AFFINION GROUP, INC. – 10-Q – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

 This Quarterly Report on Form 10-Q (this "Form 10-Q") is prepared by Affinion Group, Inc. Unless otherwise indicated or the context otherwise requires, in this Form 10-Q all references to "Affinion," the "Company," "we," "our" and "us" refer to Affinion Group, Inc. and its subsidiaries on a consolidated basis; and all references to "Affinion Holdings" refer to Affinion Group Holdings, Inc., the parent company of 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, 2011 and 2010, and for the years ended December 31, 2011, 2010 and 2009, included in our Annual Report on Form 10-K for the year ended December 31, 2011 (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 and six months ended June 30, 2012 and 2011. 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 six months ended June 30,

2012 and 2011 and our financial condition as of June 30, 2012, 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                                            35 

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management in their application. In addition, we refer you to our audited

consolidated financial statements as of December 31, 2011 and 2010, and

for the years ended December 31, 2011, 2010 and 2009, included in the Form

10-K for a summary of our significant accounting policies.

  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 partner with these leading companies to develop and market 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 identity-theft 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 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 nearly 40 year history, position us to deliver consistent results in a variety of market conditions.  

As of December 31, 2011, we had approximately 71.9 million subscribers and end-customers enrolled in our membership, insurance and package programs worldwide and approximately 127 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 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, 2011, managed

programs

             representing an aggregate estimated redemption value of

approximately

$4.7 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, gift cards and merchandise, and, in 2011, we

facilitated over

$2 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.                                            36 

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• 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.

   We offer our products and services through both retail and wholesale arrangements, although on a wholesale basis, currently we primarily provide 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 marketing expenses to acquire new customers for our subscription-based membership, insurance and package enhancement products with the objective of building highly profitable and predictable recurring future revenue streams and cash flows. For our membership, insurance and package enhancement products, these marketing costs are expensed when the costs are incurred as the campaign is launched.  Our membership programs are offered under a variety of terms and conditions. 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 use the benefits of membership before they are billed. 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 membership 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 is incurred and expensed. Currently, annual memberships are primarily offered 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. During both the six months ended June 30, 2012 and the year ended December 31, 2011, in excess of 95% of our domestic 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. Memberships generally remain under the billing terms in which they were originated.  We generally utilize the brand names and customer contacts of our marketing partners 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, during 2009, as we saw subscriber pay-through rates in our North America Membership Products line begin to drop below historical averages, we began to enter into arrangements with certain marketing partners which we believe offer better utilization of our marketing spend. Under these arrangements, we pay our 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.  We serve as an agent and third-party administrator 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. Insurance revenues are recognized ratably over the insurance period and there are no significant differences between cash flows and related revenue recognition. 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. Our estimated share of profits from these arrangements is reflected as profit-sharing receivables from insurance carriers on the accompanying audited consolidated balance sheets and any changes in estimated profit sharing are periodically recorded as an adjustment to net revenue. Revenue from insurance programs is reported net of insurance costs in the accompanying audited consolidated statements of comprehensive income.  In our wholesale arrangements, we provide products and services as well as customer service and fulfillment related to such products and services supporting our marketing partners' programs that they offer to their customers. 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 and discount shopping and travel purchases by members. The revenues from such transactional activities are recognized in the month earned.                                           37

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  We have made significant progress in increasing the flexibility of our business model by transitioning our operations from a highly fixed-cost structure to a more variable-cost structure by combining similar functions and processes, consolidating facilities and outsourcing a significant portion of our call center and other back-office processing. This added flexibility better enables us to redeploy our 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, to obtain a share of the customers' business. As affinity direct marketers, we derive our leads from customer contacts, which our competitors seek access to, and we must generate sufficient earnings per lead for our marketing partners to compete effectively for access to their customer contacts.  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, with more resources, financial and otherwise.  

We expect this competitive environment to continue in the foreseeable future.

Acquisitions

  On January 14, 2011, the Company and Affinion Holdings entered into, and consummated, an Agreement and Plan of Merger that resulted in the acquisition of Webloyalty Holdings, Inc. and its subsidiaries ("Webloyalty") for $290.7 million. 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.  The Webloyalty acquisition is consistent with our long-standing business strategy in several respects: the acquisition enhances our operations in attractive international markets, including France and the U.K.; it provides us with a technology platform that expands the range of its marketing media, particularly in online channels; and it provides additional economies of scale in the management of our combined product portfolio.  On July 14, 2011, the Company and Affinion Holdings entered into an Agreement and Plan of Merger to acquire Prospectiv Direct, Inc. ("Prospectiv"), an online performance marketer and operator of a daily deal website. On August 1, 2011, the merger was consummated and, as a result, the Company acquired all of the capital stock of Prospectiv for an initial cash purchase price of $31.8 million. If Prospectiv achieves certain performance targets over the 30 month period that commenced on July 1, 2011, the former equity holders will be entitled to additional consideration in the form of an earn-out of up to $45.0 million and certain members of Prospectiv's management will be entitled to receive additional compensation related to their continued employment of up to $10.0 million. Such additional consideration and compensation will be settled in some combination of cash and shares of Affinion Holdings' common stock.  In late March of 2012, Prospectiv implemented a reduction in force and revised its growth plans for 2012 and 2013. Based on these revised growth plans, the Company has concluded that it does not expect to pay any additional consideration in the form of an earn-out or additional compensation based on achievement of performance targets. Accordingly, during the three months ended March 31, 2012, the Company reversed certain accruals for additional consideration recorded as part of the Prospectiv acquisition and additional compensation as the Company will not be able to achieve the growth originally planned for these years due to market conditions. The reduction of these accruals during the three months ended March 31, 2012 reduced general and administrative expense for the six months ended June 30, 2012 by $14.6 million and $1.1 million, respectively.  The Company concluded that the revisions made to the Prospectiv forecast as well as other marketplace events, represented an indication of potential impairment of Prospectiv's goodwill and intangible assets. As a result, during the three months ended June 30, 2012, the Company performed an interim impairment test of the goodwill for Prospectiv, which is a separate reporting unit within the Membership Products reporting segment, as of April 1, 2012. Based on the interim impairment test, the Company recorded an impairment loss during the three months ended June 30, 2012 of $31.5 million, representing all of the goodwill ascribed to Prospectiv                                           38 

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  at the date of acquisition. During the three months ended June 30, 2012, the Company also performed an impairment test related to the intangible assets of Prospectiv as of April 1, 2012 and, based on the impairment test, recorded an impairment loss related to the Prospectiv intangible assets of $8.2 million.  

