UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the Quarterly Period Ended March 31, 2005

OR

For the transition period from __________ to __________

Commission File Number: 001-15749

ALLIANCE DATA SYSTEMS CORPORATION

(972) 348-5100

     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

     As of April 29, 2005, 83,372,725 shares of the registrant’s common stock, par value $0.01 per share, were outstanding.

ALLIANCE DATA SYSTEMS CORPORATION

INDEX

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PART I

Item 1. Financial Statements

ALLIANCE DATA SYSTEMS CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

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ALLIANCE DATA SYSTEMS CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

4

ALLIANCE DATA SYSTEMS CORPORATION

See accompanying notes to unaudited condensed consolidated financial statements.

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ALLIANCE DATA SYSTEMS CORPORATION

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:

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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

3. INTANGIBLE ASSETS AND GOODWILL

     Intangible assets consist of the following:

Goodwill

     The changes in the carrying amount of goodwill for the three months ended March 31, 2005 are as follows:

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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

4. DEBT

     Debt consists of the following:

     As of March 31, 2005, the certificates of deposit had effective annual fixed rates ranging from 2.3% to 2.6%, and the credit facilities had a weighted average interest rate of 4.1%.

     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. Except as set forth above, the remaining terms of each credit facility remain unchanged.

5. DEFERRED REVENUE

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

6. INCOME TAXES

     For the three months ended March 31, 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.

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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

7. COMPREHENSIVE INCOME

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

8. SEGMENT INFORMATION

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

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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. STOCK COMPENSATION

     At March 31, 2005, the Company had two 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 1.9 million shares of common stock were granted in the first quarter of 2005 at a weighted average fair value of $16.73 per share. The Black-Scholes model would have produced a pro forma stock compensation expense that was approximately 15% lower than that derived from the Binomial model. The first quarter after-tax increase in pro forma stock-based employee compensation expense as a result of this change was approximately $0.3 million.

     During the first quarter of 2005, 125,872 shares of performance based restricted stock were granted under the 2003 Long Term Incentive Plan (“LTIP”). 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 $5.1 million associated with the award as unearned compensation.

     Additionally, during the first quarter of 2005, the Company awarded 262,126 shares of time-based restricted stock with vesting periods of two to three years. The Company recorded $10.8 million (the aggregate value of the common stock based on the market price at the date of the award) as unearned compensation. The Company has recorded $1.4 million of amortization related to shares of time-based restricted stock outstanding.

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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.

Quarter in Review Highlights

     Our first quarter 2005 results included significant new and renewed customer and sponsor 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.

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.

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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 three months ended March 31, 2005, senior debt-to-operating EBITDA was 0.8x compared to a maximum ratio of 2.0x and operating EBITDA to interest expense was 30.0x 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 March 31, 2005, we had borrowings of $286.5 million outstanding under these credit facilities and had approximately $168.5 million in unused borrowing capacity. We were in compliance with our covenants at March 31, 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 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.

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Results of Operations

Three months ended March 31, 2004 compared to the three months ended March 31, 2005

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     Revenue. Total revenue increased $63.9 million, or 20.5%, to $375.9 million for the three months ended March 31, 2005 from $312.0 million for the comparable period in 2004. The increase was due to a 71.0% increase in Marketing Services revenue and a 6.7% increase in Credit Services revenue partially offset by a 2.2% decrease in Transaction Services revenue as follows:

