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EX-32.1 - EXHIBIT 32.1 - ALLIANCE DATA SYSTEMS CORPexhibit_32-1.htm
EX-31.1 - EXHIBIT 31.1 - ALLIANCE DATA SYSTEMS CORPexhibit_31-1.htm
EX-31.2 - EXHIBIT 31.2 - ALLIANCE DATA SYSTEMS CORPexhibit_31-2.htm
EX-32.2 - EXHIBIT 32.2 - ALLIANCE DATA SYSTEMS CORPexhibit_32-2.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-Q
 
(Mark One)
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      
For the quarterly period ended September 30, 2015
      
OR
    
£
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.)

7500 Dallas Parkway, Suite 700
Plano, Texas 75024
(Address of principal executive office, including zip code)

(214) 494-3000
(Registrant's telephone number, including area code)
________________


Indicate by check mark whether the registrant: (1) has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes R     No  £  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes R     No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.   See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 
Large accelerated filer R     
Accelerated filer  £     
 
Non-accelerated filer £ (Do not check if a smaller reporting company)
Smaller reporting company £

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

As of October 31, 2015, 61,138,307 shares of common stock were outstanding.
 



ALLIANCE DATA SYSTEMS CORPORATION
INDEX
   
Page
Number
Part I:   FINANCIAL INFORMATION
 
Item 1.
Financial Statements (unaudited)
 
 
3
 
4
 
5
 
6
 
7
Item 2.
34
Item 3.
48
Item 4.
48
Part II:   OTHER INFORMATION
 
Item 1.
49
Item 1A.
49
Item 2.
52
Item 3.
52
Item 4.
52
Item 5.
52
Item 6.
53
55

2

PART I
Item 1.
Financial Statements.
ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
     
   
September 30,
2015
   
December 31,
2014
 
   
(In thousands, except per share amounts)
 
ASSETS
       
Cash and cash equivalents  
 
$
977,341
   
$
1,077,152
 
Trade receivables, less allowance for doubtful accounts ($3,643 and $3,811 at September 30, 2015 and December 31, 2014, respectively)
   
642,681
     
743,294
 
Credit card and loan receivables:
               
Credit card receivables – restricted for securitization investors  
   
8,589,282
     
8,312,291
 
Other credit card and loan receivables  
   
3,210,737
     
2,931,589
 
Total credit card and loan receivables  
   
11,800,019
     
11,243,880
 
Allowance for loan loss  
   
(671,246
)
   
(570,171
)
Credit card and loan receivables, net  
   
11,128,773
     
10,673,709
 
Credit card and loan receivables held for sale  
   
98,709
     
125,060
 
Deferred tax asset, net  
   
237,723
     
218,872
 
Other current assets  
   
544,069
     
456,349
 
Redemption settlement assets, restricted  
   
468,417
     
520,340
 
Total current assets  
   
14,097,713
     
13,814,776
 
Property and equipment, net  
   
561,300
     
559,628
 
Deferred tax asset, net  
   
841
     
164
 
Cash collateral, restricted  
   
4,888
     
22,511
 
Intangible assets, net  
   
1,268,627
     
1,515,994
 
Goodwill  
   
3,835,419
     
3,865,484
 
Other non-current assets  
   
531,886
     
485,420
 
Total assets  
 
$
20,300,674
   
$
20,263,977
 
LIABILITIES AND EQUITY
               
Accounts payable  
 
$
382,220
   
$
455,656
 
Accrued expenses  
   
395,467
     
457,472
 
Contingent consideration  
   
     
326,023
 
Deposits  
   
2,589,313
     
2,645,995
 
Non-recourse borrowings of consolidated securitization entities  
   
1,230,000
     
1,058,750
 
Current debt  
   
389,146
     
208,164
 
Other current liabilities  
   
280,720
     
306,123
 
Deferred revenue  
   
703,774
     
846,370
 
Deferred tax liability, net  
   
1,719
     
930
 
Total current liabilities  
   
5,972,359
     
6,305,483
 
Deferred revenue  
   
148,443
     
166,807
 
Deferred tax liability, net  
   
642,069
     
690,175
 
Deposits  
   
2,633,109
     
2,127,546
 
Non-recourse borrowings of consolidated securitization entities  
   
3,743,166
     
4,133,166
 
Long-term and other debt  
   
4,710,032
     
4,001,082
 
Other liabilities  
   
266,764
     
207,772
 
Total liabilities  
   
18,115,942
     
17,632,031
 
Commitments and contingencies (Note 12)
               
Redeemable non-controlling interest  
   
236,847
     
235,566
 
Stockholders' equity:
               
Common stock, $0.01 par value; authorized, 200,000 shares; issued, 112,072 shares and 111,686 shares at September 30, 2015 and December 31, 2014, respectively
   
1,121
     
1,117
 
Additional paid-in capital  
   
2,956,814
     
2,905,563
 
Treasury stock, at cost, 50,949 shares and 47,874 shares at September 30, 2015 and December 31, 2014, respectively
   
(3,840,253
)
   
(2,975,795
)
Retained earnings  
   
2,948,081
     
2,540,948
 
Accumulated other comprehensive loss  
   
(117,878
)
   
(75,453
)
Total stockholders' equity  
   
1,947,885
     
2,396,380
 
Total liabilities and equity  
 
$
20,300,674
   
$
20,263,977
 
See accompanying notes to unaudited condensed consolidated financial statements.
3

ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
  2015    
2014
 
2015
 
2014
 
 
(In thousands, except per share amounts)
 
Revenues
   
 
 
 
 
 
Transaction  
 
$
83,126
   
$
87,162
  $
263,195
 
 
$
251,390
 
Redemption  
 
 
220,922
     
232,464
 
 
747,192
 
 
 
744,658
 
Finance charges, net  
 
 
737,918
     
597,892
 
 
2,101,360
 
 
 
1,672,339
 
Marketing services  
 
 
498,955
     
353,525
 
 
1,435,520
 
 
 
1,021,813
 
Other revenue  
 
 
48,196
     
48,090
 
 
143,625
 
 
 
126,991
 
Total revenue  
 
 
1,589,117
     
1,319,133
 
 
4,690,892
 
 
 
3,817,191
 
Operating expenses
                         
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
 
 
901,095
     
767,415
 
 
2,787,501
 
 
 
2,323,210
 
Provision for loan loss  
 
 
171,678
     
114,577
 
  
461,944
 
 
 
281,811
 
General and administrative  
 
 
40,890
     
39,169
 
 
111,992
 
 
 
101,498
 
Regulatory settlement  
 
 
64,563
     
 
 
