**Table of Contents**

** **

 

** **

**UNITED STATES**

##### **SECURITIESAND EXCHANGE COMMISSION**

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

###### ** **

**FORM 10-Q**

** **

**QuarterlyReport Under Section 13 or 15 (d) of**

**TheSecurities Exchange Act of 1934**

 

| **For  Quarter Ended:** | ** ** | **Commission  File Number** |
|-------------------------|------------|-----------------------------|
| **June 30,  2008** | ** ** | **333-124109**              |

 

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**AFFINITYGROUP HOLDING, INC.**

(Exact name ofregistrant 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)         |

 

SECURITIESREGISTERED PURSUANT TO SECTION 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 reports required to be filed by Section 13 or 15 (d) ofthe Securities 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    x               NO    o

 

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

 

| Large accelerated filer    o           |       | Accelerated filer                             o |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                       |       |                                                                                                                                                                                             |
| Non-accelerated filer      x |       | Smaller reporting company            o                                                                                               |
| (Do not check if a smaller  reporting company)             | ** ** | ** **                                                                                                                                                                                       |

 

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

YES    o               NO    x

 

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**                     | ** ** | **August 8, 2008**    |
| Common Stock, $.01 par  value |       | 100                             |

 

**DOCUMENTS INCORPORATED BYREFERENCE: None**

 

 

 

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

** **

**INDEX**

 
| ** **                            | ** **  | **Page**                                                                                            |
|---------------------------------------|-------------|-----------------------------------------------------------------------------------------------------|
|                                  |        |                                                                                                |   |
| **Part I.**Financial Information |        |                                                                                                |   |
|                                  |        |                                                                                                |   |
|                                  | **Item 1:** | **Financial  Statements**                                                                           |   |   |   |
|                                  |        |                                                                                                |   |   |
|                                  |        | Consolidated Balance Sheets  as of June 30, 2008 (unaudited) and December 31, 2007                  |   | 1 |   |
|                                  |        |                                                                                                |   |   |   |
|                                  |        | Unaudited Consolidated  Statements of Operations  for the three months ended June 30, 2008 and 2007 |   | 2 |   |
|                                  |        |                                                                                                |   |   |   |
|                                  |        | Unaudited Consolidated  Statements of Operations  for the six months ended June 30, 2008 and 2007   |   | 3 |   |
|                                  |        |                                                                                                |   |   |   |
|                                  |        | Unaudited Consolidated  Statements of Cash Flows  for the six months ended June 30, 2008 and 2007   |   | 4 |   |
|                                  |        |                                                                                                |   |   |   |
|                                  |        | Notes to  Unaudited Consolidated Financial Statements                                               |   | 5 |   |
|                                  |        |                                                                                                |   |   |
| ** **                            | **Item 2:** | **Management’s Discussion and Analysis of  Financial Condition and Results of Operations**     |   | 15 |   |
|                                  |        |                                                                                                |   |   |   |
|                                  | **Item 3:** | **Quantitative  and Qualitative Disclosures about Market Risk**                                     |   | 30 |   |
|                                  |        |                                                                                                |   |   |   |
|                                  | **Item 4:** | **Controls and  Procedures**                                                                        |   | 31 |   |
|                                  |        |                                                                                                |   |
| **Part II. Other Information**   |        | 31                                                                                                  |   |
|                                  |        |                                                                                                |   |
| **Signatures**                        |        | 32                                                                                                  |   |
|                                       |             |                                                                                                     |  |  |  |  |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2008 and December 31, 2007

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **6/30/2008**   | ** ** | **12/31/2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 7,845      |           | $          | 8,566 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,582 in 2008 and $1,473 in 2007 |       | 33,294          |       | 33,330         |       |
| Inventories                                                                                     |       | 64,493          |       | 64,209         |       |
| Prepaid expenses and other assets                                                               |       | 16,749          |       | 14,431         |       |
| Deferred tax assets                                                                             |       | 4,037           |       | 3,922          |       |
| Total current assets                                                                            |       | 126,418         |       | 124,458        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 45,895          |       | 44,307         |       |
| INVESTMENT IN AFFILIATE                                                                         |       | 81,005          |       | 81,005         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,629           |       | 4,650          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 26,340          |       | 25,836         |       |
| GOODWILL                                                                                        |       | 144,429         |       | 144,429        |       |
| OTHER ASSETS                                                                                    |       | 2,012           |       | 1,979          |       |
| Total assets                                                                                    |       | $               | 430,728    |           | $          | 426,664 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 27,087     |           | $          | 27,171 |   |
| Accrued interest                                                                                |       | 11,539          |       | 6,700          |       |
| Accrued income taxes                                                                            |       | 1,275           |       | 1,189          |       |
| Accrued liabilities                                                                             |       | 32,234          |       | 36,123         |       |
| Deferred revenues and gains                                                                     |       | 64,248          |       | 65,855         |       |
| Current portion of long-term debt                                                               |       | 139,582         |       | 4,406          |       |
| Total current liabilities                                                                       |       | 275,965         |       | 141,444        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 37,680          |       | 38,535         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 265,405         |       | 392,553        |       |
| DEFERRED TAX LIABILITY                                                                          |       | 2,817           |       | 2,702          |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 20,634          |       | 22,704         |       |
|                                                                                            |       | 602,501         |       | 597,938        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.01 par value, 3,000 shares  authorized, 100 shares issued and outstanding       |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 5,861           |       | 5,861          |       |
| Accumulated deficit                                                                             |       | (173,944        | )          | (172,431       | )          |
| Accumulated other comprehensive loss                                                            |       | (3,691          | )          | (4,705         | )          |
| Total stockholder’s deficit                                                                |       | (171,773        | )          | (171,274       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 430,728    |           | $          | 426,664 |   |

 

See notes toconsolidated financial statements.

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                               | ** ** | **THREE MONTHS ENDED** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| ** **                               | ** ** | **6/30/2008**                    | ** ** | **6/30/2007** | ** ** |
|                                     |       |                             |       |   |   |
| REVENUES:                                |       |                             |       |   |   |
| Membership services                      |       | $                                | 42,563     |   | $ | 38,092 |   |
| Publications                             |       | 15,424                           |       | 17,529 |   |
| Retail                                   |       | 89,742                           |       | 98,243 |   |
|                                     |       | 147,729                          |       | 153,864 |   |
|                                     |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:            |       |                             |       |   |   |
| Membership services                      |       | 26,518                           |       | 24,294 |   |
| Publications                             |       | 11,387                           |       | 12,263 |   |
| Retail                                   |       | 52,332                           |       | 60,073 |   |
|                                     |       | 90,237                           |       | 96,630 |   |
|                                     |       |                             |       |   |   |
| GROSS PROFIT                             |       | 57,492                           |       | 57,234 |   |
|                                     |       |                             |       |   |   |
| OPERATING EXPENSES:                      |       |                             |       |   |   |
| Selling, general and administrative      |       | 40,283                           |       | 38,950 |   |
| Depreciation and amortization            |       | 5,163                            |       | 4,841 |   |
|                                     |       | 45,446                           |       | 43,791 |   |
|                                     |       |                             |       |   |   |
| INCOME FROM OPERATIONS                   |       | 12,046                           |       | 13,443 |   |
|                                     |       |                             |       |   |   |
| NON-OPERATING ITEMS:                     |       |                             |       |   |   |
| Interest income                          |       | 139                              |       | 183 |   |
| Interest expense                         |       | (9,259                           | )          | (9,365 | ) |
| Other non-operating items, net           |       | (25                              | )          | 44 |   |
|                                     |       | (9,145                           | )          | (9,138 | ) |
|                                     |       |                             |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAX |       | 2,901                            |       | 4,305 |   |
|                                     |       |                             |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT             |       | (272                             | )          | 85 |   |
|                                     |       |                             |       |   |   |
| NET INCOME                               |       | $                                | 2,629      |   | $ | 4,390 |   |

 

See notes toconsolidated financial statements.

