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
June 30, 1998 0-22852
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AFFINITY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377709
(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)
- -------------------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
11 1/2% Senior Subordinated Notes Due 2003
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 JULY 31, 1998
- ------ -----------------
Common Stock, $.001 par value 2,000
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
AFFINITY GROUP, INC. AND SUBSIDIARIES
INDEX
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PAGE
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PART I. Financial Information
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
As of June 30, 1998 and December 31, 1997
Consolidated Statements of Operations 2
For the three months ended June 30, 1998 and 1997
Consolidated Statements of Operations 3
For the six months ended June 30, 1998 and 1997
Consolidated Statements of Cash Flows 4
For the six months ended June 30, 1998 and 1997
Notes to Consolidated Financial Statements 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF 7
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. Other Information 17
SIGNATURES 18
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(In Thousands)
(Unaudited)
6/30/98 12/31/97
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 27,572 $ 43,978
Investments 2,447 2,590
Accounts receivable, less allowance for doubtful accounts 23,023 25,802
Inventories 37,234 30,283
Prepaid expenses and other assets 14,685 11,089
----------- -----------
Total current assets 104,961 113,742
PROPERTY AND EQUIPMENT 56,482 51,559
LOANS RECEIVABLE 91,219 44,973
INTANGIBLE ASSETS 197,570 201,758
DEFERRED TAX ASSET 4,528 8,545
RESTRICTED INVESTMENTS 1,997 2,096
OTHER ASSETS 5,948 5,391
----------- -----------
$ 462,705 $ 428,064
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $ 26,662 $ 16,334
Accrued interest 2,896 3,026
Accrued taxes 9,201 9,639
Accrued liabilities 19,455 23,498
Customer deposits 104,959 74,528
Deferred tax liability - current 2,132 2,132
Current portion of long-term debt 6,554 6,132
----------- -----------
Total current liabilities 171,859 135,289
DEFERRED REVENUES 84,373 79,572
LONG-TERM DEBT 145,636 147,729
OTHER LONG-TERM LIABILITIES 5,204 5,467
COMMITMENTS AND CONTINGENCIES --- ---
----------- -----------
407,072 368,057
----------- -----------
STOCKHOLDER'S EQUITY:
Preferred stock, $.001 par value, 1,000 shares authorized,
none issued or outstanding --- ---
Common stock, $.001 par value, 2,000 shares authorized,
2,000 shares issued and outstanding 1 1
Additional paid-in capital 143,290 151,462
Accumulated deficit (87,658) (91,456)
----------- -----------
Total stockholder's equity 55,633 60,007
----------- -----------
$ 462,705 $ 428,064
----------- -----------
----------- -----------
See notes to consolidated financial statements.
1
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
--------------------------------
6/30/98 6/30/97
------------ -------------
REVENUES:
Membership services $ 33,998 $ 30,024
Publications 11,576 10,618
Merchandise 55,269 51,305
------------ -------------
100,843 91,947
COSTS APPLICABLE TO REVENUES:
Membership services 21,364 16,861
Publications 8,736 7,447
Merchandise 36,729 34,523
------------ -------------
66,829 58,831
GROSS PROFIT 34,014 33,116
OPERATING EXPENSES:
Selling, general and administrative 18,652 17,801
Depreciation and amortization 3,558 3,600
------------ -------------
22,210 21,401
------------ -------------
INCOME FROM OPERATIONS 11,804 11,715
NON-OPERATING ITEMS:
Interest expense, net (4,137) (4,090)
Other non-operating income, net 69 34
------------ -------------
(4,068) (4,056)
------------ -------------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 7,736 7,659
INCOME TAX EXPENSE (3,980) (3,391)
------------ -------------
INCOME BEFORE EXTRAORDINARY ITEM 3,756 4,268
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, less
applicable income tax benefit of $145 --- (241)
------------ -------------
NET INCOME $ 3,756 $ 4,027
------------ -------------
------------ -------------
See notes to consolidated financial statements.
