<PAGE>
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, 1998 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 OCTOBER 31, 1998
- ----- -----------------
Common Stock, $.01 par value 100
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT REFERENCED ON EXHIBIT INDEX
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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, 1998 and December 31, 1997
Consolidated Statements of Operations 2
For the three months ended September 30, 1998 and 1997
Consolidated Statements of Operations 3
For the nine months ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows 4
For the nine months ended September 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
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
9/30/98 12/31/97
--------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,201 $ 43,978
Investments 2,199 2,590
Accounts receivable, less allowance for
doubtful accounts 22,929 25,802
Inventories 31,985 30,283
Prepaid expenses and other assets 12,775 11,089
-------- ---------
Total current assets 96,089 113,742
PROPERTY AND EQUIPMENT 57,064 51,559
LOANS RECEIVABLE 121,269 44,973
INTANGIBLE ASSETS 199,485 206,104
DEFERRED TAX ASSET 8,354 8,521
RESTRICTED INVESTMENTS 1,997 2,096
OTHER ASSETS 6,168 5,391
-------- ---------
$490,426 $432,386
-------- ---------
-------- ---------
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable $13,954 $16,334
Accrued interest 14,100 7,371
Accrued taxes 553 5,035
Accrued liabilities 21,389 23,498
Customer deposits 133,613 74,528
Deferred tax liability - current 2,132 2,132
Current portion of long-term debt 7,090 6,132
-------- ---------
Total current liabilities 192,831 135,030
DEFERRED REVENUES 88,796 79,572
LONG-TERM DEBT 279,555 288,229
OTHER LONG-TERM LIABILITIES 4,860 5,467
COMMITMENTS AND CONTINGENCIES --- ---
-------- ---------
566,042 508,298
-------- ---------
-------- ---------
STOCKHOLDER'S DEFICIT:
Common stock, $.01 par value, 1,000 shares
authorized, 100 shares issued and outstanding 1 1
Additional paid-in capital 12,021 12,021
Accumulated deficit (87,638) (87,934)
-------- ---------
Total stockholder's deficit (75,616) (75,912)
-------- ---------
$490,426 $432,386
-------- ---------
-------- ---------
</TABLE>
See notes to consolidated financial statements.
1
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------
9/30/98 9/30/97
--------- ---------
<S> <C> <C>
REVENUES:
Membership services $34,525 $31,035
Publications 10,090 10,244
Merchandise 53,119 49,258
------- -------
97,734 90,537
COSTS APPLICABLE TO REVENUES:
Membership services 23,249 18,860
Publications 7,629 7,285
Merchandise 36,070 33,875
------- -------
66,948 60,020
GROSS PROFIT 30,786 30,517
OPERATING EXPENSES:
Selling, general and administrative 18,543 17,507
Depreciation and amortization 3,741 3,656
------- -------
22,284 21,163
------- -------
INCOME FROM OPERATIONS 8,502 9,354
NON-OPERATING ITEMS:
Interest expense, net (8,018) (8,079)
Other non-operating income, net 54 189
------- -------
(7,964) (7,890)
------- -------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 538 1,464
INCOME TAX EXPENSE (195) (1,130)
------- -------
NET INCOME $343 $334
------- -------
------- -------
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------
9/30/98 9/30/97
--------- ---------
<S> <C> <C>
REVENUES:
Membership services $ 98,239 $ 85,309
Publications 34,265 30,595
Merchandise 146,213 100,563
-------- --------
278,717 216,467
COSTS APPLICABLE TO REVENUES:
Membership services 63,338 50,266
Publications 26,689 22,437
Merchandise 98,406 68,398
-------- --------
188,433 141,101
GROSS PROFIT 90,284 75,366
OPERATING EXPENSES:
Selling, general and administrative 55,082 39,533
Depreciation and amortization 11,060 9,622
-------- --------
66,142 49,155
-------- --------
INCOME FROM OPERATIONS 24,142 26,211
NON-OPERATING ITEMS:
Interest expense, net (23,935) (19,864)
Other non-operating income, net 257 231
-------- --------
(23,678) (19,633)
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 464 6,578
INCOME TAX EXPENSE (168) (3,545)
-------- --------
INCOME BEFORE EXTRAORDINARY ITEM 296 3,033
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, less
applicable income tax benefit of $145 --- (241)
-------- --------
NET INCOME $296 $2,792
-------- --------
-------- --------
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
9/30/98 9/30/97