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                  | ** ** | **6/30/2007** | ** ** |
|                                       |       |                           |       |   |   |
| REVENUES:                                  |       |                           |       |   |   |
| Membership services                        |       | $                              | 78,108     |   | $ | 72,153 |   |
| Publications                               |       | 41,680                         |       | 42,218 |   |
| Retail                                     |       | 152,926                        |       | 167,300 |   |
|                                       |       | 272,714                        |       | 281,671 |   |
|                                       |       |                           |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                           |       |   |   |
| Membership services                        |       | 49,659                         |       | 45,961 |   |
| Publications                               |       | 28,604                         |       | 28,040 |   |
| Retail                                     |       | 89,195                         |       | 101,909 |   |
|                                       |       | 167,458                        |       | 175,910 |   |
|                                       |       |                           |       |   |   |
| GROSS PROFIT                               |       | 105,256                        |       | 105,761 |   |
|                                       |       |                           |       |   |   |
| OPERATING EXPENSES:                        |       |                           |       |   |   |
| Selling, general and administrative        |       | 76,722                         |       | 73,515 |   |
| Depreciation and amortization              |       | 10,294                         |       | 9,744 |   |
|                                       |       | 87,016                         |       | 83,259 |   |
|                                       |       |                           |       |   |   |
| INCOME FROM OPERATIONS                     |       | 18,240                         |       | 22,502 |   |
|                                       |       |                           |       |   |   |
| NON-OPERATING ITEMS:                       |       |                           |       |   |   |
| Interest income                            |       | 282                            |       | 357 |   |
| Interest expense                           |       | (18,441                        | )          | (18,502 | ) |
| Debt extinguishment expense                |       | —                         |       | (775 | ) |
| Other non-operating items, net             |       | (23                            | )          | 93 |   |
|                                       |       | (18,182                        | )          | (18,827 | ) |
|                                       |       |                           |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 58                             |       | 3,675 |   |
|                                       |       |                           |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (571                           | )          | 183 |   |
|                                       |       |                           |       |   |   |
| NET (LOSS) INCOME                          |       | $                              | (513       | ) | $ | 3,858 |   |

 

See notes toconsolidated financial statements.

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                            | ** ** | **SIX MONTHS ENDED** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                            | ** ** | **6/30/2008**                  | ** ** | **6/30/2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                           |       |   |   |
| Net (loss) income                                                                     |       | $                              | (513       | ) | $ | 3,858 |   |
| Adjustments to reconcile net (loss) income to net  cash used in operating activities: |       |                           |       |   |   |
| Depreciation                                                                          |       | 5,881                          |       | 4,846 |   |
| Amortization                                                                          |       | 4,413                          |       | 4,898 |   |
| Provision for losses on accounts receivable                                           |       | 617                            |       | 726 |   |
| Deferred compensation                                                                 |       | (130                           | )          | 240 |   |
| Deferred tax benefit                                                                  |       | —                         |       | (826 | ) |
| Loss (gain) on sale of property and equipment                                         |       | 86                             |       | (5 | ) |
| Loss on early extinguishment of debt                                                  |       | —                         |       | 775 |   |
| Non-cash interest on AGHI Notes                                                       |       | 1,465                          |       | 1,389 |   |
| Accretion of original issue discount                                                  |       | 232                            |       | 173 |   |
| Changes in operating assets and liabilities                                           |       |                           |       |   |   |
| Accounts receivable                                                                   |       | (581                           | )          | 1,304 |   |
| Inventories                                                                           |       | (284                           | )          | (16,361 | ) |
| Prepaid expenses and other assets                                                     |       | (1,930                         | )          | (4,239 | ) |
| Accounts payable                                                                      |       | (84                            | )          | (5,001 | ) |
| Accrued and other liabilities                                                         |       | 110                            |       | 2,921 |   |
| Deferred revenues and gains                                                           |       | (3,523                         | )          | 5,208 |   |
| Net cash provided by (used in) operating activities                                   |       | 5,759                          |       | (94 | ) |
|                                                                                  |       |                           |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                           |       |   |   |
| Capital expenditures                                                                  |       | (7,559                         | )          | (11,167 | ) |
| Net proceeds from sale of property and equipment                                      |       | 4                              |       | 10 |   |
| Change in intangible assets                                                           |       | —                         |       | (4 | ) |
| Acquisitions, net of cash received                                                    |       | (3,409                         | )          | (304 | ) |
| Repayment of loans receivable                                                         |       | 21                             |       | 19 |   |
| Net cash used in investing activities                                                 |       | (10,943                        | )          | (11,446 | ) |
|                                                                                  |       |                           |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |                           |       |   |   |
| Dividends paid                                                                        |       | (1,000                         | )          | (3,750 | ) |
| Borrowings on short-term debt                                                         |       | 33,000                         |       | 45,000 |   |
| Payment of debt issue costs                                                           |       | —                         |       | (291 | ) |
| Principal payments of short-term debt                                                 |       | (27,537                        | )          | (42,053 | ) |
| Net cash provided by (used in) financing activities                                   |       | 4,463                          |       | (1,094 | ) |
|                                                                                  |       |                           |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                               |       | (721                           | )          | (12,634 | ) |
|                                                                                  |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |       | 8,566                          |       | 15,238 |   |
|                                                                                  |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |       | $                              | 7,845      |   | $ | 2,604 |   |

 

See notes toconsolidated financial statements.

 

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**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation**–*The consolidated financial statements includedherein include the accounts of Affinity Group Holding, Inc. (“AGHI”), itswholly-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.  In November 2007, AGI Holding Corp. (“AGHC”)formed a holding company, AGI Intermediate Holdco LLC (“AGII”), at which time AGHCcontributed 100% of the outstanding shares of common stock of AGHI toAGII.  AGII is the parent company ofAGHI.

 

These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2007 as filed with the Securitiesand Exchange Commission.  In the opinionof management of the Company, these consolidated financial statements containall adjustments 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) RECENTACCOUNTING PRONOUNCEMENTS**

 

The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements” (“SFAS 157”) on January 1, 2008.  The FASB delayed the effective date of SFAS157 until January 1, 2009 with respect to fair value measurement requirementsfor non-financial assets and liabilities that are not re-measured on arecurring basis.  SFAS 157 defines fairvalue, establishes a framework and gives guidance regarding the method used formeasuring fair value, and expands disclosures about fair valuemeasurements.  SFAS 157 requirescompanies to disclose the fair value of their financial instruments accordingto a fair value hierarchy, as defined, and may require companies to provideadditional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears.  The adoption of the provisions ofSFAS 157 did not have a material impact on the Company’s consolidated financialstatements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Liabilities” including an amendment of FASB Statement No. 115 (“SFAS159”).  SFAS 159 expands the use of fairvalue accounting but does not affect existing standards which requires assetsor liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providingcompanies with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. Under SFAS 159, a company may elect to use fair value to measureeligible items at specified election dates and report unrealized gains

 

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**(2) RECENTACCOUNTING PRONOUNCEMENTS (continued)**

 

and losses onitems for which the fair value option has been elected in earnings at eachsubsequent reporting date.  Eligibleitems include, but are not limited to, accounts and loans receivable,available-for-sale and held-to-maturity securities, equity method investments,accounts payable, guarantees, issued debt and firm commitments.  If elected, SFAS 159 would be effective forfiscal years beginning after November 15, 2007.  The Company has elected not to adopt SFAS159.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141(R)”).  SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.  SFAS 141(R) also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  SFAS 141(R) iseffective for fiscal years beginning after December 15, 2008.  The Company will adopt SFAS 141(R) in thefirst quarter of fiscal 2009 and apply the provisions of the Statement for anyacquisition after the adoption date.

 

In December 2007,the FASB issued SFAS No. 160, “Accounting and Reporting of Non-controllingInterests in Consolidated Financial Statements – an amendment of AccountingResearch Bulletin No. 51” (“SFAS 160”). This standard will significantlychange the accounting and reporting for business combination transactions andnon-controlling (minority) interests in consolidated financial statements,including capitalizing at the acquisition date the fair value acquired fromin-process research and development, and re-measuring and writing down theseassets, if necessary, in subsequent periods during their development. This newstandard will be applied for business combinations that occur on or after January 1,2009 and presentation and disclosure requirements of SFAS 160 shall be appliedretrospectively.

 

In March 2008,the FASB issued SFAS Statement No. 161 (“SFAS 161”), “Disclosures aboutDerivative Instruments and Hedging Activities”. SFAS 161 requires companieswith derivative instruments to disclose information that should enablefinancial-statement users to understand how and why a company uses derivativeinstruments, how derivative instruments and related hedged items are accountedfor under FASB Statement No. 133 “Accounting for Derivative Instrumentsand Hedging Activities” and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. We are currentlyevaluating the impact, if any, that SFAS 161 will have on our consolidatedfinancial statements.

 

**(3) DISCLOSURESABOUT SEGMENTS OF AN 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, Camp Club USA and RV Handyman Club forrecreational vehicle (“RV”) owners, campers and outdoor vacationers, and theGolf

 

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** **

**(3) DISCLOSURESABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (continued)**

 

CardClub for golf enthusiasts.  ThePublications segment publishes a variety of publications for selected marketsin the recreation and leisure industry, including general circulationperiodicals, directories, and RV and powersports industry trade magazines, andproduces outdoor 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 reportablesegments are strategic business units that offer different products andservices.  They are managed separatelybecause each business requires different technology, management expertise andmarketing strategies.

