** **

**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** |
|-------------------------|------------|-----------------------------|
| **March  31, 2006**     |       | **333-124109**              |

 

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**AFFINITYGROUP HOLDING, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

----

 

SECURITIESREGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:  **NONE**

SECURITIESREGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

**10-7/8%Senior Notes Due 2012**

 

Indicate by check markwhether 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  ý   NO  o

 

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

 

Large accelerated filer  o   Accelerated filer  o  Non-acceleratedfiler  ý

 

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

 

YES  o   NO  ý

 

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

 
| ** **                               | ** ** | **Outstanding as of** |
|------------------------------------------|------------|---------------------------------|
| **Class**                                | ** ** | **May 8, 2006**       |
| Common Stock,   $.01 par value |       | 100                             |

** **

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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

** **

**INDEX**

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

** **

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2006 and December 31, 2005

(In Thousands)

 
| ** **                                                                                    | ** ** | **3/31/2006**   | ** ** | **12/31/2005** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                    | ** ** | ** **      | ** ** | ** **     | ** ** |
| CURRENT ASSETS:                                                                               |       |            |       |           |       |
| Cash and cash equivalents                                                                     |       | $               | 20,107     |           | $          | 25,061 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,149 in 2006 and $952 in 2005 |       | 24,625          |       | 26,508         |       |
| Inventories                                                                                   |       | 48,440          |       | 47,039         |       |
| Prepaid expenses and other assets                                                             |       | 14,150          |       | 11,218         |       |
| Deferred tax assets, net                                                                      |       | 4,995           |       | 4,995          |       |
| Total current assets                                                                          |       | 112,317         |       | 114,821        |       |
|                                                                                          |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                   |       | 31,120          |       | 29,843         |       |
| INVESTMENT IN AFFILIATE                                                                       |       | 81,005          |       | 81,005         |       |
| NOTE FROM AFFILIATE                                                                           |       | 4,713           |       | 4,722          |       |
| INTANGIBLE ASSETS, net                                                                        |       | 37,996          |       | 37,724         |       |
| GOODWILL                                                                                      |       | 144,429         |       | 144,429        |       |
| DEFERRED TAX ASSETS, net                                                                      |       | 5,046           |       | 4,620          |       |
| OTHER ASSETS                                                                                  |       | 1,687           |       | 1,731          |       |
| Total assets                                                                                  |       | $               | 418,313    |           | $          | 418,895 |   |
|                                                                                          |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                | ** ** | ** **      | ** ** | ** **     | ** ** |
| CURRENT LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts payable                                                                              |       | $               | 18,577     |           | $          | 12,683 |   |
| Accrued interest                                                                              |       | 2,790           |       | 6,897          |       |
| Accrued income taxes                                                                          |       | —          |       | 465            |       |
| Accrued liabilities                                                                           |       | 35,395          |       | 34,094         |       |
| Deferred revenues and gains                                                                   |       | 60,645          |       | 60,994         |       |
| Current portion of long-term debt                                                             |       | 4,821           |       | 6,136          |       |
| Total current liabilities                                                                     |       | 122,228         |       | 121,269        |       |
|                                                                                          |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                   |       | 38,638          |       | 37,926         |       |
| LONG-TERM DEBT, net of current portion                                                        |       | 407,701         |       | 406,528        |       |
| OTHER LONG-TERM LIABILITIES                                                                   |       | 2,701           |       | 5,641          |       |
|                                                                                          |       | 571,268         |       | 571,364        |       |
| COMMITMENTS AND CONTINGENCIES                                                                 |       |            |       |           |       |
|                                                                                          |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                   |       |            |       |           |       |
| Common stock, $.01 par value, 3,000 shares  authorized, 100 shares issued and outstanding     |       | 1               |       | 1              |       |
| Accumulated deficit                                                                           |       | (152,956        | )          | (152,470       | )          |
| Total stockholder’s deficit                                                              |       | (152,955        | )          | (152,469       | )          |
| Total liabilities and stockholder’s deficit                                              |       | $               | 418,313    |           | $          | 418,895 |   |

 

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** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** |
|                                       |       |                             |       |   |   |
| REVENUES:                                  |       |                             |       |   |   |
| Membership services                        |       | $                                | 32,948     |   | $ | 32,423 |   |
| Publications                               |       | 23,103                           |       | 17,198 |   |
| Retail                                     |       | 60,819                           |       | 59,066 |   |
|                                       |       | 116,870                          |       | 108,687 |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |
| Membership services                        |       | 21,116                           |       | 20,201 |   |
| Publications                               |       | 14,575                           |       | 11,521 |   |
| Retail                                     |       | 36,403                           |       | 34,294 |   |
|                                       |       | 72,094                           |       | 66,016 |   |
|                                       |       |                             |       |   |   |
| GROSS PROFIT                               |       | 44,776                           |       | 42,671 |   |
|                                       |       |                             |       |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |
| Selling, general and administrative        |       | 30,233                           |       | 30,021 |   |
| Depreciation and amortization              |       | 4,650                            |       | 3,707 |   |
|                                       |       | 34,883                           |       | 33,728 |   |
|                                       |       |                             |       |   |   |
| INCOME FROM OPERATIONS                     |       | 9,893                            |       | 8,943 |   |
|                                       |       |                             |       |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |
| Interest income                            |       | 329                              |       | 166 |   |
| Interest expense                           |       | (9,267                           | )          | (6,376 | ) |
| Other non-operating items, net             |       | 33                               |       | 16 |   |
|                                       |       | (8,905                           | )          | (6,194 | ) |
|                                       |       |                             |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 988                              |       | 2,749 |   |
|                                       |       |                             |       |   |   |
| INCOME TAX EXPENSE                         |       | (428                             | )          | (1,072 | ) |
|                                       |       |                             |       |   |   |
| NET INCOME                                 |       | $                                | 560        |   | $ | 1,677 |   |