2
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
------------------------------
6/30/98 6/30/97
---------- -----------
REVENUES:
Membership services $ 63,714 $ 54,274
Publications 24,175 20,351
Merchandise 93,094 51,305
---------- -----------
180,983 125,930
COSTS APPLICABLE TO REVENUES:
Membership services 40,089 31,406
Publications 19,060 15,152
Merchandise 62,336 34,523
---------- -----------
121,485 81,081
GROSS PROFIT 59,498 44,849
OPERATING EXPENSES:
Selling, general and administrative 36,537 22,026
Depreciation and amortization 7,085 5,693
---------- -----------
43,622 27,719
---------- -----------
INCOME FROM OPERATIONS 15,876 17,130
NON-OPERATING ITEMS:
Interest expense, net (8,259) (8,180)
Other non-operating income, net 203 42
---------- -----------
(8,056) (8,138)
---------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 7,820 8,992
INCOME TAX EXPENSE (4,017) (4,089)
---------- -----------
INCOME BEFORE EXTRAORDINARY ITEM 3,803 4,903
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, less
applicable income tax benefit of $145 --- (241)
---------- -----------
NET INCOME $ 3,803 $ 4,662
---------- -----------
---------- -----------
See notes to consolidated financial statements.
3
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
6/30/98 6/30/97
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,803 $ 4,662
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred tax provision 4,017 3,609
Depreciation and amortization 7,085 5,693
Provision for losses on accounts receivable 179 252
Deferred compensation --- 300
(Gain) Loss on disposal of property and equipment (1) 9
Extraordinary item --- 386
Changes in operating assets and liabilities (net of
purchased businesses):
Accounts receivable 2,600 (1,151)
Inventories (6,951) (698)
Restricted investments 143 (1,042)
Prepaids and other assets (4,153) (3,042)
Accounts payable 10,328 (1,143)
Accrued and other liabilities (4,874) (4,594)
Deferred revenues 4,801 5,539
Net assets and liabilities of discontinued operations --- (1,395)
------------- ------------
Net cash provided by operating activities 16,977 7,385
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,790) (1,700)
Net changes in intangible assets (29) (3,491)
Net changes in loans receivable (46,246) (6,210)
Sale of investments 99 31
Purchase of Ehlert Publishing Group, Inc. --- (20,800)
Purchase of Camping World, Inc., net of cash acquired --- (97,418)
------------- ------------
Net cash used in investing activities (53,966) (129,588)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital contribution from Parent --- 126,016
Dividends paid (8,177) ---
Net change in customer deposits 30,431 16,170
Borrowings on long-term debt 30,348 57,150
Principal payments of long-term debt (32,019) (54,588)
------------- ------------
Net cash provided by financing activities 20,583 144,748
------------- ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (16,406) 22,545
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,978 4,278
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 27,572 $ 26,823
------------- ------------
------------- ------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 8,471 8,232
Income Taxes 5,158 279
See notes to consolidated financial statements.
4
AFFINITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The financial statements included herein include the accounts of Affinity
Group, Inc., and subsidiaries (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.
(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 six months ended June
30, 1998 and 1997 is the same amount as the Company's net income 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 determined and requires disclosure of
certain financial and
5
(2) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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.