64,563
 
 
 
 
Depreciation and other amortization  
 
 
36,450
     
28,070
 
  
104,983
 
 
 
79,555
 
Amortization of purchased intangibles  
 
 
86,930
     
48,261
 
  
262,131
 
 
 
145,144
 
Total operating expenses  
 
 
1,301,606
     
997,492
 
 
3,793,114
 
 
 
2,931,218
 
Operating income  
 
 
287,511
     
321,641
 
  
897,778
 
 
 
885,973
 
Interest expense
             
Securitization funding costs  
 
 
23,143
     
22,763
 
  
71,509
 
 
 
67,974
 
Interest expense on deposits  
 
 
13,719
     
9,064
 
  
37,099
 
 
 
25,526
 
Interest expense on long-term and other debt, net  
 
 
45,236
     
29,637
 
  
132,212
 
 
 
98,643
 
Total interest expense, net  
 
 
82,098
     
61,464
 
  
240,820
 
 
 
192,143
 
Income before income tax  
 
$
205,413
   
$
260,177
  $
656,958
 
 
$
693,830
 
Provision for income taxes  
 
 
75,031
     
95,229
 
 
231,705
 
 
 
253,946
 
Net income  
 
$
130,382
   
$
164,948
  $
425,253
 
 
$
439,884
 
Less: net income attributable to non-controlling interest  
 
 
1,952
     
706
 
  
2,927
 
 
 
803
 
Net income attributable to common stockholders  
 
$
128,430
   
$
164,242
  $
422,326
 
 
$
439,081
 
                                
Net income attributable to common stockholders per share:
                              
Basic  
 
$
2.09
   
$
2.84
  $
6.55
 
 
$
7.98
 
Diluted  
 
$
2.08
   
$
2.74
  $
6.51
 
 
$
6.98
 
                              
Weighted average shares:
             
Basic  
 
 
61,430
     
57,742
 
 
62,149
 
 
 
54,998
 
Diluted  
 
 
61,796
     
59,908
 
 
62,567
 
 
 
62,887
 
                             
 
See accompanying notes to unaudited condensed consolidated financial statements.
4

ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(In thousands)
 
   
   
   
   
 
Net income  
 
$
130,382
   
$
164,948
   
$
425,253
   
$
439,884
 
Other comprehensive income (loss), net of tax:
                               
Net unrealized gain (loss) on securities available-for-sale, net of tax expense (benefit) of $700, $(228), $572 and $688 for the three and nine months ended September 30, 2015 and 2014, respectively
   
420
     
(1,991
)
   
(1,034
)
   
(1,435
)
Net unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of $406, $(34), $(510) and $(34) for the three and nine months ended September 30, 2015 and 2014, respectively
   
1,415
     
(104
)
   
(1,466
)
   
(104
)
Foreign currency translation adjustments  
   
4,633
     
(37,956
)
   
(39,925
)
   
(34,480
)
Other comprehensive income (loss)  
   
6,468
     
(40,051
)
   
(42,425
)
   
(36,019
)
Total comprehensive income, net of tax  
 
$
136,850
   
$
124,897
   
$
382,828
   
$
403,865
 
Less: comprehensive income attributable to non-controlling interest  
   
2,363
     
1,251
     
3,360
     
1,514
 
Comprehensive income attributable to common
stockholders  
 
$
134,487
   
$
123,646
   
$
379,468
   
$
402,351
 
                                 
 
See accompanying notes to unaudited condensed consolidated financial statements.
5

ALLIANCE DATA SYSTEMS CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Nine Months Ended
September 30,
 
 
 
2015
   
2014
 
 
 
(In thousands)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
 
Net income                                                                                                                                                            
 
$
425,253
   
$
439,884
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
Depreciation and amortization                                                                                                                                                        
   
367,114
     
224,699
 
Deferred income tax (benefit) expense                                                                                                                                                        
   
(62,807
)
   
5,320
 
Provision for loan loss                                                                                                                                                        
   
461,944
     
281,811
 
Non-cash stock compensation                                                                                                                                                        
   
73,343
     
49,754
 
Amortization of discount on debt                                                                                                                                                        
   
646
     
12,499
 
Amortization of deferred financing costs                                                                                                                                                        
   
23,489
     
17,092
 
Change in deferred revenue                                                                                                                                                            
   
(34,168
)
   
(41,537
)
Change in contingent consideration                                                                                                                                                            
   
(99,601
)
   
 
Change in other operating assets and liabilities, net of acquisitions                                                                                                                                                            
   
(82,996
)
   
21,786
 
Originations of credit card and loan receivables held for sale                                                                                                                                                            
   
(4,569,806
)
   
(3,645,315
)
Sales of credit card and loan receivables held for sale                                                                                                                                                            
   
4,556,339
     
3,636,809
 
Excess tax benefits from stock-based compensation                                                                                                                                                            
   
(22,952
)
   
(31,888
)
Other                                                                                                                                                            
   
(4,566
)
   
(2,935
)
Net cash provided by operating activities                                                                                                                                                    
   
1,031,232
     
967,979
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
Change in redemption settlement assets                                                                                                                                                            
   
(16,374
)
   
(48,906
)
Change in cash collateral, restricted                                                                                                                                                            
   
18,000
     
(1,582
)
Change in restricted cash                                                                                                                                                            
   
(369
)
   
(316,071
)
Change in credit card and loan receivables                                                                                                                                                            
   
(913,803
)
   
(633,336
)
Purchase of credit card portfolios                                                                                                                                                            
   
     
(379,616
)
Proceeds from the sale of a credit card portfolio                                                                                                                                                            
   
26,900
     
 
Payment for acquired businesses, net of cash                                                                                                                                                            
   
(45,430
)
   
(259,514
)
Capital expenditures                                                                                                                                                            
   
(140,091
)
   
(114,595
)
Purchases of other investments                                                                                                                                                            
   
(38,772
)
   
(109,780
)
Maturities/sales of other investments                                                                                                                                                            
   
7,981
     
4,565
 
Other                                                                                                                                                            
   
(1,011
)
   
(4,000
)
Net cash used in investing activities                                                                                                                                                    
   
(1,102,969
)
   
(1,862,835
)
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
Borrowings under debt agreements                                                                                                                                                            
   
2,426,443
     
1,920,190
 
Repayments of borrowings                                                                                                                                                            
   
(1,528,890
)
   
(1,580,796
)
Proceeds from convertible note hedge counterparties                                                                                                                                                            
   
     
1,519,833
 
Settlement of convertible note borrowings                                                                                                                                                            
   
     
(1,864,803
)
Payment of acquisition-related contingent consideration                                                                                                                                                            
   
(205,928
)
   
