GOOD SAM ENTERPRISES, LLC – 10-K – : MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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The following tables set forth the components of the statements of operations for the years ended
Percentage of Percentage Increase/ Total Revenues (Decrease) Year 2011 Year 2010 2011 2010 2009 over 2010 over 2009 REVENUES: Membership services 30.7% 31.1% 30.1% 1.0% 2.9% Media 10.6% 11.4% 12.5% (4.9%) (8.8% ) Retail 58.7% 57.5% 57.4% 4.4% - 100.0% 100.0% 100.0% 2.3% (0.2% ) COSTS APPLICABLE TO REVENUES: Membership services 16.9% 18.1% 18.0% (4.3%) 0.5% Media 8.3% 8.6% 9.8% (1.9%) (11.9% ) Retail 34.8% 33.5% 34.8% 6.3% (4.2% ) 60.0% 60.2% 62.6% 1.9% (4.1% ) GROSS PROFIT 40.0% 39.8% 37.4% 2.9% 6.2% OPERATING EXPENSES: Selling, general and 27.2% 26.9% 27.3% 3.4% (1.8% ) administrative Goodwill impairment - - 9.9% - (100.0% ) Financing expense (recovery) - 3.1% 0.6% (100.1%) 100.0% Depreciation and amortization 3.4% 3.9% 4.5% (10.9%) (12.1% ) 30.6% 33.9% 42.3% (7.6%) (20.1% ) INCOME (LOSS) FROM OPERATIONS 9.4% 5.9% (4.9% ) (62.9%) 220.4% NON-OPERATING ITEMS: Interest income 0.1% 0.1% 0.1% 10.2% (3.5% ) Interest expense (9.4% ) (8.3% ) (6.5% ) 15.3% 27.1% Gain (loss) on derivative 0.8% (1.4% 0.2% (158.4%) (996.6% ) instrument ) Gain (loss) on debt - (0.6% 1.0% (100.0%) (157.2% ) restructure ) Gain (loss) on sale of assets 0.2% - (0.2% ) nm (100.2% ) Other non-operating (expense) income, net - - (0.2% ) nm (100.0% ) (8.3% ) (10.2% ) (5.6% ) (16.5%) 83.6% INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES 1.1% (4.3% ) (10.5% ) 125.5% 58.9% INCOME TAX (EXPENSE) BENEFIT (0.3% ) 0.3% 2.2% (184.7%) (85.6% ) NET INCOME (LOSS) 0.8% (4.0% ) (8.3% ) 120.8% 51.8% 30
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Year Ended
Revenues
Revenues of
Membership Services revenues for 2011 of
Media revenues of
Retail revenues of
Costs Applicable to Revenues
Costs applicable to revenues totaled
Membership Services costs applicable to revenues of
Media costs applicable to revenues of
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Retail costs applicable to revenues increased
Operating Expenses
Selling, general and administrative expenses of
Financing expense of
Depreciation and amortization expense of
Income from Operations
Income from operations for 2011 totaled
Non-Operating Items
Non-operating expenses of
Income (loss) before Income Tax
Income from operations before income tax for 2011 was
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Income Tax (Expense) Benefit
The Company recorded an income tax expense of
Net Income (Loss)
Net income for 2011 was
Segment Profit (Loss)
The Company's three principal lines of business are Membership Services, Media and Retail. The Membership Services segment operates the
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
Media segment profit of
Retail segment profit of
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Year Ended
Revenues
Revenues of
Membership Services revenues for 2010 of
Media revenues of
Retail revenues of
Costs Applicable to Revenues
Costs applicable to revenues totaled
Membership Services costs applicable to revenues of
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Media costs applicable to revenues of
Retail costs applicable to revenues decreased
Operating Expenses
Selling, general and administrative expenses of
The Company recorded a non-cash goodwill impairment charge of
Financing expense of
Depreciation and amortization expense of
Income (Loss) from Operations
Income from operations for 2010 totaled
Non-Operating Items
Non-operating expenses of approximately
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Loss before Income Tax
Loss before income tax for 2010 was
Income Tax Benefit
The Company recorded an income tax benefit of
Net loss
Net loss for 2010 was
Segment Profit (Loss)
The Company's three principal lines of business are Membership Services, Media and Retail. The Membership Services segment operates the
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
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Media segment profit improved to
Retail segment profit was
Liquidity and Capital Resources
We had working capital of
Contractual Obligations and Commercial Commitments
The following table summarizes our commitments to make long-term debt, lease, deferred compensation and letter of credit payments atDecember 31, 2011 . This table includes principal and future interest due under our debt agreements based on interest rates as ofDecember 31, 2011 and assumes debt obligations will be held to maturity. Payments Due by Period (in thousands) Total 2012 2013 2014 2015 2016 Thereafter Debt and future interest $ 524,540 $ 54,866 $ 46,558 $ 55,808 $ 43,940 $ 323,368 $ - Operating lease obligations 224,591 23,139 22,652 21,691 20,442 17,351 119,316 Deferred compensation 2,298 1,034 1,021 243 - - - Other commercial commitments Letters of credit 7,091 5,081 2,010 - - - - Grand total $ 758,520 $ 84,120 $ 72,241 $ 77,742 $ 64,382 $ 340,719 $ 119,316
