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AFFINION GROUP HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q (this "Form 10-Q") is prepared by Affinion Group Holdings, Inc. Unless otherwise indicated or the context otherwise requires, in this Form 10-Q all references to "Affinion Holdings," the "Company," "we," "our" and "us" refer to Affinion Group Holdings, Inc. and its subsidiaries on a consolidated basis; and all references to "Affinion" refer to our wholly-owned subsidiary, Affinion Group, Inc. The following discussion and analysis of our results of operations and financial condition should be read in conjunction with our audited consolidated financial statements as of December 31, 2013 and 2012, and for the years ended December 31, 2013, 2012 and 2011, included in our Annual Report on Form 10-K for the year ended December 31, 2013 (the "Form 10-K") and with the unaudited condensed consolidated financial statements and related notes thereto presented in this Form 10-Q. Disclosure Regarding Forward-Looking Statements Our disclosure and analysis in this Form 10-Q may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, that are subject to risks and uncertainties. Forward-looking statements give our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify these statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as "anticipate," "estimate," "expect," "project," "intend," "plan," "believe" and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. All statements other than statements of historical facts included in this Form 10-Q that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These forward-looking statements are largely based on our expectations and beliefs concerning future events, which reflect estimates and assumptions made by our management. These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Although we believe our estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control. In addition, management's assumptions about future events may prove to be inaccurate. Management cautions all readers that the forward-looking statements contained in this Form 10-Q are not guarantees of future performance, and we cannot assure any reader that those statements will be realized or the forward-looking events and circumstances will occur. Actual results may differ materially from those anticipated or implied in the forward-looking statements due to the factors listed under "Item 1A. Risk Factors" in our Form 10-K and this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, or MD&A. All forward-looking statements speak only as of the date of this Form 10-Q. We do not intend to publicly update or revise any forward-looking statements as a result of new information, future events or otherwise, except as required by law. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. Introduction The MD&A is provided as a supplement to the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere herein to help provide an understanding of our financial condition, results of our operations and changes in our financial condition. The MD&A is organized as follows: - Overview. This section provides a general description of our business and operating segments, as well as recent developments that we believe are important in understanding our results of operations and financial condition and in anticipating future trends. - Results of operations. This section provides an analysis of our results of operations for the three months ended March 31, 2014 and 2013. This analysis is presented on both a consolidated basis and on an operating segment basis. - Financial condition, liquidity and capital resources. This section provides an analysis of our cash flows for the three months ended March 31, 2014 and 2013 and our financial condition as of March 31, 2014, as well as a discussion of our liquidity and capital resources. - Critical accounting policies. This section discusses certain significant accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application. In addition, we refer you to our audited consolidated financial statements as of December 31, 2013 and 2012, and for the years ended December 31, 2013, 2012 and 2011, included in the Form 10-K for a summary of our significant accounting policies. 25 -------------------------------------------------------------------------------- Overview Description of Business We are a global leader in the designing, marketing and servicing of comprehensive customer engagement and loyalty solutions that enhance and extend the relationship of millions of consumers with many of the largest and most respected companies in the world. We generally partner with these leading companies in two ways: 1) by developing and supporting programs that are natural extensions of our partner companies' brand image and that provide valuable services to their end-customers, and 2) by providing the back-end technological support and redemption services for points-based loyalty programs. Using our expertise in customer engagement, product development, creative design and data-driven targeted marketing, we develop and market programs and services that enable the companies we partner with to generate significant, high-margin incremental revenue, enhance our partners' brand among targeted consumers as well as strengthen and enhance the loyalty of their customer relationships. The enhanced loyalty can lead to increased acquisition of new customers, longer retention of existing customers, improved customer satisfaction rates, and greater use of other services provided by such companies. We refer to the leading companies that we work with to provide customer engagement and loyalty solutions as our marketing partners or clients. We refer to the consumers to whom we provide services directly under a contractual relationship as subscribers, insureds or members. We refer to those consumers that we service on behalf of a third party, such as one of our marketing partners, and with whom we have a contractual relationship as end-customers. We utilize our substantial expertise in a variety of direct engagement media to market valuable products and services to the customers of our marketing partners on a highly targeted, campaign basis. The selection of the media employed in a campaign corresponds to the preferences and expectations the targeted customers have demonstrated for transacting with our marketing partners, as we believe this optimizes response, thereby improving the efficiency of our marketing investment. Accordingly, we maintain significant capabilities to market through direct mail, point-of-sale, direct response television, the internet, inbound and outbound telephony and voice response unit marketing, as well as other media as needed. We design customer engagement and loyalty solutions with an attractive suite of benefits and ease of usage that we believe are likely to interest and engage consumers based on their needs and interests. For example, we provide discount travel services, credit monitoring and identity-theft resolution, AD&D insurance, roadside assistance, various checking account and credit card enhancement services, loyalty program design and management, disaggregated loyalty points redemptions for gift cards, travel and merchandise, as well as other products and services. We believe our portfolio of the products and services that are embedded in our engagement solutions is the broadest in the industry. Our scale, combined with the industry's largest proprietary database, proven marketing techniques and strong marketing partner relationships developed over our 40 year operating history, position us to deliver consistent results in a variety of market conditions. As of December 31, 2013, we had approximately 60 million subscribers and end-customers enrolled in our membership, insurance and package programs worldwide and approximately 150 million customers who received credit or debit card enhancement services or loyalty points-based management services. We organize our business into two operating units: - Affinion North America. Affinion North America comprises our Membership, Insurance and Package, and Loyalty customer engagement businesses in North America. - Membership Products. We design, implement and market subscription programs that provide our members with personal protection benefits and value-added services including credit monitoring and identity-theft resolution services as well as access to a variety of discounts and shop-at-home conveniences in such areas as retail merchandise, travel, automotive and home improvement. - Insurance and Package Products. We market AD&D and other insurance programs and design and provide checking account enhancement programs to financial institutions. These programs allow financial institutions to bundle valuable discounts, protection and other benefits with a standard checking account and offer these packages to customers for an additional monthly fee. - Loyalty Products. We design, implement and administer points-based loyalty programs and, as of December 31, 2013, managed programs representing an aggregate estimated redemption value of approximately $3.1 billion for financial, travel, auto and other companies. We provide our clients with solutions that meet the most popular redemption options desired by their program points holders, including travel services, gift cards, cash back and merchandise, and, in 2013, we facilitated approximately $2.4 billion in redemption volume. We also provide enhancement benefits to major financial institutions in connection with their credit and debit card programs. In addition, we provide and manage turnkey travel services that are sold on a private label basis to provide our clients' customers with direct access to our proprietary travel platform. A marketing partner typically engages us on a fee-for-service contractual basis, where we generate revenue in connection with the volume of redemption transactions. 