Financial Industry Trends

  Historically, financial institutions have represented a significant majority of our marketing partner base. In the past few years, a number of our existing financial institution marketing partners have been acquired by, or merged with, other financial institutions. Several relatively recent examples include Bank of America Corporation and Countrywide Financial Corp., JPMorgan Chase & Co. and Washington Mutual, Inc. and Wells Fargo & Co. and Wachovia Corporation. As we generally have relationships with either the acquirer, the target or, as in most cases, both the acquirer and the target, this industry consolidation has not, to date, had a material long-term impact on either our marketing opportunities or our margins, but has created delays in new program launches while the merging institutions focus on consolidating their internal operations.  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 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 has lower net revenue, but unlike our retail arrangement, has no related commission expense. Partially as a result of this trend, we have experienced a revenue reduction in our membership business.  Additionally, 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 was signed into law on July 21, 2010, and is in the process of being fully implemented. Dodd-Frank provides a regulatory framework and requires that regulators draft, review and approve, and implement numerous regulations and conduct studies that are likely to lead to more regulations. As part of this, Dodd-Frank created the Consumer Financial Protection Bureau (the "CFPB") that 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 new and contemplated regulations could impose additional reporting, supervisory, and regulatory requirements on our financial institution marketing partners that could adversely affect 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. If our marketing partners become involved in legal proceedings or governmental inquiries relating to our products or marketing practices this could result in our marketing partners terminating their contracts with us, their inability to facilitate payment processing or their ceasing or changing marketing services and we may be subject to indemnification obligations under our marketing agreements, all of which could have a material impact on our business. Partially as a result of this uncertain regulatory environment, we have experienced slower growth in our domestic membership customer base and domestic membership revenues, and we anticipate that this trend may continue in the near future.  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.  

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; and federal, state and foreign insurance and insurance mediation 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. 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, and impact our ability to obtain information from our members and end-customers. For our insurance products, these regulations limit our ability to implement pricing changes. In addition, new and contemplated regulations enacted by 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 marketing campaigns with certain marketing partners, impact the services and products we provide to consumers, and adversely affect our business, financial condition and results of operations.                                           39

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  We incur significant costs to ensure compliance with these regulations; however, we are party to lawsuits, including class action lawsuits, and state attorney general 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."  

Seasonality

  Historically, seasonality has not had a significant impact on our business. Our revenues are more affected by the timing of marketing programs which can change from year to year depending on the opportunities available and pursued.  

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            Six Months Ended                                                           June 30,                     June 30,                                                      2012           2011          2012          2011 Global Average Subscribers, excluding Basic Insureds                                              43,689        48,619        44,708        48,193 Annualized Net Revenue Per Global Average Subscriber, excluding Basic Insureds(1)           $    30.76      $  28.40      $  30.30      $  28.48 Global Membership Subscribers Average Global Retail Subscribers(2)                  10,702        11,377        10,910        11,407 Annualized Net Revenue Per Global Average Subscriber(1)                                     $    80.85      $  79.32      $  79.83      $  79.52 Global Package Subscribers and Wholesale Average Global Package Subscribers and Wholesale(2)                                          28,813        32,924        29,600        32,455 Annualized Net Revenue per Global Average Package Subscriber(1)                             $     8.52      $   6.43      $   7.74      $   6.40 Global Insureds Average Supplemental Insureds(2)                       4,174         4,318         4,198         4,331 Annualized Net Revenue Per Supplemental Insured(1)                                        $    55.83      $  61.76      $  60.59      $  59.48 Global Average Subscribers, including Basic Insureds                                              65,739        71,047        66,907        70,574    

(1) Annualized Net Revenue Per Global Average Subscriber and Annualized Net

Revenue Per Supplemental Insured are each 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 each calculated by determining the average subscribers or insureds, as

applicable, for each month (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) for each of the months in the period 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.                                           40

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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.

  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 June 30, 2012 Compared to Three Months Ended June 30, 2011

The following table summarizes our consolidated results of operations for the three months ended June 30, 2012 and 2011:

                                                  Three Months          Three Months                                                    Ended                 Ended              Increase                                                June 30, 2012         June 30, 2011         (Decrease) Net revenues                                  $         377.6       $         387.1       $       (9.5 )  Expenses: Cost of revenues, exclusive of depreciation and amortization shown separately below: Marketing and commissions                               150.8                 159.9               (9.1 ) Operating costs                                         115.3                 109.2                6.1 General and administrative                               44.1                  44.6               (0.5 ) Impairment of goodwill and other long-lived assets                                        39.7                    -                39.7 Facility exit costs                                        -                    1.3               (1.3 ) Depreciation and amortization                            49.0                  61.4              (12.4 )  Total expenses                                          398.9                 376.4               22.5  Income from operations                                  (21.3 )                10.7              (32.0 ) Interest income                                           0.2                   0.6               (0.4 ) Interest expense                                        (36.9 )               (38.9 )              2.0 Other income, net                                        (0.4 )                (0.1 )             (0.3 )  Income (loss) before income taxes and non-controlling interest                                (58.4 )               (27.7 )            (30.7 ) Income tax expense                                       (4.3 )                (0.2 )             (4.1 )  Net loss                                                (62.7 )               (27.9 )            (34.8 ) Less: net income attributable to non-controlling interest                                 (0.2 )                (0.3 )              0.1  Net loss attributable to Affinion Group, Inc.                                          $         (62.9 )     $         (28.2 )     $      (34.7 )   

Summary of Operating Results for the Three Months Ended June 30, 2012

The following is a summary of changes affecting our operating results for the three months ended June 30, 2012.

  Net revenues decreased $9.5 million, or 2.5%, for the three months ended June 30, 2012 as compared to the same period of the prior year. Net revenues in our North American units decreased $12.3 million primarily as a result of a higher cost of insurance from higher claims experience in our Insurance and Package business and lower retail revenues in our Membership business which was partially offset by growth from existing clients in our Loyalty business. International segment net revenues increased by $2.8 million, primarily from higher retail revenue, partially offset by lower package revenues and an unfavorable currency impact from the stronger U.S. dollar.                                           41

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  Segment EBITDA decreased $44.4 million primarily due to an impairment charge of $39.7 million of goodwill and certain other intangible assets that were acquired in the August 1, 2011 acquisition of Prospectiv. Excluding this charge Segment EBITDA decreased $4.7 million as the impact of the lower net revenues, along with higher operating costs, more than offset the impact of lower marketing and commissions.  

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

The following section provides an overview of our consolidated results of operations for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011.

