant fees, which are transaction fees charged to the retailer, of $29.9 million attributable to increases in royalty payments to our retail clients, as well as a decline in fees earned from our deferred programs; anda decline in transition services revenue of $19.1 million from agreements associated with the acquirers of our merchant services and utility services businesses, which were no longer in place in 2010.These decreases were offset in part by increased AIR MILES reward miles issuance fees of $22.5 million due to a favorable foreign currency exchange rate and growth in our AIR MILES reward miles issued. Our issuance fees, which consist of marketing and administrative services provided to sponsors, are recognized pro rata over the estimated life of an AIR MILES reward mile. The averagemile, or 42 months;forcontributed $7.8 million to the current year periodincrease in revenue. In local currency (Canadian dollars, or CAD), revenue increased to $0.96 as compared to $0.86 in the prior year period. Debt cancellation premiums received from our credit card holders increased $13.2approximately CAD $3.3 million, or 2.3%. Revenue growth of CAD $11.7 million due to higher volumes.•Redemption. Revenue increased $40.0 million, or 11.5%, to $386.8 million for the nine months ended September 30, 2010, which was impacted by a favorable foreign currency rate. Redemption revenue in local currency (Canadian dollars) decreased approximately CAD $4.0 million. Redemption revenue was negatively impacted by a decline in the run-off deferred revenue related to the conversion of a certain split-fee to non-split fee program of CAD $32.8 million. This decrease was offset by an increase in redemption revenue of CAD $28.8 million, consistent with the increase in AIR MILES reward miles redeemed of 9.4%.•Securitization income. Securitization income decreased $315.3 million. Upon adoption of ASC 860 and ASC 810 and the consolidation of the credit card securitization trusts, securitization income is no longer reflected. Amounts that were previously included in this financial statement line item are now reflected in finance charges, net in our unaudited condensed consolidated statements of income.•Finance charges, net. Revenue increased $908.0 million to $953.3 million for the nine months ended September 30, 2010. On a conformed presentation, adjusting 2009 securitization income for securitization funding costs and credit losses, revenue increased $192.2 million. The increase was a result of average receivable balances of 19.8%, credit sales growth of 13.3% and an increase in our gross yield from the prior year period.•Database marketing fees and direct marketing. Revenue increased $62.6 million, or 17.2%, to $427.2 million for the nine months ended September 30, 2010. The database/digital businesses continue to build from recent client signings and expansion of services to existing clients, increasing 16.0% for the nine months ended September 30, 2010. Our catalog business has shown positive trends for the current year as compared to the prior year with our large catalog coalition database, Abacus, achieving solid revenue growth of 12.6%. The data sector continued to show positive momentum. Additionally, the recent DMS acquisition added $12.6 million in revenue for the nine months ended September 30, 2010.•Other revenue. Revenue decreased $12.4 million, or 18.6%, to $54.2 million for the nine months ended September 30, 2010 due to (1) the inclusion in 2009 of revenue from the sale of our MasterCard Incorporated class B stock, (2) the elimination of investment revenue of $5.0 million from investments held by LoyaltyOne in the credit card securitization trusts due to their consolidation in 2010 upon adoption of ASC 860 and ASC 810, and (3) the inclusion in 2009 of revenue from the sale of certain licenses. These decreases were offset in part by additional consulting revenue at LoyaltyOne.$127.7$43.5 million, or 13.1%12.1%, to $1.10 billion$404.5 million for the ninethree months ended September 30,March 31, 2011 as compared to the three months ended March 31, 2010. The increase was driven byresulted primarily from growth across each of our segments, including the following:at Epsilon of $29.3$14.6 million and Private Label Services and Credit of $22.6 million, respectively, due to the DMS acquisition, the addition of a customer call center with the Charming Shoppes acquisition, and to support overall growth;increasedhigher data processing costs at Epsilon of $7.5 million from new database builds coming online and$3.9 million;assumption of expenses related to the DMS acquisition;increases inLoyaltyOne segment, the cost of redemptionsfulfillment for the AIR