** **

See notes toconsolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                   | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                        |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 560        |   | $ | 1,677 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation                                                                                 |       | 2,494                            |       | 2,274 |   |
| Amortization                                                                                 |       | 2,156                            |       | 1,433 |   |
| Provision for losses on accounts receivable                                                  |       | 276                              |       | 241 |   |
| Deferred compensation                                                                        |       | —                           |       | 900 |   |
| Deferred tax benefit                                                                         |       | (426                             | )          | (694 | ) |
| Gain on sale of property and equipment                                                       |       | (11                              | )          | (3 | ) |
| Non-cash interest on AGHI Notes                                                              |       | 2,568                            |       | — |   |
| Accretion of original issue discount                                                         |       | 59                               |       | 3 |   |
| Changes in operating assets and liabilities                                                  |       |                             |       |   |   |
| Accounts receivable                                                                          |       | 1,607                            |       | 583 |   |
| Inventories                                                                                  |       | (1,401                           | )          | (6,397 | ) |
| Prepaid expenses and other assets                                                            |       | (2,631                           | )          | (1,012 | ) |
| Accounts payable                                                                             |       | 5,894                            |       | 3,112 |   |
| Accrued and other liabilities                                                                |       | (6,211                           | )          | (5,114 | ) |
| Deferred revenues and gains                                                                  |       | (640                             | )          | 926 |   |
| Net cash provided by (used in) operating activities                                          |       | 4,294                            |       | (2,071 | ) |
|                                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                        |       |                             |       |   |   |
| Capital expenditures                                                                         |       | (3,780                           | )          | (2,779 | ) |
| Net proceeds from sale of property and equipment                                             |       | 52                               |       | 27 |   |
| Change in intangible assets                                                                  |       | (3                               | )          | (9 | ) |
| Investment in affiliate                                                                      |       | —                           |       | (81,005 | ) |
| Acquisitions, net of cash received                                                           |       | (1,334                           | )          | — |   |
| Loans receivable                                                                             |       | 9                                |       | 7 |   |
| Net cash used in investing activities                                                        |       | (5,056                           | )          | (83,759 | ) |
|                                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                        |       |                             |       |   |   |
| Dividends paid                                                                               |       | (1,046                           | )          | — |   |
| Borrowings on long-term debt                                                                 |       | —                           |       | 85,005 |   |
| Payment of debt issue costs                                                                  |       | —                           |       | (3,277 | ) |
| Principal payments of long-term debt                                                         |       | (3,146                           | )          | (350 | ) |
| Net cash (used in) provided by financing activities                                          |       | (4,192                           | )          | 81,378 |   |
|                                                                                         |       |                             |       |   |   |
| NET DECREASE IN CASH AND CASH EQUIVALENTS                                                    |       | (4,954                           | )          | (4,452 | ) |
|                                                                                         |       |                             |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                               |       | 25,061                           |       | 24,564 |   |
|                                                                                         |       |                             |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                   |       | $                                | 20,107     |   | $ | 20,112 |   |

 

See notes to consolidated financial statements.

 

3

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**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

** **

**(1) BASIS OF PRESENTATION**

 

*Principles of Consolidation**–*The consolidated financial statements includedherein include the accounts of Affinity Group Holding, Inc. (“AGHI”), its wholly-ownedsubsidiary, Affinity Group, Inc (“AGI”), and AGI’s subsidiaries (collectivelythe “Company”), in accordance with U.S. generally accepted accountingprinciples, and pursuant to the rules and regulations of the Securities andExchange Commission. AGHI was formed on March 2, 2005, at which time all of thestock of AGI was contributed to AGHI from its parent, AGI Holding Corp. (“AGHC”)a privately-owned corporation. These interim consolidated financial statementsshould be read in conjunction with the Company’s consolidated financialstatements and notes in the Company’s 10-K report for the year ended December31, 2005 as filed with the Securities and Exchange Commission. In the opinionof management of the Company, these consolidated financial statements containall adjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

 

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

 

The Company’s threeprincipal lines of business are Membership Services, Publications, and Retail. TheMembership Services segment operates the Good Sam Club, Coast to Coast Club,Camping World’s President’s Club and Camp Club USA for recreational vehicle (“RV”)owners, campers and outdoor vacationers, and the Golf Card Club for golfenthusiasts. The Publications segment publishes a variety of publications forselected markets in the recreation and leisure industry, including generalcirculation periodicals, club magazines, directories, and RV and powersports industrytrade magazines, and produces outdoor recreational consumer events. The Retailsegment sells specialty retail merchandise and services for RV owners primarilythrough Camping World retail supercenters, mail order catalogs and its website.The Company evaluates performance based on profit or loss from operationsbefore income taxes.

