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

 

 

 

AFFINITY GROUP HOLDING, INC.

(Exact name of registrant as specified in its charter)

 

 

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  ý          NO  o

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

DOCUMENTS INCORPORATED BY REFERENCE:  None

 

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

 

INDEX

 

Part I.  Financial Information
	Item 1:  Financial Statements
			Consolidated Balance Sheets As of September 30, 2003 and December 31, 2002
			Consolidated Statements of Income For the three months ended September 30, 2003 and 2002
			Consolidated Statements of Income For the nine months ended September 30, 2003 and 2002
			Consolidated Statements of Cash Flows For the nine months ended September 30, 2003 and 2002
			Notes to Consolidated Financial Statements
	Item 2:			Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3:			Quantitative and Qualitative Disclosures about Market Risk
	Item 4:			Control and Procedures
Part II.  Other Information
Signatures

 

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2003 AND DECEMBER 31, 2002

(In Thousands, Except Share Amounts)

 

		9/30/03			12/31/02
		(unaudited)			(audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	23,829		$	1,730
Accounts receivable, less allowance for doubtful accounts of $1,509 in 2003 and $1,202 in 2002		19,444			25,082
Inventories		37,940			31,806
Prepaid expenses and other assets		15,569			9,307
Deferred tax assets		5,596			5,596
Total current assets		102,378			73,521
PROPERTY AND EQUIPMENT, net		26,425			22,935
NOTES FROM AFFILIATES		9,055			8,911
INTANGIBLE ASSETS, net		20,010			20,830
GOODWILL		151,210			151,210
DEFERRED TAX ASSETS		22,775			20,885
OTHER ASSETS		2,368			4,344
		$	334,221		$	302,636
LIABILITIES AND STOCKHOLDER’S DEFICIT
CURRENT LIABILITIES:
Accounts payable		$	18,910		$	11,048
Accrued interest		5,811			3,900
Accrued income taxes		3,293			3,014
Accrued liabilities		29,226			31,276
Deferred revenues and gains		65,126			54,827
Deferred tax liabilities		1,223			1,223
Current portion of long-term debt		1,427			8,053
Total current liabilities		125,016			113,341
DEFERRED REVENUES AND GAINS		41,075			39,648
LONG-TERM DEBT, net of current portion		237,900			214,948
DEFERRED TAX LIABILITIES		15,453			15,453
OTHER LONG-TERM LIABILITIES		7,972			6,794
		427,416			390,184
COMMITMENTS AND CONTINGENCIES		—			—
STOCKHOLDER’S DEFICIT:
Common stock, $.01 par value, 1,000 shares authorized, 100 shares issued and outstanding		1			1
Additional paid-in capital		—			2,021
Accumulated deficit		(93,196		)	(89,570		)
Total stockholder’s deficit		(93,195		)	(87,548		)
		$	334,221		$	302,636

 

See notes to consolidated financial statements.

 

1

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands)

(Unaudited)

 

		THREE MONTHS ENDED
		9/30/03			9/30/02
REVENUES:
Membership services		$	32,237		$	31,318
Publications		11,494			12,744
Retail		66,368			68,240
		110,099			112,302
COSTS APPLICABLE TO REVENUES:
Membership services		21,347			19,520
Publications		8,106			8,439
Retail		40,706			45,359
		70,159			73,318
GROSS PROFIT		39,940			38,984
OPERATING EXPENSES:
Selling, general and administrative		29,231			27,706
Restructuring charge		100			600
Depreciation and amortization		2,529			2,427
		31,860			30,733
INCOME FROM OPERATIONS		8,080			8,251
NON-OPERATING ITEMS:
Interest expense, net		(4,569		)	(4,153		)
Debt extinguishment expense		(1,509		)	—
Other non-operating items, net		256			61
		(5,822		)	(4,092		)
INCOME BEFORE TAXES		2,258			4,159
INCOME TAX EXPENSE		(1,037		)	(1,785		)
NET INCOME		$	1,221		$	2,374

 

See notes to consolidated financial statements.

 

2

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In Thousands)

(Unaudited)

 

		NINE MONTHS ENDED
		9/30/03			9/30/02
REVENUES:
Membership services		$	97,437		$	93,955
Publications		40,922			40,610
Retail		179,877			196,349
		318,236			330,914
COSTS APPLICABLE TO REVENUES:
Membership services		60,815			56,592
Publications		28,596			28,530
Retail		107,921			130,691
		197,332			215,813
GROSS PROFIT		120,904			115,101
OPERATING EXPENSES:
Selling, general and administrative		80,593			77,359
Restructuring charge		402			1,552
Depreciation and amortization		7,381			7,431
		88,376			86,342
INCOME FROM OPERATIONS		32,528			28,759
NON-OPERATING ITEMS:
Interest expense, net		(13,649		)	(12,618		)
Debt extinguishment expense		(3,218		)	—
Other non-operating items, net		400			247
		(16,467		)	(12,371		)
INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE		16,061			16,388
INCOME TAX EXPENSE		(6,197		)	(6,143		)
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		9,864			10,245
CUMULATIVE EFFECT OF ACCOUNTING CHANGE		—			(1,742		)
NET INCOME		$	9,864		$	8,503

 

See notes to consolidated financial statements.

