UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2017.
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: 000-55577
AFFINION GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 16-1732155 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification Number) |
6 High Ridge Park
Stamford, CT 06905
(Address, including zip code, of principal executive offices)
(203) 956-1000
(Registrant’s telephone number, including area code)
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☐ |
| Accelerated filer |
| ☐ |
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Non-accelerated filer |
| ☒ (Do not check if a smaller reporting company) |
| Smaller reporting company |
| ☐ |
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| Emerging growth company |
| ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 25, 2017, the number of shares outstanding of the registrant’s (1) Common Stock, $0.01 par value, was 9,157,071, (2) Class C Common Stock, $0.01 par value, was 433,803, and (3) Class D Common Stock, $0.01 par value, was 456,643.
i
AFFINION GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2017 AND DECEMBER 31, 2016
(In millions, except share amounts)
|
| September 30, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 65.3 |
|
| $ | 37.7 |
|
Restricted cash |
|
| 30.1 |
|
|
| 26.1 |
|
Receivables (net of allowances for doubtful accounts of $5.8 and $3.0, respectively) |
|
| 153.2 |
|
|
| 135.9 |
|
Profit-sharing receivables from insurance carriers |
|
| 26.0 |
|
|
| 18.8 |
|
Prepaid commissions |
|
| 36.4 |
|
|
| 33.9 |
|
Other current assets |
|
| 71.9 |
|
|
| 70.6 |
|
Total current assets |
|
| 382.9 |
|
|
| 323.0 |
|
Property and equipment, net |
|
| 108.4 |
|
|
| 105.5 |
|
Contract rights and list fees, net |
|
| 17.8 |
|
|
| 16.4 |
|
Goodwill |
|
| 224.2 |
|
|
| 218.2 |
|
Other intangibles, net |
|
| 36.4 |
|
|
| 41.5 |
|
Other non-current assets |
|
| 26.3 |
|
|
| 34.3 |
|
Total assets |
| $ | 796.0 |
|
| $ | 738.9 |
|
|
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Liabilities and Deficit |
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Current liabilities: |
|
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|
|
|
Current portion of long-term debt |
| $ | 13.4 |
|
| $ | 7.8 |
|
Accounts payable and accrued expenses |
|
| 390.2 |
|
|
| 327.6 |
|
Deferred revenue |
|
| 51.5 |
|
|
| 54.8 |
|
Income taxes payable |
|
| 3.8 |
|
|
| 2.7 |
|
Total current liabilities |
|
| 458.9 |
|
|
| 392.9 |
|
Long-term debt |
|
| 1,832.9 |
|
|
| 1,855.8 |
|
Deferred income taxes |
|
| 29.4 |
|
|
| 26.9 |
|
Deferred revenue |
|
| 4.3 |
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|
| 4.8 |
|
Other long-term liabilities |
|
| 32.1 |
|
|
| 31.4 |
|
Total liabilities |
|
| 2,357.6 |
|
|
| 2,311.8 |
|
Commitments and contingencies |
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Deficit: |
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Common Stock, $0.01 par value, 520,000,000 shares authorized, 9,157,071 shares and 9,093,330 shares issued and outstanding |
|
| 0.1 |
|
|
| 0.1 |
|
Class C Common Stock, $0.01 par value, 10,000,000 shares authorized, 429,039 shares and 429,039 shares issued and 427,955 shares and 427,955 shares outstanding |
| — |
|
| — |
| ||
Class D Common Stock, $0.01 par value, 10,000,000 shares authorized, 451,623 shares and 451,623 shares issued and 450,482 shares and 450,482 shares outstanding |
| — |
|
| — |
| ||
Additional paid in capital |
|
| 411.7 |
|
|
| 409.5 |
|
Warrants |
|
| 31.1 |
|
| — |
| |
Accumulated deficit |
|
| (1,995.0 | ) |
|
| (1,966.5 | ) |
Accumulated other comprehensive income |
|
| (9.7 | ) |
|
| (15.7 | ) |
Treasury stock, at cost, 1,084 Class C and 1,141 Class D shares |
|
| (1.1 | ) |
|
| (1.1 | ) |
Total Affinion Group Holdings, Inc. deficit |
|
| (1,562.9 | ) |
|
| (1,573.7 | ) |
Non-controlling interest in subsidiary |
|
| 1.3 |
|
|
| 0.8 |
|
Total deficit |
|
| (1,561.6 | ) |
|
| (1,572.9 | ) |
Total liabilities and deficit |
| $ | 796.0 |
|
| $ | 738.9 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
1
AFFINION GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(In millions, except share and per share amounts)
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2017 |
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| 2016 |
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| 2017 |
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| 2016 |
| ||||
Net revenues |
| $ | 243.2 |
|
| $ | 238.1 |
|
| $ | 721.6 |
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| $ | 737.0 |
|
Expenses: |
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Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
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Marketing and commissions |
|
| 76.1 |
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|
| 81.6 |
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|
| 230.5 |
|
|
| 254.4 |
|
Operating costs |
|
| 83.4 |
|
|
| 78.5 |
|
|
| 278.9 |
|
|
| 248.0 |
|
General and administrative |
|
| 22.6 |
|
|
| 27.2 |
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|
| 73.2 |
|
|
| 87.2 |
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Facility exit costs |
|
| (1.2 | ) |
|
| 0.1 |
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|
| 0.3 |
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|
| 0.1 |
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Depreciation and amortization |
|
| 12.0 |
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|
| 13.7 |
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|
| 34.9 |
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|
| 41.9 |
|
Total expenses |
|
| 192.9 |
|
|
| 201.1 |
|
|
| 617.8 |
|
|
| 631.6 |
|
Income from operations |
|
| 50.3 |
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|
| 37.0 |
|
|
| 103.8 |
|
|
| 105.4 |
|
Interest income |
|
| — |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.3 |
|
Interest expense |
|
| (56.4 | ) |
|
| (27.9 | ) |
|
| (128.5 | ) |
|
| (82.3 | ) |
Gain (loss) on extinguishment of debt |
|
| (2.8 | ) |
|
| — |
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|
| 3.5 |
|
|
| — |
|
Other expense, net |
|
| (0.1 | ) |
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
Income (loss) before income taxes and non-controlling interest |
|
| (9.0 | ) |
|
| 9.2 |
|
|
| (21.4 | ) |
|
| 23.4 |
|
Income tax expense |
|
| (1.8 | ) |
|
| (1.7 | ) |
|
| (6.4 | ) |
|
| (5.7 | ) |
Net income (loss) |
|
| (10.8 | ) |
|
| 7.5 |
|
|
| (27.8 | ) |
|
| 17.7 |
|
Less: net income attributable to non-controlling interest |
|
| (0.1 | ) |
|
| (0.3 | ) |
|
| (0.7 | ) |
|
| (0.5 | ) |
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (10.9 | ) |
| $ | 7.2 |
|
| $ | (28.5 | ) |
| $ | 17.2 |
|
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Earnings (loss) per share attributable to holders of Common Stock |
|
|
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Basic |
| $ | (0.80 | ) |
| $ | 0.80 |
|
| $ | (2.51 | ) |
| $ | 1.89 |
|
Diluted |
| $ | (0.80 | ) |
| $ | 0.80 |
|
| $ | (2.51 | ) |
| $ | 1.89 |
|
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Weighted average common shares outstanding |
|
|
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Basic |
|
| 13,522,890 |
|
|
| 9,107,929 |
|
|
| 11,356,425 |
|
|
| 9,101,109 |
|
Diluted |
|
| 13,522,890 |
|
|
| 9,109,436 |
|
|
| 11,356,425 |
|
|
| 9,102,011 |
|
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Net income (loss) |
| $ | (10.8 | ) |
| $ | 7.5 |
|
| $ | (27.8 | ) |
| $ | 17.7 |
|
Currency translation adjustment, net of tax for all periods |
|
| 2.4 |
|
|
| (1.4 | ) |
|
| 6.0 |
|
|
| (5.8 | ) |
Comprehensive income (loss) |
|
| (8.4 | ) |
|
| 6.1 |
|
|
| (21.8 | ) |
|
| 11.9 |
|
Less: comprehensive income attributable to non-controlling interest |
|
| (0.3 | ) |
|
| (0.3 | ) |
|
| (0.7 | ) |
|
| (0.5 | ) |
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (8.7 | ) |
| $ | 5.8 |
|
| $ | (22.5 | ) |
| $ | 11.4 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
2
AFFINION GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(In millions, except share amounts)
|
|
|
|
|
| Affinion Group Holdings, Inc. Deficit |
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Common Shares |
|
| Common Stock and Additional Paid-in Capital |
|
| Warrants |
|
| Accumulated Deficit |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Treasury Stock |
|
| Non- Controlling Interest |
|
| Total Deficit |
| ||||||||
Balance, January 1, 2017 |
|
| 9,093,330 |
|
| $ | 409.6 |
|
| $ | — |
|
| $ | (1,966.5 | ) |
| $ | (15.7 | ) |
| $ | (1.1 | ) |
| $ | 0.8 |
|
| $ | (1,572.9 | ) |
Net income (loss) |
|
|
|
|
| — |
|
| — |
|
|
| (28.5 | ) |
| — |
|
| — |
|
|
| 0.7 |
|
|
| (27.8 | ) | ||||
Currency translation adjustment |
|
|
|
|
| — |
|
| — |
|
| — |
|
|
| 6.0 |
|
| — |
|
| — |
|
|
| 6.0 |
| |||||
Dividend paid to non-controlling interest |
|
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| (0.2 | ) |
|
| (0.2 | ) | |||||
Issuance of warrants in connection with debt refinancing |
|
|
|
|
| — |
|
|
| 31.1 |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| 31.1 |
| |||||
Exercise of warrants |
|
| 63,741 |
|
|
| 0.4 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| 0.4 |
| |||||
Share-based compensation |
|
|
|
|
|
| 1.8 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| 1.8 |
| |||||
Balance, September 30, 2017 |
|
| 9,157,071 |
|
| $ | 411.8 |
|
| $ | 31.1 |
|
| $ | (1,995.0 | ) |
| $ | (9.7 | ) |
| $ | (1.1 | ) |
| $ | 1.3 |
|
| $ | (1,561.6 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
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| Affinion Group Holdings, Inc. Deficit |
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
| Common Shares |
|
| Common Stock and Additional Paid-in Capital |
|
| Warrants |
|
| Accumulated Deficit |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Treasury Stock |
|
| Non- Controlling Interest |
|
| Total Deficit |
| ||||||||
Balance, January 1, 2016 |
|
| 9,093,330 |
|
| $ | 405.8 |
|
| $ | — |
|
| $ | (1,982.2 | ) |
| $ | (6.2 | ) |
| $ | (1.1 | ) |
| $ | 0.7 |
|
| $ | (1,583.0 | ) |
Net income |
|
|
|
|
| — |
|
| — |
|
|
| 17.2 |
|
| — |
|
| — |
|
|
| 0.5 |
|
|
| 17.7 |
| ||||
Currency translation adjustment |
|
|
|
|
| — |
|
| — |
|
| — |
|
|
| (5.8 | ) |
| — |
|
| — |
|
|
| (5.8 | ) | |||||
Dividend paid to non-controlling interest |
|
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| (0.3 | ) |
|
| (0.3 | ) | |||||
Share-based compensation |
|
|
|
|
|
| 2.8 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
| 2.8 |
| |||||
Balance, September 30, 2016 |
|
| 9,093,330 |
|
| $ | 408.6 |
|
| $ | — |
|
| $ | (1,965.0 | ) |
| $ | (12.0 | ) |
| $ | (1.1 | ) |
| $ | 0.9 |
|
| $ | (1,568.6 | ) |
|
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|
See accompanying notes to the unaudited condensed consolidated financial statements.
3
AFFINION GROUP HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(In millions)
|
| For the Nine Months Ended |
| |||||
|
| September 30, |
|
| September 30, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Operating Activities |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (27.8 | ) |
| $ | 17.7 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 34.9 |
|
|
| 41.9 |
|
Amortization of debt discount and financing costs |
|
| 9.1 |
|
|
| 4.5 |
|
Provision for accounts receivable loss |
|
| 3.0 |
|
|
| 0.2 |
|
Amortization of carrying value adjustment |
|
| (13.6 | ) |
|
| (28.0 | ) |
Gain on extinguishment of debt |
|
| (3.5 | ) |
|
| — |
|
Facility exit costs |
|
| 0.3 |
|
|
| 0.1 |
|
Share-based compensation |
|
| 1.8 |
|
|
| 2.8 |
|
Deferred income taxes |
|
| 2.7 |
|
|
| 1.8 |
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
Restricted cash |
|
| (3.9 | ) |
|
| (0.1 | ) |
Receivables |
|
| (16.8 | ) |
|
| (4.4 | ) |
Profit-sharing receivables from insurance carriers |
|
| (7.2 | ) |
|
| (5.0 | ) |
Prepaid commissions |
|
| (1.5 | ) |
|
| 7.8 |
|
Other current assets |
|
| 0.2 |
|
|
| 10.3 |
|
Contract rights and list fees |
|
| (1.5 | ) |
|
| 0.6 |
|
Other non-current assets |
|
| 8.1 |
|
|
| 0.2 |
|
Accounts payable and accrued expenses |
|
| 57.7 |
|
|
| (2.8 | ) |
Deferred revenue |
|
| (5.2 | ) |
|
| (9.2 | ) |
Income taxes receivable and payable |
|
| 1.2 |
|
|
| 0.3 |
|
Other long-term liabilities |
|
| (0.1 | ) |
|
| (1.6 | ) |
Other, net |
|
| (3.3 | ) |
|
| 0.6 |
|
Net cash provided by operating activities |
|
| 34.6 |
|
|
| 37.7 |
|
Investing Activities |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (30.1 | ) |
|
| (24.3 | ) |
Acquisition-related payments |
|
| (0.4 | ) |
|
| — |
|
Restricted cash |
|
| 0.6 |
|
|
| 1.5 |
|
Net cash used in investing activities |
|
| (29.9 | ) |
|
| (22.8 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from borrowings |
|
| 1,539.6 |
|
|
| — |
|
Borrowings under revolving credit facility, net |
|
| 40.0 |
|
|
| — |
|
Principal payments on borrowings |
|
| (1,531.4 | ) |
|
| (5.8 | ) |
Financing costs |
|
| (28.1 | ) |
|
| — |
|
Dividend paid to non-controlling interest |
|
| (0.2 | ) |
|
| (0.3 | ) |
Proceeds from sale of warrants |
|
| 0.5 |
|
|
| — |
|
Net cash provided by (used in) financing activities |
|
| 20.4 |
|
|
| (6.1 | ) |
Effect of changes in exchange rates on cash and cash equivalents |
|
| 2.5 |
|
|
| (1.1 | ) |
Net increase in cash and cash equivalents |
|
| 27.6 |
|
|
| 7.7 |
|
Cash and cash equivalents, beginning of period |
|
| 37.7 |
|
|
| 55.4 |
|
Cash and cash equivalents, end of period |
| $ | 65.3 |
|
| $ | 63.1 |
|
Supplemental Disclosure of Cash Flow Information: |
|
|
|
|
|
|
|
|
Interest payments |
| $ | 87.6 |
|
| $ | 90.3 |
|
Income tax payments, net of refunds |
| $ | 3.4 |
|
| $ | 3.6 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Accrued capital expenditures |
| $ | 0.7 |
|
| $ | 0.9 |
|
Exchange of notes and accrued interest for new notes |
| $ | 295.3 |
|
| $ | — |
|
Payment of debt discount |
| $ | 25.9 |
|
| $ | — |
|
Payment of in-kind interest |
| $ | 3.4 |
|
| $ | 5.9 |
|
See accompanying notes to the unaudited condensed consolidated financial statements.
4
AFFINION GROUP HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)
1. BASIS OF PRESENTATION AND BUSINESS DESCRIPTION
Basis of Presentation—
The accompanying unaudited condensed consolidated financial statements include the accounts and transactions of Affinion Group Holdings, Inc. (the “Company” or “Affinion Holdings”), the parent of Affinion Group, Inc. (“Affinion”). In presenting these unaudited condensed consolidated financial statements, management makes estimates and assumptions that affect reported amounts of assets and liabilities and related disclosures, and disclosure of contingent assets and liabilities, at the date of the financial statements, and reported amounts of revenues and expenses during the reporting periods. Estimates, by their nature, are based on judgments and available information at the time such estimate is made. As such, actual results could differ from those estimates. In management’s opinion, the unaudited condensed consolidated financial statements contain all normal recurring adjustments necessary for a fair statement of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and following the guidance of Rule 10-01 of Regulation S-X for interim financial statements required to be filed with the U.S. Securities and Exchange Commission (the “SEC”). As permitted under such rules, certain notes and other financial information normally required by accounting principles generally accepted in the United States of America have been condensed or omitted; however, the unaudited condensed consolidated financial statements do include such notes and financial information sufficient so as to make the interim information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes of the Company, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017 (the “Form 10-K”).
Business Description— The Company develops programs and solutions that motivate and inspire loyalty. Through our proprietary technology platforms and end-to-end customer service capabilities, we design, administer and fulfill loyalty, customer engagement and insurance programs and solutions that strengthen and expand the value of customer relationships for many of the world’s largest and most respected companies. Our programs and solutions include:
| • | Loyalty solutions that help reward, motivate and retain consumers. We create and manage any and all aspects of our clients’ points-based loyalty programs, including design, platform, analytics, points management and fulfillment. Our loyalty solutions offer relevant, best-in-class rewards (such as travel, gift cards and merchandise) to consumers enabling clients to motivate, retain and thank their best customers. For example, our platform and technology support points-based programs for financial services, automotive, gaming, travel and hospitality companies. |
| • | Customer engagement programs and solutions that address key consumer needs such as greater peace of mind and meaningful savings for everyday purchases. We provide these solutions to leading companies in the financial institution, telecommunications, ecommerce, retail and travel sectors globally. These differentiated programs help our clients enrich their offerings to drive deeper connections with their customers, and to encourage their customers to engage more, stay loyal and generate more revenue for our clients. For example, we develop and manage programs such as identity theft protection, credit monitoring, savings on everyday purchases, concierge services, discount travel services and roadside assistance. |
| • | Insurance programs and solutions that help protect consumers in the event of a covered accident, injury, illness, or death. We market accident and life insurance programs on behalf of our financial institution partners. We work with leading insurance carriers to administer coverage for over 19 million people across America. These insurance solutions provide affordable, convenient insurance to consumers resulting in proven customer loyalty and generating incremental revenue for our clients. Our insurance solutions include accidental death and dismemberment insurance (“AD&D”), hospital accident plan, recuperative care, graded benefit whole life and simplified issue term life insurance. |
In 2016, we implemented a new globalized organizational structure (the “Global Reorganization”) to better support our key strategic initiatives and enhance long-term revenue growth. This new organizational structure allows us to combine similar lines of business on common platforms and shared infrastructures on a global basis to drive best practices and efficiencies with meaningful cost savings. In addition, we no longer materially invest in lines of business that we believe are not essential to our long-term growth prospects. We remain committed to our business strategy of pursuing initiatives that maintain and enhance our position as a global leader in loyalty and customer engagement solutions. The implementation of the Global Reorganization marks another major step in our strategic plan and ongoing transformation. See Note 12 to these unaudited condensed consolidated financial statements for more information concerning our segment results.
5
Starting in the first quarter of 2016, we have the following four operating segments:
| • | Global Loyalty. This segment consists of all of our loyalty assets globally in which we are a provider of end-to-end loyalty solutions that help clients reward, enrich, motivate and retain customers, including program design, points management and administration, and broad-based fulfillment and redemption across multiple channels. |
| • | Global Customer Engagement. This segment consists of our customer engagement business, in which we are a leading global solutions provider that delivers a flexible mix of benefits and services for our clients that meet customers’ needs, including products that are designed to help consumers save money and gain peace of mind. |
| • | Insurance Solutions. This segment consists of the domestic insurance business, in which we are a leading third-party agent, administrator and marketer of certain accident & life insurance solutions. |
| • | Legacy Membership and Package. This segment consists of certain global membership and package programs that are no longer being actively marketed but continue to be serviced and supported. |
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. The new standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The fundamental principles of the guidance are that entities should recognize revenue in a manner that reflects the timing of transfer of goods and services to customers and the amount of revenue recognized reflects the consideration that an entity expects to receive for the goods and services provided. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). Entities are not permitted to adopt the standard earlier than annual reporting periods beginning after December 15, 2016, but are required to adopt it for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Our project implementation team, with the assistance of a third-party consultant, has been evaluating the impact of the new guidance on our consolidated financial statements. Based on our preliminary assessment, we believe that the new standard will have an impact primarily on our Global Loyalty segment, which will be required to estimate variable consideration for contracts with our customers that have revenue-sharing and tiered pricing components. In addition, the new guidance will likely result in insignificant changes in the timing and classification of certain other revenue streams. As we continue to evaluate all the potential impacts of the guidance through the adoption date, our current assessment is subject to change. Additionally, we are currently identifying applicable changes to our business processes and controls to support recognition and disclosures under the new standard. Lastly, we continue to monitor additional changes, modifications, clarifications or interpretations being issued by the FASB, which may impact our current conclusions. The Company will adopt the new standard on its effective date.
In February 2016, the FASB issued ASU 2016-02, its new standard on accounting for leases. The new standard requires lessees to recognize leases on the balance sheet and disclose key information about leasing arrangements. The new standard is effective for the Company on January 1, 2019 with early adoption permitted. Entities are required to adopt the guidance using a modified retrospective method. The Company has formed a project implementation team with representatives from each of its operating segments. The team is working to compile a lease database containing all of the relevant information required to assess the impact of the new guidance and has held training on the new guidance. The Company expects to adopt the new standard on its effective date.
In August 2016, the FASB issued ASU 2016-15, which addresses eight specific cash flow issues, including presentation of debt prepayments or debt extinguishment costs, with the objective of reducing the existing diversity in practice. For public business entities, the new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. When adopted, the new guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18, which requires an entity’s reconciliation of the beginning-of-period and end-of-period total amounts shown on the statement of cash flows to include in cash and cash equivalents amounts generally described as restricted cash and restricted cash equivalents. For public business entities, the new guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. When adopted, the new guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU 2017-04 to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the new guidance, an impairment charge, if triggered, is calculated as the difference between a reporting unit’s carrying value and fair value, but is limited to the carrying value of the goodwill. Current guidance, however, requires an impairment charge to be calculated as the excess of the carrying value of goodwill over its implied fair value. The new guidance is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
6
Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. When adopted, the new guidance is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
2. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consisted of:
|
| September 30, 2017 |
| |||||||||
|
| Gross Carrying |
|
| Accumulated |
|
| Net Carrying |
| |||
|
| Amount |
|
| Amortization |
|
| Amount |
| |||
|
| (in millions) |
| |||||||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Member relationships |
| $ | 936.1 |
|
| $ | (934.1 | ) |
| $ | 2.0 |
|
Affinity relationships |
|
| 642.4 |
|
|
| (614.6 | ) |
|
| 27.8 |
|
Proprietary databases and systems |
|
| 59.8 |
|
|
| (58.5 | ) |
|
| 1.3 |
|
Trademarks and tradenames |
|
| 28.1 |
|
|
| (23.0 | ) |
|
| 5.1 |
|
Patents and technology |
|
| 47.6 |
|
|
| (47.5 | ) |
|
| 0.1 |
|
Covenants not to compete |
|
| 2.5 |
|
|
| (2.4 | ) |
|
| 0.1 |
|
|
| $ | 1,716.5 |
|
| $ | (1,680.1 | ) |
| $ | 36.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2016 |
| |||||||||
|
| Gross Carrying |
|
| Accumulated |
|
| Net Carrying |
| |||
|
| Amount |
|
| Amortization |
|
| Amount |
| |||
|
| (in millions) |
| |||||||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Member relationships |
| $ | 932.4 |
|
| $ | (930.8 | ) |
| $ | 1.6 |
|
Affinity relationships |
|
| 632.9 |
|
|
| (600.9 | ) |
|
| 32.0 |
|
Proprietary databases and systems |
|
| 59.6 |
|
|
| (58.0 | ) |
|
| 1.6 |
|
Trademarks and tradenames |
|
| 27.7 |
|
|
| (21.7 | ) |
|
| 6.0 |
|
Patents and technology |
|
| 47.7 |
|
|
| (47.5 | ) |
|
| 0.2 |
|
Covenants not to compete |
|
| 2.4 |
|
|
| (2.3 | ) |
|
| 0.1 |
|
|
| $ | 1,702.7 |
|
| $ | (1,661.2 | ) |
| $ | 41.5 |
|
Foreign currency translation resulted in an increase in intangible assets and accumulated amortization of $13.3 million and $12.7 million, respectively, from December 31, 2016 to September 30, 2017.
Amortization expense relating to intangible assets was as follows:
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (in millions) |
| |||||||||||||
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Member relationships |
| $ | 0.1 |
|
| $ | 0.2 |
|
| $ | 0.4 |
|
| $ | 0.7 |
|
Affinity relationships |
|
| 1.3 |
|
|
| 2.2 |
|
|
| 4.3 |
|
|
| 6.6 |
|
Proprietary databases and systems |
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.3 |
|
|
| 0.3 |
|
Trademarks and tradenames |
|
| 0.4 |
|
|
| 0.3 |
|
|
| 1.1 |
|
|
| 0.9 |
|
Patents and technology |
|
| — |
|
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.9 |
|
Covenants not to compete |
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| 0.1 |
|
|
| $ | 1.9 |
|
| $ | 3.2 |
|
| $ | 6.2 |
|
| $ | 9.5 |
|
Based on the Company’s amortizable intangible assets as of September 30, 2017, the Company expects the related amortization expense for fiscal year 2017 and the four succeeding fiscal years to be approximately $8.9 million in 2017, $7.5 million in 2018, $6.1 million in 2019, $5.6 million in 2020 and $3.7 million in 2021.
7
At September 30, 2017 and December 31, 2016, the Company had gross goodwill of $653.2 million and $647.2 million, respectively, and accumulated impairment losses of $429.0 million at each date. The accumulated impairment losses represent the $15.5 million impairment loss recognized in 2006 impairing all of the goodwill assigned to the Global Loyalty segment (previously included in the Global Loyalty Products segment) related to the Apollo Transactions (as defined in Note 10 to these unaudited condensed consolidated financial statements), the $31.5 million impairment loss recognized in 2012 impairing all of the goodwill assigned in connection with the acquisition of Prospectiv Direct, Inc. included in the Legacy Membership and Package segment (previously included in the former Membership Products segment) and the $292.4 million and the $89.6 million impairment losses recognized in 2014 and 2015, respectively, impairing all of the goodwill assigned to the former Membership Products segment, which has been allocated to the Legacy Membership and Package segment.
The changes in the Company’s carrying amount of goodwill for the year ended December 31, 2016 and the nine months ended September 30, 2017 are as follows:
|
| Balance at |
|
|
|
|
|
| Balance at |
|
|
|
|
|
| Balance at |
| |||
|
| January 1, |
|
| Currency |
|
| December 31, |
|
| Currency |
|
| September 30, |
| |||||
|
| 2016 |
|
| Translation |
|
| 2016 |
|
| Translation |
|
| 2017 |
| |||||
|
| (in millions) |
| |||||||||||||||||
Global Loyalty |
| $ | 105.1 |
|
| $ | (0.3 | ) |
| $ | 104.8 |
|
| $ | 0.9 |
|
| $ | 105.7 |
|
Global Customer Engagement |
|
| 62.4 |
|
|
| (7.3 | ) |
|
| 55.1 |
|
|
| 5.1 |
|
|
| 60.2 |
|
Insurance Solutions |
|
| 58.3 |
|
| — |
|
|
| 58.3 |
|
| — |
|
|
| 58.3 |
| ||
Legacy Membership and Package |
| — |
|
| — |
|
|
| — |
|
| — |
|
| — |
| ||||
Total |
| $ | 225.8 |
|
| $ | (7.6 | ) |
| $ | 218.2 |
|
| $ | 6.0 |
|
| $ | 224.2 |
|
3. CONTRACT RIGHTS AND LIST FEES, NET
Contract rights and list fees consisted of:
|
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| Gross Carrying |
|
| Accumulated |
|
| Net Carrying |
|
| Gross Carrying |
|
| Accumulated |
|
| Net Carrying |
| ||||||
|
| Amount |
|
| Amortization |
|
| Amount |
|
| Amount |
|
| Amortization |
|
| Amount |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Contract rights |
| $ | 5.0 |
|
| $ | (5.0 | ) |
| $ | — |
|
| $ | 5.0 |
|
| $ | (5.0 | ) |
| $ | — |
|
List fees |
|
| 66.4 |
|
|
| (48.6 | ) |
|
| 17.8 |
|
|
| 61.6 |
|
|
| (45.2 | ) |
|
| 16.4 |
|
|
| $ | 71.4 |
|
| $ | (53.6 | ) |
| $ | 17.8 |
|
| $ | 66.6 |
|
| $ | (50.2 | ) |
| $ | 16.4 |
|
Amortization expense for the three and nine months ended September 30, 2017 was $1.1 million and $3.4 million, respectively, which is included in marketing expense in the unaudited condensed consolidated statement of comprehensive income. Amortization expense for the three and nine months ended September 30, 2016 was $1.3 million and $3.8 million, respectively, of which $1.2 million and $3.6 million, respectively, is included in marketing expense and $0.1 million and $0.2 million, respectively, is included in depreciation and amortization expense in the unaudited condensed consolidated statement of comprehensive income. Based on the Company’s contract rights and list fees as of September 30, 2017, the Company expects the related amortization expense for fiscal year 2017 and the four succeeding fiscal years to be approximately $4.5 million in 2017, $4.0 million in 2018, $3.3 million in 2019, $2.7 million in 2020 and $1.9 million in 2021.
8
4. LONG-TERM DEBT
Long-term debt consisted of:
|
| September 30, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
|
| (in millions) |
| |||||
First-lien term loan due 2018 |
| $ | — |
|
| $ | 753.7 |
|
Second-lien term loan due 2018 |
|
| — |
|
|
| 425.0 |
|
Term loan due 2022, net of unamortized discount of $30.9 million, with an effective interest rate of 10.01% |
|
| 1,302.4 |
|
|
| — |
|
Revolving credit facility, expiring in 2018 |
|
| — |
|
|
| — |
|
Revolving credit facility, expiring in 2022, net of unamortized discount of $2.5 million |
|
| 37.5 |
|
|
| — |
|
7.875% senior notes due 2018, net of unamortized discount of $0.4 million (2016) with an effective interest rate of 8.31% |
|
| — |
|
|
| 474.6 |
|
7.5% cash/PIK senior notes due 2018, with an effective interest rate of 7.39% |
|
| — |
|
|
| 116.2 |
|
13.50% senior subordinated notes due 2018, with an effective interest rate of 14.31% |
|
| — |
|
|
| 22.6 |
|
13.75%/ 14.50% senior PIK toggle notes, due 2018, with an effective interest rate of 17.69% |
|
| — |
|
|
| 15.0 |
|
Senior cash 12.5%/ PIK step-up to 15.5% notes due 2022, net of unamortized discount of $24.0 million with an effective interest rate of 16.20% |
|
| 533.0 |
|
|
| — |
|
Adjustment to carrying value of debt |
|
| — |
|
|
| 65.7 |
|
Total debt |
|
| 1,872.9 |
|
|
| 1,872.8 |
|
Less: current portion of long-term debt |
|
| (13.4 | ) |
|
| (7.8 | ) |
Less: unamortized deferred financing costs |
|
| (26.6 | ) |
|
| (9.2 | ) |
Long-term debt |
| $ | 1,832.9 |
|
| $ | 1,855.8 |
|
Credit Agreement Refinancing and International Notes Redemption
On May 10, 2017, Affinion entered into a new credit facility (the “New Credit Facility”) having a five year maturity with a lender, pursuant to which the lender provided term loans in an aggregate principal amount equal to approximately $1.3 billion and committed to provide revolving loans in an aggregate principal amount at any one time outstanding not to exceed $110.0 million, decreasing to $80.0 million on May 10, 2018.
The term loans provide for quarterly amortization payments totaling (i) for the first two years after May 10, 2017, 1% per annum, (ii) for the third year after May 10, 2017, 2.5% per annum, and (iii) for each year thereafter, 5% per annum, in each case, payable quarterly, with the balance due upon the final maturity date, subject in each case, to reduction of such amortization payments for certain prepayments. The New Credit Facility also requires mandatory prepayments of the outstanding term loans based on excess cash flow (as defined in the New Credit Facility), if any, and the proceeds from certain specified transactions.
The interest rates with respect to the term loans and revolving loans under the New Credit Facility are based on, at Affinion’s option, (x) the higher of (i) adjusted LIBOR and (ii) 1.00%, in each case, plus 7.75%, or (y) the highest of (i) the prime rate, (ii) the Federal Funds Effective Rate plus 0.5%, and (iii) 2.00% (“ABR”) in each case plus 6.75%.
Affinion’s obligations under the New Credit Facility are, and Affinion’s obligations under any interest rate protection or other hedging arrangements entered into with a lender or any of its affiliates are, guaranteed by Affinion Holdings and by each of Affinion’s existing and subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. The New Credit Facility is secured on a first-priority basis to the extent legally permissible by substantially all of the assets of (i) Affinion Holdings, which consists of a pledge of all the Company’s capital stock and (ii) Affinion and the subsidiary guarantors, including but not limited to: (a) a pledge of substantially all capital stock held by Affinion or any subsidiary guarantor and (b) security interests in substantially all tangible and intangible assets of Affinion and each subsidiary guarantor, subject to certain exceptions. The New Credit Facility also contains financial, affirmative and negative covenants. The negative covenants in the New Credit Facility include, among other things, limitations (all of which are subject to certain exceptions) on Affinion’s (and in certain cases, Affinion Holdings’) ability to: declare dividends and make other distributions, redeem or repurchase Affinion’s capital stock; prepay, redeem or repurchase certain of Affinion’s subordinated indebtedness; make loans or investments (including acquisitions); incur additional indebtedness (subject to certain exceptions); enter into agreements that would restrict the ability of Affinion’s subsidiaries to pay dividends; merge or enter into acquisitions; sell assets; and enter into transactions with affiliates. The New Credit Facility requires Affinion to comply with (a) a maximum ratio of senior secured debt to EBITDA (as defined in the New Credit Facility) and (y) a minimum ratio of EBITDA to
9
consolidated fixed charges. For the quarter ended September 30, 2017 and through December 31, 2017, the maximum ratio of senior secured debt to EBITDA is 7.5:1.0 and the minimum ratio of EBITDA to consolidated fixed charges is 1.0:1.0.