  Net Revenues. During the three months ended June 30, 2012 we reported net revenues of $377.6 million, a decrease of $9.5 million, or 2.5%, as compared to net revenues of $387.1 million in the comparable period of 2011. Net revenues of our Membership Products decreased $5.4 million from lower retail member volumes, primarily from the continued, but anticipated, attrition of the domestic member base of Webloyalty, which more than offset higher average revenue per average retail member and higher revenues from the Prospectiv acquisition. Insurance and Package revenues decreased $9.7 million primarily due to a higher cost of insurance from higher claims experience. Loyalty Products net revenues increased $2.7 million which was primarily attributable to increased revenues from existing client programs. International Products net revenues increased $2.8 million primarily from higher retail revenue in our online channel partially offset by lower package revenue and an unfavorable currency impact of $5.0 million as a result of the stronger U.S. dollar.  Marketing and Commissions Expense. Marketing and commissions expense decreased by $9.1 million, or 5.7%, to $150.8 million for the three months ended June 30, 2012 from $159.9 million for the three months ended June 30, 2011. Marketing and commissions expense decreased primarily due to the decreases in our Membership and Insurance and Package businesses partially offset by increases in our International business. The decrease in Membership was primarily the result of the delay in launches of certain marketing campaigns while the increase in International was primarily due to increased spending in our retail channel.  Operating Costs. Operating costs increased by $6.1 million, or 5.6%, to $115.3 million for the three months ended June 30, 2012 from $109.2 million for the three months ended June 30, 2011. Operating costs were higher primarily due to higher fulfillment costs in our Membership and Loyalty businesses.  Impairment of Goodwill and Other Long-Lived Assets. An impairment charge for goodwill and certain intangible assets in the amount of $39.7 million related to our 2011 Prospectiv acquisition was recorded in the three months ended June 30, 2012, primarily the result of lower projected future cash flows and other negative marketplace events in the daily deals business. The impairment charge includes $31.5 million related to all of the goodwill for Prospectiv and $8.2 million related to certain intangible assets ascribed in the August 1, 2011 acquisition, primarily tradenames and technology.  Facility Exit Costs. During the three months ended June 30, 2011, we recorded facility exit costs in the amount of $1.3 million associated with the lease on a Webloyalty facility. These costs represent the present value of future lease payments and other expenses related to the facility through the expiration of the lease, net of any estimated sublease income.  Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $12.4 million for the three months ended June 30, 2012 to $49.0 million from $61.4 million for the three months ended June 30, 2011, primarily from recording $8.6 million less amortization expense in 2012 as compared to 2011 related to intangible assets acquired in the Webloyalty acquisition, principally member relationships, and lower amortization of $2.8 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.  Interest Expense. Interest expense decreased by $2.0 million, or 5.1%, to $36.9 million for the three months ended June 30, 2012 from $38.9 million for the three months ended June 30, 2011, primarily due to a $1.7 million more favorable impact of interest rate swaps in 2012 as compared to 2011.  Income Tax Expense. Income tax expense increased by $4.1 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011, primarily due to an increase in the current state and foreign tax liabilities and deferred federal and foreign tax liabilities for the three months ended June 30, 2012, partially offset by a decrease in deferred state tax liabilities for the same period.                                           42 

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  Our effective income tax rates for the three months ended June 30, 2012 and 2011 were (7.3)% and (0.7)%, respectively. The difference in the effective tax rates for the three months ended June 30, 2012 and 2011 is primarily a result of the increase in loss before income taxes and non-controlling interest from $27.7 million for the three months ended June 30, 2011 to $58.4 million for the three months ended June 30, 2012 and an increase in income tax expense from $0.2 million for the three months ended June 30, 2011 to $4.3 million for the three months ended June 30, 2012. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn 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%.  Operating Segment Results 

Net revenues and Segment EBITDA by operating segment are as follows:

                                                                     Three Months Ended June 30,                                                    Net Revenues                             Segment EBITDA(1)                                                                   Increase                                    Increase                                        2012         2011         (Decrease)        2012         2011         (Decrease)                                                                         (in millions) Affinion North America Membership Products                   $ 189.5      $ 194.9      $       

(5.4 ) $ 31.7$ 34.8 $ (3.1 ) Insurance and Package Products

           75.3         85.0              (9.7 )       19.2         22.5              (3.3 ) Loyalty Products                         37.4         34.7               2.7         12.2         10.9               1.3 Eliminations                             (0.7 )       (0.8 )             0.1           -            -                 -  Total North America                     301.5        313.8             (12.3 )       63.1         68.2              (5.1 ) Affinion International International Products                   76.1         73.3               2.8         10.0          9.8               0.2  Total products                          377.6        387.1              (9.5 )       73.1         78.0              (4.9 ) Corporate                                  -            -                 -          (5.7 )       (5.9 )             0.2 Impairment of goodwill and other long-lived assets                          -            -                 -         (39.7 )         -              (39.7 )  Total                                 $ 377.6      $ 387.1      $       (9.5 )       27.7         72.1             (44.4 )  Depreciation and amortization                                                       (49.0 )      (61.4 )            12.4  Income (loss) from operations                                                     $ (21.3 )    $  10.7      $      (32.0 )     

(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 $5.4 million, or 2.8%, to $189.5 million for the three months ended June 30, 2012 as compared to $194.9 million for the three months ended June 30, 2011. Net revenues decreased primarily from lower retail member volumes, primarily from the continued, but anticipated, attrition of the domestic member base of Webloyalty, which more than offset higher average revenue per average retail member and higher revenues from the Prospectiv acquisition.  Segment EBITDA decreased by $3.1 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. Segment EBITDA decreased primarily due to the lower net revenues of $5.4 million and higher operating costs of $6.0 million, principally due to increased costs associated with higher membership and one-time conversion costs for our identity theft protection programs. These factors more than offset lower marketing and commissions of $7.4 million, primarily from the timing of launches for certain marketing campaigns, and lower facility exit costs of $1.3 million.                                           43

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  Insurance and Package Products. Insurance and Package Products net revenues decreased by $9.7 million, or 11.4%, to $75.3 million for the three months ended June 30, 2012 as compared to $85.0 million for the three months ended June 30, 2011. Insurance revenue decreased approximately $8.7 million primarily from a higher cost of insurance from higher claims experience. Package revenue decreased approximately $0.9 million primarily from lower fee-based revenue from our NetGain product.  Segment EBITDA decreased by $3.3 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011, primarily due to the lower net revenues which were partially offset by lower marketing and commissions and lower general and administrative costs.  Loyalty Products. Revenues from Loyalty Products increased by $2.7 million, or 7.8%, for the three months ended June 30, 2012 to $37.4 million as compared to $34.7 million for the three months ended June 30, 2011 primarily due to growth from existing clients.  

Segment EBITDA increased by $1.3 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011, as the higher net revenue was partially offset by higher product and servicing costs.

Affinion International

  International Products. International Products net revenues increased by $2.8 million, or 3.8%, to $76.1 million for the three months ended June 30, 2012 as compared to $73.3 million for the three months ended June 30, 2011. Net revenues increased primarily from higher retail revenues in our online channel and were partially offset by lower package revenue and an unfavorable impact of $5.0 million as a result of the stronger U.S. dollar.  Segment EBITDA increased by $0.2 million for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 as the positive impact of the higher revenue was primarily offset by higher marketing and commissions from increased spending in our retail channel.  

Corporate

  Corporate costs decreased by $0.2 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 as lower costs associated with stock compensation plans of $2.4 million were primarily offset by a $2.2 million negative impact from foreign exchange on intercompany borrowings in 2012 as compared to 2011.  

Impairment of Goodwill and Other Long-Lived Assets

  An impairment charge for goodwill and certain intangible assets in the amount of $39.7 million related to our 2011 Prospectiv acquisition was recorded during the three months ended June 30, 2012, primarily the result of lower projected future cash flows and other negative marketplace events in the daily deals business. The impairment charge includes $31.5 million related to all of the goodwill for Prospectiv and $8.2 million related to certain intangible assets ascribed in the August 1, 2011 acquisition, primarily tradenames and technology.  

