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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ----- SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
- ----- OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 0-22852
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AFFINITY GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3377709
(State of incorporation or organization) (I.R.S. Employer Identification No.)
64 Inverness Drive East (303) 792-7284
Englewood, CO 80112 (Registrant's telephone number,
(Address of principal including area code.)
executive offices)
----------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
11 1/2% Senior Subordinated Notes Due 2003
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
---- ----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
OUTSTANDING AS OF
CLASS March 26, 1997
----- -----------------
Preferred stock, $.001 par value none
Common stock, $.001 par value 2,000
DOCUMENTS INCORPORATED BY REFERENCE: DOCUMENTS REFERENCED ON EXHIBIT INDEX
PART I
ITEM 1: BUSINESS
GENERAL
Except where the context indicates otherwise, the term "Company", or "AGI"
means Affinity Group, Inc. and its predecessors and subsidiaries but excludes
the operations of the National Association for Female Executives ("NAFE")
club which is classified as a discontinued operation.
The Company is a membership-based direct marketing organization primarily
engaged in selling club memberships to selected recreational affinity groups
principally comprised of recreational vehicle owners, campers, outdoor
vacationers and, to a lesser extent, golfers. The Company's club members
form a receptive audience to which it sells products and services,
merchandise and publications targeted to the recreational interests of such
members. The Company's two principal lines of business are: (i) club
memberships and related products, services and club magazines (ii)
subscription magazines and other publications including directories. The
Company's affinity groups and publishing operations provide its club members
with access to discounts for certain activities and competitively priced
products and services addressing club members' specific needs. See Footnote
15 in the Notes to Consolidated Financial Statements for financial
information about the Company's segments.
At December 31, 1996, there were approximately 1.3 million dues paying
members enrolled in the Company's clubs, level with 1.3 million at December
31, 1995. The paid circulation per issue of the Company's general circulation
magazines estimated at 579,000 with an aggregate readership estimated at over
3 million at December 31, 1996. The Company believes its club members have
favorable demographic characteristics and comparatively high renewal rates.
Revenues of the Company were $140.0 million for the year ended December 31,
1996, compared to $139.2 million for the year ended December 31, 1995,
representing a 0.5% increase. Excluding $1.1 million ($0.3 million in 1995)
from Affinity Thrift and Loan ("ATL") and Affinity Insurance Group, Inc.
("AINS") acquired in October and June of 1995, respectively, revenues for
1996 were $138.9 million compared to $139.0 million in 1995. Excluding the
ATL and AINS operations acquired in 1995, membership service revenue
represented 70.4% of revenues in 1996 compared to 71.2% in 1995, and
publications revenue represented 29.3% of total revenues in 1996 compared to
28.8% in 1995.
On February 25, 1997, the Company entered into a purchase agreement to
acquire the stock of Camping World Inc. ("Camping World"), a specialty
retailer offering merchandise and services through retail supercenters and
mail order catalogs primarily to members of its buying club. The
consideration for the Camping World acquisition will consist of $108 million
in cash at closing (including $19 million to be paid pursuant to
non-competition and consulting agreements with certain Camping World
executives) and $15 million to be paid over the five years following closing
pursuant to management incentive agreements with certain Camping World
executives. Upon completion of the Camping World acquisition, the Company
will have over 1.7 million paying members enrolled in its recreational
affinity clubs, including approximately 465,000 Camping World buying club
members, and will have over 3.9 million names in its proprietary database
targeted to the recreational activities of the Company's club members,
including approximately 1.0 million new names from Camping World.
On March 6, 1997, the Company acquired the stock of Ehlert Publishing
companies ("Ehlert"), a specialty sports and recreation magazine publisher
for $22.3 million, including a note for $1.5 million issued by the Company's
parent, Affinity Group Holding, Inc., and entered into a non-competition
agreement with Ehlert's principal stockholder for $200,000. As a result of
the Ehlert acquisition, the circulation of the Company's publications exceeds
4.7 million.
BUSINESS STRATEGY
The Company's business strategy is to increase (i) the enrollment of its
clubs through internal growth and acquisitions, (ii) the sales of its
products and services by marketing to club members through the most effective
distribution channels and by developing and enhancing its product and service
offerings, and (iii) the circulation of its publications by introducing new
magazines and acquiring publications which are complementary to the Company's
recreational market niche. The Company also seeks to realize operational
efficiencies through the integration of acquired businesses such as occurred
as a result of the Golf Card club and Woodall Publishing.
ENHANCE CLUB MEMBERSHIP ENROLLMENT
The Company seeks to increase the number of its club members by maximizing
renewals, establishing an optimal mix of channels for soliciting new members
and re-acquiring inactive members. Management believes that the
participation levels and renewal rates of club members reflect the benefits
derived from membership. In order to maintain high participation rates in
its clubs, the Company continuously evaluates member satisfaction and
actively responds to changing member preferences through the enhancement or
introduction of new membership benefits including products and services. The
Company also seeks to optimize its use of alternative channels for acquiring
club members.
INCREASE SALES OF PRODUCTS AND SERVICES.
The Company seeks to increase the sale of its products and services due to
their profitability and the favorable impact such programs have on club
membership growth and retention. The Company regularly studies the
feasibility of introducing products and services. For example, in 1995, the
Company introduced its extended vehicle warranty program which had
approximately 1,600 policies in force as of December 31, 1996.
IMPROVE OPERATING PERFORMANCE
The Company seeks to achieve operating efficiencies by selectively acquiring
and developing recreational affinity groups which enable the Company to
increase membership enrollment and to realize cost savings. The Company also
seeks to enhance its importance with third party providers of products and
services by maintaining high membership enrollment levels in such programs,
thereby increasing the fees it receives from such vendors. Where
appropriate, the Company may consider directly providing certain products and
services and thereby retain all of the financial benefits from such provision.
ACQUIRE AND DEVELOP OTHER AFFINITY GROUPS.
The Company believes that the experience it has accumulated in managing its
existing recreational affinity groups is applicable to the management of
other recreational interest organizations. In 1990, the Company acquired the
Golf Card club and has successfully grown membership by approximately 47%
since its acquisition. As a result, the Company conducts ongoing evaluations
for developing or acquiring affinity groups for which it can build membership
enrollment and to which it can market products and services.
EXPAND NICHE RECREATIONAL PUBLICATIONS
The Company seeks to expand its presence as a dominant publisher in select
recreational niches through the introduction of new magazine formats and the
acquisition of other publications in its market or in complementary
recreational market niches. Publications in complementary niches may also
provide the Company with the opportunity to launch new membership clubs, to
market its products and services to members of new clubs and to develop other
products and services which meet the special needs of such
2
members. The Company believes overall circulation of its magazines is an
important factor in determining the amount of revenues it can obtain from
advertisers.
RV INDUSTRY
The use of RVs and the demand for club memberships and related products and
services may be influenced by a number of factors including general economic
conditions, the availability and price of propane and gasoline, and the total
number of RVs. The Company believes that both the installed base of RVs and
the type of RV owned (full service vehicles excluding van conversions) are
the most important factors affecting the demand for its membership clubs,
merchandise and products and services. Based on the most recent survey
conducted by the Survey Research Center of the University of Michigan (the
"Survey"), the number of households owning RVs increased from 7.3 million in
1984 to 8.2 million in 1993. The Survey also indicates that the percentage of
households owning RVs during this period was unchanged at approximately 10%.
According to the Survey, the average RV owner was 48 years old. RV ownership
also rose with age reaching its highest percentage level among those 55 to 74
years old. According to the 1994 U. S. Census, households in this age group
are projected to increase from 23.8 million to 28.9 million in 2005. RV
ownership also is concentrated in the western United States in which area the
population growth rate is expected to be greater than the national average
through 2005. The Survey also indicates that RV ownership is associated with
higher than average annual household income which among RV owners was
approximately $39,000 per annum as compared to the national average of
$31,000 per annum according to the 1994 U. S. Census.
The median age and annual household income of the Company's club members were
65 years and $49,000 in 1995 based on member survey data. The Company
believes that the demographic profile of its typical club member, coupled
with a demographic trend towards an aging population will have a favorable
impact on RV ownership and the demand for club memberships and related
products and services.
MEMBERSHIP CLUBS
The Company operates the Good Sam Club and the Coast to Coast Club for RV
owners, campers and outdoor vacationers and the Golf Card Club for golf
enthusiasts. The membership clubs form a receptive audience to which the
Company markets its products and services. The following table sets forth
the number of members at December 31, 1996, annual membership dues and
average annual renewal rates during the period of 1992 to 1996 for each club:
Number of Members at Average Renewal
Membership Club December 31, 1996 Annual Fee(1) Rate(2)
--------------------------------------------------------------------------
Good Sam Club 911,430 $10-$25 70%
Coast to Coast Club 257,236 $43-$60 80%
Golf Card Club 136,162 $76-$95 68%
- ---------------
(1) For a single member, subject to special discounts and promotions.
(2) Excludes members having life-time memberships.
3
In addition to regular memberships, the Company also sells multi-year
memberships. Management believes that multi-year memberships provide several
advantages, including the up-front receipt of dues in cash, reduced
membership costs and a strengthened member commitment.
Beginning in 1992, the Company began selling life-time memberships for the
Good Sam Club. As of December 31, 1996, the average price for a life-time
membership was $274 with 68,490 members registered. Based on an actuarial
analysis of the life-time members, the Company expects the average length of
a life-time membership to be 18 years.
