**UNITED STATES**

##### **SECURITIES AND EXCHANGECOMMISSION**

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

###### ** **

**FORM10-Q**

** **

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

**TheSecurities Exchange Act of 1934**

 

| **For  Quarter Ended:** | ** ** | **Commission  File Number** |
|-------------------------|------------|-----------------------------|
| **September  30, 2007** | ** ** | **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 checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES   **x            **NO   o

 

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

 

Large accelerated filer   o                    Acceleratedfiler   o                    Non-acceleratedfiler   x

 

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

 

YES   o**            **NO   **x**

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 

| ** **                                      | ** ** | **Outstanding as of** |
|-------------------------------------------------|------------|-----------------------|
| **Class**                                       | ** ** | **November 14, 2007** |
| Common  Stock,    $.01 par value | ** ** | 100                   |

** **

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

** **

 

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** **

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

** **

**INDEX**

 
| **Part I. **Financial Information | ** **                                                                                                     |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------|
| ** **                             | ** **                                                                                                     |
|                                   | **Item 1: Financial Statements**                                                                               |   |
|                                   |                                                                                                           |   |
|                                   |                                                                                                           | Consolidated Balance Sheets as of  September 30, 2007 (unaudited) and December 31, 2006 |   |
|                                   |                                                                                                           |   |   |
|                                   |                                                                                                           | Unaudited Consolidated  Statements of Operations for the three months ended September 30, 2007 and  2006 |   |
|                                   |                                                                                                           |   |   |
|                                   |                                                                                                           | Unaudited Consolidated  Statements of Operations for the nine months ended September 30, 2007 and  2006 |   |
|                                   |                                                                                                           |   |   |
|                                   |                                                                                                           | Unaudited Consolidated  Statements of Cash Flows for the nine months ended September 30, 2007 and  2006 |   |
|                                   |                                                                                                           |   |   |
|                                   |                                                                                                           | Notes to Unaudited  Consolidated Financial Statements |   |
|                                   |                                                                                                           |   |
| ** **                             | **Item 2:   Management’s Discussion and Analysis of Financial Condition and  Results of Operations** |   |
| ** **                             | ** **                                                                                                     | ** ** |
|                                   | **Item  3:  Quantitative and Qualitative  Disclosures about Market Risk**                                 |   |
|                                   |                                                                                                           |   |
|                                   | **Item 4:  Controls and Procedures**                                                                      |   |
|                                   |                                                                                                           |
| **Part II.  Other  Information**  | * *                                                                                                       |
| * *                               | * *                                                                                                       |
| **Signatures**                         |                                                                                                           |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2007 and December 31, 2006

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **9/30/2007**   | ** ** | **12/31/2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 5,643      |           | $          | 15,238 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,360 in 2007 and $1,193 in 2006 |       | 24,160          |       | 27,199         |       |
| Inventories                                                                                     |       | 70,213          |       | 52,703         |       |
| Prepaid expenses and other assets                                                               |       | 19,389          |       | 13,006         |       |
| Deferred tax assets                                                                             |       | 3,316           |       | 3,203          |       |
| Total current assets                                                                            |       | 122,721         |       | 111,349        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 42,026          |       | 34,765         |       |
| INVESTMENT IN AFFILIATE                                                                         |       | 81,005          |       | 81,005         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,660           |       | 4,688          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 28,116          |       | 32,957         |       |
| GOODWILL                                                                                        |       | 144,429         |       | 144,429        |       |
| OTHER ASSETS                                                                                    |       | 1,391           |       | 1,704          |       |
| Total assets                                                                                    |       | $               | 424,348    |           | $          | 410,897 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 23,045     |           | $          | 32,577 |   |
| Accrued interest                                                                                |       | 1,983           |       | 5,936          |       |
| Accrued income taxes                                                                            |       | 1,163           |       | 1,736          |       |
| Accrued liabilities                                                                             |       | 38,092          |       | 35,687         |       |
| Deferred revenues and gains                                                                     |       | 73,771          |       | 62,906         |       |
| Current portion of long-term debt                                                               |       | 4,366           |       | 7,271          |       |
| Total current liabilities                                                                       |       | 142,420         |       | 146,113        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 38,706          |       | 37,183         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 390,870         |       | 381,510        |       |
| DEFERRED TAX LIABILITY                                                                          |       | 5,359           |       | 15,724         |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 17,883          |       | 3,386          |       |
|                                                                                            |       | 595,238         |       | 583,916        |       |
|                                                                                            |       |            |       |           |       |
| 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           |       | —         |       |
| Accumulated deficit                                                                             |       | (176,752        | )          | (173,020       | )          |
| Total stockholder’s deficit                                                                |       | (170,890        | )          | (173,019       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 424,348    |           | $          | 410,897 |   |

 

See notes to consolidated financial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                      | ** ** | **THREE MONTHS ENDED** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **9/30/2007**                    | ** ** | **9/30/2006** | ** ** |
|                                            |       |                             |       |   |   |
| REVENUES:                                       |       |                             |       |   |   |
| Membership services                             |       | $                                | 39,375     |   | $ | 34,128 |   |
| Publications                                    |       | 14,864                           |       | 14,289 |   |
| Retail                                          |       | 92,189                           |       | 81,623 |   |
|                                            |       | 146,428                          |       | 130,040 |   |
|                                            |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:                   |       |                             |       |   |   |
| Membership services                             |       | 26,244                           |       | 22,293 |   |
| Publications                                    |       | 10,867                           |       | 9,982 |   |
| Retail                                          |       | 55,812                           |       | 49,030 |   |
|                                            |       | 92,923                           |       | 81,305 |   |
|                                            |       |                             |       |   |   |
| GROSS PROFIT                                    |       | 53,505                           |       | 48,735 |   |
|                                            |       |                             |       |   |   |
| OPERATING EXPENSES:                             |       |                             |       |   |   |
| Selling, general and administrative             |       | 38,623                           |       | 36,000 |   |
| Depreciation and amortization                   |       | 4,820                            |       | 4,845 |   |
|                                            |       | 43,443                           |       | 40,845 |   |
|                                            |       |                             |       |   |   |
| INCOME FROM OPERATIONS                          |       | 10,062                           |       | 7,890 |   |
|                                            |       |                             |       |   |   |
| NON-OPERATING ITEMS:                            |       |                             |       |   |   |
| Interest income                                 |       | 161                              |       | 205 |   |
| Interest expense                                |       | (9,248                           | )          | (8,967 | ) |
| Debt extinguishment expense                     |       | —                           |       | (142 | ) |
| Other non-operating items, net                  |       | (51                              | )          | 24 |   |
|                                            |       | (9,138                           | )          | (8,880 | ) |
|                                            |       |                             |       |   |   |
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAX |       | 924                              |       | (990 | ) |
|                                            |       |                             |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT                    |       | (4,764                           | )          | 2,292 |   |
|                                            |       |                             |       |   |   |
| NET (LOSS) INCOME                               |       | $                                | (3,840     | ) | $ | 1,302 |   |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **9/30/2007**                   | ** ** | **9/30/2006** | ** ** |
|                                       |       |                            |       |   |   |
| REVENUES:                                  |       |                            |       |   |   |
| Membership services                        |       | $                               | 111,528    |   | $ | 104,588 |   |
| Publications                               |       | 57,082                          |       | 53,976 |   |
| Retail                                     |       | 259,489                         |       | 227,349 |   |
|                                       |       | 428,099                         |       | 385,913 |   |
|                                       |       |                            |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                            |       |   |   |
| Membership services                        |       | 72,205                          |       | 68,416 |   |
| Publications                               |       | 38,907                          |       | 36,195 |   |
| Retail                                     |       | 157,721                         |       | 136,497 |   |
|                                       |       | 268,833                         |       | 241,108 |   |
|                                       |       |                            |       |   |   |
| GROSS PROFIT                               |       | 159,266                         |       | 144,805 |   |
|                                       |       |                            |       |   |   |
| OPERATING EXPENSES:                        |       |                            |       |   |   |
| Selling, general and administrative        |       | 112,138                         |       | 101,362 |   |
| Depreciation and amortization              |       | 14,564                          |       | 14,217 |   |
|                                       |       | 126,702                         |       | 115,579 |   |
|                                       |       |                            |       |   |   |
| INCOME FROM OPERATIONS                     |       | 32,564                          |       | 29,226 |   |
|                                       |       |                            |       |   |   |
| NON-OPERATING ITEMS:                       |       |                            |       |   |   |
| Interest income                            |       | 518                             |       | 929 |   |
| Interest expense                           |       | (27,750                         | )          | (27,635 | ) |
| Debt extinguishment expense                |       | (775                            | )          | (835 | ) |
| Other non-operating items, net             |       | 42                              |       | 77 |   |
|                                       |       | (27,965                         | )          | (27,464 | ) |
|                                       |       |                            |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 4,599                           |       | 1,762 |   |
|                                       |       |                            |       |   |   |
| INCOME TAX EXPENSE                         |       | (4,581                          | )          | (22,578 | ) |
|                                       |       |                            |       |   |   |
| NET INCOME (LOSS)                          |       | $                               | 18         |   | $ | (20,816 | ) |

 

See notes to consolidated financial statements.