11.50% Senior Secured Notes due 2016
On
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The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of our existing and future domestic restricted subsidiaries. All of the Company's subsidiaries other than
The indenture governing the Senior Secured Notes (the "Senior Secured Notes Indenture") limits the Company's ability to, among other things, incur more debt, pay dividends or make other distributions to our 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, we must make an offer to purchase some or all of the Senior Secured Notes with the excess cash flow offer amount (as defined in the indenture) determined for each applicable period, commencing with the annual period ending
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
The CW Credit Facility
On
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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
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. We were in compliance with all debt covenants at
Interest Rate Swap Agreements
On
Due to the potential sale of
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Due to the issuance of an option to the shareholder of the ultimate parent of the Company to purchase
Due to the issuance of the Senior Secured Notes representing fixed rate debt to replace the existing variable rate debt on
Other Contractual Obligations and Commercial Commitments
During 2011, deferred executive compensation under our deferred compensation agreements was earned and the Company made payments of
Capital expenditures for 2011 totaled
Factors Affecting Future Performance
Our financial operations have been affected by the recent economic downturn. 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
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
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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. Emergency Road Service ("ERS") revenues are deferred and recognized over the life of the membership. ERS 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 fifteen years.
Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with 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.
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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, non-compete and deferred consulting agreements and deferred financing costs which have weighted average useful lives of approximately 6 years, 15 years and 6 years, respectively.
Indefinite-Lived Intangible Assets
We evaluate indefinite-lived intangible assets for impairment at least annually or when events indicate that an impairment exists. The impairment tests for goodwill and other indefinite-lived intangible assets are assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with the net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds the fair value, or if another indicator of impairment exists, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, accordingly the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.
Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge. Our estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, technological change, economic conditions or changes to our business operations. Such changes may result in impairment charges recorded in future periods.
The fair value of our reporting units is annually determined using a combination of the income approach and the market approach. Under the income approach, the fair value of a reporting unit is calculated based on the present value of estimated future cash flows. Future cash flows are estimated by us under the market approach, fair value is estimated based on market multiples of revenue or earnings for comparable companies.
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We performed an annual goodwill impairment test as required and there were no goodwill impairment indicators for our other reporting units. Based on the results of the annual impairment tests, we determined that no indicators of goodwill impairment existed for the other reporting units as of
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 utilizes derivative financial instruments to manage its exposure to interest rate risks. The Company does not enter into derivative financial instruments for trading purposes.
Due to the issuance of fixed rate date to replace the existing variable rate debt in
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.
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