 

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

 

4

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The Company does notallocate income taxes or unusual items to segments. Financial information byreportable business segment is summarized as follows (in thousands):

 
| ** **                             | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **QUARTER ENDED MARCH 31, 2006**       | ** ** | ** **               | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers       |       | $                        | 32,948     |             | $          | 23,103     |       | $                | 60,819     |   | $ | 116,870 |   |
| Depreciation and amortization          |       | 910                      |       | 1,020            |       | 1,977      |       | 3,907            |       |
| Gain on sale of property and equipment |       | —                   |       | 5                |       | 6          |       | 11               |       |
| Interest income                        |       | 1,376                    |       | —           |       | 5          |       | 1,381            |       |
| Interest expense                       |       | —                   |       | 94               |       | 3,496      |       | 3,590            |       |
| Segment profit (loss)                  |       | 10,472                   |       | 6,462            |       | (4,319     | )          | 12,615           |       |
|                                        |            |                          |            |                  |            |            |            |                  |            |  |  |  |  |

 
| ** **                       | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **QUARTER ENDED MARCH 31, 2005** | ** ** | ** **               | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
| Revenues from external customers |       | $                        | 32,423     |             | $          | 17,198     |       | $                | 59,066     |   | $ | 108,687 |   |
| Depreciation and amortization    |       | 972                      |       | 474              |       | 1,718      |       | 3,164            |       |
| Interest income                  |       | 1,003                    |       | —           |       | 2          |       | 1,005            |       |
| Interest expense                 |       | —                   |       | 90               |       | 2,590      |       | 2,680            |       |
| Segment profit (loss)            |       | 10,359                   |       | 4,428            |       | (1,658     | )          | 13,129           |       |
|                                  |            |                          |            |                  |            |            |            |                  |            |  |  |  |  |

 

The following is areconciliation of income from operations to the Company’s consolidatedfinancial statements for the three months

ended March 31, (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** |
| **Income From Operations Before Income Taxes**                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Total profit for reportable segments                           |       | $                                | 12,615     |   | $ | 13,129 |   |
| Unallocated G & A expense                                  |       | (4,155                           | )          | (5,302 | ) |
| Unallocated depreciation and amortization expense              |       | (743                             | )          | (543 | ) |
| Unallocated interest income, net of intercompany  elimination  |       | (1,052                           | )          | (839 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (5,677                           | )          | (3,696 | ) |
| Income from operation before taxes                             |       | $                                | 988        |   | $ | 2,749 |   |

 

5

----

 

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

 
| ** **                                          | ** ** | **3/31/2006** | ** ** | **12/31/2005** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 171,493    |           | $          | 162,562 |   |
| Publications segment                                |       | 88,425        |       | 89,104         |       |
| Retail segment                                      |       | 213,258       |       | 207,736        |       |
| Total assets for reportable segments                |       | 473,176       |       | 459,402        |       |
| Capitalized finance costs not allocated to segments |       | 12,168        |       | 12,720         |       |
| Corporate unallocated assets                        |       | 18,312        |       | 16,659         |       |
| Elimination of intersegment receivable              |       | (85,343       | )          | (69,886        | )          |
| Total assets                                        |       | $             | 418,313    |           | $          | 418,895 |   |

 

**(3) STATEMENTS OF CASH FLOWS**

 

Supplementaldisclosures of cash flow information for the three months ended March 31, (inthousands):

 
| ** **                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 10,747     |     | $          | 10,221 |   |
| Income taxes                     |       | 1,576    |       | 2,673    |       |
|                                  |            |          |            |          |            |  |  |

 

In February 2006, theCompany assumed $1.4 million of liabilities and issued $0.4 million of debt inthe acquisition of Plus Events consumer shows and related assets of H & SProductions, LLC.

 

**(4) GOODWILL AND INTANGIBLEASSETS**

 

The Company reviewsgoodwill and indefinite-lived intangible assets for impairment at leastannually. The Company performs its annual impairment test during the fourthquarter. Based on the results of this test, we recorded an impairment charge of$4.3 million in 2005 related to Golf Card Club, which is included in themembership services segment.

 

There were no changes inthe Company’s goodwill by business segment for the three months ended March 31,2006 and 2005.

 

6

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Finite lived intangibleassets, related accumulated amortization and weighted average useful life consistedof the following at March 31, 2006 (in thousands, except as noted):

 
| ** **                                      | ** ** | **Weighted  Average Useful  Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
| Membership and customer lists                   |       | 6                                                            |       | $         | 26,939     |                          | $          | (8,081  | )          | $ | 18,858 |   |
| Resort and golf course participation agreements |       | 23                                                           |       | 13,531    |       | (11,851                       | )          | 1,680   |       |
| Non-compete and deferred consulting agreements  |       | 15                                                           |       | 18,455    |       | (11,778                       | )          | 6,677   |       |
| Deferred financing costs                        |       | 7                                                            |       | 15,393    |       | (4,612                        | )          | 10,781  |       |
|                                            |       |                                                         |       | $         | 74,318     |                          | $          | (36,322 | )          | $ | 37,996 |   |

 

**(5) AGHI NOTES**

 

On March 24, 2005 in aprivate placement, AGHI issued $88.2 million principal amount of its 10-7/8%senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount. The Company completed a registered exchange of these AGHI Notes underthe Securities Act of 1933 in June 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 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 payments on and prior to February 15, 2008,AGHI may elect to pay interest on the AGHI Notes in cash or by issuance ofadditional notes of the same tenor as the AGHI Notes, except the maturity dateis March 15, 2010.

 

**(6) RECENT EVENTS**

 

On March 6, 2006, Camping World, Inc. (“CampingWorld”), a wholly-owned subsidiary of Affinity Group, Inc., entered intoa Joint Venture Agreement with FreedomRoads Holding Company, LLC, a Minnesotalimited liability company (“FreedomRoads”). FreedomRoads is indirectly ownedand controlled by Stephen Adams, the Chairman and indirect controllingshareholder of Affinity Group Holding, Inc. FreedomRoads, through itswholly-owned subsidiaries, owns and operates RV dealerships, currentlyoperating 52 locations across the United States. The Joint Venture Agreement provides that Camping World andFreedomRoads are to act cooperatively with a view to maximizing synergies andto locate, establish and utilize mutually beneficial relationships that areavailable only to the parties acting together that would not otherwise beavailable to either party independently.