 

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 JUNE 30, 2008**   |       |           |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $              | 42,563     |             | $          | 15,424     |       | $                | 89,742     |   | $ | 147,729 |   |
| Depreciation and amortization          |       | 825            |       | 1,581            |       | 2,070      |       | 4,476            |       |
| Loss on sale of property and equipment |       | —         |       | —           |       | (60        | )          | (60              | )          |
| Interest income                        |       | 904            |       | —           |       | 9          |       | 913              |       |
| Interest expense                       |       | —         |       | 56               |       | 3,979      |       | 4,035            |       |
| Segment operating profit (loss)        |       | 13,215         |       | 944              |       | (510       | )          | 13,649           |       |
|                                   |       |           |       |             |       |       |       |             |       |
| **THREE MONTHS ENDED JUNE 30, 2007**   |       |           |       |             |       |       |       |             |       |
| Revenues from external customers       |       | 38,092         |       | 17,529           |       | 98,243     |       | 153,864          |       |
| Depreciation and amortization          |       | 903            |       | 1,309            |       | 1,930      |       | 4,142            |       |
| Gain on sale of property and equipment |       | —         |       | 5                |       | —     |       | 5                |       |
| Interest income                        |       | 2,377          |       | —           |       | 35         |       | 2,412            |       |
| Interest expense                       |       | —         |       | 76               |       | 3,839      |       | 3,915            |       |
| Segment operating profit               |       | 12,793         |       | 2,380            |       | 1,755      |       | 16,928           |       |
|                                        |            |                |            |                  |            |            |            |                  |            |  |  |  |  |

 

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**(3) DISCLOSURESABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION (continued)**

 
| ** **                             | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|----------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                             | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **SIX MONTHS ENDED JUNE 30, 2008**     |       |           |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $              | 78,108     |             | $          | 41,680     |       | $                | 152,926    |   | $ | 272,714 |   |
| Depreciation and amortization          |       | 1,562          |       | 3,044            |       | 4,422      |       | 9,028            |       |
| Loss on sale of property and equipment |       | —         |       | —           |       | (86        | )          | (86              | )          |
| Interest income                        |       | 1,821          |       | —           |       | 20         |       | 1,841            |       |
| Interest expense                       |       | —         |       | 104              |       | 8,090      |       | 8,194            |       |
| Segment operating profit (loss)        |       | 23,214         |       | 6,753            |       | (8,936     | )          | 21,031           |       |
|                                   |       |           |       |             |       |       |       |             |       |
| **SIX MONTHS ENDED JUNE 30, 2007**     |       |           |       |             |       |       |       |             |       |
| Revenues from external customers       |       | 72,153         |       | 42,218           |       | 167,300    |       | 281,671          |       |
| Depreciation and amortization          |       | 1,797          |       | 2,549            |       | 3,815      |       | 8,161            |       |
| Gain on sale of property and equipment |       | —         |       | 5                |       | —     |       | 5                |       |
| Interest income                        |       | 4,553          |       | —           |       | 67         |       | 4,620            |       |
| Interest expense                       |       | —         |       | 146              |       | 7,410      |       | 7,556            |       |
| Segment operating profit (loss)        |       | 23,944         |       | 8,790            |       | (1,984     | )          | 30,750           |       |
|                                        |            |                |            |                  |            |            |            |                  |            |  |  |  |  |

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three months and six months ended June 30,(in thousands):

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                    | ** ** | **6/30/2008**                    | ** ** | **6/30/2007**                  | ** ** | **6/30/2008** | ** ** | **6/30/2007** | ** ** |
| **Income From Operations Before Income Taxes**                |       |                             |       |                           |       |   |   |   |   |
| Total profit for reportable segments                          |       | $                                | 13,649     |                           | $          | 16,928 |   | $ | 21,031 |   | $ | 30,750 |   |
| Unallocated G & A expense                            |       | (4,063                           | )          | (4,245                         | )          | (7,901 | ) | (9,508 | ) |
| Unallocated depreciation and amortization expense             |       | (687                             | )          | (699                           | )          | (1,266 | ) | (1,583 | ) |
| Elimination of intercompany interest income                   |       | (774                             | )          | (2,229                         | )          | (1,559 | ) | (4,263 | ) |
| Unallocated interest expense, net of intercompany elimination |       | (5,224                           | )          | (5,450                         | )          | (10,247 | ) | (10,946 | ) |
| Unallocated debt restructure expense                          |       | —                           |       | —                         |       | — |   | (775 | ) |
| Income from operations before income taxes                    |       | $                                | 2,901      |                           | $          | 4,305 |   | $ | 58 |   | $ | 3,675 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of June 30, 2008 and December 31,2007 (in thousands):

 
| ** **                                          | ** ** | **6/30/2008** | ** ** | **12/31/2007** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 204,569    |           | $          | 203,836 |   |
| Publications segment                                |       | 88,877        |       | 89,074         |       |
| Retail segment                                      |       | 252,471       |       | 249,174        |       |
| Total assets for reportable segments                |       | 545,917       |       | 542,084        |       |
| Capitalized finance costs not allocated to segments |       | 6,545         |       | 7,489          |       |
| Corporate unallocated assets                        |       | 3,609         |       | 3,544          |       |
| Elimination of intersegment receivable              |       | (125,343      | )          | (126,453       | )          |
| Total assets                                        |       | $             | 430,728    |           | $          | 426,664 |   |

 

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**(4) STATEMENTS OF CASH FLOWS**

 

Supplementaldisclosures of cash flow information for the six months ended June 30 (inthousands):

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid (received) during the period for: |       |     |       |     |       |
| Interest                                    |       | $        | 11,700     |     | $          | 13,140 |   |
| Income taxes                                |       | —   |       | (192     | )          |
|                                             |            |          |            |          |            |  |  |

 

In January 2007, the Company assumed $0.3 million of liabilitiesin connection with the acquisition of the Madison Boat Show from MAC Events,LLC.

 

In February 2007, the Company assumed $0.6 million of liabilitiesand issued $1.5 million of debt in connection with the acquisition of five RVand Sportsman Shows from Industrial Expositions, Inc.

 

In January 2008,the Company assumed $0.6 million of liabilities and issued $0.4 million of debtin connection with the acquisition of nine RV and boat shows from MAC Events,LLC.

 

In February 2008,the Company assumed $0.5 million of liabilities and issued $0.5 million of debtin connection with the acquisition of three RV and boat shows from Mid AmericaExpositions, Inc.

 

For the six monthsended June 30, 2008, the Company recorded an adjustment to the fair valueof the interest rate swap resulting in a $1.0 million decrease in both OtherLong-Term Liabilities and Other Comprehensive Loss.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually and more often when impairment indicators are present.  The Company performs its annual impairmenttest during the fourth quarter.  Therewere no changes in the Company’s goodwill by business segment and no indicatorsof impairment for the six months ended June 30, 2008 and 2007.

 

In January 2007,AGI Productions, Inc. acquired a consumer show from MAC Events, Inc.for $0.5 million.  As part of thepurchase, the Company assumed $0.3 million of liabilities.  In February 2007, AGI Productions, Inc.acquired consumer shows from Industrial Exposition Inc. for $1.9 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.6 million of liabilities.

 

In January 2008,AGI Productions, Inc. acquired consumer shows from MAC Events, LLC for$3.4 million.  As part of the purchase,the Company issued $0.4 million of debt and assumed $0.6 million ofliabilities.  In February 2008, AGIProductions, Inc. acquired consumer shows from Mid America Expositions, Inc.for $1.6 million.  As part of thepurchase, the Company issued $0.5 million of debt and assumed $0.5 million ofliabilities.

 

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

 

These acquisitionshave been accounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations,” and accordingly, the acquired assets and liabilities have beenrecorded at fair value.  The allocationsof purchase price to assets and liabilities include various finite-livedintangible assets (primarily customer lists) and no additional goodwill.  The operations of each entity are included inthe operations of the Company as of their respective acquisition dates.

 

Finite-lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at June 30, 2008(in thousands, except as noted):

 
| ** **                                      | ** ** | **Weighted**                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**       | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                          |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                             |       | $          | 36,384     |             | $          | (19,557    | )          | $ | 16,827 |   |
| Resort and golf course participation agreements |       | 4                             |       | 13,399     |       | (13,381          | )          | 18         |       |
| Non-compete and deferred consulting agreements  |       | 15                            |       | 18,830     |       | (14,494          | )          | 4,336      |       |
| Deferred financing costs                        |       | 7                             |       | 13,956     |       | (8,797           | )          | 5,159      |       |
|                                            |       |                          |       |       |       |             |       |       |       |
|                                            |       |                          |       | $          | 82,569     |             | $          | (56,229    | )          | $ | 26,340 |   |

 

**(6) DEBT**

 

Senior Subordinated Notes

 

In February 2004, AGI issued $200.0 million of 9% SeniorSubordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  On June 8, 2006, AGIamended its Amended and Restated Credit Agreement (“Senior Credit Facility”) topermit AGI to purchase up to $30.0 million of the Senior Subordinated Notesfrom time to time as and when AGI determines. AGI retired $29.9 million of the Senior Subordinated Notes in 2006. On February 27,2007, AGI amended its Senior Credit Facility to permit AGI to repurchase up toan additional $50.0 million of the Senior Subordinated Notes from time to time,as and when AGI determines, through the issuance of additional term loans of upto $50.0 million under the Senior Credit Facility.  On March 8, 2007, AGI purchased $17.7million of the Senior Subordinated Notes. As of June 30, 2008, $152.4 million of the Senior SubordinatedNotes remain outstanding.  Interest ispayable on the remaining Senior Subordinated Notes twice a year on February 15and August 15.  AGI’s present andfuture restricted subsidiaries will guarantee the Senior Subordinated Noteswith unconditional guarantees of payment that will rank junior in right ofpayment to their existing and future senior debt, but will rank equal in rightof payment to their existing and future senior subordinated debt.

