<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
FOR QUARTER ENDED: COMMISSION FILE NUMBER
June 30, 1997 0-22852
_______________________________________________________________
AFFINITY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377709
(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 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 JULY 12, 1997
- ----- -------------
Common Stock, $.001 par value 2,000
DOCUMENTS INCORPORATED BY REFERENCE:
Exhibits to the Company's Form 8-K Report dated April 2, 1997.
<PAGE>
AFFINITY GROUP, INC. AND SUBSIDIARIES
INDEX
-----
PAGE
----
PART I. Financial Information
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets 1
As of June 30, 1997 and December 31, 1996
Consolidated Statements of Operations 2
For the three months ended June 30, 1997 and 1996
Consolidated Statements of Operations 3
For the six months ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows 4
For the six months ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9
PART II. Other Information 18
SIGNATURES 19
<PAGE>
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
6/30/97 12/31/96
--------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,823 $ 4,278
Investments 1,541 499
Accounts receivable (net of allowance for doubtful accounts) 20,437 14,812
Inventories 34,502 2,473
Prepaid expenses and other assets 10,969 6,052
Deferred tax asset-current 2,342 2,228
--------- --------
Total current assets 96,614 30,342
PROPERTY AND EQUIPMENT 49,714 10,550
LOANS RECEIVABLE 19,344 13,134
INTANGIBLE ASSETS 192,026 109,065
DEFERRED TAX ASSET 2,014 13,516
RESTRICTED INVESTMENTS 2,106 2,137
OTHER ASSETS 5,185 4,411
NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 1,278 973
--------- --------
$ 368,281 $ 184,128
--------- --------
--------- --------
LIABILITIES AND STOCKHOLDER'S EARNINGS (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 27,004 $ 4,517
Accrued interest 3,022 2,966
Accrued liabilities 19,501 14,516
Customer deposits 31,149 14,979
Current portion of long-term debt 7,154 5,344
Net current liabilities of discontinued operations 374 1,464
--------- --------
Total current liabilities 88,204 43,786
DEFERRED REVENUES 77,643 70,113
LONG-TERM DEBT 143,371 142,031
OTHER LONG-TERM LIABILITIES 7,819 7,632
COMMITMENTS AND CONTINGENCIES - -
--------- --------
317,037 263,562
--------- --------
STOCKHOLDER'S EARNINGS (DEFICIT):
Preferred stock, $.001 par value, 1,000 shares authorized, - -
none issued or outstanding
Common stock, $.001 par value, 2,000 shares authorized, 1 1
2,000 shares issued and outstanding
Additional paid-in capital 138,037 12,021
Accumulated earnings (deficit) (86,794) (91,456)
--------- --------
Total stockholder's earnings (deficit) 51,244 (79,434)
--------- --------
$ 368,281 $ 184,128
--------- --------
--------- --------
</TABLE>
See notes to consolidated financial statements.
1
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AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
THREE MONTHS ENDED
----------------------
6/30/97 6/30/96
------- -------
REVENUES:
Membership services $ 30,024 $ 25,429
Publications 10,618 7,777
Merchandise 51,305 -
--------- ---------
91,947 33,206
COSTS APPLICABLE TO REVENUES:
Membership services 16,861 13,900
Publications 7,447 5,784
Merchandise 34,523 -
--------- ---------
58,831 19,684
GROSS PROFIT 33,116 13,522
OPERATING EXPENSES:
Selling, general and administrative 17,801 4,641
Depreciation and amortization 3,600 2,085
--------- ---------
21,401 6,726
--------- ---------
INCOME FROM OPERATIONS 11,715 6,796
NON-OPERATING EXPENSE:
Interest expense, net (4,090) (4,184)
Other non-operating charges, net 34 (1)
--------- ---------
(4,056) (4,185)
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 7,659 2,611
INCOME TAX EXPENSE (3,391) (1,268)
--------- ---------
INCOME FROM CONTINUING OPERATIONS 4,268 1,343
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of applicable
deferred income tax benefit of $147 in 1996 - (245)
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 4,268 1,098
EXTRAORDINARY ITEM:
Loss on early extinquishment of debt, less
applicable income tax benefit of $145 (241) -
--------- ---------
NET INCOME $4,027 $1,098
--------- ---------
--------- ---------
See notes to consolidated financial statements.
