Bread Financial 10Q 2005 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the Quarterly Period Ended September 30, 2005

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

		For the transition period from to

Commission File Number: 001-15749

ALLIANCE DATA SYSTEMS CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware		31-1429215
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

17655 Waterview Parkway

Dallas, Texas 75252

(Address of Principal Executive Office, Including Zip Code)

(972) 348-5100

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (ii) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of October 31, 2005, 82,036,045 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

ALLIANCE DATA SYSTEMS CORPORATION

INDEX


		Page
		Number

Part I: FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of December 31, 2004 and September 30, 2005		3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2004 and 2005		4
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2005		5
	Notes to Condensed Consolidated Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		28
Item 4.	Controls and Procedures		28
Part II: OTHER INFORMATION
Item 1.	Legal Proceedings		29
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3.	Defaults Upon Senior Securities		29
Item 4.	Submission of Matters to a Vote of Security Holders		29
Item 5.	Other Information		29
Item 6.	Exhibits		30
SIGNATURES			31
Certification of CEO Pursuant to Rule 13a-14(a)
Certification of CFO Pursuant to Rule 13a-14(a)
Certification of CEO Pursuant to Rule 13a-14(b)
Certification of CFO Pursuant to Rule 13a-14(b)

PART I


Item 1.	Financial Statements

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


		December 31,			September 30,
		2004			2005

		(in thousands, except
		per share amounts)
ASSETS
Cash and cash equivalents		$	84,409		$	157,797
Due from card associations			10,995			13,190
Trade receivables, less allowance for doubtful accounts ($1,458 and $3,993 at December 31, 2004 and September 30, 2005, respectively)			158,236			197,033
Seller’s interest and credit card receivables, less allowance for doubtful accounts ($11,673 and $11,854 at December 31, 2004 and September 30, 2005, respectively)			248,074			255,215
Deferred tax asset, net			49,606			48,727
Other current assets			66,026			78,501

	Total current assets		617,346			750,463
Redemption settlement assets, restricted			243,492			257,321
Property and equipment, net			147,531			155,662
Due from securitizations			244,291			198,606
Intangible assets, net			233,779			239,316
Goodwill			709,146			826,997
Other non-current assets			43,495			40,688

	Total assets	$	2,239,080		$	2,469,053


LIABILITIES AND STOCKHOLDERS’ EQUITY
Accounts payable		$	56,214		$	65,843
Accrued expenses			141,534			140,405
Merchant settlement obligations			77,980			95,947
Certificates of deposit, current			94,700			130,500
Credit facilities and other debt, current			135,962			210,429
Other current liabilities			54,229			49,130

	Total current liabilities		560,619			692,254
Deferred tax liability, net			49,283			48,948
Deferred revenue—service			158,026			178,550
Deferred revenue—redemption			389,097			419,764
Certificates of deposit, long term			—			36,500
Credit facilities and other debt, long-term			206,861			115,408
Other liabilities			4,674			14,664

	Total liabilities		1,368,560			1,506,088
Stockholders’ equity:
Common stock, $0.01 par value; authorized 200,000 shares; issued 82,765 shares as of December 31, 2004, 84,652 shares as of September 30, 2005			828			847
Unearned compensation			(7,739	)		(19,700	)
Additional paid-in capital			679,776			738,279
Treasury stock, at cost, 418 shares as of December 31, 2004, 2,070 shares as of September 30, 2005			(6,151	)		(71,385	)
Retained earnings			199,336			306,752
Accumulated other comprehensive income			4,470			8,172

	Total stockholders’ equity		870,520			962,965

	Total liabilities and stockholders’ equity	$	2,239,080		$	2,469,053

See accompanying notes to unaudited condensed consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME


			Three months ended				Nine months ended
			September 30,				September 30,

			2004		2005		2004		2005

			(in thousands, except per share amounts)
Revenues
	Transaction services		$	151,232	$	159,092	$	445,225	$	452,845
	Redemption			55,339		66,221		160,316		196,745
	Securitization income			80,643		98,441		268,160		306,390
	Database marketing fees and marketing services			5,404		43,833		15,621		135,007
	Other revenue			6,254		17,226		21,280		40,269

		Total revenues		298,872		384,813		910,602		1,131,256
Operating expenses
	Cost of operations (exclusive of depreciation and amortization disclosed separately below)			218,908		277,627		654,876		812,411
	General and administrative			15,414		23,050		44,494		65,960
	Depreciation and other amortization			15,236		13,972		47,025		43,182
	Amortization of purchased intangibles			6,556		10,359		20,060		30,301

		Total operating expenses		256,114		325,008		766,455		951,854

Operating income				42,758		59,805		144,147		179,402

Fair value loss on interest rate derivative				—		—		808		—
Interest expense, net				1,029		2,422		4,727		7,537

Income before income taxes				41,729		57,383		138,612		171,865
Provision for income taxes				15,732		21,532		52,258		64,449

Net income			$	25,997	$	35,851	$	86,354	$	107,416

Net income per share — basic			$	0.32	$	0.43	$	1.07	$	1.30

Net income per share — diluted			$	0.31	$	0.42	$	1.03	$	1.26

Weighted average shares — basic				81,387		82,755		80,861		82,612

Weighted average shares — diluted				84,703		85,249		83,792		85,320

See accompanying notes to unaudited condensed consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


				Nine months ended
				September 30,

				2004			2005

				(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income			$	86,354		$	107,416
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and other amortization			47,025			43,182
		Amortization of purchased intangibles			20,060			30,301
		Deferred income taxes			12,868			(5,741	)
		Fair value loss on interest rate derivative			808			—
		(Recovery of) provision for doubtful accounts			(661	)		13,705
		Non-cash compensation			—			5,263
	Change in operating assets and liabilities, net of acquisitions:
			Change in trade receivables		(4,136	)		(30,023	)
			Change in merchant settlement activity		18,990			15,772
			Change in other assets		3,135			8,762
			Change in accounts payable and accrued expenses		16,700			(2,132	)
			Change in deferred revenue		21,053			31,016
			Change in other liabilities		(15,370	)		(8,836	)
	Purchase of credit card receivables				(34,417	)		(20,527	)
	Proceeds from sale of credit card receivable portfolios to securitization trusts				105,538			—
	Other operating activities				381			427

	Net cash provided by operating activities				278,328			188,585
CASH FLOWS FROM INVESTING ACTIVITIES:
	Change in redemption settlement assets				(6,434	)		(6,064	)
	Payments for acquired businesses, net of cash acquired				(780	)		(139,675	)
	Change in seller’s interest				(9,838	)		(3,622	)
	Change in due from securitizations				101,059			61,516
	Capital expenditures				(35,244	)		(45,595	)
	Other investing activities				(530	)		(2,783	)

	Net cash provided by (used in) investing activities				48,233			(136,223	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Borrowings under debt agreements				339,273			577,172
	Repayment of borrowings				(427,416	)		(591,418	)
	CD issuance				500			166,500
	Repayment of CD				(168,300	)		(94,200	)
	Payment of capital lease obligations				(3,892	)		(5,471	)
	Proceeds from issuances of common stock				25,630			27,397
	Purchase of treasury shares				—			(60,267	)

	Net cash (used in) provided by financing activities				(234,205	)		19,713
	Effect of exchange rate changes on cash and cash equivalents				(1,111	)		1,313

	Change in cash and cash equivalents				91,245			73,388
	Cash and cash equivalents at beginning of period				67,745			84,409

	Cash and cash equivalents at end of period			$	158,990		$	157,797

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid				$	6,719		$	9,798

Income taxes paid				$	15,106		$	40,164

See accompanying notes to unaudited condensed consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS


1.	BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements included herein have been prepared by Alliance Data Systems Corporation (“ADSC” or, including its wholly owned subsidiaries, the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2004.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. The results of operations for the interim periods presented are not necessarily indicative of the operating results to be expected for any subsequent interim period or for the fiscal year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

For purposes of comparability, certain prior period amounts have been reclassified to conform with the current year presentation. Such reclassifications have no impact on previously reported net income.


