10-Q 1 a12-20184_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q REPORT

 

Quarterly Report Under Section 13 or 15 (d) of

The Securities Exchange Act of 1934

 

For Quarter Ended:

 

Commission File Number

September 30, 2012

 

000-22852

 


 

GOOD SAM ENTERPRISES, LLC

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3377709

(State of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

250 Parkway Drive, Suite 270

 

(847) 229-6720

Lincolnshire, IL 60069

 

(Registrant’s telephone

(Address of principal executive offices)

 

number, including area code)

 


 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

11.5% Senior Secured Notes Due 2016

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such filings).

YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer

o

 

Accelerated filer

o

Non-accelerated filer

x

 

Smaller reporting company

o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES o  NO x

 

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

 

 

 

Outstanding as of

Class

 

November 14, 2012

Membership Units

 

2,000

 

DOCUMENTS INCORPORATED BY REFERENCE:  None

 

 

 



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

 

INDEX

 

 

Page

 

 

Part I. Financial Information

 

 

 

Item 1: Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2012 (unaudited) and December 31, 2011

1

 

 

Unaudited Consolidated Statements of Operations for the three months ended September 30, 2012 and 2011

2

 

 

Unaudited Consolidated Statements of Operations for the nine months ended September 30, 2012 and 2011

3

 

 

Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011

4

 

 

Notes to Unaudited Consolidated Financial Statements

5

 

 

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

Item 3: Quantitative and Qualitative Disclosures about Market Risk

37

 

 

Item 4: Controls and Procedures

37

 

 

Part II. Other Information

38

 

 

Signatures

39

 



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2012 and December 31, 2011

(In thousands except shares and par value)

 

 

 

9/30/2012

 

12/31/2011

 

 

 

(Unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

18,811

 

$

20,275

 

Accounts receivable, less allowance for doubtful accounts of $2,556 in 2012 and $2,086 in 2011

 

33,703

 

32,972

 

Note from affiliate

 

3,116

 

3,117

 

Inventories

 

73,523

 

56,558

 

Prepaid expenses and other assets

 

16,795

 

11,792

 

Total current assets

 

145,948

 

124,714

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

24,761

 

22,563

 

AFFILIATE NOTES AND INVESTMENTS

 

4,953

 

4,587

 

INTANGIBLE ASSETS, net

 

13,723

 

14,715

 

GOODWILL

 

49,944

 

49,944

 

OTHER ASSETS

 

6,046

 

6,440

 

Total assets

 

$

245,375

 

$

222,963

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S DEFICIT

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

22,814

 

$

18,050

 

Accrued interest

 

13,277

 

3,989

 

Accrued income taxes

 

2,406

 

2,263

 

Accrued liabilities

 

24,798

 

27,519

 

Deferred revenues and gains

 

62,718

 

54,870

 

Current portion of long-term debt

 

10,000

 

12,422

 

Total current liabilities

 

136,013

 

119,113

 

 

 

 

 

 

 

DEFERRED REVENUES AND GAINS

 

32,283

 

30,979

 

LONG-TERM DEBT, net of current portion

 

318,450

 

325,028

 

OTHER LONG-TERM LIABILITIES

 

2,754

 

1,639

 

 

 

489,500

 

476,759

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

MEMBER’S DEFICIT:

 

 

 

 

 

Membership units, 2,000 units issued and outstanding

 

1

 

1

 

Member contributions

 

77,025

 

74,000

 

Accumulated deficit

 

(321,151

)

(327,797

)

Total member’s deficit

 

(244,125

)

(253,796

)

Total liabilities and member’s deficit

 

$

245,375

 

$

222,963

 

 

See notes to consolidated financial statements.

 

1



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

 

 

 

THREE MONTHS ENDED

 

 

 

9/30/2012

 

9/30/2011

 

REVENUES:

 

 

 

 

 

Membership services

 

$

38,725

 

$

39,151

 

Retail

 

95,359

 

82,166

 

Media

 

5,529

 

7,288

 

 

 

139,613

 

128,605

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

Membership services

 

21,634

 

22,852

 

Retail

 

59,031

 

48,934

 

Media

 

3,988

 

6,029

 

 

 

84,653

 

77,815

 

 

 

 

 

 

 

GROSS PROFIT

 

54,960

 

50,790

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

Selling, general and administrative

 

38,129

 

34,559

 

Depreciation and amortization

 

3,791

 

4,210

 

 

 

41,920

 

38,769

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

13,040

 

12,021

 

 

 

 

 

 

 

NON-OPERATING ITEMS:

 

 

 

 

 

Interest income

 

215

 

124

 

Interest expense

 

(11,191

)

(11,321

)

Gain on derivative instrument

 

1,259

 

1,198

 

Gain on sale of assets or businesses

 

(2

)

(7

)

Other non-operating items, net

 

 

7

 

 

 

(9,719

)

(9,999

)

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

3,321

 

2,022

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

(57

)

(43

)

 

 

 

 

 

 

NET INCOME

 

$

3,264

 

$

1,979

 

 

See notes to consolidated financial statements.

 

2



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

 

 

 

NINE MONTHS ENDED

 

 

 

9/30/2012

 

9/30/2011

 

REVENUES:

 

 

 

 

 

Membership services

 

$

117,693

 

$

113,452

 

Retail

 

255,344

 

218,763

 

Media

 

22,968

 

30,047

 

 

 

396,005

 

362,262

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

Membership services

 

65,692

 

64,486

 

Retail

 

156,477

 

128,556

 

Media

 

16,634

 

24,217

 

 

 

238,803

 

217,259

 

 

 

 

 

 

 

GROSS PROFIT

 

157,202

 

145,003

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

Selling, general and administrative

 

107,329

 

97,458

 

Financing (gain) expense

 

 

(19

)

Depreciation and amortization

 

10,623

 

12,435

 

 

 

117,952

 

109,874

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

39,250

 

35,129

 

 

 

 

 

 

 

NON-OPERATING ITEMS:

 

 

 

 

 

Interest income

 

651

 

374

 

Interest expense

 

(33,552

)

(33,947

)

Gain on derivative instrument

 

3,448

 

2,676

 

Loss on debt restructure

 

(440

)

 

Gain on sale of assets or businesses

 

1,257

 

490

 

Other non-operating items, net

 

 

17

 

 

 

(28,636

)

(30,390

)

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

10,614

 

4,739

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

(168

)

(163

)

 

 

 

 

 

 

NET INCOME

 

$

10,446

 

$

4,576

 

 

See notes to consolidated financial statements.

