** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C.  20549**

 

 

**FORM10-K**

(Mark One)

**ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**For the fiscal year endedDecember 31, 2004    OR**

 

**o****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                to                **

** **

**Commission File Number     333-113982**

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**AFFINITY GROUP, INC.**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                              |   | ** ** |   | **13-3377709**                        |
|-------------------------------------------|--------|------------|--------|---------------------------------------|
| (State of incorporation  or organization) |   |       |   | (I.R.S. Employer  Identification No.) |
|                                      |   |       |   |                                  |
| **2575  Vista Del Mar Drive**             |   |       |   | **(805)  667-4100**                   |
| **Ventura,  CA 93001**                    |   |       |   | (Registrant’s telephone          |
| (Address of principal  executive offices) |   |       |   | number including area  code.)         |

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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OFTHE ACT:  NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

                                     9% Senior SubordinatedNotes Due 2012

 

                                                Indicate by check mark whether theRegistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the Registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

YES ý        NO o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

YES o        NO ý

Indicate the number ofshares outstanding of each of the issuer’s classes of common

stock, as of the latestpracticable date.

|                           |       | **Outstanding  as of** |
|--------------------------------|------------|------------------------|
| **Class**                      | ** ** | **March  4, 2005**     |
| Common stock, $.001 par  value |       | 2,000                  |

 

 

 

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**PART I**

 

**ITEM 1: BUSINESS**

 

 

**General**

 

Exceptwhere the context indicates otherwise, the term “Company,” or “AGI” meansAffinity Group, Inc. and its predecessors and subsidiaries.

 

We are a wholly-owned subsidiary of AGI HoldingCorp., a privately-owned corporation.  Weare a member-based direct marketing organization targeting North American recreationalvehicle (“RV”) owners and outdoor enthusiasts. Our club members form a receptive audience to which we sell products,services, merchandise and publications targeted to their specific recreationalinterests.  In addition, we are a specialtyretailer of RV-related products.  Weoperate through three principal lines of business, consisting of (i) clubmemberships and related products and services, (ii) subscription magazines andother publications including directories, and (iii) specialty merchandise soldprimarily through our 39 Camping World retail stores, mail order catalogs andthe Internet.

 

There areapproximately 1.7 million dues paying members enrolled in our clubs.  We currently have approximately 5.9 millionin aggregate circulation and 1.1 million paid circulation across our 37publications.  For the year ended December31, 2004, our revenue, operating income and net income were $464.7 million, $46.2million and $10.3 million, respectively.

 

 

**Competitive Strengths**

 

We believe that our key competitive strengthsare as follows:

 

*Stable, Recurring Cash Flow Stream -* Approximately 85% of our operatingincome is generated through our membership club, subscription-based productsand services and publications businesses, which historically have provided arecurring income stream through a core base of customers. Our four membershipclubs have a historical average renewal rate of 66%, which we believe comparesfavorably to other subscription-based businesses. Similarly, our subscription-basedproducts and services have historically also experienced high renewal rates,averaging over 85% over the past four years for our largest product and serviceofferings, Emergency Road Service (“ERS”), RV vehicle insurance and extendedwarranty.

 

*Established Market Positions* - We are a member-based direct marketingorganization targeting North American RV owners and outdoor enthusiasts withcomprehensive targeted product offerings. The Good Sam Club, which was foundedin 1966, and the President’s Club are both long-established RV membership clubsin North America.  Camping World is along-established national specialty retailer of merchandise accessories andservices for RV owners and camping enthusiasts.

 

We believe our significant size relative to our competition is ameaningful advantage that provides us greater leverage to negotiate benefitsand discounts with third-party service providers for our members andconsequently enhances the value of our product and service offerings.  Additionally, these negotiating and pricingadvantages allow us to increase membership dues without risking the loss ofmembers, who are compensated by additional savings.  These advantages compound as new customers aredrawn to the higher savings earned by our club members.  Our 1.7 million club members and the 6.8million consumers in our proprietary database serve as a unique, captiveaudience for direct marketing, which significantly lowers customer acquisitioncosts relative to our competitors and facilitates cost-effective cross-selling.

 

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*Largely Recession Resistant -* We believe the characteristics of ourbusiness mitigate the effects of economic downturns on our operatingperformance.  While the sale of new RVsis generally influenced by economic conditions, our financial performance hashistorically shown little correlation to changes in the Gross Domestic Product,gas prices or even new RV shipments.  Webelieve this is partially due to the small cost of our products and servicesrelative to the cost of purchasing an RV and the fact that our clubs provideaverage annual savings significantly in excess of the annual dues.  We market our clubs, products and services toa sizable existing installed base of 6.9 million RV owners, which affords usthe ability to continue to attract new customers irrespective of new RV sales.  We believe RV owners may be more likely totake vacations utilizing RVs during an economic downturn, because they aregenerally less expensive than vacations necessitating plane or train travel andhotel accommodations, which would drive increased sales of our products.

 

*Favorable Demographic Trends* - Favorable demographic trends, inparticular the aging of the “baby boomers,” indicate that RV ownership shouldincrease during the next 10 years.  OverallRV ownership rates have historically been highest, with 14% penetration, in the55-64 age bracket, an age group that is expected to grow 45% by 2010, accordingto the National Survey of the RV Consumer by the University of Michigan in 2001(the “RV Survey”).  Furthermore, the45-54 age bracket, which maintains the second highest ownership rate of RVs, isexpected to grow 15% by 2010.  The growthin these age groups is expected to generate dramatic growth in the pool ofpotential RV consumers.  Also, accordingto the RV Survey, this age group shift will drive the number of households thatown at least one RV from 6.9 million in 2001 to 7.9 million in 2010. Inaddition, RV owners have household incomes that significantly exceed thenational average.  These demographics areattractive for advertisers and third-party providers of products and services.

 

*Experienced and Incentivized Management Team -* Our executive management team hasextensive publishing, direct marketing and retail experience with significantexpertise in the RV industry. With an average of over 13 years with us, theteam has developed substantial experience in increasing our target customerbase, using strategic alliances to bolster product offerings that create valuefor our customers and increasing cross-selling opportunities for our highmargin product offerings. Our consistent operating performance, to a greatextent, is attributable to our senior managers who are responsible fordeveloping and implementing our business strategy and focusing on increasingprofitability. Our executive management team is compensated both through anannual salary and through a management incentive program that is directly tiedto our financial performance.

