10-K 1 form_10k.htm FORM 10-K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 offices)
(Zip Code)
(214) 494-3000
(Registrant's telephone number, including area code)
                                                          
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Name of each exchange on which registered
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
                                                          
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No

Indicate by check mark whether the registrant (1) 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 (2) has been subject to such filing requirements for the past 90 days. Yes 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 Regulation 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 No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10‑K.

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 definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer 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

As of June 30, 2015, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $17.6 billion (based upon the closing price on the New York Stock Exchange on June 30, 2015 of $291.94 per share).

As of February 16, 2016, 59,261,410 shares of common stock were outstanding.

Documents Incorporated By Reference

Certain information called for by Part III is incorporated by reference to certain sections of the Proxy Statement for the 2016 Annual Meeting of our stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2015.
 



ALLIANCE DATA SYSTEMS CORPORATION

INDEX

Item No.
   
Form 10-K
Report
Page
         
     
1
         
PART I
1.
   
2
1A.
   
10
1B.
   
19
2.
   
19
3.
   
19
4.
   
19
         
PART II
5.
   
20
6.
   
23
7.
   
25
7A.
   
41
8.
   
41
9.
   
41
9A.
   
42
9B.
   
42
         
PART III
10.
   
43
11.
   
43
12.
   
43
13.
   
43
14.
   
43
         
PART IV
15.
   
44
Caution Regarding Forward-Looking Statements
This Form 10-K 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. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as "believe," "expect," "anticipate," "estimate," "intend," "project," "plan," "likely," "may," "should" or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this release, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:

·
loss of, or reduction in demand for services from, significant clients;
·
increased redemptions by AIR MILES® Reward Program collectors;
·
increases in the cost of doing business, including the cost to fulfill redemptions for the AIR MILES Reward Program and market interest rates;
·
loss of active AIR MILES Reward Program collectors;
·
disruptions in the airline or travel industries;
·
failure to identify or successfully integrate business acquisitions;
·
increases in net charge-offs in credit card and loan receivables;
·
inability to access the asset-backed securitization funding market;
·
unfavorable fluctuations in foreign currency exchange rates;
·
limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy;
·
increases in FDIC, Delaware or Utah regulatory capital requirements for banks;
·
failure to maintain exemption from regulation under the Bank Holding Company Act;
·
loss or disruption, due to cyber attack or other service failures, of data center operations or capacity;
·
loss of consumer information due to compromised physical or cyber security; and
·
those factors discussed in Item 1A of this Form 10-K, elsewhere in this Form 10-K and in the documents incorporated by reference in this Form 10-K.

If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Any forward-looking statements contained in this Form 10-K speak only as of the date made, and we undertake no obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, subsequent events, anticipated or unanticipated circumstances or otherwise.
1

PART I
Item 1.
Business.
Our Company
We are a leading global provider of data-driven marketing and loyalty solutions serving large, consumer-based businesses in a variety of industries. We offer a comprehensive portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services and private label and co-brand retail credit card programs. We focus on facilitating and managing interactions between our clients and their customers through all consumer marketing channels, including in-store, online, email, social media, mobile, direct mail and telephone. We capture and analyze data created during each customer interaction, leveraging the insight derived from that data to enable clients to identify and acquire new customers and to enhance customer loyalty. We believe that our services are more valued as businesses shift marketing resources away from traditional mass marketing toward more targeted marketing programs that provide measurable returns on marketing investments.
Our client base of more than 1,500 companies consists primarily of large consumer-based businesses, including well-known brands such as Bank of Montreal, Sobeys Inc., Shell Canada Products, AstraZeneca, Hilton, Bank of America, General Motors, FedEx, Kraft, Victoria's Secret, Lane Bryant, Pottery Barn, J. Crew and Ann Taylor. Our client base is diversified across a broad range of end-markets, including financial services, specialty retail, grocery and drugstore chains, petroleum retail, automotive, hospitality and travel, telecommunications, insurance and healthcare. We believe our comprehensive suite of marketing solutions offers us a significant competitive advantage, as many of our competitors offer a more limited range of services. We believe the breadth and quality of our service offerings have enabled us to establish and maintain long-standing client relationships.
Corporate Headquarters. Our corporate headquarters are located at 7500 Dallas Parkway, Suite 700, Plano, Texas 75024, where our telephone number is 214-494-3000.
Our Market Opportunity and Growth Strategy
We intend to continue capitalizing on the shift in traditional advertising and marketing spend to highly targeted marketing programs. We intend to enhance our position as a leading global provider of data-driven marketing and loyalty solutions and to continue our growth in revenue and earnings by pursuing the following strategies:
Capitalize on our Leadership in Highly Targeted and Data-Driven Consumer Marketing. As consumer-based businesses shift their marketing spend to data-driven marketing strategies, we believe we are well-positioned to acquire new clients and sell additional services to existing clients based on our extensive experience in capturing and analyzing our clients' customer transaction data to develop targeted marketing programs. We believe our comprehensive portfolio of high-quality targeted marketing and loyalty solutions provides a competitive advantage over other marketing services firms with more limited service offerings. We seek to extend our leadership position by continuing to improve the breadth and quality of our products and services. We intend to enhance our leadership position in loyalty and marketing solutions by expanding the scope of the Canadian AIR MILES Reward Program, by continuing to develop stand-alone loyalty programs such as the Hilton HHonors® and Citi Thank You® programs as well as short-term loyalty programs, and by increasing our penetration in the retail sector with our integrated marketing and credit services offering.
Sell More Fully Integrated End-to-End Marketing Solutions. In our Epsilon® segment, we have assembled what we believe is the industry's most comprehensive suite of targeted and data-driven marketing services, including marketing strategy consulting, data services, marketing technology services, marketing analytics, creative design and delivery services such as video, mobile and permission-based email communications. We offer an end-to-end solution to clients, providing a significant opportunity to expand our relationships with existing clients, the majority of whom do not currently purchase our full suite of services. In addition, we further intend to integrate our product and service offerings so that we can provide clients with a comprehensive portfolio of targeted marketing solutions, including coalition and individual loyalty programs, private label and co-brand retail credit card programs and other data-driven marketing solutions. By selling integrated solutions across our entire client base, we have a significant opportunity to maximize the value of our long-standing client relationships.
Continue to Expand our Global Footprint. Global reach is increasingly important as our clients grow into new markets, and we are well positioned to cost-effectively increase our global presence. We believe continued international expansion will provide us with strong revenue growth opportunities. In 2014, with our acquisition of our interests in BrandLoyalty Group B.V., or BrandLoyalty, and the acquisition of Conversant Inc., or Conversant, we expanded our presence in Europe, Asia, and Latin America, which provides an opportunity to leverage our core competencies in these markets. We also own approximately 37% of CBSM-Companhia Brasileira De Servicos De Marketing, the operator of the dotz coalition loyalty program, or dotz, which continues to expand its presence in Brazil with dotz operating in 13 markets as of December 31, 2015.
Optimize our Business Portfolio. We intend to continue to evaluate our products and services given our strategic direction and demand trends. While we are focused on realizing organic revenue growth and margin expansion, we will consider select acquisitions of complementary businesses that would enhance our product portfolio, market positioning or geographic presence.
2

Products and Services
Our products and services are reported under three segments—LoyaltyOne®, Epsilon and Card Services, and are listed below. Financial information about our segments and geographic areas appears in Note 22, "Segment Information," of the Notes to Consolidated Financial Statements. In the first quarter of 2015, we renamed our Private Label Services and Credit segment to "Card Services."
Segment
 
Products and Services
       
LoyaltyOne  
 
AIR MILES Reward Program
       
   
Short-term Loyalty Programs
       
   
Loyalty Services
     
—Loyalty consulting
     
—Customer analytics
     
—Creative services
     
—Mobile solutions
       
Epsilon  
 
Marketing Services
     
—Agency services
     
—Marketing technology services
     
—Data services
     
—Strategy and analytical services
     
—Traditional and digital marketing
       
Card Services  
 
Receivables Financing
     
—Underwriting and risk management
     
—Receivables funding
       
   
Processing Services
     
—New account processing
     
—Bill processing
     
—Remittance processing
     
—Customer care
       
   
Marketing Services

3

LoyaltyOne
Our LoyaltyOne clients are focused on acquiring and retaining loyal and profitable customers. We use the information gathered through our loyalty programs to help our clients design and implement effective marketing programs. Our clients within this segment include financial services providers, grocers, drug stores, petroleum retailers and specialty retailers. LoyaltyOne operates the AIR MILES Reward Program and BrandLoyalty.
The AIR MILES Reward Program enables consumers, referred to as collectors, to earn AIR MILES reward miles as they shop across a broad range of retailers and other sponsors participating in the AIR MILES Reward Program. These AIR MILES reward miles can be redeemed by our collectors for travel or other rewards. Through our AIR MILES Cash program option, collectors can also instantly redeem their AIR MILES reward miles collected in the AIR MILES Cash program option toward in-store purchases at participating sponsors. Approximately two-thirds of Canadian households actively participate in the AIR MILES Reward Program, and it was recently named as an influential Canadian brand in Canada's Ipsos Influence Index.
The three primary parties involved in our AIR MILES Reward Program are: sponsors, collectors and suppliers, each of which is described below.
Sponsors. Approximately 170 brand name sponsors participate in our AIR MILES Reward Program, including Shell Canada Products, Jean Coutu, RONA, Amex Bank of Canada, Sobeys Inc. and Bank of Montreal.
The AIR MILES Reward Program is a full service outsourced loyalty program for our sponsors, who pay us a fee per AIR MILES reward mile issued, in return for which we provide all marketing, customer service, rewards and redemption management. We typically grant participating sponsors exclusivity in their market category, enabling them to realize incremental sales and increase market share as a result of their participation in the AIR MILES Reward Program coalition.
Collectors. Collectors earn AIR MILES reward miles at thousands of retail and service locations, typically including any online presence the sponsor may have. Collectors can also earn AIR MILES reward miles at the many locations where collectors can use certain credit cards issued by Bank of Montreal and Amex Bank of Canada. This enables collectors to rapidly accumulate AIR MILES reward miles across a significant portion of their everyday spend. The AIR MILES Reward Program offers a reward structure that provides a quick, easy and free way for collectors to earn a broad selection of travel, entertainment and other lifestyle rewards through their day-to-day shopping at participating sponsors.
Suppliers. We enter into agreements with airlines, manufacturers of consumer electronics and other providers to supply rewards for the AIR MILES Reward Program. The broad range of rewards that can be redeemed is one of the reasons the AIR MILES Reward Program remains popular with collectors. Over 400 suppliers use the AIR MILES Reward Program as an additional distribution channel for their products. Suppliers include well-recognized companies in diverse industries, including travel, hospitality, electronics and entertainment.
BrandLoyalty designs, organizes, implements and evaluates innovative and tailor-made loyalty programs for grocers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered through leading grocers across Europe and Asia, as well as around the world. These short-term loyalty programs are designed to drive traffic by attracting new customers and motivating existing customers to spend more because the reward is instant, topical and newsworthy. These programs are tailored for the specific client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Rewards for these programs are sourced from, and in some cases, produced by key suppliers in advance of the programs being offered based on expected demand. Following the completion of each program, BrandLoyalty analyzes spending data to determine the grocer's lift in market share and the program's return on investment.
4

Epsilon
Epsilon is a leading marketing services firm providing end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity and technology to help clients more effectively acquire, retain and grow relationships with their customers. Services include strategic consulting, customer database technologies, omnichannel marketing, loyalty management, proprietary data, predictive modeling, permission-based email marketing, personalized digital marketing and a full range of direct and digital agency services. On behalf of our clients, we develop marketing programs for individual consumers with highly targeted offers and personalized communications to create better customer experiences. Since these communications are more relevant to the consumer, the consumer is more likely to be responsive to these offers, resulting in a measurable return on our clients' marketing investments. We distribute marketing campaigns and communications through all marketing channels based on the consumer's preference, including direct mail and digital platforms such as email, mobile, display and social media. Epsilon has over 1,300 clients, operating primarily in the financial services, insurance, media and entertainment, automotive, consumer packaged goods, retail, travel and hospitality, pharmaceutical/healthcare and telecommunications industries.
Agency Services. Through our consulting services we analyze our clients' business, brand and/or product strategy to create customer acquisition and retention strategies and tactics designed to further optimize our clients' customer relationships and marketing return on investment. We offer ROI-based targeted marketing services through data-driven creative, digital user experience design technology, customer relationship marketing, consumer promotions marketing, direct and digital shopper marketing, distributed and local area marketing, and services that include brand planning and consumer insights.
Marketing Technology Services. For large consumer-facing brands, we design, build and operate complex consumer marketing databases, including loyalty program management, such as Hilton HHonors®, Walgreens Balance® Rewards and the Citi Thank You® programs. Our solutions are highly customized and support our clients' needs for real-time data integration from a multitude of data sources, including multichannel transactional data.
Data Services. We believe we are one of the leading sources of comprehensive consumer data that is essential to marketers when making informed marketing decisions. Together with our clients, we use this data to create customer profiles and develop highly-targeted, personalized marketing programs that increase response rates and build stronger customer relationships.
Strategy and Analytical Services. We provide behavior-based, demographic and attitudinal customer segmentation, purchase analysis, web analytics, marketing mix modeling, program optimization, predictive modeling and program measurement and analysis. Through our analytical services, we gain a better understanding of consumer behavior that can help our clients as they develop customer relationship strategies.
Traditional and Digital Marketing. We provide strategic communication solutions and our end-to-end suite of products and services includes strategic consulting, creative services, campaign management and delivery optimization. We deploy marketing campaigns and communications through all marketing channels, including direct mail and digital platforms such as email, mobile and social media. We also operate what we believe to be one of the largest global permission-based email marketing platforms in the industry, sending tens of billions of emails per year on behalf of our clients, which enables clients to build campaigns using measurable distribution channels.
With our acquisition of Conversant, we enhanced our digital marketing capabilities, allowing for more effective targeted marketing programs across an expanded distribution network; provided scale in display, mobile, video and social digital channels; and added essential capabilities to Agility Harmony®. We offer a fully integrated personalization platform, personalized media programs and one of the world's largest affiliate marketing networks, all fueled by an in-depth understanding of what motivates people to engage, connect and buy. Further, we help companies grow by creating personalized experiences that deliver higher returns for brands and greater value for consumers.
5

Card Services
Our Card Services segment assists some of the best known retailers in extending their brand with a private label and/or co-brand credit card account that can be used by their customers in the store, or through online or catalog purchases. Our partners benefit from customer insights and analytics, with each of our credit card branded programs tailored to our partner's brand and their unique card members.
Receivables Financing. Our Card Services segment provides risk management solutions, account origination and funding services for our more than 160 private label and co-brand credit card programs. Through these credit card programs, as of December 31, 2015, we had $13.2 billion in principal receivables from over 37.8 million active accounts, with an average balance for the year ended December 31, 2015 of approximately $595 for accounts with outstanding balances. Ascena Retail Group, Inc. and its retail affiliates and L Brands and its retail affiliates each accounted for approximately 12% of our average credit card and loan receivables for the year ended December 31, 2015. We process millions of credit card applications each year using automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new credit card accountholders and establishing their credit limits. We augment these procedures with credit risk scores provided by credit bureaus. This information helps us segment prospects into narrower risk ranges, allowing us to better evaluate individual credit risk.
Our accountholder base consists primarily of middle- to upper-income individuals, in particular women who use our credit cards primarily as brand affinity tools. These accounts generally have lower average balances compared to balances on general purpose credit cards. We focus our sales efforts on prime borrowers and do not target sub-prime borrowers.
We use a securitization program as our primary funding vehicle for our credit card receivables. Securitizations involve the packaging and selling of both current and future receivable balances of credit card accounts to a master trust, which is a variable interest entity, or VIE. Our three master trusts are consolidated in our financial statements.
Processing Services. We perform processing services and provide service and maintenance for private label and co-brand credit card programs. We use automated technology for bill preparation, printing and mailing, and also offer consumers the ability to view, print and pay their bills online. By doing so, we improve the funds availability for both our clients and for those private label and co-brand credit card receivables that we own or securitize. We also provide collection activities on delinquent accounts to support our private label and co-brand credit card programs. Our customer care operations are influenced by our retail heritage and we view every customer touch point as an opportunity to generate or reinforce a sale. Our call centers are equipped to handle a variety of inquiry types, including phone, mail, fax, email, text and web. We provide focused training programs in all areas to achieve the highest possible customer service standards and monitor our performance by conducting surveys with our clients and their customers. In 2014, for the 10th time since 2003, we were certified as a Center of Excellence for the quality of our operations, the most prestigious ranking attainable, by BenchmarkPortal. Founded by Purdue University in 1995, BenchmarkPortal is a global leader of best practices for call centers.
Marketing Services. Our private label and co-branded credit card programs are designed specifically for retailers and have the flexibility to be customized to accommodate our clients' specific needs. Through our integrated marketing services, we design and implement strategies that assist our clients in acquiring, retaining and managing valuable repeat customers. Our credit card programs capture transaction data that we analyze to better understand consumer behavior and use to increase the effectiveness of our clients' marketing activities. We use multi-channel marketing communication tools, including in-store, web, permission-based email, mobile messaging and direct mail to reach our clients' customers.
Disaster and Contingency Planning
We operate, either internally or through third-party service providers, multiple data processing centers to process and store our customer transaction data. Given the significant amount of data that we or our third-party service providers manage, much of which is real-time data to support our clients' commerce initiatives, we have established redundant capabilities for our data centers. We have a number of safeguards in place that are designed to protect us from data-related risks and in the event of a disaster, to restore our data centers' systems.
6

