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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K/A

Amendment No. 1

 

 

(Mark One)

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

For the fiscal year ended December 31, 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)

Securities registered pursuant to section 12(b) of the Act: None

Securities registered pursuant to section 12(g) of the Act: Common Stock, par value $0.01 per share

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☐    No  ☒

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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		☐
Non-Accelerated Filer		☒  (Do not check if a smaller reporting company)		Smaller Reporting Company		☐
				Emerging Growth Company		☐

If an emerging growth company, indicate by checkmark 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 Act).    Yes  ☐    No  ☒

Due to the limited trading of the registrant’s common stock, the aggregate market value of the voting and non-voting common equity held by non-affiliates as of the close of business on June 30, 2017 was zero.

As of February 28, 2018, 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 433,813, and (3) Class D Common Stock, $0.01 par value, was 456,643.

DOCUMENTS INCORPORATED BY REFERENCE: None

 

 

 

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TABLE OF CONTENTS

 

EXPLANATORY NOTE			3
PART II			4
Item 8. Financial Statements and Supplementary Data			4
Part IV			5
Item 15. Exhibits, Financial Statement Schedules			5

 

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EXPLANATORY NOTE

This Amendment No. 1 (“Amendment No. 1”) amends the Annual Report on Form 10-K of Affinion Group Holdings, Inc. (the “Company”) for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission on March 1, 2018 (the “Original Filing” and the “Original Filing Date”).

This Amendment No. 1 is being filed solely to revise the Report of Independent Registered Public Accounting Firm of Deloitte & Touche LLP (the “Report”) related to the consolidated statements of comprehensive income (loss) and the related consolidated statements of changes in deficit and cash flows of the Company and its subsidiaries for the year ended December 31, 2015 contained in Part II, Item 8 of the Original Filing, and to update the Exhibit Index contained in Part IV, Item 15 of the Original Filing to reflect exhibits previously filed. The revision to the Report adds a parenthetical relating to the dating of the Report with respect to certain footnotes in the financial statements to which it relates, which parenthetical was inadvertently omitted during the processing of the Original Filing.

Pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, as amended, currently-dated certifications from the Company’s Chief Executive Officer and Chief Financial Officer are included as Exhibits to this Amendment No. 1, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002. Except as described above, this Amendment No. 1 does not amend, update, or change any other information contained in the Original Filing. This Amendment No. 1 speaks as of the Original Filing Date, and does not reflect events that may have occurred subsequent to the Original Filing Date.

 

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PART II

 

Item 8.

Financial Statements and Supplementary Data

AFFINION GROUP HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firm			F–2
Consolidated Balance Sheets as of December 31, 2017 and 2016			F–5
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015			F–6
Consolidated Statements of Changes in Deficit for the years ended December 31, 2017, 2016 and 2015			F–7
Consolidated Statements of Cash Flows for the years ended December  31, 2017, 2016 and 2015			F–8
Notes to Consolidated Financial Statements of the Company			F–9

 

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Part IV

Item 15. Exhibits, Financial Statement Schedules

(a)(1) Financial Statements

The following financial statements of Affinion Group Holdings, Inc., together with the Reports of Independent Registered Public Accounting Firm, are included in Part II, Item 8, Financial Statements and Supplementary Data:

 

•

Reports of Independent Registered Public Accounting Firm

 

•

Consolidated Balance Sheets as of December 31, 2017 and 2016

 

•

Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015

 

•

Consolidated Statements of Changes in Deficit for the years ended December 31, 2017, 2016 and 2015

 

•

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

 

•

Notes to Consolidated Financial Statements

(2) Financial Statement Schedules

Not applicable.

(3) Exhibits

 

Exhibit No.		Description
3.1		Fourth Amended and Restated Certificate of Incorporation of Affinion Group Holdings, Inc., filed in the State of Delaware on November 9, 2015 (incorporated by reference to Exhibit 3.1 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November 12, 2015, File No. 333-173105).
3.2		Fourth Amended and Restated By-laws of Affinion Group Holdings, Inc., adopted on November 9, 2015 (incorporated by reference to Exhibit 3.2 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November 12, 2015, File No. 333-173105).
4.1		Form of Shareholders Agreement, dated as of November  9, 2015, among Affinion Group Holdings, Inc. and the investors party thereto thereto (incorporated by reference to Exhibit No.  4.20 to Affinion Group Holdings, Inc.’s Annual Report on Form 10-K filed with the SEC on March 31, 2017, File No. 000-55577).
4.2		Amendment No. 1, dated as of October 4, 2016, to the Shareholders Agreement, dated as of November  9, 2015, by and among Affinion Group Holdings, Inc. and the investors party thereto (incorporated by reference to Exhibit No.  10.1 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on October 4, 2016, File No. 000-55577).
4.3		Amendment No. 2, dated as of March 31, 2017, to the Shareholders Agreement, dated as of November  9, 2015, among Affinion Group Holdings, Inc. and the investors party thereto (incorporated by reference to Exhibit No.  10.1 to Affinion Group Holdings, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on May 12, 2017, File No. 000-55577).
4.4		Amended and Restated Registration Rights Agreement, dated March  31, 2017, among Affinion Group Holdings, Inc. and the investors party thereto (incorporated by reference to Exhibit No.  10.2 to Affinion Group Holdings, Inc.’s Quarterly Report on Form 10-Q filed with the SEC on May 12, 2017, File No. 000-55577).
4.5		Limited Warrant, dated as of November  9, 2015, issued by Affinion Group Holdings, Inc. (incorporated by reference to Exhibit 10.7 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November  12, 2015, File No. 333-173105).
4.6		Indenture, dated as of May  10, 2017, among Affinion Group, Inc., the Guarantors party thereto, and Wilmington Trust, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2017, File No. 000-55577).
10.1		Form of Restricted Stock Unit Agreement (incorporated by reference to Exhibit No.  10.2 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2010, File No. 333-133895).

 

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Exhibit No.		Description
10.2		Affinion Group Holdings, Inc. 2005 Stock Incentive Plan, dated as of October 17, 2005 (incorporated by reference to  Exhibit No. 10.6 to Affinion Group, Inc.’s Registration Statement on Form S-4 filed with the SEC on May 8, 2006, File No.  333-133895).
10.3		First Amendment to the Affinion Group Holdings, Inc. 2005 Stock Incentive Plan, dated December  4, 2006 (incorporated by reference to Exhibit 10.8 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2006, File No. 333-133895).
10.4		Second Amendment to the Affinion Group Holdings, Inc. 2005 Stock Incentive Plan, dated January  30, 2007 (incorporated by reference to Exhibit 10.1 to Affinion Group, Inc.’s Current Report on Form 8-K filed with the SEC on February  1, 2007, File No. 333-133895).
10.5		Form of Affinion Group Holdings, Inc. 2007 Stock Award Plan (incorporated by reference to Exhibit No.  10.6 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, File No. 333-133895).
10.6		Form of Nonqualified Stock Option Agreement pursuant to Affinion Group Holdings, Inc.’s 2007 Stock Award Plan  (incorporated by reference to Exhibit No. 10.7 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, File No. 333-133895).
10.7		Option Agreement, dated as of October  17, 2005, between Affinion Group Holdings, Inc. and Optionee (with Optionee signatories being Siegel, among others) (incorporated by reference to Exhibit No. 10.9 to Affinion Group, Inc.’s Registration Statement on Form S-4 filed with the SEC on May 8, 2006, File No. 333-133895).
10.8		Subscription Agreement, dated as of October  17, 2005, between Affinion Group Holdings, Inc. and Investor (with Investor signatories being Siegel, among others) (incorporated by reference to Exhibit No. 10.15 to Affinion Group, Inc.’s Registration Statement on Form S-4 filed with the SEC on May 8, 2006, File No. 333-133895).
10.9		Supplemental Bonus Letter by and between Officer and Cendant Marketing Services Division dated September  28, 2005 (assumed by Affinion Group, Inc.) (with Officer signatories being Siegel, among others) (incorporated by reference to Exhibit No.  10.18 to Affinion Group, Inc.’s Registration Statement on Form S-4 filed with the SEC on May 8, 2006, File No. 333-133895).
10.10		Employment Agreement, dated as of November  9, 2007, by and among Affinion Group Holdings, Inc., Affinion Group, Inc. and Todd H. Siegel (incorporated by reference to Exhibit No.  10.5 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2007, File No. 333-133895).
10.11		Amendment to Employment Agreement, dated as of September  20, 2012, among Affinion Group Holdings, Inc., Affinion Group, Inc. and Todd H. Siegel (incorporated by reference to Exhibit No.  10.3 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2012, File No. 333-133895).
10.12		Employment Agreement, dated as of December  16, 2013, by and among Affinion Group Holdings, Inc., Affinion Group, Inc. and Gregory S. Miller (incorporated by reference to Exhibit No.  10.32 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013, File No. 333-133895).
10.13		Amended and Restated Deferred Compensation Plan, dated as of November  20, 2008, of Affinion Group, Inc. (incorporated by reference to Exhibit 10.28 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2008, File No. 333-133895).
10.14		Offer Letter, dated as of January  16, 2014, among Affinion Group Holdings, Inc., Affinion Group, Inc. and Robert A. Lyons (incorporated by reference to Exhibit 10.1 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, File No. 333-133895).
10.15		Amendment to Affinion Group Holdings, Inc.’s 2007 Stock Award Plan, dated April  1, 2014 (incorporated by reference to Exhibit 10.2 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, File No. 333-133895).
10.16		Form of Performance Incentive Award Agreement pursuant to Affinion Group Holdings, Inc.’s 2007 Stock Award Plan (incorporated by reference to Exhibit 10.3 to Affinion Group, Inc.’s Quarterly Report on Form 10-Q for the period ended March 31, 2014, File No. 333-133895).
10.17		Amendment to Employment Agreement, dated as of February  2, 2015, among Affinion Group Holdings, Inc., Affinion Group, Inc. and Todd H. Siegel (incorporated by reference to Exhibit 10.43 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December  31, 2014, File No. 333-133895).

 

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Exhibit No.		Description
10.18		Amendment to the Affinion Group Holdings, Inc. 2007 Stock Award Plan, dated April  1, 2014 (incorporated by reference to Exhibit 10.44 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, File No. 333-133895).
10.19		Amendment to the Webloyalty Holdings, Inc. 2005 Equity Award Plan, dated April  1, 2014 (incorporated by reference to Exhibit 10.45 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, File No. 333-133895).
10.20		Employment Agreement, dated as of April  13, 2007, between Affinion International S.r.l. and Michele Conforti (incorporated by reference to Exhibit 10.46 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December  31, 2014, File No. 333-133895).
10.21		Secondment Agreement, dated as of May  9, 2014, between Affinion International S.r.l. and Michele Conforti (incorporated by reference to Exhibit 10.47 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December  31, 2014, File No. 333-133895).
10.22		Employment Agreement, dated as of December  27, 2014, among Affinion Group Holdings, Inc., Affinion Group, Inc. and Robert Lyons (incorporated by reference to Exhibit 10.48 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December  31, 2014, File No. 333-133895).
10.23†		Agreement and General Release, dated December 15, 2017, between Affinion Group Holdings, Inc. and Robert Lyons.
10.24		Form of Affinion Group Holdings, Inc. 2007 Stock Award Plan Retention Award Agreement (incorporated by reference to Exhibit 10.49 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2014, File No. 333-133895).
10.25		Nominating Agreement, dated as of November  9, 2015, between Affinion Group Holdings, Inc. and Third Avenue Trust, on behalf of Third Avenue Focused Credit Fund (incorporated by reference to Exhibit 10.4 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November 12, 2015, File No. 333-173105).
10.26		Nominating Agreement, dated as of November  9, 2015, between Affinion Group Holdings, Inc. and Ares Management LLC, on behalf of certain affiliated funds and managed accounts (incorporated by reference to Exhibit 10.5 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on November 12, 2015, File No. 333-173105).
10.27		Affinion Group Holdings, Inc. 2015 Equity Incentive Plan, dated as of November  9, 2015 (incorporated by reference to Exhibit 4.3 to Affinion Group Holdings, Inc.’s Registration Statement on Form S-8 filed with the SEC on October 27, 2016, File No. 333-214272).
10.28		Amendment to Employment Agreement, dated as of March  9, 2016, between Affinion International S.r.l. and Michele Conforti (incorporated by reference to Exhibit 10.51 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December  31, 2015, File No. 333-133895).
10.29		Form of Affinion Group Holdings, Inc. 2016 Long Term Incentive Award Agreement (incorporated by reference to Exhibit 10.52 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, File No. 333-133895).
10.30		Affinion Group Holdings, Inc. 2016 Long Term Incentive Plan Amended and Restated Award Agreement, dated as of June  1, 2017, between Affinion Group Holdings, Inc. and Scott Lazear (incorporated by reference to Exhibit 10.2 to Affinion Group Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, File No. 000-55577).
10.31		Form of Non-Qualified Stock Option Award Agreement (incorporated by reference to Exhibit 10.53 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2015, File No. 333-133895).
10.32		Employment Agreement, dated as of December  27, 2014, among Affinion Group Holdings, Inc., Affinion Group, Inc. and Scott Lazear (incorporated by reference to Exhibit 10.42 to Affinion Group, Inc.’s Annual Report on Form 10-K for the year ended December  31, 2016, File No. 333-133895).
10.33		Amended and Restated Employment Agreement, dated as of June  1, 2017, among Affinion Group Holdings, Inc., Affinion Group, Inc. and Scott Lazear (incorporated by reference to Exhibit 10.1 to Affinion Group Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended June 30, 2017, File No. 000-55577).

 

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Exhibit No.		Description
10.34		Investor Purchase Agreement, dated as of March  31, 2017, by and among Affinion Group Holdings, Inc., Affinion Group, Inc., Affinion Investments, LLC, affiliates of Elliott Management Corporation, Franklin Mutual Quest Fund, affiliates of Empyrean Capital Partners, LP, and Metro SPV LLC (incorporated by reference to Exhibit 10.1 to Affinion Group, Inc.’s Current Report on Form 8-K filed with the SEC on March 31, 2017, File No. 333-133895).
10.35		Credit Agreement, dated as of May  10, 2017, among Affinion Group Holdings, Inc., Affinion Group, Inc., as Borrower, the lenders party thereto, HPS Investment Partners, LLC, as Administrative Agent and Collateral Agent and HPS Investment Partners, LLC, as Lead Arranger, Syndication Agent, Documentation Agent and Bookrunner (incorporated by reference to Exhibit 10.1 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2017, File No. 000-55577).
10.36		First Amendment to Credit Agreement, dated as of November  30, 2017, among Affinion Group, Inc., as Borrower, HPS Investment Partners, LLC, as administrative agent, the Revolving Facility Lenders and for purposes of Section  3 thereof each other Loan Party party thereto (incorporated by reference to Exhibit 10.1 to Affinion Group Holdings, Inc.’s Current Report on Form 8-K filed with the SEC on December  6, 2017, File No. 000-55577).
10.37		Nominating Agreement, dated as of May  10, 2017, between Affinion Group Holdings, Inc. and affiliates of Elliott Management Corporation (incorporated by reference to Exhibit 10.2 to Affinion Group, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2017, File No. 333-133895).
10.38		Nominating Agreement, dated as of May  10, 2017, between Affinion Group Holdings, Inc. and Metro SPV LLC, an affiliate of ICG Strategic Secondaries Advisors LLC (incorporated by reference to Exhibit 10.3 to Affinion Group, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2017, File No. 333-133895).
10.39		Warrant Agreement, dated as of May 10, 2017, between Affinion Group Holdings, Inc. and American Stock Transfer  & Trust Company, LLC (incorporated by reference to Exhibit 10.4 to Affinion Group, Inc.’s Current Report on Form 8-K filed with the SEC on May 12, 2017, File No. 333-133895).
10.40†		Form of Restricted Stock Unit Award Agreement for Directors.
10.41†		Restricted Stock Unit Agreement, dated as of December 18, 2017, between Affinion Group Holdings, Inc. and Metro SPV LLC.
10.42†		Employment Agreement, dated as of July  15, 2014, among Affinion Group Holdings, Inc., Affinion Group, Inc. and James C. Daly, Jr.
10.43		Form of Indemnity (incorporated by reference to Exhibit 10.1 to Affinion Group Holdings, Inc.’s Quarterly Report on Form 10-Q for the period ended September 30, 2017, File No. 000-55577).
12.1†		Statement re: Computation of Ratio of Earnings to Fixed Charges.
21.1†		Subsidiaries of Affinion Group Holdings, Inc.
23.1†		Consent of PricewaterhouseCoopers LLP.
23.2†		Consent of Deloitte & Touche LLP.
31.1*		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act.
31.2*		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act.
32.1**		Certification of the Chief Executive Officer pursuant to 18 USC Section 1350.
32.2**		Certification of the Chief Financial Officer pursuant to 18 USC Section 1350.