	•	Transaction Services. Transaction Services revenue decreased $3.8 million, or 2.2%, primarily due to a decrease in the number of statements generated and the loss of a client that ceased operations in the fourth quarter of 2004 due to bankruptcy. Statements generated decreased by 1.9%, while revenue per statement remained firm. The decrease in the number of statements generated is primarily attributable to private label that had one 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 $9.5 million, or 6.7%, primarily due to an 8.2% increase in securitization income. Securitization income increased $8.7 million primarily as a result of a 5.8% increase in our average securitized portfolio and lower net charge-offs consistent with recent trends.
	•	Marketing Services. Marketing Services revenue increased $57.1 million, or 71.0%, 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 accretion of deferred services revenue. Changes in the exchange rate of the Canadian dollar accounted for approximately $6.0 million of the $57.1 million increase in our Marketing Services revenue, or 10.5%. Our deferred revenue balance increased 0.5% to $549.8 million at March 31, 2005 from $547.1 million at December 31, 2004 due to a decline in the end of period Canadian dollar exchange rate, partially offset by continued growth in the program, including a 14.5% increase in AIR MILES reward miles issued during the three months ended March 31, 2005 over the comparable period in 2004. Deferred revenue in local currency increased 1.1%.

     Operating Expenses. Total operating expenses, excluding depreciation, amortization and stock compensation expense, increased $53.4 million, or 22.9%, to $287.0 million during the three months ended March 31, 2005 from $233.6 million during the comparable period in 2004. Total adjusted EBITDA margin decreased to 23.6% for the three months ended March 31, 2005 from 25.1% for the comparable period in 2004, primarily due to decreased margins for Transaction Services and Marketing Services offset in part by an increased margin for Credit Services.

	•	Transaction Services. Transaction Services operating expenses, excluding depreciation, amortization and stock compensation expense, decreased $0.1 million, or 0.1%, to $147.6 million for the three months ended March 31, 2005 from $147.7 million for the comparable period in 2004, and EBITDA margin decreased to 12.0% for the three months ended March 31, 2005 from 13.9% during the comparable period in 2004. The decrease in adjusted EBITDA margin was primarily the result of a decrease in revenue driven by a 1.9% decrease in the segment’s key driver, statements generated, in addition to expenses related to our streamlining efforts in utility services during the first quarter of 2005.
	•	Credit Services. Credit Services operating expenses, excluding depreciation, amortization and stock compensation expense, increased $1.8 million, or 1.8%, to $104.0 million for the three months ended March 31, 2005 from $102.2 million for the comparable period in 2004, and adjusted EBITDA margin increased to 31.3% for the three months ended March 31, 2005 from 28.0% for the same period in 2004. The increased margin is the result of favorable revenue trends from an increase in our average securitized portfolio and lower net charge-offs. Margin growth also came from leveraging existing infrastructure.
	•	Marketing Services. Marketing Services operating expenses, excluding depreciation, amortization and stock compensation expense, increased $50.6 million, or 77.4%, to $116.0 million for the three months ended March 31, 2005 from $65.4 million for the comparable period in 2004, and adjusted EBITDA margin decreased to 15.5% for the three months ended March 31, 2005 from 18.5% for the comparable period in 2004. The decrease in EBITDA margin is being driven by an increase in marketing expenses as a result of a change in timing compared to the prior year. Prior year marketing expenses were heavily weighted to the second-half of the year, while current year expenses will be more evenly weighted. Additionally, adjusted EBITDA margin decreased due to the impact of overhead expense offset in part by strong operating results of the AIR MILES reward program and Epsilon.

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	•	Stock compensation expense. Stock compensation expense was $1.4 million for the three months ended March 31, 2005 compared to zero for the comparable period in 2004. The increase is from amortization related to shares of time-based restricted stock outstanding.
	•	Depreciation and Amortization. Depreciation and amortization increased $1.9 million, or 8.0%, to $25.2 million for the three months ended March 31, 2005 from $23.3 million for the comparable period in 2004 due to a $3.1 million increase in the amortization of purchased intangibles slightly offset by a decrease of $1.2 million in depreciation and other amortization.

     Operating Income. Operating income increased $7.1 million, or 12.9%, to $62.2 million for the three months ended March 31, 2005 from $55.1 million during the comparable period in 2004. Operating income increased due to the revenue and expense factors discussed above.

     Interest Expense. Interest expense increased $0.1 million, or 3.7%, to $2.8 million for the three months ended March 31, 2005 from $2.7 million for the comparable period in 2004 due to higher average balances under our credit facilities.