 

3

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

		NINE MONTHS ENDED
		9/30/03			9/30/02
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	9,864		$	8,503
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change		—			1,742
Debt extinguishment expense		3,218			—
Deferred tax benefit		(1,890		)	(865		)
Depreciation and amortization		7,381			7,431
Provision for losses on accounts receivable		1,441			1,369
Deferred compensation		1,200			4,500
Gain on sale of property and equipment		(227		)	(4		)
Changes in operating assets and liabilities:
Accounts receivable		4,197			(1,623		)
Inventories		(6,134		)	(299		)
Prepaid expenses and other assets		(4,286		)	(6,561		)
Accounts payable		7,862			576
Accrued and other liabilities		118			3,039
Deferred revenues and gains		11,726			7,791
Net cash provided by operating activities		34,470			25,599
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures		(8,176		)	(4,761		)
Net proceeds from sale of property and equipment		252			4
Increase in intangible assets		(4,018		)	(136		)
Notes from affiliates		(144		)	(1,557		)
Net cash used in investing activities		(12,086		)	(6,450		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid		(15,511		)	—
Borrowings on long-term debt		181,975			82,830
Principal payments of long-term debt		(166,749		)	(104,198		)
Net cash used in financing activities		(285		)	(21,368		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		22,099			(2,219		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR		1,730			3,180
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	23,829		$	961

 

See notes to consolidated financial statements.

 

4

 

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 accounting principles generally accepted in the United States, 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, 2002 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

 

Accounting for Costs Associated with Exit or Disposal Activities – In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS No. 146 nullifies the guidance in EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.  Under EITF No. 94-3, an entity recognizes a liability for an exit cost on the date that the entity committed itself to an exit plan.  In SFAS No. 146, the FASB acknowledges that an entity’s commitment to a plan does not, by itself, create a present obligation to the other parties that meets the definition of a liability and requires that a liability for a cost that is associated with an exit or disposal activities be recognized when the liability is incurred.  It also establishes that fair value is the objective for the initial measurement of the liability.  SFAS No. 146 will be effective for exit or disposal activities that are initiated after December 31, 2002.  The adoption of this standard had no significant impact on the Company’s financial statements.

 

Rescission of SFAS Nos. 4, 44, and 64, Amendment of SFAS No. 13, and Technical Corrections – In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.  SFAS No. 145 is effective for fiscal years beginning after May 15, 2002.  This statement revises accounting treatment for reporting gains or losses on debt extinguishments and amends certain other existing accounting pronouncements.  The adoption of this standard did not have a material impact on the Company’s financial statements.

 

5

 

Guarantor’s Accounting and Disclosure Requirements for Guarantees – During November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34” (“FIN 45”).  FIN 45 elaborates on the existing disclosure requirements for a guarantor in its interim and annual financial statements regarding its obligations under guarantees issued.  It also clarifies that at the time a guarantee is issued, the guarantor must recognize an initial liability for the fair value of the obligations it assumes under the guarantee and must disclose that information in its financial statements.  The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, and the disclosure requirements apply to guarantees outstanding as of December 31, 2002.  The Company adopted the provisions of FIN 45 as of January 1, 2003 and it did not have a material impact on the Company’s consolidated financial statements.

 

Consolidation of Variable Interest Entities – In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities.  FIN No. 46 addresses the consolidation and financial reporting of variable interest entities.  FIN No. 46 is effective for financial statements of interim or annual periods beginning after June 15, 2002 for variable interest entities created before February 1, 2003, or immediately for variable interest entities created after February 1, 2003.  The adoption of this interpretation is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

 

(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.  The Publications segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation 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.

 

6

 

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):

 

		Membership Services			Publications			Retail			Consolidated
QUARTER ENDED SEPTEMBER 30, 2003
Revenues from external customers		$	32,237		$	11,494		$	66,368		$	110,099
Segment operating profit		9,079			3,003			3,405			15,487
QUARTER ENDED SEPTEMBER 30, 2002
Revenues from external customers		$	31,318		$	12,744		$	68,240		$	112,302
Segment operating profit		9,980			3,911			3,967			17,858

 

		Membership Services			Publications			Retail			Consolidated
NINE MONTHS ENDED SEPTEMBER 30, 2003
Revenues from external customers		$	97,437		$	40,922		$	179,877		$	318,236
Segment operating profit		31,224			11,114			12,815			55,153
NINE MONTHS ENDED SEPTEMBER 30, 2002
Revenues from external customers		$	93,955		$	40,610		$	196,349		$	330,914
Segment operating profit		30,980			10,917			12,631			54,528

 

The following is a summary of the reportable segment reconciliations to the Company’s consolidated financial statements for the quarter and nine months ended September 30, 2003 and 2002 (in thousands):

 