The proceeds of the term loans under the New Credit Facility were used by Affinion to refinance its 2014 Credit Facility, as defined below (the “Credit Agreement Refinancing”), to redeem in full the International Notes, as defined below (the “International Notes Redemption”), to pay transaction fees and expenses and for general corporate purposes.
On May 20, 2014, Affinion, as Borrower, and Affinion Holdings entered into an amendment to its amended and restated senior secured credit facility (as so amended, the “2014 Credit Facility”). The 2014 Credit Facility consisted of (i) $775.0 million in aggregate principal amount of first lien secured term loans, (ii) $425.0 million in aggregate principal amount of second lien secured term loans and (iii) an $80.0 million first lien senior secured revolving credit facility, which included a letter of credit subfacility and a swingline loan subfacility.
On May 10, 2017, Affinion International Holdings Limited (“Affinion International”) (i) elected to redeem all of its outstanding $118.5 million principal amount of 7.5% Cash/Pay-in-Kind (“PIK”) Senior Notes due 2018 (the “International Notes”) on June 9, 2017 at a redemption price of 100% of the principal amount of the International Notes, plus accrued and unpaid interest to the redemption date, (ii) irrevocably deposited sufficient funds received from borrowings under the New Credit Facility to effect such redemption with the trustee under the indenture governing the International Notes and (iii) entered into a satisfaction and discharge agreement to discharge its obligations under the indenture governing the International Notes. The International Notes were originally issued by Affinion International on November 9, 2015 in an original principal amount of $110.0 million and bore interest at 7.5% per annum, of which 3.5% per annum was payable in cash and 4.0% per annum was payable in kind; provided, that all of the accrued interest on the International Notes from the issue date to, but not including, May 1, 2016 was payable on May 1, 2016 entirely in kind. Interest on the International Notes was payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2016. The International Notes Redemption was consummated on June 9, 2017.
In connection with the Credit Agreement Refinancing and International Notes Redemption, the Company recognized a gain of approximately $5.3 million, which consisted of the write-off of unamortized troubled debt restructuring carrying value adjustments from 2015 of $21.0 million associated with the Company’s prior senior secured credit facility and the International Notes, reduced by deferred financing costs associated with the Company’s prior senior secured credit facility and the International Notes of $6.3 million and prepayment premiums incurred of $9.4 million, and is included in Gain on extinguishment of debt on the condensed consolidated statement of operations for the nine months ended September 30, 2017. The prepayment premiums of $9.4 million are included in the Gain on extinguishment of debt adjustment to reconcile net income (loss) to net cash provided by (used in) operating activities in the statement of cash flows. Transaction fees and expenses of approximately $17.1 million and $3.4 million related to the term loans and revolving facility, respectively, under the New Credit Facility have been capitalized and are being amortized over the term of the term loans and revolving facility, respectively. The Company also incurred lender transaction fees of $36.3 million, which have been accounted for as a debt discount and are being amortized over the term of the term loans and revolving financing facility.
As of September 30, 2017, there were outstanding borrowings of $40.0 million under the revolving facility under the New Credit Facility and as of December 31, 2016, there were no outstanding borrowings under the revolving facility under the 2014 Credit Facility. During the period from May 10, 2017 to September 30, 2017, Affinion had borrowings and repayments under the revolving facility under the New Credit Facility of $122.2 million and $82.2 million, respectively. During the period from January 1, 2017 to May 9, 2017, Affinion had borrowings and repayments under the revolving facility under the 2014 Credit Facility of $99.0 and $99.0 million, respectively. During the nine months ended September 30, 2016, Affinion had borrowings and repayments of $107.0 million and $107.0 million, respectively, under the revolving facility under the 2014 Credit Facility. As of September 30, 2017, Affinion had $70.0 million available for borrowing under the revolving facility under the New Credit Facility.
The weighted average interest rate on the term loan under the New Credit Facility for the period from May 10, 2017 to September 30, 2017 was 9.0% and the weighted average interest rate on revolving facility borrowings under the New Credit Facility for the period from May 10, 2017 to September 30, 2017 was 9.8%. The weighted average interest rate on the first lien secured term loans under the 2014 Credit Facility for the period from January 1, 2017 to May 10, 2017 and the nine months ended September 30, 2016 was 6.75% for each period and the weighted average interest rate on the second lien secured term loans under the 2014 Credit Facility for the period from January 1, 2017 to May 10, 2017 and the nine months ended September 30, 2016 was 8.50% for each period. The weighted average interest rate on revolving facility borrowings under the 2014 Credit Facility for the period from January 1, 2017 to May 10, 2017 and the nine months ended September 30, 2016 was 8.1%, and 7.8%, respectively.
2017 Exchange Offers, Issuance of New Notes and New Warrants and Redemptions of Other Existing Notes
On May 10, 2017, (a) Affinion completed a private offer to exchange or repurchase at the holder’s election (collectively, the “AGI Exchange Offer”) Affinion’s 7.875% senior notes due 2018 (Affinion’s “2010 senior notes”) for (i) new Senior Cash 12.5%/ PIK Step-Up to 15.5% Notes due 2022 of Affinion (the “New Notes”) and new warrants (the “New Warrants”) to acquire Common Stock, par value $0.01 per share, of Affinion Holdings (the “Common Stock”) or (ii) cash; (b) Affinion Holdings completed a private
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offer to exchange or repurchase at the holder’s election (collectively, the “Holdings Exchange Offer”) Affinion Holdings’ 13.75%/14.50% senior secured PIK/toggle notes due 2018 (Affinion Holdings’ “2013 senior notes”) for (i) New Notes and New Warrants or (ii) cash; and (c) Affinion Investments, LLC (“Affinion Investments”) completed a private offer to exchange or repurchase at the holder’s election (collectively, the “Investments Exchange Offer” and, together with the AGI Exchange Offer and the Holdings Exchange Offer, the “Exchange Offers”) Affinion Investments’ 13.50% senior subordinated notes due 2018 (the “Investments senior subordinated notes”) for (i) New Notes and New Warrants or (ii) cash. Under the terms of the AGI Exchange Offer, for each $1,000 principal amount of Affinion’s 2010 senior notes accepted in the AGI Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $930 in cash. Under the terms of the Holdings Exchange Offer, for each $1,000 principal amount of Affinion Holdings’ 2013 senior notes accepted in the Holdings Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $700 in cash. Under the terms of the Investments Exchange Offer, for each $1,000 principal amount of the Investments senior subordinated notes accepted in the Investments Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $880 in cash. Pursuant to the AGI Exchange Offer, approximately $269.7 million of Affinion’s 2010 senior notes plus accrued and unpaid interest were exchanged for approximately $277.8 million of New Notes, New Warrants to purchase 1,103,203 shares of Common Stock and approximately $417,386 in cash, including $238.0 million of Affinion’s 2010 senior notes plus accrued and unpaid interest exchanged by related parties in exchange for $245.5 million of New Notes and New Warrants to purchase 985,438 shares of Common Stock; pursuant to the Holdings Exchange Offer, approximately $4.6 million of Affinion Holdings’ 2013 senior notes plus accrued and unpaid interest were exchanged by a related party for approximately $4.7 million of New Notes and New Warrants to purchase 18,539 shares of Common Stock; and pursuant to the Investments Exchange Offer, approximately $12.4 million of the Investments senior subordinated notes plus accrued and unpaid interest were exchanged for approximately $12.8 million of New Notes, New Warrants to purchase 51,005 shares of Common Stock and approximately $912 in cash, including $12.2 million of the Investments senior subordinated notes plus accrued and unpaid interest exchanged by related parties in exchange for $12.6 million of New Notes and New Warrants to purchase 49,894 shares of Common Stock. Affinion used the proceeds of the New Notes issued pursuant to the Investor Purchase Agreement (as defined below) to pay the cash tender consideration to participating holders in the Exchange Offers.
Previously, in connection with the Exchange Offers, on March 31, 2017, affiliates of Elliott Management Corporation (“Elliott”), Franklin Mutual Quest Fund, an affiliate of Franklin Mutual Advisers, LLC (“Franklin”), affiliates of Empyrean Capital Partners, LP (“Empyrean”) and Metro SPV LLC, an affiliate of ICG Strategic Secondaries Advisors LLC (“ICG”) (collectively, in such capacity, the “Investors”), entered into an investor purchase agreement (the “Investor Purchase Agreement”) with Affinion Holdings, Affinion and Affinion Investments, in which they agreed to purchase New Notes and New Warrants in an aggregate principal amount sufficient to pay all holders that participate in the Exchange Offers and elect to receive cash. Further, pursuant to the Investor Purchase Agreement, if Affinion Holdings, Affinion or Affinion Investments exercised its option to redeem any of Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and/or the Investments senior subordinated notes not tendered in the Exchange Offers, the Company could obligate the Investors to purchase an aggregate principal amount of New Notes and New Warrants that would yield sufficient cash proceeds to fund any such redemptions. In addition, pursuant to the terms of the Investor Purchase Agreement, Affinion was required to pay to the Investors upon the closing of the Exchange Offers a commitment premium of $17.5 million and a funding premium of $7.4 million in aggregate principal amount of New Notes and the same number of New Warrants that such principal amount of New Notes would have been issued as part of the Exchange Offers as described in more detail in Note 5.
Also, on May 10, 2017, Affinion exercised its option to redeem Affinion’s 2010 senior notes that were not tendered in the Exchange Offers and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement. As a result, on May 10, 2017, Affinion (i) elected to redeem all of its outstanding $205.3 million aggregate principal amount of Affinion’s 2010 senior notes on May 15, 2017 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date, (ii) irrevocably deposited sufficient funds received from the Investors pursuant to the Investor Purchase Agreement to effect such redemption with the trustee under the indenture governing Affinion’s 2010 senior notes and (iii) entered into a satisfaction and discharge agreement to discharge its obligations under the indenture governing Affinion’s 2010 senior notes. Affinion’s 2010 senior notes were originally issued by Affinion on November 19, 2010 in an aggregate principal amount of $475.0 million and bore interest at 7.875% per annum. The redemption of Affinion’s 2010 senior notes was consummated on May 15, 2017.
Accordingly, on May 10, 2017, Affinion issued approximately $532.6 million aggregate principal amount of New Notes and New Warrants to purchase 3,974,581 shares of Common Stock, of which (i) approximately $295.3 million principal amount of New Notes and New Warrants to purchase 1,172,747 shares of Common Stock were issued to participating holders (including the Investors) in the Exchange Offers, including $262.8 million of New Notes and New Warrants to purchase 1,053,871 shares of Common Stock issued to related parties, and (ii) approximately $237.3 million principal amount of New Notes and New Warrants to purchase 2,801,834 shares of Common Stock were issued, including all of the New Notes and New Warrants to purchase 2,791,475 shares of Common Stock issued to the Investors, all of whom are related parties, pursuant to the Investor Purchase Agreement to fund the cash consideration payable in the Exchange Offers and the cash redemption price for the balance of Affinion’s 2010 senior notes that were not exchanged or tendered in the AGI Exchange Offer and to pay the commitment premium and funding premium under the Investor Purchase Agreement. The New Warrants received by the Investors on May 10, 2017, represented approximately 26.7% of the
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pro forma fully diluted ownership of Affinion Holdings after giving effect to issuances pursuant to the Exchange Offers and the Investor Purchase Agreement, but without giving effect to options and restricted stock units granted under Affinion Holdings’ management compensation and incentive plans. The number of shares of Common Stock issuable upon the exercise of the New Warrants, as described herein, reflects the application of the anti-dilution protections of the New Warrants issued in the Exchange Offers and pursuant to the Investor Purchase Agreement (other than the New Warrants issued as part of the funding premium) that are triggered by the issuance of New Warrants as part of the funding premium.
On June 13, 2017, (i) Affinion Holdings exercised its option to redeem the $11.5 million principal amount of Affinion Holdings’ 2013 senior notes that were not tendered in the Holdings Exchange Offer and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement and (ii) Affinion Investments exercised its option to redeem the $10.2 million principal amount of the Investments senior subordinated notes that were not tendered in the Investments Exchange Offer and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement. Affinion Holdings’ 2013 senior notes were redeemed on July 17, 2017 at a redemption price of 103.4375% of the principal amount, plus accrued and unpaid interest to the redemption date and the Investments senior subordinated notes were redeemed on July 17, 2017 at a redemption price of 103.375% of the principal amount, plus accrued and unpaid interest to the redemption date. Affinion Holdings’ 2013 senior notes were originally issued by Affinion Holdings on December 12, 2013 in an aggregate principal amount of $292.8 million and bore interest at 13.75% per annum in cash, or at Affinion Holdings’ option, in payment-in-kind interest at 13.75% per annum plus 0.75%. The Investments senior subordinated notes were originally issued by Affinion Investments on December 12, 2013 in an aggregate principal amount of $360.0 million and bore interest at 13.50% per annum.
On July 17, 2017, pursuant to the Investor Purchase Agreement, Affinion issued approximately $23.7 million aggregate principal amount of New Notes to the Investors and Affinion Holdings issued New Warrants to the Investors. Pursuant to the Investor Purchase Agreement, the Investors paid a purchase price of approximately $23.5 million to Affinion, which amount includes the payment of pre-issuance accrued interest of approximately $0.6 million from May 10, 2017. The New Notes and New Warrants issued by Affinion and Affinion Holdings, respectively, to the Investors include the funding premium payable under the Investor Purchase Agreement. The New Notes constitute a further issuance of, and form a single series with, the $532.6 million in aggregate principal amount of New Notes that Affinion issued on May 10, 2017.
In connection with the Exchange Offers and the redemption of Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes that were not tendered pursuant to the Exchange Offers, the Company determined that the debt had been extinguished and the Company recognized a loss of approximately $2.8 million and $1.8 million, respectively, for the three and nine periods ended September 30, 2017, which represented the excess of the fair value of New Notes and New Warrants issued over the carrying value of the notes exchanged in the Exchange Offers and Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes that were redeemed, including all associated unamortized fees, discounts and 2015 troubled debt restructuring carrying value adjustments. The loss of $2.8 million and $1.8 million is included in Gain (loss) on extinguishment of debt on the condensed consolidated statement of operations for the three and nine months ended September 30, 2017, respectively. Transaction fees and expenses of approximately $8.4 million related to the issuance of the New Notes have been capitalized and are being amortized over the term of the New Notes using the effective interest method.
The Company performed an accounting analysis and determined that the New Warrants represent in substance common stock and that the New Warrants issued pursuant to the Exchange Offers, the Investor Purchase Agreement, required anti-dilution provisions and commitment premium and funding premium represented a debt discount of $16.1 million. Fees associated with new lenders of $4.6 million have been recorded as debt discount. Fees related to existing lenders who continued to be lenders in connection with the Exchange Offers have been expensed.
The New Notes bear interest at the rate per annum as follows:
For any interest payment period ending on or prior to the date that is the 18 month anniversary of the settlement date of the Exchange Offers (the “Settlement Date”), Affinion may, at its option, elect to pay interest on the New Notes (1) entirely in cash (“Cash Interest”) at a rate per annum of 12.50% or (2) entirely by increasing the principal amount of the outstanding New Notes or by issuing PIK notes (“PIK Interest”) at a rate per annum of 14.00%, provided that interest for the first interest period commencing on the Settlement Date shall be payable entirely in PIK Interest.
For any interest payment period ending after the date that is the 18 month anniversary of the Settlement Date, (i) if immediately after giving effect to such interest payment, on a pro forma basis, Affinion’s Senior Secured Leverage Ratio (as defined in the indenture governing the New Notes (the “New Notes Indenture”)) would be less than or equal to 4.375 to 1.000, Affinion’s Consolidated Fixed Charge Coverage Ratio (as defined in the New Notes Indenture) would be greater than or equal to 1.375 to 1.000, in each case, as of the last day of the most recently completed fiscal quarter of Affinion immediately preceding the scheduled interest payment date for which internal financial statements are available, and Affinion’s Average Liquidity (as defined in the New Notes Indenture) less the amount of the anticipated cash interest payment is equal to or greater than $80.0 million as of the record date for such interest payment, then Affinion shall be required to pay interest on the New Notes for such interest period entirely in Cash Interest at a rate per annum of 12.50%, (ii) if immediately after giving effect to such interest payment, on a pro forma basis, Affinion’s Senior Secured Leverage Ratio would be less than or equal to 4.375 to 1.000, Affinion’s Consolidated Fixed Charge Coverage Ratio
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would be greater than or equal to 1.250 to 1.000 but less than 1.375 to 1.000, in each case, as of the last day of the most recently completed fiscal quarter of Affinion immediately preceding the scheduled interest payment date for which internal financial statements are available, and Affinion’s Average Liquidity less the amount of the anticipated cash interest payment is equal to or greater than $80.0 million as of the record date for such interest payment, then Affinion shall be required to pay interest on the New Notes for such interest period as a combination (“Combined Interest”) of Cash Interest at a rate per annum of 6.50% and PIK Interest at a rate per annum of 7.50% and (iii) if immediately after giving effect to such interest payment, on a pro forma basis, Affinion’s Senior Secured Leverage Ratio would be greater than 4.375 to 1.000, Affinion’s Consolidated Fixed Charge Coverage Ratio would be less than 1.250 to 1.000, in each case, as of the last day of the most recently completed fiscal quarter of Affinion immediately preceding the scheduled interest payment date for which internal financial statements are available, or Affinion’s Average Liquidity less the amount of the anticipated cash interest payment is less than $80.0 million as of the record date for such interest payment, then Affinion may elect to pay interest on the New Notes for such interest period as PIK Interest at a rate per annum of: (x) 14.75% for any interest payment period ending on or prior to the date that is the 30 month anniversary of the Settlement Date and (y) 15.50% for any interest payment period ending after the date that is the 30 month anniversary of the Settlement Date; provided that, for the avoidance of doubt, if the aforementioned ratios are satisfied and require Affinion to either pay Cash Interest or Combined Interest for any interest period, as applicable, any restriction in the New Credit Facility on the payment of such interest shall not relieve Affinion of such obligation to pay Cash Interest or Combined Interest, as applicable, for such interest period and Affinion shall take all such actions as may be required in order to permit such payment of Cash Interest or Combined Interest, as applicable, for such interest period under the New Credit Facility (including, without limitation, any required repayment of outstanding borrowings under the revolving facility under the New Credit Facility).
Interest on the New Notes is payable semi-annually on May 10 and November 10 of each year, commencing on November 10, 2017. The New Notes will mature on November 10, 2022. Under certain circumstances, the New Notes are redeemable at Affinion’s option prior to maturity. If the New Notes are not so redeemed by Affinion, under certain circumstances, Affinion may be required to make an offer to purchase New Notes.
Affinion’s obligations under the New Notes are jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by the same entities that guarantee the New Credit Facility. The New Notes and guarantees thereof are unsecured senior obligations of Affinion and each of the guarantors. The New Notes Indenture contains negative covenants that restrict the ability of Affinion and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. In addition, the covenants restrict Affinion Holdings’ ability to engage in certain businesses or business activities. Affinion will not be required to deliver any separate reports to holders or financial statements or other information of Affinion and its restricted subsidiaries as long as Affinion Holdings is a guarantor of the New Notes and files such reports with the SEC.
2015 Exchange Offers
On November 9, 2015, (a) Affinion Holdings completed a private offer to exchange (the “2015 Holdings Exchange Offer”) its outstanding 2013 senior notes for shares of its Common Stock, (b) Affinion Investments completed a private offer to exchange (the “2015 Investments Exchange Offer” and, together with the 2015 Holdings Exchange Offer, the “2015 Exchange Offers”) its senior subordinated notes for shares of Common Stock, and (c) Affinion Holdings and Affinion International jointly completed a rights offering (the “2015 Rights Offering”) giving holders of Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes the right to purchase $110.0 million aggregate principal amount of International Notes and up to 2,483,333 shares of Common Stock for an aggregate cash purchase price of $110.0 million. Pursuant to the 2015 Holdings Exchange Offer, approximately $247.4 million of Affinion Holdings’ 2013 senior notes were exchanged for 1,769,104 shares of Common Stock and pursuant to the 2015 Investments Exchange Offer, approximately $337.3 million of the Investments senior subordinated notes were exchanged for 5,236,517 shares of Common Stock.
In connection with the 2015 Rights Offering, Empyrean agreed to purchase any rights offering units that were unpurchased in the 2015 Rights Offering (the “Backstop”). Pursuant to the 2015 Rights Offering and the Backstop, Affinion International received cash of approximately $110.0 million in exchange for $110.0 million aggregate principal amount of International Notes and 2,021,042 shares of Common Stock and a non-participating penny warrant (the “Limited Warrant”) of Affinion Holdings that are exercisable into 462,266 shares of Common Stock upon certain conditions.
The carrying value of the aggregate debt instruments held by the participants to the 2015 Exchange Offers and 2015 Rights Offering (including associated debt discounts, deferred financing, and accrued interest), was $945.7 million. This was compared to the fair value of the equity issued in the 2015 Exchange Offers and 2015 Rights Offering for such debt instruments, which were valued at $133.5 million as of the date of the 2015 Exchange Offers. This exceeded the undiscounted cash flows of the aggregate lending. The Company recognized a gain in its consolidated statement of operations of $318.9 million on the 2015 Exchange Offers in 2015, which represented the write-down of the carrying value of the aggregate debt instruments to the undiscounted cash flows of the continuing debt instruments. The 2015 Exchange Offers contemplated a portion of the overall debt instruments held by the participants to the 2015 Exchange Offers.
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In connection with the recognition of the 2015 Exchange Offers and 2015 Rights Offering, the impact of these transactions is summarized as follows, including the aforementioned gain of $318.9 million (in millions).
Reduction of carrying value of debt exchanged |
| $ | (584.8 | ) |
Reduction of accrued interest associated with debt exchanged |
|
| (16.0 | ) |
Write-off of debt discount and deferred financing costs, plus professional fees |
|
| 40.0 |
|
Fair value of equity issued in the debt exchange and rights offering |
|
| 133.5 |
|
Gain recorded as noted above |
|
| 318.9 |
|
Adjustment to carrying value of debt |
| $ | (108.4 | ) |
The adjustment to the carrying value of the debt was the net impact of the aforementioned transactions and represented an adjustment of Affinion’s first lien term loan due 2018, Affinion’s second lien term loans due 2018, Affinion’s 2010 senior notes and the International Notes of $108.4 million. This amount represented the interest to be paid in cash on the continuing debt instruments held by those who participated in the 2015 Exchange Offers but which were not modified by the 2015 Exchange Offers through the scheduled maturity of those instruments. This amount, net of amortization, increased the carrying value of the Company’s recorded long term debt at December 31, 2016 by $65.7 million. Such amounts had been reduced as scheduled interest is paid on those remaining instruments.
Upon consummation of the 2015 Exchange Offers, concurrent consent solicitations and 2015 Rights Offering, Affinion Holdings effected a reclassification (the “Reclassification”) as follows. Affinion Holdings’ existing Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) (including Class A Common Stock issued as a result of a mandatory cashless exercise of all of Affinion Holdings’ Series A Warrants (the “Series A Warrants”) was converted into (i) shares of Affinion Holdings’ new Class C Common Stock (as defined below), that upon conversion will represent 5% of the outstanding shares of Common Stock on a fully diluted basis, and (ii) shares of Affinion Holdings’ new Class D Common Stock (as defined below), that upon conversion will represent 5% of the outstanding shares of Common Stock on a fully diluted basis. In addition, Affinion Holdings’ Series A Warrants and Affinion Holdings’ Class B Common Stock were eliminated from Affinion Holdings’ certificate of incorporation and Affinion Holdings’ Series B Warrants (the “Series B Warrants”) were cancelled for no additional consideration.
5. DEFICIT
As of September 30, 2017 and December 31, 2016, the Company’s capital stock consisted of a total of 550,000,000 authorized shares, of which 520,000,000 shares, $0.01 par value per share, are designated as “Common Stock,” 10,000,000 shares, $0.01 par value per share, are designated as “Class C Common Stock,” 10,000,000 shares, $0.01 par value per share, are designated as “Class D Common Stock” (and, together with the Class C Common Stock, the “Class C/D Common Stock”) and 10,000,000 shares, $0.01 par value per share, are designated as “preferred stock.” As of September 30, 2017, the Company had outstanding (i) 9,157,071 shares of Common Stock, (ii) 427,955 shares of Class C Common Stock and (iii) 450,482 shares of Class D Common Stock. As of September 30, 2017, the Company had outstanding New Warrants (as described further below) to purchase shares of Common Stock. As of December 31, 2016, the Company had outstanding (i) 9,093,330 shares of Common Stock, (ii) 427,955 shares of Class C Common Stock and (iii) 450,482 shares of Class D Common Stock. As of December 31, 2016, the Company had no outstanding New Warrants. In addition, at September 30, 2017 and December 31, 2016, the Limited Warrant to purchase up to 462,266 shares of Common Stock was outstanding. As of September 30, 2017 and December 31, 2016, there were no shares of preferred stock outstanding.
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On May 10, 2017, in connection with the Exchange Offers and Investor Purchase Agreement, the Company issued New Warrants to purchase 3,974,581 shares of Common Stock, in the aggregate, of which (a) New Warrants to purchase 1,172,747 shares of Common Stock were issued to holders (including certain of the Investors) whose Existing Notes (as defined below) were accepted for exchange in the Exchange Offers, including 1,053,871 issued to related parties, and (b) New Warrants to purchase 2,801,834 shares of Common Stock were issued in connection with the Investor Purchase Agreement, including the funding and commitment premiums under the Investor Purchase Agreement, including 2,791,475 issued to the Investors, all of whom are related parties. In connection with the Exchange Offers and the Investor Purchase Agreement, and in accordance with Affinion Holdings’ obligations under the Shareholders Agreement, dated as of November 9, 2015 (as amended, the “Shareholders Agreement”), due to the issuance of the New Warrants in the Exchange Offers and pursuant to the Investor Purchase Agreement, commencing on June 22, 2017, and expiring on July 7, 2017, Affinion Holdings offered (the “Pre-Emptive Rights Offer”) to each holder of pre-emptive rights (“Pre-Emptive Rights Holder”) the right to purchase with cash up to such Pre-Emptive Rights Holder’s pro rata share (as determined in accordance with the Shareholders Agreement) of New Warrants issued pursuant to the Exchange Offers and the Investor Purchase Agreement at a price of $7.13 per New Warrant. On July 12, 2017, Affinion Holdings issued New Warrants to purchase 63,741 shares of Common Stock, which were subsequently exercised on August 10, 2017, to participants in the Pre-Emptive Rights Offer (as defined below). On July 17, 2017, Affinion Holdings issued New Warrants to purchase 418,355 shares of Common Stock, including New Warrants to purchase 414,868 shares of Common Stock to the Investors, all of whom are related parties, in connection with the Investor Purchase Agreement, including the funding premium under the Investor Purchase Agreement. In addition, as a result of the anti-dilution protections of the New Warrants, the number of shares of Common Stock underlying the New Warrants issued on May 10, 2017 to holders other than the Investors increased, in the aggregate, by 3,487 shares. The number of shares of Common Stock issuable upon the exercise of the New Warrants, as described herein, reflects the application of the anti-dilution protections of the New Warrants issued in the Exchange Offers and pursuant to the Investor Purchase Agreement that are triggered by the issuance of New Warrants as part of the funding premium and in the Pre-Emptive Rights Offer.
The New Warrants are immediately exercisable upon issuance and will terminate on the earlier to occur of (i) November 10, 2022 and (ii) five business days following the consummation of a sale of Affinion Holdings or other similar fundamental transaction. Each New Warrant is exercisable for one share of Common Stock at a price equal to $0.01. New Warrants will not be exercisable if the recipient of the Common Stock to be issued upon exercise has failed to obtain any required consents or waivers from, or failed to file any required notices with, any applicable governmental agency.
The New Warrants contain customary provisions for the adjustment of the number of shares of Common Stock issuable upon exercise in the event of the occurrence of any organic dilutive (or anti-dilutive) events, including, but not limited to, splits, combinations, stock dividends and similar transactions, as well as in the event of dividends or distributions in respect of Common Stock to the extent that holders of New Warrants are not permitted to participate on an as-exercised basis. The New Warrants were all subject to anti-dilution adjustments (the “Adjustment Feature”) in connection with the issuance of New Warrants pursuant to the Investor Purchase Agreement in respect of the funding premium thereunder and pursuant to the Pre-Emptive Rights Offer that expired on July 7, 2017. As a result of the application of these anti-dilution adjustments, the New Warrants offered in the Exchange Offers and pursuant to the Investor Purchase Agreement (excluding the New Warrants to be issued in respect of the funding premium) represented, as of July 17, 2017, approximately 15% of the fully diluted ownership of Affinion Holdings and the New Warrants issued as part of the commitment premium under the Investor Purchase Agreement represented, as of July 17, 2017, approximately 14.3% of the fully diluted ownership of Affinion Holdings, in each case without giving effect to options and restricted stock units granted under Affinion Holdings’ management compensation and incentive plans.
All Holders of exercisable New Warrants will be entitled to participate in dividends on an as-exercised basis, subject to any regulatory restrictions. Holders will not be entitled to any other rights of holders of Common Stock until, and to the extent, they have validly exercised their New Warrants. Upon exercise, such holders will be entitled to execute joinders to the Shareholders Agreement, dated as of November 9, 2015, as amended, by and among Affinion Holdings and the stockholders from time to time party thereto and the Amended and Restated Registration Rights Agreement, dated as of March 31, 2017, and effective as of May 10, 2017, by and among Affinion Holdings and the investors from time to time party thereto.
The Company performed an accounting analysis and determined that the New Warrants represent in substance common stock and that the New Warrants issued pursuant to the Exchange Offers, Investor Purchase Agreement, required anti-dilution provisions and commitment premium and funding premium represent a debt discount of $16.1 million. Fees associated with new lenders of $4.6 million have been recorded as debt discount. Fees related to existing lenders who continued to be lenders in connection with the Exchange Offers have been expensed.
The consummation of the AGI Exchange Offer as of May 10, 2017 has resulted in an “ownership change” for the Company pursuant to Section 382 of the Internal Revenue Code. This may further limit our ability to use our pre-change net operating loss carryforwards (including those attributable to the 2005 Acquisition) and certain other pre-change tax attributes to offset our post-change income. Similar rules and limitations may apply for state tax purposes as well. It is not expected at this time that any potential limitation will have a material impact on either the tax provision or the operating results.
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6. EARNINGS PER SHARE
Basic earnings per share (“EPS”) attributable to holders of Common Stock is computed by dividing net income attributable to holders of Common Stock for the three and nine months ended September 30, 2017 and 2016 by the weighted average number of shares of Common Stock outstanding. Diluted EPS attributable to holders of Common Stock reflects the potential dilution of Class C/D Common Stock, stock options, restricted stock units (“RSUs”) and incentive awards that could be exercised or converted into shares of Common Stock, and is computed by dividing net income attributable to holders of Common Stock for the three and nine months ended September 30, 2017 and 2016 by the weighted average number of shares of Common Stock outstanding plus the potentially dilutive securities.
The computation of basic and diluted earnings (loss) per share is set forth below:
($ in millions, except per share data) |
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| September 30, 2017 |
|
| September 30, 2016 |
|
| September 30, 2017 |
|
| September 30, 2016 |
| ||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (10.9 | ) |
| $ | 7.2 |
|
| $ | (28.5 | ) |
| $ | 17.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of Common Stock |
|
| 9,129,357 |
|
|
| 9,093,330 |
|
|
| 9,105,471 |
|
|
| 9,093,330 |
|
Weighted average shares for warrants |
|
| 4,373,493 |
|
|
| — |
|
|
| 2,230,914 |
|
|
| — |
|
Weighted average shares for vested RSUs |
|
| 20,040 |
|
|
| 14,599 |
|
|
| 20,040 |
|
|
| 7,779 |
|
Basic weighted average shares of Common Stock |
|
| 13,522,890 |
|
|
| 9,107,929 |
|
|
| 11,356,425 |
|
|
| 9,101,109 |
|
Basic weighted average shares of Common Stock |
|
| 13,522,890 |
|
|
| 9,107,929 |
|
|
| 11,356,425 |
|
|
| 9,101,109 |
|
Weighted average dilutive effect of RSUs |
|
| — |
|
|
| 1,507 |
|
|
| — |
|
|
| 902 |
|
Diluted weighted average shares of Common Stock |
|
| 13,522,890 |
|
|
| 9,109,436 |
|
|
| 11,356,425 |
|
|
| 9,102,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to holders of Common Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | (0.80 | ) |
| $ | 0.80 |
|
| $ | (2.51 | ) |
| $ | 1.89 |
|
Diluted |
| $ | (0.80 | ) |
| $ | 0.80 |
|
| $ | (2.51 | ) |
| $ | 1.89 |
|
7. INCOME TAXES
The income tax provision is determined using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statements and income tax bases of assets and liabilities using currently enacted tax rates. Deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion, or all, of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the income tax provision, while increases to the valuation allowance result in additional income tax provision. The realization of deferred tax assets is primarily dependent on estimated future taxable income. As of September 30, 2017 and December 31, 2016, the Company has recorded a full valuation allowance for its U.S. federal net deferred tax assets. As of September 30, 2017 and December 31, 2016, the Company has also recorded valuation allowances against the deferred tax assets related to certain state and foreign tax jurisdictions.
The Company’s effective income tax rates for the three and nine months ended September 30, 2017 were (21.1)% and (30.1)%, respectively. The Company’s effective income tax rates for the three and nine months ended September 30, 2016 were 19.1% and 24.5%, respectively. The difference in the effective tax rates for the three months ended September 30, 2017 and 2016 is primarily a result of the change from income before income taxes and non-controlling interest of $9.2 million for the three months ended September 30, 2016 to a loss before income taxes and non-controlling interest of $9.0 million for the three months ended September 30, 2017 and an increase in the income tax provision from $1.7 million for the three months ended September 30, 2016 to $1.8 million for the three months ended September 30, 2017. The difference in the effective tax rates for the nine months ended September 30, 2017 and 2016 is primarily a result of the change from income before income taxes and non-controlling interest of $23.4 million for the nine months ended September 30, 2016 to a loss before income taxes and non-controlling interest of $21.4 million for the nine months ended September 30, 2017 and an increase in the income tax provision from $5.7 million for the nine months ended September 30, 2016 to $6.4 million for the nine months ended September 30, 2017. The Company’s effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income it earns in those jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state and foreign income taxes, the requirement to maintain valuation allowances had the most significant impact on the difference between the Company’s effective tax rate and the statutory U.S. federal income tax rate of 35%.