 

 

**Our Strategy**

 

Our primary business strategy is to maximizethe sale of club memberships, products, services, publications and merchandiseto our target customer base of RV owners and outdoor enthusiasts. To this end,we focus on cross-selling our various offerings to each of our customers whilemanaging customer acquisition costs and maintaining high renewal rates byproviding high value product offerings.

 

*Maximize Customer Retention withValue-Added Product Offerings -*A key aspect of our strategyis to maximize the value proposition of each of our product offerings, whichcontributes to strong customer renewal rates. Each of our four membership clubsprovides our customers with tangible savings over and above the membership fee. On average, club members realize savingsfive times greater than the cost of their annual membership dues as the resultof being able to purchase products and services at discounts made availablethrough our clubs.  We believe that theparticipation levels and renewal rates of club members reflect the benefitsderived from their membership.  As such,in order to maximize customer renewal rates, we constantly evaluate membersatisfaction and actively respond to changing member preferences through theenhancement or introduction of new membership benefits including products andservices.

 

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*Efficiently Acquire New Customers-*We believe efficient customer acquisition and a sizeable databasepopulation are critical to driving our growth and profitability.  Camping World and its discount buyer’s club,President’s Club, together, account for approximately 50% of our new customerdatabase entries.  In addition to being ahighly valuable customer loyalty program, President’s Club allows us to capturespecific information about each customer including RV type and usage, as wellas information on the customer’s age, income, net worth and interests, whileadding virtually no incremental customer acquisition costs.  We are able to customize our direct marketingoffers based upon our customers’ profiles.  Other methods of customer acquisition includepurchasing lists from data providers and placing our publications atcampgrounds and dealerships. We then manage our database and target our offersto the customers most likely to purchase more than one of our productofferings.

 

*Cross-Sell Products and Servicesto Existing Customers -*We proactively cross-sell our products andservices across our customer base. For example, we use our existing customerdatabase to cost-efficiently market Camping World products through catalogs.  Conversely, Camping World supercenters providedirect customer referrals to our membership clubs, products and servicesthrough their in-store kiosks.  Inaddition, we use our publications to communicate with our core customer baseand to promote our other business segments to existing club members.  Our magazines contain relevant content as wellas various forms of advertisements for our membership clubs, products andservices.

 

*Develop and Market AdditionalProduct and Service Offerings and Additional Affinity Groups -*We continuallyevaluate additional products and services that can be developed and offered toour customer base of RV owners and outdoor enthusiasts and we continually expandthe variety of products and services that are attractive to our customer base.  When introducing new products and services, weconcentrate on products and services provided by third parties, which we canmarket without significant capital investment or underwriting risk and forwhich we typically receive a marketing fee from the service provider based onsales volume.  We seek to utilize thepurchasing power of our club members to obtain products and services atattractive prices.  Also, we believe thatthe experience we have accumulated in managing our existing recreationalaffinity groups is applicable to the management of other recreational interestorganizations.  As a result, we conductongoing evaluations for developing or acquiring affinity groups for which wecan build membership enrollment and to which we can market products andservices.

 

*Expand Niche RecreationalPublications -*We believe aggregate circulation of our magazines isan important factor in determining the amount of revenue we can obtain fromadvertisers.  Consequently, we seek toexpand our presence as a publisher in select recreational niches through theintroduction of new magazine titles and the acquisition of other publicationsin our markets or in complementary recreational market niches.  Publications in complementary niches may alsoprovide the opportunity to launch new membership clubs, to market our productsand services to new customers and to develop other products and services, whichmeet the special needs of these customers.  For example, our acquisition of the publishingassets of Poole Publications, Inc. in October 2003 allowed us to expand ourpresence in the recreational boat market niche.

 

*Increase Camping WorldPenetration -*We intend to continue the controlled expansion ofour Camping World supercenter network by developing Camping World storesalongside or within independent RV dealerships, including RV dealerships ownedand operated by our affiliates, which provides a competitive advantage bycreating a means of increasing retail customer traffic.  In 2004 we opened six new Camping Worldstores, and in 2005 we intend to open ten new Camping World stores as a part ofour dealer alliance program.  In additionto generating increased cash flows from the sale of merchandise, a largernetwork of geographically diverse Camping World stores will enhance our abilityto market our portfolio of membership clubs, publications and product andservice offerings to a significantly larger customer base.

 

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**RV Industry**

 

The use of RVs and the demand for club memberships and related productsand services may be influenced by a number of factors including generaleconomic conditions, the availability and price of propane and gasoline, andthe total number of RVs.  We believe thatboth the installed base of RVs and the type of RV owned (full service vehiclesexcluding van conversions) are the most important factors affecting the demandfor our membership clubs, merchandise, products and services.  Based on the RV Survey, the number ofhouseholds owning RVs is projected to increase from 6.9 million in 2001 to nearly7.9 million in 2010.  The RV Survey alsoindicates that the percentage of households owning RVs during this period willrise slightly from 7.6% to 7.8%.

 

According to the RV Survey, the average RV owner is 49 years old.  RV ownership also increases with age reachingits highest percentage level among those 55 to 64 years old.  Households in this age group are projected toincrease from 14.3 million in 2001 to 20.7 million in 2010.  RV ownership also is concentrated in thewestern United States, an area in which the population growth rate continues tobe greater than the national average. The RV Survey also indicates that RV ownership is associated with higherthan average annual household income, which among RV owners was approximately $56,000per annum as compared to the national average of $40,000 per annum.

 

The average age andannual household income of our club members in 2001 were 57 years and $57,000,respectively, based on member survey data compiled by us.  We believe that the demographic trend towardsan aging population will have a favorable impact on RV ownership.  The demographic profile of our typical clubmember follows that of the general population and thus we believe this willalso have a favorable impact on demand for our club memberships and relatedproducts and services.

 

**Membership Clubs**

 

Weoperate the Good Sam Club, President’s Club, and Coast to Coast Club for RVowners, campers and outdoor vacationers, and the Golf Card Club for golfenthusiasts.  The membership clubs form areceptive audience to which we market our products and services.

 

The following table sets forth the number of members atDecember 31, 2004, annual membership dues and average annual renewal ratesduring the period of 2000 to 2004 for each club:

 
| ** **            | ** ** | **Number of Members** | ** ** | ** **         | ** ** | **Average Renewal** | ** ** |
|-----------------------|------------|-----------------------|------------|--------------------|------------|---------------------|------------|
| **Membership Club**   | ** ** | **at 2004 (1)**       | ** ** | **Annual Fee (2)** | ** ** | **Rate (3)**        | ** ** |
| Good Sam Club         |       | 971,000               |       | $12 - $25          |       | 67                  | %          |
| President’s Club |       | 596,700               |       | $15 - $20          |       | 65                  | %          |
| Coast to Coast  Club  |       | 98,700                |       | $90 - $140         |       | 71                  | %          |
| Golf Card Club        |       | 67,200                |       | $49 - $65          |       | 60                  | %          |

 

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(1)  Also includes multi-year and lifetimemembers.

