Attached files
file | filename |
---|---|
EX-32.2 - EX-32.2 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex32d2.htm |
EX-31.1 - EX-31.1 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex31d1.htm |
EX-31.2 - EX-31.2 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex31d2.htm |
EX-32.1 - EX-32.1 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex32d1.htm |
EX-10.42 - EX-10.42 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex10d42.htm |
EX-10.41 - EX-10.41 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex10d41.htm |
EX-10.40 - EX-10.40 - GOOD SAM ENTERPRISES, LLC | a10-12990_1ex10d40.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d) of
The Securities Exchange Act of 1934
For Quarter Ended: |
|
Commission File Number |
June 30, 2010 |
|
333-113982 |
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.) |
|
|
|
2575 Vista Del Mar Drive |
|
(805) 667-4100 |
Ventura, CA 93001 |
|
(Registrants 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:
9% Senior Subordinated Notes Due 2012
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 o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filings).
YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
o |
|
Accelerated filer |
o |
Non-accelerated filer |
x |
|
Smaller reporting company |
o |
(Do not check if a smaller reporting company) |
|
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
|
|
Outstanding as of |
Class |
|
August 13, 2010 |
Common Stock, $.001 par value |
|
2,000 |
DOCUMENTS INCORPORATED BY REFERENCE: None
AFFINITY GROUP, INC. AND SUBSIDIARIES
INDEX
AFFINITY GROUP, INC. AND SUBSIDIARIES
June 30, 2010 and December 31, 2009
(In thousands except shares and par value)
|
|
6/30/2010 |
|
12/31/2009 |
|
||
|
|
(Unaudited) |
|
|
|
||
ASSETS |
|
|
|
|
|
||
CURRENT ASSETS: |
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
12,589 |
|
$ |
8,640 |
|
Restricted cash |
|
|
|
8,058 |
|
||
Accounts receivable, less allowance for doubtful accounts of $3,607 in 2010 and $3,128 in 2009 |
|
30,920 |
|
32,321 |
|
||
Inventories |
|
66,678 |
|
49,921 |
|
||
Prepaid expenses and other assets |
|
17,150 |
|
13,067 |
|
||
Total current assets |
|
127,337 |
|
112,007 |
|
||
|
|
|
|
|
|
||
PROPERTY AND EQUIPMENT, net |
|
29,468 |
|
34,276 |
|
||
AFFILIATE NOTES AND INVESTMENTS |
|
4,815 |
|
4,837 |
|
||
INTANGIBLE ASSETS, net |
|
13,906 |
|
13,738 |
|
||
GOODWILL |
|
49,944 |
|
49,944 |
|
||
OTHER ASSETS |
|
5,762 |
|
6,767 |
|
||
Total assets |
|
$ |
231,232 |
|
$ |
221,569 |
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS DEFICIT |
|
|
|
|
|
||
CURRENT LIABILITIES: |
|
|
|
|
|
||
Accounts payable |
|
$ |
30,378 |
|
$ |
23,795 |
|
Accrued interest |
|
7,134 |
|
5,688 |
|
||
Accrued income taxes |
|
1,723 |
|
1,598 |
|
||
Accrued liabilities |
|
27,128 |
|
24,060 |
|
||
Deferred revenues and gains |
|
60,253 |
|
60,728 |
|
||
Current portion of long-term debt |
|
1,037 |
|
892 |
|
||
Total current liabilities |
|
127,653 |
|
116,761 |
|
||
|
|
|
|
|
|
||
DEFERRED REVENUES AND GAINS |
|
35,030 |
|
35,607 |
|
||
LONG-TERM DEBT, net of current portion |
|
284,929 |
|
277,522 |
|
||
OTHER LONG-TERM LIABILITIES |
|
15,678 |
|
13,204 |
|
||
|
|
463,290 |
|
443,094 |
|
||
|
|
|
|
|
|
||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
|
||
|
|
|
|
|
|
||
STOCKHOLDERS DEFICIT: |
|
|
|
|
|
||
Common stock, $.001 par value, 2,000 shares authorized, 2,000 shares issued and outstanding |
|
1 |
|
1 |
|
||
Additional paid-in capital |
|
89,505 |
|
89,505 |
|
||
Accumulated deficit |
|
(314,437 |
) |
(304,031 |
) |
||
Accumulated other comprehensive loss |
|
(7,127 |
) |
(7,000 |
) |
||
Total stockholders deficit |
|
(232,058 |
) |
(221,525 |
) |
||
Total liabilities and stockholders deficit |
|
$ |
231,232 |
|
$ |
221,569 |
|
See notes to consolidated financial statements.
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
|
|
THREE MONTHS ENDED |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
||
REVENUES: |
|
|
|
|
|
||
Membership services |
|
$ |
38,661 |
|
$ |
39,197 |
|
Media |
|
8,009 |
|
9,363 |
|
||
Retail |
|
84,412 |
|
81,339 |
|
||
|
|
131,082 |
|
129,899 |
|
||
|
|
|
|
|
|
||
COSTS APPLICABLE TO REVENUES: |
|
|
|
|
|
||
Membership services |
|
23,217 |
|
24,615 |
|
||
Media |
|
5,982 |
|
7,396 |
|
||
Retail |
|
49,847 |
|
49,370 |
|
||
|
|
79,046 |
|
81,381 |
|
||
|
|
|
|
|
|
||
GROSS PROFIT |
|
52,036 |
|
48,518 |
|
||
|
|
|
|
|
|
||
OPERATING EXPENSES: |
|
|
|
|
|
||
Selling, general and administrative |
|
35,599 |
|
33,114 |
|
||
Financing expense |
|
244 |
|
1,540 |
|
||
Depreciation and amortization |
|
4,616 |
|
5,570 |
|
||
|
|
40,459 |
|
40,224 |
|
||
|
|
|
|
|
|
||
INCOME FROM OPERATIONS |
|
11,577 |
|
8,294 |
|
||
|
|
|
|
|
|
||
NON-OPERATING ITEMS: |
|
|
|
|
|
||
Interest income |
|
124 |
|
134 |
|
||
Interest expense |
|
(9,774 |
) |
(7,814 |
) |
||
(Loss) gain on derivative instrument |
|
(144 |
) |
665 |
|
||
Gain on debt restructure |
|
|
|
4,678 |
|
||
Other non-operating items, net |
|
(3 |
) |
(736 |
) |
||
|
|
(9,797 |
) |
(3,073 |
) |
||
|
|
|
|
|
|
||
INCOME BEFORE INCOME TAXES |
|
1,780 |
|
5,221 |
|
||
|
|
|
|
|
|
||
INCOME TAX EXPENSE |
|
(59 |
) |
(304 |
) |
||
|
|
|
|
|
|
||
NET INCOME |
|
$ |
1,721 |
|
$ |
4,917 |
|
See notes to consolidated financial statements.
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
(Unaudited)
|
|
SIX MONTHS ENDED |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
||
REVENUES: |
|
|
|
|
|
||
Membership services |
|
$ |
75,735 |
|
$ |
74,429 |
|
Media |
|
22,692 |
|
26,783 |
|
||
Retail |
|
138,589 |
|
133,740 |
|
||
|
|
237,016 |
|
234,952 |
|
||
|
|
|
|
|
|
||
COSTS APPLICABLE TO REVENUES: |
|
|
|
|
|
||
Membership services |
|
43,293 |
|
44,945 |
|
||
Media |
|
17,608 |
|
20,880 |
|
||
Retail |
|
82,076 |
|
80,906 |
|
||
|
|
142,977 |
|
146,731 |
|
||
|
|
|
|
|
|
||
GROSS PROFIT |
|
94,039 |
|
88,221 |
|
||
|
|
|
|
|
|
||
OPERATING EXPENSES: |
|
|
|
|
|
||
Selling, general and administrative |
|
65,766 |
|
63,051 |
|
||
Financing expense |
|
7,330 |
|
1,540 |
|
||
Depreciation and amortization |
|
9,444 |
|
10,408 |
|
||
|
|
82,540 |
|
74,999 |
|
||
|
|
|
|
|
|
||
INCOME FROM OPERATIONS |
|
11,499 |
|
13,222 |
|
||
|
|
|
|
|
|
||
NON-OPERATING ITEMS: |
|
|
|
|
|
||
Interest income |
|
250 |
|
264 |
|
||
Interest expense |
|
(19,055 |
) |
(13,637 |
) |
||
(Loss) gain on derivative instrument |
|
(520 |
) |
685 |
|
||
Gain on debt restructure |
|
|
|
4,678 |
|
||
Other non-operating items, net |
|
22 |
|
(819 |
) |
||
|
|
(19,303 |
) |
(8,829 |
) |
||
|
|
|
|
|
|
||
(LOSS) INCOME BEFORE INCOME TAXES |
|
(7,804 |
) |
4,393 |
|
||
|
|
|
|
|
|
||
INCOME TAX EXPENSE |
|
(202 |
) |
(700 |
) |
||
|
|
|
|
|
|
||
NET (LOSS) INCOME |
|
$ |
(8,006 |
) |
$ |
3,693 |
|
See notes to consolidated financial statements.
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
|
|
SIX MONTHS ENDED |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
||
Net (loss) income |
|
$ |
(8,006 |
) |
$ |
3,693 |
|
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
|
||
Depreciation |
|
5,622 |
|
6,525 |
|
||
Amortization |
|
3,822 |
|
3,883 |
|
||
Loss (gain) on derivative instrument |
|
520 |
|
(685 |
) |
||
Loss (gain) on debt restructure |
|
279 |
|
(4,678 |
) |
||
Provision for losses on accounts receivable |
|
776 |
|
799 |
|
||
Deferred compensation |
|
1,750 |
|
|
|
||
(Gain) loss on sale of property and equipment |
|
(23 |
) |
165 |
|
||
Accretion of original issue discount |
|
522 |
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
||
Accounts receivable |
|
625 |
|
(3,633 |
) |
||
Inventories |
|
(16,757 |
) |
(7,397 |
) |
||
Prepaid expenses and other assets |
|
(3,078 |
) |
(1,236 |
) |
||
Accounts payable |
|
6,583 |
|
19,213 |
|
||
Accrued and other liabilities |
|
4,716 |
|
(1,960 |
) |
||
Deferred revenues and gains |
|
(1,052 |
) |
832 |
|
||
Net cash (used in) provided by operating activities |
|
(3,701 |
) |
15,521 |
|
||
|
|
|
|
|
|
||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
||
Capital expenditures |
|
(1,449 |
) |
(2,391 |
) |
||
Net proceeds from sale of property and equipment |
|
658 |
|
11 |
|
||
Investment in affiliate |
|
22 |
|
(115 |
) |
||
Net cash used in investing activities |
|
(769 |
) |
(2,495 |
) |
||
|
|
|
|
|
|
||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
||
Dividends paid |
|
(2,400 |
) |
(3,500 |
) |
||
Contribution from parent |
|
|
|
8,500 |
|
||
Release of restricted cash |
|
8,058 |
|
|
|
||
Borrowings on debt |
|
151,059 |
|
12,000 |
|
||
Payment of debt issue costs |
|
(4,349 |
) |
(2,541 |
) |
||
Principal payments on debt |
|
(143,949 |
) |
(27,402 |
) |
||
Net cash provided by (used in) financing activities |
|
8,419 |
|
(12,943 |
) |
||
|
|
|
|
|
|
||
NET CHANGE IN CASH AND CASH EQUIVALENTS |
|
3,949 |
|
83 |
|
||
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
8,640 |
|
10,608 |
|
||
|
|
|
|
|
|
||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
12,589 |
|
$ |
10,691 |
|
See notes to consolidated financial statements.
AFFINITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
(1) BASIS OF PRESENTATION
Principles of Consolidation The consolidated financial statements include the accounts of Affinity Group, Inc. (AGI) and its subsidiaries (collectively the Company), presented in accordance with U.S. generally accepted accounting principles, (GAAP), and pursuant to the rules and regulations of the Securities and Exchange Commission. Affinity Group Holding, Inc., a Delaware corporation (AGHI), is the direct parent of AGI. The ultimate parent company of AGHI is AGI Holding Corp. (AGHC), a privately-owned corporation.
These interim consolidated financial statements should be read in conjunction with the Companys consolidated financial statements and notes in the Companys 10-K report for the year ended December 31, 2009 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.
