10-K 1 a12-29719_110k.htm 10-K

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

    X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2012

 

or

 

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                        to

 

Commission File Number     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

Lincolnshire, IL 60069

(Address of principal executive offices, Zip Code)

 

(847) 229-6720

(Registrant’s telephone 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

YES                 NO   X

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act

 

YES    X         NO       

 

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       

 

*The issuer has filed all Exchange Act reports for the preceding 12 months.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 files).

 

YES    X          NO       

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                                                               

 

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

 

 

Large Accelerated filer         

Accelerated filer                             

 

 

 

 

Non-accelerated filer       X      (Do not check if smaller

Smaller reporting company          

 

reporting company)

 

 

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

 

YES                 NO   X

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, was $0 as of the last business day of the registrant’s most recently completed second quarter.

 


 


 

PART I

 

ITEM 1: BUSINESS

 

General

 

Except where the context indicates otherwise, the term “Company,” or “GSE” means Good Sam Enterprises, LLC and its predecessors, and subsidiaries.  Our predecessor, Affinity Group, Inc., was incorporated as a Delaware corporation on September 25, 1986.  On March 2, 2011, Affinity Group, Inc. converted the form of its organization from a corporation to a limited liability company called Affinity Group, LLC.  On May 2, 2011, Affinity Group, LLC changed its name to Good Sam Enterprises, LLC by filing a Certificate of Amendment to its Certificate of Organization with the Secretary of State of Delaware.

 

We are a wholly-owned subsidiary of Affinity Group Holding, LLC, (the “Parent”), a privately-owned limited liability company.  We are a leading direct marketer, specialty retailer and publisher targeting North American recreational vehicle (“RV”) owners and outdoor enthusiasts. Our core audience is the estimated 30 million RV enthusiasts in North America and the approximately nine million households in North America that own at least one RV.  Our unique business model is based on “affinity marketing,” in which our membership club members and retail customers form a receptive audience to which we sell products, services, merchandise and publications targeted to their specific recreational interests.  Our long operating history dates back approximately 75 years with our publishing businesses and our Good Sam Club dates back 46 years.  This long history has enabled the development of a rich database of approximately ten million RV enthusiasts who have purchased our products or services, subscribed to our publications or have otherwise indicated an interest in the RV lifestyle.

 

We operate through three complementary business segments that together provide the most comprehensive product and service suite to the RV and outdoor enthusiast market:

 

·                  Membership Services:

 

·                  Membership Clubs:  Our membership clubs represent approximately 7%, 9%, and 9% of revenues for 2012, 2011 and 2010, respectively.  We operate two membership clubs totaling approximately 1.3 million club members, including the largest club in the RV market - Good Sam Club, and Coast to Coast Club.  These clubs represents some of the most recognizable brands within the RV community and offers a wide variety of potential discounts and benefits, the average estimated value of which significantly exceeds the cost of membership.  The Good Sam Club and the Camping World President’s Club were combined effective January 1, 2012 under the name Good Sam Club, providing greater member benefits, less brand confusion and lower renewal cost.  Our membership clubs have experienced an average five year retention rate of approximately 74%.

 

·                  Ventures:  Our membership services segment includes ventures with third party providers which represent approximately 22%, 21% and 22% of revenues for 2012, 2011 and 2010, respectively. Our club members, retail customers and publication subscribers form a receptive audience for us to offer our safety, finance and security products and services that enhance the RV experience, including (i) roadside assistance services (“RA”), (ii) property and casualty insurance programs, (iii) mechanical breakdown insurance through our extended service plans (“ESP”), (iv) vehicle financing, (v) credit cards and (vi) emergency assistance services. We have limited liability exposure, as the majority of our products and services are provided by third parties who pay us a marketing fee. Our products and services generate significant value, with an average renewal rate of 81% over the last five years.

 

1



 

·                  Retail:

 

Our retail segment, Camping World, represents approximately 63%, 59%, and 57% of revenues for 2012, 2011, and 2010, respectively.  With a nationwide footprint of 93 Camping World retail and service stores in 32 states, we are the only national specialty retailer of aftermarket parts and accessories and the largest national provider of repair and maintenance services exclusively serving the North American RV industry.  We believe that Camping World’s leading position in the RV accessory industry results from a high level of brand recognition, an effective triple channel distribution strategy (stores, catalogs and online) that allows us to reach our customers at home or on the road, and a commitment to offer a broad selection of specialized RV products and services combined with technical assistance and on-site installation.

 

·                  Membership Services - Media:

 

Our membership services -media segment represents approximately 8%, 11% and 12% of revenues for 2012, 2011, and 2010, respectively.  Through our publications and consumer events, the Membership Services - Media segment helps create awareness of our brand in the RV community, attracts RV enthusiasts and owners and builds our customer database.  We publish and distribute 18 specialty publications for select markets in the recreation and leisure industry, including general circulation periodicals, club magazines, campground directories, and RV industry trade magazines, with aggregate circulation of approximately 2.6 million and approximately 700,000 paid subscribers.  In addition, we operate more than 40 websites, primarily as companion sites to print publications that offer more detailed reference information.  We believe that the targeted audience of each of our publications is an important factor in attracting advertisers, which include manufacturers of RVs and RV-related products, campground operators and large national RV dealerships as well as manufacturers of power sports vehicles and accessories.  We also operate 26 consumer outdoor recreation shows at 23 venues in 19 cities, which are primarily RV, boat and sport shows.  The total audience of RV, boating, powersports and outdoor recreation enthusiasts who attend our shows is approximately 250,000 annually.

 

Industry Overview

 

We believe that both the size of the installed base of RVs and RV usage are the most important factors affecting the demand for our membership clubs, merchandise, products, services and publications. Our core audience is the roughly 30 million RV enthusiasts in North America and the approximately nine million installed base of RVs (defined as the total number of RVs currently in operation in the United States), as estimated by the Recreation Vehicle Industry Association (“RVIA”).  According to the National Survey of the RV Consumer published by the University of Michigan in 2011 (the “RV Survey”), during the past forty years, the average yearly sales of traditional RVs was just over 280,000 units.  Additionally, the total number of households owning RVs was approximately 6.9 million in 2001, 7.9 million in 2005 and 8.9 million for 2011.

 

Another factor attributed by the RVIA to an increase in the installed base of RVs is the positive demographic trend that indicates RV ownership increases with age.  According to the RV Survey, the median age of RV owners was 48 in 2011, with ownership rates reaching its highest percentage level, 11.4%, among those 45 to 54 years old.  The RV Survey revealed that high RV ownership rates now extend across a 40-year span from age 35 to 75.  In addition, we believe the aging of the baby boomers will grow the pool of potential RV enthusiasts and owners.  Furthermore, according to the U.S. Census Bureau, the over-45 population in the United States is expected to grow from approximately 127 million in 2010 to approximately 167 million in 2030, which we believe should have a positive impact on RV ownership and usage.  According to the RV Study, RV ownership is also concentrated in the western United States, an area in which the population growth rate continues to be greater than the national average.  The RV Survey also indicates that RV ownership is associated with higher than average annual household income, which among RV owners was approximately $75,000 per annum in 2011 as compared to the national average of $67,530 per annum in 2010.

 

2



 

Furthermore, despite fuel price increases, RV trips remain the least expensive type of vacation according to a study entitled “Family Vacation Cost Comparison” conducted by PKF Consulting in 2008 (the “PKF Study”). The PKF Study also noted that an RV vacation is typically 27% to 61% less costly than other comparable types of vacations studied.  While fuel costs are a component of overall vacation costs, the PKF Study determined that fluctuations in fuel prices should not be a significant factor affecting a family’s decision to take RV trips.

 

Our Competitive Strengths

 

We believe that our key competitive strengths are as follows:

 

Attractive Industry Demographics and Stable Installed Base.  Favorable demographic trends indicate that RV ownership should increase during the next several years.  According to the RV Survey, overall RV ownership rates have historically been highest in the 45-64 age bracket, representing 22.5% of RV ownership.  Also, the RV Survey stated that RV owning households reached 8.9 million in 2011.  We believe the aging of the baby boomers is projected to generate growth in the pool of potential RV consumers, with the over age 45 population in the U.S. expected to grow from approximately 127 million in 2010 to approximately 167 million in 2030.  In addition, RV owners have household incomes that generally exceed the national average. We believe that these demographics are attractive for advertisers and third-party providers of our products and services.

 

Substantial Barriers to Entry.  We believe we hold a dominant market position within the RV industry due to our existing database of approximately ten million RV enthusiasts and the penetration of our products and service offerings to this customer segment.  We believe it would be prohibitively expensive to replicate the size and quality of information contained in our database.  Through our marketing channels, we are able to collect market data on RV owners and enthusiasts and based on such data, we offer valuable products and services to a targeted audience that we believe will be highly likely to purchase our offerings.  By offering products and services to a targeted audience we are able to lower our overall marketing costs, improve our profitability and reduce the price offered to consumers, which improves our value proposition relative to our competitors.  Within our membership club segment, Good Sam Club, which was founded in 1966, is the largest RV membership club in North America in terms of number of members.  Within our retail segment, Camping World, which has grown to 93 retail stores since inception, is the largest and only national specialty retailer of merchandise accessories and services for RV owners and camping enthusiasts.  Through publications and events, we are able to create awareness of our brands in the RV community and attract RV owners and enthusiasts.

 

Nationwide Footprint.  Within our retail segment, Camping World is the largest and only national specialty retailer of merchandise accessories and services for RV owners and outdoor enthusiasts, with 93 retail stores in 32 states.  In 2003, we began a strategy of expanding our footprint in order to more effectively serve our customers whether they are at home or on the road.  We opened a total of 73 stores since that time, targeting high traffic, convenient sites located adjacent to major interstates, where customers live, or near major RV destinations.

 

Comprehensive Product and Service Offerings Allow Us to Deliver Substantial Value to Our Members.  We believe our comprehensive suite of product and service offerings relative to our competition is a meaningful advantage that provides us greater leverage to negotiate benefits and discounts with third-party service providers for our members.  Further, we believe that the savings that are provided to our members as a result of these benefits and discounts have outweighed increases in membership dues.  Our approximately 1.3 million club members and the approximately ten million consumers in our proprietary database serve as a unique, receptive audience for direct marketing, which we believe significantly lowers customer acquisition costs relative to our competitors and facilitates cost-effective cross-selling.  We believe our leading position within the retail market allows us to leverage our buying power, enabling us to purchase our inventory at what we believe are competitive prices.  Our retail pricing strategy is to pass along our low merchandise costs to our customers.

 

3



 

Stable Recurring Cash Flow.  Approximately 79% of our operating income, net of non-recurring, non-cash charges, is generated through our non-retail based businesses, which historically has provided a recurring income stream through a core base of loyal customers.  Our two membership clubs (the Good Sam Club and the Coast to Coast Club) have an average five year retention rate of approximately 74%, which we believe compares favorably to other subscription-based businesses.  Similarly, our membership-based products and services have historically experienced high renewal rates, averaging approximately 81% over the past five years for our largest product and service offerings, roadside assistance, RV insurance and extended service plans.

 

Significant Operating Leverage.  We have implemented a successful strategy to manage operations through the recent economic downturn.  Our disciplined cost saving initiatives have included work force, payroll and employee benefit reductions, office consolidations, right sizing magazine titles, and procurement, marketing and selling expense savings, creating significant operating leverage and improving our cost position.

 

Experienced and Successful Management Team.  With an average of fourteen years with our Company and an average of nineteen years in the industry, our executive management team has a proven track record in direct marketing, retail and media in the RV industry.  In addition to the recent successful implementation of cost saving initiatives, the team has developed substantial experience in increasing our target customer base, using strategic alliances to bolster product offerings that create value for our customers and increasing cross-selling opportunities for our high margin product offerings.

 

Our Business Strategy

 

Maximize Customer Retention with Value-Added Product Offerings.  A key aspect of our strategy is to develop strong membership loyalty by providing an attractive value proposition for club members and offering add-on products specifically targeted to meet their needs as reflected by our strong customer retention rates.  Our two membership clubs (the Good Sam Club and the Coast to Coast Club) provide our customers with tangible savings potential, the estimated value of which substantially exceeds the membership fee.  On average, club members benefit by saving nearly six times the cost of their annual membership dues as a result of being able to purchase products and services at discounts made available through our clubs.  We believe that the participation levels and retention rates of club members reflect the benefits derived from their membership.  To continue to improve customer retention rates, we regularly evaluate member satisfaction and actively respond to changing member preferences through the enhancement or introduction of new membership benefits including products and services.

 

Cross-Sell Products and Services to Existing Customers.  We proactively cross-sell our products and services across our customer base.  For example, one of our core strategies is to offer our safety, finance and security products and services to our Good Sam Club members.  We also use our customer database to cost-efficiently market Camping World products through catalogs and the Internet.  At the same time, Camping World stores provide direct customer referrals and sales to our membership clubs, products and services.  In addition, we use our publications to communicate with our core customer base and to promote our other business segments to existing club members and magazine readers.  Our magazines contain relevant content as well as various forms of advertisements for our membership clubs, products and services.

 

Continue to Enhance Service Offerings at Camping World.  We recently completed a multi-year capital investment of approximately $38 million in 62 new stores, a distribution center expansion and a systems upgrade, which not only expanded the Company’s nationwide Camping World footprint and increased our ability to market products and services, but also enhanced efficiency and lowered distribution costs.  We are focused on improving profitability by continuing to shift focus to the higher margin service and repair business while expanding service offerings.

 

4



 

Continue to Enhance Digital Products.  We believe that we have developed the most comprehensive source of RV news and information on vehicles, the industry, trends and campgrounds through our RV.net and related websites.  Our digital “companion” websites provide our subscribers with additional relevant information tailored to their interests, while providing us with another profitable advertising channel.  We currently operate more than 40 websites dedicated to the RV lifestyle including CampingWorld.com, a direct channel business which allows us to reach customers who are on the road or who do not live near a retail store.

 

Membership Services Segment

 

The Membership Services segment funds its working capital needs through club dues and contract policy fees which are paid in advance, and marketing fees which we receive monthly and quarterly from third party providers.  These prepaid membership fees are classified as deferred revenues.  Revenues, segment profit/ (loss) and assets for the Membership Services segment are detailed in Note 15 – Segment Information in the Notes to the Consolidated Financial Statements.

