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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
September 30, 1997 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 NOVEMBER 10, 1997
- ----- -----------------
Common Stock, $.01 par value 100
DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I. Financial Information
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
As of September 30, 1997 and December 31, 1996
Consolidated Statements of Operations 2
For the three months ended September 30, 1997 and 1996
Consolidated Statements of Operations 3
For the nine months ended September 30, 1997 and 1996
Consolidated Statements of Cash Flows 4
For the nine months ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF 10
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. Other Information 20
SIGNATURES 21
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(In Thousands)
(Unaudited)
9/30/97 12/31/96
------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 37,494 $ 4,278
Investments 1,745 499
Accounts receivable (net of
allowance for doubtful accounts) 21,197 14,812
Inventories 29,350 2,473
Prepaid expenses and other assets 13,313 6,052
Deferred tax asset-current 1,430 2,228
Net current assets of discontinued
operations 512 -
--------- --------
Total current assets 105,041 30,342
PROPERTY AND EQUIPMENT 51,255 10,550
LOANS RECEIVABLE 32,278 13,134
INTANGIBLE ASSETS 205,739 109,065
DEFERRED TAX ASSET 3,463 13,516
RESTRICTED INVESTMENTS 2,606 2,137
OTHER ASSETS 5,107 4,411
NET LONG-TERM ASSETS OF DISCONTINUED
OPERATIONS - 973
--------- --------
$ 405,489 $ 184,128
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 17,465 $ 4,517
Accrued interest 13,594 2,966
Accrued liabilities 24,016 14,516
Customer deposits 49,378 14,979
Current portion of long-term debt 8,019 5,344
Net current liabilities of
discontinued operations - 1,464
--------- --------
Total current liabilities 112,472 43,786
DEFERRED REVENUES 81,229 70,113
LONG-TERM DEBT 281,858 142,031
OTHER LONG-TERM LIABILITIES 6,572 7,632
COMMITMENTS AND CONTINGENCIES - -
--------- --------
482,131 263,562
--------- --------
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 (88,664) (91,456)
--------- --------
Total stockholder's deficit (76,642) (79,434)
--------- --------
$ 405,489 $ 184,128
--------- --------
--------- --------
See notes to consolidated financial statements.
1
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
----------------------
9/30/97 9/30/96
REVENUES: ------- -------
Membership services $ 31,035 $ 25,917
Publications 10,244 6,242
Merchandise 49,258 ---
--------- ---------
90,537 32,159
COSTS APPLICABLE TO REVENUES:
Membership services 18,860 15,816
Publications 7,285 4,040
Merchandise 33,875 ---
--------- ---------
60,020 19,856
GROSS PROFIT 30,517 12,303
OPERATING EXPENSES:
Selling, general and administrative 17,507 4,460
Depreciation and amortization 3,656 2,092
--------- ---------
21,163 6,552
--------- ---------
INCOME FROM OPERATIONS 9,354 5,751
NON-OPERATING EXPENSE:
Interest expense, net (8,079) (4,099)
Other non-operating charges, net 189 ---
--------- ---------
(7,890) (4,099)
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND DISCONTINUED OPERATIONS 1,464 1,652
INCOME TAX EXPENSE (1,130) (826)
--------- ---------
INCOME FROM CONTINUING OPERATIONS 334 826
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of
applicable deferred income tax benefit of
$90 in 1996 --- (141)
--------- ---------
NET INCOME $334 $685
--------- ---------
--------- ---------
See notes to consolidated financial statements.
2
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
NINE MONTHS ENDED
----------------------
9/30/97 9/30/96
REVENUES: ------- -------
Membership services $ 85,309 $ 75,087
Publications 30,595 21,871
Merchandise 100,563 ---
--------- ---------
216,467 96,958
COSTS APPLICABLE TO REVENUES:
Membership services 50,266 43,650
Publications 22,437 17,027
Merchandise 68,398 ---
--------- ---------
141,101 60,677
GROSS PROFIT 75,366 36,281
OPERATING EXPENSES:
Selling, general and administrative 39,533 13,009
Depreciation and amortization 9,622 6,234
--------- ---------
49,155 19,243
--------- ---------
INCOME FROM OPERATIONS 26,211 17,038
NON-OPERATING EXPENSE:
Interest expense, net (19,864) (12,459)
Other non-operating charges, net 231 (1)
--------- ---------
(19,633) (12,460)
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 6,578 4,578
INCOME TAX EXPENSE (3,545) (2,233)
--------- ---------
INCOME FROM CONTINUING OPERATIONS 3,033 2,345
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of
applicable deferred income tax benefit of
$288 in 1996 --- (470)
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 3,033 1,875
EXTRAORDINARY ITEM:
Loss on early extinquishment of debt, less
applicable income tax benefit of $145 (241) ---
--------- ---------
NET INCOME $2,792 $1,875
--------- ---------
--------- ---------
See notes to consolidated financial statements.