16
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company recognized less than $0.1 million and $0.2 million, respectively, of interest related to uncertain tax positions in the three and nine month periods ended September 30, 2017. The Company recognized less than $0.1 million and $0.2 million, respectively, of interest related to uncertain tax positions in the three and nine month periods ended September 30, 2016. The interest has been included in income tax expense for the three and nine month periods ended September 30, 2017. The Company’s gross unrecognized tax benefits for the nine months ended September 30, 2017 decreased by $0.2 million as a result of tax positions taken during the three and nine month periods ended September 30, 2017, which was offset by a valuation allowance.
The Company’s income tax returns are periodically examined by various tax authorities. In connection with these and future examinations, certain tax authorities, including the Internal Revenue Service, may raise issues and impose additional assessments. The Company regularly evaluates the likelihood of additional assessments resulting from these examinations and establishes liabilities, through the provision for income taxes, for potential amounts that may result therefrom. The recognition of uncertain tax benefits are not expected to have a material impact on the Company’s effective tax rate or results of operations. Federal, state and local jurisdictions are subject to examination by the taxing authorities for all open years as prescribed by applicable statute. For significant foreign jurisdictions, tax years in Germany, France, Turkey, Switzerland and the United Kingdom remain open as prescribed by applicable statute. The Company does not believe that it is reasonably possible that the total amount of unrecognized tax benefits will change significantly within the next 12 months.
8. COMMITMENTS AND CONTINGENCIES
Litigation
In the ordinary course of business, the Company is involved in claims, governmental inquiries and legal proceedings related to employment matters, contract disputes, business practices, trademark and copyright infringement claims and other commercial matters. The Company is also a party to lawsuits which were brought against it and its affiliates and which purport to be a class action in nature and allege that the Company violated certain federal or state consumer protection statutes (as described below). The Company intends to vigorously defend itself against such lawsuits.
On June 17, 2010, a class action complaint was filed against the Company and Trilegiant Corporation (“Trilegiant”) in the United States District Court for the District of Connecticut. The complaint asserts various causes of action on behalf of a putative nationwide class and a California-only subclass in connection with the sale by Trilegiant of its membership programs, including claims under the Electronic Communications Privacy Act (“ECPA”), the Connecticut Unfair Trade Practices Act (“CUTPA”), the Racketeer Influenced Corrupt Organizations Act (“RICO”), the California Consumers Legal Remedies Act, the California Unfair Competition Law, the California False Advertising Law, and for unjust enrichment. On April 26, 2012, the court consolidated two additional lawsuits making substantially similar allegations that were filed against the Company, Trilegiant, and numerous other defendants. An additional lawsuit, which was identical in all respects to these cases, was also consolidated on March 28, 2014.
On December 7, 2012, all Defendants filed motions seeking to dismiss the consolidated amended complaint. On March 28, 2014, the court entered orders granting in part and denying in part the motions to dismiss. After the motions, claims under the ECPA and CUTPA and for unjust enrichment remained pending against the Company and Trilegiant. On February 29, 2016, the Company filed a Motion for Summary Judgment on the claims of the remaining named Plaintiffs. On August 23, 2016, the court granted the Company’s motion for Summary Judgment as to all remaining claims against the Defendants. Plaintiffs appealed. Briefing of the appeal is complete, and the court of appeals has scheduled oral argument for October 27, 2017.
On August 27, 2010, a former member of Webloyalty’s membership programs filed a putative class action lawsuit against Webloyalty, one of its former clients, and one of the credit card associations in the United States District Court for the District of Connecticut (the “Connecticut District Court”). The Plaintiff alleged that Webloyalty’s enrollment of the Plaintiff using debit card information obtained from a third party via data pass, and not directly from the Plaintiff, was deceptive. The Plaintiff seeks to represent a nationwide class of consumers whose credit or debit card data was transferred to Webloyalty via data pass on or after October 1, 2008. The complaint, which was amended several times, asserted, among others, claims for violations of the Electronic Funds Transfer Act (“EFT”), the ECPA, and CUTPA as well as other common law claims. On October 15, 2015, the Connecticut District Court entered judgment dismissing all claims with prejudice. The Plaintiff appealed that judgment as to Webloyalty and its former client to the United States Court of Appeals for the Second Circuit (the “Second Circuit”). On December 20, 2016, the Second Circuit affirmed the District Court of Connecticut’s dismissal in part, but reversed and remanded the dismissal of claims under CUTPA and the EFT. On March 23, 2017, the District Court of Connecticut held a scheduling conference and took the parties’ respective recommendations for the remaining case schedule under advisement. The defendants have answered the complaint and denied any liability. On June 30, 2017, the Plaintiff filed his opposition to this motion, and the defendants’ reply was filed on July 14, 2017.
On June 7, 2012, a factually similar class action lawsuit was filed against Webloyalty in the U.S. District Court for the Southern District of California (the “District Court of S.C.”). After filing several amended complaints, the Plaintiff asserted a variety of claims, including claims under the EFT, the ECPA, California Business and Professional Code § 17200, et seq. (the “CBPC”), CUTPA,
17
various privacy statutes, and common law. The Plaintiff seeks to represent a nationwide class of consumers whose credit or debit card information was obtained by Webloyalty via data pass, and had their credit or debit cards charged on or after October 1, 2008. On June 22, 2015, the District Court of S.C. entered judgment dismissing the Plaintiff’s federal claims with prejudice, and his state claims without prejudice. The Plaintiff appealed that judgement to the United States Court of Appeals for the Ninth Circuit (the “Ninth Circuit”). On March 28, 2017, the Ninth Circuit affirmed the dismissal of the Plaintiff’s ECPA and privacy-based state law claims, but reversed and remanded the dismissal of other claims, including the Plaintiff’s claims under the EFT, CBPC, and CUTPA. On September 5, 2017, the Plaintiff filed a third amended complaint, which asserts the claims that were remanded by the Ninth Circuit. Webloyalty has answered the complaint and denied all liability. The District Court of S.C. has not yet entered a scheduling order.
On May 11, 2016, Kohl’s Department Stores, Inc. (“Kohl’s”) filed a third-party complaint against Trilegiant in the United States District Court for the Eastern District of Pennsylvania (the “District Court of E. Pa.”), alleging claims for indemnification, contribution and breach of contract. The third-party complaint arises in a case filed in the same court on February 13, 2015, in which a putative class action has been brought against Kohl’s and the issuer of Kohl’s credit cards alleging breach of the covenant of good faith and fair dealing and unjust enrichment. Kohl’s third-party complaint alleged that Trilegiant breached alleged obligations to Kohl’s under a marketing agreement between Trilegiant and Kohl’s through which a Trilegiant membership program was offered to Kohl’s credit card customers, including Trilegiant’s purported obligation under that agreement to indemnify Kohl’s and participate in its defense of the class action. Kohl’s third-party complaint sought damages from Trilegiant, including amounts for which Kohl’s may be liable to the named plaintiffs or the putative class in the class action relating to their claims pertaining to Trilegiant’s membership program and Kohl’s costs, including attorney fees, of defending against such claims On March 1, 2017, the parties entered into a settlement and release wherein Trilegiant agreed to make a payment to Kohl’s of approximately $0.3 million and to pay 30% of Kohl’s on-going legal fees in the putative class action, capped at $0.4 million (excluding Trilegiant’s initial payment of approximately $0.3 million), to resolve Kohl’s indemnification, contribution and breach of contract claims against Trilegiant with respect to fees and expenses that Kohl’s has incurred or will incur in connection with its defense of the putative class action. Kohl’s reserved its right to seek indemnity from Trilegiant for any liability Kohl’s may incur to the plaintiffs in the putative class action relating to Trilegiant’s membership program. The third-party complaint was dismissed without prejudice by stipulation of the parties on March 10, 2017.
On August 18, 2016, Lion Receivables 2004 Trust (“Lion”) served Long Term Preferred Care, Inc. (“LTPC”), a subsidiary of Affinion Benefits Group, LLC, with a complaint (the “Lion Litigation”), which was filed in the United States District Court for the State of Delaware (the “District Court of Delaware”). In the complaint, Lion alleges that LTPC made certain inaccurate representations and warranties in the Commission Purchase Agreement, dated as of December 30, 2004, between LTPC and Lion. Lion seeks compensatory damages, pre-judgment and post-judgment interest, and attorneys’ fees. LTPC filed a motion to dismiss in response to the complaint on October 24, 2016. On March 20, 2017, a magistrate judge recommended the Court deny LTPC’s motion to dismiss. On August 31, 2017 the District Court of Delaware adopted the magistrate’s recommendation denying LTPC’s motion to dismiss. On September 14, 2017, LTPC filed its Answer and Defenses to the complaint. Pursuant to the Company’s purchase agreement with Cendant, the Cendant Entities (as such terms are defined in Note 10 to these unaudited condensed consolidated financial statements) have agreed to indemnify us for any liability relating to this matter.
Other Contingencies
From time to time, the Company receives inquiries from federal and state agencies, which may include the Federal Trade Commission, the Federal Communications Commission, the Consumer Financial Protection Bureau, state attorneys general and other state regulatory agencies, including state insurance regulators. The Company responds to these matters and requests for documents, some of which may lead to further investigations and proceedings. Additionally, certain of our clients have become, and others may become, involved in legal proceedings or governmental inquiries relating to our programs and solutions or marketing practices. As a result, we may be subject to claims under our marketing agreements, and we have accrued $8.5 million for certain asserted claims, including claims for which no litigation has been commenced.
From time to time, our international operations also receive inquiries from consumer protection, insurance or data protection agencies. The Company responds to these matters and requests for documents, some of which may lead to further investigations and proceedings. On January 27, 2015, following voluntary discussions with the UK Financial Conduct Authority, AIL, one of our UK subsidiaries, and 11 UK retail banks and credit card issuers, announced a proposed joint arrangement, which allows eligible consumers to make claims for compensation in relation to a discontinued benefit in one of AIL’s products. The proposed arrangement has been approved by a majority of those affected consumers who voted at a creditors’ meeting held on June 30, 2015, and has also been approved by the High Court in London at a hearing held on July 9, 2015. The proposed arrangement, which will not result in the imposition of any fines on AIL or the Company, became effective on August 17, 2015 and eligible customers had until March 18, 2016 to claim compensation (in exceptional circumstances, they had until September 18, 2016). The arrangement, as well as its underlying structure, was terminated on August 1, 2017 and as of September 30, 2017, all of the compensation to consumers had been paid.
On November 30, 2015, PNC Bank, N.A. (“PNC”) filed a pleading called a Praecipe for Writ of Summons (the “Writ”) in the Court of Common Pleas of Allegheny County, Pennsylvania, naming as defendants Trilegiant Corporation, Affinion Benefits Group, LLC, Affinion and/or Affinion Holdings. The parties participated in a non-binding mediation on September 13, 2016. The parties were
18
unable to resolve their dispute in the mediation. On November 18, 2016, PNC filed a complaint in the Pennsylvania Court of Common Pleas against Trilegiant for indemnification, breach of contract, unjust enrichment and breach of implied covenant of good faith and fair dealing. The complaint also alleges negligence and intentional misconduct by other Affinion entities. These claims arise out of consent orders that PNC entered into with the Office of the Comptroller of the Currency (“OCC”) to settle the OCC’s Section 5 claim against it. According to PNC, the damages it incurred pursuant to those consent orders were the result of Trilegiant’s failure to properly service PNC’s customers. Trilegiant’s preliminary objections to PNC’s complaint were filed on January 12, 2017. On January 30, 2017, the case was transferred from the Court of Common Pleas to the Commerce Court and Complex Litigation Center. Oral argument on Trilegiant’s preliminary objections was held on May 9, 2017. On May 25, 2017, the Court issued its opinion, dismissing some claims, but keeping the indemnification and unjust enrichment claims. On June 19, 2017, the defendants filed their answer. Discovery is under way.
On August 5, 2016, Citizens Bank, N.A. (“Citizens”) filed a complaint against Affinion Holdings, Affinion, Trilegiant, and Affinion Group, LLC (collectively, the “Defendants”) in the United States District Court for the District of Rhode Island. In the complaint, Citizens asserts various causes of action and requests for monetary relief, including a demand for contractual indemnification for customer refunds and attorneys’ fees that Citizens incurred related to a consent order entered into by Citizens with the Office of the Comptroller of the Currency on November 10, 2015 with respect to certain identity theft protection products offered to Citizens’ customers. On November 18, 2016, Defendants’ filed a motion to dismiss in response to the complaint. On February 6, 2017, the Court denied Defendants’ motion to dismiss. Dispositive motions were due by December 6, 2017. On July 13, 2017, the parties entered into a settlement agreement dismissing the lawsuit with prejudice and requiring a payment of less than $1.0 million to Citizens.
In the first quarter of 2017, a charge of $5.2 million was recorded relating to the anticipated customer remediation of an external gift card cyber theft. During the three months ended June 30, 2017, a charge of $18.1 million was recorded related to the cyber theft, primarily related to a commercial dispute with one of our gift card providers and discussions with that provider are still ongoing. An insurance claim related to the cyber theft is currently being pursued with the Company’s carriers and we expect a recovery in a future period which will be recorded when realizable.
The Company believes that the amount accrued for the above litigation and contingencies matters is adequate, and the reasonably possible loss beyond the amounts accrued will not have a material effect on its consolidated financial statements, taken as a whole, based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that accruals are adequate and it intends to vigorously defend itself against such matters, unfavorable resolution could occur, which could have a material effect on the Company’s consolidated financial statements, taken as a whole.
Surety Bonds and Letters of Credit
In the ordinary course of business, the Company is required to provide surety bonds to various state authorities in order to operate its membership, insurance and travel agency programs. As of September 30, 2017, the Company provided guarantees for surety bonds totaling approximately $10.1 million and issued letters of credit totaling $7.2 million.
9. STOCK-BASED COMPENSATION
On October 17, 2005, Affinion Holdings adopted the 2005 Stock Incentive Plan (the “2005 Plan”). The Board was authorized to grant up to 4.9 million shares of Affinion Holdings’ common stock under the 2005 Plan over a ten year period. As discussed below, no additional grants may be made under Affinion Holdings’ 2005 Plan on or after November 7, 2007, the effective date of the 2007 Plan (as defined below). As discussed below, on November 9, 2015, the effective date of the Reclassification, as defined below, existing option awards under the 2005 Plan were adjusted in accordance with their terms. Generally, existing options for Class A Common Stock (as defined below) under the 2005 Plan have been converted into options for shares of Affinion Holdings’ Class C Common Stock, and Affinion Holdings’ Class D Common Stock, and both the exercise price and the number of shares of Class C Common Stock and Class D Common Stock underlying such options have been adjusted.
In November 2007, Affinion Holdings adopted the 2007 Stock Award Plan (the “2007 Plan”). The Board was authorized to grant up to 10.0 million shares of Affinion Holdings’ common stock under the 2007 Plan over a ten year period. As discussed below, no additional grants may be made under Affinion Holdings’ 2007 Plan on or after November 9, 2015, the effective date of the Reclassification and all outstanding options granted under the 2007 Plan were cancelled for no consideration, effective November 9, 2015.
In connection with the acquisition of Webloyalty in January 2011, the Company assumed the Webloyalty Holdings, Inc. 2005 Equity Award Plan (the “Webloyalty 2005 Plan”). In connection with the Reclassification, as defined below, all outstanding options granted under the Webloyalty 2005 Plan were cancelled for no consideration, effective November 9, 2015.
19
On November 9, 2015, in conjunction with the 2015 Exchange Offers, the 2015 Consent Solicitations and the 2015 Rights Offering, Affinion Holdings effected the Reclassification as follows. Immediately prior to the Reclassification, the Series A Warrants were mandatorily cashlessly exercised for shares of Affinion Holdings’ then existing Class A Common Stock and the Series B Warrants were cancelled for no additional consideration. In addition, all issued and outstanding options under the Webloyalty 2005 Plan and the 2007 Plan were cancelled for no additional consideration. Stock options issued and outstanding under the 2005 Plan were not affected by the cancellation. In accordance with the Reclassification, Affinion Holdings’ Class A Common Stock was converted into shares of Affinion Holdings’ Class C/D Common Stock. Issued and outstanding options under the 2005 Plan were converted into options to acquire shares of Affinion Holdings’ Class C Common Stock and shares of Affinion Holdings’ Class D Common Stock. The number of shares of Class C/D Common Stock subject to the issued and outstanding options was adjusted based on the conversion ratio utilized for the conversion of the Class A Common Stock, and the exercise price was correspondingly adjusted. As of September 30, 2017, there were outstanding options to acquire approximately 2,214 shares of Affinion Holdings’ Class C Common Stock and approximately 2,331 shares of Affinion Holdings’ Class D Common Stock. The weighted average exercise price of the outstanding options, all of which were vested at September 30, 2017, is $147.12 and the issued and outstanding options granted to employees and to directors each have a weighted average contractual life of 6.5 years.
On November 9, 2015, the Company’s Board of Directors (the “Board of Directors”) adopted the 2015 Equity Incentive Plan (the “2015 Plan”), which authorizes the Compensation Committee to grant stock options, restricted stock, RSUs and other equity-based awards. Under the 2015 Plan, 10% of the outstanding shares of common stock have been reserved for issuance pursuant to awards. On March 9, 2016, the Compensation Committee awarded 859,500 options to employees under the 2015 Plan, and subsequently issued another 28,000 options to employees under the 2015 Plan. As of September 30, 2017, there were 836,719 options outstanding.
For employee stock awards, the Company recognizes compensation expense, net of estimated forfeitures, over the requisite service period, which is the period during which the employee is required to provide services in exchange for the award. The Company has elected to recognize compensation cost for awards with only a service condition and have a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.
Stock Options
During the three and nine months ended September 30, 2017 and 2016, there were no stock options granted to employees from the 2005 Plan. All options previously granted were granted with an exercise price equal to the estimated fair market value of a share of the underlying common stock on the date of grant.
Stock options granted to employees from the 2005 Plan are comprised of three tranches with the following terms:
|
| Tranche A |
| Tranche B |
| Tranche C |
Vesting |
| Ratably over 5 years* |
| 100% after 8 years** |
| 100% after 8 years** |
Initial option term |
| 10 years |
| 10 years |
| 10 years |
* | In the event of a sale of the Company, vesting for tranche A occurs 18 months after the date of sale. |
** | Tranche B and C vesting would be accelerated upon specified realized returns to Apollo Global Management, LLC (together with its subsidiaries, “Apollo”). |
On March 28, 2014, the Company modified approximately 1.9 million of the outstanding options under the 2005 Plan, adjusting the exercise price to $1.14 per common share and extending the contractual life of the modified options until April 1, 2024.
During the three and nine months ended September 30, 2017 and 2016, there were no stock options granted to employees from the 2007 Plan. All options granted were granted with an exercise price equal to the estimated fair market value of a share of the underlying common stock on the date of grant.
The stock options granted to employees from the 2007 Plan have the following terms:
Vesting period |
| Ratably over 4 years |
Initial option term |
| 10 years |
On March 28, 2014, the Company modified approximately 2.4 million of the outstanding options under the 2007 Plan, adjusting the exercise price to $1.14 per common share and extending the contractual life of the modified options until April 1, 2024. On November 9, 2015, in conjunction with the Reclassification, all issued and outstanding options under the 2007 Plan were cancelled for no additional consideration.
20
During the three and nine months ended September 30, 2017 and 2016, there were no stock options granted to members of the Board of Directors from the 2007 Plan. Generally, options granted to members of the Board of Directors fully vest on the date of grant and have an initial option term of 10 years. On March 28, 2014, the Company modified approximately 0.2 million of the outstanding options granted to members of the Board of Directors, adjusting the exercise price to $1.14 per common share and extending the contractual life of the modified options until April 1, 2024. On November 9, 2015, in conjunction with the Reclassification, all issued and outstanding options granted to members of the Board of Directors under the 2007 Plan were cancelled for no additional consideration.
During the nine months ended September 30, 2016, the Compensation Committee granted options to employees under the 2015 Plan to purchase 0.9 million shares of Affinion Holdings’ Common Stock. There were no options granted to employees under the 2015 Plan during the three and nine months ended September 30, 2017 and three months ended September 30, 2016. The options have a contractual life of 10 years and vest ratably on each of the first four anniversaries of the grant date. The exercise price of the options is $13.97 per share, the grant date fair value of a share of Affinion Holdings’ Common Stock.
The fair value of each option award was estimated on the date of grant using the Black-Scholes option-pricing model based on the assumptions noted in the following table. Expected volatilities are based on historical volatilities of comparable companies.
The expected term of the options granted represents the period of time that options are expected to be outstanding, and is based on the average of the requisite service period and the contractual term of the option.
|
| 2016 Grants |
| |
Expected volatility |
|
| 75 | % |
Expected life (in years) |
| 6.5 |
| |
Risk-free interest rate |
|
| 1.64 | % |
Expected dividends |
| — |
|
A summary of option activity for options to acquire shares of Class C/D Common Stock under the 2005 Plan for the nine months ended September 30, 2017 is presented below (number of options in thousands):
|
| 2005 Plan |
|
| 2005 Plan |
|
| 2005 Plan |
|
|
|
|
| |||
|
| Grants to |
|
| Grants to |
|
| Grants to |
|
| Grants to |
| ||||
|
| Employees - |
|
| Employees - |
|
| Employees - |
|
| Board of |
| ||||
|
| Tranche A |
|
| Tranche B |
|
| Tranche C |
|
| Directors |
| ||||
Outstanding options at January 1, 2017 |
|
| 2 |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited or expired |
|
| — |
|
|
| — |
|
|
| — |
|
| — |
| |
Outstanding options at September 30, 2017 |
|
| 2 |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Vested or expected to vest at September 30, 2017 |
|
| 2 |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Exercisable options at September 30, 2017 |
|
| 2 |
|
|
| 1 |
|
|
| 1 |
|
|
| 1 |
|
Weighted average remaining contractual term (in years) |
|
| 6.5 |
|
|
| 6.5 |
|
|
| 6.5 |
|
|
| 6.5 |
|
Weighted average grant date fair value per option granted in 2017 |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
Weighted average exercise price of exercisable options at September 30, 2017 |
| $ | 147.12 |
|
| $ | 147.12 |
|
| $ | 147.12 |
|
| $ | 147.12 |
|
Weighted average exercise price of outstanding options at September 30, 2017 |
| $ | 147.12 |
|
| $ | 147.12 |
|
| $ | 147.12 |
|
| $ | 147.12 |
|
21
A summary of option activity for options to acquire shares of Common Stock granted under the 2015 Plan for the nine months ended September 30, 2017 is presented below (number of options in thousands):
Outstanding options at January 1, 2017 |
|
| 874 |
|
Granted |
|
| — |
|
Exercised |
| — |
| |
Forfeited or expired |
|
| (37 | ) |
Outstanding options at September 30, 2017 |
|
| 837 |
|
Vested or expected to vest at September 30, 2017 |
|
| 837 |
|
Exercisable options at September 30, 2017 |
|
| 212 |
|
Weighted average remaining contractual term (in years) |
|
| 8.5 |
|
Weighted average grant date fair value per option granted in 2017 |
| $ | — |
|
Weighted average exercise price of exercisable options at September 30, 2017 |
| $ | 13.97 |
|
Weighted average exercise price of outstanding options at September 30, 2017 |
| $ | 13.97 |
|
Based on the estimated fair values of options granted, stock-based compensation expense for the three and nine months ended September 30, 2017 totaled $0.5 million and $1.4 million, respectively. Based on the estimated fair values of options granted, stock-based compensation expense for the three and nine months ended September 30, 2016 totaled $0.5 million and $1.1 million, respectively. As of September 30, 2017, there was $4.8 million of unrecognized compensation cost related to unvested stock options, which will be recognized over a weighted average period of approximately 1.4 years.
Restricted Stock Units
On March 25, 2016, each of the non-employee members of the Board of Directors was granted RSUs under the 2015 Plan as a component of their annual compensation. The RSUs vested 3/12ths as of the date of grant and an additional 1/12th vested on March 31, 2016 and 1/12th vested on the last day of the next eight months, subject to the director’s continuing service on each vesting date. Subject to vesting, the RSUs granted to the non-employee directors will be settled in shares of Affinion Holdings’ common stock on the earlier to occur of a Change in Control (as defined in the 2015 Plan) and the third anniversary of the date of grant. In connection with the resignation of one of the directors, the RSUs awarded to the resigning director immediately vested. The RSUs granted to the remaining directors vested in 2016. As these awards will be settled in shares of Affinion Holdings’ common stock, the Company has accounted for these RSUs as an equity award.
Based on the estimated fair value of the RSUs granted, stock-based compensation expense for the three and nine months ended September 30, 2016 was $0.1 million and $0.3 million respectively. There was no stock-based compensation expense related to the RSU awards for the three and nine months ended September 30, 2017.
Incentive Awards
On March 16, 2015, the Compensation Committee of the Board approved the terms of (i) the Affinion Group Holdings, Inc. 2015 Retention Award Program (the “2015 Retention Program”), an equity and cash incentive award program intended to foster retention of key employees of Affinion Holdings and its subsidiaries, and (ii) the awards (the “Retention Awards”) to each such key employee consisting of retention units (“RUs”) and a cash retention award (“CRA”) to be made by Affinion Holdings under the 2015 Retention Program. Each Retention Award will entitle the employee to one share of Affinion Holdings’ common stock for each RU and a cash payment in respect of the CRA, in each case, subject to applicable withholding taxes, when the applicable vesting conditions for the Retention Awards are met. The Retention Awards are subject to time-based vesting conditions. Upon termination of employment for any reason, an employee will forfeit the entire unvested portion of his or her Retention Award. In conjunction with the Reclassification, which was effective on November 9, 2015, Retention Awards under the 2015 Retention Program that called for vesting of Class A Common Stock will vest in an adjusted number of shares of Class C Common Stock and Class D Common Stock. During the year ended December 31, 2016, 6,466 shares of Class C Common Stock and 6,809 shares of Class D Common Stock vested, in addition to CRAs of approximately $2.0 million. During the nine months ended September 30, 2017, 5,858 shares of Class C Common Stock and 6,161 shares of Class D Common Stock vested, in addition to CRAs of approximately $1.8 million During the nine months ended September 30, 2017, the Company recognized expense related to the 2015 Retention Program of $0.7 million, of which $0.4 million related to the common stock portion of the Retention Awards. During the three and nine months ended September 30, 2016, the Company recognized expense related to the 2015 Retention Program of $0.9 million and $2.7 million, respectively, of which $0.5 million and $1.4 million, respectively, related to the common stock portion of the Retention Awards. There was no expense recognized related to the 2015 Retention Plan during the three months ended September 30, 2017.
22
Subsequent Events
On October 24, 2017, the Board approved a restricted stock unit agreement, under the terms of the 2015 Plan, for awards Affinion Holdings intends to enter into promptly in respect of services rendered by each of its non-employee directors. Pursuant to the restricted stock unit agreement, each such director will be awarded 9,804 restricted stock units, (i) three-fourths (3/4) of which will vest on the date of grant and (ii) the remaining one-fourth (1/4) will vest in equal installments on each of October 31, 2017, November 30, 2017 and December 31, 2017, respectively, subject to continued service on the applicable vesting date; provided that, in the event of a “Change in Control” (as defined in the agreement), any unvested restricted stock units will fully vest. Each vested restricted stock unit will be settled by the delivery of one share of common stock of Affinion Holdings to the applicable director on the earlier to occur of (A) a “Change in Control” or (B) the third anniversary of the date of grant.
On October 23, 2017, the Compensation Committee of the Board approved the 2017 Retention Award Program (the “2017 Retention Program”), a cash incentive award program intended to encourage the retention of certain key employees, which provides for aggregate payments of between approximately $5.9 million and $8.8 million. The 2017 Retention Program is subject to a time-based vesting condition. An employee will become vested in the 2017 Retention Program grant on June 15, 2018, subject to the employee’s continued employment in good standing on such date.
10. RELATED PARTY TRANSACTIONS
Post-Closing Relationships with Cendant
On October 17, 2005, Cendant Corporation (“Cendant”) completed the sale of the Cendant Marketing Services Division to the Company and an affiliate of Apollo, pursuant to a purchase agreement dated July 26, 2005 for approximately $1.8 billion (the “Apollo Transactions”).
All references to Cendant refer to Cendant Corporation, which changed its name to Avis Budget Group, Inc. in August 2006, and its consolidated subsidiaries, specifically in the context of its business and operations prior to, and in connection with, the Company’s separation from Cendant. In connection with the Apollo Transactions, Cendant has agreed to indemnify the Company, Affinion and the Company’s affiliates (collectively the “indemnified parties”) for breaches of representations, warranties and covenants made by Cendant, as well as for other specified matters, certain of which are described below. Affinion and the Company have agreed to indemnify Cendant for breaches of representations, warranties and covenants made in the purchase agreement, as well as for certain other specified matters. Generally, all parties’ indemnification obligations with respect to breaches of representations and warranties (except with respect to the matters described below) (i) are subject to a $0.1 million occurrence threshold, (ii) are not effective until the aggregate amount of losses suffered by the indemnified party exceeds $15.0 million (and then only for the amount of losses exceeding $15.0 million), and (iii) are limited to $275.1 million of recovery. Generally, subject to certain exceptions of greater duration, the parties’ indemnification obligations with respect to representations and warranties survived until April 15, 2007 with indemnification obligations related to covenants surviving until the applicable covenant has been fully performed.
In connection with the purchase agreement, Cendant agreed to specific indemnification obligations with respect to the matters described below.
Excluded Litigation. Cendant has agreed to fully indemnify the indemnified parties with respect to any pending or future litigation, arbitration, or other proceeding relating to accounting irregularities in the former CUC International, Inc. announced on April 15, 1998. Of the legal proceedings disclosed in Note 8 to these unaudited condensed consolidated financial statements, the Lion Litigation is a matter that involves the Cendant Entities (as defined below) agreeing to indemnify us for any related liabilities.
Certain Litigation and Compliance with Law Matters. Cendant has agreed to indemnify the indemnified parties up to specified amounts for: (a) breaches of its representations and warranties with respect to legal proceedings that (1) occur after the date of the purchase agreement, (2) relate to facts and circumstances related to the business of Affinion Group, LLC or Affinion International, and (3) constitute a breach or violation of its compliance with law representations and warranties and (b) breaches of its representations and warranties with respect to compliance with laws to the extent related to the business of Affinion Group, LLC or Affinion International.
Cendant, Affinion and the Company have agreed that losses up to $15.0 million incurred with respect to these matters will be borne solely by the Company and losses in excess of $15.0 million will be shared by the parties in accordance with agreed upon allocations. The Company has the right at all times to control litigation related to shared losses and Cendant has consultation rights with respect to such litigation.
Prior to 2009, Cendant (i) distributed the equity interests it previously held in its hospitality services business (“Wyndham”) and its real estate services business (“Realogy”) to Cendant stockholders and (ii) sold its travel services business, Travelport, to a third party. Cendant continues as a re-named publicly traded company which owns the vehicle rental business (“Avis Budget,” together
23
with Wyndham and Realogy, the “Cendant Entities”). Subject to certain exceptions, Wyndham and Realogy have agreed to share Cendant’s contingent and other liabilities (including its indemnity obligations to the Company described above and other liabilities to the Company in connection with the Apollo Transactions) in specified percentages. If any Cendant Entity defaults in its payment, when due, of any such liabilities, the remaining Cendant Entities are required to pay an equal portion of the amounts in default.
2017 Exchange Offers, Issuance of New Notes and New Warrants and Redemptions of Other Existing Notes
As discussed in Note 4, on May 10, 2017, the Company completed the Exchange Offers and exercised its option under the Investor Purchase Agreement relating to Affinion’s 2010 senior notes, obligating the Investors to purchase an aggregate principal amount of New Notes and New Warrants that would yield sufficient cash proceeds to fund the redemptions of Affinion’s 2010 senior notes not tendered in the AGI Exchange Offer. On June 13, 2017, the Company exercised its options under the Investor Purchase Agreement relating to Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes, obligating the Investors to purchase an aggregate principal amount of New Notes and New Warrants that would yield sufficient cash proceeds to fund the redemptions of Affinion Holdings’ senior notes and the Investments senior subordinated notes not tendered in the Holdings Exchange Offer and Investments Exchange Offer, respectively. Prior to the completion of the Exchange Offers, Empyrean was the beneficial owner of 5% or more of the Company’s Common Stock. Upon consummation of the Exchange Offers, each of the Investors was the beneficial owner of 5% or more of the Company’s Common Stock. In connection with the 2017 Exchange Offers, Issuance of New Notes and New Warrants and redemption of Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes as of September 30, 2017, the Company issued approximately $515.1 million aggregate principal amount of New Notes and New Warrants to purchase 4,234,335 shares of Common Stock to the Investors, all of whom were related parties as a result of their beneficial ownership of 5% or more of the Company’s Common Stock.
11. FINANCIAL INSTRUMENTS, DERIVATIVES AND FAIR VALUE MEASURES
As a matter of policy, the Company does not use derivatives for trading or speculative purposes.
The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity for the Company’s long-term debt as of September 30, 2017:
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| Fair Value At |
| |
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|
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|
|
|
|
|
|
| 2022 and |
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|
|
|
|
| September 30, |
| ||
|
| 2017 |
|
| 2018 |
|
| 2019 |
|
| 2020 |
|
| 2021 |
|
| Thereafter |
|
| Total |
|
| 2017 |
| ||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||
Fixed rate debt |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 557.0 |
|
| $ | 557.0 |
|
| $ | 479.0 |
|
Average interest rate |
|
| 13.97 | % |
|
| 14.10 | % |
|
| 14.85 | % |
|
| 15.50 | % |
|
| 15.50 | % |
|
| 15.50 |
|
|
|
|
|
|
|
|
|
Variable rate debt |
| $ | 3.4 |
|
| $ | 13.4 |
|
| $ | 28.5 |
|
| $ | 58.6 |
|
| $ | 67.0 |
|
| $ | 1,202.4 |
|
| $ | 1,373.3 |
|
| $ | 1,372.8 |
|
Average interest rate (a) |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
|
|
|
|
|
|
|
(a) | Average interest rate is based on rates in effect at September 30, 2017. |
Foreign Currency Forward Contracts
Through April 30, 2017, on a limited basis the Company entered into 30 day foreign currency forward contracts, and upon expiration of the contracts, entered into successive 30 day foreign currency forward contracts. The contracts were entered into to mitigate the Company’s foreign currency exposures related to intercompany loans which were not expected to be repaid within the next twelve months and that were denominated in Euros and British pounds.