 

3

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **NINE MONTHS ENDED** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **9/30/2007**                   | ** ** | **9/30/2006** | ** ** |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                            |       |   |   |
| Net income (loss)                                                                         |       | $                               | 18         |   | $ | (20,816 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                              |       | 7,323                           |       | 7,661 |   |
| Amortization                                                                              |       | 7,241                           |       | 6,556 |   |
| Provision for losses on accounts receivable                                               |       | 904                             |       | 515 |   |
| Deferred compensation                                                                     |       | 440                             |       | 920 |   |
| Deferred tax expense                                                                      |       | 3,706                           |       | 21,885 |   |
| Loss (gain) on sale of property and equipment                                             |       | 73                              |       | (13 | ) |
| Loss on early extinguishment of debt                                                      |       | 775                             |       | 835 |   |
| Non-cash interest on AGHI Notes                                                           |       | 2,854                           |       | 7,912 |   |
| Accretion of original issue discount                                                      |       | 272                             |       | 194 |   |
| Changes in operating assets and liabilities                                               |       |                            |       |   |   |
| Accounts receivable                                                                       |       | 2,135                           |       | 5,100 |   |
| Inventories                                                                               |       | (17,510                         | )          | (6,129 | ) |
| Prepaid expenses and other assets                                                         |       | (5,788                          | )          | (5,423 | ) |
| Accounts payable                                                                          |       | (9,532                          | )          | 8,093 |   |
| Accrued and other liabilities                                                             |       | (2,248                          | )          | (3,082 | ) |
| Deferred revenues and gains                                                               |       | 11,582                          |       | 10,040 |   |
| Net cash provided by operating activities                                                 |       | 2,245                           |       | 34,248 |   |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                            |       |   |   |
| Capital expenditures                                                                      |       | (14,570                         | )          | (9,203 | ) |
| Net proceeds from sale of property and equipment                                          |       | 10                              |       | 124 |   |
| Additions to intangible assets                                                            |       | (14                             | )          | — |   |
| Acquisitions, net of cash received                                                        |       | (304                            | )          | (2,853 | ) |
| Repayment of loans receivable                                                             |       | 28                              |       | 25 |   |
| Net cash used in investing activities                                                     |       | (14,850                         | )          | (11,907 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                            |       |   |   |
| Dividends paid                                                                            |       | (3,750                          | )          | (3,287 | ) |
| Contribution from parent                                                                  |       | 5,861                           |       | — |   |
| Borrowings on long-term debt                                                              |       | 53,100                          |       | — |   |
| Payment of debt issue costs                                                               |       | (291                            | )          | (12 | ) |
| Principal payments of long-term debt                                                      |       | (51,910                         | )          | (33,992 | ) |
| Net cash provided by (used in) financing activities                                       |       | 3,010                           |       | (37,291 | ) |
|                                                                                      |       |                            |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                   |       | (9,595                          | )          | (14,950 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |       | 15,238                          |       | 25,061 |   |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |       | $                               | 5,643      |   | $ | 10,111 |   |

 

See notes to consolidated financial statements.

 

4

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** **

**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

** **

**(1) BASISOF PRESENTATION**

** **

*Principlesof Consolidation**–*The consolidated financial statements includedherein include the accounts of Affinity Group Holding, Inc. (“AGHI”), itswholly-owned subsidiary, Affinity Group, Inc. (“AGI”), and AGI’s subsidiaries(collectively the “Company”), presented in accordance with U.S. generallyaccepted accounting principles, and pursuant to the rules and regulations ofthe Securities and Exchange Commission. The parent company of AGHI is AGI Holding Corp. (“AGHC”), aprivately-owned corporation.

 

In the second quarter of 2006, AGHC received approval from the InternalRevenue Service to change its tax status from a Subchapter C corporation to aSubchapter S corporation (“S corporation”) to be effective as of January 1,2006.  The election for change in taxstatus to an S corporation included AGHC and all its subsidiaries with theexception of Camping World, Inc. and its wholly-owned subsidiaries, whichremain Subchapter C corporations. Pursuant to SFAS 109, “Accounting for Income taxes”, a change in taxstatus resulting from an S corporation election requires that all deferred taxaccounts be revalued upon formal approval of the S corporation status.  Accordingly, all deferred tax accounts ofAGHC and its subsidiaries, excluding Camping World, Inc. and its wholly-ownedsubsidiaries, were revalued to account for the tax effect for the change to theS corporation status in the second quarter of 2006.

 

Theseinterim consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2006 as filed with the Securities andExchange Commission.  In the opinion ofmanagement of the Company, these consolidated financial statements contain alladjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

 

**(2)RECENT ACCOUNTING PRONOUNCEMENTS**

** **

The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January1, 2007.  At the date of adoption, theCompany had $14.2 million of unrecognized tax benefits.  Accounting for the unrecognized tax benefitshad no affect on current period earnings or retained earnings as the liabilityhad been previously recorded and was reclassified from long-term deferred taxliabilities to other long-term liabilities. There would be no affect on the effective tax rate if the unrecognizedtax benefits were recognized.  TheCompany did not have any material increases in unrecognized tax benefits in thecurrent period and does not anticipate any material increases over the nexttwelve months.

 

5

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**(2)RECENT ACCOUNTING PRONOUNCEMENTS (continued)**

** **

During the thirdquarter of 2007 and for the nine months ended September 30, 2007, the Companyrecorded an additional $0.2 million and $0.6 million, respectively, of accruedinterest and penalties related to the unrecognized tax benefits.  The Company’s policy is to classify interestand penalties as income tax expense in the financial statements.

 

The Company andits subsidiaries file income tax returns in the U.S. and various states.  With few exceptions, the Company is no longersubject to U.S. federal, state, and local income tax examinations by taxauthorities for years before 2002.

 

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements.  This standard provides guidance for usingfair value to measure assets and liabilities. The standard also responds to investors’ requests for expandedinformation about the extent to which companies measure assets and liabilitiesat fair value, the information used to measure fair value, and the effect offair value measurements on earnings.  Thestandard applies whenever other standards require (or permit) assets orliabilities to be measured at fair value, but does not expand the use of fairvalue in any new circumstances.  SFAS No.157 is effective for financial statements issued for fiscal years beginningafter November 15, 2007, and interim periods within those fiscal years.  There are numerous previously issuedstatements dealing with fair values that are amended by SFAS No. 157.  We have not evaluated the impact, if any,that the adoption of SFAS No. 157 will have on our consolidated financial statements.

 

**(3)DISCLOSURES ABOUT 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 and Camp Club USA for recreationalvehicle (“RV”) owners, campers and outdoor vacationers, and the Golf Card Clubfor golf enthusiasts.  The Publicationssegment publishes a variety of publications for selected markets in therecreation and leisure industry, including general circulation periodicals,directories, and RV and powersports industry trade magazines, and producesoutdoor recreational consumer events. The Retail segment sells specialty retail merchandise and services forRV owners primarily through Camping World retail supercenters, mail ordercatalogs and its website.  For recentevents regarding the Retail segment, see Note 7 below.  The Company evaluates performance based onprofit or loss from operations before income taxes.

 

The reportablesegments are strategic business units that offer different products andservices.  They are managed separatelybecause each business requires different technology, management expertise andmarketing strategies.