Protection of Intellectual Property and Other Proprietary Rights
We rely on a combination of copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and technology used in each segment of our business. In the United States, we have 14 issued patents and 46 pending patent applications, each with the U.S. Patent and Trademark Office. In Canada, we have one issued patent and seven pending patent applications. In addition, we have one issued patent in each of France, Germany, and Great Britain. We also have one pending Patent Cooperation Treaty application and one pending European Patent Convention application. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technology, documentation and other proprietary information. Despite the efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain the use of our products or technology that we consider proprietary and third parties may attempt to develop similar technology independently. We pursue registration and protection of our trademarks primarily in the United States and Canada, although we also have either registered trademarks or applications pending for certain marks in the European Union or some of its individual countries (Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden, United Kingdom), Argentina, Australia, Brazil, China, Hong Kong, India, Israel, Japan, Malaysia, Mexico, New Zealand, Norway, Peru, Philippines, Republic of Korea, Singapore, Switzerland, Taiwan, Thailand, Turkey and Venezuela, and internationally under the Madrid Protocol and the World Intellectual Property Organization in several countries, including several of the aforementioned countries. We are the exclusive Canadian licensee of the AIR MILES family of trademarks pursuant to a perpetual license agreement with Air Miles International Trading B.V., for which we pay a royalty fee. We believe that the AIR MILES family of trademarks and our other trademarks are important for our branding, corporate identification and marketing of our services in each business segment.
Competition
The markets for our products and services are highly competitive. We compete with marketing services companies, credit card issuers, and data processing companies, as well as with the in-house staffs of our current and potential clients.
LoyaltyOne. As a provider of marketing services, our LoyaltyOne segment generally competes with advertising and other promotional and loyalty programs, both traditional and online, for a portion of a client's total marketing budget. In addition, we compete against internally developed products and services created by our existing and potential clients. We expect competition to intensify as more competitors enter our market. Competitors may target our sponsors, clients and collectors as well as draw rewards from our rewards suppliers. Our ability to generate significant revenue from clients and loyalty partners will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our loyalty and rewards programs to consumers. The continued attractiveness of our loyalty and rewards programs will also depend on our ability to remain affiliated with sponsors that are desirable to consumers and to offer rewards that are both attainable and attractive to consumers.
Epsilon. Our Epsilon segment generally competes with a variety of niche providers as well as large media/digital agencies. For the niche provider competitors, their focus has primarily been on one or two services within the marketing value chain, rather than the full spectrum of data-driven marketing services used for both traditional and online advertising and promotional marketing programs. For the larger media/digital agencies, most offer the breadth of services but typically do not have the internal integration of offerings to deliver a seamless "one stop shop" solution, from strategy to execution across traditional as well as digital and emerging technologies. In addition, Epsilon competes against internally developed products and services created by our existing clients and others. We expect competition to intensify as more competitors enter our market. For our targeted direct marketing services offerings, our ability to continue to capture detailed customer transaction data is critical in providing effective marketing and loyalty strategies for our clients. Our ability to differentiate the mix of products and services that we offer, together with the effective delivery of those products and services, are also important factors in meeting our clients' objective to continually improve their return on marketing investment.
Card Services. Our Card Services segment competes primarily with financial institutions whose marketing focus has been on developing credit card programs with large revolving balances. These competitors further drive their businesses by cross-selling their other financial products to their cardholders. Our focus has primarily been on targeting specialty retailers that understand the competitive advantage of developing loyal customers. Typically, these retailers seek customers that make more frequent but smaller transactions at their retail locations. As a result, we are able to analyze card-based transaction data we obtain through managing our credit card programs, including customer specific transaction data and overall consumer spending patterns, to develop and implement successful marketing strategies for our clients. As an issuer of private label retail credit cards and co-branded Visa®, MasterCard® and Discover® credit cards, we also compete with general purpose credit cards issued by other financial institutions, as well as cash, checks and debit cards.
7

Regulation
Federal and state laws and regulations extensively regulate the operations of our bank subsidiaries, Comenity Bank and Comenity Capital Bank. Many of these laws and regulations are intended to maintain the safety and soundness of Comenity Bank and Comenity Capital Bank, and they impose significant restraints to which other non-regulated companies are not subject. Because Comenity Bank is deemed a credit card bank and Comenity Capital Bank is an industrial bank within the meaning of the Bank Holding Company Act, we are not subject to regulation as a bank holding company. If we were subject to regulation as a bank holding company, we would be constrained in our operations to a limited number of activities that are closely related to banking or financial services in nature. As a state bank, Comenity Bank is subject to overlapping supervision by the Federal Deposit Insurance Corporation, or FDIC, and the State of Delaware; and, as an industrial bank, Comenity Capital Bank is subject to overlapping supervision by the FDIC and the State of Utah.
Comenity Bank and Comenity Capital Bank must maintain minimum amounts of regulatory capital, including maintenance of certain capital ratios, paid-in capital minimums, and an appropriate allowance for loan loss, as well as meeting specific guidelines that involve measures and ratios of their assets, liabilities, regulatory capital and interest rate, among other factors. If Comenity Bank or Comenity Capital Bank does not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our financial statements. To pay any dividend, Comenity Bank and Comenity Capital Bank must maintain adequate capital above regulatory guidelines.
We are limited under Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve Board Regulation W in the extent to which we can borrow or otherwise obtain credit from or engage in other "covered transactions" with Comenity Bank or Comenity Capital Bank, which may have the effect of limiting the extent to which Comenity Bank or Comenity Capital Bank can finance or otherwise supply funds to us. "Covered transactions" include loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright bar on engaging in "covered transactions," they do require that we engage in "covered transactions" with Comenity Bank or Comenity Capital Bank only on terms and under circumstances that are substantially the same, or at least as favorable to Comenity Bank or Comenity Capital Bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, with certain exceptions, each loan or extension of credit by Comenity Bank or Comenity Capital Bank to us or our other affiliates must be secured by collateral with a market value ranging from 100% to 130% of the amount of the loan or extension of credit, depending on the type of collateral.
We are required to monitor and report unusual or suspicious account activity as well as transactions involving amounts in excess of prescribed limits under the Bank Secrecy Act, Internal Revenue Service, or IRS, rules, and other regulations. Congress, the IRS and the bank regulators have focused their attention on banks' monitoring and reporting of suspicious activities. Additionally, Congress and the bank regulators have proposed, adopted or passed a number of new laws and regulations that may increase reporting obligations of banks. We are also subject to numerous laws and regulations that are intended to protect consumers, including state laws, the Truth in Lending Act, Equal Credit Opportunity Act and Fair Credit Reporting Act, as amended by the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or the CARD Act. These laws and regulations mandate various disclosure requirements and regulate the manner in which we may interact with consumers. These and other laws also limit finance charges or other fees or charges earned in our lending activities. We conduct our operations in a manner that we believe excludes us from regulation as a consumer reporting agency under the Fair Credit Reporting Act. If we were deemed a consumer reporting agency, however, we would be subject to a number of additional complex regulatory requirements and restrictions.
A number of privacy laws and regulations have been enacted in the United States, Canada, the European Union, China and other international markets in which we operate. These laws and regulations place many restrictions on our ability to collect and disseminate customer information. In addition, the enactment of new or amended legislation around the world could place additional restrictions on our ability to utilize customer information. For example, Canada has enacted privacy legislation known as the Personal Information Protection and Electronic Documents Act. Among its principles, this act requires organizations to obtain a consumer's consent to collect, use or disclose personal information. Under this act, which took effect on January 1, 2001, the nature of the required consent depends on the sensitivity of the personal information, and the act permits personal information to be used only for the purposes for which it was collected. Some Canadian provinces have enacted substantially similar privacy legislation. We believe we have taken appropriate steps with our AIR MILES Reward Program to comply with these laws.
8