During the nine months ended September 30, 2017, the Company recognized a realized loss on the forward contracts of $1.3 million. There was no realized gain or loss recognized during the three months ended September 30, 2017. During the three and nine months ended September 30, 2016, the Company recognized a realized gain on the forward contracts of $0.3 million and $2.2 million, respectively.
Credit Risk and Exposure
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of receivables, profit-sharing receivables from insurance carriers and prepaid commissions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties. Receivables and profit-sharing receivables from insurance carriers are from various marketing, insurance and business partners and the Company maintains an allowance for losses, based upon expected collectability. Commission advances are periodically evaluated as to recovery.
24
Fair Value
The Company determines the fair value of financial instruments as follows:
| a. | Cash and Cash Equivalents, Restricted Cash, Receivables, Profit-Sharing Receivables from Insurance Carriers and Accounts Payable—Carrying amounts approximate fair value at September 30, 2017 and December 31, 2016 due to the short-term maturities of these assets and liabilities. |
| b. | Long-Term Debt—The Company’s estimated fair value of its long-term fixed-rate debt at September 30, 2017 and December 31, 2016 is based upon available information for debt having similar terms and risks (Level 2). The fair value of the debt is based on third party indicative valuations and estimates prepared by the Company after consideration of the creditworthiness of the counterparties. |
| c. | Foreign Currency Forward Contracts—At December 31, 2016, the Company’s estimated fair value of its foreign currency forward contracts was based upon available market information. The fair value of the foreign currency forward contracts was based on significant other observable inputs, adjusted for contract restrictions and other terms specific to the foreign currency forward contracts. The fair value was determined after consideration of foreign currency exchange rates and the creditworthiness of the parties to the foreign currency forward contracts. The counterparty to the foreign currency forward contracts was a major financial institution. |
Current accounting guidance establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and (2) the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, giving the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. Level 1 inputs to a fair value measurement are quoted market prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
There were no financial instruments measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016, other than foreign currency forward contracts as of December 31, 2016. Such contracts historically had a term of approximately thirty days and were held to maturity. The fair value of the foreign currency forward contracts was measured based on significant observable inputs (Level 2).
12. SEGMENT INFORMATION
Management evaluates the operating results of each of its reportable segments based upon several factors, of which the primary factors are revenue and “Segment EBITDA,” which the Company defines as income from operations before depreciation and amortization. The presentation of Segment EBITDA may not be comparable to similarly titled measures used by other companies. The segment information discussed below reflects our new operating segments in effect as of January 1, 2016, as discussed in Note 1 to these unaudited condensed consolidated financial statements.
25
The Segment EBITDA of the Company’s four reportable segments does not include general corporate expenses. Corporate expenses include certain departmental service costs such as human resources, legal, corporate finance and accounting and unallocated portions of information technology, in addition to expenses previously recorded in corporate such as professional fees related to debt financing activities and stock compensation costs. General corporate expenses have been excluded from the presentation of the Segment EBITDA for the Company’s four reportable segments because they are not reported to the chief operating decision maker for purposes of allocating resources among operating segments or assessing operating segment performance. The accounting policies of the reportable segments are the same as those described in Note 2—Summary of Significant Accounting Policies in the Company’s Form 10-K for the year ended December 31, 2016.
Net Revenues |
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|
|
|
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (in millions) |
| |||||||||||||
Global Loyalty |
| $ | 58.3 |
|
| $ | 42.9 |
|
| $ | 170.8 |
|
| $ | 122.8 |
|
Global Customer Engagement |
|
| 90.6 |
|
|
| 92.5 |
|
|
| 268.8 |
|
|
| 294.8 |
|
Insurance Solutions |
|
| 59.9 |
|
|
| 59.3 |
|
|
| 172.8 |
|
|
| 172.0 |
|
Subtotal |
|
| 208.8 |
|
|
| 194.7 |
|
|
| 612.4 |
|
|
| 589.6 |
|
Legacy Membership and Package |
|
| 34.4 |
|
|
| 43.6 |
|
|
| 109.2 |
|
|
| 148.2 |
|
Eliminations |
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| (0.8 | ) |
|
| $ | 243.2 |
|
| $ | 238.1 |
|
| $ | 721.6 |
|
| $ | 737.0 |
|
Segment EBITDA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2017 |
|
| 2016 |
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| 2017 |
|
| 2016 |
| ||||
|
| (in millions) |
| |||||||||||||
Global Loyalty |
| $ | 22.8 |
|
| $ | 14.8 |
|
| $ | 46.4 |
|
| $ | 41.2 |
|
Global Customer Engagement |
|
| 17.0 |
|
|
| 17.2 |
|
|
| 39.9 |
|
|
| 54.9 |
|
Insurance Solutions |
|
| 22.7 |
|
|
| 22.4 |
|
|
| 60.5 |
|
|
| 61.3 |
|
Subtotal |
|
| 62.5 |
|
|
| 54.4 |
|
|
| 146.8 |
|
|
| 157.4 |
|
Legacy Membership and Package |
|
| 11.8 |
|
|
| 8.2 |
|
|
| 28.9 |
|
|
| 32.7 |
|
Corporate |
|
| (12.0 | ) |
|
| (11.9 | ) |
|
| (37.0 | ) |
|
| (42.8 | ) |
|
| $ | 62.3 |
|
| $ | 50.7 |
|
| $ | 138.7 |
|
| $ | 147.3 |
|
|
| For the Three Months Ended |
|
| For the Nine Months Ended |
| ||||||||||
|
| September 30, |
|
| September 30, |
|
| September 30, |
|
| September 30, |
| ||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
|
| (in millions) |
| |||||||||||||
Segment EBITDA |
| $ | 62.3 |
|
| $ | 50.7 |
|
| $ | 138.7 |
|
| $ | 147.3 |
|
Depreciation and amortization |
|
| (12.0 | ) |
|
| (13.7 | ) |
|
| (34.9 | ) |
|
| (41.9 | ) |
Income from operations |
| $ | 50.3 |
|
| $ | 37.0 |
|
| $ | 103.8 |
|
| $ | 105.4 |
|
13. GUARANTOR/NON-GUARANTOR SUPPLEMENTAL FINANCIAL INFORMATION
The following supplemental condensed consolidating financial information presents, in separate columns, the condensed consolidating balance sheets as of September 30, 2017 and December 31, 2016, and the related condensed consolidating statements of comprehensive income (loss) for the three and nine month periods ended September 30, 2017 and 2016 and the related condensed consolidating statements of cash flows for the nine month periods ended September 30, 2017 and 2016 for (i) the Company (Affinion Group Holdings, Inc. or Affinion Holdings, which is a parent guarantor of the New Notes) on a parent-only basis, with its investment in subsidiaries recorded under the equity method, (ii) the issuer of the New Notes (Affinion Group, Inc.) with its investment in subsidiaries recorded under the equity method, (iii) the Guarantor Subsidiaries (Affinion Holdings’ subsidiaries that guarantee the New Notes) on a combined basis, (iii) the Non-Guarantor Subsidiaries (Affinion Holdings’ subsidiaries that do not guarantee the New Notes) on a combined basis and (iv) the Company on a consolidated basis. The guarantees are full and unconditional and joint and several obligations of each of the guarantor subsidiaries, all of which are 100% owned by the Company. There are no significant restrictions on the ability of the issuer of the New Notes (Affinion Group, Inc.) to obtain funds from any of its guarantor subsidiaries by dividends or loan.
26
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 30, 2017
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | — |
|
| $ | 27.0 |
|
| $ | 16.5 |
|
| $ | 21.8 |
|
| $ | — |
|
| $ | 65.3 |
|
Restricted cash |
|
| — |
|
|
| 6.0 |
|
|
| 18.4 |
|
|
| 5.7 |
|
|
| — |
|
|
| 30.1 |
|
Receivables, net |
|
| — |
|
|
| 2.7 |
|
|
| 114.9 |
|
|
| 35.6 |
|
|
| — |
|
|
| 153.2 |
|
Profit-sharing receivables from insurance carriers |
|
| — |
|
|
| — |
|
|
| 26.0 |
|
|
| — |
|
|
| — |
|
|
| 26.0 |
|
Prepaid commissions |
|
| — |
|
|
| — |
|
|
| 33.1 |
|
|
| 3.3 |
|
|
| — |
|
|
| 36.4 |
|
Intercompany loan receivable |
|
| — |
|
|
| — |
|
|
| 208.1 |
|
|
| — |
|
|
| (208.1 | ) |
|
| — |
|
Other current assets |
|
| — |
|
|
| 24.1 |
|
|
| 35.3 |
|
|
| 12.5 |
|
|
| — |
|
|
| 71.9 |
|
Total current assets |
|
| — |
|
|
| 59.8 |
|
|
| 452.3 |
|
|
| 78.9 |
|
|
| (208.1 | ) |
|
| 382.9 |
|
Property and equipment, net |
|
| — |
|
|
| 8.3 |
|
|
| 94.0 |
|
|
| 6.1 |
|
|
| — |
|
|
| 108.4 |
|
Contract rights and list fees, net |
|
| — |
|
|
| — |
|
|
| 17.8 |
|
|
| — |
|
|
| — |
|
|
| 17.8 |
|
Goodwill |
|
| — |
|
|
| — |
|
|
| 187.4 |
|
|
| 36.8 |
|
|
| — |
|
|
| 224.2 |
|
Other intangibles, net |
|
| — |
|
|
| — |
|
|
| 31.4 |
|
|
| 5.0 |
|
|
| — |
|
|
| 36.4 |
|
Investment in subsidiaries |
|
| — |
|
|
| 2,570.2 |
|
|
| 498.0 |
|
|
| — |
|
|
| (3,068.2 | ) |
|
| — |
|
Intercompany loan receivable |
|
| — |
|
|
| 354.5 |
|
|
| 16.5 |
|
|
| 2.3 |
|
|
| (373.3 | ) |
|
| — |
|
Intercompany receivables |
|
| 33.1 |
|
|
| — |
|
|
| 2,478.9 |
|
|
| 116.4 |
|
|
| (2,628.4 | ) |
|
| — |
|
Other non-current assets |
|
| — |
|
|
| 0.4 |
|
|
| 24.5 |
|
|
| 1.4 |
|
|
| — |
|
|
| 26.3 |
|
Total assets |
| $ | 33.1 |
|
| $ | 2,993.2 |
|
| $ | 3,800.8 |
|
| $ | 246.9 |
|
| $ | (6,278.0 | ) |
| $ | 796.0 |
|
Liabilities and Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | — |
|
| $ | 13.4 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 13.4 |
|
Accounts payable and accrued expenses |
|
| 3.6 |
|
|
| 109.2 |
|
|
| 227.3 |
|
|
| 50.1 |
|
|
| — |
|
|
| 390.2 |
|
Intercompany loan payable |
|
| — |
|
|
| — |
|
|
| 51.9 |
|
|
| 156.2 |
|
|
| (208.1 | ) |
|
| — |
|
Deferred revenue |
|
| — |
|
|
| — |
|
|
| 45.1 |
|
|
| 6.4 |
|
|
| — |
|
|
| 51.5 |
|
Income taxes payable |
|
| — |
|
|
| 0.3 |
|
|
| 1.3 |
|
|
| 2.2 |
|
|
| — |
|
|
| 3.8 |
|
Total current liabilities |
|
| 3.6 |
|
|
| 122.9 |
|
|
| 325.6 |
|
|
| 214.9 |
|
|
| (208.1 | ) |
|
| 458.9 |
|
Long-term debt |
|
| — |
|
|
| 1,832.9 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,832.9 |
|
Deferred income taxes |
|
| — |
|
|
| 2.5 |
|
|
| 26.4 |
|
|
| 0.5 |
|
|
| — |
|
|
| 29.4 |
|
Deferred revenue |
|
| — |
|
|
| 0.2 |
|
|
| 3.8 |
|
|
| 0.3 |
|
|
| — |
|
|
| 4.3 |
|
Intercompany loans payable |
|
| 28.9 |
|
|
| — |
|
|
| 344.4 |
|
|
| — |
|
|
| (373.3 | ) |
|
| — |
|
Intercompany payables |
|
| — |
|
|
| 2,628.4 |
|
|
| — |
|
|
| — |
|
|
| (2,628.4 | ) |
|
| — |
|
Other long-term liabilities |
|
| — |
|
|
| 8.7 |
|
|
| 20.7 |
|
|
| 2.7 |
|
|
| — |
|
|
| 32.1 |
|
Negative carrying amount of subsidiaries, net |
|
| 1,563.5 |
|
|
| — |
|
|
| — |
|
|
| 631.0 |
|
|
| (2,194.5 | ) |
|
| — |
|
Total liabilities |
|
| 1,596.0 |
|
|
| 4,595.6 |
|
|
| 720.9 |
|
|
| 849.4 |
|
|
| (5,404.3 | ) |
|
| 2,357.6 |
|
Total Affinion Group Holdings, Inc. deficit |
|
| (1,562.9 | ) |
|
| (1,602.4 | ) |
|
| 3,079.9 |
|
|
| (603.8 | ) |
|
| (873.7 | ) |
|
| (1,562.9 | ) |
Non-controlling interest in subsidiary |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.3 |
|
|
| — |
|
|
| 1.3 |
|
Total deficit |
|
| (1,562.9 | ) |
|
| (1,602.4 | ) |
|
| 3,079.9 |
|
|
| (602.5 | ) |
|
| (873.7 | ) |
|
| (1,561.6 | ) |
Total liabilities and deficit |
| $ | 33.1 |
|
| $ | 2,993.2 |
|
| $ | 3,800.8 |
|
| $ | 246.9 |
|
| $ | (6,278.0 | ) |
| $ | 796.0 |
|
27
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2016
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 1.5 |
|
| $ | 9.1 |
|
| $ | 12.8 |
|
| $ | 14.3 |
|
| $ | — |
|
| $ | 37.7 |
|
Restricted cash |
|
| — |
|
|
| — |
|
|
| 20.1 |
|
|
| 6.0 |
|
|
| — |
|
|
| 26.1 |
|
Receivables, net |
|
| — |
|
|
| 2.6 |
|
|
| 104.7 |
|
|
| 28.6 |
|
|
| — |
|
|
| 135.9 |
|
Profit-sharing receivables from insurance carriers |
|
| — |
|
|
| — |
|
|
| 18.8 |
|
|
| — |
|
|
| — |
|
|
| 18.8 |
|
Prepaid commissions |
|
| — |
|
|
| — |
|
|
| 33.1 |
|
|
| 0.8 |
|
|
| — |
|
|
| 33.9 |
|
Intercompany interest receivable |
|
| — |
|
|
| — |
|
|
| 1.1 |
|
|
| — |
|
|
| (1.1 | ) |
|
| — |
|
Other current assets |
|
| — |
|
|
| 11.8 |
|
|
| 42.5 |
|
|
| 16.3 |
|
|
| — |
|
|
| 70.6 |
|
Total current assets |
|
| 1.5 |
|
|
| 23.5 |
|
|
| 233.1 |
|
|
| 66.0 |
|
|
| (1.1 | ) |
|
| 323.0 |
|
Property and equipment, net |
|
| — |
|
|
| 4.9 |
|
|
| 93.7 |
|
|
| 6.9 |
|
|
| — |
|
|
| 105.5 |
|
Contract rights and list fees, net |
|
| — |
|
|
| — |
|
|
| 16.4 |
|
|
| — |
|
|
| — |
|
|
| 16.4 |
|
Goodwill |
|
| — |
|
|
| — |
|
|
| 184.9 |
|
|
| 33.3 |
|
|
| — |
|
|
| 218.2 |
|
Other intangibles, net |
|
| — |
|
|
| — |
|
|
| 36.4 |
|
|
| 5.1 |
|
|
| — |
|
|
| 41.5 |
|
Investment in subsidiaries |
|
| — |
|
|
| 2,396.6 |
|
|
| 498.6 |
|
|
| — |
|
|
| (2,895.2 | ) |
|
| — |
|
Intercompany loan receivable |
|
| — |
|
|
| 192.9 |
|
|
| 38.4 |
|
|
| 23.3 |
|
|
| (254.6 | ) |
|
| — |
|
Intercompany receivables |
|
| 16.2 |
|
|
| — |
|
|
| 2,370.8 |
|
|
| 13.0 |
|
|
| (2,400.0 | ) |
|
| — |
|
Other non-current assets |
|
| — |
|
|
| — |
|
|
| 32.3 |
|
|
| 2.0 |
|
|
| — |
|
|
| 34.3 |
|
Total assets |
| $ | 17.7 |
|
| $ | 2,617.9 |
|
| $ | 3,504.6 |
|
| $ | 149.6 |
|
| $ | (5,550.9 | ) |
| $ | 738.9 |
|
Liabilities and Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | — |
|
| $ | 7.8 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 7.8 |
|
Accounts payable and accrued expenses |
|
| 4.7 |
|
|
| 83.2 |
|
|
| 189.6 |
|
|
| 50.1 |
|
|
| — |
|
|
| 327.6 |
|
Intercompany interest payable |
|
| — |
|
|
| — |
|
|
| 1.1 |
|
|
| — |
|
|
| (1.1 | ) |
|
| — |
|
Deferred revenue |
|
| — |
|
|
| 0.1 |
|
|
| 48.8 |
|
|
| 5.9 |
|
|
| — |
|
|
| 54.8 |
|
Income taxes payable |
|
| — |
|
|
| 0.5 |
|
|
| 0.7 |
|
|
| 1.5 |
|
|
| — |
|
|
| 2.7 |
|
Total current liabilities |
|
| 4.7 |
|
|
| 91.6 |
|
|
| 240.2 |
|
|
| 57.5 |
|
|
| (1.1 | ) |
|
| 392.9 |
|
Long-term debt |
|
| 15.0 |
|
|
| 1,687.7 |
|
|
| 153.1 |
|
|
| — |
|
|
| — |
|
|
| 1,855.8 |
|
Deferred income taxes |
|
| — |
|
|
| 2.1 |
|
|
| 24.2 |
|
|
| 0.6 |
|
|
| — |
|
|
| 26.9 |
|
Deferred revenue |
|
| — |
|
|
| 0.3 |
|
|
| 4.0 |
|
|
| 0.5 |
|
|
| — |
|
|
| 4.8 |
|
Intercompany loans payable |
|
| 28.9 |
|
|
| 23.8 |
|
|
| 138.1 |
|
|
| 63.8 |
|
|
| (254.6 | ) |
|
| — |
|
Intercompany payables |
|
| — |
|
|
| 2,387.5 |
|
|
| 12.5 |
|
|
| — |
|
|
| (2,400.0 | ) |
|
| — |
|
Other long-term liabilities |
|
| — |
|
|
| 8.3 |
|
|
| 21.4 |
|
|
| 1.7 |
|
|
| — |
|
|
| 31.4 |
|
Negative carrying amount of subsidiaries, net |
|
| 1,542.8 |
|
|
| — |
|
|
| — |
|
|
| 631.0 |
|
|
| (2,173.8 | ) |
|
| — |
|
Total liabilities |
|
| 1,591.4 |
|
|
| 4,201.3 |
|
|
| 593.5 |
|
|
| 755.1 |
|
|
| (4,829.5 | ) |
|
| 2,311.8 |
|
Total Affinion Group Holdings, Inc. deficit |
|
| (1,573.7 | ) |
|
| (1,583.4 | ) |
|
| 2,911.1 |
|
|
| (606.3 | ) |
|
| (721.4 | ) |
|
| (1,573.7 | ) |
Non-controlling interest in subsidiary |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 0.8 |
|
|
| — |
|
|
| 0.8 |
|
Total deficit |
|
| (1,573.7 | ) |
|
| (1,583.4 | ) |
|
| 2,911.1 |
|
|
| (605.5 | ) |
|
| (721.4 | ) |
|
| (1,572.9 | ) |
Total liabilities and deficit |
| $ | 17.7 |
|
| $ | 2,617.9 |
|
| $ | 3,504.6 |
|
| $ | 149.6 |
|
| $ | (5,550.9 | ) |
| $ | 738.9 |
|
28
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Net revenues |
| $ | — |
|
| $ | — |
|
| $ | 213.7 |
|
| $ | 29.5 |
|
| $ | — |
|
| $ | 243.2 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
| — |
|
|
| — |
|
|
| 63.9 |
|
|
| 12.2 |
|
|
| — |
|
|
| 76.1 |
|
Operating costs |
|
| — |
|
|
| 10.7 |
|
|
| 57.9 |
|
|
| 14.8 |
|
|
| — |
|
|
| 83.4 |
|
General and administrative |
|
| — |
|
|
| 10.1 |
|
|
| 11.8 |
|
|
| 0.7 |
|
|
| — |
|
|
| 22.6 |
|
Facility exit costs |
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| (1.4 | ) |
|
| — |
|
|
| (1.2 | ) |
Depreciation and amortization |
|
| — |
|
|
| 0.1 |
|
|
| 10.8 |
|
|
| 1.1 |
|
|
| — |
|
|
| 12.0 |
|
Total expenses |
|
| — |
|
|
| 20.9 |
|
|
| 144.6 |
|
|
| 27.4 |
|
|
| — |
|
|
| 192.9 |
|
Income (loss) from operations |
|
| — |
|
|
| (20.9 | ) |
|
| 69.1 |
|
|
| 2.1 |
|
|
| — |
|
|
| 50.3 |
|
Interest income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Interest expense |
|
| (0.1 | ) |
|
| (56.2 | ) |
|
| (0.1 | ) |
|
| — |
|
|
| — |
|
|
| (56.4 | ) |
Interest income (expense) - intercompany |
|
| (0.2 | ) |
|
| 0.3 |
|
|
| (0.2 | ) |
|
| 0.1 |
|
|
| — |
|
|
| — |
|
Loss on extinguishment of debt |
|
| — |
|
|
| (2.8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2.8 | ) |
Other expense, net |
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
Income (loss) before income taxes and non-controlling interest |
|
| (0.3 | ) |
|
| (79.6 | ) |
|
| 68.7 |
|
|
| 2.2 |
|
|
| — |
|
|
| (9.0 | ) |
Income tax expense |
|
| — |
|
|
| (0.2 | ) |
|
| (1.2 | ) |
|
| (0.4 | ) |
|
| — |
|
|
| (1.8 | ) |
|
|
| (0.3 | ) |
|
| (79.8 | ) |
|
| 67.5 |
|
|
| 1.8 |
|
|
| — |
|
|
| (10.8 | ) |
Equity in income (loss) of subsidiaries |
|
| (10.6 | ) |
|
| 69.2 |
|
|
| 1.7 |
|
|
| — |
|
|
| (60.3 | ) |
|
| — |
|
Net income (loss) |
|
| (10.9 | ) |
|
| (10.6 | ) |
|
| 69.2 |
|
|
| 1.8 |
|
|
| (60.3 | ) |
|
| (10.8 | ) |
Less: net income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (10.9 | ) |
| $ | (10.6 | ) |
| $ | 69.2 |
|
| $ | 1.7 |
|
| $ | (60.3 | ) |
| $ | (10.9 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (10.9 | ) |
| $ | (10.6 | ) |
| $ | 69.2 |
|
| $ | 1.8 |
|
| $ | (60.3 | ) |
| $ | (10.8 | ) |
Currency translation adjustment, net of tax |
|
| 2.2 |
|
|
| 2.4 |
|
|
| (0.2 | ) |
|
| 1.3 |
|
|
| (3.3 | ) |
|
| 2.4 |
|
Comprehensive income (loss) |
|
| (8.7 | ) |
|
| (8.2 | ) |
|
| 69.0 |
|
|
| 3.1 |
|
|
| (63.6 | ) |
|
| (8.4 | ) |
Less: comprehensive income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| (0.3 | ) |
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (8.7 | ) |
| $ | (8.2 | ) |
| $ | 69.0 |
|
| $ | 2.8 |
|
| $ | (63.6 | ) |
| $ | (8.7 | ) |
29
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Net revenues |
| $ | — |
|
| $ | — |
|
| $ | 636.1 |
|
| $ | 85.5 |
|
| $ | — |
|
| $ | 721.6 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
| — |
|
|
| 0.1 |
|
|
| 197.2 |
|
|
| 33.2 |
|
|
| — |
|
|
| 230.5 |
|
Operating costs |
|
| — |
|
|
| 32.3 |
|
|
| 205.2 |
|
|
| 41.4 |
|
|
| — |
|
|
| 278.9 |
|
General and administrative |
|
| 0.1 |
|
|
| 34.5 |
|
|
| 33.2 |
|
|
| 5.4 |
|
|
| — |
|
|
| 73.2 |
|
Facility exit costs |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
|
| 0.3 |
|
Depreciation and amortization |
|
| — |
|
|
| 0.3 |
|
|
| 31.4 |
|
|
| 3.2 |
|
|
| — |
|
|
| 34.9 |
|
Total expenses |
|
| 0.1 |
|
|
| 67.2 |
|
|
| 467.3 |
|
|
| 83.2 |
|
|
| — |
|
|
| 617.8 |
|
Income (loss) from operations |
|
| (0.1 | ) |
|
| (67.2 | ) |
|
| 168.8 |
|
|
| 2.3 |
|
|
| — |
|
|
| 103.8 |
|
Interest income |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Interest expense |
|
| (1.1 | ) |
|
| (125.4 | ) |
|
| (1.5 | ) |
|
| (0.5 | ) |
|
| — |
|
|
| (128.5 | ) |
Interest income (expense) - intercompany |
|
| (0.6 | ) |
|
| (0.2 | ) |
|
| 0.4 |
|
|
| 0.4 |
|
|
| — |
|
|
| — |
|
Gain (loss) on extinguishment of debt |
|
| — |
|
|
| (6.9 | ) |
|
| 10.4 |
|
|
| — |
|
|
| — |
|
|
| 3.5 |
|
Other expense, net |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
Income (loss) before income taxes and non-controlling interest |
|
| (1.8 | ) |
|
| (199.7 | ) |
|
| 177.9 |
|
|
| 2.2 |
|
|
| — |
|
|
| (21.4 | ) |
Income tax expense |
|
| — |
|
|
| (0.6 | ) |
|
| (3.7 | ) |
|
| (2.1 | ) |
|
| — |
|
|
| (6.4 | ) |
|
|
| (1.8 | ) |
|
| (200.3 | ) |
|
| 174.2 |
|
|
| 0.1 |
|
|
| — |
|
|
| (27.8 | ) |
Equity in income (loss) of subsidiaries |
|
| (26.7 | ) |
|
| 173.6 |
|
|
| (0.6 | ) |
|
| — |
|
|
| (146.3 | ) |
|
| — |
|
Net income (loss) |
|
| (28.5 | ) |
|
| (26.7 | ) |
|
| 173.6 |
|
|
| 0.1 |
|
|
| (146.3 | ) |
|
| (27.8 | ) |
Less: net income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
|
| — |
|
|
| (0.7 | ) |
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (28.5 | ) |
| $ | (26.7 | ) |
| $ | 173.6 |
|
| $ | (0.6 | ) |
| $ | (146.3 | ) |
| $ | (28.5 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (28.5 | ) |
| $ | (26.7 | ) |
| $ | 173.6 |
|
| $ | 0.1 |
|
| $ | (146.3 | ) |
| $ | (27.8 | ) |
Currency translation adjustment, net of tax |
|
| 6.0 |
|
|
| 6.0 |
|
|
| (1.4 | ) |
|
| 3.6 |
|
|
| (8.2 | ) |
|
| 6.0 |
|
Comprehensive income (loss) |
|
| (22.5 | ) |
|
| (20.7 | ) |
|
| 172.2 |
|
|
| 3.7 |
|
|
| (154.5 | ) |
|
| (21.8 | ) |
Less: comprehensive income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
|
| — |
|
|
| (0.7 | ) |
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (22.5 | ) |
| $ | (20.7 | ) |
| $ | 172.2 |
|
| $ | 3.0 |
|
| $ | (154.5 | ) |
| $ | (22.5 | ) |
30
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Net revenues |
| $ | — |
|
| $ | — |
|
| $ | 209.1 |
|
| $ | 29.0 |
|
| $ | — |
|
| $ | 238.1 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
| — |
|
|
| 0.1 |
|
|
| 68.5 |
|
|
| 13.0 |
|
|
| — |
|
|
| 81.6 |
|
Operating costs |
|
| — |
|
|
| 10.7 |
|
|
| 50.7 |
|
|
| 17.1 |
|
|
| — |
|
|
| 78.5 |
|
General and administrative |
|
| — |
|
|
| 15.4 |
|
|
| 9.8 |
|
|
| 2.0 |
|
|
| — |
|
|
| 27.2 |
|
Facility exit costs |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Depreciation and amortization |
|
| — |
|
|
| 0.1 |
|
|
| 11.9 |
|
|
| 1.7 |
|
|
| — |
|
|
| 13.7 |
|
Total expenses |
|
| — |
|
|
| 26.3 |
|
|
| 141.0 |
|
|
| 33.8 |
|
|
| — |
|
|
| 201.1 |
|
Income (loss) from operations |
|
| — |
|
|
| (26.3 | ) |
|
| 68.1 |
|
|
| (4.8 | ) |
|
| — |
|
|
| 37.0 |
|
Interest income |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Interest expense |
|
| (0.5 | ) |
|
| (26.3 | ) |
|
| (0.8 | ) |
|
| (0.3 | ) |
|
| — |
|
|
| (27.9 | ) |
Interest income (expense) - intercompany |
|
| (0.2 | ) |
|
| (0.4 | ) |
|
| 0.5 |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
Income (loss) before income taxes and non-controlling interest |
|
| (0.7 | ) |
|
| (53.0 | ) |
|
| 67.9 |
|
|
| (5.0 | ) |
|
| — |
|
|
| 9.2 |
|
Income tax expense |
|
| — |
|
|
| (0.2 | ) |
|
| (1.1 | ) |
|
| (0.4 | ) |
|
| — |
|
|
| (1.7 | ) |
|
|
| (0.7 | ) |
|
| (53.2 | ) |
|
| 66.8 |
|
|
| (5.4 | ) |
|
| — |
|
|
| 7.5 |
|
Equity in income of subsidiaries |
|
| 7.9 |
|
|
| 61.1 |
|
|
| (5.7 | ) |
|
| — |
|
|
| (63.3 | ) |
|
| — |
|
Net income (loss) |
|
| 7.2 |
|
|
| 7.9 |
|
|
| 61.1 |
|
|
| (5.4 | ) |
|
| (63.3 | ) |
|
| 7.5 |
|
Less: net income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| (0.3 | ) |
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | 7.2 |
|
| $ | 7.9 |
|
| $ | 61.1 |
|
| $ | (5.7 | ) |
| $ | (63.3 | ) |
| $ | 7.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 7.2 |
|
| $ | 7.9 |
|
| $ | 61.1 |
|
| $ | (5.4 | ) |
| $ | (63.3 | ) |
| $ | 7.5 |
|
Currency translation adjustment, net of tax |
|
| (1.4 | ) |
|
| (1.4 | ) |
|
| 0.2 |
|
|
| 0.2 |
|
|
| 1.0 |
|
|
| (1.4 | ) |
Comprehensive income (loss) |
|
| 5.8 |
|
|
| 6.5 |
|
|
| 61.3 |
|
|
| (5.2 | ) |
|
| (62.3 | ) |
|
| 6.1 |
|
Less: comprehensive income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| (0.3 | ) |
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | 5.8 |
|
| $ | 6.5 |
|
| $ | 61.3 |
|
| $ | (5.5 | ) |
| $ | (62.3 | ) |
| $ | 5.8 |
|
31
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Net revenues |
| $ | — |
|
| $ | — |
|
| $ | 645.8 |
|
| $ | 91.2 |
|
| $ | — |
|
| $ | 737.0 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
| — |
|
|
| 0.2 |
|
|
| 215.4 |
|
|
| 38.8 |
|
|
| — |
|
|
| 254.4 |
|
Operating costs |
|
| — |
|
|
| 33.0 |
|
|
| 163.6 |
|
|
| 51.4 |
|
|
| — |
|
|
| 248.0 |
|
General and administrative |
|
| 0.1 |
|
|
| 45.8 |
|
|
| 35.2 |
|
|
| 6.1 |
|
|
| — |
|
|
| 87.2 |
|
Facility exit costs |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Depreciation and amortization |
|
| — |
|
|
| 0.3 |
|
|
| 36.9 |
|
|
| 4.7 |
|
|
| — |
|
|
| 41.9 |
|
Total expenses |
|
| 0.1 |
|
|
| 79.3 |
|
|
| 451.2 |
|
|
| 101.0 |
|
|
| — |
|
|
| 631.6 |
|
Income (loss) from operations |
|
| (0.1 | ) |
|
| (79.3 | ) |
|
| 194.6 |
|
|
| (9.8 | ) |
|
| — |
|
|
| 105.4 |
|
Interest income |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
|
| 0.3 |
|
Interest expense |
|
| (1.5 | ) |
|
| (78.5 | ) |
|
| (1.5 | ) |
|
| (0.8 | ) |
|
| — |
|
|
| (82.3 | ) |
Interest income (expense) - intercompany |
|
| (0.5 | ) |
|
| (1.2 | ) |
|
| 1.4 |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
Income (loss) before income taxes and non-controlling interest |
|
| (2.1 | ) |
|
| (159.0 | ) |
|
| 194.8 |
|
|
| (10.3 | ) |
|
| — |
|
|
| 23.4 |
|
Income tax expense |
|
| — |
|
|
| (0.7 | ) |
|
| (3.2 | ) |
|
| (1.8 | ) |
|
| — |
|
|
| (5.7 | ) |
|
|
| (2.1 | ) |
|
| (159.7 | ) |
|
| 191.6 |
|
|
| (12.1 | ) |
|
| — |
|
|
| 17.7 |
|
Equity in income of subsidiaries |
|
| 19.3 |
|
|
| 179.0 |
|
|
| (12.6 | ) |
|
| — |
|
|
| (185.7 | ) |
|
| — |
|
Net income (loss) |
|
| 17.2 |
|
|
| 19.3 |
|
|
| 179.0 |
|
|
| (12.1 | ) |
|
| (185.7 | ) |
|
| 17.7 |
|
Less: net income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.5 | ) |
|
| — |
|
|
| (0.5 | ) |
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | 17.2 |
|
| $ | 19.3 |
|
| $ | 179.0 |
|
| $ | (12.6 | ) |
| $ | (185.7 | ) |
| $ | 17.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 17.2 |
|
| $ | 19.3 |
|
| $ | 179.0 |
|
| $ | (12.1 | ) |
| $ | (185.7 | ) |
| $ | 17.7 |
|
Currency translation adjustment, net of tax |
|
| (5.8 | ) |
|
| (5.8 | ) |
|
| 2.1 |
|
|
| 0.3 |
|
|
| 3.4 |
|
|
| (5.8 | ) |
Comprehensive income (loss) |
|
| 11.4 |
|
|
| 13.5 |
|
|
| 181.1 |
|
|
| (11.8 | ) |
|
| (182.3 | ) |
|
| 11.9 |
|
Less: comprehensive income attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.5 | ) |
|
| — |
|
|
| (0.5 | ) |
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | 11.4 |
|
| $ | 13.5 |
|
| $ | 181.1 |
|
| $ | (12.3 | ) |
| $ | (182.3 | ) |
| $ | 11.4 |
|
32
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (28.5 | ) |
| $ | (26.7 | ) |
| $ | 173.6 |
|
| $ | 0.1 |
|
| $ | (146.3 | ) |
| $ | (27.8 | ) |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| — |
|
|
| 0.3 |
|
|
| 31.4 |
|
|
| 3.2 |
|
|
| — |
|
|
| 34.9 |
|
Amortization of debt discount and financing costs |
|
| — |
|
|
| 9.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9.1 |
|
Provision for accounts receivable loss |
|
| — |
|
|
| 0.3 |
|
|
| 1.1 |
|
|
| 1.6 |
|
|
| — |
|
|
| 3.0 |
|
Amortization of carrying value adjustment |
|
| — |
|
|
| (10.4 | ) |
|
| (3.2 | ) |
|
| — |
|
|
| — |
|
|
| (13.6 | ) |
Gain (loss) on extinguishment of debt, net |
|
| — |
|
|
| 6.9 |
|
|
| (10.4 | ) |
|
| — |
|
|
| — |
|
|
| (3.5 | ) |
Facility exit costs |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
|
| 0.3 |
|
Share-based compensation |
|
| — |
|
|
| 1.8 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1.8 |
|
Equity in (income) loss of subsidiaries |
|
| 26.7 |
|
|
| (173.6 | ) |
|
| 0.6 |
|
|
| — |
|
|
| 146.3 |
|
|
| — |
|
Deferred income taxes |
|
| — |
|
|
| 0.3 |
|
|
| 2.5 |
|
|
| (0.1 | ) |
|
| — |
|
|
| 2.7 |
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
| — |
|
|
| (6.0 | ) |
|
| 1.7 |
|
|
| 0.4 |
|
|
| — |
|
|
| (3.9 | ) |
Receivables |
|
| — |
|
|
| (0.4 | ) |
|
| (10.9 | ) |
|
| (5.5 | ) |
|
| — |
|
|
| (16.8 | ) |
Receivables from related parties |
|
| — |
|
|
| (1.1 | ) |
|
| 1.1 |
|
|
| — |
|
|
| — |
|
|
| — |
|
Profit-sharing receivables from insurance carriers |
|
| — |
|
|
| — |
|
|
| (7.2 | ) |
|
| — |
|
|
| — |
|
|
| (7.2 | ) |
Prepaid commissions |
|
| — |
|
|
| — |
|
|
| 0.8 |
|
|
| (2.3 | ) |
|
| — |
|
|
| (1.5 | ) |
Other current assets |
|
| — |
|
|
| (12.6 | ) |
|
| 8.1 |
|
|
| 4.7 |
|
|
| — |
|
|
| 0.2 |
|
Contract rights and list fees |
|
| — |
|
|
| — |
|
|
| (1.5 | ) |
|
| — |
|
|
| — |
|
|
| (1.5 | ) |
Other non-current assets |
|
| — |
|
|
| (0.5 | ) |
|
| 7.9 |
|
|
| 0.7 |
|
|
| — |
|
|
| 8.1 |
|
Accounts payable and accrued expenses |
|
| — |
|
|
| 15.3 |
|
|
| 37.2 |
|
|
| (4.9 | ) |
|
| 10.1 |
|
|
| 57.7 |
|
Payables to related parties |
|
| 11.4 |
|
|
| (11.4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Deferred revenue |
|
| — |
|
|
| (0.1 | ) |
|
| (5.1 | ) |
|
| — |
|
|
| — |
|
|
| (5.2 | ) |
Income taxes receivable and payable |
|
| — |
|
|
| (0.1 | ) |
|
| 0.4 |
|
|
| 0.9 |
|
|
| — |
|
|
| 1.2 |
|
Other long-term liabilities |
|
| — |
|
|
| 0.3 |
|
|
| (1.1 | ) |
|
| 0.7 |
|
|
| — |
|
|
| (0.1 | ) |
Other, net |
|
| — |
|
|
| (2.4 | ) |
|
| 8.8 |
|
|
| (9.7 | ) |
|
| — |
|
|
| (3.3 | ) |
Net cash provided by (used in) operating activities |
|
| 9.6 |
|
|
| (211.0 | ) |
|
| 236.1 |
|
|
| (10.2 | ) |
|
| 10.1 |
|
|
| 34.6 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| — |
|
|
| (4.0 | ) |
|
| (25.5 | ) |
|
| (0.6 | ) |
|
| — |
|
|
| (30.1 | ) |
Acquisition-related payments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.4 | ) |
|
| — |
|
|
| (0.4 | ) |
Restricted cash |
|
| — |
|
|
| — |
|
|
| 0.4 |
|
|
| 0.2 |
|
|
| — |
|
|
| 0.6 |
|
Intercompany receivables and payables |
|
| — |
|
|
| — |
|
|
| (313.8 | ) |
|
| — |
|
|
| 313.8 |
|
|
| — |
|
Net cash provided by (used in) investing activities |
|
| — |
|
|
| (4.0 | ) |
|
| (338.9 | ) |
|
| (0.8 | ) |
|
| 313.8 |
|
|
| (29.9 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowing |
|
| — |
|
|
| 1,539.6 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,539.6 |
|
Borrowings under revolving credit facility, net |
|
| — |
|
|
| 40.0 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 40.0 |
|
Principal payments on borrowings |
|
| (11.5 | ) |
|
| (1,391.1 | ) |
|
| (128.8 | ) |
|
| — |
|
|
| — |
|
|
| (1,531.4 | ) |
Financing costs |
|
| — |
|
|
| (28.1 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (28.1 | ) |
Other financing activities |
|
| 0.4 |
|
|
| 0.3 |
|
|
| 0.3 |
|
|
| (0.7 | ) |
|
| — |
|
|
| 0.3 |
|
Intercompany receivables and payables |
|
| — |
|
|
| 224.0 |
|
|
| — |
|
|
| 99.9 |
|
|
| (323.9 | ) |
|
| — |
|
Intercompany loans |
|
| — |
|
|
| (151.8 | ) |
|
| 234.0 |
| �� |
| (82.2 | ) |
|
| — |
|
|
| — |
|
Net cash provided by (used in) financing activities |
|
| (11.1 | ) |
|
| 232.9 |
|
|
| 105.5 |
|
|
| 17.0 |
|
|
| (323.9 | ) |
|
| 20.4 |
|
Effect of changes in exchange rates on cash and cash equivalents |
|
| — |
|
|
| — |
|
|
| 1.0 |
|
|
| 1.5 |
|
|
| — |
|
|
| 2.5 |
|
Net increase (decrease) in cash and cash equivalents |
|
| (1.5 | ) |
|
| 17.9 |
|
|
| 3.7 |
|
|
| 7.5 |
|
|
| — |
|
|
| 27.6 |
|
Cash and cash equivalents, beginning of period |
|
| 1.5 |
|
|
| 9.1 |
|
|
| 12.8 |
|
|
| 14.3 |
|
|
| — |
|
|
| 37.7 |
|
Cash and cash equivalents, end of period |
| $ | — |
|
| $ | 27.0 |
|
| $ | 16.5 |
|
| $ | 21.8 |
|
| $ | — |
|
| $ | 65.3 |
|
33
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016
(In millions)
|
|
|
|
|
| Subsidiary |
|
| Guarantor |
|
| Non-Guarantor |
|
|
|
|
|
|
|
|
| |||
|
| Parent |
|
| Issuer |
|
| Subsidiaries |
|
| Subsidiaries |
|
| Eliminations |
|
| Consolidated |
| ||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 17.2 |
|
| $ | 19.3 |
|
| $ | 179.0 |
|
| $ | (12.1 | ) |
| $ | (185.7 | ) |
| $ | 17.7 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| — |
|
|
| 0.3 |
|
|
| 36.9 |
|
|
| 4.7 |
|
|
| — |
|
|
| 41.9 |
|
Amortization of debt discount and financing costs |
|
| — |
|
|
| 4.5 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4.5 |
|
Provision for accounts receivable loss |
|
| — |
|
|
| — |
|
|
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| 0.2 |
|
Amortization of carrying value adjustment |
|
| — |
|
|
| (21.7 | ) |
|
| (6.3 | ) |
|
| — |
|
|
| — |
|
|
| (28.0 | ) |