2.	SHARES USED IN COMPUTING NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the periods indicated:


			Three months ended				Nine months ended
			September 30,				September 30,

			2004		2005		2004		2005

			(in thousands)
Numerator
Net income available to common stockholders			$	25,997	$	35,851	$	86,354	$	107,416

Denominator
	Weighted average shares, basic			81,387		82,755		80,861		82,612
	Weighted average effect of dilutive securities:
		Net effect of dilutive stock options and unvested restricted stock		3,316		2,494		2,931		2,708

	Denominator for diluted calculation			84,703		85,249		83,792		85,320

Basic
Net income per share			$	0.32	$	0.43	$	1.07	$	1.30

Diluted
Net income per share			$	0.31	$	0.42	$	1.03	$	1.26

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)


3.	ACQUISITIONS

In November 2004, the Company acquired Capstone Consulting Partners, Inc. In connection with the acquisition, the Company is required to pay the seller additional consideration for exceeding certain revenue targets, as defined in the agreement. The contingent payment is limited to $15.0 million. As of September 30, 2005, the Company had met the initial threshold and recorded a purchase price adjustment of approximately $5.7 million. The Company believes that it has a potential liability in the range of $5.0 million to $9.3 million associated with this earn-out provision, which will be recorded in the fourth quarter when the amount can be reasonably estimated.

In May 2005, the Company acquired the stock of Atrana Solutions Inc., a provider of point-of-sale technology services. Total consideration paid was approximately $13.1 million, including $1.5 million which was placed in escrow for a period of twelve to eighteen months to satisfy potential indemnification claims. The results of operations for Atrana have been included since the date of acquisition and are reflected in our Transaction Services segment.

On September 30, 2005, Epsilon Data Management, Inc., one of the Company’s wholly-owned subsidiaries, acquired Bigfoot Interactive Inc., (“Epsilon Interactive”), a leading full-service provider of strategic ROI-focused email communications and marketing automation solutions. Total consideration paid was approximately $133.4 million, including $8.8 million which was placed in escrow for a period of six to eighteen months. The preliminary purchase price allocation is as follows:


Identifiable intangible assets	$	26,000
Capitalized software		3,600
Goodwill		92,827
Net assets		10,939

Purchase price	$	133,366


4.	INTANGIBLE ASSETS AND GOODWILL

Intangible assets consist of the following:


	September 30, 2005

	Gross		Accumulated
	Assets		Amortization			Net		Amortization Life and Method

	(in thousands)
Customer contracts and lists	$	243,908	$	(65,095	)	$	178,813		2-20 years—straight line
Collector database		60,207		(41,583	)		18,624		15%—declining balance
Premium on purchased credit card portfolios		41,908		(14,354	)		27,554		5-10 years—straight line
Tradename		12,350		—			12,350		Indefinite life
Noncompete agreements		2,400		(1,425	)		975		1-5 years—straight line
Favorable lease		1,000		—			1,000		4 years—straight line

Total intangible assets	$	361,773	$	(122,457	)	$	239,316

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)


4.	INTANGIBLE ASSETS AND GOODWILL — (Continued)


	December 31, 2004

	Gross		Accumulated
	Assets		Amortization			Net		Amortization Life and Method

	(in thousands)
Customer contracts and lists	$	216,277	$	(45,236	)	$	171,041		2-20 years—straight line
Collector database		58,233		(37,831	)		20,402		15%—declining balance
Premium on purchased credit card portfolios		43,137		(12,299	)		30,838		5-10 years—straight line
Tradename		11,200		—			11,200		Indefinite life
Noncompete agreements		1,500		(1,202	)		298		1-5 years—straight line

Total intangible assets	$	330,347	$	(96,568	)	$	233,779

In connection with the Epsilon Interactive acquisition, the Company acquired $24.1 million in customer contracts and $1.9 million in other related intangible assets.


	Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2005 are as follows:


		Transaction		Credit		Marketing
		Services		Services		Services			Total

				(in thousands)
Beginning balance		$	303,874	$	—	$	405,272		$	709,146
	Goodwill acquired during period		7,106		—		92,827			99,933
	Effects of foreign currency translation		343		—		6,574			6,917
	Other, primarily final purchase price adjustments⁽¹⁾		12,110		—		(1,109	)		11,001

Ending balance		$	323,433	$	—	$	503,564		$	826,997


⁽¹⁾	Represents recognition of a deferred payment, certain earn-out provisions, and other initial purchase price adjustments associated with the Company’s acquisitions.


5.	DEBT

Debt consists of the following:


	December 31,			September 30,
	2004			2005

	(in thousands)
Certificates of deposit	$	94,700		$	167,000
Credit facilities		324,629			310,000
Other		18,194			15,837

		437,523			492,837
Less: current portion		(230,662	)		(340,929	)

Long term portion	$	206,861		$	151,908

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

5. DEBT — (Continued)

As of September 30, 2005, the certificates of deposit had effective annual fixed rates ranging from 4.1% to 4.8%, and the credit facilities had a weighted average interest rate of 5.6%.

On April 7, 2005, the Company entered into amendments to its three credit facilities. The amendment to the 3-year credit facility extended the maturity date from April 10, 2006 to April 3, 2008. The amendment to the 364-day credit facility extended the maturity date from April 7, 2005 to April 6, 2006. The amendment to the Canadian credit facility extended the maturity date from April 10, 2006 to April 3, 2008 and reduced the aggregate amount of the commitments permitted thereunder by $15.0 million from $50.0 million to $35.0 million. The range of margins on the interest rate on eurodollar loans for each of the three facilities and the commitment fee percentages, both of which are based upon the ratio of total debt under the credit facilities to consolidated operating EBITDA, as each term is defined in the credit facilities, was revised from 1.0%-1.5% to 0.5%-1.0% and from 0.1%-0.3% to 0.1%-0.15%, respectively.

On October 28, 2005, the Company entered into amendments to the Company’s three credit facilities to increase the amount of revolving commitments under the facilities and amend certain covenants. The amendment to the 3-year credit facility increased the amount of revolving commitments thereunder from $200.0 million to $250.0 million. The amendment to the 364-day credit facility increased the amount of revolving commitments thereunder from $205.0 million to $230.0 million. After giving effect to the three amendments, the aggregate amount of revolving commitments under the three credit facilities is $515.0 million. In addition, the amendments increased the aggregate amounts of commitments permitted under the three facilities from $500.0 million to $550.0 million. As a result, the Company has the right to obtain commitments under the three credit facilities for an additional $35.0 million in the aggregate without having to amend the credit facilities. In addition, the amendments increased the amount of restricted payments permitted under the credit facilities. Except as set forth above, the remaining terms of each credit facility remain unchanged.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)


6.	DEFERRED REVENUE

A reconciliation of deferred revenue for the AIR MILES®Reward Program is as follows (in thousands):


Deferred Revenue—Service
	Beginning balance December 31, 2004	$	158,026
	Cash proceeds		77,748
	Revenue recognized		(63,334	)
	Effects of foreign currency translation		6,110

	Ending balance September 30, 2005	$	178,550

Deferred Revenue—Redemption
	Beginning balance December 31, 2004	$	389,097
	Cash proceeds		136,183
	Revenue recognized		(120,123	)
	Effects of foreign currency translation		14,607

	Ending balance September 30, 2005	$	419,764


7.	INCOME TAXES

For the three and nine months ended September 30, 2005, the Company has utilized an effective tax rate of 37.5% to calculate its provision for income taxes. In accordance with Accounting Principles Board (“APB”) Opinion No. 28, Interim Financial Reporting, this effective tax rate is the Company’s expected annual effective tax rate for calendar year 2005 based on all known variables.


8.	COMPREHENSIVE INCOME

The components of comprehensive income, net of tax effect, are as follows:


	Three months ended					Nine months ended
	September 30,					September 30,

	2004		2005			2004			2005

			(in thousands)
Net income	$	25,997	$	35,851		$	86,354		$	107,416
Reclassifications into earnings		—		—			482			—
Unrealized gain (loss) on securities available-for-sale, net		1,055		(583	)		(951	)		529
Foreign currency translation adjustments⁽¹⁾		1,582		3,724			3,840			3,173

Total comprehensive income	$	28,634	$	38,992		$	89,725		$	111,118


⁽¹⁾	Primarily related to the impact of changes in the Canadian currency exchange rate.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)


9.	SEGMENT INFORMATION

Consistent with prior periods, the Company classifies its businesses into three segments: Transaction Services, Credit Services and Marketing Services.