(2)  For a single member, subject to specialdiscounts and promotions.

(3)  Excludes members having lifetime memberships.

 

In addition to regular annual memberships, wealso sell multi-year memberships.  Webelieve that multi-year memberships provide several advantages, including theup-front receipt of dues in cash, reduced membership costs and a strengthenedmember commitment.

 

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*Good Sam Club*

 

The Good Sam Club,founded in 1966, is a membership organization for RV owners.  The Good Sam Club is the largest RV organizationin North America with approximately 971,000 member families and almost 1,800local chapters as of December 31, 2004. The average renewal rate for Good Sam Club members was approximately 67%during the period 2000 through 2004.  Wehave focused on selling higher margin multi-year memberships which, among otheradvantages, reduces the cost of renewal membership.  The average length of time for participationin the Good Sam Club is almost six years with most club members purchasingannual memberships.

 

Membership fees range from $12 to $25, subject to the term and type(acquisition or renewal).  The benefitsof club membership include: discounts for overnight stays at approximately 1,750participating RV parks and campgrounds; discounts on the purchase of suppliesand accessories for RVs at over 60 RV service centers; gas, fuel and fooddiscounts at 80+ Love’s Travel Stops; a free annual subscription to *Highways*, the club’s regular news magazine; discounts on ourother publications; trip routing and mail-forwarding; and access to productsand services developed for club members. Based on typical usage patterns, we estimate that Good Sam Club membersrealize estimated annual savings from discounts of approximately $100.

 

TheGood Sam Club establishes quality standards for RV parks and campgroundsparticipating in its discount program. Campgrounds and parks participating in the Good Sam Club program benefitfrom increased occupancy and sales of camping related products.  We believe we have established considerablepenetration of those for-profit RV parks and campgrounds that meet our qualitystandards for participation in the discount program.  We monitor our affiliated campgrounds andremove substandard facilities from our program to ensure that our brand image andreputation are not diluted.

 

In 1992, we began selling lifetime memberships for the Good SamClub.  In 2004, the average price for alifetime membership was $272 with 131,900 members registered as of December 31,2004.  Based on an actuarial analysis ofthe lifetime members, we expect the average length of a lifetime membership tobe 18 years.

 

Thefollowing table lists the number of club members and RV parks and campgroundsfrom 2000 through 2004 at which discounts for members were available atDecember 31st of the respective year:

 
| ** **                                                         | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|--------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of Good  Sam memberships                                    |       | 971,000    |       | 958,000    |       | 960,600    |       | 946,800    |       | 949,600    |       |
|                                                               |       |       |       |       |       |       |       |       |       |       |       |
| Lifetime members  included above                                   |       | 131,900    |       | 127,700    |       | 121,400    |       | 119,000    |       | 114,800    |       |
|                                                               |       |       |       |       |       |       |       |       |       |       |       |
| Number of RV  campgrounds offering

discounts to  Good Sam members |       | 1,750      |       | 1,750      |       | 1,650      |       | 1,650      |       | 1,747      |       |

 

 

 

*President’s Club*

 

The President’s Club program, which was established in1986, is the discount buyer’s club for Camping World and the second largest RVclub worldwide (behind only our Good Sam Club). As of December 31, 2004, the President’s Club had 596,700 members.  The primary benefit offered to members of thePresident’s Club is a 10% discount on all retail merchandise at Camping Worldstores.  The President’s Club offers usan extremely cost effective and powerful method of acquiring customers who arelikely to be receptive to our product and service offerings.  We use the significant amount of informationgathered when a customer signs up for membership in the President’s Club totailor product offers to

 

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his or her likely needs and interests.  Additionally, we believe that the President’sClub, much like a traditional customer loyalty program, serves to bolster salesat our Camping World supercenters.

 

In addition to the 10% discount at Camping World stores,President’s Club members also receive *RV View*, theclub magazine, as well as special mailings, including newsletters and flyersoffering selected products and services at special prices.  Typically, we use the President’s Club brandin the marketing of our products and services to these customers.

 

President’s Club memberships may initially be obtainedfor one, two or three years at a cost of $20, $35 or $50, respectively.  We estimate that the average President’s Clubmember realizes savings of approximately $41. The average renewal rate for members of the President’s Club was 65%during the period from 2000 to 2004.

 

The following table sets forth the number of President’s Clubmembers and number of retail stores at year-end for 2000 through 2004:

 
|                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Camping World’s  President’s Club

memberships |       | 596,700    |       | 598,200    |       | 626,000    |       | 596,500    |       | 581,700    |       |
|                                                     |       |       |       |       |       |       |       |       |       |       |       |
| Number of stores                                         |       | 39         |       | 33         |       | 30         |       | 30         |       | 30         |       |

 

 

 

*Coast to Coast Club*

 

The Coast to Coast Club operates a long-established reciprocal usenetwork of private RV resorts in North America. We offer a series of membership benefits depending upon pricing andprogram type under the Coast to Coast Club name.  Members of the Coast to Coast Club belong toa private RV resort owned and operated by parties unrelated to us.  Our club members may use the other resorts inthe Coast to Coast Club network on a reservation or space available basis andobtain discounts from other non-private campgrounds.  At December 31, 2004, there were approximately98,700 member families in the Coast to Coast Club which had nationwide accessto approximately 309 private RV resorts and a network of approximately 176public affiliated campgrounds that participated in the Coast to Coast Club reciprocaluse programs.  These private resorts aredesigned primarily for RV owners, but typically provide camping or lodgingfacilities, comprised of RVs, cabins, park models, and condominiums.  For an initial membership fee plus annualmaintenance fees, both paid by the customer to the resort, the private resortsprovide an RV site with water, sewer and electrical hook-ups and recreationalamenities, such as swimming, tennis or fishing, or proximity to theme parks orother recreational activities.  We haveestablished quality criteria for resorts to join and remain in the Coast toCoast Club networks.

 

For standard annualrenewal dues from $89.95 for a single year membership to $179.95 for amultiple-year membership, Coast to Coast Club members receive the followingbenefits: discounts for overnight stays at participating resorts andcampgrounds; an annual subscription to *Coast to Coast Magazine;*the*Coast to Coast Directory*providing information on theparticipating resorts; discounts on our other publications; access to discount hotelsand travel services; and access to ancillary products and services developedfor our club members.