GOOD SAM CLUB
The Good Sam Club, founded in 1966, is a membership organization for owners
of recreation vehicles. The Good Sam Club is the largest for-profit RV club
in North America with over 910,000 member families and over 2,100 local
chapters as of December 31, 1996. The average renewal rate for Good Sam Club
members was approximately 70% during the period 1992 and 1996. The Company
has focused on selling higher margin multi-year memberships which, among
other advantages, reduces the cost of membership renewal. At December 31,
1996, the average length of time for participation in the Good Sam Club was
approximately 7 years with most club members purchasing annual memberships.
Membership fees range from $10.00 to $59.00, subject to the term and type
(new vs. renewal). The benefits of club memberships include: discounts for
overnight stays at approximately 1,700 participating RV parks and
campgrounds; discounts on the purchase of supplies and accessories for
recreation vehicles at approximately 900 RV service centers; a free annual
subscription to HIGHWAYS, the club's regular news magazine; discounts on
other Company publications; access to group tours and travel services; trip
routing and mail-forwarding; and access to products and services developed
for club members. Based on typical usage patterns, the Company estimates
that Good Sam club members realize estimated annual savings from discounts of
$156. The Good Sam Club establishes quality standards for RV parks and
campgrounds participating in its discount program. Campgrounds and parks
participating in the Good Sam program benefit from increased occupancy and
sales of camping related products. The Company believes it has established
considerable penetration of those for-profit RV parks and campgrounds which
meet its quality standards for network affiliation.
The following table lists the number of club members and RV parks and
campgrounds from 1992 through 1996 at which discounts for members were
available at December 31st of the respective year:
Year Ended December 31
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1996 1995 1994 1993 1992
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Number of Good Sam Members(1) 911,400 900,500 930,200 928,600 874,400
Life-time members included above 68,490 57,786 45,251 34,088 21,229
Number of RV campgrounds offering 1,682 1,624 1,674 1,785 1,880
discounts to Good Sam members (2)
- --------------
(1) A member consists of a household.
(2) In 1992, the Company revised the standards required to become a Good Sam
Park. Over 400 parks were eliminated as a result of the revised standards.
4
COAST TO COAST
The Coast to Coast clubs operate the largest reciprocal use network of
private RV resorts in North America. The Company offers a series of
membership benefits depending upon pricing and program type under the Coast
to Coast name. Members of Coast to Coast clubs belong to a private RV resort
owned and operated by parties unrelated to the Company. Club members may use
any of the participating resorts in the Coast to Coast network subject to
availability. At December 31, 1996, there were 257,000 member families in
the Coast to Coast club, and 461 private RV resorts nationwide participated
in the Coast to Coast reciprocal use programs, representing approximately 82%
of such resorts in the US. These private resorts are designed primarily for
RV owners, but typically provide camping or lodging facilities, comprised of
RVs, cabins and condominiums. For an initial membership fee plus annual
maintenance fees, both paid by the customer to the resort, the private
resorts provide an RV site with water, sanitary and electrical hook-ups and
recreational amenities, such as swimming, tennis or fishing, or proximity to
theme parks or other recreational activities. The Company has established
quality criteria for resorts to join and remain in the Coast to Coast
networks.
For standard annual renewal dues from $60 for a single year membership to
$255 for a multiple-year membership, Coast to Coast club members receive the
following benefits: discounts for overnight stays at participating resorts,
hotels and campgrounds; an annual subscriptions to COAST TO COAST MAGAZINE;
the COAST TO COAST DIRECTORY providing information on the participating
resorts; discounts on other Company publications, access to discount travel
services; trip routing; and access to products and services developed for
club members. Coast to Coast Resort Club members also have the right to use,
subject to availability, the lodging facilities at approximately 461
participating resorts at a discounted rate.
The Company believes that resorts participating in the Coast to Coast
networks view access to reciprocating member resorts as an incentive for
their customers to join their resort. Because a majority of members of Coast
to Coast clubs own RVs, access to participating resorts throughout North
America can be an important complement to local resort membership. During
1996, Coast to Coast members utilized over 1.4 million nightly stays under
the reciprocal use program. Based on typical use patterns, the Company
estimates that Coast to Coast members realize estimated annual savings from
these discounts of over $200 from discounted overnight stay accommodations at
participating resorts. The average annual renewal rate for members of the
Coast to Coast clubs after the initial one year membership (which is
generally paid by the member resort not the club member) was approximately
80% during the period 1992 through 1996.
The following table sets forth the number of members in Coast to Coast Club
and of resorts participating in the reciprocal use program at December 31st
of the respective year:
Year Ended December 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------
Number of member families in 257,200 283,900 296,300 303,200 307,100
Coast to Coast Club
Number of resorts 461 463 473 467 472
Coast to Coast Club members declined 5.4% from 1995 to 1996, and 12.5% from
1992 to 1996. The high cost of marketing and the lack of available financing
at the resorts has resulted in a reduced number of new membership sales, thus
precluding new developers from entering the industry and causing other
developers to leave the industry. These factors directly impact the Coast to
Coast membership enrollment.
5
GOLF CARD CLUB
The Golf Card club, founded in 1974, had approximately 136,000 members at
December 31, 1996. The major attraction for membership is the financial
savings which members receive when playing at one of over 3,100 participating
golf courses located throughout the US and Canada. The annual membership fee
varies with the length and type (single or double) of membership. Based on
surveys conducted by the Company, members realize savings on green fees,
ranging from $150 to $250 annually which significantly exceed the cost of
membership. Members of the Golf Card club receive the following benefits:
the right to play two rounds of golf each year at each participating golf
course either without green fees or with reduced fees; discounts on vacation
packages at over 300 participating "Stay and Play" resorts and at over 2,000
hotels in North America; an annual subscription to THE GOLF TRAVELER,
published six times per year; and access to products and services developed
for club members. The Company believes that the participating golf courses
providing playing privileges to club members represents the largest number of
golf courses participating in a discount program in North America. None of
the participating golf courses is owned or operated by the Company.
The standard annual membership fee is $95 for a single membership and $125 to
$145 for a double membership. In 1992, multi-year memberships were
initiated. A member can buy a 3 year or 5 year single or double membership.
The single membership fee for 3 years is $239 and for 5 years is $379. The
double membership fee for 3 years is $369 and for 5 years is $579.
Both municipal and privately-owned golf courses participate in the Golf Card
program. The program is attractive to participating courses because club
members must rent a golf cart when exercising the playing privileges, and the
members playing time may be limited to off-peak hours. Members may purchase
other merchandise or services when exercising their playing privileges. In
this manner, the Golf Card members provide incremental revenue to the golf
courses. Eight field marketing representatives visit golf courses in their
assigned territories to manage relationships with participating courses and
to solicit additional courses for the program.
The average renewal rate for Golf Card club members at December 31, 1996 was
approximately 68% during the period 1992 to 1996 with a renewal rate of 63%
for 1996. The lower 1996 renewal rate can be attributed, in part, to the low
conversion rate of those members who joined through the Partner Free Offer (2
for the price of 1). The following table lists the number of Golf Card
members, participating golf courses and "Stay and Play" resorts at December
31st of each year in this period:
Year Ended December 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------
Number of Members 136,200 132,300 118,500 110,000 105,300
in the Golf Card Club (1)
Number of Participating Golf 3,100 2,980 2,707 2,408 2,090
Courses
Number of "Stay and Play" Golf 310 350 373 389 402
Resorts
- -------------------
(1) A single membership counts as one member and a double membership as two
members.
MEMBERSHIP PRODUCTS AND SERVICES
The Company's 1.3 million club members form a receptive audience to which it
sells products and services targeted to the recreational interests of its
club members. The Company promotes products and services
6
which either address special needs arising in the activities of the club
members or appeal generally to persons with the demographic characteristics
of club members. The two most established products are the emergency road
service and the vehicle insurance program, which were introduced in 1984 and
in 1978, respectively. Most of the Company's products and services are
provided by third parties who pay the Company a marketing fee, except for
emergency road service (ERS) program where the Company pays a third party to
administer the program.
EMERGENCY ROAD SERVICE (ERS)
The Company developed the ERS program for Good Sam Club members to address
the special towing requirements of RV owners in the event of mechanical
breakdown and to enhance the availability of such services. The Company also
markets the ERS program to members of the Coast to Coast clubs. At December
31, 1996, 209,177 and 9,988 members of the Good Sam Club and Coast to Coast
clubs, respectively, participated in the ERS program, representing
penetration rates for each club of 23.0% and 3.7%, respectively. During the
period 1992 to 1996, the average annual renewal rate of members enrolled in
the ERS program was approximately 73%.
The ERS program is marketed nationally through direct mail and advertising in
the Company's RV magazines and annual campground directories. Under the ERS
program, a subscriber pays an annual fee ranging from $79.95 to $99.95 for
which the member receives roadside repair and towing at no additional cost to
the subscriber. The Company's emergency road service provider administers
the program, provides dispatching services for roadside service and satisfies
applicable regulatory requirements pursuant to a contract which expires
December 31, 1997.
Year Ended December 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------
ERS members in the 209,200 215,100 230,900 227,500 225,000
Good Sam Club
ERS members in the 9,988 9,686 11,454 13,095 15,320
Coast to Coast Club
The number of Good Sam members participating in the ERS program decreased
7.0% from 1992 to 1996 and decreased by 2.8% from 1995 to 1996. The number
of Coast to Coast Club members participating in the ERS program decreased
34.8% from 1992 to 1996 and increased 3.1% from 1995 to 1996. The Company
believes that the decreases in enrollment are primarily due to a maturing of
the membership file and increased competition.
