REPORT TO HOLDERS AND INDENTURE TRUSTEE $325,000,000 PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2015 OF AFFINION GROUP HOLDINGS, INC. - PDF

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REPORT TO HOLDERS AND INDENTURE TRUSTEE $325,000,000 PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2015 OF AFFINION GROUP HOLDINGS, INC. PREPARED IN ACCORDANCE WITH ANNUAL REPORT ON FORM 10-K FOR THE YEAR
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REPORT TO HOLDERS AND INDENTURE TRUSTEE $325,000,000 PRINCIPAL AMOUNT OF % SENIOR NOTES DUE 2015 OF AFFINION GROUP HOLDINGS, INC. PREPARED IN ACCORDANCE WITH ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010 Affinion Group Holdings, Inc. (Exact Name of Company as Specified in Its Charter) Delaware (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 6 High Ridge Park, Stamford, Connecticut (Address of Principal Executive Offices) (Zip Code) (203) (Company s Telephone Number, Including Area Code) At March 1, 2011, there were 84,785,601 outstanding shares of common stock of Affinion Group Holdings, Inc. TABLE OF CONTENTS PART I Item 1. Business 2 Item 1A. Risk Factors 21 Item 1B. Unresolved Staff Comments 34 Item 2. Properties 34 Item 3. Legal Proceedings 34 Item 4. (Removed and Reserved) 37 PART II Item 5. Market for the Company s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 38 Item 6. Selected Financial Data 38 Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations 39 Item 7A. Quantitative and Qualitative Disclosures about Market Risk 66 Item 8. Financial Statements and Supplementary Data 68 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 69 Item 9A. Controls and Procedures 69 Item 9B. Other Information 70 PART III Item 10. Directors, Executive Officers and Corporate Governance 70 Item 11. Executive Compensation 75 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 92 Item 13. Certain Relationships and Related Transactions, and Director Independence 95 Item 14. Principal Accounting Fees and Services 102 Item 15. Exhibits, Financial Statement Schedules 102 Page IMPORTANT INFORMATION REGARDING THIS REPORT Readers should consider the following information as they review this Report. EXPLANATORY NOTE This Report (this Report ) to the Trustee (as defined below) and Holders of $325,000,000 principal amount of % Senior Notes due 2015 (the Notes ) of Affinion Group Holdings, Inc. ( Holdings or the Company ) has been prepared in all material respects in accordance with the rules and regulations of the Securities and Exchange Commission (the SEC ) applicable to an Annual Report on Form 10-K for the year ended December 31, 2010, except to the extent permitted in the Indenture (as defined below). This Report has been prepared in accordance with the obligations of Holdings under Section 4.02 of the Indenture dated as of October 5, 2010 (the Indenture ) among Holdings, as issuer, and Wells Fargo Bank, National Association, as trustee (the Trustee ), relating to the Notes and is not being filed with the SEC as it would not be accepted by the SEC for filing because Holdings has not yet filed a registration statement with the SEC. DOCUMENT SUMMARIES Statements contained in this Report referring to documents and agreements are subject to, or qualified in their entirety by reference to, the definitive agreements. Copies of the documents and agreements will be made available without charge to you by making a written or oral request to us. FISCAL YEAR All references to fiscal year are to the twelve months ended December 31 of the year referenced. OTHER ITEMS This Report is prepared by Affinion Group Holdings, Inc. Unless otherwise indicated or the context otherwise requires, in this Report all references to Holdings, the Company, we, our and us refer to Affinion Group Holdings, Inc. and its subsidiaries on a consolidated basis. 1 Item 1. Business The following description of our business is current as of December 31, 2010 and does not give effect to or incorporate any subsequent events unless otherwise noted. Overview 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 partner with these leading companies to develop and market subscription-based programs that provide valuable services to their end-customers using our expertise in customer engagement, product development, creative design and data-driven targeted marketing. These programs and services enable the companies we partner with to generate significant, high-margin incremental revenue, as well as strengthen and enhance the loyalty of their customer relationships, which 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. We refer to subscribers or members as those consumers to whom we provide services directly and have a contractual relationship. We refer to end-customers as those consumers that we service on behalf of a third party, such as one of our marketing partners, with whom we have a contractual relationship. We utilize our substantial expertise in a variety of direct engagement media, such as direct mail, inbound and outbound telephony, point-of-sale marketing, direct response radio and television and the Internet to market valuable products and services to the customers of our marketing partners on a highly targeted basis. We design customer engagement and loyalty solutions with an attractive suite of benefits that we believe are likely to interest and engage consumers based on their needs and interests, with a particular focus on programs offering lifestyle and protection benefits and programs which offer considerable savings. For example, we provide credit monitoring and identitytheft resolution, accidental death and dismemberment insurance ( AD&D ), discount travel services, loyalty points programs, various checking account and credit card enhancement services, as well as other products and services. We believe our portfolio of the products and services which 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 35 year history, position us to deliver consistent results in a variety of market conditions. Our comprehensive portfolio of customer engagement and loyalty solutions include: marketing strategy development and