 

Membership Clubs

 

Our membership clubs provide a receptive audience to which we market our products and services.  We operate primarily two membership clubs: the Good Sam Club and Coast to Coast Club for RV owners, campers and outdoor vacationers.  Effective January 1, 2012, the Good Sam Club and the Camping World President’s Club were combined to a single club called Good Sam Club.  This club merger has allowed the company to provide greater member benefits, less brand confusion, and lower renewal cost for its members.  The combined club has approximately 1.3 million unique members.  In the fourth quarter of 2011, the Company entered into a marketing agreement to transition the operations and members of Camp Club USA to a third party marketing organization.  The marketing agreement transfers the individual memberships to the third party marketing organization upon the end of their current membership period.  On March 1, 2012, Golf Card Club was sold to a third party.

 

The following table sets forth the approximate number of members and annual membership fees as of December 31, 2012, and the approximate average annual retention rate during the period of 2008 through 2012 for each club:

 

 

 

 

 

Annual

 

Average

 

 

Members as of

 

Membership

 

Annual Retention

Membership Club

 

December 31, 2012 (1)

 

Fee (2)

 

Rate (3)

 

 

 

 

 

 

 

 

Good Sam Club

 

1,271,100

 

 

$20 - $25

 

75%

 

 

 

 

 

 

 

 

Coast to Coast Club

 

40,600

 

 

$90 - $140

 

73%

 


(1)                              Includes multi-year and lifetime memberships.

 

(2)                              Annual membership for a single member, subject to special discounts and promotions.

 

(3)                              Excludes members having lifetime memberships.

 

In addition to regular annual memberships, we also sell multi-year memberships. We believe that multi-year memberships provide several advantages, including the up-front receipt of dues in cash, reduced membership marketing costs and a stronger member commitment.

 

Good Sam Club

 

The Good Sam Club, founded in 1966, is a membership organization for RV owners.  The Camping World President’s Club was combined into the Good Sam Club in January, 2012.  The Good Sam Club is the largest RV organization in North America with approximately 1,271,100 members and over 1,300

 

5



 

local chapters as of December 31, 2012.  The average annual retention rate for Good Sam Club members was approximately 75% during the period 2008 through 2012.  We are focused on selling higher margin multi-year memberships which, among other advantages, reduces the cost of renewal membership. Most members purchase annual memberships.

 

Annual membership fees range from $20 to $25, depending on the term and type (acquisition or renewal).  The benefits of club membership include: discounts on all retail merchandise at Camping World stores of up to 30%, discounts for overnight stays at over 2,000 participating RV parks and campgrounds; discounts on fuel, propane, dumping stations and more at approximately 570 Pilot & Flying J Travel Centers in the U.S. and 62 in Canada; a free annual subscription to Highways, the club’s regular news magazine; savings of over 61% on the new 2013 Good Sam RV Travel & Campground Guide; discounts on our other publications; trip routing and mail-forwarding; access to online coupons from Camping World and our Smile & Save partners; a 50% discount on admission to Good Sam consumer events and shows, discounts on products and services developed for club members, and much more.  Based on typical usage patterns, we estimate that Good Sam Club members realize estimated annual savings from discounts of approximately $143.

 

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 Club program benefit from increased occupancy and sales of camping related products.  We believe we have established discount programs with a considerable portion of for-profit RV parks and campgrounds that meet our quality standards.  We monitor the participating campgrounds and remove substandard facilities from our program to ensure that our brand image and reputation are not harmed.

 

In 1992, we began selling lifetime memberships for the Good Sam Club. In 2012, the average price for a lifetime membership was $161 with 170,700 lifetime members registered as of December 31, 2012. Based on actuarial tables, we expect the average length of a lifetime membership to be 18 years.

 

The following table lists the approximate number of club memberships, lifetime club memberships and RV parks and campgrounds at which discounts for members were available as of December 31 for the years 2008 through 2012:

 

 

 

December 31,

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Good Sam memberships (1)

 

1,271,100

 

885,800

 

866,100

 

930,000

 

952,200

 

 

 

 

 

 

 

 

 

 

 

Lifetime memberships

 

170,700

 

155,700

 

163,200

 

157,700

 

150,900

 

 

 

 

 

 

 

 

 

 

 

RV parks and campgrounds offering discounts to Good Sam members

 

2,020

 

1,670

 

1,600

 

1,580

 

1,520

 


(1)                              Includes multi-year and lifetime memberships, and includes former Camping World President’s Club members beginning in 2012.

 

Coast to Coast Club

 

The Coast to Coast Club operates a long-established reciprocal use network of membership RV resorts in North America.  We offer a series of membership benefits depending upon pricing and program type under the Coast to Coast Club name.  Members of the Coast to Coast Club belong to a membership RV resort owned and operated by parties unrelated to us. Our club members may use the other resorts in the Coast to Coast Club network on a reservation or space available basis and obtain discounts from other non-private campgrounds.  As of December 31, 2012, there were approximately 40,600 members in the Coast to Coast Club which had nationwide access to approximately 210 membership RV resorts and a network of 185 public campgrounds that participated in the Coast to Coast Club reciprocal use programs. These membership resorts are designed primarily for RV owners, but typically provide camping or lodging facilities, comprised of RVs, cabins, park models, and condominiums.  The membership resorts

 

6


 

 


 

provide an RV site with water, sewer and electrical hook-ups and recreational amenities, such as swimming, tennis or fishing, or proximity to theme parks or other recreational activities.  We have established quality criteria for resorts to join and remain in the Coast to Coast Club networks.

 

For standard annual renewal dues from $99.95 for a single year membership to $599.95 for a multi-year membership, Coast to Coast Club members receive the following benefits: discounts for overnight stays at participating resorts and campgrounds; an annual subscription to Coast to Coast Magazine; the Coast to Coast Directory, which provides information on the participating resorts; discounts on our other publications; access to discount hotels and travel services; condo vacation rentals at discounted prices, dining, shopping, and recreation/entertainment discounts; and access to ancillary products and services developed for our club members.

 

We believe that resorts participating in the Coast to Coast Club networks view access to reciprocating member resorts as an incentive for their customers to join their resort.  Because a majority of Coast to Coast Club members own RVs, access to participating resorts throughout North America can be an important complement to local resort membership.  Based on typical use patterns, we estimate that Coast to Coast Club members realize estimated annual savings from these discounts of approximately $132.  The average annual retention rate for members of the Coast to Coast Club after the initial one-year membership (which is generally paid by the member resort not the club member) was approximately 73% during the period 2008 through 2012.

 

The following table sets forth the approximate number of memberships in the Coast to Coast Club, the approximate number of private resorts participating in the reciprocal use program, and the approximate number of public resorts extending discounts to Coast to Coast Club members as of December 31 for the years 2008 through 2012:

 

 

 

December 31,

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Coast to Coast Club memberships (1)

 

40,600

 

42,200

 

46,400

 

53,700

 

60,200

 

 

 

 

 

 

 

 

 

 

 

Participating membership resorts

 

210

 

218

 

231

 

238

 

239

Participating public resorts

 

185

 

200

 

190

 

189

 

211

 


(1)                              Includes multi-year memberships.

 

Membership Ventures

 

Our approximately 1.3 million club members provide a receptive audience to which we market our products and services. We promote products and services which either address special needs arising from the activities of our club members or appeal generally to persons within the demographic of our club members.  The two products with the largest enrollment are the roadside assistance and the vehicle insurance programs.  Most of our safety, finance and security products and services are provided by third parties who pay us a marketing fee, with the exception of roadside assistance where we assume the risk of incurred claims.

 

Roadside Assistance

 

We promote various Roadside Assistance (“RA”) products to Good Sam Club and Coast to Coast Club members, as well as to non-club members.  The RA programs provide towing and other roadside services for subscribers with annual dues ranging from $59.95 to $159.95.  We developed our RA program initially for Good Sam Club members in 1984, and, as of December 31, 2012, approximately 29% of Good Sam Club members were enrolled.  We currently market these programs through various channels including direct mail, print advertising, online and at Camping World stores and RV dealerships.

 

7



 

The table below sets forth the approximate total enrollment in the various RA programs as of December 31 for the years 2008 through 2012:

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

RA Enrollment

 

408,800

 

360,300

 

352,000

 

356,200

 

354,400

 

 

Vehicle Insurance Programs

 

We offer vehicle insurance programs that offer cost-effective collision and liability insurance suitable to the demographic characteristics and vehicle usage patterns of our various club members.  The Vehicle Insurance Program is marketed primarily to the members of Good Sam Club and Coast to Coast Club.  We have other programs that address the needs of non-Good Sam members.  As of December 31, 2012, approximately 158,100 members participated in the vehicle insurance programs, which represented an 11% penetration of the Good Sam Club.  During the period 2008 to 2012, the average renewal rate of members participating in these insurance programs was approximately 91%.  Our marketing fee revenue is based on the amount of written premiums and the insurance provider assumes all claim risks.

 

The following table sets forth the total number of policies in force as of December 31 for the years 2008 to 2012, and the dollar amount of written premiums paid to insurance providers and the marketing fees generated for such periods:

 

 

 

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

Total policies in force

 

 

158,100

 

152,900

 

161,600

 

168,200

 

184,100

 

 

 

 

 

 

 

 

 

 

 

 

Written premiums paid to insurance providers (in millions)

 

 

$

168

 

$

173

 

$

187

 

$

197

 

$

218

 

 

 

 

 

 

 

 

 

 

 

 

Marketing fees (in millions)

 

 

$

15

 

$

15

 

$

16

 

$

17

 

$

18

 

Extended Service Plan

 

Our Extended Service Plan (“ESP”), a private label extended vehicle warranty program for RVs, had total net revenue for 2012 of $46.6 million, increasing 15% over 2011.  The program had approximately 51,200 policies in force as of December 31, 2012.  Sales of new policies were derived from direct mail marketing, print ads in our magazines, Internet and e-mail solicitations, and promotions in Camping World stores. ESP policy renewals represented 58% of the total revenue for 2012.

 

Other products and services marketed to club members include vehicle financing, credit cards, supplemental health and life insurance, and financial services.  Most of these services are provided to club members by third parties who pay us a marketing fee.

 

Retail Segment

 

The Retail segment funds its working capital needs through its credit facility (see Note 6 - Long-term Debt in the Consolidated Notes to the Financial Statements) and its retail operations.  Camping World is required to carry significant amounts of inventory to meet the requirements of its customers through its retail, internet and mail order channels.  Revenues, segment profit/ (loss) and assets for the Retail segment are detailed in Note 15 – Segment Information in the Notes to the Consolidated Financial Statements.

 

Camping World Stores

 

Camping World is a national specialty retailer of merchandise and services for RV owners. We currently operate 93 Camping World retail locations, which are located in 32 states.  These stores accounted for

 

8



 

approximately 83% of total revenues from the Retail segment for 2012, and the remaining 17% of revenue was derived from catalog and Internet sales.

 

In the RV accessory industry, we believe that Camping World has a high level of positive brand recognition, an effective triple channel distribution strategy (stores, catalogs, and online), and a commitment to offer a broad selection of specialized RV products and services at competitive prices combined with technical assistance and on-site installation.  Camping World’s stores offer approximately 9,200 products, of which we estimate approximately 70% are not regularly available in general merchandise stores.  In addition, general merchandise stores do not provide installation or repair services for RV products, which are available at Camping World’s stores.  Products sold by Camping World include specialty-sized refrigerators, housewares and other appliances, bedding and furniture, generators and hydraulic leveling systems, awnings, chairs, ladders, cleaning and maintenance products, bicycles, hitch towing, sanitation products, automotive electronics and lifestyle products.  Camping World’s stores are designed to provide one-stop shopping by combining broad product selection, technical assistance and on-site installation and repair services.  We strategically locate Camping World stores in areas where many RV owners live, along major Interstates, and/or in proximity to destinations frequented by RV users.

 

Camping World sources its products from approximately 1,100 vendors.  Camping World attends regional, national and international trade shows to determine what products will be offered.  The purchasing activities of Camping World are focused on RV parts and accessories, electronics, housewares, hardware, automotive, crafts, clothing, home furnishings, gifts, camping and sporting goods.  Camping World uses an automated “plan-o-gram” system to develop and maintain merchandising plans unique to each store and an inventory replenishment system for its operations to improve in-stock rates on key items.  Camping World believes that the volume of merchandise it purchases from domestic and international suppliers, and its ability to buy direct from manufacturers, enables it to obtain merchandise at costs which compare favorably to local RV dealers and retailers.  Camping World does not enter into material long-term contracts or commitments with its vendors.

 

The retail stores are periodically refreshed to enhance the customers’ shopping experience as well as to maximize merchandise offerings.  New products and services are introduced in order to keep pace with the advances of the RV industry and to address our customers’ needs.  Customers take advantage of the state-of-the art performance centers staffed with expert, in-house trained, RV technical consultants which are equipped with merchandise demonstrations to assist in educating customers about RV performance products.  Finally, store dress, promotional signage and directional signage are periodically refreshed to further enhance our customers’ shopping experience at Camping World’s stores.

 

Camping World’s stores generally range in size from approximately 10,000 to 64,000 square feet. Approximately 40% of each store is devoted to a retail sales floor, a customer service area, and a technical information counter; 40% is comprised of an installation facility, which contains 4 to 16 drive-through installation bays; and 20% is allocated to office and warehouse space.  Large parking areas provide sufficient space to facilitate maneuvering of RVs.  Camping World maintains toll-free telephone numbers for customers to schedule installation and repair appointments.  All stores are open seven days a week.

 

Camping World has developed dealer partnerships across North America through which Camping World has established retail stores alongside or within existing RV dealerships.  This marketing strategy has provides an expanded number of customers with access to the vast array of products and services that we offer and generates traffic for our dealer partners.  Camping World has established 76 stores alongside or within RV dealerships.  Of the Camping World stores that are located alongside or within RV dealerships, 68 are located within dealerships indirectly owned or operated by FreedomRoads. FreedomRoads is indirectly owned and controlled by Stephen Adams, our Chairman.

 

9



 

Mail Order Operations and Internet

 

Camping World initiated its catalog operations in 1967. Camping World currently has a proprietary mailing list of approximately 2.4 million RV owners, all of whom have made a purchase or requested a catalog from Camping World within the prior 60 months.  Camping World maintains a database of these names, which includes information such as order frequency, size of order, date of most recent order and type of merchandise purchased. Camping World analyzes its database to determine which customers are most likely to order from Camping World’s catalogs.  As a result, Camping World is able to target customers for catalog mailings more effectively than direct marketers of catalogs offering general merchandise.  Camping World continually expands its proprietary mailing list through in-store subscriptions and requests for catalogs in response to advertisements in regional publications directed at RV owners.