 
Acquisition of non-controlling interest                                                                                                                                                            
   
(87,376
)
   
 
Issuances of deposits                                                                                                                                                            
   
2,191,885
     
2,342,836
 
Repayments of deposits                                                                                                                                                            
   
(1,743,004
)
   
(1,431,392
)
Non-recourse borrowings of consolidated securitization entities                                                                                                                                                            
   
2,570,000
     
1,495,000
 
Repayments/maturities of non-recourse borrowings of consolidated securitization entities
   
(2,788,750
)
   
(1,635,000
)
Payment of deferred financing costs                                                                                                                                                            
   
(16,396
)
   
(24,470
)
Excess tax benefits from stock-based compensation                                                                                                                                                            
   
22,952
     
31,888
 
Proceeds from issuance of common stock                                                                                                                                                            
   
8,775
     
10,439
 
Purchase of treasury shares                                                                                                                                                            
   
(856,855
)
   
(217,486
)
Other                                                                                                                                                            
   
     
(1,476
)
Net cash (used in) provided by financing activities                                                                                                                                                    
   
(7,144
)
   
564,763
 
Effect of exchange rate changes on cash and cash equivalents                                                                                                                                                            
   
(20,930
)
   
(4,905
)
Change in cash and cash equivalents                                                                                                                                                            
   
(99,811
)
   
(334,998
)
Cash and cash equivalents at beginning of period                                                                                                                                                            
   
1,077,152
     
969,822
 
Cash and cash equivalents at end of period                                                                                                                                                    
 
$
977,341
   
$
634,824
 
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 
Interest paid                                                                                                                                                            
 
$
223,681
   
$
153,839
 
Income taxes paid, net                                                                                                                                                            
 
$
225,913
   
$
147,927
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
6

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited condensed consolidated financial statements included herein have been prepared by Alliance Data Systems Corporation ("ADSC" or, including its consolidated subsidiaries and variable interest entities ("VIEs"), 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, 2014, filed with the SEC on February 27, 2015.
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 (1) the reported amounts of assets; (2) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation in accordance with GAAP.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, "Revenue from Contracts with Customers," which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Companies may adopt ASU 2014-09 using a full retrospective approach or report the cumulative effect as of the date of adoption. On July 9, 2015, the FASB voted to defer the effective date by one year to December 15, 2017 for interim and annual reporting periods beginning after that date and permitted early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is evaluating the impact that adoption of ASU 2014-09 will have on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, "Amendments to the Consolidation Analysis," which amends the consolidation requirements in Accounting Standards Codification ("ASC") 810, "Consolidation." ASU 2015-02 makes targeted amendments to the current consolidation guidance for VIEs, which could change consolidation conclusions. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015, with early application permitted. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. ASU 2015-03 is effective for interim and annual reporting periods beginning after December 15, 2015, with early application permitted. Under ASU 2015-03, unamortized debt issuance costs of $84.9 million would be reclassified from other non-current assets to a reduction of debt as of September 30, 2015.
In April 2015, the FASB issued ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement." ASU 2015-05 provides guidance about whether a cloud computing arrangement includes a software license and is effective for interim and annual reporting periods beginning after December 15, 2015, with early adoption permitted. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.
7

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

In July 2015, the FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory." ASU 2015-11 changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. ASU  2015-11 is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this standard to materially impact its consolidated financial statements.
2. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
   
2015
 
2014
 
2015
 
2014
 
       
(In thousands, except per share amounts)
     
Numerator:
 
 
 
 
 
 
Net income attributable to common stockholders  
 
 
$
128,430
 
$
164,242
 
$
422,326
 
$
439,081
 
Less: accretion of redeemable non-controlling interest  
     
    
    
15,194
    
 
Net income attributable to common stockholders after accretion of redeemable non-controlling interest
 
 
$
128,430
 
$
164,242
 
$
407,132
 
$
439,081
 
Denominator:
                      
Weighted average shares, basic  
 
   
61,430
 
  
57,742
 
  
62,149
 
  
54,998
 
Weighted average effect of dilutive securities:
           
Shares from assumed conversion of convertible senior notes  
 
   
 
  
 
  
 
  
2,816
 
Shares from assumed exercise of convertible note warrants  
 
   
 
  
1,664
 
  
 
  
4,561
 
Net effect of dilutive stock options and unvested restricted stock  
 
   
366
 
  
502
 
  
418
 
  
512
 
Denominator for diluted calculations  
 
   
61,796
 
  
59,908
 
  
62,567
 
  
62,887
 
 
 
       
  
   
 
   
  
   
Net income attributable to common stockholders per share:
                               
Basic  
 
 
$
2.09
 
$
2.84
 
$
6.55
 
$
7.98
 
Diluted  
 
 
$
2.08
  $
2.74
 
$
6.51
  $
6.98
 
3. ACQUISITIONS
2014 Acquisitions:
Brand Loyalty Group B.V.
On January 2, 2014, the Company acquired a 60% ownership interest in BrandLoyalty Group B.V. ("BrandLoyalty"), a Netherlands-based, data-driven loyalty marketer. BrandLoyalty designs, organizes, implements and evaluates innovative and tailor-made loyalty programs for food retailers worldwide. The acquisition expands the Company's presence across Europe, Asia and Latin America. The results of BrandLoyalty have been included since the date of acquisition and are reflected in the Company's LoyaltyOne® segment. The initial cash consideration was approximately $259.5 million in addition to the assumption of debt. The goodwill resulting from the acquisition is not deductible for tax purposes.
 