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 296 $ 2,792
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred tax provision 167 3,072
Depreciation and amortization 11,060 9,622
Provision for losses on accounts receivable 517 499
Deferred compensation (325) 800
Gain on disposal of property and equipment (6) ---
Extraordinary item --- 386
Changes in operating assets and liabilities (net of
purchased businesses):
Accounts receivable 2,356 (2,158)
Inventories (1,702) 4,454
Restricted investments 391 (1,246)
Prepaids and other assets (2,463) (5,308)
Accounts payable (2,380) (10,682)
Accrued and other liabilities (144) (1,254)
Deferred revenues 9,224 9,125
Net assets and liabilities of discontinued
operations --- (1,003)
-------- --------
Net cash provided by operating activities 16,991 9,099
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,940) (3,060)
Net changes in intangible assets (45) (11,334)
Net changes in loans receivable (76,296) (19,144)
Sale of investments 99 (469)
Proceeds from sale of property and equipment 45 29
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 (86,137) (152,196)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in customer deposits 59,085 34,399
Borrowings on long-term debt 37,848 200,650
Principal payments of long-term debt (45,564) (58,736)
-------- --------
Net cash provided by financing activities 51,369 176,313
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (17,777) 33,216
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 43,978 4,278
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,201 $ 37,494
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 9,144 8,942
Income Taxes 5,172 523
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The financial statements included herein include the accounts of Affinity
Group Holding, Inc. ("AGHI"), its wholly-owned subsidiary, Affinity Group,
Inc. ("AGI"), and AGI's subsidiaries (collectively the "Company") without
audit, in accordance with generally accepted accounting principles, and
pursuant to the rules and regulations of the Securities and Exchange
Commission. These interim consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes in the
Company's 10-K report for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission. In the opinion of management of the
Company, these consolidated financial statements contain all adjustments of a
normal recurring nature necessary to present fairly the financial position,
results of operations and cash flows of the Company for the interim periods
presented.
On March 6, 1997, AGI 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, AGI 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 nine months ended
September 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
5
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(2) RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)
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 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
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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM 2:
The following table is derived from the Company's Consolidated Statements of
Operations and expresses the results from operations as a percentage of
revenues and reflects the net increase (decrease) between periods:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------
9/30/98 9/30/97 Inc/(Dec)
---------- --------- ------------
<S> <C> <C> <C>
REVENUES:
Membership services 35.3% 34.3% 11.2%
Publications 10.3% 11.3% (1.5%)
Merchandise 54.4% 54.4% 7.8%
------ ------ ---------
100.0% 100.0% 7.9%
COSTS APPLICABLE TO REVENUES:
Membership services 23.8% 20.9% 23.3%
Publications 7.8% 8.0% 4.7%
Merchandise 36.9% 37.4% 6.5%
------ ------ ---------
68.5% 66.3% 11.5%
GROSS PROFIT 31.5% 33.7% 0.9%
OPERATING EXPENSES:
Selling, general and administrative 19.0% 19.4% 5.9%
Depreciation and amortization 3.8% 4.0% 2.3%
------ ------ ---------
22.8% 23.4% 5.3%
------ ------ ---------
INCOME FROM OPERATIONS 8.7% 10.3% (9.1%)
NON-OPERATING ITEMS:
Interest expense, net (8.2%) (8.9%) (0.8%)
Other non-operating income, net 0.1% 0.2% (71.4%)
------ ------ ---------
(8.1%) (8.7%) 0.9%
------ ------ ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES 0.6% 1.6% (63.3%)
INCOME TAX EXPENSE (0.2%) (1.2%) (82.7%)
------ ------ ---------
NET INCOME 0.4% 0.4% 2.7%
------ ------ ---------
------ ------ ---------