 

During 2012, Camping World distributed 4.1 million high-quality, full-color catalogs, 3.4 million of which were mailed in six separate mailings, and the remaining 660,000 catalogs were distributed in stores, at campgrounds and other RV locations, and as package inserts.  During the same period, Camping World processed approximately 430,000 catalog orders with an average net order amount of $118, excluding postage and handling charges.  Camping World distributed six high-quality, full-color catalogs during 2012; the Master Catalog, plus the Early Spring, May, Summer, Late Summer and Fall catalogs.

 

Member Services - Media Segment

 

The Membership Services – Media segment funds its working capital needs through upfront fees paid for annual subscriptions and advertising revenues, in addition to consumer show exhibitor fee revenues and sponsorships paid in advance for their respective annual shows.  Revenues, segment profit/ (loss) and assets for the Retail segment are detailed in Note 15 – Segment Information in the Notes to the Consolidated Financial Statements.

 

We produce and distribute a variety of publications for select markets in the recreation and leisure industry, including general circulation periodicals, club magazines, directories, and RV and powersports industry trade magazines. Revenues are recognized from the sale of advertising, subscriptions and direct sales of some of the publications. We believe that the focused audience of each publication is an important factor in attracting advertisers.

 

10



 

The following chart sets forth the circulation and frequency of our publications:

 

 

 

Average Circulation

 

 

 

 

for the Year Ended

 

Number of Issues

 

 

December 31,

 

Published

Publication

 

2012

 

Annually

 

 

 

 

 

 

 

 

 

 

 

 

 

PAID CIRCULATION MAGAZINES (1)

 

 

 

 

 

 

Camping Life (2)

 

78,688

 

 

3

 

MotorHome

 

127,043

 

 

12

 

Rider

 

133,989

 

 

12

 

SnowGoer

 

59,135

 

 

7

 

Trailer Life

 

202,168

 

 

12

 

 

 

 

 

 

 

 

CONTROLLED CIRCULATION- Business (3)

 

 

 

 

 

 

Boating Industry

 

23,096

 

 

11

 

Campground Management (4)

 

12,939

 

 

8

 

PowerSports Business

 

12,098

 

 

14

 

PowerSports Business Market Data Book

 

13,700

 

 

1

 

 

 

 

 

 

 

 

FREE DISTRIBUTION (5)

 

 

 

 

 

 

Thunder Press- North

 

24,905

 

 

12

 

Thunder Press- South

 

17,789

 

 

12

 

Thunder Press- West

 

28,463

 

 

12

 

 

 

 

 

 

 

 

ANNUALS

 

 

 

 

 

 

Good Sam RV Travel Guide & Campground Directory (1)

 

143,826

 

 

1

 

Trailer Life’s RV Buyers Guide

 

53,856

 

 

1

 

Towing Guides

 

332,680

 

 

1

 

Woodall’s Tenting Directory (6)

 

83,815

 

 

1

 

 

 

 

 

 

 

 

CLUB MAGAZINES (7)

 

 

 

 

 

 

Coast to Coast Magazine

 

45,494

 

 

4

 

Highways

 

1,230,062

 

 

5

 

 

(1) Paid circulation

(2) Merged into Trailer Life Magazine in June 2012

(3) Trade publication distributed to industry-specific groups.

(4) Magazine was sold in 2012. The last issue published by the Company was in August, 2012.

(5) Includes limited paid.

(6) Discontinued after 2012 issue.

(7) Limited to club members and promotional copies. The price is included in the membership fee.

 

Paid Circulation Magazines

 

Camping Life appeals to family-style campers and other outdoor enthusiasts with articles about destinations, products and activities to enhance their outdoor lifestyles.  This publication was merged into Trailer Life in June 2012.

 

MotorHome is a monthly periodical for owners and prospective buyers of motorhomes which has been published since 1968 and 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.

 

11



 

SnowGoer is designed for highly active snowmobiling participants and provides detailed equipment and product critiques, and maintenance tips.

 

Trailer Life, initially published in 1941, is the leading consumer magazine for the RV industry, featuring articles on subjects including product tests, travel and tourist attractions.

 

Controlled Circulation Magazines- Business

 

Boating Industry is the leading source of news and information for dealers, manufacturers, aftermarket vendors and other professionals in the marine industries through its magazine and daily web site.

 

Campground Management is the leading trade magazine for the campground industry.  This publication was sold June, 2012.

 

PowerSports Business is an industry trade magazine, introduced in January 1998, which combines the previously issued Snowmobile Business and Watercraft Business with a motorcycle and ATV business section.  Distribution is to dealers servicing these industries, which in numerous cases have combined operations to service more than one of these segments.

 

PowerSports Business Market Data Book is an annual publication that provides industry sales trends for power sports manufacturers and dealers; dealer customer service and performance data; manufacturer stock performance updates; industry supplier information; and various industry research projects.

 

Free Distribution Publications

 

Thunder Press newspapers are published monthly in three separate editions to reach the country’s motorcycling public and are available primarily through motorcycle dealers.  This tell-it-like-it-is magazine is designed for the ultra-active motorcycle enthusiast who feels passionate about the lifestyle.

 

Annual Publications

 

Good Sam RV Travel Guide & Campground Directory  is an annually updated camping and RVing resource guide which provides comprehensive information on over 14,000 public and private campgrounds, Camping World locations, and approximately 750 select travel service and tourism locations in North America.  It is the official directory of the Good Sam Club and the premier source to find all the Good Sam discount locations. The directory is sold primarily to Good Sam members and RV enthusiasts via Camping World retail stores, e-commerce, bookstores, and at RV dealerships and campgrounds.

 

Trailer Life’s RV Buyers Guide, issued annually, features more than 500 listings with photos, floorplans and specifications on new RVs including travel trailers, fifth-wheel trailers, folding camping trailers, motorhomes and truck campers.  The publication is sold on newsstands and by mail order through magazine print and online advertisements. It is also distributed at all of the Company events and RV shows.

 

The Towing Guides are booklets dedicated to meeting the needs of all camping and boating enthusiasts that are towing a trailer.  These booklets serve as a step-by-step tutorial for newcomers and a refresher course for trailer-towing veterans intended to ensure that maximum enjoyment of their trailer by making informed decisions.

 

Woodall’s Tenting Directory is an annual directory distributed primarily through newsstands, which provides information on both government and privately-owned campgrounds and the outdoor activities and attractions that are available near them.

 

12



 

Club or Trade Magazines and Books

 

Each of our membership clubs has its own publication which provides information on club activities and events, feature stories and other articles.  We publish Highways for the Good Sam Club, and Coast to Coast Magazine for the Coast to Coast Club.

 

Consumer Shows

 

We also operate 26 consumer outdoor recreation shows at 23 venues in 19 cities, which are primarily RV, boat and sport shows.  These shows provide us with the opportunity to reach new customers and interact with them on a face-to-face basis.  Revenues are recognized primarily from the sale of exhibitor booth space and admission fees.  The total audience of RV, boating, powersports and outdoor recreation enthusiasts who attend these shows is approximately 250,000 annually.

 

Marketing

 

We market our club memberships and related products and services through direct mail, websites, e-mail, inserts, ride-alongs, space advertisements, promotional events, point of sale, member-get-a-member campaigns, and telemarketing.  Direct response marketing efforts account for approximately 55% of new enrollments with the remaining 45% derived from other sources.  Currently, our most widely used list database is our internal proprietary database.

 

Our Membership Services- Media segment solicits advertisements through an internal sales force and by paying commissions to advertising agencies and independent contractors who place advertisements. We believe that the targeted audience for each of our publications is an important factor in attracting advertisers, which include manufacturers of RVs and RV-related products, campground operators and large national RV dealerships as well as manufacturers of powersports vehicles and accessories.  Many advertisers are repeat customers with whom we have long-standing relationships.

 

We market our retail products through the strategic location of our Camping World stores in high traffic RV areas, in-store promotions, our websites, mail order catalogs, direct mail retail flyers, advertisements in national and regional industry publications, vendor co-op advertising programs, promotional events, direct mailings and personal solicitations and referrals. Camping World’s principal marketing strategy is to capitalize on its broad name recognition among RV owners.

 

The Internet has proved to be a significant, low-cost source for new club members, subscriptions and other ancillary product sales.  We maintain more than 40 websites, which are accessible through http://www.rv.net, and are experiencing significant growth.  Online sales increased 86.2% to $96.3 million for 2012 compared to 2011.

 

Operations

 

Our customer service operations are located in Denver, Colorado and Bowling Green, Kentucky. The primary focus of these groups is to improve our customers’ experience with our products and services and to maintain customer satisfaction with our company.  On average, these member service operations process approximately 3,800 telephone calls daily.  Approximately 75% of the calls into these centers originate from our catalog mailings or relate to membership acquisition and membership renewals. Customers can contact our customer service operations using toll-free numbers that we provide in our mailings.

 

Camping World’s catalog and Internet operations, located at its headquarters in Bowling Green, Kentucky, are supported by the customer contact center in the same location.  Orders are usually processed and shipped within 24 hours of receipt.

 

13



 

Fulfillment operations involve the processing of orders and checks principally received by mail.  Certain fulfillment operations are performed by third parties.  Our publications operations develop the layout for publications and outsource printing to third parties.

 

Information Support Services

 

We utilize integrated computer systems to support our membership club and publishing operations.  A database containing all customer activity across our various businesses and programs has been integrated into our websites and call centers.  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 marketing our products and services.  We employ publishing software for publication makeup and content and for advertising to support our publications operations.  A wide-area network facilitates communication within and between our offices.  We also utilize information technology, including list segmentation and merge and purge programs, to select prospects for direct mail solicitations and other direct marketing efforts.

 

Camping World’s management information systems and electronic data processing systems consist of an extensive range of retail, mail order, financial and merchandising systems, including purchasing, inventory distribution and logistics, sales reporting, accounts payable and merchandise management.  Camping World’s management information system includes point-of-sale registers that are equipped with bar code readers in each store.  These registers are polled nightly by a central computer.  With this point-of-sale information and the information from Camping World’s on-line distribution centers, Camping World compiles comprehensive data, including detailed sales volume and inventory information by product, merchandise transfers and receipts, special orders, supply orders and returns of product purchases to vendors.  In conjunction with its nightly polling, Camping World’s central computer sends price changes to registers at the point of sale.  The registers capture Good Sam member numbers and associated sales and references to specific promotional campaigns.  Management monitors the performance of each store and mail order operation to evaluate inventory levels, determine markdowns and analyze gross profit margins by product.

 

Regulation

 

Our operations are subject to varying degrees of federal, state and local regulation.  Specifically, our outbound telemarketing, direct mail, and Roadside Assistance, as well as certain safety, finance and security products and services provided by third parties, including insurance, RV financing, and extended warranty programs, are currently subject to certain regulation, and may be subject to increased regulation in the future.  We do not believe that such federal, state and local regulations currently have a material impact on our operations.  However, new regulatory efforts impacting our operations may be proposed from time to time at the federal, state and local level.  There can be no assurance that such regulatory efforts will not have a material adverse effect on our ability to operate our businesses or on our results of operations.

 

Competition

 

We face strong competition in all of our business segments.  Our competitors vary in size and the breath of their product offerings.  Many of our competitors have a larger of number of financial, distribution, marketing and other resources, and some of them have greater market presence and name recognition.  We compete directly or indirectly with the following types of companies:

 

·                  other specialty retailers that compete with us across a significant portion of our merchandising categories through retail store or direct businesses, such as individual RV dealerships, RV Supply Warehouse and JC Whitney;

 

·                  mass merchandisers, warehouse clubs, discount stores and department stores, such as Wal-Mart;

 

14



 

·                  direct marketer competitors through all media, including the Internet; and

 

·                  major national insurance companies and providers of roadside assistance such as AAA.

 

By offering significant membership benefits at a reasonable cost and actively marketing to club members, we believe that we have been able to maintain a loyal following for our membership organizations as evidenced by the retention rates of our membership clubs.  We also believe that we are able to use the large volume of purchases by our club members to secure attractive pricing for the products and services marketed by us, which also helps to maintain our loyal customer base.

 

Seasonality

 

Our cash flow is highest in the summer months due to the seasonal nature of the retail segment, membership renewals and advertising prepayments for the annual directories and guides.

 

Trademarks and Copyrights

 

We own a variety of registered trademarks and service marks for the names of our clubs, magazines and other publications.  For the Membership Services segment, a partial list of our trademarks and trademark renewal dates include:  (1) Good Sam Club (August 2013), (2) Coast to Coast (April 2020), and (3) Good Sam RV Emergency Road Service (September 2022).  For the Retail segment, our primary trademark is Camping World, which has a renewal date of February 2022.  For the Membership Services – Media segment, a partial list of our trademarks and trademark renewal dates include: (1) Trailer Life Campgrounds, RV Parks and Services Directory (June 2016), (2) Trailer Life (July 2018), and Motorhome (September 2018).  We also own the copyrights to certain articles in our publications.  We believe that our trademarks and copyrights have significant value and are important to our marketing efforts.

 

Employees

 

As of December 31, 2012, we had 1,621 full-time and 83 part-time or seasonal employees, consisting of 9 executives, 1,193 employees in retail operations, 355 employees in administrative and club operations, 98 employees in publishing and advertising sales, 5 employees in resort services and 44 employees in marketing.  No employees are covered by a collective bargaining agreement.  We believe that our employee relations are good.

 

Available Information

 

Our website, Campingworld.com, includes free access to our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports as soon as reasonably practicable after we voluntarily file such material with, or furnish it to, the SEC.

 

ITEM 1A:  RISK FACTORS

 

The risks described below are not the only risks we face.  Any of the following risks could materially adversely affect our business, financial condition or results of operations.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially adversely affect our business operations.

 

Risks Related to Our Business

 

We depend on our ability to attract and retain active members in our membership clubs.

 

Our future success depends in large part upon continued demand for our membership club programs by consumers.  Any number of factors could affect the frequency with which consumers participate in our programs or whether they enroll in a membership club at all.  These factors include (1) consumer

 

15



 

preferences, (2) the frequency with which members participate in club activities, (3) general economic conditions, (4) weather conditions, (5) the availability of alternative discount programs in the region in which consumers live and work, (6) significant increases in gasoline prices, and (7) the disposable income of consumers available for discretionary expenditures.  Any significant decline in usage of our club programs or increase in program cancellations, without a corresponding increase in new member enrollments, could have a material adverse effect on our business.