8

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table summarizes the final allocation of consideration and the respective fair values of the assets acquired and liabilities assumed in the BrandLoyalty acquisition as of the date of purchase:
 
 
As of January 2, 2014
 
     
(In thousands)
 
Current assets, net of cash acquired                                                                                                                                          
 
 
$
246,769
 
Deferred tax asset                                                                                                                                          
 
   
3,509
 
Property and equipment                                                                                                                                          
 
   
19,719
 
Other non-current assets                                                                                                                                          
 
   
3,994
 
Intangible assets                                                                                                                                          
 
   
423,832
 
Goodwill                                                                                                                                          
 
   
565,015
 
Total assets acquired                                                                                                                                      
 
   
1,262,838
 
         
Current liabilities                                                                                                                                          
 
   
146,559
 
Current portion of long-term debt                                                                                                                                          
 
   
34,180
 
Deferred tax liability                                                                                                                                          
     
105,512
 
Long-term debt (net of current portion)                                                                                                                                          
     
126,323
 
Other liabilities                                                                                                                                          
     
142
 
Total liabilities assumed                                                                                                                                      
 
   
412,716
 
         
Redeemable non-controlling interest                                                                                                                                      
 
   
341,907
 
         
Net assets acquired                                                                                                                                      
 
 
$
508,215
 
As part of the initial purchase price allocation, the Company recorded a liability for the earn-out provision included in the BrandLoyalty share purchase agreement of €181.9 million ($248.7 million as of January 2, 2014). The liability was measured at fair value on the date of purchase and subsequent changes in the fair value of the liability were included in operating expenses in the Company's consolidated statements of income. On February 10, 2015, the Company paid €269.9 million ($305.5 million) to settle the contingent liability.
Conversant, Inc.
On December 10, 2014, the Company completed the acquisition of 100% of the common stock of Conversant, Inc. ("Conversant"), a digital marketing services company offering unique end-to-end digital marketing solutions that empower clients to more effectively market to their customers across all channels. The results of Conversant® have been included since the date of the acquisition and are reflected in the Company's Epsilon® segment.
The Company paid total consideration of approximately $2.3 billion, with cash consideration of approximately $936.3 million, net of cash acquired and equity consideration of approximately $1.3 billion through the issuance of approximately 4.6 million shares and the exchange of certain restricted stock awards and stock options. The cash and equity consideration paid and issued were determined in accordance with the terms of the merger agreement, with the value based on the volume weighted average price per share of the Company's common stock for the consecutive period of 15 trading days ending on the close of trading on the second trading day immediately preceding the closing of the merger. The goodwill recognized is attributable to expected synergies and an assembled workforce. The goodwill resulting from the acquisition is not deductible for tax purposes.
9

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
In the first quarter of 2015, the Company finalized the purchase price allocation, with no changes from the preliminary purchase price allocation disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The following table summarizes the allocation of the consideration and the respective fair values of the assets acquired and liabilities assumed in the Conversant acquisition as of the date of purchase:
 
 
As of December 10, 2014
 
   
(In thousands)
 
Current assets, net of cash acquired                                                                                                                                          
 
 
$
180,030
 
Deferred tax asset                                                                                                                                          
 
   
11,905
 
Property and equipment                                                                                                                                          
 
   
25,555
 
Developed technology                                                                                                                                          
 
   
182,500
 
Other non-current assets                                                                                                                                          
 
   
1,744
 
Intangible assets                                                                                                                                          
 
   
755,600
 
Goodwill                                                                                                                                          
 
   
1,650,299
 
Total assets acquired                                                                                                                                      
 
   
2,807,633
 
         
Current liabilities                                                                                                                                          
 
   
177,585
 
Deferred tax liability                                                                                                                                          
     
344,081
 
Other liabilities                                                                                                                                          
     
26,933
 
Total liabilities assumed                                                                                                                                      
 
   
548,599
 
         
Net assets acquired                                                                                                                                      
 
 
$
2,259,034
 
The following table presents the Company's unaudited pro forma consolidated revenue and net income for the three and nine months ended September 30, 2014. The unaudited pro forma results include the historical consolidated statements of income of the Company and Conversant, giving effect to the Conversant acquisition and related financing transactions as if they had occurred on January 1, 2013.
 
 
Three Months Ended
September 30, 2014
   
Nine Months Ended
September 30, 2014
 
 
 
(In thousands, except per share amounts)
 
Total revenue  
 
$
1,457,446
   
$
4,238,797
 
Net income  
 
$
151,921
   
$
411,476
 
Net income attributable to common stockholders  
 
$
151,215
   
$
410,673
 
                 
Net income attributable to common stockholders per share:
               
Basic  
 
$
2.43
   
$
6.89
 
Diluted  
 
$
2.34
   
$
6.08
 
The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Conversant acquisition had been completed as of the date for which the unaudited pro forma financial information is presented. The unaudited pro forma financial information for the three and nine months ended September 30, 2014 includes adjustments that are directly related to the acquisition, factually supportable and expected to have a continuing impact. These adjustments include, but are not limited to, amortization related to fair value adjustments to intangible assets and interest expense on acquisition-related debt. The unaudited pro forma financial information for the three months and nine months ended September 30, 2014 exclude $6.6 million of acquisition costs consisting primarily of advisory, legal and other professional fees.
10

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
2015 Acquisition:
Edison International Concept & Agencies B.V. and Max Holding B.V.
On August 31, 2015, BrandLoyalty acquired all of the stock of Edison International Concept & Agencies B.V. ("Edison") and Max Holding B.V. ("Merison"), two Netherlands-based loyalty marketers, for consideration of approximately $45.4 million, net of $2.2 million of cash and cash equivalents acquired. The acquisition expands BrandLoyalty's short-term loyalty programs into new markets with new brands. Total net assets acquired were $61.4 million, including $6.7 million of intangible assets and $34.7 million of goodwill, with total liabilities assumed of $16.0 million. The goodwill resulting from the acquisition is not deductible for tax purposes. The results of Edison and Merison have been included since the date of acquisition and are reflected in the Company's LoyaltyOne segment.
4. CREDIT CARD AND LOAN RECEIVABLES
The Company's credit card and loan receivables are the only portfolio segment or class of financing receivables. Quantitative information about the components of credit card and loan receivables is presented in the table below:
 
 
September 30,
2015
   
December 31,
2014
 
 
 
(In thousands)
 
Principal receivables  
 
$
11,297,882
   
$
10,762,498
 
Billed and accrued finance charges  
   
480,315
     
422,838
 
Other credit card and loan receivables  
   
21,822
     
58,544
 
Total credit card and loan receivables  
   
11,800,019
     
11,243,880
 
Less credit card receivables – restricted for securitization investors
   
8,589,282
     
8,312,291
 
Other credit card and loan receivables  
 
$
3,210,737
   
$
2,931,589
 
Allowance for Loan Loss
The Company maintains an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The allowance for loan loss covers forecasted uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.
In estimating the allowance for principal loan losses, management utilizes a migration analysis of delinquent and current credit card and loan receivables. Migration analysis is a technique used to estimate the likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off. The allowance is maintained through an adjustment to the provision for loan loss. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. In estimating the allowance for uncollectible unpaid interest and fees, the Company utilizes historical charge-off trends, analyzing actual charge-offs for the prior three months. The allowance is maintained through an adjustment to finance charges, net. In evaluating the allowance for loan loss for both principal and unpaid interest and fees, management also considers factors that may impact loan loss experience, including seasoning, loan volume and amounts, seasonality, payment rates and forecasting uncertainties.
Net charge-offs include the principal amount of losses from credit cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged‑off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off at the end of the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off at the end of each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.
The Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. Actual charge-offs for unpaid interest and fees were $88.9 million and $70.9 million for the three months ended September 30, 2015 and 2014, respectively, and $258.2 million and $212.9 million for the nine months ended September 30, 2015 and 2014, respectively.
11

