** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C.  20549

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**FORM 10-Q**

**QuarterlyReport Under Section 13 or 15 (d) ofThe Securities Exchange Act of 1934**

| **For Quarter Ended:**  |   | **Commission  File Number** |
|-------------------------|--------|-----------------------------|
| **September  30, 2006** |   | **333-124109**              |

 

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**AFFINITY GROUP HOLDING, INC.**(Exact name of registrant as specified in its charter)

| **Delaware**                              |   | **20-2428068**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                      |   |                                  |
| **2575  Vista Del Mar Drive**             |   | **(805)  667-4100**                   |
| **Ventura,  CA  93001**              |   | (Registrant’s  telephone         |
| (Address of  principal executive offices) |   | number,  including area code)         |

 

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**SECURITIES REGISTERED PURSUANT TOSECTION 12 (b) OF THE ACT: NONE**

**SECURITIESREGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:10-7/8% Senior Notes Due 2012**

Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

YES  x                  NO  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  o                   Accelerated filer  o               Non-accelerated filer  x

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

YES  o                   NO  x

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

| **Class**                     |   | **Outstanding  as of  November 3, 2006** |
|-------------------------------|--------|------------------------------------------|
| Common Stock, $.01  par value |   | 100                                      |

 

**DOCUMENTSINCORPORATED BY REFERENCE: None**

** **

 

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**AFFINITY GROUPHOLDING, INC. AND SUBSIDIARIES**

**INDEX**
|                                                                                                          | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------|------------|----------|
| **Part I. Financial Information**                                                                        |       |     |
| **Item 1: Financial Statements**                                                                         |       |     |
| Consolidated Balance Sheets  As of September 30, 2006 (unaudited) and December 31, 2005                  |       | 1        |
| Unaudited Consolidated Statements of Operations  For the three months ended September 30, 2006 and 2005  |       | 2        |
| Unaudited Consolidated Statements of Operations  For the nine months ended September 30, 2006 and 2005   |       | 3        |
| Unaudited Consolidated Statements of Cash Flows  For the nine months ended September 30, 2006 and 2005   |       | 4        |
| Notes to Unaudited Consolidated Financial Statements                                                     |       | 5        |
| **Item 2:  Management’s Discussion and Analysis of  Financial Condition and Results of Operations** |       | 12       |
| **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                  |       | 27       |
| **Item  4: Control and Procedures**                                                                      |       | 27       |
| **Part  II. Other Information**                                                                          |       | 28       |
| **Signatures**                                                                                           |       | 29       |

 

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**AFFINITY GROUP HOLDING, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSSeptember 30, 2006 and December 31, 2005(In Thousands)**
| ** **                                                                                     | ** ** | **9/30/2006**   | ** ** | **12/31/2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                     | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                     | ** ** | ** **      | ** ** | ** **     | ** ** |
| CURRENT ASSETS:                                                                                |       |            |       |           |       |
| Cash and cash  equivalents                                                                     |       | $               | 10,111     |           | $          | 25,061 |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,155 in 2006 and $952  in 2005 |       | 20,893          |       | 26,508         |       |
| Inventories                                                                                    |       | 53,168          |       | 47,039         |       |
| Prepaid expenses  and other assets                                                             |       | 17,008          |       | 11,218         |       |
| Deferred tax  assets, net                                                                      |       | 3,141           |       | 4,995          |       |
| Total current  assets                                                                          |       | 104,321         |       | 114,821        |       |
|                                                                                           |       |            |       |           |       |
| PROPERTY AND  EQUIPMENT, net                                                                   |       | 31,394          |       | 29,843         |       |
| INVESTMENT IN  AFFILIATE                                                                       |       | 81,005          |       | 81,005         |       |
| NOTE FROM  AFFILIATE                                                                           |       | 4,697           |       | 4,722          |       |
| INTANGIBLE  ASSETS, net                                                                        |       | 35,215          |       | 37,724         |       |
| GOODWILL                                                                                       |       | 144,429         |       | 144,429        |       |
| DEFERRED TAX  ASSETS, net                                                                      |       | —          |       | 4,620          |       |
| OTHER ASSETS                                                                                   |       | 1,636           |       | 1,731          |       |
| Total assets                                                                                   |       | $               | 402,697    |           | $          | 418,895 |   |
|                                                                                           |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                |       |            |       |           |       |
| CURRENT  LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts payable                                                                               |       | $               | 20,776     |           | $          | 12,683 |   |
| Accrued interest                                                                               |       | 2,186           |       | 6,897          |       |
| Accrued income  taxes                                                                          |       | 1,047           |       | 465            |       |
| Accrued  liabilities                                                                           |       | 38,828          |       | 34,094         |       |
| Deferred  revenues and gains                                                                   |       | 72,248          |       | 60,994         |       |
| Current portion  of long-term debt                                                             |       | 3,912           |       | 6,136          |       |
| Total current  liabilities                                                                     |       | 138,997         |       | 121,269        |       |
|                                                                                           |       |            |       |           |       |
| DEFERRED  REVENUES AND GAINS                                                                   |       | 38,341          |       | 37,926         |       |
| LONG-TERM DEBT,  net of current portion                                                        |       | 383,646         |       | 406,528        |       |
| DEFERRED TAX  LIABILITY                                                                        |       | 15,411          |       | —         |       |
| OTHER LONG-TERM  LIABILITIES                                                                   |       | 2,874           |       | 5,641          |       |
|                                                                                           |       | 579,269         |       | 571,364        |       |
|                                                                                           |       |            |       |           |       |
| COMMITMENTS AND  CONTINGENCIES                                                                 |       |            |       |           |       |
|                                                                                           |       |            |       |           |       |
| STOCKHOLDER’S  DEFICIT:                                                                   |       |            |       |           |       |
| Common stock,  $.01 par value, 3,000 shares authorized, 100 shares issued and outstanding      |       | 1               |       | 1              |       |
| Accumulated  deficit                                                                           |       | (176,573        | )          | (152,470       | )          |
| Total  stockholder’s deficit                                                              |       | (176,572        | )          | (152,469       | )          |
| Total liabilities and stockholder’s deficit                                               |       | $               | 402,697    |           | $          | 418,895 |   |

 

See notes to consolidated financial statements.

 

1

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**AFFINITY GROUPHOLDING, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OFOPERATIONS(In Thousands)(Unaudited)
| ** **                                         | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **9/30/2006**                    | ** ** | **9/30/2005** | ** ** |
|                                               |       |                             |       |   |   |
| REVENUES:                                          |       |                             |       |   |   |
| Membership services                                |       | $                                | 34,128     |   | $ | 35,098 |   |
| Publications                                       |       | 14,289                           |       | 13,951 |   |
| Retail                                             |       | 81,623                           |       | 75,668 |   |
|                                               |       | 130,040                          |       | 124,717 |   |
|                                               |       |                             |       |   |   |
| COSTS APPLICABLE  TO REVENUES:                     |       |                             |       |   |   |
| Membership services                                |       | 22,293                           |       | 24,335 |   |
| Publications                                       |       | 9,982                            |       | 10,401 |   |
| Retail                                             |       | 49,030                           |       | 45,354 |   |
|                                               |       | 81,305                           |       | 80,090 |   |
|                                               |       |                             |       |   |   |
| GROSS PROFIT                                       |       | 48,735                           |       | 44,627 |   |
|                                               |       |                             |       |   |   |
| OPERATING  EXPENSES:                               |       |                             |       |   |   |
| Selling, general and administrative                |       | 36,000                           |       | 31,773 |   |
| Depreciation and amortization                      |       | 4,845                            |       | 4,057 |   |
|                                               |       | 40,845                           |       | 35,830 |   |
|                                               |       |                             |       |   |   |
| INCOME FROM  OPERATIONS                            |       | 7,890                            |       | 8,797 |   |
|                                               |       |                             |       |   |   |
| NON-OPERATING  ITEMS:                              |       |                             |       |   |   |
| Interest income                                    |       | 205                              |       | 351 |   |
| Interest expense                                   |       | (8,967                           | )          | (8,977 | ) |
| Debt extinguishment expense                        |       | (142                             | )          | — |   |
| Other non-operating items, net                     |       | 24                               |       | 19 |   |
|                                               |       | (8,880                           | )          | (8,607 | ) |
|                                               |       |                             |       |   |   |
| INCOME (LOSS)  FROM OPERATIONS BEFORE INCOME TAXES |       | (990                             | )          | 190 |   |
|                                               |       |                             |       |   |   |
| INCOME TAX  BENEFIT (EXPENSE)                      |       | 2,292                            |       | (68 | ) |
|                                               |       |                             |       |   |   |
| NET INCOME                                         |       | $                                | 1,302      |   | $ | 122 |   |

 

See notes to consolidated financial statements.