		THREE MONTHS ENDED						NINE MONTHS ENDED
		9/30/03			9/30/02			9/30/03			9/30/02
Income From Operations Before Depreciation and Amortization
Total profit for reportable segments		$	15,487		$	17,858		$	55,153		$	54,528
Unallocated G & A expense		(4,878		)	(7,180		)	(15,244		)	(18,338		)
Income from operations before depreciation and amortization		$	10,609		$	10,678		$	39,909		$	36,190

 

7

 

(4) STATEMENTS OF CASH FLOWS

 

Supplemental disclosures of cash flow information the nine months ended September 30 (in thousands):

 

		2003			2002
Cash paid during the period for:
Interest		$	12,337		$	11,433
Income taxes		7,294			6,493

 

Concurrent with the AGI debt refinancing (see Note 6), AGI distributed its interest in life insurance policies insuring the life of Stephen Adams, the Company Chairman.  This $1.8 million non-cash dividend was distributed on June 24, 2003 from AGI to AGHI and from AGHI to its sole shareholder.

 

(5) GOODWILL AND INTANGIBLE ASSETS

 

In January 2002, Affinity Group Holding, Inc. adopted SFAS No. 142, which requires companies to stop amortizing goodwill and certain intangible assets with an indefinite useful life.  Instead, SFAS No. 142 requires that goodwill and intangible assets deemed to have an indefinite useful life be reviewed for impairment upon adoption of SFAS No. 142 (January 1, 2002) and annually thereafter.  The Company performs its annual impairment review during the fourth quarter.

 

In accordance with the transition provisions of SFAS No. 142, Goodwill and Other Intangible Assets, Affinity Group Holding, Inc. recorded a non-cash charge of approximately $1.7 million to reduce the carrying value of its goodwill in 2002.  The SFAS No. 142 goodwill impairment is associated solely with goodwill of the Golf Card Club, which is included in the Membership Services segment.  Such charge is reflected as a cumulative effect of an accounting change in the accompanying consolidated statement of operations.  In calculating the impairment charge, the fair value of the impaired reporting units underlying the segments were estimated using either a discounted cash flow methodology or recent comparable transactions.

 

8

 

No changes were made in the carrying amount of the Company’s goodwill during the first nine months of 2003.  The following is a summary of changes in the Company’s goodwill by business segment, for the nine months ended September 30, 2003 and 2002 (in thousands):

 

		Membership Services			Publications			Retail			Consolidated
Balance as of December 31, 2002		$	54,288		$	48,181		$	48,741		$	151,210
Impairments		—			—			—			—
Balance as of September 30, 2003		$	54,288		$	48,181		$	48,741		$	151,210
Balance as of December 31, 2001		$	56,030		$	48,181		$	48,741		$	152,952
Impairments		(1,742		)	—			—			(1,742		)
Balance as of September 30, 2002		$	54,288		$	48,181		$	48,741		$	151,210

 

Finite lived intangible assets and related accumulated amortization consisted of the following at September 30, 2003 (in thousands):

 

		Gross			Accumulated Amortization			Net
Membership and customer lists		$	4,263		$	(2,244	)	$	2,019
Resort and golf course participation agreements		13,547			(9,537		)	4,010
Non-compete and deferred consulting agreements		17,880			(9,002		)	8,878
Deferred financing and organization costs costs		7,865			(2,762		)	5,103
		$	43,555		$	(23,545	)	$	20,010

 

(6) DEBT RESTRUCTURING AND SENIOR NOTES REDEMPTION

 

On June 24, 2003, Affinity Group Holding, Inc.’s wholly owned subsidiary, Affinity Group, Inc. (“AGI”), entered into an Amended and Restated Credit Agreement and a Senior Secured Floating Rate Note Purchase Agreement (“AGI Credit Facility”) providing for term loans (“Term B1” and “Term B2”) in the aggregate of $140.0 million and a revolving credit facility of $35.0 million.  Proceeds from the restructured AGI Credit Facility were used to refinance the existing senior secured indebtedness, pay a dividend of $13.7 million to AGI’s ultimate parent, AGI Holding Corp. and to redeem $30.0 million of the AGHI 11% Senior Notes at 103.667% of par as of July 24, 2003.  The funds available under the AGI Revolving Credit line may be utilized for borrowings or letters of credit; however, a maximum of $12.5 million may be allocated to such letters of credit.  Re-borrowings under the Term Loans are not permitted.  The interest on borrowings under the new AGI Credit Facility is at variable rates based on the ratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and the London Interbank Offered Rates

 

9

 

(“LIBOR”), plus an applicable margin ranging from 1.50% to 4.0% over the stated rates.  AGI also pays a commitment fee of 0.5% per annum on the unused amount of the revolving credit line.  The AGI Credit Facility is secured by virtually all the assets and a pledge of the stock of AGI.  As of the refinancing date, AGI incurred a $1.7 million debt extinguishment charge representing the write-off of unamortized deferred financing cost on the prior financing facility.

 

AGHI also announced on June 24, 2003 that notice was given on same date, to note holders of record, to redeem $30.0 million of its 11.0% Senior Notes due 2007.   The redemption date was July 24, 2003.   The notes were redeemed at 103.667% of par plus accrued interest to the date of redemption.  The redemption was funded by borrowings under the AGI Credit Facility.  The bond redemption premium and the pro rata amount of unamortized deferred financing costs in the amount of $1.1 million and $0.4 million, respectively, were recognized as of the redemption date.