 

AGHI Notes

 

On March 24, 2005 in a private placement, AGHI issued $88.2million principal amount of its

 

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**(6) DEBT (continued)**

 

10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 millionoriginal issue discount.  The Companycompleted a registered exchange of these AGHI Notes under the Securities Act of1933 in June 2005.  The AGHI Notesare unsecured obligations of AGHI and its subsidiaries have not guaranteedpayment of principal or interest on the AGHI Notes.  Interest on the AGHI Notes is payablesemi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and prior to February 15, 2008, AGHI had the optionto pay interest on the AGHI Notes in cash or by the issuance of additionalnotes of the same tenor as the AGHI Notes, except the maturity date of theadditional notes is March 15, 2010. On August 15, 2005, February 15, 2006, August 15, 2006, February 15,2007, and February 15, 2008 the Company issued additional notes in theamount of $3.8 million, $5.0 million, $5.3 million, $5.6 million, and $5.9million, respectively.  AGHI paid theinterest on the notes due August 15, 2007 of $5.9 million from theproceeds of a $5.9 million contribution made by AGHC.  As of June 30, 2008, $111.5 million ofAGHI Notes remain outstanding.

 

Senior Credit Facility

 

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 Senior Credit Facility provides for a revolving credit facility of$35.0 million and term loans in the aggregate of $140.0 million.  As of June 30, 2008, $8.5 million was outstandingunder the revolving credit facility and $127.8 million was outstanding underthe term loans.  Reborrowings under theterm loans are not permitted.  Theinterest on borrowings under the AGI Senior Credit Facility was at variablerates based on the ratio of total cash flow to outstanding indebtedness (asdefined).  Interest rates float withprime and the London Interbank Offered Rates, or LIBOR, plus an applicablemargin ranging from 1.50% to 2.50% over the stated rates.  As of June 30, 2008, the averageinterest rates on the term loans and the revolving credit facility were 6.02%and 6.18%, respectively, and permitted borrowings under the revolving facilitywere $28.6 million.  AGI also pays a commitmentfee of 0.5% per annum on the unused amount of the revolving creditfacility.  The aggregate quarterlyscheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and theterm loans mature on June 24, 2009. The funds available under the AGI Senior Credit Facility may be utilizedfor borrowings or letters of credit; however, a maximum of $12.5 million may beallocated to such letters of credit.  Asof June 30, 2008, AGI had letters of credit in the aggregate amount of$6.4 million outstanding.  The AGI SeniorCredit Facility is secured by virtually all of AGI’s assets and a pledge of AGI’sstock and the stock of AGI’s subsidiaries. The Company expects to replace or refinance the AGI Senior CreditFacility well in advance of its maturity late in June 2009, and hasreceived a number of proposals from prospective lenders in this regard.  See the discussion under “Liquidity andCapital Resources” under Item 2 below.

 

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**(7) INCOME TAXES**

 

Thefollowing table summarizes the activity related to unrecognized tax benefits:

** **
| Balance at December 31, 2007                                                        |   | $      | 14,390 |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Gross increases in unrecognized tax benefits due to  prior year positions                |   | — |   |
| Gross decreases in unrecognized tax benefits due to  prior year positions                |   | — |   |
| Gross increases in unrecognized tax benefits due to  current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due to  current year positions              |   | — |   |
| Gross decreases in unrecognized tax beneifts due to  settlements with taxing authorities |   | — |   |
| Gross decreases in unrecognized tax benefits due to  statute expirations                 |   | — |   |
| Other                                                                                    |   | 52     |   |
| Unrecognized tax benefits at June 30, 2008                                          |   | $      | 14,442 |   |

 

TheCompany accrues interest and penalties related to unrecognized tax benefits inits income tax provision.  The Companyrecorded interest and penalties of $0.5 million related to unrecognized taxbenefits during the first six months of 2008 and the liability for penaltiesand interest was $2.0 million.  Thisamount was included in other long-term liabilities.  The Company does not expect its unrecognizedtax benefits to change significantly over the next twelve months.

 

TheCompany and its subsidiaries file income tax returns in the U.S. and variousstates.  With few exceptions, the Companyis no longer subject to U.S. federal, state, and local income tax examinationsby tax authorities for years before 2002.

 

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**(8) INTEREST RATE SWAPS AGREEMENTS**

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (2.90% at June 30, 2008 based upon the April 30,2008 reset date) and make periodic payments at a fixed rate of 5.135% percent,with settlement and rate reset dates every January 31, April 30, July 31,and October 31.  AGI entered intothe interest rate swap to limit the effect of increases on our floating ratedebt.  The interest rate swap agreementwas effective beginning October 31, 2007 and expires on October 31, 2012.

 

On March 19,2008, AGI entered into a 4.5 year interest rate swap agreement effective April 30,2008, with a notional amount of $35.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (2.90% at June 30,2008 based upon the April 30, 2008 reset date) and make periodic paymentsat a fixed rate of 3.43% percent, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap was effectivebeginning April 30, 2008 and expires on October 31, 2012.

 

The fair value ofthese swaps is included in other accrued liabilities and accumulated othercomprehensive loss and totaled $3.7 million and $4.7 million as of June 30,2008 and December 31, 2007, respectively.

 

**(9) FAIR VALUE MEASUREMENTS**

 

The Company has adopted the provisions of SFAS 157 as of January 1,2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact itsfinancial condition, results of operations, or cash flow, the Company is nowrequired to provide additional disclosures as part of its financial statements.

 

SFAS 157 establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined asinputs other than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as unobservable inputs in whichlittle or no market data exists, therefore requiring an entity to develop itsown assumptions.

 

As of June 30, 2008, AGI holds interest rate swap contracts thatare required to be measured at fair value on a recurring basis.  AGI’s interest rate swap contracts are nottraded on a public exchange.  See Note 6for further information on the interest rate swap contracts.  The fair value of these interest rate swapcontracts are determined based on inputs that are readily available in publicmarkets or can be derived from information available in publicly quotedmarkets.  Therefore, the Company hascategorized these swap contracts as Level 2.

 

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**(9) FAIR VALUE MEASUREMENTS (continued)**

 

The Company’s liability at June 30, 2008, measured at fair valueon a recurring basis subject to the disclosure requirements of SFAS 157, was asfollows:

 
| ** **                   | ** ** | ** **    | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|------------------------------|------------|---------------|------------|-----------------------------------------------------------------------------------|------------|
| **(in millions)**       | ** ** | ** **    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets**   | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**              | ** ** | **6/30/2008** | ** ** | **(Level 1)**                                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                         |       |          |       |                                                                              |       |   |   |   |   |
| Interest Rate Swap Contracts |       | $             | (3,690     | )                                                                                 | $          | — |   | $ | (3,690 | ) | $ | — |   |
|                              |            |               |            |                                                                                   |            |  |  |  |  |  |  |  |  |

 

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| **ITEM 2:**                                             |   |   |
|---------------------------------------------------------|--------|--------|
| AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES           |
| MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL |
| CONDITION AND  RESULTS OF OPERATIONS                    |

 