</TABLE>
7
<PAGE>
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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------------------
9/30/98 9/30/97 Inc/(Dec)
----------- --------- ------------
<S> <C> <C> <C>
REVENUES:
Membership services 35.2% 39.4% 15.2%
Publications 12.3% 14.1% 12.0%
Merchandise 52.5% 46.5% 45.4%
---------- --------- ----------
100.0% 100.0% 28.8%
COSTS APPLICABLE TO REVENUES:
Membership services 22.7% 23.1% 26.0%
Publications 9.6% 10.4% 19.0%
Merchandise 35.3% 31.7% 43.9%
---------- --------- ----------
67.6% 65.2% 33.5%
GROSS PROFIT 32.4% 34.8% 19.8%
OPERATING EXPENSES:
Selling, general and administrative 19.7% 18.3% 39.3%
Depreciation and amortization 4.0% 4.4% 14.9%
---------- --------- ----------
23.7% 22.7% 34.6%
---------- --------- ----------
INCOME FROM OPERATIONS 8.7% 12.1% (7.9%)
NON-OPERATING ITEMS:
Interest expense, net (8.6%) (9.2%) 20.5%
Other non-operating income, net 0.1% 0.1% 11.3%
---------- --------- ----------
(8.5%) (9.1%) 20.6%
---------- --------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 0.2% 3.0% (92.9%)
INCOME TAX EXPENSE (0.1%) (1.6%) (95.3%)
---------- --------- ----------
INCOME BEFORE EXTRAORDINARY ITEM 0.1% 1.4% (90.2%)
EXTRAORDINARY ITEM:
Loss on early extinguishment of
debt, less applicable income tax
benefit of $145 --- (0.1%) ---
---------- --------- ----------
NET INCOME 0.1% 1.3% (89.4%)
---------- --------- ----------
---------- --------- ----------
</TABLE>
8
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED WITH THREE MONTHS ENDED SEPTEMBER 30, 1997
REVENUES
Revenues of $97.7 million for the third quarter of 1998 increased by
approximately $7.2 million or 7.9% from the comparable period in 1997.
Membership services revenues of $34.5 million for the third quarter of 1998
increased by approximately $3.5 million from the comparable period in 1997,
an 11.2% increase. This revenue increase was largely attributable to a $2.2
million increase in financial and insurance services revenue, a $2.4 million
increase from the extended vehicle warranty program, a $0.3 million increase
from the Rapid Response emergency road service contracts acquired August 4,
1997 and a $0.3 million increase in Camping World's President's Club
membership fees. These increases were partially offset by a membership
services revenue decrease of approximately $1.7 million primarily associated
with reduced Coast to Coast Club enrollment and reduced Good Sam revenue
recognition as a result of selling more memberships at a reduced average
price to enhance ancillary product revenue.
Publication revenue of $10.1 million for the third quarter of 1998 decreased
by $0.2 million from the comparable period in 1997. This revenue decrease
was largely attributable to the introduction of new book titles in the latter
part of the third quarter of 1997.
Merchandise revenue of $53.1 million was related entirely to the acquisition
of CWI in April 1997. Merchandise revenue for the quarter increased $3.9
million or 7.8%. This increase was principally attributable to a $2.0
million or 5.6% increase in retail sales, a $1.2 million or 9.9% increase in
mail order sales, and a $0.7 million increase in installation and other
sales. These increases are principally due to increased promotional efforts,
including an increase in catalogs distributed, in addition to two stores
added in 1998. Comparable store retail sales increased 4.2% over 1997.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $66.9 million for the third quarter of
1998, an increase of $6.9 million or 11.5% over the comparable period in 1997.
Membership services costs and expenses increased by approximately $4.4
million or 23.3% to $23.2 million in the third quarter of 1998 compared to
$18.9 million in 1997. This increase was largely as a result of increased
expenses of $2.0 million associated with financial and insurance services,
$2.0 million associated with the increase in extended
9
<PAGE>
vehicle warranty policies, and $0.4 million in costs associated with the
Rapid Response emergency road service contracts.
Publication costs and expenses of $7.6 million for the third quarter of 1998
increased $0.3 million or 4.7% compared to the third quarter of 1997. This
$0.3 million increase is primarily from increased marketing efforts for the
TRAILER LIFE CAMPGROUND/ RV PARK & SERVICES DIRECTORY and increased paper
costs.