 

As of September 30, 2003, $39.8 million and $99.5 million were outstanding under the Term B1 and B2 loans, respectively.  As of September 30, 2003, the average interest rate on the term loans was 5.15%, and permitted borrowings under the undrawn revolving line were $30.3 million.  The Company had commercial and standby letters of credit in the aggregate amount of $4.7 million outstanding as of September 30, 2003.  The aggregate quarterly scheduled payments on the term loans are $0.35 million.  The revolving credit facility matures on June 24, 2008, and the Term B1 and B2 loans mature on June 24, 2009.

 

The AGI Credit Facility permits the Company to refinance the existing AGHI Senior Notes.  In the event the indebtedness incurred to refinance the AGHI Senior Notes has a maturity dated prior to December 24, 2008, then the maturity dates of the AGI Credit Facility are adjusted to the date six months prior to the new indebtedness maturity date.

 

(7) CONTINGENCIES

 

From time to time, the Company is involved in litigation arising in the normal course of business operations.

 

The Insurance Commissioner of the state of California, by order dated April 23, 2002, directed GSS Enterprises, Inc. (“GSS”), one of the Company’s subsidiaries, to cease and desist from engaging in certain insurance and motor club services without requisite licensing, advising such subsidiary that the Commissioner may impose certain fines if GSS fails to be licensed.  The order provides GSS the right to a hearing on the matter.  The order issued by the Insurance Commissioner of the state of California applies only to operations of GSS within the state of California.  If sustained, the order could materially limit certain activities of GSS within the state of California.  GSS operates in all 50 states, a majority of which have regulations comparable to those of the state of California.  To the Company’s knowledge, there is no similar pending

 

10

 

investigation by any other state.  The Company and the Department of Insurance of the state of California are in the process of resolving the cease and desist order through clarifications in the Company’s marketing materials and clarifications of applicable California laws.  Toward that end, revisions to applicable California statutes were signed into law in July, 2003.

 

11

 

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 Income and expresses the results from operations as a percentage of revenues and reflects the net increase (decrease) between periods:

 

		THREE MONTHS ENDED
		9/30/03		9/30/02		Inc/(Dec)
REVENUES:
Membership services		29.3	%	27.9	%	2.9	%
Publications		10.4	%	11.3	%	(9.8	)%
Retail		60.3	%	60.8	%	(2.7	)%
		100.0	%	100.0	%	(2.0	)%
COSTS APPLICABLE TO REVENUES:
Membership services		19.4	%	17.4	%	9.4	%
Publications		7.4	%	7.5	%	(3.9	)%
Retail		36.9	%	40.4	%	(10.3	)%
		63.7	%	65.3	%	(4.3	)%
GROSS PROFIT		36.3	%	34.7	%	2.5	%
OPERATING EXPENSES:
Selling, general and administrative		26.6	%	24.7	%	5.5	%
Restructuring charge		0.1	%	0.5	%	(83.3	)%
Depreciation and amortization		2.3	%	2.2	%	4.2	%
		29.0	%	27.4	%	3.7	%
INCOME FROM OPERATIONS		7.3	%	7.3	%	(2.1	)%
NON-OPERATING ITEMS:
Interest expense, net		(4.1	)%	(3.7	)%	10.0	%
Debt extinguishment expense		(1.4	)%	—		—
Other non-operating items, net		0.2	%	0.1	%	319.7	%
		(5.3	)%	(3.6	)%	42.3	%
INCOME BEFORE INCOME TAXES		2.0	%	3.7	%	(45.7	)%
INCOME TAX EXPENSE		(0.9	)%	(1.6	)%	(41.9	)%
NET INCOME		1.1	%	2.1	%	(48.6	)%

 

12

 

		NINE MONTHS ENDED
		9/30/03		9/30/02		Inc/(Dec)
REVENUES:
Membership services		30.6	%	28.4	%	3.7	%
Publications		12.9	%	12.3	%	0.8	%
Retail		56.5	%	59.3	%	(8.4	)%
		100.0	%	100.0	%	(3.8	)%
COSTS APPLICABLE TO REVENUES:
Membership services		19.1	%	17.1	%	7.5	%
Publications		9.0	%	8.6	%	0.2	%
Retail		33.9	%	39.5	%	(17.4	)%
		62.0	%	65.2	%	(8.6	)%
GROSS PROFIT		38.0	%	34.8	%	5.0	%
OPERATING EXPENSES:
Selling, general and administrative		25.4	%	23.4	%	4.2	%
Restructuring charge		0.1	%	0.5	%	(74.1	)%
Depreciation and amortization		2.3	%	2.2	%	(0.7	)%
		27.8	%	26.1	%	2.4	%
INCOME FROM OPERATIONS		10.2	%	8.7	%	13.1	%
NON-OPERATING ITEMS:
Interest expense, net		(4.3	)%	(3.8	)%	8.2	%
Debt extinguishment expense		(1.0	)%	—		—
Other non-operating items, net		0.1	%	0.1	%	61.9	%
		(5.2	)%	(3.7	)%	33.1	%
INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE		5.0	%	5.0	%	(2.0	)%
INCOME TAX EXPENSE		(1.9	)%	(1.9	)%	0.9	%
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE		3.1	%	3.1	%	(3.7	)%
CUMULATIVE EFFECT OF ACCOUNTING CHANGE		—		(0.5	)%	(100.0	)%
NET INCOME		3.1	%	2.6	%	16.0	%