** **

2

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**AFFINITY GROUPHOLDING, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTS OFOPERATIONS(In Thousands)(Unaudited)
| ** **                                  | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **9/30/2006**                   | ** ** | **9/30/2005** | ** ** |
|                                        |       |                            |       |   |   |
| REVENUES:                                   |       |                            |       |   |   |
| Membership services                         |       | $                               | 104,588    |   | $ | 101,922 |   |
| Publications                                |       | 53,976                          |       | 46,450 |   |
| Retail                                      |       | 227,349                         |       | 218,244 |   |
|                                        |       | 385,913                         |       | 366,616 |   |
|                                        |       |                            |       |   |   |
| COSTS APPLICABLE  TO REVENUES:              |       |                            |       |   |   |
| Membership services                         |       | 68,416                          |       | 66,837 |   |
| Publications                                |       | 36,195                          |       | 32,160 |   |
| Retail                                      |       | 136,497                         |       | 129,746 |   |
|                                        |       | 241,108                         |       | 228,743 |   |
|                                        |       |                            |       |   |   |
| GROSS PROFIT                                |       | 144,805                         |       | 137,873 |   |
|                                        |       |                            |       |   |   |
| OPERATING  EXPENSES:                        |       |                            |       |   |   |
| Selling, general and administrative         |       | 101,362                         |       | 94,496 |   |
| Depreciation and amortization               |       | 14,217                          |       | 11,711 |   |
|                                        |       | 115,579                         |       | 106,207 |   |
|                                        |       |                            |       |   |   |
| INCOME FROM  OPERATIONS                     |       | 29,226                          |       | 31,666 |   |
|                                        |       |                            |       |   |   |
| NON-OPERATING  ITEMS:                       |       |                            |       |   |   |
| Interest income                             |       | 929                             |       | 695 |   |
| Interest expense                            |       | (27,635                         | )          | (24,157 | ) |
| Debt extinguishment expense                 |       | (835                            | )          | — |   |
| Other non-operating items, net              |       | 77                              |       | 49 |   |
|                                        |       | (27,464                         | )          | (23,413 | ) |
|                                        |       |                            |       |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 1,762                           |       | 8,253 |   |
|                                        |       |                            |       |   |   |
| INCOME TAX  EXPENSE                         |       | (22,578                         | )          | (2,920 | ) |
|                                        |       |                            |       |   |   |
| NET (LOSS) INCOME                           |       | $                               | (20,816    | ) | $ | 5,333 |   |

 

See notes to consolidated financial statements.

 

3

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**AFFINITY GROUPHOLDING, INC. AND SUBSIDIARIES**CONSOLIDATED STATEMENTSOF CASH FLOWS(In Thousands)(Unaudited)
| ** **                                                                                | ** ** | **NINE MONTHS ENDED** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **9/30/2006**                   | ** ** | **9/30/2005** | ** ** |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |                            |       |   |   |
| Net (loss) income                                                                         |       | $                               | (20,816    | ) | $ | 5,333 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                              |       | 7,661                           |       | 6,838 |   |
| Amortization                                                                              |       | 6,556                           |       | 4,873 |   |
| Provision for losses on accounts receivable                                               |       | 515                             |       | 505 |   |
| Deferred compensation                                                                     |       | 920                             |       | 2,925 |   |
| Deferred tax expense (benefit)                                                            |       | 21,885                          |       | (3,076 | ) |
| Gain on sale of property and equipment                                                    |       | (13                             | )          | (1 | ) |
| Loss on early extinguishment of debt                                                      |       | 835                             |       | — |   |
| Non-cash interest on AGHI Notes                                                           |       | 7,912                           |       | 5,007 |   |
| Accretion of original issue discount                                                      |       | 194                             |       | 98 |   |
| Changes in operating assets and liabilities                                               |       |                            |       |   |   |
| Accounts receivable                                                                       |       | 5,100                           |       | 3,547 |   |
| Inventories                                                                               |       | (6,129                          | )          | (7,543 | ) |
| Prepaid expenses and other assets                                                         |       | (5,423                          | )          | (5,289 | ) |
| Accounts payable                                                                          |       | 8,093                           |       | (1,955 | ) |
| Accrued and other liabilities                                                             |       | (3,082                          | )          | (6,649 | ) |
| Deferred revenues and gains                                                               |       | 10,040                          |       | 9,568 |   |
| Net cash provided by operating activities                                                 |       | 34,248                          |       | 14,181 |   |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |                            |       |   |   |
| Capital expenditures                                                                      |       | (9,203                          | )          | (8,579 | ) |
| Net proceeds from sale of property and equipment                                          |       | 124                             |       | 30 |   |
| Additions to intangible assets                                                            |       | —                          |       | (38 | ) |
| Investment in affiliate                                                                   |       | —                          |       | (81,005 | ) |
| Acquisitions, net of cash received                                                        |       | (2,853                          | )          | (2,639 | ) |
| Repayment of loans receivable                                                             |       | 25                              |       | 22 |   |
| Net cash used in investing activities                                                     |       | (11,907                         | )          | (92,209 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |                            |       |   |   |
| Dividends paid                                                                            |       | (3,287                          | )          | — |   |
| Borrowings on long-term debt                                                              |       | —                          |       | 85,005 |   |
| Payment of debt issue costs                                                               |       | (12                             | )          | (3,563 | ) |
| Principal payments of long-term debt                                                      |       | (33,992                         | )          | (1,070 | ) |
| Net cash (used in) provided by financing activities                                       |       | (37,291                         | )          | 80,372 |   |
|                                                                                      |       |                            |       |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                                  |       | (14,950                         | )          | 2,344 |   |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF YEAR                                           |       | 25,061                          |       | 24,564 |   |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                               |       | $                               | 10,111     |   | $ | 26,908 |   |

 

See notes to consolidated financial statements.

 

4

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**AFFINITY GROUPHOLDING, INC. AND SUBSIDIARIESNotes to Consolidated Financial Statements(Unaudited)**

** **

**(1) BASIS OF PRESENTATION**

*Principles of Consolidation**—*The consolidated financial statementsincluded herein include the accounts of Affinity Group Holding, Inc. (“AGHI”),its wholly-owned subsidiary, Affinity Group, Inc (“AGI”), and AGI’ssubsidiaries (collectively the “Company”), presented in accordance with U.S.generally accepted accounting principles, and pursuant to the rules andregulations of the Securities and Exchange Commission.  AGHI was formed on March 2, 2005, at whichtime all of the stock of AGI was contributed to AGHI from its parent, AGIHolding Corp. (“AGHC”) a privately-owned corporation.

On March 7, 2006, AGHCfiled an election with the Internal Revenue Service to change its tax statusfrom a Subchapter C corporation to a Subchapter S corporation (“S corporation”)to be effective as of January 1, 2006. The election for change in tax status toan S corporation included AGHC and all its subsidiaries with the exception ofCamping World, Inc. and its wholly-owned subsidiaries, which are to remainSubchapter C corporations.  During thefirst quarter of 2006, the Company continued to file as Subchapter Ccorporations since AGHC had not received approval from the IRS regarding its Scorporation change of tax status election. As such, the Company recorded a $1.5 million tax provision for the firstquarter of 2006.   Approval for the Scorporation change of tax status election was received from the IRS in thesecond quarter of 2006.  This approvalfor change in tax status was granted retroactive to January 1, 2006. Pursuantto FAS 109, “Accounting for Income taxes”, a change in tax status resultingfrom an S corporation election requires that all deferred tax accounts berevalued upon formal approval of the S corporation status.  Accordingly, all deferred tax accounts ofAGHC and its subsidiaries, excluding Camping World, Inc. and its wholly ownedsubsidiaries, were revalued to account for the tax effect for the change to theS corporation status.  Deferred taxliabilities related to Camping World, Inc. and its wholly-owned subsidiarieswhich remained C corporation companies were approximately $12.6 million.  As result of the Company’s change of taxstatus to S corporation, a deferred tax liability related to a Subchapter Scorporation of approximately $2.8 million was recorded on the financialstatements for potential tax liability in prior C corporation years.  The effect of this revaluation on thedeferred tax accounts was initially recorded in the income tax provision in thesecond quarter of 2006.  Additionaladjustments to deferred taxes were made in the third quarter of 2006 to reflectadjustments to the actual deferred tax accounts recorded at Camping World, Inc.based on additional analysis performed by the Company on the separate balancesheet of Camping World, Inc.  The impactof such adjustments resulted in a tax benefit of $2.3 million being recorded inthe three months ended September 30, 2006. The adjustment has no impact on the nine months ended September 30, 2006financial statements.

5

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**(1) BASIS OF PRESENTATION(continued)**

Theseinterim consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2005 as filed with the Securities andExchange Commission.  In the opinion ofmanagement of the Company, these consolidated financial statements contain alladjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

**(2) RECENT ACCOUNTINGPRONOUNCEMENTS**

InJuly 2006, the FASB issued Interpretation No. 48 (“FIN No. 48”), “Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109.”FIN No. 48 clarifies the accounting for uncertainty in income taxes recognizedin an enterprise’s financial statements in accordance with SFAS No. 109. FINNo. 48 also prescribes a recognition threshold and measurement attribute forthe financial statement recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN No. 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. The provisions of FIN No. 48 are effectivefor fiscal years beginning after December 15, 2006. The Company is currentlyassessing the possible impact implementing FIN No. 48 may have on its financialposition and results of operations.