3
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
NINE MONTHS ENDED
----------------------
9/30/97 9/30/96
CASH FLOWS FROM OPERATING ACTIVITIES: ------- -------
Net Income $ 2,792 $ 1,875
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred tax provision 3,072 1,945
Depreciation and amortization 9,622 6,234
Provision for losses on accounts receivable 499 518
Deferred compensation 800 ---
Gain on disposal of property and equipment --- 1
Extraordinary item 386 ---
Changes in operating assets and liabilities
(net of purchased business):
Accounts receivable (2,158) 1,017
Inventories 4,454 1,423
Prepaids and other assets (5,308) (4,541)
Accounts payable (10,682) (3,443)
Accrued and other liabilities (1,254) (885)
Deferred revenues 9,125 5,948
Restricted investments (1,246) (61)
Net assets and liabilities of
discontinued operations (1,003) (398)
-------- --------
Net cash provided by operating
activities 9,099 9,633
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,060) (1,305)
Net changes in intangible assets (11,334) (697)
Net changes in loans receivable (19,144) 1,197
Sale of investments (469) 783
Purchase of Camping World (97,418) ---
Purchase of Ehlert Publishing Group (20,800) ---
Proceeds from sale of property and equipment 29 2
Note receivable from affiliate --- 3,113
-------- --------
Net cash (used in) provided by
investing activities (152,196) 3,093
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in customer deposits 34,399 1,559
Borrowings on long-term debt 200,650 26,550
Principal payments of long-term debt (58,736) (39,004)
-------- --------
Net cash provided by (used in)
financing activities 176,313 (10,895)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 33,216 1,831
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,278 3,833
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 37,494 $ 5,664
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 8,942 9,343
Income taxes 523 472
See notes to consolidated financial statements
4
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The financial statements included herein include the results of Affinity Group
Holding, Inc. ("AGHI"), its wholly-owned subsidiary, Affinity Group, Inc.
("AGI"), and AGI's subsidiaries (collectively the "Company").
These interim consolidated financial statements are unaudited, 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 for year ended December 31, 1996
included in the Company's Form S-4 Registration Statement (Registration No.
333-26389) as filed with the Securities and Exchange Commission.
AGHI was formed in November 1996 and all of the stock of AGI was contributed
to AGHI from its parent, AGI Holding Corp., (formerly Affinity Group Holding,
Inc.) upon formation. Since all companies are under common control, and
since AGHI has no operations other than those related to AGI and AGI's
subsidiaries, the contribution was accounted for as if it was pooling of
interests. Therefore, the accounts of AGI and AGI's subsidiaries are
presented in the accompanying financial statements. In the opinion of
management, 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.
Certain reclassifications of prior year amounts have been made to conform to
the current presentation.
The "Results of Operations" discussion below excludes the operations of the
National Association for Female Executives ("NAFE") since it has been
classified as a discontinued operation. See Note (4) below.
(2) ACQUISITIONS
On March 6, 1997, AGI acquired the stock of Ehlert Publishing companies
("Ehlert") for $22.3 million, of which $20.8 million was paid in cash at
closing. In addition, a $1.5 million note was issued by AGHI to the seller,
of which $1.0 million was repaid in April 1997. The purchase price of Ehlert
was funded primarily through borrowings under AGI's senior credit facility
and a $6.5 million capital contribution to AGI from AGHI ($5.0 million of the
capital contribution was in cash).
Ehlert is a specialty publisher of sports and recreation magazines focusing
on four niches: snowmobiling, personal watercraft, archery and all-terrain
vehicles.
5
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On April 2, 1997, AGI acquired the common stock of Camping World, Inc.