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

The following table summarizes our consolidated results of operations for the six months ended June 30, 2012 and 2011:

                                                Six Months             Six Months                                                 Ended                  Ended               Increase                                             June 30, 2012          June 30, 2011          (Decrease) Net revenues                               $         759.4        $         754.0        $        5.4  Expenses: Cost of revenues, exclusive of depreciation and amortization shown separately below: Marketing and commissions                            305.6                  303.8                 1.8 Operating costs                                      233.4                  217.2                16.2 General and administrative                            66.1                   97.4               (31.3 ) Impairment of goodwill and other long-lived assets                                     39.7                     -                 39.7 Facility exit costs                                     -                     1.3                (1.3 )                                            44 

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  Table of Contents                                             Six Months              Six Months                                                Ended                   Ended                Increase                                            June 30, 2012           June 30, 2011           (Decrease) Depreciation and amortization                        99.1                   122.9                (23.8 )  Total expenses                                      743.9                   742.6                  1.3  Income from operations                               15.5                    11.4                  4.1 Interest income                                       0.5                     0.8                 (0.3 ) Interest expense                                    (74.5 )                 (74.7 )                0.2 Other income, net                                    (0.3 )                  (0.1 )               (0.2 )  Income (loss) before income taxes and non-controlling interest                        (58.8 )                 (62.6 )                3.8 Income tax expense                                   (7.0 )                  (4.7 )               (2.3 )  Net loss                                            (65.8 )                 (67.3 )                1.5 Less: net income attributable to non-controlling interest                             (0.4 )                  (0.5 )                0.1  Net loss attributable to Affinion Group, Inc.                               $         (66.2 )       $         (67.8 )       $        1.6   

Summary of Operating Results for the Six Months Ended June 30, 2012

The following is a summary of changes affecting our operating results for the six months ended June 30, 2012.

  Net revenues increased $5.4 million, or 0.7%, for the six months ended June 30, 2012 as compared to the same period of the prior year. Net revenues in our North American units decreased $3.8 million, primarily as a result of the absence in 2012 of a one-time payment from an insurance provider in our Insurance and Package business and lower retail revenues in our Membership business which more than offset higher net revenues from the acquisition of Prospectiv, and growth from existing clients in our Loyalty business. International segment net revenues increased by $9.2 million, primarily from higher retail revenue partially offset by lower package revenue and an unfavorable currency impact from the stronger U.S. dollar.  Segment EBITDA decreased $19.7 million, primarily due to an impairment charge of $39.7 million of goodwill and certain other intangible assets that were acquired in the August 1, 2011 acquisition of Prospectiv. Excluding this charge, Segment EBITDA increased $20.0 million as the positive impact of the higher revenues along with lower general and administrative costs, more than offset higher operating costs. The lower general and administrative costs were primarily due to the absence in 2012 of a special cash distribution of $14.8 million to option holders in connection with dividends paid by Affinion Holdings to stockholders in January 2011 and February 2011, and the reversal of a $14.6 million liability in connection with previously anticipated earn-out payments originally recorded in 2011 for the Prospectiv acquisition.  

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

The following section provides an overview of our consolidated results of operations for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011.

  Net Revenues. During the six months ended June 30, 2012 we reported net revenues of $759.4 million, an increase of $5.4 million, or 0.7%, as compared to net revenues of $754.0 million in the comparable period in 2011. Net revenues of our Membership Products decreased $0.8 million as lower revenues from lower retail member volumes, primarily from the continued, but anticipated, attrition of the domestic member base of Webloyalty, which more than offset higher revenues from the Prospectiv acquisition and higher volumes in wholesale arrangements. Insurance and Package net revenues decreased $11.7 million primarily due to the absence in 2012 of a one-time payment from an insurance provider along with lower package revenue. Loyalty Products net revenues increased $8.3 million primarily attributable to increased revenues from existing client programs. International Products net revenues increased $9.2 million primarily from higher retail revenue in our online channel partially offset by lower package revenue and an unfavorable currency impact of $7.3 million as a result of the stronger U.S. dollar.  Marketing and Commissions Expense. Marketing and commissions expense increased by $1.8 million, or 0.6%, to $305.6 million for the six months ended June 30, 2012 from $303.8 million for the six months ended June 30, 2011. Marketing and commissions expense increased primarily due to increases in our International business primarily due to increased spending in our retail channel and was partially offset by decreases in our Membership business, primarily from delayed program launches, and our Insurance and Package business.                                           45

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  Operating Costs. Operating costs increased by $16.2 million, or 7.5%, to $233.4 million for the six months ended June 30, 2012 from $217.2 million for the six months ended June 30, 2011. Operating costs were higher primarily due to higher fulfillment costs in our Membership business from higher membership and one-time conversion costs in our identity theft protection programs and our Loyalty business from the revenue growth in client programs and certain start up costs in our International business related to new markets.  General and Administrative Expense. General and administrative expense decreased by $31.3 million, or 32.1%, to $66.1 million for the six months ended June 30, 2012 from $97.4 million for the six months ended June 30, 2011 primarily from the absence in 2012 of a special cash distribution of $14.8 million to option holders in connection with dividends paid by Affinion Holdings to stockholders in January 2011 and February 2011 and the reversal of a liability of $14.6 million in connection with anticipated earn-out payments originally recorded in 2011 for the Prospectiv acquisition.  Impairment of Goodwill and Other Long-Lived Assets. An impairment charge for goodwill and certain intangible assets in the amount of $39.7 million related to our 2011 Prospectiv acquisition was recorded in the six months ended June 30, 2012, primarily the result of lower projected future cash flows and other negative marketplace events in the daily deals business. The impairment charge includes $31.5 million related to all of the goodwill for Prospectiv and $8.2 million related to certain intangible assets ascribed in the August 1, 2011 acquisition, primarily tradenames and technology.  Facility Exit Costs. During the six months ended June 30, 2011, we recorded facility exit costs in the amount of $1.3 million associated with the lease on a Webloyalty facility. These costs represent the present value of future lease payments and other expenses related to the facility through the expiration of the lease, net of any estimated sublease income.  Depreciation and Amortization Expense. Depreciation and amortization expense decreased by $23.8 million for the six months ended June 30, 2012 to $99.1 million from $122.9 million for the six months ended June 30, 2011, primarily from recording $16.9 million less amortization expense in 2012 as compared to 2011 related to intangible assets acquired in the Webloyalty acquisition, principally member relationships, and lower amortization of $5.6 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.  Interest Expense. Interest expense decreased by $0.2 million, or 0.3%, to $74.5 million for the six months ended June 30, 2012 from $74.7 million for the six months ended June 30, 2011, as a more favorable impact of interest rate swaps in 2012 as compared to 2011 substantially offset higher accreted interest on non-interest bearing liabilities.  Income Tax Expense. Income tax expense increased by $2.3 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, primarily due to an increase in the current state and foreign tax liabilities and deferred federal and foreign tax liabilities for the six months ended June 30, 2012, partially offset by a decrease in deferred state tax liabilities for the same period.  Our effective income tax rates for the six months ended June 30, 2012 and 2011 were (11.9)% and (7.5)%, respectively. The difference in the effective tax rates for the six months ended June 30, 2012 and 2011 is primarily a result of the decrease in loss before income taxes and non-controlling interest from $62.6 million for the six months ended June 30, 2011 to $58.8 million for the six months ended June 30, 2012 and an increase in income tax expense from $4.7 million for the six months ended June 30, 2011 to $7.0 million for the six months ended June 30, 2012. Our tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amount of income we earn 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%.                                           46 

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Operating Segment Results

Net revenues and Segment EBITDA by operating segment are as follows:

