** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

###### **Washington, D.C.  20549**

###### ** **

**FORM 10-Q**

** **

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

 
| **For Quarter Ended:**  | ** ** | **Commission File Number** |
|-------------------------|------------|----------------------------|
| **March 31, 2005** | ** ** | **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)         |

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THEACT:  **NONE**

 

SECURITIES REGISTERED 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 allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

YES                          o                                    NO                              ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Act)

 

YES                          o                                    NO                              ý

 

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

 
| ** **                    | ** ** | **Outstanding as of** | ** ** |
|-------------------------------|------------|-----------------------|------------|
| **Class**                     | ** ** | **May 4, 2005**  | ** ** |
| Common Stock, $.01 par  value |       | 100                   |       |

 

DOCUMENTS INCORPORATED BY REFERENCE:**  None**

 

 

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**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

** **

**INDEX**

 
| **Part I.**Financial  Information                                                                  |   |
|---------------------------------------------------------------------------------------------------------|--------|
|                                                                                                    |   |
| **Item 1:  Financial Statements**                                                                       |   |
|                                                                                                    |   |
| Unaudited  Consolidated Balance Sheets                                                                  |   |
| As of March 31,  2005 and December 31, 2004                                                   |   |
|                                                                                                    |   |
| Unaudited Consolidated  Statements of Operations                                                        |   |
| For the three months ended March 31,  2005 and 2004                                                |   |
|                                                                                                    |   |
| Unaudited Consolidated  Statements of Cash Flows                                                        |   |
| For the three months ended March 31,  2005 and 2004                                                |   |
|                                                                                                    |   |
| Notes to Unaudited Consolidated Financial  Statements                                                   |   |
|                                                                                                    |   |
| **Item 2: Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |   |
|                                                                                                    |   |
| **Item 3: Quantitative and  Qualitative Disclosures about Market Risk**                                 |   |
|                                                                                                    |   |
| **Item 4: Control and  Procedures**                                                                     |   |
|                                                                                                    |   |
| **Part II.  Other Information**                                                                    |   |
|                                                                                                    |   |
| **Signatures**                                                                                          |   |

 

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AFFINITY GROUP HOLDING, INC. ANDSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31,2005 and December 31, 2004

(InThousands)

 
| ** **                                                                                                                                                                                  | ** ** | **3/31/2005**   | ** ** | **12/31/2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                                                                                                                  | ** ** | **(Unaudited)** | ** ** | **(Note 1)**   | ** ** |
| **ASSETS**                                                                                                                                                                                  |       |            |       |           |       |
| CURRENT ASSETS:                                                                                                                                                                             |       |            |       |           |       |
| Cash and cash  equivalents                                                                                                                                                                  |       | $               | 20,112     |           | $          | 24,564 |   |
| Accounts receivable,  less allowance for doubtful accounts of $1,062 in 2005 and $810 in 2004                                                                                               |       | 23,404          |       | 24,228         |       |
| Inventories                                                                                                                                                                                 |       | 48,860          |       | 42,463         |       |
| Prepaid expenses and  other assets                                                                                                                                                          |       | 12,439          |       | 11,383         |       |
| Deferred tax assets,  net                                                                                                                                                                   |       | 6,615           |       | 6,615          |       |
| Total current assets                                                                                                                                                                        |       | 111,430         |       | 109,253        |       |
|                                                                                                                                                                                        |       |            |       |           |       |
| PROPERTY AND EQUIPMENT,  net                                                                                                                                                                |       | 28,123          |       | 27,642         |       |
| AFFILIATE NOTES AND  INVESTMENTS                                                                                                                                                            |       | 85,750          |       | 4,752          |       |
| INTANGIBLE ASSETS, net                                                                                                                                                                      |       | 29,569          |       | 27,716         |       |
| GOODWILL                                                                                                                                                                                    |       | 148,773         |       | 148,773        |       |
| DEFERRED TAX ASSETS,  net                                                                                                                                                                   |       | 1,017           |       | 323            |       |
| OTHER ASSETS                                                                                                                                                                                |       | 1,719           |       | 1,763          |       |
| Total assets                                                                                                                                                                                |       | $               | 406,381    |           | $          | 320,222 |   |
|                                                                                                                                                                                        |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                                                                                                             |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                                                                                                                        |       |            |       |           |       |
| Accounts payable                                                                                                                                                                            |       | $               | 19,623     |           | $          | 16,511 |   |
| Accrued interest                                                                                                                                                                            |       | 3,009           |       | 6,857          |       |
| Accrued income taxes                                                                                                                                                                        |       | 2,259           |       | 3,131          |       |
| Accrued liabilities                                                                                                                                                                         |       | 34,247          |       | 34,230         |       |
| Deferred revenues and  gains                                                                                                                                                                |       | 59,556          |       | 57,661         |       |
| Current portion of  long-term debt                                                                                                                                                          |       | 1,676           |       | 1,676          |       |
| Total current  liabilities                                                                                                                                                                  |       | 120,370         |       | 120,066        |       |
|                                                                                                                                                                                        |       |            |       |           |       |
| DEFERRED REVENUES AND  GAINS                                                                                                                                                                |       | 40,500          |       | 41,469         |       |
| LONG-TERM DEBT, net of  current portion                                                                                                                                                     |       | 397,318         |       | 312,660        |       |
| OTHER LONG-TERM  LIABILITIES                                                                                                                                                                |       | 4,624           |       | 4,135          |       |
|                                                                                                                                                                                        |       | 562,812         |       | 478,330        |       |
|                                                                                                                                                                                        |       |            |       |           |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                                              |       |            |       |           |       |
|                                                                                                                                                                                        |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                                                                                                                 |       |            |       |           |       |
| Common stock, $.01 par  value, 3,000 shares authorized, 100 shares issued and outstanding (2005) and  $.001 par value, 2,000 shares authorized, 2,000 shares issued and outstanding  (2004) |       | 1               |       | 1              |       |
| Accumulated deficit                                                                                                                                                                         |       | (156,432        | )          | (158,109       | )          |
| Total stockholder’s deficit                                                                                                                                                            |       | (156,431        | )          | (158,108       | )          |
| Total liabilities and  stockholder’s deficit                                                                                                                                           |       | $               | 406,381    |           | $          | 320,222 |   |

 

See notes toconsolidated financial statements.