 

We depend on our relationships with third party providers of products and services and a disruption of these relationships or of these providers’ operations could have an adverse effect on our business and results of operations.

 

Our business depends in part on developing and maintaining productive relationships with third party providers of products and services that we market to our customers.  Many factors outside our control may harm these relationships.  For example, financial difficulties that some of our providers may face adversely affect our marketing program with them and could result in their inability to service, manufacture or deliver products to us in a timely manner.  Camping World sources its products from approximately 1,100 domestic and international vendors.  If any of our key vendors or manufacturers fail to supply us with merchandise, we may not be able to meet the demands of our customers and our sales could decline.  The loss of any key vendor or manufacturer for any reason could limit our ability to offer products that our customers want to purchase.  A disruption of our relationships with our marketing partners or a disruption in our marketing partners’ operations could have a material adverse effect on our business and results of operations.

 

Our business could be adversely affected by deteriorating general economic conditions or any decrease in disposable income spent on leisure merchandise and activities.

 

In general, our sales from our membership clubs, retail and catalog operations and publications result from discretionary spending by our consumers, and discretionary spending is particularly vulnerable to declines in disposable income and actual or perceived unfavorable economic conditions.  Our business, therefore, is sensitive to general economic conditions affecting the willingness of consumers to purchase club memberships and related products and services and of advertisers to place advertisements in our publications.  Economic slowdown may negatively impact consumer confidence, consumer spending and, consequently, our business.  For example, our 2009 total revenue experienced a 10.3% drop from 2008, and our 2010 total revenue experienced a 0.2% drop from 2009 primarily as a result of the recession.  In particular, during the gasoline shortages and resulting price increases in 1973, 1980 and 1990, there was a reduction in advertising revenues in our publications.

 

In addition, the success of the membership club portion of our business depends on our members’ use of certain RV sites and/or the purchase of goods through participating merchants.  If the economy slows, our members may perceive that they have less disposable income to permit them to pursue leisure activities.  As a consequence, they may travel less frequently, spend less when they travel and use the benefits of their club memberships less often, if at all.  Any decline in program usage would hurt our business.  Furthermore, the products and services we market compete with similar products, services, publications and retail businesses offered by other providers.  Increased competition from these and other sources could require us to respond to competitive pressures by establishing pricing, marketing and other programs or seeking out additional strategic alliances or acquisitions that may be less favorable to us than we could otherwise establish or obtain. In addition, declines in the national economy could cause some of the merchants who participate in our programs to go out of business.  It is likely that, should the number of merchants entering bankruptcy rise, the number of uncollectible accounts would also rise.  This would have an adverse effect on our business and financial results.

 

We are subject to varying degrees of federal, state and local regulations which may affect our operations and costs of doing business.

 

Our operations are subject to varying degrees of federal, state and local regulation, including our

 

16



 

outbound telemarketing, direct mail, roadside assistance programs, and insurance activities.  New regulatory efforts may be proposed from time to time that have an adverse effect on our ability to operate our businesses or our results of operations.  For example, a principal source of leads for our direct response marketing efforts was new vehicle registrations provided by motor vehicle departments in various states.  Currently, all states restrict access to motor vehicle registration information.

 

Changes in laws or regulations relating to the sourcing or reselling of products, Internet and e-commerce transactions, environmental protection and health and safety and federal or state wage requirements could increase our costs of compliance and adversely impact our ability to achieve anticipated operating results.

 

Increases in paper costs, postage costs and shipping costs may have an adverse impact on our future financial results.

 

The price of paper is a significant expense relating to our publications and direct mail solicitations.  Postage for publication distribution and direct mail solicitations is also a significant expense. In addition, shipping costs are a significant expense for our business.  In 2012, we spent $26.6 million on paper, postage and shipping costs, which was approximately 8.5% of total costs applicable to revenues.  Paper, postage and shipping costs have increased in the past and may be expected to increase in the future. Such increases could have an adverse effect on our business if we are unable to pass them on to our customers.

 

We face competition in the markets in which we operate, including competition from companies with significantly greater resources than ours. If we are unable to compete effectively with these companies, our business, financial condition and results of operations could be harmed.

 

We face strong competition in all of our business segments. Our competitors vary in size and the breadth of their product offerings. Many of our competitors have a larger number of financial, distribution, marketing and other resources and some of them have greater market presence and name recognition. We compete directly or indirectly with the following types of companies:

 

·                  other specialty retailers that compete with us across a significant portion of our merchandising categories through retail store or direct businesses, such as individual RV dealerships, RV Supply Warehouse and JC Whitney;

 

·                  mass merchandisers, warehouse clubs, discount stores and department stores, such as Wal-Mart;

 

·                  direct marketer competitors through all media, including the Internet; and

 

·                  major national insurance companies and providers of roadside assistance such as AAA.

 

Additional competitors may enter the businesses in which we operate and further competition.  It is also possible that additional competitors may enter the direct and website publishing business, where competition is centered on advertising rates, the nature and size of the audience, effectiveness of sales teams and editorial quality.  If any of our competitors successfully provides a broader, more efficient or attractive combination of products and services to our target customers, our business results could be materially adversely affected.  Our inability to compete effectively with existing or potential competitors could have a material adverse effect on our business, financial condition and results of operations.

 

The interests of the holders of our debt instruments may conflict with the interests of our principal owner and the interests of our directors or executive officers that have relationships with certain of our affiliates or other companies.

 

We are a wholly-owned subsidiary of Affinity Group Holding, LLC (or the “Parent”) which also converted to a limited liability company on March 2, 2011, and 90% of which is indirectly owned by AGI Holding

 

17



 

Corp. (“AGHC”), a privately held company.  Stephen Adams, our Chairman, indirectly beneficially owns 100% of the outstanding shares of AGHC.  Accordingly, Mr. Adams will be able to elect our board of directors and to control matters submitted to the vote of our members.  In addition, Mr. Adams has numerous other business interests including FreedomRoads Holding Company, LLC (“FreedomRoads”), which is also indirectly owned 100% by AGHC.  We and our Camping World subsidiary are parties to a long term Cooperative Resources Agreement with FreedomRoads pursuant to which, among other things, each party shares certain data with the other and each agrees to market and advertise certain aspects of the other’s businesses.  Pursuant to an amendment and restatement of such agreement in October 2010, FreedomRoads has, since the quarter ended December 31, 2010, and will continue to pay us a licensing fee for the use of the Camping World name.  Payments under such agreement are expected to aggregate $3.7 million annually; however, there can be no assurance that, in the future, FreedomRoads will have the funds available to satisfy its obligations under such agreement or that in the event of a breach or default by FreedomRoads of its obligations under the agreement, we would be able to recover any damages or losses.  See “Certain Relationships and Related Transactions—FreedomRoads Cooperative Resources Agreement.”

 

Since January 2011, Marcus Lemonis has been President and Chief Executive Officer of the Company.  In addition, he also serves as Chief Executive Officer and President of FreedomRoads, and our Camping World subsidiary.  Certain other officers and key employees of the Company are also officers or employees of FreedomRoads.  Certain executive officers of the Company, including Messrs. Adams, Lemonis, Wolfe and Moody, are also officers of one or more of the holding companies between our immediate parent, AGHI, and AGHC.  Certain of our directors, including Messrs. Adams and Baltins, are also directors of one or more of the holding companies between our immediate parent, AGHI, and AGHC.  With some of our executive officers or directors holding these positions with different entities, transactions may occur in the future between us and FreedomRoads or other companies which could give rise to a conflict of interest on the part of such officers or directors.

 

Dealerships controlled by subsidiaries of FreedomRoads share facilities with many of our Camping World stores, allocating expenses in a manner that is believed by management to be fair and reasonable to both.  There can also be no assurance that FreedomRoads will continue to sell RVs at Camping World retail locations or other locations affiliated with us or our restricted subsidiaries, the result of which could have an adverse effect on our business operations and/or financial condition.  In addition, transactions may occur in the future between us and FreedomRoads or other companies which could give rise to a conflict of interest on the part of Mr. Adams, Mr. Lemonis, other directors or executive officers of the Company who also serve as officers or directors of such other companies.  Any such conflict of interest could have a material adverse effect on our business, results of operations or financial condition.

 

Although we believe that the relationship between us and FreedomRoads is beneficial to us and provides us with competitive advantages that would be otherwise unavailable to us, circumstances may occur in which the interests of Mr. Adams or FreedomRoads could be in conflict with the interests of the holders of our debt instruments.  For example, Mr. Adams may have an interest in pursuing acquisitions, divestitures or other transactions that, in his judgment, could enhance the value of his equity investment or one or more of the holding companies above AGHI may have need for funds so there could be pressure on the Company to make distributions up the holding company structure, even though such transactions and distributions may not benefit us or may involve risks to the holders of our debt instruments.

 

For more information regarding related party transactions, see “Certain Relationships and Related Transactions.”

 

If we are unable to retain senior executives and attract and retain other qualified employees, our business might be adversely affected.

 

Our success depends in part on our ability to attract, hire, train and retain qualified managerial, sales and marketing personnel. Competition for these types of personnel is high.  We may be unsuccessful in

 

18



 

attracting and retaining the personnel we require to conduct our operations successfully and, in such an event, our business could be materially and adversely affected.  Our success also depends to a significant extent on the continued service and performance of our senior management team.  The loss of any member of our senior management team could impair our ability to execute our business plan and could therefore have a material adverse effect on our business, results of operations and financial condition.  We do not currently maintain key-man life insurance policies on any member of our senior management team or other key employees.

 

We must successfully order and manage our inventory to reflect consumer demand in a volatile market and anticipate changing consumer preferences and buying trends or our operating results could suffer.

 

Our success depends upon our ability to successfully manage our inventory and to anticipate and respond to merchandise trends and consumer demands in a timely manner.  The retail consumer industry, by its nature, is volatile and sensitive to numerous economic factors, including consumer preferences, competition, market conditions and general economic conditions. None of these factors are within our control.  We cannot predict consumer preferences with certainty, and consumer preferences often change over time.  We usually must order merchandise well in advance of the following selling season.  The extended lead times for many of our purchases may make it difficult for us to respond rapidly to new or changing product trends, increases in consumer demand or changes in prices.  We have recorded changes in required reserves in recent periods due to changes in strategic direction, such as discontinuances of product lines as well as changes in market conditions due to changes in demand requirements.  If we misjudge either the market for our merchandise or our consumers’ purchasing habits in the future, our revenues may decline significantly and we may not have sufficient quantities of merchandise to satisfy consumer demand or we may be required to mark down excess inventory, either of which could harm our operating results.

 

Reliance on our management information systems and electronic data processing systems exposes us to potential risks.

 

Reliance on our management information systems and electronic data processing systems exposes us to potential risks of interruptions due to natural disasters, cyber-attacks, unplanned outages, fraud perpetrated by malicious individuals or other causes.  Our customer service and data processing operations are located in Denver, Colorado and Bowling Green, Kentucky.  We rely on information technology systems to support our membership club, publishing and catalog operations and for purchasing, inventory distribution and control, sales reporting, accounts payable and merchandise management.  We use these systems to monitor the performance of each store and mail order operation, to evaluate inventory levels, determine markdowns, analyze gross profit margins by product and to improve our business processes and supply chain efficiencies.  Any unmitigated interruption of our information technology systems may have a negative impact on future financial results.

 

We primarily rely on two fulfillment and distribution centers for our retail, Internet and catalog businesses, and if there is a natural disaster or other serious disruption at either facility, we may be unable to deliver merchandise effectively to our stores or consumers.

 

We rely on two distribution and fulfillment centers located in Franklin, Kentucky and Bakersfield, California for our retail, Internet and catalog businesses.  We handle almost all of our Internet and catalog orders through these two facilities.  Any serious disruption at either facility due to a natural disaster or any other cause could damage our on-site inventory or impair our ability to use such distribution and fulfillment center.  While we maintain business interruption insurance, as well as general property insurance, the amount of insurance coverage may not be sufficient to cover our losses in such an event.  Any of these occurrences could impair our ability to adequately stock our stores or fulfill consumer orders and harm our operating results.

 

19



 

We lease all of our store locations. If we are unable to maintain those leases or locate alternative sites for our stores in our target markets and on terms that are acceptable to us, our net revenues and profitability could be adversely affected.

 

We lease all of the real properties where we have operations, including 93 Camping World store retail locations in 32 states and our two distribution centers.  Our real property leases generally provide for fixed monthly rentals with annual escalation clauses.  There can also be no assurance that we will be able to maintain our existing store locations as leases expire, extend the leases or be able to locate alternative sites in our target markets and on favorable terms.  If we cannot maintain our existing store locations, extend the leases or locate alternative sites on favorable or acceptable terms, our business, results of operations and financial condition could be adversely affected.

 

Dealerships controlled by subsidiaries of FreedomRoads share facilities with many of our Camping World stores.  As of December 31, 2012, the Company leased 55 properties from FreedomRoads and sub-leased three properties to FreedomRoads, and Camping World was a joint tenant with FreedomRoads under 11 leases.  There can also be no assurance that FreedomRoads will continue to sell RVs at Camping World retail locations or other locations affiliated with us or our restricted subsidiaries, the result of which could have an adverse effect on our business operations and/or financial condition.

 

We may be unable to enforce our intellectual property rights and we may be accused of infringing intellectual property rights of third parties which could adversely affect our business.

 

We own a variety of registered trademarks and service marks for the names of our clubs, magazines and other publications.  We also own the copyrights to certain articles in our publications.  We believe that our trademark and copyrights have significant value and are important to our marketing efforts.  If we are unable to continue to protect the trademarks and service marks for our proprietary brands, if such marks become generic or if third parties adopt marks similar to our marks, our ability to differentiate our products and services may be diminished.  In the event that our trademarks or service marks are successfully challenged by third parties, we could lose brand recognition and be forced to devote additional resources to advertising and marketing new brands for our products.

 

From time to time, we may be compelled to protect our intellectual property, which may involve litigation.  Such litigation may be time-consuming, expensive and distract our management from running the day-to-day operations of our business, and could result in the impairment or loss of the involved intellectual property.  There is no guarantee that the steps we take to protect our intellectual property, including litigation when necessary, will be successful.  The loss or reduction of any of our significant intellectual property rights could diminish our ability to distinguish our products from competitors’ products and retain our market share for our proprietary products.  If we are unable to effectively protect our proprietary intellectual property rights our business, results of operations and financial condition could be adversely affected.

 

Other parties also may claim that we infringe their proprietary rights.  Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against us or the payment of damages.

 

We may be subject to product liability claims if people or property are harmed by the products we sell.