Facility exit costs |
|
| — |
|
|
| — |
|
|
| 0.1 |
|
|
| — |
|
|
| — |
|
|
| 0.1 |
|
Share-based compensation |
|
| — |
|
|
| 2.8 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2.8 |
|
Equity in (income) loss of subsidiaries |
|
| (19.3 | ) |
|
| (179.0 | ) |
|
| 12.6 |
|
|
| — |
|
|
| 185.7 |
|
|
| — |
|
Deferred income taxes |
|
| — |
|
|
| 0.3 |
|
|
| 2.2 |
|
|
| (0.7 | ) |
|
| — |
|
|
| 1.8 |
|
Net change in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| 0.2 |
|
|
| — |
|
|
| (0.1 | ) |
Receivables |
|
| — |
|
|
| — |
|
|
| (7.6 | ) |
|
| 3.2 |
|
|
| — |
|
|
| (4.4 | ) |
Receivables from related parties |
|
| — |
|
|
| 0.4 |
|
|
| (0.4 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Profit-sharing receivables from insurance carriers |
|
| — |
|
|
| — |
|
|
| (5.0 | ) |
|
| — |
|
|
| — |
|
|
| (5.0 | ) |
Prepaid commissions |
|
| — |
|
|
| — |
|
|
| 7.4 |
|
|
| 0.4 |
|
|
| — |
|
|
| 7.8 |
|
Other current assets |
|
| — |
|
|
| (1.1 | ) |
|
| 8.6 |
|
|
| 2.8 |
|
|
| — |
|
|
| 10.3 |
|
Contract rights and list fees |
|
| — |
|
|
| — |
|
|
| 0.6 |
|
|
| — |
|
|
| — |
|
|
| 0.6 |
|
Other non-current assets |
|
| — |
|
|
| 0.1 |
|
|
| (0.2 | ) |
|
| 0.3 |
|
|
| — |
|
|
| 0.2 |
|
Accounts payable and accrued expenses |
|
| 1.1 |
|
|
| (6.4 | ) |
|
| 11.3 |
|
|
| (8.8 | ) |
|
| — |
|
|
| (2.8 | ) |
Payables to related parties |
|
| (1.7 | ) |
|
| 1.7 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Deferred revenue |
|
| — |
|
|
| (0.1 | ) |
|
| (8.4 | ) |
|
| (0.7 | ) |
|
| — |
|
|
| (9.2 | ) |
Income taxes receivable and payable |
|
| — |
|
|
| (0.3 | ) |
|
| (0.3 | ) |
|
| 0.9 |
|
|
| — |
|
|
| 0.3 |
|
Other long-term liabilities |
|
| — |
|
|
| 0.2 |
|
|
| (0.4 | ) |
|
| (1.4 | ) |
|
| — |
|
|
| (1.6 | ) |
Other, net |
|
| — |
|
|
| 1.5 |
|
|
| (0.5 | ) |
|
| (0.4 | ) |
|
| — |
|
|
| 0.6 |
|
Net cash provided by (used in) operating activities |
|
| (2.7 | ) |
|
| (177.5 | ) |
|
| 229.5 |
|
|
| (11.6 | ) |
|
| — |
|
|
| 37.7 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| — |
|
|
| (3.8 | ) |
|
| (19.0 | ) |
|
| (1.5 | ) |
|
| — |
|
|
| (24.3 | ) |
Restricted cash |
|
| — |
|
|
| — |
|
|
| 1.2 |
|
|
| 0.3 |
|
|
| — |
|
|
| 1.5 |
|
Intercompany receivables and payables |
|
| — |
|
|
| — |
|
|
| (222.6 | ) |
|
| — |
|
|
| 222.6 |
|
|
| — |
|
Net cash used in investing activities |
|
| — |
|
|
| (3.8 | ) |
|
| (240.4 | ) |
|
| (1.2 | ) |
|
| 222.6 |
|
|
| (22.8 | ) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments on borrowings |
|
| — |
|
|
| (5.8 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5.8 | ) |
Intercompany receivables and payables |
|
| — |
|
|
| 214.7 |
|
|
| — |
|
|
| 7.9 |
|
|
| (222.6 | ) |
|
| — |
|
Capital contribution to subsidiary |
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| 0.3 |
|
|
| — |
|
|
| — |
|
Intercompany loans |
|
| — |
|
|
| (28.2 | ) |
|
| 20.9 |
|
|
| 7.3 |
|
|
| — |
|
|
| — |
|
Intercompany dividend |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| (0.3 | ) |
|
| — |
|
|
| — |
|
Dividend paid to non-controlling interest |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| — |
|
|
| (0.3 | ) |
Net cash provided by financing activities |
|
| — |
|
|
| 180.4 |
|
|
| 21.2 |
|
|
| 14.9 |
|
|
| (222.6 | ) |
|
| (6.1 | ) |
Effect of changes in exchange rates on cash and cash equivalents |
|
| — |
|
|
| — |
|
|
| (0.7 | ) |
|
| (0.4 | ) |
|
| — |
|
|
| (1.1 | ) |
Net increase (decrease) in cash and cash equivalents |
|
| (2.7 | ) |
|
| (0.9 | ) |
|
| 9.6 |
|
|
| 1.7 |
|
|
| — |
|
|
| 7.7 |
|
Cash and cash equivalents, beginning of period |
|
| 4.2 |
|
|
| 31.0 |
|
|
| 7.4 |
|
|
| 12.8 |
|
|
| — |
|
|
| 55.4 |
|
Cash and cash equivalents, end of period |
| $ | 1.5 |
|
| $ | 30.1 |
|
| $ | 17.0 |
|
| $ | 14.5 |
|
| $ | — |
|
| $ | 63.1 |
|
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q (this “Form 10-Q”) is prepared by Affinion Group Holdings, Inc. Unless otherwise indicated or the context otherwise requires, in this Form 10-Q all references to “Affinion Holdings,” the “Company,” “we,” “our” and “us” refer to Affinion Group Holdings, Inc. and its subsidiaries on a consolidated basis; and all references to “Affinion” refer to Affinion Group, Inc., our wholly-owned subsidiary.
The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, included in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Form 10-K”) and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q.
Disclosure Regarding Forward-Looking Statements
Our disclosure and analysis in this Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements.
These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control.
Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management’s assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed under “Item 1A. Risk Factors” in our Form 10-K and this Form 10-Q and this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, or MD&A. All forward-looking statements speak only as of the date of this Form 10-Q. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.
Introduction
Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to and should be read in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. The MD&A is organized as follows:
| • | Overview. This section provides a general description of our business and operating segments, as well as recent developments that we believe are important in understanding our results of operations and financial condition and in anticipating future trends. |
| • | Results of operations. This section provides an analysis of our results of operations for the three and nine months ended September 30, 2017 to 2016. This analysis is presented on both a consolidated basis and on an operating segment basis. |
| • | Financial condition, liquidity and capital resources. This section provides an analysis of our cash flows for the nine months ended September 30, 2017 and 2016, and our financial condition as of September 30, 2017, as well as a discussion of our liquidity and capital resources as of September 30, 2017. |
| • | Critical accounting policies. This section discusses certain significant accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, we refer you to our audited consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, included in the Form 10-K for a summary of our significant accounting policies. |
35
Overview
Description of Business
The Company develops programs and solutions that motivate and inspire loyalty. Through our proprietary technology platforms and end-to-end customer service capabilities, we design, administer and fulfill loyalty, customer engagement and insurance programs and solutions that strengthen and expand the value of customer relationships for many of the world’s largest and most respected companies. Our programs and solutions include:
| • | Loyalty solutions that help reward, motivate and retain consumers. We create and manage any and all aspects of our clients’ points-based loyalty programs, including design, platform, analytics, points management and fulfillment. Our loyalty solutions offer relevant, best-in-class rewards (such as travel, gift cards and merchandise) to consumers enabling clients to motivate, retain and thank their best customers. For example, our platform and technology support points-based programs for financial services, automotive, gaming, travel and hospitality companies. |
| • | Customer engagement programs and solutions that address key consumer needs such as greater peace of mind and meaningful savings for everyday purchases. We provide these solutions to leading companies in the financial institution, telecommunications, ecommerce, retail and travel sectors globally. These differentiated programs help our clients enrich their offerings to drive deeper connections with their customers, and to encourage their customers to engage more, stay loyal and generate more revenue for our clients. For example, we develop and manage programs such as identity theft protection, credit monitoring, savings on everyday purchases, concierge services, discount travel services and roadside assistance. |
| • | Insurance programs and solutions that help protect consumers in the event of a covered accident, injury, illness, or death. We market accident and life insurance programs on behalf of our financial institution partners. We work with leading insurance carriers to administer coverage for over 19 million people across America. These insurance solutions provide affordable, convenient insurance to consumers resulting in proven customer loyalty and generating incremental revenue for our clients. Our insurance solutions include accidental death and dismemberment insurance (“AD&D”), hospital accident plan, recuperative care, graded benefit whole life and simplified issue term life insurance. |
Our financial business model is characterized by substantial recurring revenues. We generate revenue primarily in three ways:
| • | Fee for service: we generate revenues from our clients through our loyalty business by designing (management, analytics and customer experience) and administering points-based loyalty programs on a platform licensing, fee-for-service basis. We also generate revenues for desired customer engagement programs and solutions, typically through a licensing and/or per user fee. |
| • | Commission or transaction fee: we earn a commission from our suppliers and/or a transaction fee from our clients based on volume for enabling or executing transactions such as fees generated from loyalty points related purchases and redemption. We can also generate revenues based on a per-subscriber and/or a per-activity commission fee from our clients for our services. |
| • | Subscription: we generate revenues through the sale of our value-added subscription-based programs and solutions to the customers of our clients whom we bill on a monthly, quarterly or annual basis. |
Global Reorganization
Effective January 1, 2016, we implemented a new globalized organizational structure (the “Global Reorganization”) to better support our key strategic initiatives and enhance long-term revenue growth. This new organizational structure allows us to combine similar lines of business on common platforms and shared infrastructures on a global basis to drive best practices and efficiencies with meaningful cost savings. In addition, we no longer materially invest in lines of business that we believe are not essential to our long-term growth prospects. We remain committed to our business strategy of pursuing initiatives that maintain and enhance our position as a global leader in loyalty and customer engagement solutions. The implementation of the Global Reorganization marks another major step in our strategic plan and ongoing transformation.
Starting in the first quarter of 2016, we have the following four operating segments:
| • | Global Loyalty. This segment consists of all of our loyalty assets globally in which we are a provider of end-to-end loyalty solutions that help clients reward, enrich, motivate and retain customers, including program design, points management and administration, and broad-based fulfillment and redemption across multiple channels. |
In this operating segment, we create and manage any and all aspects of our clients’ loyalty programs including program design, program management, technology platform, data analytics, points administration and rewards fulfillment. We manage loyalty solutions for points-based loyalty programs for many large financial institutions and other significant businesses. We provide our clients with solutions that meet the most popular redemption options desired by their program
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points holders, including travel, gift cards and merchandise. Our loyalty programs are private-label, customizable, full-service rewards solutions that consist of a variety of configurations that are offered on a stand-alone and/or bundled basis depending on customer requirements.
We provide and manage reward products for loyalty programs through Connexions Loyalty, Inc. (“Connexions”), our wholly-owned subsidiary, which is a service provider for points-based loyalty programs. We typically charge a per-subscriber and/or a per-activity administrative fee to clients for our services. Connexions also provides clients with the ability to offer leisure travel as a subscriber benefit in a purchase environment, and a travel gift card which can be used on all travel components, including airfare, rental car, hotel stays and cruise vacations.
| • | Global Customer Engagement. This segment consists of our customer engagement business, in which we are a leading global solutions provider that delivers a flexible mix of benefits and services for our clients that meet customers’ needs, including products that are designed to help consumers save money and gain peace of mind. |
Through our global customer engagement operations, we create and manage innovative programs and solutions that address key consumer needs such as greater peace-of-mind and meaningful savings. We provide our solutions to leading companies in the financial institution, telecommunications, retail and travel sectors globally.
Our customer engagement solutions may be categorized in two ways: (1) revenue enhancement, which is a traditional subscription-based model, and (2) engagement solutions, which is a fee-for-service or transactional based model.
In the revenue enhancement model, we provide incremental services for our clients to monetize their customer base. We also partner with clients to customize benefits that resonate with their brand and their customers’ needs.
In the engagement solutions model, we help clients differentiate their products and build strong customer relations. We also bundle appropriate rewards and benefits along the lifecycle of clients’ customers to create intimate, reciprocal connections that drive purchase decisions, interaction and participation over time.
| • | Insurance Solutions. This segment consists of the domestic insurance business, in which we are a leading third-party agent, administrator and marketer of certain accident and life insurance solutions. |
We offer five primary insurance solutions that pertain to supplemental health or life insurance. These solutions, including AD&D, represent our core insurance offerings and the majority of our annual insurance revenue.
We market our insurance products primarily by direct mail and the Internet. We use retail arrangements with our clients when we market our insurance solutions to their customers. We earn revenue in the form of commissions from premiums collected, and in some cases, from economic sharing arrangements with the insurance carriers that underwrite the policies that we market. While these economic sharing arrangements have a loss-sharing feature that is triggered in the event that the claims made against an insurance carrier exceed the premiums collected over a specified period of time, historically, we have never had to make a payment to insurance carriers under such loss-sharing feature.
| • | Legacy Membership and Package. This segment consists of certain global membership and package programs that are no longer being actively marketed but continue to be serviced and supported. This segment includes membership programs that were previously marketed with many of our large domestic financial institution partners. Although we will continue to service these members, we expect that cash flows and revenues will decrease over time due to the anticipated attrition of the member base in this operating segment. |
Factors Affecting Results of Operations and Financial Condition
Competitive Environment
We are a leading loyalty and customer engagement solutions company with value-added programs and services with a network of more than 5,500 clients as of December 31, 2016, approximately 44 million subscribers and end-customers enrolled in our customer engagement and insurance programs worldwide and approximately 42 million customers who received credit or debit card enhancement services and loyalty points-based management and redemption services as of December 31, 2016. We believe our portfolio of programs and benefits is the broadest in the industry, and that we are capable of providing the full range of administrative services for loyalty points programs. At December 31, 2016, we offered 13 core products and services with 241 unique benefits and supported almost 4,600 versions of products and services representing different combinations of pricing, benefit configurations and branding.
Our competitors include any company seeking direct and regular access to large groups of customers through any direct marketing channel, as well as any company capable of managing loyalty points programs or providing redemption options for those programs. Our products and services compete with those marketed by financial institutions and other third parties who have marketing relationships with our competition, including large, fully integrated companies that have financial, marketing and product development resources that are greater than ours. We face competition in all areas of our business, including price, product offerings and product performance. As a whole, the direct marketing services industry is extremely fragmented, while competition in loyalty points program administration is somewhat more concentrated. Most companies in the direct marketing services industry are relatively small and provide a limited array of products and services. In general, competition for the consumer’s attention is intense, with a wide
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variety of players competing in different segments of the direct marketing industry. More specifically, competition within our business lines comes from companies that vary significantly in size, scope and primary core competencies.
Financial Industry Trends
Historically, financial institutions have represented a significant majority of our marketing partner base. Consumer banking is a highly regulated industry, with various federal, state and international authorities governing various aspects of the marketing and servicing of the products we offer through our financial institution partners.
For instance, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) mandates the most wide-ranging overhaul of financial industry regulation in decades. Dodd-Frank created the Consumer Financial Protection Bureau (the “CFPB”), which became operational on July 21, 2011, and has been given authority to regulate all consumer financial products sold by banks and non-bank companies. These regulations have imposed additional reporting, supervisory, and regulatory requirements on our financial institution clients which have adversely affected our business, financial condition and results of operations. In addition, even an inadvertent failure of our financial institution clients to comply with these laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could adversely affect our business or our reputation going forward. Some of our clients have become involved in governmental inquiries that include our products or marketing practices. As a result, certain financial institution clients have, and others could, delay or cease marketing with us, terminate their agreements with us, require us to cease providing services to subscribers, or require changes to our programs or solutions to subscribers that could also have a material adverse effect on our business.
In certain circumstances, our financial institution clients have sought to source and market their own in-house programs and solutions, most notably programs and solutions that are analogous to our credit card registration, credit monitoring and identity-theft resolution programs and solutions. As we have sought to maintain our market share in these areas and to continue these programs and solutions with our clients, in some circumstances, we have shifted from a retail arrangement to a fee for service arrangement which results in lower net revenue, but unlike our retail arrangement, has no related commission expense, thereby preserving our ability to earn a suitable rate of return on the campaign.
Regulatory Environment
We are subject to federal and state regulation as well as regulation by foreign authorities in other jurisdictions. Certain laws and regulations that govern our operations include: federal, state and foreign marketing and consumer protection laws and regulations; federal, state and foreign privacy and data protection laws and regulations; federal, state and foreign insurance and insurance mediation laws and regulations; and federal, state and foreign travel laws and regulations. Federal regulations are primarily enforced by the Federal Trade Commission, the Federal Communications Commission and the CFPB. State regulations are primarily enforced by individual state attorneys general and insurance departments. Foreign regulations are enforced by a number of regulatory bodies in the relevant jurisdictions.
These regulations primarily impact the means we use to market our programs, which can reduce the acceptance rates of our solicitation efforts, impact our ability to obtain information from our members and end-customers and impact the benefits we provide and how we service our customers. In addition, new and contemplated regulations enacted by, or client settlement agreements or consent orders with, the CFPB could impose additional reporting, supervisory and regulatory requirements on, as well as result in inquiries of, us and our clients that could delay or terminate marketing campaigns with certain clients, impact the programs and solutions we provide to customers, and adversely affect our business, financial condition and results of operations.
We incur significant costs to ensure compliance with these regulations; however, we are party to lawsuits, including class action lawsuits, and regulatory investigations involving our business practices which also increase our costs of doing business. See Note 8 to our unaudited condensed consolidated financial statements in “Item 1. Financial Statements.”
Seasonality
Historically, seasonality has not had a significant impact on our business. Our revenues are more affected by the timing of marketing programs that can change from year to year depending on the opportunities available and pursued. More recently, in connection with the growth in our loyalty business, we have experienced increasing seasonality in the timing of our cash flows, particularly with respect to working capital. This has been due primarily to the consumer’s increasing acceptance and use of certain categories for points redemptions, such as travel services and gift cards. These categories typically present a delay from the time we incur a cash outlay to provision the redemption until we are reimbursed by the client for the activity, and in certain instances, these delays may extend across multiple reporting periods. Redemptions for some categories, such as gift cards, have been weighted more heavily to the end of the year due to consumers’ increasing usage of points in connection with seasonal gift giving.
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Company History
We have over 40 years of operational history. We started offering membership products in 1973, and in 1985 began marketing insurance and package enhancement products. In 1988, we entered the loyalty solutions business and in the early 1990s, we started offering certain of our program offerings internationally.
In 2005, the Company was acquired by investment funds affiliated with Apollo Global Management, LLC (such investment funds, the “Apollo Funds”) from Cendant Corporation (“Cendant”) through the consummation of the Apollo Transactions (as defined in “—The Apollo Transactions”).
In 2011, we entered into a merger agreement that resulted in the Webloyalty Acquisition and the acquisition of approximately 21% of the common stock of Affinion Holdings by investment funds affiliated with General Atlantic LLC (such investment funds referred to as “General Atlantic”) with the Apollo Funds continuing to own approximately 70% of the common stock of Affinion Holdings.
On November 9, 2015, we consummated the 2015 Exchange Offers, 2015 Rights Offering and Reclassification, each as defined and described below under “—2015 Exchange Offers, 2015 Rights Offering and Reclassification.” Upon consummation of the 2015 Exchange Offers, the Apollo Funds and General Atlantic ceased to have beneficial ownership of any common stock of Affinion Holdings.
On May 10, 2017, we consummated the Credit Agreement Refinancing and International Notes Redemption, each as defined and described under “— 2017 Credit Agreement Refinancing and International Notes Redemption” and the 2017 Exchange Offers, issuance of New Notes and New Warrants pursuant to the Investor Purchase Agreement and redemption of Affinion’s 2010 senior notes, each as defined and described under “— 2017 Exchange Offers, Issuance of New Notes and New Warrants and Redemptions of Other Existing Notes.” On July 17, 2017, we consummated the issuance of New Notes and New Warrants pursuant to the Investor Purchase Agreement and redemption of the Investments senior subordinated notes and Affinion Holdings’ 2013 senior notes.
The Apollo Transactions
On October 17, 2005, Cendant completed the sale of the Cendant Marketing Services Division (the “Predecessor”) to Affinion, an affiliate of Apollo Global Management, LLC (together with its subsidiaries, “Apollo”), pursuant to a purchase agreement dated July 26, 2005 for approximately $1.8 billion. The purchase price consisted of approximately $1.7 billion of cash, net of estimated closing adjustments, plus $125 million face value of 125,000 shares of newly issued preferred stock (with a fair value at issuance of $80.4 million) of Affinion Holdings, and a warrant (with a fair value at issuance of $16.7 million) that was exercisable for 4,437,170 shares of Affinion Holdings’ common stock, subject to customary anti-dilution adjustments, and $38.1 million of transaction related costs (collectively, the “Apollo Transactions”). The warrants expired in 2011 and the remaining outstanding shares of preferred stock were redeemed in 2011.
As part of the Apollo Transactions, we made a special tax election referred to as a “338(h)(10) election” with respect to the Predecessor. Under the 338(h)(10) election, the companies constituting the Predecessor were deemed to have sold and repurchased their assets at fair market value. By adjusting the tax basis in such assets to fair market value for U.S. federal income tax purposes, the aggregate amount of our tax deductions for depreciation and amortization have increased, which has reduced our cash taxes and further enhanced our free cash flow generation. We expect these tax deductions for U.S. federal income tax purposes to continue until 2020.
2015 Exchange Offers, 2015 Rights Offering and Reclassification
On November 9, 2015, (a) Affinion Holdings completed a private offer to exchange (the “2015 Holdings Exchange Offer”) its outstanding 13.75%/14.50% senior secured Pay-in-Kind (“PIK”)/toggle notes due 2018 (Affinion Holdings’ “2013 senior notes”) for shares of Common Stock and (b) Affinion Investments, LLC (“Affinion Investments”) completed a private offer to exchange (the “2015 Investments Exchange Offer” and, together with the 2015 Holdings Exchange Offer, the “2015 Exchange Offers”) its outstanding 13.50% senior subordinated notes due 2018 (the “Investments senior subordinated notes”) for shares of Common Stock of Affinion Holdings and (c) Affinion Holdings and Affinion International, a wholly-owned subsidiary of Affinion, jointly completed a rights offering (the “2015 Rights Offering”) giving holders of Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes the right to purchase an aggregate principal amount of $110.0 million of International Notes (as defined below) and up to 2,483,333 shares of Common Stock for an aggregate cash purchase price of $110.0 million. Pursuant to the 2015 Holdings Exchange Offer, approximately $247.4 million of Affinion Holdings’ 2013 senior notes were exchanged for 1,769,104 shares of Common Stock and pursuant to the 2015 Investments Exchange Offer, approximately $337.3 million of the Investments senior subordinated notes were exchanged for 5,236,517 shares of Common Stock. Upon closing of the 2015 Exchange Offers, there remained outstanding approximately $13.1 million aggregate principal amount of Affinion Holdings’ 2013 senior notes and $22.6 million aggregate principal amount of the Investments senior subordinated notes.
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In connection with the 2015 Exchange Offers, Affinion Holdings and Affinion International (as defined below) jointly conducted the 2015 Rights Offering for International Notes and shares of Common Stock. The 2015 Rights Offering was for an aggregate principal amount of $110.0 million of International Notes and up to 2,483,333 shares of Common Stock. In connection with the 2015 Rights Offering, Empyrean Capital Partners, L.P. agreed to purchase any rights offering units that were unpurchased in the 2015 Rights Offering (the “Backstop”). Pursuant to the 2015 Rights Offering and the Backstop, Affinion International received cash of $110.0 million in exchange for $110.0 million aggregate principal amount of International Notes and 2,021,042 shares of Common Stock and a non-participating penny warrant (the “Limited Warrant”) to purchase up to 462,266 shares of Common Stock.
Upon consummation of the 2015 Exchange Offers, the 2015 Consent Solicitations (as defined below) and the 2015 Rights Offering, Affinion Holdings effected a reclassification (the “Reclassification” and, together with the 2015 Exchange Offers, the 2015 Consent Solicitations, the 2015 Rights Offering and the related transactions, the “2015 Transactions”) as follows: All of Affinion Holdings’ then existing Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”) (including Class A Common Stock issued as a result of a mandatory cashless exercise of all of its Series A Warrants (the “Series A Warrants”)), consisting of 84,842,535 outstanding shares of Class A Common Stock and 45,003,196 shares of Class A Common Stock underlying the Series A Warrants, was converted into (i) 490,083 shares of Affinion Holdings’ Class C Common Stock, par value $0.01 per share (the “Class C Common Stock”), that upon conversion will represent 5% of the outstanding shares of Common Stock on a fully diluted basis, and (ii) 515,877 shares of Affinion Holdings’ Class D Common Stock, par value $0.01 per share (the “Class D Common Stock” and, together with the Class C Common Stock, the “Class C/D Common Stock”), that upon conversion will represent 5% of the outstanding shares of Common Stock on a fully diluted basis. In addition, Affinion Holdings’ Series A Warrants and Affinion Holdings’ Class B Common Stock, par value $0.01 per share (the “Class B Common Stock”) were eliminated from Affinion Holdings’ certificate of incorporation and Affinion Holdings’ Series B Warrants (the “Series B Warrants”) were cancelled for no additional consideration. In connection with the Reclassification, (i) the Apollo Funds received 218,002 shares of the Class C Common Stock and 229,476 shares of the Class D Common Stock, or 4.7% of the outstanding Common Stock on a beneficial ownership basis after giving effect to the conversion of the Class C/D Common Stock held by the Apollo Funds, and (ii) General Atlantic received 65,945 shares of the Class C Common Stock and 69,415 shares of the Class D Common Stock, or 1.5% of the outstanding Common Stock on a beneficial ownership basis after giving effect to the conversion of the Class C/D Common Stock held by General Atlantic.