 

1

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AFFINITY GROUP HOLDING, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                         | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|
| ** **                                         | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** |
| ** **                                         | ** ** | ** **             | ** ** | **(Note 1)** | ** ** |
| REVENUES:                                          |       |                   |       |   |   |
| Membership services                                |       | $                      | 32,423     |   | $ | 31,519 |   |
| Publications                                       |       | 17,198                 |       | 17,229 |   |
| Retail                                             |       | 59,066                 |       | 52,534 |   |
|                                               |       | 108,687                |       | 101,282 |   |
|                                               |       |                   |       |   |   |
| COSTS APPLICABLE TO  REVENUES:                     |       |                   |       |   |   |
| Membership services                                |       | 20,201                 |       | 20,724 |   |
| Publications                                       |       | 11,521                 |       | 12,002 |   |
| Retail                                             |       | 34,294                 |       | 30,810 |   |
|                                               |       | 66,016                 |       | 63,536 |   |
|                                               |       |                   |       |   |   |
| GROSS PROFIT                                       |       | 42,671                 |       | 37,746 |   |
|                                               |       |                   |       |   |   |
| OPERATING EXPENSES:                                |       |                   |       |   |   |
| Selling, general and  administrative               |       | 30,021                 |       | 25,185 |   |
| Depreciation and  amortization                     |       | 3,707                  |       | 3,037 |   |
|                                               |       | 33,728                 |       | 28,222 |   |
|                                               |       |                   |       |   |   |
| INCOME FROM OPERATIONS                             |       | 8,943                  |       | 9,524 |   |
|                                               |       |                   |       |   |   |
| NON-OPERATING ITEMS:                               |       |                   |       |   |   |
| Interest income                                    |       | 166                    |       | 177 |   |
| Interest expense                                   |       | (6,376                 | )          | (5,424 | ) |
| Debt extinguishment  expense                       |       | —                 |       | (4,616 | ) |
| Other non-operating  items, net                    |       | 16                     |       | 47 |   |
|                                               |       | (6,194                 | )          | (9,816 | ) |
|                                               |       |                   |       |   |   |
| INCOME (LOSS) FROM  OPERATIONS BEFORE INCOME TAXES |       | 2,749                  |       | (292 | ) |
|                                               |       |                   |       |   |   |
| INCOME TAX (EXPENSE)  BENEFIT                      |       | (1,072                 | )          | 110 |   |
|                                               |       |                   |       |   |   |
| NET INCOME (LOSS)                                  |       | $                      | 1,677      |   | $ | (182 | ) |

 

See notes toconsolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                          | ** ** | **THREE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** |
| ** **                                                                                          | ** ** | ** **             | ** ** | **(Note 1)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                              |       |                   |       |   |   |
| Net income (loss)                                                                                   |       | $                      | 1,677      |   | $ | (182 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation                                                                                        |       | 2,274                  |       | 1,747 |   |
| Amortization                                                                                        |       | 1,433                  |       | 1,290 |   |
| Provision for losses on  accounts receivable                                                        |       | 241                    |       | 533 |   |
| Deferred compensation                                                                               |       | 900                    |       | — |   |
| Deferred tax benefit                                                                                |       | (694                   | )          | (592 | ) |
| Gain on sale of  property and equipment                                                             |       | (3                     | )          | (1 | ) |
| Loss on early  extinguishment of debt                                                               |       | —                 |       | 4,616 |   |
| Accretion of original  issue discount                                                               |       | 3                      |       | — |   |
| Changes in operating  assets and liabilities                                                        |       |                   |       |   |   |
| Accounts receivable                                                                                 |       | 583                    |       | 929 |   |
| Inventories                                                                                         |       | (6,397                 | )          | (8,880 | ) |
| Prepaid expenses and  other assets                                                                  |       | (1,012                 | )          | (2,330 | ) |
| Accounts payable                                                                                    |       | 3,112                  |       | 9,153 |   |
| Accrued and other  liabilities                                                                      |       | (5,114                 | )          | 1,379 |   |
| Deferred revenues and  gains                                                                        |       | 926                    |       | 888 |   |
| Net cash (used in)  provided by operating activities                                                |       | (2,071                 | )          | 8,550 |   |
|                                                                                                |       |                   |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                              |       |                   |       |   |   |
| Capital expenditures                                                                                |       | (2,779                 | )          | (2,577 | ) |
| Net proceeds from sale  of property and equipment                                                   |       | 27                     |       | 1 |   |
| Change in intangible  assets                                                                        |       | (9                     | )          | (10 | ) |
| Investment in affiliate                                                                             |       | (81,005                | )          | — |   |
| Loans receivable                                                                                    |       | 7                      |       | (29 | ) |
| Net cash used in  investing activities                                                              |       | (83,759                | )          | (2,615 | ) |
|                                                                                                |       |                   |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                              |       |                   |       |   |   |
| Dividends paid                                                                                      |       | —                 |       | (60,000 | ) |
| Borrowings on long-term  debt                                                                       |       | 85,005                 |       | 200,000 |   |
| Payment of debt issue  costs                                                                        |       | (3,277                 | )          | (7,099 | ) |
| Principal payments of  long-term debt                                                               |       | (350                   | )          | (114,161 | ) |
| Net cash provided by  financing activities                                                          |       | 81,378                 |       | 18,740 |   |
|                                                                                                |       |                   |       |   |   |
| NET (DECREASE) INCREASE  IN CASH AND CASH EQUIVALENTS                                               |       | (4,452                 | )          | 24,675 |   |
|                                                                                                |       |                   |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF YEAR                                                     |       | 24,564                 |       | 6,115 |   |
|                                                                                                |       |                   |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                                         |       | $                      | 20,112     |   | $ | 30,790 |   |

 

See notes toconsolidated financial statements.