6
AFFINITY GROUP, 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
------------------------------------------------
6/30/98 6/30/97 Inc/(Dec)
---------- ---------- ----------
REVENUES:
Membership services 33.7% 32.7% 13.2%
Publications 11.5% 11.5% 9.0%
Merchandise 54.8% 55.8% 7.7%
---------- ---------- ----------
100.0% 100.0% 9.7%
COSTS APPLICABLE TO REVENUES:
Membership services 21.2% 18.3% 26.7%
Publications 8.7% 8.1% 17.3%
Merchandise 36.4% 37.6% 6.4%
---------- ---------- ----------
66.3% 64.0% 13.6%
---------- ---------- ----------
GROSS PROFIT 33.7% 36.0% 2.7%
OPERATING EXPENSES:
Selling, general and administrative 18.5% 19.4% 4.8%
Depreciation and amortization 3.5% 3.9% (1.2%)
---------- ---------- ----------
22.0% 23.3% 3.8%
---------- ---------- ----------
INCOME FROM OPERATIONS 11.7% 12.7% 0.8%
NON-OPERATING ITEMS:
Interest expense, net (4.1%) (4.4%) 1.1%
Other non-operating income, net 0.1% --- 102.9%
---------- ---------- ----------
(4.0%) (4.4%) 0.3%
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 7.7% 8.3% 1.0%
INCOME TAX EXPENSE (4.0%) (3.7%) 17.4%
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 3.7% 4.6% (12.0%)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, less
applicable income tax benefit of $145 --- (0.2%) ---
---------- ---------- ----------
NET INCOME 3.7% 4.4% (6.7%)
---------- ---------- ----------
---------- ---------- ----------
7
AFFINITY GROUP, 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:
SIX MONTHS ENDED
----------------------------------------------
6/30/98 6/30/97 Inc/(Dec)
--------- -------- ----------
REVENUES:
Membership services 35.2% 43.1% 17.4%
Publications 13.4% 16.2% 18.8%
Merchandise 51.4% 40.7% 81.5%
--------- -------- ----------
100.0% 100.0% 43.7%
COSTS APPLICABLE TO REVENUES:
Membership services 22.2% 24.9% 27.6%
Publications 10.5% 12.0% 25.8%
Merchandise 34.4% 27.5% 80.6%
--------- -------- ----------
67.1% 64.4% 49.8%
--------- -------- ----------
GROSS PROFIT 32.9% 35.6% 32.7%
OPERATING EXPENSES:
Selling, general and administrative 20.2% 17.5% 65.9%
Depreciation and amortization 3.9% 4.5% 24.5%
--------- -------- ----------
24.1% 22.0% 57.4%
--------- -------- ----------
INCOME FROM OPERATIONS 8.8% 13.6% (7.3%)
NON-OPERATING ITEMS:
Interest expense, net (4.6%) (6.5%) 1.0%
Other non-operating income, net 0.1% --- 383.3%
--------- -------- ----------
(4.5%) (6.5%) (1.0%)
--------- -------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 4.3% 7.1% (13.0%)
INCOME TAX EXPENSE (2.2%) (3.2%) (1.8%)
--------- -------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 2.1% 3.9% (22.4%)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, less
applicable income tax benefit of $145 --- (0.2%) ---
--------- -------- ----------
NET INCOME 2.1% 3.7% (18.4%)
--------- -------- ----------
--------- -------- ----------
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998
COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
REVENUES
Revenues of $100.8 million for the second quarter of 1998 increased by
approximately $8.9 million or 9.7% from the comparable period in 1997.
Membership services revenues of $34.0 million for the second quarter of 1998
increased by approximately $4.0 million from the comparable period in 1997, a
13.2% increase. This revenue increase was largely attributable to a $2.0
million increase in financial and insurance services revenue, a $2.2 million
increase from the extended vehicle warranty program, and a $1.1 million
increase from the Rapid Response emergency road service contracts acquired
August 4, 1997. These increases were partially offset by a membership
services revenue decrease of approximately $0.9 million primarily associated
with reduced Coast to Coast Club enrollment and a $0.4 million revenue
decrease associated with member events.
Publication revenue of $11.6 million for the second quarter of 1998 increased
by $1.0 million from the comparable period in 1997. This revenue increase
was largely attributable to additional issues published by EPG.