 

We believe that resorts participating in the Coast to Coast Club networksview access to reciprocating member resorts as an incentive for their customersto join their resort.  Because a majorityof Coast to Coast Club members own RVs, access to participating resortsthroughout North America can be an important complement to local resortmembership.  Based on typical usepatterns, we estimate that Coast to Coast Club members realize estimated annualsavings from these discounts of approximately $125.  The average annual renewal rate for membersof the Coast

 

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to Coast Club after the initial one-year membership (which is generallypaid by the member resort not the club member) was approximately 71% during theperiod 2000 through 2004.

 

The following table setsforth the number of members in the Coast to Coast Club, resorts participatingin the reciprocal use program, and the number of public resorts extendingdiscounts to Coast to Coast Club members for 2000 through 2004:

 
|                                       | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of Coast  to Coast Club memberships |       | 98,700     |       | 117,300    |       | 139,800    |       | 157,200    |       | 178,100    |       |
|                                       |       |       |       |       |       |       |       |       |       |       |       |
| Participating  private resorts             |       | 309        |       | 329        |       | 383        |       | 360        |       | 360        |       |
| Participating  public resorts              |       | 176        |       | 220        |       | 572        |       | 624        |       | 590        |       |

 

The reduction in the number of participating public resortsin the Coast to Coast Club reciprocal use program during 2003 and 2004 resultedprimarily from the operational changes in the system which was implemented by theCoast to Coast Club during 2003 to improve the quality of the system for Coastto Coast Club members.  These changesincreased the responsibilities of the public resorts.  Since the Coast to Coast Club system is anetwork for private resorts and their members, participation by public resortsis an ancillary benefit to the members and the reduction in participatingpublic resorts does not materially affect the program.

 

 

##### *Golf Card Club*

 

The Golf Card Club, founded in 1974, had approximately 67,200 membersat December 31, 2004.  The majorattraction for membership is the financial savings which members receive whenplaying at any of the 3,650 participating golf courses located throughout theUS and Canada. The annual membership fee varies with the length and type(single or double) of membership.  Webelieve that the participating golf courses providing playing privileges toclub members represent the largest number of golf courses participating in adiscount program in North America.  Noneof the participating golf courses are owned or operated by us.

 

Members of the Golf Card Club receive the following benefits:  (i) a minimum of two rounds annually of freeor discounted golf at participating golf courses, (ii) discounted vacationpackages at 200 “Stay and Play” resorts, (iii) savings on golf merchandisepurchases at select member golf courses, (iv) car rental discounts fromNational and Alamo, (v) an annual subscription to the *GolfTraveler* member publication, published four times per year in printand eight times electronically, (vi) the Annual Directory of Affiliated Coursesand Resorts (“Annual Directory”), (vii) a one-year Quest membership (hotel discountcard), (viii) access to 120 local Grasshopper Clubs for tournaments and socialactivities, (ix) an opportunity to play in Member-Guest Tournaments, and (x) a chanceto test (and keep) select golf products.

 

Daily-fee, semi-private resort and municipal golf coursesparticipate in the Golf Card program. The program is attractive to participating courses because it buildstraffic and helps fill empty tee times during off-peak hours.  In addition, participating courses receivepromotion of their golf course in the *Golf Traveler* memberpublication, the Annual Directory, and the club website, www.golfcard.com.  Members also purchase other merchandise orservices when exercising their playing privileges.  In this manner, the Golf Card Club memberstend to provide incremental revenue to the golf courses.  Based on surveys conducted by us, membersrealize savings on green fees, ranging from $150 to $250 annually, whichsignificantly exceed the cost of membership.

 

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The standard annual membership fee is $65 for a single membership and $110for a double membership.  Multi-yearmemberships range from a single two-year membership for $118, to a three-yeardouble membership for $267.  The averagerenewal rate for Golf Card Club members was approximately 60% for the period from2000 to 2004.

 

The following table sets forth the number of Golf Card Club members,participating golf courses and “Stay and Play” resorts at December 31st of eachrespective year:

 

 
|                                              | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|---------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Number of Golf  Card Club memberships (1)         |       | 67,200     |       | 77,400     |       | 79,400     |       | 82,300     |       | 93,900     |       |
|                                              |       |       |       |       |       |       |       |       |       |       |       |
| Number of  Participating Golf Courses             |       | 3,650      |       | 3,800      |       | 3,800      |       | 3,300      |       | 3,300      |       |
|                                              |       |       |       |       |       |       |       |       |       |       |       |
| Number of “Stay  and Play” Golf Resorts |       | 200        |       | 220        |       | 225        |       | 241        |       | 251        |       |

 

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(1)  A single membership countsas one member and a double membership as two members.

 

 

**Membership Products and Services**

 

Our approximately1.7 million club members form a receptive audience to which we sell productsand services targeted to the recreational interests of our club members.  We promote products and services which eitheraddress special needs arising in the activities of our club members or appealgenerally to persons with the demographic characteristics of our clubmembers.  The two most establishedproducts are the ERS and the vehicle insurance programs.  Most of our products and services areprovided by third parties who pay us a marketing fee, with the exception of ERSwhere we assume the risk of incurred claims.

 

*Emergency Road Service (ERS)*

 

Wepromote various ERS products to our existing membership clubs, as well as tonon-club members.  The ERS programsprovide towing and roadside assistance for subscribers with annual dues rangingfrom $79.95 to $99.95.  We developed ERS initiallyfor Good Sam members in 1984, and 29% of the Good Sam Club membership iscurrently enrolled in the Good Sam ERS program. We believe it is important to target the diversified market niches withidentifiable products that offer a full range of benefits.  We currently market these products through directmail, advertising in publications, campground directories, space ads, Internet,telemarketing and direct sales.

 

Thetable below sets forth the total enrollment in the various ERS programs for2000 through 2004:

 

 
| ** **     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|----------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ERS Enrollment |       | 360,900    |       | 354,400    |       | 348,400    |       | 345,100    |       | 341,600    |       |

 

 

 

For the seventh year in a row, enrollment in the various ERSprograms has grown through promotional and marketing efforts which haveattracted new members and improved renewal rates.  Combined enrollment in the programs hasincreased by 19,300 members or approximately 5.6% since 2000.