MILES Reward Program increased $12.0 million as a result of $43.6 million, driven by thea 10.7% increase in average foreign currency exchange ratesthe number of AIR MILES reward miles redeemed; and an increase in redemptions. The costredemptionshigher costs due to growth, including marketing costs, travel costs and other expenses.AIR MILES Reward Program in local currency increased CAD $14.0 million, or 4.9%, due to an increase in miles redeemed; andcredit card related expenses such as marketing, stationary and supplies, credit bureau and postage rose $22.8 million in the current periodthree months ended March 31, 2011 as compared to the same period in the prior yearyear. The provision was impacted by both a decline in rate and volume of credit card receivables. The net charge-off rate improved 150 basis points to 7.9% for the quarter ended March 31, 2011 as compared to 9.4% for the same period duein 2010, with net losses decreasing $24.2 million. The decline in the net charge-off rate reflected the continued improvement in credit quality of the credit card receivables. Net charge-off rates continue to trend lower and delinquency rates, historically a good predictor of future losses, improved to 4.9% of principal credit card receivables at March 31, 2011 from 5.6% at March 31, 2010. Additionally, credit card receivables declined 4.2% primarily as a result of higher volumes and changes in cardholder terms.administrative.administrative. General and administrative expenses decreased $13.7$1.2 million, or 17.8%5.5%, to $63.4$20.9 million for the ninethree months ended September 30,March 31, 2011 as compared to the three months ended March 31, 2010. The decrease was driven primarily by a decline in stock-based compensation expense, partially offset by an increase in medical and benefit costs, for the ninethree months ended September 30, 2010March 31, 2011 as compared to the prior year comparable period, and costs associated with the sale of certain licenses incurred in the third quarter of 2009.period.Provision for loan loss. Provision for loan loss was $275.0 million for the nine months ended September 30, 2010. In 2009, net losses were netted against securitization income. On a conformed presentation, provision for loan loss decreased $22.2 million, or 7.5%, as compared to the prior year comparable period provision for loan loss of $297.2 million. The decrease was a result of continued declines in the loss rate.amortization.amortization. Depreciation and other amortization increased $4.4 million, or 9.6%,slightly to $50.1$16.8 million for the ninethree months ended September 30,March 31, 2011 as compared to $16.3 million for the three months ended March 31, 2010 due to additional capital expenditures including internally developed software projects placed in service during the second half of 2009 and the first nine months of 2010.$10.6$0.8 million, or 23.1%4.5%, to $56.4$18.6 million for the ninethree months ended September 30, 2010.March 31, 2011. The increase was primarily related to the amortization of $6.4 million associated with the intangible assets acquired in the Charming Shoppes acquisition in October 2009 and $2.7 million associated with the intangible assets acquired in the DMS acquisition offset in July 2010.part by certain fully amortized intangible assets at Epsilon.increased $146.7decreased $11.2 million, or 141.1%13.6%, to $250.7$71.5 million for the ninethree months ended September 30, 2010March 31, 2011 from $104.0$82.7 million for three months ended March 31, 2010. The decrease was due to the following:2009.2010 due primarily to an increase in taxable income. The effective tax rate remained relatively consistent at 38.5% for the three months ended March 31, 2011 as compared to 38.2% for the three months ended March 31, 2010.•Securitization funding costs. Securitization funding costs were $128.3 for the nine months ended September 30, 2010. In 2009, these costs were netted against securitization income and totaled $103.3 million. In 2010, with the consolidation of the WFN Trusts and the WFC Trust, amounts are now reflected as an expense. The increase in these costs from 2009 relates to increased borrowings due to growth in the portfolio and the amortization of securitized fees.•Interest expense on certificates of deposit. Interest expense on certificates of deposit increased $3.7 million to $23.5 million for the nine months ended September 30, 2010 from $19.8 million for the comparable period in 2009 due to an increase in the average balance offset in part by a decline in interest rates.•Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net increased $14.7 million, or 17.5%, to $98.9 million for the nine months ended September 30, 2010 from $84.2 million for the comparable period in 2009. The increase in interest expense resulted from an $11.7 million increase in the amortization of the discount associated with our convertible senior notes, an increase of $1.3 million for our credit facilities due to higher average balances and the amortization of debt issuance costs of $1.3 million.Merger costs (reimbursements). In 2010, there were no merger costs or reimbursements. During the nine months ended September 30, 2009, we received a reimbursement of $0.5 million from costs associated with our proposed merger with an affiliate of The Blackstone Group. We do not anticipate any future costs associated with the proposed merger.Taxes. Income tax expense increased $35.9 million9.0%, to $90.9$217.7 million for the ninethree months ended September 30, 2010March 31, 2011. Revenue benefited from $55.0a favorable foreign currency exchange rate, which represented $11.4 million of the increase. Revenue for the AIR MILES Reward Program increased CAD $6.2 million, or 3.0%. Redemption revenue increased a net CAD $3.3 million, or 2.3%, due to a 10.7% increase in AIR MILES reward miles redeemed, which increased redemption revenue by CAD $11.7 million. This increase was offset in part by a CAD $13.4 million net decrease in amortized revenue related to the conversion of a certain split-fee to non split-fee program. Revenue from issuance fees increased CAD $3.4 million due to previous increases in the total number of AIR MILES reward miles issued.comparable period in 2009. In 2009, we recognized an $11.7three months ended March 31, 2011. Strategic database grew by $15.5 million, tax benefit relatedor 25.7%, benefitting from recent client database launches. Within our targeting business, Abacus had solid mid-single digit level growth, with the acquisition of DMS contributing $11.1 million to previously established tax reservesrevenue.cover various uncertain tax positions, which were no longer necessary during$368.9 million for the periodthree months ended September 30, 2009. The remaining increase was due in part toMarch 31, 2011. Finance charges and late fees increased by $35.8 million driven primarily by an increase in taxable income,our gross yield of 390 basis points, offset in part by a 4.2% decline in average credit card receivables. The expansion in our gross yield was in part due to changes in cardholder terms made throughout 2010 which positively impacted our gross yield in the first quarter of 2011, offset in part by the implementation of the of the CARD Act in February 2010 which negatively impacted our gross yield for the first quarter of 2010. This increase was partially offset by a decline$6.0 million reduction in our effective tax rate to 38.2%transaction revenue as compared to 38.8%, exclusivea result of lower merchant fees.tax benefit recognized.Income (Loss) from discontinued operations. In 2010, there were no gains or losses associated with discontinued operations. Loss from discontinued operations, net of taxes, of $13.7 million in the ninethree months ended September 30, 2009March 31, 2011 primarily due to a reduction in transition services being provided. We are currently earning only a minimal amount of revenue related to the sale of the remaining portion of our utility services business, offset by income from the terminated operations of our credit program for web and catalog retailer VENUE.sublease agreements with Fujitsu.Segment Revenue and Adjusted EBITDA:Revenue. Total revenue increased $617.3 million, or 43.5%, to $2.04 billion for the nine months ended September 30, 2010 from $1.42 billion for the comparable period in 2009. The increase was due to the following:•LoyaltyOne. Revenue increased $70.6 million, or 14.0%, to $575.6 million for the nine months ended September 30, 2010 due to a favorable foreign currency exchange rate. The average foreign currency exchange rate for the current year period increased to $0.96 as compared to $0.86 in the prior period. In local currency (Canadian), revenue increased by CAD $2.5 million, as increases in issuance revenue of CAD $9.9 million driven by AIR MILES reward miles issuance growth of 1.5% were offset by declines in redemption revenue of CAD $4.0 million. Although redemptions increased 9.4%, increasing redemption revenue by CAD $28.8 million in total, redemption revenue declined as a result of a CAD $32.8 million decline in the run-off of deferred revenue related to the conversion of a certain split-fee to non-split fee program. Revenue was also negatively impacted by approximately CAD $3.0 million due to a decrease in investment revenue resulting from a decline in our rate of return and lower average balance of redemption settlement assets.