The following tableis derived from the Company’s Consolidated Statements of Operationsand expresses the results from operationsas a percentage of revenues and reflects the netincrease (decrease) between periods:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                    | ** ** | **6/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                             |       |   |   |   |   |
| REVENUES:                                  |       |                             |       |   |   |   |   |
| Membership services                        |       | 28.8                             | %          | 24.8 | % | 11.7 | % |
| Publications                               |       | 10.4                             | %          | 11.4 | % | (12.0 | )% |
| Retail                                     |       | 60.8                             | %          | 63.8 | % | (8.7 | )% |
|                                       |       | 100.0                            | %          | 100.0 | % | (4.0 | )% |
|                                       |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |   |   |
| Membership services                        |       | 18.0                             | %          | 15.8 | % | 9.2 | % |
| Publications                               |       | 7.7                              | %          | 8.0 | % | (7.1 | )% |
| Retail                                     |       | 35.4                             | %          | 39.0 | % | (12.9 | )% |
|                                       |       | 61.1                             | %          | 62.8 | % | (6.6 | )% |
|                                       |       |                             |       |   |   |   |   |
| GROSS PROFIT                               |       | 38.9                             | %          | 37.2 | % | 0.5 | % |
|                                       |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |   |   |
| Selling, general and administrative        |       | 27.2                             | %          | 25.4 | % | 3.4 | % |
| Depreciation and amortization              |       | 3.5                              | %          | 3.1 | % | 6.7 | % |
|                                       |       | 30.7                             | %          | 28.5 | % | 3.8 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 8.2                              | %          | 8.7 | % | (10.4 | )% |
|                                       |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |   |   |
| Interest income                            |       | 0.1                              | %          | 0.1 | % | (24.0 | )% |
| Interest expense                           |       | (6.3                             | )%         | (6.0 | )% | (1.1 | )% |
| Other non-operating items, net             |       | —                           |       | — |   | (156.8 | )% |
|                                       |       | (6.2                             | )%         | (5.9 | )% | 0.1 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 2.0                              | %          | 2.8 | % | (32.6 | )% |
|                                       |       |                             |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (0.2                             | )%         | 0.1 | % | (420.0 | )% |
|                                       |       |                             |       |   |   |   |   |
| NET INCOME                                 |       | 1.8                              | %          | 2.9 | % | (40.1 | )% |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

The followingtable is derived from the Company’s Consolidated Statements of Operationsand expresses the results from operationsas a percentage of revenues and reflects the netincrease (decrease) between periods:

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                  | ** ** | **6/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                           |       |   |   |   |   |
| REVENUES:                                  |       |                           |       |   |   |   |   |
| Membership services                        |       | 28.6                           | %          | 25.6 | % | 8.3 | % |
| Publications                               |       | 15.3                           | %          | 15.0 | % | (1.3 | )% |
| Retail                                     |       | 56.1                           | %          | 59.4 | % | (8.6 | )% |
|                                       |       | 100.0                          | %          | 100.0 | % | (3.2 | )% |
|                                       |       |                           |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                           |       |   |   |   |   |
| Membership services                        |       | 18.2                           | %          | 16.3 | % | 8.0 | % |
| Publications                               |       | 10.5                           | %          | 10.0 | % | 2.0 | % |
| Retail                                     |       | 32.7                           | %          | 36.2 | % | (12.5 | )% |
|                                       |       | 61.4                           | %          | 62.5 | % | (4.8 | )% |
|                                       |       |                           |       |   |   |   |   |
| GROSS PROFIT                               |       | 38.6                           | %          | 37.5 | % | (0.5 | )% |
|                                       |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                           |       |   |   |   |   |
| Selling, general and administrative        |       | 28.1                           | %          | 26.0 | % | 4.4 | % |
| Depreciation and amortization              |       | 3.8                            | %          | 3.5 | % | 5.6 | % |
|                                       |       | 31.9                           | %          | 29.5 | % | 4.5 | % |
|                                       |       |                           |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 6.7                            | %          | 8.0 | % | (18.9 | )% |
|                                       |       |                           |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                           |       |   |   |   |   |
| Interest income                            |       | 0.1                            | %          | 0.1 | % | (21.0 | )% |
| Interest expense                           |       | (6.8                           | )%         | (6.5 | )% | (0.3 | )% |
| Debt extinguishment expense                |       | —                         |       | (0.3 | )% | (100.0 | )% |
| Other non-operating items, net             |       | —                         |       | — |   | (124.7 | )% |
|                                       |       | (6.7                           | )%         | (6.7 | )% | (3.4 | )% |
|                                       |       |                           |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 0.0                            | %          | 1.3 | % | (98.4 | )% |
|                                       |       |                           |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (0.2                           | )%         | 0.1 | % | (412.0 | )% |
|                                       |       |                           |       |   |   |   |   |
| NET (LOSS) INCOME                          |       | (0.2                           | )%         | 1.4 | % | (113.3 | )% |

 

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** **

**RESULTS OF OPERATIONS**

** **

**ThreeMonths Ended June 30, 2008**

**ComparedWith Three Months Ended June 30, 2007**

** **

*Revenues*

* *

Revenuesof $147.7 million for the second quarter of 2008 decreased by $6.1 million, or4.0%, from the comparable period in 2007.

 

Membershipservices revenues of $42.6 million for the second quarter of 2008 increased by$4.5 million, or 11.7%, from the comparable period in 2007.  This revenue increase was largelyattributable to an increase in member events revenue of $2.1 million due totiming of the Good Sam Club annual rally, which occurred in the second quarterof 2008 versus the third quarter of 2007, a $1.6 million increase in extendedvehicle warranty program revenue due to the continued growth of contracts inforce, a $0.5 million increase in marketing fee revenue from health and lifeinsurance products, a $0.5 million revenue increase due to increased enrollmentin Camping World President’s Club, and a $0.3 million revenue increase inemergency road service programs due to increased average enrollment.  These increases were partially offset by a$0.3 million decrease in fee income recognized on vehicle insurance productsand a revenue reduction of $0.2 million due to enrollment decreases in theCoast to Coast Club and the Golf Card Club.

 

Publicationrevenues of $15.4 million for the second quarter of 2008 decreased $2.1million, or 12.0%, from the comparable period in 2007.  This decrease was primarily attributable to$0.8 million of reduced advertising revenue primarily associated with theoutdoor power sports magazine group and issue month delay of the annual *Touring Rider*Magazine to July, 2008, $0.7 million ofreduced consumer show revenue primarily resulting from cancellation of one showand another show occurring in quarter one of 2008 versus quarter two in 2007,$0.4 million of reduced advertising revenue associated with the RV magazinegroup, and $0.2 million of reduced revenue associated with the annualdirectories.

 

Retail revenues ofapproximately $89.7 million decreased $8.5 million, or 8.7%, from thecomparable period in 2007.  Storemerchandise sales decreased approximately $7.3 million over the second quarterof 2007 due to a same store sales decrease of $9.8 million, or 15.0%, comparedto a 5.0% decrease in same store sales for the second quarter of 2007,partially offset by a $2.5 million revenue increase from the opening of 22 newstores over the past eighteen 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.  Further,supplies and other sales increased $2.1 million, and mail order sales decreased$3.3 million.

 

*CostsApplicable to Revenues*

* *

Costsapplicable to revenues totaled $90.2 million for the second quarter of 2008, adecrease of $6.4 million, or 6.6%, from the comparable period in 2007.

 

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Membershipservices costs and expenses of $26.5 million increased $2.2 million, or 9.2%,from the comparable period in 2007.  Thisincrease consisted of $1.9 million of additional expenses associated withtiming of the Good Sam Club annual rally, $1.0 million of incremental costsassociated with increased extended vehicle warranty program revenue andemergency road service revenue, and a $0.2 million increase in program costsassociated with increased marketing fee revenue from health and life insuranceproducts.  These increases in membershipservices costs were partially offset by a $0.9 million reduction in marketingcosts related to the Good Sam Club, Coast to Coast Club and Golf Card Club.

 

Publicationcosts and expenses of $11.4 million for the second quarter of 2008 decreased$0.9 million, or 7.1%, from the comparable period in 2007.  This decrease was attributable to $0.4million of reduced costs associated with issue timing of *TouringRider* Magazine and reduced marketing in the outdoor power sportsmagazines, a $0.3 million decrease in consumer show-related expenses associatedwith reduced revenue, and a $0.2 million reduction in RV-related magazinecosts.

 

Retailcosts applicable to revenues decreased $7.7 million, or 12.9%, to $52.3 millionprimarily as a result of the decrease in retail revenue.  The retail gross profit margin of 41.7% forthe second quarter of 2008 increased from 38.9% for the comparable period in2007 primarily due to general price increases.

 

*OperatingExpenses*

* *

Selling,general and administrative expenses of approximately $40.3 million for thesecond quarter of 2008 increased $1.3 million compared to the second quarter of2007.  This increase was due to anincrease in retail selling and general and administrative expenses ofapproximately $1.5 million consisting of increases in labor and real propertyexpenses primarily due to new store openings, partially offset by a $0.2million reduction in executive compensation expense.

 

Depreciationand amortization expense of $5.2 million increased $0.3 million from the prioryear primarily due to increased depreciation from the retail store openings andincreased amortization of intangible assets associated with the 2008 purchaseof consumer events.

 

*Incomefrom Operations*

* *

Incomefrom operations for the second quarter of 2008 totaling $12.0 million decreased$1.4 million compared to the second quarter of 2007.  This decrease was primarily due to increasedoperating expenses of $1.6 million and reduced gross profit for publications andretail operations of $1.2 million and $0.8 million, respectively, partiallyoffset by increased gross profit for the membership services operations of $2.2million.