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
The following table presents the Company's allowance for loan loss for the periods indicated:
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
   
(In thousands)
 
Balance at beginning of period  
 
$
623,316
   
$
483,580
   
$
570,171
   
$
503,169
 
Provision for loan loss  
   
171,678
     
114,577
     
461,944
     
281,811
 
Change in estimate for uncollectible unpaid interest and fees  
   
     
1,000
     
4,500
     
1,500
 
Recoveries  
   
48,767
     
39,074
     
129,623
     
115,548
 
Principal charge-offs  
   
(172,515
)
   
(126,877
)
   
(494,992
)
   
(390,674
)
Balance at end of period  
 
$
671,246
   
$
511,354
   
$
671,246
   
$
511,354
 
Delinquencies
A credit card account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder's statement. It is the Company's policy to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit 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 becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.
The following table presents the delinquency trends of the Company's credit card and loan receivables portfolio:
 
 
September 30,
2015
   
% of
Total
   
December 31,
2014
   
% of
Total
 
 
     
(In thousands, except percentages)
     
Receivables outstanding – principal  
 
$
11,297,882
     
100.0
%
 
$
10,762,498
     
100.0
%
Principal receivables balances contractually delinquent:
                               
31 to 60 days  
   
175,018
     
1.5
%
   
157,760
     
1.4
%
61 to 90 days  
   
113,360
     
1.0
     
93,175
     
0.9
 
91 or more days  
   
225,553
     
2.0
     
182,945
     
1.7
 
Total  
 
$
513,931
     
4.5
%
 
$
433,880
     
4.0
%
Modified Credit Card Receivables
The Company holds certain credit card receivables for which the terms have been modified. The Company's modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs' concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. These concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms.
12

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
Credit card receivables for which temporary hardship or permanent concessions have been granted are both considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivables balance and the discounted present value of cash flows expected to be collected. Consistent with the Company's measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of ASC 450-20, "Loss Contingencies." If the Company applied accounting under ASC 310-40, "Troubled Debt Restructurings by Creditors," to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.
The Company had $155.5 million and $134.9 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $39.1 million and $35.2 million, respectively, as of September 30, 2015 and December 31, 2014. These modified credit card receivables represented less than 2% of the Company's total credit card receivables as of both September 30, 2015 and December 31, 2014.
The average recorded investment in impaired credit card receivables was $149.2 million and $114.0 million for the three months ended September 30, 2015 and 2014, respectively, and $141.5 million and $114.2 million for the nine months ended September 30, 2015 and 2014, respectively.
Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized $3.8 million and $3.3 million for the three months ended September 30, 2015 and 2014, respectively, and $10.7 million and $9.6 million for the nine months ended September 30, 2015 and 2014, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.
The following tables provide information on credit card receivables that are considered troubled debt restructurings as described above, which entered into a modification program during the specified periods:
 
Three Months Ended September 30, 2015
 
Nine Months Ended September 30, 2015
 
 
Number of
Restructurings
 
Pre-modification
Outstanding Balance
 
Post-modification
Outstanding Balance
 
Number of
Restructurings
 
Pre-modification
Outstanding Balance
 
Post-modification
Outstanding Balance
 
 
 (Dollars in thousands)  
Troubled debt restructurings – credit card receivables
 
44,955
 
$
48,088
 
$
48,048
   
120,074
 
$
129,775
 
$
129,661
 
                                   
 
Three Months Ended September 30, 2014
 
Nine Months Ended September 30, 2014
 
 
Number of
Restructurings
 
Pre-modification
Outstanding Balance
 
Post-modification
Outstanding Balance
 
Number of
Restructurings
 
Pre-modification
Outstanding Balance
 
Post-modification
Outstanding Balance
 
 
(Dollars in thousands)  
Troubled debt restructurings – credit card receivables
 
36,846
 
$
37,130
 
$
37,100
   
102,000
 
$
101,837
 
$
101,750
 
                                     
The tables below summarize troubled debt restructurings that have defaulted in the specified periods where the default occurred within 12 months of their modification date:
 
Three Months Ended
September 30, 2015
 
Nine Months Ended
September 30, 2015
 
 
Number of
Restructurings
 
Outstanding
Balance
 
Number of
Restructurings
 
Outstanding
Balance
 
 
(Dollars in thousands)
 
Troubled debt restructurings that subsequently defaulted – credit card receivables
 
20,212
 
$
21,436
   
55,940
 
$
57,995
 
                         

13

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

 
Three Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2014
 
 
Number of
Restructurings
 
Outstanding
Balance
 
Number of
Restructurings
 
Outstanding
Balance
 
 
(Dollars in thousands)
 
Troubled debt restructurings that subsequently defaulted – credit card receivables
 
14,047
 
$
14,037
   
44,545
 
$
44,009
 
                         
Age of Credit Card and Loan Receivables Accounts
The following tables set forth, as of September 30, 2015 and 2014, the number of active credit card and loan receivables accounts with balances and the related principal balances outstanding, based upon the age of the active credit card and loan receivables accounts from origination:
   
September 30, 2015
 
Age of Accounts Since Origination
 
Number of Active
Accounts with Balances
   
Percentage of Active
Accounts with Balances
   
Principal
Receivables Outstanding
   
Percentage of Principal
Receivables Outstanding
 
 
 
(In thousands, except percentages)
 
0-12 Months  
   
5,881
     
29.8
%
 
$
2,994,083
     
26.5
%
13-24 Months  
   
3,014
     
15.3
     
1,783,846
     
15.8
 
25-36 Months  
   
2,085
     
10.6
     
1,266,628
     
11.2
 
37-48 Months  
   
1,509
     
7.6
     
917,319
     
8.1
 
49-60 Months  
   
1,107
     
5.6
     
676,015
     
6.0
 
Over 60 Months  
   
6,148
     
31.1
     
3,659,991
     
32.4
 
Total  
   
19,744
     
100.0
%
 
$
11,297,882
     
100.0
%

   
September 30, 2014
 
Age of Accounts Since Origination
 
Number of Active
Accounts with Balances
   
Percentage of Active
Accounts with Balances
   
Principal
Receivables Outstanding
   
Percentage of Principal
Receivables Outstanding
 
 
 