**(3) DISCLOSURES ABOUT SEGMENTS OFAN ENTERPRISE AND RELATED INFORMATION**

TheCompany’s three principal lines of business are Membership Services,Publications, and Retail.  The MembershipServices segment includes the operations of the Good Sam Club, Coast to CoastClub, Camping World’s President’s Club and Camp Club USA for recreationalvehicle (“RV”) owners, campers and outdoor vacationers, and the Golf Card Clubfor golf enthusiasts.  The Publicationssegment publishes a variety of publications for selected markets in therecreation and leisure industry, including general circulation periodicals,directories, and RV and powersports industry trade magazines, and producesoutdoor recreational consumer events. The Retail segment sells specialty retail merchandise and services forRV owners primarily through Camping World retail supercenters, mail ordercatalogs and its website.  The Companyevaluates performance based on profit or loss from operations before incometaxes.

The reportable segmentsare strategic business units that offer different products and services.  They are managed separately because eachbusiness requires different technology, management expertise and marketingstrategies.

6

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**(3) DISCLOSURES ABOUT SEGMENTS OFAN ENTERPRISE AND RELATED INFORMATION**

TheCompany does not allocate income taxes or unusual items to segments.  Financial information by reportable businesssegment is summarized as follows (in thousands):
| ** **                                 | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE  MONTHS ENDED SEPTEMBER 30, 2006** | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers           |       | $              | 34,128     |             | $          | 14,289     |       | $                | 81,623     |   | $ | 130,040 |   |
| Interest income                            |       | 1,746          |       | —           |       | 1          |       | 1,747            |       |
| Interest expense                           |       | —         |       | 77               |       | 3,140      |       | 3,217            |       |
| Depreciation and amortization              |       | 915            |       | 1,111            |       | 2,102      |       | 4,128            |       |
| Segment operating profit (loss)            |       | 10,511         |       | 2,105            |       | (367       | )          | 12,249           |       |
|                                            |            |                |            |                  |            |            |            |                  |            |  |  |  |  |

 
| ** **                                 | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE  MONTHS ENDED SEPTEMBER 30, 2005** | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers           |       | $              | 35,098     |             | $          | 13,951     |       | $                | 75,668     |   | $ | 124,717 |   |
| Gain on sale of property and equipment     |       | —         |       | —           |       | 3          |       | 3                |       |
| Interest income                            |       | 1,353          |       | —           |       | 4          |       | 1,357            |       |
| Interest expense                           |       | —         |       | 70               |       | 2,497      |       | 2,567            |       |
| Depreciation and amortization              |       | 882            |       | 666              |       | 1,762      |       | 3,310            |       |
| Segment profit                             |       | 9,274          |       | 2,197            |       | 2,497      |       | 13,968           |       |
|                                            |            |                |            |                  |            |            |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE  MONTHS ENDED SEPTEMBER 30, 2006** | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers          |       | $              | 104,588    |             | $          | 53,976     |       | $                | 227,349    |   | $ | 385,913 |   |
| Gain on sale of property and equipment    |       | —         |       | 5                |       | 8          |       | 13               |       |
| Interest income                           |       | 4,685          |       | —           |       | 7          |       | 4,692            |       |
| Interest expense                          |       | —         |       | 258              |       | 10,119     |       | 10,377           |       |
| Depreciation and amortization             |       | 2,714          |       | 3,190            |       | 6,108      |       | 12,012           |       |
| Segment profit (loss)                     |       | 32,198         |       | 11,289           |       | (4,174     | )          | 39,313           |       |
|                                           |            |                |            |                  |            |            |            |                  |            |  |  |  |  |

 
| ** **                                    | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                    | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE  MONTHS ENDED SEPTEMBER 30, 2005**     | ** ** | ** **     | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers              |       | $              | 101,922    |             | $          | 46,450     |       | $                | 218,244    |   | $ | 366,616 |   |
| Gain (loss) on sale of property and equipment |       | —         |       | (5               | )          | 6          |       | 1                |       |
| Interest income                               |       | 3,523          |       | —           |       | 9          |       | 3,532            |       |
| Interest expense                              |       | —         |       | 229              |       | 7,709      |       | 7,938            |       |
| Depreciation and amortization                 |       | 2,641          |       | 1,682            |       | 5,250      |       | 9,573            |       |
| Segment profit                                |       | 30,286         |       | 10,388           |       | 4,285      |       | 44,959           |       |
|                                               |            |                |            |                  |            |            |            |                  |            |  |  |  |  |

 

7

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**(3) DISCLOSURES ABOUT SEGMENTS OFAN ENTERPRISE AND RELATED INFORMATION (continued)**

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three and nine months ended September30, (in thousands):
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **9/30/2006**                    | ** ** | **9/30/2005**                   | ** ** | **9/30/2006** | ** ** | **9/30/2005** | ** ** |
| **Income  From Operations Before Taxes**                       | ** ** | ** **                       | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total profit for  reportable segments                          |       | $                                | 12,249     |                            | $          | 13,968 |   | $ | 39,313 |   | $ | 44,959 |   |
| Unallocated G  & A expense                                 |       | (5,088                           | )          | (5,615                          | )          | (13,490 | ) | (15,512 | ) |
| Unallocated  depreciation and amortization expense             |       | (717                             | )          | (747                            | )          | (2,205 | ) | (2,138 | ) |
| Unallocated  interest income, net of intercompany elimination  |       | (1,542                           | )          | (1,006                          | )          | (3,763 | ) | (2,837 | ) |
| Unallocated  interest expense, net of intercompany elimination |       | (5,750                           | )          | (6,410                          | )          | (17,258 | ) | (16,219 | ) |
| Unallocated debt  restructure expense                          |       | (142                             | )          | —                          |       | (835 | ) | — |   |
| Income from operations  before taxes                           |       | $                                | (990       | )                               | $          | 190 |   | $ | 1,762 |   | $ | 8,253 |   |

 

The following is areconciliation of assets of reportable segments to the Company’s consolidatedfinancial statements as of September 30, 2006 and December 31, 2005 (inthousands):

|                                                      | ** ** | **9/30/2006** | ** ** | **12/31/2005** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership  services segment                         |       | $             | 161,715    |           | $          | 162,562 |   |
| Publications  segment                                |       | 89,161        |       | 89,104         |       |
| Retail segment                                       |       | 221,206       |       | 207,736        |       |
| Total assets for  reportable segments                |       | 472,082       |       | 459,402        |       |
| Capitalized  finance costs not allocated to segments |       | 10,337        |       | 12,720         |       |
| Corporate  unallocated assets                        |       | 6,751         |       | 16,659         |       |
| Elimination of  intersegment receivable              |       | (86,473       | )          | (69,886        | )          |
| Total assets                                         |       | $             | 402,697    |           | $          | 418,895 |   |

 

8

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**(4)STATEMENTS OF CASH FLOWS**

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

|                                   | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during  the period for: |       |     |       |     |       |
| Interest                          |       | $        | 24,240     |     | $          | 23,487 |   |
| Income taxes                      |       | 205      |       | 8,493    |       |
|                                   |            |          |            |          |            |  |  |

 

In February 2006, theCompany assumed $1.0 million of liabilities and issued $0.4 million of debt inthe acquisition of Plus Events consumer shows and related assets of H & SProductions, LLC.

On February 15, 2006 andAugust 15, 2006 the Company paid the interest on the AGHI Notes by the issuanceof notes of the same tenor as the AGHI Notes in the amounts of $5.0 million and$5.3 million, respectively.   It is theCompany’s intent to pay the current interest on the AGHI Notes through theissuance of additional notes of the same tenor as the AGHI Notes.  Non-cash interest as of September 30, 2006was $1.4 million.

On March 7, 2006, AGHCmade an S corporation change of tax status election effective for 2006, whichincluded AGHI and all its subsidiaries with the exception of Camping World,Inc. and its wholly-owned subsidiaries, which will remain Subchapter Ccorporations.  With the exception ofbuilt-in gains taxes, S corporations do not pay income taxes but pass theincome and related income tax liability through to their stockholders.  To assist the stockholder with its income taxliability, the Company made distributions of $2.6 million and $0.7 million toits parent in the form of a dividend in March 2006 and August 2006,respectively.

In August 2006, theCompany assumed $0.3 million of liabilities and issued $0.1 million of debt inthe acquisition of the publishing assets of American Guide Services, Inc.

In September 2006, theCompany assumed $0.4 million of liabilities and issued $0.2 million of debt inthe asset acquisition of four North Carolina RV shows from Apple RockAdvertising and Promotions, Inc.

**(5)GOODWILL AND INTANGIBLE ASSETS**

The Company reviewsgoodwill and indefinite-lived intangible assets for impairment at leastannually.  The Company performs itsannual impairment test during the fourth quarter.  Based on the results of this test, an impairmentcharge of $4.3 million was recorded in 2005 related to Golf Card Club, which isincluded in the membership services segment.

There were no changes inthe Company’s goodwill by business segment for the nine months ended September30, 2006 and 2005.

As noted above, theCompany completed several acquisitions in 2006. Such acquisitions have been accounted for as a purchase in accordancewith FASB No. 141, “Business Combinations,”

9

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**(5)GOODWILL AND INTANGIBLE ASSETS (continued)**

and accordingly, theacquired assets and liabilities have been recorded at fair value.  The allocations of purchase price to assetsand liabilities include various finite lived assets and no additional goodwill.  The operations of each entity are included inthe operations of the Company from the respective acquisition dates.