In the United States under the Gramm-Leach-Bliley Act, we are required to maintain a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information. It also requires us to provide initial and annual privacy notices to customers that describe in general terms our information sharing practices. If we intend to share nonpublic personal information about customers with affiliates and/or nonaffiliated third parties, we must provide our customers with a notice and a reasonable period of time for each customer to "opt out" of any such disclosure. In Canada, the Act to promote the efficiency and adaptability of the Canadian economy by regulating certain activities that discourage reliance on electronic means of carrying out commercial activities, and to amend the Canadian Radio-television and Telecommunications Commission Act, the Competition Act, the Personal Information Protection and Electronic Documents Act and the Telecommunications Act, more generally known as Canada's Anti-Spam Legislation, may restrict our ability to send commercial "electronic messages," defined to include text, sound, voice and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and prospective customers. The Act requires that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender. In the European Union, the Directive 95/46/EC of the European Parliament, or the EU Parliament, and of the Council of 24 October 1995 requires member states to implement and enforce a comprehensive data protection law that is based on principles designed to safeguard personal data, defined as any information relating to an identified or identifiable natural person. The Directive frames certain requirements for transfer outside of the European Economic Area and individual rights such as consent requirements. In January 2012, the European Commission proposed the General Data Protection Regulation, or the GDPR, a new European Union-wide legal framework to govern data sharing and collection and related consumer privacy rights. In December 2015, the EU Parliament, and the Council of the European Union, or the EU Council, reached informal agreement on the text of the GDPR. The final version of the GDPR is expected to be submitted to the EU Parliament and the EU Council for formal vote in early 2016 and will take effect two years following its adoption. Once approved, the GDPR will replace the Directive and, because it is a regulation rather than a directive, will directly apply to and bind the 28 EU Member States. Compared to the Directive, the GDPR includes a strengthened notion of consent, the development of a 'one stop shop' mechanism for the jurisdiction of EU regulators and increased compliance and accountability requirements on data controllers.
In addition to U.S. federal privacy laws with which we must comply, states also have adopted statutes, regulations or other measures governing the collection and distribution of nonpublic personal information about customers. In some cases these state measures are preempted by federal law, but if not, we monitor and seek to comply with individual state privacy laws in the conduct of our business.
We also have systems and processes to comply with the USA PATRIOT ACT of 2001, which is designed to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes.
Employees
As of December 31, 2015, we had over 16,000 employees. We believe our relations with our employees are good. We have no collective bargaining agreements with our employees.
Available Information
We file or furnish annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy, for a fee, any document we file or furnish at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public at the SEC's website at www.sec.gov. You may also obtain copies of our annual, quarterly and current reports, proxy statements and certain other information filed or furnished with the SEC, as well as amendments thereto, free of charge from our website, www.AllianceData.com. No information from this website is incorporated by reference herein. These documents are posted to our website as soon as reasonably practicable after we have filed or furnished these documents with the SEC. We post our audit committee, compensation committee, nominating and corporate governance committee, and executive committee charters, our corporate governance guidelines, and our code of ethics, code of ethics for Senior Financial Executives and Chief Executive Officer, and code of ethics for Board Members on our website. These documents are available free of charge to any stockholder upon request.
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Item 1A. Risk Factors.
RISK FACTORS
Strategic Business Risk and Competitive Environment
Our 10 largest clients represented 36% and 39%, respectively, of our consolidated revenue for the years ended December 31, 2015 and 2014, and the loss of any of these clients could cause a significant drop in our revenue.
We depend on a limited number of large clients for a significant portion of our consolidated revenue. Our 10 largest clients represented approximately 36% and 39%, respectively, of our consolidated revenue during the years ended December 31, 2015 and 2014, with no single client representing more than 10% of our consolidated revenue during either of these periods. A decrease in revenue from any of our significant clients for any reason, including a decrease in pricing or activity, or a decision either to utilize another service provider or to no longer outsource some or all of the services we provide, could have a material adverse effect on our consolidated revenue.
LoyaltyOne. LoyaltyOne represents 21% and 27%, respectively, of our consolidated revenue for the years ended December 31, 2015 and 2014. Our 10 largest clients in this segment represented approximately 60% and 58%, respectively, of our LoyaltyOne revenue for the years ended December 31, 2015 and 2014. Bank of Montreal and Sobeys Inc. represented approximately 22% and 13%, respectively, of this segment's revenue for the year ended December 31, 2015 and 25% and 10%, respectively, of this segment's revenue for the year ended December 31, 2014. Our contract with Bank of Montreal expires in 2017, subject to automatic renewals at five-year intervals. Our contract with Sobeys Inc. and its retail affiliates expires in 2024.
Epsilon. Epsilon represents 33% and 29%, respectively, of our consolidated revenue for the years ended December 31, 2015 and 2014. Our 10 largest clients in this segment represented approximately 28% and 34%, respectively, of our Epsilon revenue for the years ended December 31, 2015 and 2014, with no single client representing more than 10% of Epsilon's revenue during either of these periods.
Card Services. Card Services represents 46% and 45%, respectively, of our consolidated revenue for the years ended December 31, 2015 and 2014. Our 10 largest clients in this segment represented approximately 63% and 67%, respectively, of our Card Services revenue for the years ended December 31, 2015 and 2014. L Brands and its retail affiliates represented approximately 16% and 17%, respectively, of this segment's revenue for the years ended December 31, 2015 and 2014. Ascena Retail Group, Inc. and its retail affiliates represented approximately 15% and 17%, respectively, of this segment's revenue for the years ended December 31, 2015 and 2014. Our contract with L Brands and its retail affiliates expires in 2018 and our contracts with Ascena Retail Group, Inc. and its retail affiliates expire in 2016, 2019 and 2021.
If actual redemptions by AIR MILES Reward Program collectors are greater than expected, or if the costs related to redemption of AIR MILES reward miles increase, our profitability could be adversely affected.
A portion of our revenue is based on our estimate of the number of AIR MILES reward miles that will go unused by the collector base. The percentage of AIR MILES reward miles not expected to be redeemed is known as "breakage."
Breakage is based on management's estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure, the introduction of new program options and changes to rewards offered. On December 31, 2011, a five-year expiry policy was applied to all outstanding and future AIR MILES reward miles issued. Changes in collector behavior or redemption patterns may impact management's estimate of breakage. Any significant change in or failure by management to reasonably estimate breakage, or if actual redemptions are greater than our estimates, our profitability could be adversely affected.
Our AIR MILES Reward Program also exposes us to risks arising from potentially increasing reward costs. Our profitability could be adversely affected if costs related to redemption of AIR MILES reward miles increase. A 10% increase in the cost of redemptions would have resulted in a decrease in pre-tax income of $35.9 million for the year ended December 31, 2015.
The loss of our most active AIR MILES Reward Program collectors could adversely affect our growth and profitability.
Our most active AIR MILES Reward Program collectors drive a disproportionately large percentage of our AIR MILES Reward Program revenue. The loss of a significant portion of these collectors, for any reason, could impact our ability to generate significant revenue from sponsors. The continued attractiveness of our loyalty and rewards programs will depend in large part on our ability to remain affiliated with sponsors that are desirable to consumers and to offer rewards that are both attainable and attractive.
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Airline or travel industry disruptions, such as an airline insolvency, could negatively affect the AIR MILES Reward Program, our revenues and profitability.
Air travel is one of the appeals of the AIR MILES Reward Program to collectors. As a result of airline insolvencies and restructurings, we may experience service disruptions that prevent us from fulfilling collectors' flight redemption requests. If one of our existing airline suppliers sharply reduces its fleet capacity and route network, we may not be able to satisfy our collectors' demands for airline tickets. Tickets from other airlines, if available, could be more expensive than a comparable ticket under our current supply agreements with existing suppliers, and the routes offered by the other airlines may be inadequate, inconvenient or undesirable to the redeeming collectors. As a result, we may experience higher air travel redemption costs, and collector satisfaction with the AIR MILES Reward Program might be adversely affected.
As a result of airline or travel industry disruptions, political instability, terrorist acts or war, some collectors could determine that air travel is too dangerous or burdensome. Consequently, collectors might forego redeeming AIR MILES reward miles for air travel and therefore might not participate in the AIR MILES Reward Program to the extent they previously did, which could adversely affect our revenue from the program.
If we fail to identify suitable acquisition candidates or new business opportunities, or to integrate the businesses we acquire, it could negatively affect our business.
Historically, we have engaged in a significant number of acquisitions, and those acquisitions have contributed to our growth in revenue and profitability. We believe that acquisitions and the identification and pursuit of new business opportunities will be a key component of our continued growth strategy. However, we may not be able to locate and secure future acquisition candidates or to identify and implement new business opportunities on terms and conditions that are acceptable to us. If we are unable to identify attractive acquisition candidates or successful new business opportunities, our growth could be impaired.
In addition, there are numerous risks associated with acquisitions and the implementation of new businesses, including, but not limited to:
the difficulty and expense that we incur in connection with the acquisition or new business opportunity;
the potential for adverse consequences when conforming the acquired company's accounting policies to ours;
the diversion of management's attention from other business concerns;
the potential loss of customers or key employees of the acquired company;
the impact on our financial condition due to the timing of the acquisition or new business implementation or the failure of the acquired or new business to meet operating expectations; and
the assumption of unknown liabilities of the acquired company.
Furthermore, acquisitions that we make may not be successfully integrated into our ongoing operations and we may not achieve expected cost savings or other synergies from an acquisition. If the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or impair the value of some or all of the assets of the acquired or new business.
We expect growth in our Card Services segment to result from new and acquired credit card programs whose credit card receivables performance could result in increased portfolio losses and negatively impact our profitability.
We expect an important source of growth in our credit card operations to come from the acquisition of existing credit card programs and initiating credit card programs with retailers and others who do not currently offer a private label or co-branded credit card. Although we believe our pricing and models for determining credit risk are designed to evaluate the credit risk of existing programs and the credit risk we are willing to assume for acquired and start-up programs, we cannot be assured that the loss experience on acquired and start-up programs will be consistent with our more established programs. The failure to successfully underwrite these credit card programs may result in defaults greater than our expectations and could have a material adverse impact on us and our profitability.
Increases in net charge-offs could have a negative impact on our net income and profitability.
The primary risk associated with unsecured consumer lending is the risk of default or bankruptcy of the borrower, resulting in the borrower's balance being charged-off as uncollectible. We rely principally on the customer's creditworthiness for repayment of the loan and therefore have no other recourse for collection. We may not be able to successfully identify and evaluate the creditworthiness of cardholders to minimize delinquencies and losses. An increase in defaults or net charge-offs could result in a reduction in net income. General economic factors, such as the rate of inflation, unemployment levels and interest rates, may result in greater delinquencies that lead to greater credit losses. In addition to being affected by general economic conditions and the success of our collection and recovery efforts, the stability of our delinquency and net charge-off rates are affected by the credit risk of our credit card and loan receivables and the average age of our various credit card account portfolios. Further, our pricing strategy may not offset the negative impact on profitability caused by increases in delinquencies and losses, thus any material increases in delinquencies and losses beyond our current estimates could have a material adverse impact on us. For 2015, our net charge-off rate was 4.5%, compared to 4.2% and 4.7% for 2014 and 2013, respectively. Delinquency rates were 4.2% of principal credit card and loan receivables at December 31, 2015 compared to 4.0% and 4.2% at December 31, 2014 and 2013, respectively.
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The markets for the services that we offer may contract or fail to expand which could negatively impact our growth and profitability.
Our growth and continued profitability depend on acceptance of the services that we offer. Our clients may not continue to use the loyalty and targeted marketing strategies and programs that we offer. Changes in technology may enable merchants and retail companies to directly process transactions in a cost-efficient manner without the use of our services. Additionally, downturns in the economy or the performance of retailers may result in a decrease in the demand for our marketing strategies. Any decrease in the demand for our services for the reasons discussed above or any other reasons could have a material adverse effect on our growth, revenue and operating results.
Competition in our industries is intense and we expect it to intensify.
The markets for our products and services are highly competitive and we expect competition to intensify in each of those markets. Some of our current competitors have longer operating histories, stronger brand names and greater financial, technical, marketing and other resources than we do. Certain of our segments also compete against in-house staffs of our current clients and others or internally developed products and services by our current clients and others. Our ability to generate significant revenue from clients and partners will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our programs to consumers. We may not be able to continue to compete successfully against our current and potential competitors.
Liquidity, Market and Credit Risk
Interest rate increases on our variable rate debt could materially adversely affect our profitability.
Interest rate risk affects us directly in our borrowing activities. Our interest expense, net was $330.2 million for the year ended December 31, 2015. To manage our risk from market interest rates, we actively monitor the interest rates and the interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income and cash flow. In 2015, a 1% increase in interest rates would have resulted in an increase to interest expense of approximately $76 million. Conversely, a corresponding decrease in interest rates would have resulted in a decrease to interest expense of approximately $59 million. In addition, we may enter into derivative instruments on related financial instruments or to lock the interest rate on a portion of our variable debt. We do not enter into derivative or interest rate transactions for trading or other speculative purposes.
If we are unable to securitize our credit card receivables due to changes in the market, we may not be able to fund new credit card receivables, which would have a negative impact on our operations and profitability.
A number of factors affect our ability to fund our receivables in the securitization market, some of which are beyond our control, including:
conditions in the securities markets in general and the asset-backed securitization market in particular;
conformity in the quality of our private label credit card receivables to rating agency requirements and changes in that quality or those requirements; and
ability to fund required overcollateralizations or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing cost.
In addition, in August 2014, the SEC adopted a number of rules that will change the disclosure, reporting and offering process for publicly registered offerings of asset-backed securities, including those offered under our credit card securitization program. We are still assessing the impact of the new rules, and the possibility of continued rulemaking, on our publicly offered securitization program. The SEC also issued an advance notice of proposed rulemaking relating to the exemptions that our credit card securitization trusts rely on in our credit card securitization programs to avoid registration as investment companies. The form that these rules may ultimately take is uncertain at this time, but such rules may impact our ability or desire to issue asset-backed securities in the future.
The FDIC, the SEC, the Federal Reserve and certain other federal regulators have adopted regulations that would mandate a minimum five percent risk retention requirement for securitizations that are issued on and after December 24, 2016. We have not yet determined whether our existing forms of risk retention will satisfy the final regulatory requirements or whether structural changes will be necessary. Such risk retention requirements may impact our ability or desire to issue asset-backed securities in the future.
Early amortization events may occur as a result of certain adverse events specified for each asset-backed securitization transaction, including, among others, deteriorating asset performance or material servicing defaults. In addition, certain series of funding notes issued by our securitization trusts are subject to early amortization based on triggers relating to the bankruptcy of retailers. Deteriorating economic conditions, particularly in the retail sector, may lead to an increase in bankruptcies among retailers who have entered into private label programs with us, which may in turn cause an early amortization for such funding notes. The occurrence of an early amortization event may significantly limit our ability to securitize additional receivables.
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As a result of Basel III, which refers generally to a set of regulatory reforms adopted in the U.S. and internationally that are meant to address issues that arose in the banking sector during the recent financial crisis, banks are becoming subject to more stringent capital, liquidity and leverage requirements. In response to Basel III, noteholders of our securitization trusts' funding notes have sought and obtained amendments to their respective transaction documents permitting them to delay disbursement of funding increases by up to 35 days. Although funding may be requested from other noteholders who have not delayed their funding, access to financing could be disrupted if all of the noteholders implement such delays or if the lending capacities of those who did not do so were insufficient to make up the shortfall. In addition, excess spread may be affected if the issuing entity's borrowing costs increase as a result of Basel III. Such cost increases may result, for example, because the noteholders are entitled to indemnification for increased costs resulting from such regulatory changes.
The inability to securitize card receivables due to changes in the market, regulatory proposals, the unavailability of credit enhancements, or any other circumstance or event would have a material adverse effect on our operations and profitability.
Our level of indebtedness could materially adversely affect our ability to generate sufficient cash to repay our outstanding debt, our ability to react to changes in our business and our ability to incur additional indebtedness to fund future needs.
We have a high level of indebtedness, which requires a high level of interest and principal payments. Subject to the limits contained in our 2013 credit agreement, the indentures governing our senior notes and our other debt instruments, we may be able to incur substantial additional indebtedness from time to time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of indebtedness could intensify. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our higher level of indebtedness, combined with our other financial obligations and contractual commitments, could:
make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under our credit agreement, the indentures governing our senior notes and the agreements governing our other indebtedness;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions and other purposes;
increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage;
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions and other corporate purposes;
reduce or delay investments and capital expenditures;
cause any refinancing of our indebtedness to be at higher interest rates and require us to comply with more onerous covenants, which could further restrict our business operations; and
prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control.
We do not intend to pay cash dividends.
We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our board deems relevant.
Our reported financial information will be affected by fluctuations in the exchange rate between the U.S. dollar and certain foreign currencies.
The results of our operations are exposed to foreign exchange rate fluctuations. We are exposed primarily to fluctuations in the exchange rate between the U.S. and Canadian dollars and the exchange rate between the U.S. dollar and the Euro. Upon translation, operating results may differ from our expectations. As we have expanded our international operations, our exposure to exchange rate fluctuations has increased. For the year ended December 31, 2015, foreign currency movements relative to the U.S. dollar negatively impacted our revenue and earnings before taxes by approximately $240 million and $35 million, respectively, as the U.S. dollar strengthened against these currencies over the course of the year.
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Regulatory Environment
Current and proposed regulation and legislation relating to our card services could limit our business activities, product offerings and fees charged and may have a significant impact on our business, results of operations and financial condition.
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was enacted into law. The Dodd-Frank Act, among other things, includes a sweeping reform of the regulation and supervision of financial institutions, as well as of the regulation of derivatives and capital market activities.
The full impact of the Dodd-Frank Act is difficult to assess because many provisions require federal agencies to adopt implementing regulations, and some of the final implementing regulations have not yet been issued. In addition, the Dodd-Frank Act mandates multiple studies, which could result in future legislative or regulatory action. In particular, the Government Accountability Office issued its study on whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system of the United States, to eliminate the exemptions to the definition of "bank" under the Bank Holding Company Act for certain institutions including limited purpose credit card banks and industrial loan companies. The study did not recommend the elimination of these exemptions. However, if legislation were enacted to eliminate these exemptions without any grandfathering of or accommodations for existing institutions, we could be required to become a bank holding company and cease certain of our activities that are not permissible for bank holding companies or divest our credit card bank subsidiary, Comenity Bank, or our industrial bank subsidiary, Comenity Capital Bank.
The Dodd-Frank Act created a Consumer Financial Protection Bureau, or CFPB, a federal consumer protection regulator with authority to make further changes to the federal consumer protection laws and regulations. The CFPB assumed rulemaking authority under the existing federal consumer financial protection laws, and enforces those laws against and examines certain non-depository institutions and insured depository institutions with total assets greater than $10 billion and their affiliates.
While the CFPB does not examine Comenity Bank and Comenity Capital Bank, it will receive information from their primary federal regulator. In addition, the CFPB's broad rulemaking authority is expected to impact their operations. For example, the CFPB's rulemaking authority may allow it to change regulations adopted in the past by other regulators including regulations issued under the Truth in Lending Act or the CARD Act by the Board of Governors of the Federal Reserve System. The CFPB's ability to rescind, modify or interpret past regulatory guidance could increase our compliance costs and litigation exposure. Furthermore, the CFPB has broad authority to prevent "unfair, deceptive or abusive" acts or practices and has taken enforcement action against other credit card issuers and financial services companies. Evolution of these standards could result in changes to pricing, practices, procedures and other activities relating to our credit card accounts in ways that could reduce the associated return. It is unclear what changes would be promulgated by the CFPB and what effect, if any, such changes would have on our credit accounts.
The Dodd-Frank Act authorizes certain state officials to enforce regulations issued by the CFPB and to enforce the Dodd-Frank Act's general prohibition against unfair, deceptive or abusive practices. To the extent that states enact requirements that differ from federal standards or courts adopt interpretations of federal consumer laws that differ from those adopted by the federal banking agencies, we may be required to alter products or services offered in some jurisdictions or cease offering products, which will increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide.
Various federal and state laws and regulations significantly limit the retail credit card services activities in which we are permitted to engage. Such laws and regulations, among other things, limit the fees and other charges that we can impose on consumers, limit or proscribe certain other terms of our products and services, require specified disclosures to consumers, or require that we maintain certain licenses, qualifications and minimum capital levels. In some cases, the precise application of these statutes and regulations is not clear. In addition, numerous legislative and regulatory proposals are advanced each year which, if adopted, could have a material adverse effect on our profitability or further restrict the manner in which we conduct our activities. The CARD Act acts to limit or modify certain credit card practices and requires increased disclosures to consumers. The credit card practices addressed by the rules include, but are not limited to, restrictions on the application of rate increases to existing and new balances, payment allocation, default pricing, imposition of late fees and two-cycle billing. The failure to comply with, or adverse changes in, the laws or regulations to which our business is subject, or adverse changes in their interpretation, could have a material adverse effect on our ability to collect our receivables and generate fees on the receivables, thereby adversely affecting our profitability.
In the normal course of business, from time to time, Comenity Bank and Comenity Capital Bank have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with their business activities. While historically the arbitration provision in each bank's customer agreement has generally limited such bank's exposure to consumer class action litigation, there can be no assurance that the banks will be successful in enforcing the arbitration clause in the future. There may also be legislative, administrative or regulatory efforts to directly or indirectly prohibit the use of pre-dispute arbitration clauses. Recently, the CFPB publicly announced that it is considering proposing rules that would ban consumer financial companies from using arbitration clauses that limit a consumer's right to participate in class action litigation.
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Comenity Bank and Comenity Capital Bank are also involved, from time to time, in reviews, investigations, and proceedings (both formal and informal) by governmental agencies regarding the bank's business, which could subject the bank to significant fines, penalties, obligations to change its business practices or other requirements. In September 2015, each bank entered into a consent order with the FDIC agreeing to collectively provide restitution of approximately $61.5 million to eligible customers, to pay $2.5 million in civil money penalties to the FDIC and to make further enhancements to their compliance and other processes related to the marketing, promotion and sale of add-on products.
The effect of the Dodd-Frank Act on our business and operations could be significant, depending upon final implementing regulations, the actions of our competitors and the behavior of other marketplace participants. In addition, we may be required to invest significant management time and resources to address the various provisions of the Dodd-Frank Act and the numerous regulations that are required to be issued under it. The Dodd-Frank Act and any related legislation or regulations may have a material impact on our business, results of operations and financial condition.
Legislation relating to consumer privacy may affect our ability to collect data that we use in providing our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients' needs.
The enactment of new or amended legislation or industry regulations pertaining to consumer or private sector privacy issues could have a material adverse impact on our marketing services. Legislation or industry regulations regarding consumer or private sector privacy issues could place restrictions upon the collection, sharing and use of information that is currently legally available, which could materially increase our cost of collecting some data. These types of legislation or industry regulations could also prohibit us from collecting or disseminating certain types of data, which could adversely affect our ability to meet our clients' requirements and our profitability and cash flow targets. While 48 states and the District of Columbia have enacted data breach notification laws, there is no such federal law generally applicable to our businesses. Data breach notification legislation has been proposed widely and exists in specific countries and jurisdictions in which we conduct business. If enacted, these legislative measures could impose strict requirements on reporting time frames for providing notice, as well as the contents of such notices. In addition to the United States, Canadian and European Union regulations discussed below, we have expanded our marketing services through the acquisition of companies formed and operating in foreign jurisdictions that may be subject to additional or more stringent legislation and regulations regarding consumer or private sector privacy.
In the United States, federal and state laws such as the federal Gramm-Leach-Bliley Act and the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, make it more difficult to collect, share and use information that has previously been legally available and may increase our costs of collecting some data. Regulations under these acts give cardholders the ability to "opt out" of having information generated by their credit card purchases shared with other affiliated and unaffiliated parties or the public. Our ability to gather, share and utilize this data will be adversely affected if a significant percentage of the consumers whose purchasing behavior we track elect to "opt out," thereby precluding us and our affiliates from using their data.
In the United States, the federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with prospective and existing customers. Similar measures were implemented in Canada beginning September 1, 2008. Regulations in both the United States and Canada give consumers the ability to "opt out," through a national do-not-call registry and state do-not-call registries of having telephone solicitations placed to them by companies that do not have an existing business relationship with the consumer. In addition, regulations require companies to maintain an internal do-not-call list for those who do not want the companies to solicit them through telemarketing. These regulations could limit our ability to provide services and information to our clients. Failure to comply with these regulations could have a negative impact on our reputation and subject us to significant penalties. Further, the Federal Communications Commission has approved interpretations of rules related to the Telephone Consumer Protection Act defining robo-calls, which may affect our ability to contact customers and may increase our litigation exposure.
In the United States, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 restricts our ability to send commercial electronic mail messages, the primary purpose of which is advertising or promoting a commercial product or service, to our customers and prospective customers. The act requires that a commercial electronic mail message provide the customers with an opportunity to opt-out from receiving future commercial electronic mail messages from the sender. Failure to comply with the terms of this act could have a negative impact on our reputation and subject us to significant penalties.
In Canada, the Personal Information Protection and Electronic Documents Act requires an organization to obtain a consumer's consent to collect, use or disclose personal information. Under this act, consumer personal information may be used only for the purposes for which it was collected. We allow our customers to voluntarily "opt out" from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail. Heightened consumer awareness of, and concern about, privacy may result in customers "opting out" at higher rates than they have historically. This would mean that a reduced number of customers would receive bonus and promotional offers and therefore those customers may collect fewer AIR MILES reward miles.
15

Canada's Anti-Spam Legislation may restrict our ability to send commercial "electronic messages," defined to include text, sound, voice and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and prospective customers. The Act requires, in part, that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender. Failure to comply with the terms of this Act or any proposed regulations that may be adopted in the future could have a negative impact on our reputation and subject us to significant monetary penalties.
In the European Union, the Directive 95/46/EC of the EU Parliament and of the Council of 24 October 1995 requires member states to implement and enforce a comprehensive data protection law that is based on principles designed to safeguard personal data, defined as any information relating to an identified or identifiable natural person. The Directive frames certain requirements for transfer outside of the European Economic Area and individual rights such as consent requirements. In January 2012, the European Commission proposed the GDPR, a new European Union-wide legal framework to govern data sharing and collection and related consumer privacy rights. In December 2015, the EU Parliament and the EU Council reached informal agreement on the text of the GDPR. The final version of the GDPR is expected to be submitted to the EU Parliament and the EU Council for formal vote in early 2016 and will take effect two years following its adoption. Once approved, the GDPR will replace the Directive and, because it is a regulation rather than a directive, will directly apply to and bind the 28 EU Member States. Compared to the Directive, the GDPR includes a strengthened notion of consent, the development of a 'one stop shop' mechanism for the jurisdiction of EU regulators and increased compliance and accountability requirements on data controllers. These and other terms of the GDPR could limit our ability to provide services and information to our customers. In addition, the GDPR includes significant new penalties for non-compliance, with fines up to the higher of €20 million ($22 million as of December 31, 2015) or 4% of total annual worldwide revenue.
In October 2015, the European Court of Justice of the European Union ruled that the EU-U.S. Safe Harbor Framework, an agreement setting forth standards by which U.S. companies could legally transfer personal data from the EU to the U.S., was invalid. Although reliance on the Safe Harbor was not the exclusive method by which such transfers of personal data could be legally made, the loss of the Safe Harbor could adversely affect our ability to transfer such data out of the EU and into the U.S. in providing service for our customers. Any failure to comply with our ongoing obligations with respect to data transfers previously made under the Safe Harbor could expose us to enforcement actions by the FTC or other regulatory authorities.
There is also rapid development of new privacy laws and regulations in the Asia Pacific region and elsewhere around the globe, including amendments of existing data protection laws to the scope of such laws and penalties for noncompliance. Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation and subject us to significant penalties.
Technologies have been developed that can block the display of ads we serve for clients, which could limit our product offerings and adversely impact our financial results.
Technologies have been developed, and will likely continue to be developed, that can block the display of ads we serve for our clients, particularly advertising displayed on personal computers. Ad blockers, cookie blocking, and tracking protection lists (TPLs) are being offered by browser agents and device manufacturers to prevent ads from being displayed to consumers. We generate revenue from online advertising, including revenue resulting from the display of ads on personal computers. Revenue generated from the display of ads on personal computers has been impacted by these technologies from time to time. If these technologies continue to proliferate, in particular with respect to mobile platforms, our product offerings may be limited and our future financial results may be harmed.
Our bank subsidiaries are subject to extensive federal and state regulation that may require us to make capital contributions to them, and that may restrict the ability of these subsidiaries to make cash available to us.
Federal and state laws and regulations extensively regulate the operations of Comenity Bank, as well as Comenity Capital Bank. Many of these laws and regulations are intended to maintain the safety and soundness of Comenity Bank and Comenity Capital Bank, and they impose significant restraints on them to which other non-regulated entities are not subject. As a state bank, Comenity Bank is subject to overlapping supervision by the State of Delaware and the FDIC. As a Utah industrial bank, Comenity Capital Bank is subject to overlapping supervision by the FDIC and the State of Utah. Comenity Bank and Comenity Capital Bank must maintain minimum amounts of regulatory capital. If Comenity Bank and Comenity Capital Bank do not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our financial statements. Comenity Bank and Comenity Capital Bank, as institutions insured by the FDIC, must maintain certain capital ratios, paid-in capital minimums and adequate allowances for loan loss. If either Comenity Bank or Comenity Capital Bank were to fail to meet any of the capital requirements to which it is subject, we may be required to provide them with additional capital, which could impair our ability to service our indebtedness. To pay any dividend, Comenity Bank and Comenity Capital Bank must each maintain adequate capital above regulatory guidelines. Accordingly, neither Comenity Bank nor Comenity Capital Bank may be able to make any of its cash or other assets available to us, including to service our indebtedness.
16

If our bank subsidiaries fail to meet certain criteria, we may become subject to regulation under the Bank Holding Company Act, which could force us to cease all of our non-banking activities and lead to a drastic reduction in our revenue and profitability.
If either of our depository institution subsidiaries failed to meet the criteria for the exemption from the definition of "bank" in the Bank Holding Company Act under which it operates (which exemptions are described below), and if we did not divest such depository institution upon such an occurrence, we would become subject to regulation under the Bank Holding Company Act. This would require us to cease certain of our activities that are not permissible for companies that are subject to regulation under the Bank Holding Company Act. One of our depository institution subsidiaries, Comenity Bank, is a Delaware State FDIC-insured bank and a limited-purpose credit card bank located in Delaware. Comenity Bank will not be a "bank" as defined under the Bank Holding Company Act so long as it remains in compliance with the following requirements:
it engages only in credit card operations;
it does not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties;
it does not accept any savings or time deposits of less than $100,000, except for deposits pledged as collateral for its extensions of credit;
it maintains only one office that accepts deposits; and
it does not engage in the business of making commercial loans (except small business loans).
 