Merchandise costs applicable to revenues were $36.1 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 7.8%
increase in merchandise sales. The gross profit margin increased by $1.6
million from 31.3% in the third quarter of 1997 to 32.1% for the same period
in 1998. The increase in the gross profit margin was primarily due to
efficiency gained from the consolidation of vendor product lines and the
utilization of enhanced merchandising software.
OPERATING EXPENSES
Selling, general and administrative expenses of $18.5 million for the third
quarter of 1998 were $1.0 million over the comparable period in 1997. This
increase was primarily as a result of $0.6 million in increased retail labor
costs, $0.4 million in other increased wage-related expenses, and an increase
of $0.5 million in other operating expenses, including Year 2000 computer
services expenses. These increases were partially offset by a $0.5 million
reduction in executive deferred compensation and other benefits.
Depreciation and amortization expenses of $3.7 million increased $0.1 million
primarily due to the Camping World operations.
INCOME FROM OPERATIONS
Income from operations for the third quarter of 1998 decreased by $0.9
million or 9.1% to $8.5 million compared to $9.4 million for the third
quarter of 1997. This net decrease was largely due to decreased gross profit
from the membership services segment of $0.9 million, decreased publication
gross profit of $0.5 million, and increased operating expenses of
approximately $1.1 million partially offset by a $1.6 million increase in
gross profit from the merchandise segment.
NON-OPERATING EXPENSES
Non-operating expenses were $8.0 million for the third quarter of 1998 and
remained relatively unchanged as compared to the same period in 1997.
10
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes in the third quarter of
1998 decreased by $0.9 million to $0.5 million compared to the third quarter
of 1997. This decrease was principally due to reduced income from operations
as mentioned above.
INCOME TAX EXPENSE
In the third quarter of 1998, the Company recognized a $0.2 million tax
expense compared to a $1.1 million tax expense in the third quarter of 1997.
NET INCOME
The net income in the third quarter of 1998 was $0.3 million compared to net
income of $0.3 million for the same period in 1997.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1997
REVENUES
Revenues of $278.7 million for the nine months ended September 30, 1998
increased by approximately $62.3 million or 28.8% from the comparable period
in 1997. Excluding the EPG operations acquired March 1997 and the CWI
operations acquired April 1997, revenues were $112.5 million for the first
nine months of 1998 compared to $101.8 million for the comparable period in
1997, a 10.5% increase.
Membership services revenues of $98.2 million for the first nine months of
1998 increased by approximately $12.9 million from the comparable period in
1997. Excluding the CWI membership services operations, membership services
revenue increased by approximately $10.0 million to $88.9 million, a 12.6%
increase. This revenue increase was largely attributable to a $6.0 million
increase in financial and insurance services revenue, a $5.5 million increase
from the extended vehicle warranty program, and a $2.0 million increase from
the Rapid Response emergency road service contracts acquired August 4, 1997.
These increases were offset by a $3.0 million decrease in membership services
revenue principally associated with reduced Coast to Coast Club enrollment,
and $0.5 million in reduced credit card fee revenue.
Publication revenue of $34.3 million for the first nine months of 1998
increased by $3.7 million from the comparable period in 1997. Excluding EPG,
publication revenue increased by approximately $0.7 million largely
attributable to increased revenue from new book title sales, an introduction
of a new motorcycle title, CRUISING RIDER, and increased motorcycle magazine
issues published.
11
<PAGE>
Merchandise revenue of $146.2 million was related entirely to the acquisition
of CWI in April 1997. On a pro forma basis, assuming the CWI acquisition had
occurred at January 1, 1997, merchandise revenue for the first nine months of
1998 increased $8.0 million or 5.8% over the comparable period in 1997. This
increase was principally attributable to a $3.8 million or 3.9% increase in
retail sales, a $3.3 million or 10.4% increase in mail order sales, and a
$0.9 million increase in installation and other sales. These increases are
principally due to increased promotional efforts, including an increase in
catalogs distributed, in addition to two stores added in 1998. Comparable
store retail sales increased 3.3% over 1997.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $188.4 million for the first nine months
of 1998, an increase of $47.3 million or 33.5% over the comparable period in
1997. Excluding the EPG and CWI operations, costs applicable to revenues
increased $13.1 million for the first nine months of 1998 compared to 1997, a
20.1% increase.
Membership services costs and expenses increased by approximately $13.1
million or 26.0% to $63.3 million in the first nine months of 1998 compared
to $50.2 million in 1997. Excluding the CWI acquisition, membership services
costs increased $11.4 million to $59.5 million largely as a result of
increased expenses of $6.0 million associated with the financial and
insurance services, $4.9 million associated with the increase in extended
warranty policies, $2.0 million in costs associated with the Rapid Response
emergency road service contracts and $0.3 million for promotional expenses
related to the new in-store kiosk marketing program. These increases were
partially offset by $0.9 million in reduced membership services expenses,
primarily associated with the Coast to Coast Clubs, and $0.9 million in
reduced expenses associated with the credit card program.
Publication costs and expenses of $26.7 million for the first nine months of
1998 increased $4.3 million or 19.0% over the comparable period in 1997.
Excluding the EPG acquisition, costs increased by $1.7 million over the
comparable period in 1997. This increase was primarily due to a $0.5 million
increase in costs associated with increased book sales, a $0.5 million
increase in TRAILER LIFE CAMPGROUND / RV PARK & SERVICES DIRECTORY expenses
primarily due to increased marketing efforts, $0.3 million in increased
expenses associated with increased ROADS TO ADVENTURE circulation, an
additional motorcycle magazine title and issues published, $0.2 million in
increased paper costs, and a $0.2 million increase in other publication
marketing and on-line development expenses.
Merchandise costs applicable to revenues were $98.4 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 nine months of 1998 increased $4.0 million. The increase in
merchandise costs was primarily attributable to the 5.8% increase in
merchandise sales. The gross profit margin increased by $4.0 million from
31.7% in the first nine months of 1997 to 32.7% for the same period in 1998
primarily due to
12
<PAGE>
consolidation of vendor product lines and the utilization of enhanced
merchandising software.
OPERATING EXPENSES
Selling, general and administrative expenses of $55.1 million for the first
nine months of 1998 were $15.5 million over the comparable period in 1997.
Excluding the EPG and CWI acquisitions, general and administrative expenses
increased by $1.6 million compared to the prior year primarily as a result of
a $1.6 million increase in wage-related expenses, an $0.8 million increase in
consulting and computer service expenses, which includes Year 2000 conversion
efforts, and a net $0.3 million increase in other professional fees,
primarily legal expenses. These increases were partially offset by a $1.1
million reduction in deferred executive compensation. Depreciation and
amortization expenses of $11.1 million were $1.4 million higher than the
first nine months of 1997, primarily due to increased depreciation and
amortization of assets attributable to the EPG and CWI acquisitions,
partially offset by the completion of amortization on the Good Sam membership
lists in 1997.
INCOME FROM OPERATIONS
Income from operations for the first nine months of 1998 decreased by $2.1
million or 7.9% to $24.1 million compared to $26.2 million for the first nine
months of 1997. Excluding income from operations recognized from the
acquired operations of EPG and CWI, income from operations decreased by $2.9
million. This decrease was due to increased operating expenses of $0.6
million, decreased gross profit from the membership services segment of $1.4
million, and a decrease in publication gross profit of $0.9 million.
NON-OPERATING EXPENSES
Non-operating expenses were $23.7 million for the first nine months of 1998
as compared to $19.6 million for the same period in 1997. This $4.0 million
increase is primarily due to the increased interest expense associated with
the issuance of AGHI's $130.0 million 11% senior notes on 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 the first nine months of 1998 was approximately $0.5 million compared to
$6.6 million for the first nine months of 1997. This decrease was
principally due to increased interest expense and reduced gross profit as
mentioned above.
13
<PAGE>
INCOME TAX EXPENSE
In the first nine months of 1998, the Company recognized a $0.2 million tax
expense compared to $3.5 million tax expense in the first nine 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 nine months of 1998 was $0.3 million compared to
net income of $2.8 million for the same period in 1997.
LIQUIDITY AND CAPITAL RESOURCES
AGHI is a holding company whose only asset is the capital stock of AGI.