•Epsilon. Revenue increased $61.3 million, or 16.5%, to $433.8 million for the nine months ended September 30, 2010. The database/digital businesses continued their trend of double-digit revenue growth increasing 16.0%. Momentum in this group continues to build as, increasingly, large multi-national companies are directing a portion of their marketing spend to Epsilon. These businesses have benefited from the number of client signings in 2009 which has continued into 2010. Our large catalog coalition database, Abacus, achieved solid revenue growth of 12.6% during the nine months ended September 30, 2010, continuing the positive trend from the first half of 2010. The data sector continues to show positive momentum, signifying the demand that marketers have for rich insight to drivetargeted marketing initiatives. Additionally, the data business was enhanced by the DMS acquisition, as it added $12.6 million in revenue.•Private Label Services and Credit. Revenue increased $519.1 million, or 101.2%, to $1.03 billion for the nine months ended September 30, 2010. On a conformed presentation, adjusting 2009 revenue for securitization funding costs and credit losses, revenue increased $118.7 million, or 13.0%. The increase was a result of continued positive trends in average receivable growth of 19.8%, credit sales growth of 13.3%, and an increase in gross yield of approximately 150 basis points. The increase was offset in part by a reduction in transaction revenue, attributable to increases in royalty payments to our retail clients, as well as a decline in fees earned from our deferred programs.•Corporate/Other. Revenue decreased $26.5 million to $1.5 million for the nine months ended September 30, 2010 due primarily to a decline of $19.1 million in transition services revenue from agreements associated with the acquirers of our merchant services and utility services businesses, which were no longer in place in 2010, and the third quarter of 2009 sale of certain licenses in conjunction with an outsourcing agreement. from continuing operations plus stock compensation expense, provision for income taxes, interest expense, net, mergerdepreciation and other costs, depreciationamortization, and amortization.amortization of purchased intangibles. Adjusted EBITDA increased $214.6$53.4 million, or 51.8%26.3%, to $629.1$256.4 million for the ninethree months ended September 30, 2010March 31, 2011 from $414.4$203.0 million for the comparable period in 2009.three months ended March 31, 2010. The increase was due to the following:•LoyaltyOne. Adjusted EBITDA increased $12.3 million, or 8.4%, to $158.7 million and adjusted EBITDA margin decreased to 27.6% for the nine months ended September 30, 2010 compared to 29.0% in the same period in 2009. Adjusted EBITDA was impacted by a favorable exchange rate as well as a decline in realized foreign currency exchange losses. In the second quarter of 2009, LoyaltyOne recognized an exchange loss of $15.9 million related to certain U.S investments held. Excluding the impact of these items, adjusted EBITDA decreased CAD $21.1 million. The decline in adjusted EBITDA margin is largely due to the run-off of deferred revenue associated with the conversion of a split-fee sponsor to a non-split fee sponsor, offset in part by increased margins on cost of AIR MILES reward miles redeemed.•Epsilon. Adjusted EBITDA increased $14.9 million, or 17.0%, to $102.7 million and adjusted EBITDA margin increased to 23.7% for the nine months ended September 30, 2010 compared to 23.5% in the same period in 2009. This was driven by double digit revenue growth offset by increases in payroll costs to support this growth, as well as expenses assumed with the DMS acquisition.•Private Label Services and Credit. Adjusted EBITDA increased $200.6 million, or 92.7%, to $416.9 million for the nine months ended September 30, 2010 while adjusted EBITDA margin decreased to 40.4% for the nine months ended September 30, 2010 compared to 42.2% in the same period in 2009. On a conformed presentation, adjusting 2009 for securitization funding costs, adjusted EBITDA increased $97.2 million, or 30.4%, and adjusted EBITDA margin increased to 40.4% from 35.0%. Adjusted EBITDA and adjusted EBITDA margin were positively impacted by the growth in our average receivable balances, which increased 19.8% from 2009, increases in our credit sales, which increased 13.3% from 2009, improvement in our gross yield and an improvement in credit losses as compared to the prior year.•Corporate/Other. Adjusted EBITDA decreased $8.2 million to a loss of $44.2 million for the nine months ended September 30, 2010 related to an increase in severance costs and an increase in incentive compensation as compared to the prior year period. Additionally, 2009 was impacted by a $2.6 million non-income based tax benefit which did not recur in 2010.rolling to a more delinquent status.becoming further delinquent. 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 collection efforts, we engage collection agencies and outside attorneys to continue those efforts. September 30,
