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, 1999 333-26389
----------------------------------------------------------------------
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)
----------------------------------------------------------------------
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 7, 1999
- ----- -----------
Common Stock, $.01 par value 100
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. Financial Information
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
As of March 31, 1999 and December 31, 1998
Consolidated Statements of Operations 2
For the three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows 3
For the three months ended March 31, 1999 and 1998
Notes to Consolidated Financial Statements 4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF 8
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. Other Information 15
SIGNATURES 16
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(In Thousands)
(Unaudited)
3/31/99 12/31/98
------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,396 $ 2,863
Accounts receivable, less allowance for doubtful accounts 21,454 24,248
Inventories 34,810 32,972
Prepaid expenses and other assets 9,746 8,939
------------- --------------
Total current assets 74,406 69,022
PROPERTY AND EQUIPMENT 69,540 69,417
NOTE FROM AFFILIATE 3,160 3,100
INTANGIBLE ASSETS 195,020 196,917
DEFERRED TAX ASSET 8,775 7,842
OTHER ASSETS 3,692 3,255
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 179,469 146,616
------------- --------------
$ 534,062 $ 496,169
------------- --------------
------------- --------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 25,345 $ 19,893
Accrued interest 8,905 4,995
Accrued taxes 773 332
Accrued liabilities 23,621 22,750
Deferred revenues 54,784 53,395
Deferred tax liability 1,964 1,964
Current portion of long-term debt 6,869 7,804
Net current liabilities of discontinued operations 162,527 129,596
------------- --------------
Total current liabilities 284,788 240,729
DEFERRED REVENUES 34,976 35,276
LONG-TERM DEBT 292,465 297,663
OTHER LONG-TERM LIABILITIES 3,265 3,447
COMMITMENTS AND CONTINGENCIES - -
------------- --------------
615,494 577,115
------------- --------------
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 (93,454) (92,968)
------------- --------------
Total stockholder's deficit (81,432) (80,946)
------------- --------------
$ 534,062 $ 496,169
------------- --------------
------------- --------------
See notes to consolidated financial statements.
1
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
---------------------------
3/31/99 3/31/98
------------- -------------
REVENUES:
Membership services $ 28,626 $ 27,499
Publications 12,991 12,599
Merchandise 43,099 37,825
------------- -------------
84,716 77,923
COSTS APPLICABLE TO REVENUES:
Membership services 17,426 15,979
Publications 9,863 10,324
Merchandise 28,702 25,607
------------- -------------
55,991 51,910
GROSS PROFIT 28,725 26,013
OPERATING EXPENSES:
Selling, general and administrative 18,877 17,886
Depreciation and amortization 3,940 3,592
------------- -------------
22,817 21,478
------------- -------------
INCOME FROM OPERATIONS 5,908 4,535
NON-OPERATING ITEMS:
Interest expense, net (7,300) (7,950)
Other non-operating income, net 51 187
------------- -------------
(7,249) (7,763)
------------- -------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1,341) (3,228)
INCOME TAX CREDIT 933 1,783
------------- -------------
LOSS FROM CONTINUING OPERATIONS (408) (1,445)
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of appli-
cable income tax expense of $240 in 1999 and
an income tax benefit of $241 in 1998 (78) (393)
------------- -------------
NET LOSS $ (486) $ (1,838)
------------- -------------
------------- -------------
See notes to consolidated financial statements.
2
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
3/31/99 3/31/98
--------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (486) $ (1,838)
Adjustments to reconcile net income to net cash provided
by operating activities:
Deferred tax benefit (933) (1,783)
Depreciation and amortization 3,940 3,592
Provision for losses on accounts receivable 98 230
Deferred compensation 250 -
Loss on disposal of property and equipment 13 -
Changes in operating assets and liabilities (net of
purchased businesses):
Accounts receivable 2,696 3,776
Inventories (1,838) 324
Prepaids and other assets (1,244) 427
Accounts payable 5,452 29
Accrued and other liabilities 4,790 4,375
Deferred revenues 1,089 1,004
Net assets and liabilities of discontinued operations 78 1,771
--------------- -------------
Net cash provided by operating activities 13,905 11,907
--------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,998) (2,243)
Proceeds from sale of property 78 -
Net changes in intangible assets (259) (12)
Net changes in loans receivable (60) -
--------------- -------------
Net cash used in investing activities (2,239) (2,255)
--------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 15,475 9,898
Principal payments of long-term debt (21,608) (16,536)
--------------- -------------
Net cash used in financing activities (6,133) (6,638)
--------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,533 3,014
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,863 4,026
--------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,396 $ 7,040
--------------- -------------
--------------- -------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 3,453 745
Income Taxes 150 81
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, 1998 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.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The
Company currently has no items related SFAS 133 other than the income/loss
related to the interest floor and cap transaction agreement. This SFAS will be
implemented January 1, 2000. The adoption by the Company of SFAS 133 is not
expected to have a material effect on its results of operations or on its
financial position.
