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, 1996 0-22852
_______________________________________________________________
AFFINITY GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3377709
(State of incorporation (I.R.S. Employer o.)
or organization) Identification No.)
64 Inverness Drive East (303) 792-7284
Englewood, CO 80112 (Registrant's telephone
(Address of principal number, including area code)
executive offices)
_________________________________________________________________
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
11 1/2% Senior Subordinated Notes Due 2003
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding as of
Class November 1,1996
Common Stock, $.001 par value 2,000
DOCUMENTS INCORPORATED BY REFERENCE: None AFFINITY GROUP, INC. and
SUBSIDIARIES
INDEX
Page
Part I. Financial Information
Item 1: Financial Statements
Consolidated Balance Sheets 1
As of September 30, 1996 and December 31, 1995
Consolidated Statements of Operations 2
For the three months ended September 30, 1996 and 1995
Consolidated Statements of Operations 3
For the nine months ended September 30, 1996 and 1995
Consolidated Statements of Cash Flows 4
For the nine months ended September 30, 1996 and 1995
Notes to Consolidated Financial Statements 5
Item 2: Management's Discussion and Analysis of 6
Financial Condition and Results of Operations
Part II. Other Information 12
Signatures 13
Exhibit
ITEM: 1
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and DECEMBER 31, 1995
(In Thousands)
(Unaudited)
9/30/96 12/31/95
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 5,502 3,746
Investments 731 1,514
Accounts receivable, net of allowance
for doubtful accounts 13,960 15,624
Notes receivable from affiliate 0 3,113
Inventories 2,660 4,046
Prepaid expenses and other assets 10,224 5,794
Deferred tax asset- current 2,435 1,907
------ ------
Total current assets 35,512 35,744
PROPERTY AND EQUIPMENT 10,704 10,876
LOANS RECEIVABLE, net 7,277 8,474
INTANGIBLE ASSETS 118,391 122,579
DEFERRED TAX ASSET 14,040 16,503
RESTRICTED INVESTMENTS 2,076 2,015
OTHER ASSETS 4,656 4,556
------- -------
Total assets 192,656 200,747
======= =======
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable 1,144 4,730
Accrued interest 6,419 3,058
Accrued liabilities 12,987 16,582
Customer deposits 12,533 10,974
Current portion of long-term debt 4,626 4,665
------ ------
Total current liabilities 37,709 40,009
DEFERRED REVENUES 76,766 71,133
LONG-TERM DEBT 147,416 159,831
OTHER LONG-TERM LIABILITIES 6,847 7,737
------- -------
Total liabilities 268,738 278,710
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S DEFICIT:
Preferred stock, .001 par value,
1,000 shares authorized, none issued or outstanding 0 0
Common stock .001 par value,
2,000 shares authorized, 2,000 shares issued
and outstanding 1 1
Additional paid-in capital, net 12,021 12,021
Accumulated deficit (88,104) (89,985)
-------- --------
Total stockholder's deficit (76,082) (77,963)
Total liabilities and stockholder's deficit 192,656 200,747
======= =======
See Notes to Consolidated Financial Statements
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
9/30/96 9/30/95
REVENUES:
Membership services 26,440 27,095
Publications 6,988 6,642
------ ------
33,428 33,737
COSTS AND EXPENSES:
Membership services 16,466 14,350
Publications 4,552 5,654
General and administrative 4,737 4,353
Depreciation and amortization 2,153 2,370
------ ------
27,908 26,727
------ ------
INCOME FROM OPERATIONS 5,520 7,010
NON-OPERATING EXPENSES:
Interest expense, net (4,099) (4,206)
Other net non-operating - (14)
------- -------
(4,099) (4,220)
------- -------
NET INCOME BEFORE INCOME TAXES 1,421 2,790
INCOME TAX PROVISION (736) (1,500)
------- -------
NET INCOME 685 1,290
======= ======
See Notes to Consolidated Financial Statements.