                                                                       Six Months Ended June 30,                                                    Net Revenues                              Segment EBITDA(1)                                                                   Increase                                     Increase                                        2012         2011         (Decrease)        2012          2011         (Decrease)                                                                          (in millions) Affinion North America Membership Products                   $ 377.4      $ 378.2      $       (0.8 )    $  76.9      $   66.3      $       10.6 Insurance and Package Products          161.2        172.9             (11.7 )       50.5          54.2              (3.7 ) Loyalty Products                         75.8         67.5               8.3         24.6          21.1               3.5 Eliminations                             (1.3 )       (1.7 )             0.4           -             -                 -  Total North America                     613.1        616.9              (3.8 )      152.0         141.6              10.4 Affinion International International Products                  146.3        137.1               9.2         11.2          13.7              (2.5 )  Total products                          759.4        754.0               5.4        163.2         155.3               7.9 Corporate                                  -            -                 -          (8.9 )       (21.0 )            12.1 Impairment of goodwill and other long-lived assets                          -            -                 -         (39.7 )          -              (39.7 )  Total                                 $ 759.4      $ 754.0      $        5.4        114.6         134.3             (19.7 )  Depreciation and amortization                                                       (99.1 )      (122.9 )            23.8  Income from operations                                                            $  15.5      $   11.4      $        4.1     

(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 $0.8 million, or 0.2%, to $377.4 million for the six months ended June 30, 2012 as compared to $378.2 million for the six months ended June 30, 2011. Net revenues decreased primarily due to lower retail member volumes, primarily from the continued, but anticipated, attrition of the domestic member base of Webloyalty, which more than offset the higher revenues from higher average revenue per average retail member, revenues from the Prospectiv acquisition and higher volumes in wholesale arrangements.  Segment EBITDA increased by $10.6 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. Segment EBITDA increased due to lower general and administrative costs of $16.7 million which primarily resulted from the reversal of a liability of $14.6 million in connection with previously anticipated earn-out payments originally recorded in 2011 related to the Prospectiv acquisition, in addition to lower marketing and commissions of $4.2 million, partially offset by higher operating costs of $10.8 million. The lower marketing and commissions was primarily due to the timing of launches for certain marketing campaigns while the higher operating costs were principally due to increased costs associated with higher membership and one-time conversion costs for our identity theft protection programs.  Insurance and Package Products. Insurance and Package Products net revenues decreased by $11.7 million, or 6.8%, to $161.2 million for the six months ended June 30, 2012 as compared to $172.9 million for the six months ended June 30, 2011. Insurance revenue decreased approximately $9.5 million primarily from the absence in 2012 of a one-time payment from an insurance provider in the first quarter of 2011. Package revenue decreased approximately $2.2 million primarily from lower fee-based revenue from our NetGain product and to lower annualized net revenue per average package member.  Segment EBITDA decreased by $3.7 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, primarily due to the lower net revenues which were partially offset by lower marketing and commissions and lower general and administrative costs.  Loyalty Products. Revenues from Loyalty Products increased by $8.3 million, or 12.3%, for the six months ended June 30, 2012 to $75.8 million as compared to $67.5 million for the six months ended June 30, 2011 primarily due to growth from existing clients.  Segment EBITDA increased by $3.5 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011, as the higher net revenue was partially offset by higher product and servicing costs.                                           47

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Affinion International

  International Products. International Products net revenues increased by $9.2 million, or 6.7%, to $146.3 million for the six months ended June 30, 2012 as compared to $137.1 million for the six months ended June 30, 2011. Net revenues increased primarily from higher retail revenue in our online channel, partially offset by lower package revenue and an unfavorable impact of $7.3 million as a result of the stronger U.S. dollar.  Segment EBITDA decreased by $2.5 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 as the positive impact of the higher revenue was more than offset by higher marketing and commissions from increased spending in our retail channel and higher costs associated with start up activities related to new markets.  

Corporate

  Corporate costs decreased by $12.1 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011, primarily due to the absence in 2012 of a charge for $14.8 million related to cash distributions made to option holders in connection with dividends paid by Affinion Holdings to its common stockholders in January and February of 2011 which was partially offset by a $3.3 million negative impact from foreign exchange on intercompany borrowings in 2012 as compared to 2011.  

Impairment of Goodwill and Other Long-Lived Assets

  An impairment charge for goodwill and certain intangible assets in the amount of $39.7 million related to our 2011 Prospectiv acquisition was recorded during the six months ended June 30, 2012, primarily the result of lower projected future cash flows and other negative marketplace events in the daily deals business. The impairment charge includes $31.5 million related to all of the goodwill for Prospectiv and $8.2 million related to certain intangible assets ascribed in the August 1, 2011 acquisition, primarily tradenames and technology.  

Financial Condition, Liquidity and Capital Resources

Financial Condition-June 30, 2012 and December 31, 2011

                                                                             Increase                           June 30, 2012        December 31, 2011        (Decrease)                                                (in millions)      Total assets        $       1,508.0      $           1,651.0      $     (143.0 )      Total liabilities           2,624.2                  2,662.7             (38.5 )      Total deficit              (1,116.2 )               (1,011.7 )          (104.5 )   Total assets decreased by $143.0 million principally due to (i) a decrease in other intangibles, net of $83.2 million, principally due to amortization expense of $74.6 million and an $8.2 million impairment of intangible assets acquired in the Prospectiv acquisition, (ii) a decrease in cash of $37.8 million (see "-Liquidity and Capital Resources-Cash Flows"), and (iii) a decrease in goodwill of $32.5 million, principally related to a $31.5 million impairment of the goodwill established in connection with the Prospectiv acquisition. These decreases were partially offset by an increase in receivables of $21.7 million, principally due to the timing of payments from clients for loyalty services, including payments for gift cards utilized for loyalty program fulfillment, and the impact of seasonality of travel services.  Total liabilities decreased by $38.5 million, primarily due to a decrease in deferred revenue of $24.4 million due to the continuing shift of the membership base to monthly memberships, and a decrease in other long-term liabilities of $13.2 million, principally due to the release of the earn-out liability established in connection with the Prospectiv acquisition.  

Total deficit increased by $104.5 million, principally due to a net loss attributable to the Company of $66.2 million, a return of capital to the Company's parent of $37.0 million and foreign currency translation effect of $1.6 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 our revolving credit facility will be                                           48

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  sufficient to meet our liquidity needs for the next twelve months and in the foreseeable future, including quarterly amortization payments on our term loan facility under our $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 our amended and restated senior secured credit facility.  Affinion Group, Inc. is a holding company, with no direct operations and no significant assets other than the direct and indirect ownership of its subsidiaries. Because we conduct our operations through our subsidiaries, our cash flows and our ability to service our indebtedness is dependent upon cash dividends and distributions or other transfers from our subsidiaries. Payments to us by our subsidiaries are contingent upon our subsidiaries' earnings, but are not limited by our debt agreements, including our senior secured credit facility and the indentures governing our 7.875% senior notes and our senior subordinated 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 which 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.  On January 18, 2011, utilizing available cash on hand, the Company paid a dividend of approximately $123.4 million to Affinion Holdings. Affinion Holdings utilized the proceeds of the dividend and available cash on hand to (i) redeem approximately $41.2 million liquidation preference of Affinion Holdings' outstanding preferred stock, (ii) pay a dividend to Affinion Holdings' 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 Affinion Holdings' option holders of approximately $9.6 million and (iv) pay additional amounts for transaction fees and expenses.  On February 11, 2011, utilizing borrowings under the term loan facility, the Company paid a dividend of approximately $199.8 million to Affinion Holdings, and expects to use the balance of the proceeds for working capital and other corporate purposes and to fund future strategic initiatives. Affinion Holdings utilized the proceeds of the dividend to (i) redeem approximately $5.4 million liquidation preference of Affinion Holdings' outstanding preferred stock, (ii) pay a dividend to Affinion Holdings' 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 Affinion Holdings' option holders of approximately $5.2 million and (iv) pay additional amounts for transaction fees and expenses.  On April 9, 2012, the Company declared, and on April 10, 2012, the Company paid a dividend of $37.0 million to Affinion Holdings, utilizing available cash on hand. Affinion Holdings expects to utilize the proceeds of the dividend to make future interest payments on its senior notes.  