management of customized marketing programs; data analysis utilizing our proprietary technology and databases to target customers most likely to value our products and services; design and implementation of marketing campaigns in various types of media including direct mail, online marketing, point-of-sale marketing, direct response radio and television marketing, inbound and outbound telephony and voice response unit marketing; development of customized and relevant products and services; fulfillment, customer service, website and mobile application development; and loyalty program design and administration. Our business model is characterized by substantial recurring revenues, strong operating margins and significant cash flow. We generate revenues primarily through the sale of our value-added subscription-based products and services to the end-customers of our marketing partners and customers whom we bill on a monthly, quarterly or annual basis. Further, we generate revenues from our marketing partners that choose to directly market our products and services to their customers on a wholesale basis and typically pay us a monthly fee per enrolled customer. We also generate revenues through our loyalty customer engagement business by designing and administering points-based loyalty programs. As a result, a substantial portion of our revenues consists of subscription payments and service fees that are recurring in nature. Revenue from our existing customer base and long-term marketing partner relationships has historically generated over 80% of our next twelve 2 months net revenue. We structure our contractual relationships with our marketing partners to support our strategy of pursuing the most profitable opportunities for our marketing, and related commission, expenditures. Business We seek to address the needs of three primary parties in developing and implementing our customer engagement and loyalty solutions: Marketing partners, which are the companies for whom we develop and manage customer engagement and loyalty programs; Customers, which are the end-customers of our marketing partners who subscribe to one or more of our programs; and Vendors, which are the third-party vendors who provide components for our products and services. Marketing Partners: Our marketing partners are many of the leading companies in the United States, or the U.S., and Europe. They enter into agreements with us to: offer products and services that appeal to their customers, thereby engaging those customers in a deeper, more meaningful, longer and more profitable relationship with them; and develop customized marketing programs that leverage their brand names to offer these programs and services to their customers. Our marketing partners value our services because we enhance their customer relationships and strengthen customer loyalty, promote their brands and provide them with incremental revenue with minimal risk because we often bear the costs of marketing and servicing these programs. We believe that we implement and operate our customer engagement and loyalty programs more effectively than a typical partner could in a stand-alone program, thereby allowing our marketing partners to focus on their core businesses. As of December 31, 2010, we had more than 5,550 marketing partners in a variety of industries including financial services, retail, travel, telecommunications, utilities and the Internet. Some of our leading marketing partners, based on revenues for the year ended December 31, 2010, include Wells Fargo, Bank of America, JPMorgan Chase, HSBC and Choice Hotels. Revenues generated from our largest marketing partner, Wells Fargo, accounted for 11.4% of total revenues in By providing services directly to the end-customers of our marketing partners, we become an important part of our marketing partners businesses. Many of our marketing partners have been working with us for over ten years. Customers: Our customers value participation in our programs because of the attractive benefits we provide to address fundamental consumer needs at a reasonable price, the ease of use of our products and the high level of service we deliver. Depending on the nature of the relationship we have with a given marketing partner, customers may either purchase our programs directly from us or receive the program from our marketing partner. We derived approximately 49.4% of our net revenues from members and end-customers we obtained through our 10 largest marketing partners. As of December 31, 2010, we had approximately 69 million subscribers and end-customers enrolled in our membership, insurance and package programs worldwide and approximately 111 million customers who received credit or debit card enhancement services or loyalty points-based management services. Vendors: We contract with a large number of third-party vendors to provide components for many of our products and services, such as credit reports, supplemental insurance coverage and travel discounts. Our vendors value their relationships with us because we provide them with significant incremental revenue by bundling their content with our own and offering these solutions through unique and supplementary marketing channels. Generally, our relationships with key vendors are governed by long-term contracts. By combining the services of our vendors with our in-house capabilities, we are able to 3 offer 31 core products and services with over 460 unique benefits and support more than 5,100 versions of products and services representing different combinations of pricing, benefits configurations and branding. 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 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, 2010, managed approximately 497 billion points with an estimated redemption value of approximately $4.9 billion for financial, travel, auto and other companies. We also provide enhancement benefits to major financial institutions in connection with their credit and debit card programs. In addition, we provide and manage travel reward products for loyalty programs. Affinion International. Affinion International comprises our Membership, Package and Loyalty customer engagement businesses outside North America. 