 

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Exhibit No.		Description
101.INS XBRL†		Instance Document.
101.SCH XBRL†		Taxonomy Extension Schema.
101.CAL XBRL†		Taxonomy Extension Calculation Linkbase.
101.DEF XBRL†		Taxonomy Extension Definition Linkbase.
101.LAB XBRL†		Taxonomy Extension Label Linkbase.
101.PRE XBRL†		Taxonomy Extension Presentation Linkbase.

 

*	Filed herewith

**	Furnished herewith

†	Filed as an exhibit to the 2017 Affinion Group Holdings, Inc. Report on Form 10-K filed on March 1, 2018.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

				AFFINION GROUP HOLDINGS, INC.
Date: March 16, 2018				By:		/s/ Gregory S. Miller
						Gregory S. Miller Chief Financial Officer

 

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INDEX TO FINANCIAL STATEMENTS

Audited Consolidated Financial Statements of Affinion Group Holdings, Inc. (the “Company”):

 

Reports of Independent Registered Public Accounting Firm			F–2
Consolidated Balance Sheets of the Company as of December  31, 2017 and 2016			F–5
Consolidated Statements of Comprehensive Income (Loss) of the Company for the years ended December 31, 2017, 2016 and 2015			F–6
Consolidated Statements of Changes in Deficit of the Company for the years ended December 31, 2017, 2016 and 2015			F–7
Consolidated Statements of Cash Flows of the Company for the years ended December 31, 2017, 2016 and 2015			F–8
Notes to Audited Consolidated Financial Statements of the Company			F–9

 

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Affinion Group Holdings, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Affinion Group Holdings, Inc. and its subsidiaries as of December 31, 2017 and December 31, 2016, and the related consolidated statements of comprehensive income (loss), changes in deficit and cash flows for each of the two years in the period ended December 31, 2017 including the related notes (collectively referred to as the (“consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

New York, New York

March 1, 2018

We have served as the Company’s auditor since 2016

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Affinion Group Holdings, Inc.:

We have audited the accompanying consolidated statements of comprehensive income (loss) and the related consolidated statements of changes in deficit and cash flows of Affinion Group Holdings, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 2 to the consolidated financial statements, the accompanying 2015 financial statements have been retrospectively adjusted for the adoption of Financial Accounting Standards Board Accounting Standards Update 2015-03, Interest – Imputation of Interest (“ASU 2015-03”).

 

/s/ Deloitte & Touche LLP

 

Stamford, CT March 10, 2016

(March 31, 2017 as to Notes 2 and 9 related to the adoption of ASU 2015-03 and Notes 1, 4, and 18 related to the adjusted segment results, and March 1, 2018 as to Note 19 related to the supplemental guarantor financial information)

 

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AFFINION GROUP HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share amounts)

 

		December 31, 2017				December 31, 2016
Assets
Current assets:
Cash and cash equivalents		$	39.8			$	37.7
Restricted cash			24.8				26.1
Receivables (net of allowances for doubtful accounts of $7.5 and $3.0, respectively)			155.6				135.9
Profit-sharing receivables from insurance carriers			23.4				18.8
Prepaid commissions			40.9				33.9
Other current assets			67.6				70.6
Total current assets			352.1				323.0
Property and equipment, net			108.4				105.5
Contract rights and list fees, net			18.8				16.4
Goodwill			224.7				218.2
Other intangibles, net			34.0				41.5
Other non-current assets			28.9				34.3
Total assets		$	766.9			$	738.9
Liabilities and Deficit
Current liabilities:
Current portion of long-term debt		$	13.9			$	7.8
Accounts payable and accrued expenses			325.5				327.6
Deferred revenue			51.5				54.8
Income taxes payable			3.2				2.7
Total current liabilities			394.1				392.9
Long-term debt, net			1,887.3				1,855.8
Deferred income taxes			5.5				26.9
Deferred revenue			4.1				4.8
Other long-term liabilities			33.5				31.4
Total liabilities			2,324.5				2,311.8
Commitments and contingencies
Deficit:
Common Stock, $0.01 par value, 520,000,000 shares authorized, 9,157,071 shares and 9,093,330 issued and outstanding			0.1				0.1
Class C Common Stock, $0.01 par value, 10,000,000 shares authorized, 434,897 and 429,039 shares issued and 433,813 and 427,955 shares outstanding			—				—
Class D Common Stock, $0.01 par value, 10,000,000 shares authorized, 457,784 and 451,623 shares issued and 456,643 and 450,482 shares outstanding			—				—
Additional paid in capital			412.5				409.5
Warrants			31.1				—
Accumulated deficit			(1,991.7	)			(1,966.5	)
Accumulated other comprehensive income			(9.5	)			(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			(1,558.6	)			(1,573.7	)
Non-controlling interest in subsidiary			1.0				0.8
Total deficit			(1,557.6	)			(1,572.9	)
Total liabilities and deficit		$	766.9			$	738.9

See notes to the consolidated financial statements.

 

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AFFINION GROUP HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

 

		For the Year Ended December 31,
		2017				2016				2015
Net revenues		$	953.1			$	969.4			$	1,169.8
Expenses:
Cost of revenues, exclusive of depreciation and amortization shown separately below:
Marketing and commissions			308.2				335.7				448.7
Operating costs			362.1				327.2				385.2
General and administrative			93.8				116.0				115.6
Impairment of goodwill and other long-lived assets			—				—				93.2
Facility exit costs			1.4				0.8				1.8
Depreciation and amortization			46.8				56.7				89.8
Total expenses			812.3				836.4				1,134.3
Income from operations			140.8				133.0				35.5
Interest income			0.3				0.5				1.8
Interest expense			(186.5	)			(109.9	)			(215.6	)
Gain on extinguishment of debt			3.5				—				318.9
Other income (expense), net			(0.4	)			0.1				1.2
Income (loss) before income taxes and non-controlling interest			(42.3	)			23.7				141.8
Income tax benefit (expense)			17.9				(7.4	)			(5.9	)
Net income (loss)			(24.4	)			16.3				135.9
Less: net income attributable to non-controlling interest			(0.8	)			(0.6	)			(0.6	)
Net income (loss) attributable to Affinion Group Holdings, Inc.		$	(25.2	)		$	15.7			$	135.3
Earnings per share attributable to Class A and Class B stockholders (Note 10)
Basic										$	0.14
Diluted										$	0.09
Earnings (loss) per share attributable to common stockholders (Note 10)
Basic		$	(2.12	)		$	1.74			$	95.07
Diluted		$	(2.12	)		$	1.74			$	95.07
Net income (loss)		$	(24.4	)		$	16.3			$	135.9
Currency translation adjustment, net of tax for all periods			6.3				(9.4	)			(7.8	)
Comprehensive income (loss)			(18.1	)			6.9				128.1
Less: comprehensive income attributable to non-controlling interest			(0.9	)			(0.7	)			(0.2	)
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc.		$	(19.0	)		$	6.2			$	127.9

See notes to the consolidated financial statements.

 

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AFFINION GROUP HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN DEFICIT

(In millions)

 

		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, 2015			85,129,859			$	145.0			$	124.8			$	(2,117.5	)		$	1.2			$	(1.1	)		$	1.1			$	(1,846.5	)
Net income			—				—				—				135.3				—				—				0.6				135.9
Currency translation adjustment, net of tax			—				—				—				—				(7.4	)			—				(0.4	)			(7.8	)
Dividend paid to non-controlling interest			—				—				—				—				—				—				(0.6	)			(0.6	)
Conversion of Series A warrants to common stock			45,003,196				117.6				(117.6	)			—				—				—				—				—
Cancellation of Series B warrants			—				7.2				(7.2	)			—				—				—				—				—
Conversion of common shares to Class C and Class D shares			(130,133,055	)			—				—				—				—				—				—				—
New common shares issued in debt exchange and subscription rights offering			9,093,330				133.5				—				—				—				—				—				133.5
Share-based compensation			—				2.5				—				—				—				—				—				2.5
Balance, December 31, 2015			9,093,330				405.8				0.0				(1,982.2	)			(6.2	)			(1.1	)			0.7				(1,583.0	)
Net income			—				—				—				15.7				—				—				0.6				16.3
Currency translation adjustment, net of tax			—				—				—				—				(9.5	)			—				0.1				(9.4	)
Dividend paid to non-controlling interest			—				—				—				—				—				—				(0.6	)			(0.6	)
Share-based compensation			—				3.8				—				—				—				—				—				3.8
Balance, December 31, 2016			9,093,330				409.6				—				(1,966.5	)			(15.7	)			(1.1	)			0.8				(1,572.9	)
Net income (loss)			—				—				—				(25.2	)			—				—				0.8				(24.4	)
Currency translation adjustment, net of tax			—				—				—				—				6.2				—				0.1				6.3
Dividend paid to non-controlling interest			—				—				—				—				—				—				(0.7	)			(0.7	)
Issuance of warrants			—				—				31.6				—				—				—				—				31.6
Exercise of warrants			63,741				0.5				(0.5	)			—				—				—				—				—
Share-based compensation			—				2.5				—				—				—				—				—				2.5
Balance, December 31, 2017			9,157,071			$	412.6			$	31.1			$	(1,991.7	)		$	(9.5	)		$	(1.1	)		$	1.0			$	(1,557.6	)

See notes to the consolidated financial statements.

 

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AFFINION GROUP HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

 

		For the Year Ended December 31,
		2017				2016				2015
Operating Activities
Net income (loss)		$	(24.4	)		$	16.3			$	135.9
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization			46.8				56.7				89.8
Amortization of debt discount, financing costs and carrying value adjustment			(0.1	)			(31.4	)			6.8
Impairment of goodwill and other long-lived assets			—				—				93.2
Payment in kind interest			41.7				—				—
Provision for (recovery of) accounts receivable loss provided for			4.8				0.2				(4.3	)
Gain on extinguishment of debt			(3.5	)			—				(318.9	)
Facility exit costs			1.4				0.8				1.8
Share-based compensation			2.5				3.7				3.0
Deferred income taxes			(22.0	)			2.4				1.2
Net change in assets and liabilities:
Restricted cash			1.4				(0.1	)			6.0
Receivables			(20.9	)			(25.6	)			4.8
Receivables from related parties			—				—				6.1
Profit-sharing receivables from insurance carriers			(4.5	)			1.0				8.9
Prepaid commissions			(5.8	)			3.7				9.3
Other current assets			5.3				12.5				10.3
Contract rights and list fees			(2.5	)			0.1				(0.2	)
Other non-current assets			6.4				(0.7	)			(6.4	)
Accounts payable and accrued expenses			(10.8	)			(4.4	)			(15.2	)
Payables to related parties			—				—				(0.2	)
Deferred revenue			(5.4	)			(14.4	)			(19.8	)
Income taxes receivable and payable			(0.2	)			(0.3	)			0.2
Other long-term liabilities			0.2				3.0				(5.0	)
Other, net			(3.4	)			2.1				3.1
Net cash provided by operating activities			7.0				25.6				10.4
Investing Activities
Capital expenditures			(38.1	)			(34.3	)			(31.4	)
Restricted cash			0.6				1.8				(0.6	)
Acquisition-related payments, net of cash acquired			(0.4	)			—				(1.7	)
Proceeds from sale of investment			—				—				1.5
Net cash used in investing activities			(37.9	)			(32.5	)			(32.2	)
Financing Activities
Borrowings (repayments) under revolving credit facility, net			55.0				—				(5.0	)
Proceeds from issuance of debt			1,539.6				—				110.0
Financing costs			(29.3	)			—				(14.7	)
Principal payments on borrowings			(1,534.7	)			(7.8	)			(42.9	)
Proceeds from issuance of warrants			0.5				—				—
Dividend paid to non-controlling interest			(0.7	)			(0.5	)			(0.6	)
Net cash provided by (used in) financing activities			30.4				(8.3	)			46.8
Effect of changes in exchange rates on cash and cash equivalents			2.6				(2.5	)			(1.9	)
Net increase (decrease) in cash and cash equivalents			2.1				(17.7	)			23.1
Cash and cash equivalents, beginning of year			37.7				55.4				32.3
Cash and cash equivalents, end of year		$	39.8			$	37.7			$	55.4
Supplemental Disclosure of Cash Flow Information:
Interest payments		$	120.1			$	133.8			$	184.2
Income tax payments, net of refunds		$	4.5			$	4.3			$	3.4

See notes to the consolidated financial statements.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO 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 — On October 17, 2005, Cendant Corporation (“Cendant”) completed the sale of the Cendant Marketing Services Division to Affinion Group, Inc. (“Affinion”), a wholly-owned subsidiary of Affinion Group Holdings, Inc. (the “Company” or “Affinion Holdings”) and 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 “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.

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 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, e-commerce, 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 approximately 18.4 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 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 2016 implementation of the Global Reorganization marks another major step in our strategic plan and ongoing transformation. See Note 17 to our audited consolidated financial statements for more information concerning our segment results and Note 3 to our audited consolidated financial statements for more information concerning the allocation of goodwill among the new segments. Prior period segment amounts throughout the notes to the audited consolidated financial statement have been reclassified to the new segment structure. The reclassification of historical business segment information had no impact on our primary financial statements.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Effective January 1, 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 (which were previously reported predominantly in our Membership Products segment and to a lesser extent in our International Products segment) and also includes the domestic Package business (which, through December 31, 2015, was reported in the Insurance and Package segment). This segment includes membership programs that were marketed with many of the Company’s large domestic financial institution partners. Although the Company will continue to service these members, it expects that cash flows and revenues will decrease over time due to the anticipated attrition of the member base in this operating segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. Investments in entities over which the Company has the ability to exercise significant influence but does not have a controlling interest are accounted for under the equity method of accounting. The Company considers several factors in determining whether it has the ability to exercise significant influence with respect to investments, including, but not limited to, direct and indirect ownership level in the voting securities, active participation on the board of directors, approval of operating and budgeting decisions and other participatory and protective rights and commercial business relationships. Under the equity method, the Company’s proportionate share of the net income or loss of such investee is reflected in the Company’s consolidated results of operations. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated.

Share-Based Compensation

For all stock-based awards issued by Affinion Holdings to directors and employees of the Company and consultants to the Company that are accounted for as equity awards, the Company recognizes compensation expense based on estimated fair values on the date of grant. For all stock-based awards issued by Affinion Holdings to directors and employees of the Company and consultants to the Company that are accounted for as liability awards, the Company recognizes compensation expense, based on estimated fair value at each reporting date. The Company recognizes forfeitures as they occur. Compensation expense is recognized ratably over the requisite service period, which is the period during which the employee is required to provide services in exchange for the award. The requisite service period is generally the vesting period. Stock compensation expense is included in general and administrative expense in the accompanying consolidated statements of comprehensive income (loss).

Revenue Recognition

Global Loyalty — Revenues are generated 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. The Company typically charges a per-subscriber and/or a per-activity administrative fee to clients for our services. In addition, commissions may be earned 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. In most circumstances, revenue is recognized net of the cost of fulfillment.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Global Customer Engagement and Legacy Membership — 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.