 

3



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 

 

 

NINE MONTHS ENDED

 

 

 

9/30/2012

 

9/30/2011

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

10,446

 

$

4,576

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

6,443

 

7,288

 

Amortization

 

4,180

 

5,147

 

Gain on derivative instrument

 

(3,448

)

(2,676

)

Loss on debt restructure

 

440

 

 

Provision for losses on accounts receivable

 

713

 

829

 

Gain on sale of assets or businesses

 

(1,257

)

(490

)

Accretion of original issue discount

 

703

 

637

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(1,244

)

(6,852

)

Inventories

 

(16,965

)

(6,617

)

Prepaid expenses and other assets

 

(4,980

)

(6,145

)

Accounts payable

 

4,764

 

7,059

 

Accrued and other liabilities

 

8,227

 

14,657

 

Deferred revenues and gains

 

9,505

 

8,589

 

Net cash provided by operating activities

 

17,527

 

26,002

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Capital expenditures

 

(8,695

)

(3,514

)

Net proceeds from sale of assets or businesses

 

764

 

208

 

Net change in intangible assets

 

(376

)

 

Net cash used in investing activities

 

(8,307

)

(3,306

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Dividends paid

 

(3,800

)

(5,530

)

Contribution from parent

 

3,025

 

 

Borrowings on debt

 

10,541

 

11,172

 

Payment of debt issue costs

 

 

(695

)

Principal payments on debt

 

(20,450

)

(17,281

)

Net cash used in financing activities

 

(10,684

)

(12,334

)

 

 

 

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

 

(1,464

)

10,362

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

 

20,275

 

15,363

 

 

 

 

 

 

 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

 

$

18,811

 

$

25,725

 

 

See notes to consolidated financial statements.

 

4



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

 

(1) BASIS OF PRESENTATION

 

Principles of Consolidation — The consolidated financial statements include the accounts of Good Sam Enterprises, LLC (“GSE”), and its subsidiaries (collectively the “Company”), presented in accordance with U.S. generally accepted accounting principles, (“GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission.  Affinity Group Holding, LLC, a Delaware limited liability company (“Parent”), is the parent of Good Sam Enterprises, LLC.  The ultimate parent company of AGHI is AGI Holding Corp. (“AGHC”), a privately-owned corporation.  Certain prior period amounts shown within prior period financial statements have been reclassified to conform to the current period presentation.

 

These interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended December 31, 2011 and notes included in the Company’s Form 10-K as filed with the Securities and Exchange Commission.  In the opinion of management of the Company, these consolidated financial statements contain all adjustments of a normal recurring nature necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented.

 

(2) RECENT ACCOUNTING PRONOUNCEMENTS

 

On January 1, 2012, the Company adopted the newly issued accounting standard which gives an entity the option of performing a qualitative assessment to determine whether it is necessary to perform step 1 of the annual goodwill impairment test. An entity is required to perform step 1 only if it concludes that it is more likely than not that a reporting unit’s fair value is less than its carrying amount.  An entity may choose to perform the qualitative assessment on none, some, or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit in any period and proceed directly to step 1 of the impairment test. We perform our annual impairment test during the fourth quarter of each year.

 

On January 1, 2012, the Company adopted the newly issued accounting standard which changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the disclosure requirements, particularly for Level 3 fair value measurements. The adoption of the newly issued accounting standard did not have a material effect on its financial position or results of operations.

 

On January 1, 2012, the Company adopted the newly issued accounting standard which amends the disclosure requirements for the presentation of other comprehensive income (“OCI”) in the financial statements, including elimination of the option to present OCI in the statement of member’s deficit.  As a result of this new standard, OCI and its

 

5



 

(2) RECENT ACCOUNTING PRONOUNCEMENTS (continued)

 

components will be required to be presented for both interim and annual periods in a single continuous financial statement, the statement of comprehensive income, or in two separate but consecutive financial statements, consisting of a statement of income followed by a separate statement of OCI.  In addition, items that are reclassified from OCI to net income must be presented on the face of the financial statement.  As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact our financial position, results of operations or cashflows.  The Company has no items of other comprehensive income in any period presented.

 

(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION

 

The Company’s three principal lines of business are Membership Services, Retail and Media.  The Membership Services segment operates the Good Sam Club, the Coast to Coast Club, the President’s Club, Camp Club USA and assorted membership products and services for RV owners, campers and outdoor vacationers.  The President’s Club was merged into the Good Sam Club on January 1, 2012, and the Golf Card Club was sold on March 1, 2012.  The operations of the Golf Card Club were not material to the Membership Services segment, representing less than 0.5% of segment revenue in 2011.  The Retail segment sells specialty retail merchandise and services for RV owners primarily through retail supercenters and internet.  The Media segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories and RV and powersports industry trade magazines.  In addition, the Media segment operates consumer outdoor recreation shows primarily focused on RV and powersports markets.  The Company evaluates performance based on profit or loss from operations before income taxes and unusual items.  Segment profit as presented herein excludes intercompany fees by which interest expense attributable to the Senior Secured Notes is allocated to such segments as management evaluates its lines of business performance before such allocation and this interest expense is evaluated on a consolidated level.

 

The reportable segments are strategic business units that offer different products and services.  They are managed separately because each business requires different technology, management expertise and marketing strategies.  The Company has been disposing of non-core publications since 2011, and for the first nine months of 2012, the Media segment accounted for less than 6% of segment revenues and less than 5% of total operating profit for reportable segments.  The Company is evaluating the potential integration of the remaining components of the Media segment into the Company’s other reportable segments.