 

7

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OnMarch 7, 2006, AGHC made a Subchapter S corporation election effective for2006, which included AGHI, AGI and its subsidiaries with the exception ofCamping World, Inc. and its wholly owned subsidiaries, which will remainSubchapter C corporations. Once the election is approved by the InternalRevenue Service, the tax provision reported in the current period will bereversed and all deferred tax assets and liabilities will be eliminated withthe exception of those related to Camping World, Inc. and its wholly ownedsubsidiaries and other potential built in gains. Management is currentlyanalyzing the effect of the Subchapter S corporation election in the firstquarter of 2006 and estimates that the tax provision would have been between $24and $27 million during the period. Distributions to shareholders will belimited to the federal and state income taxes which would have been paid had AGHI,AGI and its subsidiaries remained a Subchapter C corporation.

 

8

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**ITEM 2:**

 

AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITIONAND RESULTS OF OPERATIONS

 

The following table isderived from the Company’s Consolidated Statements of Operations and expressesthe results from operations as a percentage of revenues and reflects the netincrease (decrease) between periods:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** | **Inc/(Dec)** | ** ** |
| REVENUES:                                  |       |                             |       |   |   |   |   |
| Membership services                        |       | 28.2                             | %          | 29.8 | % | 1.6 | % |
| Publications                               |       | 19.8                             | %          | 15.8 | % | 34.3 | % |
| Retail                                     |       | 52.0                             | %          | 54.4 | % | 3.0 | % |
|                                       |       | 100.0                            | %          | 100.0 | % | 7.5 | % |
|                                       |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |   |   |
| Membership services                        |       | 18.1                             | %          | 18.6 | % | 4.5 | % |
| Publications                               |       | 12.5                             | %          | 10.6 | % | 26.5 | % |
| Retail                                     |       | 31.1                             | %          | 31.5 | % | 6.1 | % |
|                                       |       | 61.7                             | %          | 60.7 | % | 9.2 | % |
| GROSS PROFIT                               |       | 38.3                             | %          | 39.3 | % | 4.9 | % |
|                                       |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |   |   |
| Selling, general and administrative        |       | 25.8                             | %          | 27.7 | % | 0.7 | % |
| Depreciation and amortization              |       | 4.0                              | %          | 3.4 | % | 25.4 | % |
|                                       |       | 29.8                             | %          | 31.1 | % | 3.4 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 8.5                              | %          | 8.2 | % | 10.6 | % |
|                                       |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |   |   |
| Interest income                            |       | 0.3                              | %          | 0.2 | % | 98.2 | % |
| Interest expense                           |       | (8.0                             | )%         | (5.9 | )% | 45.3 | % |
| Other non-operating items, net             |       | —                           |       | — |   | 106.3 | % |
|                                       |       | (7.7                             | )%         | (5.7 | )% | 43.8 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 0.8                              | %          | 2.5 | % | (64.1 | )% |
|                                       |       |                             |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (0.3                             | )%         | (1.0 | )% | (60.1 | )% |
|                                       |       |                             |       |   |   |   |   |
| NET INCOME                                 |       | 0.5                              | %          | 1.5 | % | (66.6 | )% |

 

9

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**RESULTS OF OPERATIONS**

 

**Three Months Ended March 31, 2006**

**Compared With Three Months Ended March31, 2005**

 

*Revenues*

 

Revenues of $116.9million for the first three months of 2006 increased by approximately $8.2million, or 7.5%, from the comparable period in 2005.

 

Membership servicesrevenues of $33.0 million for the first three months of 2006 increased byapproximately $0.5 million, or 1.6%, from the comparable period in 2005. Thisrevenue increase was largely attributable to a $0.9 million increase inextended vehicle warranty program revenue due to the continued growth ofcontracts in force, and a $0.2 million revenue increase in emergency roadservice programs due to increased enrollment, partially offset by a $0.4million reduction in dealer advertising program marketing revenue and a $0.2million net reduction in membership services revenue, resulting primarily fromreduced enrollment in the Coast to Coast and Golf Card Clubs.

 

Publication revenues of$23.1 million for the first three months of 2006 increased $5.9 million, or34.3%, from the comparable period in 2005 primarily attributable to $4.8million of revenue from the consumer shows acquired in December 2005 and theconsumer shows acquired from H & S Productions, LLC in February 2006, $0.6million of revenue primarily resulting from an additional issue of ATV Magazinein the first quarter 2006, $0.5 million of revenue relating to *Powerboat Magazine* acquired in May 2005, and $0.5 million ofrevenue primarily associated with an updated edition of the campground atlas. Theserevenue increases were partially offset by a $0.3million decrease in advertising revenue for the RV-related titles and a $0.2million decrease related to a reduction in the number of issues of *SnowGoer* in the first quarter of 2006.

 

Retailrevenues of $60.8 million increased $1.8 million, or 3.0%, over the first threemonths of 2005. Store merchandise sales increased approximately $1.8 millionover the first three months of 2005 due to a $2.6 million revenue increase fromthe addition of seven new stores over the past fifteen months, partially offsetby a same store sales decrease of $0.8 million or 1.8%, compared to a 5.9%increase in the first three months of 2005. Same store sale calculations for agiven period include only those stores that were open both at the end of thatperiod and at the beginning of the preceding fiscal year.