Basis for Presentation On March 1, 2010, AGI refinanced its existing senior credit facility ($128.9 million aggregate principal amount outstanding as of December 31, 2009) and second lien notes totaling $9.7 million due July 31, 2010. The New Senior Credit Facility provides for term loans (aggregating $144.3 million outstanding as of June 30, 2010), including an original issue discount of 2%, that are payable in quarterly installments of $360,750 beginning March 1, 2011. In addition, there are mandatory prepayments of the term loans from excess cash flow (as defined) of AGI and from asset sales. The term loans under the New Senior Credit Facility mature on the earlier of (i) March 1, 2015 or (ii) 90 days prior to the maturity of either AGIs 9% senior subordinated notes due 2012 (the Senior Notes) ($137.8 million principal amount outstanding as of June 30, 2010) or AGHIs 10-7/8% senior notes due 2012 (the AGHI Notes) ($88.2 million aggregate principal amount outstanding as of June 30, 2010). See Note 6 Debt.
In addition, on March 1, 2010, AGIs subsidiary that operates the Retail segment, Camping World, Inc. (Camping World) entered into a credit agreement (the CW Credit Facility) providing for an asset based lending facility of up to $22.0 million, of which $10.0 million is available for letters of credit and $12.0 million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1, 2013, (ii) 60 days prior to the date of maturity of the New Senior Credit Facility, or (iii) 120 days prior to the earlier date of maturity of the Senior Notes and the AGHI Notes. As of June 30, 2010, $5.9 million was borrowed and $6.9 million of letters of credit were outstanding under the CW Credit Facility. See Note 6 Debt.
We have evaluated subsequent events through the date of issuance of our financial statements in this Form 10-Q.
(2) RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the Company was required to adopt a newly issued accounting standard which requires additional disclosure about the amounts of and reasons for significant transfers between levels of the fair value hierarchy discussed in Note 9, Fair Value Measurements. This standard also clarifies existing disclosure requirements related to the level of disaggregation of fair value measurements for each class of assets and liabilities and disclosures about inputs and valuation techniques used to measure fair value for both recurring and nonrecurring Level 2 and Level 3 measurements. As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact our financial position, results of operations or cash flows. In addition, effective for interim and annual periods beginning after December 15, 2010, this standard will require additional disclosure and require an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than a single amount.
(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Companys three principal lines of business are Membership Services, Media, and Retail. The Membership Services segment operates the Good Sam Club, the Coast to Coast Club, the Presidents Club, Camp Club USA and assorted membership products and services for recreational vehicles (RV) owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts. The Media segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories and RV and powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreation shows primarily focused on RV and powersports markets. The Retail segment sells specialty retail merchandise and services for RV owners primarily through retail supercenters, mail order catalogs and internet sales. The Company evaluates performance based on profit or loss from operations before income taxes and unusual items.
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.
(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (continued)
The Company does not allocate income taxes or unusual items to segments. Financial information by reportable business segment is summarized as follows (in thousands):
|
|
Membership |
|
|
|
|
|
|
|
||||
|
|
Services |
|
Media |
|
Retail |
|
Consolidated |
|
||||
THREE MONTHS ENDED JUNE 30, 2010 |
|
|
|
|
|
|
|
|
|
||||
Revenues from external customers |
|
$ |
38,661 |
|
$ |
8,009 |
|
$ |
84,412 |
|
$ |
131,082 |
|
Depreciation and amortization |
|
477 |
|
948 |
|
2,356 |
|
3,781 |
|
||||
Interest income |
|
789 |
|
|
|
|
|
789 |
|
||||
Interest expense |
|
|
|
(18 |
) |
586 |
|
568 |
|
||||
Segment operating profit |
|
13,408 |
|
30 |
|
4,451 |
|
17,889 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
Membership |
|
|
|
|
|
|
|
||||
|
|
Services |
|
Media |
|
Retail |
|
Consolidated |
|
||||
THREE MONTHS ENDED JUNE 30, 2009 |
|
|
|
|
|
|
|
|
|
||||
Revenues from external customers |
|
$ |
39,197 |
|
$ |
9,363 |
|
$ |
81,339 |
|
$ |
129,899 |
|
Depreciation and amortization |
|
812 |
|
1,341 |
|
2,637 |
|
4,790 |
|
||||
Gain (loss) on sale of property and equipment |
|
|
|
1 |
|
(84 |
) |
(83 |
) |
||||
Interest income |
|
849 |
|
|
|
2 |
|
851 |
|
||||
Interest expense |
|
|
|
19 |
|
2,823 |
|
2,842 |
|
||||
Segment operating profit (loss) |
|
11,953 |
|
(26 |
) |
459 |
|
12,386 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
Membership |
|
|
|
|
|
|
|
||||
|
|
Services |
|
Media |
|
Retail |
|
Consolidated |
|
||||
SIX MONTHS ENDED JUNE 30, 2010 |
|
|
|
|
|
|
|
|
|
||||
Revenues from external customers |
|
$ |
75,735 |
|
$ |
22,692 |
|
$ |
138,589 |
|
$ |
237,016 |
|
Depreciation and amortization |
|
1,118 |
|
1,891 |
|
4,620 |
|
7,629 |
|
||||
Gain on sale of property and equipment |
|
|
|
|
|
23 |
|
23 |
|
||||
Interest income |
|
1,595 |
|
|
|
|
|
1,595 |
|
||||
Interest expense |
|
|
|
(8 |
) |
1,118 |
|
1,110 |
|
||||
Segment operating profit (loss) |
|
28,596 |
|
942 |
|
(97 |
) |
29,441 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
|
|
Membership |
|
|
|
|
|
|
|
||||
|
|
Services |
|
Media |
|
Retail |
|
Consolidated |
|
||||
SIX MONTHS ENDED JUNE 30, 2009 |
|
|
|
|
|
|
|
|
|
||||
Revenues from external customers |
|
$ |
74,429 |
|
$ |
26,783 |
|
$ |
133,740 |
|
$ |
234,952 |
|
Depreciation and amortization |
|
1,618 |
|
2,664 |
|
4,826 |
|
9,108 |
|
||||
Loss on sale of property and equipment |
|
|
|
|
|
(165 |
) |
(165 |
) |
||||
Interest income |
|
1,713 |
|
|
|
4 |
|
1,717 |
|
||||
Interest expense |
|
|
|
47 |
|
6,741 |
|
6,788 |
|
||||
Segment operating profit (loss) |
|
24,578 |
|
1,286 |
|
(7,702 |
) |
18,162 |
|
(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (continued)
The following is a reconciliation of profit from operations to the Companys consolidated financial statements for the three months and six months ended June 30, 2010 and 2009 (in thousands):
|
|
THREE MONTHS ENDED |
|
SIX MONTHS ENDED |
|
||||||||
|
|
6/30/2010 |
|
6/30/2009 |
|
6/30/2010 |
|
6/30/2009 |
|
||||
Income (loss) From Operations Before Income Taxes |
|
|
|
|
|
|
|
|
|
||||
Total income for reportable segments |
|
$ |
17,889 |
|
$ |
12,386 |
|
$ |
29,441 |
|
$ |
18,162 |
|
Unallocated G & A expense |
|
(5,015 |
) |
(3,845 |
) |
(8,715 |
) |
(7,336 |
) |
||||
Unallocated depreciation and amortization expense |
|
(835 |
) |
(780 |
) |
(1,815 |
) |
(1,300 |
) |
||||
Unallocated other finance costs |
|
|
|
(654 |
) |
|
|
(654 |
) |
||||
Unallocated (loss) gain on derivative instrument |
|
(144 |
) |
665 |
|
(520 |
) |
685 |
|
||||
Unallocated financing expense |
|
(244 |
) |
(1,540 |
) |
(6,905 |
) |
(1,540 |
) |
||||
Unallocated gain on debt restructure |
|
|
|
4,678 |
|
|
|
4,678 |
|
||||
Elimination of intercompany interest income |
|
(665 |
) |
(717 |
) |
(1,345 |
) |
(1,453 |
) |
||||
Unallocated interest expense, net of intercompany elimination |
|
(9,206 |
) |
(4,972 |
) |
(17,945 |
) |
(6,849 |
) |
||||
Income (loss) from operations before income taxes |
|
$ |
1,780 |
|
$ |
5,221 |
|
$ |
(7,804 |
) |
$ |
4,393 |
|
The following is a reconciliation of assets of reportable segments to the Companys consolidated financial statements as of June 30, 2010 and December 31, 2009 (in thousands):
|
|
6/30/2010 |
|
12/31/2009 |
|
||
Membership services segment |
|
$ |
242,964 |
|
$ |
237,597 |
|
Media segment |
|
21,783 |
|
26,876 |
|
||
Retail segment |
|
110,281 |
|
95,193 |
|
||
Total assets for reportable segments |
|
375,028 |
|
359,666 |
|
||
Restricted cash |
|
|
|
8,058 |
|
||
Intangible assets not allocated to segments |
|
3,371 |
|
2,185 |
|
||
Corporate unallocated assets |
|
6,500 |
|
6,654 |
|
||
Elimination of intersegment receivable |
|
(153,667 |
) |
(154,994 |
) |
||
Total assets |
|
$ |
231,232 |
|
$ |
221,569 |
|
(4) STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information for the six months ended June 30 (in thousands):
|
|
2010 |
|
2009 |
|
||
Cash paid during the period for: |
|
|
|
|
|
||
Interest |
|
$ |
17,087 |
|
$ |
15,067 |
|
Income taxes |
|
|
|
2 |
|
||
For the six months ended June 30, 2009, the Company recorded an adjustment to the fair value of the interest rate swap resulting in a $4.9 million decrease in Other Long-Term Liabilities and a $3.6 million decrease in Other Comprehensive Loss and ineffective portion in the statement of operations as a non-cash gain on derivative instruments of $1.3 million.
For the six months ended June 30, 2010, the Company recorded an adjustment to the fair value of the interest rate swap resulting in a $0.6 million increase in Other Long-Term Liabilities and a $0.1 million increase in Other Comprehensive Loss and ineffective portion in the statement of operations as a non-cash loss on derivative instruments of $0.5 million.
In June 2010, the Company recorded an adjustment of $0.1 million to the current portion of Long-term Debt, related to the Powerboat Magazine acquisition in May 2005, to write-off the remaining contingency to amortization expense as the contingency was resolved and resulted in no final payment.
(5) GOODWILL AND INTANGIBLE ASSETS
The Company reviews goodwill and indefinite-lived intangible assets for impairment at least annually and more often when impairment indicators are present. The Company performs its annual impairment test during the fourth quarter.
Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge. The Companys estimates of fair value utilized in the goodwill impairment tests may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, economic conditions, or changes to the Companys business operations. Such changes may result in impairment charges recorded in future periods. Also see Note 9 Fair Value Measurements.
(5) GOODWILL AND INTANGIBLE ASSETS (continued)
The following is a summary of changes in the Companys goodwill by business segment, for the six months ended June 30, 2010 and 2009 (in thousands):
|
|
Membership |
|
Media |
|
Retail |
|
Consolidated |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Gross goodwill |
|
$ |
56,030 |
|
$ |
46,884 |
|
$ |
47,601 |
|
$ |
150,515 |
|
Impairment prior to January 1, 2010 |
|
(6,086 |
) |
(46,884 |
) |
(47,601 |
) |
(100,571 |
) |
||||
Balance as of January 1, 2010 |
|
49,944 |
|
|
|
|
|
49,944 |
|
||||
Impairments |
|
|
|
|
|
|
|
|
|
||||
Balance as of June 30, 2010 |
|
$ |
49,944 |
|
$ |
|
|
$ |
|
|
$ |
49,944 |
|
|
|
|
|
|
|
|
|
|
|
||||
Gross goodwill |
|
$ |
56,030 |
|
$ |
46,884 |
|
$ |
47,601 |
|
$ |
150,515 |
|
Impairment prior to January 1, 2009 |
|
(6,086 |
) |
|
|
(47,601 |
) |
(53,687 |
) |
||||
Balance as of January 1, 2009 |
|
49,944 |
|
46,884 |
|
|
|
96,828 |
|
||||
Impairments |
|
|
|
|
|
|
|
|
|
||||
Balance as of June 30, 2009 |
|
$ |
49,944 |
|
$ |
46,884 |
|
$ |
|
|
$ |
96,828 |
|
The Company has evaluated the remaining useful lives of its finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary. The Company determined that no adjustments to the useful lives of its finite-lived purchased intangible assets were necessary as of June 30, 2010. Under the accounting guidance for goodwill and other intangible assets, as issued by the FASB, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. The Companys reporting units are generally consistent with the operating segments underlying the reporting segments identified in Note 3 Disclosures about Segments of an Enterprise and Related Information.