 

6



 

(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (continued)

 

The Company does not allocate income taxes or unusual items to segments.  Financial information by reportable business segment is summarized as follows (in thousands):

 

 

 

Membership

 

 

 

 

 

 

 

 

 

Services

 

Retail

 

Media

 

Consolidated

 

THREE MONTHS ENDED SEPTEMBER 30, 2012

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

$

38,725

 

$

95,359

 

$

5,529

 

$

139,613

 

Depreciation and amortization

 

282

 

1,822

 

764

 

2,868

 

Gain (loss) on sale of property and equipment

 

1

 

(3

)

 

(2

)

Interest income

 

639

 

 

2

 

641

 

Interest expense

 

25

 

643

 

 

668

 

Segment operating profit

 

14,648

 

3,230

 

76

 

17,954

 

 

 

 

 

 

 

 

 

 

 

THREE MONTHS ENDED SEPTEMBER 30, 2011

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

39,151

 

82,166

 

7,288

 

128,605

 

Depreciation and amortization

 

276

 

2,001

 

924

 

3,201

 

Loss on sale of property and equipment

 

(7

)

 

 

(7

)

Interest income

 

710

 

 

1

 

711

 

Interest expense

 

 

524

 

 

524

 

Segment operating profit (loss)

 

14,307

 

3,191

 

(381

)

17,117

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 30, 2012

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

117,693

 

255,344

 

22,968

 

396,005

 

Depreciation and amortization

 

634

 

5,259

 

2,331

 

8,224

 

Gain (loss) on sale of property and equipment

 

530

 

(45

)

772

 

1,257

 

Interest income

 

1,972

 

 

5

 

1,977

 

Interest expense

 

25

 

1,896

 

 

1,921

 

Segment operating profit

 

45,314

 

5,902

 

2,525

 

53,741

 

 

 

 

 

 

 

 

 

 

 

NINE MONTHS ENDED SEPTEMBER 30, 2011

 

 

 

 

 

 

 

 

 

Revenues from external customers

 

113,452

 

218,763

 

30,047

 

362,262

 

Depreciation and amortization

 

1,022

 

6,249

 

2,857

 

10,128

 

Gain (loss) on sale of property and equipment

 

(2

)

(28

)

520

 

490

 

Interest income

 

2,181

 

 

3

 

2,184

 

Interest expense

 

 

1,703

 

1

 

1,704

 

Segment operating profit

 

43,424

 

5,387

 

771

 

49,582

 

 

7



 

(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (continued)

 

The following is a reconciliation of operating profit for reportable segments to the Company’s consolidated income before taxes for the three and nine months ended September 30, 2012 and 2011 (in thousands):

 

 

 

THREE MONTHS ENDED

 

NINE MONTHS ENDED

 

 

 

9/30/2012

 

9/30/2011

 

9/30/2012

 

9/30/2011

 

Income Before Income Taxes

 

 

 

 

 

 

 

 

 

Total operating profit for reportable segments

 

$

17,954

 

$

17,117

 

$

53,741

 

$

49,582

 

Unallocated G & A expense

 

(4,020

)

(3,900

)

(10,779

)

(11,178

)

Unallocated depreciation and amortization expense

 

(923

)

(1,009

)

(2,399

)

(2,307

)

Unallocated gain on derivative instrument

 

1,259

 

1,198

 

3,448

 

2,676

 

Unallocated financing charges

 

 

 

 

19

 

Unallocated loss on debt extinguishment

 

 

 

(440

)

 

Elimination of intercompany interest income

 

(426

)

(587

)

(1,326

)

(1,810

)

Unallocated interest expense, net of intercompany elimination

 

(10,523

)

(10,797

)

(31,631

)

(32,243

)

Income before income taxes

 

$

3,321

 

$

2,022

 

$

10,614

 

$

4,739

 

 

The following is a reconciliation of assets of reportable segments to the Company’s consolidated total assets as of September 30, 2012 and December 31, 2011 (in thousands):

 

 

 

9/30/2012

 

12/31/2011

 

Membership Services segment

 

$

291,540

 

$

268,944

 

Retail segment

 

93,790

 

92,117

 

Media segment

 

12,939

 

16,695

 

Total assets for reportable segments

 

398,269

 

377,756

 

Intangible assets not allocated to segments

 

9,392

 

10,881

 

Corporate unallocated assets

 

9,587

 

8,602

 

Elimination of intersegment receivable

 

(171,873

)

(174,276

)

Total assets

 

$

245,375

 

$

222,963

 

 

(4) STATEMENTS OF CASH FLOWS

 

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

 

 

 

2012

 

2011

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

23,561

 

$

23,839

 

Taxes

 

276

 

177

 

 

8



 

(4) STATEMENTS OF CASH FLOWS (continued)

 

For the nine months ended September 30, 2012, the Company recorded an adjustment to the fair value of the interest rate swap resulting in a $3.4 million decrease in Accrued Liabilities in the Balance Sheet as of September 31, 2012, and as a non-cash gain on derivative instruments of $3.4 million in the Statement of Operations for the nine months ended September 30, 2012.  For the nine months ended September 30, 2011, the Company recorded an adjustment to the fair value of the interest rate swap resulting in a $2.7 million decrease in Accrued Liabilities and Other Long-Term Liabilities in the Balance Sheet as of September 31, 2011, and as a non-cash gain on derivative instruments of $2.7 million in the Statement of Operations for the nine months ended September 30, 2011.

 

Effective August 1, 2012, the Company acquired the Good Sam Travel Assist Program (“GSTA”) from a current marketing partner. GSTA provides travel assistance services, including emergency medical assistance and evacuation assistance services to its members.  The acquisition provides the Company full control of the marketing strategies for the program.  The results of the GSTA operations have been included in the consolidated financial statements since that date.  Prior to the acquisition, the Company had a pre-existing relationship with the marketing partner and received a marketing fee for each membership contract sold to our marketing database.  The contingent consideration arrangement requires the Company to pay an agreed upon percentage of acquisition and renewal revenue over a five year period ending on July, 31, 2017 and will be paid monthly.  The preliminary fair value of the contingent consideration arrangement at the acquisition date was $3.0 million.  We estimated the fair value of the contingent consideration using a discounted cash flow model.  The contingent consideration approximates the projected amount that would have been received by the marketing partner over the next five years if the prior marketing agreement was extended.  This fair value measurement was based on significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820.  As of September 30, 2012, there were no significant changes in estimated contingent consideration recognized as a result of the acquisition.  The purchase price was allocated to intangible customer lists and was assigned a life of 5 years.