(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company's three principal lines of business are Membership Services,
Publications, and Retail. The Membership Services segment operates the Good Sam
Club, Coast to Coast Club, and Camping World's President's Club for RV owners,
campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts.
These membership clubs form a receptive audience to which the Company markets
its products and services. The Publications segment publishes a variety of
publications for selected markets in the recreation and leisure industry,
including general circulation
4
(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
periodicals, club magazines, directories and RV industry trade magazines. The
Retail segment sells specialty retail merchandise and services for RV owners
primarily through retail supercenters and mail order catalogs. The Company
evaluates performance based on profit or loss from operations before interest,
income taxes, depreciation and amortization.
The reportable segments are strategic business units that offer different
products and services. They are managed separately because each business
requires different technology, management expertise and marketing strategies.
Most of the businesses were acquired as a unit, and the management at the time
of acquisition was retained.
The Company does not allocate depreciation, amortization, interest, income taxes
or unusual items to segments. Financial information by reportable business
segment is summarized as follows (in thousands):
Membership
Services Publications Retail Consolidated
----------------------------------------------------
QUARTER ENDED MARCH 31, 1999
Revenue from external customers $ 28,626 $ 12,991 $ 43,099 $ 84,716
Segment operating profit 9,286 2,442 2,291 14,019
QUARTER ENDED MARCH 31, 1998
Revenues from external customers $ 27,499 $ 12,599 $ $37,825 $ 77,923
Segment operating profit 9,816 1,515 1,119 12,450
The following is a summary of the reportable segment reconciliations to the
Company's consolidated financial statements for the three months ended March 31,
1999 and 1998 (in thousands):
3/31/99 3/31/98
---------- ----------
INCOME FROM OPERATIONS BEFORE DEPRECIATION
AND AMORTIZATION
Total profit for reportable segments $ 14,019 $ 12,450
Unallocated G & A expense (4,171) (4,323)
---------- ----------
Income from operations before
depreciation and amortization $ 9,848 $ 8,127
---------- ----------
---------- ----------
5
(4) DISCONTINUED OPERATIONS
During the fourth quarter of 1998, the Company's Board of Directors adopted a
plan to sell the stock of Affinity Bank ("AB"), subject to regulatory
approval, to an affiliate of the Company at its net book value, which in the
opinion of management approximates market value.
On December 31, 1998, the Company sold Affinity Insurance Group, Inc. ("AINS")
to a related party in exchange for a promissory note in the amount of $3.1
million. In connection with the sale, the Company recorded a loss of $87,000,
net of a related income tax benefit of $33,000. The results of operations of AB
and AINS have been classified as discontinued operations in the accompanying
financial statements.
Information relating to the operations of AB and AINS for the three months ended
March 31, 1999 and 1998 are as follows (in thousands):
3/31/99 3/31/98
------------- -------------
Revenues $ 3,628 $ 2,217
Costs applicable to revenues 3,416 2,746
------------- -------------
Gross profit (loss) 212 (529)
Operating expenses 50 105
------------- -------------
Income (loss) from operations 162 (634)
Income tax (expense) benefit (240) 241
------------- -------------
Loss from discontinued operations $ (78) $ (393)
------------- -------------
------------- -------------
The tax expense for the period ended March 31, 1999 differs from the statutory
rate due primarily to non-deductible reserves and valuation allowances.