(In thousands, except percentages)
 
0-12 Months  
   
4,869
     
28.2
%
 
$
2,220,148
     
25.1
%
13-24 Months  
   
2,554
     
14.8
     
1,282,695
     
14.5
 
25-36 Months  
   
1,781
     
10.3
     
937,043
     
10.6
 
37-48 Months  
   
1,283
     
7.4
     
701,808
     
7.9
 
49-60 Months  
   
969
     
5.6
     
557,911
     
6.3
 
Over 60 Months  
   
5,828
     
33.7
     
3,149,984
     
35.6
 
Total  
   
17,284
     
100.0
%
 
$
8,849,589
     
100.0
%

14

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
Credit Quality
The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company's obligor credit quality. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. The proprietary scoring models are based on historical data and require various assumptions about future performance. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 90 or more days past due at any time within the next 12 months. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects composition of the Company's credit card and loan receivables by obligor credit quality as of September 30, 2015 and 2014:
   
September 30, 2015
   
September 30, 2014
 
Probability of an Account
Becoming 90 or More Days Past Due or
Becoming Charged-off (within the next 12 months)
   
Total Principal
Receivables Outstanding
   
Percentage of Principal
Receivables Outstanding
   
Total Principal
Receivables Outstanding
   
Percentage of Principal
Receivables Outstanding
 
       
(In thousands, except percentages)
     
No Score
   
$
176,379
     
1.6
%
 
$
180,003
     
2.0
%
27.1% and higher
     
607,856
     
5.4
     
430,333
     
4.9
 
17.1% - 27.0%    
944,270
     
8.3
     
829,208
     
9.4
 
12.6% - 17.0%
 
   
1,140,013
     
10.1
     
955,459
     
10.8
 
3.7% - 12.5%
 
   
4,413,422
     
39.1
     
3,613,024
     
40.8
 
1.9% - 3.6%
 
   
2,405,329
     
21.3
     
1,837,713
     
20.8
 
Lower than 1.9%
     
1,610,613
     
14.2
     
1,003,849
     
11.3
 
Total
   
$
11,297,882
     
100.0
%
 
$
8,849,589
     
100.0
%
Transfer of Financial Assets
The Company originates loans under an agreement with one of its clients, and after origination, these loan receivables are sold to the client at par value plus accrued interest. These transfers qualify for sale treatment as they meet the conditions established in ASC 860-10, "Transfers and Servicing." Following the sale, the client owns the loan receivables, bears the risk of loss in the event of loan defaults and is responsible for all servicing functions related to the loan receivables. The loan receivables originated by the Company that have not yet been sold to the client were $62.2 million and $48.9 million at September 30, 2015 and December 31, 2014, respectively, and are included in credit card and loan receivables held for sale in the Company's unaudited condensed consolidated balance sheets and carried at the lower of cost or fair value. The carrying value of these loan receivables approximates fair value due to the short duration between the date of origination and sale. Originations and sales of these loan receivables held for sale are reflected as operating activities in the Company's unaudited condensed consolidated statements of cash flows.
Upon the client's purchase of the originated loan receivables, the Company is obligated to purchase a participating interest in a pool of loan receivables that includes the loan receivables originated by the Company. Such interest participates on a pro rata basis in the cash flows of the underlying pool of loan receivables, including principal repayments, finance charges, losses and recoveries. The Company bears the risk of loss related to its participation interest in this pool.
During the nine months ended September 30, 2015 and 2014, the Company purchased $227.7 million and $181.8 million, respectively, of loan receivables under these agreements.
The total outstanding balance of these loan receivables was $193.6 million and $160.6 million as of September 30, 2015 and December 31, 2014, respectively, and was included in other credit card and loan receivables in the Company's unaudited condensed consolidated balance sheets.
Portfolios Held for Sale
The Company has certain credit card portfolios held for sale, which are carried at the lower of cost or fair value,  and were $36.5 million and $76.2 million as of September 30, 2015 and December 31, 2014, respectively. In June 2015, the Company sold one credit card portfolio previously classified as held for sale for cash proceeds of $26.9 million and recognized a de minimis gain.
15

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
Securitized Credit Card Receivables
The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of the World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust ("Master Trust I") and World Financial Network Credit Card Master Trust III ("Master Trust III") (collectively, the "WFN Trusts"), and World Financial Capital Credit Card Master Note Trust (the "WFC Trust"). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore are not reflected in the Company's unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2015 and 2014.
The WFN Trusts and the WFC Trust are VIEs and the assets of these consolidated VIEs include certain credit card receivables that are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include non-recourse secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.
The tables below present quantitative information about the components of total securitized credit card receivables, delinquencies and net charge-offs:
 
September 30,
2015
   
December 31,
2014
 
 
(In thousands)
 
Total credit card receivables – restricted for securitization investors  
$
8,589,282
   
$
8,312,291
 
Principal amount of credit card receivables – restricted for securitization investors, 90 days or more past due
$
172,524
   
$
145,768
 

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(In thousands)
 
Net charge-offs of securitized principal  
$
94,130
 
$
75,092
 
$
290,585
 
$
240,754
 
                         
5. INVENTORIES
Inventories of $230.4 million and $220.5 million at September 30, 2015 and December 31, 2014, respectively, consist of finished goods primarily to be utilized as rewards in the Company's loyalty programs and are included in other current assets in the Company's unaudited condensed consolidated balance sheets.
Inventories are stated at the lower of cost or market and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future market conditions and an analysis of historical experience.
16

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
6. OTHER INVESTMENTS
Other investments consist of restricted cash, marketable securities and U.S. Treasury bonds and are included in other current assets and other assets in the Company's unaudited condensed consolidated balance sheets. The principal components of other investments, which are carried at fair value, are as follows:
 
September 30, 2015
   
December 31, 2014
 
 
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair Value
 
 
(In thousands)
 
Restricted cash  
$
23,414
   
$
   
$
   
$
23,414
   
$
22,611
   
$
   
$
   
$
22,611
 
Marketable securities  
 
125,672
     
851
     
(1,007
)
   
125,516
     
95,669
     
520
     
(1,322
)
   
94,867
 
U.S. Treasury bonds  
 
100,051
     
893
     
     
100,944
     
100,072
     
66
     
(33
)
   
100,105
 
Total                                  
$
249,137
   
$
1,744
   
$
(1,007
)
 
$
249,874
   
$
218,352
   
$
586
   
$
(1,355
)
 
$
217,583
 
The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2015 and December 31, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
 