	Transaction		Credit		Marketing		Other/
	Services		Services		Services		Elimination			Total

	(in thousands)
Three months ended September 30, 2004
Revenues	$	169,434	$	121,398	$	84,992	$	(76,952	)	$	298,872
Adjusted EBITDA⁽¹⁾		25,075		26,328		13,147		—			64,550
Depreciation and amortization		14,808		2,039		4,945		—			21,792
Operating income		10,267		24,289		8,202		—			42,758
Interest expense, net		—		—		—		1,029			1,029
Income before income taxes		10,267		24,289		8,202		(1,029	)		41,729
Three months ended September 30, 2005
Revenues	$	178,973	$	137,049	$	145,404	$	(76,613	)	$	384,813
Adjusted EBITDA⁽¹⁾		23,242		39,470		23,368		—			86,080
Stock compensation expense		648		648		648		—			1,944
Depreciation and amortization		13,810		1,894		8,627		—			24,331
Operating income		8,784		36,928		14,093		—			59,805
Interest expense, net		—		—		—		2,422			2,422
Income before income taxes		8,784		36,928		14,093		(2,422	)		57,383


	Transaction		Credit		Marketing		Other/
	Services		Services		Services		Elimination			Total

	(in thousands)
Nine months ended September 30, 2004
Revenues	$	511,531	$	384,631	$	249,449	$	(235,009	)	$	910,602
Adjusted EBITDA⁽¹⁾		76,528		92,790		41,914		—			211,232
Depreciation and amortization		46,907		6,039		14,139		—			67,085
Operating income		29,621		86,751		27,775		—			144,147
Fair value loss on interest rate derivative		—		808		—		—			808
Interest expense, net		—		—		—		4,727			4,727
Income before income taxes		29,621		85,943		27,775		(4,727	)		138,612
Nine months ended September 30, 2005
Revenues	$	515,278	$	419,229	$	428,501	$	(231,752	)	$	1,131,256
Adjusted EBITDA⁽¹⁾		65,531		121,510		71,107		—			258,148
Stock compensation expense		1,754		1,755		1,754		—			5,263
Depreciation and amortization		42,100		5,717		25,666		—			73,483
Operating income		21,677		114,038		43,687		—			179,402
Interest expense, net		—		—		—		7,537			7,537
Income before income taxes		21,677		114,038		43,687		(7,537	)		171,865

⁽¹⁾

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)


10.	STOCK COMPENSATION AND UNEARNED COMPENSATION

At September 30, 2005, the Company had three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations. No stock-based employee compensation cost is reflected in net income for stock options, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, “Accounting for Stock-Based Compensation”, to stock-based employee compensation.

In the first quarter of 2005, the Company changed the valuation model used for estimating the fair value of options granted from a Black-Scholes option pricing model to a Binomial lattice pricing model. This change was made in order to provide a better estimate of fair value. The Binomial model can incorporate a range of possible outcomes over an option’s term and can be adjusted for changes in certain assumptions over time. The Black-Scholes model assumptions are more constant over time, which is not always consistent with an employee’s exercise behavior. In accordance with APB Opinion No. 20, “Accounting Changes,” this change was made for options granted to employees beginning in the first quarter of 2005. Options to purchase a total of 0.1 million shares of common stock were granted in the third quarter of 2005 at a weighted average fair value of $16.96 per share. The historical Black-Scholes model would have produced a pro forma stock compensation expense that was approximately 14% lower than that derived from the Binomial model. As a result of this change, the after-tax increase in pro forma stock-based employee compensation expense for the nine months ended September 30, 2005 was approximately $0.3 million.


	Three months ended						Nine months ended
	September 30,						September 30,

	2004			2005			2004			2005

	(in thousands, except per share amounts)
Net income, as reported	$	25,997		$	35,851		$	86,354		$	107,416
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		—			1,215			—			3,289
Deduct: Total stock-based employee compensation expense determined under fair value based method for all stock option awards, net of related tax effects		(2,313	)		(4,899	)		(6,580	)		(13,587	)

Net income, pro forma	$	23,684		$	32,167		$	79,774		$	97,118

Net income per share:
Basic — as reported	$	0.32		$	0.43		$	1.07		$	1.30
Diluted — as reported	$	0.31		$	0.42		$	1.03		$	1.26
Basic — pro forma	$	0.29		$	0.39		$	0.99		$	1.18
Diluted — pro forma	$	0.28		$	0.38		$	0.95		$	1.14

During the nine months ended September 30, 2005, a total of 635,807 shares of restricted stock were granted under the 2003 Long Term Incentive Plan (“2003 LTIP”) and the 2005 Long Term Incentive Plan (“2005 LTIP”).

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS — (Continued)

10. STOCK COMPENSATION AND UNEARNED COMPENSATION — (Continued)

Under the plans, 125,872 shares of performance based restricted stock were granted. The restrictions on the shares subject to these grants do not lapse unless specified performance measures tied to either cash earnings per share or total shareholder return are met. If these performance targets are met, the restrictions on some of these shares lapse at the end of a three-year period. However, the Company’s Board of Directors may accelerate the lapsing of such restrictions if certain annual cash earnings per share performance targets are met. As the performance targets have not been met, compensation has not been earned. The Company has recorded $4.9 million associated with the award as unearned compensation in the stockholders’ equity section of the accompanying balance sheet.

Additionally, during the nine months ended September 30, 2005, the Company awarded 509,935 shares of time-based restricted stock under the plans, with vesting periods of two to three years. The Company recorded $12.0 million (the aggregate value of the common stock based on the market price at the date of the award) as unearned compensation in the stockholders’ equity section of the accompanying balance sheet. The Company recorded $1.9 million and $5.3 million of compensation expense for the three and nine months ended September 30, 2005, respectively, related to shares of time-based restricted stock outstanding.


11.	STOCKHOLDERS’ EQUITY

On June 8, 2005, the Company’s Board of Directors authorized a repurchase program to acquire up to an aggregate of $80.0 million of its outstanding common stock through June 2006. As of September 30, 2005, the Company has repurchased 1,652,400 shares of its common stock for approximately $65.2 million under this program.

On October 27, 2005, the Company’s board of directors authorized a new stock repurchase program to acquire up to an additional $220.0 million of its outstanding common stock through October 2006.


12.	EMPLOYEE BENEFIT PLANS

On June 7, 2005, at the annual meeting of stockholders, the stockholders approved and adopted the Amended and Restated Employee Stock Purchase Plan (the “ESPP”), effective on July 1, 2005. No employee may purchase more than $25,000 in stock under the ESPP in any calendar year, and no employee may purchase stock under the ESPP if such purchase would cause the employee to own more than 5% of the voting power or value of the Company’s common stock. The ESPP provides for three month offering periods, commencing on the first trading day of each calendar quarter and ending on the last trading day of each calendar quarter. The purchase price of the common stock upon exercise shall be 85% of the fair market value of shares on the applicable purchase date as determined by averaging the high and low trading prices of the last trading day of each quarter. An employee may elect to pay the purchase price of such common stock through payroll deductions. The maximum number of shares that were reserved for issuance under the ESPP is 1,500,000 shares, and subject to adjustment as provided in the ESPP. Employees are required to hold any stock purchased through the ESPP for 180 days prior to any sale or withdrawal of shares.

On June 7, 2005, the stockholders, at the annual meeting of stockholders, approved the Executive Annual Incentive Plan (the “Executive Incentive Plan”). Under the plan, the Company may grant to each eligible employee, including executive officers and other key employees, incentive awards to receive cash upon the achievement of pre-established performance goals. No participant may be granted performance awards in excess of $5.0 million in any calendar year.


Item 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this quarterly report and the notes thereto included in our Annual Report filed on Form 10-K for the year ended December 31, 2004.

Year to Date in Review Highlights

Our year to date 2005 results included significant new and renewed agreements:


	•	In February 2005, we signed a multi-year renewal to provide private label credit card services to Pacific Sunwear of California, Inc., a leading specialty retailer of everyday casual apparel, accessories and footwear.