Effective January 1, 2009, the Company adopted new accounting guidance related to business combinations which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in a business combination. The Company will apply the provisions and disclosure requirements of the new guidelines for any acquisitions after the adoption date.
(5) GOODWILL AND INTANGIBLE ASSETS (continued)
Finite-lived intangible assets, related accumulated amortization and weighted average useful life consisted of the following at June 30, 2010 (in thousands, except as noted):
|
|
Weighted |
|
|
|
|
|
|
|
|||
|
|
Average Useful |
|
|
|
Accumulated |
|
|
|
|||
|
|
Life (in years) |
|
Gross |
|
Amortization |
|
Net |
|
|||
|
|
|
|
|
|
|
|
|
|
|||
Membership and customer lists |
|
6 |
|
$ |
35,355 |
|
$ |
(27,888 |
) |
$ |
7,467 |
|
Resort and golf course participation agreements |
|
4 |
|
7 |
|
(6 |
) |
1 |
|
|||
Non-compete and deferred consulting agreements |
|
15 |
|
18,650 |
|
(16,743 |
) |
1,907 |
|
|||
Deferred financing costs |
|
5 |
|
9,523 |
|
(4,992 |
) |
4,531 |
|
|||
|
|
|
|
$ |
63,535 |
|
$ |
(49,629 |
) |
$ |
13,906 |
|
(6) DEBT
New Senior Credit Facility
On March 1, 2010, AGI entered into the Second Amended and Restated Credit Agreement (the New Senior Credit Facility) to refinance its existing senior credit facility ($128.9 million principal amount outstanding at December 31, 2009) which was scheduled to mature on June 30, 2010, the second lien notes due July 31, 2010 ($9.7 million principal amount outstanding at December 31, 2009), and the loan from SA Holding, LLC, (the SA Loan), an affiliate of the ultimate shareholder of AGI, ($1.0 million principal amount outstanding at December 31, 2009). The New Senior Credit Facility provides for term loans aggregating $144.3 million, including an original issue discount of 2%, and are payable in quarterly installments of $360,750 beginning March 1, 2011. In addition, there are mandatory prepayments of the term loans from excess cash flow (as defined) of AGI and from asset sales. The term loans under the New Senior Credit Facility mature on the earlier of (i) March 1, 2015 or (ii) 90 days prior to the maturity of either Senior Notes ($137.8 million principal amount outstanding as at June 30, 2010 and are due on February 15, 2012) or the AGHI Notes ($88.2 million aggregate principal amount outstanding at June 30, 2010 and are due February 15, 2012). Interest on the term loans under the New Senior Credit Facility floats at either 8.75% over the base rate (defined as the greater of the prime rate, federal funds rate plus 50 basis points or 5.25%) for borrowings whose interest is based on the prime rate or 10.0% over the LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) for borrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swap agreements, (see Note 8- Interest Rate Swap Agreements), as of June 30, 2010, the average annual interest rate on the term loans was 16.76%. The New Senior Credit Facility contains affirmative covenants, including financial covenants, and negative covenants, including a restriction on dividends or distributions by AGI to AGHI. Borrowings under the New Senior Credit Facility are guaranteed by the direct and indirect subsidiaries of AGI and are secured by liens on the assets of AGI and its direct and indirect subsidiaries. As a condition to the term loans under the New Senior Credit Facility, $25.4 million of AGHI Notes due on March 15, 2010 that were held by an affiliate of AGHI were contributed to AGHI and AGHI cancelled those notes. As of June 30,
(6) DEBT (continued)
2010, $141.9 million, net of approximately $2.4 million of unamortized original issue discount, was outstanding on the New Senior Credit Facility.
CW Credit Facility
On March 1, 2010, Camping World entered into a credit agreement (the CW Credit Facility) providing for an asset based lending facility of up to $22.0 million, of which $10.0 million is available for letters of credit and $12.0 million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1, 2013, (ii) 60 days prior to the date of maturity of the New Senior Credit Facility, or (iii) 120 days prior to the earlier date of maturity of the Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floats at either 3.25% over the base rate (defined as the greater of the prime rate, federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whose interest is based on the prime rate or 3.25% over the LIBOR rate (defined as the greater of LIBOR rate applicable to the period of the respective LIBOR borrowings or 1.0%) for borrowings whose interest is based on LIBOR. As of June 30, 2010, the average interest rate on the CW Credit Facility was 4.25%. Borrowings under the CW Credit Facility are based on the borrowing base of eligible inventory and accounts receivable of Camping World and its subsidiaries. The CW Credit Facility contains affirmative covenants, including financial covenants, and negative covenants. Borrowings under the CW Credit Facility are guaranteed by the direct and indirect subsidiaries of Camping World and are secured by a pledge on the stock of Camping World and its direct and indirect subsidiaries and liens on the assets of Camping World and its direct and indirect subsidiaries. The lenders under the New Senior Credit Facility and the CW Credit Facility have entered into an intercreditor agreement that governs their rights in the collateral that is pledged to secure their respective loans. As of June 30, 2010, $5.9 million was borrowed and $6.9 million of letters of credit were issued under the CW Credit Facility.
Senior Notes
In February 2004, AGI issued $200.0 million aggregate principal amount of 9% senior subordinated notes due 2012 (Senior Notes) pursuant to an indenture (the AGI Indenture). Interest is payable on the Senior Notes twice a year on February 15 and August 15. AGIs present and future restricted subsidiaries guarantee the Senior Notes with unconditional guarantees of payment that rank junior in right of payment to their existing and future senior debt, including indebtedness under the New Senior Credit Facility and the CW Credit Facility, but rank equal in right of payment to their existing and future senior subordinated debt. All of the Companys subsidiaries have jointly and severally guaranteed the indebtedness under the Senior Notes except for CWFR Capital Corp. As of June 30, 2010, $137.8 million of Senior Notes remain outstanding.
The New Senior Credit Facility, the CW Credit Facility and the AGI Indenture contain 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.
(6) DEBT (continued)
The New Senior Credit Facility and the CW Credit Facility also contain certain financial affirmative covenants. The Company was in compliance with all debt covenants at June 30, 2010.
(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The Senior Notes issued February 2004 are due February 15, 2012 and interest at 9% per annum is payable on currently outstanding $137.8 million principal amount of Senior Notes twice a year on February 15 and August 15. The Companys present and future restricted subsidiaries guarantee the Senior Notes with unconditional guarantees of payment that rank junior in right of payment to their existing and future senior debt, including indebtedness under the New Senior Credit Facility and the CW Credit Facility, but rank equal in right of payment to their existing and future senior subordinated debt. All of the Companys subsidiaries have jointly and severally guaranteed the indebtedness under the Senior Notes except for CWFR Capital Corp. Full financial statements of the Guarantors have not been included because, pursuant to their respective guarantees, the Guarantors are jointly and severally liable with respect to the Senior Notes.
(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)
The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries as of and for the six months ended June 30, 2010 (in thousands).
|
|
|
|
|
|
NON- |
|
|
|
AGI |
|
|||||
|
|
AGI |
|
GUARANTORS |
|
GUARANTOR |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash & cash equivalents |
|
$ |
8,904 |
|
$ |
3,685 |
|
$ |
|
|
$ |
|
|
$ |
12,589 |
|
Accounts receivable- net of allowance |
|
1,534 |
|
183,053 |
|
|
|
(153,667 |
) |
30,920 |
|
|||||
Inventories |
|
|
|
66,678 |
|
|
|
|
|
66,678 |
|
|||||
Other current assets |
|
3,117 |
|
14,033 |
|
|
|
|
|
17,150 |
|
|||||
Total current assets |
|
13,555 |
|
267,449 |
|
|
|
(153,667 |
) |
127,337 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Property and equipment, net |
|
2,903 |
|
26,565 |
|
|
|
|
|
29,468 |
|
|||||
Intangible assets |
|
3,371 |
|
10,535 |
|
|
|
|
|
13,906 |
|
|||||
Goodwill |
|
49,944 |
|
|
|
|
|
|
|
49,944 |
|
|||||
Investment in subsidiaries |
|
678,944 |
|
|
|
|
|
(678,944 |
) |
|
|
|||||
Affiliate note and investments |
|
40,142 |
|
4,673 |
|
|
|
(40,000 |
) |
4,815 |
|
|||||
Other assets |
|
4,596 |
|
1,166 |
|
|
|
|
|
5,762 |
|
|||||
Total assets |
|
$ |
793,455 |
|
$ |
310,388 |
|
$ |
|
|
$ |
(872,611 |
) |
$ |
231,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accounts payable |
|
$ |
1,221 |
|
$ |
29,157 |
|
$ |
|
|
$ |
|
|
$ |
30,378 |
|
Accrued and other liabilities |
|
11,920 |
|
24,065 |
|
|
|
|
|
35,985 |
|
|||||
Current portion of long-term debt |
|
154,389 |
|
40,315 |
|
|
|
(193,667 |
) |
1,037 |
|
|||||
Current portion of deferred revenue |
|
2,200 |
|
58,053 |
|
|
|
|
|
60,253 |
|
|||||
Total current liabilities |
|
169,730 |
|
151,590 |
|
|
|
(193,667 |
) |
127,653 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Deferred revenue |
|
2,230 |
|
32,800 |
|
|
|
|
|
35,030 |
|
|||||
Long-term debt |
|
279,038 |
|
5,891 |
|
|
|
|
|
284,929 |
|
|||||
Other long-term liabilities |
|
574,515 |
|
(558,837 |
) |
|
|
|
|
15,678 |
|
|||||
Total liabilities |
|
1,025,513 |
|
(368,556 |
) |
|
|
(193,667 |
) |
463,290 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interdivisional equity |
|
|
|
678,944 |
|
|
|
(678,944 |
) |
|
|
|||||
Stockholders deficit |
|
(232,058 |
) |
|
|
|
|
|
|
(232,058 |
) |
|||||
Total liabilities & stockholders deficit |
|
$ |
793,455 |
|
$ |
310,388 |
|
$ |
|
|
$ |
(872,611 |
) |
$ |
231,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Revenue |
|
$ |
925 |
|
$ |
236,091 |
|
$ |
|
|
$ |
|
|
$ |
237,016 |
|
Costs applicable to revenues |
|
(3,967 |
) |
(139,010 |
) |
|
|
|
|
(142,977 |
) |
|||||
Operating expenses |
|
(17,181 |
) |
(65,359 |
) |
|
|
|
|
(82,540 |
) |
|||||
Interest expense, net |
|
(19,290 |
) |
485 |
|
|
|
|
|
(18,805 |
) |
|||||
Income from investment in consolidated subsidiaries |
|
29,347 |
|
|
|
|
|
(29,347 |
) |
|
|
|||||
Other non operating income (expenses) |
|
2,304 |
|
(2,802 |
) |
|
|
|
|
(498 |
) |
|||||
Income tax expense |
|
(144 |
) |
(58 |
) |
|
|
|
|
(202 |
) |
|||||
Net income |
|
$ |
(8,006 |
) |
$ |
29,347 |
|
$ |
|
|
$ |
(29,347 |
) |
$ |
(8,006 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from operations |
|
$ |
(30,159 |
) |
$ |
26,458 |
|
$ |
|
|
$ |
|
|
$ |
(3,701 |
) |
Cash flows provided by (used in) investing activities |
|
(906 |
) |
137 |
|
|
|
|
|
(769 |
) |
|||||
Cash flows provided by (used in) financing activities |
|
39,567 |
|
(31,148 |
) |
|
|
|
|
8,419 |
|
|||||
Cash at beginning of year |
|
402 |
|
8,238 |
|
|
|
|
|
8,640 |
|
|||||
Cash at end of period |
|
$ |
8,904 |
|
$ |
3,685 |
|
$ |
|
|
$ |
|
|
$ |
12,589 |
|
(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)
The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries as of and for the three months ended June 30, 2010 (in thousands).