VEHICLE INSURANCE PROGRAM (VIP)
The Company initiated a vehicle insurance program to facilitate the
availability of cost-effective vehicle insurance suitable to the demographic
characteristics and vehicle usage patterns of its club members. At December
31, 1996, the VIP program had 215,052 members which represented a 20.5% and
3.9% penetration, respectively, of the Good Sam Club and Coast to Coast
clubs. During the period 1992 to 1996, the average annual renewal rate of
members participating in the VIP program was approximately 90%.
The Company's marketing fee is based on the amount of premiums written, the
number of policies in force and the profitability of the program. The
insurance provider, National General Insurance Company ("NGIC"), a subsidiary
of General Motors Corporation and rated A+ by A.M. Best's Rating Service,
assumes all claim risks. In 1996, NGIC received premiums under the VIP
programs totaling $208.7 million which generated marketing fees to the
Company of $17.1 million The number of members participating in the vehicle
insurance programs has increased 16.7% from 1992 to 1996 and a slight
increase in 1995 compared to 1996. The table below
7
sets forth the number of member subscribers for the program and the
dollar amount of premiums written by NGIC as of December 31 of each year
indicated:
Year Ended December 31
--------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------------------------------------------------------------
VIP members 215,100 214,800 209,800 200,500 184,300
Premiums written by NGIC
under the VIP program $ 208.7 $ 207.2 $ 200.1 $ 194.4 $ 175.5
(millions)
Management believes that increased participation in the VIP program is
attributed to favorable premium rates, endorsement of the program by its
clubs and marketing efforts.
OTHER PRODUCTS AND SERVICES
Other products and services marketed to club members include credit cards,
vehicle financing, supplemental health and life insurance, financial services
and extended vehicle warranties. Most of these services are provided to club
members by third parties who pay the Company a marketing fee. The Company
also sells subscriptions to its various publications, including TRAILER LIFE,
MOTORHOME and the annual CAMPGROUNDS & RV SERVICES DIRECTORY.
The RV financing program is administered by Ganis Credit Corporation (Ganis).
Ganis RV loans to the Company's club members increased by 49% from 1995 to
1996 primarily due to lower interest rates in 1996.
Affinity Thrift and Loan was acquired by the Company in October 1995 and
Affinity Insurance Group, Inc. was acquired in June 1995. These businesses
will facilitate the vertical integration of financial services provided to
club members. Through ATL and AINS, the Company offers its club members
various depository products (such as thrift certificates and passbook
accounts), and intends to offer loan products (such as consumer, installment,
small business, and home equity loans) and property and casualty insurance in
the states in which it is licensed. At December 31, 1996, ATL had total
assets and stockholders equity of $17.7 million and $2.2 million,
respectively and AINS had total assets and stockholders equity of $3.4
million and $2.1 million, respectively.
In addition, the Company is evaluating other products and services that club
members may find attractive. When introducing new products and services, the
Company concentrates on products and services provided by third parties which
it can market without significant capital investment by the Company and for
which it receives a marketing fee from the service provider based on sales
volume. The Company seeks to utilize the purchasing power of its club members
to obtain products and services at attractive prices. During 1995, the
Company introduced its extended vehicle warranty program, which currently had
approximately 1,600 policies in force as of December 31, 1996.
8
PUBLICATIONS
The Company produces and distributes a variety of publications for select
markets in the recreation and leisure industry, including general circulation
periodicals, club magazines, directories, and RV industry trade magazines.
Revenues are recognized from the sale of advertising, subscriptions and
direct sales of some of the publications. The Company believes that the
focused audience of each publication is an important factor in attracting
advertisers. The following chart sets forth the circulation and frequency of
the Company's publications:
1996 Number of Issues
Publication Circulation Published Each Year
- -------------------------------------------------------------------------------
Trailer Life 275,082 (1) 12
Motor Home 140,123 (1) 12
Rider 106,906 (1) 12
American Rider 56,514 (1) 6
Roads to Adventure 370,000 (3) 1 (2)
Trailer Life Campground/RV Park & 320,000 (1) 1
Services Directory
Trailer Life's RV Buyers Guide 40,746 (1) 1
Woodall Campground Directory 284,000 (3) 1
Woodall's Regional News Tabloids 185,000 (4) 12
Woodall's Specials 165,000 (4) 1
Woodall Buyer's Guide 33,000 (1) 1
Woodall Plan-it Pack-it Go 62,261 (1) 1
Touring Rider 25,600 (1) (5) 1
RV Business 12,603 (6) 12
Campground Management 10,000 (7) 12
Highways 912,214 (8) 11
Coast to Coast Magazine 271,562 (8) 8
Golf Traveler 103,000 (8) (9) 6
_______________
(1) Paid circulation.
(2) Introduced in 1996 and currently scheduled for quarterly publication.
(3) Includes sales and free distribution.
(4) Cumulative distribution to RV outlets, including campgrounds and
dealerships
(5) Debuted in 1995.
(6) Free to qualifying RV manufacturers, distributors, suppliers and dealers.
(7) Trade publication distributed primarily to campground owners.
(8) Circulation is limited to club members and the price is included in the
annual membership fee.
(9) Only one magazine is issued when two members are from the same household.
9
GENERAL CIRCULATION MAGAZINES
TRAILER LIFE, initially published in 1941, is the leading consumer magazine
for the RV industry with a paid circulation averaging 275,000 copies per
issue in 1996. TRAILER LIFE features articles on subjects including product
tests, travel and tourist attractions.
MOTORHOME is a monthly periodical for owners and prospective buyers of motor
homes which has been published since 1968 with a paid circulation averaging
140,000 copies per issue in 1996. MOTORHOME features articles on subjects
such as product tests, travel and tourist attractions.
RIDER is a monthly magazine for motorcycle touring enthusiasts and has been
published since 1974. Each issue focuses on motorcycles, personalities,
technical subjects, travel notes and other features of interest to this
recreational affinity group.
AMERICAN RIDER, introduced in November 1993, and was increased from four to
six issues per year in 1995, is targeted to owners and operators of
Harley-Davidson motorcycles.
ROADS TO ADVENTURE, introduced in 1996, is targeted to younger families
pursuing camping and other outdoor recreation activities and is currently
published quarterly.
ANNUAL DIRECTORIES
TRAILER LIFE CAMPGROUND/ RV PARK & SERVICES DIRECTORY, initially published in
1972, is an annually updated directory which provides information on and
ratings for 12,250 public and private campgrounds, 2,200 RV service centers,
and over 1,000 tourist attractions in North America. In 1996, over 320,000
directories were distributed. The publication features Good Sam Parks that
offer discounts on overnight camping fees for the Company's club members.
This directory is sold by direct mail to Good Sam Club members, at RV
dealerships and in bookstores.
WOODALL CAMPGROUND DIRECTORY, initially published in 1948, is an annual
consumer directory offered in both national and regional editions. In 1996,
approximately 284,000 directories were distributed. The Woodall directory is
primarily distributed through book stores.
CLUB OR TRADE MAGAZINES AND BOOKS
Each of the Company's membership clubs has its own publication which provides
information on club activities and events, feature stories and other
articles. The Company publishes HIGHWAYS for the Good Sam Club, COAST TO
COAST MAGAZINE for the Coast to Coast clubs, and THE GOLF TRAVELER for the
Golf Card Club. The Company also publishes RV BUSINESS, the leading trade
magazine for the RV industry, and CAMPGROUND MANAGEMENT, the leading trade
magazine for the campground industry. The Company also periodically
publishes books targeted for its club membership which address the RV
lifestyle.
MARKETING
The Company is a direct marketer of club memberships and related products and
services. Direct response promotions include direct mail, target marketing
inserts, advertisements, promotional events and telemarketing. Direct
response marketing efforts account for approximately 84% of new enrollments
with the remaining 16% derived from miscellaneous other sources. The Company
uses a variety of commercially available mailing lists of RV owners in its
direct mail efforts. The most useful lists are compiled from vehicle
10
registrations provided by the motor vehicles departments in over 30 states,
direct response lists from RV industry participants, and in-house lists.
The Company solicits advertisements for its publications through its internal
sales force and by paying commissions to advertising agencies and independent
contractors which place advertisements. Many advertisers are repeat customers
with whom the Company has long standing relationships.
OPERATIONS
The Company's member service operations are located in Denver, Colorado. The
primary focus of member services is to handle information requests from club
members through the Company's toll-free telephone number. Member service
representatives market products and services to existing and potential club
members in response to telephone inquiries. On average, the member service
department processes approximately 5,000 telephone inquiries daily. The
Company expects to increase sales through better management of its member
service operations coupled with greater efficiency in its telemarketing
efforts. Fulfillment operations involve the processing of orders and checks
principally received by mail. Certain fulfillment operations are performed
by third parties. The Company's publication operations develop the layout
for publications and outsource printing to third parties.
INFORMATION SUPPORT SERVICES
The Company utilizes integrated computer systems to support its membership
club and publishing operations. Comprehensive information on each member,
including a profile of the purchasing activities of members, is available to
customer service representatives when responding to member requests and when
sales representatives market the Company's products and services. The
Company employs publishing software for publication makeup and content and
for advertising to support its publications operations. An area wide network
facilitates communication within and between the Company's offices. The
Company also utilizes information technology, including list segmentation and
merge and purge programs, to select prospects for direct mail solicitations
and other direct marketing efforts.