 

Some of the products we sell may expose us to product liability claims relating to personal injury, death, or environmental or property damage, and may require product recalls or other actions.  Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.  In addition, some of our agreements with our vendors and sellers do not indemnify us from product liability.  In addition, even if a product liability claim is not successful or is not fully pursued, the negative publicity surrounding a product recall or any assertion that our products caused property damage or

 

20


 


 

personal injury could damage our brand identity and our reputation with existing and potential consumers and have a material adverse effect on our business, financial condition and results of operations.

 

Failure to protect the integrity and security of our customers’ information could expose us to litigation and materially damage our reputation.

 

We maintain a database with information about our approximately 1.3 million club members and a proprietary database of our approximately ten million customers, which includes information such as order frequency, size of order, date of most recent order and type of merchandise purchased.  We rely on proprietary and commercially available systems, software, tools and monitoring to provide security for processing, transmitting and storing confidential customer information, such as customer’s payment cards and personal information.  There can be no assurance that our efforts to protect customer and confidential information will be successful.  If any compromise of our information security were to occur, it could have a material adverse effect on our reputation, business, operating results and financial condition and may increase the costs we incur to protect against such information security breaches or subject us to fines, penalties or litigation.

 

Our failure to comply with certain environmental regulations could adversely affect our business.

 

The storage, distribution, transportation and disposal of some of the products that we sell are subject to a variety of federal and state environmental regulations.  Our failure to comply with these regulations could have an adverse impact on our business.  In addition, we have indemnified certain of our landlords for any hazardous waste which may be found on or about property we lease.  If any such hazardous waste were to be found on property that we occupy, a significant claim giving rise to our indemnity obligation could adversely impact our operating results.

 

We may be named in litigation, which may result in substantial costs and divert management’s attention and resources.

 

We face legal risks in our business, including claims from disputes with our employees and our former employees and claims associated with general commercial disputes, product liability and other matters. Risks associated with legal liability often are difficult to assess or quantify and their existence and magnitude can remain unknown for significant periods of time.  While we maintain director and officer insurance, as well as general and product liability insurance, the amount of insurance coverage may not be sufficient to cover a claim and the continued availability of this insurance cannot be assured.  We may in the future be the target of litigation and this litigation may result in substantial costs and divert management’s attention and resources.

 

Risks Related to Our Debt

 

Our substantial debt could adversely affect our financial health.

 

We have a significant amount of debt, which requires significant interest payments.  As of December 31, 2012, we had approximately $332.5 million of total debt outstanding, net of original issue discount, of which $325.6 million (without deduction for original issue discount in connection with the issuance of the Senior Secured Notes) consisted of our 11.5% senior secured noted due 2016 (“Senior Secured Notes”) and $11.9 million was owed by Camping World and its subsidiaries under the Camping World credit facility (the “CW Credit Facility”).  In addition, we had additional borrowing availability of $7.8 million under the CW Credit Facility.  The Senior Secured Notes are secured by substantially all of our assets and the CW Credit Facility is secured by the assets of Camping World and its subsidiaries.

 

Our ability to satisfy our debt service obligations depends primarily on our operating performance. Future debt repayments by us, including the interest and principal on the Senior Secured Notes and the CW Credit Facility, may require funds in excess of our available cash flow.  We cannot assure our stakeholders that we will be able to raise additional funds, if necessary, through future financings.  The

 

21



 

indenture pursuant to which the Senior Secured Notes were issued (the “Senior Secured Notes Indenture”) and the CW Credit Facility impose several restrictions upon our ability to incur additional indebtedness, pledge assets and make dividends and distributions.

 

Our substantial indebtedness could have important consequences to stakeholders in the Company.  For example, it could: (i) increase our vulnerability to general adverse economic and industry conditions, (ii) require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, expansion through acquisitions and other general corporate purposes, (iii) limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate, (iv) place us at a competitive disadvantage compared to our competitors that have less debt, and (v) limit our ability, among other things, to borrow additional funds.

 

We will require a significant amount of cash to service our indebtedness, including the Senior Secured Notes and the CW Credit Facility.  Our ability to generate cash depends on many factors beyond our control, and any failure to meet our debt service obligations could harm our business, financial condition and results of operations.

 

Our ability to make payments on and to refinance our indebtedness, including the Senior Secured Notes and the CW Credit Facility, and to fund working capital needs and planned capital expenditures will depend on our ability to generate cash in the future.  Our ability to generate cash from operations is dependent on our financial and operating performance, which in turn is affected by general economic, financial, competitive, business, legislative, regulatory and other factors, including the availability of financing in the banking and capital markets that are beyond our control.

 

If our business does not generate sufficient cash flow from operations or if future borrowings are not available to us in an amount sufficient to enable us to pay our indebtedness, including the Senior Secured Notes and the CW Credit Facility, or to fund our other liquidity needs, we may need to refinance all or a portion of our indebtedness on or before the maturity thereof, sell assets, reduce or delay capital investments or seek to raise additional capital, any of which could have a material adverse effect on our operations.  In addition, we may not be able to affect any of these actions, if necessary, on commercially reasonable terms or at all.  Our ability to restructure or refinance our indebtedness will depend on the condition of the capital markets and our financial condition at such time.  Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations.  The terms of our existing or future debt instruments, including the Senior Secured Notes Indenture and the CW Credit Facility, may limit or prevent us from taking any of these actions. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all and negatively impact the market value of the Senior Secured Notes.

 

In addition, if we are unable to meet our debt service obligations under the Senior Secured Notes, including with respect to excess cash flow offers on the Senior Secured Notes or under the CW Credit Facility, the holders of our debt would have the right, following a cure period, to cause the entire principal amount of the indebtedness to become immediately due and payable.  If the amounts outstanding under any of our debt instruments are accelerated, there can be no assurance that our assets will be sufficient to repay in full the money owed to our debt holders.

 

22



 

The Senior Secured Notes Indenture and the CW Credit Facility impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.

 

The Senior Secured Notes Indenture and the CW Credit Facility contain operating and financial restrictions that limit or prohibit, among other things, our ability to:

 

·                  incur or guarantee additional indebtedness;

 

·                  pay dividends on, redeem or repurchase capital stock;

 

·                  make investments or repay subordinated indebtedness;

 

·                  make capital expenditures;

 

·                  engage in sale and leaseback transactions;

 

·                  enter into transactions with affiliates;

 

·                  sell assets;

 

·                  create liens; and

 

·                  engage in a consolidation, amalgamation or merger, or sell, transfer or otherwise dispose of all or substantially all of our or their assets.

 

These restrictions may prevent us from taking actions that we believe would be in the best interest of our business and may make it difficult for us to successfully execute our business strategy or effectively compete with companies that are not similarly restricted.  We may also incur future debt obligations, including any future credit facilities permitted under the Senior Secured Notes Indenture in replacement of the CW Credit Facility, which might subject us to additional restrictive covenants that could affect our financial and operational flexibility. There can be no assurance that we will be granted waivers or amendments to these agreements if for any reason we are unable to comply with these agreements or that we will be able to refinance our debt on terms acceptable to us, or at all. The breach of any of these covenants and restrictions could result in a default under the agreements governing our indebtedness, including the Senior Secured Notes Indenture, the CW Credit Facility and any future credit facilities. An event of default under our debt agreements could permit our lenders or other debt holders to declare all amounts borrowed from them to become due and payable.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS

 

None.

 

23



 

ITEM 2:  PROPERTIES

 

We lease all of the real properties where we have operations.  Our real property leases generally provide for fixed monthly rentals with annual escalation clauses.  The table below sets forth certain information concerning our offices and distribution facilities and the lease expiration date includes all stated option periods.

 

 

 

Square
Feet

 

Acres

 

Lease
Expiration

 

Office Facilities:

 

 

 

 

 

 

 

Denver, CO (Membership Services customer service, warehousing fulfillment, and information system functions)

 

60,000

 

 

 

2039

 

Bowling Green, KY (Retail administrative headquarters and mail order operations)

 

31,278

 

 

 

2039

 

Chesterfield, VA (Membership Services - Media sales office)

 

5,900

 

 

 

2013

 

Plymouth, MN (Membership Services - Media headquarters)

 

15,871

 

 

 

2021

 

Retail Distribution Centers:

 

 

 

 

 

 

 

Bakersfield, California

 

164,747

 

14.827

 

2037

 

Franklin, Kentucky

 

250,000

 

33.000

 

2035

 

 

We also lease 93 retail locations, in 32 states, where we operate our Camping World retail operations.  These stores range in size from approximately 10,000 to 64,000 square feet.

 

 

 

ITEM 3: LEGAL PROCEEDINGS

 

From time to time, we are involved in litigation arising in the normal course of business operations.  We are not party to any pending legal proceedings that we believe are material to our business or financial condition.

 

 

ITEM 4:  MINE SAFETY DISCLOSURES

 

Not Applicable

 

PART II

 

ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The Company is a wholly-owned subsidiary of Affinity Group Holding, LLC.  There is no established public trading market for our membership units.  There have not been any sales or repurchases of our common equity during the last two fiscal years.

 

24



 

ITEM 6:  SELECTED FINANCIAL DATA

 

The selected financial data of our Company for each of the five years ended December 31 are derived from our audited consolidated financial statements.  This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations and Comprehensive Income (Loss),” and our consolidated financial statements and the Notes thereto included herein.

 

 

 

Year ended

 

 

 

(dollars in thousands)

 

Statement of Operations Data:

 

2012

 

2011

 

2010

 

2009

 

2008

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Membership services

 

  $

153,788

 

$

147,806

 

$

146,274

 

$

142,147

 

$

152,643

 

Retail

 

325,774

 

282,366

 

270,551

 

270,573

 

291,070

 

Membership services - media

 

39,180

 

51,232

 

53,844

 

59,061

 

82,424

 

 

 

518,742

 

481,404

 

470,669

 

471,781

 

526,137

 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Membership services

 

86,525

 

81,521

 

85,211

 

84,826

 

90,758

 

Retail

 

201,699

 

167,431

 

157,574

 

164,510

 

170,911

 

Membership services - media

 

26,598

 

39,803

 

40,584

 

46,079

 

61,126

 

 

 

314,822

 

288,755

 

283,369

 

295,415

 

322,795

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

203,920

 

192,649

 

187,300

 

176,366

 

203,342

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

141,427

 

130,845

 

126,577

 

128,917

 

142,757

 

Goodwill impairment

 

-

 

-

 

-

 

46,884

 

47,601

 

Impairment of investment in affiliate

 

-

 

-

 

-

 

-

 

81,005

 

Financing expense (recovery)

 

-

 

(19

)

14,364

 

2,607

 

-

 

Depreciation and amortization

 

14,457

 

16,512

 

18,536

 

21,076

 

19,798

 

 

 

155,884

 

147,338

 

159,477

 

199,484

 

291,161

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS

 

48,036

 

45,311

 

27,823

 

(23,118

)

(87,819

)

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING ITEMS:

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

(42,946

)

(44,671

)

(38,732

)

(30,356

)

(23,649

)

Gain (loss) on derivative instrument (1)

 

3,871

 

3,899

 

(6,680

)

745

 

(2,394

)

Gain (loss) on debt restructure

 

-

 

-

 

(2,678

)

4,678

 

-

 

Loss on debt repayment

 

(440

)

-

 

-

 

-

 

-

 

Gain (loss) on sale of assets

 

1,171

 

632

 

1

 

(604

)

(321

)

Other non-operating expense, net

 

-

 

-

 

-

 

(659

)

(2

)

 

 

(38,344

)

(40,140

)

(48,089

)

(26,196

)

(26,366

)

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES

 

9,692

 

5,171

 

(20,266

)

(49,314

)

(114,185

)

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX (EXPENSE) BENEFIT

 

(317

)

(1,264

)

1,493

 

10,366

 

2,213

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

9,375

 

3,907

 

(18,773

)

(38,948

)

(111,972

)

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on interest rate swap

 

-

 

-

 

191

 

(3,337

)

(5,632

)

Gain on interest rate swap reclassified into earnings

 

-

 

-

 

6,809

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

  $

9,375

 

$

3,907

 

$

(11,773

)

$

(3,337

)

$

(5,632

)

 

25



 

SELECTED FINANCIAL DATA (continued)

 

 

 

December 31,

 

 (dollars in thousands)

 

2012

 

2011

 

2010

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 Balance Sheet Data (at period end):

 

 

 

 

 

 

 

 

 

 

 

Working capital (deficiency)

 

$

16,163

 

$

5,601

 

$

10,644

 

$

(7,609

)

$

(10,494

)

Total assets

 

230,361

 

222,963

 

222,018

 

221,569

 

294,352

 

Deferred revenues and gains (2)

 

88,899

 

85,849

 

90,389

 

96,335

 

96,424

 

Total debt

 

332,470

 

337,450

 

332,231

 

278,414

 

292,146

 

Total stockholders’ deficit

 

(243,796

)

(253,796

)

(252,173

)

(221,525

)

(186,514

)

 


 

(1) The 2012 and 2011 gain on derivative instrument was due to the change in value of the $100.0 million and $20.0 million interest rate swap agreements. The 2010 loss on derivative instrument was due to the $100.0 million and $20.0 million interest rate swap agreements no longer meeting the requirements for hedge accounting as the Company replaced its variable rate debt with fixed rate debt on December 1, 2010 and reclassed the amounts recorded in Other Comprehensive Loss to earnings.  The 2009 gain on derivative instrument is due to the change in value of the $35.0 million interest rate swap agreement effective April 30, 2008, and $20.0 million of the $100.0 million interest rate swap agreement effective October 15, 2007.  The 2008 loss on derivative instrument relates solely to the change in value of the $35.0 million interest rate swap.  Both interest rate swap agreements expired on October 31, 2012.

 

(2) Deferred revenues represent cash received by us in advance of the recognition of revenues in accordance with accounting principles generally accepted in the United States.  Deferred revenues primarily reflect club membership dues, annual roadside assistance fees, advances on third party credit card fee revenues and publication subscriptions.  These revenues are recognized at the time the goods or services are provided or over the membership period, which averages approximately 15 months.  The deferred revenue balance for 2012, 2011, 2010, 2009 and 2008 also include deferred gains of $7.0 million, $7.5 million, $7.9 million, $8.4 million and $8.9 million, respectively, from the real estate sale-leaseback transactions which occurred in December 2001.