Finite lived intangibleassets, related accumulated amortization and weighted average useful lifeconsisted of the following at September 30, 2006 (in thousands, except asnoted):
| ** **                                       | ** ** | **Weighted**                  | ** ** | ** **      | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|-------------------------------|------------|-----------------|------------|------------------|------------|------------|------------|
| ** **                                       | ** ** | **Average Useful**       | ** ** | **Accumulated** | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Life (in years)** | ** ** | **Gross**       | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
| Membership and  customer lists                   |       | 6                             |       | $               | 28,946     |             | $          | (10,349    | )          | $ | 18,597 |   |
| Resort and golf  course participation agreements |       | 23                            |       | 13,497          |       | (12,297          | )          | 1,200      |       |
| Non-compete and  deferred consulting agreements  |       | 15                            |       | 18,830          |       | (12,363          | )          | 6,467      |       |
| Deferred  financing costs                        |       | 7                             |       | 14,311          |       | (5,360           | )          | 8,951      |       |
|                                             |       |                          |       | $               | 75,584     |             | $          | (40,369    | )          | $ | 35,215 |   |

 

**(6) DEBT**

AGHI Notes

On March 24, 2005 in aprivate placement, AGHI issued $88.2 million principal amount of its 10-7/8%senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 inJune 2005.  The AGHI Notes are unsecuredobligations of AGHI and its subsidiaries have not guaranteed payment ofprincipal or interest on the AGHI Notes. Interest on the AGHI Notes is payable semi-annually on February 15 andAugust 15 commencing August 15, 2005 and the entire $88.2 million principalamount of the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior toFebruary 15, 2008, AGHI may elect to pay interest on the AGHI Notes in cash orby issuance of additional notes of the same tenor as the AGHI Notes, except thematurity date is March 15, 2010.  TheCompany elected to issue additional notes in lieu of cash payments.  On February 15 and August 15, 2006 theCompany issued additional notes in the amount of $5.0 million and $5.3 million,respectively.

Senior Subordinated Notes

In February 2004, AGI issued $200.0 millionof 9% Senior Subordinated Notes (“Senior Subordinated Notes”) due 2012 pursuantto the AGI Indenture.  On June 8, 2006,AGI amended its Amended and Restated Credit Agreement to permit AGI to purchaseup to $30.0 million of the Senior Subordinated Notes from time to time as andwhen AGI determines.  AGI purchased andretired $24.8 million, $4.9 million, and $0.2 million of the SeniorSubordinated Notes in June, July and August of 2006, respectively.  Interest is payable on the remaining SeniorSubordinated Notes twice a year on February 15 and August 15.  AGI’s present and future restrictedsubsidiaries will guarantee the Senior

 

10

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** **

**(6) DEBT(continued)**

Subordinated Notes with unconditionalguarantees of payment that will rank junior in right of payment to theirexisting and future senior debt, but will rank equal in right of payment totheir existing and future senior subordinated debt.

**(7)RECENT EVENTS**

On March 6, 2006, Camping World, Inc. (“CampingWorld”), a wholly-owned subsidiary of Affinity Group, Inc., entered intoa Joint Venture Agreement with FreedomRoads Holding Company, LLC, a Minnesotalimited liability company (“FreedomRoads”). FreedomRoads is indirectly owned andcontrolled by Stephen Adams, the Chairman and indirect controlling shareholderof Affinity Group Holding, Inc.  FreedomRoads, through its wholly-ownedsubsidiaries, owns and operates RV dealerships across the United States.  The Joint Venture Agreement provides that Camping World andFreedomRoads are to act cooperatively with a view to maximizing synergies andto locate, establish and utilize mutually beneficial relationships that areavailable only to the parties acting together that would not otherwise beavailable to either party independently. Certain executives of Camping World share their time with FreedomRoadsand are compensated separately by each Company for their services.

 

11

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** **

**ITEM 2:**

**AFFINITY GROUP HOLDING, INC.AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL**CONDITION AND RESULTS OF OPERATIONS

 

The followingtable is derived from the Company’s Consolidated Statements of Operations and expresses the results from operationsas a percentage of revenues and reflects the net increase (decrease) between periods:
| ** **                                         | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **9/30/2006**                    | ** ** | **9/30/2005** | ** ** | **Inc/(Dec)** | ** ** |
|                                               |       |                             |       |   |   |   |   |
| REVENUES:                                          |       |                             |       |   |   |   |   |
| Membership  services                               |       | 26.2                             | %          | 28.1 | % | (2.8 | %) |
| Publications                                       |       | 11.0                             | %          | 11.2 | % | 2.4 | % |
| Retail                                             |       | 62.8                             | %          | 60.7 | % | 7.9 | % |
|                                               |       | 100.0                            | %          | 100.0 | % | 4.3 | % |
|                                               |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:                     |       |                             |       |   |   |   |   |
| Membership  services                               |       | 17.1                             | %          | 19.5 | % | (8.4 | %) |
| Publications                                       |       | 7.7                              | %          | 8.3 | % | (4.0 | %) |
| Retail                                             |       | 37.7                             | %          | 36.4 | % | 8.1 | % |
|                                               |       | 62.5                             | %          | 64.2 | % | 1.5 | % |
|                                               |       |                             |       |   |   |   |   |
| GROSS PROFIT                                       |       | 37.5                             | %          | 35.8 | % | 9.2 | % |
|                                               |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                                |       |                             |       |   |   |   |   |
| Selling, general  and administrative               |       | 27.7                             | %          | 25.4 | % | 13.3 | % |
| Depreciation and  amortization                     |       | 3.7                              | %          | 3.3 | % | 19.4 | % |
|                                               |       | 31.4                             | %          | 28.7 | % | 14.0 | % |
|                                               |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS                             |       | 6.1                              | %          | 7.1 | % | (10.3 | %) |
|                                               |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                               |       |                             |       |   |   |   |   |
| Interest income                                    |       | 0.2                              | %          | 0.3 | % | (41.6 | %) |
| Interest expense                                   |       | (7.0                             | %)         | (7.2 | %) | (0.1 | %) |
| Debt  extinguishment expense                       |       | (0.1                             | %)         | — |   | 100.0 | % |
| Other  non-operating items, net                    |       | —                           |       | — |   | 26.3 | % |
|                                               |       | (6.9                             | %)         | (6.9 | %) | 3.2 | % |
|                                               |       |                             |       |   |   |   |   |
| INCOME (LOSS) FROM  OPERATIONS BEFORE INCOME TAXES |       | (0.8                             | %)         | 0.2 | % | (621.1 | %) |
|                                               |       |                             |       |   |   |   |   |
| INCOME TAX BENEFIT  (EXPENSE)                      |       | 1.8                              | %          | (0.1 | %) | (3470.6 | %) |
|                                               |       |                             |       |   |   |   |   |
| NET INCOME                                         |       | 1.0                              | %          | 0.1 | % | 967.2 | % |

 

12

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**AFFINITY GROUP HOLDING, INC.AND SUBSIDIARIESMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL**CONDITION AND RESULTS OF OPERATIONS

 

The followingtable is derived from the Company’s Consolidated Statements of Operations and expresses the results from operationsas a percentage of revenues and reflects the net increase (decrease) betweenperiods:
| ** **                                  | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|
| ** **                                  | ** ** | **9/30/2006**                   | ** ** | **9/30/2005** | ** ** | **Inc/(Dec)** | ** ** |
|                                        |       |                            |       |   |   |   |   |
| REVENUES:                                   |       |                            |       |   |   |   |   |
| Membership services                         |       | 27.1                            | %          | 27.8 | % | 2.6 | % |
| Publications                                |       | 14.0                            | %          | 12.7 | % | 16.2 | % |
| Retail                                      |       | 58.9                            | %          | 59.5 | % | 4.2 | % |
|                                        |       | 100.0                           | %          | 100.0 | % | 5.3 | % |
|                                        |       |                            |       |   |   |   |   |
| COSTS APPLICABLE  TO REVENUES:              |       |                            |       |   |   |   |   |
| Membership services                         |       | 17.7                            | %          | 18.2 | % | 2.4 | % |
| Publications                                |       | 9.4                             | %          | 8.8 | % | 12.5 | % |
| Retail                                      |       | 35.4                            | %          | 35.4 | % | 5.2 | % |
|                                        |       | 62.5                            | %          | 62.4 | % | 5.4 | % |
|                                        |       |                            |       |   |   |   |   |
| GROSS PROFIT                                |       | 37.5                            | %          | 37.6 | % | 5.0 | % |
|                                        |       |                            |       |   |   |   |   |
| OPERATING  EXPENSES:                        |       |                            |       |   |   |   |   |
| Selling, general and administrative         |       | 26.2                            | %          | 25.7 | % | 7.3 | % |
| Depreciation and amortization               |       | 3.7                             | %          | 3.2 | % | 21.4 | % |
|                                        |       | 29.9                            | %          | 28.9 | % | 8.8 | % |
|                                        |       |                            |       |   |   |   |   |
| INCOME FROM  OPERATIONS                     |       | 7.6                             | %          | 8.6 | % | (7.7 | %) |
|                                        |       |                            |       |   |   |   |   |
| NON-OPERATING  ITEMS:                       |       |                            |       |   |   |   |   |
| Interest income                             |       | 0.2                             | %          | 0.2 | % | 33.7 | % |
| Interest expense                            |       | (7.1                            | %)         | (6.5 | %) | 14.4 | % |
| Debt extinguishment expense                 |       | (0.2                            | %)         | — |   | 100.0 | % |
| Other non-operating items, net              |       | —                          |       | — |   | 57.1 | % |
|                                        |       | (7.1                            | %)         | (6.3 | %) | 17.3 | % |
|                                        |       |                            |       |   |   |   |   |
| INCOME FROM  OPERATIONS BEFORE INCOME TAXES |       | 0.5                             | %          | 2.3 | % | (78.7 | %) |
|                                        |       |                            |       |   |   |   |   |
| INCOME TAX  EXPENSE                         |       | (5.9                            | %)         | (0.8 | %) | 673.2 | % |
|                                        |       |                            |       |   |   |   |   |
| NET (LOSS)  INCOME                          |       | (5.4                            | %)         | 1.5 | % | (490.3 | %) |