("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 a management incentive agreement
with certain Camping World executives pursuant to which up to $15.0 million
will be paid subject to Camping World achieving certain goals. The purchase
price of Camping World was funded through capital contributions to AGI from
AGHI (consisting of the net proceeds from the April 2, 1997 issuance by AGHI
of $130.0 million in 11% senior notes due 2007, net of expenses and repayment
of approximately $7.5 million of AGHI's debt) together with borrowings under
AGI's $75.0 million senior credit facility established April 2, 1997. See
Note (3) below.
Camping World is a national specialty retailer of merchandise and services
for RV owners.
(3) LONG-TERM DEBT
The major components of long-term debt of AGHI, its wholly owned subsidiary,
AGI and AGI's subsidiaries at September 30, 1997 are as follows:
In 1993, a total of $120.0 million of senior subordinated notes ("AGI Senior
Subordinated Notes") were issued in a public offering. The notes bear
interest at the rate of 11 1/2% per annum with interest payable semi-annually
each April 15 and October 15, and mature on October 15, 2003. These notes
are unsecured obligations of AGI and are subordinated in right of payment to
the existing senior indebtedness, but rank senior or pari passu with all
other existing indebtedness and future indebtedness of AGI.
On April 2, 1997, AGHI issued a total of $130.0 million of senior notes ("AGHI
Senior Notes"). The notes bear interest at the rate of 11% per annum with
interest payable semi-annually each April 1 and October 1, and mature on
April 1, 2007. These notes are general unsecured obligations of AGHI and
rank pari passu with all existing indebtedness of AGHI and senior in right of
payment to all existing and future subordinated indebtedness of the Company.
On April 2, 1997, AGI entered into a new five year credit agreement ("AGI
Senior Credit Facility") with certain lenders and Fleet National Bank, as
agent, consisting of a term loan of $30.0 million (reducing in quarterly
principal installments of $1.5 million) and revolving credit facility of
$45.0 million. The interest on borrowings under the AGI 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. AGI also pays a commitment fee of
0.5% per annum on the unused amount of the revolving credit line. The funds
were used to retire senior secured term notes and revolving credit lines
established on October 11, 1994 and partially fund the acquisition of Camping
World. The AGI 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. At September 30, 1997, no amounts were outstanding under
the $45.0 million revolving credit line.
On April 2, 1997, AGHI entered into management incentive agreements ("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
6
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operating goals. 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. This obligation was
recorded at the present value of $10.0 million and accrues interest at the
rate of 10% per annum on the unpaid balance.
The AGI indenture pursuant to which the AGI Senior Subordinated Notes were
issued ("AGI Indenture"), the AGHI indenture pursuant to which the AGHI
Senior Notes were issued ("AGHI Indenture") and the AGI Senior Credit
Facility individually 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 following reflects long-term debt as of September 30, 1997 and December 31,
1996 (in thousands):
9/30/97 12/31/96
-------- --------
AGI Senior Subordinated Notes $120,000 $120,000
AGHI Senior Notes 130,000 ---
AGI Senior Credit Facility 27,000 ---
Camping World Management Incentive Obligation 10,500 ---
Other LongTerm Obligations 2,377 27,375
-------- --------
289,877 147,375
Less current portion (8,019) (5,344)
-------- --------
$281,858 $142,031
-------- --------
-------- --------
(4) DISCONTINUED OPERATIONS
In October 1994, AGI acquired substantially all the assets and assumed certain
liabilities of NAFE. The total consideration for the acquisition, including
assumed liabilities and costs of acquisition, totaled $10.8 million.
AGI adopted a plan to dispose of the NAFE assets in the fourth quarter of 1996.
In connection with the plan, AGI recorded a loss of $5.9 million net of related
income taxes of $1.1 million in the fourth quarter of 1996 based on the
anticipated proceeds upon sale. On July 31, 1997, AGI entered into a definitive
agreement to sell the assets of NAFE for $200,000, plus assumption by the buyer
of the deferred membership liability. In 1996, the results of operations of
NAFE were classified as discontinued operations in the accompanying financial
statements. As of September 30, 1997, management believes the estimated loss on
sale and balance of the reserve established in 1996 remains adequate.