REGULATION
The Company's operations are subject to varying degrees of federal, state and
local regulation. Specifically, the Company's outbound telemarketing, direct
mail, emergency road service program, insurance and thrift and loan
activities are currently subject to regulation and may be subjected to
increased scrutiny in the future. The Company does not believe that such
federal, state and local regulations currently have a material impact on its
operations. However, new regulatory efforts impacting the Company's
operations may be proposed from time to time in the future at the federal,
state and local level. There can be no assurance that such regulatory
efforts will not have a material adverse effect on the Company's ability to
operate its businesses or on its results of operations.
COMPETITION
In general, the Company's membership clubs and publications compete with
numerous organizations in the recreation industry for disposable income spent
on leisure activities. By offering significant membership benefits at a
reasonable cost and actively marketing to club members, the Company believes
that it has been able to maintain a loyal following for its membership
organizations as evidenced by such clubs' high renewal rates. The products
and services marketed by the Company compete with similar products and
services
11
offered by other providers. However, management believes that it is able to
use the large volume of purchases by its club members to secure attractive
pricing for the products and services marketed by the Company.
EMPLOYEES
As of December 31, 1996, the Company had 428 full-time and 19 part-time
employees, including 8 executives, 273 employees in administrative and club
operations (including 9 NAFE employees), 126 employees in publishing and
advertising sales (including 2 NAFE employees), 17 employees in resort
services and 23 employees in marketing (including 3 NAFE employees). No
employees are covered by a collective bargaining agreement. The Company
believes that its employee relations are good.
TRADEMARKS AND COPYRIGHTS
The Company owns a variety of registered trademarks and service marks for the
names of its clubs, magazines and other publications, including among others:
"Trailer Life", "MotorHome", "Rider", "American Rider", "Caraventure", "Good
Sam Park", "Good Samtours", "RV Business", "RV Shopper", "Samboree", "Traffic
Builders", "Good Sam Emergency Road Service", "Trailer Life Campground/RV
Park and Services Directory", "Highways", "Coast to Coast", "Golf Traveler",
"Executive Female", "NAFE", "NAFE Welcome Network", "National Association for
Female Executives", "Coastlink", "Coast Club Vacations", "Good Neighbor
Parks", "Protection Coast to Coast", "Woodall's", "Trails-a-way", "Texas RV",
and "Southern RV" all of which are used in connection with its membership
clubs or publications. The Company also owns the copyrights to certain
articles in its publications. The Company believes that its trademark and
copyrights have significant value and are important to its marketing efforts.
ITEM 2: PROPERTIES
In 1995, the Company moved its marketing, accounting and editorial functions
from Camarillo, California to a 74,100 square foot office in Ventura,
California leased through July, 2005 from an affiliate of the Company. The
remainder of the Company's operations are conducted from 3,000 square feet of
leased office space in Tallahassee, Florida, 672 square feet of leased
offices in Seattle, Washington, 4,076 square feet of leased space in Elkhart,
Indiana, 20,000 square feet of leased office space in Lake Forest, Illinois
and 2,000 square feet of leased office space in Greenville, Michigan, and
60,000 square feet of owned office space in Denver, Colorado (for its
customer service, warehousing fulfillment, and information system functions).
The Company also leases data processing and other office equipment. The
previously occupied 49,500 square feet of office space in Camarillo,
California is under a lease expiring in 1998.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company is involved in litigation arising in the
normal course of business operations. None of such current litigation is
expected, individually or in the aggregate, to have a material adverse effect
on the Company.
On February 7, 1997, Affinity Group Plans, Inc. (an entity not affiliated
with the Company) and National Alliance Insurance Company filed a complaint
in the United States District Court for the Eastern District of Missouri
against Camping World, a subsidiary of Camping World, and two of the
directors of Camping World (who were directors of Affinity Group Plans, Inc.)
seeking damages in excess of $125 million (and punitive damages in the like
amount) alleging breaches of contract, misrepresentations, misappropriation of
12
information and breaches of fiduciary duty in connection with the
Company's preliminary discussions with Camping World to purchase certain
assets of Camping World (excluding insurance marketing arrangements and
related assets in which the plaintiffs have an interest). The Company and
the owners of Camping World have structured the acquisition of Camping World
by the Company as a stock purchase, which will result in the insurance
marketing arrangements and related assets in dispute to remain as the assets
and liabilities of Camping World. The Company has advised the plaintiffs in
this litigation that it recognizes the contractual obligations of Camping
World relating to such marketing arrangements and that it intends to comply
(and to cause Camping World to comply) with the terms of such insurance
marketing arrangements after its acquisition of Camping World. The Company,
Camping World and the defendant directors believe the complaint to be without
merit and that such litigation will not have a material adverse effect on the
Company.
ITEM 4: SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Not Applicable
13
ITEM 6: SELECTED FINANCIAL DATA
The selected financial data of the Company for each of the five years ended
December 31 for each year are derived from the audited consolidated financial
statements of the Company. The results of operations for the years ended
December 31, 1994 and 1995 have been restated to give effect to the
reclassification of NAFE as a discontinued operation. The selected financial
data of the Company should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the notes thereto
included elsewhere herein.
14
Years Ended December 31
-----------------------------
(DOLLARS IN THOUSANDS)
1996 1995 1994 1993 1992
----------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
REVENUES:
Membership services $ 98,901 $ 99,194 $ 91,185 $ 86,405 $ 80,491
Publications 41,078 40,043 37,601 29,224 24,561
----------------------------------------------------------
139,979 139,237 128,786 115,629 105,052
COSTS APPLICABLE TO REVENUES:
Membership services 57,003 54,203 51,795 47,751 45,595
Publications 29,571 29,700 27,148 22,157 18,847
----------------------------------------------------------
86,574 83,903 78,943 69,908 64,442
GROSS PROFIT 53,405 55,334 49,843 45,721 40,610
OPERATING EXPENSES:
General and administrative 16,326 18,376 13,615 13,113 12,907
Depreciation and amortization 8,340 9,013 11,020 11,396 11,574
Provision for litigation and management -- -- -- 1,531 1,500
restructure charges, net
----------------------------------------------------------
24,666 27,389 24,635 26,040 25,981
----------------------------------------------------------
INCOME FROM OPERATIONS 28,739 27,945 25,208 19,681 14,629
NON-OPERATING EXPENSE:
Interest expense, net (16,518) (16,433) (16,716) (13,111) (15,191)
Interest expense-warrants -- -- -- (6,990) (18,257)
Other non-operating charges, net (996) (1,579) (811) (550) (331)
----------------------------------------------------------
(17,514) (18,012) (17,527) (20,651) (33,779)
----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERA-
TIONS BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 11,225 9,933 7,681 (970) (19,150)
INCOME TAX (EXPENSE) BENEFIT (6,144) (5,047) 13,255 1,970 (375)
----------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 5,081 4,886 20,936 1,000 (19,525)
DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations,
net of applicable income taxes (686) 430 265 -- --
Estimated loss on disposal including operating
losses during holding period, net of applicable
deferred income tax benefit (5,866) -- -- -- --
-----------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,471) 5,316 21,201 1,000 (19,525)
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt, less
applicable income tax benefit -- -- (1,277) (6,650)
----------------------------------------------------------
NET INCOME (LOSS) $ (1,471) $ 5,316 $ 19,924 $ (5,650) $ (19,525)
----------------------------------------------------------
----------------------------------------------------------
15
1996 1995 1994 1993 1992
----------------------------------------------------------
(dollars in thousands)
Balance Sheet Data (at period end):
Working capital (deficiency)(1) $ 6,879 $ 11,374 $ 1,001 $ 10,301 $ 11,014
Total assets 184,128 197,699 180,790 166,620 175,044
Deferred revenues (2) 70,113 68,702 67,448 67,236 62,729
Total debt (3) 147,375 164,496 157,270 160,643 151,624
Total stockholder's (deficit) (79,434) (77,963) (74,279) (89,072) (82,672)
- --------------------
(1) Restated to give effect to the reclassification of NAFE as a discontinued
operation.
(2) Deferred revenues represent cash received by the Company in advance of
the recognition of revenues in accordance with generally accepted accounting
principles. Deferred revenues primarily reflect club membership dues, annual
ERS fees and publication subscriptions. These revenues are recognized at the
time the goods or services are provided or over the membership period, which
averages approximately 18 months.
(3) Total debt includes current and long-term portions of indebtedness,
including warrants subject to put rights in 1992 of $25,645,000. In October
1993, the warrants were redeemed.
16
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following tables set forth the components of the statement of operations
for the years ended December 31, 1996, 1995, and 1994 as a percentage of
total revenues, and the comparison of those components from period to period.
The following discussion is based on the Company's Consolidated Financial
Statements included elsewhere herein. The Company's revenues are derived
principally from membership services, including club membership dues and
marketing fees paid to the Company for services provided by third parties,
and from publications, including subscriptions and advertising. In the
fourth quarter of 1996, the Company adopted a plan to dispose of the
operations of the National Association of Female Executives ("NAFE") club
which was acquired in 1994. The "Management's Discussion and Analysis of
Financial Condition and Results of Operations" discussion below excludes the
operations of NAFE since it has been classified as a discontinued operation.