 

13

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**RESULTS OFOPERATIONS**

**Three Months Ended September 30,2006****Compared With Three Months Ended September 30,2005**

*Revenues*

Revenuesof $130.0 million for the third quarter of 2006 increased by $5.3 million, or4.3%, from the comparable period in 2005.

Membershipservices revenues of $34.1 million for the third quarter of 2006 decreased by$1.0 million, or 2.8%, from the comparable period in 2005.  This revenue decrease was largelyattributable to a $1.9 million decrease in member events revenue primarily dueto timing of the Good Sam Club annual rally, which occurred in the secondquarter of 2006 versus the third quarter of 2005, and a $0.4 million reductionin dealer advertising program marketing revenue, partially offset by a $0.6million increase in extended vehicle warranty program revenue due to thecontinued growth of contracts in force, a $0.3 million revenue increase inemergency road service programs due to increased enrollment, a $0.2 millionrevenue increase from the rollout of our new discount camping club, Camp ClubUSA and a $0.2 million revenue increase in other ancillary products.

Publicationrevenues of $14.3 million for the third quarter of 2006 increased $0.3 million,or 2.4%, from the comparable period in 2005 primarily attributable to $0.7million of revenue from the consumer shows acquired in December 2005 andFebruary 2006, and a $0.2 million increase in advertising revenue formotorcycle-related magazines.  Theseincreases were partially offset by $0.6 million of reduced revenue relating tothe discontinuation of *Snowmobile Magazine*,an annual publication, and fewer issues of *Snow Week Magazine*.

Retail revenues of $81.6 millionincreased $6.0 million, or 7.9%, from the comparable period in 2005.  Store merchandise sales increased approximately$6.6 million over the third quarter of 2005 due to a $9.2 million revenueincrease from the addition of seventeen new stores over the past twenty-onemonths, partially offset by a same store sales decrease of $2.6 million, or4.8%, compared to a 0.4% increase in the third quarter of 2005.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  The increase in store merchandise sales was partiallyoffset by a $1.0 million decrease in mail order sales, and a $0.4 millionincrease in installation and service work.

*Costs Applicable to Revenues*

Costsapplicable to revenues totaled $81.3 million for the third quarter of 2006, anincrease of $1.2 million, or 1.5%, from the comparable period in 2005.

Membership services costs and expenses of$22.3 million decreased $2.0 million, or 8.4%, from the comparable period in2005.  This decrease consisted of a $1.9million decrease in member event costs primarily due to timing of the Good SamClub annual rally and a $0.4 million decrease in costs associated with reduceddealer marketing revenue, partially offset

14

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by $0.3 million of incremental marketingand fulfillment costs relating to the start-up of a new discount camping club,Camp Club USA.

Publication costs and expenses of $10.0million for the third quarter of 2006 decreased $0.4 million, or 4.0%, from thecomparable period in 2005.  This decreasewas attributable to reduced costs associated with the reduction of snow-relatedissues, partially offset by increased costs associated with the recentlyacquired consumer shows.

Retail costs applicable to revenuesincreased approximately $3.7 million, or 8.1%, to $49.0 million primarily as aresult of seventeen new stores opened over the past twenty-one months.  The retail gross profit margin of 39.9% forthe third quarter of 2006 decreased slightly from 40.1% for the comparableperiod in 2005.

*Operating Expenses*

Selling, general and administrativeexpenses of approximately $36.0 million for the third quarter of 2006 increased$4.2 million compared to the third quarter of 2005 primarily due to an increasein retail selling and general and administrative expenses of approximately $4.4million consisting of increases in wages, advertising, and other retail generaland administrative expenses, and a $0.3 million increase due to the newlyacquired consumer shows, partially offset by a $0.5 million decrease indeferred executive compensation expense. The increase in retail selling, general and administrative expenses wasprimarily due to new store openings and other marketing programs.

Depreciation and amortization expense of$4.8 million increased approximately $0.8 million over the prior year primarilydue to increased depreciation on additional capital expenditures at CampingWorld related to new store openings, and amortization of intangible assetsassociated with the purchase of *Powerboat Magazine*inMay 2005 and the consumer show acquisitions.

*Income from Operations*

Incomefrom operations for the third quarter of 2006 totaling $7.9 million decreased$0.9 million compared to the third quarter of 2005.  This decrease was primarily due to increasedoperating expenses of $5.0 million partially offset by increased gross profitfor retail, membership services and publications operations of $2.3 million,$1.1 million and $0.7 million, respectively.

*Non-Operating Items*

Non-operating items were $8.9 million forthe third quarter of 2006, compared to $8.6 million for the same period in2005.  This $0.3 million increasecomprises of $0.1 million of debt extinguishment expense relating to the purchaseand retirement of $5.1 million of the AGI Senior Subordinated Notes in thethird quarter, and a $0.2 million decrease in interest income.

15

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* *

*Income (Loss) before Income Taxes*

Loss before income taxes for the thirdquarter of 2006 was approximately $1.0 million, or $1.2 million lower than thethird quarter of 2005.  This decrease wasattributable to a $0.9 million decrease in income from operations for thecurrent period, $0.1 million of debt extinguishment expense and a $0.2 milliondecrease in interest income.

*Income Tax Benefit (Expense)*

TheCompany recorded a $2.3 million income tax benefit for the third quarter of 2006,compared to a $0.1 million income tax expense for the third quarter of2005.  This increase was primarily due toan income tax benefit recorded as a result of adjustment to the deferred assetsand liabilities originally revalued in the second quarter of 2006.  Income taxes were not recorded in the thirdquarter for the other companies which elected Subchapter S effective for2006.  Only Camping World Inc., and itswholly-owned subsidiaries remain Subchapter C corporations.  In 2005 the Company and all of itssubsidiaries were Subchapter C corporations.

# *Net Income*

Net income in the third quarter of 2006was $1.3 million compared to $0.1 million for the same period in 2005 primarilydue to the income tax benefit of $2.3 million in the third quarter of 2006 as aresult of the S corporation change of tax status election for the Company(other than Camping World, Inc. and its wholly-owned subsidiaries).

*Segment Profit*

Segment profit of $12.2million for the third quarter of 2006 (before unallocated depreciation andamortization, general and administrative, interest, and income tax expense)decreased $1.7 million, or 12.3%, from the comparable period in 2005.

Membership servicessegment profit of approximately $10.5 million for the third quarter of 2006increased $1.2 million, or 13.3%, from the comparable period in 2005.  This increase was largely attributable to a$0.9 million increase in profit from emergency road service products, a $0.2million increase in profit from the extended vehicle warranty programs, and$0.1 million of other ancillary product segment profit.

Publication segmentprofit of $2.1 million for the third quarter of 2006 decreased $0.1 million, or4.2%, from the comparable period in 2005. This decrease was largely attributable to an increase in amortization ofintangibles primarily relating to the show purchases in December 2005 andFebruary 2006, partially offset by an increase in profit for themotorcycle-related magazines due to increased advertising revenue.

Retail segment profitdecreased $2.9 million, or 114.7% from the third quarter in 2005 to a $0.4million loss in the third quarter of 2006. This decreaseresulted primarily from a $4.4 million increase in selling, general andadministrative expenses, a $0.6 million increase in interest expenserelating to intercompany debt issued as a result of the Camping World, Inc.$40.0 million dividend declared and paid in the form of a note on December 23,2005,

16

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and a $0.3 million increase in depreciationexpense, partially offset by a$2.4 million increase in gross profit margin.

**Nine Months Ended September 30,2006****Compared With Nine Months Ended September 30, 2005**

*Revenues*

Revenuesof $385.9 million for the first nine months of 2006 increased by approximately$19.3 million, or 5.3%, from the comparable period in 2005.