Information relating to the operations of NAFE for the nine months ended
September 30, 1997 and 1996 are as follows (in thousands):
7
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9/30/97 9/30/96
------- -------
Revenues $ 3,036 4,355
Costs applicable to revenues 3,702 4,236
-------- ------
Gross profit (loss) (666) 119
Operating expenses 562 877
-------- ------
Loss from operations (1,228) (758)
Income tax benefit 335 288
-------- ------
Loss from discontinued operations (893) (470)
Accrued for at December 31, 1996 893 -
-------- ------
Net loss $ - $ (470)
-------- ------
-------- ------
The assets and liabilities of NAFE included in the accompanying consolidated
balance sheet as of September 30, 1997 and December 31, 1996 are as follows (in
thousands):
9/30/97 12/31/96
------- --------
Current assets:
Cash $ 52 $ 261
Accounts receivable 475 539
Inventories - 183
Prepaid expenses 10 884
----- -------
Total current assets 537 1,867
Current liabilities:
Accounts payable 15 1,048
Accrued liabilities 10 2,283
----- -------
Total current liabilities 25 3,331
----- -------
Net current assets/ (liabilities) $ 512 $(1,464)
----- -------
----- -------
Long-term assets:
Property and equipment $ - $ 67
Intangible assets - 3,000
Other assets - 25
----- -------
Total long-term assets - 3,092
Long-term liabilities:
Deferred revenues - 2,119
----- -------
Net long-term assets $ - $ 973
----- -------
----- -------
(5) UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The operating results of Ehlert and Camping World have been included in AGI'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 Ehlert and Camping World have
been recorded at the estimated fair market value at the dates of the
acquisitions.
The following unaudited pro forma results of operations for the quarters
ended September 30, 1997 and 1996 assume the acquisitions occurred as of
January 1, 1996 giving effect to certain adjustments including elimination of
non-recurring income and expenses recorded by the previous owners and
increased expenses that would have been applicable from the beginning of the
year for depreciation and amortization, and interest expense. These pro
forma results
8
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have been prepared solely for comparative purposes and are not
necessarily indicative of the results of operations that actually would have
occurred had the combinations been in effect at the beginning of the
respective periods, nor are they indicative of future results of operations
of the combined companies (in thousands).
9/30/97 9/30/96
------- -------
Revenues $ 258,939 $ 246,377
Income from continuing operations
and before extraordinary items 2,085 2,174
Net income 1,844 1,704
(6) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 descriptive
information about a company's operating segments. The Company anticipates with
the adoption of SFAS No. 131, it will expand its segment disclosures. 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.
9
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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 tables are derived from the Company's Consolidated Statements
of Operations and express the results from operations as a percentage of
revenues and reflect the net increase (decrease) between periods:
THREE MONTHS ENDED
----------------------------
9/30/97 9/30/96 Inc/(Dec)
------- ------- ---------
REVENUES:
Membership services 34.3% 80.6% 19.7%
Publications 11.3% 19.4% 64.1%
Merchandise 54.4% --- ---
------- ------- ---------
100.0% 100.0% 181.5%
COSTS APPLICABLE TO REVENUES:
Membership services 20.9% 49.1% 19.2%
Publications 8.0% 12.6% 80.3%
Merchandise 37.4% --- ---
------- ------- ---------
66.3% 61.7% 202.3%
GROSS PROFIT 33.7% 38.3% 148.0%
OPERATING EXPENSES:
Selling, general and administrative 19.4% 13.9% 292.5%
Depreciation and amortization 4.0% 6.5% 74.8%
------- ------- ---------
23.4% 20.4% 223.0%
------- ------- ---------
INCOME FROM OPERATIONS 10.3% 17.9% 62.6%
NON-OPERATING EXPENSE:
Interest expense, net (8.9%) (12.8%) 97.1%
Other non-operating charges, net 0.2% --- ---
------- ------- ---------
(8.7%) (12.8%) 92.5%
------- ------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS 1.6% 5.1% (11.4%)
INCOME TAX EXPENSE (1.2%) (2.6%) (36.8%)
------- ------- ---------
INCOME FROM CONTINUING OPERATIONS 0.4% 2.5% (59.6%)
DISCONTINUED OPERATIONS:
Loss from discontinued operations,
net of applicable tax benefit --- (0.4%) (100.0%)
------- ------- ---------
NET INCOME 0.4% 2.1% (51.2%)
------- ------- ---------
------- ------- ---------
10
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AFFINITY GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NINE MONTHS ENDED
-----------------------------
9/30/97 9/30/96 Inc/(Dec)
------- ------- ---------
REVENUES:
Membership services 39.4% 77.4% 13.6%
Publications 14.1% 22.6% 39.9%
Merchandise 46.5% --- ---