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
NINE MONTHS ENDED
9/30/96 9/30/95
REVENUES:
Membership services 78,354 79,190
Publications 22,959 22,395
------- -------
101,313 101,585
COSTS AND EXPENSES:
Membership services 47,029 43,695
Publications 17,884 17,853
General and administrative 13,753 14,452
Depreciation and amortization 6,367 7,204
------ ------
85,033 83,204
INCOME FROM OPERATIONS 16,280 18,381
NON-OPERATING EXPENSES:
Interest expense, net (12,459) (12,268)
Other net non-operating (1) 58
-------- --------
(12,460) (12,210)
NET INCOME BEFORE INCOME TAXES 3,820 6,171
INCOME TAX PROVISION (1,945) (3,200)
------- -------
NET INCOME 1,875 2,971
======= =======
See Notes to Consolidated Financial Statements.
<PAGE>
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
9/30/96 9/30/95
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 1,875 2,971
Adjustments to reconcile net income to net cash
provided (used in) operating activities:
Depreciation and amortization 6,367 7,204
Deferred Income Taxes 1,945 3,200
Provision for losses on accounts receivable 518 459
Deferred phantom stock compensation - 640
Gain (Loss) on disposal of property and equipment 1 (54)
Changes in assets and liabilities:
Accounts receivable 1,146 851
Inventories 1,386 52
Prepaids and other assets (4,530) (4,026)
Loans receivable 1,197 -
Restricted investments (61) -
Accounts payable (3,586) (1,069)
Accrued and other liabilities (1,130) (1,540)
Customer deposits 1,559 -
Deferred revenues 5,633 5,333
------ ------
Net cash provided by operating activities 12,320 14,021
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,311) (2,250)
Change in intangible assets (697) (364)
Sale of investments 783 -
Prepaid lease - (1,600)
Note receivable from affiliate 3,113 -
Proceeds from sale of property and equipment 2 263
----- -------
Net cash provided by (used) in investing activities 1,890 (3,951)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid - (9,000)
Borrowings on long-term debt 26,550 103,247
Principal payments of long-term debt (39,004) (104,663)
-------- ---------
Net cash used in financing activities (12,454) (10,416)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,754 (346)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 3,746 346
----- -----
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 5,502 -
===== =====
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 9,343 10,293
Income taxes 472 281
See Notes to Consolidated Financial Statements.
AFFINITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
The financial statements included herein include the results of Affinity Group,
Inc. and subsidiaries (the Company) without audit, in accordance with
generally accepted accounting principles, and pursuant to the rules and
regulations of the Securities and Exchange Commission. These interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes in the Company's 10-K report for
the year ended December 31, 1995 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) PENDING ACQUISITION
On August 28, 1996, the Company entered into a Stock Purchase Agreement to
purchase all of the issued and outstanding voting securities of Ehlert
Publishing Group, Inc. and Expositions Group, Inc., a recreation and sports
publishing group, headquartered in Minnetonka, Minnesota. The purchase price
(subject to adjustment under certain circumstances) is $22.3 million.
Closing of the transactions contemplated under the Stock Purchase Agreement
is expected to occur in January 1997.
AFFINITY GROUP INC. AND SUBSIDIARIES
ITEM 2: 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:
THREE MONTHS ENDED
9/30/96 9/30/95 INC/(DEC)
REVENUES:
Membership services 79.10 80.31 (2.42)
Publications 20.90 19.69 5.21
------ ------ ------
100.00 100.00 (0.92)
COSTS AND EXPENSES:
Membership services 49.26 42.54 14.75
Publications 13.62 16.76 (19.49)
General and administrative 14.17 12.90 8.82
Depreciation and amortization 6.44 7.02 (9.16)
----- ----- -------
83.49 79.22 4.42
INCOME FROM OPERATIONS 16.51 20.78 (21.26)
NON-OPERATING EXPENSES:
Interest expense, net 12.26 12.47 (2.54)
Other net non-operating 0.00 0.04 (100.00)
----- ----- --------
12.26 12.51 (2.87)
NET INCOME BEFORE INCOME TAXES 4.25 8.27 (49.07)
INCOME TAX PROVISION 2.20 4.45 (50.93)
----- ---- -------
NET INCOME 2.05 3.82 (46.90)
===== ==== =======
NINE MONTHS ENDED
9/30/96 9/30/95 INC/(DEC)
REVENUES:
Membership services 77.34 77.95 (1.06)
Publications 22.66 22.05 2.52
------ ------ ------
100.00 100.00 (0.27)
COSTS AND EXPENSES:
Membership services 46.42 43.01 7.63
Publications 17.65 17.57 0.17
General and administrative 13.57 14.23 (4.84)
Depreciation and amortization 6.28 7.09 (11.62)
----- ----- -------
83.93 81.91 2.20
INCOME FROM OPERATIONS 16.07 18.09 (11.43)
NON-OPERATING EXPENSES:
Interest expense, net 12.30 12.08 1.56
Other net non-operating 0.00 (0.06) (101.72)
----- ------ --------
12.30 12.02 2.05
NET INCOME BEFORE INCOME TAXES 3.77 6.07 (38.10)
INCOME TAX PROVISION 1.92 3.16 (39.22)
---- ---- -------
NET INCOME 1.85 2.90 (36.89)
==== ==== =======
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1996
Compared With Three Months Ended September 30, 1995
Revenues of $33.4 million for the third quarter of 1996 decreased by
approximately $300,000 or 0.9% from the comparable period in 1995.