 

In June 2012, the Company completed the sale of various home and garden shows for approximately $0.6 million, resulting in a gain of $0.7 million.  Included in the sale was $0.1 million of prepaid deposits related to the home and garden shows.

 

In March 2012, the Company completed the sale of the Golf Card Club for approximately $0.2 million, of which $0.1 million was paid at closing date, resulting in a gain of approximately $0.5 million.  Included in the sale was $0.3 million of deferred revenue related to the Golf Card Club unearned membership fees.

 

On February 27, 2012, and in accordance with the provisions of the indenture (the “Senior Secured Notes Indenture”) pursuant to which the Company issued its 11.5% senior secured notes due 2016 (the “Senior Secured Notes”), the Company completed an excess cash flow offer to purchase of $7.4 million in principal amount of the Senior Secured Notes.  These Senior Secured Notes were purchased by the Company and retired on February 27, 2012.  See Note 6 - Debt.  The loss on debt extinguishment includes a $0.1 million

 

9



 

(4) STATEMENTS OF CASH FLOWS (continued)

 

premium, $0.1 million of unamortized original issue discount and $0.2 million of capitalized finance expense related to the $7.4 million in principal purchased on February 27, 2012. On July 31, 2012, the Company completed an excess cash flow offer to purchase up to $4.95 million in principal amount of the Senior Secured Notes.  The amount of Senior Secured Notes tendered was $4,000.  These Senior Secured Notes were purchased by the Company and retired on August 7, 2012.

 

(5) GOODWILL AND INTANGIBLE ASSETS

 

The Company reviews goodwill and indefinite-lived intangible assets for impairment at least annually and more often when impairment indicators are present.  The Company performs its annual impairment test during the fourth quarter.  Under the accounting guidance for goodwill and other intangible assets, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value.

 

The Company’s reporting units are generally consistent with the operating segments underlying the reporting segments identified in Note 3 — Disclosures about Segments of an Enterprise and Related Information.

 

Finite-lived intangible assets, related accumulated amortization and weighted average useful life consisted of the following at September 30, 2012 (in thousands, except as noted):

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

Average Useful

 

 

 

Accumulated

 

 

 

 

 

Life (in years)

 

Gross

 

Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

Membership and customer lists

 

6

 

$

34,955

 

$

(31,315

)

$

3,640

 

Non-compete and deferred consulting agreements

 

 

18,275

 

(18,275

)

 

Deferred financing costs

 

6

 

15,104

 

(5,397

)

9,707

 

 

 

 

 

$

68,334

 

$

(54,987

)

$

13,347

 

 

Indefinite-lived intangible assets totaling $0.4 million at September 30, 2012 consisted of internet domain names purchased at various times during the 2012.

 

(6) DEBT

 

Senior Secured Notes

 

On November 30, 2010, the Company issued $333.0 million principal amount Senior Secured Notes at an original issue discount of $6.9 million, or 2.1%.  Interest on the Senior Secured Notes at a rate of 11.5% per annum is due each December 1 and June 1

 

10



 

(6) DEBT (continued)

 

commencing June 1, 2011.  The Senior Secured Notes mature on December 1, 2016.  The Company used the net proceeds of $326.0 million from the issuance of the Senior Secured Notes: (i) to irrevocably redeem or otherwise retire all of the outstanding 9% senior subordinated notes due 2012 (the “Senior Subordinated Notes”) in an approximate amount (including accrued interest through but not including November 30, 2010) of $142.5 million; (ii) to permanently repay all of the outstanding indebtedness under the Company’s existing senior secured credit facility (the “2010 Senior Credit Facility”) in an approximate amount (including call premium and accrued interest through but not including November 30, 2010) of $153.4 million; (iii) to make a $19.6 million distribution to the Company’s direct parent, Affinity Group Holding, LLC, (“Parent”), to enable Parent, together with other funds contributed to the Parent, to redeem, repurchase or otherwise acquire for value and satisfy and discharge all of its outstanding 10 7/8% senior notes due 2012 (the “AGHI Notes”); and (iv) to pay related fees and expenses in connection with the foregoing transactions and to provide for general corporate purposes.  As of September 30, 2012, an aggregate of $325.6 million of Senior Secured Notes remain outstanding.

 

The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of the Company’s existing and future domestic restricted subsidiaries.  All of the Company’s subsidiaries other than CWFR are designated as restricted subsidiaries, and CWFR constitutes our only “unrestricted subsidiary”.  In the event of a bankruptcy, liquidation or reorganization of an unrestricted subsidiary, holders of the indebtedness of an unrestricted subsidiary and their trade creditors are generally entitled to payment of their claims from the assets of an unrestricted subsidiary before any assets are made available for distribution to us.  As a result, with respect to assets of unrestricted subsidiaries, the Senior Secured Notes are structurally subordinated to the prior payment of all of the debts of such unrestricted subsidiaries.

 

The Senior Secured Notes Indenture limits the Company’s ability to, among other things, incur more debt, pay dividends or make other distributions to the Company’s Parent, redeem stock, make certain investments, create liens, enter into transactions with affiliates, merge or consolidate, transfer or sell assets and make capital expenditures.

 

Subject to certain conditions, the Company is required to offer to redeem Senior Secured Notes at 101% of principal amount tendered for redemption in an aggregate amount of the Excess Cash Flow Amount (as defined in the Senior Secured Indenture) for the respective period.  For the calendar year ended December 31, 2011, the Excess Cash Flow Amount was the greater of $7.5 million or 75% of the Excess Cash Flow.  For each six month period ending on June 30 beginning June 30, 2012, the minimum Excess Cash Flow Amount is $5.0 million if the then outstanding aggregate principal amount of the Senior Secured Notes exceeds $233.0 million or $1.0 million if the then outstanding aggregate principal amount of the Senior Secured Notes is $233.0 million or less (such amount called the “Minimum Excess Cash Flow”).  For the calendar years commencing with the calendar year ended December 31, 2012, the Excess Cash Flow Amount is the greater of (i) the Minimum Excess Cash Flow Amount, or (ii) (x) 75% of Excess Cash

 

11



 

(6) DEBT (continued)

 

Flow for such annual period, minus (y) the Minimum Excess Cash Flow Amount for the immediately preceding nine months period ending on June 30.  On February 27, 2012, the Company completed an excess cash flow offer to purchase $7.4 million in principal amount of the Company’s outstanding Senior Secured Notes.  The Senior Secured Notes were purchased by the Company and retired on February 27, 2012, resulting in a $0.4 million loss on debt extinguishment.  On July 31, 2012, the Company completed an excess cash flow offer to purchase up to $4.95 million in principal amount of the Senior Secured Notes.  The amount of Senior Secured Notes tendered was $4,000.  These Senior Secured Notes were purchased by the Company and retired on August 7, 2012.