 

26


 

 


 

ITEM 7: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS and Comprehensive Income (Loss)

 

 

The following tables set forth the components of the statements of operations for the years ended December 31, 2012, 2011, and 2010 as a percentage of total revenues, and the comparison of those components from period to period.  The following discussion is based on our Consolidated Financial Statements included elsewhere herein.  Our revenues are derived principally from membership services, including club membership dues and marketing fees paid to us for services provided by third parties, from publications, including subscriptions and advertising, and from retail sales.

 

 

 

Percentage of

 

Percentage Increase/

 

 

Total Revenues

 

(Decrease)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year 2012

 

Year 2011

 

 

 

2012

 

2011

 

2010

 

 

over 2011

 

over 2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Membership services

 

29.6%

 

30.7%

 

31.1%

 

 

4.0%

 

1.0%

 

Retail

 

62.8%

 

58.7%

 

57.5%

 

 

15.4%

 

4.4%

 

Membership services - media

 

7.6%

 

10.6%

 

11.4%

 

 

(23.5%

)

(4.9%

)

 

 

100.0%

 

100.0%

 

100.0%

 

 

7.8%

 

2.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

Membership services

 

16.7%

 

16.9%

 

18.1%

 

 

6.1%

 

(4.3%

)

Retail

 

38.9%

 

34.8%

 

33.5%

 

 

20.5%

 

6.3%

 

Membership services - media

 

5.1%

 

8.3%

 

8.6%

 

 

(33.2%

)

(1.9%

)

 

 

60.7%

 

60.0%

 

60.2%

 

 

9.0%

 

1.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

39.3%

 

40.0%

 

39.8%

 

 

5.9%

 

2.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

27.2%

 

27.2%

 

26.9%

 

 

8.1%

 

3.4%

 

Financing expense (recovery)

 

-

 

-

 

3.1%

 

 

(100.0%

)

(100.1%

)

Depreciation and amortization

 

2.8%

 

3.4%

 

3.9%

 

 

(12.4%

)

(10.9%

)

 

 

30.0%

 

30.6%

 

33.9%

 

 

5.8%

 

(7.6%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

9.3%

 

9.4%

 

5.9%

 

 

6.0%

 

62.9%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NON-OPERATING ITEMS:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

0.2%

 

0.1%

 

0.1%

 

 

55.1%

 

10.2%

 

Interest expense

 

(8.3%

)

(9.4%

)

(8.3%

)

 

(3.1%

)

15.3%

 

Gain (loss) on derivative instrument

 

0.7%

 

0.8%

 

(1.4%

)

 

(0.7%

)

(158.4%

)

Loss on debt restructure

 

-

 

-

 

(0.6%

)

 

-

 

(100.0%

)

Loss on debt repayment

 

(0.1%

)

-

 

-

 

 

(100.0%

)

-

 

Gain on sale of assets

 

0.2%

 

0.2%

 

-

 

 

85.3%

 

nm

 

 

 

(7.3%

)

(8.3%

)

(10.2%

)

 

(4.5%

)

(16.5%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES

 

2.0%

 

1.1%

 

(4.3%

)

 

87.4%

 

(125.5%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME TAX (EXPENSE) BENEFIT

 

(0.2%

)

(0.3%

)

0.3%

 

 

(74.9%

)

(184.7%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

1.8%

 

0.8%

 

(4.0%

)

 

140.0%

 

(120.8%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap

 

-

 

-

 

-

 

 

-

 

(100.0%

)

Gain on interest rate swap reclassified into earnings

 

-

 

-

 

1.4%

 

 

-

 

(100.0%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

1.8%

 

0.8%

 

(2.5%

)

 

140.0%

 

(133.2%

)

 

27



 

Year Ended December 31, 2012 compared with Year Ended December 31, 2011

 

Revenues

 

Revenues of $518.7 million for 2012 increased by $37.3 million, or 7.8%, from 2011.

 

Membership Services revenues for 2012 of $153.8 million increased $6.0 million, or 4.0%, from 2011.  This revenue increase was largely attributable to a $6.2 million increase in extended vehicle warranty program revenue due to contract price increases and the development of additional programs, a $1.6 million increase in roadside assistance revenue, a $2.4 million increase in member events revenue due to two additional annual member rallies, and a $0.6 million increase in marketing fee revenue from health and life insurance products.  These increases were partially offset by a $3.3 million decrease in revenue primarily as a result of merging the President’s Club into the Good Sam Club, an $0.8 million decrease in the Coast to Coast and Golf Card Club revenue due to decreased membership and the sale of the Golf Card Club in March 2012, and a $0.7 million decrease in other club revenue.

 

Retail revenues of $325.8 million for 2012 increased $43.4 million, or 15.4%, from 2011.  Store merchandise sales increased $34.2 million from 2011 due to a same store sales increase of $19.3 million, or 9.9%, (compared to a 1.1% decrease in same store sales for 2011 versus 2010), and a $17.3 million revenue increase from the opening of seventeen new stores over the past twenty-four months, partially offset by decreased revenue from discontinued stores of $2.4 million.  Three stores were closed in the last twenty-four months in order to reduce fixed operating costs and to consolidate operations within the respective trade areas.  Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year.  Also, mail order and internet sales increased $14.4 million primarily due to increases in selling expense for direct channel advertising and search engine marketing, supplies and other sales decreased $1.3 million, and installation and service fees decreased $3.9 million.

 

Membership Services - Media revenues of $39.2 million for 2012 decreased $12.1 million, or 23.5%, from 2011.  This decrease was primarily attributable to a $3.9 million revenue reduction resulting from the sale or closure of non-core media businesses in 2011, a $1.6 million reduction in circulation and advertising magazine revenue, a $1.1 million reduction in consumer show revenue resulting from reduced sponsorship revenue and 3 fewer shows produced, and a $5.5 million reduction in annual directory revenues due to combining two annual directories in order to create an upgraded product with reduced brand confusion, reduced direct mail marketing and phase out the unprofitable CD/DVD version.

 

Costs Applicable to Revenues

 

Costs applicable to revenues totaled $314.8 million, an increase of $26.1 million, or 9.0%, from the comparable period in 2011.

 

Membership Services costs applicable to revenues of $86.5 million increased $5.0 million, or 6.1%, from 2011.  This increase consisted of a $4.9 million increase in marketing and program costs for extended vehicle warranty programs, a $3.4 million increase due to two additional annual member rallies, a $3.2 million increase in roadside assistance marketing and program costs, and a $1.3 million increase in costs associated with the vehicle insurance programs.  These increases were partially offset by a $5.5 million program and marketing cost decrease primarily attributable to merging the President’s Club into the Good Sam Club, a $1.3 million reduction in other club costs, and a $1.0 million expense reduction from the Coast to Coast and Golf Card clubs.

 

Retail costs applicable to revenues increased $34.3 million, or 20.5%, to $201.7 million.  The retail gross profit margin of 38.1% for 2012 decreased from 40.7% for 2011 primarily due to decreased installation and service fees, incremental merchandise discounts and markdowns to drive traffic in order to expand

 

28



 

the base of customers available to promote our higher margin Membership Services products and services, and, to a lesser extent, increased shipping and freight-in costs.

 

Membership Services - Media costs applicable to revenues of $26.6 million for 2012 decreased $13.2 million, or 33.2%, from 2011 due to a $4.7 million decrease from the sale or closure of non-core media businesses in 2011, a $4.1 million reduction from combining our two annual campground directories, a $2.0 million decrease in wage-related costs within ongoing businesses primarily due to headcount reductions, a $1.3 million reduction in magazine costs mostly related to reduced magazine sizes within the outdoor powersports group, and a $1.1 million reduction from consumer show costs due to three fewer shows produced.

 

Operating Expenses

 

Selling, general and administrative expenses of $141.4 million for 2012 increased $10.6 million compared to 2011.  This increase was primarily due to a $10.2 million increase in retail selling, general and administrative expenses primarily related to increased retail labor, travel and training associated with new store openings, an incremental $2.1 million to promote the Good Sam brand, and $0.9 million of legal expenses, including the establishment of a settlement reserve.  These selling, general and administrative expense increases were partially offset by a $1.6 million reduction in wage-related expenses and a $1.0 million reduction in other general and administrative expenses.

 

Depreciation and amortization expense of $14.5 million in 2012 decreased $2.1 million from the prior year primarily due to reduced capital expenditures in prior years, and completed amortization of customer lists related to consumer show purchases and retail non-compete agreements.

 

Income from Operations

 

Income from operations for 2012 totaled $48.0 million compared to $45.3 million for 2011.  This $2.7 million increase was primarily the result of an increase in gross profit for the Retail, Membership Services – Media and Membership Services segments of $9.1 million, $1.1 million and $1.0 million, respectively, partially offset by an $8.5 million increase in operating expenses.

 

Non-Operating Items

 

Non-operating expenses of $38.3 million for 2012 decreased $1.8 million compared to 2011 due to a $1.7 million decrease in net interest expense, and an incremental $0.5 million gain on sale of assets primarily due to the sale of Golf Card Club and consumer shows in 2012, partially offset by the sale of Powerboat Magazine in 2011 and a $0.4 million loss on debt extinguishment in 2012.

 

Income before Income Tax

 

Income from operations before income tax for 2012 was $9.7 million, compared to approximately $5.2 million for 2011.  This $4.5 million increase was attributable to the $2.7 million increase in income from operations, and the decrease in non-operating items of $1.8 million discussed above.

 

Income Tax Expense

 

The Company recorded an income tax expense of $0.3 million for 2012, compared to $1.3 million for 2011.  This change was primarily the result of a decrease in the Company’s taxable income, before the use of net operating loss carryforwards, and the recognition of the related current tax expense in 2012 and 2011 for federal alternative minimum tax and state income taxes.

 

Net Income

 

Net income for 2012 was $9.4 million compared to a $3.9 million for 2011 mainly due to the reasons discussed above.

 

29



 

Segment Profit

 

The Company’s three principal lines of business are Membership Services, Retail, and Membership Services - Media.  The Membership Services segment currently operates the Good Sam Club, the Coast to Coast Club and assorted membership products and services for RV owners, campers and outdoor vacationers.  The Golf Card Club was sold in March 2012.  The Retail segment sells specialty retail merchandise and services for RV owners primarily through Camping World retail supercenters and mail order catalogs.  The Membership Services - 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 Membership Services - 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.

 

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.

 

Membership Services segment profit of $59.6 million for 2012 increased $1.2 million, or 2.0%, from the comparable period in 2011.  This increase was attributable to a $2.2 million segment profit increase from the Good Sam Club primarily due to cost savings resulting from merging the President’s Club into the Good Sam Club on January 1, 2012, a $1.1 million reduction in overhead costs, a $1.0 million profit increase from extended warranty program products, an $0.8 million increase from health insurance and credit card products, a $0.7 million decrease in other club costs, a $0.5 million increase from the Coast to Coast Club, and a $0.5 million gain on sale of Golf Card Club.  These segment profit increases were partially offset by a $2.3 million decrease in segment profit from vehicle insurance products, $2.2 million decrease from the roadside assistance programs due to increases in marketing expenses and claims costs, and a $1.1 million decrease in segment profit from member events.

 

Retail segment loss of $0.3 million for 2012 decreased from a segment profit of $2.2 million in 2011.  This reduction in segment profit of approximately $2.4 million was the result of a $10.2 million increase in selling, general and administrative expenses and a $0.3 million increase in interest expense from 2011, partially offset by a $7.0 million increase in gross profit margin, and a $1.1 million reduction in depreciation and amortization expense.

 

Membership Services – Media segment profit of $7.3 million for 2012 increased $2.5 million, or 52.3%, from 2011.  This increase was due to a $1.2 million increase in segment profit from the annual directories primarily due to combining directories and reduced direct mail quantities, an $0.8 million increase in segment profit from the sale or closure of non-core media businesses in 2011, $0.6 million of reduced overhead costs, and a $0.6 million increase in segment profit from the consumer shows group, partially offset by decreased segment profit of $0.7 million from the outdoor powersports publications.

 

Year Ended December 31, 2011 compared with Year Ended December 31, 2010

 

Revenues

 

Revenues of $481.4 million for 2011 increased by $10.7 million, or 2.3%, from 2010.

 

Membership Services revenues for 2011 of $147.8 million increased $1.5 million, or 1.0%, from 2010.  This revenue increase was largely attributable to a $4.3 million increase in extended vehicle warranty program revenue, due to an increase in the average price per contract, and a $2.8 million increase in license fees received from FreedomRoads.  These increases were partially offset by a $3.4 million decrease in vehicle insurance program revenue primarily from the $2.5 million fee received in 2010 as a

 

30



 

result of waiving our right of first refusal regarding the sale of the third party provider of vehicle insurance, a $1.0 million reduction in dealer program marketing revenue, a $0.8 million revenue reduction from the Coast to Coast Club and Golf Card Club primarily attributable to decreased membership, and a $0.4 million reduction in member events revenue.

 

Retail revenues of $282.4 million for 2011 increased $11.8 million, or 4.4%, from 2010.  Store merchandise sales decreased $0.7 million from 2010 due to a same store sales decrease of $2.1 million, or 1.1%, (compared to a 0.5% decrease in same store sales for 2010 versus 2009), and decreased revenue from discontinued stores of $1.4 million, partially offset by a $2.8 million revenue increase from the opening of six new stores during 2011 and 2010.  Two stores were closed in 2011 and 2010 in order to reduce fixed operating costs and to consolidate operations within the respective trade areas.  Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year.  Also, mail order and internet sales increased $10.6 million, supplies and other sales increased $1.8 million, and installation and service fees increased $0.1 million.

 

Membership Services - Media revenues of $51.2 million for 2011 decreased $2.6 million, or 4.9%, from 2010.  This decrease was primarily attributable to a $3.5 million revenue reduction related to the sale of five publication businesses in 2011 (RV Business magazine in March 2011, Powerboat magazine in May 2011, Trailer Boats magazine in May 2011, guest services campground guides in June 2011, and ATV Magazine in October 2011).  In addition, two fewer issues of motorcycle magazines were published in 2011, resulting in reduced revenue of $0.4 million, and other conferences and internet revenue decreased by $0.4 million.  These decreases were partially offset by a $1.2 million increase in corporate sponsorships in the consumer shows group, and a $0.5 million increase in annual directory revenue.

 

Costs Applicable to Revenues

 

Costs applicable to revenues totaled $288.8 million, an increase of $5.4 million, or 1.9%, from the comparable period in 2010.