 

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*Vehicle Insurance Programs*

 

Weoffer two vehicle insurance programs that offer cost-effective collision andliability insurance suitable to the demographic characteristics and vehicleusage patterns of our various club members. The Vehicle Insurance Program (“VIP”) is marketed primarily to the membersof Good Sam Club and Coast to Coast Club. The Motor Vehicle Program (“MVP”) is marketed to President’s Clubmembers.  For 2004, the two programs hadapproximately 208,000 members, which represented a 15.1%, 6.7% and 3.0%penetration, respectively, of the Good Sam Club, the President’s Club, and the Coastto Coast Club.  During the period 2000 to2004, the average annual renewal rate of members participating in theseinsurance programs was over 90%.  Ourmarketing fee revenue is based on the amount of written premiums and theinsurance provider assumes all claim risks.

 

The following sets forth the total number of policies inforce, the dollar amount of written premiums paid to insurance providers, andthe marketing fees generated for 2000 through 2004:

 
|                                                     | ** ** | **2004**   | ** ** | **2003**   | ** ** | **2002**   | ** ** | **2001**   | ** ** | **2000**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Total policies  in force                                 |       | 208,000    |       | 213,400    |       | 230,600    |       | 234,600    |       | 231,200    |       |
|                                                     |       |       |       |       |       |       |       |       |       |       |       |
| Written premiums  paid to insurance providers (millions) |       | $253       |       | $254       |       | $249       |       | $240       |       | $231       |       |
|                                                     |       |       |       |       |       |       |       |       |       |       |       |
| Marketing fees  (millions)                               |       | $20        |       | $20        |       | $19        |       | $18        |       | $19        |       |

 

 

 

*Other Products and Services*

 

Other products andservices marketed to club members include extended vehicle warranties, vehiclefinancing, credit cards, supplemental health and life insurance, and financialservices.  Most of these services areprovided to club members by third parties who pay us a marketing fee.

 

In 1996, we launched theContinued Service Plan, a private label extended vehicle warranty program forRVs.  Total marketing fees for 2004increased 16% over 2003, to a total of $15.9 million.  The program had 31,800 policies in force asof December 31, 2004.  Sales of newpolicies were derived from direct mail marketing, print ads in our magazines,Internet and E-mail solicitations, and retail kiosks in Camping Worldstores.  Policy renewals represented 44%of the total sales in 2004.

 

The RV financing program is administered by E*TRADE Consumer FinanceCorporation.  The number of E*TRADE RVloans to our club members decreased by 33.6% from 2003 to 2004.  The decrease in loans can be attributed to achanging interest rate environment and the fact that many with RV loans havealready refinanced at a lower rate.  During the fourth quarter of 2003, therelationship with E*Trade expanded to include auto, truck, motorcycle, mortgageand home equity loans and brokerage and deposit services. The products wereofficially launched in January 2004.

 

In addition, we evaluate other products and servicesthat club members may find attractive.  Whenintroducing new products and services, we concentrate on products and servicesprovided by third parties, which we can market without significant capitalinvestment by us, and for which we receive a marketing fee from the serviceprovider based on sales volume.  We seekto utilize the purchasing power of our club members to obtain products andservices at attractive prices.

 

9

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**Publications**

We produce and distribute a variety of publications for select marketsin the recreation and leisure industry, including general circulationperiodicals, club magazines, directories, and RV and powersports industry trademagazines.  Revenues are recognized fromthe sale of advertising, subscriptions and direct sales of some of thepublications.  We believe that thefocused audience of each publication is an important factor in attractingadvertisers.

 

10

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The following chart sets forth the circulation and frequencyof our publications:
| ** **                                                | ** ** | **2004**        | ** ** | **Issues Published** | ** ** |
|-----------------------------------------------------------|------------|-----------------|------------|----------------------|------------|
| **Publication**                                           | ** ** | **Circulation** | ** ** | **Annually**         | ** ** |
|                                                      |       |            |       |                 |       |
| **PAID  CIRCULATION MAGAZINES (1)**                       |       |            |       |                 |       |
| American Rider                                            |       | 59,099          |       | 7                    |       |
| ATV Sport                                                 |       | 54,446          |       | 10                   |       |
| Bass &  Walleye Boats                                 |       | 71,324          |       | 9                    |       |
| Bowhunting World  (2)                                     |       | 83,564          |       | 9                    |       |
| Camping Life                                              |       | 80,769          |       | 7                    |       |
| MotorHome                                                 |       | 149,937         |       | 12                   |       |
| Rider                                                     |       | 127,139         |       | 12                   |       |
| SnowGoer                                                  |       | 63,577          |       | 6                    |       |
| Snow Week                                                 |       | 20,033          |       | 15                   |       |
| Trailer Boats                                             |       | 105,125         |       | 11                   |       |
| Trailer Life                                              |       | 272,936         |       | 12                   |       |
| Woman Rider                                               |       | 43,282          |       | 1                    |       |
|                                                      |       |            |       |                 |       |
| **CONTROLLED  CIRCULATION- Business (3)**                 |       |            |       |                 |       |
| Archery Business  (2)                                     |       | 11,000          |       | 7                    |       |
| Boating Industry                                          |       | 23,504          |       | 6                    |       |
| Campground  Management                                    |       | 14,011          |       | 12                   |       |
| PowerSports  Business                                     |       | 11,010          |       | 16                   |       |
| PowerSports  Business Directory                           |       | 9,372           |       | 4                    |       |
| RV Business                                               |       | 18,000          |       | 12                   |       |
|                                                      |       |            |       |                 |       |
| **CONTROLLED  CIRCULATION- Consumer (4)**                 |       |            |       |                 |       |
| ATV Magazine                                              |       | 238,589         |       | 6                    |       |
| Cruising Rider                                            |       | 141,572         |       | 4                    |       |
| Snowmobile                                                |       | 476,567         |       | 2                    |       |
| Watercraft World                                          |       | 108,128         |       | 6                    |       |
|                                                      |       |            |       |                 |       |
| **FREE  DISTRIBUTION (5)**                                |       |            |       |                 |       |
| Thunder Press-  North                                     |       | 33,336          |       | 12                   |       |
| Thunder Press-  East                                      |       | 25,451          |       | 12                   |       |
| Thunder Press-  West                                      |       | 50,159          |       | 12                   |       |
| Woodall’s  Specials (6)                              |       | 59,880          |       | 1                    |       |
| Woodall’s  Regional News Tabloids                    |       | 146,422         |       | 12                   |       |
|                                                      |       |            |       |                 |       |
| **ANNUALS  (1)**                                          |       |            |       |                 |       |
| Blacks Sporting  Directories (2)                          |       |            |       |                 |       |
| Archery                                                   |       | 13,476          |       | 1                    |       |
| Wing and Clay                                             |       | 40,089          |       | 1                    |       |
| Trailer Life  Campground/RV Park & Services Directory |       | 257,051         |       | 1                    |       |
| Trailer Life’s  RV Buyers Guide                      |       | 113,374         |       | 1                    |       |
| Towing Guide                                              |       | 500,019         |       | 1                    |       |
| Ultimate  Snowmobile Buyers Guide                         |       | 170,990         |       | 1                    |       |
| Woodall’s  Buyer’s Guide                        |       | 59,758          |       | 1                    |       |
| Woodall’s  Campground Directory                      |       | 331,642         |       | 1                    |       |
| Woodall’s  Tenting Directory                         |       | 40,578          |       | 1                    |       |
| Woodall’s Go  & Rent... Rent & Go (5)        |       | 123,717         |       | 1                    |       |
|                                                      |       |            |       |                 |       |
| **CLUB  MAGAZINES (7)**                                   |       |            |       |                 |       |
| Coast to Coast  Magazine                                  |       | 137,114         |       | 8                    |       |
| Golf Traveler (8)                                         |       | 77,750          |       | 6                    |       |
| Highways                                                  |       | 955,668         |       | 11                   |       |
| RV View                                                   |       | 577,015         |       | 4                    |       |