Upon consummation of the 2015 Exchange Offers, the Apollo Funds and General Atlantic ceased to have beneficial ownership of any Common Stock.
The consummation of the exchange offers and the rights offering resulted in an “ownership change” for the Company pursuant to Section 382 of the Internal Revenue Code. This substantially limits our ability to use our pre-change net operating loss carryforwards (including those attributable to the 2005 Acquisition) and certain other pre-change tax attributes to offset our post-change income. Similar rules and limitations may apply for state tax purposes as well.
2017 Credit Agreement Refinancing and International Notes Redemption
On May 10, 2017, Affinion entered into a new credit facility (the “New Credit Facility”) having a five year maturity with a lender, pursuant to which the lender provided term loans in an aggregate principal amount equal to approximately $1.3 billion and committed to provide revolving loans in an aggregate principal amount at any one time outstanding not to exceed $110.0 million, decreasing to $80.0 million on May 10, 2018. The term loans provide for quarterly amortization payments totaling (i) for the first two years after May 10, 2017, 1% per annum, (ii) for the third year after May 10, 2017, 2.5% per annum, and (iii) for each year thereafter, 5% per annum, in each case, payable quarterly, with the balance due upon the final maturity date, subject in each case, to reduction of such amortization payments for certain prepayments. The New Credit Facility also requires mandatory prepayments of the outstanding term loans based on excess cash flow (as defined in the New Credit Facility), if any, and the proceeds from certain specified transactions.
The proceeds of the term loans under the New Credit Facility were used by Affinion to refinance its credit facility, which was amended and restated in May 2014, to redeem in full the International Notes, to pay transaction fees and expenses and for general corporate purposes.
On May 10, 2017, Affinion International Holdings Limited (“Affinion International”) (i) elected to redeem all of its outstanding $118.5 million principal amount of 7.5% Cash/PIK Senior Notes due 2018 (the “International Notes”) on June 9, 2017 at a redemption price of 100% of the principal amount of the International Notes, plus accrued and unpaid interest to the redemption date, (ii) irrevocably deposited sufficient funds received from borrowings under the New Credit Facility to effect such redemption with the trustee under the indenture governing the International Notes, and (iii) entered into a satisfaction and discharge agreement to discharge its obligations under the indenture governing the International Notes. The International Notes were originally issued by Affinion International on November 9, 2015 in an original principal amount of $110.0 million and bore interest at 7.5% per annum, of which 3.5% per annum was payable in cash and 4.0% per annum was payable in kind; provided, that all of the accrued interest on the International Notes from the issue date to, but not including, May 1, 2016 was payable on May 1, 2016 entirely in kind. Interest on the
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International Notes was payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2016. The International Notes Redemption was consummated on June 9, 2017.
2017 Exchange Offers, Issuance of New Notes and New Warrants and Redemptions of Other Existing Notes
On May 10, 2017, (a) Affinion completed a private offer to exchange or repurchase at the holder’s election (collectively, the “AGI Exchange Offer”) Affinion’s 7.875% senior notes due 2018 (Affinion’s “2010 senior notes”) for (i) new Senior Cash 12.5%/ PIK Step-Up to 15.5% Notes due 2022 of Affinion (the “New Notes”) and new warrants (the “New Warrants”) to acquire Common Stock, par value $0.01 per share, of Affinion Holdings (the “Common Stock”) or (ii) cash; (b) Affinion Holdings completed a private offer to exchange or repurchase at the holder’s election (collectively, the “Holdings Exchange Offer”) Affinion Holdings’ 13.75%/14.50% senior secured PIK/toggle notes due 2018 (Affinion Holdings’ “2013 senior notes”) for (i) New Notes and New Warrants or (ii) cash; and (c) Affinion Investments, LLC (“Affinion Investments”) completed a private offer to exchange or repurchase at the holder’s election (collectively, the “Investments Exchange Offer” and, together with the AGI Exchange Offer and the Holdings Exchange Offer, the “Exchange Offers”) Affinion Investments’ 13.50% senior subordinated notes due 2018 (the “Investments senior subordinated notes”) for (i) New Notes and New Warrants or (ii) cash. Under the terms of the AGI Exchange Offer, for each $1,000 principal amount of Affinion’s 2010 senior notes accepted in the AGI Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $930 in cash. Under the terms of the Holdings Exchange Offer, for each $1,000 principal amount of Affinion Holdings’ 2013 senior notes accepted in the Holdings Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $700 in cash. Under the terms of the Investments Exchange Offer, for each $1,000 principal amount of the Investments senior subordinated notes accepted in the Investments Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $880 in cash. Pursuant to the AGI Exchange Offer, approximately $269.7 million of Affinion’s 2010 senior notes plus accrued and unpaid interest were exchanged for approximately $277.8 million of New Notes, New Warrants to purchase 1,103,203 shares of Common Stock and approximately $417,386 in cash, including $238.0 million of Affinion’s 2010 senior notes plus accrued and unpaid interest exchanged by related parties in exchange for $245.5 million of New Notes and New Warrants to purchase 985,438 shares of Common Stock; pursuant to the Holdings Exchange Offer, approximately $4.6 million of Affinion Holdings’ 2013 senior notes plus accrued and unpaid interest were exchanged by a related party for approximately $4.7 million of New Notes and New Warrants to purchase 18,539 shares of Common Stock; and pursuant to the Investments Exchange Offer, approximately $12.4 million of the Investments senior subordinated notes plus accrued and unpaid interest were exchanged for approximately $12.8 million of New Notes, New Warrants to purchase 51,005 shares of Common Stock and approximately $912 in cash, including $12.2 million of the Investments senior subordinated notes plus accrued and unpaid interest exchanged by related parties in exchange for $12.6 million of New Notes and New Warrants to purchase 49,894 shares of Common Stock. Affinion used the proceeds of the New Notes issued pursuant to the Investor Purchase Agreement (as defined below) to pay the cash tender consideration to participating holders in the Exchange Offers.
Previously, in connection with the Exchange Offers, on March 31, 2017, affiliates of Elliott Management Corporation (“Elliott”), Franklin Mutual Quest Fund, an affiliate of Franklin Mutual Advisers, LLC (“Franklin”), affiliates of Empyrean Capital Partners, LP (“Empyrean”) and Metro SPV LLC, an affiliate of ICG Strategic Secondaries Advisors LLC (“ICG”) (collectively, in such capacity, the “Investors”), all of whom were, at the time of the closing, or became, as a result of the 2017 Exchange Offers, Issuance of New Notes and New Warrants and redemption of Affinion’s 2010 senior notes, related parties, entered into an investor purchase agreement (the “Investor Purchase Agreement”) with Affinion Holdings, Affinion and Affinion Investments, in which they agreed to purchase New Notes and New Warrants in an aggregate principal amount sufficient to pay all holders that participate in the Exchange Offers and elect to receive cash. Further, pursuant to the Investor Purchase Agreement, if Affinion Holdings, Affinion or Affinion Investments exercised its option to redeem any of Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and/or the Investments senior subordinated notes not tendered in the Exchange Offers, the Company could obligate the Investors to purchase an aggregate principal amount of New Notes and New Warrants that would yield sufficient cash proceeds to fund any such redemptions. In addition, pursuant to the terms of the Investor Purchase Agreement, Affinion was required to pay to the Investors upon the closing of the Exchange Offers a commitment premium of $17.5 million and a funding premium of $7.4 million in aggregate principal amount of New Notes and the same number of New Warrants that such principal amount of New Notes would have been issued as part of the Exchange Offers, as described in more detail in Note 5.
On May 10, 2017, Affinion exercised its option to redeem Affinion’s 2010 senior notes that were not tendered in the Exchange Offers and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement. As a result, on May 10, 2017, Affinion (i) elected to redeem all of its outstanding $205.3 million aggregate principal amount of Affinion’s 2010 senior notes on May 15, 2017 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date, (ii) irrevocably deposited sufficient funds received from the Investors pursuant to the Investor Purchase Agreement to effect such redemption with the trustee under the indenture governing Affinion’s 2010 senior notes, and (iii) entered into a satisfaction and discharge agreement to discharge its obligations under the indenture governing Affinion’s 2010 senior notes. Affinion’s 2010 senior notes were originally issued by Affinion on November 19, 2010 in an aggregate principal amount of $475.0 million and bore interest at 7.875% per annum. The redemption of Affinion’s 2010 senior notes was consummated on May 15, 2017.
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Accordingly, on May 10, 2017, Affinion issued approximately $532.6 million aggregate principal amount of New Notes and New Warrants to purchase 3,974,581 shares of Common Stock, of which (i) approximately $295.3 million principal amount of New Notes and New Warrants to purchase 1,172,747 shares of Common Stock were issued to participating holders (including the Investors) in the Exchange Offers, including $262.8 million of New Notes and New Warrants to purchase 1,053,871 shares of Common Stock issued to related parties, and (ii) approximately $237.3 million principal amount of New Notes and New Warrants to purchase 2,801,834 shares of Common Stock were issued, including all of the New Notes and New Warrants to purchase 2,791,475 shares of Common Stock issued to the Investors, all of whom are related parties, pursuant to the Investor Purchase Agreement to fund the cash consideration payable in the Exchange Offers and the cash redemption price for the balance of Affinion’s 2010 senior notes that were not exchanged or tendered in the AGI Exchange Offer and to pay the commitment premium and funding premium under the Investor Purchase Agreement. The New Warrants received by the Investors on May 10, 2017, represented approximately 26.7% of the pro forma fully diluted ownership of Affinion Holdings after giving effect to issuances pursuant to the Exchange Offers and the Investor Purchase Agreement, but without giving effect to options and restricted stock units granted under Affinion Holdings’ management compensation and incentive plans. The number of shares of Common Stock issuable upon the exercise of the New Warrants, as described herein, reflects the application of the anti-dilution protections of the New Warrants issued in the Exchange Offers and pursuant to the Investor Purchase Agreement (other than the New Warrants issued as part of the funding premium) that are triggered by the issuance of New Warrants as part of the funding premium.
On June 13, 2017, (i) Affinion Holdings’ exercised its option to redeem the $11.5 million principal amount of Affinion Holdings’ 2013 senior notes that were not tendered in the Holdings Exchange Offer and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement and (ii) Affinion Investments exercised its option to redeem the $10.2 million principal amount of the Investments senior subordinated notes that were not tendered in the Investments Exchange Offer and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement. Affinion Holdings’ 2013 senior notes were redeemed on July 17, 2017 at a redemption price of 103.4375% of the principal amount, plus accrued and unpaid interest to the redemption date and the Investments senior subordinated notes were redeemed on July 17, 2017 at a redemption price of 103.375% of the principal amount, plus accrued and unpaid interest to the redemption date. Affinion Holdings’ 2013 senior notes were originally issued by Affinion Holdings on December 12, 2013 in an aggregate principal amount of $292.8 million and bore interest at 13.75% per annum in cash, or at Affinion Holdings’ option, in payment-in-kind interest at 13.75% per annum plus 0.75%. The Investments senior subordinated notes were originally issued by Affinion Investments on December 12, 2013 in an aggregate principal amount of $360.0 million and bore interest at 13.50% per annum.
On July 17, 2017, pursuant to the Investor Purchase Agreement, Affinion issued approximately $23.7 million aggregate principal amount of New Notes to the Investors and Affinion Holdings issued New Warrants to the Investors. Pursuant to the Investor Purchase Agreement, the Investors paid a purchase price of approximately $23.5 million to Affinion, which amount includes the payment of pre-issuance accrued interest of approximately $0.6 million from May 10, 2017. The New Notes and New Warrants issued by Affinion and Affinion Holdings, respectively, to the Investors include the funding premium payable under the Investor Purchase Agreement. The New Notes constitute a further issuance of, and form a single series with, the $532.6 million in aggregate principal amount of New Notes that Affinion issued on May 10, 2017.
In connection with the Exchange Offers and the Investor Purchase Agreement, and in accordance with Affinion Holdings’ obligations under the Shareholders Agreement, dated as of November 9, 2015 (as amended, the “Shareholders Agreement”), due to the issuance of the New Warrants in the Exchange Offers and pursuant to the Investor Purchase Agreement, Affinion Holdings offered (the “Pre-Emptive Rights Offer”) to each holder of pre-emptive rights (“Pre-Emptive Rights Holder”) the right to purchase with cash up to such Pre-Emptive Rights Holder’s pro rata share (as determined in accordance with the Shareholders Agreement) of New Warrants at an exercise price of $0.01 per New Warrant.
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Results of Operations
Supplemental Data
We manage our business using a portfolio approach, meaning that we allocate our investments in the ongoing pursuit of the highest and best available returns, allocating our resources to whichever products, services, geographies and programs offer the best opportunities. With the globalization of our clients, programs and solutions and the ongoing refinement and execution of our capital allocation strategy, we have developed the following table that we believe captures the way we look at the businesses (amounts in thousands, except dollars per unit).
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| Three Months Ended |
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| Nine Months Ended |
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| September 30, |
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| September 30, |
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| 2017 |
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| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
Global Loyalty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Transactional Sales Volume (1) |
| $ | 787,307 |
|
| $ | 506,907 |
|
| $ | 2,400,274 |
|
| $ | 1,481,437 |
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Gross Transactional Sales Volume per Transaction (1) |
| $ | 255.47 |
|
| $ | 137.93 |
|
| $ | 248.65 |
|
| $ | 146.25 |
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Total Transactions |
|
| 3,082 |
|
|
| 3,675 |
|
|
| 9,653 |
|
|
| 10,130 |
|
Global Customer Engagement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Subscribers (2) |
|
| 2,411 |
|
|
| 2,593 |
|
|
| 2,468 |
|
|
| 2,652 |
|
Annualized Net Revenue per Average Subscriber (3) |
| $ | 107.75 |
|
| $ | 104.10 |
|
| $ | 104.36 |
|
| $ | 104.23 |
|
Engagement Solutions Platform Revenue |
| $ | 25,642 |
|
| $ | 27,853 |
|
| $ | 75,584 |
|
| $ | 90,298 |
|
Insurance Solutions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Supplemental Insureds (2) |
|
| 3,090 |
|
|
| 3,300 |
|
|
| 3,143 |
|
|
| 3,357 |
|
Annualized Net Revenue per Supplemental Insured (3) |
| $ | 73.84 |
|
| $ | 70.47 |
|
| $ | 71.07 |
|
| $ | 66.99 |
|
Legacy Membership and Package |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Legacy Members (2) |
|
| 1,063 |
|
|
| 1,460 |
|
|
| 1,145 |
|
|
| 1,701 |
|
Annualized Net Revenue per Legacy Member (3) |
| $ | 108.25 |
|
| $ | 102.55 |
|
| $ | 106.52 |
|
| $ | 98.51 |
|
(1) | Gross Transactional Sales Volume primarily includes the gross sales amount of travel bookings, gift cards and merchandise redeemed by customers of our clients’ programs that we support and excludes cash redemptions and revenue generated from programming, platform, administration and other non-transactional services. Gross Transactional Sales Volume per Transaction is calculated by taking the Gross Transactional Sales Volume reported for the period and dividing it by the total transactions for the same period. |
(2) | Average Subscribers, Average Supplemental Insureds and Average Legacy Members for the period are all calculated by determining the average subscribers, insureds or members, as applicable, for each month in the period (adding the number of subscribers, insureds or members, as applicable, at the beginning of the month with the number of subscribers, insureds or members, as applicable, at the end of the month and dividing that total by two) and then averaging that result for the period. A subscriber’s, insured’s or member’s, as applicable, account is added or removed in the period in which the subscriber, insured or member, as applicable, has joined or cancelled. |
(3) | Annualized Net Revenue per Average Subscriber and Supplemental Insured are all calculated by taking the revenues from subscribers or insureds, as applicable, for the period and dividing it by the average subscribers or insureds, as applicable, for the period. Quarterly periods are then multiplied by four to annualize this amount for comparative purposes. Upon cancellation of a subscriber or an insured, as applicable, the subscriber’s or insured’s, as applicable, revenues are no longer recognized in the calculation. |
Basic insureds typically receive $1,000 of AD&D coverage at no cost to the consumer since the marketing partner pays the cost of this coverage. Supplemental insureds are customers who have elected to pay premiums for higher levels of coverage.
43
Segment EBITDA
Segment EBITDA consists of income from operations before depreciation and amortization. Segment EBITDA is the measure management uses to evaluate segment performance and we present Segment EBITDA to enhance your understanding of our operating performance. We use Segment EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that Segment EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. However, Segment EBITDA may not be comparable to similarly titled measures of other companies. You should not consider Segment EBITDA as an alternative to operating or net income determined in accordance with U.S. GAAP, as an indicator of operating performance or as an alternative to cash flows from operating activities determined in accordance with U.S. GAAP, or as an indicator of cash flows, or as a measure of liquidity.
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
The following table summarizes our consolidated results of operations for the three months ended September 30, 2017 and 2016:
Summary of Operating Results for the Three Months Ended September 30, 2017
|
| Three Months Ended |
|
| Three Months Ended |
|
|
|
|
| ||
|
| September 30, |
|
| September 30, |
|
| Increase |
| |||
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
|
| (in millions) |
| |||||||||
Net revenues |
| $ | 243.2 |
|
| $ | 238.1 |
|
| $ | 5.1 |
|
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
| 76.1 |
|
|
| 81.6 |
|
|
| (5.5 | ) |
Operating costs |
|
| 83.4 |
|
|
| 78.5 |
|
|
| 4.9 |
|
General and administrative |
|
| 22.6 |
|
|
| 27.2 |
|
|
| (4.6 | ) |
Facility exit costs |
|
| (1.2 | ) |
|
| 0.1 |
|
|
| (1.3 | ) |
Depreciation and amortization |
|
| 12.0 |
|
|
| 13.7 |
|
|
| (1.7 | ) |
Total expenses |
|
| 192.9 |
|
|
| 201.1 |
|
|
| (8.2 | ) |
Income from operations |
|
| 50.3 |
|
|
| 37.0 |
|
|
| 13.3 |
|
Interest income |
|
| — |
|
|
| 0.1 |
|
|
| (0.1 | ) |
Interest expense |
|
| (56.4 | ) |
|
| (27.9 | ) |
|
| (28.5 | ) |
Loss on debt extinguishment |
|
| (2.8 | ) |
|
| — |
|
|
| (2.8 | ) |
Other expense, net |
|
| (0.1 | ) |
|
| — |
|
|
| (0.1 | ) |
Income (loss) before income taxes and non-controlling interest |
|
| (9.0 | ) |
|
| 9.2 |
|
|
| (18.2 | ) |
Income tax expense |
|
| (1.8 | ) |
|
| (1.7 | ) |
|
| (0.1 | ) |
Net income (loss) |
|
| (10.8 | ) |
|
| 7.5 |
|
|
| (18.3 | ) |
Less: net income attributable to non-controlling interest |
|
| (0.1 | ) |
|
| (0.3 | ) |
|
| 0.2 |
|
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (10.9 | ) |
| $ | 7.2 |
|
| $ | (18.1 | ) |
The following is a summary of changes affecting our operating results for the three months ended September 30, 2017.
Net revenues increased $5.1 million, or 2.1%, for the three months ended September 30, 2017 as compared to the same period of the prior year primarily the result of higher net revenue in Global Loyalty primarily due to increased growth with existing clients and launches with new clients partially offset by lower retail revenues from a decline in retail member volumes in Legacy Membership and Package and lower revenue in Global Customer Engagement primarily due to the timing of product launches with new clients in our engagement solutions business and lower revenue in our revenue enhancement business.
Segment EBITDA increased $11.6 million for the three months ended September 30, 2017 as compared to the same period of the prior year as the impact of the higher net revenues and lower marketing and commissions and lower general and administrative expenses was partially offset by higher operating costs.
44
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
The following section provides an overview of our consolidated results of operations for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.
Net Revenues. During the three months ended September 30, 2017, we reported net revenues of $243.2 million, an increase of $5.1 million, or 2.1%, as compared to net revenues of $238.1 million in the comparable period of 2016. Global Loyalty net revenues increased $15.4 million primarily due to increased growth with existing clients and launches with new clients. Net revenues decreased $1.9 million in Global Customer Engagement primarily from lower net revenues in our engagement solutions business primarily due to the timing of product launches with new clients along with lower revenue in our revenue enhancement business. Insurance Solutions net revenues increased $0.6 million as an increase in the average revenue per supplemental insured along with a lower cost of insurance principally from lower claims experience was partially offset by the impact of lower supplemental insureds. Net revenues in Legacy Membership and Package decreased $9.2 million primarily due to the expected attrition of legacy members, including those from our large financial institution partners, principally due to the cessation of new marketing campaigns and terminated programs with those partners as a result of the regulatory issues that have negatively impacted these partners. We expect this downward trend in net revenues related to our financial institution partners to continue for the foreseeable future. Net revenues further decreased from lower package revenue, primarily the result of lower average package members.
Marketing and Commissions Expense. Marketing and commissions expense decreased by $5.5 million, or 6.7%, to $76.1 million for the three months ended September 30, 2017 from $81.6 million for the three months ended September 30, 2016. Marketing and commissions expense decreased $4.6 million in Legacy Membership and Package primarily due to lower commissions principally due to the decline in the member base.
Operating Costs. Operating costs increased by $4.9 million, or 6.2%, to $83.4 million for the three months ended September 30, 2017 from $78.5 million for the three months ended September 30, 2016. Costs increased $7.0 million in Global Loyalty primarily from higher servicing costs related to the higher net revenues. Operating costs decreased $2.1 million in Legacy Membership and Package primarily from lower product and servicing costs associated with the lower retail member volumes.
General and Administrative Expense. General and administrative expense decreased by $4.6 million, or 16.9% to $22.6 million for the three months ended September 30, 2017 from $27.2 million for the three months ended September 30, 2016. Legacy Membership and Package decreased $5.2 million primarily due to lower reserves and fees related to certain legal matters.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $1.7 million for the three months ended September 30, 2017 to $12.0 million from $13.7 million for the three months ended September 30, 2016, primarily from a decrease in amortization expense of $1.3 million related to lower amortization of intangible assets acquired in various acquisitions, principally member relationships, which are amortized on an accelerated basis. Depreciation expense decreased $0.4 million.
Interest Expense. Interest expense increased $28.5 million for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 as a result of restructuring our debt on May 10, 2017 whereby we entered into a new credit facility for term loans totaling $1.34 billion and revolving loans. The proceeds were used to refinance our existing senior secured credit facility and redeem in full our outstanding International Notes. We also completed a private offer to exchange or repurchase Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes for New Notes and New Warrants to acquire Affinion Holdings’ common stock. The new debt issues are at higher principal amounts with associated higher interest rates.
Loss on Extinguishment of Debt. For the three months ended September 30, 2017, we recorded a loss in the amount of $2.8 million from redeeming the remaining Investments senior subordinated notes and Affinion Holdings’ 2013 senior notes in the third quarter of 2017.
Income Tax Expense. Income tax expense increased by $0.1 million for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily due to an increase in the deferred state and foreign tax provisions for the three months ended September 30, 2017, partially offset by a decrease in the current state and foreign tax provisions and deferred federal tax provision for the same period.
The Company’s effective income tax rates for the three months ended September 30, 2017 and 2016 were (21.1)% and 19.1%, respectively. The difference in the effective tax rates for the three months ended September 30, 2017 and 2016 is primarily a result of the change from income before income taxes and non-controlling interest of $9.2 million for the three months ended September 30, 2016 to a loss before income taxes and non-controlling interest of $9.0 million for the three months ended September 30, 2017 and an increase in the income tax provision from $1.7 million for the three months ended September 30, 2016 to $1.8 million for the three months ended September 30, 2017. The Company’s effective tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income it earns in those jurisdictions. It is also affected by discrete items that may occur in any
45
given year, but are not consistent from year to year. In addition to the state and foreign income taxes, the requirement to maintain valuation allowances had the most significant impact on the difference between the Company’s effective tax rate and the statutory U.S. federal income tax rate of 35%.
Operating Segment Results
Net revenues, Segment EBITDA and Adjusted EBITDA by operating segment are as follows:
|
| Three Months Ended September 30, |
| |||||||||||||||||||||||||||||||||
|
| Net Revenues |
|
| Segment EBITDA (1) |
|
| Adjusted EBITDA (1) |
| |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Increase |
|
|
|
|
|
|
|
|
|
| Increase |
|
|
|
|
|
|
|
|
|
| Increase |
| |||
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||||||
Global Loyalty |
| $ | 58.3 |
|
| $ | 42.9 |
|
| $ | 15.4 |
|
| $ | 22.8 |
|
| $ | 14.8 |
|
| $ | 8.0 |
|
| $ | 22.7 |
|
| $ | 14.9 |
|
| $ | 7.8 |
|
Global Customer Engagement |
|
| 90.6 |
|
|
| 92.5 |
|
|
| (1.9 | ) |
|
| 17.0 |
|
|
| 17.2 |
|
|
| (0.2 | ) |
|
| 17.3 |
|
|
| 21.3 |
|
|
| (4.0 | ) |
Insurance Solutions |
|
| 59.9 |
|
|
| 59.3 |
|
|
| 0.6 |
|
|
| 22.7 |
|
|
| 22.4 |
|
|
| 0.3 |
|
|
| 22.7 |
|
|
| 22.0 |
|
|
| 0.7 |
|
Subtotal |
|
| 208.8 |
|
|
| 194.7 |
|
|
| 14.1 |
|
|
| 62.5 |
|
|
| 54.4 |
|
|
| 8.1 |
|
|
| 62.7 |
|
|
| 58.2 |
|
|
| 4.5 |
|
Legacy Membership and Package |
|
| 34.4 |
|
|
| 43.6 |
|
|
| (9.2 | ) |
|
| 11.8 |
|
|
| 8.2 |
|
|
| 3.6 |
|
|
| 11.8 |
|
|
| 15.2 |
|
|
| (3.4 | ) |
Eliminations |
|
| — |
|
|
| (0.2 | ) |
|
| 0.2 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12.0 | ) |
|
| (11.9 | ) |
|
| (0.1 | ) |
|
| (11.3 | ) |
|
| (10.6 | ) |
|
| (0.7 | ) |
Total |
| $ | 243.2 |
|
| $ | 238.1 |
|
| $ | 5.1 |
|
|
| 62.3 |
|
|
| 50.7 |
|
|
| 11.6 |
|
|
| 63.2 |
|
|
| 62.8 |
|
|
| 0.4 |
|
Business optimization expenses and restructuring charges or expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (0.9 | ) |
|
| (1.8 | ) |
|
| 0.9 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (0.5 | ) |
|
| (8.5 | ) |
|
| 8.0 |
|
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 0.5 |
|
|
| (1.8 | ) |
|
| 2.3 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (12.0 | ) |
|
| (13.7 | ) |
|
| 1.7 |
|
|
| (12.0 | ) |
|
| (13.7 | ) |
|
| 1.7 |
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 50.3 |
|
| $ | 37.0 |
|
| $ | 13.3 |
|
| $ | 50.3 |
|
| $ | 37.0 |
|
| $ | 13.3 |
|
46
The following tables summarize the adjustments between income from operations and Adjusted EBITDA for the three months ended September 30, 2017 and 2016 by reportable segment.
|
| Three Months Ended September 30, 2017 |
| |||||||||||||||||||||
|
| Global Loyalty |
|
| Global Customer Engagement |
|
| Insurance Solutions |
|
| Legacy Membership and Package |
|
| Corporate |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Business optimization expenses and restructuring charges or expenses |
| $ | 0.1 |
|
| $ | 0.5 |
|
| $ | — |
|
| $ | (0.3 | ) |
| $ | 0.6 |
|
| $ | 0.9 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges |
|
| (0.2 | ) |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| 0.4 |
|
|
| 0.5 |
|
Other, net |
|
| — |
|
|
| (0.2 | ) |
|
| — |
|
|
| — |
|
|
| (0.3 | ) |
|
| (0.5 | ) |
Total |
| $ | (0.1 | ) |
| $ | 0.3 |
|
| $ | — |
|
| $ | — |
|
| $ | 0.7 |
|
| $ | 0.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, 2016 |
| |||||||||||||||||||||
|
| Global Loyalty |
|
| Global Customer Engagement |
|
| Insurance Solutions |
|
| Legacy Membership and Package |
|
| Corporate |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Business optimization expenses and restructuring charges or expenses |
| $ | 0.1 |
|
| $ | 1.4 |
|
| $ | (0.7 | ) |
| $ | 1.1 |
|
| $ | (0.1 | ) |
| $ | 1.8 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges |
|
| — |
|
|
| 2.7 |
|
|
| — |
|
|
| 5.8 |
|
|
| — |
|
|
| 8.5 |
|
Other, net |
|
| — |
|
|
| — |
|
|
| 0.3 |
|
|
| 0.1 |
|
|
| 1.4 |
|
|
| 1.8 |
|
Total |
| $ | 0.1 |
|
| $ | 4.1 |
|
| $ | (0.4 | ) |
| $ | 7.0 |
|
| $ | 1.3 |
|
| $ | 12.1 |
|
(1) | See “ – Results of Operations – Segment EBITDA” and “ – Financial Condition, Liquidity and Capital Resources – Credit Facilities and Long-Term Debt – Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures” below and Note 12 to our unaudited condensed consolidated financial statements included elsewhere herein for a discussion on Segment EBITDA. |
Global Loyalty. Net revenues from Global Loyalty increased by $15.4 million, or 35.9%, for the three months ended September 30, 2017 to $58.3 million as compared to $42.9 million for the three months ended September 30, 2016 primarily due to increased growth with existing clients and launches with new clients.
Segment EBITDA increased by $8.0 million, or 54.1%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily from the higher net revenue partially offset by higher servicing costs
Global Customer Engagement. Global Customer Engagement net revenues decreased by $1.9 million, or 2.1%, to $90.6 million for the three months ended September 30, 2017 as compared to $92.5 million for the three months ended September 30, 2016. Net revenues decreased primarily as a result of lower net revenues in our engagement solutions business primarily due to the timing of product launches with new clients along with lower revenue in our revenue enhancement business.
Segment EBITDA decreased $0.2 million, or 1.2%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 as the lower net revenues of $1.9 million was partially offset by lower operating expenses of $1.7 million.
Insurance Solutions. Insurance Solutions net revenues increased by $0.6 million, or 1.0%, to $59.9 million for the three months ended September 30, 2017 as compared to $59.3 million for the three months ended September 30, 2016. Net revenues increased $0.6 million as an increase in the average revenue per supplemental insured along with a lower cost of insurance principally from lower claims experience was partially offset by the impact of lower supplemental insureds.
Segment EBITDA increased by $0.3 million, or 1.3%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016 as the impact of higher net revenues was principally offset by slightly higher operating expenses.
Legacy Membership and Package. Legacy Membership and Package net revenues decreased by $9.2 million, or 21.1%, to $34.4 million for the three months ended September 30, 2017 as compared to $43.6 million for the three months ended September 30, 2016. Net revenues decreased primarily from the expected attrition of legacy members, including those from our large financial institution partners, principally due to the cessation of new marketing campaigns and terminated programs with those partners as a result of the regulatory issues that have negatively impacted such partners. We expect this downward trend in net revenues related to our financial
47
institution partners to continue for the foreseeable future. Net revenues further decreased from lower package revenue primarily the result of lower average package members.
Segment EBITDA increased by $3.6 million, or 43.9%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016. Segment EBITDA increased as the impact from the lower net revenues of $9.2 million was more than offset by lower marketing and commissions expense of $4.6 million, lower operating costs of $2.1 million and lower general and administrative expenses of $5.2 million. The lower marketing and commissions expense was primarily due to lower commissions principally due to the decline in the member base. The lower operating costs are the result of lower product and servicing costs related to the lower revenue. The lower general and administrative costs were primarily due to lower reserves and fees related to certain legal matters.
Corporate. Corporate costs include certain departmental service costs such as human resources, legal, corporate finance and accounting functions and unallocated portions of information technology. Expenses such as professional fees related to debt financing activities and stock compensation costs are also recorded in corporate. Corporate costs increased by $0.1 million for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
The following table summarizes our consolidated results of operations for the nine months ended September 30, 2017 and 2016:
Summary of Operating Results for the Nine Months Ended September 30, 2017
|
| Nine Months Ended |
|
| Nine Months Ended |
|
|
|
|
| ||
|
| September 30, |
|
| September 30, |
|
| Increase |
| |||
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
|
| (in millions) |
| |||||||||
Net revenues |
| $ | 721.6 |
|
| $ | 737.0 |
|
| $ | (15.4 | ) |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, exclusive of depreciation and amortization shown separately below: |
|
|
|
|
|
|
|
|
|
|
|
|
Marketing and commissions |
|
| 230.5 |
|
|
| 254.4 |
|
|
| (23.9 | ) |
Operating costs |
|
| 278.9 |
|
|
| 248.0 |
|
|
| 30.9 |
|
General and administrative |
|
| 73.2 |
|
|
| 87.2 |
|
|
| (14.0 | ) |
Facility exit costs |
|
| 0.3 |
|
|
| 0.1 |
|
|
| 0.2 |
|
Depreciation and amortization |
|
| 34.9 |
|
|
| 41.9 |
|
|
| (7.0 | ) |
Total expenses |
|
| 617.8 |
|
|
| 631.6 |
|
|
| (13.8 | ) |
Income from operations |
|
| 103.8 |
|
|
| 105.4 |
|
|
| (1.6 | ) |
Interest income |
|
| 0.1 |
|
|
| 0.3 |
|
|
| (0.2 | ) |
Interest expense |
|
| (128.5 | ) |
|
| (82.3 | ) |
|
| (46.2 | ) |
Gain on debt extinguishment |
|
| 3.5 |
|
|
| — |
|
|
| 3.5 |
|
Other expense, net |
|
| (0.3 | ) |
|
| — |
|
|
| (0.3 | ) |
Income (loss) before income taxes and non-controlling interest |
|
| (21.4 | ) |
|
| 23.4 |
|
|
| (44.8 | ) |
Income tax expense |
|
| (6.4 | ) |
|
| (5.7 | ) |
|
| (0.7 | ) |
Net income (loss) |
|
| (27.8 | ) |
|
| 17.7 |
|
|
| (45.5 | ) |
Less: net income attributable to non-controlling interest |
|
| (0.7 | ) |
|
| (0.5 | ) |
|
| (0.2 | ) |
Net income (loss) attributable to Affinion Group Holdings, Inc. |
| $ | (28.5 | ) |
| $ | 17.2 |
|
| $ | (45.7 | ) |
The following is a summary of changes affecting our operating results for the nine months ended September 30, 2017.