 

The Senior Secured Notes and the related guarantees are the Company’s and the guarantors’ senior secured obligations.  The Senior Secured Notes (i) rank senior in right of payment to all of our and the guarantors’ existing and future subordinated indebtedness, (ii) rank equal in right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness other than the obligations of Camping World and its subsidiaries under the CW Credit Facility and future replacements of that facility, (iii) are structurally subordinated to all future indebtedness of the Company’s subsidiaries that are not guarantors of the Senior Secured Notes and (iv) are effectively subordinated to the CW Credit Facility and any future credit facilities in replacement thereof to the extent of the value of the collateral securing indebtedness under such facilities.

 

CW Credit Facility

 

On March 1, 2010, our wholly-owned subsidiary, Camping World, Inc. entered into the CW Credit Facility providing for an asset based lending facility of up to $22.0 million, of which $10.0 million is available for letters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility initially matured on the earlier of March 1, 2013, 60 days prior to the date of maturity of the 2010 Senior Credit Facility, or 120 days prior to the earlier date of maturity of the Senior Subordinated Notes and the AGHI Notes.  Interest under the revolving loans under the CW Credit Facility floated at either 3.25% over the base rate (defined as the greater of the prime rate, federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whose interest is based on the prime rate or 3.25% over the LIBOR rate (defined as the greater of LIBOR rate applicable to the period of the respective LIBOR borrowings) for borrowings whose interest is based on LIBOR.  On December 30, 2010, the CW Credit Facility was amended to extend the maturity to September 1, 2014, to decrease the interest rate margin to 2.75%, to remove the 1% LIBOR floor, to increase the revolving loan commitment amount from $12.0 million to $20.0 million, with a $5.0 million sublimit for letters of credit, and to decrease the letters of credit commitment from $10.0 million to $5.0 million.  On April 23, 2012, the Company amended the CW Credit Facility to (a) increase borrowing availability by reducing the collateral availability block from $5.0 million to $2.5 million from October 1st of each year through the last day of February of the immediately following year, (b) eliminate any restrictions on the number of new store openings during the year, and (c) increase the interest rate margin from 2.75% to 3.25%.  On July 23, 2012, Camping World amended the CW Credit Facility to provide that capital expenditures may be

 

12



 

(6) DEBT (continued)

 

incurred in excess of $5.0 million if during such fiscal year (a) the holders of Camping World’s Equity Interest make a cash common equity contribution to Camping World in an amount at least equal to such excess, or (b) the Camping World or their Subsidiaries receive proceeds from asset sales (other than inventory sold in the ordinary course of business) in an amount at least equal to such excess.  As of September 30, 2012, the Company made equity contributions totaling $2.0 million to Camping World to enable additional capital expenditures above $5.0 million.

 

The CW Credit Facility contains affirmative covenants, including financial covenants, and negative covenants.  Borrowings under the Camping World Credit Agreement are guaranteed by the direct and indirect subsidiaries of Camping World and are secured by a pledge on the stock of Camping World and its direct and indirect subsidiaries and liens on the assets of Camping World and its direct and indirect subsidiaries.  As of September 30, 2012, the average interest rate on the CW Credit Facility was 3.481%.  Borrowings under the CW Credit Facility are based on the borrowing base of eligible inventory and accounts receivable of Camping World and its subsidiaries.  The administrative agent under the CW Credit Facility, the collateral agent under the Senior Secured Notes Indenture, the Company, and certain guarantor subsidiaries of the Company entered into the Intercreditor Agreement that governs their rights to the collateral pledged to secure the respective indebtedness of the Company and the guarantors pursuant to the CW Credit Facility and the Senior Secured Notes Indenture.  As of September 30, 2012, $8.1 million of CW Credit Facility remains outstanding and $5.3 million of letters of credit were issued.

 

The Senior Secured Notes Indenture and the CW Credit Facility contain certain restrictive covenants relating to, but not limited to, mergers, changes in the nature of the business, acquisitions, additional indebtedness, sale of assets, investments, and the payment of dividends subject to certain limitations and minimum operating covenants.  The Company was in compliance with all debt covenants at September 30, 2012.

 

(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

 

In November 2010, the Company completed an offering of $333.0 million principal amount of the Senior Secured Notes.  See Note 6 - Debt.  The Company’s present and future restricted subsidiaries guarantee the Senior Secured Notes with unconditional guarantees of payment.

 

All of the Company’s restricted subsidiaries have jointly and severally guaranteed the indebtedness under the Senior Secured Notes.  Full financial statements of the Guarantors have not been included because, pursuant to their respective guarantees, the Guarantors are jointly and severally liable with respect to the Senior Secured Notes.  The Company’s unrestricted subsidiary, CWFR Capital Corp. is a not a guarantor of the Senior Secured Notes.

 

13



 

(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)

 

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries as of and for the nine months ended September 30, 2012 (in thousands).