During the three years ended December 31,1996, the Company completed three
other acquisitions: (i) Woodall Publishing, publisher of an annual campground
directory and other camping and RV publications, in May 1994, (ii) Affinity
Insurance Group, Inc. ("AINS"), an insurance company domiciled in the state
of Colorado, in June 1995, and (iii) Affinity Thrift and Loan ("ATL"), a
thrift and loan company based in California, in October 1995.
17
AFFINITY GROUP, INC. AND SUBSIDIARIES
TABLE FOR PERCENTAGE COMPARISONS OF TOTAL REVENUES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
PERCENTAGE OF PERCENTAGE INCREASE
TOTAL REVENUES (DECREASE)
---------------------- ---------------------
YEAR 1996 YEAR 1995
1996 1995 1994 OVER 1995 OVER 1994
-----------------------------------------------
REVENUES:
Membership services 70.7% 71.2% 70.8% (0.3%) 8.8%
Publications 29.3% 28.8% 29.2% 2.6% 6.5%
------------------------ --------------------
100.0% 100.0% 100.0% 0.5% 8.1%
COSTS APPLICABLE TO REVENUES:
Membership services 40.7% 38.9% 40.2% 5.2% 4.6%
Publications 21.1% 21.2% 21.1% (0.4%) 9.4%
----------------------- --------------------
61.8% 60.3% 61.3% 3.2% 6.3%
----------------------- --------------------
GROSS PROFIT 38.2% 39.7% 38.7% (3.5%) 11.0%
OPERATING EXPENSES:
General and administrative 11.7% 13.2% 10.6% (11.2%) 35.0%
Depreciation and amortization 6.0% 6.4% 8.5% (7.5%) (18.2%)
----------------------- --------------------
17.7% 19.6% 19.1% (9.9%) 11.2%
----------------------- --------------------
INCOME FROM OPERATIONS 20.5% 20.1% 19.6% 2.8% 10.9%
NON-OPERATING EXPENSE:
Interest expense, net (11.8%) (11.8%) (13.0%) 0.5% (1.7%)
Other non-operating charges,
net (0.7%) (1.2%) (0.6%) (36.9%) 94.7%
----------------------- --------------------
(12.5%) (13.0%) (13.6%) (2.8%) 2.8%
----------------------- --------------------
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME
TAXES AND EXTRAORDINARY
ITEM 8.0% 7.1% 6.0% 13.0% 29.3%
INCOME TAX (EXPENSE) BENEFIT (4.4%) (3.6%) 10.3% 21.7% (138.1%)
----------------------- --------------------
INCOME FROM CONTINUING
OPERATIONS 3.6% 3.5% 16.3% 4.0% (76.7%)
DISCONTINUED OPERATIONS:
Income (loss) from
discontinued operations,
net of applicable income
taxes (0.5%) 0.3% 0.2% (259.5%) 62.3%
Estimated loss on disposal
including operating losses
during holding period, net
of applicable deferred
income tax benefit (4.2%) --- --- --- ---
---------------------- --------------------
INCOME (LOSS) BEFORE EXTRA-
ORDINARY ITEM (1.1%) 3.8% 16.5% (127.7%) (74.9%)
EXTRAORDINARY ITEM:
Loss on early extinguishment
of debt, less applicable
income tax benefit --- --- (1.0%) --- (100.0%)
---------------------- --------------------
NET INCOME (LOSS) (1.1%) 3.8% 15.5% (127.7%) (73.3%)
---------------------- --------------------
---------------------- --------------------
18
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
REVENUES
Revenues for 1996 of $140.0 million increased slightly from $139.2 million
for 1995 due to a $1.0 million increase in publications revenues partially
offset by a $0.3 million decrease in membership services revenues. Excluding
the Affinity Thrift and Loan ("ATL") and Affinity Insurance Group, Inc.
("AINS") operations acquired in October and June of 1995, respectively,
revenues were $138.9 million in 1996 compared to $139.0 million in 1995.
Membership services revenues for 1996 of $98.9 million decreased slightly
from $99.2 million for 1995. The $0.3 million decrease in membership
services revenues resulted from $0.8 million in additional revenues from the
financial services operations of ATL and AINS which were acquired in 1995 and
an increase in RV financing and extended vehicle program income, which were
offset by a net decrease of $0.9 million in club membership revenues due
primarily to reduced membership enrollment in the Coast to Coast clubs and a
$0.2 million net decrease in marketing and commission fee income largely
composed of a decrease in the emergency road service program income.
Publications revenues for 1996 of $41.1 million increased 2.6% from $40.0
million for 1995. This increase was primarily due to higher advertising
income associated with higher advertising lineage and advertising rates.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues (membership services and publications
expenses)for 1996 were $86.6 million or 61.8% of revenues compared to $83.9
million or 60.3% of revenues for 1995. Excluding the ATL and AINS operations
acquired in 1995, costs applicable to revenues were $84.0 million or 60.5% of
revenues for 1996 compared to $83.3 million or 59.9% of revenues for 1995.
Costs associated with operations acquired in 1995 contributed $2.0 million of
the $2.7 million overall increase. The balance of the increase related to
increased expenses associated with the development of an Internet web site,
the introduction of an extended warranty program and higher club development,
membership service and marketing costs. Such increases were only partially
offset by savings from the discontinuance of a direct mail catalog in 1996, a
reduction in marketing expense for the VIP program and reduced membership
enrollment expense in the Coast to Coast clubs.
OPERATING EXPENSES
Operating expenses for 1996 of $24.7 million or 17.6% of revenues decreased
by $2.7 million or 9.9% from $27.4 million or 19.7% for 1995. The $2.7
million decrease in operating expenses was attributed to recording no phantom
stock expense in 1996, a net decrease in other administrative costs as well
as lower amortization expenses as certain customer lists and other
intangibles were amortized in full in 1995.
INCOME FROM OPERATIONS
Income from operations of $28.7 million or 20.5% of revenues for 1996
increased by $0.8 million or 2.8% compared to $27.9 million or 20.1% of
revenues for 1995. Excluding the operations of ATL and AINS which were
acquired in 1995, income from operations of $30.4 million or 21.9% of
revenues for 1996 increased by $2.1 million or 7.4% compared to $28.3 million
or 20.3% of revenues for 1995. The improvement in operating income excluding
operations acquired in 1995 is primarily a result of lower operating expenses
as discussed above.
19
NON-OPERATING EXPENSES
Non-operating expenses for 1996 were $17.5 million compared to $18.0 million
for 1995. The decrease is primarily due to non-recurring expenses in the
amount of a $1.0 million provision for management restructuring charges in
1996 compared to a $1.2 million facility relocation expense and a $0.4
million loss on sale of assets in 1995. The slight increase in interest
expense resulted from higher average borrowings which were largely offset by
lower interest rates.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes for 1996 was $11.2
million compared to $9.9 million for 1995. The increase was primarily due to
lower operating expenses as discussed above which were only partially offset
by costs associated with ATL and AINS which were acquired in 1995.
INCOME TAXES
Income taxes for 1996 increased by $1.1 million to $6.1 million from $5.0
million in 1995 as a result of higher pre-tax income. The effective income
tax rate in both 1996 and 1995 is higher than statutory rates due primarily
to the amortization of non-deductible goodwill.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations for 1996 was $5.1 million compared to $4.9
million for 1995. The increase was primarily due to lower operating expenses
which were only partially offset by costs associated with ATL and AINS which
were acquired in 1995.
DISCONTINUED OPERATIONS
As further described in Note 18 to the consolidated financial statements, the
Company adopted a plan to dispose of the assets of NAFE in the fourth quarter
of 1996. Aggregate losses of $6.6 million, net of taxes, were recognized in
1996 from such discontinued operations. The loss from NAFE in 1996 resulted
from a 27% decrease in membership revenues in 1996 compared to 1995 while the
percentage of costs applicable to revenues increased in 1996 compared to 1995.
NET LOSS
Net loss for 1996 was $1.5 million compared to net income of $5.3 million for
1995. This difference resulted from a $2.0 million decrease in gross profit
from club membership services, a $1.1 million decrease in gross profit for
ATL and AINS, a $1.1 million increase in income taxes and a $7.0 million
increase in the loss from NAFE. These losses were partially offset by a $1.2
million increase in gross profit from publications and a $3.2 million
decrease in operating and non-operating expenses.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
REVENUES
Revenues for 1995 of $139.2 million increased by 8.1% from $128.8 million for
1994. Excluding the operations acquired in 1995 (ATL and AINS) and in 1994
(Woodall Publishing), revenues were $128.6 million in 1995 compared to $121.3
million in 1994, an increase of 6.0%.
Membership services revenues for 1995 of $99.2 million increased 8.8% from
$91.2 million for 1994. Excluding revenues from the operations acquired in
1995 and 1994, membership service revenues were $98.9 million for 1995 and
$91.2 million for 1994, an increase of 8.4%. The increase reflects
additional revenues
20
associated with the introduction of a new overnight camping card in July 1994
and an increase in products and services sold to club members, primarily
marketing fees from the VIP program. The increase was partially offset by
lower club dues associated with a 2.1% decline in club membership enrollment.
Publications revenues for 1995 of $40.0 million increased 6.5% from $37.6
million for 1994. Excluding the revenues from operations acquired in 1995
and 1994, publication revenues for 1995 were $29.7 million compared to $30.1
million for 1994, a decrease of 1.3%. The overall increase in publication
revenues reflects $2.8 million in additional revenues associated with Woodall
Publishing acquired in 1994 which more than offset a net decrease of $0.4
million in revenues from certain existing general circulation magazines and
the campground directory.