	•	In March 2005, we entered into an agreement to provide marketing services to TruGreen ChemLawn, a leading provider of lawn care services.

	•	In March 2005, we signed a long-term agreement to provide private label credit card services for Z Gallerie, a leading retailer specializing in high-quality, distinctive furnishings and decorative accessories for the home.

	•	In April 2005, we signed a long-term agreement to provide a fully integrated private label credit card and co-brand bankcard solution for Hanover Direct, a leading catalog and Web retailer of home furnishings and accessories and men’s and women’s apparel.

	•	In April 2005, we signed an agreement to provide project management and systems integration services to Cobb Energy, one of the largest co-op electric utilities in the United States.

	•	In April 2005, we signed an agreement with Blair Corporation to purchase Blair’s private label credit portfolio and a 10-year agreement with Blair to provide a fully integrated private label credit program. Blair, through its Blair and Irvine Park brands, sells quality men’s and women’s business and casual fashion attire and home accessories. We expect this transaction to close in the fourth quarter of 2005.

	•	In May 2005, we signed a long-term agreement to provide private label credit card services for Crescent Jewelers, which operates 122 stores in California, Arizona and Nevada, and sells quality fine jewelry, including unique and exclusive jewelry collections targeted to mid- and upper-end consumers.

	•	In May 2005, we acquired Atrana Solutions Inc., a leading provider of point-of-sale technology solutions that will give us additional capabilities, product offerings and client relationships.

	•	In May 2005, Epsilon Data Management, Inc., one of our wholly-owned subsidiaries, signed a five-year extension with Hilton HHonors Worldwide, one of our top 15 clients, to provide integrated relationship management services, including database hosting and development, for the Hilton HHonors® Guest Rewards Program.

	•	In June 2005, Epsilon Data Management, Inc., one of our wholly-owned subsidiaries, completed the build of a comprehensive database system for Pfizer Inc. to manage and host Pfizer’s database solution geared toward enhancing Pfizer’s overall consumer outreach efforts.

	•	In July 2005, we signed a multi-year renewal agreement to continue providing private label credit card services for leading specialty retailers The Dress Barn, Inc. and Maurices Incorporated.

	•	In July 2005, we signed an agreement to provide a credit card program for Gander Mountain Company, one of the fastest-growing retailers in the outdoor lifestyle industry.


	•	In July 2005, we signed a long-term contract renewal with Pepco Energy Services, Inc. to continue hosting the customer information system and to provide traditional and electronic billing, payment processing and other services related to the support and maintenance of the customer information system.

	•	In July 2005, Epsilon Data Management, Inc., one of our wholly-owned subsidiaries, signed a multi-year renewal and expanded agreement with Bank of America to complete the build of an enhanced consumer marketing database and to host and manage the system on behalf of Bank of America.

	•	In August 2005, we signed an agreement with Hampton Roads Sanitation District to provide consulting services related to CIS selection, improvement of business processes and project management.

	•	In August 2005, we signed a multi-year renewal with Sobeys Inc. to continue as a participating sponsor in the AIR MILES Reward Program.

	•	In August 2005, we signed a multi-year agreement with Gordmans, Inc., an existing private label credit card client, to also provide a comprehensive servicing solution for their gift card program.

	•	In August 2005, we signed an agreement to provide customer care maintenance and support services for Greenville Utilities Commission, a provider of electric, gas and water services in North Carolina.

	•	In September 2005, Epsilon Data Management, Inc., one of our wholly-owned subsidiaries, acquired Epsilon Interactive, a leading full-service provider of strategic ROI-focused email communications and marketing automation solutions.

	•	In September 2005, we signed a five-year agreement with Carter Lumber, one of the nation’s top building materials retailers operating 240 stores in 10 states, to provide integrated commercial and private label card services and payment processing services.

	•	In September 2005, we entered into an agreement with CompUSA, Inc., one of the nation’s leading retailers and resellers of technology products and services, to provide a full suite of loyalty marketing services forThe CompUSA Network™For Businessloyalty program.

Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2004.

Use of Non-GAAP Financial Measures

Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most directly comparable GAAP financial measure, plus stock compensation expense, provision for income taxes, interest expense, net, fair value loss on interest rate derivative, depreciation and other amortization and amortization of purchased intangibles. Operating EBITDA is a non-GAAP financial measure equal to adjusted EBITDA plus the change in deferred revenue less the change in redemption settlement assets. We have presented operating EBITDA because we use the financial measure as part of our monitoring of compliance with the financial covenants in our credit facilities. For the nine months ended September 30, 2005, senior debt-to-operating EBITDA was 0.8x compared to a maximum ratio of 2.0x and operating EBITDA to interest expense was 30.8x compared to a minimum ratio of 3.5x. As discussed in more detail in the liquidity section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, our credit facilities together with cash flow from operations are the two main sources of funding for our acquisition strategy and for our future working capital needs and capital expenditures. As of September 30, 2005, we had borrowings of $310.0 million outstanding under these credit facilities and had approximately $130.0 million in unused borrowing capacity. We were in compliance with our covenants at September 30, 2005 and we expect to be in compliance with these covenants during the year ending December 31, 2005.

We use adjusted EBITDA as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management. Adjusted EBITDA is considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, the impact of related impairments, as well as asset sales through other financial measures, such as capital expenditures, investment spending and return on capital. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense. Stock compensation expense is not included in the measurement of segment adjusted EBITDA provided to the chief operating decision maker for purposes of assessing segment performance and decision making with respect to resource allocations. Therefore, we believe that adjusted EBITDA provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and operating EBITDA are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either operating income or net income as an indicator of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and operating EBITDA are not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. The adjusted EBITDA and operating EBITDA measures presented in this Quarterly Report on Form 10-Q may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.


		Three months ended				Nine months ended
		September 30,				September 30,

		2004		2005		2004		2005

		(in thousands)
Net income		$	25,997	$	35,851	$	86,354	$	107,416
	Stock compensation expense		—		1,944		—		5,263
	Provision for income taxes		15,732		21,532		52,258		64,449
	Interest expense, net		1,029		2,422		4,727		7,537
	Fair value loss on interest rate derivative		—		—		808		—
	Depreciation and other amortization		15,236		13,972		47,025		43,182
	Amortization of purchased intangibles		6,556		10,359		20,060		30,301

Adjusted EBITDA			64,550		86,080		211,232		258,148
	Change in deferred revenue		36,899		44,092		35,062		51,191
	Less change in redemption settlement assets		16,537		18,265		15,195		13,829

Operating EBITDA		$	84,912	$	111,907	$	231,099	$	295,510


Note:	Change in deferred revenue is affected by fluctuations in foreign exchange rates. Change in redemption settlement assets is affected by transfers of cash.

Results of Operations


	*Three months ended September 30, 2004 compared to the three months ended September 30, 2005*


			Three months ended
			September 30,						Change

			2004			2005			$			%

			(in thousands, except percentages)
Revenue:
	Transaction Services		$	169,434		$	178,973		$	9,539			5.6	%
	Credit Services			121,398			137,049			15,651			12.9
	Marketing Services			84,992			145,404			60,412			71.1
	Other/ Eliminations			(76,952	)		(76,613	)		339			0.4

		Total	$	298,872		$	384,813		$	85,941			28.8	%

Adjusted EBITDA:
	Transaction Services		$	25,075		$	23,242		$	(1,833	)		(7.3	)%
	Credit Services			26,328			39,470			13,142			49.9
	Marketing Services			13,147			23,368			10,221			77.7

		Total	$	64,550		$	86,080		$	21,530			33.4	%

Stock compensation expense:
	Transaction Services		$	—		$	648		$	648			—
	Credit Services			—			648			648			—
	Marketing Services			—			648			648			—

		Total	$	—		$	1,944		$	1,944			—

Depreciation and amortization:
	Transaction Services		$	14,808		$	13,810		$	(998	)		(6.7	)%
	Credit Services			2,039			1,894			(145	)		(7.1	)
	Marketing Services			4,945			8,627			3,682			74.5

		Total	$	21,792		$	24,331		$	2,539			11.7	%

Operating income:
	Transaction Services		$	10,267		$	8,784		$	(1,483	)		(14.4	)%
	Credit Services			24,289			36,928			12,639			52.0
	Marketing Services			8,202			14,093			5,891			71.8

		Total	$	42,758		$	59,805		$	17,047			39.9	%

Adjusted EBITDA margin⁽¹⁾:
	Transaction Services			14.8	%		13.0	%		(1.8	)%
	Credit Services			21.7			28.8			7.1
	Marketing Services			15.5			16.1			0.6

		Total		21.6	%		22.4	%		0.8	%

Segment operating data:
	Statements generated			47,410			47,523			113			0.2	%
	Credit Sales		$	1,450,033		$	1,508,123		$	58,090			4.0	%
	Average managed receivables⁽²⁾		$	2,960,628		$	3,114,452		$	153,824			5.2	%
	AIR MILES reward miles issued			733,279			830,604			97,325			13.3	%
	AIR MILES reward miles redeemed			435,069			475,400			40,331			9.3	%


⁽¹⁾	Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on operating expenses.