 

 

 

 

 

 

 

NON-

 

 

 

GSE

 

 

 

GSE

 

GUARANTORS

 

GUARANTOR

 

ELIMINATIONS

 

CONSOLIDATED

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

 

$

14,693

 

$

4,118

 

$

 

$

 

$

18,811

 

Accounts receivable - net of allowance for doubtful accounts

 

24,705

 

180,871

 

 

 

(171,873

)

33,703

 

Inventories

 

 

73,523

 

 

 

73,523

 

Other current assets

 

4,476

 

15,435

 

 

 

19,911

 

Total current assets

 

43,874

 

273,947

 

 

(171,873

)

145,948

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

3,220

 

21,541

 

 

 

24,761

 

Intangible assets

 

9,392

 

4,331

 

 

 

13,723

 

Goodwill

 

49,944

 

 

 

 

49,944

 

Investment in subsidiaries

 

786,215

 

 

 

(786,215

)

 

Affiliate note and investments

 

40,000

 

4,953

 

 

(40,000

)

4,953

 

Other assets

 

3,820

 

2,226

 

 

 

6,046

 

Total assets

 

$

936,465

 

$

306,998

 

$

 

$

(998,088

)

$

245,375

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

196

 

$

22,618

 

$

 

$

 

$

22,814

 

Accrued and other liabilities

 

19,752

 

20,729

 

 

 

40,481

 

Current portion of long-term debt

 

181,873

 

40,000

 

 

(211,873

)

10,000

 

Current portion of deferred revenue

 

1,086

 

61,632

 

 

 

62,718

 

Total current liabilities

 

202,907

 

144,979

 

 

 

(211,873

)

136,013

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

1,952

 

30,331

 

 

 

32,283

 

Long-term debt

 

310,353

 

8,097

 

 

 

318,450

 

Other long-term liabilities

 

665,603

 

(662,849

)

 

 

2,754

 

Total liabilities

 

1,180,815

 

(479,442

)

 

 

(211,873

)

489,500

 

 

 

 

 

 

 

 

 

 

 

 

 

Interdivisional equity

 

 

786,215

 

 

(786,215

)

 

Member’s deficit

 

(244,125

)

 

 

 

(244,125

)

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities & member’s deficit

 

$

936,690

 

$

306,773

 

$

 

$

(998,088

)

$

245,375

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,499

 

$

395,213

 

$

 

$

(5,707

)

$

396,005

 

Costs applicable to revenues

 

(8,026

)

(236,484

)

 

5,707

 

(238,803

)

Operating expenses

 

(13,329

)

(104,623

)

 

 

(117,952

)

Interest expense, net

 

(32,957

)

56

 

 

 

(32,901

)

Income from investment in consolidated subsidiaries

 

36,991

 

 

 

(36,991

)

 

Other non operating income (expenses)

 

21,410

 

(17,145

)

 

 

4,265

 

Income tax expense

 

(142

)

(26

)

 

 

(168

)

Net income

 

$

10,446

 

$

36,991

 

$

 

$

(36,991

)

$

10,446

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operations

 

$

(43,863

)

$

59,365

 

$

 

$

2,025

 

$

17,527

 

Cash flows provided by (used in) investing activities

 

(1,607

)

(6,700

)

 

 

(8,307

)

Cash flows provided by (used in) financing activities

 

52,414

 

(61,073

)

 

(2,025

)

(10,684

)

Cash at beginning of year

 

7,749

 

12,526

 

 

 

20,275

 

Cash at end of period

 

$

14,693

 

$

4,118

 

$

 

$

 

$

18,811

 

 

14



 

(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)

 

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries as of and for the three months ended September 30, 2012 (in thousands).

 

 

 

 

 

 

 

NON-

 

 

 

GSE

 

 

 

GSE

 

GUARANTORS

 

GUARANTOR

 

ELIMINATIONS

 

CONSOLIDATED

 

Revenue

 

$

1,297

 

$

139,569

 

$

 

$

(1,253

)

$

139,613

 

Costs applicable to revenues

 

(1,314

)

(84,592

)

 

1,253

 

(84,653

)

Operating expenses

 

(4,991

)

(36,929

)

 

 

(41,920

)

Interest expense, net

 

(10,949

)

(27

)

 

 

(10,976

)

Income from investment in consolidated subsidiaries

 

11,847

 

 

 

(11,847

)

 

Other non operating income (expenses)

 

7,405

 

(6,148

)

 

 

1,257

 

Income tax expense

 

(31

)

(26

)

 

 

(57

)

Net income

 

$

3,264

 

$

11,847

 

$

 

$

(11,847

)

$

3,264

 

 

The following are summarized balance sheet statements setting forth certain financial information concerning the Guarantor Subsidiaries as of December 31, 2011 (in thousands).

 

 

 

 

 

 

 

NON-

 

 

 

GSE

 

 

 

GSE

 

GUARANTORS

 

GUARANTOR

 

ELIMINATIONS

 

CONSOLIDATED

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash & cash equivalents

 

$

7,749

 

$

12,526

 

$

 

$

 

$

20,275

 

Accounts receivable - net of allowance for doubtful accounts

 

1,295

 

205,953

 

 

(174,276

)

32,972

 

Inventories

 

 

56,558

 

 

 

56,558

 

Other current assets

 

5,204

 

9,705

 

 

 

14,909

 

Total current assets

 

14,248

 

284,742

 

 

(174,276

)

124,714

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

2,906

 

19,657

 

 

 

22,563

 

Intangible assets

 

10,881

 

3,834

 

 

 

14,715

 

Goodwill

 

49,944

 

 

 

 

49,944

 

Investment in subsidiaries

 

749,224

 

 

 

(749,224

)

 

Affiliate note and investments

 

40,000

 

4,587

 

 

(40,000

)

4,587

 

Other assets

 

3,960

 

2,480

 

 

 

6,440

 

Total assets

 

$

871,163

 

$

315,300

 

$

 

$

(963,500

)

$

222,963

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,638

 

$

16,412

 

$

 

$

 

18,050

 

Accrued and other liabilities

 

14,110

 

19,661

 

 

 

33,771

 

Current portion of long-term debt

 

186,698

 

40,000

 

 

(214,276

)

12,422

 

Current portion of deferred revenue

 

861

 

54,009

 

 

 

54,870

 

Total current liabilities

 

203,307

 

130,082

 

 

 

(214,276

)

119,113

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred revenue

 

2,045

 

28,934

 

 

 

30,979

 

Long-term debt

 

314,522

 

10,506

 

 

 

325,028

 

Other long-term liabilities

 

605,085

 

(603,446

)

 

 

1,639

 

Total liabilities

 

1,124,959

 

(433,924

)

 

 

(214,276

)

476,759

 

 

 

 

 

 

 

 

 

 

 

 

 

Interdivisional equity

 

 

749,224

 

 

(749,224

)

 

Member’s deficit

 

(253,796

)

 

 

 

(253,796

)

Total liabilities & member’s deficit

 

$

871,163

 

$

315,300

 

$

 

$

(963,500

)

$

222,963

 

 

15



 

(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)

 

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the nine months ended September 30, 2011 (in thousands).