Net revenues decreased $15.4 million, or 2.1%, for the nine months ended September 30, 2017 as compared to the same period of the prior year primarily the result of lower retail revenues from a decline in retail member volumes in Legacy Membership and Package and lower revenue in Global Customer Engagement primarily due to the unfavorable impact of foreign exchange and the timing of product launches with new clients. Net revenue increased in Global Loyalty primarily due to increased growth with existing clients and launches with new clients.
Segment EBITDA decreased $8.6 million for the nine months ended September 30, 2017 as compared to the same period of the prior year as the impact of the lower net revenues and higher operating costs was partially offset by lower marketing and commissions and lower general and administrative expenses.
48
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
The following section provides an overview of our consolidated results of operations for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
Net Revenues. During the nine months ended September 30, 2017, we reported net revenues of $721.6 million, a decrease of $15.4 million, or 2.1%, as compared to net revenues of $737.0 million in the comparable period of 2016. Global Loyalty net revenues increased $48.0 million primarily due to increased growth with existing clients and launches with new clients. Net revenues decreased $26.0 million in Global Customer Engagement primarily from the unfavorable impact of foreign exchange of $8.2 million and lower net revenues in our engagement solutions business primarily due to the timing of product launches with new clients along with lower revenue in our revenue enhancement business. Insurance Solutions net revenues increased $0.8 million as an increase in the average revenue per supplemental insured along with a lower cost of insurance principally from lower claims experience was partially offset by the impact of lower supplemental insureds. Net revenues in Legacy Membership and Package decreased $39.0 million primarily due to the expected attrition of legacy members, including those from our large financial institution partners, principally due to the cessation of new marketing campaigns and terminated programs with those partners as a result of the regulatory issues that have negatively impacted these partners. We expect this downward trend in net revenues related to our financial institution partners to continue for the foreseeable future. Net revenues further decreased from lower package revenue primarily the result of lower average package members and an unfavorable foreign exchange impact of $0.9 million.
Marketing and Commissions Expense. Marketing and commissions expense decreased by $23.9 million, or 9.4%, to $230.5 million for the nine months ended September 30, 2017 from $254.4 million for the nine months ended September 30, 2016. Marketing and commissions expense decreased $13.5 million in Global Customer Engagement primarily due to lower volumes, a migration of certain partner commission arrangements from traditional bounty to advance commissions whereby the partner has the potential for additional revenue sharing, and the favorable impact of foreign exchange. Costs decreased in Legacy Membership and Package by $12.6 million primarily due to lower commissions principally due to the decline in the member base.
Operating Costs. Operating costs increased by $30.9 million, or 12.5%, to $278.9 million for the nine months ended September 30, 2017 from $248.0 million for the nine months ended September 30, 2016. Costs increased $41.7 million in Global Loyalty primarily from higher servicing costs related to the higher net revenues and a charge of $23.3 million recorded in relation to the external gift card inventory cyber theft that occurred in the first quarter of 2017. The charge includes costs associated with customer remediation of the cyber theft and costs related to a commercial dispute with a gift card provider and discussions with that provider are still ongoing. An insurance claim related to the cyber theft is currently being pursued with our carriers and we expect a recovery in a future period which will be recorded when realizable. Operating costs decreased $10.5 million in Legacy Membership and Package primarily from lower product and servicing costs associated with the lower retail member volumes.
General and Administrative Expense. General and administrative expense decreased by $14.0 million, or 16.1% to $73.2 million for the nine months ended September 30, 2017 from $87.2 million for the nine months ended September 30, 2016. Costs decreased $11.2 million in Legacy Membership and Package primarily due to lower reserves and fees related to certain legal matters. Corporate costs decreased $6.3 million primarily due to cost savings initiatives, lower employee incentive plan costs and the favorable impact of unrealized foreign exchange on intercompany borrowings. Costs increased $5.0 million in Global Customer Engagement primarily due to higher professional fees and a provision recorded related to the collectability of a customer receivable.
Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $7.0 million for the nine months ended September 30, 2017 to $34.9 million from $41.9 million for the nine months ended September 30, 2016 primarily from a decrease in amortization expense of $3.4 million related to lower amortization of intangible assets acquired in various acquisitions, principally member relationships which are amortized on an accelerated basis. Depreciation expense decreased $3.6 million primarily the result of fully depreciating significant capital projects in 2016.
Interest Expense. Interest expense increased $46.2 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as a result of restructuring our debt on May 10, 2017, whereby we entered into a new credit facility for term loans totaling $1.34 billion and revolving loans. The proceeds were used to refinance our existing senior secured credit facility and redeem in full our outstanding International Notes. We also completed a private offer to exchange or repurchase Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes for New Notes and New Warrants to acquire Holdings’ common stock. The new debt issues are at higher principal amounts with associated higher interest rates.
Gain on Extinguishment of Debt. For the nine months ended September 30, 2017, we recorded a gain in the amount of $3.5 million as a result of restructuring our debt on May 10, 2017 and July 17, 2017.
Income Tax Expense. Income tax expense increased by $0.7 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, primarily due to an increase in the deferred state and foreign tax provisions for the nine
49
months ended September 30, 2017, partially offset by a decrease in the current state and foreign tax provisions and deferred federal tax provision for the same period.
The Company’s effective income tax rates for the nine months ended September 30, 2017 and 2016 were (30.1)% and 24.5%, respectively. The difference in the effective tax rates for the nine months ended September 30, 2017 and 2016 is primarily a result of the change from income before income taxes and non-controlling interest of $23.4 million for the nine months ended September 30, 2016 to a loss before income taxes and non-controlling interests of $21.4 million for the nine months ended September 30, 2017 and an increase in the income tax expense from $5.7 million for the nine months ended September 30, 2016 to $6.4 million for the nine months ended September 30, 2017. The Company’s tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income it earns in those jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to the state and foreign income taxes, the requirement to maintain valuation allowances had the most significant impact on the difference between the Company’s effective tax rate and the statutory U.S. federal income tax rate of 35%.
Operating Segment Results
Net revenues, Segment EBITDA and Adjusted EBITDA by operating segment are as follows:
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||||||||||
|
| Net Revenues |
|
| Segment EBITDA (1) |
|
| Adjusted EBITDA (1) |
| |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| Increase |
|
|
|
|
|
|
|
|
|
| Increase |
|
|
|
|
|
|
|
|
|
| Increase |
| |||
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||||||
Global Loyalty |
| $ | 170.8 |
|
| $ | 122.8 |
|
| $ | 48.0 |
|
| $ | 46.4 |
|
| $ | 41.2 |
|
| $ | 5.2 |
|
| $ | 69.3 |
|
| $ | 41.8 |
|
| $ | 27.5 |
|
Global Customer Engagement |
|
| 268.8 |
|
|
| 294.8 |
|
|
| (26.0 | ) |
|
| 39.9 |
|
|
| 54.9 |
|
|
| (15.0 | ) |
|
| 47.2 |
|
|
| 62.0 |
|
|
| (14.8 | ) |
Insurance Solutions |
|
| 172.8 |
|
|
| 172.0 |
|
|
| 0.8 |
|
|
| 60.5 |
|
|
| 61.3 |
|
|
| (0.8 | ) |
|
| 60.7 |
|
|
| 60.6 |
|
|
| 0.1 |
|
Subtotal |
|
| 612.4 |
|
|
| 589.6 |
|
|
| 22.8 |
|
|
| 146.8 |
|
|
| 157.4 |
|
|
| (10.6 | ) |
|
| 177.2 |
|
|
| 164.4 |
|
|
| 12.8 |
|
Legacy Membership and Package |
|
| 109.2 |
|
|
| 148.2 |
|
|
| (39.0 | ) |
|
| 28.9 |
|
|
| 32.7 |
|
|
| (3.8 | ) |
|
| 33.6 |
|
|
| 50.9 |
|
|
| (17.3 | ) |
Eliminations |
|
| — |
|
|
| (0.8 | ) |
|
| 0.8 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Corporate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (37.0 | ) |
|
| (42.8 | ) |
|
| 5.8 |
|
|
| (34.1 | ) |
|
| (36.0 | ) |
|
| 1.9 |
|
Total |
| $ | 721.6 |
|
| $ | 737.0 |
|
| $ | (15.4 | ) |
|
| 138.7 |
|
|
| 147.3 |
|
|
| (8.6 | ) |
|
| 176.7 |
|
|
| 179.3 |
|
|
| (2.6 | ) |
Business optimization expenses and restructuring charges or expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (10.6 | ) |
|
| (11.4 | ) |
|
| 0.8 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (26.9 | ) |
|
| (17.3 | ) |
|
| (9.6 | ) |
Other, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (0.5 | ) |
|
| (3.3 | ) |
|
| 2.8 |
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (34.9 | ) |
|
| (41.9 | ) |
|
| 7.0 |
|
|
| (34.9 | ) |
|
| (41.9 | ) |
|
| 7.0 |
|
Income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 103.8 |
|
| $ | 105.4 |
|
| $ | (1.6 | ) |
| $ | 103.8 |
|
| $ | 105.4 |
|
| $ | (1.6 | ) |
50
The following tables summarize the adjustments between income from operations and Adjusted EBITDA for the nine months ended September 30, 2017 and 2016 by reportable segment.
|
| Nine Months Ended September 30, 2017 |
| |||||||||||||||||||||
|
| Global Loyalty |
|
| Global Customer Engagement |
|
| Insurance Solutions |
|
| Legacy Membership and Package |
|
| Corporate |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Business optimization expenses and restructuring charges or expenses |
| $ | 0.1 |
|
| $ | 7.1 |
|
| $ | 0.1 |
|
| $ | 1.3 |
|
| $ | 2.0 |
|
| $ | 10.6 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges |
|
| 23.1 |
|
|
| 0.1 |
|
|
| — |
|
|
| 3.3 |
|
|
| 0.4 |
|
|
| 26.9 |
|
Other, net |
|
| (0.3 | ) |
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.1 |
|
|
| 0.5 |
|
|
| 0.5 |
|
Total |
| $ | 22.9 |
|
| $ | 7.3 |
|
| $ | 0.2 |
|
| $ | 4.7 |
|
| $ | 2.9 |
|
| $ | 38.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2016 |
| |||||||||||||||||||||
|
| Global Loyalty |
|
| Global Customer Engagement |
|
| Insurance Solutions |
|
| Legacy Membership and Package |
|
| Corporate |
|
| Total |
| ||||||
|
| (in millions) |
| |||||||||||||||||||||
Business optimization expenses and restructuring charges or expenses |
| $ | 1.3 |
|
| $ | 4.0 |
|
| $ | (0.6 | ) |
| $ | 4.4 |
|
| $ | 2.3 |
|
| $ | 11.4 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges |
|
| — |
|
|
| 2.7 |
|
|
| — |
|
|
| 13.5 |
|
|
| 1.1 |
|
|
| 17.3 |
|
Other, net |
|
| (0.7 | ) |
|
| 0.4 |
|
|
| (0.1 | ) |
|
| 0.3 |
|
|
| 3.4 |
|
|
| 3.3 |
|
Total |
| $ | 0.6 |
|
| $ | 7.1 |
|
| $ | (0.7 | ) |
| $ | 18.2 |
|
| $ | 6.8 |
|
| $ | 32.0 |
|
(1) | See “ – Results of Operations – Segment EBITDA” and “ – Financial Condition, Liquidity and Capital Resources – Credit Facilities and Long-Term Debt – Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures” below and Note 12 to our unaudited condensed consolidated financial statements included elsewhere herein for a discussion on Segment EBITDA. |
Global Loyalty. Net revenues from Global Loyalty increased by $48.0 million, or 39.1%, for the nine months ended September 30, 2017 to $170.8 million as compared to $122.8 million for the nine months ended September 30, 2016 primarily due to increased growth with existing clients and launches with new clients.
Segment EBITDA increased by $5.2 million, or 12.6%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016, as the impact of the higher net revenue was partially offset by higher servicing costs and a charge of $23.3 million recorded in relation to the external gift card inventory cyber theft that occurred in the first quarter of 2017. The charge includes costs associated with customer remediation of the cyber theft and costs related to a commercial dispute with a gift card provider and discussions with that provider are still ongoing. An insurance claim related to the cyber theft is currently being pursued with our carriers and we expect a recovery in a future period which will be recorded when realizable.
Global Customer Engagement. Global Customer Engagement net revenues decreased by $26.0 million, or 8.8%, to $268.8 million for the nine months ended September 30, 2017 as compared to $294.8 million for the nine months ended September 30, 2016. Net revenues decreased $8.2 million from the unfavorable impact of foreign exchange. On a currency consistent basis, net revenues decreased $17.8 million primarily from lower net revenues in our engagement solutions business principally due to the timing of product launches with new clients, as well as lower revenue in our revenue enhancement business.
Segment EBITDA decreased $15.0 million, or 27.3%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as the lower net revenues of $26.0 million and higher general and administrative cost of $5.0 million were partially offset by lower marketing and commissions of $13.5 million and lower operating costs of $2.1 million. The lower marketing and commissions were primarily attributable to lower volumes, a migration of certain partner commission arrangements from traditional bounty to advance commissions whereby the partner has the potential for additional revenue sharing and the favorable impact of foreign exchange. The lower operating costs were primarily related to the favorable impact of foreign exchange. The higher general and administrative costs were primarily due to higher professional fees and a provision recorded related to the collectability of a customer receivable.
Insurance Solutions. Insurance Solutions net revenues increased by $0.8 million, or 0.5%, to $172.8 million for the nine months ended September 30, 2017 as compared to $172.0 million for the nine months ended September 30, 2016. Net revenues increased as
51
an increase in the average revenue per supplemental insured along with a lower cost of insurance principally from lower claims experience was partially offset by the impact of lower supplemental insureds.
Segment EBITDA decreased by $0.8 million, or 1.3%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 as the impact of the higher net revenue was more than offset by higher operating expenses.
Legacy Membership and Package. Legacy Membership and Package net revenues decreased by $39.0 million, or 26.3%, to $109.2 million for the nine months ended September 30, 2017 as compared to $148.2 million for the nine months ended September 30, 2016. Net revenues decreased primarily from the expected attrition of legacy members, including those from our large financial institution partners, principally due to the cessation of new marketing campaigns and terminated programs with those partners as a result of the regulatory issues that have negatively impacted such partners. We expect this downward trend in net revenues related to our financial institution partners to continue for the foreseeable future. Net revenues further decreased from lower package revenue primarily the result of lower average package members and an unfavorable foreign exchange impact of $0.9 million.
Segment EBITDA decreased by $3.8 million, or 11.6%, for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. Segment EBITDA decreased as the impact from the lower net revenues of $39.0 million was partially offset by lower marketing and commissions expense of $12.6 million, lower operating costs of $10.5 million and lower general and administrative costs of $11.2 million. The lower marketing and commissions expense was primarily due to lower commissions principally due to the decline in the member base. The lower operating costs are the result of lower product and servicing costs related to the lower revenue. The lower general and administrative costs were primarily due to lower reserves and fees related to certain legal matters.
Corporate. Corporate costs include certain departmental service costs such as human resources, legal, corporate finance and accounting functions and unallocated portions of information technology. Expenses such as professional fees related to debt financing activities and stock compensation costs are also recorded in corporate. Corporate costs decreased by $5.8 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016 primarily the result of cost savings initiatives, lower employee incentive plan costs and the favorable impact of unrealized foreign exchange on intercompany borrowings.
Financial Condition, Liquidity and Capital Resources
Financial Condition – September 30, 2017 and December 31, 2016
|
| September 30, |
|
| December 31, |
|
| Increase |
| |||
|
| 2017 |
|
| 2016 |
|
| (Decrease) |
| |||
|
| (in millions) |
| |||||||||
Total assets |
| $ | 796.0 |
|
| $ | 738.9 |
|
| $ | 57.1 |
|
Total liabilities |
|
| 2,357.6 |
|
|
| 2,311.8 |
|
|
| 45.8 |
|
Total deficit |
|
| (1,561.6 | ) |
|
| (1,572.9 | ) |
|
| 11.3 |
|
Total assets increased by $57.1 million, primarily due to an increase in cash and cash equivalents of $27.6 million, principally due to the timing of cash receipts at the end of the quarter, and an increase in receivables of $17.3 million due to higher receivables in our domestic and international travel businesses.
Total liabilities increased by $45.8 million, primarily due to an increase in accounts payable and accrued expenses of $62.6 million, principally due to an increase in gift card deposits, payables to travel vendors and the reserve accrual related to the gift card inventory cyber theft.
Total deficit decreased by $11.3 million, principally due to the issuance of warrants of $31.1 million, share-based compensation of $2.2 million and the change in currency translation adjustment of $6.0 million, partially offset by the net loss attributable to the Company of $28.5 million.
Liquidity and Capital Resources
Our primary sources of liquidity on both a short-term and long-term basis are cash on hand and cash generated through operating and financing activities. Our primary cash needs are to service our indebtedness and for working capital, capital expenditures and general corporate purposes. Many of the Company’s significant costs are variable in nature, including marketing and commissions. The Company has a great degree of flexibility in the amount and timing of marketing expenditures and focuses its marketing expenditures on its most profitable marketing opportunities. Commissions correspond directly with revenue generated and have been decreasing as a percentage of revenue over the last several years. We believe, based on our current operations and new business prospects, coupled with our flexibility in the amount and timing of marketing expenditures, that our cash on hand and
52
borrowing availability under Affinion’s revolving credit facility will be sufficient to meet our liquidity needs for the next twelve months and in the foreseeable future, including the $3.35 million quarterly amortization payments on Affinion’s term loan facility under Affinion’s senior secured credit facility. In addition, we do not expect to be required to make any excess cash flow or other mandatory prepayments in the near future under Affinion’s term loan facility.
In addition to quarterly amortization payments, the term loan facility requires mandatory prepayments under certain conditions. First, a prepayment may be required based on excess cash flows as defined in Affinion’s senior secured credit facility. For this purpose, excess cash flow for any annual accounting period is defined as Affinion’s Adjusted EBITDA reduced by debt service, increases to working capital, capital expenditures and business acquisitions net of external funding and certain other uses of cash. Increases to excess cash flow include decreases to working capital and certain other receipts of cash. If the excess cash flow calculation for any annual accounting period is positive, a prepayment of the term loan facility in an amount equal to a percentage of the excess cash flow may be required. Such percentage is determined based upon the senior secured leverage ratio as of the end of the applicable annual accounting period. Second, a prepayment may be required with the net proceeds of certain asset sales. However, certain of such net proceeds will not be required to be applied to prepay Affinion’s senior secured credit facility if they are applied to acquire, maintain, develop, construct, improve or repair assets useful in our business or to make acquisitions or other permitted investments within 12 months.
Affinion Holdings is a holding company, with no direct operations and no significant assets other than the ownership of 100% of the stock of Affinion. Because we conduct our operations through our subsidiaries, our cash flows and our ability to service our indebtedness is dependent upon cash dividends and distributions or other transfers from our subsidiaries. Payments to us by our subsidiaries will be contingent upon our subsidiaries’ earnings, but will not be limited by our debt agreements following the 2017 Transactions consisting of the New Credit Facility and the indenture governing the New Notes.
Although we historically have a working capital deficit, a major factor included in this deficit is deferred revenue resulting from the cash collected from annual memberships that is deferred until the appropriate refund period has concluded. As the membership base continues to shift away from memberships billed annually to memberships billed monthly, it will have a negative effect on our operating cash flow. However, we anticipate that in future periods the reduced cash interest expense will favorably impact the operating cash and offset the working capital deficit that will continue for the foreseeable future. In spite of our historical working capital deficit, we expect that we will continue to be able to operate effectively primarily due to our cash flows from operations and our available funds under the revolving credit facility under our New Credit Facility. In addition, during 2017 and 2018, our required quarterly amortization payments under the term loan under our New Credit Facility will be nominal and we do not currently anticipate any other mandatory principal prepayments under the term loan.
Cash Flows – Nine Months Ended September 30, 2017 and 2016
At September 30, 2017, we had $65.3 million of cash and cash equivalents on hand, an increase of $2.2 million from $63.1 million at September 30, 2016.
The following table summarizes our cash flows and compares the $27.6 million increase in our cash and cash equivalents on hand during the period from December 31, 2016 to September 30, 2017 to the $7.7 million increase in our cash and cash equivalents on hand during the period from December 31, 2015 to September 30, 2016.
|
| Nine Months Ended September 30, |
| |||||||||
|
| 2017 |
|
| 2016 |
|
| Change |
| |||
|
| (in millions) |
| |||||||||
Cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 34.6 |
|
| $ | 37.7 |
|
| $ | (3.1 | ) |
Investing activities |
|
| (29.9 | ) |
|
| (22.8 | ) |
|
| (7.1 | ) |
Financing activities |
|
| 20.4 |
|
|
| (6.1 | ) |
|
| 26.5 |
|
Effect of exchange rate changes |
|
| 2.5 |
|
|
| (1.1 | ) |
|
| 3.6 |
|
Net change in cash and cash equivalents |
| $ | 27.6 |
|
| $ | 7.7 |
|
| $ | 19.9 |
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Operating Activities
During the nine months ended September 30, 2017, we generated $3.1 million less cash from operating activities than during the nine months ended September 30, 2016. Segment EBITDA decreased $8.6 million for the nine months ended September 30, 2017, which includes a $23.3 million charge for the third-party gift card inventory theft, as compared to the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we also paid approximately $14.3 million of costs related to the third-party gift card inventory cyber theft.
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Investing Activities
We used $7.1 million more cash in investing activities during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we used $30.1 million for capital expenditures and made $0.4 million in acquisition-related payments. During the nine months ended September 30, 2016, we used $24.3 million for capital expenditures.
Financing Activities
We generated $26.5 million more cash from financing activities during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. During the nine months ended September 30, 2017, we made payments on our first-lien and second-lien term loans for $753.8 million and $425.0 million, respectively, redeemed the International senior subordinated notes for $118.5 million, redeemed Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and the Investments 2013 senior subordinated notes for $227.4 million and made payments on our new term loan of $6.7 million. We also issued New Notes for $235.9 million, received $1,303.7 million and $40.0 million of term loans and revolving credit facility under our New Credit Facility and incurred $28.1 million of financing costs related to the New Notes and New Credit Facility. During the nine months ended September 30, 2016, we had repayments under Affinion’s first lien term loan and other debt of $5.8 million.
Credit Facilities and Long-Term Debt
General
As a result of the Apollo Transactions, we became a highly leveraged company, and we continue to be a highly leveraged company. As of September 30, 2017, we had approximately $1.9 billion in indebtedness.
At September 30, 2017, on a consolidated basis, Affinion had $1,333.3 million outstanding term loans under Affinion’s New Credit Facility, as defined below ($1,302.4 million, net of discount) and $557.0 million outstanding under Affinion’s New Notes, as defined below ($533.0 million, net of discount),. At September 30, 2017, there were borrowings of $40.0 million ($37.5 million, net of discount) outstanding under Affinion’s revolving credit facility and Affinion had $70.0 million available under the revolving credit facility.
As of September 30, 2017, Affinion’s New Credit Facility and the indenture governing Affinion’s New Notes contained various restrictive covenants that apply to Affinion. As of September 30, 2017, Affinion was in compliance with the restrictive covenants under Affinion’s debt agreements.
On May 10, 2017, Affinion entered into the New Credit Facility having a five-year maturity with a lender, pursuant to which the lender provided term loans in an aggregate principal amount equal to approximately $1.3 billion and committed to provide revolving loans in an aggregate principal amount at any one time outstanding not to exceed $110.0 million, decreasing to $80.0 million on May 10, 2018. The proceeds of the term loans under the New Credit Facility were used by Affinion to refinance its existing senior secured credit facility (the “Credit Agreement Refinancing”), to redeem in full the International Notes (the “International Notes Redemption”), to pay transaction fees and expenses and for general corporate purposes. The term loans provide for quarterly amortization payments totaling (i) for the first two years after May 10, 2017, 1% per annum, (ii) for the third year after May 10, 2017, 2.5% per annum, and (iii) for each year thereafter, 5% per annum, in each case, payable quarterly, with the balance due upon the final maturity date, subject in each case, to reduction of such amortization payments for certain prepayments. The New Credit Facility also requires mandatory prepayments of the outstanding term loans based on excess cash flow (as defined in the New Credit Facility), if any, and the proceeds from certain specified transactions.
The interest rates with respect to the term loans and revolving loans under the New Credit Facility are based on, at Affinion’s option, (x) the higher of (i) adjusted LIBOR and (ii) 1.00%, in each case, plus 7.75%, or (y) the highest of (i) the prime rate, (ii) the Federal Funds Effective Rate plus 0.5%, and (iii) 2.00% (“ABR”) in each case plus 6.75%.
Affinion’s obligations under the New Credit Facility are, and Affinion’s obligations under any interest rate protection or other hedging arrangements entered into with a lender or any of its affiliates are, guaranteed by Affinion Holdings and by each of Affinion’s existing and subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. The New Credit Facility is secured on a first-priority basis to the extent legally permissible by substantially all of the assets of (i) Affinion Holdings, which consists of a pledge of all the Company’s capital stock and (ii) Affinion and the subsidiary guarantors, including but not limited to: (a) a pledge of substantially all capital stock held by Affinion or any subsidiary guarantor and (b) security interests in substantially all tangible and intangible assets of Affinion and each subsidiary guarantor, subject to certain exceptions. The New Credit Facility also contains financial, affirmative and negative covenants. The negative covenants in the New Credit Facility include, among other things, limitations (all of which are subject to certain exceptions) on Affinion’s (and in certain cases, Affinion Holdings’) ability to: declare dividends and make other distributions, redeem or repurchase Affinion’s capital stock; prepay, redeem or repurchase certain of Affinion’s subordinated indebtedness; make loans or investments (including acquisitions); incur additional indebtedness (subject to
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certain exceptions); enter into agreements that would restrict the ability of Affinion’s subsidiaries to pay dividends; merge or enter into acquisitions; sell assets; and enter into transactions with affiliates. The New Credit Facility requires Affinion to comply with (a) a maximum ratio of senior secured debt to EBITDA (as defined in the New Credit Facility) and (y) a minimum ratio of EBITDA to consolidated fixed charges. For the quarter ended September 30, 2017 and through December 31, 2017, the maximum ratio of senior secured debt to EBITDA was 7.5:1.0 and the minimum ratio of EBITDA to consolidated fixed charges was 1.0:1.0.
On May 10, 2017, Affinion International Holdings Limited (“Affinion International”) (i) elected to redeem all of its outstanding $118.5 million principal amount of 7.5% Cash/PIK Senior Notes due 2018 (the “International Notes”) on June 9, 2017 at a redemption price of 100% of the principal amount of the International Notes, plus accrued and unpaid interest to the redemption date, (ii) irrevocably deposited sufficient funds received from borrowings under the New Credit Facility to effect such redemption with the trustee under the indenture governing the International Notes and (iii) entered into a satisfaction and discharge agreement to discharge its obligations under the indenture governing the International Notes. The International Notes were originally issued by Affinion International on November 9, 2015 in an original principal amount of $110.0 million and bore interest at 7.5% per annum, of which 3.5% per annum was payable in cash and 4.0% per annum was payable in kind; provided, that all of the accrued interest on the International Notes from the issue date to, but not including, May 1, 2016 was payable on May 1, 2016 entirely in kind. Interest on the International Notes was payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2016. The International Notes Redemption was consummated on June 9, 2017.
On May 10, 2017, (a) Affinion completed the AGI Exchange Offer; (b) Affinion Holdings completed the Holdings Exchange Offer; and (c) Affinion Investments completed the Investments Exchange Offer. Under the terms of the AGI Exchange Offer, for each $1,000 principal amount of Affinion’s 2010 senior notes accepted in the AGI Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $930 in cash. Under the terms of the Holdings Exchange Offer, for each $1,000 principal amount of Affinion Holdings’ 2013 senior notes accepted in the Holdings Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $700 in cash. Under the terms of the Investments Exchange Offer, for each $1,000 principal amount of the Investments senior subordinated notes accepted in the Investments Exchange Offer, holders could elect to receive (i)(A) $1,000 principal amount of New Notes and New Warrants to purchase 3.37 shares of Common Stock or (B) $880 in cash. Pursuant to the AGI Exchange Offer, approximately $269.7 million of Affinion’s 2010 senior notes plus accrued and unpaid interest were exchanged for approximately $277.8 million of New Notes, New Warrants to purchase 1,103,203 shares of Common Stock and approximately $417,386 in cash, including $238.0 million of Affinion’s 2010 senior notes plus accrued and unpaid interest exchanged by related parties in exchange for $245.5 million of New Notes and New Warrants to purchase 985,438 shares of Common Stock; pursuant to the Holdings Exchange Offer, approximately $4.6 million of Affinion Holdings’ 2013 senior notes plus accrued and unpaid interest were exchanged by a related party for approximately $4.7 million of New Notes and New Warrants to purchase 18,539 shares of Common Stock; and pursuant to the Investments Exchange Offer, approximately $12.4 million of the Investments senior subordinated notes plus accrued and unpaid interest were exchanged for approximately $12.8 million of New Notes, New Warrants to purchase 51,005 shares of Common Stock and approximately $912 in cash, including $12.2 million of the Investments senior subordinated notes plus accrued and unpaid interest exchanged by related parties in exchange for $12.6 million of New Notes and New Warrants to purchase 49,894 shares of Common Stock. Affinion used the proceeds of the New Notes issued pursuant to the Investor Purchase Agreement to pay the cash tender consideration to participating holders in the Exchange Offers.
Concurrently with the Exchange Offers, Affinion and Affinion Investments successfully solicited consents from holders to certain amendments to (a) the indenture governing Affinion’s 2010 senior notes to remove substantially all of the restrictive covenants and certain of the default provisions and to reduce from 30 days to three business days the minimum notice period for optional redemptions, and (b) the indenture governing the Investments senior subordinated notes to reduce from 30 days to three business days the minimum notice period for optional redemptions.
Also, on May 10, 2017, Affinion exercised its option to redeem Affinion’s 2010 senior notes that were not tendered in the Exchange Offers and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement. As a result, on May 10, 2017, Affinion (i) elected to redeem all of its outstanding $205.3 million principal amount of Affinion’s 2010 senior notes on May 15, 2017 at a redemption price of 100% of the principal amount, plus accrued and unpaid interest to the redemption date, (ii) irrevocably deposited sufficient funds received from the Investors pursuant to the Investor Purchase Agreement to effect such redemption with the trustee under the indenture governing Affinion’s 2010 senior notes and (iii) entered into a satisfaction and discharge agreement to discharge its obligations under the indenture governing Affinion’s 2010 senior notes. Affinion’s 2010 senior notes were originally issued by Affinion on November 19, 2010 in an aggregate principal amount of $475.0 million and bore interest at 7.875% per annum. The redemption of the Affinion 2010 senior notes was consummated on May 15, 2017.
The New Notes bear interest at the rate per annum as follows:
For any interest payment period ending on or prior to the date that is the 18 month anniversary of the settlement date of the Exchange Offers (the “Settlement Date”), Affinion may, at its option, elect to pay interest on the New Notes (1) entirely in cash (“Cash Interest”) at a rate per annum of 12.50% or (2) entirely by increasing the principal amount of the outstanding New Notes or by
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issuing PIK notes (“PIK Interest”) at a rate per annum of 14.00%, provided that interest for the first interest period commencing on the Settlement Date shall be payable entirely in PIK Interest.
For any interest payment period ending after the date that is the 18 month anniversary of the Settlement Date, (i) if immediately after giving effect to such interest payment, on a pro forma basis, Affinion’s Senior Secured Leverage Ratio (as defined in the indenture governing the New Notes (the “New Notes Indenture”)) would be less than or equal to 4.375 to 1.000, Affinion’s Consolidated Fixed Charge Coverage Ratio (as defined in the New Notes Indenture) would be greater than or equal to 1.375 to 1.000, in each case, as of the last day of the most recently completed fiscal quarter of Affinion immediately preceding the scheduled interest payment date for which internal financial statements are available, and Affinion’s Average Liquidity (as defined in the New Notes Indenture) less the amount of the anticipated cash interest payment is equal to or greater than $80.0 million as of the record date for such interest payment, then Affinion shall be required to pay interest on the New Notes for such interest period entirely in Cash Interest at a rate per annum of 12.50%, (ii) if immediately after giving effect to such interest payment, on a pro forma basis, Affinion’s Senior Secured Leverage Ratio would be less than or equal to 4.375 to 1.000, Affinion’s Consolidated Fixed Charge Coverage Ratio would be greater than or equal to 1.250 to 1.000 but less than 1.375 to 1.000, in each case, as of the last day of the most recently completed fiscal quarter of Affinion immediately preceding the scheduled interest payment date for which internal financial statements are available, and Affinion’s Average Liquidity less the amount of the anticipated cash interest payment is equal to or greater than $80.0 million as of the record date for such interest payment, then Affinion shall be required to pay interest on the New Notes for such interest period as a combination (“Combined Interest”) of Cash Interest at a rate per annum of 6.50% and PIK Interest at a rate per annum of 7.50% and (iii) if immediately after giving effect to such interest payment, on a pro forma basis, Affinion’s Senior Secured Leverage Ratio would be greater than 4.375 to 1.000, Affinion’s Consolidated Fixed Charge Coverage Ratio would be less than 1.250 to 1.000, in each case, as of the last day of the most recently completed fiscal quarter of Affinion immediately preceding the scheduled interest payment date for which internal financial statements are available, or Affinion’s Average Liquidity less the amount of the anticipated cash interest payment is less than $80.0 million as of the record date for such interest payment, then Affinion may elect to pay interest on the New Notes for such interest period as PIK Interest at a rate per annum of: (x) 14.75% for any interest payment period ending on or prior to the date that is the 30 month anniversary of the Settlement Date and (y) 15.50% for any interest payment period ending after the date that is the 30 month anniversary of the Settlement Date; provided that, for the avoidance of doubt, if the aforementioned ratios are satisfied and require Affinion to either pay Cash Interest or Combined Interest for any interest period, as applicable, any restriction in the New Credit Facility on the payment of such interest shall not relieve Affinion of such obligation to pay Cash Interest or Combined Interest, as applicable, for such interest period and Affinion shall take all such actions as may be required in order to permit such payment of Cash Interest or Combined Interest, as applicable, for such interest period under the New Credit Facility (including, without limitation, any required repayment of outstanding borrowings under the revolving facility under the New Credit Facility).