 

Membership Services costs applicable to revenues of $81.5 million decreased $3.7 million, or 4.3%, from 2010.  This decrease consisted of a $4.7 million decrease in roadside assistance costs primarily due to lower average claim costs, a $0.9 million reduction the dealer program marketing, a $0.7 million reduction in other ancillary product costs, a $0.4 million reduction in overhead costs, and a net $0.2 million reduction in wage-related costs ($0.7 million of wage savings partially offset by $0.5 million of severance expense), partially offset by a $2.2 million increase in extended vehicle warranty program costs relating to increased revenue from those programs, and incremental Good Sam Club sponsorship fees and member publication costs of $1.0 million.

 

Retail costs applicable to revenues increased $9.9 million, or 6.3%, to $167.4 million.  The retail gross profit margin of 40.7% for 2011 decreased from 41.8% for 2010 primarily due to an increase in merchandise markdowns in order to drive increased retail traffic to provide greater opportunity to sell Good Sam memberships and other membership services to customers at retail stores.

 

Membership Services - Media costs applicable to revenues of $39.8 million for 2011 decreased $0.8 million, or 1.9%, from 2010 due to a $1.7 million expense reduction from the sale of five publication businesses in 2011, and a net $0.5 million reduction in wage-related costs (consisting of $1.1 million in wage savings partially offset by $0.6 million of severance expense), partially offset by a $0.9 million increase in annual directory costs and $0.5 million of incremental promotional costs related to the book division.

 

31



 

Operating Expenses

 

Selling, general and administrative expenses of $130.8 million for 2011 increased $4.3 million compared to 2010.  This increase was due to a $5.0 million increase in retail selling, general and administrative expenses, primarily related to increased advertising and other selling expenses, $2.0 million of incremental wage-related expense, consisting of $1.2 million of severance and $0.8 million of other wage-related expense, and a $1.0 million reimbursement of legal expenses in 2010 related to the collection of a prior favorable judgment.  These increases were partially offset by a $3.1 million decrease in deferred executive compensation under the deferred compensation agreements, and a $0.6 million decrease in professional fees.

 

Financing expense of $14.4 million was incurred in 2010 primarily for closing fees, premiums, legal and consulting costs related to the 2010 Senior Credit Facility entered into on March 1, 2010 which were expensed in accordance with accounting guidance for debtors accounting for a modification or exchange of debt instruments.  The Company did not incur similar financing expenses in 2011.

 

Depreciation and amortization expense of $16.5 million in 2011 decreased $2.0 million from the prior year primarily due to reduced capital expenditures in prior years, and completed amortization of membership software and amortization of finance costs associated with the 2010 Senior Credit Facility entered into on March 1, 2010.

 

Income from Operations

 

Income from operations for 2011 totaled $45.3 million compared to $27.8 million for 2010.  This $17.5 million increase was primarily the result of decreased financing expense of $14.4 million, decreased deferred executive compensation expense of $3.1 million, and increased gross profit for Membership Services and Retail segments of $5.2 million and $1.9 million, respectively.  These favorable changes were partially offset by increased other operating expenses of $5.3 million and reduced gross profit of $1.8 million for the Membership Services - Media segment.

 

Non-Operating Items

 

Non-operating expenses of $40.1 million for 2011 decreased $7.9 million compared to 2010 due to a $10.6 million positive change in the loss/gain on derivative instruments related to the interest rate swap agreements, a $2.7 million loss on extinguishment of the 2010 Senior Credit Facility and the GSE Senior Notes in 2010, and a $0.6 million gain on sale of assets in 2011, primarily media businesses, partially offset by a $6.0 million increase in interest expense relating to the higher incremental interest rate on the Company’s debt in 2011.

 

Income (loss) before Income Tax

 

Income from operations before income tax for 2011 was $5.2 million, compared to a loss of $20.3 million for 2010.  This $25.4 million favorable change was attributable to the $17.5 million increase in income from operations, and the decrease in non-operating items of $7.9 million discussed above.

 

Income Tax (Expense) Benefit

 

The Company recorded an income tax expense of $1.3 million for 2011, compared to a benefit of $1.5 million for 2010.  This change was primarily the result of the Company’s recognition of current tax expense in 2011 for federal alternative minimum tax and state income taxes, the recognition of tax benefit in 2010 from previously unrecognized tax benefits, as well as reversal of accrued interest and penalties related to unrecognized tax benefits and a decrease in the valuation allowance against deferred tax assets in 2010.

 

Net Income (Loss)

 

Net income for 2011 was $3.9 million compared to a net loss of $18.8 million for 2010 mainly due to the reasons discussed above.

 

32



 

Segment Profit (Loss)

 

The Company’s three principal lines of business are Membership Services, Retail, and Membership Services - Media.  The Membership Services segment operated the Good Sam Club, the Coast to Coast Club, the President’s Club, the Camp Club USA and assorted membership products and services for RV owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts.  The Retail segment sells specialty retail merchandise and services for RV owners primarily through retail supercenters and mail order catalogs.  The Membership Services - 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 Membership Services - 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.

 

The reportable segments are strategic business units that offer different products and services.  They are managed separately because each business required different technology, management expertise and marketing strategies.

 

Membership services segment profit of $58.4 million for 2011 increased $4.5 million, or 8.4%, from the comparable period in 2010.  This increase was largely attributable to a $4.2 million increase in segment profit from roadside assistance programs, $2.8 million of incremental license fees received from FreedomRoads, and a $2.1 million increase in segment profit from the extended vehicle warranty programs.  These increases were partially offset by a $3.4 million reduction in vehicle insurance program profit primarily relating to the $2.5 million fee received in 2010 as a result of waiving our right of first refusal regarding the sale of a third party partner, a $0.6 million profit reduction in the Coast and Golf Card Clubs relating to reduced membership, and a $0.6 million reduction in member events segment profit.

 

Retail segment profit of $2.2 million for 2011 decreased $0.7 million, or 25.7%, from 2010.  This decrease was the result of a $4.9 million increase in selling, general and administrative expenses, partially offset by a $1.1 million reduction in depreciation and amortization expense, a $2.7 million increase in gross profit margin, and a $0.4 million reduction in financing expense from 2010.

 

Membership Services - Media segment profit of $4.8 million for 2011 decreased $0.2 million, or 4.2%, from 2010.  This decrease was due to $0.6 million of reduced segment profit in the RV magazine group primarily related to severance costs, and $0.5 million of reduced segment profit in the annual directories, partially offset by increased segment profit from the consumer shows group of $0.9 million.

 

Liquidity and Capital Resources

 

We had working capital of $16.2 million, $5.6 million and $10.6 million, respectively, as of December 31, 2012, 2011 and 2010.  The primary reason for the low levels of working capital is the deferred revenue and gains reported under current liabilities of $54.6 million, $54.9 million and $56.6 million as of December 31, 2012, 2011 and 2010, respectively, which reduce working capital.  Deferred revenue is primarily comprised of cash collected for club memberships in advance of services to be provided which is deferred and recognized as revenue over the life of the membership.  We use net proceeds from this deferred membership revenue to lower our long-term borrowings and finance our working capital needs.

 

33



 

Contractual Obligations and Commercial Commitments

 

The following table summarizes our commitments to make long-term debt, lease commitments, deferred compensation payable and letter of credit commitments at December 31, 2012.  This table includes principal and future interest due under our debt agreements based on interest rates as of December 31, 2012 and assumes debt obligations will be held to maturity.

 

 

 

Payments Due by Period (in thousands)

 

 

 

Total

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt and future interest

 

$ 478,887

 

$  47,325

 

$   57,910

 

$   44,614

 

$ 329,038

 

$             -

 

$             -

 

Operating lease obligations

 

224,510

 

23,938

 

22,985

 

21,564

 

18,432

 

15,652

 

121,939

 

Deferred compensation

 

1,264

 

1,021

 

243

 

-

 

-

 

-

 

-

 

Standby letters of credit

 

5,286

 

5,286

 

-

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand total

 

$ 709,947

 

$  77,570

 

$   81,138

 

$   66,178

 

$ 347,470

 

$  15,652

 

$ 121,939

 

 

11.50% Senior Secured Notes due 2016

 

On November 30, 2010, the Company issued $333.0 million of 11.5% senior secured notes due 2016 (the “Senior Secured Notes”) at an original issue discount of 2.1%.  Interest on the Senior Secured Notes is due each December 1 and June 1 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 our outstanding 9% senior subordinated notes due 2012 (the “GSE Senior 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 our then 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 our 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 December 31, 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 indenture governing the Senior Secured Notes (the “Senior Secured Indenture”)) for the respective period.  For the calendar year ended December 31, 2011, the Excess Cash Flow Amount

 

34


 


 

was calculated as the greater of $7.5 million or 75% of the Excess Cash Flow (as defined in the Senior Secured Notes Indenture).  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 Flow for such annual period, minus (y) the Minimum Excess Cash Flow Amount for the immediately preceding six 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.  On July 31, 2012, the Company completed an excess cash flow offer to purchase up to $4.95 million in principal amount of the Company’s Senior Secured Notes and $4,000 were tendered and were retired on August 7, 2012.  The Excess Cash Flow Offer for the year ended December 31, 2012 is for $4.95 million.  The offer was presented to holders of record as of March 12, 2013 and shall expire on April 10, 2013.

 

The Senior Secured Notes and the related guarantees are our 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 our and the guarantors’ existing and future senior indebtedness other than the obligations of Camping World and its subsidiaries under the credit agreement dated March 1, 2010 (“CW Credit Facility”) and future replacements of that facility, (iii) are structurally subordinated to all future indebtedness of our 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.

 

The 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 Secured 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 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) 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 December 31, 2012, the Company made equity contributions totaling $3.8 million to Camping World to enable additional capital expenditures above $5.0 million.

 

35



 

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 December 31, 2012, the average interest rate on the CW Credit Facility was 3.464%.  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 December 31, 2012, $11.9 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 December 31, 2012.

 

On March 1, 2013, the Company received the requisite consents from noteholders of the Senior Secured Notes to amend the Indenture relating to the Senior Secured Notes outstanding and the Company’s Intercreditor Agreement to allow the CW Credit Facility to increase from $25.0 million to $35.0 million.  An aggregate fee in the amount of $0.3 million was paid to the consenting noteholders.  Consequently, Camping World, Inc. amended its agreement with the current lender of the CW Credit Facility to increase the facility to $35.0 million, reduce the interest rate margin to 2.50%, and extend the maturity to the earlier of March 1, 2018 or 180 days prior to the maturity of the Senior Secured Notes or any notes issued or exchanged to refinance the Senior Secured Notes.

 

Interest Rate Swap Agreements

 

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 received periodic payments at the 3 month LIBOR-based variable rate and made 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 expired 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 received periodic payments at the 3 month LIBOR-based variable rate and made 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 expired 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, and accordingly, the effective portion of gains and losses on the fair value of the interest rate swap agreements were previously reported in accumulated other comprehensive loss and reclassified to earnings in the same period in which the hedged interest payment affects earnings.

 

On June 11, 2009, the Company partially terminated the $35.0 million interest rate swap, subject to a partial termination fee of $0.6 million which was expensed.  The notional amount was reduced to $20.0 million.  All other terms of the interest rate swap agreement remained unchanged.  As a result, the amount included in other comprehensive income related to the $35.0 million interest rate swap was reduced pro rata and included in earnings as a gain (loss) on derivative instrument.

 

On October 31, 2012, the remaining interest rate swap agreements expired.

 

36



 

Other Contractual Obligations, Capital Expenditures and Commitments

 

During 2012, deferred executive compensation under our deferred compensation agreements was earned and the Company made payments of $1.0 million on mature deferred compensation plans.  The Company expects to pay $1.0 million on the mature deferred compensation plans in 2013.

 

Capital expenditures for 2012 totaled $10.5 million, compared to capital expenditures of $5.1 million in 2011.  For 2012, $5.0 million of capital expenditures were funded through operations, $4.8 million through capital contributions, and $0.7 million through proceeds of asset sales.  Capital expenditures are anticipated to be approximately $9.1 million for 2013, primarily for new retail stores, a Point Of Sale system, existing retail store upgrades, leasehold improvements, software enhancements, and information technology upgrades.  There are no material commitments for capital expenditures at December 31, 2012.

 

The Company and a majority of its subsidiaries are pass-through entities for federal and state purposes.  Distributions to our parent are permitted under the Senior Secured Notes Indenture and the CW Credit Facility for reasonable estimates of the amount of federal, state and local income taxes that the Company would be required to pay with respect to the applicable fiscal year calculated as if the Company were treated as a “C corporation.”  The following tax distributions have been paid during the last three fiscal years: $4.2 million in 2012, $6.5 million in 2011 and $2.4 million in 2010.

 

Our financial operations have been affected by economic downturns.  Other factors that could adversely affect our operations include increases in operating costs, fuel shortages and substantial increases in propane and gasoline prices.  Such events could cause declines in advertisements, club enrollment and retail spending.  We are unable to predict at what point fluctuating fuel prices may begin to adversely impact revenues or cash flow.  We believe we will be able to partially offset any cost increases with price increases to our members along with certain cost reducing measures.

 

Seasonality

 

Our cash flow is highest in the summer months due to the seasonal nature of the retail segment, membership renewals and advertising prepayments for the annual directories.

 

Critical Accounting Policies

 

General

 

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate our estimates, including those related to membership programs and incentives, bad debts, inventories, intangible assets, employee health insurance benefits, income taxes, restructuring, contingencies and litigation.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

 

37



 

Revenue Recognition

 

Merchandise revenue is recognized when products are sold in the retail stores, shipped for mail and Internet orders, or when services are provided to customers.  Roadside assistance (“RA”) revenues are deferred and recognized over the life of the membership.  RA claim expenses are recognized when incurred.  Royalty revenue is earned under the terms of an arrangement with a third party credit card provider based on a percentage of the Company’s outstanding credit card balances with such third party credit card provider.  Membership revenue is generated from annual, multi-year and lifetime memberships.  The revenue and expenses associated with these memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year period is used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily of direct mail advertising, are deferred and expensed over the period of expected future benefit, typically three months based on historical actual response rates.  Renewal expenses are expensed at the time related materials are mailed.  Recognized revenues and profit are subject to revisions as the membership progresses to completion.  Revisions to membership period estimates would change the amount of income and expense amortized in future accounting periods.

 

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.  Revenues and related expenses for consumer shows are recognized when the show occurs.

 

Accounts Receivable

 

We estimate the collectability of our trade receivables.  A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer.  Changes in required reserves have been recorded in recent periods and may occur in the future due to the market conditions and the economic environment.

 

Inventory

 

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

 

Long-Lived Assets

 

Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, ranging from one to six years.