Merchandise revenue was $55.3 million and was related entirely to the
acquisition of CWI in April 1997. Merchandise revenue for the quarter
increased $4.0 million or 7.7%. This increase was principally attributable
to a $2.5 million increase in retail sales and a $1.4 million increase in
mail order sales resulting from increased promotional efforts, and an
increase in catalogs distributed.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $66.8 million for the second quarter of
1998, an increase of $8.0 million or 13.6% over the comparable period in 1997.
Membership services costs and expenses increased by approximately $4.5
million or 26.7% to $21.4 million in the second quarter of 1998 compared to
$16.9 million in 1997. This increase was largely as a result of increased
expenses of $2.2 million associated with financial and insurance services,
$2.0 million associated with the increase in extended warranty policies, and
$1.1 million in costs associated with the Rapid Response emergency road
service contracts. This increase was partially offset by $0.8 million in
reduced expenses for membership services, primarily due to reduced enrollment
in the Coast to Coast Club.
9
Publication costs and expenses of $8.7 million for the second quarter of 1998
increased $1.3 million or 17.3% compared to the second quarter of 1997. This
increase consisted of $0.7 million associated with increased issues published
by EPG, $0.3 million due to increased book sales, and $0.3 million in other
expenses, primarily increased marketing efforts for the TRAILER LIFE
CAMPGROUND/ RV PARK & SERVICES DIRECTORY.
Merchandise costs applicable to revenues were $36.7 million and related
entirely to CWI acquired in April 1997. The $2.2 million increase in
merchandise costs for the quarter was primarily attributable to the 7.7%
increase in merchandise sales. The gross profit margin increased by $1.8
million from 32.7% in the second quarter of 1997 to 33.5% for the same period
in 1998. The increase in the gross profit margin was primarily due the
consolidation of vendor product lines and the utilization of enhanced
merchandising software.
OPERATING EXPENSES
Selling, general and administrative expenses of $18.7 million for the second
quarter of 1998 were $0.9 million over the comparable period in 1997. This
increase was primarily as a result of increased CWI promotional efforts, and
an increase in computer consulting, which included Year 2000 conversion
efforts, and wage-related expenses. Depreciation and amortization expenses
of $3.6 million remained relatively unchanged from the second quarter of 1997.
INCOME FROM OPERATIONS
Income from operations for the second quarter of 1998 increased by $0.1
million or 0.8% to $11.8 million compared to $11.7 million for the second
quarter 1997. This net increase was due to a $1.8 million increase in gross
profit from the merchandise segment, largely offset by increased operating
expenses of $0.8 million, decreased gross profit from the membership services
segment of $0.5 million, and decreased publication gross profit of $0.3
million.
NON-OPERATING EXPENSES
Non-operating expenses were $4.1 million for the second quarter of 1998 and
remained relatively unchanged as compared to the same period in 1997.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income from continuing operations before income taxes and extraordinary item
in the second quarter of 1998 was approximately $7.7 million and remained
relatively unchanged as compared to the second quarter of 1997.
10
INCOME TAX EXPENSE
In the second quarter of 1998, the Company recognized a $4.0 million tax
expense compared to $3.4 million tax expense in the second quarter of 1997.
EXTRAORDINARY ITEM
The Company refinanced its senior term and revolving credit facilities April
2, 1997. As a result, the Company incurred a write-off of unamortized
financing cost of $0.2 million, net of tax.
NET INCOME
The net income in the second quarter of 1998 was $3.8 million compared to net
income of $4.0 million for the same period in 1997.
SIX MONTHS ENDED JUNE 30, 1998
COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
REVENUES
Revenues of $181.0 million for the six months ended June 30, 1998 increased
by approximately $55.1 million or 43.7% from the comparable period in 1997.
Excluding the EPG operations acquired March 1997 and the CWI operations
acquired April 1997, revenues were $74.6 million for the first six months of
1998 compared to $67.2 million for the comparable period in 1997, an 11.1%
increase.