Our other depository institution subsidiary, Comenity Capital Bank, is a Utah industrial bank that is authorized to do business by the State of Utah and the FDIC. Comenity Capital Bank will not be a "bank" as defined under the Bank Holding Company Act so long as it remains an industrial bank in compliance with the following requirements:
it is an institution organized under the laws of a state which, on March 5, 1987, had in effect or had under consideration in such state's legislature a statute which required or would require such institution to obtain insurance under the Federal Deposit Insurance Act; and
it does not accept demand deposits that the depositor may withdraw by check or similar means for payment to third parties.
Operational and Other Risk
We rely on third party vendors to provide products and services. Our profitability could be adversely impacted if they fail to fulfill their obligations.
The failure of our suppliers to deliver products and services in sufficient quantities and in a timely manner could adversely affect our business. If our significant vendors were unable to renew our existing contracts, we might not be able to replace the related product or service at the same cost which would negatively impact our profitability.
Failure to safeguard our databases and consumer privacy could affect our reputation among our clients and their customers, and may expose us to legal claims.
Although we have extensive physical and cyber security and associated procedures, our databases have in the past been and in the future may be subject to unauthorized access. In such instances of unauthorized access, the integrity of our databases has in the past been and may in the future be affected. Security and privacy concerns may cause consumers to resist providing the personal data necessary to support our loyalty and marketing programs. The use of our loyalty, marketing services or credit card programs could decline if any compromise of physical or cyber security occurred. In addition, any unauthorized release of customer information or any public perception that we released consumer information without authorization, could subject us to legal claims from our clients or their customers, consumers or regulatory enforcement actions, which may adversely affect our client relationships.
Loss of data center capacity, interruption due to cyber attacks, loss of telecommunication links, computer viruses or inability to utilize proprietary software of third party vendors could affect our ability to timely meet the needs of our clients and their customers.
Our ability, and that of our third-party service providers, to protect our data centers against damage, loss or inoperability from fire, power loss, cyber attacks, telecommunications failure, computer viruses and other disasters is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data as well as periodically expand and upgrade our database capabilities. Any damage to our data centers, or those of our third-party service providers, any failure of our telecommunication links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber attacks, could adversely affect our ability to meet our clients' needs and their confidence in utilizing us for future services.
17

Our failure to protect our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly.
Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. The actions we take to protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We may not be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. Third parties may also assert infringement claims against us. Any claims and any resulting litigation could subject us to significant liability for damages. An adverse determination in any litigation of this type could require us to design around a third party's patent or to license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.
Our international operations, acquisitions and personnel may require us to comply with complex United States and international laws and regulations in the various foreign jurisdictions where we do business.
Our operations, acquisitions and employment of personnel outside the United States may require us to comply with numerous complex laws and regulations of the United States government and those of the various international jurisdictions where we do business. These laws and regulations may apply to a company, or individual directors, officers, employees or agents of such company, and may restrict our operations, investment decisions or joint venture activities. Specifically, we may be subject to anti-corruption laws and regulations, including, but not limited to, the United States' Foreign Corrupt Practices Act, or FCPA; the United Kingdom's Bribery Act 2010, or UKBA; and Canada's Corruption of Foreign Public Officials Act, or CFPOA. These anti-corruption laws generally prohibit providing anything of value to foreign officials for the purpose of influencing official decisions, obtaining or retaining business, or obtaining preferential treatment and require us to maintain adequate record-keeping and internal controls to ensure that our books and records accurately reflect transactions. As part of our business, we or our partners may do business with state-owned enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA, UKBA or CFPOA. There can be no assurance that our policies, procedures, training and compliance programs will effectively prevent violation of all United States and international laws and regulations with which we are required to comply, and such a violation may subject us to penalties that could adversely affect our reputation, business, financial condition or results of operations. In addition, some of the international jurisdictions in which we operate may lack a developed legal system, have elevated levels of corruption, maintain strict currency controls, present adverse tax consequences or foreign ownership requirements, require difficult or lengthy regulatory approvals, or lack enforcement for non-compete agreements, among other obstacles.
Future sales of our common stock, or the perception that future sales could occur, may adversely affect our common stock price.
As of February 16, 2016, we had an aggregate of 79,936,906 shares of our common stock authorized but unissued and not reserved for specific purposes. In general, we may issue all of these shares without any action or approval by our stockholders. We have reserved 7,291,571 shares of our common stock for issuance under our employee stock purchase plan and our long-term incentive plans, of which 1,112,120 shares are issuable upon vesting of restricted stock awards, restricted stock units, and upon exercise of options granted as of February 16, 2016, including options to purchase approximately 56,902 shares exercisable as of February 16, 2016 or that will become exercisable within 60 days after February 16, 2016. We have reserved for issuance 1,500,000 shares of our common stock, 667,857 of which remain issuable, under our 401(k) and Retirement Savings Plan as of December 31, 2015. In addition, we may pursue acquisitions of competitors and related businesses and may issue shares of our common stock in connection with these acquisitions. Sales or issuances of a substantial number of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the ownership interests of existing stockholders.
The market price and trading volume of our common stock may be volatile and our stock price could decline.
The trading price of shares of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price of our common stock may be affected by a number of factors, including our operating results, changes in our earnings estimates, additions or departures of key personnel, our financial condition, legislative and regulatory changes, general conditions industries in which we operate, general economic conditions, and general conditions in the securities markets. Other risks described in this report could also materially and adversely affect our share price.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent or delay change of control transactions or attempts by our stockholders to replace or remove our current management.
Delaware law, as well as provisions of our certificate of incorporation, bylaws and debt instruments, could discourage unsolicited proposals to acquire us, even though such proposals may be beneficial to our stockholders. These include our board's authority to issue shares of preferred stock without further stockholder approval.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by our then-current board of directors, including a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline or delay or prevent our stockholders from receiving a premium over the market price of our common stock that they might otherwise receive.
18

Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2015, we own one general office property and lease approximately 124 general office properties worldwide, comprised of approximately 4.4 million square feet. These facilities are used to carry out our operational, sales and administrative functions. Our principal facilities are as follows:
Location
 
Segment
 
Approximate Square Footage
 
Lease Expiration Date
 
Plano, Texas  
 
Corporate
 
108,269
 
June 29, 2021
 
Columbus, Ohio  
 
Corporate, Card Services
 
272,602
 
February 28, 2018
 
Toronto, Ontario, Canada  
 
LoyaltyOne
 
194,018
 
September 30, 2017
 
Mississauga, Ontario, Canada  
 
LoyaltyOne
 
50,908
 
November 30, 2019
 
Den Bosch, Netherlands  
 
LoyaltyOne
 
132,482
 
December 31, 2028
 
Maasbree, Netherlands  
 
LoyaltyOne
 
488,681
 
September 1, 2028
 
Wakefield, Massachusetts  
 
Epsilon
 
184,411
 
December 31, 2020
 
Irving, Texas  
 
Epsilon
 
221,898
 
June 30, 2026
 
Earth City, Missouri  
 
Epsilon
 
116,783
 
December 31, 2016
 
West Chicago, Illinois  
 
Epsilon
 
155,412
 
October 31, 2025
 
Columbus, Ohio  
 
Card Services
 
103,161
 
January 31, 2019
 
Westminster, Colorado  
 
Card Services
 
119,207
 
November 30, 2027
 
Couer D'Alene, Idaho  
 
Card Services
 
114,000
 
March 31, 2027
 
Westerville, Ohio  
 
Card Services
 
100,800
 
July 31, 2024
 
Wilmington, Delaware  
 
Card Services
 
5,198
 
November 30, 2020
 
Salt Lake City, Utah  
 
Card Services
 
6,488
 
January 18, 2018
 
We believe our current and proposed facilities are suitable to our businesses and that we will be able to lease, purchase or newly construct additional facilities as needed.
Item 3. 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 effect on our business or financial condition, including claims and lawsuits alleging breaches of our contractual obligations. See Note 14, "Commitments and Contingencies," of the Notes to Consolidated Financial Statements for additional information.
Item 4.
Mine Safety Disclosures.
Not applicable.
 
19

PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Our common stock is listed on the New York Stock Exchange, or NYSE, and trades under the symbol "ADS." The following tables set forth for the periods indicated the high and low composite per share prices as reported by the NYSE.
   
High
   
Low
 
Year Ended December 31, 2015
       
First quarter  
 
$
301.74
   
$
268.93
 
Second quarter  
   
312.00
     
289.38
 
Third quarter  
   
307.78
     
241.91
 
Fourth quarter  
   
303.75
     
256.24
 
                 
Year Ended December 31, 2014
               
First quarter  
 
$
300.49
   
$
230.53
 
Second quarter  
   
284.40
     
230.79
 
Third quarter  
   
288.67
     
239.83
 
Fourth quarter  
   
292.96
     
230.54
 
Holders
As of February 16, 2016, the closing price of our common stock was $187.49 per share, there were 59,261,410 shares of our common stock outstanding, and there were approximately 98 holders of record of our common stock.
Dividends
We have never declared or paid any cash dividends on our common stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We currently intend to retain all available funds and future earnings, if any, for use in the operation and the expansion of our business. Any future determination to pay cash dividends on our common stock will be at the discretion of our board of directors and will be dependent upon our financial condition, operating results, capital requirements and other factors that our board deems relevant. In addition, under the terms of our credit agreement, we are restricted in the amount of any cash dividends or return of capital, other distribution, payment or delivery of property or cash to our common stockholders.
Issuer Purchases of Equity Securities
On January 1, 2015, our Board of Directors authorized a stock repurchase program to acquire up to $600.0 million of our outstanding common stock from January 1, 2015 through December 31, 2015. On April 15, 2015, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2015 to acquire an additional $400.0 million of our outstanding common stock through December 31, 2015, for a total authorization of $1.0 billion.
On January 1, 2016, our Board of Directors authorized a stock repurchase program to acquire up to $500.0 million of our outstanding common stock from January 1, 2016 through December 31, 2016. On February 15, 2016, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2016 to acquire an additional $500.0 million of our outstanding common stock through December 31, 2016, for a total authorization of $1.0 billion. Each stock repurchase program was subject to any restrictions pursuant to the terms of our credit agreements, indentures, and applicable securities laws or otherwise.
20

The following table presents information with respect to purchases of our common stock made during the three months ended December 31, 2015:
Period
     
Total Number of Shares Purchased (1)
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
 
         
(In millions)
 
During 2015:
                         
October 1-31  
       
14,600
 
$
 
264.13
       
11,769
 
$
 
132.5
 
November 1-30  
       
45,279
       
285.27
       
43,950
       
120.0
 
December 1-31  
       
264,204
       
274.00
       
261,000
       
48.4
 
Total  
       
324,083
 
$
 
275.13
       
316,719
 
$
 
48.4
 
                                   
     
(1) During the period represented by the table, 7,364 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Saving Plan for the benefit of the employees who participated in that portion of the plan.
(2) On January 1, 2015, our Board of Directors authorized a stock repurchase program to acquire up to $600.0 million of our outstanding common stock from January 1, 2015 through December 31, 2015. On April 15, 2015, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2015 to acquire an additional $400.0 million of our outstanding common stock through December 31, 2015, for a total authorization of $1.0 billion. On January 1, 2016, our Board of Directors authorized a stock repurchase program to acquire up to $500.0 million of our outstanding common stock from January 1, 2016 through December 31, 2016. On February 15, 2016, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2016 to acquire an additional $500.0 million of our outstanding common stock through December 31, 2016, for a total authorization of $1.0 billion. Each stock repurchase program was subject to any restrictions pursuant to the terms of our credit agreements, indentures, and applicable securities laws or otherwise.
Performance Graph
The following graph compares the yearly percentage change in cumulative total stockholder return on our common stock since December 31, 2010, with the cumulative total return over the same period of (1) the S&P 500 Index and (2) a peer group of fourteen companies selected by us and utilized in our prior Annual Report on Form 10-K, which we will refer to as the Old Peer Group Index, and (3) a new peer group of sixteen companies selected by us, which we will refer to as the New Peer Group Index.
The fourteen companies in the Old Peer Group Index group are Acxiom Corporation, American Express Company, Discover Financial Services, Equifax, Inc., Experian PLC, Fidelity National Information Services, Inc., Fiserv, Inc., Global Payments, Inc., Nielsen Holdings N.V., Omnicom Group Inc., The Dun & Bradstreet Corporation, The Interpublic Group of Companies, Inc., Total System Services, Inc. and WPP plc.
The sixteen companies in the New Peer Group Index are CDK Global, Inc., Discover Financial Services, Equifax, Inc., Experian PLC, Fidelity National Information Services, Inc., Fiserv, Inc., Global Payments, Inc., MasterCard Incorporated, Nielsen Holdings N.V., Omnicom Group Inc., Synchrony Financial, The Dun & Bradstreet Corporation, The Interpublic Group of Companies, Inc., Total System Services, Inc., Vantiv, Inc. and WPP plc.
21

Pursuant to rules of the SEC, the comparison assumes $100 was invested on December 31, 2010 in our common stock and in each of the indices and assumes reinvestment of dividends, if any. Also pursuant to SEC rules, the returns of each of the companies in the peer group are weighted according to the respective company's stock market capitalization at the beginning of each period for which a return is indicated. Historical stock prices are not indicative of future stock price performance.
 
 
   
Alliance Data
Systems
Corporation
     
S&P 500
   
Old Peer
Group Index
   
New Peer
Group Index
 
December 31, 2010  
 
$
100.00
   
$
100.00
   
$
100.00
   
$
100.00
 
December 31, 2011  
   
146.19
     
102.11
     
106.16
     
118.27
 
December 31, 2012  
   
203.80
     
118.45
     
134.22
     
152.84
 
December 31, 2013  
   
370.17
     
156.82
     
204.61
     
237.61
 
December 31, 2014  
   
402.72
     
178.29
     
216.18
     
252.41
 
December 31, 2015  
   
389.37
     
180.75
     
211.48
     
279.46
 
Our future filings with the SEC may "incorporate information by reference," including this Form 10-K. Unless we specifically state otherwise, this Performance Graph shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
22

Item 6.
Selected Financial Data.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following table sets forth our summary historical consolidated financial information for the periods ended and as of the dates indicated. You should read the following historical consolidated financial information along with "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in this Form 10-K. The fiscal year financial information included in the table below is derived from our audited consolidated financial statements.