 

*Costs Applicable to Revenues*

 

Costs applicable torevenues totaled $72.1 million for the first three months of 2006, an increaseof $6.1 million, or 9.2%, from the comparable period in 2005.

 

Membershipservices costs and expenses of $21.1 million increased approximately $0.9million, or 4.5%, from the first three months of 2005. This increase consistedof $0.7 million of marketing and program expenses associated with increasedenrollment in the extended vehicle warranty programs, $0.4 million ofincremental marketing and fulfillment

 

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costsrelating to the start-up of a new discount camping club, Camp Club USA, and$0.2 million of additional marketing expenses for the vehicle insuranceprograms, partially offset by a $0.4 million reduction in dealer marketing expensesassociated with reduced revenue.

 

Publicationcosts and expenses of $14.6 million for the first three months of 2006increased $3.1 million, or 26.5%, from the comparable period in 2005 primarilydue to a $2.1 million increase relating to the recent consumer showacquisitions, $0.6 million of additional costs attributable to the newlyacquired *Powerboat Magazine* title, $0.3 millionof additional costs associated with the additional issue of *ATV Magazine*, and $0.4 million of additional costs associatedwith an updated edition of the campground atlas. These increases were partiallyoffset by $0.2 million of reduced production and marketing costs for theRV-related magazines, and $0.1 million of reduced costs relating to a reductionin the number of issues of *SnowGoer*magazine.

 

Retailcosts applicable to revenues increased $2.1 million, or 6.1%, to $36.4 millionprimarily due to a decrease in the retail gross profit margin and an increasein sales due to the seven new stores opened over the past fifteen months. Theretail gross profit margin of 40.1% for the first three months of 2006decreased from 41.9 % for the comparable period in 2005 primarily due to lowersales of higher margin products.

 

*Operating Expenses*

 

Selling,general and administrative expenses of approximately $30.2 million for thefirst three months of 2006 increased $0.2 million compared to the first threemonths of 2005 primarily due to an increase in retail selling and general andadministrative expenses of approximately $1.1 million consisting of increasesin wages, operating insurance, travel and training, and other retail generaland administrative expenses, and a $0.2 million increase due to the recentconsumer show acquisitions, partially offset by a $0.9 million decrease indeferred executive compensation expense and a $0.2 million decrease in othergeneral and administrative expenses.

 

Depreciationand amortization expense of $4.7 million increased approximately $0.9 millionover the prior year primarily due to increased depreciation on capitalexpenditures at Camping World, and amortization of intangible assets associatedwith the purchase of *Powerboat Magazine*inMay 2005 and the acquisition of consumer shows in December 2005 and February2006.

 

*Income from Operations*

 

Income from operationsfor the first three months of 2006 totaling $9.9 million increased $0.9 millioncompared to the first three months of 2005. This increase was primarily due toincreased gross profit for the publications operations of $2.9 millionpartially offset by increased operating expenses of $1.2 million and reducedgross profit for the retail and membership services operations of $0.4 millionand $0.4 million, respectively.

 

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*Non-Operating Items*

 

Non-operatingitems were $8.9 million for the first three months of 2006, compared to $6.2million for the same period in 2005. This $2.7 million increase comprises of $2.9million of additional interest expense in 2006 due to the issuance of the AGHINotes in March 2005 and increased average interest rates, partially offset by a$0.2 million increase in interest income.

 

*Income before Income Taxes*

 

Incomebefore income taxes for the first three months of 2006 was $1.0 million, or $1.8million lower than the first three months of 2005. This decrease wasattributable to a $2.7 million increase in net interest expense, partiallyoffset by a $0.9 million increase in income from operations for the currentperiod.

 

*Income Tax Expense*

 

The Company recognizedapproximately $0.4 million of income tax expense for the first quarter of 2006compared to $1.1 million for the same period in 2005. The effective tax ratesare higher than statutory rates primarily due to state taxes.

 

# *Net Income*

# * *

Netincome in the first three months of 2006 was $0.6 million compared to netincome of $1.7 million for the same period in 2005.

 

*Segment Profit*

 

Segment profit of $12.6million for the first three months of 2006 (before unallocated depreciation andamortization, general and administrative, interest, and income tax expense)decreased $0.5 million, or 3.9%, from the comparable period in 2005.

 

Membership servicessegment profit of approximately $10.5 million for the first three months of2006 increased $0.1 million, or 1.1%, from the comparable period in 2005. Thisincrease was largely attributable to a $0.5 million increase in profit fromemergency road service products, and a $0.2 million increase in profit from theextended vehicle warranty programs, partially offset by a $0.2 million decreasein profit recognized on RV financing products, and a $0.4 million decrease inprofit for Camp Club USA due to marketing expenses for the new club.

 

Publication segmentprofit of $6.5 million for the first three months of 2006 increased $2.0million, or 45.9%, from the comparable period in 2005. This increase waslargely attributable to a $2.0 million profit increase for the newly acquired showgroup, and a $0.2 million increase in profit from the additional issue of *ATV Magazine*, partially offset by a $0.2 million decrease inprofit for the RV-related magazines.