Membershipservices revenues of $104.6 million for the first nine months of 2006 increasedby approximately $2.7 million, or 2.6%, from the comparable period in2005.  This revenue increase was largelyattributable to a $2.2 million increase in extended vehicle warranty programrevenue due to the continued growth of contracts in force, a $0.7 millionrevenue increase in emergency road service programs due to increasedenrollment, a $0.3 million revenue increase from the rollout of the newdiscount camping club, Camp Club USA, a $0.2 million increase in advertisingrevenue for Highways Magazine, and a $0.4 million increase in other ancillaryproduct revenue.  These increases werepartially offset by a $1.1 million reduction in dealer program marketingrevenue.

Publicationrevenues of $54.0 million for the first nine months of 2006 increased $7.5million, or 16.2%, from the comparable period in 2005 primarily attributable to$6.6 million of revenue from the consumershow acquisitions, $1.3 million of additional revenue from the boating magazinegroup, primarily relating to the acquisition of *PowerboatMagazine*in May 2005, $0.5 million of additional advertising revenuefor powersports-related magazines, and $0.4 million of revenue from the updatededition of the campground atlas.  Theserevenue increases were partially offset by a $0.7million decrease in revenue relating to thediscontinuation of *Snowmobile Magazine*,an annual publication, and fewer issues of *Snow Week Magazine*, and a $0.6million decrease in advertising and subscription revenue associated with theRV-related titles.

Retail revenues of $227.3 millionincreased $9.1 million, or 4.2%, over the first nine months of 2005.  Store merchandise sales increasedapproximately $10.5 million over the first nine months of 2005 due to an $18.4million revenue increase from the addition of seventeen new stores over thepast twenty-one months, partially offset by a same store sales decrease of $7.9million or 5.0%, compared to a 4.9% increase in the first nine months of2005.  Same store sale calculations for agiven period include only those stores that were open both at the end of thatperiod and at the beginning of the preceding fiscal year.  This revenue increase was partially offset bya $1.4 million decrease in mail order sales.

*Costs Applicable to Revenues*

Costsapplicable to revenues totaled $241.1 million for the first nine months of2006, an increase of $12.4 million, or 5.4%, from the comparable period in2005.

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Membership services costs and expenses of$68.4 million increased approximately $1.6 million, or 2.4%, from the firstnine months of 2005.  This increaseconsisted of $1.2 million of marketing and program expenses associated with increasedenrollment in the extended vehicle warranty programs and emergency road serviceprograms, $1.1 million of costs associated with the start-up of Camp Club USA,and $0.2 million of additional ancillary product costs.  These increases were partially offset by a$0.9 million reduction in costs related to reduced dealer program marketingrevenue.

Publication costs and expenses of $36.2million for the first nine months of 2006 increased $4.0 million, or 12.5%,from the comparable period in 2005 primarily due to a $3.0 million increaserelating to the newly acquired consumer shows, $1.1 million of additional costsattributable to *Powerboat Magazine* acquired May2005, $0.4 million of additional costs associated with an updated edition ofthe campground atlas and $0.3 million of costs associated with increased booksize of powersports-related magazines. These increases were partially offset by $0.4 million of reducedRV-related magazine expenses, and $0.4 million of reduced expenses related to afewer issues of snow-related titles.

Retail costs applicable to revenuesincreased $6.8 million, or 5.2%, to $136.5 million primarily due to an increasein sales due to the seventeen new stores opened over the past twenty-one monthsand a slight decrease in the retail gross profit margin.  The retail gross profit margin of 40.0% forthe first nine months of 2006 decreased from 40.6% for the comparable period in2005 primarily due to an increase in lower margin wholesale sales to dealers.

*Operating Expenses*

Selling, general and administrativeexpenses of approximately $101.4 million for the first nine months of 2006increased $6.9 million, or 7.3%, compared to the first nine months of 2005primarily due to an increase in retail selling and general and administrativeexpenses of approximately $7.9 million consisting of increases in wages,selling expenses, and other retail general and administrative expensesassociated primarily with new stores opened, a $0.8 million increase due to thenewly acquired consumer shows, and $0.2 million of other general and administrativeexpenses, partially offset by a $2.0 million decrease in deferred executivecompensation expense.

Depreciation and amortization expense of$14.2 million increased $2.5 million over the prior year primarily due toincreased depreciation on additional capital expenditures at Camping Worldrelated to new stores and amortization of intangible assets associated with thepurchase of *Powerboat Magazine*in May 2005 and theacquisition of consumer shows in December 2005 and February 2006.

*Income from Operations*

Incomefrom operations for the first nine months of 2006 totaling $29.2 milliondecreased $2.4 million compared to the first nine months of 2005.  This decrease was primarily due to increasedoperating expenses of $9.4 million partially offset by increased gross profitfor the publications, retail and membership services operations of $3.5million, $2.4 million and $1.1 million, respectively.

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* *

*Non-Operating Items*

Non-operating items were approximately$27.5 million for the first nine months of 2006, a $4.1 million increase over2005.  This increase is comprised of $3.5million of additional interest expense in 2006 due to higher interest rates andthe issuance of AGHI Notes, and $0.8 million of debt extinguishment expenserelating to the purchase and retirement of $29.9 million of the Company’sSenior Subordinated Notes, partially offset by a $0.2 million increase ininterest income.

*Income before Income Taxes*

Income before income taxes for the firstnine months of 2006 was approximately $1.8 million, or $6.5 million lower thanthe first nine months of 2005.  Thisdecrease was attributable to a $2.4 million decrease in income from operationsfor the current period, a $3.3 million increase in net interest expense, and$0.8 million of debt extinguishment expense.

*Income Tax Expense*

The Company recorded$22.6 million of income tax expense for the first nine months of 2006, anincrease of $19.7 million from the first nine months of 2005.  This increase was primarily due to AGHC’s Scorporation change of tax status election effective for 2006, which includedAGI and all its subsidiaries, with the exception of Camping World, Inc. and itswholly-owned subsidiaries which remain Subchapter C corporations.  As a result, all deferred tax assets andliabilities were revalued in the second quarter of 2006, with the exception ofthose related to Camping World, Inc. and its wholly-owned subsidiaries.  Deferred tax liabilities related to CampingWorld, Inc and its wholly-owned subsidiaries which remained Subchapter Ccorporations were approximately $12.6 million. As a result of the Company’s change of tax status to S corporation, adeferred tax liability related to a Subchapter S corporation of approximately$2.8 million was recorded on the financial statements for a potential taxliability in prior C corporation years. As of September 30, 2006, all deferredtax assets relate solely to Camping World, Inc.

# *Net (Loss) Income*

Net loss in the first nine months of 2006was $20.8 million compared to net income $5.3 million for the same period in2005 primarily due to income tax expense of $22.6 million in the second quarterof 2006 as a result of the S corporation change of tax status election for theCompany (other than Camping World, Inc. and its wholly-owned subsidiaries).

*Segment Profit*

Segment profit of $39.3million for the first nine months of 2006 (before unallocated depreciation andamortization, general and administrative, interest, and income tax expense)decreased $5.6 million, or 12.6%, from the comparable period in 2005.

Membership servicessegment profit of $32.2 million for the first nine months of 2006 increased$1.9 million, or 6.3%, from the comparable period in 2005.  This increase was largely attributable to a$2.0 million increase in profit from emergency road service

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products, and a $0.8million increase in profit from the extended vehicle warranty programs,partially offset by a $0.9 million decrease in profit attributable to themarketing rollout of Camp Club USA.

Publication segmentprofit of $11.3 million for the first nine months of 2006 increased $0.9million, or 8.7%, from the comparable period in 2005.  This increase was largely attributable to a$1.1 million profit increase for the newly acquired show group and a $0.2million profit increase related to the *Powerboat Magazine*acquisition,partially offset by a $0.4 million decrease in profit for the RV-relatedmagazines.

Retail segment loss forthe first nine months of 2006 was $4.2 million, resulting in a reduction ofprofit of $8.5 million from the comparable period in 2005.  This decrease in profit resulted primarily from a $7.9 million increasein selling, general and administrative expenses, a $0.9 million increase indepreciation and amortization expense and a $2.4 million increase in interestexpense relating to intercompany debt issued as a result of the CampingWorld, Inc. $40.0 million dividend declared and paid in the form of a noteDecember 23, 2005, partially offset bya $2.7 million increase in gross profit margin.

**LIQUIDITY AND CAPITAL RESOURCES**

The Company has historically operated with a workingcapital deficit.  The working capitaldeficit as of September 30, 2006 and December 31, 2005 was $34.7 million and$6.4 million, respectively.  The primaryreason for the working capital deficit is the deferred revenue and gainsreported under current liabilities in the amount of $72.2 million and $61.0million as of September 30, 2006 and December 31, 2005, respectively.  Deferred revenue is primarily comprised ofcash collected for club memberships in advance, which is amortized over thelife of the membership.  The Company usesnet proceeds from this deferred membership revenue to lower its long-termborrowings. The working capital deficit increased compared to the prior year-endprimarily due to the purchase and retirement of $29.9 million of the SeniorSubordinated Notes and a seasonal increase in deferred revenue and accountspayable.  Management believes that fundsgenerated by operations together with available borrowings under the Company’srevolving credit line will be sufficient to meet all of the Company’s debtservice requirements and capital requirements over the next twelve months.  Further, management believes that the changein the tax status to a Subchapter S corporation for the Company and all itssubsidiaries, with the exception of Camping World, Inc. and its wholly-ownedsubsidiaries, has not limited the Company’s ability to issue debt through thecapital markets but may limit the ability of the Company to raise funds in theequity market.