The Company generates revenues for desired customer engagement programs and solutions typically through a licensing and/or per user fee. In other arrangements, we generate revenues though 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.

Insurance Solutions — Commission revenue for marketing and administrative services earned per administrative services agreements with carriers is based on a percentage of premiums earned by the insurance carriers that issue the policies. Premiums are typically paid either monthly or quarterly. Commission revenue is recognized ratably for the marketing and administrative services provided over the underlying policy coverage period. There are also profit-sharing arrangements with certain of the insurance carriers that issue the underlying insurance policies. All revenue from insurance programs is reported net of insurance costs. Insurance costs totaled approximately $143.4 million in 2017, $157.6 million in 2016 and $169.3 million in 2015. Under the profit sharing arrangements, approximately 60% of the gross premiums collected on behalf of the insurance carrier are earned as commission revenue under administrative agreements and the remaining 40% of gross premiums are retained in a fiduciary account managed on behalf of the carrier. The remaining carrier funds are distributed monthly to the carrier to pay claims, administrative expenses, and the carrier’s retention fee. Any surplus or deficit is distributed to the Company under the profit share arrangement.

Marketing Expense

Global Customer Engagement — Marketing expense to acquire new members is recognized when incurred, which is generally prior to both the commencement of the trial period and recognition of revenue for membership programs.

Insurance Solutions — Marketing expense to acquire new insurance business is recognized by the Company when incurred. Payments are made to marketing partners or third parties associated with acquiring rights to their existing block of insurance customers (contract rights) and for the renewal of existing contracts that provide the Company primarily with the right to retain billing rights for renewal of existing customers’ insurance policies and the ability to perform future marketing (list fees). These payments are deferred on the accompanying consolidated balance sheets, with contract rights amortized to amortization expense and list fees amortized to marketing expense. The amortization methods employed generally approximate the expected pattern of net insurance revenue earned over the applicable contractual terms.

Commission Expense

Global Customer Engagement and Legacy Membership — Membership commissions represent payments to partners, which are generally based on a percentage of revenue from the marketing of programs to such partners’ customers. Commissions are generally paid for each initial and renewal membership following the collection of membership fees from the customer. These commission costs are deferred on the accompanying consolidated balance sheets as prepaid commissions and are recognized as expense over the applicable membership period in the same manner as the related retail membership revenue is recognized. In certain marketing arrangements, the Company pays an advance commission to the partner, with the advance commission earned down by the partner based on the initial and renewal membership revenue realized by the Company and the commission rate specified in the marketing arrangement, with the partner having the ability to continue to earn commissions in excess of the advance if sufficient revenue is realized by the Company. These commission costs are deferred on the accompanying consolidated balance sheets as prepaid commissions and recognized as expense as earned down by the partner. In other arrangements, the Company pays an upfront payment, called a bounty, to the partner and the partner is not entitled to any additional compensation based on initial and renewal membership. Bounties are recognized as expense when incurred.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Insurance Solutions — Insurance administrative fees represent payments made to bank marketing partners, generally based on a fee per insured or a percentage of the revenue earned from the marketing of insurance programs to such marketing partners’ customers. Administrative fees are paid for new and renewal insurance premiums received. Additionally, for certain channels and clients, commissions are paid to brokers. Administrative fees are included within commission expense on the accompanying consolidated statements of comprehensive income (loss) and are recognized ratably over the underlying insurance policy coverage period.

Operating Costs

Operating costs represent the costs associated with servicing our members and end-customers. These costs include product fulfillment costs, communication costs with members and end-customers, information technology and payroll, telecommunications and facility costs attributable to operations responsible for servicing our members and end-customers.

Income Taxes

Income taxes are presented in the consolidated financial statements using the asset and liability approach. 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 December 31, 2017 and 2016, the Company has recorded a full valuation allowance for its U.S. federal net deferred tax assets. As of December 31, 2017 and 2016, the Company has also recorded valuation allowances against the deferred tax assets of certain state and foreign tax jurisdictions.

The tax effects of an uncertain tax position (“UTP”) taken or expected to be taken in income tax returns are recognized only if it is “more likely-than-not” to be sustained on examination by the taxing authorities, based on its technical merits as of the reporting date. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. The Company recognizes estimated accrued interest and penalties related to UTPs in income tax expense.

The Company recognizes the benefit of a UTP in the period when it is effectively settled. Previously recognized tax positions are derecognized in the first period in which it is no longer more likely than not that the tax position would be sustained upon examination.

On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was enacted into law. The TCJA significantly revises the U.S. corporate income tax laws by, among other things, lowering the corporate income tax rate to 21%, implementing a modified territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the “transition tax”). The U.S. federal income tax rate reduction was effective as of January 1, 2018. The Company has recorded provisional amounts related to the TCJA for the remeasurement of deferred taxes and the transition tax. Further, the Company is in the process of analyzing the effects of new taxes due on certain foreign income, that are effective starting in 2018, and other provisions of the TCJA. The Company has elected to account for GILTI (global intangible low-taxed income), as a period cost if and when incurred pursuant to the exposure draft issued by the FASB in January 2018.To complete the accounting associated with the TCJA, the Company will continue to review the technical tax interpretations associated with the underlying law, monitor state legislative changes, and review U.S. federal and state guidance as it is issued. Further, the Company will continue to accumulate and refine the relevant data and computational elements needed to finalize its accounting by December 22, 2018.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

 

F-12

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Restricted Cash

Restricted cash amounts relate primarily to insurance premiums collected from members that are held pending remittance to third-party insurance carriers. These amounts are not available for general operations under state insurance laws or under the terms of the agreements with the carriers that underwrite and issue insurance policies to the members. Changes in such amounts are included in operating cash flows in the consolidated statements of cash flows. Restricted cash also includes amounts to collateralize certain bonds and letters of credit issued on the Company’s behalf and amounts held in escrow. Changes in such amounts are included in investing cash flows in the consolidated statements of cash flows.

Derivative Instruments

The Company records all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives are recognized in earnings unless specific hedge criteria are met. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recognized in current period earnings in the consolidated statements of comprehensive income (loss). For derivative instruments that are designated as cash flow hedges, the effective portion of changes in the fair value of derivative instruments is initially recorded in other comprehensive income (loss) and subsequently reclassified into earnings when the hedged transaction affects earnings. Any ineffective portion of changes in the fair value of cash flow hedges are immediately recognized in earnings.

The Company uses derivative financial instruments, primarily foreign currency forward contracts, to manage its foreign exchange risk. The Company’s foreign currency forward contracts are recorded at fair value on the consolidated balance sheets. The derivative financial instruments are not designated as hedging instruments and therefore changes in their fair value are recognized currently in earnings. The Company does not use derivative instruments for speculative purposes.

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements and computer equipment acquired under capital leases is determined using the straight-line method over the shorter of the estimated useful lives of the related assets or the lease term. Useful lives are from 5 to 15 years for leasehold improvements, from 3 to 5 years for capitalized software, from 3 to 5 years for computer equipment and from 5 to 7 years for furniture, fixtures and equipment.

Internally-Developed Software

The Company capitalizes the costs of acquiring, developing and testing software to meet the Company’s internal needs. Capitalization of costs associated with software obtained or developed for internal use commences when both the preliminary project stage is completed and management has authorized further funding for the project, based on a determination that it is probable that the project will be completed and used to perform the function intended. Capitalized costs include (1) external direct cost of materials and services consumed in developing or obtaining internal-use software, and (2) payroll and payroll-related costs for employees who are directly associated with and devote time to the internal-use software project. Capitalization of such costs ceases no later than the point at which the project is substantially complete and ready for its intended use.

Goodwill and Identifiable Intangible Assets

Goodwill represents the excess of the cost of an acquired entity over the net of the fair value of assets acquired and liabilities assumed. Goodwill has been assigned to the Company’s reporting units and is tested for impairment at least annually. The Company evaluates the recoverability of the carrying value of each reporting unit’s goodwill as of December 1, or whenever events or circumstances indicate that an impairment may have occurred. Goodwill is tested for impairment by comparing the carrying value of each reporting unit to its fair value. The Company determines the fair value of its reporting units utilizing a combination of the income and market approaches and incorporating assumptions that it believes marketplace participants would utilize. If the carrying amount of the reporting unit is greater than its fair value, a comparison of the reporting unit’s implied goodwill is compared to the carrying amount of the goodwill to determine the amount of the impairment, if any. Any impairment is recognized in earnings in the period in which the impairment is determined.

 

F-13

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

During the fourth quarter of 2017, the Company performed its annual goodwill impairment test for those reporting units that had goodwill recorded. Key assumptions used in the goodwill impairment test were long-term growth rates ranging from 0.5% to 2.0% growth and discount rates ranging from 9.5% to 11.0%. In 2017, the fair value of each of the reporting units that have goodwill exceeded its respective carrying amount by more than 25% of the carrying amount.

During the fourth quarter of 2016, the Company performed its annual goodwill impairment test for those reporting units that had goodwill recorded. Key assumptions used in the goodwill impairment test were long-term growth rates ranging from 0.5% to 2.0% growth and discount rates ranging from 10.0% to 12.0%. In 2016, the fair value of each of the reporting units that have goodwill exceeded its respective carrying amount by more than 25% of the carrying amount.

Indefinite-lived intangible assets, if any, are tested for impairment annually, or sooner if events occur or circumstances change. An indefinite-lived intangible asset is tested for impairment by comparing its fair value to its carrying amount and, if the carrying amount is greater than the fair value, recognizing an impairment loss for the excess.

The Company’s intangible assets as of December 31, 2017 and 2016 consist primarily of intangible assets with finite useful lives acquired by the Company in the Apollo Transactions and subsequent acquisitions and were initially recorded at their respective estimated fair values. Finite-lived intangible assets are amortized as follows:

 

Intangible Asset		Amortization Method		Estimated Useful Lives
Member relationships		Declining balance		5 – 8 years
Affinity relationships		Declining balance, straight line		1 – 14 years
Proprietary databases and systems		Straight line		3 – 10 years
Trademarks and tradenames		Straight line		5 – 15 years
Patents and technology		Declining balance, straight line		5 – 12 years
Covenants not-to-compete		Straight line		Contract life

Impairment of Long-Lived Assets

The Company evaluates the recoverability of the carrying amount of its long-lived assets when events and circumstances indicate that the carrying value of an asset may not be recoverable. For long-lived assets held and used by the Company, an impairment loss is recognized only if the carrying amount of the long-lived asset is not recoverable and exceeds its fair value. The carrying amount is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. If an asset is determined to be impaired, the loss is measured based on the difference between the fair value of the long-lived asset and its carrying amount.

Foreign Currency Translation

Assets and liabilities of foreign operations whose functional currency is the local currency are translated at exchange rates as of the balance sheet dates. Revenues and expenses of such local functional currency foreign operations are translated at average exchange rates during the periods presented. Translation adjustments resulting from the process of translating the functional currency foreign operation financial statements into U.S. dollars are included in accumulated other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in the consolidated statements of comprehensive income (loss). Foreign local currency gains and losses relating to non-operational transactions are included in other income (expense), net. Foreign currency gains and losses relating to operations are included in general and administrative expense.

Contingencies

Contingencies by their nature relate to uncertainties that require management to exercise judgment both in assessing the likelihood that a liability has been incurred as well as in estimating the amount of potential loss, if any. The Company accrues for costs relating to litigation, claims and other contingent matters when such liabilities become probable and reasonably estimable. Such estimates may be based on advice from third parties or on management’s judgment, as appropriate. Actual amounts paid may differ from amounts estimated, and such differences will be charged to operations in the period in which the final determination of the liability is made.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include accounting for profit-sharing receivables from insurance carriers, accruals and income tax valuation allowances, evaluation of going concern assessment, litigation accruals, the 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.

Concentration of Risk

The Company generally derives a substantial portion of its net revenues from customers of 10 of the Company’s clients. For the years ended December 31, 2017, 2016 and 2015, the Company derived approximately 34%, 32% and 34%, respectively, of its net revenues from customers through marketing and servicing agreements with these 10 clients. The Company’s largest client and its customers accounted for approximately 11.1% of consolidated net revenue for the year ended December 31, 2017. The Company’s largest client and its customers accounted for 10.1% of consolidated net revenue for the year ended December 31, 2016. The Company’s largest client and its customers accounted for 10.2% of consolidated net revenue for the year ended December 31, 2015. Many of these key client relationships are governed by agreements that may be terminated without cause by the clients upon notice of as few as 90 days without penalty. Some of these agreements may be terminated by the Company’s clients upon notice of as few as 30 days without penalty. Moreover, under many of these agreements, the clients may cease or reduce their marketing of the Company’s services without terminating or breaching agreements with the Company. A loss of key clients, a cessation or reduction in their marketing of the Company’s services, or a decline in their businesses could have a material adverse effect on the Company’s future revenue.

Allowance for Doubtful Accounts

The activity in the allowance for doubtful accounts is as follows:

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Balance at beginning of period		$	3.0			$	3.1			$	8.5
Provision charged to expense, net of recoveries			4.8				0.1				(4.3	)
Write-offs			(0.3	)			(0.2	)			(1.1	)
Balance at end of period		$	7.5			$	3.0			$	3.1

Supplemental Disclosure of Cash Flow Information

In connection with the debt restructuring that was consummated in May 2017, the Company exchanged notes with an aggregate principal amount of $286.3 million plus accrued interest of $9.0 million, issuing (1) new notes with an aggregate principal amount of $321.1 million, including $25.8 million issued in connection with commitment and funding premiums, and (2) warrants to acquire shares of the Company’s common stock valued at $7.7 million, including $0.6 million issued in connection with commitment and funding premiums. During the year ended December 31, 2017, the Company increased long-term debt by $41.7 million in connection with payment-in-kind interest. During 2017, the Company entered into a capital lease, acquiring property and equipment with a fair value of $1.1 million. At December 31, 2017, the Company had an accrual for the acquisition of property and equipment of $1.3 million.

At December 31, 2016, the Company had an accrual for the acquisition of property and equipment of $1.6 million.

During 2015, the Company performed its annual goodwill impairment test, which resulted in recognition of an impairment loss of $89.6 million, representing all of the remaining goodwill ascribed to the former Membership Products business. In connection with the debt restructuring consummated in November 2015, the Company extinguished debt with a carrying amount net of discount of $566.9 million, wrote-off accrued interest of $16.0 million that was forgiven in the debt exchange, wrote-off deferred financing costs of $6.8 million, issued equity with a fair value at the time of the exchange of $133.5 million and recorded an adjustment to the carrying value of the remaining debt of $108.4 million. During 2015, the Company transferred certain equipment and associated capital leases for no consideration. At December 31, 2015, the Company had an accrual for the acquisition of property and equipment of $0.6 million.

 

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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). We have adopted the new guidance effective January 1, 2018 using the modified retrospective method, focusing on contracts not yet completed as of December 31, 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. 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. Historically, revenue for these arrangements was recognized per the terms of our contracts as certain transaction volumes were achieved. Under the new guidance, we will defer recognizing a portion of that revenue to a future period as these contract features provide a material right to our customer in the form of an accumulating benefit. The impact of this change is not expected to be material. In addition, the new guidance will lead to insignificant changes in the timing and classification of certain other revenue streams and result in a cumulative adjustment to our balance sheet at January 1, 2018 to reflect such timing. We have implemented changes to our business processes and controls as related to the adoption of the new standard. We continue to evaluate the disclosures required under the new standard.

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 continues to work on compiling 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 and must be adopted using the full retrospective method. 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. 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.

 

F-16

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Other Recently Issued Pronouncements

In response to the TCJA, which was signed into law on December 22, 2017, the Securities and Exchange Commission’s Office of the Chief Accountant published Staff Accounting Bulletin No. 118 (“SAB 118”). SAB 118 addresses the requirements to account for the impact of a change in tax law or tax rates in the period of enactment. Specifically, SAB 118 provides guidance for issuers that are not able to complete the accounting for the income tax effects of the TCJA by the time financial statements are issued for the reporting period that includes the enactment date (“enactment period financials”).

