UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
FOR QUARTER ENDED: COMMISSION FILE NUMBER
March 31, 1998 333-26389
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AFFINITY GROUP HOLDING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 59-2922099
(State of incorporation or organization) (I.R.S. Employer Identification No.)
64 Inverness Drive East (303) 792-7284
Englewood, CO 80112 (Registrant's telephone
(Address of principal executive offices) number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
11% Senior Notes Due 2007
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES _X_ NO __
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS MAY 11, 1998
- ----- ------------
Common Stock, $.01 par value 100
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
INDEX
PAGE
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PART I. Financial Information
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
As of March 31, 1998 and December 31, 1997
Consolidated Statements of Operations 2
For the three months ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows 3
For the three months ended March 31, 1998 and 1997
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF 6
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part II. Other Information 12
SIGNATURES 13
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(In Thousands)
(Unaudited)
3/31/98 12/31/97
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 50,307 $ 43,978
Investments 2,596 2,590
Accounts receivable, less allowance for
doubtful accounts 21,726 25,802
Inventories 29,959 30,283
Prepaid expenses and other assets 10,554 11,089
----------- -----------
Total current assets 115,142 113,742
PROPERTY AND EQUIPMENT 53,679 51,559
LOANS RECEIVABLE 64,858 44,973
INTANGIBLE ASSETS 203,881 206,104
DEFERRED TAX ASSET 10,545 8,521
RESTRICTED INVESTMENTS 2,096 2,096
OTHER ASSETS 5,679 5,391
----------- -----------
$ 455,880 $ 432,386
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 16,370 $ 16,334
Accrued interest 14,632 7,371
Accrued taxes 5,588 5,035
Accrued liabilities 22,099 23,498
Customer deposits 99,206 74,528
Deferred tax liability - current 2,132 2,132
Current portion of long-term debt 6,619 6,132
----------- -----------
Total current liabilities 166,646 135,030
DEFERRED REVENUES 80,667 79,572
LONG-TERM DEBT 281,104 288,229
OTHER LONG-TERM LIABILITIES 5,213 5,467
COMMITMENTS AND CONTINGENCIES - -
----------- -----------
533,630 508,298
----------- -----------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000
shares authorized, 100 shares
issued and outstanding 1 1
Additional paid-in capital 12,021 12,021
Accumulated deficit (89,772) (87,934)
----------- -----------
Total stockholder's deficit (77,750) (75,912)
----------- -----------
$ 455,880 $ 432,386
----------- -----------
----------- -----------
See notes to consolidated financial statements.
1
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
---------------------------
3/31/98 3/31/97
----------- -----------
REVENUES:
Membership services $ 29,716 $ 24,250
Publications 12,599 9,733
Merchandise 37,825 --
----------- -----------
80,140 33,983
COSTS APPLICABLE TO REVENUES:
Membership services 18,725 14,545
Publications 10,324 7,705
Merchandise 25,607 --
----------- -----------
54,656 22,250
GROSS PROFIT 25,484 11,733
OPERATING EXPENSES:
Selling, general and administrative 17,886 4,225
Depreciation and amortization 3,644 2,093
----------- -----------
21,530 6,318
----------- -----------
INCOME FROM OPERATIONS 3,954 5,415
NON-OPERATING ITEMS:
Interest expense, net (7,950) (4,153)
Other non-operating income, net 134 8
----------- -----------
(7,816) (4,145)
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INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (3,862) 1,270
INCOME TAX CREDIT (EXPENSE) 2,024 (674)
----------- -----------
NET INCOME (LOSS) $ (1,838) $ 596
----------- -----------
----------- -----------
See notes to consolidated financial statements.