 

*Non-OperatingItems*

* *

Non-operatingitems of approximately $9.1 million for the second quarter of 2008 remainedunchanged from the second quarter of 2007 due to a $0.1 million decrease in netinterest expense resulting from reduced interest rates partially offset by a$0.1 million loss on sale of retail assets.

 

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*Incomebefore Income Taxes*

* *

Incomebefore income taxes for the second quarter of 2008 was $2.9 million, a decreaseof $1.4 million compared to the second quarter of 2007, which was attributableto the $1.4 million decrease in income from operations mentioned above.

 

*IncomeTax Expense*

* *

TheCompany recorded a $0.3 million income tax expense for the second quarter of2008, compared to a $0.1 million tax benefit for the second quarter of 2007.

 

# *Net Income*

# * *

Netincome in the second quarter of 2008 was $2.6 million compared to net income of$4.4 million for the same period in 2007 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

* *

Segment profit of$13.6 million for the second quarter of 2008 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)decreased $3.3 million, or 19.4%, from the comparable period in 2007.

 

Membership servicessegment profit of approximately $13.2 million for the second quarter of 2008increased $0.4 million, or 3.3%, from the comparable period in 2007.  This increase was largely attributable to a$0.9 million increase in profit from the extended vehicle warranty programs, a$0.6 million increase in segment profit from Coast Club and Golf Club,associated with reduced marketing expenses, and a $0.5 million increase inprofit from health and life insurance products. These increases were partially offset by a $1.3 million decrease inprofit from emergency road service products primarily due to reducedintercompany interest income, and a $0.3 million of reduced fee incomerecognized on vehicle insurance products.

 

Publicationsegment profit of $0.9 million for the second quarter of 2008 decreased $1.4million, or 60.3%, from the comparable period in 2007.  This decrease was largely attributed to a$0.7 million decrease in segment profit from our consumer shows group primarilyrelated to the consumer shows acquired in 2008, a $0.4 million decrease inprofit in the RV-related publications related to reduced advertising revenue,and a $0.3 million decrease in segment profit related to our outdoorpowersports magazine group, primarily driven by the reduced advertising revenue*.*

 

Retail segmentprofit decreased $2.3 million, or 129.1% from the second quarter of 2007 to aloss of $0.5 million for the second quarter of 2008.  This increase in segmentloss resulted primarily from a $1.5 million increase in selling, general and administrative expensesprimarily related to the increase in new stores, $0.5 million decrease in grossprofit margin, a $0.2 million increase in depreciation expense and a $0.1million increase in interest expense.

 

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** **

**SixMonths Ended June 30, 2008**

**ComparedWith Six Months Ended June 30, 2007**

** **

*Revenues*

* *

Revenuesof $272.7 million for the first six months of 2008 decreased by $9.0 million,or 3.2%, from the comparable period in 2007.

 

Membershipservices revenues of $78.1 million for the first six months of 2008 increasedby approximately $5.9 million, or 8.3%, from the comparable period in2007.  This revenue increase was largelyattributable to a $2.4 million increase in extended vehicle warranty programrevenue due to the continued growth of contracts in force, an increase inmember events revenue of $2.3 million primarily due to timing of the Good SamClub annual rally, which occurred in the second quarter of 2008 versus thethird quarter of 2007, a $1.2 million increase in marketing fee revenue fromhealth and life insurance products, a $0.9 million revenue increase due toincreased enrollment in Camping World President’s Club, and an $0.8 millionrevenue increase in emergency road service programs due to increased averageenrollment.  These increases werepartially offset by a revenue reduction of $0.7 million due to enrollment decreasesin the Coast to Coast Club and the Golf Card Club, a $0.6 million decrease infee income recognized on vehicle insurance products and a $0.4 millionreduction in royalty fee income associated with the credit card program.

 

Publicationrevenues of $41.7 million for the first six months of 2008 decreased $0.5million, or 1.3%, from the comparable period in 2007 primarily attributable toa $1.4 million revenue reduction from outdoor power sports magazine group,primarily associated with reduced advertising revenue and issue timing of *Touring Rider* Magazine, a $1.0 million reduction inadvertising and circulation revenue associated with the RV magazine group, anda $0.4 million revenue reduction associated with the annual directories.  These decreases were partially offset by $2.0million of incremental revenue primarily associated with nine RV and boat showspurchased from MAC Events, LLC in January 2008 and three RV and boat showspurchased from Mid America Expositions, Inc. in February 2008 and$0.3 million of additional campground atlas revenue.

 

Retail revenues ofapproximately $152.9 million decreased $14.4 million, or 8.6%, from thecomparable period in 2007.  Storemerchandise sales decreased approximately $12.7 million over the first sixmonths of 2007 due to a same store sales decrease of $18.3 million, or 15.7%,compared to a 3.3% decrease in same store sales for the first six months of2007, partially offset by a $5.6 million revenue increase from the opening of22 new stores over the past eighteen 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.  Supplies andother sales increased $3.0 million, and mail order sales decreased $4.7million.

 

*CostsApplicable to Revenues*

* *

Costsapplicable to revenues totaled $167.5 million for the first six months of 2008,a decrease of approximately $8.4 million, or 4.8%, from the comparable periodin 2007.

 

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Membershipservices costs and expenses of $49.7 million increased $3.7 million, or 8.0%,from the comparable period in 2007.  Thisincrease consisted of $2.1 million of additional member events costs primarilydue to timing of the Good Sam Club annual rally, $1.5 million of additionalcosts associated with increased extended vehicle warranty program revenue andemergency road service revenue and a $0.6 million increase in program costsassociated with increased marketing fee revenue from health and life insuranceproducts.  In addition, membershipservices costs decreased approximately $0.5 million due to a net reduction inclub marketing and program costs.

 

Publicationcosts and expenses of approximately $28.6 million for the first six months of2008 increased $0.6 million, or 2.0%, from the comparable period in 2007.  This increase was attributable to $1.3million of additional costs related primarily to the consumer shows purchasedover the past eighteen months and $0.3 million of additional campground atlascosts associated with increased revenue, partially offset by $0.3 million ofreduced production costs for the RV-related publications, $0.3 million ofreduced costs related to the annual directories, and $0.4 million of reducedcosts primarily relating to issue timing of *Touring Rider*magazine.

 

Retailcosts applicable to revenues decreased $12.7 million, or 12.5%, to $89.2million primarily as a result of the decrease in retail revenue.  The retail gross profit margin of 41.7% forthe first six months of 2008 increased from 39.1% for the comparable period in2007 primarily due to general price increases.

 

*OperatingExpenses*

* *

Selling,general and administrative expenses of approximately $76.7 million for thefirst six months of 2008 increased $3.2 million compared to the first sixmonths of 2007.  This increase was due toan increase in retail selling and general and administrative expenses ofapproximately $4.2 million primarily consisting of increases in labor and realproperty expenses primarily due to new store openings, and a $0.3 millionincrease related to the consumer show acquisitions.  These increases were partially offset by a$0.9 million reduction in arbitration expense recorded in 2007 in connectionwith our asserted claim to a right of first refusal in connection with the saleof General Motors Acceptance Corporation, the insurance provider for the RVvehicle insurance offered by our Membership Services segment, which claim wasrejected by the arbitration panel, and a $0.4 million reduction in deferredexecutive compensation expense.

 

Depreciationand amortization expense of $10.3 million increased $0.5 million from the prioryear primarily due to increased depreciation from the retail store openings andincreased amortization of intangible assets associated with the 2008 purchaseof consumer events.

 

*Income from Operations*

* *

Incomefrom operations for the first six months of 2008 totaling $18.2 million decreased$4.3 million compared to the first six months of 2007.  This decrease was primarily due to increasedoperating expenses of $3.8 million and reduced gross profit for retail andpublications operations of $1.7 million and $1.1 million, respectively, partiallyoffset by increased gross profit for the membership services operations of $2.3million.

 

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*Non-OperatingItems*

 

Non-operatingitems of approximately $18.1 million for the first six months of 2008 decreased$0.6 million compared to the first six months of 2007 due to $0.8 million ofdebt extinguishment expense associated with the retirement of SeniorSubordinated Notes in 2007, and a $0.3 million decrease in net interestexpense, partially offset by a $0.1 million loss on sale of retail assets.

 

*Income beforeIncome Taxes*

 

Incomebefore income taxes for the first six months of 2008 was $0.1 million, adecrease of $3.6 million compared to the first six months of 2007.  This decrease was attributable to the $4.3million decrease in income from operations and $0.6 million of decreasednon-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded a $0.6 million income tax expense for the first six months of2008, compared to a $0.2 million tax benefit for the first six months of 2007.

 

# *Net (Loss) Income*

# * *

Netloss in the first six months of 2008 was $0.5 million compared to net income ofapproximately $3.9 million for the same period in 2007 mainly due to thereasons discussed above.