* *

----

*(1)**      *Paid circulation, may include supplemental qualifiedcontrolled circulation.

*(2)**      *These titles were divested in the third quarter of2004.

*(3)**      *Trade publication distributed to industry-specificgroups.

*(4)**      *Qualified and limited paid circulation.

*(5)**      *Includes limited paid circulation.

*(6)**      *Distribution to RV outlets, including campgrounds anddealerships.

*(7)**      *Limited to club members and promotional copies.  The price is included in the membership fee.

*(8)**      *Only one magazine is issued when two members are fromthe same household.

 

11

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*PaidCirculation Magazines*

 

*American Rider*, introduced in November 1993, istargeted to owners and operators of Harley-Davidson motorcycles.

 

*ATV Sport* was introduced in May 1998 and targets recreationaland racing sport quad riders.

 

*Bass and Walleye Boats* is the only magazine dedicatedexclusively to freshwater fishing boat owners who demand top performance fromtheir boats, engines and accessories.

 

*Bowhunting World* is the archery equipment authority which providesinformation on new equipment reviews and maintenance techniques, and featuresarticles which discuss ethical hunting, hunting rights, and pertinentlegislative issues.  *BowhuntingWorld* was sold in the third quarter of 2004.

 

*Camping life*is dedicated to providing family-style campers andothers with articles about destinations, products and activities to enhancetheir outdoor lifestyles.

 

*MotorHome* is a monthly periodical for owners andprospective buyers of motorhomes which has been published since 1968 andfeatures articles on subjects such as product tests, travel and touristattractions.

 

*Rider* is a monthly magazine for motorcycle touringenthusiasts and has been published since 1974. Each issue focuses on motorcycles, personalities, technical subjects,travel notes and other features of interest to this recreational affinitygroup.

 

*SnowGoer* is designed for the sport’s highly active participantsand provides detailed equipment and product critiques and maintenance tips.

 

*Snow Week* is the central source of information for the competitionand high-performance snowmobiling market segment.  The publication provides timely, year-roundarticles on racing, performance enhancing products, technical assistance, newproduct introductions, and general industry information.

 

*Trailer Boats*magazine, the country’s only trailer boating magazine,is dedicated to the hard-core enthusiast of trailerable boats, marinepropulsion, accessory installations and use, maintenance and repair, towvehicles, boat trailering, seamanship, water sports and cruising.

 

*Trailer Life*, initially published in 1941, is the leading consumermagazine for the RV industry, featuring articles on subjects including producttests, travel and tourist attractions.

 

###### *Woman Rider*was introduced in 2000 and filled an important void inmotorcycle publications.  Readers learnabout new products from the female point of view and discover more about thelifestyle of motorcycling.

 

12

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#### *Controlled Circulation Magazines- Business*

 

*Archery Business*is a trade publication for archery dealers andpresents a mix of industry news and trends, product reviews and sales tipsdesigned to improve financial performance of archery product dealers.  *Archery Business*was sold in the third quarter of 2004.

 

*Boating Industry*is the leading source of news and information fordealers, manufacturers, aftermarket vendors and other professionals in themarine industries through its bi-monthly magazine and daily web site.

 

*Campground Management* is the leading trade magazine for thecampground industry.

 

*PowerSports Business*is an industry trade magazine, introducedin January 1998, which combines the previously issued *SnowmobileBusiness* and *Watercraft Business*with a motorcycle and ATV business section. Distribution is to dealers servicing these industries, which in numerouscases have combined operations to service more than one of these segments.

 

*PowerSports Directories* are supplier directories for each of theATV, snowmobile and watercraft markets. These directories feature hundreds of manufacturers and suppliers ofparts, services, apparel and much more, complete with detailed companyinformation.

 

*RV Business* is the leading trade magazine coveringindustry news and trends for RV dealers, manufacturers, suppliers, associationsand others.

 

##### *Controlled CirculationMagazines- Consumer*

 

*ATV Magazine’s* first issue was published in October 1995.  The publication is designed to reach largenumbers of active ATV owners with comprehensive product information during thepeak periods when equipment is purchased.

 

*Cruising Rider* was introduced in March 1998 and targets cruisermotorcycle owners and buyers.

 

*Snowmobile* magazine delivers broad-based editorial andsnowmobile-related information to its audience of active snowmobileenthusiasts.

 

*Watercraft World* is targeted to avid personal watercraftenthusiasts and provides detailed critiques of watercraft, in-depth gear andaccessory evaluations, technical tips and racing information.  *PWC Magazine*was combined with *Watercraft World* in 2002.

 

#### *Free Distribution Publications*

#### * *

###### *Thunder Press*newspapers are published monthly in three separate editionsto reach the country’s motorcycling public and are available primarily throughmotorcycle dealers.  This tell-it-like-it-ismagazine is designed for the ultra-active motorcycle enthusiast who feelspassionate about the lifestyle.

 

*Woodall’s Specials* are annualpublications geared around specific events, such as the beginning of thecamping season and the beginning of the snowbird season.  Its editorial content is aimed at seasonevents and the ads are largely from regional campgrounds.

#### * *

*Woodall’s Regional News Tabloids* publications aredesigned to appeal to the prospective or first-time RV owner.  Stories in these publications cover areacampgrounds and RV dealerships, as well as new vehicles on the market and newproducts within the industry.  Thepublications are primarily distributed at campgrounds and RV parks, as well asat RV shows and state welcome centers.