6
(4) DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of AB are included in the accompanying consolidated
balance sheets as of March 31, 1999 and December 31, 1998 as follows (in
thousands):
3/31/99 12/31/98
------------- -------------
Current assets:
Cash $ 9,010 $ 23,027
Investments 1,737 1,992
Prepaid expenses and other assets 334 255
------------- -------------
Total current assets 11,081 25,274
Current liabilities:
Accrued liabilities 1,039 707
Customer deposits 172,569 154,163
------------- -------------
Total current liabilities 173,608 154,870
------------- -------------
Net current liabilities $(162,527) $(129,596)
------------- -------------
------------- -------------
Long-term assets:
Property and equipment $ 2,524 $ 2,420
Loans receivable 183,528 143,443
Intangible assets (63) (74)
Other assets 1,005 827
------------- -------------
Total long-term assets 186,994 146,616
Long-term liabilities:
Other long-term liabilities 7,525 -
------------- -------------
Net long-term assets $179,469 $146,616
------------- -------------
------------- -------------
7
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
----------------------------------
3/31/99 3/31/98 Inc/(Dec)
------- ------- ---------
REVENUES:
Membership services 33.8% 35.3% 4.1%
Publications 15.3% 16.2% 3.1%
Merchandise 50.9% 48.5% 13.9%
----- ----- -----
100.0% 100.0% 8.7%
COSTS APPLICABLE TO REVENUES:
Membership services 20.6% 20.5% 9.1%
Publications 11.6% 13.2% (4.5%)
Merchandise 33.9% 32.9% 12.1%
----- ----- -----
66.1% 66.6% 7.9%
GROSS PROFIT 33.9% 33.4% 10.4%
OPERATING EXPENSES:
Selling, general and administrative 22.2% 23.0% 5.5%
Depreciation and amortization 4.7% 4.6% 9.7%
----- ----- -----
26.9% 27.6% 6.2%
----- ----- -----
INCOME FROM OPERATIONS 7.0% 5.8% 30.3%
NON-OPERATING ITEMS:
Interest expense, net (8.7%) (10.1%) (8.2%)
Other non-operating income, net 0.1% 0.2% (72.7%)
----- ----- -----
(8.6%) (9.9%) (6.6%)
----- ----- -----
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (1.6%) (4.1%) (58.5%)
INCOME TAX CREDIT 1.1% 2.2% (47.7%)
----- ----- -----
LOSS FROM CONTINUING OPERATIONS (0.5%) (1.9%) (71.8%)
DISCONTINUED OPERATIONS
Loss from discontinued operations, net of
applicable income tax benefits (0.1%) (0.5%) (80.2%)
----- ----- -----
NET LOSS (0.6%) (2.4%) (73.6%)
----- ----- -----
----- ----- -----
8
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999
COMPARED WITH THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Revenues of $84.7 million for the first quarter of 1999 increased by
approximately $6.8 million or 8.7% from the comparable period in 1998.
Membership services revenues of $28.6 million for the first quarter of 1999
increased by approximately $1.1 million or 4.1% from the comparable period in
1998. This revenue increase was largely attributable to $0.5 million in
increased marketing fee income generated from the sales of health and life
insurance policies as a result of a renewed contract with our third party
administrator, $0.4 million in additional Good Sam emergency road service
revenue as a result of increased enrollment, and $0.2 million from the
extended vehicle warranty program.
Publication revenue of $13.0 million for the first quarter of 1999 increased
by $0.4 million from the comparable period in 1997 largely due to increased
advertising revenue partially offset by a reduction in book sales.
Merchandise revenue of $43.1 million increased $5.3 million or 13.9% over the
first quarter of 1998. This increase was attributable to a $3.7 million
increase in retail showroom sales, which includes a $1.9 million increase
related to the addition of two new stores and a $1.8 million or 6.7% same
store growth over the first quarter of 1998, a $1.1 million increase in mail
order sales, and a $0.5 million increase in installation fees and other
supplies and services.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $56.0 million for the first quarter of
1999, an increase of $4.1 million or 7.9% over the comparable period in 1998.
Membership services costs and expenses increased by approximately $1.4
million or 9.1% to $17.4 million in the first quarter of 1999 compared to
$16.0 million in 1998. This increase was due to a $0.5 million increase in
marketing costs associated with the Good Sam Club as well as increased costs
associated with the sales of the Coast to Coast accommodation cards, $0.3
million in additional emergency road service expenses associated with
increased enrollment, $0.3 million associated with the increase in extended
warranty policies, and $0.3 million due to increased marketing and one-time
health and life insurance administration costs as a result of the contract
renewal with the third party administrator.
9
Publication costs and expenses of $9.9 million for the first quarter of 1999
decreased approximately $0.5 million or 4.5% compared to the first quarter of
1998. This decrease was primarily due to decreased book and directory expenses
partially offset by increased publication expenses associated with increased
circulation of the snow, ATV and water publication titles.
Merchandise costs applicable to revenues of $28.7 increased $3.1 million from
the first quarter of 1998 primarily attributable to the 13.9% increase in
merchandise sales. The gross profit margin increased by $2.2 million from 32.3%
in the first quarter of 1998 to 33.4% for the same period in 1999.