September 30, 2015
 
 
Less than 12 months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
 
(In thousands)
 
Marketable securities  
$
18,913
 
$
(153
)
$
35,783
 
$
(854
)
$
54,696
 
$
(1,007
)
Total  
$
18,913
 
$
(153
)
$
35,783
 
$
(854
)
$
54,696
 
$
(1,007
)

 
December 31, 2014
 
 
Less than 12 months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
Fair Value
 
Unrealized Losses
 
 
(In thousands)
 
Marketable securities                                              
$
8,757
 
$
(27
)
$
48,961
 
$
(1,295
)
$
57,718
 
$
(1,322
)
U.S. Treasury bonds                                              
 
75,043
   
(33
)
 
   
   
75,043
   
(33
)
Total                                          
$
83,800
 
$
(60
)
$
48,961
 
$
(1,295
)
$
132,761
 
$
(1,355
)
The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at September 30, 2015 by contractual maturity are as follows:
 
 
Amortized Cost
   
Fair Value
 
 
 
(In thousands)
 
Due in one year or less  
 
$
31,638
   
$
31,672
 
Due after one year through five years  
   
75,042
     
75,901
 
Due after five years through ten years  
   
15,331
     
15,606
 
Due after ten years  
   
103,712
     
103,281
 
Total  
 
$
225,723
   
$
226,460
 
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security's issuer, and the Company's intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of September 30, 2015, the Company does not consider the investments to be other-than-temporarily impaired.
There were no realized gains or losses from the sale of investment securities for the three and nine months ended September 30, 2015 and 2014.
17

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
7. REDEMPTION SETTLEMENT ASSETS
Redemption settlement assets consist of cash and cash equivalents and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES® Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:
 
September 30, 2015
   
December 31, 2014
 
 
Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
   
Cost
   
Unrealized Gains
   
Unrealized Losses
   
Fair Value
 
 
(In thousands)
 
Cash and cash equivalents
$
272,649
   
$
   
$
   
$
272,649
   
$
237,127
   
$
   
$
   
$
237,127
 
Mutual funds                                      
 
26,291
     
     
(246
)
   
26,045
     
     
     
     
 
Corporate bonds                                      
 
168,285
     
1,439
     
(1
)
   
169,723
     
280,053
     
3,160
     
     
283,213
 
Total                                  
$
467,225
   
$
1,439
   
$
(247
)
 
$
468,417
   
$
517,180
   
$
3,160
   
$
   
$
520,340
 
The following table shows the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2015, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:
 
September 30, 2015
 
 
Less than 12 months
 
12 Months or Greater
 
Total
 
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
 
(In thousands)
 
Mutual funds  
$
26,045
 
$
(246
)
$
 
$
 
$
26,045
 
$
(246
)
Corporate bonds  
 
7,675
   
(1
)
 
   
   
7,675
   
(1
)
Total  
$
33,720
 
$
(247
)
$
 
$
 
$
33,720
 
$
(247
)
There were no investments that were in an unrealized loss position at December 31, 2014.
The amortized cost and estimated fair value of the securities at September 30, 2015 by contractual maturity are as follows:
 
Amortized Cost
   
Fair Value
 
 
(In thousands)
 
Due in one year or less  
$
128,927
   
$
129,252
 
Due after one year through five years  
 
65,649
     
66,516
 
Total  
$
194,576
   
$
195,768
 
Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security's issuer, and the Company's intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of September 30, 2015, the Company does not consider the investments to be other-than-temporarily impaired.
There were no realized gains or losses from the sale of investment securities for the three and nine months ended September 30, 2015 and 2014.
18

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
8. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the following:
   
September 30, 2015
   
   
Gross
Assets
   
Accumulated
Amortization
   
Net
 
Amortization Life and Method
   
(In thousands)
   
Finite Lived Assets
                   
Customer contracts and lists  
 
$
1,204,572
   
$
(319,976
)
 
$
884,596
 
3-12 years—straight line
Premium on purchased credit card portfolios
   
249,743
     
(110,995
)
   
138,748
 
3-10 years—straight line, accelerated
Customer database  
   
210,300
     
(153,887
)
   
56,413
 
3-10 years—straight line
Collector database  
   
52,572
     
(49,507
)
   
3,065
 
30 years—15% declining balance
Publisher networks  
   
140,200
     
(22,344
)
   
117,856
 
5-7 years—straight line
Tradenames  
   
85,077
     
(40,586
)
   
44,491
 
2-15 years—straight line
Purchased data lists  
   
11,944
     
(6,238
)
   
5,706
 
1-5 years—straight line, accelerated
Favorable lease  
   
6,891
     
(1,597
)
   
5,294
 
3-10 years—straight line
Noncompete agreements  
   
1,300
     
(1,192
)
   
108
 
3 years—straight line
   
$
1,962,599
   
$
(706,322
)
 
$
1,256,277
   
Indefinite Lived Assets
                               
Tradenames  
   
12,350
     
     
12,350
 
Indefinite life
Total intangible assets  
 
$
1,974,949
   
$
(706,322
)
 
$
1,268,627
   

   
December 31, 2014
   
   
Gross
Assets
   
Accumulated
Amortization
   
Net
 
Amortization Life and Method
   
(In thousands)
   
Finite Lived Assets
                   
Customer contracts and lists  
 
$
1,328,056
   
$
(295,263
)
 
$
1,032,793
 
4-12 years—straight line
Premium on purchased credit card portfolios
   
289,173
     
(114,923
)
   
174,250
 
3-10 years—straight line, accelerated
Customer database                                                                    
   
210,300
     
(126,157
)
   
84,143
 
3-10 years—straight line
Collector database                                                                    
   
60,238
     
(56,239
)
   
3,999
 
30 years—15% declining balance
Publisher networks                                                                    
   
140,200
     
(1,662
)
   
138,538
 
5-7 years—straight line
Tradenames                                                                    
   
86,934
     
(29,408
)
   
57,526
 
2-15 years—straight line
Purchased data lists                                                                    
   
12,335
     
(6,497
)
   
5,838
 
1-5 years—straight line, accelerated
Favorable lease                                                                    
   
6,891
     
(767
)
   
6,124
 
3-10 years—straight line
Noncompete agreements                                                                    
   
1,300
     
(867
)
   
433
 
3 years—straight line
   
$
2,135,427
   
$
(631,783
)
 
$
1,503,644
   
Indefinite Lived Assets
                               
Tradenames                                                                    
   
12,350
     
     
12,350
 
Indefinite life
Total intangible assets                                                                    
 
$
2,147,777
   
$
(631,783
)
 