2
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,838) $ 596
Adjustments to reconcile net income
to net cash provided by operating activities:
Deferred tax provision (benefit) (2,024) 261
Depreciation and amortization 3,644 2,093
Provision for losses on accounts receivable 230 36
Deferred compensation - 300
Loss on disposal of property and equipment - 7
Changes in operating assets and liabilities
(net of purchased businesses):
Accounts receivable 3,846 1,241
Inventories 324 816
Restricted investments (6) -
Prepaids and other assets 247 (2,236)
Accounts payable 36 1,148
Accrued and other liabilities 6,161 1,516
Deferred revenues 1,095 1,181
Net assets and liabilities of
discontinued operations - (222)
----------- -----------
Net cash provided by operating activities 11,715 6,737
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,526) (562)
Net changes in intangible assets (15) (1,711)
Net changes in loans receivable (19,885) 756
Purchase of investments - 350
Purchase of Ehlert Publishing Group, Inc. - (20,800)
----------- -----------
Net cash used in investing activities (23,426) (21,967)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in customer deposits 24,678 2,761
Borrowings on long-term debt 9,898 30,450
Principal payments of long-term debt (16,536) (10,547)
----------- -----------
Net cash provided by financing activities 18,040 22,664
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NET INCREASE IN CASH AND CASH EQUIVALENTS 6,329 7,434
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 43,978 4,278
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 50,307 $ 11,712
----------- -----------
----------- -----------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 745 690
Income Taxes 81 16
See notes to consolidated financial statements.
3
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The financial statements included herein include the accounts of Affinity Group
Holding, Inc. ("AGHI"), its wholly-owned subsidiary, Affinity Group, Inc.
("AGI"), and AGI's subsidiaries (collectively the Company) without audit, in
accordance with generally accepted accounting principles, and pursuant to the
rules and regulations of the Securities and Exchange Commission. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes in the Company's 10-K report for the
year ended December 31, 1997 as filed with the Securities and Exchange
Commission. In the opinion of management of the Company, these consolidated
financial statements contain all adjustments of a normal recurring nature
necessary to present fairly the financial position, results of operations and
cash flows of the Company for the interim periods presented.
On March 6, 1997, the Company acquired the stock of Ehlert Publishing Group
("EPG"). EPG is a specialty publisher of sports and recreation magazines
focusing on five niches: snowmobiling, personal watercraft, archery, all-terrain
vehicles and motorcycles. Further, on April 2, 1997, the Company acquired the
common stock of Camping World, Inc. ("CWI"). CWI is a national specialty
retailer of merchandise and services for RV owners. The operating results of
EPG and CWI have been included in the Company's consolidated results of
operations from the dates of acquisition. The acquisitions have been accounted
for using the purchase method of accounting and, accordingly, the assets and
liabilities of EPG and CWI have been recorded at the estimated fair market value
at the dates of the acquisitions.
Certain reclassifications of prior year amounts have been made to conform to the
current presentation.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and presentation of comprehensive income and its
components. It requires that all changes in equity during a period, except
those resulting from investment by owners and distributions to owners, be
reported as a component of comprehensive income and that comprehensive income be
displayed in annual financial statements with the same prominence as other
financial statements that constitute a full set of financial statements. The
Company's comprehensive income for the three months ended March 31, 1998 and
1997 is the same amount as the Company's net income (loss) for these periods.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
will be effective for the Company beginning January 1, 1998. SFAS No. 131
redefines how operating segments are
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(2) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
determined and requires disclosure of certain financial and descriptive
information about a company's operating segments. The Company believes the
segment information required to be disclosed under SFAS No. 131 will be more
comprehensive than previously provided, including expanded disclosure of income
statement and balance sheet items for each of its reportable operating segments.
SFAS No. 131 will be first reflected in the Company's 1998 Annual Report.