 

3

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**AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes****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’s subsidiaries(collectively the “Company”) without audit, in accordance with U.S. generallyaccepted accounting principles, and pursuant to the rules and regulationsof the Securities and Exchange Commission. AGHI was formed on March 2, 2005, and all of the stock of AGI wascontributed to AGHI from its parent, AGI Holding Corp. (“AGHC”) aprivately-owned corporation.  On April 27,2004, AGI’s previous parent, Affinity Group Holding, Inc. (“AGH”) wasmerged into AGI, with AGI being the surviving entity after the merger.  The merger was accounted for as a combinationof entities under common control using historical costs.  The balance sheet as of December 31,2004 is that of AGI prior to the formation of AGHI on March 2, 2005.  The three months ended March 31, 2004have been restated to reflect the combined financial position and results ofoperations of AGI and AGH.  These interimconsolidated financial statements should be read in conjunction with AGI’sconsolidated financial statements and notes for the year ended December 31,2004 included in the Registration Statement on Form S-4 filed April 15,2005.  Certain balances in the prior yearconsolidated financial statements were reclassified to conform to the currentyear presentation.  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) DISCLOSURES ABOUTSEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION**

 

TheCompany’s three principal lines of business are Membership Services,Publications, and Retail.  The MembershipServices segment operates the Good Sam Club, Coast to Coast Club, and CampingWorld’s President’s Club for RV owners, campers and outdoor vacationers, andthe Golf Card Club for golf enthusiasts. The Publications segment publishes a variety of publications forselected markets in the recreation and leisure industry, including general circulationperiodicals, club magazines, directories and RV industry trade magazines.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through retail supercentersand mail order catalogs.  The Companyevaluates performance based on profit or loss from operations before incometaxes.

 

The reportable segments are strategic business units that offerdifferent products and services.  Theyare managed separately because each business requires different technology,management expertise and marketing strategies.

 

4

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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** | ** ** |
| **QUARTER  ENDED MARCH 31, 2005**  |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers       |       | $              | 32,423     |             | $          | 17,198     |       | $                | 59,066     |   | $ | 108,687 |   |
| Depreciation and  amortization          |       | 972            |       | 474              |       | 1,718      |       | 3,164            |       |
| Interest income                         |       | 1,003          |       | —           |       | 2          |       | 1,005            |       |
| Interest expense                        |       | —         |       | 90               |       | 2,590      |       | 2,680            |       |
| Segment profit (loss)                   |       | 10,359         |       | 4,428            |       | (1,658     | )          | 13,129           |       |
|                                    |       |           |       |             |       |       |       |             |       |
| **QUARTER  ENDED MARCH 31, 2004**  |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers       |       | $              | 31,519     |             | $          | 17,229     |       | $                | 52,534     |   | $ | 101,282 |   |
| Depreciation and  amortization          |       | 904            |       | 426              |       | 1,226      |       | 2,556            |       |
| Gain on sale of  property and equipment |       | —         |       | —           |       | 1          |       | 1                |       |
| Interest income                         |       | 592            |       | —           |       | 1          |       | 593              |       |
| Interest expense                        |       | —         |       | 273              |       | 2,611      |       | 2,884            |       |
| Segment profit (loss)                   |       | 9,003          |       | 3,915            |       | (1,165     | )          | 11,753           |       |

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three months ended March 31, (inthousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** |
| **Income  From Continuing Operations Before Income Taxes**     |       |                   |       |   |   |
| Total profit for  reportable segments                          |       | $                      | 13,129     |   | $ | 11,753 |   |
| Unallocated G &  A expense                            |       | (5,302                 | )          | (3,992 | ) |
| Unallocated  depreciation and amortization expense             |       | (543                   | )          | (481 | ) |
| Unallocated interest  expense, net of intercompany elimination |       | (3,696                 | )          | (2,540 | ) |
| Unallocated interest  income, net of intercompany elimination  |       | (839                   | )          | (416 | ) |
| Unallocated debt  restructure expense                          |       | —                 |       | (4,616 | ) |
| Income (loss) from  continuing operations before income taxes  |       | $                      | 2,749      |   | $ | (292 | ) |

 

5

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Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of March 31, 2005 and December 31,2004 (in thousands):

 
| ** **                                           | ** ** | **3/31/2005** | ** ** | **12/31/2004** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services  segment                         |       | $             | 163,534    |           | $          | 170,270 |   |
| Publications segment                                 |       | 76,267        |       | 75,731         |       |
| Retail segment                                       |       | 213,447       |       | 124,325        |       |
| Total assets for  reportable segments                |       | 453,248       |       | 370,326        |       |
| Capitalized finance  costs not allocated to segments |       | 13,810        |       | 10,951         |       |
| Corporate unallocated  assets                        |       | 15,085        |       | 13,705         |       |
| Elimination of  intersegment receivable              |       | (75,762       | )          | (74,760        | )          |
| Total assets                                         |       | $             | 406,381    |           | $          | 320,222 |   |

 

Total assets for the retail segment increased $89.1 million from December 31,2004 primarily due to the acquisition of a preferred membership interest inFreedomRoads Holding Company, LLC.  (SeeNote 5)

 

**(3) STATEMENTS OF CASH FLOWS**

 

Supplemental disclosures of cash flowinformation for the three months ended March 31 (in thousands):

 

| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the  period for: |       |     |       |     |       |
| Interest                          |       | $        | 10,221     |     | $          | 4,434 |   |
| Income taxes                      |       | 2,673    |       | 1,657    |       |
|                                   |            |          |            |          |            |  |  |

 

In February 2004, the Company declared and distributed a $4.4million non-cash dividend to its ultimate parent, AGHC, consisting of the AdamsInsurance Holding LLC notes receivable.

 

**(4) GOODWILL AND INTANGIBLE ASSETS**

 

The Company reviews goodwill and indefinite-lived intangible assets forimpairment at least annually.  TheCompany performs its annual impairment review during the fourth quarter.  Based on the results of the annual impairmenttest, the Company determined that no impairment of goodwill existed as of December 31,2004.