------- ------- ---------
100.0% 100.0% 123.3%
COSTS APPLICABLE TO REVENUES:
Membership services 23.1% 45.0% 15.2%
Publications 10.4% 17.6% 31.8%
Merchandise 31.7% --- ---
------- ------- ---------
65.2% 62.6% 132.5%
GROSS PROFIT 34.8% 37.4% 107.7%
OPERATING EXPENSES:
Selling, general and administrative 18.3% 13.4% 203.9%
Depreciation and amortization 4.4% 6.4% 54.3%
------- ------- ---------
22.7% 19.8% 155.4%
------- ------- ---------
INCOME FROM OPERATIONS 12.1% 17.6% 53.8%
NON-OPERATING EXPENSE:
Interest expense, net (9.2%) (12.9%) 59.4%
Other non-operating charges, net 0.1% --- ---
------- ------- ---------
(9.1%) (12.9%) 57.6%
------- ------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 3.0% 4.7% 43.7%
INCOME TAX EXPENSE (1.6%) (2.3%) 58.8%
------- ------- ---------
INCOME FROM CONTINUING OPERATIONS 1.4% 2.4% 29.3%
DISCONTINUED OPERATIONS:
Loss from discontinued operations,
net of applicable tax benefit --- (0.5%) (100.0%)
------- ------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 1.4% 1.9% 61.8%
EXTRAORDINARY ITEM:
Extraordinary item, net of applicable
income tax benefit (0.1%) --- 100.0%
------- ------- ---------
NET INCOME 1.3% 1.9% 48.9%
------- ------- ---------
------- ------- ---------
11
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RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Revenues of $90.5 million for the third quarter of 1997 increased by
approximately $58.4 million or 181.5% from the comparable period in 1996.
Excluding the Ehlert operations acquired March 6, 1997 and the Camping World
operations acquired April 2, 1997, revenues were $34.6 million for the third
quarter of 1997 compared to $32.2 million for the comparable period in 1996,
a 7.7% increase.
Membership services revenues of $31.0 million for the third quarter of 1997
increased by approximately $5.1 million from the comparable period in 1996.
Excluding the Camping World operations, membership services revenue increased
by approximately $2.2 million to $28.1 million, an 8.5% increase. This
revenue increase was largely attributable to a $0.6 million increase in
ancillary product revenue consisting of an $0.8 million increase from the new
extended vehicle warranty program, $0.3 million increase from the Rapid
Response emergency road service contracts acquired August 4, 1997, and $0.3
million increase in marketing fees from sales of health and life insurance
offset by an $0.8 million revenue decrease in member events. An $0.8 million
increase in financial and insurance services revenue and a membership
services revenue increase of $0.8 million principally attributable to the
Good Sam Club due to renewals of existing members from an increased member
pool account for the balance of the increase.
Publication revenue of $10.2 million for the third quarter of 1997 increased
by $4.0 million from the comparable period in 1996. Excluding the Ehlert
acquisition revenue, publication revenue increased by approximately $0.3
million largely attributable to increased revenue from new books mailed and
increases in advertising revenue in certain publications.
Merchandise revenue was $49.3 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 July 1, 1996, merchandise revenue for the
quarter increased $1.0 million or 2.1%. This increase was principally
attributable to a $0.6 million increase in retail showroom sales and a $0.4
million increase in mail order sales.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $60.0 million for the third quarter of
1997, an increase of $40.2 million or 202.3% over the comparable period in
1996. Excluding the Ehlert and Camping World operations, costs applicable to
revenues increased $2.9 million for the third quarter of 1997 compared to the
third quarter of 1996.
12
<PAGE>
Membership services costs and expenses increased by approximately $3.0
million or 19.2% to $18.9 million in the third quarter of 1997 compared to
$15.8 million in 1996. Excluding the Camping World acquisition, membership
services costs increased $2.0 million to $17.9 million largely as a result of
an $0.8 million increase in emergency road service claims costs, a $0.5
million increase related to a new membership credit card program, increased
expenses of $1.0 million associated with the financial and insurance services
and offset by $0.3 million in lower marketing and promotional costs for the
various clubs and other ancillary products and services.
Publication costs and expenses of $7.3 million for the third quarter of 1997
increased $3.2 million or 80.3% compared to the third quarter of 1996.
Excluding the Ehlert and Camping World acquisitions, costs increased by $0.9
million over the comparable period in 1996. This increase was primarily due
to increased CAMPGROUND DIRECTORY expenses of $0.7 million and a $0.2 million
increase in publication expenses due to an additional ROADS TO ADVENTURE
issue.