Pursuant to SAB 118, if the accounting for specific income tax effects of the TCJA is incomplete at the time the financial statements are issued, a company should provide a provisional amount for specific income tax effects for which a reasonable estimate can be determined. For any specific income tax effects of the TCJA for which a reasonable estimate cannot be determined because additional information, data, analysis or preparation is required, a company should not report a provisional amount but continue to apply the rules in effect immediately prior to enactment. For income tax effects for which a company was not able to determine a reasonable estimate in the enactment period financials, a provisional amount must be recorded in the first reporting period in which a reasonable estimate can be determined.

Under SAB 118, the measurement period for accounting for the TCJA begins in the period of enactment and ends when an entity has obtained, prepared and analyzed the information necessary to complete the accounting requirements under ASC 740 (the “measurement period”), but in no event can the measurement period extend beyond one year (December 22, 2018) from the TCJA’s enactment date. Any provisional amount or adjustment to a provisional amount included in a company’s financial statements during the measurement period should be included in income from continuing operations as an adjustment to tax expense or benefit in the reporting period the amounts are determined.

The Company has not finalized accounting for the income tax effects of TCJA. This includes the provisional amounts recorded for the remeasurement of deferred taxes and the transition tax. While we do not expect other aspects of the TCJA to have a material impact, additional guidance or changes in the law could have an impact on the financial statements and therefore we consider the accounting for amounts related to these items to be provisional. The Company will continue to review the technical tax interpretations associated with the underlying law, monitor state legislative changes, and review U.S. federal and state guidance as it is issued.

3. INTANGIBLE ASSETS AND GOODWILL

Intangible assets consisted of:

 

		December 31, 2017												December 31, 2016
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
		(in millions)												(in millions)
Amortizable intangible assets:
Member relationships		$	936.1			$	(934.4	)		$	1.7			$	932.4			$	(930.8	)		$	1.6
Affinity relationships			643.5				(617.1	)			26.4				632.9				(600.9	)			32.0
Proprietary databases and systems			59.8				(58.6	)			1.2				59.6				(58.0	)			1.6
Trademarks and tradenames			27.9				(23.4	)			4.5				27.7				(21.7	)			6.0
Patents and technology			47.7				(47.6	)			0.1				47.7				(47.5	)			0.2
Covenants not to compete			2.5				(2.4	)			0.1				2.4				(2.3	)			0.1
		$	1,717.5			$	(1,683.5	)		$	34.0			$	1,702.7			$	(1,661.2	)		$	41.5

During 2017 and 2016, foreign currency translation resulted in an increase of $14.3 million and a decrease of $11.9 million, respectively, in the gross carrying amount of intangible assets and an increase of $14.2 million and a decrease of 11.3 million, respectively, in accumulated amortization.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Amortization expense relating to intangible assets was as follows:

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Amortizable intangible assets:
Member relationships		$	0.6			$	1.4			$	4.1
Affinity relationships			5.6				8.6				33.2
Proprietary databases and systems			0.4				0.4				0.5
Trademarks and tradenames			1.4				1.3				2.4
Patents and technology			0.1				1.0				2.0
Covenants not to compete			0.1				0.1				0.2
		$	8.2			$	12.8			$	42.4

Based on the Company’s amortizable intangible assets as of December 31, 2017, the Company expects the related amortization expense for fiscal year 2018 and the four succeeding fiscal years to be approximately $7.6 million in 2018, $6.2 million in 2019, $5.5 million in 2020, $3.8 million in 2021 and $3.5 million in 2022.

At December 31, 2017 and 2016, and January 1, 2016, the Company had gross goodwill of $653.7 million, $647.2 million and $654.8 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, 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 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 years ended December 31, 2017 and 2016 are as follows:

 

		Balance at January 1, 2016				Currency Translation				Balance at December 31, 2016				Currency Translation				Balance at December 31, 2017
		(in millions)
Global Loyalty		$	105.1			$	(0.3	)		$	104.8			$	1.1			$	105.9
Global Customer Engagement			62.4				(7.3	)			55.1				5.4				60.5
Insurance Solutions			58.3				—				58.3				—				58.3
Legacy Membership and Package			—				—				—				—				—
Total		$	225.8			$	(7.6	)		$	218.2			$	6.5			$	224.7

4. CONTRACT RIGHTS AND LIST FEES, NET

Contract rights and list fees consisted of:

 

		December 31, 2017												December 31, 2016
		Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount				Gross Carrying Amount				Accumulated Amortization				Net Carrying Amount
		(in millions)
Contract rights		$	5.0			$	(5.0	)		$	—			$	5.0			$	(5.0	)		$	—
List fees			68.5				(49.7	)			18.8				61.6				(45.2	)			16.4
		$	73.5			$	(54.7	)		$	18.8			$	66.6			$	(50.2	)		$	16.4

 

F-18

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Amortization expense for the year ended December 31, 2017 was $4.5 million, all of which was included in marketing expense in the consolidated statement of comprehensive income (loss). Amortization expense for the year ended December 31, 2016 was $4.9 million, of which $4.8 million was included in marketing expense and $0.1 million was included in depreciation and amortization expense in the consolidated statement of comprehensive income (loss). Amortization expense for the year ended December 31, 2015 was $5.4 million, of which $5.1 million was included in marketing expense and $0.3 million was included in depreciation and amortization expense in the consolidated statement of comprehensive income (loss). Based on the Company’s contract rights and list fees as of December 31, 2017, the Company expects the related amortization expense for fiscal year 2018 and the four succeeding fiscal years to be approximately $4.1 million in 2018, $3.4 million in 2019, $2.8 million in 2020, $2.0 million in 2021 and $1.5 million in 2022.

5. OTHER CURRENT ASSETS

Other current assets consisted of:

 

		December 31,
		2017				2016
		(in millions)
Gift card inventory		$	17.2			$	30.8
Prepaid membership materials			0.6				0.9
Prepaid insurance costs			1.7				4.8
Other receivables			10.6				7.2
Prepaid credit card charges			15.3				5.7
Prepaid information technology costs			6.4				5.5
Other			15.8				15.7
Total		$	67.6			$	70.6

The prior year presentation has been revised to conform to the current year presentation.

6. PROPERTY AND EQUIPMENT, NET

Property and equipment, net consisted of:

 

		December 31,
		2017				2016
		(in millions)
Leasehold improvements		$	24.8			$	24.2
Capitalized software			342.5				264.0
Computer equipment ($4.6 million and $3.5 million in 2017 and 2016, respectively, under capital leases)			80.5				137.8
Furniture, fixtures and equipment			21.5				19.6
Projects in progress			33.8				19.2
			503.1				464.8
Less: Accumulated depreciation and amortization			(394.7	)			(359.3	)
Total		$	108.4			$	105.5

Depreciation and amortization expense on property and equipment, including assets acquired under capital leases, totaled $38.6 million, $43.8 million and $47.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consisted of:

 

		December 31,
		2017				2016
		(in millions)
Accounts payable		$	106.6			$	112.1
Accrued commissions			10.8				11.0
Accrued payroll and related costs			31.0				35.6
Accrued product costs			18.3				21.7
Accrued marketing costs			11.7				16.7
Accrued interest			30.3				15.8
Accrued taxes, other than income taxes			8.9				9.3
Accrued legal and professional fees and loss contingency accruals			13.2				14.5
Gift card deposits			32.7				37.2
Accrued revenue sharing payable			23.4				13.2
Other			38.6				40.5
Total		$	325.5			$	327.6

8. LONG-TERM DEBT, NET

Long-term debt consisted of:

 

		December 31, 2017				December 31, 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 $29.2 million, with an effective interest rate of 10.01%			1,300.8				—
Revolving credit facility, expiring in 2018			—				—
Revolving credit facility, expiring in 2022, net of unamortized discount of $2.4 million			52.6				—
7.875% senior notes due 2018, net of unamortized discount of $0.4 million and $0.6 million, respectively, 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 $22.9 million, with an effective interest rate of 16.20%			572.4				—
Capital lease obligations			1.1				—
Adjustment to carrying value of debt			—				65.7
Total debt			1,926.9				1,872.8
Less: current portion of long-term debt			(13.9	)			(7.8	)
Less: unamortized deferred financing costs			(25.7	)			(9.2	)
Long-term debt		$	1,887.3			$	1,855.8

Credit Agreement Refinancing and International Notes Redemption

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 consolidated fixed charges. 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. As of December 31, 2017, Affinion was in compliance with the restrictive covenants under the New Credit Facility.

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 in aggregate 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.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 consolidated statement of operations for the year ended December 31, 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.

On November 30, 2017 Affinion entered into the First Amendment to the New Credit Facility, pursuant to which the parties (i) revised the terms of the New Credit Facility in order for certain of the lenders under the revolving facility established thereunder to act as issuing banks in respect of letters of credit and as swingline lenders, (ii) modified certain provisions relating to the mechanics surrounding letters of credit and swingline loans, and (iii) set aggregate sub-limits for both letter of credit commitments and swingline commitments at $20 million.

As of December 31, 2017, there were outstanding borrowings of $55.0 million under the New Credit Facility. As of December 31, 2016, there were no outstanding borrowings under Affinion’s 2014 Credit Facility. During the period from May 10, 2017 through December 31, 2017, the Company had borrowings and repayments of $192.2 million and $137.2 million, respectively, under the New Credit Facility. During the period from January 1, 2017 through May 10, 2017 and the years ended December 31, 2016 and 2015 and 2014, Affinion had borrowings of $99.0 million, $122.0 million and $81.0 million, respectively, under the 2014 Credit Facility. During the period from January 1, 2017 through May 10, 2017 and the years ended December 31, 2016 and 2015, Affinion had repayments of $99.0 million, $122.0 million and $86.0 million, respectively, under the 2014 Credit Facility. As of December 31, 2017, Affinion had $50.0 million available for borrowing under the New Credit Facility, after giving effect to the issuance of $5.0 million of letters of credit.

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

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 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.

Also, on May 10, 2017, Affinion exercised its option to redeem Affinion’s 2010 senior notes that were not tendered in the AGI Exchange Offer 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 Affinion Holdings issued New Warrants to purchase 3,974,581 shares of Common Stock, of which (i) approximately $295.3 million in aggregate 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 in aggregate 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 in aggregate 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 in aggregate 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

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 $1.8 million for the year ended December 31, 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 $1.8 million is included in Gain (loss) on extinguishment of debt on the consolidated statement of operations for the year ended December 31, 2017. 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.

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.

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 and 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. The interest for the first interest period was paid in PIK Interest on November 10, 2017.

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

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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. As of December 31, 2017, Affinion was in compliance with the restrictive covenants under the New Notes.

2015 Exchange Offers

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 PIK/toggle notes due 2018 (Affinion Holdings’ “2013 senior notes”) for shares of its Common Stock, par value $0.01 per share (Affinion Holdings’ “Common Stock”), (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 Investments senior subordinated notes for shares of Common Stock, and (c) Affinion Holdings and Affinion International Holdings Limited (“Affinion International”), a wholly-owned subsidiary of Affinion, jointly completed a 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 7.5% Cash/PIK Senior Notes due 2018 (the “International Notes”) of Affinion International 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 Investments senior subordinated notes were exchanged for 5,236,517 shares of Common Stock.

In connection with the 2015 Exchange Offers, Affinion Holdings and Affinion International jointly conducted a rights offering (the “2015 Rights Offering”) for International Notes and shares of Affinion Holdings’ 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 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 non-participating penny warrants (the “Limited Warrants”) of Affinion Holdings that are convertible into 462,266 shares of Common Stock upon certain conditions.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

The International Notes bore interest at 7.5% per annum, of which 3.5% per annum was payable in cash (“International Cash Interest”) and 4.0% per annum was 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 was payable semi-annually on May 1 and November 1 of each year, commencing on May 1, 2016. The International Notes would have matured on July 30, 2018. The International Notes were redeemable at Affinion International’s option prior to maturity. The indenture governing the International Notes contained negative covenants which restricted 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 were fully and unconditionally guaranteed on an unsecured senior basis by each of Affinion’s existing and future domestic subsidiaries that guaranteed Affinion’s indebtedness under Affinion’s 2014 Credit Facility (other than Affinion Investments and Affinion Investments II, LLC (“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 were unsecured senior obligations of Affinion International’s and ranked 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.

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 $988.4 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 the 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.

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 is the net impact of the aforementioned transactions and represented an adjustment of the carrying value of Affinion’s first lien term loan due 2018, Affinion’s second lien term loan 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 exchange but were not subject to the exchange itself 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 amount had been reduced as scheduled interest was paid on those remaining instruments.

Upon consummation of the 2015 Exchange Offers, 2015 Consent Solicitations and 2015 Rights Offering in November 2015, Affinion Holdings effected a reclassification (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’ new Class C Common Stock, 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, 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 were cancelled for no additional consideration.

The Company also leases certain equipment under capital leases expiring through 2020.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

The aggregate maturities of debt, including capital leases, as of December 31, 2017 are as follows:

 

		Amount
		(in millions)
2018		$	13.9
2019			28.8
2020			58.9
2021			67.0
2022			1,812.8
Thereafter			—
		$	1,981.4

9. DEFICIT

As of December 31, 2017, 2016 and 2015, the Company’s capital stock consists 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 10,000,000 shares, $0.01 par value per share, are designated as “preferred stock.” As of December 31, 2017 and 2016, the Company has outstanding (i) 9,157,071 and 9,093,330 shares, respectively, of Common Stock, (ii) 433,813 and 427,955 shares, respectively, of Class C Common Stock and (iii) 456,643 and 450,482 shares, respectively, of Class D Common Stock. In addition, at December 31, 2017 and 2016, the Limited Warrant (see below) to purchase up to 462,266 shares of Common Stock was outstanding. As of December 31, 2017 and 2016, there were no shares of preferred stock outstanding.

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. 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.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 and 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.

On November 9, 2015, concurrent with the debt exchanges and subscription rights offering, the Company mandatorily cashlessly converted the then-outstanding Series A warrants to shares of Class A common stock. The 130,133,055 shares of Class A common stock then-outstanding were converted into 490,083 shares of Class C Common Stock and 515,877 shares of Class D Common Stock. In connection with the debt exchanges and subscription rights offering, 9,093,330 shares of Common Stock were issued. In addition, in lieu of issuing Common Stock to an investor that would otherwise have beneficially owned more than 19.9% of the Common Stock, the Company issued a Limited Warrant to purchase up to 462,266 shares of Common Stock, which Limited Warrant may only be exercised upon the receipt of requisite regulatory approval.

10. EARNINGS PER SHARE

In the periods prior to the 2015 Exchange Offers and 2015 Rights Offering on November 9, 2015, the Company’s authorized capital was comprised of Class A Common Stock, Class B Common Stock and preferred stock. There were no shares of Class B Common Stock or preferred stock outstanding as of December 31, 2015. The Class A Common Stock and Class B Common Stock were identical in every respect, and the rights and privileges of the holders were identical. Therefore, as the basic and diluted earnings per share (“EPS”) are the same for Class A Common Stock and Class B Common Stock because they were entitled to the same liquidation and dividend rights, the basic and diluted EPS are presented for Class A and B Common Stock for the year ended December 31, 2015.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Subsequent to the 2015 Exchange Offers and 2015 Rights Offering, the Company changed its capital structure by (i) mandatorily converting all outstanding Series A Warrants into Class A Common Stock, (ii) converting all outstanding shares of Class A Common Stock into shares of Class C and D Common Stock, and (iii) issuing shares of Common Stock. Under the new capital structure, Common Stock participates in profits and losses of the Company but Class C and D Common Stock do not. As the change in capital structure was not the result of a stock dividend or stock split, the Company reflected the change in capital structure prospectively. Therefore, the basic and diluted EPS attributable to common stockholders are presented for the years ended December 31, 2017, 2016 and 2015.