 

There were no changes in the Company’s goodwill by business segment,for the three months ended March 31, 2005 and 2004.

 

6

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Finite lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at March 31, 2005(in thousands, except as noted):

 
| ** **                                       | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                       | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                             |       |                |       |       |       |             |       |       |       |
| Membership and customer  lists                   |       | 6                   |       | $          | 12,133     |             | $          | (4,914     | )          | $ | 7,219 |   |
| Resort and golf course  participation agreements |       | 23                  |       | 13,553     |       | (10,946          | )          | 2,607      |       |
| Non-compete and deferred  consulting agreements  |       | 15                  |       | 17,955     |       | (10,652          | )          | 7,303      |       |
| Deferred financing  costs                        |       | 7                   |       | 14,864     |       | (2,424           | )          | 12,440     |       |
|                                             |       |                |       | $          | 58,505     |             | $          | (28,936    | )          | $ | 29,569 |   |

 

**(5) RECENT EVENTS**

 

On March 24, 2005 in a privateplacement, the Company 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 AGHI Notes are unsecuredobligations of the Company, 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 15and August 15 commencing August 15, 2005 and the entire $88.2 millionprincipal amount of the AGHI Notes are due in full on February 15,2012.  For interest payments on and priorto February 15, 2008, AGHI may elect to pay interest on the AGHI Notes incash or by the issuance of additional notes of the same tenor as the AGHINotes.  Any additional AGHI Notes issuedin payment of interest are due in full on or before March 15, 2010.  The AGHI Notes cannot be redeemed prior to February 15,2008.  Although the only source of thecash payment of the AGHI Notes is dividends from its subsidiary, there arecertain restrictions on the payment of dividends under AGI’s senior securedcredit facility (the “AGI Senior Credit Facility”) and the indenture (“AGIIndenture”) under which AGI has issued $200.0 million in 9% senior subordinatednotes due 2012.

 

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, Inc. (“CampingWorld”).  Camping World then made anequity capital contribution in the same amount to its wholly-owned subsidiary,CWI, Inc. (“CWI”).  CWI created anew wholly-owned subsidiary named CWFR Capital Corp., a Delaware corporation (“CWFR”)which is an “unrestricted subsidiary” under the AGHI Notes and the AGIIndenture.  Since CWFR is an unrestrictedsubsidiary, its operations are not restricted by either the AGI Indenture orthe AGHI Notes.  CWI made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat CWI received from Camping World.  CWFR used the proceeds from the equity capitalcontribution to acquire a preferred membership interest in FreedomRoads HoldingCompany, LLC (“FreedomRoads Holding”), a Minnesota limited liability companyowned 

 

7

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90%by The Stephen Adams Living Trust which also indirectly owns 97.4% of theoutstanding capital stock of AGHC and indirectly AGHI.

 

Thepreferred membership interest acquired by CWFR has a face amount of $88.2million and is entitled to receive a preferred payment from FreedomRoadsHolding at 10-7/8% per annum when and as declared by the Board of Governors ofFreedomRoads from any source legally available therefor.  Any portion of the preferred payment not paidwill accumulate and will be compounded semi-annually until paid.  FreedomRoads Holding may redeem the preferredmembership interest upon the payment of $88.2 million plus the accrued andunpaid preferred return to the date of redemption.  FreedomRoads Holding will be required toredeem the preferred membership interest at that same redemption price if thereis a sale or reorganization of the membership interests of FreedomRoads Holdingor a sale of substantially all of the assets of FreedomRoads Holding. According to the terms of the preferred membership interest, FreedomRoadsHolding cannot make distributions with respect to membership interests otherthan (a) distributions with respect to the preferred membership interest, (b) distributionsfor the members’ estimated tax liabilities from earnings of FreedomRoadsHolding and (c) distributions in the aggregate not to exceed 50% of theamount of (i) FreedomRoads Holding’s net profit for the period from January 1,2005 through the end of the fiscal quarter next preceding the distribution dateless (ii) the aggregate amount of tax distributions made during the periodfrom January 1, 2005 through the end of the fiscal quarter next precedingthe distribution date.  CWFR may notsell, pledge or otherwise transfer the preferred membership interest.  The preferred membership interest does notprovide CWFR with any voting rights in FreedomRoads Holding.  The preferred membership interestFreedomRoads Holding is being carried at cost and will be reviewed periodicallyfor impairment.

 

**(6) RESTRUCTURING CHARGES**

 

During 2003, the Company recorded reserves in connection with arestructuring program primarily within the retail segment.  These reserves include estimates pertainingto employee severance costs.  Allseverance payments have been paid as of March 31, 2005.

 

The following table reflects a summary of the severance activity forthe three months ended March 31, 2005 and 2004, dollars in thousands.

 
| ** **          | ** ** | **Three months ended March 31,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **          | ** ** | **# of Employees**                    | ** ** | **Amount** | ** ** | **# of Employees** | ** ** | **Amount** | ** ** |
| Opening balance     |       | 1                                     |       | $ | 83 |   | 1 |   | $ | 83 |   |
| Actual terminations |       | (1                                    | )          | (83 | ) | — |   | — |   |
| Ending balance      |       | —                                |       | $ | — |   | 1 |   | $ | 83 |   |

 

8

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**(7) CONTINGENCIES**

 

From time to time, the Company is involved inlitigation arising in the normal course of business operations.

 

In September 2004, the Company’ssubsidiary, CWI, Inc., was sued in California state court by PrivacyRights Clearinghouse and Benjamin Greene in a suit alleging that CWI, Inc.was recording personal identification information from retail customers inviolation of certain California statutes. The plaintiff seeks injunctive relief preventing CWI, Inc. fromengaging in any act or practice constituting unfair competition under thestatutes and for statutory penalties and damages.  CWI, Inc. has responded to the suit anddenied that its practices violate the statutes. The Company has not recorded a provision for loss as of the date of theaccompanying financial statements.  Inthe opinion of management, the likelihood of a material unfavorable outcome isnot probable as of the date of the accompanying consolidated financialstatements.