26 -------------------------------------------------------------------------------- - Affinion International. Affinion International comprises our Membership and Package customer engagement businesses outside North America and a discrete loyalty program benefit provider. We have not offered AD&D or related insurance programs outside North America since 2000. We expect to leverage our current international operational platform to expand our range of products and services, develop new marketing partner relationships in various industries and grow our geographical footprint. Most recently, we have expanded our footprint into Brazil by launching business operations and into Turkey through the acquisition of existing marketing capabilities. We offer our products and services through both retail and wholesale arrangements with our marketing partners as well as through direct-to-consumer marketing. Currently, we primarily provide wholesale services and benefits derived from our credit card registration, credit monitoring and identity-theft resolution products. In the majority of our retail arrangements, we incur the marketing solicitation expenses to acquire new customers for our subscription-based membership, insurance and package enhancement products with the objective of building a base of highly profitable and predictable recurring future revenue streams and cash flows. For our membership, insurance and package enhancement products, these upfront marketing costs are expensed when the costs are incurred in support of a launched campaign. Our membership programs are offered under a variety of terms and conditions. Prospective members are usually offered incentives (e.g. free credit reports or other premiums) and one to three month risk-free trial periods to encourage them to evaluate and use the benefits of membership before the first billing period takes effect. We do not recognize any revenue during the trial period and expense the cost of all incentives and program benefits and servicing costs as incurred. Customers of our membership programs typically pay their subscription fees either annually or monthly. Our membership products may have significant timing differences between the receipt of membership fees for annual members and revenue recognition. Historically, memberships were offered primarily under full money back terms whereby a member could receive a full refund upon cancellation at any time during the current membership term. These revenues were recognized upon completion of the membership term when they were no longer refundable. Depending on the length of the trial period, this revenue may not have been recognized for up to 16 months after the related marketing spend was incurred and expensed. Currently, annual memberships are primarily renewed under pro-rata arrangements in which the member is entitled to a prorated refund for the unused portion of their membership term. This allows us to recognize revenue ratably over the annual membership term. Upon completion of the subscription term, the membership renews under generally the same billing terms in which it originated. Given that we had historically offered a significant amount of subscriptions offering annual terms, our existing base continues to reflect a blend of both monthly and annual terms, and will continue doing so for as long as a substantial percentage of the annual subscribers renew. However, the majority of our recent solicitation activity has been for subscriptions offering monthly terms, and during the three months ended March 31, 2014 and the year ended December 31, 2013, in excess of 95% of our new member and end-customer enrollments were in monthly payment programs. Revenue is recognized monthly under both annual pro rata and monthly memberships, allowing for a better matching of revenues and related servicing and benefit costs when compared to annual full money back memberships. When marketing with a marketing partner, we generally utilize the brand names and customer contacts of the marketing partner in our marketing campaigns. We usually compensate our marketing partners either through commissions based on revenues we receive from members (which we expense in proportion to the revenue we recognize) or up-front marketing payments, commonly referred to as "bounties" (which we expense when incurred). In addition, we enter into arrangements with certain marketing partners where we pay the marketing partners advance commissions which provide the potential for recovery from the marketing partners if certain targets are not achieved. These payments are capitalized and amortized over the expected life of the acquired members. The commission rates that we pay to our marketing partners differ depending on the arrangement we have with the particular marketing partner and the type of media we utilize for a given marketing campaign. In a direct-to-consumer campaign, we invest in a variety of media to generate consumer awareness of our programs and services and stimulate responses from our targeted markets. The media channels we employ in direct-to-consumer include television advertising as well as Internet marketing, such as search engine optimization and related techniques. When marketing directly to the consumer, we generally use our proprietary brands and avoid incurring any commission expense. We serve as an agent and third-party administrator on behalf of a variety of underwriters for the marketing of AD&D and our other insurance products. Free trial periods and incentives are generally not offered with our insurance programs. Insurance program participants typically pay their insurance premiums either monthly or quarterly. We earn revenue in the form of commissions collected on behalf of the insurance carriers and participate in profit-sharing relationships with the carriers that underwrite the insurance policies that we market, where profit is measured by the excess amount of premium remitted to the carrier less the cost for claim activities and any related expenses. Our estimated share of profits from these arrangements is reflected as profit-sharing receivables from insurance carriers on the accompanying unaudited condensed consolidated balance sheets and any changes in estimated profit sharing in connection with the actual claims activities are periodically recorded as an adjustment to net revenue. Insurance revenues are recognized ratably over the insurance period for which a policy is in effect and there are no significant differences between cash flows and related revenue recognition. Revenue from insurance programs is reported net of insurance costs in the accompanying unaudited condensed consolidated statements of comprehensive income. 27 -------------------------------------------------------------------------------- We are currently in the process of transferring a significant portion of our AD&D business to a new carrier. Upon completion, and for any additional portion of the business that is subsequently transferred to this carrier or another carrier under similar terms, we expect to lessen the volatility in our results by setting a fixed distribution of collected premiums, thereby considerably reducing the profit-sharing feature that has historically contributed to fluctuations in our revenues and profitability. Additionally, the new carrier is expected to provide us with opportunities to expand our existing insurance product offerings. In our wholesale arrangements, we provide our products and services as well as customer service and fulfillment related to such products and services to support programs that our marketing partners offer to their customers. In such arrangements, our marketing partners are typically responsible for customer acquisition, retention and collection and generally pay us one-time implementation fees and on-going monthly service fees based on the number of members enrolled in their programs. Implementation fees are recognized ratably over the contract period while monthly service fees are recognized in the month earned. Wholesale revenues also include revenues from transactional activities associated with our programs, such as the sales of additional credit reports, discount shopping or travel purchases by members. The revenues from such transactional activities are recognized in the month earned. We have a highly variable-cost structure because the majority of our expenses are either discretionary in nature or tied directly to the generation of revenue. In addition, we have achieved meaningful operating efficiencies by combining similar functions and processes, consolidating facilities and outsourcing a significant portion of our call center and other back-office processing, particularly with respect to previously acquired businesses. This added flexibility better enables us to deploy our discretionary marketing expenditures globally across our operations to maximize returns. Factors Affecting Results of Operations and Financial Condition Competitive Environment As a leader in the affinity direct marketing industry, we compete with many other organizations, including certain of our marketing partners as well as other benefit providers, to obtain a share of the end-consumer's spending in each of our respective product categories. As an affinity direct marketer, we derive our leads from a marketing partner's contacts, which our competitors also seek access to, and we must therefore generate sufficient earnings per lead for our marketing partners to compete effectively for access to their end-customers. As direct-to-consumer marketers, we compete with any company who offers comparable benefits and services to what we market from our own product portfolio. We compete with companies of varying size, financial strength and availability of resources. Our competitors include marketing solutions providers, financial institutions, insurance companies, consumer goods companies, internet companies and others, as well as direct marketers offering similar programs. Some of our competitors are larger than we are and are able to deploy more resources in their pursuit of the limited target market for our products. We expect these competitive environments to continue in the foreseeable future. Acquisitions On November 14, 2012, the Company entered into, and consummated, a Share Sale and Purchase Agreement ("Agreement") that resulted in the acquisition of Boyner Bireysel Urunler Satis ve Pazarlama A.S ("Back-Up"), a Turkish provider of assistance and consultancy services to its members, and a sister company, Bofis Turizm ve Ticaret A.S. ("Travel"), a Turkish travel agency. In accordance with the Agreement, on November 14, 2012, the Company acquired 90% of the outstanding capital stock of Back-Up and 99.99% of the outstanding capital stock of Travel for an upfront cash payment of approximately $12.5 million and contingent consideration payable ratably on each of the first three anniversaries of the acquisition date aggregating approximately $8.4 million. Back-Up and Travel were owned by Turkey's largest retail group at that time and the Company believes that Back-Up's and Travel's assistance and concierge service model fits well with the Company's global product offerings. The acquisition will enable the Company to expand into Turkey, which the Company deems a key market, given both its size as well as the attractive demographics of its population, and enables the expansion of the Company's product offerings to a new customer base. Financial Industry Trends Historically, financial institutions have represented a significant majority of our marketing partner base. Consumer banking is a highly regulated industry, with various federal, state and international authorities governing various aspects of the marketing and servicing of the products we offer through our financial institution partners. 