Merchandise costs applicable to revenues were $33.9 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 July 1, 1996,
merchandise costs for the quarter increased $0.9 million. In addition to the
corresponding $0.7 million increase attributable to the increase in
merchandise sales, the gross profit margin decreased by $0.2 million or 0.3%.
OPERATING EXPENSES
Selling, general and administrative expenses of $17.5 million for the third
quarter of 1997 were $13.0 million over the third quarter of 1996. Excluding
the Camping World and Ehlert acquisitions, general and administrative
expenses declined by $0.2 million compared to the prior year primarily as a
net result of an increase of $0.5 million for deferred executive compensation
more than offset by decreases in other compensation-related expenses.
Depreciation and amortization expenses of $3.6 million were $1.6 million over
the third quarter of 1996. This variance is principally due to depreciation
and amortization of assets attributable to the Ehlert and Camping World
acquisitions.
INCOME FROM OPERATIONS
Income from operations for the third quarter of 1997 increased by $3.6
million or 62.6% to $9.4 million compared to $5.8 million for the third
quarter of 1996. Excluding income from operations of $4.1 million recognized
from the acquired operations of Camping World and Ehlert, income from
operations decreased by $0.5 million. Improved gross profit from the
membership services segment of $0.2 million was more than offset by decreases
in publication gross profit of $0.6 million and $0.1 million in increased
operating expenses.
NON-OPERATING EXPENSES
13
<PAGE>
Non-operating expenses were $7.9 million for the third quarter of 1997,
compared to $4.1 million for the same period in 1996. This increase was
principally due to interest expense on the AGHI Senior Notes issued April 2,
1997.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS
Income from continuing operations before income taxes and discontinued
operations in the third quarter of 1997 was $1.5 million compared to income
of $1.7 million for the third quarter of 1996. This $0.2 million decrease
was largely due to the increased interest expense on the AGHI Senior Notes
issued April 2, 1997 partially offset by the increase in income from
operations from the Ehlert and Camping World acquisitions.
INCOME TAXES
In the third quarter of 1997, the Company recognized a $1.1 million tax
expense compared to $0.8 million tax expense in the third quarter of 1996.
DISCONTINUED OPERATIONS
As further described in Note 3 to the consolidated financial statements, the
Company adopted a plan to dispose of the assets of NAFE in the fourth quarter
of 1996. NAFE operating losses in the third quarter of 1997 were included in
the estimated loss on disposal accrued in 1996. The 1996 results have been
restated to recognize NAFE as a discontinued operation in the prior year for
comparative purposes.
NET INCOME
The net income in the third quarter of 1997 was $0.3 million compared to net
income of $0.7 million for the same period in 1996.
NINE MONTHS ENDED SEPTEMBER 30, 1997
COMPARED WITH NINE MONTHS ENDED SEPTEMBER 30, 1996
REVENUES
Revenues of $216.5 million for the nine months ended September 30, 1997
increased by approximately $119.5 million or 123.3% from the comparable
period in 1996. Excluding the Ehlert operations acquired March 6, 1997 and
the Camping World operations acquired April 2, 1997, revenues were $101.8
million for the first nine months of 1997 compared to $97.0 million for the
comparable period in 1996, a 5.0% increase.
Membership services revenues of $85.3 million for the first nine months of
1997 increased by approximately $10.2 million or 13.6% from the comparable
period in 1996. Excluding the Camping World membership services operations,
membership services revenue of $79.0
14
<PAGE>
million increased $3.9 million compared to 1996 partially due to a $2.5
million revenue increase from the new extended vehicle warranty program, a
$1.8 million revenue increase in the Good Sam Club due to renewals of
existing members from an increased member pool, and a $1.4 million revenue
increase from financial and insurance services. These increases were offset
by a decrease in membership services revenue of $1.1 million associated with
reduced Coast to Coast Club enrollment and a $0.7 million decrease in member
event revenue and other marketing fee revenue.
Publication revenue of $30.6 million for the first nine months of 1997
increased by $8.7 million or 39.9% from the comparable period in 1996. This
revenue increase was primarily due to $7.7 million in additional revenue from
the Ehlert operations plus $0.4 million in new advertising revenue for
TRAILER LIFE, a $0.3 million increase due to two additional ROADS TO
ADVENTURE issues, and $0.4 million of additional revenue due to more book
publications and increased promotion.