 

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**ITEM 2****:**

AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

The following table is derived from the Company’s ConsolidatedStatements of Operations and expresses the results from operations as apercentage of revenues and reflects the net increase (decrease) betweenperiods:

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| REVENUES:                            |       |                   |       |   |   |   |   |
| Membership services                  |       | 29.8                   | %          | 31.1 | % | 2.9 | % |
| Publications                         |       | 15.8                   | %          | 17.0 | % | (0.2 | )% |
| Retail                               |       | 54.4                   | %          | 51.9 | % | 12.4 | % |
|                                 |       | 100.0                  | %          | 100.0 | % | 7.3 | % |
|                                 |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                   |       |   |   |   |   |
| Membership services                  |       | 18.6                   | %          | 20.5 | % | (2.5 | )% |
| Publications                         |       | 10.6                   | %          | 11.9 | % | (4.0 | )% |
| Retail                               |       | 31.5                   | %          | 30.3 | % | 11.3 | % |
|                                 |       | 60.7                   | %          | 62.7 | % | 3.9 | % |
|                                 |       |                   |       |   |   |   |   |
| GROSS PROFIT                         |       | 39.3                   | %          | 37.3 | % | 13.0 | % |
|                                 |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |   |   |
| Selling, general and  administrative |       | 27.7                   | %          | 24.9 | % | 19.2 | % |
| Depreciation and  amortization       |       | 3.4                    | %          | 3.0 | % | 22.1 | % |
|                                 |       | 31.1                   | %          | 27.9 | % | 19.5 | % |
|                                 |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 8.2                    | %          | 9.4 | % | (6.1 | )% |
|                                 |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |   |   |
| Interest income                      |       | 0.2                    | %          | 0.2 | % | (6.2 | )% |
| Interest expense                     |       | (5.9                   | )%         | (5.4 | )% | 17.6 | % |
| Debt extinguishment  expense         |       | —                 |       | (4.5 | )% | (100.0 | )% |
| Other non-operating  items, net      |       | —                 |       | — |   | (66.0 | )% |
|                                 |       | (5.7                   | )%         | (9.7 | )% | (36.9 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME (LOSS) BEFORE  INCOME TAXES   |       | 2.5                    | %          | (0.3 | )% | 1041.4 | % |
|                                 |       |                   |       |   |   |   |   |
| INCOME TAX (EXPENSE)  BENEFIT        |       | (1.0                   | )%         | 0.1 | % | 1074.5 | % |
|                                 |       |                   |       |   |   |   |   |
| NET INCOME (LOSS)                    |       | 1.5                    | %          | (0.2 | )% | 1021.4 | % |

 

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**RESULTSOF OPERATIONS**

** **

**Three Months Ended March 31, 2005**

**Compared With Three Months Ended March 31,2004**

 

*Revenues*

 

Revenuesof $108.7 million for the first quarter of 2005 increased by approximately $7.4million, or 7.3%, from the comparable period in 2004.

 

Membershipservices revenues of $32.4 million for the first quarter of 2005 increased byapproximately $0.9 million, or 2.9%, from the comparable period in 2004.  This revenue increase was largelyattributable to a $1.2 million increase in extended vehicle warranty programrevenue due to continued growth in the sales of one-year warranty products, anda $0.3 million increase in emergency road service revenue due to increasedenrollment, partially offset by a $0.3 million reduction in marketing feeincome recognized on RV financing products and a $0.3 million reduction inmembership services revenue, primarily associated with reduced enrollment inthe Coast to Coast Club and Golf Card Club.

 

Publicationrevenues of $17.2 million for the first quarter of 2005 remained unchanged fromthe comparable period in 2004 primarily due to a $1.0 million revenue increase associatedwith consumer shows acquired through the acquisition of ARU, Inc.,(“ARU”) in December 2004, offset by a $0.6 million reduction in revenue fromthe timing of annual directory shipments and reduced promotion of the atlas, anda $0.4 million revenue reduction due to the disposition of archery-relatedpublication titles in the third quarter of 2004.

 

Retail revenues of $59.1 million increased $6.5million, or 12.4%, over the first quarter of 2004.  Store merchandise sales increased $5.7million over the first quarter of 2004 due to a same store sales increase of $2.3million or 5.9%, compared to a 13.7% increase in the first quarter of 2004, anda $3.4 million revenue increase from the addition of eight new stores atvarious times over the past fifteen months. Same store sale calculations for a given period include only thosestores that were open both at the end of that period and at the beginning ofthe preceding fiscal year.  The remainingnet increase in retail revenue was attributable to a $0.8 million increase in otherinstallation fees, supplies and services revenue.

 

*Costs Applicable to Revenues*

 

Costsapplicable to revenues totaled $66.0 million for the first quarter of 2005, an increaseof $2.5 million, or 3.9%, from the comparable period in 2004.

 

Membership services costs and expenses of $20.2million decreased approximately $0.5 million, or 2.5%, from the first quarterof 2004.  This decrease consisted of a $0.6million decrease in membership services costs, primarily due to reducedmarketing and programs expenses of the Coast to Coast Club and Golf Card Cluband increased Good Sam Club 

 

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marketing costs due to the timing of promotions,and a $0.4 million decrease in other marketing expenses, partially offset by a$0.5 million increase in marketing costs and program expenses associated withincreased enrollment in the extended vehicle warranty programs.

 

Publication costs and expenses of $11.5 millionfor the first quarter of 2005 decreased $0.5 million from the comparable periodin 2004 primarily due to a reduction in costs associated with reduced annualdirectory and atlas sales, and the disposition of archery-related titles in thethird quarter of 2004 partially offset by costs attributable to the newlyacquired operations of ARU.

 

Retail costs applicable to revenues increased $3.5million, or 11.3%, to $34.3 million primarily due to increased store sales.  The retail gross profit margin of 41.9% forthe first quarter of 2005 increased from 41.4% from the comparable period in 2004.