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. See Item 7. Management s Discussion and Analysis of Financial Condition and Results of Operations Operating Segment Results and Note 18 to our audited consolidated financial statements included elsewhere herein for additional financial information about these business segments. In addition, see Note 18 to our audited consolidated financial statements included elsewhere herein for additional financial information by geographic area. Business Model Our business model is characterized by substantial recurring revenues, strong operating margins and significant cash flow. We generate revenues primarily through the sale of our value-added subscription-based products and services to the end-customers of our marketing partners and customers whom we bill on a monthly, quarterly or annual basis. Further, we generate revenues from our marketing partners that choose to directly market our products and services to their customers on a wholesale basis and typically pay us a monthly fee per enrolled customer. We also generate revenues through our loyalty customer engagement business by designing and administering points-based loyalty programs. As a result, a substantial portion of our revenues consists of subscription payments and service fees that are recurring in nature. Revenue from our existing customer base has historically generated over 80% of our next twelve months net revenue. We structure our contractual relationships with our marketing partners to support our strategy of pursuing the most profitable opportunities for our marketing, and related commission, expenditures. Recent Developments Acquisition of Webloyalty On January 14, 2011, the Company and its wholly-owned subsidiary, Affinion Group, Inc. ( Affinion ), entered into, and consummated, an Agreement and Plan of Merger that resulted in our indirect acquisition of all of the capital stock of Webloyalty Holdings, Inc. ( Webloyalty ) and the conversion of Webloyalty securities into our securities. Webloyalty is a leading online marketing services company. Webloyalty provides, designs, and administers online subscription loyalty solutions that offer valuable discounts, services and benefits for its subscribers and provides its clients with programs that enhance their relationship with their customers. In addition to its domestic services, Webloyalty operates in several countries in Europe. In connection with the Webloyalty acquisition, Webloyalty and its domestic subsidiaries have become guarantors under the Affinion Group senior secured credit facility, the indentures governing Affinion s 7.875% senior notes and 11 ½% senior subordinated notes and the indenture governing our notes. 4 As a result of the Merger, (i) Affinion Group Holdings, LLC ( Parent LLC ), which is an affiliate of Apollo Global Management, LLC ( Apollo ), and our existing management investors collectively own approximately 70.4% of our issued and outstanding common stock; (ii) certain investment partnerships sponsored by General Atlantic LLC (collectively, General Atlantic ) collectively own approximately 20.6% of our issued and outstanding common stock; and (iii) other former holders of Webloyalty common stock collectively own approximately 9.0% of our issued and outstanding common stock. Competitive Strengths We generally offer our products and services through affinity marketing relationships, which is a subset of the larger direct marketing industry. Affinity marketing involves marketing products and services to a marketing partner s base of customers. This generally results in higher customer receptiveness as those customers recognize and trust the marketing partner and its brands. In addition, incorporating our marketing partners logos and trademarks in our marketing materials, or co-branding with our marketing partners, provides customers with additional assurances and validation as to the quality of the program or service we are offering. We believe that marketing associated with well-known brands of leading, well-respected companies provides a significant advantage over other forms of direct marketing. We attribute our success and competitive advantage in providing comprehensive customer engagement and loyalty solutions and marketing services to our ability to leverage a number of key strengths, including: Proprietary Technology, Models and Databases. Based on the length of our operating history, we believe our database of actual customer interactions, with approximately 1.2 billion unique records, is the largest and most comprehensive in the industry and cannot be replicated. We track the performance of all of our marketing campaigns across all different media and measure consumer preferences, response rates, and other engagement-related performance and profitability data while adhering to the highest standards of consumer data protection and privacy. We utilize this data to develop highly targeted, individualized marketing programs across multiple media and product offerings for each partner with the goal of strengthening their customer relationships and more precisely identifying types of customers likely to find our products and services of value. We believe our proprietary database increases the efficacy of our marketing, enhances the profitability of our marketing expenditures, allows us to better engage with customers, and helps us to continue to secure and maintain long-term relationships with marketing partners. Expertise in Various Marketing Methods and Types of Media. We have conducted more than 101,000 customer engagement and loyalty program marketing campaigns over the last ten years. We utilize a variety of direct engagement media to market our programs and services, including direct mail, online marketing, point-of-sale marketing, direct response and television marketing, inbound and outbound telephony and voice response unit marketing. We operate a full-service creative agency with expertise in utilizing a wide variety of customer acquisition
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