 

6

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

 

TheCompany does not allocate income taxes or unusual items to segments.  Financial information by reportable businesssegment is summarized as follows (in thousands):

 
| ** **                                                         | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **THREE MONTHS ENDED SEPTEMBER 30, 2007** | ** ** | ** **               | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers                                   |       | $                        | 39,375     |             | $          | 14,864     |       | $                | 92,189     |   | $ | 146,428 |   |
| Loss on sale of property and equipment                             |       | —                   |       | —           |       | (78        | )          | (78              | )          |
| Interest income                                                    |       | 2,528                    |       | —           |       | 10         |       | 2,538            |       |
| Interest expense                                                   |       | —                   |       | 52               |       | 3,943      |       | 3,995            |       |
| Depreciation and amortization                                      |       | 859                      |       | 1,304            |       | 1,955      |       | 4,118            |       |
| Segment operating profit                                           |       | 11,998                   |       | 1,335            |       | 142        |       | 13,475           |       |
|                                                               |       |                     |       |             |       |       |       |             |       |
| **THREE MONTHS ENDED SEPTEMBER 30, 2006**                          |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers                                   |       | $                        | 34,128     |             | $          | 14,289     |       | $                | 81,623     |   | $ | 130,040 |   |
| Interest income                                                    |       | 1,746                    |       | —           |       | 1          |       | 1,747            |       |
| Interest expense                                                   |       | —                   |       | 77               |       | 3,140      |       | 3,217            |       |
| Depreciation and amortization                                      |       | 915                      |       | 1,111            |       | 2,102      |       | 4,128            |       |
| Segment operating profit (loss)                                    |       | 10,511                   |       | 2,105            |       | (367       | )          | 12,249           | )          |

 
| ** **                                                        | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **NINE MONTHS ENDED SEPTEMBER 30, 2007** | ** ** | ** **               | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers                                  |       | $                        | 111,528    |             | $          | 57,082     |       | $                | 259,489    |   | $ | 428,099 |   |
| Gain (loss) on sale of property and equipment                     |       | —                   |       | 5                |       | (78        | )          | (73              | )          |
| Interest income                                                   |       | 7,081                    |       | —           |       | 77         |       | 7,158            |       |
| Interest expense                                                  |       | —                   |       | 198              |       | 11,353     |       | 11,551           |       |
| Depreciation and amortization                                     |       | 2,656                    |       | 3,853            |       | 5,770      |       | 12,279           |       |
| Segment profit (loss)                                             |       | 35,942                   |       | 10,125           |       | (1,842     | )          | 44,225           |       |
|                                                              |       |                     |       |             |       |       |       |             |       |
| **NINE MONTHS ENDED SEPTEMBER 30, 2006**                          |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers                                  |       | $                        | 104,588    |             | $          | 53,976     |       | $                | 227,349    |   | $ | 385,913 |   |
| Gain on sale of property and equipment                            |       | —                   |       | 5                |       | 8          |       | 13               |       |
| Interest income                                                   |       | 4,685                    |       | —           |       | 7          |       | 4,692            |       |
| Interest expense                                                  |       | —                   |       | 258              |       | 10,119     |       | 10,377           |       |
| Depreciation and amortization                                     |       | 2,714                    |       | 3,190            |       | 6,108      |       | 12,012           |       |
| Segment profit (loss)                                             |       | 32,198                   |       | 11,289           |       | (4,174     | )          | 39,313           |       |

 

7

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

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the nine months ended September 30, (inthousands):

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **9/30/2007**                    | ** ** | **9/30/2006**                   | ** ** | **9/30/2007** | ** ** | **9/30/2006** | ** ** |
| **Income From Operations Before Income Taxes**    |       |                             |       |                            |       |   |   |   |   |
| Total profit for reportable segments              |       | $                                | 13,475     |                            | $          | 12,249 |   | $ | 44,225 |   | $ | 39,313 |   |
| Unallocated G & A expense                     |       | (4,219                           | )          | (5,088                          | )          | (13,727 | ) | (13,490 | ) |
| Unallocated depreciation and amortization expense |       | (702                             | )          | (717                            | )          | (2,285 | ) | (2,205 | ) |
| Unallocated interest income, net of intercompany  |       |                             |       |                            |       |   |   |   |   |
| elimination                                       |       | (2,377                           | )          | (1,542                          | )          | (6,640 | ) | (3,763 | ) |
| Unallocated interest expense, net of intercompany |       |                             |       |                            |       |   |   |   |   |
| elimination                                       |       | (5,253                           | )          | (5,750                          | )          | (16,199 | ) | (17,258 | ) |
| Unallocated debt restructure expense              |       | —                           |       | (142                            | )          | (775 | ) | (835 | ) |
| Income (loss) from operations before income taxes |       | $                                | 924        |                            | $          | (990 | ) | $ | 4,599 |   | $ | 1,762 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2007 and December 31,2006 (in thousands):

 
| ** **                                          | ** ** | **9/30/2007** | ** ** | **12/31/2006** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 182,676    |           | $          | 184,928 |   |
| Publications segment                                |       | 87,695        |       | 87,122         |       |
| Retail segment                                      |       | 250,317       |       | 225,680        |       |
| Total assets for reportable segments                |       | 520,688       |       | 497,730        |       |
| Capitalized finance costs not allocated to segments |       | 7,999         |       | 10,836         |       |
| Corporate unallocated assets                        |       | 3,496         |       | 6,596          |       |
| Elimination of intersegment receivable              |       | (107,835      | )          | (104,265       | )          |
| Total assets                                        |       | $             | 424,348    |           | $          | 410,897 |   |

 

**(4)STATEMENTS OF CASH FLOWS**

** **

Supplementaldisclosures of cash flow information for the nine months ended September 30 (inthousands):

 
| ** **                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid (received) during the period for: |       |     |       |     |       |
| Interest                                    |       | $        | 28,577     |     | $          | 24,240 |   |
| Income taxes                                |       | (194     | )          | 205      |       |
|                                             |            |          |            |          |            |  |  |

** **

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

 

In February 2007,the Company assumed $0.6 million of liabilities and issued $1.5 million of debtin connection with the acquisition of five RV and Sportsman Shows fromIndustrial Expositions, Inc.

 

8

----

 

**(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 for the ninemonths ended September 30, 2007 and 2006 and no indicators of impairment.

 

The Companycompleted two acquisitions in the first quarter of 2007.  These acquisitions have been accounted for asa purchase in accordance with SFAS No. 141, “Business Combinations,” andaccordingly, the acquired assets and liabilities have been recorded at fairvalue.  The allocations of purchase priceto assets and liabilities include various finite-lived assets and no additionalgoodwill.  The operations of each entityare included in the operations of the Company as of their respectiveacquisition dates.

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at September 30, 2007 (in thousands, except asnoted):

 
| ** **                                      | ** ** | **Weighted**                                                                    | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**                                                         | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)**                                                   | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                                                                            |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6              |       | $          | 31,466     |             | $          | (15,474    | )          | $ | 15,992 |   |
| Resort and golf course participation agreements |       | 23                  |       | 13,427     |       | (13,166          | )          | 261        |       |
| Non-compete and deferred consulting agreements  |       | 15                  |       | 18,830     |       | (13,580          | )          | 5,250      |       |
| Deferred financing costs                        |       | 7              |       | 13,956     |       | (7,343           | )          | 6,613      |       |
|                                            |       |                                                                            |       |       |       |             |       |       |       |
|                                            |       |                                                                            |       | $          | 77,679     |             | $          | (49,563    | )          | $ | 28,116 |   |

 

**(6) DEBT**

** **

Senior Subordinated Notes

 

In February 2004, AGI issued $200.0 million of 9% Senior SubordinatedNotes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  On June 8, 2006, AGI amendedits Amended and Restated Credit Agreement (“Senior Credit Facility”) to permitAGI to purchase up to $30.0 million of the Senior Subordinated Notes from timeto time as and when AGI determines.  AGIpurchased and retired $24.8 million, $4.9 million, and $0.2 million of theSenior Subordinated Notes in June, July and August of 2006, respectively.  On February 27, 2007, AGI amended its SeniorCredit Facility to permit AGI to repurchase up to an additional $50.0 millionof the Senior Subordinated Notes from time to time, as and when AGI determines,through the issuance of additional term loans of up to $50.0 million under theSenior Credit Facility.  On March 8,2007, AGI purchased $17.7 million of the Senior Subordinated Notes.  As of September 30, 2007, $152.4 million ofthe Senior Subordinated Notes remain outstanding.  Interest is payable on the remaining SeniorSubordinated Notes twice a year on February 15 and August 15.  AGI’s present and future restrictedsubsidiaries will guarantee the Senior Subordinated Notes with unconditionalguarantees of payment that

 

9

----

 

(**6) DEBT (continued)**

** **

will rank junior in right of payment to their existing and future seniordebt, but will rank equal in right of payment to their existing and futuresenior subordinated debt.