Cash Flows-Six Months Ended June 30, 2012 and 2011

  At June 30, 2012, we had $48.5 million of cash and cash equivalents on hand, a decrease of $28.3 million from $76.8 million at June 30, 2011. 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.                                                          Six Months Ended June 30,                                                   2012         2011        Change                                                           (in millions)       Cash provided by (used in):       Operating activities                      $   33.7      $  28.4      $   5.3       Investing activities                         (28.2 )       (1.0 )      (27.2 )       Financing activities                         (42.9 )      (73.1 )    

30.2

      Effect of exchange rate changes               (0.4 )        1.4      

(1.8 )

       Net change in cash and cash equivalents   $  (37.8 )    $ (44.3 )    $   6.5    Operating Activities  During the six months ended June 30, 2012, we generated $5.3 million more cash from operating activities than during the six months ended June 30, 2011. Segment EBITDA decreased by $19.7 million for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 (see "-Results of Operations"). Accounts payable and accrued expenses generated cash flows                                           49

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  that were $40.2 million more favorable due to the impact of the timing of payments to travel vendors, primarily in the International travel business, and certain accruals recognized during the six months ended June 30, 2011 related to the Webloyalty acquisition, partially offset by the impact of timing of payments for gift cards utilized for loyalty program fulfillment. This favorability was partially offset by less favorable cash flow generated by accounts receivable due to timing of receipts, including the impact of new loyalty program clients and growth in loyalty programs with existing clients, and timing of marketing support payments from insurance carriers.  

Investing Activities

  We used $27.2 million more cash in investing activities during the six months ended June 30, 2012 as compared to the same period in 2011. During the six months ended June 30, 2012, we used $27.2 million for capital expenditures and $1.2 million for acquisition-related payments. During the six months ended June 30, 2011, we acquired $26.1 million of cash as a result of our non-cash acquisition of Webloyalty and used $24.9 million for capital expenditures and $3.6 million for capital expenditures.  

Financing Activities

  We used $30.2 million less cash in financing activities during the six months ended June 30, 2012 as compared to the same period in 2011. During the six months ended June 30, 2012, we paid dividends to our parent company of $37.0 million and made principal payments on borrowings of $5.9 million. During the six months ended June 30, 2011, we borrowed an additional $250.0 million under the term loan facility under our senior secured credit facility, made principal payments on our debt of $5.9 million and incurred financing costs of $5.5 million. In addition, during the six months ended June 30, 2011, we paid dividends of $323.2 million to our parent company.  

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. As of June 30, 2012, we had approximately $1.9 billion in indebtedness. Payments required to service this indebtedness have substantially increased our liquidity requirements as compared to prior years.  As part of the Apollo Transactions, we issued senior notes, entered into a senior subordinated bridge loan facility and entered into our 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 we 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.  On April 26, 2006, we issued $355.5 million aggregate principal amount of 11 1/2% senior subordinated notes due October 15, 2015 (the "senior subordinated notes") and applied the gross proceeds of $350.5 million to repay $349.5 million of outstanding borrowings under our senior subordinated loan facility, plus accrued interest including as part of refinancing our senior subordinated bridge loan facility, and used cash on hand to pay fees and expenses associated with such issuance. The interest on our senior subordinated notes is payable semi-annually. We may redeem some or all of the senior subordinated notes at the redemption prices (generally at a premium) set forth in the indenture governing the senior subordinated notes. The senior subordinated notes are unsecured obligations. The senior subordinated notes are guaranteed by the same subsidiaries that guarantee our senior secured credit facility and our 7.875% senior notes. The senior subordinated notes contain restrictive covenants related primarily to our ability to distribute dividends to our parent, redeem or repurchase capital stock, sell assets, issue additional debt or merge with or acquire other companies.  On April 9, 2010, the Company, as borrower, and Affinion Holdings, as guarantor, entered into a $1.0 billion amended and restated senior secured credit facility with its lenders, amending our senior secured credit facility. We refer to the amended and restated senior secured credit facility, as amended from time to time, including by the Incremental Assumption Agreements (as defined below) as "our senior secured credit facility". Our senior secured credit facility initially consisted of a five-year $125.0 million revolving credit facility and an $875.0 million term loan facility.  On November 19, 2010, the Company completed a private offering of $475.0 million aggregate principal amount of 7.875% senior notes due 2018 (the "7.875% senior notes") providing net proceeds of $471.5 million. The 7.875% 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. The 7.875% senior notes will mature on December 15, 2018. The 7.875% senior notes are redeemable at the Company's option prior to maturity. The indenture governing the 7.875% senior notes contains negative covenants which restrict the ability of the Company and its restricted subsidiaries to engage in certain transactions and also contains customary events of default. The Company's obligations                                           50