|
|
|
|
|
|
NON- |
|
|
|
AGI |
|
|||||
|
|
AGI |
|
GUARANTORS |
|
GUARANTOR |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
Revenue |
|
$ |
372 |
|
$ |
130,710 |
|
$ |
|
|
$ |
|
|
$ |
131,082 |
|
Costs applicable to revenues |
|
(1,913 |
) |
(77,133 |
) |
|
|
|
|
(79,046 |
) |
|||||
Operating expenses |
|
(6,162 |
) |
(34,576 |
) |
|
|
|
|
(40,738 |
) |
|||||
Interest expense, net |
|
(9,871 |
) |
221 |
|
|
|
|
|
(9,650 |
) |
|||||
Income from investment in consolidated subsidiaries |
|
17,795 |
|
|
|
|
|
(17,795 |
) |
|
|
|||||
Other non operating income (expenses) |
|
1,530 |
|
(1,398 |
) |
|
|
|
|
132 |
|
|||||
Income tax expense |
|
(30 |
) |
(29 |
) |
|
|
|
|
(59 |
) |
|||||
Net income |
|
$ |
1,721 |
|
$ |
17,795 |
|
$ |
|
|
$ |
(17,795 |
) |
$ |
1,721 |
|
The following are summarized balance sheet statements setting forth certain financial information concerning the Guarantor Subsidiaries as of December 31, 2009 (in thousands).
|
|
|
|
|
|
NON- |
|
|
|
AGI |
|
|||||
|
|
AGI |
|
GUARANTORS |
|
GUARANTOR |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash & cash equivalents |
|
$ |
402 |
|
$ |
8,238 |
|
$ |
|
|
$ |
|
|
$ |
8,640 |
|
Restricted cash |
|
8,058 |
|
|
|
|
|
|
|
8,058 |
|
|||||
Accounts receivable- net of allowance |
|
1,363 |
|
185,952 |
|
|
|
(154,994 |
) |
32,321 |
|
|||||
Inventories |
|
|
|
49,921 |
|
|
|
|
|
49,921 |
|
|||||
Other current assets |
|
2,210 |
|
10,857 |
|
|
|
|
|
13,067 |
|
|||||
Total current assets |
|
12,033 |
|
254,968 |
|
|
|
(154,994 |
) |
112,007 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Property and equipment, net |
|
2,913 |
|
31,363 |
|
|
|
|
|
34,276 |
|
|||||
Intangible assets |
|
2,185 |
|
11,553 |
|
|
|
|
|
13,738 |
|
|||||
Goodwill |
|
49,944 |
|
|
|
|
|
|
|
49,944 |
|
|||||
Investment in subsidiaries |
|
649,597 |
|
|
|
|
|
(649,597 |
) |
|
|
|||||
Affiliate note and investments |
|
40,000 |
|
4,837 |
|
|
|
(40,000 |
) |
4,837 |
|
|||||
Other assets |
|
4,683 |
|
2,084 |
|
|
|
|
|
6,767 |
|
|||||
Total assets |
|
$ |
761,355 |
|
$ |
304,805 |
|
$ |
|
|
$ |
(844,591 |
) |
$ |
221,569 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Accounts payable |
|
$ |
984 |
|
$ |
22,811 |
|
$ |
|
|
$ |
|
|
$ |
23,795 |
|
Accrued and other liabilities |
|
10,677 |
|
20,669 |
|
|
|
|
|
31,346 |
|
|||||
Current portion of long-term debt |
|
154,994 |
|
40,892 |
|
|
|
(194,994 |
) |
892 |
|
|||||
Current portion of deferred revenue |
|
738 |
|
59,990 |
|
|
|
|
|
60,728 |
|
|||||
Total current liabilities |
|
167,393 |
|
144,362 |
|
|
|
(194,994 |
) |
116,761 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Deferred revenue |
|
2,292 |
|
33,315 |
|
|
|
|
|
35,607 |
|
|||||
Long-term debt |
|
277,427 |
|
95 |
|
|
|
|
|
277,522 |
|
|||||
Other long-term liabilities |
|
535,768 |
|
(522,564 |
) |
|
|
|
|
13,204 |
|
|||||
Total liabilities |
|
982,880 |
|
(344,792 |
) |
|
|
(194,994 |
) |
443,094 |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Interdivisional equity |
|
|
|
649,597 |
|
|
|
(649,597 |
) |
|
|
|||||
Stockholders deficit |
|
(221,525 |
) |
|
|
|
|
|
|
(221,525 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Total liabilities & stockholders deficit |
|
$ |
761,355 |
|
$ |
304,805 |
|
$ |
|
|
$ |
(844,591 |
) |
$ |
221,569 |
|
(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)
The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the six months ended June 30, 2009 (in thousands).
|
|
|
|
|
|
NON- |
|
|
|
AGI |
|
|||||
|
|
AGI |
|
GUARANTORS |
|
GUARANTOR |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
Revenue |
|
$ |
3,600 |
|
$ |
231,352 |
|
$ |
|
|
$ |
|
|
$ |
234,952 |
|
Costs applicable to revenues |
|
(5,891 |
) |
(140,840 |
) |
|
|
|
|
(146,731 |
) |
|||||
Operating expenses |
|
(10,461 |
) |
(64,538 |
) |
|
|
|
|
(74,999 |
) |
|||||
Interest expense, net |
|
(8,302 |
) |
(5,071 |
) |
|
|
|
|
(13,373 |
) |
|||||
Income from investment in consolidated subsidiaries |
|
17,768 |
|
|
|
|
|
(17,768 |
) |
|
|
|||||
Other non operating income (expenses) |
|
7,266 |
|
(2,722 |
) |
|
|
|
|
4,544 |
|
|||||
Income tax expense |
|
(287 |
) |
(413 |
) |
|
|
|
|
(700 |
) |
|||||
Net income |
|
$ |
3,693 |
|
$ |
17,768 |
|
$ |
|
|
$ |
(17,768 |
) |
$ |
3,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Cash flows from operations |
|
$ |
(18,076 |
) |
$ |
33,597 |
|
$ |
|
|
$ |
|
|
$ |
15,521 |
|
Cash flows provided by (used in) investing activities |
|
1,760 |
|
(4,255 |
) |
|
|
|
|
(2,495 |
) |
|||||
Cash flows provided (used in) by financing activities |
|
21,632 |
|
(34,575 |
) |
|
|
|
|
(12,943 |
) |
|||||
Cash at beginning of year |
|
1,300 |
|
9,308 |
|
|
|
|
|
10,608 |
|
|||||
Cash at end of year |
|
$ |
6,616 |
|
$ |
4,075 |
|
$ |
|
|
$ |
|
|
$ |
10,691 |
|
The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the three months ended June 30, 2009 (in thousands).
|
|
|
|
|
|
NON- |
|
|
|
AGI |
|
|||||
|
|
AGI |
|
GUARANTORS |
|
GUARANTOR |
|
ELIMINATIONS |
|
CONSOLIDATED |
|
|||||
Revenue |
|
$ |
1,783 |
|
$ |
128,116 |
|
$ |
|
|
$ |
|
|
$ |
129,899 |
|
Costs applicable to revenues |
|
(3,621 |
) |
(77,760 |
) |
|
|
|
|
(81,381 |
) |
|||||
Operating expenses |
|
(6,393 |
) |
(33,831 |
) |
|
|
|
|
(40,224 |
) |
|||||
Interest expense, net |
|
(5,689 |
) |
(1,991 |
) |
|
|
|
|
(7,680 |
) |
|||||
Income from investment in consolidated subsidiaries |
|
12,948 |
|
|
|
|
|
(12,948 |
) |
|
|
|||||
Other non operating income (expenses) |
|
5,985 |
|
(1,378 |
) |
|
|
|
|
4,607 |
|
|||||
Income tax expense |
|
(96 |
) |
(208 |
) |
|
|
|
|
(304 |
) |
|||||
Net income |
|
$ |
4,917 |
|
$ |
12,948 |
|
$ |
|
|
$ |
(12,948 |
) |
$ |
4,917 |
|
(8) INTEREST RATE SWAP AGREEMENTS
The Company is exposed to certain risks related to its business operations. The primary risks that we managed by using derivatives is interest rate risk. We use financial instruments, including interest rate swap agreements, to reduce our risk to this exposure. We do not use derivatives for speculative trading purposes and are not a party to leveraged derivatives.
We recognize all of our derivative instruments as either assets or liabilities at fair value. Fair value is determined in accordance with the accounting guidance for Fair Value Measurements. See Note 9 Fair Value Measurements. The accounting for changes in
(8) INTEREST RATE SWAP AGREEMENTS (continued)
the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivatives designated as hedges under the accounting guidance for derivative instruments and hedging activities, we formally assess, both at inception and periodically thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. Our derivatives that are not designated and do not qualify as hedges under the accounting guidance for derivative instruments and hedging activities are adjusted to fair value through current earnings.
Effective January 1, 2009, the Company adopted the provisions of the new accounting guidance for Disclosures about Derivative Instruments and Hedging Activities. The guidance requires that the objectives for using derivative instruments be disclosed to better convey the purpose of derivative use in terms of the risks that the Company is intending to manage. This standard also requires disclosure of how derivatives and related hedged items are accounted for and how they affect the Companys financial statements. The adoption of the new guidance did not have a material impact on our condensed consolidated results of operations, financial position or cash flows.
On October 15, 2007, AGI entered into a five-year interest rate swap agreement with a notional amount of $100.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30, 2010 based upon the April 30, 2010 reset date) and make periodic payments at a fixed rate of 5.135%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31. The interest rate swap agreement was effective beginning October 31, 2007 and expires on October 31, 2012. On March 19, 2008, AGI entered into a 4.5 year interest rate swap agreement with a notional amount of $35.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30, 2010 based upon the April 30, 2010 reset date) and make periodic payments at a fixed rate of 3.430%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31. The interest rate swap was effective beginning April 30, 2008 and expires on October 31, 2012. The fair value of the swap agreements were zero at inception. The Company entered into the interest rate swap agreements to limit the effect of increases on our floating rate debt. The interest rate swap agreements are designated as a cash flow hedge of the variable rate interest payments due on $135.0 million of the term loans, and accordingly, gains and losses on the fair value of the interest rate swap agreements are reported in accumulated other comprehensive loss and reclassified to earnings in the same period in which the hedged interest payment affects earnings. The interest rate swap agreements expire on October 31, 2012. The fair value of these swaps included in other long-term liabilities was $8.7 million of which approximately $7.1 million is in accumulated other comprehensive loss, and $1.1 million included in retained earnings and $0.5 million in the statement of operations in the period ended June 30, 2010. The fair value of these swaps included in other long-term liabilities was $8.1 million of which $7.0 million is in accumulated other comprehensive loss and $1.1 million in the statement of operations in aggregate periods through December 31, 2009. See Note 9 Fair Value Measurements.
(8) INTEREST RATE SWAP AGREEMENTS (continued)
Due to the potential sale of Camping World in September 2008, a highly effective hedge on the cash flows related to the $35.0 million notional amount interest rate swap agreement was deemed to be no longer probable and was deemed to be reasonably possible. As a result, changes in the value of the $35.0 million interest rate swap agreement are included in earnings as a gain (loss) on derivative instrument on October 1, 2008. Included in other comprehensive loss is $0.4 million related to changes in the fair value of the $35.0 million interest rate swap prior to October 1, 2008 which will be amortized over the remaining life of the interest rate swap and included in earnings as a gain (loss) on derivative instrument.
On June 11, 2009, the Company partially terminated the $35.0 million interest rate swap, subject to a partial termination fee of $0.6 million which was expensed. The notional amount was reduced to $20.0 million. All other terms of the interest rate swap agreement remained unchanged. As a result, the amount included in other comprehensive loss related to the $35.0 million interest rate swap was reduced prorata and included in earnings as a gain (loss) on derivative instrument.
Due to the issuance of an option to the shareholder of the ultimate parent of the Company to purchase Camping World, in the second quarter of 2009, a portion of the highly effective hedge on the cash flows related to the $100.0 million notional amount interest rate swap agreement was deemed to be no longer probable and was deemed to be reasonably possible. As a result, changes in the value of the last $20.0 million of the $100.0 million interest rate swap agreement are included in earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last $20.0 million of the $100.0 million interest rate swap which will be amortized over the remaining life of the interest rate swap and included in earnings as a gain (loss) on derivative instrument.
The following is the location and amounts of derivative instruments fair values in the statement of financial position segregated between designated, qualifying hedging instruments segregated by assets and liabilities as required by accounting guidance.