 

*SegmentProfit (Loss)*

 

Segment profit of$21.0 million for the first six months of 2008 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)decreased $9.7 million, or 31.6%, from the comparable period in 2007.

 

Membershipservices segment profit of approximately $23.2 million for the first six monthsof 2008 decreased $0.7 million, or 3.0%, from the comparable period in2007.  This decrease was largelyattributable to a $2.3 million decrease in profit from emergency road serviceproducts primarily due to reduced intercompany interest income, a $0.6 milliondecrease in profit from vehicle insurance products, a $0.6 million increase inmarketing related to new club and new product development and a $0.5 millionincrease in miscellaneous online development and overhead expense, partiallyoffset by a $1.4 million increase in profit from the extended vehicle warrantyprograms, a $1.0 million increase in profit from health and life insuranceproducts, and a $0.9 increase in segment profit for Coast Club and Golf Clubdue to decreased marketing, depreciation and amortization expense.

 

Publicationsegment profit of $6.8 million for the first six months of 2008 decreased $2.0million, or 23.2%, from the comparable period in 2007.  This decrease was largely attributed to a$1.1 million decrease in segment profit related to our outdoor powersportsmagazine group, 

 

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primarily relatingto reduced advertising revenue, a $0.6 million decrease in profit in theRV-related publications, and a $0.3 million decrease in segment profit fromannual directories*.*

 

Retail segmentloss increased $7.0 million, or 350.4% from the first six months of 2007 to aloss of $8.9 million for the first six months of 2008.  This increase in segment loss resulted primarily from a $4.3 million increase in selling, general andadministrative expenses primarily related to the increase in new stores, a $1.4million decrease in gross profit margin, a $0.7 million increase in interestexpense, and a $0.6 millionincrease in depreciation expense.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany has historically operated with a working capital deficit.  The working capital deficit as of June 30,2008 and December 31, 2007 was $149.5 million and $17.0 million,respectively.  The primary reason for theincrease in working capital deficit for 2008 is the classification of thedebt associated with the Amended and Restated Credit Agreement totaling $136.3million as a current liability, since the credit facility matures June 24,2009.  Deferred revenue and gains reported undercurrent liabilities was $64.2 million and $65.9 million as of June 30,2008 and December 31, 2007, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  The Company uses netproceeds from this deferred membership revenue to lower its long-term borrowings.  The Company anticipates that it will be ableto refinance or replace the existing credit facility before its maturity on June 24,2009 and, assuming such refinancing, will have sufficient funds from itsoperations together with available borrowing under the replacement creditfacility to meet all of the Company’s debt service, capital requirements andworking capital needs over the next twelve months.

 

*Contractual Obligations andCommercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at June 30, 2008.  Thistable includes principal and future interest due under our debt agreementsbased on interest rates as of June 30, 2008 and assumes debt obligationswill be held to maturity.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Total**                                 | ** ** | **Balance of  2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  2012** | ** ** | **Thereafter** | ** ** |
|                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |       | $                                         | 519,895    |   | $ | 18,475 |   | $ | 221,622 |   | $ | 279,798 |   | $ | — |   |
| Operating lease obligations        |       | 206,696                                   |       | 10,533 |   | 39,867 |   | 34,588 |   | 121,708 |   |
| Deferred compensation              |       | 1,605                                     |       | 31 |   | 1,461 |   | 113 |   | — |   |
| Standby letters of credit          |       | 6,406                                     |       | 5,906 |   | 500 |   | — |   | — |   |
| Grand total                        |       | $                                         | 734,602    |   | $ | 34,945 |   | $ | 263,450 |   | $ | 314,499 |   | $ | 121,708 |   |

 

On June 24,2003, AGI entered into an Amended and Restated Credit Agreement and a SeniorSecured Floating Rate Note Purchase Agreement (as amended, the “AGI SeniorCredit Facility”).  The AGI Senior CreditFacility provides for a revolving credit facility of $35.0 million and termloans in the aggregate of $140.0 million. As of June 30, 2008, $127.8 million was outstanding under the termloans and $8.5 million was outstanding under the revolving credit 

 

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facility.  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 June 30, 2008, the average interest rates on the term loansand the revolving credit facility were 6.02% and 6.18%, respectively, andpermitted borrowings under the revolving facility were $28.6 million.  AGI also pays a commitment fee of 0.5% perannum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $0.4 million.  Boththe revolving credit facility and the term loans mature on June 24,2009.  The funds available under the AGISenior Credit Facility may be utilized for borrowings or letters of credit;however, a maximum of $12.5 million may be allocated to such letters ofcredit.  As of June 30, 2008, AGIhad letters of credit in the aggregate amount of $6.4 million outstanding.  The AGI Senior Credit Facility is secured byvirtually all of the AGI’s assets and a pledge of AGI’s stock and the stock ofthe AGI’s subsidiaries.

 

In February 2004, AGI issued $200.0 million aggregate principalamount of 9% Senior Subordinated Notes due 2012 (“AGI Senior Subordinated Notes”).  AGI completed a registered exchange of theAGI Senior Subordinated Notes under the Securities Act of 1933 in August 2004.

 

On March 3,2006, AGI amended its Senior Credit Facility to revise the definition ofConsolidated Fixed Charges Ratio and Permitted Tax Distributions.  This amendment allows the Company todistribute taxes to its ultimate parent based on its stand-alone tax obligationrather than the tax obligation of its ultimate parent, AGHI, until such timethat AGHI pays interest on its 10 7/8% Senior Notes in cash instead of by the issuanceof additional notes and AGI makes a distribution to AGHI for purposes of payingthat cash interest..  For the six monthsended June 30, 2008 and 2007, the Company distributed $1.0 million and$3.7 million, respectively, in the form of dividends to its ultimate parent tofund the Company’s tax obligations. Further, AGI amended the AGI Senior Credit Facility’s covenantrestrictions with affiliates to permit a joint venture arrangement betweenCamping World and FreedomRoads, an affiliate of the Company.

 

On February 27,2007, AGI amended its AGI Senior Credit Facility to extend the maturity of therevolving credit facility from June 24, 2008 to June 24, 2009,increase the consolidated senior leverage ratio from 1.9 to 3.5 times EBITDA,as defined, and fix the consolidated total leverage ratio at 5.0 times EBITDA,as defined.  Further, the amendmentpermits AGI to repurchase up to an additional $50.0 million of the SeniorSubordinated Notes from time to time as and when AGI determines through theissuance of additional term loans of up to $50.0 million.  Any loan amounts not used for the repurchaseof the Senior Subordinated Notes may be used for acquisitions or repayrevolving credit loans.

 

On March 8,2007, AGI purchased $17.7 million of the Senior Subordinated Notes.  AGI funded the purchase through the issuanceof the $25.0 million in additional incremental term loans as permitted underthe February 27, 2007 amendment to the AGI Senior Credit Facility.  The balance of the $25.0 million issued wasused to pay down AGI’s revolving credit facility by $6.5 million and to payassociated loan fees and transaction expenses. The terms on the additional incremental loans are consistent with theremaining term loan outstanding under the 

 

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AGI Senior CreditFacility.  As of June 30, 2008,$152.4 million of Senior Subordinated Notes remain outstanding.

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (2.90% at June 30, 2008 based upon the April 30,2008 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  On March 19,2008, AGI entered into an interest rate swap agreement with a notional amountof $35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (2.90% at June 30, 2008 based upon the April 30,2008 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapcontracts were zero at inception.  TheCompany entered into the interest rate swap contracts to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap contracts are designated as a cash flow hedge of thevariable rate interest payments due on $135 million of the term loans and therevolving credit facility issued June 24, 2003, and accordingly, gains andlosses on the fair value of the interest rate swap agreements are reported inaccumulated other comprehensive loss and reclassified to earnings in the sameperiod in which the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of the swapcontracts are included in other accrued liabilities and was $3.7 million and$4.7 million as of June 30, 2008 and December 31, 2007, respectively.

 

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 June 30, 2008.

 

The Company hasbeen reviewing its financing needs with a number of potential lenders torefinance or replace the AGI Senior Credit Facility, which matures on June 24,2009.  The Company expects to enter intoa new senior credit facility permitting borrowings of up to $160 million, whichis the maximum amount of senior indebtedness permitted under the AGI Indenturefor the Senior Subordinated Notes and the indenture under which the AGHI Noteswere issued, well in advance of the maturity of the AGI Senior CreditFacility.  The Company has receivedseveral financing proposals and is assessing such proposals and timing in lightof the current credit market environment. Given the current state of the credit markets generally as well as theCompany’s overall leverage, the Company believes that the interest rate payableby the Company under a new senior credit facility will be greater than theinterest rates under the current AGI Senior Credit Facility.  Based on the proposals received, the Companyexpects that it will be able to refinance or replace the current AGI SeniorCredit Facility well in advance of the June 24, 2009 maturity date.