Membership services revenues of $63.7 million for the first six months of
1998 increased by approximately $9.4 million from the comparable period in
1997. Excluding the CWI membership services operations, membership services
revenue increased by approximately $6.8 million to $57.6 million, a 13.3%
increase. This revenue increase was largely attributable to a $3.8 million
increase in financial and insurance services revenue, a $3.2 million increase
from the extended vehicle warranty program, and a $1.8 million increase from
the Rapid Response emergency road service contracts acquired August 4, 1997.
These increases were partially offset by a membership services revenue
decrease of $1.3 million, principally associated with reduced Coast to Coast
Club enrollment, a $0.4 million revenue decrease from reduced Good Sam
emergency road service enrollment, and a net $0.3 million decrease in revenue
associated with ancillary products.
Publication revenue of $24.2 million for the first six months of 1998
increased by $3.8 million from the comparable period in 1997. Excluding EPG,
publication revenue increased by approximately $0.6 million largely
attributable to increased revenue from new book title sales.
11
Merchandise revenue was $93.1 million and was related entirely to CWI
acquired in April 1997. On a pro forma basis, assuming the CWI acquisition
had occurred at January 1, 1997, merchandise revenue for the first six months
increased $4.1 million or 4.7%. This increase was principally attributable
to a $2.1 million increase in mail order sales and a $2.0 million increase in
retail sales resulting from increased promotional efforts.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $121.5 million for the first six months
of 1998, an increase of $40.4 million or 49.8% over the comparable period in
1997. Excluding the EPG and CWI operations, costs applicable to revenues
increased $8.5 million for the first six months of 1998 compared to 1997, a
20.1% increase.
Membership services costs and expenses increased by approximately $8.7
million or 27.6% to $40.1 million in the first six months of 1998 compared to
$31.4 million in 1997. Excluding the CWI acquisition, membership services
costs increased $7.2 million to $37.4 million largely as a result of
increased expenses of $4.0 million associated with the financial and
insurance services, $2.9 million associated with the increase in extended
warranty policies, and $1.6 million in costs associated with the Rapid
Response emergency road service contracts. These increases were partially
offset by $1.0 million in reduced membership services expenses, primarily
associated with the Coast to Coast Clubs, and $0.3 million in reduced
expenses associated with ancillary products and services.
Publication costs and expenses of $19.1 million for the first six months of
1998 increased $3.9 million or 25.8% over the comparable period in 1997.
Excluding the EPG acquisition, costs increased by $1.3 million over the
comparable period in 1997. This increase was primarily due to increased book
sales, and increased marketing and paper costs.
Merchandise costs applicable to revenues were $62.3 million and were related
entirely to CWI acquired in April 1997. On a pro forma basis, assuming the
CWI acquisition had occurred at January 1, 1997, merchandise costs for the
first six months of 1998 increased $1.7 million. The increase in merchandise
costs was primarily attributable to the 4.7% increase in merchandise sales.
The gross profit margin increased by $1.0 million from 31.9% in the first six
months of 1997 to 33.0% for the same period in 1998 primarily due to
consolidation of vendor product lines and the utilization of enhanced
merchandising software.
OPERATING EXPENSES
Selling, general and administrative expenses of $36.5 million for the first
six months of 1998 were $14.5 million over the comparable period in 1997.
Excluding the EPG and CWI acquisitions, general and administrative expenses
increased by $0.8 million compared to the prior year primarily as a result of
an increase of $0.4 million in consulting expenses, which includes Year 2000
conversion efforts, and a $0.9 million increase in wage-related expenses,
which were partially offset by a $0.2 million reduction in legal expenses and
$0.3
12
million in reduced deferred executive compensation for the first six months
of 1998. Depreciation and amortization expenses of $7.1 million were $1.4
million higher than the first six months of 1997, primarily due to
depreciation and amortization of assets attributable to the EPG and CWI
acquisitions.