For the three months ended December 31, 2015, the net income attributable to Affinion Group Holdings, Inc. was allocated to Class A and B common stockholders and common stockholders based on the number of days these classes of common stock were outstanding in the period. For the nine months ended September 30, 2015, the net income attributable to Affinion Group Holdings, Inc. was entirely allocated to Class A and B common stockholders.

In connection with the Exchange Offers and Investor Purchase Agreement, the Company issued warrants to purchase 3,974,581 shares of Common Stock. The warrants represent in-substance common stock and the warrants are included in basic EPS based on the number of days during the year that they were outstanding.

Basic EPS attributable to Class A and B common stockholders is computed by dividing net income (loss) attributable to Class A and B common stockholders by the weighted average number of shares of Class A and B Common Stock outstanding. Diluted EPS attributable to Class A and B common stockholders reflects the potential dilution of warrants, stock options, restricted stock units and incentive awards that could be exercised or converted into shares of Class A and B Common Stock, and is computed by dividing net income (loss) attributable to Class A and B common stockholders by the weighted average number of shares of Class A and B Common Stock outstanding plus the potentially dilutive securities.

Basic EPS attributable to common stockholders is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Common Stock outstanding. Diluted EPS attributable to common stockholders reflects the potential dilution of Class C and D common stock, stock options, restricted stock units and incentive awards that could be exercised or converted into shares of Common Stock, and is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of Common Stock outstanding plus the potentially dilutive securities. There was no potentially dilutive effect for the year ended December 31, 2015.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

The computation of basic and diluted earnings (loss) per share is set forth below:

 

($ in millions, except per share data)		Year Ended December 31,
		2017				2016				2015
Numerator:
Net income (loss) attributable to Affinion Group Holdings, Inc.		$	(25.2	)		$	15.7			$	135.3
Net income (loss) attributable to Class A and B common shareholders			—				—				9.8
Net income attributable to common shareholders		$	(25.2	)		$	15.7			$	125.5
Denominator for Common Stock:
Weighted average shares of Common Stock			9,126,952				9,093,330				1,320,401
Weighted average shares for warrants			2,766,781				—				—
Weighted average shares for vested RSUs			28,398				10,861				—
Basic weighted average shares of Common Stock			11,922,131				9,104,191				1,320,401
Weighted average dilutive effect of RSUs			—				792				—
Diluted weighted average shares of Common Stock			11,922,131				9,104,983				1,320,401
Denominator for Class A and B Common Stock:
Basic and diluted weighted average shares of Class A and B Common Stock											72,290,489
Basic weighted average shares of Class A and B Common Stock											72,290,489
Weighted average dilutive effect of Series A Warrants											38,131,042
Weighted average dilutive effect of restricted stock units											96,491
Weighted average dilutive effect of 2015 retention units											597,657
Diluted weighted average shares of Class A and B Common Stock											111,115,679
Earnings per share attributable to holders of Common Stock:
Basic		$	(2.12	)		$	1.74			$	95.07
Diluted		$	(2.12	)		$	1.74			$	95.07
Earnings (loss) per share attributable to holders of Class A and B Common Stock:
Basic										$	0.14
Diluted										$	0.09

11. INCOME TAXES

On December 22, 2017, the TCJA was enacted into law. The TCJA significantly revises the U.S. corporate income tax laws by, among other things, lowering the corporate income tax rate to 21%, implementing a modified territorial tax system and imposing a one-time repatriation tax on deemed repatriated earnings and profits of U.S.-owned foreign subsidiaries (the “transition tax”). The U.S. federal income tax rate reduction was effective as of January 1, 2018. While the provisions of the TCJA are generally effective January 1, 2018, several provisions impact the Company’s current period financial statements. The provisions of the TCJA have and will continue to impact our accounting treatment of certain items in our financial statements. As of December 31, 2017, we have not completed our assessment of the accounting impact of the tax effects of enactment of the TCJA and accordingly our accounting is provisional as of and for the year ended December 31, 2017. Where we have been able to make a reasonable estimate of the impact we have accounted for such provisional impact in the accompanying 2017 financial statements. For items related to the TCJA for which we were able to determine a reasonable estimate, we recognized a provisional tax benefit amount of approximately $25.5 million, which is included as a component of the income tax provision from continuing operations

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

The TCJA is complex and includes significant changes to the Internal Revenue Code which impact the Company. The Company has subsidiaries in 23 countries outside the U.S. To complete the accounting associated with the TCJA, the Company will continue to review the technical tax interpretations associated with the underlying law, monitor state legislative changes, and review U.S. federal and state guidance as it is issued. Further, the Company will continue to accumulate and refine the relevant data and computational elements needed to finalize its accounting by December 22, 2018.

Our 2017 accompanying financial statements reflect provisional estimates for the revaluation of US deferred tax assets and liabilities in accordance with ASC 740 based on rates at which they are expected to reverse in the future, which is generally 21%.

With respect to our deferred tax balances, we have made provisional estimates on amounts impacted by the TCJA but we are still analyzing certain aspects of the TCJA and refining our calculation, which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. As the Company continues to monitor and evaluate the external factors impacting our provisional amounts, the Company will also obtain, prepare and analyze additional information to further refine our provisional estimate for the transition tax and to determine whether an additional provisional amount is required with respect to deferred taxes.

The Company also evaluated the impact of the TCJA on its uncertain tax positions and recorded provisional estimates of these impacts.

Our provisional accounting for the transition tax is based on our estimate of both earnings and profits (“E&P”) and the portion of E&P which is held in cash and other specified assets measured as of specific dates. This transition tax charge, while not expected to be material, will be updated throughout the measurement period as we finalize our calculations and the amounts held in cash or other specified assets, relative to the date such assets are required to be measured.

The income tax benefit (expense) consisted of the following:

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Current:
Federal		$	—			$	0.4			$	(0.4	)
State			(0.7	)			(0.4	)			(1.0	)
Foreign			(3.4	)			(5.0	)			(3.3	)
			(4.1	)			(5.0	)			(4.7	)
Deferred:
Federal			21.9				(3.1	)			(3.1	)
State			0.1				0.1				0.7
Foreign			—				0.6				1.2
			22.0				(2.4	)			(1.2	)
Total income tax benefit (expense)		$	17.9			$	(7.4	)		$	(5.9	)

Pre-tax income (loss) for domestic and foreign operations before non-controlling interests consisted of the following:

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Domestic		$	(42.7	)		$	37.7			$	192.0
Foreign			0.4				(14.0	)			(50.2	)
Pre-tax income (loss)		$	(42.3	)		$	23.7			$	141.8

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Deferred income tax assets and liabilities consisted of the following:

 

		December 31,
		2017				2016 (a)
		(in millions)
Non-current deferred income tax assets:
Net operating loss carryforwards		$	250.1			$	297.0
State net operating loss carryforwards			18.9				26.1
Depreciation and amortization			70.8				156.3
Accrued expenses and deferred revenue			17.2				30.3
Prepaid expenses			1.3				0.5
Provision for doubtful accounts			0.5				0.1
Other			13.4				20.5
Non-current deferred income tax assets			372.2				530.8
Non-current deferred income tax liabilities:
Other			(1.2	)			(2.7	)
Accrued expenses and deferred revenue			—				(0.6	)
Profit-sharing receivables from insurance carriers			(1.6	)			(0.9	)
Non-current deferred income tax liabilities			(2.8	)			(4.2	)
Valuation allowance			(371.8	)			(551.0	)
Non-current net deferred income tax liability (net of non-current deferred income tax asset included in other non-current assets on the 2017 and 2016 consolidated balance sheet of $3.1 and $2.5, respectively)		$	(2.4	)		$	(24.4	)

 

(a)	Prior year amounts for depreciation and amortization have been revised to conform to the current year presentation.

As of December 31, 2017, Affinion Holdings and its subsidiaries had federal net operating loss carryforwards available to offset future taxable income of approximately $818.0 million (which will expire in 2026 through 2037).

As of December 31, 2017, Affinion Holdings and its subsidiaries have state net operating loss carryforwards of approximately $693.6 million (which expire, depending on the jurisdiction, between 2018 and 2037) and state tax credits of $1.8 million (which expire between 2018 and 2022). A full valuation allowance has been recognized with respect to these carryforwards and credits net of the impact of the future reversal of existing taxable temporary differences because it is more likely than not that these assets will not be realized.

The Company also has net operating loss carryforwards in foreign jurisdictions. These net operating losses total approximately $266.9 million (which expire, depending on the jurisdiction, between 2018 and 2037, or may be carried forward indefinitely). Affinion Holdings and its subsidiaries have concluded that a valuation allowance relating to approximately $266.9 million of these net operating losses is required due to the uncertainty of their realization.

The net operating losses for tax return purposes are different than the net operating losses for financial statement purposes, primarily due to book to tax differences associated with the Section 338 election and uncertain tax positions. The carrying value of Affinion Holdings’ valuation allowance against all of its deferred tax assets at December 31, 2017 and 2016 totaled $371.8 million and $551.0 million, respectively. The decrease in valuation allowance of $179.2 million is attributable to the SAB 118 estimates applicable to the TCJA, a decrease in the book to tax temporary differences that require a valuation allowance and a decrease in the valuation allowance attributable to tax attributes (i.e., net operating losses).

As of December 31, 2016, Affinion Holdings and its subsidiaries had federal net operating loss carryforwards of approximately $664.8 million (which will expire in 2032 through 2036).

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

As of December 31, 2016, Affinion Holdings and its subsidiaries have state net operating loss carryforwards of approximately $609.6 million (which expire, depending on the jurisdiction, between 2017 and 2036) and state tax credits of $1.9 million (which expire between 2017 and 2021). A full valuation allowance has been recognized with respect to these carryforwards and credits net of the impact of the future reversal of existing taxable temporary differences because it is more likely than not that these assets will not be realized.

The Company also has net operating loss carryforwards in foreign jurisdictions. These net operating losses total approximately $216.4 million (which expire, depending on the jurisdiction, between 2017 and 2036, or may be carried forward indefinitely). Affinion Holdings and its subsidiaries have concluded that a valuation allowance relating to approximately $216.3 million of these net operating losses is required due to the uncertainty of their realization.

The net operating losses for tax return purposes are different than the net operating losses for financial statement purposes, primarily due to book to tax differences associated with the Section 338 election and uncertain tax positions. The carrying value of Affinion Holdings’ valuation allowance against all of its deferred tax assets at December 31, 2016 and 2015 totaled $551.0 million and $565.8 million, respectively. The decrease in valuation allowance of $14.8 million is attributable to a decrease in the book to tax temporary differences that require a valuation allowance offset by an increase in the valuation allowance attributable to tax attributes (i.e., net operating losses).

With the exception of South African, Italian and Turkish subsidiaries, foreign taxable income is recognized currently for U.S. federal and state income tax purposes because such operations are entities disregarded for U.S. federal and state income tax purposes. The Company does not provide for deferred taxes on the excess of the amount for the tax over the financial reporting basis in its South African, Italian and Turkish subsidiaries because they are permanent in duration. A deferred tax asset is recognized in this circumstance only if it is apparent that the temporary difference will reverse in the foreseeable future. As of December 31, 2017, there is a $16.8 million deficit in retained earnings of the South African, Italian and Turkish subsidiaries.

The effective income tax rate differs from the U.S. federal statutory rate as follows:

 

		For the Year Ended December 31,
		2017				2016				2015
Federal statutory rate			35.0	%			35.0	%			35.0	%
State and local income taxes, net of federal expense			(18.0	)			(3.1	)			12.3
Change in valuation allowance and other			(39.8	)			(0.1	)			(170.1	)
Taxes on foreign operations at rates different than U.S. federal rates			(8.1	)			18.1				1.6
SAB 118 impact of TCJA			60.1				—				—
Impairment of goodwill and other long-lived assets			—				—				8.8
Impact of debt exchanges and subscription rights offering			9.9				(13.7	)			(57.3	)
Foreign taxes deduction			3.2				(6.4	)			—
Foreign tax credit net operating loss reclassification			—				—				17.5
Federal net operating loss adjustments			—				—				145.9
Stock compensation			—				—				7.8
Prior year accrual and adjustments			0.2				0.6				2.1
Non-deductible expenses			(0.3	)			0.6				0.6
			42.2	%			31.0	%			4.2	%

As noted above, the effective tax rate has fluctuated significantly over the last three years. These fluctuations are primarily the results of the 2015 goodwill impairment charges, a change in the valuation allowances due to changes in the corresponding deferred tax balances, and the impacts associated with the debt exchange and subscriptions right offering. The 2016 tax benefit associated with the 2015 debt exchange and subscriptions right offering resulted from a change in the estimated tax relative to the same. The fluctuation for 2017 is primarily the result of the change on deferred tax balance requirements, including valuation allowances, estimated pursuant to SAB 118 in accordance with the TCJA enactment and the impact of the 2017 AGI Exchange Offer. These fluctuations are also the result of the change to a loss before income taxes and non-controlling interest of $42.3 million for the year ended December 31, 2017 compared to income before income taxes and non-controlling interest of $23.7 million and $141.8 million for the years ended December 31, 2016 and 2015, respectively.

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

The Company was granted a 50% tax holiday in the Swiss canton of Vaud in 2013. The tax holiday is valid for cantonal purposes from the 2012 start date until the end of the 2017 tax period. The Company is currently subject to Cantonal law.

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The Company recognized $(0.2) million, $(0.1) million and $(0.4) million of interest in income tax expense related to uncertain tax positions arising in 2017, 2016 and 2015, respectively. The Company’s gross unrecognized tax benefits decreased by $1.6 million, increased by $11.0 million and decreased by $0.7 million for the years ended December 31, 2017, 2016 and 2015, respectively, as a result of tax positions for the applicable year.

A reconciliation of the beginning and ending amount of tax reserves for uncertain tax positions for the years ended December 31, 2017, 2016 and 2015 is as follows:

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Unrecognized tax benefits – January 1		$	6.6			$	(4.4	)		$	(3.7	)
Gross increase – prior period tax positions			—				11.3				—
Gross decrease – prior period tax positions			(2.1	)			—				—
Gross increase – current period tax positions			0.7				0.2				0.4
Gross decrease – current period tax positions			(0.2	)			(0.5	)			(1.1	)
Unrecognized tax benefits – December 31		$	5.0			$	6.6			$	(4.4	)

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. During 2017, income tax waivers were executed in certain states that extend the period subject to examination beyond the period prescribed by statute. There are no significant changes anticipated in accordance with the extension of the income tax statutes in these jurisdictions. 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.

12. 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.

 

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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 and the court of appeals held oral arguments on October 27, 2017. A decision has not yet been issued.

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 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 against Webloyalty and its former client under CUTPA and the EFT. The District Court of Connecticut held a scheduling conference on March 23, 2017, but has not yet issued a case schedule. The defendants have answered the complaint and denied any liability.

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, 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 matter is now in discovery.

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

 

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(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

agreement with Cendant, the Cendant Entities (as such terms are defined in Note 15 to these audited consolidated financial statements) have agreed to indemnify us for any liability relating to this matter. Plaintiffs served their First Set of Requests for Production of Documents and Things on December 29, 2017.

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 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.

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 $8.7 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 December 31, 2017, all of the compensation to consumers had been paid.

During the year ended December 31, 2017, a charge of $23.2 million was recorded relating to an external gift card cyber theft. 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.

 

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(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 December 31, 2017, the Company provided guarantees for surety bonds totaling approximately $9.9 million and issued letters of credit totaling $7.3 million.

Leases

The Company has noncancelable operating leases covering various facilities and equipment. Rent expense totaled $17.5 million, $17.1 million and $17.6 million for the years ended December 31, 2017, 2016 and 2015. At each of December 31, 2017 and 2016, the Company has accrued $0.9 million, included in other long-term liabilities on the consolidated balance sheets, in connection with asset retirement obligations relating to its leased facilities.