2010 % of
total December 31,
2009 % of
total (In thousands, except percentages) $ 4,705,361 100 % $ 5,332,777 100 % 93,027 2.0 97,024 1.8 64,641 1.3 70,423 1.3 130,547 2.8 157,449 3.0 $ 288,215 6.1 % $ 324,896 6.1 % (In thousands, except percentages) Receivables outstanding – principal $ 4,642,290 100 % $ 5,116,111 100 % Principal receivables balances contractually delinquent: 31 to 60 days 68,180 1.5 % 87,252 1.7 % 61 to 90 days 50,477 1.1 59,564 1.2 91 or more days 109,953 2.3 130,538 2.5 Total $ 228,610 4.9 % $ 277,354 5.4 % charged offcharged-off at the end of the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies. Customer bankruptcies or death. Credit card receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged offcharged-off at the end of theeach month, subsequent to 60 days followingafter the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame. Three Months Ended
September 30, Nine Months Ended
September 30, 2010 2009 2010 2009 (In thousands) $ 4,909,977 $ 4,217,159 $ 5,029,052 $ 4,197,426 102,108 99,614 336,797 297,161 8.3 % 9.4 % 8.9 % 9.4 % For the Three Months Ended March 31, 2011 2010 (In thousands, except percentages) Average credit card receivables $ 4,968,459 $ 5,185,147 Net charge-offs of principal receivables 98,030 122,266 Net charge-offs as a percentage of average credit card receivables 7.9 % 9.4 % Age Since Origination Number of Active Accounts with Balances Percentage of Active Accounts with Balances Percentage of Receivables Outstanding (In thousands, except percentages) 0-12 Months 2,703 23.4 % $ 876,492 18.9 % 13-24 Months 1,578 13.7 654,138 14.1 25-36 Months 1,174 10.2 522,678 11.3 37-48 Months 965 8.3 419,685 �� 9.0 49-60 Months 830 7.2 364,228 7.8 Over 60 Months 4,297 37.2 1,805,069 38.9 Total 11,547 100.0 % $ 4,642,290 100.0 % $693.5$210.4 million and $306.1$206.6 million for the ninethree months ended September 30,March 31, 2011 and 2010, and 2009, respectively. The increase in operating cash flows was primarily due to increased profitability, includingnet of the effect of non-cash charges to income such asitems, and an increase of $275.0 million in the provision for loan loss as a result of the consolidation of the credit card securitization trusts. We also generated positive operating cash flow of $71.9 million from increases in working capital of $5.0 million for the three months ended March 31, 2011 as compared to 2010, including the timing of payments for other assets. Also impacting cash flow from operations was amounts due from the credit card securitization trusts. In 2009, the amounts due from the credit card securitization trusts were included in other assets and resulted in a use of cash as amounts increased during the period. In 2010, with the consolidation of the credit card securitization trusts upon the adoption of ASC 860 and ASC 810, amounts due from the credit card securitization trusts were eliminated. We utilize our cash flow from operations for ongoing business operations, acquisitions and capital expenditures.Activities.Activities. Cash provided by investing activities was $164.2$258.7 million for the ninethree months ended September 30, 2010. Cash used by investing activities was $378.9March 31, 2011 as compared to $443.1 million for the ninethree months ended September 30, 2009.March 31, 2010. Significant components of investing activities are as follows:•Credit Card Receivables Funding. Cash increased $273.9 million due to a decline in receivables from the seasonal pay down of our credit card receivables.•Acquisition. Cash decreased $117.0 million as a result of the DMS acquisition completed on July 1, 2010.•Capital Expenditures. Our capital expenditures for the nine months ended September 30, 2010 were $48.3 million compared to $39.7 million for the comparable period in 2009. We anticipate capital expenditures to be approximately 3% of annual revenue for the foreseeable future.