 

 

 

 

 

 

 

NON-

 

 

 

GSE

 

 

 

GSE

 

GUARANTORS

 

GUARANTOR

 

ELIMINATIONS

 

CONSOLIDATED

 

Revenue

 

$

5,571

 

$

356,691

 

$

 

$

 

$

362,262

 

Costs applicable to revenues

 

(7,156

)

(210,103

)

 

 

(217,259

)

Operating expenses

 

(12,576

)

(97,298

)

 

 

(109,874

)

Interest expense, net

 

(34,053

)

480

 

 

 

(33,573

)

Income from investment in consolidated subsidiaries

 

31,762

 

 

 

(31,762

)

 

Other non operating income (expenses)

 

21,186

 

(18,003

)

 

 

3,183

 

Income tax expense

 

(158

)

(5

)

 

 

(163

)

Net income

 

$

4,576

 

$

31,762

 

$

 

$

(31,762

)

$

4,576

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from operations

 

$

(25,159

)

$

51,161

 

$

 

$

 

$

26,002

 

Cash flows provided by (used in) investing activities

 

(560

)

(2,746

)

 

 

(3,306

)

Cash flows provided (used in) by financing activities

 

40,788

 

(53,122

)

 

 

(12,334

)

Cash at beginning of year

 

2,071

 

13,292

 

 

 

15,363

 

Cash at end of period

 

$

17,140

 

$

8,585

 

$

 

$

 

$

25,725

 

 

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the three months ended September 30, 2011 (in thousands).

 

 

 

 

 

 

 

NON-

 

 

 

GSE

 

 

 

GSE

 

GUARANTORS

 

GUARANTOR

 

ELIMINATIONS

 

CONSOLIDATED

 

Revenue

 

$

2,958

 

$

125,647

 

$

 

$

 

$

128,605

 

Costs applicable to revenues

 

(3,269

)

(74,546

)

 

 

(77,815

)

Operating expenses

 

(4,779

)

(33,990

)

 

 

(38,769

)

Interest expense, net

 

(11,384

)

187

 

 

 

(11,197

)

Income from investment in consolidated subsidiaries

 

1,340

 

 

 

(1,340

)

 

Other non operating income (expenses)

 

17,151

 

(15,953

)

 

 

1,198

 

Income tax expense

 

(38

)

(5

)

 

 

(43

)

Net income

 

$

1,979

 

$

1,340

 

$

 

$

(1,340

)

$

1,979

 

 

(8) INTEREST RATE SWAP AGREEMENTS

 

The Company is exposed to certain risks related to its business operations.  The primary risks that the Company managed by using derivatives is interest rate risk.  The Company uses financial instruments, including interest rate swap agreements, to reduce the Company’s risk to this exposure.  The Company does not use derivatives for speculative trading purposes and are not a party to leveraged derivatives.  The Company recognizes all of their derivative instruments as either assets or liabilities at fair value.  Fair value is determined in accordance with the accounting guidance for Fair Value Measurements.  See Note 9 — Fair Value Measurements.  The accounting for

 

16



 

(8) INTEREST RATE SWAP AGREEMENTS (continued)

 

changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.  For derivatives designated as hedges under the accounting guidance for derivative instruments and hedging activities, the Company formally assesses, both at inception and periodically thereafter, whether the hedging derivatives are highly effective in offsetting changes in either the fair value or cash flows of the hedged item.  The Company’s derivatives that are not designated and do not qualify as hedges under the accounting guidance for derivative instruments and hedging activities are adjusted to fair value through current earnings.

 

On October 15, 2007, the Company entered into a five-year interest rate swap agreement with a notional amount of $100.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.447% at September 30, 2012 based upon the July 31, 2012 reset date) and make periodic payments at a fixed rate of 5.135%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31.  The interest rate swap agreement was effective beginning October 31, 2007 and expires on October 31, 2012.  On March 19, 2008, the Company entered into a 4.5 year interest rate swap agreement effective April 30, 2008 with a notional amount of $35.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.447% at September 30, 2012 based upon the July 31, 2012 reset date) and make periodic payments at a fixed rate of 3.430%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31.  The interest rate swap was effective beginning April 30, 2008 and expires on October 31, 2012.  The fair value of the swap agreements were zero at inception.  The Company entered into the interest rate swap agreements to limit the effect of variable interest rates on the Company’s floating rate debt.  The interest rate swap agreements were originally designated as cash flow hedges of the variable rate interest payments due on $135.0 million of the term loans and the revolving credit facility issued June 24, 2003.  Due to the issuance of the Senior Secured Notes representing fixed rate debt to replace the existing variable rate debt on November 30, 2010, the interest rate swaps no longer qualified as cash flow hedges as the underlying cash flows being hedged were no longer going to occur.  The fair value of the swap contracts is included in Accrued Liabilities, and totaled $0.4 million and $3.9 million as of September 30, 2012 and December 31, 2011, respectively.

 

The following is the location and amounts of derivative instruments fair values in the statement of financial position for derivatives not designated as hedging instruments.

 

Derivatives not designated

 

 

 

Fair Value as of:

 

as hedging instruments

 

Balance Sheet Location

 

9/30/2012

 

12/31/2011

 

 

 

 

 

 

 

 

 

Interest rate swap contracts

 

Accrued liabilities

 

$

(423

)

$

(3,871

)

 

17



 

(8) INTEREST RATE SWAP AGREEMENTS (continued)

 

The following is the location and amount of gains and losses on derivative instruments in the statement of operations for the nine months ended September 30, 2012 and 2011 (in thousands):

 

 

 

Interest Rate Swap Agreements

 

 

 

9/30/2012

 

9/30/2011

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

Amount of Gain recognized in income on Statement of Operations

 

$

3,448

 

$

2,676

 

Location of Gain recognized in Statement of Operations

 

Gain on derivative instrument

 

 

(9) FAIR VALUE MEASUREMENTS

 

Accounting guidance for fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

As of September 30, 2012, the Company holds interest rate swap contracts that are required to be measured at fair value on a recurring basis.  The Company’s interest rate swap contracts are not traded on a public exchange.  See Note 8 - Interest Rate Swap Agreements for further information on the interest rate swap contracts.  The fair value of these interest rate swap contracts are determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets.  Therefore, the Company has categorized these swap contracts as Level 2.