Future minimum lease payments required under non-cancelable operating leases, net of sublease receipts, as of December 31, 2017 are as follows:

 

		Amount
		(in millions)
2018		$	19.6
2019			18.0
2020			16.0
2021			13.9
2022			12.6
Thereafter			11.5
Future minimum lease payments		$	91.6

13. STOCK-BASED COMPENSATION

In connection with the closing of the Apollo Transactions 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, $0.01 par value per share (the “Class C Common Stock”), and Affinion Holdings’ Class D Common Stock, $0.01 par value per share (the “Class D Common Stock” and, together with the Class C Common Stock, the “Class C/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, as defined below, 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.

 

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(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 (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. Immediately prior to the Reclassification, Affinion Holdings’ Series A Warrants (the “Series A Warrants”) were mandatorily cashlessly exercised for shares of Affinion Holdings’ then existing Class A Common Stock, par value $0.01 per share (the “Class A Common Stock”), and Affinion Holdings’ Series B Warrants (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.

On November 9, 2015, 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 December 31, 2017, there were 776,250 options outstanding.

For employee stock awards, the Company recognizes compensation expense 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 recognizes forfeitures as they occur. 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 year ended December 31, 2016, the Compensation Committee granted options to employees under the 2015 Plan to purchase 0.9 million shares of Affinion Holdings’ Common Stock. 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. There were no options granted to employees under the 2015 Plan during the year ended December 31, 2017.

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			—

 

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(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

A summary of option activity for options to acquire shares of Class C/D Common Stock under the 2005 Plan for each annual period during the three years ended December 31, 2017 is presented below (number of options in thousands):

 

		2005 Plan Grants to Employees -Tranche A				2005 Plan Grants to Employees -Tranche B				2005 Plan Grants to Employees -Tranche C				Grants to Board of Directors				2007 Plan Grants to Employees
Outstanding options at January 1, 2015			1,109				554				554				383				4,003
Granted			—				—				—				—				—
Exercised			—				—				—				—				—
Forfeited or expired			(209	)			(106	)			(106	)			—				(435	)
Cancelled			—				—				—				(107	)			(3,568	)
Reclassification adjustment			(893	)			(445	)			(445	)			(274	)			—
Outstanding options at December 31, 2015			7				3				3				2				—
Granted			—				—				—				—				—
Exercised			—				—				—				—				—
Forfeited or expired			(5	)			(2	)			(2	)			(1	)			—
Outstanding options at December 31, 2016			2				1				1				1				—
Granted			—				—				—				—				—
Exercised			—				—				—				—				—
Forfeited or expired			—				—				—				—				—
Outstanding options at December 31, 2017			2				1				1				1				—
Vested or expected to vest at December 31, 2017			2				1				1				1				—
Exercisable options at December 31, 2017			2				1				1				1				—
Weighted average remaining contractual term (in years)			6.3				6.3				6.3				6.3				—
Weighted average grant date fair value per option granted in 2017		$	—			$	—			$	—			$	—			$	—
Weighted average exercise price of exercisable options at December 31, 2017		$	147.12			$	147.12			$	147.12			$	147.12			$	—
Weighted average exercise price of outstanding options at December 31, 2017		$	147.12			$	147.12			$	147.12			$	147.12			$	—

A summary of option activity for options to acquire shares of Common Stock granted under the 2015 Plan for the years ended December 31, 2017 and 2016 is presented below (number of options in thousands):

 

Outstanding options at January 1, 2016			—
Granted			888
Exercised			—
Forfeited or expired			(14	)
Outstanding options at December 31, 2016			874
Granted			—
Exercised			—
Forfeited or expired			(98	)
Outstanding options at December 31, 2017			776
Vested or expected to vest at December 31, 2017			776
Exercisable options at December 31, 2017			208
Weighted average remaining contractual term (in years)			8.2
Weighted average grant date fair value per option granted in 2017		$	—
Weighted average exercise price of exercisable options at December 31, 2017		$	13.97
Weighted average exercise price of outstanding options at December 31, 2017		$	13.97

 

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(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Based on the estimated fair values of options granted, stock-based compensation expense for the year ended December 31, 2017, 2016 and 2015 totaled $1.7 million, $1.6 million and $2.2 million, respectively. As of December 31, 2017, there was $3.9 million of unrecognized compensation cost related to unvested stock options, which will be recognized over a weighted average period of approximately 1.2 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 3/12^ths as of the date of grant and an additional 1/12^th vested on March 31, 2016 and 1/12^th vested on the last day of the next eight months, until November 30, 2016. 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. As these awards will be settled in shares of Affinion Holdings’ common stock, the Company has accounted for these RSUs as an equity award.

On October 24, 2017, six of the non-employee directors were granted RSUs under the 2015 Plan as a component of their annual compensation, however one of the non-employee directors waived receipt of such RSUs. Pursuant to the restricted stock unit agreement entered into with each director, each such director has been awarded 9,804 restricted stock units, (i) three-fourths (3/4) of which vested on the date of grant and (ii) the remaining one-fourth (1/4) vested in equal installments on each of October 31, 2017, November 30, 2017 and December 31, 2017, respectively. 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 December 18, 2017, RSUs were granted under the 2015 Plan in consideration of the Board service of the non-employee director who waived receipt of the October 24, 2017 award of RSUs as described above. Pursuant to the restricted stock unit agreement entered into, 9,804 restricted stock units were awarded, (i) 11/12ths of which vested on the date of grant and (ii) the remaining 1/12th vested on December 31, 2017. Each vested restricted stock unit will be settled by the delivery of one share of common stock of Affinion Holdings on the earlier to occur of (A) a “Change in Control” or (B) the third anniversary of the date of grant.

A summary of RSU activity under the 2015 Plan for the years ended December 31, 2017 and 2016 is presented below (number of RSUs in thousands):

 

		Number of Restricted Stock Units				Weighted Average Grant Date Fair Value
Outstanding restricted unvested awards at January 1, 2016			—
Granted			20			$	13.97
Vested			(20	)			13.97
Forfeited			—
Outstanding restricted unvested awards at December 31, 2016			—
Granted			59				7.14
Vested			(59	)			7.14
Forfeited			—
Outstanding restricted unvested awards at December 31, 2017			—

Based on the estimated fair value of the RSUs granted, stock-based compensation expense for the year ended December 31, 2017, 2016 and 2015 was $0.4 million, $0.3 million and $0.3 million, respectively. As of December 31, 2017, there was no unrecognized compensation cost related to the RSU awards.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 year ended December 31, 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 years ended December 31, 2017, 2016 and 2015, the Company recognized expense related to the 2015 Retention Program of $0.7 million, $3.6 million and $3.1 million, respectively, of which $0.4 million, $1.8 million and $1.6 million, respectively, related to the common stock portion of the Retention Awards.

14. EMPLOYEE BENEFIT PLANS

The Company sponsors a domestic defined contribution savings plan that provides certain eligible employees an opportunity to accumulate funds for retirement. Under the domestic 401(k) defined contribution plan, the Company matched the contributions of participating employees based on 100% of the first 4% of the participating employee’s contributions up to 4% of the participating employee’s salary. The Company also sponsors certain other international defined contribution retirement plans that are customary in each local country. Under these local country defined contribution plans, the Company contributes between 6% and 10% of each participating employee’s salary or as otherwise provided by the plan. The Company recorded aggregate defined contribution plan expense of $5.9 million, $6.2 million and $6.6 million for the years ended December 31, 2017, 2016 and 2015, respectively.

The Company sponsors certain other international defined benefit retirement plans that are customary in each local country, including a multi-employer plan in one country. Under these local country defined benefit pension plans, benefits are based on a percentage of an employee’s final average salary or as otherwise described by the plan. These plans are not material, individually or in the aggregate, to the consolidated financial statements.

15. RELATED PARTY TRANSACTIONS

Post-Closing Relationships with Cendant

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.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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 Holdings Limited (“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. Of the legal proceedings disclosed in Note 12 to our 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.

Except with respect to the Lion Litigation, in which the Cendant Entities agreed to indemnify us for all losses, for the other matters, Cendant, Affinion and the Company have agreed that losses up to $15.0 million 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 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. Wyndham held a portion of the preferred stock issued in connection with the Apollo Transactions until the preferred stock was redeemed in 2011, and a portion of the warrants issued in connection with the Apollo Transactions until the warrants expired in 2011, while Realogy was subsequently acquired by an affiliate of Apollo and remained an affiliate of Apollo until July 2013. Therefore, for the years ended December 31, 2017, 2016 and 2015, none of the Cendant Entities is a related party.

2017 Exchange Offers, Issuance of New Notes and New Warrants and Redemptions of Other Existing Notes

As discussed in Note 8, 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 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 December 31, 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.

Other Agreements

On October 17, 2005, Apollo entered into a consulting agreement with the Company for the provision of certain structuring and advisory services. The consulting agreement allowed Apollo and its affiliates to provide certain advisory services for a period of twelve years or until Apollo owned less than 5% of the beneficial economic interests of the Company, whichever was earlier. The agreement could be terminated earlier by mutual consent. The Company was required to pay Apollo an annual fee of $2.0 million for these services commencing in 2006. On January 14, 2011, the Company and Apollo entered into an Amended and Restated Consulting Agreement (“Consulting Agreement”), pursuant to which Apollo and its affiliates would continue to provide Affinion with certain advisory services on substantially the same terms as the previous consulting agreement, except that the annual fee paid by Affinion increased to $2.6 million from $2.0 million, commencing January 1, 2012, with an additional one-time fee of $0.6 million which was paid in January 2011 in respect of calendar year 2011. In connection with the December 2013 refinancing of Affinion’s 2006 senior subordinated notes and Affinion Holdings’ 2010 senior notes, Apollo and the Company further amended the consulting agreement, pursuant to which Apollo would not be paid any fees due under the consulting agreement until such time as none of Affinion

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Holdings’ 2013 senior notes remained outstanding. If a transaction was consummated involving a change of control or an initial public offering, then, in lieu of the annual consulting fee and subject to certain qualifications, Apollo could have elected to receive a lump sum payment equal to the present value of all consulting fees payable through the end of the term of the consulting agreement.

In addition, the Company would have been required to pay Apollo a transaction fee if it engaged in any merger, acquisition or similar transaction. The Company would also indemnify Apollo and its affiliates and their directors, officers and representatives for potential losses relating to the services to be provided under the consulting agreement.

In connection with the 2015 Exchange Offers and 2015 Rights Offering, each of the parties to the Consulting Agreement entered into a termination agreement for no additional consideration. As a result of the termination of the consulting agreement, the Company has no obligation to pay Apollo any previously accrued and unpaid amounts for prior services rendered under the consulting agreement. During the year ended December 31, 2015, the Company recognized an expense reduction of $2.6 million, which is included in general and administrative expenses in the accompanying consolidated statements of comprehensive income (loss) for the year ended December 31, 2015. There was no expense recognized related to this consulting agreement for the years ended December 31, 2017 and 2016.

In July 2014, Novitex Enterprise Solutions (“Novitex”), a document outsourcing provider owned by affiliates of Apollo, commenced providing administrative services to the Company. In addition, in June 2015, Novitex assumed responsibility for the performance and management of the Company’s domestic print and mailing operations. During the year ended December 31, 2015, the Company recognized expenses of $3.1 million, which are included in general and administrative expenses in the accompanying consolidated statements of comprehensive income (loss) for the year ended December 31, 2015. In connection with the transfer of responsibility for performance and management of the Company’s domestic print and mailing operations, the Company also recognized a reduction of operating expense of $1.0 million for the year ended December 31, 2015 for usage of certain equipment by Novitex and during the year ended December 31, 2015 also sold certain assets to Novitex for $0.1 million and recognized a gain of less than $0.1 million. As a result of the 2015 Exchange Offers and 2015 Rights Offering consummated on November 9, 2015, Novitex was not a related party during the years ended December 31, 2017 and 2016.

SkyMall Ventures LLC (now known as Connexions SM Ventures, LLC), which was acquired by the Company in September 2014, provides fulfillment services to Caesar’s Entertainment Corporation (“Caesar’s”), which is owned by an affiliate of Apollo. During the year ended December 31, 2015, the Company recognized revenues, net of the cost to acquire the merchandise and gift cards, of $0.9 million, which are included in net revenues in the accompanying consolidated statements of comprehensive income (loss) for the year ended December 31, 2015. As a result of the 2015 Exchange Offers and 2015 Rights Offering consummated on November 9, 2015, Caesar’s was not a related party during the years ended December 31, 2017 and 2016.

During the year ended December 31, 2015, the Company sold its investment in Prospectiv Direct, LLC for cash proceeds of $0.1 million, shares of common stock of the buyer valued at $0.2 million and receivables of $0.7 million, which was recorded at its estimated net realizable value of $0.4 million. In connection with the sale, the Company recognized a gain of $0.7 million during the year ended December 31, 2015 and also recognized revenue of $0.2 million related to the settlement of future royalty income due to the Company.

On January 28, 2010, the Company acquired an ownership interest of approximately 5%, subsequently reduced to approximately 2.9%, in Alclear Holdings, LLC (“Alclear”) for $1.0 million. A family member of one of the Company’s directors, at that time, controls and partially funded Alclear and serves as its chief executive officer. In March 2015, the Company sold its ownership interest in Alclear to certain existing members of Alclear who are not related parties or otherwise affiliated with the Company for $1.5 million, and the related gain of $0.5 million is included in other income, net in the accompanying consolidated statement of comprehensive income (loss) for the year ended December 31, 2015. The Company continued to provide support services to Alclear and recognized revenue of $0.4 million for the year ended December 31, 2015. The master services agreement was terminated on April 1, 2016. The Company provided transition services to Alclear until August 1, 2016. As a result of the 2015 Exchange Offers and 2015 Rights Offering consummated on November 9, 2015, Alclear was not a related party during the years ended December 31, 2017 and 2016.

On May 8, 2013, in connection with his resignation as Chief Executive Officer of Global Retail Services and Co-President of Affinion, Mr. Richard J. Fernandes entered into a consulting agreement with Trilegiant Corporation, a wholly-owned subsidiary of the Company, effective May 13, 2013, pursuant to which he would continue working with the Company until the one-year anniversary of such resignation. The contract was subsequently amended to extend the term on a month-to-month basis and the contract could be

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

terminated by either party upon thirty days written notice. Mr. Fernandes provided certain consulting services to the Company on a part-time basis and received a fee of $7,500 per month, subject to increase depending on the level of consulting services provided. The agreement also provided for reimbursement of Mr. Fernandes’ out-of-pocket business and travel expenses and for his healthcare insurance costs during the contract period. The consulting agreement was terminated during the fourth quarter of 2015.

16. FINANCIAL INSTRUMENTS

As disclosed in Note 2—Summary of Significant Accounting Policies, 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 December 31, 2017.

 

		2018				2019				2020				2021				2022				2023 and Thereafter				Total				Fair Value At December 31, 2017
		(in millions)
Fixed rate debt		$	0.5			$	0.3			$	0.3			$	—			$	595.3			$	—			$	596.4			$	530.6
Average interest rate			14.11	%			14.86	%			15.50	%			15.50	%			15.50	%
Variable rate debt		$	13.4			$	28.5			$	58.6			$	67.0			$	1,217.5			$	—			$	1,385.0			$	1,421.9
Average interest rate (a)			9.17	%			9.17	%			9.17	%			9.17	%			9.17	%

 

(a)	Average interest rate is based on rates in effect at December 31, 2017.

Foreign Currency Forward Contracts

Through April 30, 2017, on a limited basis the Company has 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 have been entered into to mitigate the Company’s foreign currency exposures related to intercompany loans which are not expected to be repaid within the next twelve months and that are denominated in Euros and British pounds. The Company has not entered into such contracts subsequent to April 2017.

During the years ended December 31, 2017, 2016 and 2015, the Company recognized a realized loss of $1.3 million and realized gains of $4.1 million and $4.2 million, respectively, on the forward contracts.