OPERATING EXPENSES
Selling, general and administrative expenses of $18.9 million for the first
quarter of 1999 were $1.0 million over the first quarter of 1998 primarily
related to the addition of two new Camping World stores and variable labor
increases associated with increased retail sales, which were partially offset by
lower corporate general and administrative expenses. Depreciation and
amortization expenses of $3.9 million were $0.3 million over the first quarter
of 1998. This variance was principally due to the depreciation of the assets
associated with the new retail stores, merchandising and distribution system,
and the acquisition of the corporate facility in the fourth quarter of 1998.
INCOME FROM OPERATIONS
Income from operations for the first quarter of 1999 increased by $1.4 million
or 30.3% to $5.9 million compared to $4.5 million for the first quarter of 1998.
This increase was due to increased gross profit from the merchandise segment of
$2.2 million, increased gross profit from the publications segment of $0.8
million, partially offset by a increased operating expenses of $1.3 million and
a $0.3 million reduction in gross profit from the membership services segment.
NON-OPERATING EXPENSES
Non-operating expenses were $7.2 million for the first quarter of 1999,
compared to $7.8 million for the same period in 1998. Despite overall higher
borrowings in the first quarter of 1999 compared to 1998, interest expense
decreased by $0.6 million due to the lower effective interest rate in 1999 as
a result of the new AGI Revolving Credit and Term Loan Facility.
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Loss from continuing operations before income taxes in the first quarter of 1999
was approximately $1.3 million compared to a loss of $3.2 million for the first
quarter of 1998. This $1.9 million improvement from the prior period was
principally due to the
10
increase in income from operations reflected above, combined with lower net
non-operating expenses, principally interest expense.
INCOME TAX CREDIT
In the first quarter of 1999, the Company recognized a $0.9 million tax credit
compared to $1.8 million tax credit in the first quarter of 1998.
DISCONTINUED OPERATIONS
As further described in Note 4 to the consolidated financial statements, the
Company adopted a plan to dispose of the assets of AB and sold AINS in the
fourth quarter of 1998. The net loss from the discontinued operations was
$78,000 for the first quarter of 1999 compared to a net loss of $393,000 for the
first quarter of 1998.
NET LOSS
The net loss in the first quarter of 1999 was $0.5 million compared to $1.8
million for the same period in 1998.
LIQUIDITY AND CAPITAL RESOURCES
AGHI is a holding company whose only assets are the capital stock of AGI and AB.
AGI, and its subsidiaries, provide the operating cash flow necessary to service
its debt as well as that of AGHI. The operations of AB have been classified in
the accompanying financial statement as discontinued.
On April 2, 1997, AGI acquired the stock of Camping World for $108.0 million in
cash, including $19.0 million for non-competition and consulting agreements with
certain Camping World executives. In addition, AGHI entered into the Camping
World Management Incentive Agreements with certain Camping World executives
pursuant to which up to an additional $15.0 million will be paid subject to
Camping World achieving certain operating goals (the "Camping World Management
Incentive Agreements"). Such contingent amounts will be payable in $1.0 million
annual installments on the first four anniversaries of the closing and $11.0
million on the fifth anniversary of the closing. The purchase price of Camping
World was funded through the net proceeds of the AGHI $130.0 million 11.0%
Senior Notes, dated April 2, 1997, ("AGHI Senior Notes") together with
borrowings under AGI's senior credit facility established on April 2, 1997.
On November 13, 1998, AGI entered into a $200.0 million five-year revolving
credit and term loan facility ("AGI Revolving Credit and Term Loan Facility")
consisting of two term loans aggregating $130.0 million (initially reducing in
quarterly principal installments of $1.65 million) and a revolving credit
facility of $70.0 million of which the outstanding balance will be due and
payable at the conclusion of the credit arrangement. The proceeds were used to
redeem the $120.0 million, 11.5%, AGI Senior Subordinated
11
Notes issued in 1993 at 104.313% of par, retire AGI's senior credit facility
established April 2, 1997 and to fund the acquisition of AGI Real Estate
Holding, Inc. The interest on borrowings under the AGI Revolving Credit and
Term Loan 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
1.625% to 3.625% over the stated rates. As of March 31, 1999, the average
interest rates on the term loans and revolving credit facility were 8.29% and
7.81%, respectively, and permitted borrowings under the undrawn revolving line
were $42.0 million. AGI also pays a commitment fee of 0.5% per annum on the
unused amount of the revolving credit line. The AGI Revolving Credit and Term
Loan Facility is secured by virtually all the assets and a pledge of the stock
of AGI.