Interest on the New Notes is payable semi-annually on May 10 and November 10 of each year, commencing on November 10, 2017. The New Notes will mature on November 10, 2022. Under certain circumstances, the New Notes are redeemable at Affinion’s option prior to maturity. If the New Notes are not so redeemed by Affinion, under certain circumstances, Affinion may be required to make an offer to purchase New Notes. The New Notes Indenture contains negative covenants that restrict the ability of Affinion and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. In addition, the covenants will restrict Affinion Holdings’ ability to engage in certain businesses or business activities. Affinion will not be required to deliver any separate reports to holders or financial statements or other information of Affinion and its restricted subsidiaries as long as Affinion Holdings is a guarantor of the New Notes and files such reports with the SEC. Affinion’s obligations under the New Notes are jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by the same entities that guarantee the New Credit Facility. The New Notes and guarantees thereof are unsecured senior obligations of Affinion and each of the guarantors and rank equally with all of Affinion’s and the guarantors’ existing and future senior indebtedness, including obligations under the New Credit Facility, and senior to Affinion’s and the guarantors’ existing and future senior indebtedness.
Previously, in connection with the Exchange Offers, on March 31, 2017, Elliott, Franklin, Empyrean, and ICG, all of whom were, or became as a result of the 2017 Exchange Offers, Issuance of New Notes and New Warrants and redemptions of Affinion’s 2010 senior notes, related parties, entered into the Investor Purchase Agreement with Affinion Holdings, Affinion and Affinion Investments, in which they agreed to purchase New Notes in an aggregate principal amount sufficient to pay all holders that participate in the Exchange Offers and elect to receive cash. Further, pursuant to the Investor Purchase Agreement, if Affinion Holdings, Affinion or Affinion Investments exercised its option to redeem any of Affinion’s 2010 senior notes, Affinion Holdings’ 2013 senior notes and/or the Investments senior subordinated notes not tendered in the Exchange Offers, the Company could obligate the Investors to purchase an aggregate principal amount of New Notes and New Warrants that would yield sufficient cash proceeds to fund any such redemptions. On May 10, 2017, Affinion exercised its option to redeem the Existing AGI Notes and irrevocably deposited the cash redemption price on such date in order to satisfy and discharge its obligations under the indenture governing the Existing AGI Notes. In addition, pursuant to the terms of the Investor Purchase Agreement, Affinion was required to pay to the Investors upon the closing of the Exchange Offers a commitment premium of $17.5 million and a funding premium of $7.4 million in aggregate principal amount of New Notes and the same number of New Warrants that such principal amount of New Notes would have been issued with as part of the Exchange Offers.
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Accordingly, on May 10, 2017, Affinion issued approximately $532.6 million aggregate principal amount of New Notes and New Warrants to purchase 3,974,581 shares of Common Stock, of which (i) approximately $295.3 million principal amount of New Notes and New Warrants to purchase 1,172,747 shares of Common Stock were issued to participating holders (including the Investors) in the Exchange Offers, including $262.8 million of New Notes and New Warrants to purchase 1,053,871 shares of Common Stock issued to related parties, and (ii) approximately $237.3 million principal amount of New Notes and New Warrants to purchase 2,801,834 shares of Common Stock were issued, including all of the New Notes and New Warrants to purchase 2,791,475 shares of Common Stock issued to the Investors, all of whom are related parties, pursuant to the Investor Purchase Agreement to fund the cash consideration payable in the Exchange Offers and the cash redemption price for the balance of Affinion’s 2010 senior notes that were not exchanged or tendered in the AGI Exchange Offer and to pay the commitment premium and funding premium under the Investor Purchase Agreement. The New Warrants received by the Investors on May 10, 2017, represented approximately 26.7% of the pro forma fully diluted ownership of Affinion Holdings after giving effect to issuances pursuant to the Exchange Offers and the Investor Purchase Agreement, but without giving effect to options and restricted stock units granted under Affinion Holdings’ management compensation and incentive plans. The number of shares of Common Stock issuable upon the exercise of the New Warrants, as described herein, reflects the application of the anti-dilution protections of the New Warrants issued in the Exchange Offers and pursuant to the Investor Purchase Agreement (other than the New Warrants issued as part of the funding premium) that are triggered by the issuance of New Warrants as part of the funding premium.
On June 13, 2017, (i) Affinion Holdings exercised its option to redeem the $11.5 million principal amount of Affinion Holdings’ 2013 senior notes that were not tendered in the Holdings Exchange Offer and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement and (ii) Affinion Investments exercised its option to redeem the $10.2 million principal amount of the Investments senior subordinated notes that were not tendered in the Investments Exchange Offer and to fund such redemption with proceeds from the Investors pursuant to the terms of the Investor Purchase Agreement. Affinion Holdings’ 2013 senior notes were redeemed on July 17, 2017 at a redemption price of 103.4375% of the principal amount, plus accrued and unpaid interest to the redemption date and the Investments senior subordinated notes were redeemed on July 17, 2017 at a redemption price of 103.375% of the principal amount, plus accrued and unpaid interest to the redemption date. Affinion Holdings’ 2013 senior notes were originally issued by Affinion Holdings on December 12, 2013 in an aggregate principal amount of $292.8 million and bore interest at 13.75% per annum in cash, or at Affinion Holdings’ option, in payment-in-kind interest at 13.75% per annum plus 0.75%. The Investments senior subordinated notes were originally issued by Affinion Investments on December 12, 2013 in an aggregate principal amount of $360.0 million and bore interest at 13.50% per annum.
On July 17, 2017, pursuant to the Investor Purchase Agreement, Affinion issued approximately $23.7 million aggregate principal amount of New Notes to the Investors and Affinion Holdings New Warrants to the Investors. Pursuant to the Investor Purchase Agreement, the Investors paid a purchase price of approximately $23.5 million to Affinion, which amount includes the payment of pre-issuance accrued interest of approximately $0.6 million from May 10, 2017. The New Notes and New Warrants issued by Affinion and Affinion Holdings, respectively, to the Investors include the funding premium payable under the Investor Purchase Agreement. The New Notes constitute a further issuance of, and form a single series with, the $532.6 million in aggregate principal amount of New Notes that Affinion issued on May 10, 2017.
In connection with the Exchange Offers and the Investor Purchase Agreement, and in accordance with Affinion Holdings’ obligations under the Shareholders Agreement, due to the issuance of the New Warrants in the Exchange Offers and pursuant to the Investor Purchase Agreement, Affinion Holdings offered to each Pre-Emptive Rights Holder the right to purchase with cash up to such Pre-Emptive Rights Holder’s pro rata share (as determined in accordance with the Shareholders Agreement) of New Warrants at an exercise price of $0.01 per New Warrant pursuant to the Pre-Emptive Rights Offer. On July 12, 2017, Affinion Holdings issued New Warrants to purchase 63,741 shares of Common Stock to participants in the Pre-Emptive Rights Offer.
Affinion’s 2010 Senior Notes
On November 19, 2010, Affinion completed a private offering of $475.0 million aggregate principal amount of Affinion’s 2010 senior notes providing net proceeds of $471.5 million, which were subsequently registered under the Securities Act. Affinion’s 2010 senior notes bear interest at 7.875% per annum payable semi-annually on June 15 and December 15 of each year, commencing on June 15, 2011. Affinion’s 2010 senior notes will mature on December 15, 2018. Affinion’s 2010 senior notes are redeemable at Affinion’s option prior to maturity. The indenture governing Affinion’s 2010 senior notes contains negative covenants which restrict the ability of Affinion and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. Affinion’s obligations under Affinion’s 2010 senior notes are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by each of Affinion’s existing and future domestic subsidiaries that guarantee Affinion’s indebtedness under Affinion’s senior secured credit facility (other than Affinion Investments and Affinion Investments II, LLC (“Affinion Investments II”)). Affinion’s 2010 senior notes and guarantees thereof are senior unsecured obligations of Affinion and rank equally with all of Affinion’s and the guarantors’ existing and future senior indebtedness and senior to Affinion’s and the guarantors’ existing and future subordinated indebtedness. Affinion’s 2010 senior notes are therefore effectively subordinated to Affinion’s and the guarantors’ existing and future secured indebtedness, including Affinion’s obligations under Affinion’s senior secured credit facility, to the extent of the value of the collateral securing such indebtedness. Affinion’s 2010 senior notes are structurally subordinated to all indebtedness
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and other obligations of each of Affinion’s existing and future subsidiaries that are not guarantors, including the Investments senior subordinated notes. In May 2017, $269.3 million of Affinion’s senior notes were exchanged for New Notes and New Warrants and $205.7 million of Affinion’s senior notes were redeemed for $212.3 million, including accrued interest.
Affinion Holdings’ 2013 Senior Notes
Affinion Holdings’ 2013 senior notes bear interest at 13.75% per annum, payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2014. At Affinion Holdings’ option (subject to certain exceptions), it may elect to pay (i) Cash Interest, (ii) PIK Interest, or (iii) 50% as Cash Interest and 50% as PIK Interest; provided that if (i) no Default or Event of Default (each as defined in Affinion’s senior secured credit facility) shall have occurred and be continuing or would result from such interest payment, (ii) immediately after giving effect to such interest payment, on a pro forma basis, the Consolidated Leverage Ratio (as defined in Affinion’s senior secured credit facility) of Affinion is less than or equal to 5.0:1.0 as of the last day of the most recently completed fiscal quarter preceding the interest payment date for which financial statements have been delivered to the agent under Affinion’s senior secured credit facility and (iii) immediately after giving effect to such interest payment, on a pro forma basis, the Adjusted Consolidated Leverage Ratio (as defined in the note agreement governing the Investments senior subordinated notes) of Affinion is less than or equal to 5.0:1.0, then Affinion Holdings shall be required to pay interest on its 2013 senior notes for such interest period in cash. PIK Interest accrues at 13.75% per annum plus 0.75%. For the first interest period ending September 15, 2014, Affinion Holdings paid interest by increasing the principal amount of its 2013 senior notes. Affinion Holdings’ 2013 senior notes will mature on September 15, 2018. Affinion Holdings may redeem some or all of its 2013 senior notes at any time on or after December 12, 2016 at redemption prices (generally at a premium) set forth in the indenture governing its 2013 senior notes. In addition, prior to December 12, 2016, up to 100% of Affinion Holdings’ outstanding 2013 senior notes are redeemable at the option of Affinion Holdings, with the net proceeds raised by Affinion Holdings in one or more equity offerings, at 113.75% of their principal amount. In addition, prior to December 12, 2016, Affinion Holdings’ 2013 senior notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of its 2013 senior notes redeemed plus a “make-whole” premium. Prior to the consummation of the 2015 Exchange Offers, Affinion Holdings’ 2013 senior notes were senior secured obligations of Affinion Holdings and ranked pari passu in right of payment to all existing and future senior indebtedness of Affinion Holdings, junior in right of payment to all secured indebtedness of Affinion Holdings secured by liens having priority to the liens securing its 2013 senior notes up to the value of the assets subject to such liens, and senior in right of payment to unsecured indebtedness of Affinion Holdings to the extent of the security of the collateral securing its 2013 senior notes and all future subordinated indebtedness of Affinion Holdings. Affinion Holdings’ 2013 senior notes were secured by (i) second-priority security interests in 100% of the capital stock of Affinion, which security interests are junior to the first priority security interests granted to the lenders under Affinion’s senior secured credit facility and (ii) first-priority security interests in all other assets of Affinion Holdings, including 100% of the capital stock of Affinion Net Patents, Inc. In connection with the 2015 Exchange Offers, the holders consented to the removal of all of the restrictive covenants and certain of the default provisions and to release the collateral securing Affinion Holdings’ 2013 senior notes. Following the consummation of the 2015 Exchange Offers, approximately $13.1 million principal amount of Affinion Holdings’ 2013 senior notes were outstanding. In May 2017, $4.6 million of Affinion Holdings’ 2013 senior notes were exchanged for New Notes and New Warrants. In July 2017, $11.5 million of Affinion Holdings’ 2013 senior notes were redeemed for $12.5 million, including accrued interest.
Investments Senior Subordinated Notes
The Investments senior subordinated notes bear interest at 13.50% per annum, payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2014. The Investments senior subordinated notes will mature on August 15, 2018. Affinion Investments may redeem some or all of the Investments senior subordinated notes at any time on or after December 12, 2016 at redemption prices (generally at a premium) set forth in the indenture governing the Investments senior subordinated notes. In addition, prior to December 12, 2016, up to 35% of the outstanding Investments senior subordinated notes are redeemable at the option of Affinion Investments, with the net proceeds raised by Affinion or Affinion Holdings in one or more equity offerings, at 113.50% of their principal amount. In addition, prior to December 12, 2016, the Investments senior subordinated notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the Investments senior subordinated notes redeemed plus a “make-whole” premium. The indenture governing the Investments senior subordinated notes contained negative covenants which restrict the ability of Affinion Investments, any future restricted subsidiaries of Affinion Investments and one of Affinion’s other wholly-owned subsidiaries that guarantees the Investments senior subordinated notes to engage in certain transactions and also contained customary events of default. Affinion Investments’ obligations under the Investments senior subordinated notes are guaranteed on an unsecured senior subordinated basis by Affinion Investments II. Each of Affinion Investments and Affinion Investments II is an unrestricted subsidiary of Affinion and guarantees Affinion’s indebtedness under its senior secured credit facility but does not guarantee Affinion’s other indebtedness. The Investments senior subordinated notes and guarantee thereof are unsecured senior subordinated obligations of Affinion Investments, as issuer, and Affinion Investments II, as guarantor, and rank junior in right of payment to their respective guarantees of Affinion’s senior secured credit facility. Following the consummation of the 2015 Investments Exchange Offer, approximately $22.6 million principal amount of the Investments senior subordinated notes were outstanding. In connection with the 2015 Investments Exchange Offer, the holders consented to the removal of all of the restrictive covenants and certain of the default provisions in the indenture governing the Investments senior subordinated notes. In May 2017,
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$12.4 million of the Investments senior subordinated notes were exchanged for New Notes and New Warrants. In July 2017, $10.2 million of the Investments senior subordinated notes were redeemed for $11.1 million, including accrued interest.
Affinion’s 2013 Senior Subordinated Notes
On December 12, 2013, Affinion Investments exchanged with Affinion all of Affinion’s 2006 senior subordinated notes received by it in the exchange offer for Affinion’s 2013 senior subordinated notes. Affinion’s 2013 senior subordinated notes bear interest at 13.50% per annum payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2014. Affinion’s 2013 senior subordinated notes will mature on August 15, 2018. Affinion’s 2013 senior subordinated notes are redeemable at Affinion’s option prior to maturity. The indenture governing Affinion’s 2013 senior subordinated notes contains negative covenants which restrict the ability of Affinion and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. Affinion’s obligations under Affinion’s 2013 senior subordinated notes are jointly and severally and fully and unconditionally guaranteed on an unsecured senior subordinated basis by each of Affinion’s existing and future domestic subsidiaries that guarantee Affinion’s indebtedness under its senior secured credit facility (other than Affinion Investments and Affinion Investments II). Affinion’s 2013 senior subordinated notes and guarantees thereof are unsecured senior subordinated obligations of Affinion’s and rank junior to all of Affinion’s and the guarantors’ existing and future senior indebtedness, pari passu with Affinion’s 2006 senior subordinated notes and senior to Affinion’s and the guarantors’ future subordinated indebtedness. Although Affinion Investments is the only holder of Affinion’s 2013 senior subordinated notes, the trustee for the Investments senior subordinated notes and holders of at least 25% of the principal amount of the Investments senior subordinated notes will have the right as third party beneficiaries to enforce the remedies available to Affinion Investments against Affinion, and Affinion Investments will not be able to amend the covenants in the note agreement governing Affinion’s 2013 senior subordinated notes in favor of Affinion unless it has received consent from the holders of a majority of the aggregate principal amount of the outstanding Investments senior subordinated notes. In connection with the 2015 Exchange Offers, the holders consented to the removal of all of the restrictive covenants and certain of the default provisions from the note agreement governing Affinion’s 2013 senior subordinated notes. In May 2017, $12.4 million of the Investments senior subordinated notes were exchanged for Affinion’s 2013 senior subordinated notes. In July 2017, $10.2 million of Affinion’s 2013 senior subordinated notes were cancelled, including accrued interest.
2015 Exchange Offers and 2015 Rights Offering
On November 9, 2015, (a) Affinion Holdings completed the 2015 Holdings Exchange Offer to exchange its outstanding 2013 senior notes for shares of Common Stock of Affinion Holdings, (b) Affinion Investments completed the 2015 Investments Exchange Offer to exchange its outstanding Investments senior subordinated notes for shares of Common Stock of Affinion Holdings, and (c) Affinion Holdings and Affinion International, a wholly-owned subsidiary of Affinion, jointly completed the 2015 Rights Offering giving holders of Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes who fully participated in the 2015 Exchange Offers the right to purchase an aggregate principal amount of $110.0 million of International Notes and up to 2,483,333 shares of Common Stock for an aggregate cash purchase price of $110.0 million. Under the terms of the 2015 Holdings Exchange Offer, for each $1,000 principal amount of Affinion Holdings’ 2013 senior notes tendered during the offer period, holders received 7.15066 shares of Common Stock. Under the terms of the 2015 Investments Exchange Offer, for each $1,000 principal amount of the Investments senior subordinated notes tendered during the offer period, holders received 15.52274 shares of Common Stock. Under certain circumstances, certain holders would have received a Limited Warrant of Affinion Holdings that would have been convertible into shares of Common Stock upon certain conditions. Pursuant to the 2015 Holdings Exchange Offer, approximately $247.4 million of Affinion Holdings’ 2013 senior notes were exchanged for 1,769,104 shares of Common Stock and pursuant to the 2015 Investments Exchange Offer, approximately $337.3 million of the Investments senior subordinated notes were exchanged for 5,236,517 shares of Common Stock. No Limited Warrants were issued in the 2015 Exchange Offers. Upon closing of the 2015 Exchange Offers, there remained outstanding approximately $13.1 million aggregate principal amount of Affinion Holdings’ 2013 senior notes and $22.6 million aggregate principal amount of the Investments senior subordinated notes. In connection with the 2015 Investments Exchange Offer, Affinion paid $14.7 million for financing costs.
Immediately after the consummation of the 2015 Holdings Exchange Offer, (i) Affinion Holdings contributed to Affinion a number of shares of Common Stock sufficient to pay the consideration for the Investments senior subordinated notes in the 2015 Investments Exchange Offer; (ii) Affinion then used such shares of Common Stock to repurchase for cancellation its Affinion 2013 senior subordinated notes from Affinion Investments in the same principal amount as the principal amount of the Investments senior subordinated notes accepted for exchange in the 2015 Investments Exchange Offer; and (iii) Affinion Investments then used such shares of Common Stock to repurchase for cancellation the tendered Investments senior subordinated notes.
Concurrently with the 2015 Exchange Offers, Affinion Holdings and Affinion Investments successfully solicited consents (the “2015 Consent Solicitations”) from holders to certain amendments to (a) the indenture governing Affinion Holdings’ 2013 senior notes to remove substantially all of the restrictive covenants and certain of the default provisions and to release the collateral securing Affinion Holdings’ 2013 senior notes, (b) the indenture governing the Investments senior subordinated notes to remove substantially all of the restrictive covenants and certain of the default provisions, and (c) the note agreement governing Affinion’s 2013 senior subordinated notes to remove substantially all of the restrictive covenants and certain of the default provisions and to permit the
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repurchase and cancellation of Affinion’s 2013 senior subordinated notes by Affinion in the same aggregate principal amount as the aggregate principal amount of the Investments senior subordinated notes repurchased or redeemed by Affinion Investments at any time, including pursuant to the 2015 Investments Exchange Offer.
In connection with the 2015 Exchange Offers, Affinion Holdings and Affinion International jointly conducted the 2015 Rights Offering for International Notes and shares of Common Stock. The 2015 Rights Offering was for an aggregate principal amount of $110.0 million of International Notes and up to 2,483,333 shares of Common Stock. Each unit sold in the 2015 Rights Offering consisted of (1) $1,000 principal amount of International Notes and (2) 22.57576 shares of Common Stock, and was sold at a purchase price per unit of $1,000. Each holder that properly tendered for exchange, and did not validly withdraw, all of their Affinion Holdings’ 2013 senior notes and the Investments senior subordinated notes in the 2015 Exchange Offers received non-certificated rights to subscribe for rights offering units. In connection with the 2015 Rights Offering, Empyrean Capital Partners, L.P. agreed to purchase any rights offering units that were unpurchased in the 2015 Rights Offering pursuant to the Backstop. Pursuant to the 2015 Rights Offering and the Backstop, Affinion International received cash of approximately $110.0 million in exchange for $110.0 million aggregate principal amount of International Notes and 2,021,042 shares of Common Stock and a Limited Warrant to purchase up to 462,266 shares of Common Stock. The net cash proceeds from the 2015 Rights Offering were used for working capital purposes of Affinion International and the Foreign Guarantors (as defined in the indenture governing the International Notes) and to repay certain intercompany loans owed by Affinion International to Affinion and its domestic subsidiaries. Affinion will use such intercompany loan repayment proceeds for general corporate purposes, including to repay borrowings under its revolving credit facility and to pay fees and expenses related to the 2015 Transactions.
Upon consummation of the 2015 Exchange Offers, 2015 Consent Solicitations and 2015 Rights Offering, Affinion Holdings effected the Reclassification as follows. Affinion Holdings’ existing Class A Common Stock (including Class A Common Stock issued as a result of a mandatory cashless exercise of all of its Series A Warrants) was converted into (i) shares of Affinion Holdings’ Class C Common Stock, that on an as-converted basis represented 5% of the outstanding shares of Common Stock on a fully diluted basis, and (ii) shares of Affinion Holdings’ Class D Common Stock, that on an as-converted basis represented 5% of the outstanding shares of Common Stock on a fully diluted basis. In addition, Affinion Holdings’ Series A Warrants and Affinion Holdings’ Class B Common Stock were eliminated from Affinion Holdings’ certificate of incorporation and Affinion Holdings’ Series B Warrants were cancelled for no additional consideration.
Upon consummation of the 2015 Exchange Offers, the Apollo Funds and General Atlantic ceased to have beneficial ownership of any Common Stock.
International Notes
The International Notes bear interest at 7.5% per annum, of which 3.5% per annum is payable in cash (“International Cash Interest”) and 4.0% per annum is payable by increasing the principal amount of the outstanding International Notes or by issuing International Notes (“International PIK Interest”); provided, that all of the accrued interest on the International Notes from the issue date to, but not including, May 1, 2016 was payable on May 1, 2016 entirely as International PIK Interest. Interest on the International Notes is payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2016. The International Notes will mature on July 30, 2018. The International Notes are redeemable at Affinion International’s option prior to maturity. The indenture governing the International Notes contains negative covenants which restrict the ability of Affinion International, Affinion and their respective restricted subsidiaries to engage in certain transactions and also contains customary events of default. Affinion International’s obligations under the International Notes are jointly and severally and fully and unconditionally guaranteed on an unsecured senior basis by each of Affinion’s existing and future domestic subsidiaries that guarantee Affinion’s indebtedness under its senior secured credit facility (other than Affinion Investments and Affinion Investments II, and additionally including (such additional guarantors, the “Foreign Guarantors”) Affinion International Limited, Affinion International Travel HoldCo Limited, Webloyalty International Limited, Loyalty Ventures Limited, Bassae Holding B.V., Webloyalty Holdings Coöperatief U.A. and Webloyalty International S.à r.l.). The International Notes and guarantees thereof are unsecured senior obligations of Affinion International’s and rank equally with all of Affinion International’s and the guarantors’ existing and future senior indebtedness and senior to Affinion International’s and the guarantors’ existing and future subordinated indebtedness.
Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures
Adjusted EBITDA consists of income from operations before depreciation and amortization further adjusted to exclude non-cash and unusual items and other adjustments permitted in Affinion’s debt agreements to test the permissibility of certain types of transactions, including debt incurrence. We use Adjusted EBITDA to evaluate our operating performance and as a basis for determining payment of bonuses under our annual incentive plan. We present Adjusted EBITDA to enhance your understanding of our operating performance. We believe that Adjusted EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. However, Adjusted EBITDA is not a measurement of financial performance under U.S. GAAP and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. You should not consider Adjusted EBITDA as an alternative to operating or net income determined in accordance with
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U.S. GAAP, as an indicator of operating performance or as an alternative to cash flows from operating activities determined in accordance with U.S. GAAP, or as an indicator of cash flows, or as a measure of liquidity.
Set forth below is a reconciliation of our consolidated net loss attributable to Affinion Group Holdings, Inc. for the twelve months ended September 30, 2017 to Adjusted EBITDA.
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| For the Twelve |
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| Months Ended |
| |
|
| September 30, 2017 (a) |
| |
|
| (in millions) |
| |
Net loss attributable to Affinion Group Holdings, Inc. |
| $ | (30.0 | ) |
Interest expense, net |
|
| 155.8 |
|
Income tax expense |
|
| 8.1 |
|
Non-controlling interest |
|
| 0.8 |
|
Other expense, net |
|
| 0.2 |
|
Gain on extinguishment of debt |
|
| (3.5 | ) |
Depreciation and amortization |
|
| 49.7 |
|
Business optimization expenses and restructuring charges or expenses (b) |
|
| 14.3 |
|
Extraordinary or nonrecurring or unusual losses, expenses or charges (c) |
|
| 35.0 |
|
Other, net (d) |
|
| 2.0 |
|
Adjusted EBITDA, excluding pro forma adjustments (e) |
|
| 232.4 |
|
Effect of the pro forma adjustments (f) |
|
| — |
|
Adjusted EBITDA, including pro forma adjustments (g) |
| $ | 232.4 |
|
(a) | Represents consolidated financial data for the year ended December 31, 2016, minus consolidated financial data for the nine months ended September 30, 2016, plus consolidated financial data for the nine months ended September 30, 2017. |
(b) | Represents the elimination of the effect of business optimization expenses and restructuring charges or expenses. |
(c) | Represents the elimination of extraordinary or nonrecurring or unusual losses, expenses or charges. |
(d) | Primarily represents the elimination of (i) net changes in certain reserves, (ii) share-based compensation expense and (iii) foreign currency gains and losses related to unusual, non-recurring intercompany transactions. |
(e) | Adjusted EBITDA, excluding pro forma adjustments, does not give pro forma effect to the projected annualized benefits of restructurings and other cost savings initiatives. However, we do make such accretive pro forma adjustments as if such restructurings and cost savings initiatives had occurred on October 1, 2016 in calculating the Adjusted EBITDA under Affinion’s senior secured credit facility, subject to certain limitations. |
(f) | Gives effect to the projected annualized benefits of restructurings and other cost savings initiatives as if such restructurings and cost savings initiatives had occurred on October 1, 2016. |
(g) | Adjusted EBITDA, including pro forma adjustments, gives pro forma effect to the adjustments discussed in (f) above. |
Debt Repurchases
We or our affiliates have, in the past, and may, from time to time in the future, purchase any of Affinion’s indebtedness. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine.
Critical Accounting Policies
In presenting our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the amounts reported therein. We believe that the estimates, assumptions and judgments involved in the accounting policies related to revenue recognition, accounting for marketing costs, stock-based compensation, valuation of goodwill and intangible assets, and valuation of tax assets and liabilities could potentially affect our reported results and as such, we consider these to be our critical accounting policies. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain, as they pertain to future events. However, certain events outside our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. We believe that the estimates and assumptions used when preparing our unaudited condensed consolidated financial statements were the most appropriate at the time. Significant estimates include accounting for profit sharing receivables from insurance carriers, accruals and income tax valuation allowances, litigation accruals, estimated fair value of stock based compensation, estimated fair values of assets and liabilities acquired in business combinations and estimated fair values of financial instruments. In addition, we refer you to our audited consolidated financial statements as of December 31, 2016 and 2015, and for the years ended December 31, 2016, 2015 and 2014, included in our Form 10-K for a summary of our significant accounting policies.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We do not use derivative instruments for trading or speculative purposes.
The following table provides information about the Company’s financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity for the Company’s long-term debt as of September 30, 2017 (dollars are in millions unless otherwise indicated):
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| Fair Value At |
| |
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| 2022 and |
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|
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| September 30, |
| ||
|
| 2017 |
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| 2018 |
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| 2019 |
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| 2020 |
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| 2021 |
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| Thereafter |
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| Total |
|
| 2017 |
| ||||||||
|
| (in millions) |
| |||||||||||||||||||||||||||||
Fixed rate debt |
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 557.0 |
|
| $ | 557.0 |
|
| $ | 479.0 |
|
Average interest rate |
|
| 13.97 | % |
|
| 14.10 | % |
|
| 14.85 | % |
|
| 15.50 | % |
|
| 15.50 | % |
|
| 15.50 |
|
|
|
|
|
|
|
|
|
Variable rate debt |
| $ | 3.4 |
|
| $ | 13.4 |
|
| $ | 28.5 |
|
| $ | 58.6 |
|
| $ | 67.0 |
|
| $ | 1,202.4 |
|
| $ | 1,373.3 |
|
| $ | 1,372.8 |
|
Average interest rate (a) |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
| 9.00 | % |
|
|
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|
|
(a) | Average interest rate is based on rates in effect at September 30, 2017. |
Foreign Currency Forward Contracts
Through April 30, 2017, on a limited basis the Company entered into 30 day foreign currency forward contracts, and upon expiration of the contracts, entered into successive 30 day foreign currency forward contracts. The contracts were entered into to mitigate the Company’s foreign currency exposures related to intercompany loans which were not expected to be repaid within the next twelve months and that are denominated in Euros and British pounds.
During the nine months ended September 30, 2017, the Company recognized a realized loss on the forward contracts of $1.3 million. During the three months ended September 30, 2017, there was no realized gain or loss recognized by the Company. During the three and nine months ended September 30, 2016, the Company recognized a realized gain on the forward contracts of $0.3 million and $2.2 million, respectively.
Credit Risk and Exposure
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of receivables, profit-sharing receivables from insurance carriers and prepaid commissions. We manage such risk by evaluating the financial position and creditworthiness of such counterparties. Receivables and profit-sharing receivables from insurance carriers are from various marketing, insurance and business partners and we maintain an allowance for losses, based upon expected collectability. Commission advances are periodically evaluated as to recovery.
Item 4. Controls and Procedures.
Evaluation of Disclosure Control and Procedures. The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures (“Disclosure Controls”) that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits 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. The Disclosure Controls are also intended to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our Disclosure Controls or our “internal controls over financial reporting” (“Internal Controls”) will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
62
future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Notwithstanding the foregoing, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
As of September 30, 2017, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934. Based upon their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2017, the Company’s disclosure controls and procedures are effective at the reasonable assurance level.
Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
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Information required by this Item is contained in Note 8 to our unaudited condensed consolidated financial statements within Part I of this Form 10-Q.
None.
Item 2. Unregistered Sales of Equity in Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosure.
Not applicable.
On October 24, 2017, Affinion Holdings’ Board approved a restricted stock unit agreement, under the terms of the 2015 Plan for awards Affinion Holdings intends to enter into promptly in respect of services provided by each of its non-employee directors. Pursuant to the restricted stock unit agreement, each such director will be awarded 9,804 restricted stock units, (i) three-fourths (3/4) of which will vest on the date of grant and (ii) the remaining one-fourth (1/4) will vest in equal installments on each of October 31, 2017, November 30, 2017 and December 31, 2017, respectively, subject to continued service on the applicable vesting date; provided that, in the event of a “Change in Control” (as defined in the agreement), any unvested restricted stock units will fully vest. Each vested restricted stock unit will be settled by the delivery of one share of common stock of Affinion Holdings to the applicable director on the earlier to occur of (A) a “Change in Control” or (B) the third anniversary of the date of grant. The form of the award agreement to be entered into by Affinion Holdings with each of the non-employee directors is filed herewith as Exhibit 10.2.
On October 23, 2017, the Compensation Committee (the “Committee”) approved the 2017 Retention Award Program (the “2017 Retention Program”), a cash incentive award program intended to encourage the retention of certain key employees, which provides for aggregate payments of between approximately $5.9 million and $8.8 million to 94 employees. Under the 2017 Retention Program, the Committee approved grants to (i) Mr. Siegel in an amount between $691,875 and $922,500, (ii) Mr. Miller in an amount between $307,500 and $410,000, (iii) Mr. Lyons in an amount between $307,500 and $410,000, (iv) Mr. Conforti in an amount between $194,170 and $388,340, and (v) Mr. Lazear in an amount between $170,000 and $340,000, each such amount to be determined in the discretion of the Committee. The 2017 Retention Program is subject to a time-based vesting condition. An employee will become vested in the 2017 Retention Program grant on June 15, 2018, subject to the employee’s continued employment in good standing on such date.
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Exhibit Number |
| Description |
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|
|
10.1* |
| Form of Indemnity. |
10.2* |
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|
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|
|
31.1* |
| Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) or 15d-14(a). |
31.2* |
|
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) or 15d-14(a). |
|
|
|
32.1** |
| Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. |
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|
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32.2** |
| Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. |
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101.INS XBRL* |
| Instance Document |
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101.SCH XBRL* |
| Taxonomy Extension Schema |
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101.CAL XBRL* |
| Taxonomy Extension Calculation Linkbase |
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|
101.DEF XBRL* |
| Taxonomy Extension Definition Linkbase |
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|
101.LAB XBRL* |
| Taxonomy Extension Label Linkbase |
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101.PRE XBRL* |
| Taxonomy Extension Presentation Linkbase |
* | Filed herewith. |
** | Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| AFFINION GROUP HOLDINGS, INC. | ||
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Date: October 26, 2017 |
| By: |
| /S/ Gregory S. Miller |
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|
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| Gregory S. Miller |
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|
|
| Executive Vice President and Chief Financial Officer |
S-1