COSTS APPLICABLE TO REVENUES
Costs applicable to revenues (membership services and publication expenses)
for 1995 were $83.9 million or 60.3% of revenues compared to $78.9 million or
61.3% of revenues in 1994. Excluding costs from the operations acquired in
1995 and 1994, costs applicable to revenues for 1995 were $75.7 million or
58.9% of revenues compared to $74.3 million or 61.3% of revenues for 1994.
Costs associated with the operations acquired in 1995 and 1994 contributed
$3.8 million of the $5.0 million overall increase. The balance of the
increase was associated with increases in membership service costs, new
product development costs and higher publishing costs which were partially
offset by a decrease in costs associated with the VIP program.
OPERATING EXPENSES
Operating expenses for 1995 were $27.4 million or 19.7% of revenues compared
to $24.6 million or 19.1% of revenues for 1994. Excluding operating expenses
from the operations acquired in 1995 and 1994, operating expenses for 1995
were $26.0 million or 20.2% of revenues compared to $23.9 million or 19.7% of
revenues for 1994. General and administrative expenses associated with the
operations acquired in 1995 and 1994 accounted for $0.7 million of the
overall increase. Other increases in operating expenses were related
primarily to increases in amortization expense associated with the newly
acquired businesses and upgrades to the membership information system which
were partially offset by reduced expenses associated with management's
deferred phantom stock plan and decreases in amortization expenses for
certain customer lists and financing fees.
INCOME FROM OPERATIONS
Income from operations was $27.9 million or 20.1% of revenues for 1995
compared to $25.2 million or 19.6% for 1994. Excluding operations acquired
in 1995 and 1994, income from operations in 1995 was $27.2 million or 20.9%
of revenues compared to $23.1 million or 19.0% in 1994. The overall $2.7
million increase was due to a $4.1 million increase from operations other
than from businesses acquired in 1995 or 1994 primarily from increased
marketing fees for the VIP program which was partially offset by a $1.4
million reduction in income from operations of the businesses acquired in
1995 and 1994.
NON-OPERATING EXPENSES
Non-operating expenses for 1995 were $18.0 million compared to $17.5 million
for 1994. A decrease in interest expense as a result of a reduction in
interest rates was more than offset by a $0.8 million net increase in
facility relocation expenses in 1995 over 1994.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes for 1995 was $9.9
million compared to $7.7 million in 1994. This $2.2 million increase is
primarily due to additional revenues recognized on the sale of certain
products and services as discussed above.
21
INCOME TAXES
The Company's effective income tax rate in 1995 was higher than statutory
rated due primarily to amortization of non-deductible goodwill. Income tax
expense in 1995 was $5.0 million compared to an income tax benefit of $13.3
million in 1994. The tax benefits recognized in 1994 were primarily the
result of the recognition of deferred tax assets for which valuation
allowances had been previously provided.
INCOME FROM CONTINUING OPERATIONS
Income from continuing operations was $4.9 million in 1995 compared with
$20.9 million in 1994. This reduction reflects the impact of a one-time gain
associated with the recognition of deferred tax assets in 1994 offset in part
by higher income before taxes.
DISCONTINUED OPERATIONS
As further described in Note 18 to the Company's consolidated financial
statements, NAFE income from operations was $0.7 million in 1995 compared to
$0.4 million in 1994. The increase is a result of only two months of
operations in 1994 and a gross profit percentage of 23.9% in 1995 compared to
45.9% in 1994.
EXTRAORDINARY ITEM
In October 1994, the Company entered into a new senior credit agreement. Due
to the new credit facility, unamortized discounts and fees related to
previous borrowing arrangements were written off as an extraordinary item in
1994. The total write-off of $2.1 million was recognized net of a tax
benefit of $800,000.
NET INCOME
Net income for 1995 was of $5.3 million compared to $19.9 million for 1994.
Increases in income from operations in 1995 compared to 1994 were more than
offset by the difference between the income tax expense recognized in 1995 of
$5.3 million and the $13.9 million income tax benefit recognized in 1994.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's senior and subordinated debt totaled
$145.1 million compared to $161.5 million at December 31, 1995. This $16.4
million decrease of debt was due to a $4.0 million decrease in the senior
term loan and a $12.4 million decrease in the senior credit revolving
facility. During 1996, the net decreased borrowings combined with cash
provided by operating activities were used primarily to make $1.7 million in
capital expenditures principally for furniture, equipment, leasehold
improvements, and database management systems.
The Company had cash, cash equivalents and investments of $4.8 million at
December 31, 1996. Substantially all of the cash, cash equivalents and
investments were held in Affinity Thrift and Loan and Affinity Insurance
Group, Inc. These balances are subject to regulatory restrictions which,
among other things, restrict the distribution or dividend of such amounts to
the Company.
The operations of ATL, although required to be consolidated with the Company,
are recognized as an "unrestricted" or non-guarantying subsidiary as defined
in the senior credit facility and the indenture under which AGI's
subordinated notes were issued. All assets, liabilities and operations of
ATL are excluded from the calculation of covenants under the terms of the
respective debt agreements.
22
On March 6, 1997, the Company acquired the common stock of Ehlert for $22.3
million. The purchase price was funded primarily through borrowings under
the Company's revolving credit facility, a $1.5 million note issued by the
Company's parent, Affinity Group Holding, Inc. ("AGH"), to the sellers, and
$4 million from capital contributions to the Company.
On February 25, 1997, the Company entered into an agreement to acquire the
common stock of Camping World for approximately $89 million, including debt
repayment upon the acquisition. Certain Camping World executives will also
enter into non-competition and consulting agreements pursuant to which the
Company will pay $19 million at closing. In addition, at closing, the
Company's parent and certain Camping World executives will enter into
incentive compensation agreements pursuant to which an additional $15 million
will be paid subsequent to closing which is payable $1 million on the first
four anniversaries after the closing date and $11 million on the fifth
anniversary of the closing date. The Company expects to complete the Camping
World acquisition in April 1997. The acquisition of Camping World will be
financed through capital contributions by the Company's parent from the net
proceeds of a $130 million bond offering, net of expenses and repayment of
approximately $7.5 million of the parent's debt, together with a new $75
million credit facility which the Company is currently negotiating. The
existing credit facility will be repaid from proceeds of the new credit
facility.
Assuming completion of the Camping World acquisition, including the
consummation of the new bank credit facility, management believes that funds
generated by operations together with available borrowings under the new
credit facility will be sufficient to satisfy the Company's operating cash
needs, debt obligations and requirements for capital expenditures during the
next twelve months. Capital expenditures (assuming the Camping World
acquisition is completed) are expected to be approximately $5.0 million
during 1997, primarily for continued enhancements to database, inbound and
outbound telecommunications, and computer systems. The Company will likely
incur additional capital expenditures of $2.0 million in the fourth quarter
of 1997 to begin construction on two Camping World supercenters. Upon
completion of construction in 1998, the Company will likely enter into sale
and leaseback agreements which are expected to result in the return of such
capital expenditures to the Company.
If the Camping World acquisition is not completed, management believes that
funds generated by operations together with available borrowings under its
revolving credit facility will be sufficient to satisfy the Company's
operating cash needs, debt obligations and requirements for capital
expenditures during the next twelve months. The capital expenditures for the
Company's existing operations are expected to be $2.5 million during 1997,
primarily for continued enhancements to database, and inbound and outbound
telecommunucations systems.
FACTORS AFFECTING FUTURE PERFORMANCE
Although increases in operating costs could adversely affect the Company's
operations, management does not believe that inflation has had a material
effect on operating profit during the past several years. However, fuel
shortages and substantial increases in propane and gasoline costs could have
a significant impact on the Company's travel-related membership services and
publications revenues. Historically such events have caused declines in
advertisements but have not significantly affected club membership
enrollment. The Company is unable to predict at what point fluctuating fuel
prices may begin to adversely impact revenues or cash flow. The Company
believes it will be able to partially offset any cost increases with price
increases to its members and certain cost reducing measures.
23
SEASONALITY
The Company's cash flow has historically been the highest in the fourth
quarter due to the annual membership renewals for the Coast to Coast clubs
which occur in the quarter.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This filing contains statements that are "forward looking statements," and
includes, among other things, discussions of the Company's business strategy
and expectations concerning market position, future operations, margins,
profitability, liquidity and capital resources, as well as statements
concerning the integrations of acquired operations and the achievement of
financial benefits and operational efficiencies in connection with
acquisitions. Forward looking statements are included in "Business--
General," "Business-- Business Strategy," "Business-- RV Industry,"
"Business-- Operations," "Business--Competition," "Legal Proceedings,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Although the Company believes that the expectations reflected
in such forward looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Generally, these
statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of such plans or strategies, number of
acquisitions and projected or anticipated benefits from acquisitions made by
or to be made by the Company (including the acquisitions of Camping World,
Inc. and the Ehlert Publishing companies), or projections involving
anticipated revenues, expenses, earnings, levels of capital expenditures or
other aspects of operating results. All phases of the operations of the
Company are subject to a number of uncertainties, risks and other influences,
including consumer spending, fuel prices, general economic conditions,
regulatory changes and competition, many of which are outside the control of
the Company, any one of which, or a combination of which, could materially
affect the results of the Company's operations and whether the forward
looking statements made by the Company ultimately prove to be accurate.