2
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AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
SIX MONTHS ENDED
---------------------
6/30/97 6/30/96
------- -------
REVENUES:
Membership services $ 54,274 $ 48,828
Publications 20,351 15,971
Merchandise 51,305 -
--------- ---------
125,930 64,799
COSTS APPLICABLE TO REVENUES:
Membership services 31,406 27,489
Publications 15,152 13,332
Merchandise 34,523 -
--------- ---------
81,081 40,821
GROSS PROFIT 44,849 23,978
OPERATING EXPENSES:
Selling, general and administrative 22,026 8,549
Depreciation and amortization 5,693 4,142
--------- ---------
27,719 12,691
--------- ---------
INCOME FROM OPERATIONS 17,130 11,287
NON-OPERATING EXPENSE:
Interest expense, net (8,180) (8,360)
Other non-operating charges, net 42 (1)
--------- ---------
(8,138) (8,361)
--------- ---------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 8,992 2,926
INCOME TAX EXPENSE (4,089) (1,407)
--------- ---------
INCOME FROM CONTINUING OPERATIONS 4,903 1,519
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of applicable
deferred income tax benefit of $198 in 1996 - (329)
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 4,903 1,190
EXTRAORDINARY ITEM:
Loss on early extinquishment of debt, less
applicable income tax benefit of $145 (241) -
--------- ---------
NET INCOME $4,662 $1,190
--------- ---------
--------- ---------
See notes to consolidated financial statements.
3
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AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------
6/30/97 6/30/96
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $4,662 $1,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred tax provision (benefit) 3,609 1,209
Depreciation and amortization 5,693 4,214
Provision for losses on accounts receivable 252 504
Deferred compensation 300 -
Gain on disposal of property and equipment 9 1
Extraordinary item 386 -
Changes in operating assets and liabilities
(net of purchased business):
Accounts receivable (1,151) 2,734
Inventories (698) 1,169
Prepaids and other assets (3,042) (2,374)
Accounts payable (1,143) (2,697)
Accrued and other liabilities (4,594) (3,048)
Deferred revenues 5,539 3,473
Restricted investments (1,042) (61)
Net assets and liabilities of discontinued operations (1,395) (90)
--------- --------
Net cash provided by operating activities 7,385 6,224
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,700) (865)
Net changes in intangible assets (3,491) (380)
Net changes in loans receivable (6,210) 912
Sale of investments 31 538
Purchase of Camping World (97,418) -
Purchase of Ehlert Publishing Group (20,800) -
Proceeds from sale of property and equipment - 2
Note receivable from affiliate - 3,113
--------- --------
Net cash provided by (used in) investing activities (129,588) 3,320
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in customer deposits 16,170 1,121
Borrowings on long-term debt 57,150 18,650
Principal payments of long-term debt (54,588) (27,387)
Increase in paid in capital 126,016 -
--------- --------
Net cash provided by (used in) financing activities 144,748 (7,616)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 22,545 1,928
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,278 3,833
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,823 $5,761
--------- --------
--------- --------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 8,232 8,609
Income taxes 279 343
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
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, 1996 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.
The "Results of Operations" discussion below excludes the operations of the
National Association for Female Executives ("NAFE") since it has been
classified as a discontinued operation. See Note (3) below.
(2) ACQUISITIONS AND NEW BORROWINGS
On March 6, 1997, the Company acquired the stock of Ehlert Publishing
companies ("Ehlert") for $22.3 million, of which $20.8 million was paid in
cash at closing. In addition, a $1.5 million note was issued by Affinity
Group Holding, Inc. ("AGHI"), the Company's parent corporation, to the
seller, of which $1.0 million was repaid in April 1997. The purchase price
of Ehlert was funded primarily through borrowings under the Company's senior
credit facility and a $6.5 million capital contribution to the Company from
AGHI ($5.0 million of the capital contribution was in cash).