 

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge. The Company’s estimates of fair value utilized in goodwill impairment test may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, economic conditions, or changes to the Company’s business operations. Such changes may result in impairment charges recorded in future periods.

 

18



 

(9) FAIR VALUE MEASUREMENTS (continued)

 

The Company’s liability at September 30, 2012 and December 31, 2011, measured at fair value on a recurring basis subject to the disclosure requirements from accounting guidance, was as follows:

 

 

 

 

 

Fair Value Measurements at Reporting Date Using

 

(in thousands)

 

 

 

Quoted Prices in
Active Markets for
Identical Assets

 

Significant Other
Observable
Inputs

 

Significant
Unobservable
Inputs

 

Description

 

Amount

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2012:

 

 

 

 

 

 

 

 

 

Interest Rate Swap Contracts

 

$

(423

)

$

 

$

(423

)

$

 

Contingent consideration

 

(2,967

)

 

 

(2,967

)

 

 

 

 

 

 

 

 

 

 

As of December 31, 2011:

 

 

 

 

 

 

 

 

 

Interest Rate Swap Contracts

 

(3,871

)

 

(3,871

)

 

 

The fair value of the interest rate swap contracts was calculated using the income method based on quoted interest rates.  The fair value of the contingent consideration was calculated using a discounted cashflow model.

 

There have been no transfers of assets or liabilities between the fair value measurement levels and there were no material re-measurements to fair value during 2012 and 2011 of assets and liabilities that are not measured at fair value on a recurring basis.

 

The following table presents the reported carrying value and fair value information for the Company’s Senior Secured Notes and the CW Credit Facility.  The fair values shown below for the Senior Secured Notes is based on quoted prices in the market for identical assets (Level 1), and the CW Credit Facility is based on indirect observable inputs (Level 2) (in thousands):

 

 

 

9/30/2012

 

12/31/2011

 

 

 

Carrying Value

 

Fair Value

 

Carrying Value

 

Fair Value

 

Senior Secured Notes

 

$

320,353

 

$

345,108

 

$

326,944

 

$

326,340

 

CW Credit Facility

 

8,097

 

8,097

 

10,506

 

10,506

 

 

(10) SUBSEQUENT EVENTS

 

The Company has completed an evaluation of all subsequent events through the filing date and concluded, that no other subsequent events have occurred that would require recognition in the Company’s Consolidated Financial Statements or disclosed in the Notes to the Consolidated Financial Statements.

 

19



 

ITEM 2:

 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following table is derived from the Company’s Consolidated Statements of Operations and expresses the results from operations as a percentage of revenues and reflects the net increase (decrease) between periods:

 

 

 

THREE MONTHS ENDED

 

 

 

9/30/2012

 

9/30/2011

 

Inc/(Dec)

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

Membership services

 

27.7

%

30.4

%

(1.1

)%

Retail

 

68.3

%

63.9

%

16.1

%

Media

 

4.0

%

5.7

%

(24.1

)%

 

 

100.0

%

100.0

%

8.6

%

 

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

 

 

Membership services

 

15.5

%

17.8

%

(5.3

)%

Retail

 

42.2

%

38.0

%

20.6

%

Media

 

2.9

%

4.7

%

(33.9

)%

 

 

60.6

%

60.5

%

8.8

%

 

 

 

 

 

 

 

 

GROSS PROFIT

 

39.4

%

39.5

%

8.2

%

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general and administrative

 

27.4

%

26.9

%

10.3

%

Depreciation and amortization

 

2.7

%

3.3

%

(10.0

)%

 

 

30.1

%

30.2

%

8.1

%

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

9.3

%

9.3

%

8.5

%

 

 

 

 

 

 

 

 

NON-OPERATING ITEMS:

 

 

 

 

 

 

 

Interest income

 

0.2

%

0.1

%

73.4

%

Interest expense

 

(8.0

)%

(8.7

)%

(1.1

)%

Gain on derivative instrument

 

0.9

%

0.9

%

5.1

%

Gain on sale of assets or businesses

 

 

 

(71.4

)%

Other non-operating items, net

 

 

 

(100.0

)%

 

 

(6.9

)%

(7.7

)%

(2.8

)%

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

2.4

%

1.6

%

64.2

%

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

(0.1

)%

(0.1

)%

32.6

%

 

 

 

 

 

 

 

 

NET INCOME

 

2.3

%

1.5

%

64.9

%

 

20



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following table is derived from the Company’s Consolidated Statements of Operations and expresses the results from operations as a percentage of revenues and reflects the net increase (decrease) between periods:

 

 

 

NINE MONTHS ENDED

 

 

 

9/30/2012

 

9/30/2011

 

Inc/(Dec)

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

Membership services

 

29.7

%

31.3

%

3.7

%

Retail

 

64.5

%

60.4

%

16.7

%

Media

 

5.8

%

8.3

%

(23.6

)%

 

 

100.0

%

100.0

%

9.3

%

 

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

 

 

Membership services

 

16.6

%

17.8

%

1.9

%

Retail

 

39.5

%

35.5

%

21.7

%

Media

 

4.2

%

6.7

%

(31.3

)%

 

 

60.3

%

60.0

%

9.9

%

 

 

 

 

 

 

 

 

GROSS PROFIT

 

39.7

%

40.0

%

8.4

%

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general and administrative

 

27.1

%

26.9

%

10.1

%

Financing expense

 

 

 

100.0

%

Depreciation and amortization

 

2.7

%

3.4

%

(14.6

)%

 

 

29.8

%

30.3

%

7.4

%

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

9.9

%

9.7

%

11.7

%