⁽²⁾	The Company will now report average managed receivables as it better reflects the Company’s future business strategy. The difference between the previously reported metric and the current one is private label credit card receivables which are not securitized will now also be included. Historically, this difference has not been meaningful but will be in the future as some private label credit card portfolios are not anticipated to be securitized for a period of time.

Revenue.Total revenue increased $85.9 million, or 28.8%, to $384.8 million for the three months ended September 30, 2005 from $298.9 million for the comparable period in 2004. The increase was due to a 5.6% increase in Transaction Services revenue, a 12.9% increase in Credit Services revenue and a 71.1% increase in Marketing Services revenue as follows:


	•	Transaction Services.Transaction Services revenue increased $9.5 million, or 5.6%, primarily due to customer ramp-ups in utility services and increased transaction volume from merchant services. Statements generated, the segment’s key driver, was flat due primarily to the reduced credit sales volume at one major client resulting in a lower corresponding statement volume for that client offset by growth from other clients.

	•	Credit Services.Credit Services revenue increased $15.7 million, or 12.9%, primarily due to a 22.3% increase in securitization income, offset in part by a small decrease in merchant discount. Securitization income increased $17.9 million primarily as a result of an increase in the net yield from the securitization trusts in addition to a 5.2% increase in average managed receivables. The net yield increased principally as a result of an approximate 130 basis point increase in the excess spread and an approximate 50 basis point decrease in cost of funds. Excess spread, which represents interest and late fees collected from cardholders, other trust-related fees, fair value changes related to the interest-only strips and charge-offs, increased due to lower charge-offs and higher collected fees from cardholders.

	•	Marketing Services.Marketing Services revenue increased $60.4 million, or 71.1%, primarily due to an increase in database marketing fees attributable to the acquisition of Epsilon Data Management, Inc., an increase in redemption revenue related to a 9.3% increase in the redemption of AIR MILES® reward miles and an increase in the amortization of deferred services revenue. Changes in the exchange rate of the Canadian dollar accounted for approximately $7.7 million of the $60.4 million increase in our Marketing Services revenue, or 12.7%. Deferred revenue-redemption is impacted by both the number of AIR MILES reward miles issued and redeemed, as well as foreign currency movements. Our deferred revenue balance increased 8.0% to $598.3 million at September 30, 2005 from $554.2 million at June 30, 2005 due to continued growth in the program for AIR MILES reward miles issued and a change in the exchange rate during the three months ended September 30, 2005. AIR MILES reward miles issued grew by 13.3% during the three months ended September 30, 2005 over the comparable period in 2004.

Operating Expenses.Total operating expenses, excluding depreciation and amortization, increased $66.4 million, or 28.3%, to $300.7 million during the three months ended September 30, 2005 from $234.3 million during the comparable period in 2004. Total adjusted EBITDA margin increased to 22.4% for the three months ended September 30, 2005 from 21.6% for the comparable period in 2004, due to increases in the margins for Marketing Services and Credit Services, partially offset by a decreased margin for Transaction Services.


	•	Transaction Services.Transaction Services operating expenses, excluding depreciation and amortization, increased $12.0 million, or 8.3%, to $156.4 million for the three months ended September 30, 2005 from $144.4 million for the comparable period in 2004, and adjusted EBITDA margin decreased to 13.0% for the three months ended September 30, 2005 from 14.8% during the comparable period in 2004. The decrease in adjusted EBITDA margin was primarily the result of an increase in expenses related to higher expenses associated with corporate overhead and, to a smaller extent, new private label credit card clients.

	•	Credit Services.Credit Services operating expenses, excluding depreciation and amortization, increased $3.1 million, or 3.3%, to $98.2 million for the three months ended September 30, 2005 from $95.1 million for the comparable period in 2004, and adjusted EBITDA margin increased to 28.8% for the three months ended September 30, 2005 from 21.7% for the comparable period in 2004. The increased adjusted EBITDA margin is the result of favorable revenue trends from an increase in average managed receivables and lower cost of funds.


	•	Marketing Services.Marketing Services operating expenses, excluding depreciation and amortization, increased $50.9 million, or 70.9%, to $122.7 million for the three months ended September 30, 2005 from $71.8 million for the comparable period in 2004, and adjusted EBITDA margin increased to 16.1% for the three months ended September 30, 2005 from 15.5% for the comparable period in 2004. Adjusted EBITDA margin increased due to increased revenue from the AIR MILES reward program and our Epsilon business unit.

	•	Depreciation and Amortization.Depreciation and amortization increased $2.5 million, or 11.7%, to $24.3 million for the three months ended September 30, 2005 from $21.8 million for the comparable period in 2004 due to a $3.8 million increase in the amortization of purchased intangibles, offset by a decrease in depreciation and other amortization of $1.3 million.

Operating Income.Operating income increased $17.0 million, or 39.9%, to $59.8 million for the three months ended September 30, 2005 from $42.8 million during the comparable period in 2004, due to the revenue and expense factors discussed above.

Interest Expense.Interest expense increased $1.4 million, or 140.0%, to $2.4 million for the three months ended September 30, 2005 from $1.0 million for the comparable period in 2004, due to higher average balances under our credit facilities.

Taxes.Income tax expense increased $5.8 million to $21.5 million for the three months ended September 30, 2005 from $15.7 million in 2004 due to an increase in income before income taxes. Our effective tax rate of 37.5% in 2005 improved from the 37.7% effective tax rate in 2004.


	*Nine months ended September 30, 2004 compared to the nine months ended September 30, 2005*


			Nine months ended
			September 30,						Change

			2004			2005			$			%

			(in thousands, except percentages)
Revenue:
	Transaction Services		$	511,531		$	515,278		$	3,747			0.7	%
	Credit Services			384,631			419,229			34,598			9.0
	Marketing Services			249,449			428,501			179,052			71.8
	Other/ Eliminations			(235,009	)		(231,752	)		3,257			(1.4	)

		Total	$	910,602		$	1,131,256		$	220,654			24.2	%

Adjusted EBITDA:
	Transaction Services		$	76,528		$	65,531		$	(10,997	)		(14.4	)%
	Credit Services			92,790			121,510			28,720			31.0
	Marketing Services			41,914			71,107			29,193			69.6

		Total	$	211,232		$	258,148		$	46,916			22.2	%

Stock compensation expense:
	Transaction Services		$	—		$	1,754		$	1,754			—
	Credit Services			—			1,755			1,755			—
	Marketing Services			—			1,754			1,754			—

		Total	$	—		$	5,263		$	5,263			—

Depreciation and amortization:
	Transaction Services		$	46,907		$	42,100		$	(4,807	)		(10.2	)%
	Credit Services			6,039			5,717			(322	)		(5.3	)
	Marketing Services			14,139			25,666			11,527			81.5

		Total	$	67,085		$	73,483		$	6,398			9.5	%

Operating income:
	Transaction Services		$	29,621		$	21,677		$	(7,944	)		(26.8	)%
	Credit Services			86,751			114,038			27,287			31.5
	Marketing Services			27,775			43,687			15,912			57.3

		Total	$	144,147		$	179,402		$	35,255			24.5	%

Adjusted EBITDA margin⁽¹⁾:
	Transaction Services			15.0	%		12.7	%		(2.3	)%
	Credit Services			24.1			29.0			4.9
	Marketing Services			16.8			16.6			(0.2	)

		Total		23.2	%		22.8	%		(0.4	)%

Segment operating data:
	Statements generated			142,946			141,839			(1,107	)		(0.8	)%
	Credit Sales		$	4,309,364		$	4,484,937		$	175,573			4.1	%
	Average managed receivables⁽²⁾		$	2,988,701		$	3,107,603		$	118,902			4.0	%
	AIR MILES reward miles issued			2,044,208			2,357,552			313,344			15.3	%
	AIR MILES reward miles redeemed			1,283,967			1,449,088			165,121			12.9	%


⁽¹⁾	Adjusted EBITDA margin is adjusted EBITDA divided by revenue. Management uses adjusted EBITDA margin to analyze the operating performance of the segments and the impact revenue growth has on operating expenses.