 

Retail segment loss of$4.3 million for the first three months of 2006 increased by $2.6 million, or160.5% from the comparable period in 2005. The increase resulted primarily

 

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froma $0.4 million decrease in gross profit margin, a $1.1 million increase inselling, general and administrative expenses, a $0.2 million increase indepreciation expense and a $0.9 million increase in interest expenserelating to intercompany debt upon issue of the Camping World, Inc. $40.0million dividend declared and paid in the form of a note December 23, 2005.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has historicallyoperated with a working capital deficit. The working capital deficit as of March31, 2006 and December 31, 2005 was $9.9 million and $6.4 million, respectively.The primary reason for the working capital deficit is the deferred revenue andgains reported under current liabilities in the amount of $60.6 million and $61.0million as of March 31, 2006 and December 31, 2005, respectively. Deferredrevenue is primarily comprised of cash collected for club memberships inadvance, which is amortized over the life of the membership. The Company usesnet proceeds from this deferred membership revenue to lower its long-termborrowings. Management believes that funds generated by operations togetherwith available borrowings under the AGI Senior Credit Facility will besufficient to meet all of the Company’s debt service requirements and capitalrequirements over the next twelve months.

 

On June 24, 2003, AGIentered into an Amended and Restated Credit Agreement and a Senior SecuredFloating Rate Note Purchase Agreement (as amended, the AGI Senior Credit Facility).The AGI Senior Credit Facility provides for a revolving credit facility of$35.0 million and term loans in the aggregate of $140.0 million. Proceeds fromthe AGI Senior Credit Facility were used to refinance the existing seniorsecured indebtedness, pay a dividend of $13.7 million to the Company’s parentAGI Holding Corp. and redeem $30.0 million principal amount of the AGH senior notes due 2007 (“AGH Notes”)at 103.667% of par in 2003. As of March 31, 2006, $109.5 million wasoutstanding under the term loans. No borrowings were outstanding on therevolving credit facility as of March 31, 2006. Reborrowings under the termloans are not permitted. The interest on borrowings under the AGI Senior CreditFacility is at variable rates based on the ratio of total cash flow tooutstanding 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 March 31, 2006, the averageinterest rate on the term loans was 7.32%, and permitted borrowings under theundrawn revolving facility were $27.4 million. AGI also pays a commitment feeof 0.5% per annum on the unused amount of the revolving credit facility. Theaggregate quarterly scheduled payments on the term loans are $350,000. Therevolving credit facility matures on June 24, 2008, and the term loans matureon June 24, 2009. The funds available under the AGI Senior Credit Facility maybe utilized for borrowings or letters of credit; however, a maximum of $12.5million may be allocated to such letters of credit. As of March 31, 2006, AGIhad letters of credit in the aggregate amount of $7.6 million outstanding. TheAGI Senior Credit Facility is secured by virtually all of the Company’s assetsand a pledge of the Company’s stock and the stock of the Company’ssubsidiaries.

 

On March 3, 2006,Affinity Group, Inc. amended its Senior Credit Facility to revise thedefinition of Consolidated Fixed Charges Ratio and Permitted Tax Distributions.This

 

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amendment allows AGI topass up taxes based on its stand-alone tax obligation rather than the taxobligation of its parent, AGHI, until such time that AGHI pays interest on its10 7/8% Senior Notes in cash instead of by the issuance of additional notes. Thefirst quarter AGI tax pass up in excess of the Company’s tax obligations of$1.046 million, was distributed to AGHC in the form of a dividend. Further,Affinity Group, Inc. amended the Senior Credit Facility’s covenant restrictionswith affiliates to permit a joint venture arrangement between Camping World andFreedomRoads Holding Company, an affiliate of the Company.

 

On March 6, 2006, Camping World, Inc. (“CampingWorld”), a wholly-owned subsidiary of Affinity Group, Inc., entered intoa Joint Venture Agreement with FreedomRoads Holding Company, LLC, a Minnesotalimited liability company (“FreedomRoads”). FreedomRoads is indirectly ownedand controlled by Stephen Adams, the Chairman and indirect controllingshareholder of Affinity Group Holding, Inc. FreedomRoads, through itswholly-owned subsidiaries, owns and operates RV dealerships, currentlyoperating 52 locations across the United States. The Joint Venture Agreement provides that Camping World andFreedomRoads are to act cooperatively with a view to maximizing synergies andto locate, establish and utilize mutually beneficial relationships that areavailable only to the parties acting together that would not otherwise beavailable to either party independently.

 

In February 2004, weissued $200.0 million aggregate principal amount of 9% Senior SubordinatedNotes due 2012 (the “AGI Senior Notes”). The Company completed a registeredexchange of the AGI Senior Notes under the Securities Act of 1933 in August2004. The proceeds from the sale of the AGI Senior Notes were used to fund thetender offer and defeasance of the remaining $100.0 million outstandingprincipal amount of the AGH Notes, prepay $25.0 million of the Term Loans underour Senior Credit Facility, pay a $60.0 million dividend distribution, create a$15.0 million segregated cash account, pay certain prepayment and transactioncosts and for general corporate purposes. The amount held in this segregatedaccount, including any earnings thereon, was available to pay stockholderdividends upon satisfaction of a leverage test specified in our Senior CreditFacility. In August and November of 2004, we satisfied the specific leveragetest and paid $3.6 million and $11.5 million in dividends, respectively.

 

On March 24,2005 in a private placement, AGHI issued $88.2 million principal amount of its10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million originalissue discount. The Company completed a registered exchange of these AGHI Notesunder the Securities Act of 1933 in June 2005. The AGHI Notes are unsecuredobligations of the Company and its subsidiaries have not guaranteed payment ofprincipal or interest on the AGHI Notes. Interest on the AGHI Notes is 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 payments on and prior to February 15, 2008,AGHI may elect to pay interest on the AGHI Notes in cash or by issuance ofadditional notes of the same tenor as the AGHI Notes, except the maturity dateis March 15, 2010. AGI has not paid any dividends to AGHI to fund payment ofinterest on the AGHI Notes and AGHI made the interest payments due on August15, 2005 and February 15, 2006 through issuance of additional notes. AGIexpects to issue additional notes of the same tenor as the AGHI Notes throughFebruary 15, 2008 to pay interest on the AGHI Notes when and as such interestis due. Although the source of the cash

 

14

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payment of theAGHI Notes is dividends from AGI, its wholly-owned subsidiary, there arecertain restrictions on the payment of dividends under the AGI Senior CreditFacility and the AGI Indenture.