   
Years Ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(In thousands, except per share amounts)
 
Income statement data
                   
Total revenue  
 
$
6,439,746
   
$
5,302,940
   
$
4,319,063
   
$
3,641,390
   
$
3,173,287
 
Cost of operations (exclusive of amortization and depreciation disclosed separately below) (1)
   
3,814,500
     
3,218,774
     
2,549,159
     
2,106,612
     
1,811,882
 
Provision for loan loss  
   
668,200
     
425,205
     
345,758
     
285,479
     
300,316
 
General and administrative (1)  
   
138,483
     
141,468
     
109,115
     
108,059
     
95,256
 
Regulatory settlement  
   
64,563
     
     
     
     
 
Earn-out obligation  
   
     
105,944
     
     
     
 
Depreciation and other amortization  
   
142,051
     
109,655
     
84,291
     
73,802
     
70,427
 
Amortization of purchased intangibles  
   
350,089
     
203,427
     
131,828
     
93,074
     
82,726
 
Total operating expenses  
   
5,177,886
     
4,204,473
     
3,220,151
     
2,667,026
     
2,360,607
 
Operating income  
   
1,261,860
     
1,098,467
     
1,098,912
     
974,364
     
812,680
 
Interest expense, net  
   
330,184
     
260,526
     
305,500
     
291,460
     
298,585
 
Income before income taxes  
   
931,676
     
837,941
     
793,412
     
682,904
     
514,095
 
Provision for income taxes  
   
326,248
     
321,801
     
297,242
     
260,648
     
198,809
 
Net income  
 
$
605,428
   
$
516,140
   
$
496,170
   
$
422,256
   
$
315,286
 
Less: net income attributable to non-controlling interest
   
8,887
     
9,847
     
     
     
 
Net income attributable to common stockholders  
 
$
596,541
   
$
506,293
   
$
496,170
   
$
422,256
   
$
315,286
 
                                         
Net income attributable to common stockholders per share:
                                       
Basic  
 
$
8.91
   
$
8.72
   
$
10.09
   
$
8.44
   
$
6.22
 
Diluted  
 
$
8.85
   
$
7.87
   
$
7.42
   
$
6.58
   
$
5.45
 
Weighted average shares:
                                       
Basic  
   
61,874
     
56,378
     
49,190
     
50,008
     
50,687
 
Diluted  
   
62,301
     
62,445
     
66,866
     
64,143
     
57,804
 
23

   
Years Ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(In thousands)
 
Adjusted EBITDA and Adjusted EBITDA, net (2)
                   
Adjusted EBITDA  
 
$
1,909,944
   
$
1,597,256
   
$
1,374,214
   
$
1,191,737
   
$
1,009,319
 
Adjusted EBITDA, net  
 
$
1,728,270
   
$
1,425,560
   
$
1,249,777
   
$
1,073,748
   
$
859,530
 
Other financial data
                                       
Cash flows from operating activities  
 
$
1,705,841
   
$
1,344,159
   
$
1,003,492
   
$
1,134,190
   
$
1,011,347
 
Cash flows from investing activities  
 
$
(3,362,548
)
 
$
(4,737,121
)
 
$
(1,619,416
)
 
$
(2,671,350
)
 
$
(1,040,710
)
Cash flows from financing activities  
 
$
1,772,901
   
$
3,516,146
   
$
704,152
   
$
2,209,019
   
$
109,250
 
                                         
Segment operating data
                                       
Credit card statements generated  
   
242,266
     
212,015
     
192,508
     
166,091
     
142,064
 
Credit sales  
 
$
24,736,089
   
$
18,948,167
   
$
15,252,299
   
$
12,523,632
   
$
9,636,053
 
Average credit card and loan receivables
 
$
11,364,581
   
$
8,750,148
   
$
7,212,678
   
$
5,927,562
   
$
4,962,503
 
AIR MILES reward miles issued  
   
5,743,099
     
5,500,889
     
5,420,723
     
5,222,887
     
4,940,364
 
AIR MILES reward miles redeemed  
   
4,406,288
     
4,100,680
     
4,017,494
     
4,040,876
     
3,633,921
 

   
As of December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(In thousands)
 
Balance sheet data
                   
Credit card and loan receivables, net  
 
$
13,057,852
   
$
10,673,709
   
$
8,069,713
   
$
6,697,674
   
$
5,197,690
 
Redemption settlement assets, restricted  
   
456,564
     
520,340
     
510,349
     
492,690
     
515,838
 
Total assets  
   
22,421,830
     
20,263,977
     
13,244,257
     
12,000,139
     
8,980,249
 
Deferred revenue  
   
844,907
     
1,013,177
     
1,137,186
     
1,249,061
     
1,226,436
 
Deposits  
   
5,622,310
     
4,773,541
     
2,816,361
     
2,228,411
     
1,353,775
 
Non-recourse borrowings of consolidated securitization entities
   
6,493,166
     
5,191,916
     
4,591,916
     
4,130,970
     
3,260,287
 
Long-term and other debt, including current maturities
   
5,062,501
     
4,209,246
     
2,800,281
     
2,854,839
     
2,183,474
 
Total liabilities  
   
20,244,423
     
17,632,031
     
12,388,496
     
11,471,652
     
8,804,283
 
Redeemable non-controlling interest  
   
167,377
     
235,566
     
     
     
 
Total stockholders' equity  
   
2,010,030
     
2,396,380
     
855,761
     
528,487
     
175,966
 
                                           
(1) Included in cost of operations is stock compensation expense of $72.6 million, $50.8 million, $40.3 million, $32.7 million and $25.8 million for the years ended December 31, 2015, 2014, 2013, 2012, and 2011, respectively. Included in general and administrative is stock compensation expense of $18.8 million, $21.7 million, $18.9 million, $17.8 million and $17.7 million for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.
(2) See "Use of Non-GAAP Financial Measures" set forth in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," for a discussion of our use of adjusted EBITDA and adjusted EBITDA, net and a reconciliation to net income, the most directly comparable GAAP financial measure.
24

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are a leading global provider of data-driven marketing and loyalty solutions serving large, consumer-based businesses in a variety of industries. We offer a comprehensive portfolio of integrated outsourced marketing solutions, including customer loyalty programs, database marketing services, end-to-end marketing services, analytics and creative services, direct marketing services and private label and co-brand retail credit card programs. We focus on facilitating and managing interactions between our clients and their customers through all consumer marketing channels, including in-store, online, email, social media, mobile, direct mail and telephone. We capture and analyze data created during each customer interaction, leveraging the insight derived from that data to enable clients to identify and acquire new customers and to enhance customer loyalty. We believe that our services are more valued as businesses shift marketing resources away from traditional mass marketing toward targeted marketing programs that provide measurable returns on marketing investments. We operate in the following reportable segments: LoyaltyOne, Epsilon, and Card Services.
2015 Highlights and Recent Developments
Total revenue increased 21% to $6.4 billion in 2015 compared to $5.3 billion in 2014.
Total adjusted EBITDA, net increased 21% to $1.7 billion in 2015 compared to $1.4 billion in 2014.
Earnings per share ("EPS") increased to $8.85 in 2015 compared to $7.87 in 2014.
We repurchased approximately 3.4 million shares for $951.6 million in 2015.
Effective January 1, 2015, we acquired an additional 10% ownership interest in BrandLoyalty for approximately $87.4 million, bringing our total ownership interest to 70%.
Effective January 1, 2016, we acquired an additional 10% ownership interest in BrandLoyalty for approximately $102.2 million, bringing our total ownership interest to 80%.
In January 2016, we purchased an existing private label credit card portfolio for total consideration paid of $547.5 million, subject to customary purchase price adjustments.
LoyaltyOne
LoyaltyOne generates revenue primarily from our coalition and short-term loyalty programs through our AIR MILES Reward Program and BrandLoyalty.
Revenue for the LoyaltyOne segment decreased 4% to $1.4 billion and adjusted EBITDA, net decreased 12% to $270.6 million for the year ended December 31, 2015, in each case as compared to the prior year period. The strengthening of the U.S. dollar against both the Euro and Canadian dollar negatively impacted revenue and adjusted EBITDA, net by approximately $234.7 million and $44.4 million, respectively.
Excluding foreign currency impacts, revenue and adjusted EBITDA, net increased by approximately 13% and 2%, respectively, due to growth from both our short-term and coalition loyalty programs. Our short-term loyalty programs have expanded into North America, currently operating in Canada, with a pilot program expected to launch in the U.S. during the first quarter of 2016.
For the AIR MILES Reward Program, AIR MILES reward miles issued and AIR MILES reward miles redeemed are the two primary drivers of revenue and indicators of success of the program. The number of AIR MILES reward miles issued impacts the number of future AIR MILES reward miles available to be redeemed. This can also impact future revenue recognized with respect to the number of AIR MILES reward miles redeemed and the amount of breakage for those AIR MILES reward miles expected to remain unredeemed.
AIR MILES reward miles issued during the year ended December 31, 2015 increased 4% compared to 2014 due to the expansion of our relationship with Sobeys, a national Canadian grocery retailer, increased promotional activity by our sponsors and growth in our instant reward program option, AIR MILES Cash. For the year ended December 31, 2015, the AIR MILES Cash program option represented approximately 20% of the AIR MILES reward miles issued and 22% of the AIR MILES reward miles redeemed. AIR MILES reward miles redeemed increased 7% due to higher redemptions within the AIR MILES Cash program option. We expect low- to mid-single digit issuance growth in 2016.
During the year ended December 31, 2015, LoyaltyOne announced a multi-year contract renewal with Metro Ontario Inc., a national grocery retailer in Canada, which extends our partnership in the Ontario market. In addition, we announced an expansion of our relationship with Sobeys to begin to issue AIR MILES reward miles at Sobeys, Sobeys Urban Fresh and Foodland stores across Ontario in 2015. We also announced a multi-year renewal of our agreement with Shell Canada Products as a sponsor in the AIR MILES Reward Program and signed a new multi-year agreement with Shell Canada Products, as the licensor and franchisor of the JiffyLube® brand in Canada, to allow AIR MILES reward miles to be issued at the more than 150 participating JiffyLube service centers throughout Canada. We also announced a new multi-year agreement with Lowe's Canada, a Canadian home improvement company, to become a sponsor in the AIR MILES Reward Program.
On August 31, 2015, BrandLoyalty acquired all of the stock of Edison International Concept & Agencies B.V., or Edison, and Max Holding B.V., or Merison, two Netherlands-based loyalty marketers, for cash consideration of approximately $45.4 million. The acquisition expands BrandLoyalty's short-term loyalty programs into new markets and introduces new brands to existing markets.
We also own approximately 37% of CBSM-Companhia Brasileira De Servicos De Marketing, or dotz, the operator of the dotz coalition loyalty program in Brazil. Our investment in dotz had no impact on our results of operations in 2015 or 2014, and a de minimis impact on our results of operations in 2013. We do not expect our investment in dotz to have an impact on our results of operations in 2016.
25

Epsilon
Epsilon is a leading marketing services firm providing end-to-end, integrated marketing solutions that leverage rich data, analytics, creativity and technology to help clients more effectively acquire, retain and grow relationships with their customers. Services include strategic consulting, customer database technologies, omnichannel marketing, loyalty management, proprietary data, predictive modeling, permission-based email marketing, personalized digital marketing and a full range of direct and digital agency services.
Revenue increased 41% to $2.1 billion and adjusted EBITDA, net increased 64%, to $508.4 million for the year ended December 31, 2015 as compared to the prior year. These increases were primarily due to the acquisition of Conversant in December 2014. Excluding Conversant, Epsilon's revenue and adjusted EBITDA, net both increased 5%, driven by growth in services for existing clients, database builds completed and placed into production for new clients, and strength in the automotive vertical, which offset weakness in our agency offerings.
During the year ended December 31, 2015, Epsilon announced new multi-year agreements with Nature's Way, a dietary supplement brand, to serve as the digital agency of record across a number of brands and to provide CRM marketing services, and with Turner Broadcasting System, Inc., a Time Warner company, to provide analytics and data services to support the Turner Data Cloud infrastructure.
Card Services
In the first quarter of 2015, we renamed our Private Label Services and Credit segment to "Card Services," which had no impact to the reported results of the segment in the current or prior periods presented.
The Card Services segment provides risk management solutions, account origination, funding services, transaction processing, marketing, customer care and collection services for our more than 160 private label retail and co-branded credit card programs.
Revenue, generated primarily from finance charges and late fees as well as other servicing fees, increased 24% to $3.0 billion and adjusted EBITDA, net increased 16% to $1.1 billion for the year ended December 31, 2015 as compared to the prior year. These increases were driven by higher average credit card and loan receivables which increased 30% as compared to the prior year as a result of increased credit sales, recent client signings and recent credit card portfolio acquisitions. Credit sales increased 31% for the year ended December 31, 2015 due to cardholder growth, strong credit cardholder spending, recent client signings and recent credit card portfolio acquisitions.
Delinquency rates were 4.2% of principal credit card and loan receivables at December 31, 2015 as compared to 4.0% at December 31, 2014. The principal net charge-off rate was 4.5% for the year ended December 31, 2015 as compared to 4.2% for the prior year. For the year ended December 31, 2016, we expect our charge-off rate to approximate 5.0%.
During the year ended December 31, 2015, Card Services announced the signing of new multi-year agreements to provide co-brand credit card services to Red Roof Inn, a hotel chain; Cornerstone, a business unit of HSN, Inc.; Farmers Insurance, a multi-line insurer in the U.S; and Univision Communications Inc., a media company. We also announced the renewal of multi-year agreements to continue providing private label credit card services to Talbots, Inc., a women's apparel retailer; FULLBEAUTY Brands, a fashion and lifestyle resource for plus-size women; and The Bon-Ton Stores, Inc, a regional department store operator. Additionally, we signed a new multi-year agreement to provide private label credit card services for Wayfair, an online retailer of home furnishings and decor. We signed a new multi-year agreement to provide private label credit card services and assume management of an existing co-brand card program in the United States and acquire an existing co-brand credit card portfolio for Toyota, a leading automaker.
26

Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure equal to net income, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles.
In 2015, adjusted EBITDA excluded costs associated with the consent orders with the FDIC, and in 2014, adjusted EBITDA excluded business acquisition costs related to the Conversant acquisition and the contingent consideration incurred as a result of the earn-out obligation associated with the BrandLoyalty acquisition. These costs, as well as stock compensation expense, were not included in the measurement of segment adjusted EBITDA as the chief operating decision maker did not factor these expenses for purposes of assessing segment performance and decision making with respect to resource allocations.
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs, interest expense on deposits and the percentage of adjusted EBITDA attributable to the non-controlling interest.
We use adjusted EBITDA and adjusted EBITDA, net 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 and adjusted EBITDA, net are each 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 intangible assets, including 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, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.
We believe that adjusted EBITDA and adjusted EBITDA, net provide useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and adjusted EBITDA, net 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 indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and adjusted EBITDA, net 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 adjusted EBITDA, net measures presented in this Annual Report on Form 10-K 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.
   
Years Ended December 31,
 
   
2015
   
2014
   
2013
   
2012
   
2011
 
   
(In thousands)
 
Net income  
 
$
605,428
   
$
516,140
   
$
496,170
   
$
422,256
   
$
315,286
 
Stock compensation expense  
   
91,381
     
72,462
     
59,183
     
50,497
     
43,486
 
Provision for income taxes  
   
326,248
     
321,801
     
297,242
     
260,648
     
198,809
 
Interest expense, net  
   
330,184
     
260,526
     
305,500
     
291,460
     
298,585
 
Depreciation and other amortization  
   
142,051
     
109,655
     
84,291
     
73,802
     
70,427
 
Amortization of purchased intangibles  
   
350,089
     
203,427
     
131,828
     
93,074
     
82,726
 
Regulatory settlement (1)  
   
64,563
     
     
     
     
 
Earn-out obligation (2)  
   
     
105,944
     
     
     
 
Business acquisition costs (3)  
   
     
7,301
     
     
     
 
Adjusted EBITDA  
 
$
1,909,944
   
$
1,597,256
   
$
1,374,214
   
$
1,191,737
   
$
1,009,319
 
Less: Securitization funding costs  
   
97,109
     
91,103
     
95,326
     
92,808
     
126,711
 
Less: Interest expense on deposits  
   
53,630
     
37,543
     
29,111
     
25,181
     
23,078
 
Less: Adjusted EBITDA attributable to non-controlling interest
   
30,935
     
43,050
     
     
     
 
Adjusted EBITDA, net  
 
$
1,728,270
   
$
1,425,560
   
$
1,249,777
   
$
1,073,748
   
$
859,530
 
                                           
(1) Represents costs associated with the consent orders with the FDIC to provide restitution to eligible customers and $2.5 million in civil penalties.
(2) Represents additional contingent consideration as a result of the earn-out obligation associated with the acquisition of our 60 percent ownership interest in BrandLoyalty in 2014.
(3) Represents expenditures directly associated with the acquisition of Conversant in 2014.
27

Consolidated Results of Operations

   
Year Ended December 31,
   
% Change
 
   
2015
   
2014
   
2013
   
2015
to 2014
   
2014
to 2013
 
Revenues
 
(in thousands, except percentages)
 
Transaction  
 
$
336,778
   
$
337,391
   
$
329,027
     
%
   
3
%
Redemption  
   
1,028,412
     
1,053,248
     
587,187
     
(2
)
   
79
 
Finance charges, net  
   
2,871,270
     
2,303,698
     
1,956,654
     
25
     
18
 
Marketing services  
   
2,006,496
     
1,438,688
     
1,289,356
     
39
     
12
 
Other revenue  
   
196,790
     
169,915
     
156,839
     
16
     
8
 
Total revenue  
   
6,439,746
     
5,302,940
     
4,319,063
     
21
     
23
 
Operating expenses
                                       
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
   
3,814,500
     
3,218,774
     
2,549,159
     
19
     
26
 
Provision for loan loss  
   
668,200
     
425,205
     
345,758
     
57
     
23
 
General and administrative  
   
138,483
     
141,468
     
109,115
     
(2
)
   
30
 
Regulatory settlement  
   
64,563
     
     
     
100
     
 
Earn-out obligation  
   
     
105,944
     
     
(100
)
   
100
 
Depreciation and other amortization  
   
142,051
     
109,655
     
84,291
     
30
     
30
 
Amortization of purchased intangibles  
   
350,089
     
203,427
     
131,828
     
72
     
54
 
Total operating expenses  
   
5,177,886
     
4,204,473
     
3,220,151
     
23
     
31
 
Operating income  
   
1,261,860
     
1,098,467
     
1,098,912
     
15
     
 
Interest expense
                                       
Securitization funding costs  
   
97,109
     
91,103
     
95,326
     
7
     
(4
)
Interest expense on deposits  
   
53,630
     
37,543
     
29,111
     
43
     
29
 
Interest expense on long-term and other debt, net  
   
179,445
     
131,880
     
181,063
     
36
     
(27
)
Total interest expense, net  
   
330,184
     
260,526
     
305,500
     
27
     
(15
)
Income before income tax  
   
931,676
     
837,941
     
793,412
     
11
     
6
 
Provision for income taxes  
   
326,248
     
321,801
     
297,242
     
1
     
8
 
Net income  
 
$
605,428
   
$
516,140
   
$
496,170
     
17
%
   
4
%
                                         
Key Operating Metrics:
                                       