$
1,515,994
   
The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:
   
For the Years Ending
December 31,
 
   
(In thousands)
 
2015 (excluding the nine months ended September 30, 2015)  
 
$
81,064
 
2016  
   
306,826
 
2017  
   
267,469
 
2018  
   
208,967
 
2019  
   
171,248
 
2020 & thereafter  
   
220,703
 

19

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
Goodwill
The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 are as follows:
 
 
LoyaltyOne
   
Epsilon
   
Card Services
   
Corporate/Other
   
Total
 
 
 
(In thousands)
 
December 31, 2014  
 
$
713,457
   
$
2,890,295
   
$
261,732
   
$
   
$
3,865,484
 
Goodwill acquired during the year
   
34,712
     
     
     
     
34,712
 
Effects of foreign currency translation
   
(63,923
)
   
(854
)
   
     
     
(64,777
)
September 30, 2015  
 
$
684,246
   
$
2,889,441
   
$
261,732
   
$
   
$
3,835,419
 
9. DEBT
Debt consists of the following:
Description
 
September 30,
2015
 
December 31,
2014
 
Maturity
 
Interest Rate
   
(Dollars in thousands)
       
Long-term and other debt:
 
 
 
 
 
 
2013 revolving line of credit  
 
$
749,000
 
$
 
July 2018 and December 2019
   
(1) 
2013 term loans  
 
  
2,736,875
 
  
2,603,125
 
Various (2)
   
(1) 
BrandLoyalty revolving line of credit  
    
115,325
    
108,789
 
August 2018
   
(3) 
Senior notes due 2017  
 
  
397,978
 
  
397,332
 
December 2017
   
5.250%
Senior notes due 2020  
 
  
500,000
 
  
500,000
 
April 2020
   
6.375%
Senior notes due 2022  
   
600,000
    
600,000
 
August 2022
   
5.375%
Total long-term and other debt  
 
  
5,099,178
 
  
4,209,246
 
 
     
Less: current portion  
 
  
389,146
 
  
208,164
 
 
     
Long-term portion  
 
$
4,710,032
 
$
4,001,082
 
 
     
                     
Deposits:
                   
Certificates of deposit  
 
$
4,017,140
 
$
3,934,906
 
Various – October 2015 – November 2021
 
0.25% to 2.80%
Money market deposits  
 
  
1,205,282
 
  
838,635
 
On demand
   
(4) 
Total deposits  
    
5,222,422
    
4,773,541
         
Less: current portion  
 
  
2,589,313
 
  
2,645,995
 
 
     
Long-term portion  
 
$
2,633,109
 
$
2,127,546
 
 
     
                       
Non-recourse borrowings of consolidated securitization entities:
 
  
   
  
   
 
     
Fixed rate asset-backed term note securities
 
$
3,158,166
 
$
3,376,916
 
Various – May 2016 – August 2020
 
0.91% to 4.55%
Floating rate asset-backed term note securities
 
  
810,000
 
  
450,000
 
February 2016 and April 2018
   
(5) 
Conduit asset-backed securities  
 
  
1,005,000
 
  
1,365,000
 
Various – May 2016 – May 2017
   
(6) 
Total non-recourse borrowings of consolidated securitization entities
    
4,973,166
    
5,191,916
          
Less: current portion  
 
 
1,230,000
 
  
1,058,750
 
 
      
Long-term portion  
 
$
3,743,166
 
$
4,133,166
 
 
     
                         
(1) The interest rate is based upon the London Interbank Offered Rate ("LIBOR") plus an applicable margin. At September 30, 2015, the weighted average interest rate was 2.20% and 2.22% for the 2013 revolving line of credit and 2013 term loans, respectively.
(2) The maturity dates for the 2013 term loans are September 2016, July 2018 and December 2019.
(3) The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin. At September 30, 2015, the weighted average interest rate was 1.20%.
(4) The interest rates are based on the Federal Funds rate. At September 30, 2015, the interest rates ranged from 0.01% to 0.44%.
(5) The interest rates are based upon LIBOR plus an applicable margin. At September 30, 2015, the interest rates ranged from 0.57% to 0.67%.
(6) The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin.  At September 30, 2015, the interest rates ranged from 1.12% to 1.75%.
At September 30, 2015, the Company was in compliance with its debt covenants.
20

ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
 
Long-term and other debt
ADSC, as borrower, and ADS Alliance Data Systems, Inc., ADS Foreign Holdings, Inc., Alliance Data Foreign Holdings, Inc., Epsilon Data Management, LLC, Comenity LLC, Comenity Servicing LLC and Aspen Marketing Services, LLC, as guarantors, are party to a credit agreement that provides for $2.65 billion in term loans (the "2013 term loans") with certain principal repayments and a $1.3 billion revolving line of credit (the "2013 revolving line of credit" and together with the 2013 term loans, the "2013 Credit Facility"). Total availability under the 2013 revolving line of credit at September 30, 2015 was $551.0 million.
On March 3, 2015, Conversant LLC and Commission Junction, Inc. were added as guarantors for the 2013 Credit Facility as well as the Senior Notes due 2017, Senior Notes due 2020 and Senior Notes due 2022.
On September 25, 2015, the Company amended the 2013 Credit Facility and borrowed incremental term loans in the aggregate principal amount of $200.0 million that mature on September 23, 2016. These term loans bear interest at the same rates and are generally subject to the same terms as the existing term loans under the 2013 Credit Facility.
BrandLoyalty Credit Agreement
BrandLoyalty, in which the Company holds a 70% interest, and certain subsidiaries of BrandLoyalty, as borrower and guarantors, amended its credit agreement in August 2015. The BrandLoyalty credit agreement, as amended, provides for a committed revolving line of credit of €62.5 million and an uncommitted revolving line of credit of €62.5 million, both of which are scheduled to mature on August 25, 2018. As of September 30, 2015, the amount outstanding under the BrandLoyalty credit agreement was €103.2 million ($115.3 million). The BrandLoyalty credit agreement is secured by the accounts receivable, inventory, fixed assets, bank accounts and shares of BrandLoyalty and certain of its subsidiaries.
All advances under the BrandLoyalty credit agreement are denominated in Euros. The interest rate fluctuates and is equal to EURIBOR, as defined in the BrandLoyalty credit agreement, plus an applicable margin based on BrandLoyalty's senior net leverage ratio. The BrandLoyalty credit agreement contains financial covenants, including a senior net leverage ratio, as well as usual and customary negative covenants and customary events of default.
Non-Recourse Borrowings of Consolidated Securitization Entities