 

The Companycontributed the net proceeds from the issuance of the AGHI Notes, approximately$81.0 million, to AGI and in turn, AGI made an equity contribution to itswholly-owned subsidiary, Camping World, Inc. (“Camping World”). Camping Worldthen made an equity capital contribution in the same amount to its wholly-ownedsubsidiary, CWI, Inc. (“CWI”). CWI created a new wholly-owned subsidiary namedCWFR Capital Corp., a Delaware corporation (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture. Since CWFR is anunrestricted subsidiary, its operations are not restricted by either the AGIIndenture or the AGHI Notes. CWI made an equity capital contribution to CWFR inan equal amount to the capital contribution that it received from Camping World.CWFR used the proceeds from the equity capital contribution to acquire apreferred membership interest in FreedomRoads Holding Company, LLC (“FreedomRoadsHolding”), a Minnesota limited liability company owned 90% by The Stephen AdamsLiving Trust, which also indirectly owns 97.4% of the outstanding capital stockof AGHC and indirectly AGHI.

 

The AGI Indenturepursuant to which the AGI Notes were issued and the AGI Senior Credit Facilitycontain certain restrictive covenants relating to, but not limited to, mergers,changes in the nature of the business, acquisitions, additional indebtedness,sale of assets, investments, and the payment of dividends subject to certainlimitations and minimum operating covenants. AGI was in compliance with alldebt covenants at March 31, 2006.

 

In April 2005, CampingWorld, Inc. acquired the assets of a mail order catalog retailer specializingin recreational vehicle merchandise for $0.6 million. In May 2005, the EhlertPublishing Group, Inc. acquired the *Powerboat Magazine*title and related assets of Nordskog Publishing, Inc. for $4.0 million. As partof the purchase, the Company issued $1.5 million of debt and assumed $0.5million of liabilities. In December 2005, AGI Productions, Inc., a subsidiaryof Ehlert Publishing Group, Inc., acquired the consumer outdoor recreation showassets of Royal Productions, Inc. for $8.5 million.

 

In February 2006, EhlertPublishing, Inc. acquired the consumer shows and related assets of H & SProductions, LLC for $2.5 million. As part of the purchase, the Company issued$0.4 million of debt and assumed $1.4 million of liabilities.

 

For the three monthsended March 31, 2006, the Company did not incur deferred executive compensationexpense under the phantom stock agreements and made payments of $0.8 million onthe pay-out provisions of existing phantom stock agreements. The earnedincentives under these agreements are scheduled to be paid at various timesover the next five years. There are no phantom stock payments scheduled to**be made for the remainder of 2006.

 

Capital expenditures forthe first three months of 2006 totaling $3.8 million increased $1.0 millionfrom the first three months of 2005. Additional capital expenditures of $13.9million are anticipated for the balance of 2006, primarily for fifteen toseventeen new Camping World

 

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stores, updating existingstore fronts, and computer hardware and software upgrades and enhancements.

 

*ContractualObligations and Commercial Commitments*

 

Thefollowing table reflects our contractual obligations and commercial commitmentsat March 31, 2006. This table includes principal and future interest due underour debt agreements based on interest rates as of March 31, 2006 and assumesdebt obligations will be held to maturity.

 
| ** **                               | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                  | ** ** | **Total**                                 | ** ** | **Balance of  2006** | ** ** | **2007 and  2008** | ** ** | **2009 and  2010** | ** ** | **Thereafter** | ** ** |
| Long-term debt and future interest       |       | $                                         | 621,023    |   | $ | 22,684 |   | $ | 70,954 |   | $ | 204,275 |   | $ | 323,110 |   |
| Operating lease obligations              |       | 135,176                                   |       | 9,840 |   | 21,383 |   | 17,476 |   | 86,477 |   |
| Deferred compensation                    |       | 5,240                                     |       | — |   | 4,192 |   | 1,048 |   | — |   |
| Standby and commercial letters of credit |       | 7,581                                     |       | 7,231 |   | 350 |   | — |   | — |   |
| Grand total                              |       | $                                         | 769,020    |   | $ | 39,755 |   | $ | 96,879 |   | $ | 222,799 |   | $ | 409,587 |   |

 

**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 these financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, the Company evaluates itsestimates, including those related to membership programs and incentives, baddebts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation. The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions 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.

 

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*RevenueRecognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and internet orders, or when services are provided to customers. Publicationadvertising and newsstand sales, net of estimated provision for returns, arerecorded at time of delivery. Subscription sales of publications are deferredand recognized over the lives of the subscriptions. Revenues from the emergencyroad service program (“ERS”) are deferred and recognized over the life of themembership. ERS claim expenses are recognized when incurred. Advances on thirdparty credit card fee revenues are deferred and recognized based primarily on apercentage of credit card receivables held by third parties. Membership revenueis generated from annual, multi-year and lifetime memberships. The revenue andexpenses associated with these memberships are deferred and amortized over themembership period. For lifetime memberships, an 18-year period is used, whichis the actuarially determined estimated fulfillment period. Promotionalexpenses, consisting primarily of direct mail advertising, are deferred andexpensed over the period of expected future benefit. Renewal expenses areexpensed at the time related materials are mailed. Recognized revenues andprofit are subject to revisions as the membership progresses to completion. Revisionsto membership period estimates would change the amount of income and expenseamortized in future accounting periods.