 

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RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2003
Compared With Three Months Ended September 30, 2002

 

Revenues

 

Revenues of $110.1 million for the third quarter of 2003 decreased by approximately $2.2 million, or 2.0%, from the comparable period in 2002.

 

Membership services revenues of $32.2 million for the third quarter of 2003 increased by approximately $0.9 million, or 2.9%, from the comparable period in 2002.  This revenue increase was largely attributable to a $0.6 million increase in extended vehicle warranty program revenue due to continued growth in the sales of one-year warranty products, and a $0.7 million increase in marketing fee income recognized on RV financing products.  These increases were partially offset by an $0.4 million decrease in Coast to Coast member services revenue primarily relating to reduced enrollment.

 

Publication revenues of $11.5 million for the third quarter of 2003 decreased $1.2 million, or 9.8%, from the comparable period in 2002 primarily due to the timing of outdoor power sports issues between the second quarter and third quarter of 2003.

 

Retail revenues of $66.4 million decreased $1.9 million, or 2.7%, over the third quarter of 2002.  This variance consisted of a $2.4 million, or 3.7%, decrease in Camping World merchandise sales and a $0.5 million, or 17.9%, increase in recreational vehicle sales.  Store merchandise sales increased $2.1 million, equating to a same store sales increase of 1.7%.  The remaining net decrease in merchandise sales was attributable to a $5.1 million decrease in mail order sales as a result of reducing the catalog circulation by strategically promoting to specific profitable market segments, partially offset by a $0.6 million increase in installation fees and other supplies and services revenue.

 

Costs Applicable to Revenues

 

Costs applicable to revenues totaled $70.2 million for the third quarter of 2003, a decrease of $3.2 million, or 4.3%, from the comparable period in 2002.

 

Membership services costs and expenses of $21.3 million increased approximately $1.8 million from the third quarter of 2002.  This increase consisted of costs of $0.7 million associated with the increased extended vehicle warranty program revenue, increased emergency road service claims costs of $0.4 million, an increase in dealer marketing costs of $0.4 million, and a $0.3 million increase in membership database maintenance fees.

 

Publication costs and expenses of $8.1 million for the third quarter of 2003 decreased $0.3 million from the comparable period in 2002 primarily due to the timing of outdoor power sports issues between the second and third quarter of 2003.

 

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Retail costs applicable to revenues decreased $4.7 million, or 10.3%, to $40.7 million primarily due to an improved gross margin combined with increased same store sales.  The retail gross profit margin of 38.7% for the third quarter of 2003 increased from 33.5% from the comparable period in 2002.  This gross margin increase was primarily attributable to a $1.8 million increase in vendor purchase rebates recognized and a reduction in customer discounts from 15.1% to 10.9%.

 

Operating Expenses

 

Selling, general and administrative expenses of $29.2 million for the third quarter of 2003 increased $1.5 million compared to the third quarter of 2002 primarily due to increased retail selling and general and administrative expenses of approximately $4.0 million partially offset by a $2.5 million reduction in deferred executive compensation.  Management restructuring expense decreased $0.5 million from the third quarter of 2002.  Depreciation and amortization expenses of $2.5 million increased slightly over the prior year.

 

Income from Operations

 

Income from operations for the third quarter of 2003 decreased $0.2 million, or 2.1%, to $8.1 million compared to $8.3 million for the third quarter of 2002.  This decrease was primarily due to increased operating expenses of $1.2 million and reduced gross profit for the publications and membership services operations of $0.9 million each, partially offset by improved gross profit from the retail operations of $2.8 million.

 

Non-Operating Items

 

Non-operating expenses were $5.8 million for the third quarter of 2003, compared to $4.1 million for the same period in 2002.  This $1.7 million increase was due to a $1.5 million debt restructuring charge associated with the redemption of $30 million of Senior Notes on July 24, 2003, a $0.3 million reduction in interest income on certain Notes from Affiliates which were contributed to AGI Holding Corp in the form of a dividend during various times in 2002, and a $0.1 million increase in interest expense due to higher loan balances.  These increases in operating expenses were partially offset by the sale of excess retail property at a gain of $0.2 million in the third quarter of 2003.

 

Income before Income Taxes

 

Income before income taxes for the third quarter of 2003 was $2.3 million, or 45.7% less than the third quarter of 2002.  This $1.9 million decrease from the prior period was due to the $0.2 million decrease in income from operations, the $1.5 million debt restructuring charge and a $0.2 million increase in other non-operating items.