Derivatives
designated as |
|
|
|
Fair Value as of: |
|
||||
Statement 133 |
|
Balance Sheet Location |
|
6/30/2010 |
|
12/31/2009 |
|
||
|
|
|
|
|
|
|
|
||
Interest rate swap contracts |
|
Other long-term liabilities |
|
$ |
(8,737 |
) |
$ |
(8,090 |
) |
(8) INTEREST RATE SWAP AGREEMENTS (continued)
The following is the location and amount of gains and losses on derivative instruments in the statement of operations for the six months ended June 30, 2010 and 2009 segregated between designated, qualifying hedging instruments and those that are not, and segregated by assets and liabilities as required by the accounting guidance for derivative instruments (in thousands):
Derivatives in Cash Flow Hedging Relationships:
|
|
Interest Rate Swap Agreements |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
||
Amount of Gain or (Loss) recognized in Other Comprehensive Loss on Derivatives |
|
$ |
(316 |
) |
$ |
3,574 |
|
|
|
|
|
|
|
||
Location of Gain (Loss) reclassified from Accumulated Other Comprehensive Loss into Statement of Operations (Effective Portion) |
|
Gain (loss) on derivative Instrument |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
||
Amount of Loss reclassified from Other Comprehensive Loss into Statement of Operations (Effective portion) |
|
$ |
(189 |
) |
$ |
(61 |
) |
|
|
|
|
|
|
||
Location of Loss Recognized in Statement of Operations on Derivatives (Ineffective portion and amount excluded from effectiveness testing) |
|
Gain (loss) on derivative Instrument |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
||
Amount of Gain or (Loss) recognized in income on Derivatives (Ineffective portion and amount excluded from effectiveness testing) |
|
$ |
(331 |
) |
$ |
746 |
|
(9) FAIR VALUE MEASUREMENTS
Accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
As of June 30, 2010, the Company holds interest rate swap contracts that are required to be measured at fair value on a recurring basis. The Companys interest rate swap contracts are not traded on a public exchange. See Note 8 Interest Rate Swap Agreements for further information on the interest rate swap contracts. The fair value of these interest rate swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2.
(9) FAIR VALUE MEASUREMENTS (continued)
The Companys liabilities at June 30, 2010, measured at fair value on a recurring basis subject to the disclosure requirements of fair value measurements, was as follows:
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
||||||||
(in thousands) |
|
|
|
Quoted Prices in |
|
Significant Other |
|
Significant |
|
||||
Description |
|
Amount |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
As of June 30, 2010: |
|
|
|
|
|
|
|
|
|
||||
Interest Rate Swap Contracts |
|
$ |
(8,737 |
) |
$ |
|
|
$ |
(8,737 |
) |
$ |
|
|
FreedomRoads Preferred Interest |
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
||||
As of December 31, 2009: |
|
|
|
|
|
|
|
|
|
||||
Interest Rate Swap Contracts |
|
(8,090 |
) |
|
|
(8,090 |
) |
|
|
||||
FreedomRoads Preferred Interest |
|
|
|
|
|
|
|
|
|
||||
The fair value of the interest rate swap contracts was calculated using the income method based on quoted interest rates.
There have been no transfers of assets or liabilities between the fair value measurement levels and there were no material remeasurements to fair value during the six months ended June 30, 2010 and 2009 of assets and liabilities that are not measured at fair value on a recurring basis.
The following table presents the reported carrying value and fair value information for the Senior Notes, New Senior Credit Facility and CW Credit Facility. The fair values shown below for the Senior Notes are based on quoted prices in the market for identical assets (Level 1), and the fair value shown for the Senior Credit Facility and the CW Credit Facility are based on indirect observable inputs (Level 2) (in thousands):
|
|
6/30/2010 |
|
12/31/2009 |
|
||||||||
|
|
Carrying Value |
|
Fair Value |
|
Carrying Value |
|
Fair Value |
|
||||
New Senior Credit Facility |
|
$ |
141,936 |
|
$ |
141,936 |
|
$ |
128,856 |
|
$ |
122,425 |
|
CW Credit Facility |
|
5,891 |
|
5,891 |
|
|
|
|
|
||||
Senior Notes |
|
137,824 |
|
102,334 |
|
137,824 |
|
93,893 |
|
||||
(10) INCOME TAXES
The following table summarizes the activity related to unrecognized tax benefits (in thousands):
Balance at January 1, 2010 |
|
$ |
1,339 |
|
Gross increases in unrecognized tax benefits due to prior year positions |
|
|
|
|
Gross decreases in unrecognized tax benefits due to prior year positions |
|
|
|
|
Gross increases in unrecognized tax benefits due to current year positions |
|
|
|
|
Gross decreases in unrecognized tax benefits due to current year positions |
|
|
|
|
Gross decreases in unrecognized tax beneifts due to settlements with taxing authorities |
|
|
|
|
Gross decreases in unrecognized tax benefits due to statute expirations |
|
|
|
|
Other |
|
5 |
|
|
Unrecognized tax benefits at June 30, 2010 |
|
$ |
1,344 |
|
The Company accrues interest and penalties related to unrecognized tax benefits in its income tax provision. The Company reversed accrued interest and penalties of $2.0 million related to decreases in unrecognized tax benefits in 2009. As of June 30, 2010, the liability for penalties and interest was $0.6 million. The Company expects its unrecognized tax benefits to decrease by $1.3 million over the next twelve months.
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states. With few exceptions, the Company is no longer subject to U.S. federal and state examinations by tax authorities for fiscal years prior to fiscal 2006 and 2005, respectively. There currently is an Internal Revenue Service examination of one of the Companys wholly owned subsidiaries for fiscal year 2008.
AFFINITY GROUP, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table is derived from the Companys 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 |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
Inc/(Dec) |
|
|
|
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
Membership services |
|
29.5 |
% |
30.2 |
% |
(1.4 |
)% |
Media |
|
6.1 |
% |
7.2 |
% |
(14.5 |
)% |
Retail |
|
64.4 |
% |
62.6 |
% |
3.8 |
% |
|
|
100.0 |
% |
100.0 |
% |
0.9 |
% |
|
|
|
|
|
|
|
|
COSTS APPLICABLE TO REVENUES: |
|
|
|
|
|
|
|
Membership services |
|
17.7 |
% |
18.9 |
% |
(5.7 |
)% |
Media |
|
4.6 |
% |
5.7 |
% |
(19.1 |
)% |
Retail |
|
38.0 |
% |
38.0 |
% |
1.0 |
% |
|
|
60.3 |
% |
62.6 |
% |
(2.9 |
)% |
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
39.7 |
% |
37.4 |
% |
7.3 |
% |
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
Selling, general and administrative |
|
27.2 |
% |
25.5 |
% |
7.5 |
% |
Financing expense |
|
0.2 |
% |
1.2 |
% |
(84.2 |
)% |
Depreciation and amortization |
|
3.5 |
% |
4.3 |
% |
(17.1 |
)% |
|
|
30.9 |
% |
31.0 |
% |
0.6 |
% |
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
8.8 |
% |
6.4 |
% |
39.6 |
% |
|
|
|
|
|
|
|
|
NON-OPERATING ITEMS: |
|
|
|
|
|
|
|
Interest income |
|
0.1 |
% |
0.1 |
% |
(7.5 |
)% |
Interest expense |
|
(7.4 |
)% |
(6.0 |
)% |
25.1 |
% |
(Loss) gain on derivative instrument |
|
(0.1 |
)% |
0.5 |
% |
(121.7 |
)% |
Gain on debt restructure |
|
|
|
3.6 |
% |
(100.0 |
)% |
Other non-operating items, net |
|
|
|
(0.6 |
)% |
(99.6 |
)% |
|
|
(7.4 |
)% |
(2.4 |
)% |
218.8 |
% |
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES |
|
1.4 |
% |
4.0 |
% |
(65.9 |
)% |
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE |
|
(0.1 |
)% |
(0.2 |
)% |
(80.6 |
)% |
|
|
|
|
|
|
|
|
NET INCOME |
|
1.3 |
% |
3.8 |
% |
(65.0 |
)% |
AFFINITY GROUP, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table is derived from the Companys 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 |
|
||||
|
|
6/30/2010 |
|
6/30/2009 |
|
Inc/(Dec) |
|
|
|
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
Membership services |
|
32.0 |
% |
31.7 |
% |
1.8 |
% |
Media |
|
9.6 |
% |
11.4 |
% |
(15.3 |
)% |
Retail |
|
58.4 |
% |
56.9 |
% |
3.6 |
% |
|
|
100.0 |
% |
100.0 |
% |
0.9 |
% |
|
|
|
|
|
|
|
|
COSTS APPLICABLE TO REVENUES: |
|
|
|
|
|
|
|
Membership services |
|
18.3 |
% |
19.1 |
% |
(3.7 |
)% |
Media |
|
7.4 |
% |
8.9 |
% |
(15.7 |
)% |
Retail |
|
34.6 |
% |
34.5 |
% |
1.4 |
% |
|
|
60.3 |
% |
62.5 |
% |
(2.6 |
)% |
|
|
|
|
|
|
|
|
GROSS PROFIT |
|
39.7 |
% |
37.5 |
% |
6.6 |
% |
|
|
|
|
|
|
|
|
OPERATING EXPENSES: |
|
|
|
|
|
|
|
Selling, general and administrative |
|
27.7 |
% |
26.8 |
% |
4.3 |
% |
Financing expense |
|
3.1 |
% |
0.7 |
% |
376.0 |
% |
Depreciation and amortization |
|
4.0 |
% |
4.4 |
% |
(9.3 |
)% |
|
|
34.8 |
% |
31.9 |
% |
10.1 |
% |
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS |
|
4.9 |
% |
5.6 |
% |
(13.0 |
)% |
|
|
|
|
|
|
|
|
NON-OPERATING ITEMS: |
|
|
|
|
|
|
|
Interest income |
|
0.1 |
% |
0.1 |
% |
(5.3 |
)% |
Interest expense |
|
(8.1 |
)% |
(5.8 |
)% |
39.7 |
% |
(Loss) gain on derivative instrument |
|
(0.2 |
)% |
0.3 |
% |
(175.9 |
)% |
Gain on debt restructure |
|
|
|
2.0 |
% |
(100.0 |
)% |
Other non-operating items, net |
|
|
|
(0.3 |
)% |
(102.7 |
)% |
|
|
(8.2 |
)% |
(3.7 |
)% |
118.6 |
% |
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE INCOME TAXES |
|
(3.3 |
)% |
1.9 |
% |
(277.6 |
)% |
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE |
|
(0.1 |
)% |
(0.3 |
)% |
(71.1 |
)% |
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
(3.4 |
)% |
1.6 |
% |
(316.8 |
)% |
RESULTS OF OPERATIONS
Three Months Ended June 30, 2010
Compared With Three Months Ended June 30, 2009
Revenues
Revenues of $131.1 million for the second quarter of 2010 increased by $1.2 million, or 0.9%, from the comparable period in 2009.
Membership Services revenues of $38.7 million for the second quarter of 2010 decreased $0.5 million, or 1.4%, from the comparable period in 2009. This revenue decrease was largely attributable to a $1.4 million reduction in member events revenue due to timing of the Good Sam Club annual rally, which occurred in the second quarter of 2009 versus the third quarter of 2010 and a $0.3 million revenue reduction due to reduced membership in the Coast Club and Golf Card Club, partially offset by a $0.5 million increase in extended vehicle warranty program revenue, resulting from continued policy growth, and emergency road service revenue, a $0.4 million increase in advertising revenue for the Presidents Club publication, RV View, and a $0.3 million increase in marketing fee revenue from health and life insurances products.
Media revenues of $8.0 million for the second quarter of 2010 decreased $1.4 million, or 14.5%, from the comparable period in 2009. This decrease was primarily attributable to a $1.2 million reduction in revenue from our outdoor power sports magazines related to reduced issues published, and a $0.2 million reduction in advertising revenue related to the campground guides in the second quarter of 2010 compared to the second quarter of 2009.
Retail revenues of $84.4 million increased by $3.1 million, or 3.8%, from the comparable period in 2009. Store merchandise sales increased $2.2 million from the second quarter of 2009 due to a same store sales increase of $3.2 million, or 5.3%, compared to a 6.5% decrease in same store sales for the second quarter of 2009, and a $0.1 million revenue increase from the opening of one new store over the past eighteen months partially offset by decreased revenue from discontinued stores of $1.1 million. Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year. Also, installation and service fees increased $0.8 million, supplies and other sales increased $0.5 million, and mail order and internet sales decreased $0.4 million.