 

On March 24,2005, in a private placement, AGHI issued $88.2 million principal amount of its10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million originalissue discount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act 

 

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of 1933 in June 2005.  The AGHI Notes are unsecured obligations ofthe Company and its subsidiaries have not guaranteed payment of principal orinterest on the AGHI Notes.  Interest onthe AGHI Notes 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 had the election to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date is March 15, 2010. AGI has not paid any dividends to AGHI to fund payment of interest onthe AGHI Notes and AGHI made the interest payments due on August 15, 2005,February 15, 2006, August 15, 2006, February 15, 2007, and February 15,2008 through the issuance of additional notes. The company paid the interest on the AGHI Notes due August 15, 2007of $5.9 million from proceeds of a $5.9 million contribution made by AGHI’sparent, AGHC.  If 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.

 

The Companycontributed the net proceeds from the issuance of the AGHI Notes, approximately$81.0 million, to AGI and in turn, AGI made an equity contribution to itswholly-owned subsidiary, Camping World. Camping World then made an equity capital contribution in the sameamount 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 99.1%of the outstanding capital stock of AGHC and indirectly AGHI.

 

In January 2007,AGI Productions, Inc. acquired a consumer show from MAC Events, Inc.for $0.5 million.  As part of thepurchase, the Company assumed $0.3 million of liabilities.  In February 2007, AGI Productions, Inc.acquired consumer shows from Industrial Exposition Inc. for $1.9 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.6 million of liabilities.

 

In January 2008,AGI Productions, Inc. acquired nine consumer shows from MAC Events, LLCfor $3.4 million.  As part of thepurchase, the Company issued $0.4 million of debt and assumed $0.6 million inliabilities.  In February 2008, AGIProductions, Inc. acquired three consumer shows from Mid AmericaExpositions, Inc. for $1.6 million. As part of the purchase, the Company issued $0.5 million in debt andassumed $0.5 million in liabilities.

 

For the six monthsended June 30, 2008, the Company incurred $0.1 million of deferredexecutive compensation benefit under the phantom stock agreements, and madepayments of $1.7 million under the terms of the vested phantom stockagreements.  The earned incentives underthese agreements are scheduled to be paid at various times over the next fouryears.  Phantom stock payments totaling$31,000 are scheduled to**be made forthe remainder of 2008.

 

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Capitalexpenditures for the first six months of 2008 totaling $7.6 million decreased$3.6 million from the first six months of 2007 primarily due to a slow down ofnew retail store openings.  Additionalcapital expenditures of $4.6 million are anticipated for the balance of 2008primarily for one new retail store, existing retail store upgrades, informationtechnology, inventory system replacement, and computer hardware and softwareupgrades and enhancements.

 

**CRITICALACCOUNTING 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 Companybelieves the following critical accounting policies affect the more significantjudgments and estimates used in the preparation of the Company’s consolidatedfinancial statements.

 

*Revenue Recognition*

 

Merchandise revenue is recognized when products are sold in the retailstores, shipped for mail and Internet orders, or when services are provided tocustomers.  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 

 

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and expense amortized in future accounting periods.  Revenue and related expenses for consumershows are recognized when the show occurs.

 

*Accounts Receivable*

 

The Companyestimates the collectability of its trade receivables.  A considerable amount of judgment is requiredin assessing the ultimate realization of these receivables including thecurrent credit-worthiness of each customer. Changes in required reserves have been recorded in recent periods andmay occur in the future due to 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-LivedAssets*

 

Purchasedintangible assets with finite lives are amortized using the straight-linemethod over the estimated economic lives of the assets, ranging from one tofifteen years.

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  The Companyassesses the fair value of the assets based on the future cash flow the assetsare expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated 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, 2007 or June 30,2008.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these 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, 4 years, 15 years and 7 years, respectively.

 

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*Indefinite-LivedIntangible Assets*

 

The Companyevaluates indefinite-lived intangible assets for impairment at least annuallyor when events indicate that an impairment exists in accordance with SFAS No. 142,“Goodwill and Other Intangibles.”  Theimpairment test for goodwill and other indefinite-lived intangible assets iscalculated annually using fair value measurement techniques.

 

Determining thefair value 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 ofthe Company’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 theCompany under the market approach, fair value is estimated based on marketmultiples of revenue or earnings for comparable companies.

 

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.

 

*AccumulatedOther Comprehensive Loss*

 

Accumulatedother comprehensive loss consists of unrealized losses on cash flowhedges.  At June 30, 2008,accumulated other comprehensive loss was $3.7 million.

 

*Derivative Financial Instruments*

 

The Company accounts for derivative instruments and hedging activitiesin accordance with SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”). All derivatives are recognized on the balance sheet at their fairvalue.  On the date that the Companyenters into a derivative contract, management formally documents allrelationships between hedging instruments and hedged items, as well as riskmanagement objectives and strategies for undertaking various hedge transactions.

 

Changes in the fair value of a derivativethat is highly effective and that is designated and qualifies as a cash flowhedge (a “swap”), to the extent that the hedge is effective, are recorded inaccumulated other comprehensive loss, until earnings are affected by thevariability of cash flows of the hedged transaction.  The Company measures effectiveness of theswap at each quarter end using the Hypothetical Derivative Method.  Under this method, hedge effectiveness ismeasured based on a comparison of the change in fair value of the 

 

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actual swap designated as the hedginginstrument and the change in fair value of the hypothetical swap which wouldhave the terms that identically match the critical terms of the hedged cashflows from the anticipated debt issuance. The amount of ineffectiveness, if any, recorded in earnings would beequal to the excess of the cumulative change in the fair value of the swap overthe cumulative change in the fair value of the plain vanilla swap lock, asdefined in the accounting literature. Once a swap is settled, the effective portion is amortized over theestimated life of the hedge item.

 

The Company utilizes derivative financialinstruments to manage its exposure to interest rate risks.  The Company does not enter into derivativefinancial instruments for trading purposes.

 

*FairValue Measurements*

 

As discussed in Note 2 to the unauditedcondensed consolidated financial statements, the Company adopted the provisionsof Statement 157 effective January 1, 2008.  The Company has determined that it utilizesobservable (Level 2) inputs in determining the fair value of its interest rateswap contracts which totaled $3.7 million at June 30, 2008.

 

*Income Taxes*

 

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

 

**ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed tomarket risks relating to fluctuations in interest rates.  Our objective of financial risk management isto minimize the negative impact of interest rate fluctuations on our earningsand cash flows.  Interest rate risk ismanaged through the use of a combination of fixed and variable interest debt aswell as the periodic use of interest rate collar contracts.

 

The followinginformation discusses the sensitivity to our earnings.  The range of changes chosen for this analysisreflects our view of changes which are reasonably possible over a one-yearperiod.  These forward-lookingdisclosures are selective in nature and only address the potential impacts fromfinancial instruments.  They do notinclude other potential effects which could impact our business as a result ofthese interest rate fluctuations.

 

*InterestRate Sensitivity Analysis*

 

At June 30,2008, we had debt totaling $405.0 million, comprised of $1.3 million ofvariable rate debt and $403.7 million of fixed rate debt, comprised of $135.0million of debt fixed through the interest rate swap agreements, $152.4 millionof Senior Notes, $111.5 million of AGHI Notes and $4.8 million of purchasedebt.  Holding other 

 

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variables constant(such as debt levels), the earnings and cash flow impact of a one-percentagepoint increase/ decrease in interest rates would have an unfavorable/ favorableimpact of less than $0.1 million.

 

*CreditRisk*

 

We are exposed tocredit risk on accounts receivable.  Weprovide credit to customers in the ordinary course of business and performongoing credit evaluations. Concentrations of credit risk with respect to trade receivables arelimited due to the number of customers comprising our customer base.  We currently believe our allowance for doubtfulaccounts is sufficient to cover customer credit risks.

 

**ITEM 4: CONTROLS 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-15(e) under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, the President and Chief Executive Officeralong with the Senior Vice President and Chief Financial Officer concluded thatthe disclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the periodic SEC filings.  Management determined that, as of June 30,2008, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A:RISK FACTORS**

 

The AGI SeniorCredit Facility matures on June 24, 2009. Although AGI is currently seeking to refinance or replace this creditfacility and has received a number of proposals from prospective lenders, therecan be no assurance that the AGI Senior Credit Facility will be refinanced orreplaced prior to its maturity.  It isalso expected that the interest rate payable on a new credit facility will behigher than the interest rates under the current AGI Senior Credit Facility.

 

**ITEM 5: 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: August 8, 2008 |       | Thomas F. Wolfe                  |
|                      |       | Senior Vice President and        |
|                      |       | Chief Financial Officer          |

 

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