 

*AccountsReceivable*

 

The Company estimates thecollectability of its trade receivables. A considerable amount of judgment isrequired in assessing the ultimate realization of these receivables includingthe current credit-worthiness of each customer. 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 ultimaterealization of inventories, the Company is required to make judgments as tofuture demand requirements and compare that with the current or committedinventory levels. The Company has recorded changes in required reserves inrecent periods due to changes in strategic direction, such as discontinuancesof product lines as well as changes in market conditions due to changes indemand requirements. It is possible that changes in required inventory reservesmay continue to occur in the future due to the market conditions.

 

*Long-Lived Assets*

 

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

 

Long-lived assets, suchas property, plant and equipment and purchased intangible assets with finitelives are evaluated for impairment whenever events or changes in circumstancesindicate the carrying value of an asset may not be recoverable in accordancewith SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  The Company assesses the fairvalue of the assets based on the future cash flow the assets are expected togenerate and recognize an impairment loss when estimated undiscounted futurecash flow expected to result from the use of the asset plus net proceedsexpected

 

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from disposition of theasset (if any) are less than the carrying value of the asset. When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values. The Company determinedthere were no indicators of impairment of long-lived assets as of December 31,2005 or March 31, 2006.

 

The Company has evaluatedthe remaining useful lives of its finite-lived purchased intangible assets todetermine if any adjustments to the useful lives were necessary or if any ofthese assets had indefinite lives and were therefore not subject toamortization. The Company determined that no adjustments to the useful lives ofits finite-lived purchased intangible assets were necessary. The finite-livedpurchased intangible assets consist of membership customer lists, resort andgolf course agreements, non-compete and deferred consulting agreements anddeferred financing costs which have weighted average useful lives of approximately6 years, 23 years, 15 years and 7 years, respectively.

 

*Indefinite Lived IntangibleAssets*

 

The Company evaluatesindefinite lived intangible assets for impairment at least annually or whenevents indicate that an impairment exists in accordance with SFAS No. 142. Theimpairment test for goodwill and other indefinite-lived intangible assets iscalculated annually using fair value measurement techniques.

 

Determining the fairvalue of a reporting unit and the fair value of individual assets and liabilitiesof a reporting unit is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand also the extent of such charge. The Company’s estimates of fair valueutilized in goodwill and other indefinite-lived intangible asset tests may bebased upon a number of factors, including assumptions about the projectedfuture cash flows, discount rate, growth rate, determination of marketcomparables, technological change, economic conditions or changes to theCompany’s business operations. Such changes may result in impairment chargesrecorded 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 fairvalue of a reporting unit is calculated based on the present value of estimatedfuture cash flows. Future cash flows are estimated by the Company under themarket approach, fair value is estimated based on market multiples of revenueor earnings for comparable companies.

 

Based on the results ofthe annual impairment tests, the Company recorded an impairment charge of $4.3million in 2005 related to Golf Card Club, which is included in the membershipservices segment. Future goodwill impairment tests could result in a charge toearnings. The Company will continue to evaluate goodwill on an annual basis andwhenever events and changes in circumstances indicate that there may be apotential impairment.

 

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

 

We are exposed to market risks relating tofluctuations in interest rates. Our objective of financial risk management isto minimize the negative impact of interest rate fluctuations on our earningsand cash flows. Interest rate risk is managed through the use of a combinationof fixed and variable interest debt as well as the periodic use of interestrate collar contracts.

 

The following information discusses the sensitivityto our earnings. The range of changes chosen for this analysis reflects ourview of changes which are reasonably possible over a one-year period. These forward-lookingdisclosures are selective in nature and only address the potential impacts fromfinancial instruments. They do not include other potential effects which couldimpact our business as a result of these interest rate fluctuations.

 

*Interest Rate Sensitivity Analysis*

 

At March 31, 2006, we had debt totaling $412.5million, comprised of $109.5 million of variable rate debt and $303.0 millionof fixed rate debt. Holding other variables constant (such as debt levels), theearnings and cash flow impact of a one-percentage point increase/ decrease ininterest rates would have an unfavorable/ favorable impact of approximately$1.1 million.

 

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*Credit Risk*

 

We are exposed to credit risk on accounts receivable.We provide credit to customers in the ordinary course of business and performongoing credit evaluations. Concentrations of credit risk with respect to tradereceivables are limited due to the number of customers comprising our customerbase. We currently believe our allowance for doubtful accounts is sufficient tocover customer credit risks.

 

**ITEM 4:CONTROL 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 Senior VicePresident and Chief Financial Officer, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures pursuant toRegulation 13a-14 under the Securities Exchange Act of 1934. Based upon thatevaluation, the President and Chief Executive Officer along with the Senior VicePresident and Chief Financial Officer concluded that the disclosure controlsand procedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the periodic SEC filings. There have been no significant changesin the Company’s internal controls or in other factors that could significantlyaffect these controls subsequent to the date the Company carried out itsevaluation.

 

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**PARTII:  OTHER INFORMATION**

 

None

 

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**SIGNATURES:**

 

 

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

 

 
|               | **AFFINITY  GROUP HOLDING, INC.** |
|--------------------|-----------------------------------|
|               |                              |
|               |                              |
|               | /s/ Thomas F.  Wolfe              |   |
| Date: May 8,  2006 | Thomas F. Wolfe                   |
|               | Senior Vice  President and        |
|               | Chief Financial  Officer          |

 

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