Credit card statements generated  
   
242,266
     
212,015
     
192,508
     
14
%
   
10
%
Credit sales  
 
$
24,736,089
   
$
18,948,167
   
$
15,252,299
     
31
%
   
24
%
Average credit card and loan receivables  
 
$
11,364,581
   
$
8,750,148
   
$
7,212,678
     
30
%
   
21
%
AIR MILES reward miles issued  
   
5,743,099
     
5,500,889
     
5,420,723
     
4
%
   
2
%
AIR MILES reward miles redeemed  
   
4,406,288
     
4,100,680
     
4,017,494
     
7
%
   
2
%

28

Year ended December 31, 2015 compared to the year ended December 31, 2014
Revenue. Total revenue increased $1.1 billion, or 21%, to $6.4 billion for the year ended December 31, 2015 from $5.3 billion for the year ended December 31, 2014. The net increase was due to the following:
Transaction. Revenue decreased $0.6 million to $336.8 million for the year ended December 31, 2015 as AIR MILES reward miles issuance fees, for which we provide marketing and administrative services, decreased $12.1 million due to the decline in the Canadian dollar relative to the U.S. dollar. This decrease was offset in part by servicing fees charged to our credit cardholders, which increased $12.7 million due to higher volumes.
Redemption. Revenue decreased $24.8 million, or 2%, to $1.0 billion for the year ended December 31, 2015. Redemption revenue was negatively impacted by the decline in both the Euro and Canadian dollar relative to the U.S. dollar, which resulted in a $184.5 million decrease in revenue. This decrease was offset in part by a greater number of short-term loyalty programs in the market during the year ended December 31, 2015 as compared to the prior year.
Finance charges, net. Revenue increased $567.6 million, or 25%, to $2.9 billion for the year ended December 31, 2015 due to a 30% increase in average credit card and loan receivables, which increased revenue $688.3 million. This increase was offset in part by an approximate 100 basis point decline in finance charge yield, which decreased revenue by $120.7 million. Our finance charge yield has been negatively impacted by the growth in our co-brand credit card programs.
Marketing services. Revenue increased $567.8 million, or 39%, to $2.0 billion for the year ended December 31, 2015. The Conversant acquisition contributed $506.2 million to the revenue increase. Additionally, revenue increased $68.8 million within our Epsilon segment due to growth in services for existing clients, database builds completed and placed into production for new clients, and strength in the automotive vertical, which offset weakness in our agency offerings.
Other revenue. Revenue increased $26.9 million, or 16%, to $196.8 million for the year ended December 31, 2015 due to the Conversant acquisition.
Cost of operations. Cost of operations increased $0.6 billion, or 19%, to $3.8 billion for the year ended December 31, 2015 as compared to $3.2 billion for the year ended December 31, 2014. The increase resulted from the following:
Within the LoyaltyOne segment, cost of operations decreased $5.9 million, impacted by the decline in both the Euro and Canadian dollar relative to the U.S. dollar, which resulted in a $185.9 million decrease in cost of operations. In local currency, cost of operations increased due to an increase in cost of redemptions associated with the number of short-term loyalty programs in market during the year ended December 31, 2015 as compared to the prior year.
Within the Epsilon segment, cost of operations increased $440.1 million, due primarily to the Conversant acquisition that contributed $374.7 million to the increase. The remaining increase is due to an increase in payroll and benefits expense of $29.6 million associated with the addition of associates to support growth, including the onboarding of new clients, and an increase of $35.6 million in direct processing expenses associated with the increase in revenue.
Within the Card Services segment, cost of operations increased by $167.7 million. Payroll and benefits expense increased $47.8 million due to the addition of associates to support growth, and marketing expenses increased $23.3 million to support the growth in credit sales. Other operating expenses increased $96.6 million due to higher credit card processing costs associated with the increase in the number of statements generated and higher data processing expenses.
Provision for loan loss. Provision for loan loss increased $243.0 million, or 57%, to $668.2 million for the year ended December 31, 2015 as compared to $425.2 million for the year ended December 31, 2014. The increase in the provision was driven by growth in our credit card and loan receivables and the increase in our loss rate. The net charge-off rate was 4.5% for the year ended December 31, 2015 as compared to 4.2% for the year ended December 31, 2014. Delinquency rates were 4.2% of principal credit card and loan receivables at December 31, 2015 as compared to 4.0% at December 31, 2014.
General and administrative. General and administrative expenses decreased $3.0 million to $138.5 million for the year ended December 31, 2015 as compared to $141.5 million for the year ended December 31, 2014 due primarily to a decrease in professional services fees related to the Conversant acquisition in 2014, offset in part by an increase in payroll expense.
Regulatory settlement. For the year ended December 31, 2015, we incurred approximately $64.6 million in expenses primarily associated with consent orders with the FDIC to provide restitution of approximately $61.5 million to eligible customers and $2.5 million in civil money penalties to the FDIC.
Earn-out obligation. We acquired a 60% ownership interest in BrandLoyalty in January 2014. The share purchase agreement contained an earn-out provision that resulted in an increase in contingent consideration of $105.9 million, which is included in operating expenses in our consolidated statements of income for the year ended December 31, 2014.
29

Depreciation and other amortization. Depreciation and other amortization increased $32.4 million, or 30%, to $142.1 million for the year ended December 31, 2015, as compared to $109.7 million for the year ended December 31, 2014, due to additional assets placed in service resulting from both the Conversant acquisition and recent capital expenditures.
Amortization of purchased intangibles. Amortization of purchased intangibles increased $146.7 million, or 72%, to $350.1 million for the year ended December 31, 2015 as compared to $203.4 million for the year ended December 31, 2014. The increase relates to $157.6 million of additional amortization associated with the intangible assets from the Conversant acquisition, offset in part by a decrease in amortization related to certain fully amortized intangible assets in the Epsilon segment.
Interest expense, net. Total interest expense, net increased $69.7 million, or 27%, to $330.2 million for the year ended December 31, 2015 as compared to $260.5 million for the year ended December 31, 2014. The increase was due to the following:
Securitization funding costs. Securitization funding costs increased $6.0 million, as an increase in average borrowings in 2015 as compared to 2014 was offset in part by a 30 basis point decrease in average interest rates over the same periods.
Interest expense on deposits. Interest on deposits increased $16.1 million due to an increase in average borrowings in 2015 as compared to 2014. Average interest rates remained relatively consistent for both periods.
Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net increased $47.6 million due primarily to an increase of $33.2 million related to term loans associated with the $1.4 billion incremental term loan borrowed in December 2014 in connection with the Conversant acquisition as well as an increase in interest associated with our revolving line of credit and amortization of debt issuance costs of $7.6 million. Interest associated with our senior notes increased $20.7 million with the $600.0 million senior notes due 2022 issued in July 2014 and the €300.0 million senior notes due 2023 issued in November 2015. These increases were offset by a decrease in interest expense of $17.5 million associated with the convertible senior notes that were repaid at maturity in May 2014.
Taxes. Income tax expense increased $4.4 million to $326.2 million for the year ended December 31, 2015 from $321.8 million for the year ended December 31, 2014 due to an increase in taxable income, offset by a decline in the effective tax rate. The effective tax rate decreased to 35.0% for the year ended December 31, 2015 as compared to 38.4% for the year ended December 31, 2014. In 2015, the effective tax rate was impacted by a favorable tax ruling and a lapse in an applicable statute of limitations whereas the 2014 effective tax rate was negatively impacted by the nondeductible expense related to the earn-out obligation associated with the BrandLoyalty acquisition.
Year ended December 31, 2014 compared to the year ended December 31, 2013
Revenue. Total revenue increased $1.0 billion, or 23%, to $5.3 billion for the year ended December 31, 2014 from $4.3 billion for the year ended December 31, 2013. The net increase was due to the following:
Transaction. Revenue increased $8.4 million, or 3%, to $337.4 million for the year ended December 31, 2014. Other servicing fees charged to our credit cardholders increased $26.7 million due to increased volumes. This increase was offset by a decline of $12.3 million in merchant fees, which are transaction fees charged to the retailer, due to increased royalty payments associated with new clients and an increase in associated credit sales. AIR MILES reward miles issuance fees, for which we provide marketing and administrative services, also decreased $7.6 million due to the impact of an unfavorable Canadian exchange rate.
Redemption. Revenue increased $466.1 million, or 79%, to $1.1 billion for the year ended December 31, 2014 due to the BrandLoyalty acquisition, which added $538.9 million. These increases were offset by an unfavorable Canadian exchange rate, which negatively impacted redemption revenue by $36.6 million and the change in estimate of our breakage rate in prior years.
Finance charges, net. Revenue increased $347.0 million, or 18%, to $2.3 billion for the year ended December 31, 2014 due to a 21% increase in average credit card and loan receivables, which increased revenue $417.0 million through a combination of credit card portfolio acquisitions and strong credit cardholder spending. This increase was offset in part by an 80 basis point decline in yield due to the onboarding of new programs, which decreased revenue $70.0 million.
Marketing services. Revenue increased $149.3 million, or 12%, to $1.4 billion for the year ended December 31, 2014. Revenue was driven by the acquisition of Conversant and by marketing technology revenue, which increased $35.7 million as a result of both database builds completed for new clients that were placed in production, and an expansion of services provided to existing clients. Agency revenue increased $43.1 million due to demand in the automotive vertical. Marketing analytic services provided by LoyaltyOne also increased $25.1 million due to new client signings.
Other revenue. Revenue increased $13.1 million, or 8%, to $169.9 million for the year ended December 31, 2014 due to the BrandLoyalty acquisition, which added $6.8 million, and additional consulting services provided by Epsilon.
30

Cost of operations. Cost of operations increased $0.7 billion, or 26%, to $3.2 billion for the year ended December 31, 2014 as compared to $2.5 billion for the year ended December 31, 2013. The increase resulted from growth across each of our segments, including the following:
Within the LoyaltyOne segment, cost of operations increased $396.1 million due to the BrandLoyalty acquisition, which added $438.2 million. This increase was offset by a decrease in operating expenses in our Canadian operations of $42.0 million due to a decline in the Canadian exchange rate.
Within the Epsilon segment, cost of operations increased $129.6 million due to the Conversant acquisition, an increase in payroll and benefits expense of $52.9 million associated with an increase in the number of associates to support growth, including the onboarding of new clients, and an increase of $44.4 million in direct processing expenses, associated with the increase in revenue.
Within the Card Services segment, cost of operations increased by $150.3 million. Payroll and benefits expense increased $76.3 million associated with an increase in the number of associates to support growth, and marketing expenses increased $23.4 million due to an increase in credit sales. Other operating expenses increased by $50.6 million, as credit card processing expenses were higher due to an increase in the number of statements generated, and data processing costs increased due to growth in volumes.
Provision for loan loss. Provision for loan loss increased $79.4 million, or 23%, to $425.2 million for the year ended December 31, 2014 as compared to $345.8 million for the year ended December 31, 2013. The increase in the provision was a result of growth in credit card and loan receivables. The net charge-off rate was 4.2% for the year ended December 31, 2014 as compared to 4.7% for the year ended December 31, 2013. Delinquency rates were 4.0% of principal credit card and loan receivables at December 31, 2014 as compared to 4.2% at December 31, 2013.
General and administrative. General and administrative expenses increased $32.4 million, or 30%, to $141.5 million for the year ended December 31, 2014 as compared to $109.1 million for the year ended December 31, 2013 as a result of increased payroll and benefits costs of $21.7 million due to higher health care costs and discretionary benefits, as well as increased professional services fees of $12.6 million primarily related to the Conversant acquisition. Additionally, foreign currency exchange gains related to the contingent liability associated with the BrandLoyalty acquisition were offset in part by the related foreign currency exchange forward contract.
Earn-out obligation. On January 2, 2014, we acquired a 60% ownership interest in BrandLoyalty. The share purchase agreement contained an earn-out provision which resulted in an increase in contingent consideration of $105.9 million, which is included in operating expenses in our consolidated statements of income for the year ended December 31, 2014.
Depreciation and other amortization. Depreciation and other amortization increased $25.4 million, or 30%, to $109.7 million for the year ended December 31, 2014, as compared to $84.3 million for the year ended December 31, 2013, due to additional assets placed into service from capital expenditures and the Conversant and BrandLoyalty acquisitions, which added $6.2 million.
Amortization of purchased intangibles. Amortization of purchased intangibles increased $71.6 million, or 54%, to $203.4 million for the year ended December 31, 2014 as compared to $131.8 million for the year ended December 31, 2013. The increase relates to $74.0 million of additional amortization associated with the intangible assets from the Conversant and BrandLoyalty acquisitions as well as credit card portfolio acquisitions.
Interest expense, net. Total interest expense, net decreased $45.0 million, or 15%, to $260.5 million for the year ended December 31, 2014 as compared to $305.5 million for the year ended December 31, 2013. The decrease was due to the following:
Securitization funding costs. Securitization funding costs decreased $4.2 million as decreases with lower average interest rates being partially offset by higher average borrowings.
Interest expense on deposits. Interest on deposits increased $8.4 million as increases with higher average borrowings being offset in part by lower average interest rates.
Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased $49.2 million due to a $71.5 million decrease associated with the maturity of the convertible senior notes in August 2013 and May 2014. This decrease was offset by increases of $13.6 million related to the $600.0 million senior notes issued in July 2014, $6.9 million related to additional borrowings on our credit agreement and $7.2 million related to assumed debt from the BrandLoyalty acquisition.
Taxes. Income tax expense increased $24.6 million to $321.8 million for the year ended December 31, 2014 from $297.2 million for the year ended December 31, 2013 due primarily to an increase in taxable income and an increase in the effective tax rate. The effective tax rate for the year ended December 31, 2014 was 38.4% as compared to 37.5% for the year ended December 31, 2013 as a result of nondeductible expense related to the earn-out obligation associated with the BrandLoyalty acquisition, partially offset by both international expansion efforts and a valuation allowance release associated with the Conversant acquisition. Absent these items noted above, our effective income tax rate would have been 36.2%.
31

Segment Revenue and Adjusted EBITDA, net
 
Year Ended December 31,
   
% Change
 
 
 
2015
   
2014
   
2013
   
2015
to 2014
   
2014
to 2013
 
Revenue:
(in thousands, except percentages)
 
LoyaltyOne  
 
$
1,352,639
   
$
1,406,877
   
$
919,480
     
(4
)%
   
53
%
Epsilon  
   
2,140,676
     
1,522,423
     
1,380,344
     
41
     
10
 
Card Services  
   
2,974,365
     
2,395,076
     
2,034,724
     
24
     
18
 
Corporate/Other  
   
321
     
556
     
82
   
nm*
   
nm*
 
Eliminations  
   
(28,255
)
   
(21,992
)
   
(15,567
)
   
nm*
     
nm*
 
Total  
 
$
6,439,746
   
$
5,302,940
   
$
4,319,063
     
21
%
   
23
%
Adjusted EBITDA, net (1):
 
LoyaltyOne  
 
$
270,564
   
$
307,508
   
$
258,541
     
(12
)%
   
19
%
Epsilon  
   
508,370
     
309,100
     
289,699
     
64
     
7
 
Card Services  
   
1,068,686
     
920,892
     
791,662
     
16
     
16
 
Corporate/Other  
   
(119,350
)
   
(111,940
)
   
(90,125
)
   
7
     
24
 
Eliminations  
   
     
     
     
nm*
     
nm*
 
Total  
 
$
1,728,270
   
$
1,425,560
   
$
1,249,777
     
21
%
   
14
%
                                           
(1) Adjusted EBITDA, net is equal to net income, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and amortization, amortization of purchased intangibles, regulatory settlement, business acquisition costs and the earn-out obligation related to the BrandLoyalty acquisition less securitization funding costs, interest expense on deposits and adjusted EBITDA attributable to the non-controlling interest. For a reconciliation of adjusted EBITDA, net to net income, the most directly comparable GAAP financial measure, see "Use of Non-GAAP Financial Measures" included in this report.
* not meaningful.
Year ended December 31, 2015 compared to the year ended December 31, 2014
Revenue. Total revenue increased $1.1 billion, or 21%, to $6.4 billion for the year ended December 31, 2015 from $5.3 billion for the year ended December 31, 2014. The net increase was due to the following:
LoyaltyOne. Revenue decreased $54.2 million, or 4%, to $1.4 billion for year ended December 31, 2015. Revenue was negatively impacted by the decline in both the Euro and Canadian dollar relative to the U.S. dollar, which resulted in a $234.7 million decrease in revenue. This decrease was offset in part by a greater number of short-term loyalty programs in the market during the year ended December 31, 2015 as compared to the prior year.
Epsilon. Revenue increased $618.3 million, or 41%, to $2.1 billion for the year ended December 31, 2015. The Conversant acquisition contributed $537.9 million to the increase in revenue. Excluding the Conversant acquisition, Epsilon's revenue increased $80.4 million due to growth in services for existing clients, database builds completed and placed into production for new clients, and strength in the automotive vertical, which offset weakness in our agency offerings.
Card Services. Revenue increased $579.3 million, or 24%, to $3.0 billion for the year ended December 31, 2015. Finance charges, net increased by $567.6 million, driven by a 30% increase in average credit card and loan receivables due to strong cardholder spending and new client signings. Other servicing fees charged to our credit cardholders increased $12.7 million due to higher volumes.
32

Adjusted EBITDA, net. Adjusted EBITDA, net increased $0.3 billion, or 21%, to $1.7 billion for the year ended December 31, 2015 from $1.4 billion for the year ended December 31, 2014. The net increase was due to the following:
LoyaltyOne. Adjusted EBITDA, net decreased $36.9 million, or 12%, to $270.6 million for the year ended December 31, 2015. Adjusted EBITDA, net was negatively impacted by the decline in both the Euro and Canadian dollar relative to the U.S. dollar, which resulted in a $44.4 million decrease in adjusted EBITDA, net, offset in part by an increase in the number of short-term loyalty programs in the market as compared to the year ended December 31, 2014.
Epsilon. Adjusted EBITDA, net increased $199.3 million, or 64%, to $508.4 million for the year ended December 31, 2015. The Conversant acquisition contributed $184.1 million to the increase in adjusted EBITDA, net. Excluding the Conversant acquisition, adjusted EBITDA, net increased by $15.2 million driven by growth in services for existing clients and database builds completed and placed in production for new clients.
Card Services. Adjusted EBITDA, net increased $147.8 million, or 16%, to $1.1 billion for the year ended December 31, 2015. Adjusted EBITDA, net was positively impacted by the increase in finance charges, net, but offset in part by both an increase in operating expenses due to increased volumes and an increase in the provision for loan loss due to the increase in credit card and loan receivables.
Corporate/Other. Adjusted EBITDA, net decreased $7.4 million to a loss of $119.4 million for the year ended December 31, 2015 due primarily to an increase in payroll and benefits.
Year ended December 31, 2014 compared to the year ended December 31, 2013
Revenue. Total revenue increased $983.9 million, or 23%, to $5.3 billion for the year ended December 31, 2014 from $4.3 billion for the year ended December 31, 2013. The net increase was due to the following:
LoyaltyOne. Revenue increased $487.4 million, or 53%, to $1.4 billion for year ended December 31, 2014, as the BrandLoyalty acquisition contributed $545.8 million to revenue. Excluding the BrandLoyalty acquisition, LoyaltyOne revenue decreased $58.4 million as a result of a decline in the Canadian exchange rate, which negatively impacted revenue by $58.2 million.
Epsilon. Revenue increased $142.1 million, or 10%, to $1.5 billion for the year ended December 31, 2014. Agency revenue increased $46.2 million due to increased demand in the automotive vertical. Additionally, marketing technology revenue increased $43.7 million as a result of both database builds completed for new clients that were placed in production, and an expansion of services provided to existing clients. The Conversant acquisition added $45.5 million to revenue.
Card Services. Revenue increased $360.4 million, or 18%, to $2.4 billion for the year ended December 31, 2014. Finance charges, net increased by $347.0 million, driven by a 21% increase in average credit card and loan receivables due to strong cardholder spending and new client signings. Transaction revenue increased $14.3 million due to an increase in other servicing fees of $26.7 million, offset by a decrease in merchant fees of $12.3 million.
Adjusted EBITDA, net. Adjusted EBITDA, net increased $175.8 million, or 14%, to $1.4 billion for the year ended December 31, 2014 from $1.2 billion for the year ended December 31, 2013. The increase was due to the following:
LoyaltyOne. Adjusted EBITDA, net increased $49.0 million, or 19%, to $307.5 million for the year ended December 31, 2014. Adjusted EBITDA, net was positively impacted by the BrandLoyalty acquisition, which contributed $64.6 million, while a weaker Canadian dollar negatively impacted adjusted EBITDA, net by $16.8 million.
Epsilon. Adjusted EBITDA, net increased $19.4 million, or 7%, to $309.1 million for the year ended December 31, 2014. Adjusted EDITDA, net was positively impacted by increases in revenue as discussed above, but was negatively impacted by expenses incurred with the onboarding of new clients, as well as higher payroll and benefit costs associated with growth.
Card Services. Adjusted EBITDA, net increased $129.2 million, or 16%, to $920.9 million for the year ended December 31, 2014. Adjusted EBITDA, net was positively impacted by an increase in finance charges, net, but offset in part by both an increase in operating expenses due to increased volumes and an increase in the provision for loan loss due to an increase in credit card and loan receivables.
Corporate/Other. Adjusted EBITDA, net decreased $21.8 million to a loss of $111.9 million for the year ended December 31, 2014 related to increases in payroll and benefit costs of $21.7 million as a result of higher health care costs and discretionary benefits.
33