INCOME FROM OPERATIONS
Income from operations for the first six months of 1998 decreased by $1.3
million or 7.3% to $15.9 million compared to $17.1 million for the first six
months of 1997. Excluding income from operations recognized from the
acquired operations of EPG and CWI, income from operations decreased by $1.6
million. This decrease was due to increased operating expenses of $0.5
million, decreased gross profit from the membership services segment of $0.4
million, and decreased publication gross profit of $0.7 million.
NON-OPERATING EXPENSES
Non-operating expenses were $8.1 million for the first six months of 1998 and
remained relatively unchanged as compared to the same period in 1997.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income from continuing operations before income taxes and extraordinary item
in the first six months of 1998 was approximately $7.8 million compared to
$9.0 million for the first six months of 1997. This decrease was principally
due to increased operating expenses and reduced operating profit as mentioned
above.
INCOME TAX EXPENSE
In the first six months of 1998, the Company recognized a $4.0 million tax
expense compared to $4.1 million tax expense in the first six months of 1997.
EXTRAORDINARY ITEM
The Company refinanced its senior term and revolving credit facilities April
2, 1997. As a result, the Company incurred a write-off of unamortized
financing cost of $0.2 million, net of tax.
NET INCOME
The net income in the first six months of 1998 was $3.8 million compared to
net income of $4.7 million for the same period in 1997.
13
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 the Company's senior subordinated debt and the Senior Credit
Facility ("SCF") totaled $151.0 million compared to $152.9 million at
December 31, 1997.
Cash, cash equivalents and investments of the Company totaled $30.0 million
at June 30, 1998 compared to $46.6 million at December 31, 1997. This
reduction is due to increased loan production at Affinity Bank ("AB").
Included in the June 30, 1998 cash, cash equivalents and investments is $24.8
million which is restricted for use by 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 SCF, as
discussed further below, and AB only is an "unrestricted" subsidiary under
the indenture (the "Indenture") pursuant to which the $120.0 million 11.5%
senior subordinated notes of the Company were issued.
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 six months of 1998 to
maintain these ratios. It is anticipated that capital contributions of $6.0
million will be made to AB during the remainder of 1998.
The $75.0 million 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 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 SCF is
secured by a security interest in the assets of the Company and its
subsidiaries and a pledge of the stock of the Company and its subsidiaries.
The Indenture limits borrowings under the SCF to 150% of the Company's
consolidated cashflow (as defined) for the preceding four fiscal quarters.
At June 30, 1998, $8.5 million was outstanding and permitted borrowings under
the undrawn revolving credit line of the SCF were $36.5 million. At June 30,
1998, $22.5 million remained outstanding under the term portion of the SCF.
The SCF and Indenture allow for, among other things, the distribution of
payments by the Company to Affinity Group Holding, Inc. ("AGHI"), the
Company's parent, to service the semi-annual interest due on the AGHI $130.0
million 11% senior notes and the annual amounts due under the Camping World
Management Incentive Agreements. Such distributions are subject to the
Company'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
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indebtedness. During the first six months of 1998, the Company made
distributions of $8.2 million to AGHI.
During the six months ended June 30, 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 six months ended June 30, 1998 totaled $7.8
million compared to capital expenditures of $2.2 million during the same
period in 1997. This increase is partially attributable to the purchase of a
commercial building by Affinity Bank, for Affinity Bank's corporate
headquarters and branch office and the purchase of the Bolingbrook, IL
Camping World supercenter for $1.3 million and $2.7 million, respectively.
The balance of the increase is primarily computer software and hardware, of
which the largest component is an enhanced retail merchandising system for
CWI's retail operations. Capital expenditures are anticipated to be
approximately $1.5 million for the remainder of 1998. The anticipated
expenditures will include continued enhancements to membership marketing
databases, inbound and outbound telecommunications, computer software and
hardware, and the addition of two new Camping World supercenters.
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 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
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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.
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PART II: OTHER INFORMATION
Items 1-6: Not Applicable
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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: July 31, 1998 Mark J. Boggess
Senior Vice President
Chief Financial Officer
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