 

AGHI Notes

 

On March 24, 2005in 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 of 1933 inJune 2005.  The AGHI Notes are unsecuredobligations of AGHI and its subsidiaries have not guaranteed payment ofprincipal or interest on the AGHI Notes. Interest on the AGHI Notes is payable semi-annually on February 15 andAugust 15 commencing August 15, 2005 and the entire $88.2 million principalamount of the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February15, 2008, AGHI may elect to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date of the additional notes is March 15, 2010.  On August 15, 2005, February 15, 2006, August15, 2006, February 15, 2007 the Company issued additional notes in the amountof $3.8 million, $5.0 million, $5.3 million, and $5.6 million, respectively.  AGHI paid the interest on the notes dueAugust 15, 2007 from the proceeds of a $5.9 million contribution made by AGHI’sparent, AGHC.

 

**(7)RECENT EVENTS**

** **

On April 16, 2007,the Company entered into a stock purchase agreement with FreedomRoads HoldingCompany, LLC (“FreedomRoads”), an entity under common ownership with theCompany’s ultimate parent corporation, pursuant to which the Company will,subject to satisfaction of certain conditions, sell all of the outstandingstock of its wholly-owned subsidiary Camping World, Inc. (“Camping World”) toFreedomRoads for $175.8 million subject to certain adjustments (the “PurchasePrice”).  The transaction is expected toclose upon satisfaction of certain conditions stipulated under the StockPurchase Agreement dated April 16, 2007, including FreedomRoads raising thenecessary funds in the capital markets. The closing date has not been set because the current uncertainty in thecapital markets has prevented FreedomRoads from achieving a desirable capitalstructure to effect the acquisition.  Noassurance can be provided that the appropriate financing will be obtained.  The Purchase Price (including the portionpaid by the assumption and discharge on the closing date by FreedomRoads of theintercompany indebtedness owed by Camping World to the Company) is to be paid 75%in immediately available funds at closing and 25% under a subordinatedpromissory note bearing interest at 11.5% per annum.  The Company intends to use the net cashproceeds from the sale of Camping World to repay indebtedness outstanding underthe Company’s term notes issued under the senior secured floating rate notepurchase agreement dated June 24, 2003, as amended, and its revolving creditline under the credit agreement dated June 24, 2003, as amended, with seniorlenders (collectively the “Senior Secured Credit Facility”).  As of September 30, 2007, an aggregate of$129.0 million was outstanding under the term loans and $7.8 million wasoutstanding (including $7.3 million in letters of credit) under the revolvingcredit facility of the Senior Secured Credit Facility.

 

10

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**(7)RECENT EVENTS (continued)**

** **

On October 15,2007, the Company entered in to an interest rate swap effective October 31,2007 with a notional amount of $100.0 million. The interest rate swap carries a fixed interest rate of 5.135% andmatures on October 31, 2012.  The Companyentered into the interest rate swap to limit the effect of increases on ourfloating rate debt.

 

11

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**ITEM 2:**

 

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 Operations andexpresses the results from operations as a percentage of revenues and reflectsthe net increase (decrease) between periods:

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **9/30/2007**                    | ** ** | **9/30/2006** | ** ** | **Inc/(Dec)** | ** ** |
|                                              |       |                             |       |   |   |   |   |
| REVENUES:                                         |       |                             |       |   |   |   |   |
| Membership services                               |       | 26.9                             | %          | 26.2 | % | 15.4 | % |
| Publications                                      |       | 10.2                             | %          | 11.0 | % | 4.0 | % |
| Retail                                            |       | 62.9                             | %          | 62.8 | % | 12.9 | % |
|                                              |       | 100.0                            | %          | 100.0 | % | 12.6 | % |
|                                              |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                             |       |   |   |   |   |
| Membership services                               |       | 17.9                             | %          | 17.1 | % | 17.7 | % |
| Publications                                      |       | 7.4                              | %          | 7.7 | % | 8.9 | % |
| Retail                                            |       | 38.2                             | %          | 37.7 | % | 13.8 | % |
|                                              |       | 63.5                             | %          | 62.5 | % | 14.3 | % |
|                                              |       |                             |       |   |   |   |   |
| GROSS PROFIT                                      |       | 36.5                             | %          | 37.5 | % | 9.8 | % |
|                                              |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                               |       |                             |       |   |   |   |   |
| Selling, general and administrative               |       | 26.4                             | %          | 27.7 | % | 7.3 | % |
| Depreciation and amortization                     |       | 3.2                              | %          | 3.7 | % | (0.5 | )% |
|                                              |       | 29.6                             | %          | 31.4 | % | 6.4 | % |
|                                              |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS                            |       | 6.9                              | %          | 6.1 | % | 27.5 | % |
|                                              |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                              |       |                             |       |   |   |   |   |
| Interest income                                   |       | 0.1                              | %          | 0.2 | % | (21.5 | )% |
| Interest expense                                  |       | (6.3                             | )%         | (7.0 | )% | 3.1 | % |
| Debt extinguishment expense                       |       | —                           |       | (0.1 | )% | (100.0 | )% |
| Other non-operating items, net                    |       | —                           |       | — |   | (312.5 | )% |
|                                              |       | (6.2                             | )%         | (6.9 | )% | 2.9 | % |
|                                              |       |                             |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES |       | 0.6                              | %          | (0.8 | )% | 193.3 | % |
|                                              |       |                             |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT                      |       | (3.2                             | )%         | 1.8 | % | (307.9 | )% |
|                                              |       |                             |       |   |   |   |   |
| NET (LOSS) INCOME                                 |       | (2.6                             | )%         | 1.0 | % | (394.9 | )% |

 

12

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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 Operations andexpresses the results from operations as a percentage of revenues and reflectsthe net increase (decrease) between periods:

 
| ** **                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **9/30/2007**                   | ** ** | **9/30/2006** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                            |       |   |   |   |   |
| REVENUES:                                  |       |                            |       |   |   |   |   |
| Membership services                        |       | 26.1                            | %          | 27.1 | % | 6.6 | % |
| Publications                               |       | 13.3                            | %          | 14.0 | % | 5.8 | % |
| Retail                                     |       | 60.6                            | %          | 58.9 | % | 14.1 | % |
|                                       |       | 100.0                           | %          | 100.0 | % | 10.9 | % |
|                                       |       |                            |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                            |       |   |   |   |   |
| Membership services                        |       | 16.9                            | %          | 17.7 | % | 5.5 | % |
| Publications                               |       | 9.1                             | %          | 9.4 | % | 7.5 | % |
| Retail                                     |       | 36.8                            | %          | 35.4 | % | 15.5 | % |
|                                       |       | 62.8                            | %     | 62.5 | % | 11.5 | % |
|                                       |       |                            |       |   |   |   |   |
| GROSS PROFIT                               |       | 37.2                            | %          | 37.5 | % | 10.0 | % |
|                                       |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                            |       |   |   |   |   |
| Selling, general and administrative        |       | 26.2                            | %          | 26.2 | % | 10.6 | % |
| Depreciation and amortization              |       | 3.4                             | %          | 3.7 | % | 2.4 | % |
|                                       |       | 29.6                            | %          | 29.9 | % | 9.6 | % |
|                                       |       |                            |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 7.6                             | %          | 7.6 | % | 11.4 | % |
|                                       |       |                            |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                            |       |   |   |   |   |
| Interest income                            |       | 0.1                             | %          | 0.2 | % | (44.2 | )% |
| Interest expense                           |       | (6.4                            | )%         | (7.1 | )% | 0.4 | % |
| Debt extinguishment expense                |       | (0.2                            | )%         | (0.2 | )% | (7.2 | )% |
| Other non-operating items, net             |       | —                          |       | — |   | (45.5 | )% |
|                                       |       | (6.5                            | )%         | (7.1 | )% | 1.8 | % |
|                                       |       |                            |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 1.1                             | %          | 0.5 | % | 161.0 | % |
|                                       |       |                            |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (1.1                            | )%         | (5.9 | )% | (79.7 | )% |
|                                       |       |                            |       |   |   |   |   |
| NET INCOME (LOSS)                          |       | —                          |       | (5.4 | )% | 100.1 | % |

 

13

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**RESULTS OF OPERATIONS**

** **

**ThreeMonths Ended September 30, 2007**

**ComparedWith Three Months Ended September 30, 2006**

** **

*Revenues*

* *

Revenuesof $146.4 million for the third quarter of 2007 increased by $16.4 million, or12.6%, from the comparable period in 2006.