28 -------------------------------------------------------------------------------- For instance, the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") mandates the most wide-ranging overhaul of financial industry regulation in decades. Dodd-Frank created the Consumer Financial Protection Bureau (the "CFPB") which became operational on July 21, 2011, and has been given authority to regulate all consumer financial products sold by banks and non-bank companies. These regulations have imposed additional reporting, supervisory, and regulatory requirements on our financial institution marketing partners which has adversely affected our business, financial condition and results of operations. In addition, even an inadvertent failure of our financial institution marketing partners to comply with these laws and regulations, as well as rapidly evolving social expectations of corporate fairness, could adversely affect our business or our reputation going forward. Some of our marketing partners have become involved in governmental inquiries that include our products or marketing practices. As a result, certain financial institution marketing partners have, and others could, delay or cease marketing with us, terminate their agreements with us, require us to cease providing services to members or end-consumers, or require changes to our products or services to consumers that could also have a material adverse effect on our business. Partially as a result of these factors, we have experienced a decline in our domestic membership customer base and domestic membership revenues, and we anticipate this trend will continue. In certain circumstances, our financial marketing partners have sought to source and market their own in-house programs, most notably programs that are analogous to our credit card registration, credit monitoring and identity-theft resolution services. As we have sought to maintain our market share in these areas and to continue these programs with our marketing partners, in some circumstances, we have shifted from a retail marketing arrangement to a wholesale arrangement which results in lower net revenue, but unlike our retail arrangement, has no related commission expense, thereby preserving our ability to earn a suitable rate of return on the campaign. During periods of increased interest from our marketing partners for wholesale activity, partially as a result of this trend, we have experienced a revenue reduction in our membership business. Internationally, our package products have been primarily offered by some of the largest financial institutions in Europe. As these banks attempt to increase their own net revenues and margins, we have experienced significant price reductions when our agreements come up for renewal from what we had previously been able to charge these institutions for our programs. We expect this pricing pressure on our international package offerings to continue in the future. Direct-to-Consumer We are allocating an increasing percentage of our domestic marketing investment to the direct-to-consumer channel. We have tested various direct-to-consumer media and we believe we will be able to achieve returns on our investments that are comparable to our traditional channels. Regulatory Environment We are subject to federal and state regulation as well as regulation by foreign authorities in other jurisdictions. Certain laws and regulations that govern our operations include: federal, state and foreign marketing and consumer protection laws and regulations; federal, state and foreign privacy and data protection laws and regulations; federal, state and foreign insurance and insurance mediation laws and regulations; and federal, state and foreign travel laws and regulations. Federal regulations are primarily enforced by the Federal Trade Commission, the Federal Communications Commission and the CFPB. State regulations are primarily enforced by individual state attorneys general and insurance departments. Foreign regulations are enforced by a number of regulatory bodies in the relevant jurisdictions. These regulations primarily impact the means we use to market our programs, which can reduce the acceptance rates of our solicitation efforts, impact our ability to obtain information from our members and end-customers and impact the benefits we provide and how we service our members and end-customers. In addition, new and contemplated regulations enacted by, or marketing partner settlement agreements or consent orders with, the CFPB could impose additional reporting, supervisory and regulatory requirements on, as well as result in inquiries of, us and our marketing partners that could delay or terminate marketing campaigns with certain marketing partners, impact the services and products we provide to consumers, subject us to indemnification obligations under our marketing agreements, and otherwise adversely affect our business, financial condition and results of operations. We incur significant costs to ensure compliance with these regulations; however, we are party to lawsuits, including class action lawsuits, and regulatory investigations involving our business practices which also increase our costs of doing business. See Note 7 to our unaudited condensed consolidated financial statements in "Item 1. Financial Statements." 29-------------------------------------------------------------------------------- Seasonality Historically, seasonality has not had a significant impact on our business. Our revenues are more affected by the timing of marketing programs that can change from year to year depending on the opportunities available and pursued. More recently, in connection with the growth in our loyalty business, we have experienced increasing seasonality in the timing of our cash flows, particularly with respect to working capital. This has been due primarily to the consumer's increasing acceptance and use of certain categories for points redemptions, such as travel services and gift cards. These categories typically present a delay from the time we incur a cash outlay to provision the redemption until we are reimbursed by the client for the activity, and in certain instances, these delays may extend across multiple reporting periods. Redemptions for some categories, such as gift cards, have been weighted more heavily to the end of the year due to consumers' increasing usage of points in connection with seasonal gift giving. Results of Operations Supplemental Data We manage our business using a portfolio approach, meaning that we allocate and reallocate our marketing investments in the ongoing pursuit of the highest and best available returns, allocating our resources to whichever products, geographies and programs offer the best opportunities. With the globalization of our clients, the continued evolution of our programs and services and the ongoing refinement and execution of our marketing allocation strategy, we have developed the following table that we believe captures the way we look at the businesses (subscriber and insured amounts in thousands except per average subscriber and insured amounts). Three Months Ended March 31, 2014 2013Global Average Subscribers, excluding Basic Insureds 40,196 42,579 Annualized Net Revenue Per Global Average Subscriber, excluding Basic Insureds(1) $ 27.49 $ 28.71 Global Membership Subscribers Average Global Retail Subscribers(2) 7,906 9,597 Annualized Net Revenue Per Global Average Subscriber(1) $ 85.08 $ 78.90 Global Package Subscribers and Wholesale Average Global Package Subscribers and Wholesale(2) 28,472 28,947 Annualized Net Revenue Per Global Average Package and Wholesale Subscriber(1) $ 6.78 $ 7.45 Global Insureds Average Supplemental Insureds(2) 3,818 4,035 Annualized Net Revenue Per Supplemental Insured(1) $ 62.67 $ 61.85 Global Average Subscribers, including Basic Insureds 60,556 63,787 (1) Annualized Net Revenue Per Global Average Subscriber and Supplemental Insured are all calculated by taking the revenues as reported for the period and dividing it by the average subscribers or insureds, as applicable, for the period. Quarterly periods are then multiplied by four to annualize this amount for comparative purposes. Upon cancellation of a subscriber or an insured, as applicable, the subscriber's or insured's, as applicable, revenues are no longer recognized in the calculation. (2) Average Global Subscribers and Average Supplemental Insureds for the period are all calculated by determining the average subscribers or insureds, as applicable, for each month in the period (adding the number of subscribers or insureds, as applicable, at the beginning of the month with the number of subscribers or insureds, as applicable, at the end of the month and dividing that total by two) and then averaging that result for the period. A subscriber's or insured's, as applicable, account is added or removed in the period in which the subscriber or insured, as applicable, has joined or cancelled. Wholesale members include end-customers where we typically receive a monthly service fee to support programs offered by our marketing partners. Certain programs historically offered as retail arrangements have switched to wholesale arrangements with lower annualized price points and no commission expense. Basic insureds typically receive $1,000 of AD&D coverage at no cost to the consumer since the marketing partner pays the cost of this coverage. Supplemental insureds are customers who have elected to pay premiums for higher levels of coverage. 30 -------------------------------------------------------------------------------- Segment EBITDA Segment EBITDA consists of income from operations before depreciation and amortization. Segment EBITDA is the measure management uses to evaluate segment performance, and we present Segment EBITDA to enhance your understanding of our operating performance. We use Segment EBITDA as one criterion for evaluating our performance relative to that of our peers. We believe that Segment EBITDA is an operating performance measure, and not a liquidity measure, that provides investors and analysts with a measure of operating results unaffected by differences in capital structures, capital investment cycles and ages of related assets among otherwise comparable companies. However, Segment EBITDA is not a measurement of financial performance under accounting principles generally accepted in the United States ("U.S. GAAP"), and Segment EBITDA may not be comparable to similarly titled measures of other companies. You should not consider Segment EBITDA as an alternative to operating or net income determined in accordance with U.S. GAAP, as an indicator of operating performance or as an alternative to cash flows from operating activities determined in accordance with U.S. GAAP, or as an indicator of cash flows, or as a measure of liquidity. Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 The following table summarizes our consolidated results of operations for the three months ended March 31, 2014 and 2013: Three Months Three Months Ended Ended Increase March 31, 2014 March 31, 2013 (Decrease) Net revenues $ 321.4 $ 347.4 $ (26.0 ) Expenses: Cost of revenues, exclusive of depreciation and amortization shown separately below: Marketing and commissions 125.4 117.7 7.7 Operating costs 108.0 116.2 (8.2 ) General and administrative 50.2 42.2 8.0 Facility exit costs (0.1 ) - (0.1 ) Depreciation and amortization 25.0 29.6 (4.6 ) Total expenses 308.5 305.7 2.8 Income from operations 12.9 41.7 (28.8 ) Interest income 0.1 0.1 - Interest expense (57.6 ) (51.4 ) (6.2 ) Other income (expense), net - 0.1 (0.1 ) Loss before income taxes and non-controlling interest (44.6 ) (9.5) (35.1 ) Income tax expense (4.2 ) (5.1 ) 0.9 Net loss (48.8 ) (14.6 ) (34.2 ) Less: net loss (income) attributable to non-controlling interest (0.1 ) 0.1 (0.2 ) Net loss attributable to Affinion (14.5 ) Group, Inc. $ (48.9 ) $ $ (34.4 ) Summary of Operating Results for the Three Months Ended March 31, 2014 The following is a summary of changes affecting our operating results for the three months ended March 31, 2014. Net revenues decreased $26.0 million, or 7.5%, for the three months ended March 31, 2014 as compared to the same period of the prior year. Net revenues in our North American units decreased $34.6 million primarily from lower retail revenues from a decline in retail member volumes in our Membership business and lower revenue in our Insurance and Package business primarily from a higher cost of insurance and lower Package members. International net revenues increased by $8.6 million primarily from higher retail membership revenue associated with increased members. Segment EBITDA decreased $33.4 million as the impact of the lower net revenues, higher marketing and commissions and higher general and administrative costs was partially offset by lower operating costs. Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013 The following section provides an overview of our consolidated results of operations for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. 31 -------------------------------------------------------------------------------- Net Revenues. During the three months ended March 31, 2014 we reported net revenues of $321.4 million, a decrease of $26.0 million, or 7.5%, as compared to net revenues of $347.4 million in the comparable period of 2013. Net revenues of our Membership Products decreased $27.6 million primarily due to a decline in retail member volumes related to the regulatory challenges facing large financial institution marketing partners with respect to new marketing campaign launches. Revenue also declined from the continued, but anticipated, attrition of the domestic member base of Webloyalty. Insurance and Package Products revenues decreased $5.7 million primarily due to a higher cost of insurance from higher claims experience partially offset by the impact of an increase in average revenue per supplemental insured. Package revenue declined primarily due to the impact of lower average Package members. Loyalty Products net revenues decreased $1.3 million as higher travel revenue was more than offset by lower revenues from the timing of programming fee-based revenue and the mix shift in redemptions. International Products net revenues increased $8.6 million primarily from higher retail membership revenue associated with increased members and a favorable currency impact of $2.1 million. Marketing and Commissions Expense. Marketing and commissions expense increased by $7.7 million, or 6.5%, to $125.4 million for the three months ended March 31, 2014 from $117.7 million for the three months ended March 31, 2013. Marketing and commissions expense increased $10.7 million in our International business primarily from increased spending in our offline retail channel and was partially offset by decreased costs in Membership of $4.6 million primarily attributable to lower commissions from lower retail member volumes. Operating Costs. Operating costs decreased by $8.2 million, or 7.1%, to $108.0 million for the three months ended March 31, 2014 from $116.2 million for the three months ended March 31, 2013. Operating costs decreased $10.7 million in our Membership business primarily due to lower product and servicing costs associated with lower retail member volumes while costs increased $2.0 million in our International business primarily due to higher product and servicing costs from increased members. General and Administrative Expense. General and administrative expense increased by $8.0 million, or 19.0% to $50.2 million for the three months ended March 31, 2014 from $42.2 million for the three months ended March 31, 2013. General and administrative costs increased $8.7 million in our International business primarily from accrued costs associated with certain regulatory matters which were partially offset by lower restructuring and employee related costs. Stock compensation costs increased $2.5 million, primarily the result of modifying a portion of the outstanding stock options by adjusting their exercise price and extending their contractual life. Costs decreased $2.8 million in our Membership business primarily from lower professional fees and lower employee related costs. Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $4.6 million for the three months ended March 31, 2014 to $25.0 million from $29.6 million for the three months ended March 31, 2013, primarily from recording lower amortization of $0.6 million on the intangible assets acquired in connection with the Company's acquisition of the Cendant Marketing Services Division (the "Apollo Transactions") as the majority of those intangibles are amortized on an accelerated basis. This amortization expense is based upon an allocation of values to intangible assets and is being amortized over lives ranging from 3 years to 15 years. In addition, lower amortization expense was recorded in 2014 as compared to 2013 in the amount of $1.9 million related to intangible assets acquired in the Webloyalty acquisition, principally member relationships which are amortized on an accelerated basis. Depreciation expense decreased $0.8 million. Interest Expense. Interest expense increased by $6.2 million, or 12.1%, to $57.6 million for the three months ended March 31, 2014 from $51.4 million for the three months ended March 31, 2013, primarily due to higher interest associated with 2014 borrowings on Affinion's revolving credit facility and higher interest from higher rate debt as a result of the debt exchange completed in the fourth quarter of 2013. Income Tax Expense. Income tax expense decreased by $0.9 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, primarily due to a decrease in the deferred federal and foreign tax liabilities and a decrease in the current foreign tax liabilities for the three months ended March 31, 2014, partially offset by an increase in the current and deferred state tax liabilities for the same period. The Company's effective income tax rates for the three months ended March 31, 2014 and 2013 were (9.4)% and (54.1)%, respectively. The difference in the effective tax rates for the three months ended March 31, 2014 and 2013 is primarily a result of the increase in loss before income taxes from a loss before income taxes and non-controlling interest of $9.5 million for the three months ended March 31, 2013 to a loss before income taxes and non-controlling interest of $44.6 million for the three months ended March 31, 2014 and a decrease in the income tax provision from $5.1 million for the three months ended March 31, 2013 to $4.2 million for the three months ended March 31, 2014. The Company's tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income it earns in those jurisdictions. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. In addition to state and foreign income taxes and related foreign tax credits, the requirement to maintain valuation allowances had the most significant impact on the difference between the Company's effective tax rate and the statutory U.S. federal income tax rate of 35%. 32 -------------------------------------------------------------------------------- Operating Segment Results Net revenues and Segment EBITDA by operating segment are as follows: Three Months Ended March 31, Net Revenues Segment EBITDA(1) Increase Increase 2014 2013 (Decrease) 2014 2013 (Decrease) (in millions) Affinion North America Membership Products $ 116.1 $ 143.7 $ (27.6 ) $ 14.3 $ 23.7 $ (9.4 ) Insurance and Package Products 70.9 76.6 (5.7 ) 21.3 29.2 (7.9 ) Loyalty Products 41.4 42.7 (1.3 ) 15.0 16.7 (1.7 ) Eliminations (0.5 ) (0.5 ) - - - - Total North America 227.9 262.5 (34.6 ) 50.6 69.6 (19.0 ) Affinion International International Products 93.5 84.9 8.6 (7.0 ) 5.8 (12.8 ) Total products 321.4 347.4 (26.0 ) 43.6 75.4 (31.8 ) Corporate - - - (5.7 ) (4.1 ) (1.6 ) Total $ 321.4 $ 347.4 $ (26.0 ) 37.9 71.3 (33.4 ) Depreciation and amortization (25.0 ) (29.6 ) 4.6 Income from operations $ 12.9 $ 41.7 $ (28.8 ) (1) See Segment EBITDA above and Note 11 to the unaudited condensed consolidated financial statements for a discussion of Segment EBITDA and a reconciliation of Segment EBITDA to income from operations. Affinion North America Membership Products. Membership Products net revenues decreased by $27.6 million, or 19.2%, to $116.1 million for the three months ended March 31, 2014 as compared to $143.7 million for the three months ended March 31, 2013. Net revenues decreased primarily due to a decline in retail member volumes related to the regulatory challenges facing large financial institution marketing partners with respect to new marketing campaign launches. Segment EBITDA decreased by $9.4 million, or 39.7%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013. Segment EBITDA decreased as the impact of the lower net revenues of $27.6 million was partially offset by lower marketing and commissions of $4.6 million, lower operating costs of $10.7 million and lower general and administrative costs of $2.8 million. The lower marketing and commissions were primarily the result of reduced commissions principally from lower retail member volumes. Operating costs decreased primarily from lower product and servicing costs associated with the lower retail member volumes. General and administrative costs decreased primarily from lower professional fees and lower employee related costs. Insurance and Package Products. Insurance and Package Products net revenues decreased by $5.7 million, or 7.4%, to $70.9 million for the three months ended March 31, 2014 as compared to $76.6 million for the three months ended March 31, 2013. Insurance revenue decreased approximately $2.6 million primarily due to a higher cost of insurance from higher claims experience partially offset by the impact of an increase in average revenue per supplemental insured. Package revenue decreased approximately $3.1 million primarily due to the impact of lower average Package members. Segment EBITDA decreased by $7.9 million, or 27.1%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 from the lower net revenues and higher marketing and commissions expense. Loyalty Products. Revenues from Loyalty Products decreased by $1.3 million, or 3.0%, for the three months ended March 31, 2014 to $41.4 million as compared to $42.7 million for the three months ended March 31, 2013 as revenue from higher travel volumes was more than offset by lower revenues from the timing of programming fee-based revenue and the mix shift in redemptions. Segment EBITDA decreased by $1.7 million, or 10.2%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013, primarily due to the decrease in net revenue and higher start-up costs for new initiatives. 