Merchandise revenue of $100.6 million related entirely to Camping World
acquired in April 1997. On a pro forma basis, assuming the Camping World
acquisition had occurred at January 1, 1996, merchandise revenue for the
first nine months of 1997 increased $5.8 million or 4.8%. This increase was
principally attributable to a $4.0 million increase in retail showroom sales
and a $1.8 million increase in mail order sales.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $141.1 million for the first nine months
of 1997, an increase of $80.4 million or 132.5% over the comparable period in
1996. Excluding the Ehlert and Camping World operations, costs applicable to
revenues increased $4.5 million for the first nine months of 1997 compared to
the first nine months of 1996, a 7.3% increase.
Membership services costs and expenses increased by approximately $6.6
million or 15.2% to $50.3 million for the first nine months of 1997 compared
to $43.7 million in 1996. Excluding the Camping World acquisition,
membership services costs increased $4.4 million to $48.1 million. This
increase was primarily the result of marketing expenses of $1.3 million
relating to the new credit card program introduced in the fourth quarter of
1996, increased emergency road service claims and marketing expenses of $1.3
million, and increased expenses of $1.6 million associated with financial and
insurance services.
Publication costs and expenses of $22.4 million for the first nine months of
1997 increased $5.4 million or 31.8% compared to the first nine months of
1996. Excluding the Ehlert operations, costs remained relatively unchanged
compared to 1996. Paper cost decreases realized in the first nine
months of 1997 as a result of a re-negotiated paper contract were offset by
increases associated with additional issues of ROADS TO ADVENTURE and
increased books marketing and fulfillment cost.
Merchandise costs applicable to revenues of $68.4 million related entirely to
Camping World acquired in April 1997. On a pro forma basis, assuming the
Camping World acquisition had
15
<PAGE>
occurred at January 1, 1996, merchandise costs for the first nine months of
1997 increased $5.4 million or 6.1%. In addition to the corresponding $3.9
million increase attributable to the increase in merchandise sales, the gross
profit margin decreased by $1.5 million or 1.1%.
OPERATING EXPENSES
Selling, general and administrative expenses of $39.5 million for the first
nine months of 1997 were $26.5 million over the first nine months of 1996.
Excluding Ehlert and Camping World operations, general and administrative
expenses decreased $0.7 million. The increased expense of $0.8 million for
deferred executive compensation was more than offset by decreases in other
compensation and legal expenses. Depreciation and amortization expenses of
$9.6 million were $3.4 million over the first nine months of 1996, of which
$3.2 million was due to depreciation and amortization of assets attributable
to the Ehlert and Camping World acquisitions.
INCOME FROM OPERATIONS
Income from operations for the first nine months of 1997 increased by $9.2
million or 53.8% to $26.2 million compared to $17.0 million for the first
nine months of 1996. The $9.2 million variance was due to $8.9 million
operating income generated by the acquisitions in 1997, and a $0.9 million
gross profit increase from publications, partially offset by a $0.5 million
decrease in gross profit from membership services and an increase of $0.1
million in operating expenses.
NON-OPERATING EXPENSES
Non-operating expenses were $19.6 million for the first nine months of 1997,
an increase $7.2 million from the same period in 1996. This increase is
principally due to the interest expense on the AGHI Senior Notes issued April
2, 1997.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income from continuing operations before income taxes and extraordinary item
in 1997 was $6.6 million compared to $4.6 million for the first nine months
of 1996. This increase was due to the increase in income from operations
from the Ehlert and Camping World acquisitions, and an increase in gross
profit from publications offset by reduced gross profit from membership
services and increases in operating expenses.
INCOME TAXES
In the first nine months of 1997, the Company recognized a $3.5 million tax
expense compared to $2.2 million tax expense in the first nine months of 1996.
DISCONTINUED OPERATIONS
16
<PAGE>
As further described in Note 3 to the consolidated financial statements, the
Company adopted a plan to dispose of the assets of NAFE in the fourth quarter
of 1996. NAFE operating losses in 1997 were included in the estimated loss
on disposal accrued in 1996. The 1996 results have been restated to
recognize NAFE as a discontinued operation in the prior year for comparative
purposes.
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 nine months of 1997 was $2.8 million compared to
net income of $1.9 million for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
AGHI is a holding company whose only asset is the capital stock of AGI. On
March 6, 1997 and April 2, 1997, as discussed further below, AGI completed
the acquisitions of the stock of Ehlert and Camping World, respectively.