 

Membershipservices revenues of $39.4 million for the third quarter of 2007 increased by$5.2 million, or 15.4%, from the comparable period in 2006.  This revenue increase was largelyattributable to member events revenue of $1.9 million due to timing of the GoodSam Club annual rally, which occurred in the third quarter of 2007 versus thesecond quarter of 2006, a $1.2 million increase in extended vehicle warrantyprogram revenue due to the continued growth of contracts in force, includingwarranty sales through the growing network of Good Sam dealers, a $1.0 millionrevenue increase due to increased enrollment in Camping World President’s Club,Camp Club USA and the Good Sam Club, partially offset by enrollment decreasesin the Coast Club and the Golf Card Club, a $0.5 million revenue increase inemergency road service programs due to increased enrollment, a $0.4 millionincrease in marketing fee revenue from health and life insurance products and a$0.2 million increase from dealer program marketing revenue.

 

Publicationrevenues of $14.9 million for the third quarter of 2007 increased $0.6 million,or 4.0%, from the comparable period in 2006 primarily attributable to $0.8million of revenue associated with the acquisition of the publishing assets ofAmerican Guide Services, Inc. in August 2006, and $0.3 million of revenuerelating to an additional *Camping Life*issue during the quarter.  Theseincreases were partially offset by a $0.3 million decrease in revenueassociated with the elimination of *Cruising Rider*magazine and $0.2 million reduction in advertising revenue for *Motorhome Magazine*.

 

Retail revenues ofapproximately $92.2 million increased $10.6 million, or 12.9%, from thecomparable period in 2006.  Storemerchandise sales increased approximately $8.3 million over the third quarterof 2006 due to a $11.6 million revenue increase from the net addition of 32 newstores over the past twenty-one months, partially offset by a same store salesdecrease of $3.3 million, or 6.1%, compared to a 4.8% decrease in same storesales for the third quarter of 2006. 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 $2.1 million, including $0.8 million recorded during theperiod relating to the recognition of estimated gift card breakage.  Prior to third quarter of 2007 the Companyhad not recorded any unredeemed gift card sales into revenue.  In the third quarter the Company changed thestate of jurisdiction where gift cards will be administered and commencedaccounting for estimated breakage of gift cards under the “redemption ratemethod.”  In addition, product extendedwarranty sales increased $0.3 million and mail order sales decreased $0.1million.

 

14

----

 

*CostsApplicable to Revenues*

* *

Costsapplicable to revenues totaled $92.9 million for the third quarter of 2007, anincrease of $11.6 million, or 14.3%, from the comparable period in 2006.

 

Membershipservices costs and expenses of $26.2 million increased $4.0 million, or 17.7%,from the comparable period in 2006.  Thisincrease consisted of a $1.9 million increase in member events costs primarilydue to timing of the Good Sam Club annual rally, which occurred in the thirdquarter of 2007 versus the second quarter of 2006, $1.2 million of incrementalcosts associated with increased extended vehicle warranty program revenue andemergency roads service revenue, including incremental marketing and overheadcosts associated with the growing network of Good Sam dealers, a $0.5 millionincrease in other marketing costs, a $0.2 million increase in program costsassociated with increased marketing fee revenue from health and life insuranceproducts and a $0.2 million increase in dealer marketing program costs.

 

Publicationcosts and expenses of approximately $10.9 million for the third quarter of 2007increased $0.9 million, or 8.9%, from the comparable period in 2006.  This increase was attributable to $0.7million of additional costs from the recently acquired American Guide Servicesgroup, a $0.2 million increase in *Motorhome Magazine*marketing costs, a $0.2 million increase in event-related expenses and $0.1million of additional costs related to an additional issue of *Camping Life*magazine. These increases were partially offset by reduced costs of $0.3 millionrelated to discontinuing *Cruising Rider*magazine.

 

Retailcosts applicable to revenues increased approximately $6.7 million, or 13.8%, to$55.8 million primarily as a result of 32 new stores opened over the pasttwenty-one months.  The retail grossprofit margin of 39.5% for the third quarter of 2007 decreased from 39.9% forthe comparable period in 2006 primarily due to a shift in product mix toslightly lower margin products, and margin compression caused by a combinationof competitive pricing and higher unit costs.

 

*OperatingExpenses*

* *

Selling,general and administrative expenses of approximately $38.6 million for thethird quarter of 2007 increased $2.6 million compared to the third quarter of2006.  This increase was due to anincrease in retail selling and general and administrative expenses of approximately$3.3 million consisting of increases in selling, real property and laborexpenses primarily due to new store openings, partially offset by $0.6 millionof reduced deferred executive compensation and a $0.1 million reduction inmiscellaneous general and administrative expenses.

 

Depreciationand amortization expense of $4.8 million remained unchanged from the prioryear.

 

15

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*Incomefrom Operations*

* *

Incomefrom operations for the third quarter of 2007 totaling $10.1 million increased$2.2 million compared to the third quarter of 2006.  This increase was primarily due to increasedgross profit for retail and membership services operations of $3.8 million and$1.3 million, respectively, partially offset by increased operating expenses of$2.6 million and reduced gross profit for the publications operations of $0.3million.

 

*Non-OperatingItems*

* *

Non-operatingitems of approximately $9.1 million for the third quarter of 2007 increased$0.3 million compared to the third quarter of 2006.  This increase was primarily due to a $0.3million increase in interest expense resulting from higher term loan balances.

 

*Incomebefore Income Taxes*

* *

Incomebefore income taxes for the third quarter of 2007 was $0.9 million, or $1.9million higher than the third quarter of 2006. This increase was attributable to the $2.2 million increase in incomefrom operations mentioned above partially offset by a $0.3 million increase ininterest expense.

 

*IncomeTax (Expense) Benefit*

* *

TheCompany recorded a $4.8 million income tax expense for the third quarter of2007, compared to a $2.3 million income tax benefit for the third quarter of2006.  The expense increase was primarilydue to the Company’s increase in its valuation allowance of $4.2 million forthe third quarter of 2007 as it was determined that the Company would haveinsufficient taxable income in the current, carryback, or carryforward periodsunder the tax laws to realize the future tax benefit of its deferred taxassets. The change was also due to AGHC’s S corporation change of tax statuselection effective for the second quarter of 2006, which included AGI and allits subsidiaries, with the exception of Camping World, Inc. and itswholly-owned subsidiaries which will remain Subchapter C corporations.  Asa result, all deferred tax assets and liabilities were revalued with theexception of those related to Camping World, Inc. and its wholly-ownedsubsidiaries and other potential built-in gains.

 

# *Net (Loss) Income*

# * *

Netloss in the third quarter of 2007 was approximately $3.8 million compared tonet income of $1.3 million for the same period in 2006 mainly due to thereasons discussed above.

 

*SegmentProfit (Loss)*

* *

Segment profit of$13.5 million for the third quarter of 2007 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)increased $1.2 million, or 10.0%, from the comparable period in 2006.

 

Membershipservices segment profit of approximately $12.0 million for the third quarter of2007 increased $1.5 million, or 14.1%, from the comparable period in 2006.  This increase

 

16

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was largelyattributable to a $1.0 million increase in profit from emergency road serviceproducts, a $0.3 million increase in profit from health and life insuranceproducts, and a $0.2 million increase in profit from the extended vehiclewarranty programs.

 

Publicationsegment profit of $1.3 million for the third quarter of 2007 decreased $0.8million, or 36.6%, from the comparable period in 2006.  This decrease was largely attributed to $0.5million of additional general and administrative expenses related to theconsumer shows acquired over the last 21 months and a $0.3 million decrease inprofit for *Motorhome Magazine.*

 

Retail segmentprofit increased $0.5 million, or 138.7% from the third quarter of 2006 to aprofit of $0.2 million in 2007.  This increase in segment profit resultedprimarily from a $4.6 million increase in gross profit margin, partiallyoffset by a $3.3 million increase in selling,general and administrative expenses primarily related to the increase in newstores, and an $0.8 million increase in interest expense.