 

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Income Tax Expense

 

The Company recognized approximately $1.0 million of income tax expense for the third quarter of 2003 compared to $1.8 million for the third quarter of 2002.  The effective tax rates are higher than statutory rates due to certain changes in tax estimates and state taxes.

 

Net Income

 

The net income in the third quarter of 2003 was $1.2 million compared to $2.4 million for the same period in 2002.

 

Nine Months Ended September 30, 2003
Compared With Nine Months Ended September 30, 2002

 

Revenues

 

Revenues of $318.2 million for the first nine months of 2003 decreased by approximately $12.7 million, or 3.8%, from the comparable period in 2002.

 

Membership services revenues of $97.4 million for the first nine months of 2003 increased by approximately $3.5 million, or 3.7%, from the comparable period in 2002.  This revenue increase was largely attributable to a $2.4 million increase in marketing fee income recognized on sales of vehicle insurance and RV financing products, a $1.7 million increase in extended vehicle warranty program revenue primarily due to the continued growth in the sales of one-year warranty products, $1.2 million from increased participation in member events and dealer marketing program revenue, and a $0.7 million revenue increase in emergency road service programs due to increased enrollment.  These increases were partially offset by a $1.1 million reduction in marketing fees associated with the sale of health and life insurance products and a $1.4 million reduction in membership services revenue primarily associated with reduced enrollment in the Coast to Coast club.

 

Publication revenues of $40.9 million for the first nine months of 2003 increased by approximately $0.3 million, or 0.8%, from the comparable period in 2002 primarily due to additional advertising revenue.

 

Retail revenues of $179.9 million decreased $16.5 million, or 8.4%, over the first nine months of 2002.  This variance consisted of a $14.5 million, or 7.8%, decrease in Camping World merchandise sales and a $2.0 million, or 17.9%, decrease in recreational vehicle sales.  Camping World store sales decreased $2.1 million, equating to a same store sales decrease of 3.2%.  The remaining net decrease in merchandise sales was attributable to a $15.3 million decrease in mail order sales, primarily as a result of reducing the catalog circulation by strategically promoting the catalogs to specific profitable market segments, partially offset by a $2.9 million increase in installation fees and other supplies and services revenue.

 

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Costs Applicable to Revenues

 

Costs applicable to revenues totaled $197.3 million for the first nine months of 2003, a decrease of $18.5 million, or 8.6%, from the comparable period in 2002.

 

Membership services costs and expenses of $60.8 million increased $4.2 million from the first nine months of 2002.  This increase consisted of $3.9 million of expenses primarily associated with revenue increases in the extended vehicle warranty program, emergency road service programs, and vehicle insurance products, a $1.1 million increase in membership operating costs, primarily associated with membership database maintenance fees, and increased expenses of $0.5 million associated with dealer promotional programs.  These increases were partially offset by a $1.3 million reduction in President’s Club membership services costs primarily associated with reduced direct mail promotions.

 

Publication costs and expenses of $28.6 million for the first nine months of 2003 increased $0.1 million from the comparable period in 2002 primarily due to additional costs associated with the initial issues of Boating Industry magazine, mostly offset by production cost efficiencies associated with the annual RV publications.

 

Retail costs applicable to revenues decreased $22.8 million, or 17.4%, to $107.9 million primarily due to reduced same store sales, decreased RV sales, and improved gross margins.  The retail gross profit margin of 40.0% for the first nine months in 2003 increased from 33.4% from the comparable period in 2002.  This gross margin increase was primarily attributable to a $5.5 million increase in vendor purchase rebates, a reduction in customer discounts from 14.9% to 11.4%, and a 17.9% drop in sales of recreational vehicles which have lower profit margins.

 

Operating Expenses

 

Selling, general and administrative expenses of $80.6 million for the first nine months of 2003 increased $3.2 million compared to the first nine months of 2002 primarily due to increased retail labor and other retail general and administrative expenses of $6.2 million, and $0.3 million of other increased corporate general and administrative expenses, partially offset by a reduction in deferred executive compensation of $3.3 million.  Management restructuring expense, primarily related to the retail segment, decreased $1.2 million from the third quarter of 2002.  Substantially all of the restructuring charges have been paid as of September 30, 2003.  Depreciation and amortization expenses of $7.4 million remained unchanged from the prior year.

 

Income from Operations

 

Income from operations for the first nine months of 2003 increased $3.8 million, or 13.1%, to $32.5 million compared to $28.7 million for the first nine months of 2002.  This increase was due to a gross profit increase from the retail and publications groups of $6.3 million and $0.2 million, respectively, partly offset by increased operating expenses of $2.0 million and a gross profit decrease for membership services operations of $0.7 million.

 

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Non-Operating Items

 

Non-operating expenses were $16.5 million for the first nine months of 2003, compared to $12.4 million for the same period in 2002 primarily due to an increase in net interest expense attributable to a $1.5 million reduction in interest income on certain Notes from Affiliates which were contributed to AGI Holding Corp. in the form of a dividend during various times in 2002, a $0.5 million decrease in interest expense due to lower interest rates, and a $3.2 million debt restructuring charge associated with refinancing the AGI Credit Facility on June 24, 2003 and the redemption of $30 million of Senior Notes on July 24, 2003.