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, prepaid commissions and interest rate swaps. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties. Receivables are due from various marketing, insurance and business partners and the Company maintains an allowance for losses, based upon expected collectability.

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 December 31, 2017 and 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 December 31, 2017 and 2016 is based upon available information for debt having similar terms and risks. The fair value of the publicly-traded debt is the published market price per unit multiplied by the number of units held or issued without consideration of transaction costs. The fair value of the non-publicly-traded debt, substantially all of which is variable-rate debt, is based on third party indicative valuations and estimates prepared by the Company after consideration of the creditworthiness of the counterparties.

 

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(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

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. The Company did not have any foreign currency forward contracts as of December 31, 2017.

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 December 31, 2017 and 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).

17. 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 EBITDA of the Company’s four reportable segments does not include general corporate expenses. General corporate expenses include costs and expenses that are of a general corporate nature or managed on a corporate basis. 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. 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, 2017.

Net Revenues

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Global Loyalty		$	225.1			$	167.0			$	171.0
Global Customer Engagement			359.3				386.3				418.2
Insurance Solutions			229.3				227.8				231.8
Subtotal			813.7				781.1				821.0
Legacy Membership and Package			139.4				189.4				350.0
Eliminations			—				(1.1	)			(1.2	)
		$953.1				$969.4				$1,169.8

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Inter-segment net revenues were not significant to the net revenues of any one segment.

Segment EBITDA

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Global Loyalty		$	64.0			$	56.4			$	60.9
Global Customer Engagement			55.7				71.1				58.5
Insurance Solutions			78.3				77.9				70.1
Subtotal			198.0				205.4				189.5
Legacy Membership and Package			39.9				40.9				86.3
Corporate			(50.3	)			(56.6	)			(57.3	)
Impairment of goodwill and other long-lived assets			—				—				(93.2	)
		$187.6				$189.7				$125.3

Provided below is a reconciliation of Segment EBITDA to income from operations.

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Segment EBITDA		$	187.6			$	189.7			$	125.3
Depreciation and amortization			(46.8	)			(56.7	)			(89.8	)
Income from operations		$	140.8			$	133.0			$	35.5

Depreciation and Amortization

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Global Loyalty		$	16.8			$	17.0			$	20.5
Global Customer Engagement			27.2				36.5				46.8
Insurance Solutions			1.6				1.9				4.7
Subtotal			45.6				55.4				72.0
Legacy Membership and Package			1.2				1.3				17.8
Total Depreciation and Amortization		$	46.8			$	56.7			$	89.8

Segment Assets

 

		December 31,
		2017				2016
		(in millions)
Global Loyalty		$	354.7			$	305.6
Global Customer Engagement			243.6				259.6
Insurance Solutions			129.3				124.7
Subtotal			727.6				689.9
Legacy Membership and Package			23.2				26.2
Corporate			16.1				22.8
Total Assets		$	766.9			$	738.9

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

Capital Expenditures

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
Global Loyalty		$	14.7			$	8.3			$	11.1
Global Customer Engagement			21.5				23.1				21.0
Insurance Solutions			1.5				1.4				0.5
Subtotal			37.7				32.8				32.6
Legacy Membership and Package			—				—				—
Corporate			0.4				1.5				(1.2	)
Total Capital Expenditures		$	38.1			$	34.3			$	31.4

Total Revenues

 

		For the Year Ended December 31,
		2017				2016				2015
		(in millions)
U.S.		$	680.9			$	674.2			$	830.3
U.K.			115.2				121.5				150.8
Other			157.0				173.7				188.7
Total Revenues		$	953.1			$	969.4			$	1,169.8

Total Assets

 

		December 31,
		2017				2016
		(in millions)
U.S.		$	543.4			$	537.6
U.K.			114.6				100.7
Other			108.9				100.6
Total Assets		$	766.9			$	738.9

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

18. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Provided below is unaudited selected quarterly financial data for 2017 and 2016:

 

		First				Second				Third				Fourth
		Quarter				Quarter				Quarter				Quarter
		(in millions, except per share data)
2017
Net revenues		$	241.1			$	237.3			$	243.2			$	231.5
Marketing and commissions		$	77.9			$	76.5			$	76.1			$	77.7
Operating costs		$	89.4			$	106.1			$	83.4			$	83.2
General and administrative		$	24.3			$	26.3			$	22.6			$	20.6
Facility exit costs		$	0.1			$	1.4			$	(1.2	)		$	1.1
Depreciation and amortization		$	11.3			$	11.6			$	12.0			$	11.9
Net income (loss)		$	8.1			$	(25.1	)		$	(10.8	)		$	3.4
Earnings (loss) per share attributable to common stockholders
Basic		$	0.85			$	(2.23	)		$	(0.80	)		$	0.24
Diluted		$	0.85			$	(2.23	)		$	(0.80	)		$	0.24
2016
Net revenues		$	254.9			$	244.0			$	238.1			$	232.4
Marketing and commissions		$	88.1			$	84.7			$	81.6			$	81.3
Operating costs		$	86.8			$	82.7			$	78.5			$	79.2
General and administrative		$	32.1			$	27.9			$	27.2			$	28.8
Facility exit costs		$	—			$	—			$	0.1			$	0.7
Depreciation and amortization		$	14.3			$	13.9			$	13.7			$	14.8
Net income (loss)		$	2.9			$	7.3			$	7.5			$	(1.4	)
Earnings (loss) per share attributable to common stockholders
Basic		$	0.30			$	0.79			$	0.80			$	(0.15	)
Diluted		$	0.30			$	0.79			$	0.80			$	(0.15	)

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

19. GUARANTOR/NON-GUARANTOR SUPPLEMENTAL FINANCIAL INFORMATION

The following supplemental consolidating financial information presents, in separate columns, the consolidating balance sheets as of December 31, 2017 and 2016, and the related consolidating statements of operations and cash flows for the years ended December 31, 2017, 2016 and 2015 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, (iv) the Non-Guarantor Subsidiaries (Affinion Holdings’ subsidiaries that do not guarantee the New Notes) on a combined basis and (v) 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.

During 2017, Affinion consummated the 2017 Exchange Offers, Issuance of New Notes and New Warrants and Redemptions of Other Existing Notes. Under the indenture governing the New Notes, the Company and certain domestic and international subsidiaries of Affinion guarantee the New Notes. Accordingly, the Company has recast its previously reported December 31, 2016 condensed consolidating balance sheet and statements of operations and cash flows for the years ended December 31, 2016 and 2015 to reflect the guarantors and non-guarantors under the New Notes.

During the preparation of the condensed consolidating financial information of the Company and its subsidiaries for the year ended December 31, 2017, it was determined that the Guarantors and Non-Guarantors investment in subsidiaries and equity reflected in the December 31, 2016 condensed consolidating balance sheet presented as the comparative balance sheet in the Company’s Form 10-Q for the quarters ended June 30, 2017 and September 30, 2017 were improperly calculated. As presented in the June 30, 2017 Form 10-Q and the September 30, 2017 Form 10-Q, the Guarantors December 31, 2016 investments in subsidiaries and equity were overstated by $431.5 million, the Non-Guarantors December 31, 2016 negative carrying amount of subsidiaries, net and equity were understated by $631.0 million and the December 31, 2016 Eliminations of investments in subsidiaries and deficit were understated by $199.5 million. The classification error was eliminated in consolidation, and therefore has no impact on the Company’s consolidated financial condition, results of operations or cash flows and, therefore, is not material to the previously issued financial statements as a whole. The Company has revised the reported amounts for Guarantors, Non-Guarantors and Eliminations in the December 31, 2016 balance sheet to correct for this error.

The supplemental financial information has been presented in lieu of separate financial statements of the guarantors as such separate financial statements are not considered meaningful.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2017

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	—			$	4.4			$	15.4			$	20.0			$	—			$	39.8
Restricted cash			—				0.8				18.4				5.6				—				24.8
Receivables, net			—				3.0				118.8				33.8				—				155.6
Profit-sharing receivables from insurance carriers			—				—				23.4				—				—				23.4
Prepaid commissions			—				—				34.5				6.4				—				40.9
Other current assets			—				23.9				32.6				11.1				—				67.6
Total current assets			—				32.1				243.1				76.9				—				352.1
Property and equipment, net			—				4.6				98.0				5.8				—				108.4
Contract rights and list fees, net			—				—				18.8				—				—				18.8
Goodwill			—				—				187.7				37.0				—				224.7
Other intangibles, net			—				—				29.8				4.2				—				34.0
Investment in subsidiaries			—				2,648.7				54.5				—				(2,703.2	)			—
Intercompany loan receivable			—				355.5				—				5.0				(360.5	)			—
Intercompany receivables			33.7				—				2,663.5				—				(2,697.2	)			—
Other non-current assets			—				0.5				27.1				1.3				—				28.9
Total assets		$	33.7			$	3,041.4			$	3,322.5			$	130.2			$	(5,760.9	)		$	766.9
Liabilities and Deficit
Current liabilities:
Current portion of long-term debt		$	—			$	13.4			$	0.5			$	—			$	—			$	13.9
Accounts payable and accrued expenses			3.7				80.3				193.0				48.5				—				325.5
Deferred revenue			—				—				45.4				6.1				—				51.5
Income taxes payable			—				0.4				0.9				1.9				—				3.2
Total current liabilities			3.7				94.1				239.8				56.5				—				394.1
Long-term debt , net			—				1,886.7				0.6				—				—				1,887.3
Deferred income taxes			—				0.1				4.9				0.5				—				5.5
Deferred revenue			—				0.2				3.6				0.3				—				4.1
Intercompany loans payable			28.9				—				331.6				—				(360.5	)			—
Intercompany payables			—				2,649.3				—				47.9				(2,697.2	)			—
Other long-term liabilities			—				9.1				21.5				2.9				—				33.5
Negative carrying amount of subsidiaries, net			1,559.7				—				—				—				(1,559.7	)			—
Total liabilities			1,592.3				4,639.5				602.0				108.1				(4,617.4	)			2,324.5
Total Affinion Group Holdings, Inc. (deficit) equity			(1,558.6	)			(1,598.1	)			2,720.5				21.1				(1,143.5	)			(1,558.6	)
Non-controlling interest in subsidiary			—				—				—				1.0				—				1.0
Total (deficit) equity			(1,558.6	)			(1,598.1	)			2,720.5				22.1				(1,143.5	)			(1,557.6	)
Total liabilities and (deficit) equity		$	33.7			$	3,041.4			$	3,322.5			$	130.2			$	(5,760.9	)		$	766.9

 

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2016

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor 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
Other current assets			—				11.8				42.5				16.3				—				70.6
Total current assets			1.5				23.5				232.0				66.0				—				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				67.1				—				(2,463.7	)			—
Intercompany loan receivable			—				169.1				—				—				(169.1	)			—
Intercompany receivables			16.2				—				2,358.3				13.0				(2,387.5	)			—
Other non-current assets			—				—				32.3				2.0				—				34.3
Total assets		$	17.7			$	2,594.1			$	3,021.1			$	126.3			$	(5,020.3	)		$	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
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				239.1				57.5				—				392.9
Long-term debt , net			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				—				99.7				40.5				(169.1	)			—
Intercompany payables			—				2,387.5				—				—				(2,387.5	)			—
Other long-term liabilities			—				8.3				21.4				1.7				—				31.4
Negative carrying amount of subsidiaries, net			1,542.8				—				—				—				(1,542.8	)			—
Total liabilities			1,591.4				4,177.5				541.5				100.8				(4,099.4	)			2,311.8
Total Affinion Group Holdings, Inc. (deficit) equity			(1,573.7	)			(1,583.4	)			2,479.6				24.7				(920.9	)			(1,573.7	)
Non-controlling interest in subsidiary			—				—				—				0.8				—				0.8
Total (deficit) equity			(1,573.7	)			(1,583.4	)			2,479.6				25.5				(920.9	)			(1,572.9	)
Total liabilities and (deficit) equity		$	17.7			$	2,594.1			$	3,021.1			$	126.3			$	(5,020.3	)		$	738.9

 

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEAR ENDED DECEMBER 31, 2017

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net revenues		$	—			$	—			$	837.3			$	115.8			$	—			$	953.1
Expenses:
Cost of revenues, exclusive of depreciation and amortization shown separately below:
Marketing and commissions			—				0.2				257.4				50.6				—				308.2
Operating costs			—				42.5				259.8				59.8				—				362.1
General and administrative			0.2				44.7				39.0				9.9				—				93.8
Facility exit costs			—				—				1.4				—				—				1.4
Depreciation and amortization			—				0.6				42.0				4.2				—				46.8
Total expenses			0.2				88.0				599.6				124.5				—				812.3
Income (loss) from operations			(0.2	)			(88.0	)			237.7				(8.7	)			—				140.8
Interest income			—				—				0.1				0.2				—				0.3
Interest income – intercompany			—				0.2				0.1				0.4				(0.7	)			—
Interest expense			(1.1	)			(182.6	)			(2.0	)			(0.8	)			—				(186.5	)
Interest expense – intercompany			(0.7	)			—				—				—				0.7				—
Gain (loss) on extinguishment of debt			—				(6.9	)			10.4				—				—				3.5
Other income, net			—				—				(0.4	)			—				—				(0.4	)
Income (loss) before income taxes and non-controlling interest			(2.0	)			(277.3	)			245.9				(8.9	)			—				(42.3	)
Income tax expense			—				1.9				18.8				(2.8	)			—				17.9
			(2.0	)			(275.4	)			264.7				(11.7	)			—				(24.4	)
Equity in income (loss) of subsidiaries			(23.2	)			252.2				(12.5	)			—				(216.5	)			—
Net income (loss)			(25.2	)			(23.2	)			252.2				(11.7	)			(216.5	)			(24.4	)
Less: net income attributable to non-controlling interest			—				—				—				(0.8	)			—				(0.8	)
Net income (loss) attributable to Affinion Group Holdings, Inc.		$	(25.2	)		$	(23.2	)		$	252.2			$	(12.5	)		$	(216.5	)		$	(25.2	)
Net income (loss)		$	(25.2	)		$	(23.2	)		$	252.2			$	(11.7	)		$	(216.5	)		$	(24.4	)
Currency translation adjustment, net of tax			6.2				6.3				(1.8	)			10.0				(14.4	)			6.3
Comprehensive income (loss)			(19.0	)			(16.9	)			250.4				(1.7	)			(230.9	)			(18.1	)
Less: comprehensive income attributable to non-controlling interest			—				—				—				(0.9	)			—				(0.9	)
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc.		$	(19.0	)		$	(16.9	)		$	250.4			$	(2.6	)		$	(230.9	)		$	(19.0	)

 