⁽²⁾	The Company will now report average managed receivables as it better reflects the Company’s future business strategy. The difference between the previously reported metric and the current one is private label credit card receivables which are not securitized will now also be included. Historically, this difference has not been meaningful but will be in the future as some private label credit card portfolios are not anticipated to be securitized for a period of time.

Revenue.Total revenue increased $220.7 million, or 24.2%, to $1,131.3 million for the nine months ended September 30, 2005 from $910.6 million for the comparable period in 2004. The increase was due to a 0.7% increase in Transaction Services revenue, a 9.0% increase in Credit Services revenue and a 71.8% increase in Marketing Services revenue as follows:


	•	Transaction Services.Transaction Services revenue increased $3.7 million, or 0.7%, primarily due to customer ramp-ups in utility services and increased transaction volume for merchant services, partially offset by the loss of a call center client which ceased operations in the fourth quarter of 2004. Statements generated decreased by 0.8%. The decrease in the number of statements generated is primarily attributable to one private label client that experienced a significant reduction in private label credit sales, which resulted in a corresponding reduction in statements generated for private label clients.

	•	Credit Services.Credit Services revenue increased $34.6 million, or 9.0%, primarily due to a 14.5% increase in securitization income, offset by a small decrease in merchant discount. Securitization income increased $38.7 million primarily as a result of an increase in the net yield from the securitization trusts in addition to a 4.0% increase in our average managed receivables. The net yield increased principally as a result of an approximate 140 basis point increase in the excess spread partially offset by a 10 basis point increase in cost of funds. Excess spread, which represents interest and late fees collected from cardholders, other trust-related fees, fair value changes related to the interest-only strips and charge-offs, increased due to lower charge-offs and higher collected fees from cardholders.

	•	Marketing Services.Marketing Services revenue increased $179.1 million, or 71.8%, primarily due to an increase in database marketing fees attributable to the acquisition of Epsilon Data Management, Inc., an increase in redemption revenue related to a 12.9% increase in the redemption of AIR MILES reward miles and an increase in the amortization of deferred services revenue. Changes in the exchange rate of the Canadian dollar accounted for approximately $21.7 million of the $179.1 million increase in our Marketing Services revenue, or 12.1%. Deferred revenue-redemption is impacted by both the number of AIR MILES reward miles issued and redeemed, as well as foreign currency movements. Our deferred revenue balance increased 9.4% to $598.3 million at September 30, 2005 from $547.1 million at December 31, 2004 due to continued growth in the program, including a 15.3% increase in AIR MILES reward miles issued during the nine months ended September 30, 2005 over the comparable period in 2004.

Operating Expenses.Total operating expenses, excluding depreciation and amortization, increased $179.0 million, or 25.6%, to $878.4 million during the nine months ended September 30, 2005 from $699.4 million during the comparable period in 2004. Total adjusted EBITDA margin decreased to 22.8% for the nine months ended September 30, 2005 from 23.2% for the comparable period in 2004, due to decreased margins in Transaction Services and Marketing Services, partially offset by an increased margin for Credit Services.


	•	Transaction Services.Transaction Services operating expenses, excluding depreciation and amortization, increased $16.5 million, or 3.8%, to $451.5 million for the nine months ended September 30, 2005 from $435.0 million for the comparable period in 2004, and adjusted EBITDA margin decreased to 12.7% for the nine months ended September 30, 2005 from 15.0% during the comparable period in 2004. The decrease in adjusted EBITDA margin was primarily the result of expenses related to streamlining efforts in utility services during the first half of 2005 and higher expenses associated with corporate overhead and, to a smaller extent, new private label credit card clients.


	•	Credit Services.Credit Services operating expenses, excluding depreciation and amortization, increased $7.7 million, or 2.6%, to $299.5 million for the nine months ended September 30, 2005 from $291.8 million for the comparable period in 2004, and adjusted EBITDA margin increased to 29.0% for the nine months ended September 30, 2005 from 24.1% for the same period in 2004. The increased adjusted EBITDA margin is the result of favorable revenue trends from an increase in our average managed receivables and lower net charge-offs as well as leveraging existing infrastructure.

	•	Marketing Services.Marketing Services operating expenses, excluding depreciation and amortization, increased $151.6 million, or 73.1%, to $359.1 million for the nine months ended September 30, 2005 from $207.5 million for the comparable period in 2004, and adjusted EBITDA margin decreased to 16.6% for the nine months ended September 30, 2005 from 16.8% for the comparable period in 2004. The decrease in adjusted EBITDA margin is the result of additional overhead expense and an increase in marketing expenses as a result of a change in timing compared to the prior year, offset by increased higher-margin revenue from the AIR MILES reward program and our Epsilon business unit.

	•	Depreciation and Amortization.Depreciation and amortization increased $6.4 million, or 9.5%, to $73.5 million for the nine months ended September 30, 2005 from $67.1 million for the comparable period in 2004 due to a $10.2 million increase in the amortization of purchased intangibles, offset by a decrease in depreciation and other amortization of $3.8 million.

Operating Income.Operating income increased $35.3 million, or 24.5%, to $179.4 million for the nine months ended September 30, 2005 from $144.1 million during the comparable period in 2004, due to the revenue and expense factors discussed above.

Interest Expense.Interest expense increased $2.8 million, or 59.6%, to $7.5 million for the nine months ended September 30, 2005 from $4.7 million for the comparable period in 2004, due to higher average balances under our credit facilities.

Taxes.Income tax expense increased $12.1 million to $64.4 million for the nine months ended September 30, 2005 from $52.3 million in 2004 due to an increase in income before income taxes. Our effective tax rate of 37.5% in 2005 improved from the 37.7% effective tax rate in 2004.

Asset Quality

Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our private label credit card receivables, the average age of our various private label credit card account portfolios, the success of our collection and recovery efforts, and general economic conditions. The average age of our private label credit card portfolio affects the stability of delinquency and loss rates of the portfolio. We continue to focus our resources on refining our credit underwriting standards for new accounts and on collections and post charge-off recovery efforts to minimize net losses. An older private label credit card portfolio generally drives a more stable performance in the portfolio. The average age of our portfolio is consistent with our historical trends as shown at September 30, 2005 with 57.9% of securitized accounts with balances and 61.6% of securitized receivables being greater than 24 months old.

Delinquencies.A credit card account is contractually delinquent if we do not receive the minimum payment by the specified due date on the cardholder’s statement. It is our policy to continue to accrue interest and fee income on all credit card accounts, except in limited circumstances, until the account balance and all related interest and other fees are charged off or paid beyond 90 days delinquent. When an account becomes delinquent, we print a message on the cardholder’s billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account rolling to a more delinquent status. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If we are unable to make a collection after exhausting all in-house efforts, we engage collection agencies and outside attorneys to continue those efforts.

The following table presents the delinquency trends of our managed receivables credit card portfolio:


			December 31,		% of			September 30,		% of
			2004		total			2005		total

					(dollars in thousands)
Managed receivables outstanding			$	3,432,105		100.0	%	$	3,193,726		100.0	%
Receivables balances contractually delinquent:
	31 to 60 days			52,467		1.5			54,718		1.7
	61 to 90 days			32,863		1.0			34,121		1.1
	91 or more days			69,340		2.0			63,618		2.0

		Total	$	154,670		4.5	%	$	152,457		4.8	%

Net Charge-Offs.Net charge-offs comprise the principal amount of losses from cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased cardholders, less current period recoveries. Net charge-offs exclude accrued finance charges and fees. The following table presents our net charge-offs for the periods indicated on a managed basis.