 

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*Contractual Obligations andCommercial Commitments*

The following table reflects our contractual obligations and commercialcommitments at September 30, 2006.  Thistable includes principal and future interest due under our debt agreementsbased on interest rates as of September 30, 2006 and assumes debt obligationswill be held to maturity.
| ** **                                | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                | ** ** | **Total**                                 | ** ** | **Balance of  2006** | ** ** | **2007 and  2008** | ** ** | **2009 and  2010** | ** ** | **Thereafter** | ** ** |
| ** **                                | ** ** | **(in thousands)**                   | ** ** |
| Long-term debt and  future interest       |       | $                                         | 566,388    |   | $ | 4,305 |   | $ | 67,000 |   | $ | 199,166 |   | $ | 295,917 |   |
| Operating lease  obligations              |       | 130,352                                   |       | 3,505 |   | 21,798 |   | 17,624 |   | 87,425 |   |
| Deferred compensation                     |       | 6,160                                     |       | 25 |   | 4,780 |   | 1,355 |   | — |   |
| Standby and commercial  letters of credit |       | 7,214                                     |       | 6,364 |   | 850 |   | — |   | — |   |
| Grand total                               |       | $                                         | 710,114    |   | $ | 14,199 |   | $ | 94,428 |   | $ | 218,145 |   | $ | 383,342 |   |

 

On June 24, 2003, AGIentered into an Amended and Restated Credit Agreement and a Senior SecuredFloating Rate Note Purchase Agreement (as amended, the AGI Senior CreditFacility).  The AGI Senior CreditFacility provides for a revolving credit facility of $35.0 million and termloans in the aggregate of $140.0 million. Proceeds from the AGI Senior Credit Facility were used to refinance theexisting senior secured indebtedness, pay a dividend of $13.7 million to the Company’sparent AGI Holding Corp. and redeem $30.0 million principal amount of the AGH senior notes due 2007 (“AGH Notes”)at 103.667% of par in 2003.  As ofSeptember 30, 2006, $108.8 million was outstanding under the termloans.  No borrowings were outstanding onthe revolving credit facility as of September 30, 2006.  Reborrowings under the term loans are notpermitted.  The interest on borrowingsunder the AGI Senior Credit Facility is at variable rates based on the ratio oftotal cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 2.50% over the stated rates. As of September 30, 2006, the average interest rate on the term loanswas 7.82%, and permitted borrowings under the undrawn revolving facility were$27.8 million.  AGI also pays acommitment fee of 0.5% per annum on the unused amount of the revolving creditfacility.  The aggregate quarterlyscheduled payments on the term loans are $350,000.  The revolving credit facility matures on June24, 2008, and the term loans mature on June 24, 2009.  The funds available under the AGI SeniorCredit Facility may be utilized for borrowings or letters of credit; however, amaximum of $12.5 million may be allocated to such letters of credit.  As of September 30, 2006, AGI had letters ofcredit in the aggregate amount of $7.2 million outstanding.  The AGI Senior Credit Facility is secured byvirtually all of the Company’s assets and a pledge of the Company’s stock andthe stock of the Company’s subsidiaries.

In February 2004, AGI issued $200.0 million aggregateprincipal amount of 9% Senior Subordinated Notes due 2012 (“AGI SeniorSubordinated Notes”).  The Companycompleted a registered exchange of the AGI Senior Subordinated Notes under theSecurities Act of 1933 in August 2004. The proceeds from the sale of the AGI Senior Subordinated Notes wereused to fund the tender offer and defeasance of the remaining $100.0 millionoutstanding principal amount of the subordinated notes previously issued

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by AGI, prepay $25.0 million of the Term Loans underour AGI Senior Credit Facility, pay a $60.0 million dividend distribution,create a $15.0 million segregated cash account, pay certain prepayment andtransaction costs and for general corporate purposes.  The amount held in this segregated account,including any earnings thereon, was available to pay stockholder dividends uponsatisfaction of a leverage test specified in our AGI Senior Credit Facility.  In August and November of 2004, AGI satisfiedthe specific leverage test and paid $3.6 million and $11.5 million individends, respectively.

On March 3, 2006, AGIamended its Senior Credit Facility to revise the definition of ConsolidatedFixed Charges Ratio and Permitted Tax Distributions.  This amendment allows AGI to distribute taxesto its ultimate parent based on its stand-alone tax obligation rather than thetax obligation of its parent, AGHI, until such time that AGHI pays interest onits 10 7/8% Senior Notes in cash instead of by the issuance of additionalnotes.  For the nine months endedSeptember 30, 2006, AGI has distributed $1.7 million in the form of a dividendto AGHC in excess of the Company’s tax obligations.  Further, AGI amended the Senior CreditFacility’s covenant restrictions with affiliates to permit a joint venturearrangement between Camping World and FreedomRoads, an affiliate of theCompany.

On March 6, 2006, Camping World, a wholly-owned subsidiary of AGI,entered into a Joint Venture Agreement with FreedomRoads.  FreedomRoadsis indirectly owned and controlled by Stephen Adams, the Chairman and indirectcontrolling shareholder of Affinity Group Holding, Inc.  FreedomRoads, through its wholly-ownedsubsidiaries, owns and operates RV dealerships, currently operating across theUnited States.  The Joint VentureAgreement provides that CampingWorld and FreedomRoads are to act cooperatively with a view to maximizingsynergies and to locate, establish and utilize mutually beneficialrelationships that are available only to the parties acting together that wouldnot otherwise be available to either party independently.

OnJune 8, 2006, AGI amended its Senior Credit Facility to permit AGI to purchaseup to $30.0 million of AGI’s Senior Subordinated Notes from time to time as andwhen the Company determines.  AGIpurchased $4,841,000, $20,000,000, $3,365,000, $1,500,000 and $200,000 of theSenior Subordinated Notes on June 14, 2006, June 20, 2006, July 18, 2006, July24, 2006 and August 3, 2006, respectively. The Senior Subordinated Note purchases were made with available cash andthe notes purchased have been retired. As of September 30, 2006, $170.1 million of Senior Subordinated Notesremain outstanding.

The AGI Indenture,pursuant to which the AGI Senior Subordinated Notes were issued, and the AGISenior Credit Facility contain certain restrictive covenants relating to, butnot limited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  AGI was in compliance with all debt covenantsat September 30, 2006.

On March 24, 2005 in aprivate placement, AGHI issued $88.2 million principal amount of its 10-7/8%senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 inJune 2005.  The AGHI Notes are unsecuredobligations of the Company and its subsidiaries have not guaranteed payment ofprincipal or interest on the

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AGHI Notes.  Interest on the AGHI Notes is payablesemi-annually on February 15 and August 15 commencing August 15, 2005 and theentire $88.2 million principal amount of the AGHI Notes are due in full onFebruary 15, 2012.  For interest paymentson and prior to February 15, 2008, AGHI may elect to pay interest on the AGHINotes in cash or by issuance of additional notes of the same tenor as the AGHINotes, except the maturity date is March 15, 2010.  AGI has not paid any dividends to AGHI tofund payment of interest on the AGHI Notes and AGHI made the interest paymentsdue on August 15, 2005, February 15, 2006, and August 15, 2006 through issuanceof additional notes.  AGI expects toissue additional notes of the same tenor as the AGHI Notes through February 15,2008 to pay interest on the AGHI Notes when and as such interest is due.  Although the source of the cash payment ofthe AGHI Notes is dividends from AGI, its wholly-owned subsidiary, there arecertain restrictions on the payment of dividends under the AGI Senior CreditFacility and the AGI Indenture.

The AGHI Indenturecontains certain restrictive covenants relating to, but not limited to,mergers, changes in the nature of the business, acquisitions, additionalindebtedness, sale of assets, investments, and the payment of dividends subjectto certain limitations and minimum operating covenants.  AGHI was in compliance with all debt covenantsat September 30, 2006.

TheCompany contributed the net proceeds from the issuance of the AGHI Notes,approximately $81.0 million, to AGI and in turn, AGI made an equitycontribution to its wholly-owned subsidiary, Camping World.  Camping World then made an equity capitalcontribution in the same amount to its wholly-owned subsidiary, CWI, Inc. (“CWI”).  CWI created a new wholly-owned subsidiarynamed CWFR Capital Corp., a Delaware corporation (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture.  Since CWFR is an unrestricted subsidiary, itsoperations are not restricted by either the AGI Indenture or the AGHINotes.  CWI made an equity capitalcontribution to CWFR in an equal amount to the capital contribution that itreceived from Camping World.  CWFR usedthe proceeds from the equity capital contribution to acquire a preferredmembership interest in FreedomRoads, a Minnesota limited liability companyowned 90% by The Stephen Adams Living Trust, which also indirectly owns 97.4%of the outstanding capital stock of AGHC and indirectly AGHI.