 

*Operating Expenses*

 

Selling, general and administrative expenses of$30.0 million for the first quarter of 2005 increased $4.8 million compared tothe first quarter of 2004 primarily due to increased retail selling and generaland administrative expenses of approximately $3.5 million consisting of $2.2million of increased in retail labor, $0.3 million of increased sellingexpenses, $0.3 million of increased rent expense, $0.7 million of increasedtraining and other retail general and administrative expenses, a $0.9 million increasein deferred executive compensation and a $0.4 million increase in other generaland administrative expenses. Depreciation and amortization expenses of $3.7 million increased approximately$0.7 million over the prior year due primarily to increased depreciation on capitalexpenditures at Camping World and amortization of intangible costs associatedwith the issuance of $200.0 million in 9% Senior Subordinated Notes in February 2004.

 

*Income from Operations*

 

Incomefrom operations for the first quarter of 2005 of $8.9 million decreased $0.6million compared to the first quarter of 2004 primarily due to increasedoperating expenses of $5.5 million partially offset by increased gross profitfor the retail, membership services and publications operations of $3.0 million,$1.4 million and $0.5 million, respectively.

 

*Non-Operating Items*

 

Non-operating items were $6.2 million for the firstquarter of 2005, compared to $9.8 million for the same period in 2004.  This $3.6 million decrease was due to a $4.6million reduction in debt extinguishment expenses associated with theredemption of the AGH senior notes partially offset by $1.0 million of additionalinterest expense from higher loan balances associated with AGI’s issuance in February 2004of $200.0 million in 9% senior subordinated notes due in 2012.

 

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*Income before Income Taxes*

 

Income before income taxes for the first quarterof 2005 was $2.7 million, or $3.0 million higher than the first quarter of 2004.  This increase was attributable to a $4.6million reduction in debt extinguishment expense from the prior period that wasonly partially offset by $1.0 million of additional interest expense and a $0.6million decrease in income from operations for the current period.

 

*Income Tax Expense*

 

TheCompany recognized approximately $1.1 million of income tax expense for the firstquarter of 2005 compared to a $0.1 million tax benefit for the first quarter of2004.  The effective tax rates are higherthan statutory rates primarily due to state taxes.

 

# *NetIncome*

# * *

Net income in the first quarter of 2005 was $1.7million compared to a net loss of $0.2 million for the same period in 2004.

 

*Segment Profit*

 

Segment profit of $13.1 million for 2005 (before unallocated depreciationand amortization, general and administrative, interest, debt restructuring, andincome tax expense) increased $1.4 million, or 11.7%, for the comparable periodin 2004.

 

Membership services segment profit increased $1.4 million, or 15.1%, to$10.4 million for the first quarter of 2005. This increase is largely attributable to a $0.8 million increase inprofit from the extended warranty program, a $0.7 million increase in profitfrom the Coast to Coast Club and Golf Card Club, and a $0.6 million increase inprofit from emergency road service products, partially offset by a $0.4 milliondecrease in profit in the Good Sam Club attributable to the timing of marketingpromotions and a $0.3 million decrease in profit from RV financing products.

 

Publication segment profit of $4.4 million for the first quarter of 2005increased by $0.5 million, or 13.1%, from 2004. This increase was primarily attributable to the consumer shows in thefirst quarter of 2005 acquired through the acquisition of ARU in December 2004.

 

Retail segment loss of $1.7 million for the first quarter of 2005increased by $0.5 million, or 42.3%, from a loss of $1.2 million in 2004.  The increased segment loss resulted primarily from a $3.5 million increasein gross profit margin offset by a $3.5 million increase in selling, generaland administrative expenses and other allocated expenses and a $0.5 millionincrease in depreciation expense.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company hashistorically operated with a working capital deficit.  The working capital deficit as of March 31,2005 and December 31, 2004 was $8.9 million and $10.8 million,respectively.  The primary reason for theworking capital deficit is the deferred revenue and gains reported undercurrent liabilities in the amount of $59.6 million and $57.7 million as of March 31,2005 and December 31, 2004, respectively. Deferred revenue is primarily comprised of cash collected for club membershipsin advance, which is amortized over the life of the membership.  The Company uses net proceeds from thisdeferred membership revenue to lower its long-term borrowings.  For the first quarter of 2005 the net cash usedin operations was $2.1 million, versus net cash provided by operations of $8.6million for the first three months of 2004. This $10.7 million decrease in net cash provided by operations wasprimarily the result of an increase in interest paid primarily associated with AGI’sissuance in February 2004 of $200.0 million in 9% senior subordinated notesdue 2012, and a reduction in the growth of accounts payable due to the timingof payments to achieve incremental product discounts.  Management believes that funds generated byoperations together with available borrowings under the AGI Senior Credit Facilitywill be sufficient to meet all of the Company’s debt service requirements andcapital requirements over the next twelve months.

 

Interest under the AGHI Notes is due semi-annuallyon August 15 and February 15. For interest payments through and including February 15, 2008, AGHIhas the right to issue additional notes of the same tenor as the AGHINotes.  Any additional AGHI Notes issuedin payment of interest are due in full on or before March 15, 2010.  The source of cash for any interest that isto be paid in cash is dividends from AGI. Both the AGI Senior Credit Facility and the AGI Indenture containcertain restrictions on the payment of dividends by AGI to AGHI.  It is AGHI’s intent to issue additional notesto pay the interest for the next twelve months.