 

Income before Income Taxes and Cumulative Effect of Accounting Change

 

Income before income taxes and cumulative effect of accounting change for the first nine months of 2003 was $16.1 million, or 2.0% less than the first nine months of 2002.  This $0.3 million decrease from the prior period was principally due to the $3.8 million increase in income from operations combined with the $3.2 million debt restructuring charge and the $0.9 million net increase in interest expense and other non-operating items.

 

Income Tax Expense

 

The Company recognized approximately $6.2 million of tax expense for the first nine months of 2003 versus $6.1 million for the first nine months of 2002.  The effective income tax rates are higher than statutory rates due primarily to state income taxes.

 

Cumulative Effect of Accounting Change

 

In accordance with the transition provisions of SFAS No. 142, Goodwill and Other Intangible Assets, the Company recorded a one-time non-cash charge of approximately $1.7 million in 2002 to reduce the carrying value of the goodwill associated solely with the Golf Card Club, which is included within the Membership Services segment.  This charge is reflected as a cumulative effect of an accounting change in the accompanying Consolidated Statement of Income.

 

Net Income

 

The net income in the first nine months of 2003 was $9.9 million compared to $8.5 million for the same period in 2002.

 

LIQUIDITY AND CAPITAL RESOURCES

 

AGHI is a holding company whose primary assets are the capital stock of AGI.  AGI, and its subsidiaries, provide the operating cash flow necessary to service its debt as well as that of AGHI.

 

The Company has historically operated with a working capital deficit.  The working capital deficit as of September 30, 2003 and December 31, 2002 was $22.6 million and $39.8

 

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million, respectively.  The primary reason for the working capital deficit is the deferred revenue and gains reported under current liabilities in the amount of $65.1 million and $54.8 million as of September 30, 2003 and December 31, 2002, respectively.  Deferred revenue is primarily comprised of cash collected for club memberships in advance, which is deferred over the life of the membership.  The Company uses this deferred membership revenue to lower its long-term borrowings.  The Company generated net cash from operations of $34.5 million and $25.6 million for the first nine months of 2003 and 2002, respectively.  Management believes that funds generated by operations together with available borrowings under its revolving credit line will be sufficient to meet all of its debt service requirements and capital requirements over the next twelve months.

 

The following table reflects the Company’s contractual obligations and commercial commitments at September 30, 2003, in thousands.

 

		Payments Due by Period
(in thousands)		Total			Balance of 2003			2004 and 2005			2006 and 2007			Thereafter
Long-term debt		$	239,327		$	360		$	2,817		$	102,800		$	133,350
Operating lease obligations		132,542			2,886			22,496			18,805			88,355
Deferred compensation		8,294			900			2,800			4,594			—
Other commercial commitments - Standby letters of credit		4,704			1,838			2,866			—			—
Grand total		$	384,867		$	5,984		$	30,979		$	126,199		$	221,705

 

The Company has two primary debt obligations.  On April 2, 1997, AGHI issued a total of $130.0 million of 11.0% senior notes under an Indenture dated April 2, 1997 (the “Indenture”) maturing on April 1, 2007 (“AGHI Senior Notes”).  On June 24, 2003, Affinity Group Holding, Inc.’s wholly owned subsidiary, Affinity Group, Inc. (“AGI”), entered into an Amended and Restated Credit Agreement and a Senior Secured Floating Rate Note Purchase Agreement (“AGI Credit Facility”) providing for term loans (“Term B1” and “Term B2”) in the aggregate of $140.0 million and a revolving credit facility of $35.0 million.  Proceeds from the restructured AGI Credit Facility were used to refinance the existing senior secured indebtedness, pay a dividend of $13.7 million to AGI’s ultimate parent, AGI Holding Corp. and to redeem $30.0 million of the AGHI 11% Senior Notes at 103.667% of par.  As of September 30, 2003, $39.8 million and $99.5 million were outstanding under the Term B1 and B2 loans, respectively.  No borrowings were outstanding on the revolving credit facility as of September 30, 2003.  Re-borrowings under the Term Loans are not permitted.  The interest on borrowings under the new AGI Credit Facility is at variable rates based on the ratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and the London Interbank Offered Rates (“LIBOR”), plus an applicable margin ranging from 1.50% to 4.0% over the stated rates.  As of September 30, 2003, the average interest rates on the term loans were 5.15%, and permitted borrowings under the undrawn revolving line were $30.3 million.  AGI also pays a commitment fee of 0.5% per annum on the unused amount of the revolving credit line.  The aggregate quarterly scheduled payments on the term loans are $0.35 million.  The revolving credit

 

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facility matures on June 24, 2008, and the Term B1 and B2 loans mature on June 24, 2009.  The AGI Credit Facility permits the Company to refinance the existing AGHI Senior Notes.  In the event the indebtedness incurred to refinance the AGHI Senior Notes has a maturity dated prior to December 24, 2008, then the maturity dates of the AGI Credit Facility are adjusted to the date six months prior to the new indebtedness maturity date.  The funds available under the AGI Revolving Credit line may be utilized for borrowings or letters of credit; however, a maximum of $12.5 million may be allocated to such letters of credit.  As of September 30, 2003, the Company had standby letters of credit in the amount of $4.7 million outstanding.  The AGI Credit Facility is secured by virtually all the assets and a pledge of the stock of AGI.