Membership services revenue of $26.4 million for the third quarter of 1996
decreased by $655,000 from the comparable period in 1995 due to an aggregate
decrease of $2,040,000 in club membership revenue which was offset by
increases of only $1,385,000 in other membership activities. The decrease in
membership revenue is primarily a result of a decline in the number of
members in the Coast to Coast and the National Association for Female
Executives ("NAFE") clubs. Due to a continuing decline in the private
campground industry, it is anticipated the membership of Coast to Coast will
also continue to decline. The decline in NAFE membership is the result of a
decision to reduce new member acquisition mailings. With improved member
benefits and new member acquisition methods, it is anticipated NAFE
membership will increase during 1997. The increases in other membership
revenue consisted of additional revenue of $263,000 from Affinity Thrift &
Loan (ATL) and Affinity Insurance Group (AINS), operations acquired in the
second half of 1995, an increase of $730,000 in revenues from Samboree
events, and an increase of $392,000 in marketing and commission fee income
primarily from a new mechanical breakdown program and VIP insurance.
Publication revenue of $7.0 million for the third quarter of 1996 increased
by $346,000 from the comparable period in 1995. Increases of $590,000 from
MotorHome, Woodall Publishing and other publication revenues were partially
offset by decreases of $244,000 in Campground Directory and RV Shopper
revenues. The increases in publication revenues are largely a result of
increased advertising income.
Costs and expenses totaled $27.9 million for the third quarter of 1996, an
increase of $1,181,000 or 4.4% over the comparable period in 1995. Costs and
expenses of ATL and AINS accounted for $734,000 of such increase.
Membership services costs and expenses, excluding ATL and AINS expenses,
increased by $1,382,000 to $15.7 million in the third quarter of 1996
compared to $14.3 million in 1995. Such increase was largely a result of
increased marketing and promotional expenses for existing membership services
as well as cost associated with the development of new services.
Publication costs and expenses of $4.6 million for the third quarter of 1996
decreased $1.1 million or 19.5% compared to the third quarter of 1995. Such
decrease was primarily due to a net decrease in Campground Directory expenses
resulting from reduced marketing cost.
General and administrative costs and expenses for the third quarter of 1996
increased $384,000 or 8.8% to 4.7 million, compared to $4.4 million in the
third quarter of 1995. Such increase was due to an increased number of
employees. Depreciation and amortization expense of $2.2 million decreased
$217,000 or 9.2% primarily due to customer list and other intangibles having
been fully amortized in prior periods.
Income from operations for the third quarter of 1996 decreased $1.5 million
or 21.3% to $5.5 million compared to $7.0 million for the third quarter of
1995. Such decrease was primarily due to the 1.0% decrease in total
revenues, coupled with increased marketing and member services associated
with the development of additional club benefits.
Non-operating expenses were $4.1 million for the third quarter of 1996,
compared to $4.2 million for the same period in 1995. Such decrease of
approximately $100,000, or 2.5%, was largely due to lower interest rates
during the third quarter of 1996 compared to the same period in 1995.