$759.3$307.6 million and $723.2 million for the ninethree months ended September 30,March 31, 2011 and 2010, as compared to cash provided by financing activities of $354.8 million for the nine months ended September 30, 2009.respectively. Our financing activities during the ninethree months ended September 30, 2010March 31, 2011 relate primarily to borrowings and repayments of debt includingand certificates of deposit, and asset-backed securities debt, and repurchases of common stock.810.810, “Consolidation.” The consolidation of World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust, World Financial Network Credit Card Master Note Trust II, and World Financial Network Credit Card Master Trust III, or collectively, the WFN Trusts, and World Financial Capital Credit Card Master Note Trust, or the WFC Trust, resulted in $81.6 million in cash and cash equivalents as of January 1, 2010, which is shown separately from operating, financing and investing activities.In addition As of March 31, 2011, we had $324.0 million of available borrowing capacity under our credit facility. The key loan covenant ratio, core debt to our effortsoperating cash flow, was 2.3 to renew1 at March 31, 2011, as compared to the covenant ratio of 3.75 to 1. Additionally, available liquidity at the bank subsidiary level totaled $3.6 billion, including $225 million of cash. The Tier 1 risk-based capital ratio, leverage ratio and expand our current facilities, we continue to seek new sources of liquidity. We have also expanded our brokered certificates of deposit to supplement liquiditytotal risk-based capital ratio for our credit card receivables.months. Since January 1996, we have sold a majority of the We regularly securitize our credit card receivables originated by WFNNB to WFN Credit Company, LLC and WFN Funding Company II, LLC, which in turn sold them tothrough the WFN Trusts and the WFC Trust as part of our securitization program. In September 2008, we initiated a securitization program for the credit card receivables originated by WFCB, selling them to World Financial Capital Credit Company, LLC which in turn sold them to the WFC Trust.securitization program. These securitization programs are the primary vehicle through which we finance WFNNB’s and WFCB’s credit card receivables.recent unsuitable volumes and pricing levels in the asset-backed securitization markets.September 30, 2010,March 31, 2011, the WFN Trusts and the WFC Trust had approximately $4.4$4.3 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 the WFC Trust and by the performance of the private label credit cards in these securitization trusts.In2010, Master Trust II issued $100.8 million of term asset-backed securities to investors. The offering consisted of $65.0 million of Class A Series 2010-1 asset-backed notes that have a fixed interest rate of 4.2% per year, $9.8 million of Class M Series 2010-1 asset-backed notes that have a fixed interest rate of 5.3% per year, $6.6 million of Class B Series 2010-1 asset-backed notes that have a fixed interest rate of 6.3% per year, $11.6 million of Class C Series 2010-1 asset-backed notes that have a fixed interest rate of 7.0% per year and $7.8 million of Class D Series 2010-1 zero-coupon notes which were retained by us. The Class A notes will mature in November 2012, the Class M notes will mature in December 2012, the Class B notes will mature in January 2013, the Class C notes will mature in February 2013 and the Class D notes will mature in March 2013. With the consolidation of the WFN Trusts, the Class D Series 2010-1 notes are eliminated from the unaudited condensed consolidated financial statements.In July 2010, Master Trust I issued $450.0 million of term asset-backed securities to investors in a public offering. The offering consisted of $355.5 million of Class A Series 2010-A asset-backed notes that have a fixed interest rate of 3.96% per year, $16.9 million of Class M Series 2010-A asset-backed notes that have a fixed interest rate of 5.2% per year, $21.4 million of Class B Series 2010-A asset-backed notes that have a fixed interest rate of 6.75% per year and $56.2 million of Class C Series 2010-A asset-backed notes that have a fixed interest rate of 5.0% per year. The Class A, Class M, Class B and Class C notes will all mature in June 2015. The Class C Series 2010-A notes were retained by us. With the consolidation of the WFN Trusts, the Class C Series 2010-A notes are eliminated from the unaudited condensed consolidated financial statements.At September 30, 2010,31, 2011, we had $3.4$3.3 billion of asset-backed securities debt – owed to securitization investors, of which $885.5 million$1.4 billion is due within the next 12 months.During the first quarter of 2010, we renewed our $550.0 million 2009-VFC1 conduit facility under Master Trust III, extending the maturity to September 30, 2011.During the second quarter of 2010, we renewed our $1.2 billion 2009-VFN conduit facility under Master Trust I, extending the maturity to June 23, 2011, and our $275.0 million 2009-VFN conduit facility under the WFC Trust, extending the maturity to June 3, 2011.September 30, 2010March 31, 2011 for the WFN Trusts and the WFC Trust by year: 2010 2011 2012 2013 2014 &