Ehlert is a specialty publisher of sports and recreation magazines focusing
on four niches: snowmobiling, personal watercraft, archery and all-terrain
vehicles.
On April 2, 1997 the Company acquired the common stock of Camping World, Inc.
("Camping World") for $108.0 million in cash, including $19.0 million for
non-competition and consulting agreements with certain Camping World
executives. The purchase price of Camping World was funded through capital
contributions to the Company from AGHI (consisting of the net proceeds from
the April 2, 1997 issuance of $130.0 million in 11% senior notes due 2007,
net of expenses and repayment of approximately $7.5 million of AGHI's debt)
together with borrowings under the Company's new $75 million senior credit
facility.
Camping World is a national specialty retailer of merchandise and services
for RV owners.
5
<PAGE>
The new senior secured credit facility consists of a revolving line of credit
of $45.0 million and a term loan of $30.0 million. The interest on
borrowings under the new senior credit facility is at variable rates based on
the ratio of total cash flow to outstanding indebtedness (as defined). The
Company also pays a commitment fee of 0.5% per annum on the unused amount of
the revolving credit line. Borrowings under the new senior credit facility
were used to pay-off outstanding balances under the previous senior secured
term note and revolving line of credit.
(3) DISCONTINUED OPERATIONS
In October 1994, the Company acquired substantially all the assets and
assumed certain liabilities of NAFE. The total consideration for the
acquisition, including assumed liabilities and costs of acquisition, totaled
$10.8 million.
The Company adopted a plan to dispose of the NAFE assets in the fourth
quarter of 1996. In connection with the plan, the Company recorded a loss of
$5.9 million net of related income taxes of $1.1 million in the fourth
quarter of 1996 based on the anticipated proceeds upon sale. On July 31,
1997, the Company entered into a definitive agreement to sell the assets of
NAFE for $200,000, plus assumption by the buyer of the deferred membership
liability. In 1996, the results of operations of NAFE were classified as
discontinued operations in the accompanying financial statements. As of June
30, 1997, the estimated loss on sale and reserve established in 1996 appear
adequate.
Information relating to the operations of NAFE for the six months ended June
30, 1997 and 1996 are as follows (in thousands):
6/30/97 6/30/96
---------- ----------
Revenues $ 2,294 $ 3,086
Costs applicable to revenues 3,119 3,074
-------- --------
Gross profit (loss) (825) 12
Operating expenses 442 539
-------- --------
Loss from operations (1,267) (527)
Income tax benefit 335 198
-------- --------
Loss from discontinued operations (932) (329)
Accrued for at December 31, 1996 932 -
-------- --------
Net loss $ - $ (329)
-------- --------
-------- --------
6
<PAGE>
The assets and liabilities of NAFE included in the accompanying consolidated
balance sheet as of June 30, 1997 and December 31, 1996 are as follows (in
thousands):
6/30/97 12/31/96
--------- ----------
Current assets:
Cash $ - $ 261
Accounts receivable 387 539
Inventories 96 183
Prepaid expenses 155 884
--------- ---------
Total current assets 638 1,867
Current liabilities:
Accounts payable 32 1,048
Accrued liabilities 980 2,283
--------- ---------
Total current liabilities 1,012 3,331
--------- ---------
Net current liabilities $ (374) $(1,464)
--------- ---------
--------- ---------
Long-term assets:
Property and equipment $ 44 $ 67
Intangible assets 3,000 3,000
Other assets 25 25
--------- ---------
Total long-term assets 3,069 3,092
Long-term liabilities:
Deferred revenues 1,791 2,119
--------- ---------
Net long-term assets $ 1,278 $ 973
--------- ---------
--------- ---------
(4) UNAUDITED PRO FORMA RESULTS OF OPERATIONS
The operating results of Ehlert and Camping World 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 Ehlert and Camping
World have been recorded at the estimated fair market value at the dates of
the acquisitions.