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2:
The following table is derived from the Company's Consolidated Statements of
Operations and expresses the results from operations as a percentage of
revenues and reflects the net increase (decrease) between periods:
THREE MONTHS ENDED
-------------------------------------------------------
3/31/98 3/31/97 Inc/(Dec)
-------------- -------------- --------------
REVENUES:
Membership services 37.1% 71.4% 22.5%
Publications 15.7% 28.6% 29.4%
Merchandise 47.2% --- ---
-------------- -------------- --------------
100.0% 100.0% 135.8%
COSTS APPLICABLE TO REVENUES:
Membership services 23.4% 42.8% 28.7%
Publications 12.9% 22.7% 34.0%
Merchandise 31.9% --- ---
-------------- -------------- --------------
68.2% 65.5% 145.6%
-------------- -------------- --------------
GROSS PROFIT 31.8% 34.5% 117.2%
OPERATING EXPENSES:
Selling, general and administrative 22.4% 12.4% 323.3%
Depreciation and amortization 4.5% 6.2% 74.1%
-------------- -------------- --------------
26.9% 18.6% 240.8%
-------------- -------------- --------------
INCOME FROM OPERATIONS 4.9% 15.9% (27.0%)
NON-OPERATING ITEMS:
Interest expense, net (9.9%) (12.2%) 91.4%
Other non-operating income, net 0.2% --- ---
-------------- -------------- --------------
(9.7%) (12.2%) 88.6%
-------------- -------------- --------------
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (4.8%) 3.7% (404.1%)
INCOME TAX CREDIT (EXPENSE) 2.5% (1.9%) (400.3%)
-------------- -------------- --------------
NET INCOME (LOSS) (2.3%) 1.8% (408.4%)
-------------- -------------- --------------
-------------- -------------- --------------
6
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
COMPARED WITH THREE MONTHS ENDED MARCH 31, 1997
REVENUES
Revenues of $80.1 million for the first quarter of 1998 increased by
approximately $46.2 million or 135.8% from the comparable period in 1997.
Excluding the Ehlert operations acquired March 1997 and the Camping World
operations acquired April 1997, revenues were $35.9 million for the first
quarter of 1998 compared to $32.8 million for the comparable period in 1997, a
9.5% increase.
Membership services revenues of $29.7 million for the first quarter of 1998
increased by approximately $5.5 million from the comparable period in 1997.
Excluding the Camping World membership services operations, membership services
revenue increased by approximately $2.5 million to $26.8 million, a 10.4%
increase. This revenue increase was largely attributable to a $1.8 million
increase in financial and insurance services revenue, a $1.1 million increase in
ancillary product revenue consisting of a $0.9 million increase from the
extended vehicle warranty program, an $0.8 million increase from the Rapid
Response emergency road service contracts acquired August 4, 1997, and a $0.6
million decrease due to reduced GoodSam emergency road service enrollment, which
were partially offset by a membership services revenue decrease of $0.4 million
principally associated with reduced Coast to Coast Club enrollment.
Publication revenue of $12.6 million for the first quarter of 1998 increased by
$2.9 million from the comparable period in 1997. Excluding Ehlert, publication
revenue increased by approximately $0.6 million largely attributable to
increased revenue from TRAILER LIFE CAMPGROUND/ RV PARK AND SERVICES DIRECTORY
and new books mailed.
Merchandise revenue was $37.8 million and was related entirely to Camping World
acquired in April 1997. On a pro forma basis, assuming the Camping World
acquisition had occurred at January 1, 1997, merchandise revenue for the quarter
increased $0.2 million or 0.5%. This increase was principally attributable to a
$0.7 million increase in mail order sales which was partially offset by a $0.5
million decrease in retail showroom sales.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $54.7 million for the first quarter of
1998, an increase of $32.4 million or 145.6% over the comparable period in 1997.
Excluding the Ehlert and Camping World operations, costs applicable to revenues
increased $3.5 million for the first quarter of 1998 compared to the first
quarter of 1997, a 16.5% increase.
7
Membership services costs and expenses increased by approximately $4.2 million
or 28.7% to $18.7 million in the first quarter of 1998 compared to $14.5 million
in 1997. Excluding the Camping World acquisition, membership services costs
increased $2.9 million to $17.4 million largely as a result of increased
expenses of $1.9 million associated with the financial and insurance services,
$0.9 million associated with the increase in extended warranty policies, and
$0.5 million in costs associated with the Rapid Response emergency road service
contracts. These increases were partially offset by $0.4 million in reduced
expenses for the Coast to Coast Clubs.
Publication costs and expenses of $10.3 million for the first quarter of 1998
increased $2.6 million or 34.0% compared to the first quarter of 1997.
Excluding the Ehlert and Camping World acquisitions, costs increased by $0.7
million over the comparable period in 1997. This increase was primarily due to
increased book sales, and increases in promotion, postage, website costs and
other related expenses.