 

Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with accounting guidance on accounting for the impairment or disposal of long-lived assets.  We assess the fair value of the assets based on the future cash flow the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset.  When an impairment is identified, we reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values.

 

38



 

We have evaluated the remaining useful lives of our finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary or if any of these assets had indefinite lives and were therefore not subject to amortization.  We determined that no adjustments to the useful lives of our finite-lived purchased intangible assets were necessary.  The finite-lived purchased intangible assets consist of membership customer lists, and deferred financing costs which have weighted average useful lives of approximately 6 years each.

 

Indefinite-Lived Intangible Assets

 

The Company evaluates goodwill and indefinite-lived intangible assets for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the Company’s goodwill or indefinite-lived intangible assets might be impaired.  The Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If the Company determines it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then it is required to perform the first step of a two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit.  If the carrying amount of a reporting unit exceeds its fair value, then the Company is required to perform the second step of the two-step goodwill impairment test to measure the amount of the impairment loss.  There were no changes in the carrying amount of goodwill for the years ended December 31, 2012 and 2011.

 

Self-insurance Program

 

Self-insurance accruals for workers compensation and general liability programs are calculated by outside actuaries and are based on claims filed and include estimates for claims incurred but not yet reported.  Projections of future loss are inherently uncertain because of the random nature of insurance claims occurrences and could be substantially affected if future occurrences and claims differ significantly from these assumptions and historical trends.

 

Derivative Financial Instruments

 

The Company accounts for derivative instruments and hedging activities in accordance with accounting guidance for accounting for derivative instruments and hedging activities.  All derivatives are recognized on the balance sheet at their fair value.  On the date that the Company enters into a derivative contract, management formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.

 

Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge (a “swap”), to the extent that the hedge is effective, are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows of the hedged transaction.  The Company measures effectiveness of the swap at each quarter end using the Hypothetical Derivative Method.  Under this method, hedge effectiveness is measured based on a comparison of the change in fair value of the actual swap designated as the hedging instrument and the change in fair value of the hypothetical swap which would have the terms that identically match the critical terms of the hedged cash flows from the anticipated debt issuance.  The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the fair value of the swap over the cumulative change in the fair value of the plain vanilla swap lock, as defined in the accounting literature.  Once a swap is settled, the effective portion is amortized over the estimated life of the hedge item.

 

The Company utilized derivative financial instruments to manage its exposure to interest rate risks.  The Company does not enter into derivative financial instruments for trading purposes.  The interest rate swap agreements expired on October 31, 2012.

 

39



 

Income Taxes

 

Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions.  The Company establishes accruals for certain tax contingencies when, despite the belief that the Company’s tax return positions are fully supported, the Company believes that certain positions may be challenged and that the Company’s positions may not be fully sustained.  The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation.  The Company’s tax provision includes the impact of tax contingency accruals and changes to the accruals, including related interest and penalties, as considered appropriate by management.

 

ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risks relating to fluctuations in interest rates.  Our objective of financial risk management is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows.  Interest rate risk is managed through the use of a combination of fixed and variable interest debt as well as the periodic use of interest rate collar contracts.

 

The following information discusses the sensitivity to our earnings.  The range of changes chosen for this analysis reflects our view of changes which are reasonably possible over a one-year period.  These forward-looking disclosures are selective in nature and only address the potential impacts from financial instruments.  They do not include other potential effects which could impact our business as a result of these interest rate fluctuations.

 

Interest Rate Sensitivity Analysis

 

At December 31, 2012, we had debt totaling $332.5 million, net of $5.0 million in original issue discount, comprised of $11.9 million of variable rate debt, and $320.6 million of fixed rate debt.  Holding other variables constant (such as debt levels), a one-percentage point increase/ decrease in interest rates would have an unfavorable/ favorable impact on earnings and cash flow of approximately $0.1 million.

 

Credit Risk

 

We are exposed to credit risk on accounts receivable.  We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations.  Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising our customer base.  We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.

 

Disclosure Regarding Forward Looking Statements

 

This annual report on Form 10-K contains statements that are “forward looking statements,” and includes, among other things, discussions of our 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.  Generally, these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of such plans or strategies, the number of acquisitions and projected or anticipated benefits from acquisitions made by or to be made by us, or projections involving anticipated revenues, expenses, earnings, levels of capital expenditures or other aspects of operating results.  Such statements may be identified by such words or phrases as “will likely result,” “are expected to,” “will continue,” “outlook,” “will benefit,” “is anticipated,” “estimate,” “project,” “management believes” or similar expressions.  These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved.  For these statements, we claim the protection of the safe harbor for forward-looking

 

40


 


 

statements contained in the Private Securities Litigation Reform Act of 1995.  Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events.

 

Although we believe that the expectations reflected in such forward looking statements are reasonable, certain factors could cause the Company’s actual results to differ materially from those expressed or implied in any forward looking statements contained herein.  Such factors include those discussed in Item 1A, “Risk Factors,” in this annual report on Form 10-K as well as the additional factors noted below.  It is not possible to foresee all such factors and, accordingly, these factors should not be seen as complete or exhaustive.

 

All phases of our operations are subject to a number of uncertainties, risks and other influences, including consumer spending, fuel prices, general economic conditions, regulatory changes, changes in interest rates, availability of debt financing in capital markets and competition, many of which are outside our control, any one of which, or a combination of which, could materially affect the results of our operations and whether the forward looking statements made by us ultimately prove to be accurate.

 

41



 

ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

Index to Financial Statements

 

Page

 

 

Report of Independent Registered Public Accounting Firm

43

 

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2012 and 2011

44

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010

45

 

 

 

 

 

 

Consolidated Statements of Stockholder’s or Member’s Deficit for the years ended December 31, 2012, 2011 and 2010

46

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010

47

 

 

 

 

 

 

Notes to Consolidated Financial Statements

48

 

 

All financial statement schedules have been omitted since the required information is included in the consolidated financial statements, the Notes thereto or because such information is not applicable.

 

42



 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

Board of Directors

Good Sam Enterprises, LLC

 

We have audited the accompanying consolidated balance sheets of Good Sam Enterprises, LLC and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive income (loss), stockholder’s or member’s deficit, and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Good Sam Enterprises, LLC. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

 

 

/s/ Ernst & Young LLP

Los Angeles, California

March 15, 2013

 

43



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2012 AND 2011 (IN THOUSANDS, EXCEPT UNIT AMOUNTS)

 

 

 

2012

 

2011

ASSETS

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

19,946

 

$

20,275

 

Accounts receivable, less allowance for doubtful accounts of $2,553 in 2012 and $2,086 in 2011

 

31,523

 

32,972

 

Note from affiliate

 

-

 

3,117

 

Inventories

 

65,221

 

56,558

 

Prepaid expenses and other assets

 

13,730

 

11,792

 

Total current assets

 

130,420

 

124,714

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, net

 

23,998

 

22,563

 

NOTE FROM AFFILIATE

 

5,075

 

4,587

 

INTANGIBLE ASSETS, net

 

12,365

 

14,715

 

GOODWILL

 

49,944

 

49,944

 

DEFERRED TAX ASSET

 

79

 

-

 

OTHER ASSETS

 

8,480

 

6,440

 

Total assets

 

$

230,361

 

$

222,963

 

 

 

 

 

 

 

LIABILITIES AND MEMBER’S DEFICIT

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Accounts payable

 

$

17,004

 

$

18,050

 

Accrued interest

 

3,016

 

3,989

 

Accrued income taxes

 

2,725

 

2,263

 

Accrued liabilities

 

26,929

 

27,519

 

Deferred revenues and gains

 

54,583

 

54,870

 

Current portion of long-term debt

 

10,000

 

12,422

 

Total current liabilities

 

114,257

 

119,113

 

 

 

 

 

 

 

DEFERRED REVENUES AND GAINS

 

34,316

 

30,979

 

LONG-TERM DEBT, net of current portion

 

322,470

 

325,028

 

OTHER LONG-TERM LIABILITIES

 

3,114

 

1,639

 

 

 

474,157

 

476,759

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

MEMBER’S DEFICIT:

 

 

 

 

 

Membership units, 2,000 units issued and outstanding

 

1

 

1

 

Member contributions

 

78,825

 

74,000

 

Accumulated deficit

 

(322,622)

 

(327,797

)

Total member’s deficit

 

(243,796)

 

(253,796

)

Total liabilities and member’s deficit

 

$

230,361

 

$

222,963

 

 

See notes to consolidated financial statements.

 

44



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (IN THOUSANDS)

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

Membership services

 

$

153,788

 

$

147,806

 

$

146,274

 

Retail

 

325,774

 

282,366

 

270,551

 

Membership services - media

 

39,180

 

51,232

 

53,844

 

 

 

518,742

 

481,404

 

470,669

 

 

 

 

 

 

 

 

 

COSTS APPLICABLE TO REVENUES:

 

 

 

 

 

 

 

Membership services

 

86,525

 

81,521

 

85,211

 

Retail

 

201,699

 

167,431

 

157,574

 

Membership services - media

 

26,598

 

39,803

 

40,584

 

 

 

314,822

 

288,755

 

283,369

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

203,920

 

192,649

 

187,300

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general and administrative

 

141,427

 

130,845

 

126,577

 

Financing expense (recovery)

 

-

 

(19)

 

14,364

 

Depreciation and amortization

 

14,457

 

16,512

 

18,536

 

 

 

155,884

 

147,338

 

159,477

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

48,036

 

45,311

 

27,823

 

 

 

 

 

 

 

 

 

NON-OPERATING ITEMS:

 

 

 

 

 

 

 

Interest income

 

853

 

550

 

499

 

Interest expense

 

(43,799)

 

(45,221)

 

(39,231

)

Gain (loss) on derivative instrument

 

3,871

 

3,899

 

(6,680

)

Loss on debt restructure

 

-

 

-

 

(2,678

)

Loss on debt repayment

 

(440)

 

-

 

-

 

Gain on sale of assets

 

1,171

 

632

 

1

 

 

 

(38,344)

 

(40,140)

 

(48,089

)

 

 

 

 

 

 

 

 

INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES

 

9,692

 

5,171

 

(20,266

)

 

 

 

 

 

 

 

 

INCOME TAX (EXPENSE) BENEFIT

 

(317)

 

(1,264)

 

1,493

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

9,375

 

3,907

 

(18,773

)

 

 

 

 

 

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

Unrealized gain on interest rate swap

 

-

 

-

 

191

 

Gain on interest rate swap reclassified into earnings

 

-

 

-

 

6,809

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

9,375

 

$

3,907

 

$

(11,773

)

 

See notes to consolidated financial statements.

 

45



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S OR MEMBER’S DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010

(IN THOUSANDS, EXCEPT SHARE/UNIT AMOUNTS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholder

 

 

 

Other

 

 

 

 

 

Common Stock

 

Member Units

 

or Member

 

Accumulated

 

Comprehensive

 

 

 

 

 

Units

 

Amount

 

Units

 

Amount

 

Contributions

 

Deficit

 

Loss

 

Total

BALANCES AT JANUARY 1, 2010

 

2,000

 

$

1

 

-

 

$

-

 

$

89,505

 

$

(304,031) 

 

$

(7,000) 

 

$

(221,525)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

-

 

-

 

-

 

-

 

(34,073) 

 

(2,400) 

 

-

 

(36,473

)

Contributions

 

-

 

-

 

-

 

-

 

17,598

 

-

 

-

 

17,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain on interest rate swap

 

-

 

-

 

-

 

-

 

-

 

-

 

191

 

191

 

Gain on interest rate swap reclassified into earnings

 

-

 

-

 

-

 

-

 

-

 

-

 

6,809

 

6,809

 

Net loss

 

-

 

-

 

-

 

-

 

-

 

(18,773) 

 

-

 

(18,773

)

Total comprehensive loss

 

-

 

-

 

-

 

-

 

-

 

-

 

-

 

(11,773

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES AT DECEMBER 31, 2010

 

2,000

 

1

 

-

 

-

 

73,030

 

(325,204) 

 

-

 

(252,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

-

 

-

 

-

 

-

 

-

 

(6,500) 

 

-

 

(6,500

)

Contributions

 

-

 

-

 

-

 

-

 

970

 

-

 

-

 

970

 

Net income

 

-

 

-

 

-

 

-

 

-

 

3,907

 

-

 

3,907

 

Change in form of organization from a corporation to a limited liability company

 

(2,000) 

 

(1) 

 

2,000

 

1

 

-

 

-

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES AT DECEMBER 31, 2011

 

-

 

-

 

2,000

 

1

 

74,000

 

(327,797) 

 

-

 

(253,796

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends

 

 

 

 

 

 

 

 

 

-

 

(4,200) 

 

-

 

(4,200

)

Contributions

 

 

 

 

 

 

 

 

 

4,825

 

-

 

-

 

4,825

 

Net income

 

 

 

 

 

 

 

 

 

-

 

9,375

 

-

 

9,375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCES AT DECEMBER 31, 2012

 

-

 

$

-

 

2,000

 

$

1

 

$

78,825

 

$

(322,622) 

 

$

-

 

$

(243,796

)

 

See notes to consolidated financial statements.

 

46



 

GOOD SAM ENTERPRISES, LLC AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012, 2011 AND 2010 (IN THOUSANDS)

 

 

 

2012

 

2011

 

2010

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

9,375

 

$

3,907

 

$

(18,773

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

Deferred tax benefit

 

(79)

 

-

 

-

 

Depreciation

 

8,919

 

9,748

 

10,927

 

Amortization

 

5,538

 

6,764

 

7,609

 

(Gain) loss on derivative instrument

 

(3,871)

 

(3,899)

 

6,680

 

Provision for losses on accounts receivable

 

998

 

808

 

1,754

 

Deferred compensation

 

-

 

-

 

3,074

 

(Gain) loss on sale of assets

 

(1,171)

 

(632)

 

(1

)

Loss on debt restructure

 

-

 

-

 

2,678

 

Loss on debt repayment

 

440

 

-

 

-

 

Accretion of original issue discount

 

949

 

861

 

1,277

 

Changes in operating assets and liabilities (net of purchased businesses):

 

 

 

 

 

 

 

Accounts receivable

 

651

 

(3,365)

 

352

 

Inventories

 

(8,663)

 

(3,885)

 

(2,752

)

Prepaid expenses and other assets

 

(1,972)

 

1,897

 

(1,069

)

Accounts payable

 

(1,046)

 

7,009

 

(12,754

)

Accrued and other liabilities

 

1,199