The following unaudited pro forma results of operations for the quarters
ended June 30, 1997 and 1996 assume the acquisitions occurred as of January
1, 1996 giving effect to certain adjustments including elimination of
non-recurring income and expenses recorded by the previous owners and
increased expenses that would have been applicable from the beginning of the
year for depreciation and amortization, and interest expense. These pro
forma results have been prepared solely for comparative purposes and are not
necessarily indicative of the results of operations that actually would have
occurred had the combinations been in effect at the beginning of the
respective periods, nor are they indicative of future results of operations
of the combined companies.
7
<PAGE>
(In thousands)
6/30/97 6/30/96
--------- ---------
Revenues $ 171,065 $ 148,502
Income from continuing operations and
before extraordinary items 2,737 1,469
Net income 2,496 942
8
<PAGE>
AFFINITY GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM: 2
The following table is derived form 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
----------------------------------
6/30/97 6/30/96 Inc/(Dec)
------- ------- ---------
REVENUES:
Membership services 32.7% 76.6% 18.1%
Publications 11.5% 23.4% 36.5%
Merchandise 55.8% - 100.0%
------- ------- -------
100.0% 100.0% 176.9%
COSTS APPLICABLE TO REVENUES:
Membership services 18.3% 41.9% 21.3%
Publications 8.1% 17.4% 28.8%
Merchandise 37.6% - 100.0%
------- ------- -------
64.0% 59.3% 198.9%
GROSS PROFIT 36.0% 40.7% 144.9%
OPERATING EXPENSES:
Selling, general and administrative 19.4% 13.9% 283.6%
Depreciation and amortization 3.9% 6.3% 72.7%
------- ------- -------
23.3% 20.2% 218.2%
------- ------- -------
INCOME FROM OPERATIONS 12.7% 20.5% 72.4%
NON-OPERATING EXPENSE:
Interest expense, net (4.4%) (12.6%) (2.2%)
Other non-operating charges, net - - -
------- ------- -------
(4.4%) (11.8%) 4.1%
------- ------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 8.3% 7.9% 193.3%
INCOME TAX EXPENSE (3.7%) (3.9%) 167.4%
------- ------- -------
INCOME FROM CONTINUING OPERATIONS 4.6% 4.0% 217.8%
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net
of applicable tax benefit - (1.3%) (100.0%)
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 4.6% 3.3% 288.7%
Extraordinary item, net of applicable
income tax benefit (0.2%) - 100.0%
------- ------- -------
NET INCOME 4.4% 3.3% 266.8%
------- ------- -------
------- ------- -------
9
<PAGE>
AFFINITY GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ITEM: 2
The following table is derived form 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:
SIX MONTHS ENDED
--------------------------------------
6/30/97 6/30/96 Inc/(Dec)
------- ------- --------
REVENUES:
Membership services 43.1% 75.4% 11.2%
Publications 16.2% 24.6% 27.4%
Merchandise 40.7% - 100.0%
------- ------- -------
100.0% 100.0% 94.3%
COSTS APPLICABLE TO REVENUES:
Membership services 24.9% 42.4% 14.2%
Publications 12.0% 20.6% 13.7%
Merchandise 27.5% - 100.0%
------- ------- -------
64.4% 63.0% 98.6%
GROSS PROFIT 35.6% 37.0% 87.0%
OPERATING EXPENSES:
Selling, general and administrative 17.5% 13.2% 157.6%
Depreciation and amortization 4.5% 6.4% 37.4%
------- ------- -------
22.0% 19.6% 118.4%
------- ------- -------
INCOME FROM OPERATIONS 13.6% 17.4% 51.8%
NON-OPERATING EXPENSE:
Interest expense, net (6.5%) (12.9%) (2.2%)
Other non-operating charges, net - - -
------- ------- -------
(6.5%) (12.9%) (2.7%)
------- ------- -------
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 7.1% 4.5% 207.3%
INCOME TAX EXPENSE (1.9%) (2.4%) 57.6%
------- ------- -------
INCOME FROM CONTINUING OPERATIONS 3.9% 2.3% 222.8%
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net
of applicable tax benefit - (0.5%) (100.0%)
------- ------- -------
INCOME BEFORE EXTRAORDINARY ITEM 3.9% 1.8% 312.0%
Extraordinary item, net of applicable
income tax benefit (0.2%) - -
------- ------- -------
NET INCOME 3.7% 1.8% 291.8%
------- ------- -------
------- ------- -------
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997
COMPARED WITH THREE MONTHS ENDED JUNE 30, 1996
REVENUES
Revenues of $91.9 million for the second quarter of 1997 increased by
approximately $58.7 million or 176.9% from the comparable period in 1996.