33-------------------------------------------------------------------------------- Affinion International International Products. International Products net revenues increased by $8.6 million, or 10.1%, to $93.5 million for the three months ended March 31, 2014 as compared to $84.9 million for the three months ended March 31, 2013. Net revenues increased primarily from higher retail membership revenue in both our online and offline acquisition channels associated with increased members. Net revenues were also positively impacted by $2.1 million from weakness in the U.S. dollar. Segment EBITDA decreased by $12.8 million, or 220.7%, for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 as the positive impact of the higher revenue was more than offset by higher marketing and commissions of $10.7 million primarily from increased spending in our offline retail channel, higher operating costs of $2.0 million primarily from higher product and servicing costs associated with the increased membership base and higher general and administrative expenses of $8.7 million as accrued costs associated with certain regulatory matters were partially offset by lower restructuring and employee related costs. Corporate Corporate costs increased by $1.6 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 primarily from higher stock compensation costs which were partially offset by the favorable impact of lower unrealized foreign exchange losses on intercompany borrowings recorded in 2014 as compared to 2013. Financial Condition, Liquidity and Capital Resources Financial Condition-March 31, 2014 and December 31, 2013 Increase March 31, 2014 December 31, 2013 (Decrease) (in millions) Total assets $ 1,363.2 $ 1,368.2 $ (5.0 ) Total liabilities 2,928.1 2,888.0 40.1 Total deficit (1,564.9 ) (1,519.8 ) (45.1 ) Total assets decreased by $5.0 million principally due to a decrease in other intangibles, net of $15.4 million, principally due to amortization expense of $15.3 million. This decrease was partially offset by an increase in cash of $8.3 million (see "-Liquidity and Capital Resources-Cash Flows"). Total liabilities increased by $40.1 million, principally due to an increase in accounts payable and accrued expenses of $28.8 million, principally due to higher accruals for interest and costs associated with certain regulatory matters,. Total deficit increased by $45.1 million, principally due to a net loss attributable to the Company of $48.9 million and foreign currency translation effect of $0.3 million, partially offset by stock-based compensation of $4.0 million. Liquidity and Capital Resources Our primary sources of liquidity on both a short-term and long-term basis are cash on hand and cash generated through operating and financing activities. Our primary cash needs are to service our indebtedness and for working capital, capital expenditures and general corporate purposes. Many of the Company's significant costs are variable in nature, including marketing and commissions. The Company has a great degree of flexibility in the amount and timing of marketing expenditures and focuses its marketing expenditures on its most profitable marketing opportunities. Commissions correspond directly with revenue generated and have been decreasing as a percentage of revenue over the last several years. We believe that, based on our current operations and anticipated growth, our cash on hand, cash flows from operating activities and borrowing availability under Affinion's revolving credit facility will be sufficient to meet our liquidity needs for the next twelve months and in the foreseeable future including quarterly amortization payments on Affinion's term loan facility under Affinion's $1.3 billion amended and restated senior secured credit facility. The term loan facility also requires mandatory prepayments based on excess cash flows as defined in Affinion's amended and restated senior secured credit facility. 34 -------------------------------------------------------------------------------- Affinion Holdings is a holding company, with no direct operations and no significant assets other than the ownership of 100% of the stock of Affinion. Because we conduct our operations through our subsidiaries, our cash flows and our ability to service our indebtedness is dependent upon cash dividends and distributions or other transfers from our subsidiaries. The terms of Affinion's amended and restated senior secured credit facility and the indentures governing Affinion's 2010 senior notes and Affinion's 2013 senior subordinated notes significantly restrict our subsidiaries from paying dividends and otherwise transferring assets to us. The terms of each of these debt instruments provide Affinion with "baskets" that can be used to make certain types of "restricted payments," including dividends or other distributions to us. If Affinion does not have sufficient payment capacity in the baskets with respect to its existing debt agreements in order to make payments to us, we may be unable to service any cash payments on Affinion Holdings' 2010 senior notes or 2013 senior notes. During the years ended December 31, 2012 and 2011, Affinion paid cash dividends to us of $37.0 million and $323.2 million, respectively. Affinion did not pay any cash dividends to us during the year ended December 31, 2013 or the three months ended March 31, 2014. On November 13, 2013, Affinion loaned $18.9 million to Affinion Holdings to be utilized by Affinion Holdings to make the November 2013 interest payments on its 2010 senior notes. Although we historically have a working capital deficit, a major factor included in this deficit is deferred revenue resulting from the cash collected from annual memberships that is deferred until the appropriate refund period has concluded. In spite of our historical working capital deficit, we have been able to operate effectively primarily due to our substantial cash flows from operations and our available revolving credit facility. However, as the membership base continues to shift away from memberships billed annually to memberships billed monthly, it will have a negative effect on our operating cash flow. We anticipate that our working capital deficit will continue for the foreseeable future. Cash Flows-Three Months Ended March 31, 2014 and 2013 At March 31, 2014, we had $28.4 million of cash and cash equivalents on hand, a decrease of $54.1 million from $82.5 million at March 31, 2013. The following table summarizes our cash flows and compares changes in our cash and cash equivalents on hand to the same period in the prior year. Three Months Ended March 31, 2014 2013 Change (in millions) Cash provided by (used in): Operating activities $ 15.9 $ 44.6 $ (28.7 ) Investing activities (14.1 ) (9.8 ) (4.3 ) Financing activities 6.4 (3.0 ) 9.4 Effect of exchange rate changes 0.1 (1.2 ) 1.3 Net change in cash and cash equivalents $ 8.3 $ 30.6 $ (22.3 ) Operating Activities During the three months ended March 31, 2014, we generated $28.7 million less cash from operating activities than during the three months ended March 31, 2013. Segment EBITDA decreased by $33.4 million for the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 (see "-Results of Operations"). Investing Activities We used $4.3 million more cash in investing activities during the three months ended March 31, 2014 as compared to the same period in 2013. During the three months ended March 31, 2014, we used $14.1 million for capital expenditures. During the three months ended March 31, 2013, we used $8.8 million for capital expenditures and $0.9 million for acquisition-related payments. Financing Activities We provided cash from financing activities of $6.4 million during the three months ended March 31, 2014 compared to using cash of $3.0 million during the three months ended March 31, 2013. During the three months ended March 31, 2014, we had net borrowings under Affinion's revolving credit facility of $12.0 million, paid financing costs of $2.7 million and made principal payments on our debt of $2.9 million. During the three months ended March 31, 2013, we made principal payments on our debt of $3.0 million. 35-------------------------------------------------------------------------------- Credit Facilities and Long-Term Debt As a result of the Apollo Transactions, we became a highly leveraged company and we have incurred additional indebtedness and refinancing indebtedness since the Apollo Transactions. We borrowed an additional $350.0 million ($346.5 million, net of discounts) under an unsecured term loan facility (the "unsecured term loan facility") in January 2007. In October 2010, we issued $325 million aggregate principal amount of our 2010 senior notes, and used a portion of the proceeds and cash on hand to repay the unsecured term loan facility. In addition, in April 2010, Affinion, our wholly owned subsidiary, entered into an amended and restated senior secured credit facility comprised of an $875.0 million term loan and a $125.0 million revolving credit facility. In December 2010, Affinion entered into an agreement with two of its lenders resulting in an increase in the revolving credit facility to $165.0 million. In February 2011, Affinion incurred incremental borrowings of $250.0 million under its term loan facility. In December 2013, we and Affinion completed exchange offers and consent solicitations pursuant to which, among other things, (i) $292.8 million principal amount of our 2010 senior notes were exchanged by the holders thereof for $292.8 million principal amount of our 2013 senior notes, 13.5 million Series A warrants and 70.2 million Series B warrants (ii) $352.9 million principal amount of Affinion's 2006 senior subordinated notes were exchanged by the holders thereof for $360.0 million principal amount of the Investments 2013 senior subordinated notes issued by its wholly-owned subsidiary, Affinion Investments, LLC ("Affinion Investments"), Affinion issued $360.0 million principal amount of Affinion's 2013 senior subordinated notes to Affinion Investments in exchange for all of Affinion's 2006 senior subordinated notes received by it in the exchange offer, (iii) we entered into a supplemental indenture pursuant to which substantially all of the restrictive covenants were eliminated in the indenture governing our 2010 senior notes, and (iv) Affinion entered into a supplemental indenture pursuant to which substantially all of the restrictive covenants were eliminated in the indenture governing Affinion's 2006 senior subordinated notes. As of March 31, 2014, we had approximately $2.3 billion in indebtedness. Payments required to service this indebtedness have substantially increased our liquidity requirements as compared to prior years due to higher principal amounts and higher interest rates associated with the new indebtedness incurred in December 2013 and the related amendment to our senior secured credit facility that increased the applicable margins. As part of the Apollo Transactions, Affinion, our wholly owned subsidiary, (a) issued $270.0 million principal amount of 10 1/8% senior notes due October 15, 2013 ($266.4 million net of discount) on October 17, 2005 and an additional $34.0 million aggregate principal amount of follow on senior notes on May 3, 2006 (collectively, the "Affinion 2005 senior notes"), (b) entered into a senior secured credit facility, consisting of a term loan facility in the principal amount of $860.0 million (which amount does not reflect the $231.0 million in principal prepayments that Affinion made prior to amendment and restatement of the senior secured credit facility in April, 2010) and a revolving credit facility in an aggregate amount of up to $100.0 million and (c) entered into a senior subordinated bridge loan facility in the principal amount of $383.6 million. Affinion's senior subordinated bridge loan facility was refinanced in part with the proceeds from the offering of Affinion's 2006 senior subordinated notes. On April 26, 2006, Affinion issued $355.5 million aggregate principal amount of Affinion's 2006 senior subordinated notes and applied the gross proceeds of $350.5 million to repay $349.5 million of outstanding borrowings under Affinion's senior subordinated loan facility, plus accrued interest, and used cash on hand to pay fees and expenses associated with such issuance. The interest on Affinion's 2006 senior subordinated notes is payable semi-annually. Affinion may redeem some or all of Affinion's 2006 senior subordinated notes at the redemption prices (generally at a premium) set forth in the agreement governing Affinion's 2006 senior subordinated notes. Affinion's 2006 senior subordinated notes are unsecured obligations. Affinion's 2006 senior subordinated notes are guaranteed by the same subsidiaries that guarantee the Affinion senior secured credit facility and Affinion's 2010 senior notes. In December 2013, Affinion Investments exchanged $352.9 million face amount of Affinion's outstanding 2006 senior subordinated notes for $360.0 million face amount Investments 2013 senior subordinated notes. Affinion Investments then exchanged with Affinion all of Affinion's 2006 senior subordinated notes received by it in the exchange offer for Affinion's 2013 senior subordinated notes. On January 31, 2007, we entered into a five-year $350.0 million senior unsecured term loan with certain banks at an initial interest rate of LIBOR, as defined, plus 6.25% (the "Senior Unsecured Term Loan"). In October 2010, the senior unsecured term loan was repaid utilizing the proceeds from our 2010 senior notes (see below). On April 9, 2010, Affinion, as borrower, and Affinion Holdings, as a guarantor, entered into a $1.0 billion amended and restated senior secured credit facility with its lenders, amending its senior secured credit facility. We refer to Affinion's amended and restated senior secured credit facility, as amended from time to time, including by the Incremental Assumption Agreements (as defined below) as "Affinion's senior secured credit facility." Affinion's senior secured credit facility initially consisted of a five-year $125.0 million revolving credit facility and an $875.0 million term loan facility. 