	Three months ended						Nine months ended
	September 30,						September 30,

	2004			2005			2004			2005

				(dollars in thousands)
Average managed receivables	$	2,960,628		$	3,114,452		$	2,988,701		$	3,107,603
Net charge-offs		49,706			49,790			159,464			148,618
Net charge-offs as a percentage of average receivables outstanding (annualized)		6.7	%		6.4	%		7.1	%		6.4	%

Liquidity and Capital Resources

Operating Activities.We have historically generated cash flow from operating activities, as detailed in the table below, although that amount may vary based on fluctuations in working capital and the timing of merchant settlement activity.


	Nine months ended
	September 30,

	2004			2005

	(in thousands)
Cash provided by operating activities before changes in credit card portfolio activity and merchant settlement activity	$	188,217		$	193,340
Purchase of credit card receivables		(34,417	)		(20,527	)
Proceeds from sale of credit card receivable portfolios to securitization trusts		105,538			—
Net change in merchant settlement activity		18,990			15,772

Cash provided by operating activities	$	278,328		$	188,585

We generated cash flow from operating activities before changes in credit card portfolio activity and merchant settlement activity of $193.3 million for the nine months ended September 30, 2005 compared to $188.2 million for the comparable period in 2004. The increase in operating cash flows before changes in credit card portfolio activity and merchant settlement activity is related to improved operating results for the nine months ended September 30, 2005, in addition to favorable working capital movements. Merchant settlement activity fluctuates significantly depending on the day in which the quarter ends. We utilize our cash flow from operations for ongoing business operations, acquisitions and capital expenditures.

Investing Activities.We used cash for investing activities of $136.2 million for the nine months ended September 30, 2005 compared to $48.2 million of cash provided for the comparable period in 2004. Significant components of investing activities are as follows:


	•	Acquisitions.Cash outlays, net of cash received, for acquisitions for the nine months ended September 30, 2005 was $139.7 million compared to $0.8 million for the comparable period in 2004. The outlay for acquisitions in 2005 relates primarily to the purchases of Atrana Solutions Inc., a provider of point-of-sale technology services and Epsilon Interactive, a leading provider of strategic ROI-focused email communications and marketing automation solutions.

	•	Securitizations and Receivables Funding.We generally fund all private label credit card receivables through a securitization program that provides us with both liquidity and lower borrowing costs. As of September 30, 2005, we had over $3.0 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread accounts and additional receivables. The credit enhancement is partially funded through the use of certificates of deposit issued through our subsidiary, World Financial Network National Bank. Cash flow from securitization activity was $57.9 million for the nine months ended September 30, 2005 and $91.2 million for the comparable period in 2004. We intend to utilize our securitization program for the foreseeable future.

	•	Capital Expenditures.Our capital expenditures for the nine months ended September 30, 2005 were $45.6 million compared to $35.2 million for the comparable period in 2004. Such amounts are consistent with our normal level of capital expenditures. We have no expectation that this will change in the foreseeable future.

Financing Activities.Net cash provided by financing activities was $19.7 million for the nine months ended September 30, 2005 compared to a use of cash of $234.2 million in the comparable period in 2004. Our financing activities during the nine months ended September 30, 2005 relate primarily to borrowings and repayments under our revolving credit facilities and the repurchase of 1,652,400 shares of our common stock.

Liquidity Sources.In addition to cash generated from operating activities, we have four main sources of liquidity: securitization program, certificates of deposit issued by World Financial Network National Bank and World Financial Capital Bank, our credit facilities and issuances of equity securities. We believe that internally generated funds and existing sources of liquidity are sufficient to meet current and anticipated financing requirements during the next 12 months.

Securitization Program and Off-Balance Sheet Transactions. Since January 1996, we have sold, sometimes through WFN Credit Company, LLC and WFN Funding Company II, LLC, substantially all of the credit card receivables owned by our credit card bank, World Financial Network National Bank, to World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust and World Financial Network Credit Card Master Trust III, which we refer to as the WFN Trusts, as part of our securitization program. This securitization program is the primary vehicle through which we finance our private label credit card receivables.

As public notes approach maturity, the notes will enter a controlled accumulation period, which typically lasts three months. During the controlled accumulation period, we will either need to arrange an additional private conduit facility or use our own balance sheet to finance the controlled accumulation until such time as we can issue a new public series in the public markets.

As of September 30, 2005 the WFN Trusts had over $3.0 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits and additional receivables. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and by the performance of the private label credit cards in the securitization trust. During the period from November to January, the WFN Trusts are required to maintain a credit enhancement level of between 6% and 10% of securitized credit card receivables. Certain of the WFN Trusts are required to maintain a level of between 4% and 9% for the remainder of the year. Accordingly, at December 31, the WFN Trusts typically have their highest balance of credit enhancement assets. We intend to utilize our securitization program for the foreseeable future.

If World Financial Network National Bank were not able to regularly securitize the receivables it originates, our ability to grow or even maintain our credit services business would be materially impaired as we would be severely limited in our financing ability. World Financial Network National Bank’s ability to effect securitization transactions is impacted by the following factors, some of which are beyond our control:


	•	conditions in the securities markets in general and the asset backed securitization market in particular; and

	•	conformity in the quality of credit card receivables to rating agency requirements and changes in those requirements; and

	•	our ability to fund required over collateralizations or credit enhancements, which we routinely utilize in order to achieve better credit ratings to lower our borrowing costs.

We believe that the conditions to securitize private label credit card receivables are favorable for us. We plan to continue using our securitization program as our primary financing vehicle.

Once World Financial Network National Bank securitizes receivables, the agreement governing the transaction contains covenants that address the receivables’ performance and the continued solvency of the retailer where the underlying sales were generated. In the event one of those or other similar covenants is breached, an early amortization event could be declared, in which case the trustee for the securitization trust would retain World Financial Network National Bank’s interest in the related receivables, along with the excess spread that would normally be paid to World Financial Network National Bank, until such time as the securitization investors are fully repaid. The occurrence of an early amortization event would significantly limit, or even negate, our ability to securitize additional receivables and would have a negative impact on the interest-only strip, which has ranged from approximately 2.0% to 2.5% of managed receivables. There have been no early amortization events as of September 30, 2005.

Certificates of Deposit.We utilize certificates of deposit to finance the operating activities and/or fund securitization enhancement requirements of our credit card bank subsidiaries, World Financial Network National Bank and World Financial Capital Bank. World Financial Network National Bank and World Financial Capital Bank issue certificates of deposit in denominations of $100,000 in various maturities ranging between three months and two years and with effective annual fixed rates ranging from 4.1 % to 4.8 %. As of September 30, 2005, we had $167.0 million of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.

Credit Facilities.On April 7, 2005, we entered into amendments to our three credit facilities. The amendment to the 3-year credit facility extended the maturity date from April 10, 2006 to April 3, 2008. The amendment to the 364-day credit facility extended the maturity date from April 7, 2005 to April 6, 2006. The amendment to the Canadian credit facility extended the maturity date from April 10, 2006 to April 3, 2008 and reduced the aggregate amount of the commitments permitted thereunder by $15.0 million from $50.0 million to $35.0 million. The range of margins on the interest rate on eurodollar loans for each of the three facilities and the commitment fee percentages, both of which are based upon the ratio of total debt under the credit facilities to consolidated Operating EBITDA, as each term is defined in the credit facilities, was revised from 1.0%-1.5% to 0.5%-1.0% and from 0.1%-0.3% to 0.1%-0.15%, respectively.

On October 28, 2005, we entered into amendments to our three credit facilities to increase the amount of revolving commitments under the facilities and amend certain covenants. The amendment to the 3-year credit facility increased the amount of revolving commitments thereunder from $200.0 million to $250.0 million. The amendment to the 364-day credit facility increased the amount of revolving commitments thereunder from $205.0 million to $230.0 million. After giving effect to the three amendments, the aggregate amount of revolving commitments under the three credit facilities is $515.0 million. In addition, the amendments increased the aggregate amounts of commitments permitted under the three facilities from $500.0 million to $550.0 million. As a result, we have the right to obtain commitments under the three credit facilities for an additional $35.0 million in the aggregate without having to amend the credit facilities. In addition, the amendments increased the amount of restricted payments permitted under the credit facilities. Except as set forth above, the remaining terms of each credit facility remain unchanged.