Excluding the Ehlert operations acquired March 6, 1997 and the Camping World
operations acquired April 2, 1997, revenues were $34.4 million for the second
quarter of 1997 compared to $33.2 million for the comparable period in 1996,
a 3.6% increase.
Membership services revenue of $30.0 million for the second quarter of 1997
increased by approximately $4.6 million from the comparable period in 1996.
Excluding the Camping World operations, membership services revenue increased
by approximately $1.2 million to $26.6 million. This increase was largely
attributable to the $1.5 million increase in marketing fee revenue from the
new extended vehicle warranty program, VIP insurance and credit cards, an
increase of $0.2 million in events, tours and rallies revenue, and a $0.4
million increase in financial and insurance services revenue offset by
declines in membership revenue in Coast to Coast and emergency road service.
Publication revenue of $10.6 million for the second quarter of 1997 increased
by $2.8 million from the comparable period in 1996. Excluding the Ehlert
acquisition revenue of $2.8 million, other publication revenue was relatively
unchanged. Increases in advertising revenue in certain publications, such as
the additional issue of ROADS TO ADVENTURE, the CAMPGROUND DIRECTORY, TRAILER
LIFE and MOTORHOME, were offset by declines in specialty publications such as
books, RV BUSINESS and RV SHOPPER.
Merchandise revenue was $51.3 million and was related entirely to the
acquisition of Camping World in April 1997.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $58.8 million for the second quarter of
1997, an increase of $39.1 million or 198.9% over the comparable period in
1996. Excluding the Ehlert and Camping World operations, costs applicable to
revenues increased $1.3 million for the second quarter of 1997 compared to
the second quarter of 1996.
Membership services costs and expenses increased by approximately $3.0
million or 21.3% to $16.9 million in the second quarter of 1997 compared to
$13.9 million in 1996. Excluding the Camping World acquisition, membership
services costs increased $1.8 million to $15.7 million largely as a result
of increased expenses of $0.7 million associated with events, tours and
rallies, increased membership services expenses of $0.5 million associated
with member
11
<PAGE>
acquisition, marketing expenses of $0.4 million relating to a new membership
credit card, and increased expenses of $0.4 million associated with the
financial and insurance services. A combination of other reduced promotional
costs totaling $0.2 million across other membership services products
account for the balance of the change.
Publication costs and expenses of $7.4 million for the second quarter of 1997
increased $1.7 million or 28.8% compared to the second quarter of 1996.
Excluding the acquisitions, costs decreased by $0.5 million over the
comparable period in 1996. This decrease is primarily due to reduced paper
costs realized in the second quarter of 1997 as a result of a re-negotiated
paper contract and reduced CAMPGROUND DIRECTORY expenses, partially offset by
an additional ROADS TO ADVENTURE issue.
Merchandise costs applicable to revenues were $34.5 million and were related
entirely to the acquisition of Camping World in April 1997.
OPERATING EXPENSES
Selling, general and administrative expenses of $17.8 million for the second
quarter of 1997 were $13.2 million over the second quarter of 1996.
Excluding the Camping World and Ehlert acquisitions, general and
administrative expenses declined by $0.6 million compared to the prior year.
Depreciation and amortization expense of $3.6 million was $1.5 million over
the second quarter of 1996, of which $1.3 million was due to the Ehlert and
Camping World acquisitions, and higher depreciation expense.