Merchandise costs applicable to revenues were $25.6 million and were related
entirely to Camping World acquired in April 1997. On a pro forma basis,
assuming the Camping World acquisition had occurred at January 1, 1997,
merchandise costs for the quarter decreased $0.4 million. In addition to the
corresponding $0.2 million increase attributable to the increase in merchandise
sales, the gross profit margin increased by $0.6 million from 30.8% in the first
quarter of 1997 to 32.3% for the same period in 1998.
OPERATING EXPENSES
Selling, general and administrative expenses of $17.9 million for the first
quarter of 1998 were $13.7 million over the first quarter of 1997. Excluding
the Camping World and Ehlert acquisitions, general and administrative expenses
increased by $0.5 million compared to the prior year primarily as a result of an
increase of $0.6 million in expenses for consulting and professional services
and $0.2 million increase in wage-related expenses, which were partially offset
by no accrual for deferred executive compensation in the first quarter of 1998.
Depreciation and amortization expenses of $3.6 million were $1.6 million over
the first quarter of 1997. This variance was principally due to depreciation
and amortization of assets attributable to the Ehlert and Camping World
acquisitions.
INCOME FROM OPERATIONS
Income from operations for the first quarter of 1998 decreased by $1.5 million
or 27.0% to $4.0 million compared to $5.4 million for the first quarter of 1997.
Excluding income from operations recognized from the acquired operations of
Camping World and Ehlert, income from operations decreased by $0.9 million.
This decrease was due to increased operating expenses of $0.4 million, decreased
gross profit from the membership services segment of $0.3 million, and decreased
publication gross profit of $0.2 million.
8
NON-OPERATING EXPENSES
Non-operating expenses were $7.8 million for the first quarter of 1998, compared
to $4.1 million for the same period in 1997. The increase is primarily interest
on the $130.0 million 11% Senior Notes issued April 1997.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Loss from continuing operations before income taxes in the first quarter of 1998
was approximately $3.9 million compared to income of $1.3 million for the first
quarter of 1997. This decrease was principally due to the increase in
depreciation and amortization resulting from the Ehlert and Camping World
acquisitions.
INCOME TAX CREDIT (EXPENSE)
In the first quarter of 1998, the Company recognized a $2.0 million tax credit
compared to $0.7 million tax expense in the first quarter of 1997.
NET INCOME (LOSS)
The net loss in the first quarter of 1998 was $1.8 million compared to net
income of $0.6 million for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
AGHI is a holding company whose only asset is the capital stock of AGI.
Cash, cash equivalents and investments totaled $52.9 million at March 31, 1998
compared to $46.6 million at December 31, 1997. Included in the March 31, 1997
cash, cash equivalents and investments is $45.9 million which is restricted for
use by Affinity Bank (AB) and Affinity Insurance Group (AINS) subsidiaries. The
assets of AB and AINS are subject to regulatory restrictions on dividends or
other distributions to the Company and are unavailable to reduce Company debt.
In addition, both AB and AINS, although required to be consolidated with the
Company, are recognized as "unrestricted" or non-guarantying subsidiaries as
defined in the AGI Senior Credit Facility ("SCF"), as discussed further below,
and AB only is an "unrestricted" subsidiary under the terms of the AGI $120.0
million 11.5% Senior Subordinated Notes due 2003, and the AGHI $130.0 million
11.0% Senior Notes due 2007.
Both AB and AINS are subject to regulatory guidelines which, among other things,
stipulate the minimum capital requirements for each entity based on certain
operating ratios. The Company was not required to contribute and did not
contribute capital to AB and AINS during the first quarter of 1998 to maintain
these ratios. It is anticipated that capital contributions of $1.0 million will
be made to AB during 1998.
9
The $75.0 million AGI SCF provides a term loan of $30.0 million (reducing in
quarterly principal installments of $1.5 million) and a $45.0 million revolving
credit line. The interest on borrowings under the senior credit facility is at
variable rates based on the ratio of total cash flow to outstanding indebtedness
(as defined). Interest rates float with prime and the London Interbank Offered
Rates (LIBOR), plus an applicable margin ranging from 0.75% to 2.75% over the
stated rates. The Company also pays a commitment fee of 0.5% per annum on the
unused amount of the revolving credit line. The senior credit facility is
secured by a security interest in the assets of AGI and its subsidiaries and a
pledge of the stock of AGI and its subsidiaries. The AGI Indenture, dated
October 29, 1993, limits borrowings under the AGI SCF to 150% of AGI's
consolidated cashflow (as defined) for the preceding four fiscal quarters. At
March 31, 1998, $2.0 million was outstanding and permitted borrowings under the
undrawn revolving credit line of the AGI SCF were $43.0 million. At March 31,
1998, $24.0 million remained outstanding under the term portion of the AGI SCF.