Effective November 1, 1998, AGI entered into an interest rate floor and cap
transaction agreement ("AGI Interest Rate Collar") at no cost. The notional
amount of the AGI Interest Rate Collar is $75.0 million with a cap rate of 6.0%
and a floor rate of 5.585% over the three month LIBOR index. The floating rate
is adjusted quarterly and was 4.9697% at March 31, 1999. This facility has a
maturity date of November 1, 2001. The AGI Interest Rate Collar protects the
Company against a rise in the base rate over 6% on $75.0 million of the floating
rate term loans noted above.
The AGI Revolving Credit and Term Loan Facility allows 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. Further,
AGI is permitted to make dividends to AGHI subject to certain limitations and
covenants as defined in the agreement.
The AGHI indenture pursuant to which the AGHI Senior Notes were issued and the
AGI Revolving Credit and Term Loan Facility each contain certain restrictive
covenants relating to, but not limited to, mergers, changes in the nature of the
business, acquisitions, additional indebtedness, sale of assets, investments,
payment of dividends, and minimum coverage ratios pertaining to interest
expense, fixed charges, levels of consolidated cash flow and cash flow leverage
ratio. The Company was in compliance with all debt covenants at March 31, 1999.
During the first quarter of 1999, payments under the terms of several phantom
stock agreements totaled $0.5 million. Additional phantom stock payments of
$1.2 are scheduled to be made over the remainder of 1999.
Capital expenditures for the first quarter of 1999 totaled $2.0 million compared
to capital expenditures of $2.2 million for the first quarter of 1998. Capital
expenditures are
12
anticipated to be approximately $7.0 million for 1999, primarily for the
addition of two Camping World supercenters, and continued enhancements to
membership marketing databases, inbound and outbound tele-communications, and
computer software and hardware, some related to the Year 2000 compliance.
During the fourth quarter of 1998, the Company's Board of Directors adopted a
plan to sell the stock of AB, subject to regulatory approval, to an affiliate of
the Company at its net book value, which in the opinion of management
approximates market value. As a result, the operations of AB are classified as
a discontinued operation in the accompanying financial statements. The assets
of AB are subject to regulatory restrictions on dividends or other distributions
to the Company and are unavailable to reduce Company debt. In addition, AB,
although required to be consolidated with the Company, is recognized as
"unrestricted" or non-guarantying subsidiary under the terms of the AGHI Senior
Notes.
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.
YEAR 2000 DATE CONVERSION
Many of the Company's computerized systems could be affected by the Year 2000
issue, which refers to the inability of such systems to properly process dates
beyond December 31, 1999. The Company also has numerous computerized interfaces
with third parties and is possibly vulnerable to failure by such third parties
if they do not adequately address their Year 2000 issues. System failures
resulting from these issues could cause significant disruption to the Company's
operations and result in a material adverse effect on the Company's business,
results of operations, financial condition or liquidity. Management believes
that a significant portion of its "mission critical" computer systems are Year
2000 compliant and is continuing to assess the balance of its computer systems
as well as equipment and other facilities systems. Management plans to complete
its investigation, remediation and contingency planning activities for all
critical systems by mid 1999, although there can be no assurance that it will be
completed within this time frame. At this time, management believes that the
Company does not have any internal critical Year 2000 issues that it cannot
remedy.
Management is in the process of surveying third parties with which it has a
material relationship primarily through written correspondence. Despite its
efforts to survey its customers, management is depending on the response of
these third parties in its assessment of Year 2000 readiness. Management cannot
be certain as to the actual Year 2000 readiness of these third parties or the
impact that any non-compliance on their part may have on the Company's business,
results of operations, financial condition or liquidity.
13
The Company expects to incur internal staff costs as well as consulting and
other expenses in preparing for the Year 2000. Because the Company has replaced
or updated a significant portion of its computer systems, both hardware and
software, in recent years, the cost to be incurred in addressing the Year 2000
issue are not expected to have a material impact on the Company's business,
results of operations, financial condition or liquidity. For the first quarter
of 1999, these costs have totaled approximately $0.2 million. Expenditures on
Year 2000 issues for the total year 1999 are expected to be in the range of $0.7
million to $0.8 million. This expectation assumes that the existing forecast of
costs to be incurred contemplates all significant actions required and that we
will not be obligated to incur significant Year 2000 related costs on behalf of
our customers, suppliers and other third parties.
14
PART II: OTHER INFORMATION
Items 1-6: Not Applicable
15
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 HOLDING, INC.
/s/ Mark J. Boggess
---------------------------
Date: May 7, 1999 Mark J. Boggess
Senior Vice President
Chief Financial Officer
16