Thereafter Total (In millions) $ — $ 1,158.9 $ 805.2 $ 925.7 $ 450.0 $ 3,339.8 — 2,447.8 — — — 2,447.8 $ — $ 3,606.7 $ 805.2 $ 925.7 $ 450.0 $ 5,787.6 2011 2012 2013 2014 2015 & Thereafter Total (In millions) Term notes $ 1,010.0 $ 700.2 $ 822.3 $ — $ 393.8 $ 2,926.3 2,025.0 — — — — 2,025.0 $ 3,035.0 $ 700.2 $ 822.3 $ — $ 393.8 $ 4,951.3 (1) (2) September 30, 2010,March 31, 2011, with the consolidation of the WFN Trusts and the WFC Trust $531.7effective January 1, 2010, $573.8 million of debt issued by the credit card securitization trusts and retained by us has been eliminated in the unaudited condensed consolidated financial statements.DebtOn June 18, 2010, we amended our $750.0 million unsecured revolvingfacility to clarifycard securitization trust would retain the application of ASC 860 and ASC 810 andinterest in the calculation of covenant compliance.On June 18, 2010, we amended our 2009 Term Loan agreement to clarifyreceivables along with the application of ASC 860 and ASC 810 and the calculation of covenant compliance. In addition, the amendment removed the prepaymentsexcess interest income that were required beginning June 30, 2010 and now provides that principal paymentswould otherwise be paid at maturity, March 30, 2012.On August 6, 2010, we, as borrower, and ADS Alliance Data Systems, Inc., ADS Foreign Holdings, Inc., Alliance Data Foreign Holdings, Inc., Epsilon Marketing Services, LLC and Epsilon Data Management, LLC, as guarantors, entered into a term loan agreement,to our bank subsidiary until the credit card securitization investors were fully repaid. The occurrence of an early amortization event would significantly limit or 2010 Term Loan, with the Bank of Montreal, as administrative agent, and various other agents and banks. The 2010 Term Loan is unsecured. Amounts borrowed under the 2010 Term Loan are schedulednegate our ability to mature on March 30, 2012. securitize additional credit card receivables.September 30, 2010, total borrowings under the 2010 Term Loan were $236.0 million.As of September 30, 2010,March 31, 2011, we were in compliance with our financial covenants. See Note 9,7, “Debt,” of the Notes to Unaudited Condensed Consolidated Financial Statements for moreadditional information related toregarding our debt.20092010 related to our exposure to market risk from interest rate risk, credit risk, foreign currency exchange rate risk and redemption reward risk.Controls and Procedures. September 30, 2010,March 31, 2011, 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 OfficerSeptember 30, 2010March 31, 2011 (the end of our thirdfirst fiscal quarter), 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.will bewas excluded from our evaluation of and conclusion on the effectiveness of internal control over financial reporting as of DecemberMarch 31, 2010. In 2011, we2011. We will expand our evaluation of the effectiveness of the internal controls over financial reporting to include DMS.20092010 and Item 1A. of Part II of this Quarterly Report.2009 or our Quarterly Report on Form 10-Q for the quarters ended March 31, 2010 or June 30, 2010.January 27,September 13, 2010, our Board of Directors authorized a stock repurchase program or Prior Repurchase Program, to acquire up to $275.1 million of our outstanding common stock, from February 5, 2010 through December 31, 2010. On September 13, 2010, our Board of Directors authorized a new stock repurchase program, replacing the Prior Repurchase Program, to acquire up to $400.0 million of our outstanding common stock from September 13, 2010 through December 31, 2011, subject to any restrictions pursuant to the terms of our credit agreements or otherwise. those purchases of our common stock made during the three months ended September 30, 2010: Total
Number of
Shares
Purchased(1) Average
Price Paid
per Share Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs Approximate Dollar
Value of Shares that
May Yet Be Purchased
Under the Plans or