24
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report 26
Consolidated Balance Sheets as of December 31, 1996 and 1995 27
Consolidated Statements of Operations for the years ended 28
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholder's Deficit for the years 29
ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the years ended 30
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements 31
Schedule II - Valuation and Qualifying Accounts 46
All other financial statement schedules not listed have been omitted since
the required information is included in the consolidated financial
statements, the notes thereto, is not applicable, or not required.
25
INDEPENDENT AUDITORS' REPORT
Board of Directors
Affinity Group, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of Affinity
Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholder's deficit, and
cash flows for each of the three years in the period ended December 31, 1996.
Our audits also included the financial statement schedule listed in the
index at Item 8. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Affinity Group, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1996 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set
forth therein.
Deloitte & Touche LLP
March 7, 1997
Denver, Colorado
26
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- -------------------------------------------------------------------------------
1996 1995
------------ -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 4,728 $ 3,833
Investments 499 1,514
Accounts receivable, less allowance
for doubtful accounts of $1,081 in
1996 and $926 in 1995 14,812 15,054
Note receivable from affiliate -- 3,113
Inventories 2,473 3,873
Prepaid expenses and other assets 6,052 5,376
Deferred tax asset-current 2,228 1,907
Net current assets of discontinued
operations -- 457
------------ -------------
Total current assets 30,342 35,127
PROPERTY AND EQUIPMENT 10,550 10,769
LOANS RECEIVABLE 13,134 8,474
INTANGIBLE ASSETS 109,065 115,009
DEFERRED TAX ASSET 13,516 16,503
RESTRICTED INVESTMENTS 2,137 2,015
OTHER ASSETS 4,411 4,530
NET LONG-TERM ASSETS OF DISCONTINUED
OPERATIONS 973 5,272
------------ -------------
$ 184,128 $ 197,699
------------ -------------
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 4,517 $ 4,426
Accrued interest 2,966 3,058
Accrued liabilities 14,516 16,269
Customer deposits 14,979 10,974
Current portion of long-term debt 5,344 4,665
Net current liabilities of discontinued
operations 1,464 --
------------ -------------
Total current liabilities 43,786 39,392
DEFERRED REVENUES 70,113 68,702
LONG-TERM DEBT 142,031 159,831
OTHER LONG-TERM LIABILIITES 7,632 7,737
COMMITMENTS AND CONTINGENCIES -- --
------------ -------------
262,562 275,662
------------ -------------
STOCKHOLDER'S DEFICT:
Preferred stock, $.001 par value, 1,000
shares authorized, none issued or
outstanding -- --
Common stock, $.001 par value, 2,000
shares authorized 2,000 shares
issued and outstanding 1 1
Additional paid-in-capital 12,021 12,021
Accumulated deficit (91,456) (89,985)
------------ -------------
Total stockholder's deficit (79,434) (77,963)
------------ -------------
$ 184,128 $ 197,699
------------ -------------
------------ -------------
See notes to consolidated financial statements.
27
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994 (IN THOUSANDS)
- --------------------------------------------------------------------------------
1996 1995 1994
--------- -------- ------
REVENUES:
Membership services $ 98,901 $ 99,194 $91,185
Publications 41,075 40,043 37,601
------- --------- --------
139,979 139,237 128,786
COSTS APPLICABLE TO REVENUES:
Membership services 57,003 54,203 51,795
Publications 29,571 29,700 27,148
--------- --------- --------
86,574 83,903 78,943
GROSS PROFIT 53,405 55,334 49,843
OPERATING EXPENSES:
General and administrative 16,326 18,376 13,615
Depreciation and amortization 8,340 9,013 11,020
-------- --------- --------
24,666 27,389 24,635
-------- --------- --------
INCOME FROM OPERATIONS 28,739 27,945 25,208
NON-OPERATING EXPENSES:
Interest expense, net (16,518) (16,433) (16,716)
Other non-operating charges, net (996) (1,579) (811)
-------- --------- --------
(17,514) (18,012) (17,527)
-------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND EXTRAORDINARY ITEM 11,225 9,933 7,681
INCOME TAX (EXPENSE) BENEFIT (6,144) (5,047) 13,255
-------- --------- --------
INCOME FROM CONTINUING OPERATIONS
DISCONTINUED OPERATIONS: 5,081 4,886 20,936
Income (loss) from discontinued operations,
net of applicable deferred income tax
benefitof $384 in 1996 and deferred
income tax expense of $264 in 1995 and
$162 in 1994 (686) 430 265
Estimated loss on disposal including
provisions for $862 in operating
losses during holding period, net
of applicable deferred income tax
benefit of $1,060 (5,866)
-------- --------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (1,471) 5,316 21,201
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt,
less applicable current income tax
benefit of $800 (1,277)
-------- --------- --------
NET INCOME (LOSS) ($1,471) $5,316 $19,924
-------- --------- --------
-------- --------- --------
See notes to consolidated financial statements.
28
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS EXCEPT NUMBER OF SHARES)
- -------------------------------------------------------------------------------
Common Stock Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------- ---------- ----------- ------------ ----------
BALANCES AT JANUARY 1, 1994 2,000 $1 $16,499 ($105,572) ($89,072)
Investments in related subsidiary (794) (794)
Dividends (4,337) (4,337)
Net income 19,924 19,924
--------- ---------- ----------- ------------ ----------
BALANCES AT DECEMBER 31, 1994 2,000 1 15,705 (89,985) (74,279)
Dividends (3,684) (5,316) (9,000)
Net income 5,316 5,316
--------- ---------- ----------- ------------ ----------
BALANCES AT DECEMBER 31, 1995 2,000 1 12,021 (89,985) (77,963)
Net loss (1,471) (1,471)
--------- ---------- ----------- ------------ ----------
BALANCES AT DECEMBER 31, 1996 2,000 $1 $12,021 ($91,456) ($79,434)
--------- ---------- ----------- ------------ ----------
--------- ---------- ----------- ------------ ----------
See notes to consolidated financial statements.
29
AFFINITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 AND 1994 (IN THOUSANDS)
- -----------------------------------------------------------------------------
1996 1995 1994
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($1,471) $ 5,316 $ 19,924
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred tax provision (benefit) 2,023 4,990 (13,124)
Depreciation and amortization 8,340 9,013 11,020
Provision for losses on accounts receivable 278 548 373
Provision for estimated loss on disposal of NAFE 6,926 -- --
Deferred compensation -- 1,000 1,300
(Gain) loss on disposal of property and equipment 1 (48) 18
Loss on sale of business -- -- 793
Loss on lease abandonment -- 1,228 --
Write-off of leasehold improvements -- 400 --
Extraordinary item - loss on early extinguishment of debt -- -- 1,277
Changes in operating assets and liabilities (net of
purchased businesses):
Accounts receivable (36) (4,810) 903
Inventories 1,400 (512) (762)
Prepaids and other assets (557) (419) (1,501)
Long term lease prepayment -- (1,679) --
Accounts payable 91 634 821
Accrued and other liabilities (1,307) (2,375) (612)
Deferred revenues 1,411 1,254 (308)
Net assets and liabilities of discontinued operations (706) (817) 677
---------- ---------- ----------
Net cash provided by operating activities 16,393 13,723 23,801
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,743) (4,713) (3,167)
Proceeds from sale of property and equipment 2 263 12
Payments received on notes receivable -- -- 44
Net changes in intangible assets (437) 30 (1,236)
Net changes in investments 893 -- --
Net changes in loans receivable (4,660) 893 --
Purchase of investments -- (3,529) --
Purchase of Affinity Thrift and Loan, net of cash acquired -- 1,854 --
Purchase of Affinity Insurance Group, Inc. -- (356) --
Note receivable from affiliate 3,113 (3,113) --
Purchase of partnership, net of cash acquired -- -- (1,599)
Purchased assets of Woodall, net of cash acquired -- -- (10,297)
Purchased assets of NAFE, net of cash acquired -- -- (6,050)
---------- ---------- ----------
Net cash used in investing activities (2,832) (8,671) (22,293)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in customer deposits 4,005 -- --
Dividends paid -- (9,000) (4,337)
Borrowings on long-term debt 34,200 125,046 89,996
Principal payments of long-term debt (51,321) (117,820) (95,718)
Deferred financing cost -- -- (824)
---------- ---------- ----------
Net cash used in financing activities (13,116) (1,774) (10,883)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 445 3,278 (9,375)
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,833 555 9,930
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,278 $ 3,833 $ 555
---------- ---------- ----------
---------- ---------- ----------
See notes to consolidated financial statements.
30
AFFINITY GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include
the accounts of Affinity Group, Inc. (AGI), and its subsidiaries
(collectively the Company). AGI is a wholly-owned subsidiary of Affinity
Group Holding, Inc. (AGH), a privately-owned corporation. AGH is a wholly-
owned subsidiary of AGI Holding Corporation (Holding), a privately-owned
corporation. All significant intercompany transactions and balances have
been eliminated.
DESCRIPTION OF THE BUSINESS - The Company is a membership based direct
marketing company which sells club memberships, products, services, and
publications to selected affinity groups primarily in North America. The
Company markets club memberships and selected products and services to RV
owners, camping and golf enthusiasts. The Company also publishes magazines,
directories and books. In connection with the acquisitions of Affinity
Thrift and Loan and Affinity Insurance Group, Inc. (see Note 2), the Company
has commenced offering certain banking services and underwriting property
and casualty insurance for its members and others in the states in which it
is licensed to do business.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires the Company's management to make estimates and assumptions that
affect the amounts reported in these financial statements and accompanying
notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all short-term, highly
liquid investments purchased with a maturity date of three months or less to
be cash equivalents.