The AGI SCF and the AGI Indenture allow for, among other things, the
distribution of payments by AGI to AGHI to service the semi-annual interest due
on the AGHI Senior Notes and the annual amounts due under the Camping World
Management Incentive Agreements. Such distributions are subject to AGI's
compliance with certain restrictive covenants, including, but not limited to, an
interest coverage ratio, fixed charge coverage ratio, minimum operating cash
flow, and limitations on capital expenditures and total indebtedness. Under the
terms of the AGI SCF and the AGI Indenture, AGI would have been permitted to
make dividends to AGHI up to $121.5 million, to service these obligations when
due, as of March 31, 1998.
During the three months ended March 31, 1998, payments under the terms of
several phantom stock agreements totaled $1.8 million. Additional phantom stock
payments of $0.2 million are scheduled to be made for the remainder of 1998.
Capital expenditures in the three months ended March 31, 1998 totaled $3.5
million compared to capital expenditures of $0.6 million during the same period
in 1997. This increase is partially attributable to the $1.3 million purchase
of a commercial building by Affinity Bank, for Affinity Bank's corporate
headquarters and branch office. The balance of the increase is primarily
computer software and hardware, of which the largest component is an enhanced
retail merchandising system for Camping World's retail operations. Capital
expenditures are anticipated to be approximately $4.5 million for the remainder
of 1998. The anticipated expenditures include the purchase of the Bolingbrook,
IL Camping World supercenter, currently under lease, along with the addition of
two new Camping World supercenters, continued enhancements to membership
marketing databases, inbound and outbound telecommunications, and computer
software and hardware.
Regarding the Year 2000 compliance issue for information systems, the Company
has recognized the need to ensure that its computer operations and operating
systems will not be adversely affected by the upcoming calendar Year 2000 and is
cognizant of the time sensitive nature of the problem. The Company has assessed
how it may be impacted by Year 2000 and has formulated and commenced
implementation of a comprehensive plan to address known issues as they relate to
its information systems. The plan, as it relates to information
10
systems, involves a combination of software modification, upgrades and
replacement. The Company preliminarily estimates that the cost of Year 2000
compliance for its information systems will be in the range of $1.0 to $1.5
million and all necessary modifications will be completed by the first quarter
of 1999. The Company is not yet able to estimate the cost of Year 2000
compliance with respect to subcontracted production systems, products, customers
and suppliers; however, based on a preliminary review, management does not
expect that such costs will have a material adverse effect on the future
consolidated results of operations of the Company.
Management believes that funds generated by operations together with available
borrowings under its revolving credit line will be sufficient to satisfy the
Company's operating cash needs, debt obligations and capital requirements of its
existing operations during the next twelve months.
This filing contains statements that are "forward looking statements," and
includes, among other things, discussions of the Company's business strategy and
expectations concerning market position, future operations, margins,
profitability, liquidity and capital resources, as well as statements concerning
the integration of acquired operations and the achievement of financial benefits
and operational efficiencies in connections with acquisitions. Although the
Company believes that the expectations reflected in such forward looking
statements are reasonable, it can give no assurance that such expectations will
prove to have been correct. All phases of the operations of the Company are
subject to a number of uncertainties, risks and other influences, including
consumer spending, fuel prices, general economic conditions, regulatory changes
and competition, many of which are outside the control of the Company, and any
one of which, or a combination of which, could materially affect the results of
the Company's operations and whether the forward looking statements made by the
Company ultimately prove to be accurate.
11
PART II: OTHER INFORMATION
Items 1-6: Not Applicable
12
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFFINITY GROUP, INC.
/S/ Mark J. Boggess
---------------------------
Date: May 11, 1998 Mark J. Boggess
Senior Vice President
Chief Financial Officer
13