 

*Contractual Obligations andCommercial Commitments*

 

The following table reflects the Company’scontractual obligations and commercial commitments at March 31, 2005, inthousands.

 
| ** **                                | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                        | ** ** | **Total**                  | ** ** | **Balance of  2005** | ** ** | **2006 and  2007** | ** ** | **2008 and  2009** | ** ** | **Thereafter** | ** ** |
|                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                            |       | $                          | 398,994    |   | $ | 1,326 |   | $ | 3,463 |   | $ | 108,971 |   | $ | 285,234 |   |
| Operating lease  obligations              |       | 137,670                    |       | 9,638 |   | 22,004 |   | 16,986 |   | 89,042 |   |
| Deferred compensation                     |       | 5,263                      |       | 564 |   | 1,554 |   | 2,596 |   | 549 |   |
| Standby and commercial  letters of credit |       | 7,322                      |       | 6,872 |   | 450 |   | — |   | — |   |
| Grand total                               |       | $                          | 549,249    |   | $ | 18,400 |   | $ | 27,471 |   | $ | 128,553 |   | $ | 374,825 |   |

 

On June 24, 2003, AGI entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the AGI Senior Credit Facility). The AGI Senior Credit Facility provides for a revolving credit facilityof 

 

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$35.0 million and term loans (“Term B1 and Term B2 loans”) in theaggregate of $140.0 million.  Proceedsfrom the AGI Senior Credit Facility were used to refinance the existing seniorsecured indebtedness, pay a dividend of $13.7 million to the Company’s parentAGI 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 of March 31,2005, $32.1 million and $80.1 million were outstanding under the Term B1and Term B2 loans, respectively.  Noborrowings were outstanding on the revolving credit facility as of March 31,2005.  Reborrowings under the term loansare not permitted.  The interest onborrowings under the AGI Senior Credit Facility is at variable rates based onthe ratio of total 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 3.50% over the stated rates. As of March 31, 2005, the average interest rate on the term loanswas 5.82%, and permitted borrowings under the undrawn revolving facility were$27.7 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 June 24,2008, and the Term B1 and Term B2 loans mature on June 24, 2009.  The funds available under the AGI Senior CreditFacility 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 March 31, 2005, AGI had letters ofcredit in the aggregate amount of $7.3 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 millionaggregate principal amount of 9% senior subordinated notes due 2012 (the “AGI Notes”).  Interest is payable on the AGI Notes twice ayear on each February 15 and August 15, beginning August 15,2004, and the Notes mature on February 15, 2012.  AGI completed a registered exchange of theNotes under the Securities Act of 1933 in August 2004.  The proceeds from the sale of the AGI Noteswere used to fund the tender offer and defeasance of the remaining $100.0million outstanding principal amount of the AGH Notes, prepay $25.0 million ofthe Term B1 and Term B2 loans under the AGI Senior Credit Facility, pay a $60.0million dividend distribution, create a $15.0 million segregated cash account,pay certain prepayment and transaction costs and for general corporatepurposes.  The amount held in thissegregated account, including any earnings thereon, was available to paystockholder dividends upon satisfaction of a leverage test specified in the AGISenior Credit Facility.  In August andNovember of 2004, AGI satisfied the specific leverage test and paid $3.6million and $11.5 million in dividends, respectively.  The segregated account replenishmentrequirement has been permanently eliminated.

 

In November 2004, AGI amended the AGI SeniorCredit Facility dated June 24, 2003. The interest rates on the Term B1 and Term B2 loans were reduced by1.00%.  The applicable interest marginwas reduced from 4.00% to 3.00% and 3.00% to 2.00% for the LIBOR and Prime Rateloans, respectively.

 

15

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On March 24, 2005 in a private placement, the Company issued $88.2million principal amount of its 10-7/8% senior notes due 2012 (the “AGHINotes”) at a $3.2 million original issue discount.  The AGHI Notes are unsecured obligations ofthe Company, and its subsidiaries have not guaranteed payment of principal or intereston the AGHI Notes.  Interest on the AGHINotes is payable semi-annually on February 15 and August 15commencing August 15, 2005 and the entire $88.2 million principal amountof the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15,2008, AGHI may elect to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes.  Any additional AGHI Notes issued in payment ofinterest are due in full on or before March 15, 2010.  The AGHI Notes cannot be redeemed prior to February 15,2008.  Although the source of the cashpayment of the AGHI Notes is dividends from AGI, its wholly-owned subsidiary,there are certain restrictions on the payment of dividends under the AGI SeniorCredit Facility and the AGI Indenture.

 

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, Inc. (“CampingWorld”).  Camping World then made anequity capital contribution in the same amount to its wholly-owned subsidiary,CWI, Inc. (“CWI”).  CWI created anew wholly-owned subsidiary named CWFR Capital Corp., a Delaware corporation (“CWFR”)which is an “unrestricted subsidiary” under the AGHI Notes, and the AGIIndenture.  Since CWFR is an unrestrictedsubsidiary, its operations are not restricted by either the AGI Indenture orthe AGHI Notes.  CWI made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World.  CWFR used the proceeds from the equity capitalcontribution to acquire a preferred membership interest in FreedomRoads HoldingCompany, LLC (“FreedomRoads Holding”), a Minnesota limited liability companyowned 90% by The Stephen Adams Living Trust which also indirectly owns 97.4% ofthe outstanding capital stock of AGHC and indirectly AGHI.

 

The AGI Indenture pursuant to which the AGI Notes were issued and theAGI Senior Credit Facility contain certain restrictive covenants relating to,but not limited to, mergers, changes in the nature of the business,acquisitions, additional indebtedness, sale of assets, investments, and thepayment of dividends subject to certain limitations and minimum operatingcovenants.  The Company was in compliancewith all debt covenants at March 31, 2005.

 

For the three months ended March 31, 2005, the Company incurred$0.9 million of deferred executive compensation expense under the phantom stockagreements and made payments of $0.9 million on mature phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next seven years.  Phantom stock payments of $0.6 million arescheduled to**be made over the remainder of thecalendar year.

 

Capital expenditures for the first three months of 2005 totaling $2.8million increased $0.2 million from the first three months of 2004.  Additional capital expenditures of $11.9million are anticipated for the balance of 2005, primarily for new CampingWorld stores and equipment, information technology and database enhancements,computer hardware upgrades and replacements, a distribution center expansion, andcomputer software upgrades and enhancements.

 

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**CRITICAL ACCOUNTING POLICIES**

 

*General*

 

The discussion and analysis of the Company’s financial condition andresults of operations are based upon the Company’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires the Company tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis, theCompany evaluates its estimates, including those related to membership programsand incentives, bad debts, inventories, intangible assets, employee healthinsurance benefits, income taxes, restructuring, contingencies andlitigation.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

The Company believes the following critical accounting policies affectthe more significant judgments and estimates used in the preparation of theCompany’s consolidated financial statements.