INVENTORIES - Inventories are valued at the lower of cost (first-in, first-
out) or market. Inventories consist of books, paper, and travel and leisure
merchandise.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated useful lives of the assets:
Years
Buildings and improvements 3-31
Furniture and equipment 3-12
Software 3
Leasehold improvements, included in buildings and improvements, are
amortized over the lives of the respective leases.
LOANS RECEIVABLE - Loans Receivable were acquired as part of Affinity
Thrift and Loan (see Note 2). In accordance with purchase accounting rules,
the loans were recorded at their fair value, $9,367,000. The
31
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
adjustment for fair value is being amortized using the interest method over
the weighted average term to maturity of the affected loans, 16 years.
INTANGIBLE ASSETS- Intangible assets are amortized over the following lives:
YEARS
-----
Goodwill 40
Membership and customer lists 3-10
Resort and golfcourse agreements 4
Noncompete and deferred consulting agreements 3-6
Organizational costs 5
Deferred financing costs are amortized over the lives of the related
debt agreements.
IMPAIRMENT OF LONG-LIVED ASSETS - In March 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-lived
assets, including intangible assets, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable and establishes guidelines for determining fair
value based on future net cash flows for the use of the asset and for the
measurement of the impairment loss. Any impairment loss is recorded in the
period in which the recognition criteria are first applied and met. The
adoption by the Company of SFAS No. 121 had no material effect on its
results of operations or on its financial position at December 31, 1996.
MEMBERSHIP SERVICES REVENUE AND EXPENSE - Membership and Emergency Road
Service (ERS) revenues are deferred and recognized over the life of the
membership. Good Sam Club lifetime membership revenues and expenses are
deferred and recognized over 18 years which is the actuarially determined
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. ERS claims expenses are recognized when incurred.
PUBLICATIONS REVENUE AND EXPENSE - Newsstand sales of publications and
related expenses are recorded at the time of delivery net of estimated
provision for returns. Subscription sales of publications are reflected in
income over the lives of the subscriptions. The related selling expenses
are expensed as incurred. Advertising revenues and related expenses are
recorded at the time of delivery. Subscription and newsstand revenues and
expenses related to annual publications are deferred until the publications
are distributed.
DEFERRED REVENUE - For balance sheet purposes, deferred revenues are
classified as long-term, although a portion of the amounts deferred expire
over the next year.
2. ACQUISITIONS
In October 1995, a wholly owned subsidiary of the Company acquired the
common stock of Affinity Thrift and Loan (ATL), formerly San Francisco
Thrift and Loan. Under the terms of the purchase agreement, ATL stock was
acquired for $125,000 and ATL entered into a noncompete agreement with the
previous owner for $75,000. In addition, in accordance with FDIC regulatory
requirements, the Company, through its wholly owned subsidiary, contributed
an additional $1.0 million of capital to ATL in each of 1995 and 1996. For
purposes of the Senior Subordinated Notes Indenture (Indenture) and the
senior credit facility discussed in Note 7, the Company's investment and the
continuing operations of the wholly owned
32
2. ACQUISITIONS (continued)
subsidiary, ATL, has been designated as an "unrestricted subsidiary".
In June 1995, the Company acquired the common stock of Affinity Insurance
Group, Inc. (AINS) formerly Aspen Indemnity Corporation, for $87,500. In
December 1995, AINS was licensed in the state of Colorado, its domicile
state. The Company contributed $3.5 million capital to AINS in 1995 to meet
regulatory requirements of which $2.0 million is recorded as restricted.
In October 1994, the Company acquired substantially all the assets and
assumed certain liabilities of the National Association for Female
Executives, Inc. (NAFE). The total consideration for the acquisition,
including assumed liabilities and costs of acquisition, totaled $10.8
million. In the fourth quarter of 1996, the Company adopted a plan to
dispose of NAFE. See Note 18.
In May 1994, the Company acquired all the assets and assumed certain
liabilities of Woodall Publishing Company, L.P. and Woodall World of Travel,
L.P. (collectively Woodall). The total consideration for the acquisitions,
including assumed liabilities and costs of acquisition, totaled $11.5
million.
In April 1994 AGI Properties of Colorado, Inc. (AGIPC), a wholly-owned
subsidiary of AGI, acquired a 99.9% partnership interest from the principal
shareholder of AGH for a total purchase price of $3,449,000 which included
$1,600,000 in cash and assumed liabilities of $1,849,000. In accordance
with generally accepted accounting principles for transfers among entities
under common control, the purchase has been reflected in the accounts of
AGIPC at the historical cost basis of the principal shareholder of AGH of
$2,174,000. The difference between the consideration paid for the
partnership interest and its carrying value in the accounts of AGIPC of
$1,275,000 has been reflected as a reduction in additional paid-in capital
in the accompanying consolidated financial statements, net of a related
deferred tax asset of $481,000. As of December 31, 1995, AGIPC is
designated a "restricted subsidiary" for the purposes of the Indenture
discussed in Note 7 and by virtue of a Supplemental Indenture is a guarantor
under the Indenture.
The operating results of ATL, AINS, AGIPC, and Woodall have been included in
the Company's consolidated results of operations from the dates of their
respective acquisition. These acquisitions have been accounted for using
the purchase method of accounting and, accordingly, the assets and
liabilities of these companies have been recorded at their estimated fair
value at the date of their respective acquisitions. In connection with
these acquisitions, the Company has recognized goodwill of approximately
$400,000 and $17,900,000 in 1995 and 1994, respectively.
The following unaudited pro forma results of operations for the year ended
December 31, 1994 assumes the acquisition of Woodall occurred as of January
1, 1994. ATL, AINS and AGIPC are excluded from the following pro forma
results of operations as their effects are immaterial. The summary pro
forma results are based on assumptions and are not necessarily indicative of
the actual results which would have occurred had this acquisition occurred
on January 1, 1994, or of the future results of operations of the Company.
Year Ended
December 31,
1994
----------------
($ in thousands)
Revenues $ 130,485
Income before extraordinary item 19,595
Net income 18,318
33
3. DISPOSITIONS
BENBOW VALLEY RV RESORT AND GOLF COURSE RESORT - The Company disposed
of a portion of the Benbow Valley RV Resort and Golf Course Resort in
Northern California during 1994 and simultaneously entered into a
contract to sell the remaining assets. The assets of the resort were
written down to the expected combined sales price of $1.9 million and
accruals were made for the projected cost of sale resulting in a loss on
disposal of $793,000. The property was sold in 1996 for approximately the
anticipated amount.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31 (in
thousands):
1996 1995
---------------------------
Land $ 536 $ 536
Building and improvements 4,936 3,929
Furniture and equipment 7,621 6,813
Software 2,276 1,935
Systems development in progress 1,873 2,293
---------------------------
17,242 15,506
Less accumulated depreciation (6,692) (4,737)
---------------------------
Net Property and Equipment $ 10,550 $ 10,769
---------------------------
---------------------------
5. INTANGIBLE ASSETS
Intangible assets consisted of the following at December 31 (in thousands):
1996 1995
---------------------------
Goodwill $ 116,785 $ 117,709
Membership and customer lists 14,691 15,099
Resort and golf course participation
agreements 14,013 13,960
Noncompete and deferred consulting
agreements 1,193 1,193
Deferred financing and organization costs 6,757 7,492
---------------------------
153,439 155,453
Less accumulated amortization (44,374) (40,444)
---------------------------
$ 109,065 $ 115,009
---------------------------
---------------------------
34
6. ACCRUED LIABILITIES
Accrued liabilities consisted of the following at December 31 (in
thousands):
1996 1995
---------------------------
Legal expense and litigation settlement $ 9 $ 301
Compensation and benefits 4,994 6,083
Other accruals 9,513 9,885
---------------------------
$ 14,516 $ 16,269
---------------------------
---------------------------
7. LONG-TERM DEBT
The following reflects outstanding long-term debt as of December 31 (in
thousands):
1996 1995
---------------------------
Senior secured term note bearing interest
that varies from prime to prime plus
1.25% or LIBOR plus 2.00% to 3.25%.
Interest rate as of December 31, 1996
was 8.25%. Quarterly principal
installments of $1 million are due
through September 30, 1999. $ 11,000 $ 15,000
Revolving line of credit of $30 million,
with the same interest arrangement as
the senior secured term note discussed
above, maturing September 1999. 14,050 26,500
Senior subordinated notes, bearing interest
at 11.50% per annum, interest payable
semi annually each April 15 and
October 15, maturing October 2003. 120,000 120,000
Other, primarily capital leases, settlement
agreements, and building mortgage 2,325 2,996
---------------------------
147,375 164,496
Less: current portion (5,344) (4,665)
---------------------------
$ 142,031 $ 159,831
---------------------------
---------------------------
In 1993, a total of $120 million of senior subordinated notes were issued in
a public offering. The notes bear interest at the rate of 11 1/2%, and
mature on October 15, 2003. These notes are unsecured obligations of the
Company and are subordinated in right of payment to the existing senior
indebtedness, but rank senior or pari passu with all other existing
indebtedness and future indebtedness of the Company.
35
7. LONG-TERM DEBT (continued)
On October 11, 1994, the Company entered into a new five year credit
agreement with certain lenders and First Bank National Association, as
agent, consisting of a term loan of $20.0 million and revolving credit
facility of $30.0 million. The funds were used primarily to retire senior
secured term notes and revolving c