Advances under the credit facilities are in the form of either base rate loans or eurodollar loans. The interest rate on base rate loans fluctuates based upon the higher of (1) the interest rate announced by the administrative agent as its “prime rate” and (2) the Federal funds rate plus 0.5%, in each case with no additional margin. The interest rate on eurodollar loans fluctuates based upon the rate at which eurodollar deposits in the London interbank market are quoted plus a margin of 0.5% to 1.0% based upon the ratio of total debt under the credit facilities to consolidated Operating EBITDA, as each term is defined in the credit facilities. The credit facilities are secured by pledges of stock of certain of our subsidiaries and pledges of certain intercompany promissory notes.

At September 30, 2005, we had borrowings of $310.0 million outstanding under these credit facilities (with a weighted average interest rate of 5.6%), we issued no letters of credit, and we had available unused borrowing capacity of approximately $130.0 million. The credit facilities limit our aggregate outstanding letters of credit to $50.0 million.

We utilize our credit facilities and cash flows from operations to support our acquisition strategy and to fund working capital and capital expenditures.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004), “Share-Based Payment”, which replaces SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board (“APB”) Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, SFAS No. 123(R) will cause unrecognized expense (based on the fair values determined for the pro forma footnote disclosure, adjusted for estimated forfeitures) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. Under SFAS No. 123(R), we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include the modified prospective or the modified retrospective adoption methods. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of SFAS No. 123(R), while the modified retrospective methods would record compensation expense for all unvested stock options and share awards beginning with the first period restated.

In March 2005, the SEC released SAB 107, “Share-Based Payment”, which expresses views of the SEC Staff about the application of SFAS No. 123(R). SFAS No. 123(R) was to be effective for interim or annual reporting periods beginning on or after June 15, 2005, but in April 2005 the SEC issued a rule that SFAS No. 123(R) will be effective for annual reporting periods beginning on or after June 15, 2005. We are evaluating the requirements of SFAS No. 123(R) and we expect that the adoption of SFAS No. 123(R) will have a material impact on our statements of income and earnings per share. We have not determined the method of adoption.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3”. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company does not expect the adoption of SFAS No. 154 to have an impact on the consolidated financial statements.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Market Risk

There has been no material change from our Annual Report on Form 10-K for the year ended December 31, 2004 related to our exposure to market risk from off-balance sheet risk, interest rate risk, credit risk, foreign currency exchange risk and redemption reward risk.


Item 4.	Controls and Procedures

As of September 30, 2005, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2005, our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our evaluation of and conclusion on the effectiveness of internal control over financial reporting as of December 31, 2004 did not include the internal controls of Epsilon and Capstone Consulting Partners, Inc., entities we acquired during 2004, which are included in the 2004 consolidated financial statements, and that constituted $363.9 million of total assets as of December 31, 2004 and an immaterial amount of revenues and net income for the year then ended. We have not assessed the effectiveness of internal control over financial reporting at Epsilon or Capstone because of the timing of the acquisitions, which were completed in October 2004 and November 2004, respectively. In the fourth quarter of 2005, we will expand our evaluation of the effectiveness of the internal controls over financial reporting to include these two acquisitions. As part of our integration of Epsilon, we are in the process of converting their general ledger platform to the platform utilized by the majority of the Company.

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

FORWARD-LOOKING STATEMENTS

This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements may use words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “predict,” “project” and similar expressions as they relate to us or our management. When we make forward-looking statements, we are basing them on our management’s beliefs and assumptions, using information currently available to us. Although we believe that the expectations reflected in the forward-looking statements are reasonable, these forward-looking statements are subject to risks, uncertainties and assumptions, including those discussed in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended December 31, 2004.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements contained in this quarterly report reflect our current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, growth strategy and liquidity. We have no intention, and disclaim any obligation, to update or revise any forward-looking statements, whether as a result of new information, future results or otherwise.

PART II


Item 1.	Legal Proceedings.

From time to time, we are involved in various claims and lawsuits arising in the ordinary course of our business that we believe will not have a material adverse affect on our business or financial condition, including claims and lawsuits alleging breaches of contractual obligations.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

On June 8, 2005, our Board of Directors authorized a stock repurchase program to acquire up to an aggregate of $80.0 million of our outstanding common stock through June 2006. As of September 30, 2005, we have repurchased 1,652,400 shares of our common stock for approximately $65.2 million under this program. On October 27, 2005, our Board of Directors authorized a new stock repurchase program to acquire up to an additional $220.0 million of our outstanding common stock through October 2006. Additionally, the administrator of our 401(k) and Retirement Savings Plan purchased shares of our common stock for the benefit of the employees who participated in that portion of the plan during the third quarter of 2005.

The following table presents information with respect to those purchases of our common stock made during the three months ended September 30, 2005:


									Approximate Dollar Value of
		Total Number				Total Number of Shares Purchased as			Shares that May Yet Be
		of Shares		Average Price		Part of Publicly Announced			Purchased
Period		Purchased		Paid per Share		Plans or Programs			Under the Plans or Programs

									(in millions)
During 2005:
July			2,704	$	42.34		—		$	282.9	^(1,2)
August			119,241		40.89		117,200	⁽¹⁾		278.1	^(1,2)
September			1,082,834		40.19		1,078,500	⁽¹⁾		234.8	^(1,2)

	Total		1,204,779	$	40.26		1,195,700		$	234.8


⁽¹⁾	On June 8, 2005, our Board of Directors authorized a stock repurchase program to acquire up to an aggregate of $80.0 million of our outstanding common stock through June 2006.

⁽²⁾	On October 27, 2005, our Board of Directors authorized a new stock repurchase program to acquire up to an additional $220.0 million of our outstanding common stock through October 2006.


Item 3.	Defaults Upon Senior Securities.

None


Item 4.	Submission of Matters to a Vote of Security Holders.

None


Item 5.	Other Information.

(a) None

(b) None


Item 6.	Exhibits.

(a) Exhibits:

EXHIBIT INDEX


Exhibit
No.			Description

	3	.1	Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit No. 3.1 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623).
	3	.2	Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623).
	3	.3	First Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.3 to our Registration Statement on Form S-1 filed with the SEC on May 4, 2001, File No. 333-94623).
	3	.4	Second Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.4 to our Annual Report on Form 10-K, filed with the SEC on April 1, 2002, File No. 001-15749).
	4		Specimen Certificate for shares of Common Stock of the Registrant (incorporated by reference to Exhibit No. 4 to our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2003, File No. 001-15749).
	*31	.1	Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	*31	.2	Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	*32	.1	Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
	*32	.2	Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.


*	Filed herewith

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ALLIANCE DATA SYSTEMS CORPORATION


	By:	/s/Edward J. Heffernan



	Edward J. Heffernan
	Executive Vice President and Chief Financial
	Officer (Principal Financial Officer)

Date: November 8, 2005


	By:	/s/Michael D. Kubic



	Michael D. Kubic
	Senior Vice President and Corporate Controller
	(Principal Accounting Officer)

Date: November 8, 2005

EXHIBIT INDEX


Exhibit
No.			Description

	3	.1	Second Amended and Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit No. 3.1 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623).
	3	.2	Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.2 to our Registration Statement on Form S-1 filed with the SEC on March 3, 2000, File No. 333-94623).
	3	.3	First Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.3 to our Registration Statement on Form S-1 filed with the SEC on May 4, 2001, File No. 333-94623).
	3	.4	Second Amendment to the Second Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit No. 3.4 to our Annual Report on Form 10-K, filed with the SEC on April 1, 2002, File No. 001-15749).
	4		Specimen Certificate for shares of Common Stock of the Registrant (incorporated by reference to Exhibit No. 4 to our Quarterly Report on Form 10-Q filed with the SEC on August 8, 2003, File No. 001-15749).
	*31	.1	Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	*31	.2	Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
	*32	.1	Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
	*32	.2	Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.


*	Filed herewith

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

Bread Financial (BFH) 10-Q2005 Q3 Quarterly report

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Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents