<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
June 30, 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.
<TABLE>
<CAPTION>
OUTSTANDING AS OF
CLASS AUGUST 5, 1999
- ----- --------------
<S> <C>
Common Stock, $.01 par value 100
</TABLE>
DOCUMENTS INCORPORATED BY REFERENCE:
None
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. Financial Information
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
As of June 30, 1999 and December 31, 1998
Consolidated Statements of Operations 2
For the three months ended June 30, 1999 and 1998
Consolidated Statements of Operations 3
For the six months ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows 4
For the six months ended June 30, 1999 and 1998
Notes to Consolidated Financial Statements 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF 9
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
PART II. Other Information 19
SIGNATURES 20
</TABLE>
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 AND DECEMBER 31, 1998
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
6/30/99 12/31/98
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,071 $ 2,863
Accounts receivable, less allowance for doubtful accounts 22,509 24,248
Inventories 40,573 32,972
Prepaid expenses and other assets 11,600 8,939
----------- -----------
Total current assets 80,753 69,022
PROPERTY AND EQUIPMENT 70,249 69,417
NOTE FROM AFFILIATE 3,220 3,100
INTANGIBLE ASSETS 192,933 196,917
DEFERRED TAX ASSET 6,103 7,842
OTHER ASSETS 4,128 3,255
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 192,330 146,616
----------- -----------
$549,716 $496,169
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 29,052 $ 19,893
Accrued interest 4,456 4,995
Accrued taxes 513 332
Accrued liabilities 22,059 22,750
Deferred revenues 58,756 53,395
Deferred tax liability 1,964 1,964
Current portion of long-term debt 7,870 7,804
Net current liabilities of discontinued operations 174,707 129,596
----------- -----------
Total current liabilities 299,377 240,729
DEFERRED REVENUES 34,900 35,276
LONG-TERM DEBT 290,895 297,663
OTHER LONG-TERM LIABILITIES 3,625 3,447
COMMITMENTS AND CONTINGENCIES -- --
----------- -----------
628,437 577,115
----------- -----------
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 (90,743) (92,968)
----------- -----------
Total stockholder's deficit (78,721) (80,946)
----------- -----------
$549,716 $496,169
----------- -----------
----------- -----------
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------
6/30/99 6/30/98
--------- --------
<S> <C> <C>
REVENUES:
Membership services $ 30,181 $31,332
Publications 10,640 11,576
Merchandise 61,237 55,269
----------- ----------
102,058 98,177
COSTS APPLICABLE TO REVENUES:
Membership services 18,047 18,237
Publications 7,302 8,736
Merchandise 39,876 36,729
----------- ----------
65,225 63,702
GROSS PROFIT 36,833 34,475
OPERATING EXPENSES:
Selling, general and administrative 20,948 18,653
Depreciation and amortization 4,059 3,633
----------- ----------
25,007 22,286
----------- ----------
INCOME FROM OPERATIONS 11,826 12,189
NON-OPERATING ITEMS:
Interest expense, net (7,180) (7,967)
Other non-operating income, net 56 47
----------- ----------
(7,124) (7,920)
----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 4,702 4,269
INCOME TAX EXPENSE (2,672) (2,180)
----------- ----------
INCOME FROM CONTINUING OPERATIONS 2,030 2,089
DISCONTINUED OPERATIONS:
Gain (loss) from discontinued operations, net of
applicable income tax expense of $129 in 1999
and an income tax benefit of $183 in 1998 681 (298)
----------- ----------
NET INCOME $ 2,711 $ 1,791
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------
6/30/99 6/30/98
--------- --------
<S> <C> <C>
REVENUES:
Membership services $ 58,807 $ 58,831
Publications 23,631 24,175
Merchandise 104,336 93,094
----------- ----------
186,774 176,100
COSTS APPLICABLE TO REVENUES:
Membership services 35,473 34,216
Publications 17,165 19,060
Merchandise 68,578 62,336
----------- ----------
121,216 115,612
GROSS PROFIT 65,558 60,488
OPERATING EXPENSES:
Selling, general and administrative 39,825 36,539
Depreciation and amortization 7,999 7,225
----------- ----------
47,824 43,764
----------- ----------
INCOME FROM OPERATIONS 17,734 16,724
NON-OPERATING ITEMS:
Interest expense, net (14,480) (15,917)
Other non-operating income, net 107 234
----------- ----------
(14,373) (15,683)
----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 3,361 1,041
INCOME TAX EXPENSE (1,739) (397)
----------- ----------
INCOME FROM CONTINUING OPERATIONS 1,622 644
DISCONTINUED OPERATIONS:
Gain (loss) from discontinued operations, net of
applicable income tax expense of $369 in 1999
and an income tax benefit of $424 in 1998 603 (691)
----------- ----------
NET INCOME (LOSS) $ 2,225 $ (47)
----------- ----------
----------- ----------
</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>
SIX MONTHS ENDED
6/30/99 6/30/98
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,225 $ (47)
Adjustments to reconcile net income (loss) to net cash
provided by operationg activities:
Discontinued operations (603) 188
Deferred tax provision 1,739 397
Depreciation and amortization 7,999 7,225
Provision for losses on accounts receivable 229 179
Deferred compensation 500 -
Gain on disposal of property and equipment (4) (1)
Changes in operating assets and liabilities (net of
purchased businesses):
Accounts receivable 1,510 2,429
Inventories (7,601) (6,951)
Prepaids and other assets (3,534) 351
Accounts payable 9,159 10,354
Accrued and other liabilities (1,731) (9,415)
Deferred revenues 4,985 4,553
-------- --------
Net cash provided by operating activities 14,873 9,262
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,602) (6,393)
Proceeds from sale of property 95 -
Net changes in intangible assets (336) (27)
Net changes in loans receivable (120) -
-------- --------
Net cash used in investing activities (4,963) (6,420)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 40,475 30,348
Principal payments of long-term debt (47,177) (32,019)
-------- --------
Net cash used in financing activities (6,702) (1,671)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,208 1,171
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,863 4,026
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,071 $ 5,197
-------- --------
-------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 15,244 16,647
Income Taxes 451 5,158
</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, 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 Statement of
Financial Accounting Standards ("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, 2001.
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
5
<PAGE>
(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):
<TABLE>
<CAPTION>
Membership
Services Publications Retail Consolidated
----------------------------------------------------------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, 1999
Revenue from external customers $30,181 $10,640 $ 61,237 $102,058
Segment operating profit 10,080 2,754 7,590 20,424
QUARTER ENDED JUNE 30, 1998
Revenues from external customers $31,332 $11,576 $ 55,269 $ 98,177
Segment operating profit 11,386 2,318 6,460 20,164
<CAPTION>
Membership
Services Publications Retail Consolidated
----------------------------------------------------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999
Revenues from external customers $58,807 $23,631 $104,336 $186,774
Segment operating profit 19,557 5,005 9,881 34,443
SIX MONTHS ENDED JUNE 30, 1998
Revenues from external customers $58,831 $24,175 $ 93,094 $176,100
Segment operating profit 21,202 3,833 7,579 32,614
</TABLE>
6
<PAGE>
(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
(CONTINUED)
The following is a summary of the reportable segment reconciliations to the
Company's consolidated financial statements for the three and six months
ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ------------------
6/30/99 6/30/98 6/30/99 6/30/98
------- ------- ------- -------
<S> <C> <C> <C> <C>
INCOME FROM OPERATIONS BEFORE
DEPRECIATION AND AMORTIZATION
Total profit for reportable segments $20,424 $20,164 $34,443 $32,614
Unallocated G & A expense (4,539) (4,342) (8,710) (8,665)
------- ------- ------- -------
Income from operations before
depreciation and amortization $15,885 $15,822 $25,733 $23,949
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
(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 six months ended June 30, 1999 and 1998
are as follows (in thousands):
<TABLE>
<CAPTION>
6/30/99 6/30/98
------- --------
<S> <C> <C>
Revenues $8,083 $ 4,883
Costs applicable to revenues 7,003 5,873
------ -------
Gross profit (loss) 1,080 (990)
Operating expenses 108 125
------ -------
Income (loss) from operations 972 (1,115)
Income tax (expense) benefit (369) 424
------ -------
Income (loss) from discontinued operations $ 603 (691)
------ -------
------ -------
</TABLE>
The tax expense for the period ended June 30, 1999 differs from the statutory
rate due primarily to non-deductible reserves and valuation allowances.
7
<PAGE>
(4) DISCONTINUED OPERATIONS (CONTINUED)
The assets and liabilities of AB are included in the accompanying
consolidated balance sheets as of June 30, 1999 and December 31, 1998 as
follows (in thousands):
<TABLE>
<CAPTION>
6/30/99 12/31/98
--------- ---------
<S> <C> <C>
Current assets:
Cash $ 2,827 $ 23,027
Investments 4,189 1,992
Prepaid expenses and other assets 559 255
--------- ---------
Total current assets 7,575 25,274
Current liabilities:
Accrued liabilities 664 638
Customer deposits 181,249 154,163
Accrued taxes 369 69
--------- ---------
Total current liabilities 182,282 154,870
--------- ---------
Net current liabilities $(174,707) $(129,596)
--------- ---------
--------- ---------
Long-term assets:
Property and equipment $ 2,698 $ 2,420
Loans receivable 200,500 143,443
Intangible assets (53) (74)
Other assets 1,185 827
--------- ---------
Total long-term assets 204,330 146,616
Long-term liabilities:
Other long-term liabilities 12,000 -
--------- ---------
Net long-term assets $ 192,330 $ 146,616
--------- ---------
--------- ---------
</TABLE>
8
<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>
THREE MONTHS ENDED
-------------------------------------
6/30/99 6/30/98 Inc/(Dec)
---------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Membership services 29.6% 31.9% (3.7%)
Publications 10.4% 11.8% (8.1%)
Merchandise 60.0% 56.3% 10.8%
---------- ----------- ----------
100.0% 100.0% 4.0%
COSTS APPLICABLE TO REVENUES:
Membership services 17.7% 18.6% (1.0%)
Publications 7.2% 8.9% (16.4%)
Merchandise 39.0% 37.4% 8.6%
---------- ----------- ----------
63.9% 64.9% 2.4%
GROSS PROFIT 36.1% 35.1% 6.8%
OPERATING EXPENSES:
Selling, general and administrative 20.5% 19.0% 12.3%
Depreciation and amortization 4.0% 3.7% 11.7%
---------- ----------- ----------
24.5% 22.7% 12.2%
---------- ----------- ----------
INCOME FROM OPERATIONS 11.6% 12.4% (3.0%)
NON-OPERATING ITEMS:
Interest expense, net (7.1%) (8.1%) (9.9%)
Other non-operating income, net 0.1% -- 19.1%
---------- ----------- ----------
(7.0%) (8.1%) (10.1%)
---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 4.6% 4.3% 10.1%
INCOME TAX EXPENSE (2.6%) (2.2%) 22.6%
---------- ----------- ----------
2.0% 2.1% (2.8%)
INCOME FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS:
Gain (loss) from discontinued operations, net of
applicable income tax expense (benefit) 0.7% (0.3%) 328.5%
---------- ----------- ----------
NET INCOME 2.7% 1.8% 51.4%
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
9
<PAGE>
AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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>
SIX MONTHS ENDED
-------------------------------------
6/30/99 6/30/98 Inc/(Dec)
---------- ----------- ----------
<S> <C> <C> <C>
REVENUES:
Membership services 31.5% 33.4% --
Publications 12.7% 13.7% (2.3%)
Merchandise 55.8% 52.9% 12.1%
---------- ----------- ----------
100.0% 100.0% 6.1%
COSTS APPLICABLE TO REVENUES:
Membership services 19.0% 19.5% 3.7%
Publications 9.2% 10.8% (9.9%)
Merchandise 36.7% 35.4% 10.0%
---------- ----------- ----------
64.9% 65.7% 4.8%
GROSS PROFIT 35.1% 34.3% 8.4%
OPERATING EXPENSES:
Selling, general and administrative 21.3% 20.7% 9.0%
Depreciation and amortization 4.3% 4.1% 10.7%
---------- ----------- ----------
25.6% 24.8% 9.3%
---------- ----------- ----------
INCOME FROM OPERATIONS 9.5% 9.5% 6.0%
NON-OPERATING ITEMS:
Interest expense, net (7.8%) (9.0%) (9.0%)
Other non-operating income, net 0.1% 0.1% (54.3%)
---------- ----------- ----------
(7.7%) (8.9%) (8.4%)
---------- ----------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 1.8% 0.6% 222.9%
INCOME TAX EXPENSE (0.9%) (0.2%) 338.0%
---------- ----------- ----------
0.9% 0.4% 151.9%
INCOME FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS:
Gain (loss) from discontinued operations, net of
applicable income tax expense (benefit) 0.3% (0.4%) 187.3%
---------- ----------- ----------
NET INCOME 1.2% -- --
---------- ----------- ----------
---------- ----------- ----------
</TABLE>
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999
COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues of $102.1 million for the second quarter of 1999 increased by
approximately $3.9 million or 4.0% from the comparable period in 1998.
Membership services revenues of $30.2 million for the second quarter of 1999
decreased by approximately $1.2 million or 3.7% from the comparable period in
1998. This revenue decrease was largely attributable to a $1.9 million
reduction in revenue from the extended vehicle warranty program due to the
use of one-year renewable sales contracts in lieu of the multi-year sales
contracts used in 1998, and a $0.5 million decrease in fee income generated
from the sales of vehicle insurance policies. This decrease was partially
offset by a revenue increase of $0.7 million in 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, and $0.5 million in
additional member services revenue as a result of increased enrollment in the
Good Sam Club and the Camping World President's Club.
Publication revenue of $10.6 million for the second quarter of 1999 decreased
by $0.9 million from the comparable period in 1998. This revenue decrease
was principally attributable to a reduction in the number of issues published
by Ehlert Publishing Group, Inc. ("EPG").
Merchandise revenue of $61.2 million increased $6.0 million or 10.8% over the
second quarter of 1998. This increase was attributable to a $4.0 million
increase in retail showroom sales, which included $2.0 million from the
addition of two new stores and $2.0 million from a 5.6% increase in same
store sales over the second quarter of 1998. In addition, mail order sales
increased $1.6 million, and installation fees and other supplies and services
increased $0.4 million.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $65.2 million for the second quarter of
1999, an increase of $1.5 million or 2.4% over the comparable period in 1998.
Membership services costs and expenses decreased by approximately $0.2
million or 1.0% to $18.0 million in the second quarter of 1999 compared to
$18.2 million in 1998. This decrease was due to a $1.0 million expense
decrease associated with reduced extended warranty policies sold, partially
offset by $0.4 million increase in marketing and administration costs as a
result of the contract renewal with our third party
11
<PAGE>
administrator, and a $0.4 million increase in marketing and club magazine
production costs associated with the Good Sam Club.
Publication costs and expenses of $7.3 million for the second quarter of 1999
decreased approximately $1.4 million or 16.4% compared to the second quarter
of 1998. This decrease was primarily due to fewer magazine issues published
by EPG in the second quarter versus 1998, and the conversion of ROADS TO
ADVENTURE from a quarterly publication in 1998 to an annual publication in
1999.
Merchandise costs applicable to revenues of $39.9 million increased $3.1
million from the second quarter of 1998 primarily attributable to the 10.8%
increase in merchandise sales. The gross profit margin increased by $2.8
million from 33.5% in the second quarter of 1998 to 34.9% for the same period
in 1999.
OPERATING EXPENSES
Selling, general and administrative expenses of $20.9 million for the second
quarter of 1999 were $2.3 million over the second quarter of 1998. This
increase was primarily due to a $1.8 million increase related to the addition
of two new Camping World stores and variable labor increases associated with
increased retail sales, $0.3 million in increased deferred executive
compensation and a $0.2 million increase in other expenses. Depreciation and
amortization expenses of $4.1 million were $0.4 million over the second
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 second quarter of 1999 decreased by $0.4
million or 3.0% to $11.8 million compared to $12.2 million for the second
quarter of 1998. This decrease was due to increased operating expenses of
$2.7 million and a $1.0 million reduction in gross profit from the membership
services segment partially offset by increased gross profit from the
merchandise segment of $2.8 million, and increased gross profit from the
publications segment of $0.5 million.
NON-OPERATING EXPENSES
Non-operating expenses were $7.1 million for the second quarter of 1999,
compared to $7.9 million for the same period in 1998. Despite overall higher
borrowings in the second quarter of 1999 compared to 1998, interest expense
decreased by $0.8 million due to the lower effective interest rate in 1999 as
a result of the new AGI Revolving Credit and Term Loan Facility.
12
<PAGE>
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes in the second quarter
of 1999 was approximately $4.7 million compared to $4.3 million for the
second quarter of 1998. This $0.4 million increase from the prior period was
principally due to the lower net non-operating expenses, principally interest
expense, partially offset by the decrease in income from operations reflected
above.
INCOME TAX EXPENSE
In the second quarter of 1999, the Company recognized a $2.7 million tax
expense compared to $2.2 million in the second 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 income from the discontinued operations was $0.7
million for the second quarter of 1999 compared to a net loss of $0.3 million
for the second quarter of 1998.
NET INCOME
The net income in the second quarter of 1999 was $2.7 million compared to
$1.8 million for the same period in 1998.
SIX MONTHS ENDED JUNE 30, 1999
COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
REVENUES
Revenues of $186.8 million for the first six months of 1999 increased by
approximately $10.7 million or 6.1% from the comparable period in 1998.
Membership services revenues of $58.8 million for the first six months of
1999 remained relatively unchanged from the comparable period in 1998. This
was largely attributable to reduced revenue of $1.7 million from the extended
vehicle warranty program, offset by $1.2 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, and $0.5
million in additional member services revenue primarily consisting of an
increase in advertising revenue associated with the club magazines.
Publication revenue of $23.6 million for the first six months of 1999
decreased by $0.5 million from the comparable period in 1998. This revenue
decrease was largely
13
<PAGE>
attributable to a reduction in the number of issues published by EPG and a
reduction of book sales, partially offset by a $0.7 million increase in
advertising revenue in the MOTORHOME and TRAILER LIFE magazine titles.
Merchandise revenue of $104.3 million increased $11.2 million or 12.1% over
the first six months of 1998. This increase was attributable to a $7.7
million increase in retail showroom sales, which includes a $3.8 million
increase related to the addition of two new stores and a $3.9 million or 6.1%
increase in same store sales over the first six months of 1998, a $2.6
million increase in mail order sales, and a $0.9 million increase in
installation fees and other supplies and services.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $121.2 million for the first six months
of 1999, an increase of $5.6 million or 4.8% over the comparable period in
1998.
Membership services costs and expenses increased by approximately $1.3
million or 3.7% to $35.5 million in the first six months of 1999 compared to
$34.2 million in 1998. This increase was due to a $1.2 million increase in
membership services costs primarily associated with increased marketing of
the Good Sam Club and an increased reserve on the anticipated redemption of
the Coast to Coast accommodation cards, as well as a $0.6 million increase in
marketing and administration costs associated with the renewed health and
life benefit contract, partially offset by a $0.7 million expense reduction
related to the decline in sales of extended warranty policies.
Publication costs and expenses of $17.2 million for the first six months of
1999 decreased approximately $1.9 million or 9.9% compared to the first six
months of 1998. This decrease was primarily due to decreased book and
directory expenses, fewer magazine issues published by EPG compared to 1998,
and a reduced number of issues of ROAD TO ADVENTURE.
Merchandise costs applicable to revenues of $68.6 increased $6.2 million from
the first six months of 1998 primarily attributable to the 12.1% increase in
merchandise sales. The gross profit margin increased by $5.0 million from
33.0% in the first six months of 1998 to 34.3% for the same period in 1999.
OPERATING EXPENSES
Selling, general and administrative expenses of $39.8 million for the first
six months of 1999 were $3.3 million over the first six months of 1998
primarily related to the addition of two new Camping World stores and
variable labor increases associated with increased retail sales.
Depreciation and amortization expenses of $8.0 million were $0.8 million over
the first six months of 1998. This variance was principally due to the
depreciation of the assets associated with the new retail stores,
merchandising and
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<PAGE>
distribution system, and the acquisition of the corporate facility in the
fourth quarter of 1998.
INCOME FROM OPERATIONS
Income from operations for the first six months of 1999 increased by $1.0
million or 6.0% to $17.7 million compared to $16.7 million for the first six
months of 1998. This increase was due to increased gross profit from the
merchandise segment of $5.0 million, increased gross profit from the
publications segment of $1.4 million, partially offset by increased operating
expenses of $4.1 million and a $1.3 million reduction in gross profit from
the membership services segment.
NON-OPERATING EXPENSES
Non-operating expenses were $14.4 million for the first six months of 1999,
compared to $15.7 million for the same period in 1998. Despite overall
higher borrowings in the first six months of 1999 compared to 1998, interest
expense decreased by $1.4 million due to the lower effective interest rate in
1999 as a result of the new AGI Revolving Credit and Term Loan Facility.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes in the first six months
of 1999 was $3.4 million compared to $1.0 million for the first six months of
1998. This improvement from the prior period was principally due to the
increase in income from operations reflected above, combined with lower net
non-operating expenses, principally interest expense.
INCOME TAX EXPENSE
In the first six months of 1999, the Company recognized a $1.7 million tax
expense compared to $0.4 million tax expense in the first six months 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 income from the discontinued operations was
$0.6 million for the first six months of 1999 compared to a net loss of $0.7
million for the first six months of 1998.
NET INCOME (LOSS)
The net income in the first six months of 1999 was $2.2 million compared to a
net loss of $47,000 for the same period in 1998.
15
<PAGE>
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 as discontinued in the accompanying financial statement.
The Company has two primary debt obligations. On April 2, 1997, AGHI issued
a total of $130.0 million of 11.0% senior notes maturing on April 1, 2007
("AGHI Senior Notes"). 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 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 June 30, 1999,
the average interest rates on the term loans and revolving credit facility
were 8.10% and 7.72%, respectively, and permitted borrowings under the
undrawn revolving line were $40.85 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 4.995% at June 30, 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 payment of certain
other AGHI obligations. 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,
16
<PAGE>
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 June 30, 1999.
During the first six months of 1999, payments under the terms of several
phantom stock agreements totaled $0.9 million. Additional phantom stock
payments of $0.3 million are scheduled to be made over the remainder of 1999.
Capital expenditures for the first six months of 1999 totaled $4.6 million
compared to capital expenditures of $6.4 million for the first six months of
1998. Capital expenditures are anticipated to be approximately $8.3 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 of
which relate 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 AGHI 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
17
<PAGE>
all critical systems by the end of the third quarter of 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. 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.
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 six months of 1999, these costs have totaled approximately $0.7
million. Expenditures on Year 2000 issues for the total year 1999 are
expected to be in the range of $1.3 million to $1.4 million. This
expectation assumes that the existing forecast of costs to be incurred
contemplates all significant actions required and that the Company will not
be obligated to incur significant Year 2000 related costs on behalf of our
customers, suppliers and other third parties.
18
<PAGE>
PART II: OTHER INFORMATION
Items 1-6: Not Applicable
19
<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: August 5, 1999 Mark J. Boggess
Senior Vice President
Chief Financial Officer
20
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