 

**NineMonths Ended September 30, 2007**

**ComparedWith Nine Months Ended September 30, 2006**

** **

*Revenues*

* *

Revenuesof $428.1 million for the first nine months of 2007 increased by $42.2 million,or 10.9%, from the comparable period in 2006.

 

Membershipservices revenues of $111.5 million for the first nine months of 2007 increasedby $6.9 million, or 6.6%, from the comparable period in 2006.  This revenue increase was largelyattributable to a $3.1 million increase in extended vehicle warranty programrevenue due to the continued growth of contracts in force, including warrantysales through the growing network of Good Sam dealers, a $2.1 million revenueincrease in membership services primarily due to increased enrollment in theCamping World President’s Club and the Camp Club USA, partially offset byreduced enrollment in the Golf Card Club and Coast to Coast Club, a $1.1million revenue increase in emergency road service programs due to increasedenrollment, a $0.6 million increase in marketing fee revenue from health andlife insurance products, and a $0.6 million increase in dealer programmarketing revenue.  These increases werepartially offset by a $0.6 million revenue reduction due to the elimination ofthe RV Today television program.

 

Publicationrevenues of $57.1 million for the first nine months of 2007 increased $3.1million, or 5.8%, from the comparable period in 2006 primarily attributable to $2.4million of revenue associated with the acquisition of the publishing assets ofAmerican Guide Services, Inc. in August 2006 and $2.1 million of revenueassociated with consumer shows acquired in the last twenty-one months.  These increases were partially offset by a$0.5 million decrease in campground atlas revenue, which is scheduled for itsbi-annual update and reprint in 2008, a $0.4 million decrease in advertisingrevenue for *Motorhome Magazine*, a $0.3 million revenuedecrease for the motorcycle magazine group due to the elimination of the *Cruising Rider* title partially offset by an advertisingrevenue increase for *Rider Magazine*,and a $0.2 million revenue decrease due to seven fewer issues of *Snow Week* magazine in 2007.

 

17

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Retailrevenues of $259.5 million increased approximately $32.2 million, or 14.1%,from the comparable period in 2006. Store merchandise sales for the first nine months of 2007 increasedapproximately $25.6 million over the comparable period in 2006 due to a $32.1million revenue increase from a net addition of 32 new stores over the pasttwenty-one months, partially offset by a same store sales decrease of $6.6million, or 4.2%, compared to a 5.0% decrease in same store sales for the firstnine months of 2006.  Same store salecalculations for a given period include only those stores that were open bothat the end of that period and at the beginning of the preceding fiscalyear.  Supplies and other sales increased$4.3 million, including $0.8 million recorded during the period relating to therecognition of estimated gift card breakage. In addition, installation and service work increased $1.1 million, productextended warranty sales increased $1.1 million and mail order sales increased$0.1 million.

 

*CostsApplicable to Revenues*

* *

Costsapplicable to revenues totaled $268.8 million for the first nine months of2007, an increase of $27.7 million, or 11.5%, from the comparable period in2006.

 

Membershipservices costs and expenses of $72.2 million increased $3.8 million, or 5.5%,from the comparable period in 2006.  Thisincrease was attributable to $2.4 million of additional costs associated withincreased extended vehicle warranty program revenue, including incrementalmarketing and overhead costs associated with the growing network of Good Samauthorized dealers, $0.5 million of additional dealer program marketing costs,$0.4 million of additional miscellaneous overhead costs, $0.3 million of additionalprogram costs associated with increased marketing fee revenue from health andlife insurance products, and $0.3 million of net additional membership servicescosts associated with increased membership in the Camping World President’sClub and Camp Club USA, partially offset by reduced membership in the CoastClub and the Golf Card Club.  Thisdecrease was partially offset by $0.6 million of reduced costs resulting fromthe elimination of the RV Today television program.

 

Publicationcosts and expenses of $38.9 million for the first nine months of 2007 increased$2.7 million, or 7.5%, from the comparable period in 2006.  This increase was attributable to $2.4million of incremental costs from the recently acquired Affinity Guest ServicesGroup, and $1.6 million of costs associated with the recently acquired consumershows, partially offset by a $0.6 million reduction in costs related to theelimination of the *Cruising Rider*title, reduced campground atlas costs of $0.4 million resulting from reducedsales, and reduced costs of $0.3 million associated with fewer issues of *Snow Week* magazine.

 

Retailcosts applicable to revenues increased approximately $21.2 million, or 15.5%,to $157.7 million primarily as a result of 32 new stores opened over the pasttwenty-one months.  The retail grossprofit margin of 39.2% for the first nine months of 2007 decreased from 40.0%for the comparable period in 2006 primarily due to a shift in product mix toslightly lower margin products and margin compression caused by a combinationof competitive pricing and higher unit costs.

 

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*OperatingExpenses*

* *

Selling,general and administrative expenses of approximately $112.1 million for thefirst nine months of 2007 increased $10.8 million compared to the first ninemonths of 2006.  This increase waslargely attributable to an increase in retail selling and general andadministrative expenses of approximately $9.9 million consisting of increasesin selling, labor and real property expenses primarily due to new storeopenings and other marketing programs, $0.9 million of arbitration expenses inconnection with our asserted claim to a right of first refusal in connectionwith the sale of General Motors Acceptance Corporation, the insurance providerfor the RV vehicle insurance offered by our Membership Services segment, whichclaim was rejected by the arbitration panel, and $0.8 million of costsassociated with the recently acquired consumer shows.  These increases were partially offset by a$0.5 million reduction in deferred executive compensation and a $0.3 millionreduction in other general and administrative expenses.

 

Depreciationand amortization expense of $14.6 million increased approximately $0.3 millionover the prior year primarily due to increased amortization of intangibleassets associated with the recent acquisitions.

 

*Incomefrom Operations*

* *

Incomefrom operations for the first nine months of 2007 totaling $32.6 millionincreased $3.3 million compared to the first nine months of 2006.  This increase was primarily due to increasedgross profit for retail, membership services and publications operations of$10.9 million, $3.1 million and $0.4 million, respectively, partially offset byincreased operating expenses of $11.1 million.

 

*Non-OperatingItems*

* *

Non-operatingitems of approximately $28.0 million for the first nine months of 2007increased approximately $0.5 million compared to the same period in 2006.  This increase was primarily due to a $0.4million decrease in interest income and a $0.1 million increase in interestexpense in 2007.

 

*Incomebefore Income Taxes*

* *

Incomebefore income taxes for the first nine months of 2007 was $4.6 million, or $2.8million higher than the first nine months of 2006.  This increase was attributable to the $3.3million increase in income from operations for the current period partiallyoffset by $0.5 million of increased non-operating items.

 

*IncomeTax Expense*

* *

TheCompany recorded approximately $4.6 million of income tax expense for the firstnine months of 2007, compared to a $22.6 million income tax expense for thefirst nine months of 2006.  This expensedecrease was primarily due to AGHC’s S corporation change of tax statuselection effective for the second quarter of 2006, which included AGI and allits subsidiaries, with the exception of Camping World, Inc. and itswholly-owned subsidiaries

 

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whichwill remain Subchapter C corporations. As a result, all deferred tax assets and liabilities were revalued withthe exception of those related to Camping World, Inc. and its wholly-ownedsubsidiaries and other potential built-in gains.  Further, the company increased its valuationallowance by $4.2 million for the third quarter of 2007 as it was determinedthat the Company would have insufficient taxable income in the current,carryback, or carryforward periods under the tax laws to realize the future taxbenefit of its deferred tax assets.

 

# *Net Income (Loss)*

# * *

Netincome for the first nine months of 2007 was $0.0 million compared to a netloss of $20.8 million for the same period in 2006 mainly due to the reasonsdiscussed above.

 

*SegmentProfit (Loss)*

* *

Segment profit of$44.2 million for the first nine months of 2007 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)increased $4.9 million, or 12.5%, from the comparable period in 2006.

 

Membershipservices segment profit of approximately $35.9 million for the first ninemonths of 2007 increased $3.7 million, or 11.6%, from the comparable period in2006.  This increase was largelyattributable to a $2.7 million increase in profit from emergency road serviceproducts, a $0.5 million increase in profit from the extended vehicle warranty programs,a $0.4 million increase in profit from health and life insurance products, anda $0.4 million increase in profit from Camp Club USA, partially offset by a$0.3 million loss for the Coast Club and Golf Card Club.