 

13

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#### *Annual Publications*

 

*Blacks*directories were purchased in 2002 and consist ofthree**directories*:  Archery/Bowhunting, Wing and Clay, and FlyFishing. *The *Archery/Bowhunting*and *Wing and Clay*directorieswere produced in 2004 prior to our selling the *Blacks*directoriesin the third quarter of 2004.

 

*Trailer Life Campground/ RV Park & ServicesDirectory*,initially published in 1972, is an annually updated directory which providesinformation on and ratings for approximately 12,100 public and privatecampgrounds, and approximately 800 RV service centers, including almost 800tourist attractions in North America along with color maps of the areascovered.  The publication features GoodSam Parks that offer discounts on overnight camping fees to our clubmembers.  This directory is sold primarilyby direct mail to Good Sam Club members, at RV dealerships and inbookstores.  In 2000, we began issuing aversion of the directory on CD-ROM.

 

*Trailer Life’s RV Buyers Guide*, issued annually, features more than 400listings with photos, floor plans and specifications on new RVs includingtravel trailers, fifth-wheel trailers, folding camping trailers, motorhomes andpickup campers.  The publication is soldat newsstands and by mail order from magazine advertisements.

 

The*TowingGuide*is a booklet dedicated to meeting the needs of all camping andboating enthusiasts that are towing a trailer. This booklet serves as a step-by-step tutorial for newcomers and arefresher course for trailer-towing veterans to ensure that maximum enjoymentof their trailer by making informed decisions.

 

The*UltimateSnowmobile Buyers Guide*is an annual publication focusing on newsnowmobiles introduced in the current year, along with accessories, providingcompetitive statistics to enable the reader to make informed purchases.

 

*Woodall’s Buyer’s Guide* is an annual publication distributedmainly through bookstores and newsstands, which provides photos, floor plansand specifications of the new model year RVs. The buyer’s guide was first published in 1978.

 

*Woodall’s Campground Directory,* initially published in 1948, is anannual consumer directory offered in both national and regional editions.  This directory is primarily distributedthrough book stores.

 

*Woodall’s Tenting Directory*is an annual directory distributedprimarily through newsstands, which provides information on both government andprivately-owned campgrounds and the outdoor activities and attractions that areavailable near them.

 

*Woodall’s Go & Rent... Rent& Go* is anannual catalog providing information on where to find on-site lodging and cabinrentals at RV Parks & Campgrounds and “Over-the-Road” RV Rentals, as wellas fully equipped campsites throughout the U.S.A. and Canada.  This book features “turn-key” campingexperiences for those who want to try camping, rent a cabin, or rent afully-equipped campsite.

#### * *

#### *Club or Trade Magazines and Books*

 

Each of our membership clubs has its own publication which providesinformation on club activities and events, feature stories and otherarticles.  We publish *Highways* for the Good Sam Club, *Coast toCoast Magazine* for the Coast to Coast Club, *The GolfTraveler* for the Golf Card Club, and*RV View*for the President’s Club.  We also periodicallypublish books targeted to our club membership which address the RV lifestyle.

 

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**Retail**

 

#### *Camping World Supercenters*

 

Camping World is a national specialty retailer ofmerchandise and services for RV owners. With the opening of our two newest Camping World supercenters in thefourth quarter of 2004, we currently have thirty-nine Camping World retaillocations, which are located in twenty-three states.  These stores accounted for approximately 72%of the 2004 total retail revenue in merchandise revenues, while approximately17% were derived from catalog and Internet sales and approximately 11% werederived from non-merchandise revenues such as shop fees, and supplies.

 

In the RV accessory industry, we believe thatCamping World has a high level of name recognition, an effective triple channeldistribution strategy (store, catalog, and Internet), and a commitment to offera broad selection of specialized RV products and services at competitive pricescombined with technical assistance and on-site installation.  Camping World’s supercenters offerapproximately 8,000 SKUs, of which we estimate approximately 70% are notregularly available in general merchandise stores.  In addition, general merchandise stores donot provide installation or repair services for RV products, which areavailable at Camping World’s supercenters. Products sold by Camping World include specialty-sized refrigerators,housewares and other appliances, bedding and furniture, generators and hydraulicleveling systems, awnings, folding boats, chairs, ladders, cleaning andmaintenance products, bicycles, hitch-towing, sanitation products, automotiveelectronics and lifestyle products. Further, resource centers, staffed with licensed insurance agents atnumerous locations, market such products and services as vehicle insurance,extended warranty and ERS.  Camping World’ssupercenters are designed to provide one-stop shopping by combining broadproduct selection, technical assistance and on-site installation services.  We strategically locate Camping Worldsupercenters in areas where many RV owners live, along major Interstates,and/or in proximity to destinations frequented by RV users.

 

Camping World sources its products fromapproximately 1,100 vendors.  CampingWorld attends regional, national and international trade shows to determine theproducts it will offer.  The purchasingactivities of Camping World are focused on RV parts and accessories,electronics, housewares, hardware, automotive, crafts, clothing, homefurnishings, gifts, camping and sporting goods. Camping World uses an automated “plan-o-gram” system to develop andmaintain merchandising plans unique to each supercenter and an inventoryreplenishment system for its operations to improve in stock rates on keyitems.  Camping World believes that thevolume of merchandise it purchases from domestic and international suppliersand its ability to buy direct from manufacturers enables them to obtainmerchandise at costs which compare favorably to local RV dealers andretailers.  Camping World does not enterinto material long-term contracts or commitments with their vendors.

 

The retail supercenters are periodically reset to enhance the customersshopping experience as well as to maximize merchandise category offerings.  New products and services are introduced inorder to keep pace with the advances of the RV industry and to satisfy ourcustomers’ needs.  Customers takeadvantage of the state-of-the art performance centers staffed with expert RVtechnical consultants and equipped with demonstrable merchandise to assist ineducating customers about RV performance products.  The resource centers provide a greatopportunity to promote a more interactive and consultative selling environment.  They are staffed with professionals offeringinsurance products, extended warranties, roadside service, club memberships,and RV financing, allowing the enhanced resource centers to add to the depth ofservices to which Camping World customers have become accustomed.  Finally, store dress, promotional signage anddirectional signage are periodically refreshed to further enhance our customers’shopping experience at Camping World’s supercenters.