Asset Quality
Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our credit card and loan receivables, the success of our collection and recovery efforts, and general economic conditions.
Delinquencies. A credit card account is contractually delinquent when we do not receive the minimum payment by the specified due date on the cardholder's statement. Our policy is 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 we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.
The following table presents the delinquency trends of our credit card and loan receivables portfolio:
   
December 31,
2015
   
% of
Total
   
December 31,
2014
   
% of
Total
 
   
(In thousands, except percentages)
 
Receivables outstanding - principal  
 
$
13,196,421
     
100.0
%
 
$
10,762,498
     
100.0
%
Principal receivables balances contractually delinquent:
                               
31 to 60 days  
 
$
178,526
     
1.4
%
 
$
157,760
     
1.4
%
61 to 90 days  
   
124,095
     
0.9
     
93,175
     
0.9
 
91 or more days  
   
256,949
     
1.9
     
182,945
     
1.7
 
Total  
 
$
559,570
     
4.2
%
 
$
433,880
     
4.0
%
Net Charge-Offs. Our net charge-offs include the principal amount of losses from 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 net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period. Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated. The following table presents our net charge-offs for the periods indicated:
 
Year Ended December 31,
 
 
2015
   
2014
   
2013
 
 
(In thousands, except percentages)
 
Average credit card and loan receivables  
$
11,364,581
   
$
8,750,148
   
$
7,212,678
 
Net charge-offs of principal receivables  
  
512,260
     
370,703
     
335,547
 
Net charge-offs as a percentage of average credit card and loan receivables  
  
4.5
%
   
4.2
%
   
4.7
%

34

Liquidity and Capital Resources
Our primary sources of liquidity include cash generated from operating activities, our credit card securitization program, deposits issued by Comenity Bank and Comenity Capital Bank, our credit agreement and issuances of debt and equity securities. In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources.
Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, and stock repurchases.
We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
Cash Flow Activity
Operating Activities. We generated cash flow from operating activities of $1.7 billion and $1.3 billion for the years ended December 31, 2015 and 2014, respectively. The increase in cash flow from operating activities during the year ended December 31, 2015 as compared to the prior year was due to increased profitability as well as non-cash charges to income, such as the increase in the provision for loan loss due to the increase in credit card receivables and the increase in depreciation and amortization due to the BrandLoyalty and Conversant acquisitions in the prior year. Changes in the fair value of the contingent liability for the BrandLoyalty acquisition from the initial valuation are classified as an adjustment to cash flow from operating activities and, as such, the adjustment of $99.6 million during the first quarter of 2015 negatively impacted our cash flow from operating activities.
Investing Activities. Cash used in investing activities was $3.4 billion and $4.7 billion for the years ended December 31, 2015 and 2014, respectively. Significant components of investing activities are as follows:
Redemption settlement assets. Cash decreased $22.4 million and $59.7 million for the years ended December 31, 2015 and 2014, respectively. The increase in funding requirements resulting from changes in our estimate of breakage in December 2013 resulted in a greater use of cash for the year ended December 31, 2014.
Credit card and loan receivables funding. Cash decreased $2.9 billion and $2.3 billion for the years ended December 31, 2015 and 2014, respectively, due to growth in our credit card and loan receivables in both years.
Payments for acquired businesses, net of cash acquired. During the year ended December 31, 2015, we utilized cash of $45.4 million in the acquisition of two Netherlands-based loyalty marketing businesses. During the year ended December 31, 2014, we utilized cash of $1.2 billion in acquisitions, consisting of $259.5 million in the acquisition of our 60% ownership interest in BrandLoyalty on January 2, 2014 and $936.3 million in the Conversant acquisition on December 10, 2014.
Purchase of credit card portfolios. During the year ended December 31, 2015, we paid $243.2 million to acquire one credit card portfolio. During the year ended December 31, 2014, we paid $953.2 million to acquire four credit card portfolios.
Capital expenditures. Cash paid for capital expenditures was $191.7 million and $158.7 million for the years ended December 31, 2015 and 2014, respectively. We anticipate capital expenditures to continue to be approximately 3% of annual revenue.
Purchases of other investments. Our purchases of other investments were $38.8 million and $125.7 million for the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2014, we purchased $100.1 million of U.S. Treasury bonds.
Financing Activities. Cash provided by financing activities was $1.8 billion and $3.5 billion for the years ended December 31, 2015 and 2014, respectively. For the year ended December 31, 2015, the primary sources of cash were the issuance of the new term loan of $200.0 million in September 2015, the €300.0 million issuance of senior notes due 2023 in November 2015 and borrowings under our debt agreements, including the asset-backed conduit facilities. These sources were partially offset by uses of $951.6 million to acquire treasury shares, $205.9 million to settle the BrandLoyalty contingent liability and $87.4 million to acquire the additional 10% ownership in BrandLoyalty. For the year ended December 31, 2014, cash provided by financing activities was primarily from new borrowings, including the $600.0 million issuance of senior notes due 2022 in July 2014 and $1.4 billion in additional term loans in December 2014, as well as a net increase in asset-backed notes and deposits to fund the acquisition and growth of our credit card and loan receivables. During 2014, we also acquired $286.6 million in treasury shares and settled our 2014 convertible senior notes in cash.
35

Debt
Long-term and Other Debt
In September 2015, we amended our credit agreement, or 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. Subsequent to the amendment, our 2013 Credit Facility provides for $2.85 billion in term loans, subject to certain principal repayments, and a $1.3 billion revolving line of credit. As of December 31, 2015, we had $465.0 million in borrowings under the revolving line of credit and total availability of $835.0 million. Our total leverage ratio, as defined in our credit agreement, was 2.7 to 1 at December 31, 2015, as compared to the maximum covenant ratio of 3.5 to 1.
In August 2015, BrandLoyalty entered into an amended and restated credit agreement, or the BrandLoyalty credit agreement, which 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 December 31, 2015, the amount outstanding under the BrandLoyalty credit agreement was €64.2 million ($69.7 million).
In November 2015, we issued and sold €300.0 million aggregate principal amount of 5.25% senior notes due November 15, 2023, or the Senior Notes due 2023. The Senior Notes due 2023 accrue interest on the principal amount at the rate of 5.25% per annum from November 19, 2015, payable semi-annually in arrears, on May 15 and November 15 of each year, beginning on May 15, 2016. The amount outstanding under the Senior Notes due 2023 was €300.0 million ($325.8 million) as of December 31, 2015.
See Note 11, "Debt," of the Notes to Consolidated Financial Statements for additional information regarding our debt.
As of December 31, 2015, we were in compliance with our debt covenants.
Deposits
We utilize money market deposits and certificates of deposit to finance the operating activities and fund securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank.
Comenity Bank and Comenity Capital Bank offer demand deposit programs through contractual arrangements with securities brokerage firms. As of December 31, 2015, Comenity Bank and Comenity Capital Bank had $1.4 billion in money market deposits outstanding with interest rates ranging from 0.22% to 0.66%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.
Comenity Bank and Comenity Capital Bank issue certificates of deposit in denominations of $100,000 and $1,000, respectively, in various maturities ranging between three months and seven years and with effective annual interest rates ranging from 0.43% to 2.80%. As of December 31, 2015, we had $4.3 billion of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.
Securitization Program
We sell a majority of the credit card receivables originated by Comenity Bank to WFN Credit Company, LLC, which in turn sells them to World Financial Network Credit Card Master Trust, or Master Trust I, World Financial Network Credit Card Master Note Trust and World Financial Network Credit Card Master Trust III, or Master Trust III, or collectively, the WFN Trusts, as part of our credit card securitization program, which has been in existence since January 1996. We also sell our credit card receivables originated by Comenity Capital Bank to World Financial Capital Credit Company, LLC, which in turn sells them to World Financial Capital Master Note Trust, or the WFC Trust. These securitization programs are the primary vehicle through which we finance Comenity Bank's and Comenity Capital Bank's credit card receivables. Historically, we have used both public and private term asset-backed securitization transactions as well as private conduit facilities as sources of funding for our credit card receivables. Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.
As of December 31, 2015, the WFN Trusts and the WFC Trust had approximately $10.6 billion of securitized credit card receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the WFN Trusts and the WFC Trust and by the performance of the credit card receivables in these credit card securitization trusts. We have secured and continue to secure the necessary commitments to fund our portfolio of securitized credit card receivables originated by Comenity Bank and Comenity Capital Bank. However, certain of these commitments are short-term in nature and subject to renewal. There is not a guarantee that these funding sources, when they mature, will be renewed on similar terms or at all as they are dependent on the asset-backed securitization markets at the time.
36

We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card receivables through Master Trust I, Master Trust III and the WFC Trust. As of December 31, 2015, total capacity under the conduit facilities was $3.0 billion, of which $2.2 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets. Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider. The conduits have varying maturities from March 2017 to December 2017 with variable interest rates ranging from 1.34% to 1.57% as of December 31, 2015.
The following table shows the maturities of borrowing commitments as of December 31, 2015 for the WFN Trusts and the WFC Trust by year:
   
2016
   
2017
   
2018
   
2019
   
2020 and Thereafter
   
Total
 
   
(In thousands)
 
Term notes  
 
$
1,050,000
   
$
950,000
   
$
991,000
   
$
802,166
   
$
475,000
   
$
4,268,166
 
Conduit facilities (1)  
   
     
2,950,000
     
     
     
     
2,950,000
 
Total (2)  
 
$
1,050,000
   
$
3,900,000
   
$
991,000
   
$
802,166
   
$
475,000
   
$
7,218,166
 
                                                   
(1) Amount represents borrowing capacity, not outstanding borrowings.
(2) Total amounts do not include $2.1 billion of debt issued by the credit card securitization trusts, which was retained by us and has been eliminated in the consolidated financial statements.
Early amortization events as defined within each asset-backed securitization transaction are generally driven by asset performance. We do not believe it is reasonably likely that an early amortization event will occur due to asset performance. However, if an early amortization event were declared, the trustee of the particular credit card securitization trust would retain the interest in the receivables along with the excess interest income that would otherwise be paid to our bank subsidiary until the credit card securitization investors were fully repaid. The occurrence of an early amortization event would significantly limit or negate our ability to securitize additional credit card receivables.
See Note 11, "Debt," of the Notes to Consolidated Financial Statements for additional information regarding our securitized debt.
Stock Repurchase Programs
On January 1, 2015, our Board of Directors authorized a stock repurchase program to acquire up to $600.0 million of our outstanding common stock from January 1, 2015 through December 31, 2015. On April 15, 2015, the Board of Directors authorized an increase to the stock repurchase program to acquire an additional $400.0 million of our outstanding common stock through December 31, 2015, for a total authorization of $1.0 billion. During the year ended December 31, 2015, we repurchased approximately 3.4 million shares of our common stock for an aggregate amount of $951.6 million.
On January 1, 2016, our Board of Directors authorized a stock repurchase program to acquire up to $500.0 million of our outstanding common stock from January 1, 2016 through December 31, 2016. On February 15, 2016, our Board of Directors authorized an increase to the stock repurchase program originally approved on January 1, 2016 to acquire an additional $500.0 million of our outstanding common stock through December 31, 2016, for a total authorization of $1.0 billion.
See Note 16, "Stockholders' Equity," of the Notes to Consolidated Financial Statements for additional information regarding our stock repurchases.
37

Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments. Our future cash payments associated with our contractual obligations and commitments to make future payments by type and period are summarized below:
   
2016
     
2017 & 2018
     
2019 & 2020
   
2021 &
Thereafter
   
Total
 
   
(In thousands)
 
Deposits (1)  
 
$
3,040,048
   
$
1,732,427
   
$
974,563
   
$
24,825
   
$
5,771,863
 
Non-recourse borrowings of consolidated securitization entities (1)  
   
1,150,464
     
4,281,446
     
1,303,590
     
     
6,735,500
 
Long-term and other debt (1)  
   
548,517
     
1,066,387
     
3,214,516
     
1,026,775
     
5,856,195
 
Operating leases  
   
91,212
     
142,546
     
108,818
     
269,377
     
611,953
 
Software licenses  
   
342
     
253
     
     
     
595
 
ASC 740 obligations (2)  
   
     
     
     
     
 
Purchase obligations (3)  
   
239,736
     
136,455
     
16,840
     
1,605
     
394,636
 
Total  
 
$
5,070,319
   
$
7,359,514
   
$
5,618,327
   
$
1,322,582
   
$
19,370,742
 
                                           
(1) The deposits, non-recourse borrowings of consolidated securitization entities and long-term and other debt represent our estimated debt service obligations, including both principal and interest. Interest was based on the interest rates in effect as of December 31, 2015, applied to the contractual repayment period.
(2) ASC 740 obligations do not reflect unrecognized tax benefits of $185.9 million, of which the timing remains uncertain.
(3) Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding and specifying all significant terms, including the following: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and approximate timing of the transaction. The purchase obligation amounts disclosed above represent estimates of the minimum for which we are obligated and the time period in which cash outflows will occur. Purchase orders and authorizations to purchase that involve no firm commitment from either party are excluded from the above table. Purchase obligations include purchase commitments under our AIR MILES Reward Program, minimum payments under support and maintenance contracts and agreements to purchase other goods and services.
We believe that we will have access to sufficient resources to meet these commitments.
Inflation and Seasonality
Although we cannot precisely determine the impact of inflation on our operations, we do not believe that we have been significantly affected by inflation. For the most part, we have relied on operating efficiencies from scale and technology, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses. Our revenues, earnings and cash flows are affected by increased consumer spending patterns leading up to and including the holiday shopping period in the third and fourth quarter and, to a lesser extent, during the first quarter as credit card and note receivable balances are paid down.
Legislative and Regulatory Matters
Comenity Bank is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. Comenity Capital Bank is subject to regulatory capital requirements administered by both the FDIC and the State of Utah. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Comenity Bank and Comenity Capital Bank must meet specific capital guidelines that involve quantitative measures of its assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by these regulators about components, risk weightings and other factors. Both Comenity Bank and Comenity Capital Bank are limited in the amounts that they can pay as dividends to us.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets. Under the regulations, a "well capitalized" institution must have a Common Equity Tier 1 capital ratio of at least 6.5%, a Tier 1 capital ratio of at least 8%, a total capital ratio of at least 10% and a leverage ratio of at least 5% and not be subject to a capital directive order. An "adequately capitalized" institution must have a Common Equity Tier 1 capital ratio of at least 4.5%, a Tier 1 capital ratio of at least 6%, a total capital ratio of at least 8% and a leverage ratio of at least 4%, but 3% is allowed in some cases. Under these guidelines, Comenity Bank and Comenity Capital Bank are considered well capitalized. As of December 31, 2015, Comenity Capital Bank's Common Equity Tier 1 capital ratio was 13.0%, Tier 1 capital ratio was 13.0%, total capital ratio was 14.3% and leverage ratio was 13.3%, and Comenity Capital Bank was not subject to a capital directive order. As of December 31, 2015, Comenity Bank's Common Equity Tier 1 capital ratio was 14.4%, Tier 1 capital ratio was 14.4%, total capital ratio was 15.7% and leverage ratio was 14.8%, and Comenity Bank was not subject to a capital directive order.
38

On September 8, 2015, Comenity Bank and Comenity Capital Bank each entered into a consent order with the FDIC in settlement of the FDIC's review of Comenity Bank and Comenity Capital Bank's practices regarding the marketing, promotion and sale of certain add-on products. Comenity Bank and Comenity Capital Bank entered into the consent orders for the purpose of resolving these matters without admitting or denying any violations of law or regulation set forth in the orders.
Under the consent orders, Comenity Bank and Comenity Capital Bank will collectively provide restitution of approximately $61.5 million to eligible customers for actions occurring between January 2008 and September 2014. In addition, Comenity Bank and Comenity Capital Bank collectively agreed to pay $2.5 million in civil money penalties to the FDIC. The civil penalties to the FDIC have been paid as of December 31, 2015, with disbursement of restitution to eligible customers expected to begin in the first quarter of 2016. Adequate provisions were made for these costs in our consolidated financial statements as of December 31, 2015. Before the FDIC's review began, Comenity Bank and Comenity Capital Bank made changes to these add-on products, and they believe their current business practices substantially address the FDIC's concerns; however, Comenity Bank and Comenity Capital Bank also agreed to make further enhancements to their compliance and other processes related to the marketing, promotion and sale of these add-on products.
In August 2014, the SEC adopted a number of rules that will change the disclosure, reporting and offering process for publicly registered offerings of asset-backed securities, including those offered under our credit card securitization program. The adopted rules finalize rules that were originally proposed on April 7, 2010 and re-proposed on July 26, 2011. A number of rules proposed by the SEC in 2010 and 2011, such as requiring group-level data for the underlying assets in credit card securitizations, were not adopted in the final rulemaking but may be implemented by the SEC in the future. We are still assessing the impact of the new rules, and the possibility of continued rulemaking, on our publicly offered credit card securitization program. The SEC also issued an advance notice of proposed rulemaking relating to the exemptions that our credit card securitization trusts relied on in our credit card securitization program to avoid registration as investment companies. The form that these rules may ultimately take is uncertain at this time, but such rules may impact our ability or desire to issue asset-backed securities in the future.
The FDIC, the SEC, the Federal Reserve and certain other federal regulators have adopted regulations that would mandate a minimum five percent risk retention requirement for securitizations that are issued on and after December 24, 2016. We have not yet determined whether our existing forms of risk retention will satisfy the final regulatory requirements or whether structural changes will be necessary. Such risk retention requirements may impact our ability or desire to issue asset-backed securities in the future.
Discussion of Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting policies that are described in the Notes to Consolidated Financial Statements. The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our judgments and estimates in determination of our financial condition and operating results. Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management's most subjective judgments. The primary critical accounting estimates are described below.
Allowance for Loan Loss.
We maintain an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The estimate of our allowance for loan loss considers uncollectible principal, interest and fees reflected in the credit card and loan receivables. While our estimation process includes historical data and analysis, there is a significant amount of judgment applied in selecting inputs and analyzing the results to determine the allowance for loan loss. We use a migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. The considerations in these analyses include past and current credit card and loan performance, seasoning and growth, account collection strategies, economic conditions, bankruptcy filings, policy changes, payment rates and forecasting uncertainties. Given the same information, others may reach different reasonable estimates.
If we used different assumptions in estimating net losses that could be incurred, the impact to the allowance for loan loss could have a material effect on our consolidated financial condition and results of operations. For example, a 100 basis point change in our estimate of incurred net loan losses could have resulted in a change of approximately $135.3 million in the allowance for loan loss at December 31, 2015, with a corresponding change in the provision for loan loss.
39