36 -------------------------------------------------------------------------------- On October 5, 2010, the Company issued $325.0 million aggregate principal amount of its 2010 senior notes. The interest on its 2010 senior notes is payable semi-annually on May 15 and November 15 of each year. At any time prior to November 15, 2012, the Company may redeem its 2010 senior notes, at its option, in whole or in part, at a redemption price equal to the principal amount plus an applicable premium. On or after November 15, 2012, the Company may redeem some or all of its 2010 senior notes at any time at the redemption prices (generally at a premium) set forth in the indenture governing the Notes. The Company's 2010 senior notes contain restrictive covenants related primarily to the Company's ability to pay dividends, redeem or repurchase capital stock, sell assets, issue additional debt or merge with or acquire other companies. The Company used a portion of the net proceeds of $320.3 million, along with proceeds from a cash dividend from Affinion in the amount of $115.3 million, to repay the Senior Unsecured Term Loan. A portion of the remaining proceeds from the offering of the Company's 2010 senior notes were utilized to pay related fees and expenses, with the balance retained for general corporate purposes. The fees and expenses were capitalized and are being amortized over the term of the Company's 2010 senior notes. In October, 2010, the Company recognized a loss of $2.8 million, representing the write-off of unamortized balances of the debt discount and deferred financing costs associated with the Senior Unsecured Term Loan, in connection with the repayment of the Senior Unsecured Term Loan. On August 24, 2011, pursuant to the registration rights agreement entered into in connection with the issuance of the Company's 2010 senior notes, the Company completed a registered exchange offer and exchanged all of the Company's then-outstanding 2010 senior notes for a like principal amount of its 2010 senior notes that have been registered under the Securities Act. In December 2013, the Company exchanged $292.8 million face amount of its 2010 senior notes for $292.8 million face amount of its 2013 senior notes and Series A warrants and Series B warrants to purchase up to approximately 13.5 million shares and approximately 70.2 million shares, respectively, of Affinion Holdings Class B common stock. On December 13, 2010, Affinion, as borrower, Affinion Holdings and certain of Affinion's subsidiaries entered into an Incremental Assumption Agreement with two of Affinion's lenders (the "Revolver Incremental Assumption Agreement," and together with the Term Loan Incremental Assumption Agreement, the "Incremental Assumption Agreements") which resulted in an increase in the revolving credit facility from $125.0 million to $160.0 million, with a further increase to $165.0 million in January 2011. On February 11, 2011, Affinion, as borrower, and Affinion Holdings, and certain of Affinion's subsidiaries entered into, and simultaneously closed under, the Term Loan Incremental Assumption Agreement, which resulted in an increase in the term loan facility from $875.0 million to $1.125 billion. On November 20, 2012, Affinion, as Borrower, and Affinion Holdings entered into an amendment to the Affinion Credit Facility, which (i) increased the margins on LIBOR loans from 3.50% to 5.00% and on base rate loans from 2.50% to 4.00%, (ii) replaced the financial covenant requiring Affinion to maintain a maximum consolidated leverage ratio with a financial covenant requiring Affinion to maintain a maximum senior secured leverage ratio, and (iii) adjusted the ratios under the financial covenant requiring Affinion to maintain a minimum interest coverage ratio. On December 12, 2013, in connection with the refinancing of Affinion's 2006 senior subordinated notes and our 2010 senior notes, Affinion, as Borrower, and the Company, entered into an amendment to its senior secured credit facility, which (i) provided permission for the consummation of the exchange offers for Affinion's 2006 senior subordinated notes and our 2010 senior notes; (ii) removed the springing maturity provisions applicable to the term loan facility; (iii) modified the senior secured leverage ratio financial covenant in the Credit Agreement; (iv) provided additional flexibility for Affinion to make dividends to the Company to be used to make certain payments with respect to the Company's indebtedness and to repay, repurchase or redeem subordinated indebtedness of Affinion; and (v) increased the interest margins by 0.25% to 5.25% on LIBOR loans and 4.25% on base rate loans. The amendment became effective upon the satisfaction of the conditions precedent set forth therein, including the payment by Affinion of the consent fee equal to 0.25% of the sum of (i) the aggregate principal amount of all term loans and (ii) the revolving loan commitments in effect, in each case, held by each lender that entered into the amendment on the date of effectiveness of the amendment. 37 -------------------------------------------------------------------------------- The revolving credit facility includes a letter of credit subfacility and a swingline loan subfacility. The term loan facility matures in October 2016. The term loan facility provides for quarterly amortization payments totaling 1% per annum, with the balance payable upon the final maturity date. The term loan facility also requires mandatory prepayments of the outstanding term loans based on excess cash flow (as defined), if any, and the proceeds from certain specified transactions. The interest rates with respect to term loans and revolving loans under Affinion's senior secured credit facility are based on, at Affinion's option, (a) the higher of (i) adjusted LIBOR and (ii) 1.50%, in each case plus 5.25%, or (b) the highest of (i) Deutsche Bank Trust Company Americas' prime rate, (ii) the Federal Funds Effective Rate plus 0.5% and (iii) 2.50%, in each case plus 4.25%. The weighted average interest rate on the term loan for the three months ended March 31, 2014 and 2013 was 6.8% and 6.5% per annum, respectively. The weighted average interest rate on borrowings under the revolving credit facility for the three months ended March 31, 2014 and 2013 was 7.1% and 7.3% per annum, respectively. Affinion's obligations under its senior secured 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 will be, guaranteed by Affinion Holdings and by each of Affinion's existing and subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. Affinion's senior secured credit facility is secured to the extent legally permissible by substantially all the assets of (i) Affinion Holdings, which consists of a pledge of all Affinion'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. Affinion's senior secured credit facility also contains financial, affirmative and negative covenants. The negative covenants in Affinion's senior secured 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 its 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 Affinion's assets; and enter into transactions with its affiliates. Affinion's senior secured credit facility also requires Affinion to comply with financial maintenance covenants with a maximum ratio of senior secured debt (as defined in Affinion's senior secured credit facility) to EBITDA (as defined in Affinion's senior secured credit facility) and a minimum ratio of EBITDA to cash interest expense. A portion of the April 2010 proceeds of the term loan under Affinion's senior secured credit facility were utilized to repay the outstanding balance of its then existing senior secured term loan, including accrued interest, of $629.7 million and pay fees and expenses of approximately $27.0 million. Any borrowings under the revolving credit facility are available to fund Affinion's working capital requirements, capital expenditures and for other general corporate purposes. In January 2011, we utilized available cash on hand and the proceeds of a dividend from Affinion to (i) redeem our outstanding preferred stock with a liquidation preference of approximately $41.2 million, (ii) pay a dividend to our stockholders (including holders of restricted stock units) of $1.35 per share (approximately $115.4 million in the aggregate), (iii) pay a one-time cash bonus to our option holders of approximately $9.6 million and (iv) pay additional amounts for transaction fees and expenses. In February 2011, Affinion used a portion of the Incremental Term Loans to pay a dividend to us of approximately $199.8 million. We used the proceeds of the dividend to (i) redeem our outstanding preferred stock with a liquidation preference of approximately $5.4 million, (ii) pay a dividend to our stockholders (including holders of restricted stock units) of $1.50 per share (approximately $128.2 million in the aggregate), (iii) pay a one-time cash bonus to certain of our option holders of approximately $5.2 million and (iv) pay additional amounts for transaction fees and expenses. On November 19, 2010, Affinion completed a private offering of $475.0 million aggregate principal amount of Affinion's 2010 senior notes providing net proceeds of $471.5 million. Affinion's 2010 senior notes bear interest at 7.875% per annum payable semi-annually on June 15 and December 15 of each year, commencing on June 15, 2011. Affinion's 2010 senior notes will mature on December 15, 2018. Affinion's 2010 senior notes are redeemable at Affinion's option prior to maturity. The indenture governing Affinion's 2010 senior notes contains negative covenants which restrict the ability of Affinion and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. Affinion's obligations under Affinion's 2010 senior notes are jointly and severally and fully and unconditionally guaranteed on a senior unsecured basis by each of Affinion's existing and future domestic subsidiaries that guarantee Affinion's indebtedness under Affinion's senior secured credit facility (other than Affinion Investments and Affinion Investments II). Affinion's 2010 senior notes and guarantees thereof are senior unsecured obligations of Affinion and rank equally with all of Affinion's and the guarantors' existing and future senior indebtedness and senior to Affinion's and the guarantors' existing and future subordinated indebtedness. Affinion's 2010 senior notes are therefore effectively subordinated to Affinion's and the guarantors' existing and future secured indebtedness, including Affinion's obligations under Affinion's senior secured credit facility, to the extent of the value of the collateral securing such indebtedness. Affinion's 2010 senior notes are structurally subordinated to all indebtedness and other obligations of each of Affinion's existing and future subsidiaries that are not guarantors, including the Investments 2013 senior subordinated notes. On August 24, 2011, pursuant to the registration rights agreement entered into in connection with the issuance of Affinion's 2010 senior notes, Affinion completed a registered exchange offer and exchanged all of Affinion's then-outstanding 2010 senior notes for a like principal amount of Affinion's 2010 senior notes that have been registered under the Securities Act. Affinion used substantially all of the net proceeds of the offering of Affinion's 2010 senior notes to finance the purchase of the 2005 senior notes and the 2009 senior notes. 