Costs Applicable to Revenues
Costs applicable to revenues totaled $79.0 million for the second quarter of 2010, a decrease of $2.3 million, or 2.9%, from the comparable period in 2009.
Membership Services costs applicable to revenues of $23.2 million decreased $1.4 million, or 5.7%, from the comparable period in 2009. This decrease consisted of a $1.7 million expense reduction related to timing of the annual rally, and a $0.3 million reduction in wage-related expenses, partially offset by a $0.6 million increase in
emergency road service and extended vehicle warranty program costs relating to increased revenue.
Media costs applicable to revenues of $6.0 million for the second quarter of 2010 decreased $1.4 million, or 19.1%, from the comparable period in 2009 primarily related to a $0.8 million expense reduction from the outdoor power sports magazine group resulting from reduced issues published, a $0.3 million expense reduction in the RV magazine group and a $0.3 million reduction in costs related to the annual directories.
Retail costs applicable to revenues increased $0.5 million, or 1.0%, to $49.8 million. The retail gross profit margin of 40.9% for the second quarter of 2010 increased from 39.3% for the comparable period in 2009 primarily due to selective price increases on high volume products.
Operating Expenses
Selling, general and administrative expenses of $35.6 million for the second quarter of 2010 increased $2.5 million compared to the second quarter of 2009. This increase was due to a $1.7 million increase in deferred executive compensation under the 2010 Phantom Stock agreements, and a $0.8 million increase in retail general and administrative expenses, primarily related to labor costs.
For the second quarter of 2010, financing expense of $0.2 million was incurred for legal and other costs related to the New Senior Credit Facility entered into on March 1, 2010, which was expensed in accordance with accounting guidance for debtors accounting for a modification or exchange of debt instruments. Financing expense of $1.5 million for second quarter of 2009 related to legal and other costs incurred associated with the amendment dated June 5, 2009 to the then senior secured credit facility.
Depreciation and amortization expense of $4.6 million decreased $1.0 million from the prior year primarily due to reduced amortization of intangible assets associated with prior acquisitions, and reduced capital expenditures.
Income from Operations
Income from operations for the second quarter of 2010 totaled $11.6 million compared to income from operations of $8.3 million for the second quarter of 2009. This $3.3 million increase was primarily the result of increased gross profit for the Retail and Membership Services segments of $2.6 million, and $0.9 million, respectively, reduced financing expense of $1.3 million, and reduced operating expenses of $0.2 million. These increases were partially offset by a $1.7 million increase in deferred executive compensation.
Non-Operating Items
Non-operating expenses of approximately $9.8 million for the second quarter of 2010 increased $6.7 million compared to the second quarter of 2009 due to the $4.7 million gain on purchase of the $14.6 million of Senior Notes in the second quarter of 2009, a
$1.9 million increase in interest expense relating to higher interest rates, and an $0.8 million reduction of gain on derivative instrument related to the interest rate swap agreements. These increases were partially offset by a $0.7 million reduction in other non-operating expenses.
Income before Income Tax
Income before income tax for the second quarter of 2010 was $1.8 million, or $3.4 million less than the second quarter of 2009. This decreased was attributable to the $6.7 million increase in non-operating items mentioned above for the second quarter of 2010 that was only partially offset by the $3.3 million increase in income from operations in the second quarter of 2010.
Income Tax Expense
The Company recorded income tax expense of approximately $0.1 million for the second quarter of 2010, compared to $0.3 million income tax expense for the second quarter of 2009.
Net income
Net income in the second quarter of 2010 was $1.7 million compared to $4.9 million for the same period in 2009 mainly due to the reasons discussed above.
Segment Profit (Loss)
The Companys three principal lines of business are Membership Services, Media and Retail. The Membership Services segment operates the Good Sam Club, the Coast to Coast Club, the Presidents Club, Camp Club USA and assorted membership products and services for RV owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts. The Media segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories, and RV and powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreation shows primarily focused on RV and powersports markets. 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 income taxes and unusual items.
The reportable segments are strategic business units that offer different products and services. They are managed separately because each business required different technology, management expertise and marketing strategies.
Membership services segment profit of $13.4 million for the second quarter of 2010 increased $1.5 million, or 12.2%, from the comparable period in 2009. This increase was largely attributable to a $0.4 million increase in profit from the Good Sam Club related to reduced marketing and administrative expense, a $0.4 million increase in Presidents Club segment profit related to increased advertising revenue in its RV View magazine, a
$0.4 million increase in profit from marketing fee revenue related to health and life insurance products, and a $0.3 million increase in segment profit related to overhead cost savings.
Media segment profit of approximately $30,000 for the second quarter of 2010 remained relatively unchanged from the comparable period in 2009. Increased segment profit from the RV magazine groups of approximately $0.2 million, related to reduced costs, was offset by reduced segment profit from consumer events, relating to reduced number of events.
Retail segment profit of $4.5 million for the second quarter of 2010 increased $4.0 million compared the $0.5 million segment profit for the second quarter of 2009. This increase in segment profit was the result of a $2.3 million increase in gross profit margin, a $2.2 million decrease in allocated interest expense, and a $0.3 million decrease in depreciation and amortization expense, partially offset by a $0.8 million increase in selling, general and administrative expenses.
Six Months Ended June 30, 2010
Compared With Six Months Ended June 30, 2009
Revenues of $237.0 million for the first six months of 2010 increased by $2.1 million, or 0.9%, from the comparable period in 2009.
Membership Services revenues of $75.7 million for the first six months of 2010 increased $1.3 million, or 1.8%, from the comparable period in 2009. This revenue increase was largely attributable to a $2.1 million revenue increase related to vehicle insurance products primarily related to a $2.5 million fee received in the first quarter as a result of waiving our right of first refusal regarding the sale of the third party partner, an $0.8 million increase in extended vehicle warranty program revenue resulting from continued policy growth, a $0.7 million increase in various other ancillary products, a $0.5 million increase in advertising revenue for the Presidents Club publication, RV View, and a $0.4 million increase in revenue from emergency road service products. These increases were partially offset by a $1.4 million reduction in member events revenue due to timing of the Good Sam Club annual rally, which occurred in the second quarter of 2009 versus the third quarter of 2010, a $1.2 million revenue decrease due to the termination of the brand usage licensing fee charged to FreedomRoads Holding LLC and its subsidiaries (collectively FreedomRoads) in December 2009, and a $0.6 million decrease due to reduced membership for the Coast Club and Golf Card Club.
Media revenues of $22.7 million for the first six months of 2010 decreased $4.1 million, or 15.3%, from the comparable period in 2009. This decrease was primarily attributable to a $2.5 million reduction in revenue from our outdoor power sports magazines related to reduced issues published, a $0.6 million reduction in RV related publication revenue primarily attributable to reduced advertising and circulation revenue, and a $1.0 million reduction in exhibitor revenue resulting from six fewer consumer shows in the first six months of 2010 compared to the first six months of 2009.
Retail revenues of $138.6 million increased by $4.8 million, or 3.6%, from the comparable period in 2009. Store merchandise sales increased $2.0 million from the first six months of 2009 due to a same store sales increase of $3.4 million, or 3.4%, compared to an 11.0% decrease in same store sales for the first six months of 2009, and a $0.2 million revenue increase from the opening of one new store over the past eighteen months, partially offset by decreased revenue from discontinued stores of $1.6 million. Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year. Also, mail order and internet sales increased $1.0 million, installation and service fees increased $1.0 million and supplies and other sales increased $0.8 million.
Costs Applicable to Revenues
Costs applicable to revenues totaled $143.0 million for the first six months of 2010, a decrease of $3.8 million, or 2.6%, from the comparable period in 2009.
Membership Services costs applicable to revenues of $43.3 million decreased $1.7 million, or 3.7%, from the comparable period in 2009. This decrease consisted of a $1.7 million reduction in member events costs related to event timing, a $0.7 million reduction in wage-related expenses, and a $0.5 million reduction in marketing and program costs related to reduced membership in the Coast Club and Golf Card Club, partially offset by a $1.0 million increase in costs associated with the extended vehicle warranty program and emergency road services, related to increased revenue, and a $0.2 million increase in vehicle insurance marketing fees.
Media costs applicable to revenues of $17.6 million for the first six months of 2010 decreased $3.3 million, or 15.7%, from the comparable period in 2009 primarily related to a $1.9 million reduction in magazine expenses resulting from reduced issues published and reduced magazine sizes, a $0.7 million reduction in costs related to reduced consumer shows revenue, and a $0.7 million reduction in wage-related costs.
Retail costs applicable to revenues increased $1.2 million, or 1.4%, to $82.1 million. The retail gross profit margin of 40.8% for the first six months of 2010 increased from 39.5% for the comparable period in 2009 primarily due to selective price increases on high volume products.
Operating Expenses
Selling, general and administrative expenses of $65.8 million for the first six months of 2010 increased $2.7 million compared to the first six months of 2009. This increase was due to a $1.7 million increase in deferred executive compensation under the 2010 Phantom Stock agreements and a $1.0 million increase in retail general and administrative expenses consisting primarily of increases in labor and property taxes.
For the first six months of 2010, financing expense of $7.3 million was incurred for legal and other costs related to the New Senior Credit Facility entered into on March 1, 2010, which was expensed in accordance with accounting guidance for debtors accounting for a modification or exchange of debt instruments. Financing expense of $1.5 million for
first six months of 2009 related to legal and other costs incurred associated with the amendment dated June 5, 2009 to the then senior secured credit facility.
Depreciation and amortization expense of $9.4 million decreased $1.0 million from the prior year primarily due to reduced amortization of intangible assets associated with prior acquisitions, and reduced capital expenditures partially offset by increased amortization related to the New Senior Credit Facility re-financing.
Income from Operations
Income from operations for the first six months of 2010 totaled $11.5 million compared to $13.2 million for the first six months of 2009. This $1.7 million decrease was primarily the result of increased financing expense of $5.8 million in the first six months of 2010, $1.7 million of deferred executive compensation, and reduced gross profit for the Media segment of $0.8 million, partially offset by increased gross profit for the Retail and Membership Service segments of $3.6 million and $3.0 million, respectively.
Non-Operating Items
Non-operating expenses of approximately $19.3 million for the first six months of 2010 increased $10.5 million compared to the first six months of 2009 due to a $5.4 million increase in interest expense relating to higher interest rates, a $4.7 million gain on purchase of the $14.6 million Senior Notes in the second quarter of 2009, and a $1.2 million increase in reduction in gain on derivative interest rate swap agreements, partially offset by an $0.8 million decrease in other non-operating expenses. See Note 8 Interest Rate Swap Agreements.
(Loss) Income before Income Tax
Loss before income tax for the first six months of 2010 was $7.8 million, compared to income before income taxes for the first six months of 2009 of $4.4 million. This $12.2 million reduction was attributable to the $1.7 million decrease in income from operations and a $10.5 million increase in non-operating items mentioned above.
Income Tax Expense
The Company recorded income tax expense of approximately $0.2 million for the first six months of 2010, compared to $0.7 million income tax expense for the first six months of 2009.
Net loss
Net loss in the first six months of 2010 was $8.0 million compared to a $3.7 million net income for the same period in 2009 mainly due to the reasons discussed above.
Segment Profit (Loss)
The Companys three principal lines of business are Membership Services, Media and Retail. The Membership Services segment operates the Good Sam Club, the Coast to Coast Club, the Presidents Club, Camp Club USA and assorted membership products and services for RV owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts. The Media segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories, and RV and powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreation shows primarily focused on RV and powersports markets. 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 income taxes and unusual items.
The reportable segments are strategic business units that offer different products and services. They are managed separately because each business required different technology, management expertise and marketing strategies.
Membership services segment profit of $28.6 million for the first six months of 2010 increased $4.0 million, or 16.3%, from the comparable period in 2009. This increase was largely attributable to a $1.8 million increase in vehicle insurance profit primarily related to a $2.5 million fee received as a result of waiving our right of first refusal regarding the sale of the third party partner, a $1.2 million increase in segment profit from various ancillary products revenue and cost reductions, a $0.9 million increase in profit from the Good Sam Club related to reduced marketing and administrative expenses, a $0.5 million increase in profit from the extended vehicle warranty program and emergency road service products, a $0.4 million increase in segment profit related to member events timing, a $0.3 million increase in segment profit relating to the additional advertising revenue in the Presidents Club publication, RV View, and a $0.1 million increase in profit related to reduced marketing and program expenses in the Coast to Coast Club and Golf Card Club. These increases were partially offset by a $1.2 million decrease in segment profit relating to reduced brand usage licensing fees from FreedomRoads.