These acquisitions were funded primarily through borrowings under the AGI
Senior Credit Facility established April 2, 1997 and the $130.0 million AGHI
Senior Notes issuance. The proceeds from the AGHI Senior Notes, net of
expenses and repayments of approximately $7.5 million of AGHI's debt were
contributed by AGHI to AGI as capital. Interest on the AGHI Senior Notes, as
well as other obligations entered into by AGHI related to the acquisitions,
will be serviced from dividends from AGI as discussed below.
Cash, cash equivalents and investments totaled $39.2 million at September 30,
1997 compared to $4.8 million at December 31, 1996. Included in the
September 30, 1997 cash, cash equivalents and investments is $23.2 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, as discussed further below, and AB only is "unrestricted"
under the terms of the AGI Senior Subordinated Notes and the AGHI Senior
Notes.
On March 6, 1997, AGI acquired the stock of Ehlert for $22.3 million, of
which $20.8 million was paid in cash at closing. In addition, a $1.5 million
note was issued by AGHI to the seller, of which $1.0 million was repaid in
April 1997. The balance of the note is payable on March 6, 1999, together
with interest at 5% per annum. In addition, John Ehlert, the founder and
principal stockholder of Ehlert, entered into a non-competition agreement for
$0.2 million. The
17
<PAGE>
purchase price of Ehlert was funded primarily through borrowings under the
AGI Senior Credit Facility and a $6.5 million capital contribution to AGI
from AGHI ($5.0 million of the capital contribution was in cash).
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. 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 capital contributions of $119.5 million to AGI from AGHI (consisting
of the net proceeds from the April 2, 1997 issuance of the AGHI Senior Notes,
net of expenses and repayments of approximately $7.5 million of AGHI's debt)
together with borrowings under the AGI Senior Credit Facility (discussed
below).
The AGI Senior Credit Facility 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. AGI also pays a commitment fee of
0.5% per annum on the unused amount of the revolving credit line. The AGI
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.
At September 30, 1997, no amounts were outstanding under the $45.0 million
revolving credit line.
The AGI Indenture limits borrowings under the AGI Senior Credit Facility to
150% of AGI's consolidated cash flow (as defined) for the preceding four
fiscal quarters. For the purposes of this calculation, the results of
Camping World and Ehlert are only included for periods after their
acquisition. As of September 30, 1997, permitted borrowings under the
undrawn revolving line of the AGI Senior Credit Facility were $45.0 million.
The AGI Senior Credit Facility 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 Senior Credit
Facility and AGI Indenture, AGI would have been permitted to make dividends
to AGHI up to $119.7 million, to service these obligations when due,
as of September 30, 1997.
During the nine months ended September 30, 1997, payments under the terms of
several phantom stock agreements totaled $0.6 million. Additional phantom
stock payments of $1.6 million are scheduled to be made over the next twelve
months.
18
<PAGE>
Capital expenditures in the nine months ended September 30, 1997 totaled $3.1
million compared to capital expenditures of $1.3 million during the same
period in 1996. Capital expenditures are anticipated to be approximately
$1.5 million for the remainder of 1997, primarily for continued enhancements
to membership marketing databases, inbound and outbound tele-communications,
and computer software and hardware.
In the next two years, most large companies will face a potentially serious
information systems (computer) problem because certain software application
and operational programs written in the past will not properly recognize
calendar dates beginning in the year 2000. The Company began the process of
identifying the changes required to their computer programs and hardware
during 1996. The necessary modifications to the Company's financial and
operational information systems are expected to be completed by the first
quarter of 1999. Preliminary estimates of the total costs to be incurred
prior to the year 2000 range from $1.0 million to $1.5 million. Maintenance
and modification costs will be expensed as incurred while the costs of new
software will be capitalized and amortized over the software's useful life.
Both AB and AINS are subject to regulatory guidelines that, among other
things, stipulate the minimum capital requirements for each entity based on
certain operating ratios. To maintain those ratios the Company contributed
$1.0 million of capital to each AB and AINS during the third quarter of 1997.
It is anticipated that additional capital contributions of $7.0 million will
be made in the remaining calendar year.
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, 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.
19
<PAGE>
PART II: OTHER INFORMATION
Items 1-6: Not Applicable
20
<PAGE>
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: November 12, 1997 Mark J. Boggess
Senior Vice President
Chief Financial Officer
21
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