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  under the 7.875% senior notes are jointly and severally and fully and unconditionally guaranteed on a senior secured basis by each of the Company's existing and future domestic subsidiaries that guarantee the Company's indebtedness under its senior secured credit facility. The 7.875% senior notes and guarantees thereof are senior unsecured obligations of the Company and rank equally with all of the Company's and the guarantors' existing and future senior indebtedness and senior to the Company's and the guarantors' existing and future subordinated indebtedness. The 7.875% senior notes are effectively subordinated to the Company's and the guarantors' existing and future secured indebtedness, including the Company's obligations under its senior secured credit facility, to the extent of the value of the collateral securing such indebtedness. The 7.875% senior notes are structurally subordinated to all indebtedness and other obligations of each of the Company's existing and future subsidiaries that are not guarantors. On August 24, 2011, pursuant to the registration rights agreement entered into in connection with the issuance of the 7.875% senior notes, the Company completed a registered exchange offer and exchanged all of the then-outstanding 7.875% senior notes into a like principal amount of 7.875% senior notes that have been registered under the Securities Act. The Company used substantially all of the net proceeds of the offering of the 7.875% senior notes to finance the purchase of all of then-outstanding senior notes that were previously issued in 2005, 2006 and 2009.  On December 13, 2010, the Company, as borrower, Affinion Holdings and certain of the Company's subsidiaries entered into an Incremental Assumption Agreement with two of its 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 upon the satisfaction of certain conditions. These conditions were satisfied in January 2011 and the revolving credit facility was increased to $165.0 million. On February 11, 2011, the Company, as borrower, and Affinion Holdings, and certain of the Company'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.  The revolving credit facility includes a letter of credit subfacility and a swingline loan subfacility. The term loan facility matures in October 2016. However, the term loan facility will mature on the date that is 91 days prior to the maturity of the senior subordinated notes unless, prior to that date, (a) the maturity for our senior subordinated notes is extended to a date that is at least 91 days after the maturity of the term loan facility or (b) the obligations under our senior subordinated notes are (i) repaid in full or (ii) refinanced, replaced or defeased in full with new loans and/or debt securities with maturity dates occurring after the maturity date of the term loan. 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 the term loan facility and the revolving loans under the credit facility are based on, at our option, (a) the higher of (i) adjusted LIBOR and (ii) 1.50%, in each case plus 3.50%, or (b) the highest of (i) Bank of America, N.A.'s prime rate, (ii) the Federal Funds Effective Rate plus 0.5% and (iii) 2.50%, in each case plus 2.50%. The effective interest rate on the term loan for the six months ended June 30, 2012 and the year ended December 31, 2011 was 5% per annum. Our obligations under our senior secured credit facility are, and our 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 our existing and subsequently acquired or organized domestic subsidiaries, subject to certain exceptions. Our 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 our capital stock and (ii) us and the subsidiary guarantors, including but not limited to: (a) a pledge of substantially all capital stock held by us or any subsidiary guarantor and (b) security interests in substantially all tangible and intangible assets of us and each subsidiary guarantor, subject to certain exceptions. Our senior secured credit facility also contains financial, affirmative and negative covenants. The negative covenants in our senior secured credit facility include, among other things, limitations (all of which are subject to certain exceptions) on our (and in certain cases, Affinion Holdings') ability to declare dividends and make other distributions, redeem or repurchase our capital stock; prepay, redeem or repurchase certain of our subordinated indebtedness; make loans or investments (including acquisitions); incur additional indebtedness (subject to certain exceptions); enter into agreements that would restrict the ability of our subsidiaries to pay dividends; merge or enter into acquisitions; sell our assets; and enter into transactions with our affiliates. The credit facility also requires us to comply with financial maintenance covenants with a maximum ratio of total debt to EBITDA (as defined in our senior secured credit facility) and a minimum ratio of EBITDA to cash interest expense. The April 2010 proceeds of the term loan under our senior secured credit facility were utilized to repay the outstanding balance of the then existing senior secured term loan, including accrued interest, of $629.7 million and pay fees and expenses of approximately $27.0 million. The remaining proceeds are available for working capital and other general corporate purposes, including permitted acquisitions and investments. Any borrowings under the revolving credit facility are available to fund Affinion's working capital requirements, capital expenditures and for other general corporate purposes.                                           51 

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  In January 2011, utilizing available cash on hand, the Company paid a dividend of approximately $123.4 million to Affinion Holdings. Affinion Holdings utilized the proceeds of the dividend and available cash on hand to (i) redeem Affinion Holdings' outstanding preferred stock with a liquidation preference of approximately $41.2 million, (ii) pay a dividend to Affinion Holdings' 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 Affinion Holdings' option holders of approximately $9.6 million and (iv) pay additional amounts for transaction fees and expenses.  In February 2011, the Company used a portion of the Incremental Term Loans to pay a dividend of approximately $199.8 million to Affinion Holdings, and expects to use the balance of the proceeds for working capital and other corporate purposes and to fund future strategic initiatives. Affinion Holdings used the proceeds of the dividend to (i) redeem Affinion Holdings' outstanding preferred stock with a liquidation preference of approximately $5.4 million, (ii) pay a dividend to Affinion Holdings' 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 Affinion Holdings' option holders of approximately $5.2 million and (iv) pay additional amounts for transaction fees and expenses.  At June 30, 2012, the Company had $1,101.6 million outstanding under the term loan facility, $475.0 million ($472.2 million net of discount) outstanding under the 7.875% senior notes and $355.5 million ($353.7 million net of discount) outstanding under the senior subordinated notes. At June 30, 2012, there were no outstanding borrowings under the revolving credit facility and the Company had $158.1 million available under the revolving credit facility after giving effect to the issuance of $6.9 million of letters of credit issued under the revolving credit facility.  Covenant Compliance  Our senior secured credit facility and the indentures that govern our 7.875% senior notes and our senior subordinated notes contain various restrictive covenants. They prohibit us from prepaying indebtedness that is junior to such debt (subject to certain exceptions). Our senior secured credit facility requires us to maintain a specified minimum interest coverage ratio and a maximum consolidated leverage ratio. The interest coverage ratio as defined in our senior secured credit facility (Adjusted EBITDA, as defined, to interest expense, as defined) must be greater than 1.85 to 1.0 at June 30, 2012. The consolidated leverage ratio as defined in our senior secured credit facility (total debt, as defined, to Adjusted EBITDA, as defined) must be less than 5.75 to 1.0 at June 30, 2012. In addition, our senior secured credit facility, among other things, restricts our ability to incur indebtedness or liens, make investments or declare or pay any dividends to our parent. The indentures governing the 7.875% senior notes and the senior subordinated notes, among other things: (a) limit 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) limit 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) place 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 June 30, 2012, 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 our senior secured credit facility and the indentures governing our 7.875% senior notes and senior subordinated notes. Under the indentures governing our 7.875% senior notes and our senior subordinated notes, in addition to specified permitted indebtedness, we will be able to incur additional indebtedness as long as on a pro forma basis our fixed charge coverage ratio (the ratio of Adjusted EBITDA to consolidated fixed charges) 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 June 30, 2012 to Adjusted EBITDA.

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  Table of Contents                                                                      Twelve Months                                                                          Ended                                                                        June 30,                                                                        2012 (a)                                                                      (in millions) Net cash provided by operating activities                           $         112.3 Interest expense, net                                                         147.4 Income tax expense                                                              7.5 Amortization of favorable and unfavorable contracts                         

0.6

 Amortization of debt discount and financing costs                              (8.4 ) Unrealized loss on interest rate swap                                          (4.2 ) Deferred income taxes                                                       

(2.9 ) Payment received for assumption of loyalty points program liability

                                                                      (4.2 ) Changes in assets and liabilities                                           

55.3

Effect of the Apollo Transactions, reorganizations, certain legal costs and net cost savings(b)

25.3

 Other, net(c)                                                               

23.8

  Adjusted EBITDA, excluding pro forma adjustments(d)                         

352.5

 Effect of the pro forma adjustments(e)                                      

10.3

  Adjusted EBITDA, including pro forma adjustments(f)                 $         362.8     

(a) Represents consolidated financial data for the year ended December 31, 2011,

minus consolidated financial data for the six months ended June 30, 2011,

plus consolidated financial data for the six months ended June 30, 2012.

(b) Eliminates the effect of the Apollo Transactions and 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 related to acquisitions and (v) consulting fees paid to Apollo.

(d) Adjusted EBITDA, excluding pro forma adjustments, does not give pro forma

effect to (i) our acquisition of Prospectiv that was completed in the third

quarter of 2011 and (ii) the projected annualized benefits of restructurings

and other cost savings initiatives in connection with the Webloyalty and

Prospectiv acquisitions. However, we do make such accretive pro forma

adjustments as if such acquisition and such restructurings and cost savings

initiatives had occurred on July 1, 2011 in calculating the Adjusted EBITDA

under the amended and restated senior secured credit facility and the

indentures governing our 7.875% senior notes and senior subordinated notes.