38 -------------------------------------------------------------------------------- On December 12, 2013, the Company completed a private offer to exchange its 2010 senior notes for its 2013 senior notes, pursuant to which $292.8 million aggregate principal amount of its 2013 senior notes were issued in exchange for $292.8 million aggregate principal amount of its 2010 senior notes. Under the terms of the exchange offer, for each $1,000 principal amount of its 2010 senior notes tendered at or prior to the consent time, holders received (i) $1,000 principal amount of its 2013 senior notes, (ii) Series A warrants to purchase 46.1069 shares of the Company's Class B common stock, and (iii) Series B warrants to purchase 239.8612 shares of the Company's Class B common stock. For each $1,000 principal amount of its 2010 senior notes tendered during the offer period but after the consent period, holders received (i) $950 principal amount of its 2013 senior notes, (ii) Series A warrants to purchase 46.1069 shares of the Company's Class B common stock, and (iii) Series B warrants to purchase 239.8612 shares of the Company's Class B common stock. The Company's 2013 senior notes bear interest at 13.75% per annum, payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2014. At the Company's option, it may elect to pay interest (i) entirely in cash ("Cash Interest"), (ii) entirely by increasing the outstanding principal amount of its 2013 senior notes or by issuing PIK notes ("PIK Interest"), or (iii) 50% as Cash Interest and 50% as PIK Interest; provided that if (i) no Default or Event of Default (each as defined in the Credit Agreement) shall have occurred and be continuing or would result from such interest payment, (ii) immediately after giving effect to such interest payment, on a pro forma basis, the Consolidated Leverage Ratio (as defined in the Credit Agreement) of Affinion is less than or equal to 5.0:1.0 as of the last day of the most recently completed fiscal quarter preceding the interest payment date for which financial statements have been delivered to the agent under the Credit Agreement and (iii) immediately after giving effect to such interest payment, on a pro forma basis, the Adjusted Consolidated Leverage Ratio (as defined in the Note Agreement) of Affinion is less than or equal to 5.0:1.0, then Affinion Holdings shall be required to pay interest on its 2013 senior notes for such interest period in cash. PIK Interest accrues at 13.75% per annum plus 0.75%. For the first interest period ending September 15, 2014, Affinion Holdings will pay interest by increasing the principal amount of its 2013 senior notes. The Company's 2013 senior notes will mature on September 15, 2018. The Company may redeem some or all of its 2013 senior notes at any time on or after December 12, 2016 at redemption prices (generally at a premium) set forth in the indenture governing its 2013 senior notes. In addition, prior to December 12, 2016, up to 100% of the Company's outstanding 2013 senior notes are redeemable at the option of the Company, with the net proceeds raised by the Company in one or more equity offerings, at 113.75% of their principal amount. In addition, prior to December 12, 2016, the Company's 2013 senior notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of its 2013 senior notes redeemed plus a "make-whole" premium. The indenture governing the Company's 2013 senior notes contains negative covenants which restrict the ability of the Company and any restricted subsidiaries of the Company to engage in certain transactions and also contains customary events of default. The Company's 2013 senior notes are senior secured obligations of the Company and rank pari passu in right of payment to all existing and future senior indebtedness of the Company, junior in right of payment to all secured indebtedness of the Company secured by liens having priority to the liens securing its 2013 senior notes up to the value of the assets subject to such liens, and senior in right of payment to unsecured indebtedness of the Company to the extent of the security of the collateral securing its 2013 senior notes and all future subordinated indebtedness of the Company. The Company's 2013 senior notes are secured by (i) second-priority security interests in 100% of the capital stock of Affinion, which security interests are junior to the first priority security interests granted to the lenders under Affinion's senior secured credit facility and (ii) first-priority security interests in all other assets of Affinion Holdings, including 100% of the capital stock of Affinion Net Patents, Inc. The Series A warrants are exercisable at any time at the option of the holders at an exercise price of $0.01 per share of Class B common stock and will expire on the tenth anniversary of their issuance date. The Series B warrants will be not become exercisable until and unless on the fourth anniversary of the exchange closing date, 5% or more in aggregate principal amount of Affinion Holdings' 2013 senior notes are then outstanding and unpaid, whereupon, if it should ever occur, the Series B warrants will become exercisable until the tenth anniversary of the exchange closing date at an exercise price of $0.01 per share of Class B common stock. In connection with the exchange, the Company recognized a loss of $4.6 million, representing the write-off of unamortized debt issuance costs and discounts of $2.8 million and $1.8 million, respectively. In connection with the exchange offer and consent solicitation relating to the Company's 2010 senior notes and the issuance of the Company's 2013 senior notes, the Company incurred financing costs of $4.7 million, which are included in other non-current assets on the accompanying unaudited condensed consolidated balance sheet and are being amortized over the term of the Company's 2013 senior notes. 39 -------------------------------------------------------------------------------- On December 12, 2013, Affinion completed a private offer to exchange Affinion's 2006 senior subordinated notes for Investments 2013 senior subordinated notes issued by Affinion Investments, pursuant to which $360.0 million aggregate principal amount of Investments 2013 senior subordinated notes were issued in exchange for $352.9 million aggregate principal amount of Affinion's 2006 senior subordinated notes. Under the terms of the exchange offer, for each $1,000 principal amount of Affinion's 2006 senior subordinated notes tendered at or prior to the consent time, holders received $1,020 principal amount of Investments 2013 senior subordinated notes. For each $1,000 principal amount of Affinion's 2006 senior subordinated notes tendered during the offer period but after the consent period, holders received $1,000 principal amount of Investments 2013 senior subordinated notes. The Investments 2013 senior subordinated notes bear interest at 13.50% per annum, payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2014. The Investments 2013 senior subordinated notes will mature on August 15, 2018. Affinion Investments may redeem some or all of the Investments 2013 senior subordinated notes at any time on or after December 12, 2016 at redemption prices (generally at a premium) set forth in the indenture governing the Investments 2013 senior subordinated notes. In addition, prior to December 12, 2016, up to 35% of the outstanding Investments 2013 senior subordinated notes are redeemable at the option of Affinion Investments, with the net proceeds raised by Affinion or the Company in one or more equity offerings, at 113.50% of their principal amount. In addition, prior to December 12, 2016, the Investments 2013 senior subordinated notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount of the Investments 2013 senior subordinated notes redeemed plus a "make-whole" premium. The indenture governing the Investments 2013 senior subordinated notes contains negative covenants which restrict the ability of Affinion Investments, any future restricted subsidiaries of Affinion Investments and one of Affinion's other wholly-owned subsidiaries that guarantees the Investments 2013 senior subordinated notes to engage in certain transactions and also contains customary events of default. Affinion Investments' obligations under the Investments 2013 senior subordinated notes are guaranteed on an unsecured senior subordinated basis by Affinion Investments II. Each of Affinion Investments and Affinion Investments II is an unrestricted subsidiary of Affinion and guarantees Affinion's indebtedness under its senior secured credit facility but does not guarantee Affinion's other indebtedness. The Investments 2013 senior subordinated notes and guarantee thereof are unsecured senior subordinated obligations of Affinion Investments, as issuer, and Affinion Investments II, as guarantor, and rank junior in right of payment to their respective guarantees of Affinion's senior secured credit facility. On December 12, 2013, Affinion Investments exchanged with Affinion all of Affinion's 2006 senior subordinated notes received by it in the exchange offer for Affinion's 2013 senior subordinated notes. Affinion's 2013 senior subordinated notes bear interest at 13.50% per annum payable semi-annually on February 15 and August 15 of each year, commencing on February 15, 2014. Affinion's 2013 senior subordinated notes will mature on August 15, 2018. Affinion's 2013 senior subordinated notes are redeemable at Affinion's option prior to maturity. The indenture governing Affinion's 2013 senior subordinated notes contains negative covenants which restrict the ability of Affinion and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. Affinion's obligations under Affinion's 2013 senior subordinated notes are jointly and severally and fully and unconditionally guaranteed on an unsecured senior subordinated basis by each of Affinion's existing and future domestic subsidiaries that guarantee Affinion's indebtedness under its senior secured credit facility (other than Affinion Investments and Affinion Investments II). Affinion's 2013 senior subordinated notes and guarantees thereof are unsecured senior subordinated obligations of Affinion's and rank junior to all of Affinion's and the guarantors' existing and future senior indebtedness, pari passu with Affinion's 2006 senior subordinated notes and senior to Affinion's and the guarantors' future subordinated indebtedness. Although Affinion Investments is the only holder of Affinion's 2013 senior subordinated notes, the trustee for the Investments 2013 senior subordinated notes, and holders of at least 25% of the principal amount of the Investments 2013 senior subordinated notes will have the right as third party beneficiaries to enforce the remedies available to Affinion