INCOME FROM OPERATIONS
Income from operations for the second quarter of 1997 increased by $4.9
million or 72.4% to $11.7 million compared to $6.8 million for the second
quarter of 1996. Excluding income from operations of $4.6 million recognized
from the acquired operations of Camping World and Ehlert, income from
operations increased by $0.3 million. Improved gross profit from the
publication segment of $0.5 million and $0.4 million in reduced operating
expenses were partially offset by decreases in membership services gross
profit of $0.6 million.
NON-OPERATING EXPENSES
Non-operating expenses were $4.1 million for the second quarter of 1997,
compared to $4.2 million for the same period in 1996.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income from continuing operations before income taxes and extraordinary item
in the second quarter of 1997 was $7.7 million compared to $2.6 million for
the second quarter of 1996. This increase was largely due to the increase in
income from operations from the Ehlert and Camping World acquisitions
combined with reduced operating expenses.
12
<PAGE>
INCOME TAXES
In the second quarter of 1997, the Company recognized a $3.4 million tax
expense compared to $1.3 million tax expense in the second quarter of 1996.
DISCONTINUED OPERATIONS
As further described in Note 3 to the consolidated financial statements, the
Company adopted a plan to dispose of the assets of NAFE in the fourth quarter
of 1996. NAFE operating losses in the second quarter of 1997 were included
in the estimated loss on disposal accrued in 1996. The 1996 results have
been restated to recognize NAFE as a discontinued operation in the prior year
for comparative purposes.
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 second quarter of 1997 was $4.0 million compared to net
income of $1.1 million for the same period in 1996.
SIX MONTHS ENDED JUNE 30, 1997
COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
REVENUES
Revenues of $125.9 million for the six months ended June 30, 1997 increased
by approximately $61.1 million or 94.3% from the comparable period in 1996.
Excluding the Ehlert operations acquired March 6, 1997 and the Camping World
operations acquired April 2, 1997, revenues were $67.2 million for the first
six months of 1997 compared to $64.8 million for the comparable period in
1996, a 3.6% increase.
Membership services revenues of $54.3 million for the first six months of 1997
increased by approximately $5.4 million from the comparable period in 1996.
Excluding the Camping World acquisition, membership services revenue of $50.8
million increased $2.0 million compared to 1996 partially due to a $1.8
million revenue increase from the new extended vehicle warranty program and a
$0.6 million revenue increase from financial and insurance services which
were partially offset by decreases in membership services revenue associated
with reduced Coast to Coast club enrollment.
Publication revenue of $20.4 million for the first six months of 1997
increased by $4.4 million from the comparable period in 1996. This revenue
increase was primarily due to $4.0 million
13
<PAGE>
in additional revenue from the Ehlert operations plus advertising revenue
increases in various publications such as TRAILER LIFE and an additional
ROADS TO ADVENTURE issue.
Merchandise revenue of $51.3 million related entirely to the acquisition of
Camping World in April 1997.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues totaled $81.1 million for the first six months
of 1997, an increase of $40.3 million or 98.6% over the comparable period in
1996. Excluding the Ehlert and Camping World operations, costs applicable to
revenues increased $1.5 million for the first six months of 1997 compared to
the first six months of 1996.
Membership services costs and expenses increased by approximately $3.9
million or 14.2% to $31.4 million for the first six months of 1997 compared
to $27.5 million in 1996. Excluding the Camping World acquisition,
membership service costs increased $2.7 million to $30.2 million. This
increase was largely a result of marketing expenses of $0.8 million relating
to the new credit card program introduced in the fourth quarter of 1996,
increased expenses of $0.8 million associated with events, tours and rallies,
increased emergency road service claims and marketing expenses of $0.5
million, and increased expenses of $0.7 million associated with financial and
insurance services.
Publication costs and expenses of $15.2 million for the first six months of
1997 increased $1.8 million or 13.7% compared to the first six months of
1996. Excluding the Ehlert operations, costs decreased by $1.2 million over
the comparable period in 1996. This decrease was primarily due to reduced
paper costs realized in the first six months of 1997 as a result of a
re-negotiated paper contract and decreased CAMPGROUND DIRECTORY expenses.