 

On July 24, 2003, $30.0 million of its 11.0% Senior Notes due 2007 were redeemed.   The notes were redeemed at 103.667% of par plus accrued interest to the date of redemption.  The redemption was funded by borrowings under the AGI Credit Facility.

 

The AGI Credit Facility allows for, among other things, certain distributions including payments by AGI to AGHI to service the semi-annual interest due on the AGHI Senior Notes.  Also, from time to time, AGI may distribute funds to AGHI to purchase the AGHI Senior Notes in the open market.  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.

 

The AGHI indenture pursuant to which the AGHI Senior Notes were issued contains certain restrictive covenants relating to, but not limited to, mergers, changes in the nature of the business, acquisitions, additional indebtedness, sale of assets, investments, and the payment of dividends subject to certain limitations and minimum operating covenants.  The Company was in compliance with all debt covenants at September 30, 2003.

 

For the nine months ended September 30, 2003, the Company incurred deferred executive compensation expense of $1.2 million under the phantom stock agreements.  The earned incentives under these agreements are scheduled to be paid at various times over the next five years.  Phantom stock payments of $0.9 million are scheduled to be made over the remainder of the calendar year.

 

Capital expenditures for the first nine months of 2003 totaling $8.2 million increased $3.4 million from the first nine months of 2002 primarily due to the new Camping World retail store which opened May, 2003 in Amsterdam, New York.  Additional capital expenditures of $3.5 million are anticipated for the balance of 2003, primarily for new Camping World stores and equipment, information technology and database enhancements, computer hardware upgrades and replacements, and computer software upgrades and enhancements.

 

CRITICAL ACCOUNTING POLICIES

 

The Company’s discussion and analysis of its financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

 

20

 

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates its estimates, including those related to membership programs and incentives, bad debts, inventories, intangible assets, employee health insurance benefits, income taxes, restructuring, and contingencies and litigation.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

 

Revenue Recognition

 

Some of the membership revenue is generated from lifetime memberships.  The revenue and expense associated with these memberships are deferred and amortized over an 18-year period, which is the actuarially determined estimated fulfillment period.  Recognized revenues and profit are subject to revisions as the membership progresses to completion.  Revisions to membership period estimates would change the amount of income and expense amortized in future accounting periods.

 

Accounts Receivable

 

The Company estimates the collectibility of its trade receivables.  A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer.  Changes in required reserves have been recorded in recent periods and may occur in the future due to the market environment.

 

Inventory

 

The Company states inventories at the lower of cost or market.  In assessing the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements and compare that with the current or committed inventory levels.  The Company has recorded changes in required reserves in recent periods due to changes in strategic direction, such as discontinuances of product lines as well as changes in market conditions due to changes in demand requirements.  It is possible that changes in required inventory reserves may continue to occur in the future due to the market conditions.

 

Restructuring

 

The Company recorded reserves in connection with the restructuring program primarily within the retail segment of the Company.  These reserves include estimates pertaining to employee separation costs and the settlements of contractual obligations resulting from our actions.  Although the Company does not anticipate significant changes, the actual costs may differ from these estimates.

 

21

 

ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risks

 

Refer to the disclosure in our 2002 Annual Report on Form 10-K.  We do not believe that the risk we face related to interest rate changes is materially different than it was at the date of the Annual Report.

 

Credit Risks

 

Refer to the disclosure in our 2002 Annual Report on Form 10-K.  We do not believe that the risk we face related to credit risk is materially different than it was at the date of the Annual Report.

 

ITEM 4: CONTROL AND PROCEDURES

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s President and Chief Executive Officer and the Company’s Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Regulation 13a-14 under the Securities Exchange Act of 1934.  Based upon that evaluation, the Company’s President and Chief Executive Officer along with the Company’s Vice President and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date the Company carried out its evaluation.

 

22

 

PART II:  OTHER INFORMATION

 

Items 1 through 5 have been omitted since no events occurred with respect to these items.

 

Item 6.    Exhibits and Reports on Form 8-K

 

(a)           Exhibits.

 

Exhibit 31.1 – Certification of Chief Executive Officer (Section 302 Certification).

 

Exhibit 31.2 – Certification of Chief Financial Officer (Section 302 Certification).

 

Exhibit 32.1 – Certification of Chief Executive Officer (Section 906 Certification).

 

Exhibit 32.2 – Certification of Chief Financial Officer (Section 906 Certification).

 

(b)           Reports on Form 8-K.

 

None.

 

23

 

SIGNATURES:

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

	AFFINITY GROUP HOLDING, INC.
	/s/      Mark J. Boggess
Date:  November 10, 2003	Mark J. Boggess
	Senior Vice President
	Chief Financial Officer

 

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