Programs(2) (In millions) 658,496 $ 56.53 652,000 $ 212.5 232,733 56.98 230,986 199.3 15,697 59.21 15,000 198.4 1,554 62.89 — 400.0 908,480 $ 56.70 897,986 $ 400.0 Period Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (In millions) During 2011: January 1-31 830,567 $ 71.57 829,246 $ 268.7 February 1-28 2,435 75.59 — 268.7 March 1-31 30,463 77.32 27,117 266.6 Total 863,465 $ 71.78 856,363 $ 266.6 (1) 10,4947,102 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Saving Plan for the benefit of the employees who participated in that portion of the plan.(2) On January 27, 2010, our Board of Directors authorized the Prior Repurchase Program which allowed us to acquire up to $275.1 million of our outstanding common stock, from February 5, 2010 through December 31, 2010. On September 13, 2010, our Board of Directors authorized a new stock repurchase program replacing the Prior Repurchase Program, to acquire up to $400.0 million of our outstanding common stock from September 13, 2010 through December 31, 2011, subject to any restrictions underpursuant to the terms of our credit agreements or otherwise. 3.1 Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit No. 3.1 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623). 3.2 Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623). 3.3 First Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.3 to our Registration Statement on Form S-1 filed with the SEC on May 4, 2001, File No. 333-94623). 3.4 Second Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.4 to our Annual Report on Form 10-K, filed with the SEC on April 1, 2002, File No. 001-15749). 3.5 Third Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Current Report on Form 8-K, filed with the SEC on February 18, 2009, File No. 001-15749). 3.6 Fourth Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Current Report on Form 8-K, filed with the SEC on December 11, 2009, File No. 001-15749). 4 Specimen Certificate for shares of Common Stock of the Registrant (incorporated by reference to Exhibit No. 4 to our Quarterly Report on Form 10-Q, filed with the SEC on August 8, 2003, File No. 001-15749). 10.1 Supplemental Agreement to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 9, 2010, among World Financial Network National Bank, WFN Credit Company, LLC and The Bank of New York Mellon Trust Company, N.A. (incorporated by reference to Exhibit No. 4.1 to the Current Report on Form 8-K filed by WFN Credit Company, LLC and World Financial Network Credit Card Master Note Trust on August 12, 2010, File Nos. 333-60418 and 333-113669). 10.2 SupplementalForm of Time-Based Restricted Stock Unit Award Agreement to Receivables Purchase Agreement, dated as of August 9, 2010, among World Financial Network National Bank and WFN Credit Company, LLC (incorporated by reference to Exhibit No. 4.2 tounder the Current Report on Form 8-K filed by WFN Credit Company, LLC and World Financial Network Credit Card Master Note Trust on August 12, 2010, File Nos. 333-60418 and 333-113669). 10.3Supplemental Agreement to Transfer and Servicing Agreement, dated as of August 9, 2010, among World Financial Network National Bank, WFN Credit Company, LLC and World Financial Network Credit Card Master Note Trust (incorporated by reference to Exhibit No. 4.3 to the Current Report on Form 8-K filed by WFN Credit Company, LLC and World Financial Network Credit Card Master Note Trust on August 12, 2010, File Nos. 333-60418 and 333-113669).Exhibit No.Description 10.4Term Loan Agreement, dated as of August 6, 2010, by and among Alliance Data Systems Corporation as borrower, and certain subsidiaries parties thereto, as guarantors, Bank2010 Omnibus Incentive Plan.Form of Montreal, as Administrative Agent, Co-Lead Arranger and Book Runner, and various other agents and banks (incorporated by reference to Exhibit No. 10.1 to our Current Report on Form 8-K, filed withPerformance-Based Restricted Stock Unit Award Agreement under the SEC on August 9,Alliance Data Systems Corporation 2010 File No. 001-15749)Omnibus Incentive Plan (2011 grant).Form of Canadian Time-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2010 Omnibus Incentive Plan. *31.1Form of Canadian Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2010 Omnibus Incentive Plan (2011 grant). Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *31.2 Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended. *32.1 Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. *32.2 Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code. *101.INS*101.INS XBRL Instance Document *101.SCH XBRL Taxonomy Extension Schema Document *101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *101.DEF XBRL Taxonomy Extension Definition Linkbase Document *101.LAB*101.LAB XBRL Taxonomy Extension Label Linkbase Document *101.PRE*101.PRE XBRL Taxonomy Extension Presentation Linkbase Document * Filed herewith + Management contract, compensatory plan or arrangement ALLIANCE DATA SYSTEMS CORPORATION By: /s/ EDWARD J. HEFFERNAN By: /s/ Edward J. Heffernan Edward J. Heffernan President and Chief Executive Officer NovemberMay 9, 20102011By: CHARLES L. HORN Charles L. Horn Charles L. Horn Executive Vice President and Chief Financial Officer NovemberMay 9, 201055