Merchandise costs applicable to revenues of $34.5 million related entirely to
the acquisition of Camping World in April 1997.
OPERATING EXPENSES
Selling, general and administrative expenses of $22.0 million for the first
six months of 1997 were $13.5 million over the first six months of 1996 .
Excluding the selling, general and administrative cost of Ehlert and Camping
World of $18.9 million, general and administrative expenses decreased $0.5
million. The increased expense of $0.3 million in phantom stock expense was
more than offset by decreases in salaries and wage benefits, travel and
entertainment, professional fees and legal expenses. Depreciation and
amortization expense of $5.7 million was $1.6 million over the first six
months of 1996, of which $1.4 million was due to the Ehlert and Camping World
acquisitions.
INCOME FROM OPERATIONS
14
<PAGE>
Income from operations for the first six months of 1997 increased by $5.8
million or 51.8% to $17.1 million compared to $11.3 million for the first six
months of 1996. The $5.8 million variance was due to $4.8 million operating
income generated by the acquisitions in 1997, $1.5 million gross profit from
publications, and a reduction of $0.2 million in operating expenses,
partially offset by a $0.7 million decrease in gross profit from membership
services.
NON-OPERATING EXPENSES
Non-operating expenses of $8.1 million for the first six months of 1997
decreased by $0.2 million from the same period in 1996 due to lower
average borrowings at a slightly higher rate of interest.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND EXTRAORDINARY ITEM
Income from continuing operations before income taxes and extraordinary item in
the second quarter of 1997 was $9.0 million compared to $2.9 million for the
first six months of 1996. This increase was due to the increase in operating
income from the Ehlert and Camping World acquisitions, and an increase in
gross profit from publications. Decreases in operating expenses were offset
by reduced gross profit from membership services.
INCOME TAXES
In the first six months of 1997, the Company recognized a $4.1 million tax
expense compared to $1.4 million tax expense in the first six months of 1996.
DISCONTINUED OPERATIONS
The Company adopted a plan to dispose of the assets of NAFE in the fourth
quarter of 1996. NAFE operating losses in 1997 were included in the
estimated loss on disposal accrued in 1996. The 1996 results have been
restated to recognize NAFE as a discontinued operation in the prior year for
comparative purposes.
EXTRAORDINARY ITEM
As discussed in Note 2 to the consolidated financial statements, 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 six months of 1997 was $4.7 million compared to
net income of $1.2 million for the same period in 1996.
LIQUIDITY AND CAPITAL RESOURCES
15
<PAGE>
At June 30, 1997 the Company's senior and subordinated debt totaled $148.5
million compared to $158.6 million at March 31, 1997 and $145.1 million at
December 31, 1996.
Cash, cash equivalents and investments totaled $28.3 million at June 30, 1997
compared to $11.9 million at March 31, 1997 and $4.8 million at December 31,
1996. Included in the June 30, 1997 cash, cash equivalents and investments
is $17.0 million which is restricted for use by Affinity Thrift and Loan
(ATL) and Affinity Insurance Group (AINS) subsidiaries. The assets of ATL
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 ATL and AINS, although required to be consolidated with the
Company, are recognized as "unrestricted" or non-guarantying subsidiaries as
defined in the new senior credit facility, as discussed further below, and
ATL only is "unrestricted" under the terms of the 11.5% senior subordinated
notes of the Company.
Further, as indicated previously, both ATL and AINS are subject to regulatory
guidelines which, among other things, stipulate the minimum capital
requirements for each entity based on certain operating ratios. To maintain
those ratios the company contributed $3.0 million of capital to ATL during
the second quarter of 1997. It is anticipated that additional aggregate
contributions of $3.0 million will be necessary in the remaining calendar
year.