Media segment profit decreased $0.3 million, or 26.7%, to $0.9 million for the first six months of 2010 from the comparable period in 2009. This decrease in segment profit resulted primarily from a $0.3 million decrease in segment profit from our consumer shows group.
Retail segment loss was $0.1 million for the first six months of 2010 compared to a loss of $7.7 million for the first six months of 2009. This $7.6 million improvement was the result of a $5.6 million decrease in allocated interest expense, a $3.0 million increase in gross profit margin and a $0.4 million reduction in amortization expense, partially offset by a $1.0 million increase in selling, general and administrative expenses, and $0.4 million of financing expense.
LIQUIDITY AND CAPITAL RESOURCES
The Company historically operates with a working capital deficit. The working capital deficit as of June 30, 2010 and December 31, 2009 was $0.3 million and $4.8 million, respectively. The primary reason for the working capital deficit was the deferred revenue and gains reported under current liabilities of $60.3 million and $60.7 million, as of June 30, 2010 and December 31, 2009, respectively. Deferred revenue is primarily comprised of cash collected for club memberships and service contracts in advance, which is amortized over the life of the membership or contract period. The Company uses net proceeds from this deferred revenue to lower its borrowings.
In 2009, the Company and its parent, AGHI, engaged a financial advisor to assist in refinancing or restructuring of the Senior Notes ($137.8 million principal outstanding at June 30, 2010 and maturing on February 15, 2012) and the AGHI Notes ($87.1 million principal outstanding at June 30, 2010 and maturing February 15, 2012). AGHI deferred payment of the interest on the AGHI Notes that was due on August 15, 2009. The indenture governing the AGHI Notes provides a 30 day grace period for the payment of interest. Before the end of the grace period, AGHI received consent letters for extending such grace period from certain institutional holders of the AGHI Notes holding in the aggregate $65.8 million principal amount of the AGHI Notes and from non-institutional holders holding in the aggregate $46.6 million principal amount of the AGHI Notes and paid the interest of the remaining AGHI Notes. The aggregate principal amount of the AGHI Notes outstanding was then $113.6 million so the holders executing the consents held 98.9% of the outstanding principal amount of the AGHI Notes. Pursuant to the consent letters from the institutional holders, AGHI agreed to pay the legal fees for a law firm to represent the institutional holders. In addition, AGHI paid a consent fee equal ¼ of 1% of the principal amount to the institutional holders who signed a consent letter, or an aggregate of $164,600. No consent fee was paid to the non-institutional holders. AGHI satisfied the August 15, 2009 interest payment in January, 2010 with $4.5 million in cash (funded, in part, from a $2.8 million capital contribution from its shareholder, and the balance from AGI as a permitted tax distributions), and the remaining $1.7 million due to related entities was forgiven and, as such, reported as an equity contribution. AGHI satisfied the interest payment due February 15, 2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from $2.5 million received by AGHI in connection with a waiver by AGHI of certain first refusal rights related to AGIs vehicle insurance business and the balance from AGI as a permitted tax distribution) and the remaining $1.8 million due to related entities was forgiven and, as such, reported as an equity contribution. As a condition to funding of the New Senior Credit Facility, AGHI acquired $25.4 million of AGHI Notes due on March 15, 2010 that were held by an affiliate of AGHI, and contributed them by the affiliate to AGHI, and AGHI then cancelled those notes, thereby reducing the approximately $112.3 million of AGHI Notes outstanding as of December 31, 2009 to approximately $87.0 million as of March 31, 2010.
Contractual Obligations and Commercial Commitments
The following table reflects our contractual obligations and commercial commitments at June 30, 2010. This table includes principal and future interest due under our debt agreements based on interest rates as of June 30, 2010 and assumes debt obligations will be held to maturity.
|
|
Payments Due by Period |
|
|||||||||||||
(in thousands) |
|
Total |
|
2010 |
|
2011 and |
|
2013 and |
|
Thereafter |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||
Debt and future interest |
|
$ |
346,689 |
|
$ |
18,641 |
|
$ |
328,048 |
|
$ |
|
|
$ |
|
|
Operating lease obligations |
|
215,286 |
|
11,511 |
|
42,950 |
|
36,660 |
|
124,165 |
|
|||||
Standby letters of credit |
|
6,891 |
|
4,891 |
|
2,000 |
|
|
|
|
|
|||||
Grand total |
|
$ |
568,866 |
|
$ |
35,043 |
|
$ |
372,998 |
|
$ |
36,660 |
|
$ |
124,165 |
|
In accordance with their respective loan agreements, the maturity dates of the New Senior Credit Facility and the CW Credit Facility accelerate to mature 90 days and 120 days, respectively, prior to maturity of the Senior Notes and the AGHI Notes. The Debt and future interest disclosed above assumes the Senior Notes and AGHI Notes, both due February 15, 2012, are not extended.
New Senior Credit Facility
On March 1, 2010, the Company entered into the New Senior Credit Facility to refinance the existing senior credit facility ($128.9 million aggregate principal amount outstanding at December 31, 2009) which was scheduled to mature on June 30, 2010, the second lien notes due July 31, 2010 ($9.7 million principal amount outstanding at December 31, 2009), and the SA Loan ($1.0 million principal amount outstanding at December 31, 2009). The New Senior Credit Facility provides for term loans aggregating $144.3 million, including an original issue discount of 2%, that are payable in quarterly installments of $360,750 beginning March 1, 2011. In addition, there are mandatory prepayments of the term loans from excess cash flow (as defined) of AGI and from asset sales. The term loans under the New Senior Credit Facility mature on the earlier of (i) March 1, 2015 or (ii) 90 days prior to the maturity of either the Senior Notes ($137.8 million principal amount outstanding as at June 30, 2010 and are due on February 15, 2012) or the AGHI Notes ($88.2 million aggregate principal amount outstanding at June 30, 2010 and are due February 15, 2012). Interest on the term loans under the New Senior Credit Facility floats at either 8.75% over the base rate (defined as the greater of the prime rate, federal funds rate plus 50 basis points or 5.25%) for borrowings whose interest is based on the prime rate or 10.0% over the LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) for borrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swap agreements, (See Note 8- Interest Rate Swap Agreements), as of June 30, 2010, the average annual interest rate on the term loans was 16.76%. The New Senior Credit Facility contains affirmative covenants, including financial covenants, and negative covenants, including a restriction on dividends or distributions by AGI to AGHI. Borrowings under the New Senior Credit Facility are guaranteed by the direct and indirect subsidiaries of AGI and are secured by liens on the assets of AGI and its direct and indirect subsidiaries. As a condition to the term loans under the New Senior Credit Facility, $25.4 million of AGHI Notes due on March 15, 2010
that were held by an affiliate of AGHI were contributed to AGHI and AGHI cancelled those notes. As of June 30, 2010, $141.9 million, net of approximately $2.4 million of unamortized original issue discount, was outstanding on the New Senior Credit Facility. Restricted cash of $8.1 million was released from its restriction on March 1, 2010, when the existing credit facility was refinanced.
CW Credit Facility
On March 1, 2010, Camping World also entered into a credit agreement (the CW Credit Facility) providing for an asset based lending facility of up to $22.0 million, of which $10.0 million is available for letters of credit and $12.0 million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1, 2013, (ii) 60 days prior to the date of maturity of the New Senior Credit Facility, or (iii) 120 days prior to the earlier date of maturity of the Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floats at either 3.25% over the base rate (defined as the greater of the prime rate, federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whose interest is based on the prime rate or 3.25% over the LIBOR rate (defined as the greater of LIBOR rate applicable to the period of the respective LIBOR borrowings or 1.0%) for borrowings whose interest is based on LIBOR. As of June 30, 2010, the average interest rate on the CW Credit Facility was 4.25%. Borrowings under the CW Credit Facility are based on the borrowing base of eligible inventory and accounts receivable of Camping World and its subsidiaries. The CW Credit Facility contains affirmative covenants, including financial covenants, and negative covenants. Borrowings under the CW Credit Facility are guaranteed by the direct and indirect subsidiaries of Camping World and are secured by a pledge on the stock of Camping World and its direct and indirect subsidiaries and liens on the assets of Camping World and its direct and indirect subsidiaries. The lenders under the New Senior Credit Facility and the CW Credit Facility have entered into an intercreditor agreement that governs their rights in the collateral that is pledged to secure their respective loans. As of June 30, 2010, $5.9 million was borrowed and $6.9 million of letters of credit were issued under the CW Credit Facility.
Senior Notes
In February 2004, AGI issued $200.0 million of Senior Notes pursuant to the AGI Indenture. Interest at the rate of 9% per annum is due on the Senior Notes on February 15 and August 15. The Senior Notes mature on February 15, 2012. As of June 30, 2010, $137.8 million of Senior Notes remained outstanding. The fair value of the Senior Notes, based on the quoted market price at June 30, 2010, was $102.3 million.
The New Senior Credit Facility, the CW Credit Facility and the AGI Indenture contain 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 New Senior Credit Facility and the CW Credit Facility also contain certain financial and minimum operating covenants. The Company was in compliance with all debt covenants at June 30, 2010.
Interest Rate Swap Agreements
The Company is exposed to certain risks related to its business operations. The primary risks that we managed by using derivatives is interest rate risk. We use financial instruments, including interest rate swap agreements, to reduce our risk to this exposure. We do not use derivatives for speculative trading purposes and are not a party to leveraged derivatives.
We recognize all of our derivative instruments as either assets or liabilities at fair value. Fair value is determined in accordance with the accounting guidance for Fair Value Measurements. See Note 9 Fair Value Measurements. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. For derivatives designated as hedges under the accounting guidance for derivative instruments and hedging activities, we formally assess, both at inception and periodically thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item. Our derivatives that are not designated and do not qualify as hedges under the accounting guidance for derivative instruments and hedging activities are adjusted to fair value through current earnings.
Effective January 1, 2009, the Company adopted the provisions of the new accounting guidance for Disclosures about Derivative Instruments and Hedging Activities. The guidance requires that the objectives for using derivative instruments be disclosed to better convey the purpose of derivative use in terms of the risks that the Company is intending to manage. This standard also requires disclosure of how derivatives and related hedged items are accounted for and how they affect the Companys financial statements. The adoption of the new guidance did not have a material impact on our condensed consolidated results of operations, financial position or cash flows.
On October 15, 2007, AGI entered into a five-year interest rate swap agreement with a notional amount of $100.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30, 2010 based upon the April 30, 2010 reset date) and make periodic payments at a fixed rate of 5.135%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31. The interest rate swap agreement was effective beginning October 31, 2007 and expires on October 31, 2012. On March 19, 2008, AGI entered into a 4.5 year interest rate swap agreement with a notional amount of $35.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30, 2010 based upon the April 30, 2010 reset date) and make periodic payments at a fixed rate of 3.430%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31. The interest rate swap was effective beginning April 30, 2008 and expires on October 31, 2012. The fair value of the swap agreements were zero at inception. The Company entered into the interest rate swap agreements to limit the effect of increases on our floating rate debt. The interest rate swap agreements are designated as a cash flow hedge of the variable rate interest payments due on $135.0 million of the term loans, and accordingly, gains and losses on the fair value of the interest rate swap agreements are reported in accumulated other comprehensive loss and reclassified to earnings in the same period in which the hedged interest payment affects earnings. The interest rate swap agreements expire on October 31, 2012. The fair value of these swaps included in other long-term
liabilities was $8.7 million of which approximately $7.1 million is in accumulated other comprehensive loss, and $1.1 million included in retained earnings and $0.5 million in the statement of operations in the period ended June 30, 2010. The fair value of these swaps included in other long-term liabilities was $8.1 million of which $7.0 million is in accumulated other comprehensive loss and $1.1 million in the statement of operations in aggregate periods through December 31, 2009. See Note 9 Fair Value Measurements.