 

Publicationsegment profit of $10.1 million for the first nine months of 2007 decreasedapproximately $1.2 million, or 10.3%, from the comparable period in 2006.  This decrease was largely attributed to a$0.6 million decrease in profit for *Motorhome Magazine*due to their reduced advertising revenue and increased marketing costs, and a$0.6 increase in amortization of intangible assets associated with the consumershows acquired over the last twenty-one months.

 

Retail segmentloss decreased $2.3 million, or 55.9% from the first nine months of 2006 to aloss of approximately $1.8 million in the first nine months of 2007.  This decrease in segment loss resulted primarily from a $13.1 millionincrease in gross profit margin, anda $0.3 million decrease in depreciation expenses, partially offset by a $9.9 million increase in selling, general andadministrative expenses primarily related to the increase in new stores and a$1.2 million increase in interest expense.

 

**LIQUIDITYAND CAPITAL RESOURCES**

** **

TheCompany has historically operated with a working capital deficit.  The working capital deficit as of September30, 2007 and December 31, 2006 was $19.7 million and $34.8 million,respectively.  The primary reason for theworking capital deficit is the deferred revenue and gains reported under currentliabilities in the amount of $73.8 million and $62.9 million as of September30, 2007 and December 31, 2006, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life

 

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ofthe membership.  The Company uses netproceeds from this deferred membership revenue to lower its long-termborrowings.  Management believes thatfunds generated by operations together with available borrowings under theCompany’s revolving credit line will be sufficient to meet all of the Company’sdebt service requirements, capital requirements and working capital needs overthe next twelve months.  Further,management believes that the change in the tax status to a Subchapter Scorporation in 2006 for the Company and all its subsidiaries, with theexception of Camping World, Inc. and its wholly-owned subsidiaries, has notlimited the Company’s ability to issue debt through the capital markets but maylimit the ability of the Company to raise funds in the equity market.

 

*Contractual Obligations and Commercial Commitments*

* *

The following table reflects our contractual obligations and commercialcommitments at September 30, 2007.  Thistable includes principal and future interest due under our debt agreementsbased on interest rates as of September 30, 2007 and assumes debt obligationswill be held to maturity.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Total**                                 | ** ** | **Balance of  2007** | ** ** | **2008 and  2009** | ** ** | **2010 and  2011** | ** ** | **Thereafter** | ** ** |
|                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |       | $                                         | 535,722    |   | $ | 8,440 |   | $ | 199,486 |   | $ | 74,159 |   | $ | 253,637 |   |
| Operating lease obligations        |       | 183,737                                   |       | 4,521 |   | 33,618 |   | 30,538 |   | 115,060 |   |
| Deferred compensation              |       | 4,430                                     |       | 853 |   | 3,137 |   | 294 |   | 146 |   |
| Standby letters of credit          |       | 7,254                                     |       | 6,254 |   | 1,000 |   | — |   | — |   |
| Grand total                        |       | $                                         | 731,143    |   | $ | 20,068 |   | $ | 237,241 |   | $ | 104,991 |   | $ | 368,843 |   |

 

On June 24, 2003,AGI entered into an Amended and Restated Credit Agreement and a Senior SecuredFloating Rate Note Purchase Agreement (as amended, the “AGI Senior CreditFacility”).  The AGI Senior CreditFacility provides for a revolving credit facility of $35.0 million and termloans in the aggregate of $140.0 million. As of September 30, 2007, $129.0 million was outstanding under the termloans and $0.5 million was outstanding under the revolving creditfacility.  Reborrowings under the termloans are not permitted.  The interest onborrowings under the AGI Senior Credit Facility is at variable rates based onthe ratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 2.50% over the stated rates. As of September 30, 2007, the average interest rates on the term loansand the revolving credit facility were 7.63% and 10.00%, respectively, andpermitted borrowings under the undrawn revolving facility were $27.2million.  AGI also pays a commitment feeof 0.5% per annum 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 AGI SeniorCredit Facility may be utilized for borrowings or letters of credit; however, amaximum of $12.5 million may be allocated to such letters of credit.  As of September 30, 2007, AGI had letters ofcredit in the aggregate amount of $7.3 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.

 

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In February 2004,AGI issued $200.0 million aggregate principal amount of 9% Senior SubordinatedNotes 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, AGIamended its Senior Credit Facility to revise the definition of ConsolidatedFixed 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 parent, AGHI, until such time that AGHIpays interest on its 10 7/8% Senior Notes in cash instead of by the issuance ofadditional notes.  Further, the Companyamended the Senior Credit Facility’s covenant restrictions with affiliates topermit a joint venture arrangement between Camping World and FreedomRoads, anaffiliate of the Company.

 

On February 27, 2007, AGIamended its Senior Credit Facility to extend the maturity of the revolving creditfacility from June 24, 2008 to June 24, 2009, increase the consolidated seniorleverage ratio from 1.9 to 3.5 times EBITDA, as defined, and fix theconsolidated total leverage ratio at 5.0 times EBITDA, as defined.  Further, the amendment permits AGI torepurchase up to an additional $50.0 million of the Senior Subordinated Notesfrom time to time as and when AGI determines through the issuance of additionalterm loans of up to $50.0 million.  Anyloan amounts not used for the repurchase of the Senior Subordinated Notes maybe used for acquisitions or repay revolving credit loans.

 

On March 8, 2007, the AGIpurchased $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 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 Senior Credit Facility.  As of September 30, 2007, $152.4 million ofSenior Subordinated Notes remain outstanding.

 

On October 15, 2007, theCompany entered in to an interest rate swap effective October 31, 2007 with anotional amount of $100.0 million.  Theinterest rate swap carries a fixed interest rate of 5.135% and matures onOctober 31, 2012.  The Company enteredinto the interest rate to limit the effect of increases on our floating ratedebt.

 

The AGI Indenture,pursuant to which the AGI Senior Subordinated Notes were issued, and the AGISenior Credit Facility contain certain restrictive covenants relating to, butnot limited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  AGI was in compliance with all debt covenantsat September 30, 2007.

 

On March 24, 2005 in aprivate placement, AGHI issued $88.2 million principal amount of its 10-7/8%senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 inJune 2005.  The AGHI Notes are unsecuredobligations of the Company and its

 

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subsidiaries have notguaranteed payment 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 theentire $88.2 million principal amount of the AGHI Notes are due in full onFebruary 15, 2012.  For interest paymentson and prior to February 15, 2008, AGHI may elect to pay interest on the AGHINotes in cash or by the issuance of additional notes of the same tenor as theAGHI Notes, except the maturity date is March 15, 2010.  AGI has not paid any dividends to AGHI tofund payment of interest on the AGHI Notes and AGHI made the interest paymentsdue on August 15, 2005, February 15, 2006, August 15, 2006, and February 15,2007 through the issuance of additional notes. The company paid the interest on the notes due August 15, 2007 fromproceeds of a $5.9 million contribution made by AGHI’s parent, AGHC.  If the source of the cash payment of the AGHINotes is dividends from AGI, its wholly-owned subsidiary, there are certainrestrictions on the payment of dividends under the AGI Senior Credit Facilityand the AGI Indenture.

 

The AGHI Indenturecontains certain restrictive covenants relating to, but not limited to,mergers, changes in the nature of the business, acquisitions, additionalindebtedness, sale of assets, investments, and the payment of dividends subjectto certain limitations and minimum operating covenants.  AGHI was in compliance with all debtcovenants at September 30, 2007.

 

The Company contributed the net proceedsfrom the issuance of the AGHI Notes, approximately $81.0 million, to AGI and inturn, AGI made an equity contribution to its wholly-owned subsidiary, CampingWorld.  Camping World then made an equitycapital contribution in the same amount to its wholly-owned subsidiary, CWI,Inc. (“CWI”).  CWI created a newwholly-owned subsidiary named CWFR Capital Corp., a Delaware corporation (“CWFR”)which is an “unrestricted subsidiary” under the AGHI Notes, and the AGIIndenture.  Since CWFR is an unrestrictedsubsidiary, its operations are not restricted by either the AGI Indenture orthe AGHI Notes.  CWI made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World. CWFR used the proceeds from the equity capital contribution to acquire apreferred membership interest in FreedomRoads, a Minnesota limited liabilitycompany owned 90% by The Stephen Adams Living Trust, which also indirectly owns97.4% of the outstanding capital stock of AGHC and indirectly AGHI.