Investments against Affinion, and Affinion Investments will not be able to amend the covenants in the note agreement governing the Investments 2013 senior subordinated notes in favor of Affinion unless it has received consent from the holders of a majority of the aggregate principal amount of the outstanding Investments 2013 senior subordinated notes. In connection with the exchange offer and consent solicitation relating to Affinion's 2006 senior subordinated notes and the issuance of Affinion's 2013 senior subordinated notes, Affinion incurred financing costs of $5.9 million, which are included in other non-current assets on the accompanying unaudited condensed consolidated balance sheet and are being amortized over the term of Affinion's 2013 senior subordinated notes. At March 31, 2014, on a consolidated basis, the Company had $1,081.9 million outstanding under Affinion's term loan facility, $292.8 million ($268.0 million, net of discount) outstanding under the Company's 2013 senior notes, $32.2 million outstanding under the Company's 2010 senior notes, $475.0 million ($472.9 million, net of discount) outstanding under Affinion's 2010 senior notes, $360.0 million ($352.3 million, net of discount) outstanding under Affinion's 2013 senior subordinated notes and $2.6 million outstanding under Affinion's 2006 senior subordinated notes. At March 31, 2014, there were outstanding borrowings of $58.0 million under Affinion's revolving credit facility and Affinion had $92.1 million available under the revolving credit facility under Affinion's senior secured credit facility, after giving effect to the issuance of $14.9 million of letters of credit. Affinion's senior secured credit facility and the indentures governing Affinion's 2010 senior notes, the Investments 2013 senior subordinated notes, and Affinion's 2013 senior subordinated notes contain various restrictive covenants that apply to Affinion Holdings. As of March 31, 2014, Affinion was in compliance with the restrictive covenants under Affinion's debt agreements. 40-------------------------------------------------------------------------------- Covenant Compliance The indenture governing our 2013 senior notes, among other things: (a) limits our ability and the ability of our subsidiaries to incur additional indebtedness, incur liens, pay dividends or make certain other restricted payments and enter into certain transactions with affiliates; (b) limits our ability to enter into agreements that would restrict the ability of our subsidiaries to pay dividends or make certain payments to us; and (c) places restrictions on our ability and the ability of our subsidiaries to merge or consolidate with any other person or sell, assign, transfer, convey or otherwise dispose of all or substantially all of our assets. However, all of these covenants are subject to significant exceptions. As of March 31, 2014, the Company was in compliance with the restrictive covenants under its debt agreements and expects to be in compliance over the next twelve months. We have the ability to incur additional debt, subject to limitations imposed by the indenture governing our 2013 senior notes. Under the indenture governing our 2013 senior notes, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness on an unconsolidated basis as long as on a pro forma basis our fixed charge coverage ratio (the ratio of Adjusted EBITDA to consolidated fixed charges, as computed under such indenture) is at least 2.0 to 1.0. Reconciliation of Non-GAAP Financial Measures to GAAP Financial Measures Adjusted EBITDA consists of income from operations before depreciation and amortization further adjusted to exclude non-cash and unusual items and other adjustments permitted in our debt agreements to test the permissibility of certain types of transactions, including debt incurrence. We believe that the inclusion of Adjusted EBITDA is appropriate as a liquidity measure. Adjusted EBITDA is not a measurement of liquidity or financial performance under U.S. GAAP and Adjusted EBITDA may not be comparable to similarly titled measures of other companies. You should not consider Adjusted EBITDA as an alternative to cash flows from operating activities determined in accordance with U.S. GAAP, as an indicator of cash flows, as a measure of liquidity, as an alternative to operating or net income determined in accordance with U.S. GAAP or as an indicator of operating performance. Set forth below is a reconciliation of our consolidated net cash provided by operating activities for the twelve months ended March 31, 2014 to Adjusted EBITDA. Twelve Months Ended March 31, 2014(a) (in millions) Net cash provided by operating activities $ (27.5 ) Interest expense, net 212.3 Income tax expense 12.7 Amortization of debt discount and financing costs (13.4 ) Provision for loss on accounts receivable (2.7 ) Deferred income taxes (7.0 ) Changes in assets and liabilities 21.2 Effect of purchase accounting, reorganizations, certain legal costs and net cost savings(b) 35.7 Other, net(c) 46.9 Adjusted EBITDA, excluding pro forma adjustments(d) 278.2 Effect of the pro forma adjustments(e) 14.4 Adjusted EBITDA, including pro forma adjustments(f) $ 292.6 (a) Represents consolidated financial data for the year ended December 31, 2013, minus consolidated financial data for the three months ended March 31, 2013, plus consolidated financial data for the three months ended March 31, 2014. (b) Eliminates the effect of purchase accounting related to the Apollo Transactions and Back-Up and Travel acquisition, legal costs for certain legal matters and costs associated with severance incurred. (c) Eliminates (i) net changes in certain reserves, (ii) foreign currency gains and losses related to unusual, non-recurring intercompany transactions, (iii) the loss from an investment accounted for under the equity method, (iv) costs associated with certain strategic and corporate development activities, including business optimization, (v) consulting fees paid to Apollo, and (vi) the impact of an adjustment related to the recognition of International retail revenue. (d) Adjusted EBITDA, excluding pro forma adjustments, does not give pro forma effect to the projected annualized benefits of restructurings and other cost savings initiatives. However, we do make such accretive pro forma adjustments as if such restructurings and cost savings initiatives had occurred on April 1, 2013 in calculating the Adjusted EBITDA under Affinion's amended and restated senior secured credit facility and the indentures governing Affinion's 2010 senior notes and Affinion's 2013 senior subordinated notes. 41 -------------------------------------------------------------------------------- (e) Gives effect to the projected annualized benefits of restructurings and other cost savings initiatives as if such restructurings and cost savings initiatives had occurred on April 1, 2013. (f) Adjusted EBITDA, including pro forma adjustments, gives pro forma effect to the adjustments discussed in (e) above. Set forth below is a reconciliation of our consolidated net loss for the twelve months ended December 31, 2013 to Adjusted EBITDA as required by our indenture governing the Company's 2013 senior notes. Twelve Months Ended March 31, 2014(a) (in millions) Net loss attributable to Affinion Group Holdings, Inc. $ (169.9 ) Interest expense, net 212.3 Income tax expense 12.7 Non-controlling interest 0.6 Loss on extinguishment of debt 4.6 Depreciation and amortization 109.3 Effect of purchase accounting, reorganizations and non-recurring revenues and gains(b) 3.3 Certain legal costs(c) 21.6 Net cost savings(d) 10.8 Other, net(e) 72.9 Adjusted EBITDA, excluding pro forma adjustments(f) 278.2 Effect of the pro forma adjustments(g) 14.4 Adjusted EBITDA, including pro forma adjustments(h) $ 292.6 (a) Represents consolidated financial data for the year ended December 31, 2013, minus consolidated financial data for the three months ended March 31, 2013, plus consolidated financial data for the three months ended March 31, 2014. (b) Eliminates the effect of purchase accounting related to the Apollo Transactionsand Back-Up and Travel acquisition. (c) Represents the elimination of legal costs for certain legal matters. (d) Represents the elimination of costs associated with severance incurred. (e) Eliminates (i) net changes in certain reserves, (ii) share-based compensation expense, (iii) foreign currency gains and losses related to unusual, non-recurring intercompany transactions, (iv) the loss from an investment accounted for under the equity method, (v) costs associated with certain strategic and corporate development activities, including business optimization, (vi) consulting fees paid to Apollo, (vii) facility exit costs, (viii) the impairment charge related to the intangible assets and property and equipment of Prospectiv, (ix) the impact of an adjustment related to the recognition of International retail revenue and (x) debt refinancing expenses. (f) Adjusted EBITDA, excluding pro forma adjustments, does not give pro forma effect to the projected annualized benefits of restructurings and other cost savings initiatives. However, we do make such accretive pro forma adjustments as if such restructurings and cost savings initiatives had occurred on April 1, 2013 in calculating the Adjusted EBITDA under Affinion's amended and restated senior secured credit facility and the indentures governing Affinion's 2010 senior notes and Affinion's 2013 senior subordinated notes. (g) Gives effect to the projected annualized benefits of restructurings and other cost savings initiatives as if such restructurings and cost savings initiatives had occurred on April 1, 2013. (h) Adjusted EBITDA, including pro forma adjustments, gives pro forma effect to the adjustments discussed in (g) above. Debt Repurchases We or our affiliates have in the past, and may, from time to time, purchase any of our or Affinion's indebtedness. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine. 42-------------------------------------------------------------------------------- Critical Accounting Policies In presenting our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the amounts reported therein. We believe that the estimates, assumptions and judgments involved in the accounting policies related to revenue recognition, accounting for marketing costs, stock-based compensation, valuation of goodwill and intangible assets, valuation of interest rate swaps and valuation of tax assets and liabilities could potentially affect our reported results and as such, we consider these to be our critical accounting policies. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain, as they pertain to future events. However, certain events outside our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. We believe that the estimates and assumptions used when preparing our unaudited condensed consolidated financial statements were the most appropriate at the time. Significant estimates include accounting for profit sharing receivables from insurance carriers, accruals and income tax valuation allowances, litigation accruals, estimated fair value of stock based compensation, estimated fair values of assets and liabilities acquired in business combinations and estimated fair values of financial instruments. In addition, we refer you to our audited consolidated financial statements as of December 31, 2013 and 2012, and for the years ended December 31, 2013, 2012 and 2011, included in our Form 10-K for a summary of our significant accounting policies. |