Due to the potential sale of Camping World in September 2008, a highly effective hedge on the cash flows related to the $35.0 million notional amount interest rate swap agreement was deemed to be no longer probable and was deemed to be reasonably possible. As a result, changes in the value of the $35.0 million interest rate swap agreement are included in earnings as a gain (loss) on derivative instrument on October 1, 2008. Included in other comprehensive loss is $0.4 million related to changes in the fair value of the $35.0 million interest rate swap prior to October 1, 2008 which will be amortized over the remaining life of the interest rate swap and included in earnings as a gain (loss) on derivative instrument.
On June 11, 2009, the Company partially terminated the $35.0 million interest rate swap, subject to a partial termination fee of $0.6 million which was expensed. The notional amount was reduced to $20.0 million. All other terms of the interest rate swap agreement remained unchanged. As a result, the amount included in other comprehensive loss related to the $35.0 million interest rate swap was reduced prorata and included in earnings as a gain (loss) on derivative instrument.
Due to the issuance of an option to the shareholder of the ultimate parent of the Company to purchase Camping World, in the second quarter of 2009, which option was subsequently terminated, a portion of the highly effective hedge on the cash flows related to the $100.0 million notional amount interest rate swap agreement was deemed to be no longer probable and was deemed to be reasonably possible. As a result, changes in the value of the last $20.0 million of the $100.0 million interest rate swap agreement are included in earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last $20.0 million of the $100.0 million interest rate swap which will be amortized over the remaining life of the interest rate swap and included in earnings as a gain (loss) on derivative instrument
Other Contractual Obligations and Commercial Commitments
For the six months ended June 30, 2010, the Company incurred $1.7 million of deferred executive compensation expense under the phantom stock agreements, and made no payments under the terms of the vested phantom stock agreements. No phantom stock payments are scheduled to be made for the remainder of 2010.
Capital expenditures for the first six months of 2010 totaling $1.4 million decreased $0.9 million from the first six months of 2009 primarily due to the curtailment of new retail store openings. Additional capital expenditures of $2.8 million are anticipated for the balance of 2010 primarily for software enhancements, information technology upgrades and further website development.
CRITICAL ACCOUNTING POLICIES
General
The discussion and analysis of the Companys financial condition and results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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, 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 the more significant judgments and estimates used in the preparation of the Companys consolidated financial statements.
Revenue Recognition
Merchandise revenue is recognized when products are sold in the retail stores, shipped for mail and Internet orders, or when services are provided to customers. Publication advertising and newsstand sales, net of estimated provision for returns, are recorded at time of delivery. Subscription sales of publications are deferred and recognized over the lives of the subscriptions. Revenues from the emergency road service program (ERS) are deferred and recognized over the life of the contract. ERS claim expenses are recognized when incurred. Advances on third party credit card fee revenues are deferred and recognized based primarily on a percentage of credit card receivables held by third parties. Membership revenue is generated from annual, multi-year and lifetime memberships. The revenue and expenses associated with these memberships are deferred and amortized over the membership period. For lifetime memberships, an 18-year period is used, which is the actuarially determined estimated fulfillment period. Promotional expenses, consisting primarily of direct mail advertising, are deferred and expensed over the period of expected future benefit. Renewal expenses are expensed at the time related materials are mailed. 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. Revenue and related expenses for consumer shows are recognized when the show occurs.
Accounts Receivable
The Company estimates the collectability 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.
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.
Long-Lived Assets
Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, ranging from one to fifteen years.
Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with new accounting guidance for accounting for the impairment or disposal of long-lived assets. The Company assesses the fair value of the assets based on the future cash flow the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment is identified, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values.
The Company has evaluated the remaining useful lives of its finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary or if any of these assets had indefinite lives and were therefore not subject to amortization. The Company determined that no adjustments to the useful lives of its finite-lived purchased intangible assets were necessary. The finite-lived purchased intangible assets consist of membership customer lists, resort and golf course agreements, non-compete and deferred consulting agreements and deferred financing costs which have weighted average useful lives of approximately 6 years, 4 years, 15 years and 5 years, respectively.
Indefinite-Lived Intangible Assets
The Company evaluates indefinite-lived intangible assets for impairment at least annually or when events indicate that an impairment exists in accordance with accounting
guidance for goodwill and other intangibles. The impairment test for goodwill and other indefinite-lived intangible assets is calculated annually using fair value measurement techniques.
Determining the fair value of a reporting unit and the fair value of individual assets and liabilities of a reporting unit is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge. The Companys estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, technological change, economic conditions or changes to the Companys business operations. Such changes may result in impairment charges recorded in future periods.
The fair value of the Companys reporting units is annually determined using a combination of the income approach and the market approach. Under the income approach, the fair value of a reporting unit is calculated based on the present value of estimated future cash flows. Future cash flows are estimated by the Company under the market approach, fair value is estimated based on market multiples of revenue or earnings for comparable companies.
Future goodwill impairment tests could result in a charge to earnings. The Company will continue to evaluate goodwill on an annual basis and whenever events and changes in circumstances indicate that there may be a potential impairment.
Derivative Financial Instruments
As discussed in Note 8 Interest Rate Swap Agreements, the Company accounts for derivative instruments and hedging activities in accordance with new accounting guidance for Accounting for Derivative Instruments and Hedging Activities. All derivatives are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, management formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.
Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge (a swap), to the extent that the hedge is effective, are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows of the hedged transaction. The Company measures effectiveness of the swap at each quarter end using the Hypothetical Derivative Method. Under this method, hedge effectiveness is measured based on a comparison of the change in fair value of the actual swap designated as the hedging instrument and the change in fair value of the hypothetical swap which would have the terms that identically match the critical terms of the hedged cash flows from the anticipated debt issuance. The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the fair value of the swap over the cumulative change in the fair value of the plain vanilla swap lock, as defined in the accounting literature. Once a
swap is settled, the effective portion is amortized over the estimated life of the hedge item.
The Company utilizes derivative financial instruments to manage its exposure to interest rate risks. The Company does not enter into derivative financial instruments for trading purposes.
Fair Value Measurements
Accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company has determined that it utilizes observable (Level 2) inputs in determining the fair value of its interest rate swap agreements. The Company has determined that it utilizes unobservable (Level 3) inputs in determining the fair value of its FreedomRoads Preferred Interest, and Media and Retail segment goodwill.
Income Taxes
Significant judgment is required in determining the Companys tax provision and in evaluating its tax positions. The Company establishes accruals for certain tax contingencies when, despite the belief that the Companys tax return positions are fully supported, the Company believes that certain positions may be challenged and that the Companys positions may not be fully sustained. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Companys tax provision includes the impact of tax contingency accruals and changes to the accruals, including related interest and penalties, as considered appropriate by management.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks relating to fluctuations in interest rates. Our objective of financial risk management is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows. Interest rate risk is managed through the use of a combination of fixed and variable interest debt as well as the periodic use of interest rate collar agreements.
The following information discusses the sensitivity to our earnings. The range of changes chosen for this analysis reflects our view of changes which are reasonably possible over a one-year period. These forward-looking disclosures are selective in nature and only address the potential impacts from financial instruments. They do not include other potential effects which could impact our business as a result of these interest rate fluctuations.
Interest Rate Sensitivity Analysis
At June 30, 2010, the total debt of the Company was $286.0 million, including $147.8 million of variable rate debt comprised of $141.9 million of term loans under the New Senior Credit Facility, of which $120.0 million is fixed through the interest rate swap agreements, and $5.9 million under the CW Credit Facility. Fixed rate debt of $138.2 million is comprised of $137.8 million of Senior Notes and approximately $0.4 million of purchase debt. Holding other variables constant (such as debt levels), the earnings and cash flow impact of a one-percentage point increase/ decrease in interest rates would have an unfavorable/ favorable impact of approximately $0.3 million.
Credit Risk
We are exposed to credit risk on accounts receivable. We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.
ITEM 4: CONTROLS AND PROCEDURES
Managements Report on Internal Control over Financial Reporting
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 Companys management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Regulation 13a-15e under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, the President and Chief Executive Officer along with the Senior Vice President and Chief Financial Officer concluded that the 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 periodic SEC filings. Management determined that, as of June 30, 2010, there have been no significant changes in the Companys internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date the Company carried out its evaluation.
In addition to Risk Factors described under Item 1A Risk Factors, in the Companys annual report on Form 10-K for the year ended December 31, 2009, the following additional risk factors supplement the Risks Relating to Our Debt:
The maturity of our senior secured indebtedness could accelerate in the fourth quarter of 2011 if we are not able to refinance or extend the maturity date of our Senior Notes and the AGHI Notes which mature on February 15, 2012.
In accordance with their respective loan agreements, the maturity dates of the New Senior Credit Facility and the CW Credit Facility accelerate to mature 90 days and 120 days, respectively, prior to maturity of the Senior Notes and the AGHI Notes. The Senior Notes and AGHI Notes are due on February 15, 2012. Although the Company and its parent, AGHI, are currently seeking to refinance, extend or replace these notes, there can be no assurance that these notes will be refinanced, extended or replaced prior to the accelerated due dates of the New Senior Credit Facility and CW Credit Facility. The availability of financing may be limited due to the current uncertainties in the capital markets and the current general conditions in the U.S. economy. As a result, it may be even more difficult for the Company and AGHI to refinance, extend or replace the Senior Notes and AGHI Notes. If we are not able to refinance, extend or replace the Senior Notes and AGHI Notes prior to the accelerated maturity dates of the New Senior Credit Facility and the CW Credit Facility, the lenders under the New Senior Credit Facility and the CW Credit Facility will be entitled to exercise their remedies to sell the collateral securing the repayment of the New Senior Credit Facility and CW Credit Facility, including the Companys assets, the stock of the Company and the stock of the Companys subsidiaries. Since the indebtedness owed under the New Senior Credit Facility and CW Credit Facility is secured, it would be repaid before any of the unsecured or subordinated obligations of the Company and its subsidiaries. It is also possible that the interest rate payable on any new borrowings will be higher than the interest rates under the current Senior Notes and AGHI Notes, which would adversely affect the Companys cash flow and profitability (or increase losses).
The next interest payment date on the AGHI Notes is August 15, 2010 and the amount of interest then due on the AGHI Notes is $4.8 million. Under the terms of the New Senior Credit Facility, we are not currently able to pay dividends or otherwise provide funds to AGHI to enable AGHI to make such interest payment and, consequently, as of the filing of this Report on Form 10-Q, AGHI does not have sufficient funds to make the August 15, 2010 interest payment on the AGHI Notes. Although for the interest payments payable August 15, 2007, August 15, 2008, February 15, 2009, August 15, 2009 and February 15, 2010, AGHIs parent, AGHC, has made capital contributions to AGHI in amounts necessary to fund those interest payments, there can be no assurance that AGHC will loan or otherwise provide funds to AGHI in an amount sufficient to make the interest payment due August 15, 2010.
As of June 30, 2010, approximately $87.1 million, net of $1.1 million in unamortized original issue discount, remained outstanding on the AGHI Notes. The next interest payment date on the AGHI Notes is August 15, 2010 and the amount of interest then due is $4.8 million. Under the terms of the New Senior Credit Facility, we are not currently able to pay dividends or otherwise provide funds to AGHI to make such interest payment and, consequently, as of the filing of this Report on Form 10-Q, AGHI does not have sufficient funds to make the August 15, 2010 interest payment on the AGHI Notes. Although for the interest payments payable August 15, 2007, August 15, 2008, February 15, 2009, August 15, 2009 and February 15, 2010, AGHIs parent, AGHC, has made capital contributions to AGHI in amounts necessary to fund those interest payments, as of the filing of this Report on Form 10-Q, AGHI has not received a commitment from its parent, AGHC, to provide funds for the interest payment due August 15, 2010. There can be no assurance that AGHIs parent company will loan or otherwise provide funds to the Company in an amount sufficient to make such interest payment.
Exhibits:
Exhibit 10.40 Form of Phantom Stock Agreement between certain executives and Affinity Group, Inc., dated January 1, 2010.
Exhibit 10.41 Audit Committee Charter revision dated June 15, 2010.
Exhibit 10.42 First Amendment and Limited Waiver to Second Amended and Restated Credit Agreement dated August 12, 2010 among Affinity Group, Inc., as borrower and as a credit party, the credit parties hereto, the lenders party hereto and Wilmington Trust FSB, as Administrative Agent.
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.
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AFFINITY GROUP, INC. |
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/s/ Thomas F. Wolfe |
Date: August 13, 2010 |
Thomas F. Wolfe |
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Senior Vice President and Chief Financial Officer |