Cash, cash equivalents and investments of the Company totaled $28.4 million
at September 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 September 30, 1998 cash, cash equivalents and investments is
$22.9 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 AGI Senior
Credit Facility ("AGI SCF"), as discussed further below, and AB only is an
"unrestricted" subsidiary under the terms of the AGI $120.0 million 11.5%
senior subordinated notes due 2003, and the AGHI $130 million 11.0% senior
notes due 2007.
Both AB and AINS are subject to regulatory guidelines which, among other
things, stipulate the minimum capital requirements for each entity based on
certain operating ratios. The Company was not required to contribute and did
not contribute capital to AB and AINS during the first nine 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 AGI SCF provides a term loan of $30.0 million (reducing in
quarterly principal installments of $1.5 million) and a $45.0 million
revolving credit line. The interest on borrowings under the 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%
14
<PAGE>
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 senior credit facility
is secured by a security interest in the assets of AGI and its subsidiaries
and a pledge of the stock of AGI and its subsidiaries. The indenture (the
"AGI Indenture"), pursuant to which the AGI $120.0 million 11.5% senior
subordinated notes due 2003 were issued, limits borrowings under the AGI SCF
to 150% of AGI's consolidated cashflow (as defined) for the preceding four
fiscal quarters. At September 30, 1998, $4.0 million was outstanding and
permitted borrowings under the undrawn revolving credit line of the AGI SCF
were $41.0 million. At September 30, 1998, $21.0 million remained
outstanding under the term portion of the AGI SCF.
The AGI SCF and 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 $130.0 million 11% 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. During the first nine months of 1998, AGI made
distributions of $8.2 million to AGHI. Under the terms of the AGI SCF and the
AGI Indenture, AGI would have been permitted to make dividends to AGHI up to
$124.7 million, to service these obligations when due, as of September 30,
1998.
During the nine months ended September 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 nine months ended September 30, 1998 totaled $9.9
million compared to capital expenditures of $3.1 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, and computer software and
hardware.
Regarding the Year 2000 compliance issue for information systems, the Company
has recognized the need to ensure that its computer operations and operating
systems will not be adversely affected by the upcoming calendar Year 2000 and
is cognizant of the time sensitive nature of the problem. The Company has
assessed how it may be impacted by Year 2000 and has formulated and commenced
implementation of a comprehensive plan to address known issues as they relate
to its information systems. The plan, as it relates to information systems,
involves a combination of software modification, upgrades and replacement.
The Company preliminarily estimates that the cost of Year 2000 compliance
15
<PAGE>
for its information systems will be in the range of $1.0 to $1.5 million and
all necessary modifications will be completed by June 1999. The Company is
not yet able to estimate the cost of Year 2000 compliance with respect to
subcontracted production systems, products, customers and suppliers.
However, based on a preliminary review, management does not expect that such
costs will have a material adverse effect on the future consolidated results
of operations of the Company.
Management believes that funds generated by operations together with
available borrowings under its revolving credit line will be sufficient to
satisfy the Company's operating cash needs, debt obligations and capital
requirements of its existing operations during the next twelve months.
This filing contains statements that are "forward looking statements," and
includes, among other things, discussions of the Company's business strategy
and expectations concerning market position, future operations, margins,
profitability, liquidity and capital resources, as well as statements
concerning the integration of acquired operations and the achievement of
financial benefits and operational efficiencies in connections with
acquisitions. Although the Company believes that the expectations reflected
in such forward looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. All phases of the
operations of the Company are subject to a number of uncertainties, risks and
other influences, including consumer spending, fuel prices, general economic
conditions, regulatory changes and competition, many of which are outside the
control of the Company, and any one of which, or a combination of which,
could materially affect the results of the Company's operations and whether
the forward looking statements made by the Company ultimately prove to be
accurate.
16
<PAGE>
PART II: OTHER INFORMATION
Items 1-5: Not Applicable
Item 6: Exhibits and Reports on Form 8-K
(a) On August 19, 1998 Affinity Group Holding, Inc. engaged Arthur
Anderson LLP as its new independent accountants. Change in Registrant's
Accountants disclosure documents and exhibits were filed with the
Securities and Exchange Commission on August 19, 1998 under Form 8-K and
are thereby incorporated by reference.
17
<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, 1998 Mark J. Boggess
Senior Vice President
Chief Financial Officer
18
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