 

In February 2006, AGIProductions, Inc., a subsidiary of Ehlert Publishing, Inc., acquired theconsumer shows and related assets of H & S Productions, LLC for $2.5million.  As part of the purchase, theCompany issued $0.4 million of debt and assumed $1.0 million ofliabilities.  In August 2006, TL Enterprises,Inc. acquired the consumer park guides and related assets of American GuideServices, Inc. for $1.0 million.  As partof the purchase, the Company issued $0.1 million of debt and assumed $0.3million of liabilities.  In September2006, AGI Productions, Inc. acquired the consumer shows and related assets ofApple Rock Advertising and Promotions, Inc. for $1.5 million.  As part of the purchase, the Company issued$0.5 million of debt and assumed $0.4 million of liabilities.

 

In January 2007, AGI Productions,Inc. acquired a consumer show from MAC Events, Inc. for $0.5 million.  As part of the purchase, the Company assumed$0.3 million of liabilities.  In February2007, AGI Productions, Inc. acquired consumer shows from Industrial ExpositionInc.

 

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for $1.9 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.6 million of liabilities.

 

For the nine months endedSeptember 30, 2007, the Company incurred $0.4 million of deferred executivecompensation expense under the phantom stock agreements and made payments of$2.5 million under the terms of the vested phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next five years.  Phantom stock payments of $0.9 million arescheduled to**be made for the remainder of 2007.

 

Capital expenditures forthe first nine months of 2007 totaling $14.6 million increased $5.4 millionfrom the first nine months of 2006 primarily due to the addition of fifteen newretail stores.  Additional capitalexpenditures of $3.6 million are anticipated for the balance of 2007 primarilyfor two new retail stores, relocation of one retail store, existing retailstore upgrades, information technology, inventory system replacement, andcomputer hardware and software upgrades and enhancements.

 

**CRITICAL ACCOUNTING POLICIES**

 

*General*

 

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

 

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

 

*RevenueRecognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and internet orders, or when services are provided to customers.  Publication advertising and newsstand sales,net of estimated provision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Advances onthird party credit card fee revenues are deferred and recognized based

 

24

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primarily on apercentage of credit card receivables held by third parties.  Membership revenue is generated from annual,multi-year and lifetime memberships.  Therevenue and expenses associated with these memberships are deferred andamortized over the membership period. For lifetime memberships, an 18-year period is used, which is the actuariallydetermined estimated fulfillment period. Promotional expenses, consisting primarily of direct mail advertising,are deferred and expensed over the period of expected future benefit.  Renewal expenses are expensed at the timerelated materials are mailed.  Recognizedrevenues and profit are subject to revisions as the membership progresses tocompletion.  Revisions to membershipperiod estimates would change the amount of income and expense amortized infuture accounting periods.

 

*A**ccounts Receivable*

 

The Company estimates thecollectability of its trade receivables. A considerable amount of judgment is required in assessing the ultimaterealization of these receivables including the current credit-worthiness of eachcustomer.  Changes in required reserveshave been recorded in recent periods and may occur in the future due to themarket environment.

 

*Inventory*

 

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

 

*Long-Lived Assets*

 

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

 

Long-lived assets, suchas property, plant and equipment and purchased intangible assets with finitelives are evaluated for impairment whenever events or changes in circumstancesindicate the carrying value of an asset may not be recoverable in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  The Company assesses the fairvalue of the assets based on the future cash flow the assets are expected togenerate and recognize an impairment loss when estimated undiscounted futurecash flow expected to result from the use of the asset plus net proceeds expectedfrom disposition of the asset (if any) are less than the carrying value of theasset.  When an impairment is identified,the Company reduces the carrying amount of the asset to its estimated fairvalue based on a discounted cash flow approach or, when available andappropriate, comparable market values. The Company determined there were no indicators of impairment oflong-lived assets as of December 31, 2006 or September 30, 2007.

 

The Company has evaluatedthe remaining useful lives of its finite-lived purchased intangible assets todetermine if any adjustments to the useful lives were necessary or if any ofthese

 

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assets had indefinitelives and were therefore not subject to amortization.  The Company determined that no adjustments tothe useful lives of its finite-lived purchased intangible assets werenecessary.  The finite-lived purchasedintangible assets consist of membership customer lists, resort and golf courseagreements, non-compete and deferred consulting agreements and deferredfinancing costs which have weighted average useful lives of approximately 6years, 23 years, 15 years and 7 years, respectively.

 

*Indefinite-Lived IntangibleAssets*

 

The Company evaluatesindefinite-lived intangible assets for impairment at least annually or whenevents indicate that an impairment exists in accordance with SFAS No. 142, “Goodwilland Other Intangibles.”  The impairmenttest for goodwill and other indefinite-lived intangible assets is calculated annuallyusing fair value measurement techniques.

 

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

 

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

 

*IncomeTaxes*

 

Significantjudgment is required in determining the Company’s tax provision and inevaluating its tax positions.  The Company establishes accruals forcertain tax contingencies when, despite the belief that the Company’s tax returnpositions are fully supported, the Company believes that certain positions maybe challenged and that the Company’s positions may not be fullysustained.  The tax contingency accruals are adjusted in light of changingfacts and circumstances, such as the progress of tax audits, case law andemerging legislation.  The Company’s taxprovision includes the impact of tax contingency accruals and changes to theaccruals, including related interest and penalties, as considered appropriateby management.

 

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**ITEM3:  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

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

 

The following information discusses the sensitivityto our earnings.  The range of changeschosen for this analysis reflects our view of changes which are reasonablypossible over a one-year period.  Theseforward-looking disclosures are selective in nature and only address thepotential impacts from financial instruments. They do not include other potential effects which could impact ourbusiness as a result of these interest rate fluctuations.

 

*Interest Rate Sensitivity Analysis*

 

At September 30, 2007, we had debt totaling $395.2million, comprised of $29.5 million of variable rate debt and $365.7 million offixed rate debt.  Holding other variablesconstant (such as debt levels), the earnings and cash flow impact of aone-percentage point increase/ decrease in interest rates would have anunfavorable/ favorable impact of approximately $0.3 million.

 

*Credit Risk*

 

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

 

**ITEM 4:CONTROLS AND PROCEDURES**

 

Within 90 days prior tothe filing of this Quarterly Report on Form 10-Q, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the President and Chief Executive Officer and the SeniorVice President and Chief Financial Officer, of the effectiveness of the designand operation of the Company’s disclosure controls and procedures pursuant toRegulation 13a-14 under the Securities Exchange Act of 1934.  Based upon that evaluation, the President andChief Executive Officer along with the Senior Vice President and ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in timely alerting them to material information relating to the Company(including its consolidated subsidiaries) required to be included in theperiodic SEC filings.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date the Companycarried out its evaluation.

 

**PARTII:  OTHER INFORMATION**

 

Items 1 through 5 havebeen omitted since no events occurred with respect to these items.

 

Item 6.                                                             Exhibitsand Reports on Form 8-K

 

(a)                                  Exhibits.

 
| Exhibit 10.28 – | Agreement with Brickell  Financial Services Motor Club, Inc. dated September 28, 2007.* |
|----------------------|-----------------------------------------------------------------------------------------|
|                 |                                                                                    |
| Exhibit 31.1 –  | Certification of Chief  Executive Officer (Section 302 Certification).                  |
|                 |                                                                                    |
| Exhibit 31.2 –  | Certification of Chief  Financial Officer (Section 302 Certification).                  |
|                 |                                                                                    |
| Exhibit 32.1 –  | Certification of Chief  Executive Officer (Section 906 Certification).                  |
|                 |                                                                                    |
| Exhibit 32.2 –  | Certification of Chief  Financial Officer (Section 906 Certification).                  |

 

(b)           Reports on Form 8-K.

 

          None.

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* Deletedinformation has been omitted pursuant to a confidentiality request submitted tothe commission.

 

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**SIGNATURES:**

 

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

 

 
| ** **              | ** ** | **AFFINITY GROUP HOLDING, INC.** |
|-------------------------|------------|----------------------------------|
|                    |       |                             |
|                    |       |                             |
|                    |       | /s/ Thomas F. Wolfe              |   |
| Date: November 14, 2007 |       | Thomas F. Wolfe                  |
|                    |       | Senior Vice President  and       |
|                    |       | Chief Financial Officer          |

 

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