Net income before taxes in the third quarter of 1996 was $1.4 million
compared to $2.8 million for the third quarter of 1995. The increases in
expenses identified above accounted for such decrease.
Net income for the third quarter of 1996 was $685,000, compared to $1,290,000
for the same period in 1995. The decrease of $605,000 was composed of a
decrease of $2,300,000 in net revenue from club membership services, $471,000
in net operating losses for ATL and AINS, and an increase of $46,000 in all
other costs and expenses, which were only partially offset by an increase of
$1,448,000 in net publications revenue, and a $764,000 corresponding decrease
in income taxes.
Nine Months Ended September 30, 1996
Compared With Nine MonthsEnded September 30, 1995.
Revenues of $101.3 million for the nine months ended September 30, 1996
decreased by $272,000 from $101.6 million for the same period in 1995 due to
an $836,000 decrease in membership services revenue which was partially
offset by a $564,000 increase in publication revenue.
The $836,000 decrease in membership services revenue resulted from a net
decrease of $2,809,000 in club membership revenue which was partially offset
by $752,000 in additional revenue from the ATL and AINS operations acquired
in the second half of 1995, a $906,000 net increase in marketing and
commission fee income largely from RV financing, various insurance programs,
mechanical breakdown and emergency road service programs and a $315,000
increase in Samborees revenue.
Publication revenue of $23.0 million for the first nine months of 1996
increased by $564,000 or 2.5% over the comparable period in 1995, due to an
aggregate increase of $1,358,000 in revenues from Trailer Life, Motorhome,
Roads To Adventure (established in 1996), and Woodall Publishing. This
increase was offset by an aggregate decrease of $794,000 in revenues from
RV Shopper, Rider, other publications and sale of books. These increases and
decreases in publication revenues are largely a result of changes in
advertising income.
Costs and expenses totaled $85.0 million for the nine months ended
September 30, 1996, an increase of $1,829,000 or 2.2% over the comparable
period in 1995. Costs and expenses of ATL and AINS were $1,964,000 during
the first nine months of 1996. Excluding the expenses of ATL and AINS
operations, costs and expenses in the first nine months of 1996 decreased by
$135,000.
Membership services costs and expenses, excluding ATL and AINS expenses, were
$45.1 million for the first nine months of 1996, a $1.4 million or 3.1%
increase over such costs and expenses for the comparable period in 1995.
Increased expenses of $836,000 associated with the development of an Internet
Web site, introduction of a mechanical breakdown program, and club development
costs, increased marketing, promotional and overhead expenses of $830,000 for
other membership services and increased club expenses of $634,000 were only
partially offset by reduction of expenses due to discontinuance of a direct mail
catalog in 1996 and a $423,000 reduction of expenses for member benefit
insurance and financial services programs.
Publication costs and expenses totaled $17.9 million in the first nine months
of 1996, the same as such expenses in the first nine months of 1995.
Increases of approximately $1.0 million in publication costs and expenses for
four publications were offset by decreases in such expenses for other
publications. The increase in publication expenses are largely a result of
increased per item production costs, primarily mailing costs. The decreases
result largely from an approximately $540,000 reduction in publication
expenses for RV Shopper which was substantially scaled back in size and
number of issues, as well as an approximately $440,0000 reduction in
marketing cost for Campground Directory.
General and administrative costs and expenses of $13.8 million in the first
nine months of 1996 decreased by $700,000 or 4.8% compared to the same period
in 1996. This decrease was attributed to recording no phantom stock expenses
in the first nine months of 1996 compared to $500,000 in such expenses in the
comparable 1995 period, and a net decrease of $200,000 in other
administrative costs in the first nine months of 1996. Depreciation and
amortization costs of $6.4 million decreased $837,000 or 11.6% in 1996 due to
the full amortization of certain customer lists and other intangibles prior to
the current period.
Income from operations of $16.3 million for the first nine months ended
September 30, 1995, decreased $2.1 million or 11.4% compared to the same
period in 1995. This decrease is a result of a slight decrease in revenues
while cost and expenses increased 2.2% as discussed above.