     Taxes. Income tax expense increased $2.7 million to $22.3 million for the three months ended March 31, 2005 from $19.6 million in 2004 due to an increase in taxable income. 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 March 31, 2005 with 57.1% of securitized accounts with balances and 61.5% 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 tables reflect statistics for our securitization trusts as reported to the trustee for compliance reporting.

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

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     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 securitized basis. Average credit card portfolio outstanding represents the average balance of the securitized receivables at the beginning of each month in the period indicated.

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.

     We generated cash flow from operating activities before changes in credit card portfolio activity and merchant settlement activity of $91.8 million for the three months ended March 31, 2005 compared to $71.4 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 three months ended March 31, 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 had cash provided by investing activities of $78.1 million for the three months ended March 31, 2005 compared to $59.8 million for the comparable period in 2004. The significant component of investing activities is securitizations and receivables funding. We generally fund all private label credit card receivables through a securitization program that provides us with both liquidity and lower borrowing costs. As of March 31, 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 funded through the use of certificates of deposit issued through our subsidiary, World Financial Network National Bank. Cash flow from securitization activity was $94.5 million for the three months ended March 31, 2005 and $81.4 million for the comparable period in 2004. We intend to utilize our securitization program for the foreseeable future.

     Financing Activities. Net cash used in financing activities was $91.6 million for the three months ended March 31, 2005 compared to $65.5 million for the comparable period in 2004. Our financing activities during the three months ended March 31, 2005 relate primarily to borrowings and repayments under our revolving credit facility.

     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, 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.

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     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, World Financial Network Credit Card Master Trust II and World Financial Network Credit Card Master Trust III, which we refer to as the WFN Trusts, as part of our securitization program. This securitization program is the primary vehicle through which we finance our private label credit card receivables.

     As 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 March 31, 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 8% of securitized credit card receivables. Certain of the WFN Trusts are required to maintain a level of between 4% and 7% 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 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 interest income that would normally be paid to World Financial Network National Bank, until such time as the securitization investors are fully repaid. The occurrence of an early amortization event would significantly limit, or even negate, our ability to securitize additional receivables.

     Certificates of Deposit. We utilize certificates of deposit to finance the operating activities of our credit card bank subsidiary, World Financial Network National Bank, and to fund securitization enhancement requirements. World Financial Network National Bank issues 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 2.3% to 2.6%. As of March 31, 2005, we had $35.5 million of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.

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     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. 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 March 31, 2005, we had borrowings of $286.5 million outstanding under these credit facilities (with a weighted average interest rate of 4.1%), we issued no letters of credit, and we had available unused borrowing capacity of approximately $168.5 million. The credit facilities limit our aggregate outstanding letters of credit to $50.0 million. We can obtain an increase in the total commitment under the credit facilities of up to $45.0 million if we are not in default under the credit facilities, one or more lenders agrees to increase its commitment and the administrative agent consents.

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

Recent Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”, which replaces SFAS No. 123 “Accounting for Stock-Based Compensation” and supersedes 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, beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. 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. We are required to adopt SFAS No. 123(R) in our third quarter of 2005, beginning July 1, 2005. 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.

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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, and redemption reward risk.

     Foreign Currency Exchange Risk. We are exposed to fluctuations in the exchange rate between the U.S. and the Canadian dollar through our significant Canadian operations. We do not hedge our net investment exposure in our Canadian subsidiary.

Item 4. Controls and Procedures

Evaluation

     As of March 31, 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 March 31, 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 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 did not assess 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.

     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.

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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 Sale of Equity Securities and Use of Proceeds.

     We do not currently have a common stock repurchase program in place. However, the administrator of our 401(k) and Retirement Savings Plan purchased shares of our common stock for the benefit of the employees who participated in that portion of the plan during the first quarter of 2005. The following table presents information with respect to those purchases of our common stock made during the three months ended March 31, 2005:

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

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Item 6. Exhibits.

     (a) Exhibits:

EXHIBIT INDEX

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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.

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EXHIBIT INDEX