F-52

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEAR ENDED DECEMBER 31, 2016

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net revenues		$	—			$	—			$	847.8			$	121.6			$	—			$	969.4
Expenses:
Cost of revenues, exclusive of depreciation and amortization shown separately below:
Marketing and commissions			—				0.2				284.1				51.4				—				335.7
Operating costs			—				43.9				215.4				67.9				—				327.2
General and administrative			0.2				64.8				44.0				7.0				—				116.0
Facility exit costs			—				—				0.8				—				—				0.8
Depreciation and amortization			—				0.4				49.5				6.8				—				56.7
Total expenses			0.2				109.3				593.8				133.1				—				836.4
Income (loss) from operations			(0.2	)			(109.3	)			254.0				(11.5	)			—				133.0
Interest income			—				—				0.4				0.1				—				0.5
Interest income – intercompany			—				—				1.8				0.5				(2.3	)			—
Interest expense			(2.1	)			(104.7	)			(2.1	)			(1.0	)			—				(109.9	)
Interest expense – intercompany			(0.7	)			(1.6	)			—				—				2.3				—
Other income, net			—				—				0.1				—				—				0.1
Income (loss) before income taxes and non-controlling interest			(3.0	)			(215.6	)			254.2				(11.9	)			—				23.7
Income tax expense			—				(0.3	)			(4.0	)			(3.1	)			—				(7.4	)
			(3.0	)			(215.9	)			250.2				(15.0	)			—				16.3
Equity in income (loss) of subsidiaries			18.7				234.6				(15.6	)			—				(237.7	)			—
Net income (loss)			15.7				18.7				234.6				(15.0	)			(237.7	)			16.3
Less: net income attributable to non-controlling interest			—				—				—				(0.6	)			—				(0.6	)
Net income (loss) attributable to Affinion Group Holdings, Inc.		$	15.7			$	18.7			$	234.6			$	(15.6	)		$	(237.7	)		$	15.7
Net income (loss)		$	15.7			$	18.7			$	234.6			$	(15.0	)		$	(237.7	)		$	16.3
Currency translation adjustment, net of tax			(9.5	)			(9.5	)			2.9				(1.4	)			8.1				(9.4	)
Comprehensive income (loss)			6.2				9.2				237.5				(16.4	)			(229.6	)			6.9
Less: comprehensive income attributable to non-controlling interest			—				—				—				(0.7	)			—				(0.7	)
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc.		$	6.2			$	9.2			$	237.5			$	(17.1	)		$	(229.6	)		$	6.2

 

F-53

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME (LOSS)

FOR THE YEAR ENDED DECEMBER 31, 2015

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Net revenues		$	—			$	—			$	1,036.2			$	133.6			$	—			$	1,169.8
Expenses:
Cost of revenues, exclusive of depreciation and amortization shown separately below:
Marketing and commissions			—				—				374.3				74.4				—				448.7
Operating costs			—				—				309.9				75.3				—				385.2
General and administrative			0.1				21.7				81.2				12.6				—				115.6
Impairment of goodwill and other long-lived assets			—				—				93.2				—				—				93.2
Facility exit costs			—				—				1.8				—				—				1.8
Depreciation and amortization			—				0.6				78.4				10.8				—				89.8
Total expenses			0.1				22.3				938.8				173.1				—				1,134.3
Income (loss) from operations			(0.1	)			(22.3	)			97.4				(39.5	)			—				35.5
Interest income			—				—				1.7				0.1				—				1.8
Interest income – intercompany			—				—				30.8				—				(30.8	)			—
Interest expense			(37.0	)			(133.7	)			(43.8	)			(1.1	)			—				(215.6	)
Interest expense – intercompany			(0.7	)			(30.0	)			—				(0.1	)			30.8				—
Gain on debt extinguishment			203.1				115.8				—				—				—				318.9
Other income, net			—				—				1.2				—				—				1.2
Income (loss) before income taxes and non-controlling interest			165.3				(70.2	)			87.3				(40.6	)			—				141.8
Income tax expense			—				(1.5	)			(3.5	)			(0.9	)			—				(5.9	)
			165.3				(71.7	)			83.8				(41.5	)			—				135.9
Equity in income (loss) of subsidiaries			(30.0	)			41.7				(42.1	)			—				30.4				—
Net income (loss)			135.3				(30.0	)			41.7				(41.5	)			30.4				135.9
Less: net income attributable to non-controlling interest			—				—				—				(0.6	)			—				(0.6	)
Net income (loss) attributable to Affinion Group Holdings, Inc.		$	135.3			$	(30.0	)		$	41.7			$	(42.1	)		$	30.4			$	135.3
Net income (loss)		$	135.3			$	(30.0	)		$	41.7			$	(41.5	)		$	30.4			$	135.9
Currency translation adjustment, net of tax			(7.8	)			(7.8	)			(2.5	)			(6.5	)			16.8				(7.8	)
Comprehensive income (loss)			127.5				(37.8	)			39.2				(48.0	)			47.2				128.1
Less: comprehensive income attributable to non-controlling interest			—				—				—				(0.2	)			—				(0.2	)
Comprehensive income (loss) attributable to Affinion Group Holdings, Inc.		$	127.5			$	(37.8	)		$	39.2			$	(48.2	)		$	47.2			$	127.9

 

F-54

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2017

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Operating Activities
Net income (loss)		$	(25.2	)		$	(23.2	)		$	252.2			$	(11.7	)		$	(216.5	)		$	(24.4	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				0.6				42.0				4.2				—				46.8
Amortization of debt discount, financing costs and carrying value adjustment			—				3.1				(3.2	)			—				—				(0.1	)
(Gain) loss on extinguishment of debt			—				6.9				(10.4	)			—				—				(3.5	)
Payment in kind interest			—				41.7				—				—				—				41.7
Provision for (recovery of) accounts receivable loss provided for			—				—				1.5				3.3				—				4.8
Facility exit costs			—				—				1.4				—				—				1.4
Share-based compensation			—				2.5				—				—				—				2.5
Equity in (income) loss of subsidiaries			23.2				(252.2	)			12.5				—				216.5				—
Deferred income taxes			—				(2.1	)			(20.0	)			0.1				—				(22.0	)
Net change in assets and liabilities:
Restricted cash			—				(0.9	)			1.8				0.5				—				1.4
Receivables			—				(0.4	)			(15.2	)			(5.3	)			—				(20.9	)
Profit-sharing receivables from insurance carriers			—				—				(4.5	)			—				—				(4.5	)
Prepaid commissions			—				—				(0.6	)			(5.2	)			—				(5.8	)
Other current assets			—				(12.5	)			11.1				6.7				—				5.3
Contract rights and list fees			—				—				(2.5	)			—				—				(2.5	)
Other non-current assets			—				(0.4	)			6.1				0.7				—				6.4
Accounts payable and accrued expenses			—				(6.0	)			2.0				(6.8	)			—				(10.8	)
Deferred revenue			—				(0.1	)			(5.2	)			(0.1	)			—				(5.4	)
Income taxes receivable and payable			—				—				(0.2	)			—				—				(0.2	)
Other long-term liabilities			—				0.7				(1.4	)			0.9				—				0.2
Other, net			—				(2.7	)			1.0				(1.7	)			—				(3.4	)
Net cash provided by (used in) operating activities			(2.0	)			(245.0	)			268.4				(14.4	)			—				7.0
Investing Activities
Capital expenditures			—				(0.4	)			(36.8	)			(0.9	)			—				(38.1	)
Restricted cash			—				—				0.2				0.4				—				0.6
Acquisition-related payments			—				—				—				(0.4	)			—				(0.4	)
Intercompany receivables and payables			—				(1.2	)			(332.4	)			—				333.6				—
Net cash used in investing activities			—				(1.6	)			(369.0	)			(0.9	)			333.6				(37.9	)
Financing Activities
Borrowing (repayments) under line of credit, net			—				55.0				—				—				—				55.0
Proceeds from issuance of debt			—				1,539.6				—				—				—				1,539.6
Financing costs			—				(29.3	)			—				—				—				(29.3	)
Principal payments on borrowings			(11.6	)			(1,394.4	)			(128.7	)			—				—				(1,534.7	)
Intercompany receivables and payables			11.6				222.5				1.2				98.3				(333.6	)			—
Intercompany loans			—				(151.8	)			234.8				(83.0	)			—				—
Proceeds from issuance of warrants			0.5				—				—				—				—				0.5
Dividend paid to non-controlling interest			—				—				—				(0.7	)			—				(0.7	)
Intercompany dividends			—				0.3				0.7				(1.0	)			—				—
Capital contribution to subsidiary			—				—				(5.9	)			5.9				—				—
Net cash provided by financing activities			0.5				241.9				102.1				19.5				(333.6	)			30.4
Effect of changes in exchange rates on cash and cash equivalents			—				—				1.1				1.5				—				2.6
Net increase (decrease) in cash and cash equivalents			(1.5	)			(4.7	)			2.6				5.7				—				2.1
Cash and cash equivalents, beginning of year			1.5				9.1				12.8				14.3				—				37.7
Cash and Cash Equivalents, End of Year		$	—			$	4.4			$	15.4			$	20.0			$	—			$	39.8

 

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2016

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Operating Activities
Net income (loss)		$	15.7			$	18.7			$	234.6			$	(15.0	)		$	(237.7	)		$	16.3
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				0.4				49.5				6.8				—				56.7
Amortization of debt discount, financing costs and carrying value adjustments			—				(23.0	)			(8.4	)			—				—				(31.4	)
(Recovery of ) provision for loss on accounts receivable			—				—				0.2				—				—				0.2
Facility exit costs			—				—				0.8				—				—				0.8
Share-based compensation			—				3.7				—				—				—				3.7
Equity in (income) loss of subsidiaries			(18.7	)			(234.6	)			15.6				—				237.7				—
Deferred income taxes			—				0.4				2.7				(0.7	)			—				2.4
Net change in assets and liabilities:
Restricted cash			—				—				(0.1	)			—				—				(0.1	)
Receivables			—				(0.7	)			(25.9	)			1.0				—				(25.6	)
Profit-sharing receivables from insurance carriers			—				—				1.0				—				—				1.0
Prepaid commissions			—				—				3.6				0.1				—				3.7
Other current assets			—				8.5				4.7				(0.7	)			—				12.5
Contract rights and list fees			—				—				0.1				—				—				0.1
Other non-current assets			—				0.2				(2.1	)			1.2				—				(0.7	)
Accounts payable and accrued expenses			2.5				(4.6	)			4.3				(6.6	)			—				(4.4	)
Deferred revenue			—				(0.1	)			(13.2	)			(1.1	)			—				(14.4	)
Income taxes receivable and payable			—				(0.6	)			0.1				0.2				—				(0.3	)
Other long-term liabilities			—				4.9				(0.9	)			(1.0	)			—				3.0
Other, net			—				3.2				0.5				(1.6	)			—				2.1
Net cash provided by (used in) operating activities			(0.5	)			(223.6	)			267.1				(17.4	)			—				25.6
Investing Activities
Capital expenditures			—				(1.5	)			(29.9	)			(2.9	)			—				(34.3	)
Restricted cash			—				—				1.5				0.3				—				1.8
Intercompany receivables and payables			(2.2	)			—				(245.9	)			—				248.1				—
Net cash used in investing activities			(2.2	)			(1.5	)			(274.3	)			(2.6	)			248.1				(32.5	)
Financing Activities
Principal payments on borrowings			—				(7.7	)			(0.1	)			—				—				(7.8	)
Intercompany receivables and payables			—				245.8				—				2.3				(248.1	)			—
Intercompany loans			—				(34.6	)			27.5				7.1				—				(0.0	)
Capital contribution to subsidiary			—				(0.3	)			(13.9	)			14.2				—				(0.0	)
Intercompany dividend			—				—				0.5				(0.5	)			—				—
Dividend paid to non-controlling interest			—				—				—				(0.5	)			—				(0.5	)
Net cash provided by financing activities			—				203.2				14.0				22.6				(248.1	)			(8.3	)
Effect of changes in exchange rates on cash and cash equivalents			—				—				(1.4	)			(1.1	)			—				(2.5	)
Net increase (decrease) in cash and cash equivalents			(2.7	)			(21.9	)			5.4				1.5				(17.7	)			(17.7	)
Cash and cash equivalents, beginning of year			4.2				31.0				7.4				12.8				—				55.4
Cash and Cash Equivalents, End of Year		$	1.5			$	9.1			$	12.8			$	14.3			$	—			$	37.7

 

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Table of Contents

AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2015

(In millions)

 

		Parent				Subsidiary Issuer				Guarantor Subsidiaries				Non- Guarantor Subsidiaries				Eliminations				Consolidated
Operating Activities
Net income (loss)		$	135.3			$	(30.0	)		$	41.7			$	(41.5	)		$	30.4			$	135.9
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			—				0.6				78.4				10.8				—				89.8
Amortization of debt discount, financing costs and carrying value adjustment			3.4				3.0				1.6				(1.2	)			—				6.8
Impairment of goodwill and other long-lived assets			—				—				93.2				—				—				93.2
Gain on extinguishment of debt			(203.1	)			(115.8	)			—				—				—				(318.9	)
Recovery of loss on accounts receivable			—				—				(4.4	)			0.1				—				(4.3	)
Facility exit costs			—				—				1.8				—				—				1.8
Share-based compensation			—				3.0				—				—				—				3.0
Equity in (income) loss of subsidiaries			30.0				(41.7	)			42.1				—				(30.4	)			—
Deferred income taxes			—				0.4				1.7				(0.9	)			—				1.2
Net change in assets and liabilities:
Restricted cash			—				1.6				(1.3	)			5.7				—				6.0
Receivables			—				(0.4	)			2.7				2.5				—				4.8
Receivables from related parties			—				(17.8	)			23.9				—				—				6.1
Profit-sharing receivables from insurance carriers			—				—				8.9				—				—				8.9
Prepaid commissions			—				—				10.4				(1.1	)			—				9.3
Other current assets			—				(8.7	)			13.8				5.2				—				10.3
Contract rights and list fees			—				—				(0.2	)			—				—				(0.2	)
Other non-current assets			—				0.1				(10.2	)			3.7				—				(6.4	)
Accounts payable and accrued expenses			29.3				8.5				(40.7	)			(12.3	)			—				(15.2	)
Payables to related parties			1.4				(1.4	)			(0.2	)			—				—				(0.2	)
Deferred revenue			—				0.4				(21.4	)			1.2				—				(19.8	)
Income taxes receivable and payable			—				0.3				0.4				(0.5	)			—				0.2
Other long-term liabilities			—				0.2				(5.5	)			0.3				—				(5.0	)
Other, net			—				2.0				2.8				(1.7	)			—				3.1
Net cash provided by (used in) operating activities			(3.7	)			(195.7	)			239.5				(29.7	)			—				10.4
Investing Activities
Capital expenditures			—				1.2				(28.2	)			(4.4	)			—				(31.4	)
Acquisition-related payments, net of cash acquired			—				—				(1.7	)			—				—				(1.7	)
Proceeds from sale of an investment			—				—				1.5				—				—				1.5
Restricted cash			—				—				0.6				(1.2	)			—				(0.6	)
Intercompany receivables and payables			—				—				(299.9	)			0.6				299.3				—
Net cash provided by (used in) investing activities			—				1.2				(327.7	)			(5.0	)			299.3				(32.2	)
Financing Activities
Repayments under revolving credit facility, net			—				(5.0	)			—				—				—				(5.0	)
Proceeds from issuance of debt			—				—				110.0				—				—				110.0
Financing costs			—				(14.7	)			—				—				—				(14.7	)
Principal payments on borrowings			(32.3	)			(10.3	)			(0.3	)			—				—				(42.9	)
Intercompany receivables and payables			35.9				197.4				—				66.0				(299.3	)			—
Intercompany loans			—				50.3				(21.4	)			(28.9	)			—				—
Intercompany dividend			—				—				0.7				(0.7	)			—				—
Dividend paid to non-controlling interest			—				—				—				(0.6	)			—				(0.6	)
Net cash provided by financing activities			3.6				217.7				89.0				35.8				(299.3	)			46.8
Effect of changes in exchange rates on cash and cash equivalents			—				—				(0.8	)			(1.1	)			—				(1.9	)
Net increase (decrease) in cash and cash equivalents			(0.1	)			23.2				—				—				—				23.1
Cash and cash equivalents, beginning of year			4.3				7.8				7.4				12.8				—				32.3
Cash and Cash Equivalents, End of Year		$	4.2			$	31.0			$	7.4			$	12.8			$	—			$	55.4

 

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AFFINION GROUP HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Unless otherwise noted, all dollar amounts are in millions, except per share amounts)

 

20. SUBSEQUENT EVENT

On February 8, 2018, the Company acquired one of its top technology partners, Tavisca Solutions (“Tavisca”), a leading provider of innovative technology to the travel industry. Tavisca is headquartered in Pune, India, with a U.S. office in Plano, Texas. The purchase price was approximately $8.5 million, of which approximately $2.0 million was deferred, with certain additional payments to be made by the Company of up to approximately $13.0 million.

 

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