(e) Gives effect to the completion of the Prospectiv acquisition and the

projected annualized benefits of restructurings and other cost savings

initiatives in connection with the Webloyalty and Prospectiv acquisitions as

if such acquisitions and restructurings and cost savings initiatives had

occurred on July 1, 2011.

(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 attributable to Affinion Group, Inc. for the twelve months ended June 30, 2012 to Adjusted EBITDA as required by our credit facility and the indentures governing our 7.875% senior notes and senior subordinated notes.

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  Table of Contents                                                                      Twelve Months                                                                          Ended                                                                        June 30,                                                                        2012 (a)                                                                      (in millions) Net loss attributable to Affinion Group, Inc.                       $        (108.1 ) Interest expense, net                                                         147.4 Income tax expense                                                              7.5 Non-controlling interest                                                        0.8 Depreciation and amortization                                                 214.9

Effect of the Apollo Transactions, reorganizations and non-recurring revenues and gains(b)

   (1.3 ) Certain legal costs(c)                                                         13.0 Net cost savings(d)                                                            13.6 Other, net(e)                                                                  64.7  Adjusted EBITDA, excluding pro forma adjustments(f)                         

352.5

 Effect of the pro forma adjustments(g)                                      

10.3

  Adjusted EBITDA, including pro forma adjustments(h)                 $       

362.8

  Interest coverage ratio(i)                                                  

2.36

 Consolidated leverage ratio(j)                                              

5.22

 Fixed charge coverage ratio(k)                                                 2.38    

(a) Represents consolidated financial data for the year ended December 31, 2011,

minus consolidated financial data for the six months ended June 30, 2011,

plus consolidated financial data for the six months ended June 30, 2012.

(b) Eliminates the effect of the Apollo Transactions.

(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, including payments to option holders, (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 related to acquisitions, (vi) consulting fees paid to Apollo,

(vii) facility exit costs and (viii) the impairment charge related to the

goodwill and certain intangible assets of Prospectiv.

(f) Adjusted EBITDA, excluding pro forma adjustments, does not give pro forma

effect to (i) our acquisition of Prospectiv that was completed in the third

quarter of 2011 and (ii) the projected annualized benefits of restructurings

and other cost savings initiatives in connection with the Webloyalty and

Prospectiv acquisitions. However, we do make such accretive pro forma

adjustments as if such acquisition and such restructurings and cost savings

initiatives had occurred on July 1, 2011 in calculating the Adjusted EBITDA

under the amended and restated senior secured credit facility and the

indentures governing our 7.875% senior notes and senior subordinated notes.

(g) Gives effect to the completion of the Prospectiv acquisition and the

projected annualized benefits of restructurings and other cost savings

initiatives in connection with the Webloyalty and Prospectiv acquisitions as

if such acquisitions and restructurings and cost savings initiatives had

occurred on July 1, 2011.

(h) Adjusted EBITDA, including pro forma adjustments, gives pro forma effect to

the adjustments discussed in (g) above.

(i) The interest coverage ratio is defined in our amended and restated senior

secured credit facility (Adjusted EBITDA, as defined, to interest expense, as

defined). The interest coverage ratio must be greater than 1.85 to 1.0 at

June 30, 2012.

(j) The consolidated leverage ratio is defined in our amended and restated senior

secured credit facility (total debt, as defined, to Adjusted EBITDA, as

defined). The consolidated leverage ratio must be less than 5.75 to 1.0 at

June 30, 2012.

(k) The fixed charge coverage ratio is defined in the indentures governing our

7.875% senior notes and our senior subordinated notes (consolidated cash

flows, as defined, which is equivalent to Adjusted EBITDA (as defined in our

amended and restated senior secured credit facility) to fixed charges, as

defined). The calculation of fixed charges excludes the amortization of

deferred financing costs associated with the amendment and restatement of our

    credit facility on April 9, 2010.                                            54 

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Affinion Group Holdings, Inc.'s Dependence on Us to Service its Obligations

  On October 5, 2010, Affinion Holdings issued $325.0 million aggregate principal amount of 11.625% senior notes due November 15, 2015 (the "Affinion Holdings senior notes"), and applied the gross proceeds, together with cash distributions from the Company, to repay the Affinion Holdings Loan Agreement (as defined below) in full, to pay the related fees and expenses and for general corporate purposes. The interest on the Affinion Holdings senior notes is payable semi-annually. Affinion Holdings may redeem some or all of its senior notes at the redemption prices (generally at a premium) set forth in the indenture governing the Affinion Holdings senior notes. The Affinion Holdings senior notes are unsecured obligations and are not guaranteed by the Company or any of its subsidiaries. The Affinion Holdings senior notes contain restrictive covenants related primarily to Affinion Holdings' ability to distribute dividends to Affinion Holdings' stockholders, redeem or repurchase capital stock, sell assets, issue additional debt or merge with or acquire other companies. As a holding company with no significant assets other than the ownership of 100% of our common stock, Affinion Holdings will depend on our cash flows to make cash interest payments on the Affinion Holdings senior notes.  As described above, we expect that Affinion Holdings will rely on distributions from us in order to pay cash amounts due in respect of the Affinion Holdings senior notes. However, our ability to make distributions to Affinion Holdings is restricted by covenants contained in our amended and restated senior secured credit facility and the indentures governing our 7.875% senior notes and our senior subordinated notes and by Delaware law. To the extent we make distributions to Affinion Holdings, the amount of cash available to us to pay principal of, and interest on, our outstanding debt, including our amended and restated senior secured credit facility, our 7.875% senior notes and our senior subordinated notes, will be reduced, and we would have less cash available for other purposes, which could negatively impact our financial condition, our results of operations and our ability to maintain or expand our business. A failure to pay principal of, or interest on, our debt, including our amended and restated senior secured credit facility, our 7.875% senior notes and our senior subordinated notes, would constitute an event of default under the applicable debt agreements, giving the holders of that debt the right to accelerate its maturity. In addition, to the extent we are not able to make distributions to Affinion Holdings because of the restrictions in our debt agreements or otherwise, then Affinion Holdings may not have sufficient cash on hand to service its obligations under the Affinion Holdings senior notes. Any failure by Affinion Holdings to pay principal of, or interest on, the Affinion Holdings senior notes would constitute an event of default under our amended and restated senior secured credit facility, giving the lenders thereunder the right to accelerate the repayment of all borrowings thereunder, which acceleration would also give rise to an event of default under our 7.875% senior notes and senior subordinated notes. If any of our debt is accelerated, we may not have sufficient cash available to repay it in full and we may be unable to refinance such debt on satisfactory terms or at all.  

Debt Repurchases

  We or our affiliates have, in the past, and may, from time to time in the future, purchase any of our or Affinion Holdings' indebtedness. Any such future purchases may be made through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices as we or any such affiliates may determine.  Critical Accounting Policies  In presenting our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the amounts reported therein. We believe that the estimates, assumptions and judgments involved in the accounting policies related to revenue recognition, accounting for marketing costs, stock-based compensation, valuation of goodwill and intangible assets, 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, the estimated fair value of stock based compensation, estimated fair values of assets and liabilities acquired in business combinations and estimated fair values of financial instruments. In addition, we refer you to our audited consolidated financial statements as of December 31, 2011 and 2010, and for the years ended December 31, 2011, 2010 and 2009, included in our Form 10-K for a summary of our significant accounting policies.                                           55

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