Non-operating expenses of $12.5 million in the first nine months of 1996
increased by $250,000 or 2.0% compared to the comparable period in 1995.
Such increase resulted from an increase in interest expense largely due to
higher average borrowings partially offset by lower interest rates during
the first nine months of 1996 compared to the same period in 1995.
Net income before taxes was $3.8 million for the first nine months of 1996,
compared to $6.2 million for the first nine months of 1995. The increases in
costs and expenses identified above account for this decrease.
For the nine months ended September 30, 1996, the Company recognized a $1.9
million income tax provision compared to $3.2 million in the comparable
period in 1995. The effective income tax rate in both periods is
approximately 51% which reflects the amortization of non-deductible goodwill.
Net income for the nine months ended September 30, 1996 was to $1.9 million
compared to $3.0 million in the comparable period in 1995. This decrease of
$1.1 million or 36.9% was composed of a decrease of $5,382,000 in net revenue
from club membership services, an increase of $533,000 in net publications
revenue, $1,212,000 in net operating losses for ATL and AINS, a decrease of
$1,286,000 in all other costs and expenses, and by a $1,255,000 corresponding
decrease in income taxes.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had $12.5 million available under its
revolving credit facility, compared to $3.5 million at December 31, 1995.
The decline in the outstanding revolver borrowings in the nine months of 1996
is primarily attributable to receipt in the first quarter of 1996 of the
annual VIP Insurance bonus for 1995 and the repayment of an affiliate note
receivable, which in the aggregate, totaled $5.8 million.
Cash, cash equivalents and investments totaling $6.2 million at September 30,
1996 are primarily restricted for use by the ATL and AINS subsidiaries and
are subject to regulatory restrictions on dividends or other distributions to
the Company and are unavailable to reduce the revolving credit facility.
The operations of Affinity Thrift and Loan, although required to be
consolidated with the Company, are recognized as an "unrestricted" or
non-guarantying subsidiary as defined in the senior credit facility and the
Indenture under which the Company's 11 1/2 % senior subordinated notes were
issued. All assets, liabilities and operations of ATL are excluded from the
calculation of covenants under the terms of the respective debt agreements.
During the nine months ended September 30, 1996, payments under the terms of
several phantom stock agreements totaled $2.2 million. Additional phantom
stock payments of $1.4 million are scheduled to be made over the next twelve
months.
Capital expenditures in the nine months ended September 30, 1996 totaled $1.3
million compared to capital expenditures of $2.3 million during the same
period in 1995. It is anticipated the Company will incur an additional
$500,000 to $1,500,000 in capital expenditures during the remainder of
calendar year 1996 to further develop its membership management database
systems.
Management believes that funds generated by operations together with
available borrowings under its revolving credit facility 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.
On August 28, 1996, the Company entered into a Stock Purchase Agreement to
purchase all of the issued and outstanding voting securities of Ehlert
Publishing Group, Inc. and Expositions Group, Inc., a recreation and sports
publishing group, headquartered in Minnetonka, Minnesota. The purchase price
(subject to adjustment under certain circumstances) is $22.3 million.
Closing of the transactions contemplated under the Stock Purchase Agreement
is expected to occur in January 1997. It is currently anticipated this
acquistion will be funded through new senior debt or a combination of senior
debt and capital provided by Affinity Group Holding, Inc. the Company's
parent.
PART II: OTHER INFORMATION
Items 1-4: Not Applicable
Item 5: Other Events
On August 28, 1996, Andris A. Baltins, a director of the registrant,
tendered his resignation as a director, which resignation was accepted by the
registrant and its sole shareholder. There was no disagreement between the
registrant and the director in respect of any matters relating to the
registrant's operations, policies or practices.
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 10.1 Purchase Agreement - Ehlert Publishing
Group, Inc.
(b) Report on Form 8-K: None
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrants have duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AFFINITY GROUP, INC.
Date: November 14, 1996 Mark J. Bogggess
Senior Vice President
Chief Financial Officer
Exhibit 10.1
STOCK PURCHASE AGREEMENT
Exhibit 10.1 has been filed with the SEC in a paper format under a Temporary
Hardship Exemption due to technical difficulties with the electronic format.
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