 

*Revenue Recognition*

 

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 andnewsstand sales, net of estimated provision for returns, are recorded at timeof delivery.  Subscription sales ofpublications are deferred and recognized over the lives of thesubscriptions.  Revenues from theemergency road service program (“ERS”) are deferred and recognized over thelife of the membership.  ERS claimexpenses are recognized when incurred. Advances on third party credit card fee revenues are deferred andrecognized based primarily on a percentage of credit card receivables held bythird parties.  Membership revenue isgenerated from annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.

 

*Accounts Receivable*

 

The Company estimates the collectability of its trade receivables.  A considerable amount of judgment is requiredin assessing the ultimate realization of these receivables including 

 

17

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the current credit-worthiness of each customer.  Changes in required reserves have beenrecorded in recent periods and may occur in the future due to the marketenvironment.

 

*Inventory*

 

The Company states inventories at the lower of cost or market.  In assessing the ultimate realization ofinventories, the Company is required to make judgments as to future demandrequirements and compare that with the current or committed inventorylevels.  The Company has recorded changesin required reserves in recent periods due to changes in strategic direction,such as discontinuances of product lines as well as changes in marketconditions due to changes in demand requirements.  It is possible that changes in requiredinventory reserves may continue to occur in the future due to the marketconditions.

 

*Long-Lived Assets*

 

Purchased intangible assets with finite lives are amortized using thestraight-line method over the estimated economic lives of the assets, rangingfrom one to twenty-three years.

 

Long-lived assets, such as property, plant and equipment and purchasedintangible assets with finite lives are evaluated for impairment whenever eventsor changes in circumstances indicate the carrying value of an asset may not berecoverable in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” The Company assesses the fair value of the assets based on the futurecash flow the assets are expected to generate and recognize an impairment losswhen estimated undiscounted future cash flow expected to result from the use ofthe asset plus net proceeds expected from disposition of the asset (if any) areless than the carrying value of the asset. When an impairment is identified, the Company reduces the carryingamount of the asset to its estimated fair value based on a discounted cash flowapproach or, when available and appropriate, comparable market values.  The Company determined there were noindicators of impairment of long-lived assets as of December 31, 2004 or March 31,2005.

 

The Company has evaluated the remaining useful lives of itsfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary or if any of these assets had indefinite lives andwere therefore not subject to amortization. The Company determined that no adjustments to the useful lives of itsfinite-lived purchased intangible assets were necessary.  The finite-lived purchased intangible assetsconsist of membership customer lists, resort and golf course agreements,non-compete and deferred consulting agreements and deferred financing costswhich have weighted average useful lives of approximately 6 years, 23 years, 15years and 7 years, respectively.

 

*Indefinite Lived Intangible Assets*

 

The Company evaluates indefinite lived intangible assets for impairmentat least annually or when events indicate that an impairment exists inaccordance with SFAS No. 142.  The impairmenttest for goodwill and other indefinite-lived intangible assets is calculatedannually using fair value measurement techniques.

 

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Determining the fair value of a reporting unit and the fair value ofindividual assets and liabilities of a reporting unit is judgmental in natureand often involves the use of significant estimates and assumptions.  These estimates and assumptions could have asignificant impact on whether or not an impairment charge is recognized andalso the extent of such charge.  TheCompany’s estimates of fair value utilized in goodwill and otherindefinite-lived intangible asset tests may be based upon a number of factors,including assumptions about the projected future cash flows, discount rate,growth rate, determination of market comparables, technological change,economic conditions or changes to the Company’s business operations.  Such changes may result in impairment chargesrecorded in future periods.

 

The fair value of the Company’s reporting units is annually determinedusing a combination of the income approach and the market approach.  Under the income approach, the fair value ofa reporting unit is calculated based on the present value of estimated futurecash flows.  Future cash flows areestimated by the Company under the market approach, fair value is estimatedbased on market multiples of revenue or earnings for comparable companies.

 

Based on the results of the annual impairment tests, the Company determinedthat no impairment of goodwill existed as of December 31, 2004.  However, future goodwill impairment testscould result in a charge to earnings.  TheCompany will continue to evaluate goodwill on an annual basis and wheneverevents and changes in circumstances indicate that there may be a potentialimpairment.

 

*Restructuring*

 

The Company recorded reserves in connection with the restructuringprogram primarily within the retail segment. These reserves include estimates pertaining to employee separation costsand the settlements of contractual obligations resulting from the Company’sactions.  Although the Company does notanticipate significant changes, the actual costs may differ from theseestimates.

 

**ITEM 3****:  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*Interest Rate Risks*

 

Refer to the disclosure in our RegistrationStatement on Form S-4 filed with the Securities and Exchange Commission.  The Company does not believe that the risk itfaces related to interest rate changes is materially different than it was atthe date of the Registration Statement.

 

*Credit Risks*

 

Refer to the disclosure in our RegistrationStatement on Form S-4 filed with the Securities and Exchange Commission.  The Company does not believe that the risk itfaces related to credit risk is materially different than it was at the date ofthe Registration Statement.

 

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**ITEM 4****: CONTROL AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-14 under the SecuritiesExchange Act of 1934.  Based upon thatevaluation, the President and Chief Executive Officer along with the Senior VicePresident and Chief Financial Officer concluded that the disclosure controlsand procedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the periodic SEC filings. There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date the Company carried out its evaluation.

 

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**PART II****:  OTHER INFORMATION**

 

None

 

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**SIGNATURES****:**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrants have duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
|                          | **AFFINITY GROUP HOLDING, INC.** |
|-------------------------------|----------------------------------|
|                          |                             |
|                          |                             |
|                          | /s/ Thomas F. Wolfe              |   |
| Date:  May 4,  2005 | Thomas F. Wolfe                  |
|                          | Senior Vice President and        |
|                          | Chief Financial Officer          |

 

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