In April 2005,Camping World, Inc. acquired the assets of a mail order catalog retailerspecializing in recreational vehicle merchandise for $0.6 million.  In May 2005, the Ehlert Publishing Group,Inc. acquired the *Powerboat Magazine* title andrelated assets of Nordskog Publishing, Inc. for $4.0 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.5 million of liabilities.  In December 2005, AGI Productions, Inc., asubsidiary of Ehlert Publishing Group, Inc., acquired the consumer outdoorrecreation show assets of Royal Productions, Inc. for $8.5 million. As part ofthe purchase, the Company issued $0.6 million of debt and assumed$18 million of liabilities.

In February 2006, EhlertPublishing, Inc. acquired the consumer shows and related assets of H & SProductions, LLC for $2.5 million.  Aspart of the purchase, the Company issued $0.4 million of debt and assumed $1.0million of liabilities.  In August 2006,TL Enterprises, Inc. acquired the consumer park guides and related assets ofAmerican Guide Services, Inc for $1.0 million. As part of the purchase, the Company issued $0.1 million of debt andassumed $0.3 million of liabilities.  InSeptember 2006, Ehlert Publishing, Inc. acquired the

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consumer shows andrelated assets of Apple Rock Advertising and Promotions, Inc. for $1.2million.  As part of the purchase, theCompany issued $0.2 million of debt and assumed $0.4 million of liabilities.

For the nine months endedSeptember 30, 2006, the Company incurred $0.9 million of deferred executivecompensation expense under the phantom stock agreements and made payments of$0.8 million on the pay-out provisions of mature phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next three years.  Phantom stock payments of $25,000 arescheduled to**be made for the remainder of 2006.

Capital expenditures forthe first nine months of 2006 totaling $9.2 million increased $0.6 million fromthe first nine months of 2005 primarily due to the addition of new retailstores in 2006.  Additional capitalexpenditures of $6.5 million are anticipated for the balance of 2006, primarilyfor new Camping World stores, updating existing store fronts, and computerhardware and software upgrades and enhancements.

**CRITICAL ACCOUNTING POLICIES**

*General*

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives,bad debts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

The Company believes thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of the Company’s consolidated financialstatements.

*RevenueRecognition*

Merchandise revenue is recognized whenproducts are sold in the retail stores, shipped for mail and internet orders,or when services are provided to customers. Publication advertising and newsstand sales, net of estimated provisionfor returns, are recorded at time of delivery. Subscription sales of publications are deferred and recognized over thelives of the subscriptions.  Revenuesfrom the emergency road service program (“ERS”) are deferred and recognizedover the life of the membership.  ERSclaim expenses are

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recognized when incurred.  Advances on third party credit card feerevenues are deferred and recognized based primarily on a percentage of creditcard receivables held by third parties. Membership revenue is generated from annual, multi-year and lifetimememberships.  The revenue and expensesassociated with these memberships are deferred and amortized over themembership period.  For lifetimememberships, an 18-year period is used, which is the actuarially determinedestimated fulfillment period.  Promotionalexpenses, consisting primarily of direct mail advertising, are deferred andexpensed over the period of expected future benefit.  Renewal expenses are expensed at the timerelated materials are mailed.  Recognizedrevenues and profit are subject to revisions as the membership progresses tocompletion.  Revisions to membershipperiod estimates would change the amount of income and expense amortized infuture accounting periods.

*AccountsReceivable*

The Company estimates thecollectability of its trade receivables. A considerable amount of judgment is required in assessing the ultimaterealization of these receivables including the current credit-worthiness ofeach customer.  Changes in requiredreserves have been recorded in recent periods and may occur in the future dueto the market environment.

*Inventory*

The Company statesinventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company isrequired to make judgments as to future demand requirements and compare thatwith the current or committed inventory levels. The Company has recorded changes in required reserves in recent periodsdue to changes in strategic direction, such as discontinuances of product linesas well as changes in market conditions due to changes in demandrequirements.  It is possible thatchanges in required inventory reserves may continue to occur in the future dueto the market conditions.

*Long-Lived Assets*

Purchased intangibleassets with finite lives are amortized using the straight-line method over theestimated economic lives of the assets, ranging from one to twenty-three years.

Long-lived assets, suchas property, plant and equipment and purchased intangible assets with finitelives are evaluated for impairment whenever events or changes in circumstancesindicate the carrying value of an asset may not be recoverable in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  The Company assesses the fairvalue of the assets based on the future cash flow the assets are expected togenerate and recognize an impairment loss when estimated undiscounted futurecash flow expected to result from the use of the asset plus net proceedsexpected from disposition of the asset (if any) are less than the carryingvalue of the asset.  When an impairmentis identified, the Company reduces the carrying amount of the asset to itsestimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.  The Company determined there were noindicators of impairment of long-lived assets as of December 31, 2005 orSeptember 30, 2006.

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The Company has evaluatedthe remaining useful lives of its finite-lived purchased intangible assets todetermine if any adjustments to the useful lives were necessary or if any ofthese assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible assets were necessary.  Thefinite-lived purchased intangible assets consist of membership customer lists,resort and golf course agreements, non-compete and deferred consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 23 years, 15 years and 7 years, respectively.

*Indefinite Lived IntangibleAssets*

The Company evaluatesindefinite lived intangible assets for impairment at least annually or whenevents indicate that an impairment exists in accordance with SFAS No. 142.  The impairment test for goodwill and otherindefinite-lived intangible assets is calculated annually using fair valuemeasurement techniques.

Determining the fairvalue of a reporting unit and the fair value of individual assets andliabilities of a reporting unit is judgmental in nature and often involves theuse of significant estimates and assumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the extent of suchcharge.  The Company’s estimates of fairvalue utilized in goodwill and other indefinite-lived intangible asset testsmay be based upon a number of factors, including assumptions about theprojected future cash flows, discount rate, growth rate, determination ofmarket comparables, technological change, economic conditions or changes to theCompany’s business operations.  Suchchanges may result in impairment charges recorded in future periods.

The fair value of theCompany’s reporting units is annually determined using a combination of theincome approach and the market approach. Under the income approach, the fair value of a reporting unit iscalculated based on the present value of estimated future cash flows.  Future cash flows are estimated by the Companyunder the market approach, fair value is estimated based on market multiples ofrevenue or earnings for comparable companies.

Based on the results ofthe annual impairment tests, the Company recorded an impairment charge of $4.3million in 2005 related to Golf Card Club, which is included in the membershipservices segment.  Future goodwillimpairment tests could result in a charge to earnings.  The Company will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

*Income Taxes*

Significant judgment is required indetermining the Company’s tax provision and in evaluating its taxpositions.  The Company establishes accruals for certain tax contingencieswhen, despite the belief that the Company’s tax return positions are fullysupported, the Company believes that certain positions may be challenged andthat the

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Company’s positions may not be fullysustained.  The tax contingency accruals are adjusted in light of changingfacts and circumstances, such as the progress of tax audits, case law andemerging legislation.  The Company’s taxprovision includes the impact of tax contingency accruals and changes to theaccruals, including related interest, as considered appropriate by management.

**ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

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

The following information discusses thesensitivity to our earnings.  The rangeof changes chosen for this analysis reflects our view of changes which arereasonably possible over a one-year period. These forward-looking disclosures are selective in nature and onlyaddress the potential impacts from financial instruments.  They do not include other potential effectswhich could impact our business as a result of these interest ratefluctuations.

*Interest Rate SensitivityAnalysis*

At September 30, 2006, we had debt totaling$387.6 million, comprised of $108.8 million of variable rate debt and $278.8million of fixed rate debt.  Holdingother variables constant (such as debt levels), the earnings and cash flowimpact of a one-percentage point increase/ decrease in interest rates wouldhave an unfavorable/ favorable impact of approximately $1.1 million.

*Credit Risk*

We are exposed to credit risk on accountsreceivable.  We provide credit tocustomers in the ordinary course of business and perform ongoing creditevaluations.  Concentrations of creditrisk with respect to trade receivables are limited due to the number ofcustomers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficientto cover customer credit risks.

**ITEM 4:CONTROL AND PROCEDURES**

Within 90 daysprior to the filing of this Quarterly Report on Form 10-Q, the Company carriedout an evaluation, under the supervision and with the participation of theCompany’s management, including the President and Chief Executive Officer andthe Senior Vice President and Chief Financial Officer, of the effectiveness ofthe design and operation of the Company’s disclosure controls and procedurespursuant to Regulation 13a-14 under the Securities Exchange Act of 1934.  Based upon that evaluation, the President andChief Executive Officer along with the Senior Vice President and ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe periodic SEC filings.  There have

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been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date the Companycarried out its evaluation.

**PARTII:  OTHER INFORMATION**

None

 

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**SIGNATURES:**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrants have dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| ** **             |   | **AFFINITY GROUP HOLDING, INC.** |
|------------------------|--------|----------------------------------|
| ** **             |   | ** **                       |
| ** **             |   | ** **                       |
|                   |   | /s/ Thomas F. Wolfe              |
| Date: November 3, 2006 |   | Thomas F. Wolfe                  |
|                   |   | Senior Vice President and        |
|                   |   | Chief Financial Officer          |

 

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