On March 6, 1997, the Company acquired the stock of Ehlert for $22.3 million,
of which $20.8 million was paid in cash at closing. In addition, a $1.5
million note was issued by AGHI to the seller, of which $1.0 million was
repaid in April 1997. The balance of the note is payable on March 6, 1999,
together with interest at 5% per annum. In addition, John Ehlert, the
founder and principal stockholder of Ehlert, entered into a non-competition
agreement for $0.2 million. The purchase price of Ehlert was funded
primarily through borrowings under the Company's senior credit facility and a
$6.5 million capital contribution to the Company from AGHI.
On April 2, 1997, the Company acquired the stock of Camping World for $108.0
million in cash, including $19.0 million for non-competition and consulting
agreements with certain Camping World executives. In addition, AGHI entered
into management incentive agreements with certain Camping World executives
pursuant to which up to an additional $15.0 million will be paid subject to
Camping World achieving certain operating goals. Such contingent amounts
will be payable in $1.0 million annual installments on the first four
anniversaries of the closing and $11.0 million on the fifth anniversary of
the closing. The purchase price of Camping World was funded through capital
contributions to the Company from AGHI (consisting of the net proceeds from
the April 2, 1997 issuance of $130.0 million in 11% senior notes due 2007,
net of expenses and repayments of approximately $7.5 million of AGHI's debt)
together with borrowings under the Company's new $75 million senior credit
facility (discussed below).
The new $75 million senior credit facility provided a term loan of $30.0
million (reducing in quarterly principal installments of $1.5 million) and a
$45 million revolving credit line. The interest on borrowings under the new
senior credit facility is at variable rates based on the
16
<PAGE>
ratio of total cash flow to outstanding indebtedness (as defined). Interest
rates float with prime and the London Interbank Offered Rates (LIBOR), plus
an applicable margin ranging from 0.75% to 2.75% over the stated rates. The
Company also pays a commitment fee of 0.5% per annum on the unused amount of
the revolving credit line. The new senior credit facility is secured by a
security interest in the assets of the Company and its subsidiaries and a
pledge of the stock of the Company and its subsidiaries. At June 30, 1997,
no amounts were outstanding under the new $45 million revolving credit line.
The new senior credit facility allows for, among other things, the
distribution of payments by the Company to AGHI to service the semi-annual
interest due on the AGHI 11% $130 million senior notes and the annual amounts
due under the Camping World management incentive agreements. Such
distributions are subject to the Company'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 six months ended June 30, 1997, payments under the terms of
several phantom stock agreements totaled $0.6 million. Additional phantom
stock payments of $1.8 million are scheduled to be made over the next twelve
months.
Capital expenditures in the six months ended June 30, 1997 totaled $2.2
million compared to capital expenditures of $0.8 million during the same
period in 1996. Capital expenditures are anticipated to be approximately $4.2
million for the remainder of 1997, primarily for continued enhancements to
membership marketing databases, inbound and outbound tele-communications,
computer software and hardware, and to begin construction on two new Camping
World retail supercenters.
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.
17
<PAGE>
PART II: OTHER INFORMATION
Items 1-5: Not Applicable
Item 6: Exhibits and Reports on Form 8-K:
(a) Exhibits:
Exhibit 4 Credit Agreement dated as of April 2, 1997 among
Affinity Group, Inc, Fleet National Bank, as agent, and the banks
named therein. (Incorporated by reference to Exhibit 2.2 to the
Company's Form 8-K Report dated April 2, 1997.)
Exhibit 10 Stock Purchase Agreement dated as of February 25,
1997, by and among the Shareholders of Camping World, Inc. and
Affinity Group, Inc. (Incorporated by reference to Exhibit 2.1 to
the Company's Form 8-K Report dated April 2, 1997.)
(b) Form 8-K Reports:
On April 2, 1997, Affinity Group, Inc. acquired the common stock of
Camping World, Inc. Details of the acquisition including Camping
World financial statements and contract documents were filed with the
Securities and Exchange Commission on April 17, 1997 under Form 8-K
and are thereby incorporated by reference.
18
<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, INC.
/s/ Mark J. Boggess
-----------------------------
Date: August 14, 1997 Mark J. Boggess
Senior Vice President
Chief Financial Officer
19
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