Revenue Recognition.
We recognize revenue when all of the following criteria are satisfied: (i) persuasive evidence of an arrangement exists; (ii) the price is fixed or determinable; (iii) collectability is reasonably assured; and (iv) the service has been performed or the product has been delivered.
We also enter into contracts that contain multiple deliverables. Judgment is required to properly identify the accounting units of the multiple deliverable transactions and to determine the manner in which revenue should be allocated among the accounting units. Estimates may be utilized in determining the fair value of each element using the selling price hierarchy price, as applicable. Moreover, judgment is used to interpret the terms and determine when all the criteria of revenue recognition have been met in order for revenue recognition to occur in the appropriate accounting period. While changes in the allocation of the estimated sales price between the units of accounting will not affect the amount of total revenue recognized for a particular sales arrangement, any material changes in these allocations could impact the timing of revenue recognition.
AIR MILES Reward Program. The AIR MILES Reward Program collects fees from its sponsors based on the number of AIR MILES reward miles issued and, in limited circumstances, the number of AIR MILES reward miles redeemed. Because management has determined that the earnings process is not complete at the time an AIR MILES reward mile is issued, the recognition of redemption and service revenue is deferred.
Under certain of our contracts, a portion of the proceeds is paid to us upon the issuance of AIR MILES reward miles and a portion is paid at the time of redemption and therefore, we do not have a redemption obligation related to these contracts. Revenue is recognized at the time of redemption. Under such contracts, the proceeds received at issuance are initially deferred as service revenue and revenue is amortized over the estimated life of an AIR MILES reward mile.
The adoption of Accounting Standards Update, or ASU, 2009-13, "Multiple-Deliverable Revenue Arrangements," established the use of a three-level hierarchy when establishing the selling price and the relative selling price method when allocating arrangement consideration and eliminated the use of the residual method for new sponsor agreements entered into, or existing sponsor agreements that are materially modified, after January 1, 2011. Effective January 1, 2015, all of our sponsor contracts are accounted for under ASU 2009-13.
Proceeds from the issuance of AIR MILES reward miles are allocated to three elements, the redemption element, the service element, and the brand element, based on the relative selling price method. Redemption revenue is recognized as the AIR MILES reward miles are redeemed; service revenue is recognized over the estimated life of an AIR MILES reward mile, or 42 months. The brand element is recognized as AIR MILES reward miles are issued.
The fair value of each element was determined using management's estimated selling price for that respective element. The objective of using the estimated selling price methodology is to determine the price at which we would transact a sale if the product or service were sold on a stand-alone basis. Accordingly, we determine our best estimate of selling price by considering multiple inputs and methods, including discounted cash flows, the estimated brand value and the number of AIR MILES reward miles issued and redeemed. We estimated the selling prices and volumes over the term of the respective agreements in order to determine the allocation of proceeds to each of the multiple elements delivered.
The amount of revenue recognized is subject to our estimate of breakage, or those AIR MILES reward miles that we estimate will remain unredeemed by the collector base, and the estimated life of an AIR MILES reward mile.
Breakage and the life of an AIR MILES reward mile are based on management's estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure. There have been no changes to management's estimate of the life of an AIR MILES reward miles in the periods presented in the financial statements. We estimate that a change to the estimated life of an AIR MILES reward mile of one month would impact revenue by approximately $5 million. Based on the analysis of historical redemption trends and additional statistical analysis performed, including the impact of changes in the program structure, our estimate of breakage was 26% for the years ended December 31, 2015 and 2014 and 27% for the year ended December 31, 2013.
As of December 31, 2015, we had $844.9 million in deferred revenue related to the AIR MILES Reward Program that will be recognized in the future. Further information is provided in Note 13, "Deferred Revenue," of the Notes to Consolidated Financial Statements.
Should there be a change in collector behavior with the advent of expiry, or redemptions exceed our expectations, this could result in a change in our estimates of breakage or life of an AIR MILES reward mile.
Income Taxes.
We account for uncertain tax positions in accordance with Accounting Standards Codification, or ASC, 740, "Income Taxes." The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of and guidance surrounding, income tax laws and regulations change over time. Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 19, "Income Taxes," of the Notes to Consolidated Financial Statements for additional detail on our uncertain tax positions and further information regarding ASC 740.
Recent Accounting Pronouncements
See "Recently Issued Accounting Standards" under Note 2, "Summary of Significant Accounting Policies," of the Notes to Consolidated Financial Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition, results of operations or cash flow.
40

Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risks include interest rate risk, credit risk and foreign currency exchange rate risk.
Interest Rate Risk. Interest rate risk affects us directly in our borrowing activities. Our interest expense, net was $330.2 million for 2015. To manage our risk from market interest rates, we actively monitor interest rates and other interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income and cash flow. To achieve this objective, we manage our exposure to fluctuations in market interest rates through the use of fixed-rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In addition, we may enter into derivative instruments such as interest rate swaps and interest rate caps to mitigate our interest rate risk on related financial instruments or to lock the interest rate on a portion of our variable debt. We do not enter into derivative or interest rate transactions for trading or other speculative purposes.
The approach we use to quantify interest rate risk is a sensitivity analysis, which we believe best reflects the risk inherent in our business. This approach calculates the impact on pre-tax income from an instantaneous and sustained increase in interest rates of 1%. In 2015, a 1% increase in interest rates would have resulted in an increase to our interest expense of approximately $76 million. Conversely, a corresponding decrease in interest rates would have resulted in a decrease to interest expense of approximately $59 million. Our use of this methodology to quantify the market risk of financial instruments should not be construed as an endorsement of its accuracy or the appropriateness of the related assumptions.
Credit Risk. We are exposed to credit risk relating to the credit card loans we make to our clients' customers. Our credit risk relates to the risk that consumers using the private label or co-brand credit cards that we issue will not repay their revolving credit card loan balances. To minimize our risk of credit card loan write-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing. We also utilize a proprietary collection scoring algorithm to assess accounts for collections efforts if they become delinquent; after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.
Foreign Currency Exchange Rate Risk. We are exposed to fluctuations in the exchange rate between the U.S. and the Canadian dollar and between the U.S. dollar and the Euro. For the year ended December 31, 2015, an additional 10% decrease in the strength of the Canadian dollar versus the U.S. dollar and the Euro versus the U.S. dollar would have resulted in an additional decrease in pre-tax income of approximately $17 million and $5 million, respectively. Conversely, a corresponding increase in the strength of the Canadian dollar or the Euro versus the U.S. dollar would result in a comparable increase to pre-tax income in these periods.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements begin on page F-1 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
41

Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2015, 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 December 31, 2015, 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.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting. In conducting this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Based on this evaluation, management, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was effective as of December 31, 2015.
The effectiveness of internal control over financial reporting as of December 31, 2015, has been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also audited our consolidated financial statements. Deloitte & Touche's attestation report on the effectiveness of our internal control over financial reporting appears on page F-3.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
42

PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Incorporated by reference to the Proxy Statement for the 2016 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2015.
Item 11. Executive Compensation.
Incorporated by reference to the Proxy Statement for the 2016 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to the Proxy Statement for the 2016 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2015.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference to the Proxy Statement for the 2016 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2015.
Item 14. Principal Accounting Fees and Services.
Incorporated by reference to the Proxy Statement for the 2016 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2015.

43

PART IV
Item 15.
Exhibits, Financial Statement Schedules.
a) The following documents are filed as part of this report:
(1) Financial Statements
(2) Financial Statement Schedule
(3) The following exhibits are filed as part of this Annual Report on Form 10-K or, where indicated, were previously filed and are hereby incorporated by reference.
           
Incorporated by Reference
Exhibit No.
 
Filer
 
Description
 
Form
 
Exhibit
 
Filing Date
                     
3.1
 
(a)
 
Second Amended and Restated Certificate of Incorporation of the Registrant.
 
S-1
 
3.1
 
3/3/00
                     
3.2
 
(a)
 
Certificate of Amendment to the Second Amended and Restated Certificate of Incorporation of the Registrant.
 
8-K
 
3.1
 
6/7/13
                     
3.3
 
(a)
 
Fifth Amended and Restated Bylaws of the Registrant.
 
8-K
 
3.1
 
2/1/16
                     
4
 
(a)
 
Specimen Certificate for shares of Common Stock of the Registrant.
 
10-Q
 
4
 
8/8/03
                     
10.1
 
(a)
 
Office Lease between Nodenble Associates, LLC and ADS Alliance Data Systems, Inc., dated as of October 1, 2009.
 
10-K
 
10.1
 
3/1/10
                     
10.2
 
(a)
 
Fourth Amendment to Office Lease between FSP One Legacy Circle LLC (as successor in interest to Nodenble Associates, LLC) and ADS Alliance Data Systems, Inc. dated as of June 15, 2011.
 
10-K
 
10.2
 
2/27/12
                     
10.3
 
(a)
 
Office Lease, dated as of June 7, 2013 between The Shops at Legacy (North) L.L.C. and ADS Alliance Data Systems, Inc.
 
10-K
 
10.3
 
2/27/15
                     
10.4
 
(a)
 
Lease Agreement, dated as of May 19, 2010 between Brandywine Operating Partnership, L.P. and ADS Alliance Data Systems, Inc.
 
10-Q
 
10.13
 
8/9/10
                     
10.5
 
(a)
 
Office Lease between Office City, Inc. and World Financial Network National Bank, dated December 24, 1986, and amended January 19, 1987, May 11, 1988, August 4, 1989 and August 18, 1999.
 
S-1
 
10.17
 
1/13/00
                     
10.6
 
(a)
 
Fifth Amendment to Office Lease between Office City, Inc. and World Financial Network National Bank, dated March 29, 2004.
 
10-K
 
10.6
 
2/28/08
                     
10.7
 
(a)
 
Lease Modification Agreement between Office City, Inc. and Comenity Servicing LLC, successor in interest to World Financial Network National Bank, dated October 17, 2013.
 
10-K
 
10.6
 
2/28/14
                     
10.8
 
(a)
 
Lease Agreement by and between Continental Acquisitions, Inc. and World Financial Network National Bank, dated July 2, 1990, and amended September 11, 1990, November 16, 1990 and February 18, 1991.
 
S-1
 
10.18
 
1/13/00
                     
10.9
 
(a)
 
Fourth Amendment to Lease Agreement by and between Continental Acquisitions, Inc. and World Financial Network National Bank, dated June 1, 2000.
 
10-Q
 
10.1
 
5/14/03
44

           
Incorporated by Reference
Exhibit No.
 
Filer
 
Description
 
Form
 
Exhibit
 
Filing Date
                     
10.10
 
(a)
 
Fifth Amendment to Lease Agreement by and between Continental Acquisitions, Inc. and World Financial Network National Bank, dated June 30, 2001.
 
10-K
 
10.10
 
3/3/06
                     
10.11
 
(a)
 
Sixth Amendment to Lease Agreement by and between Continental Acquisitions, Inc. and World Financial Network National Bank, dated January 27, 2006.
 
10-K
 
10.10
 
2/28/08
                     
10.12
 
(a)
 
Letter Agreement by and between Continental Realty, Ltd. and ADS Alliance Data Systems, Inc., dated as of October 29, 2009.
 
10-K
 
10.10
 
3/1/10
                     
10.13
 
(a)
 
Seventh Amendment to Lease Agreement by and among JEL/220 W. Schrock, LLC, FEK/220 W. Schrock, LLC, CP/220 W. Schrock, LLC, NRI 220 Schrock, LLC, ADS Alliance Data Systems, Inc. and Alliance Data Systems Corporation, dated as of January 14, 2010.
 
10-K
 
10.10
 
2/28/11
                     
10.14
 
(a)
 
Eighth Amendment to Lease by and between JEL/220 W. Schrock, LLC, FEK/220 W. Schrock, LLC, CP/220 W. Schrock, LLC, NRI 220 Schrock, LLC, Comenity Servicing LLC, successor in interest to ADS Alliance Data Systems, Inc., and Alliance Data Systems Corporation, dated as of December 3, 2013.
 
10-K
 
10.13
 
2/28/14
                     
10.15
 
(a)
 
Lease Agreement by and between 601 Edgewater LLC and Epsilon Data Management, Inc., dated July 30, 2002.
 
10-K
 
10.17
 
3/4/05
                     
10.16
 
(a)
 
First Amendment to Lease Agreement by and between 601 Edgewater LLC and Epsilon Data Management, Inc., dated August 29, 2007.
 
10-K
 
10.13
 
2/28/08
                     
10.17
 
(a)
 
Second Amendment to Lease Agreement by and between 601 Edgewater LLC and Epsilon Data Management, LLC, dated October 3, 2008.
 
10-K
 
10.13
 
3/2/09
                     
10.18
 
(a)
 
Third Amendment to Lease Agreement by and between 601 Edgewater LLC and Epsilon Data Management, LLC, dated November 10, 2009.
 
10-K
 
10.14
 
3/1/10
                     
10.19
 
(a)
 
Lease by and between 601 Edgewater LLC and Epsilon Data Management, LLC, dated August 16, 2011.
 
10-K
 
10.19
 
2/27/15
                     
10.20
 
(a)
 
Lease Agreement by and between Sterling Direct, Inc. and Sterling Properties, L.L.C., dated September 22, 1997, as subsequently assigned.
 
10-K
 
10.18
 
3/4/05
                     
10.21
 
(a)
 
First Amendment to Lease by and between Bekins Properties LLC (as successor in interest to Sterling Properties LLC) and Epsilon Data Management, LLC (as successor in interest to Sterling Direct, Inc.), dated as of September 1, 2011.
 
10-K
 
10.17
 
2/27/12
                     
10.22
 
(a)
 
Second Amendment to Lease by and between RGA Real Estate Holdings, LLC (as successor in interest to Bekins Properties LLC) and Epsilon Data Management, LLC (as successor in interest to Sterling Direct, Inc.), dated as of September 30, 2014.
 
10-K
 
10.22
 
2/27/15
                     
10.23
 
(a)
 
Lease between 592423 Ontario Inc. and Loyalty Management Group Canada, Inc., dated November 14, 2005.
 
10-K
 
10.18
 
2/26/07
                     
10.24
 
(a)
 
Lease Amending Agreement by and between Dundeal Canada (GP) Inc. (as successor in interest to 592423 Ontario Inc.) and LoyaltyOne, Inc., dated as of May 21, 2009.
 
10-K
 
10.19
 
3/1/10
45

           
Incorporated by Reference
Exhibit No.
 
Filer
 
Description
 
Form
 
Exhibit
 
Filing Date
                     
10.25
 
(a)
 
Lease Agreement by and between ADS Place Phase I, LLC and ADS Alliance Data Systems, Inc. dated August 25, 2006.
 
10-K
 
10.20
 
2/26/07
                     
10.26
 
(a)
 
Third Lease Amendment by and between ADS Place Phase I, LLC and ADS Alliance Data Systems, Inc. dated as of November 1, 2007.
 
10-K
 
10.21
 
3/1/10
                     
10.27
 
(a)
 
Office Lease by and between BRE/COH OH LLC and ADS Alliance Data Systems, Inc. dated as of July 26, 2012, as amended.
 
10-K
 
10.26
 
2/28/14
                     
10.28
 
(a)
 
Lease between 2725312 Canada Inc. and Loyalty Management Group Canada Inc. dated as of February 26, 2008, as amended.
 
10-K
 
10.29
 
2/27/12
                     
10.29
 
(a)
 
Industrial Building Lease between Aspen Marketing Services, Inc. (as successor in interest to Aspen Marketing, Inc.) and A. & A. Conte Joint Venture Limited Partnership dated June 3, 2003, as amended.
 
10-K
 
10.30
 
2/27/12
                     
10.30
 
(a)
 
Fourth Amendment to Industrial Building Lease between Aspen Marketing Services, LLC (as successor in interest to Aspen Marketing Services, Inc.) and A. & A. Conte Joint Venture Limited Partnership dated March 26, 2012.
 
10-K
 
10.26
 
2/28/13
                     
10.31
 
(a)
 
Lease Agreement between NOP Cottonwood 2795, LLC and ADS Alliance Data Systems, Inc. dated as of September 21, 2010, as amended.
 
10-K
 
10.28
 
2/28/13
                     
10.32
 
(a)
 
Third Amendment to Lease Agreement between NOP Cottonwood 2795, LLC and Comenity Servicing LLC (successor in interest to ADS Alliance Data Systems, Inc.), dated as of March 11, 2014.
 
10-K
 
10.33
 
2/27/15
                     
10.33
 
(a)
 
Lease Agreement between Piedmont Operating Partnership, L.P. and Epsilon Data Management, LLC dated as of August 1, 2013.
 
10-K
 
10.34
 
2/27/15
                     
10.34