 

Camping World’s supercenters generally range insize from approximately 10,000 to 64,000 square feet.  Approximately 40% of each supercenter isdevoted to a retail sales floor, a customer service area, and a technicalinformation counter; 40% is comprised of the installation facility, whichcontains 4 to 16 drive-through installation bays; and 20% is allocated tooffice and warehouse space.  Largeparking

 

15

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areas provide sufficient space and facilitatemaneuvering of RVs.  By combining broadproduct selection, technical assistance, installation and repair services,Camping World’s supercenters provide one-stop shopping for RV owners.  Camping World maintains toll-free telephonenumbers for customers to schedule installation and repair appointments.  All supercenters are open seven days a week.

 

Camping World intends to continue the controlled expansion of theirsupercenter store network while at the same time develop dealer partnershipsacross North America.  We plan toestablish Camping World stores alongside or within existing RVdealerships.  This marketing strategywill provide an expanded number of customers with access to the vast array ofproducts and services that we offer and generate traffic for our dealerpartners by marketing locally, regionally and nationally our extensive partsand accessories business.  Camping Worldhas established twenty such Camping World stores alongside or within RVdealerships, including thirteen Camping World stores that are part of ourdealer alliance program.  Of the CampingWorld stores that are part of our dealer alliance program, seven are locatedwithin dealerships indirectly owned or operated by FreedomRoads, LLC, (“FreedomRoads”).  FreedomRoads is indirectly owned andcontrolled by Stephen Adams, our Chairman.

 

 

#### *Mail Order Operations and Internet*

 

Camping World initiated its catalog operations in1967.  Camping World currently has aproprietary mailing list of approximately 2.6 million RV owners, all of whomhave made a purchase or requested a catalog from Camping World within the prior60 months.  Camping World maintains adatabase of these names, which includes information such as order frequency,size of order, date of most recent order and type of merchandise purchased.  Camping World analyzes its database todetermine those customers most likely to order from Camping World’scatalogs.  As a result, Camping World isable to target catalog mailings more effectively than direct marketers ofcatalogs offering general merchandise. Camping World continually expands its proprietary mailing list throughin-store subscriptions and requests for catalogs in response to advertisementsin regional publications directed to RV owners. In addition, Camping World rents mailing lists of RV owners from thirdparties.

 

During 2004, Camping World distributed 7.6 millioncatalogs, 6.4 million of which were mailed in thirteen separate mailings, andthe remaining 1.2 million catalogs were distributed in supercenters, atcampgrounds and other RV locations, and as package inserts.  During the same period, Camping Worldprocessed approximately 342,000 catalog orders at an average net order size of$115, excluding postage and handling charges. Camping World distributed thirteen high-quality, full-color catalogsduring 2004, consisting of one catalog each month plus a Master Catalog in theSpring of 2004.

 

The Internet is proving to be a significant,low-cost source for new club members, subscriptions and other ancillary productsales.  We maintain thirty-three Internetweb sites, which are accessible through *http://www,rv,net*,and are experiencing significant growth. In 2000, our club operations commenced a low-cost marketing strategythrough e-mail membership acquisition campaigns.  Members added in 2004 under these programsrepresented approximately 11.9% of all new club members.  E-mail acquisition campaigns and Internetonline revenue totaled approximately $26.0 million in 2004, an increase of 43.6%over prior year.

 

 

**Marketing**

 

Wemarket our club memberships and related products and services through directmail, e-mail, inserts, ride-alongs, space advertisements, promotional events,point of sale, member-get-a-member campaigns, and telemarketing.  Direct response marketing efforts account forapproximately 49% of new enrollments with the remaining 51% derived from othersources.  We use a variety ofcommercially available mailing lists of RV owners in our direct mailefforts.  Currently, the most widely

 

16

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usedlist databases are provided by three commercial list compilers, and directresponse lists are from RV industry participants, RV consumer surveys, andproprietary in-house lists.

 

Our publications segment solicits advertisements through an internalsales force and by paying commissions to advertising agencies and independentcontractors who place advertisements. Many advertisers are repeat customers with whom we have long standingrelationships.

 

We market our retail products through mail order catalogs, direct mailretail flyers, advertisements in national and regional industry publications,vendor co-op advertising programs, promotional events, the President’s Clubdirect mailings and personal solicitations and referrals. Camping World’sprincipal marketing strategy is to capitalize on its broad name recognitionamong RV owners.

 

 

**Operations**

Our customer service operations are located in Denver, Colorado andBowling Green, Kentucky.  The primaryfocus of these groups is to manage our customers’ expectations and relationshipwith the organization.  On average, thesemember service operations process approximately 6,100 telephone callsdaily.  Approximately fifty percent ofthe calls into these centers originate from the marketing efforts of catalogmailings, membership acquisition, membership renewals and associated ancillaryproducts and events.  All such effortsuse toll-free numbers as a response mechanism.

 

Camping World’s catalog and Internet operations, located at itsheadquarters in Bowling Green, Kentucky, are supported by the customer contactcenter in the same location.  Orders areusually processed and shipped within 24 hours of receipt.

 

Fulfillment operations involve the processing of orders and checksprincipally received by mail.  Certainfulfillment operations are performed by third parties.  Our publication operations develop the layoutfor publications and outsource printing to third parties.

 

 

**Information Support Services**

 

Weutilize integrated computer systems to support our membership club andpublishing operations.  A databasecontaining all customer activity across our various businesses and programs hasbeen integrated into our web sites and call centers.  Comprehensive information on each member,including a profile of the purchasing activities of members, is available tocustomer service representatives when responding to member requests and whenmarketing our products and services.  Weemploy publishing software for publication makeup and content and foradvertising to support our publications operations.  A wide-area network facilitates communicationwithin and between our offices.  We alsoutilize information technology, including list segmentation and merge and purgeprograms, to select prospects for direct mail solicitations and other directmarketing efforts.

 

CampingWorld’s management information systems and electronic data processing systemsconsist of an extensive range of retail, mail order, financial andmerchandising systems, including purchasing, inventory distribution andcontrol, sales reporting, accounts payable and merchandise management.  Camping World’s management information systemincludes point-of-sale registers that are equipped with bar code readers ineach supercenter.  These registers arepolled nightly by a central computer. With this point-of-sale information and the information from CampingWorld’s on-line distribution centers, Camping World compiles comprehensivedata, including detailed sales volume and inventory information by product,merchandise transfers and receipts, special orders, supply orders and returnsof product purchases to vendors.  Inconjunction with its nightly polling, Camping World’s central computer sendsprice changes to registers at the point of sale.  The

 

17

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registerscapture President’s Club member numbers and associated sales and references tospecific promotional campaigns. Management monitors the performance of each supercenter and mail orderoperation to evaluate inventory levels, determine markdowns and analyze grossprofit margins by product.

 

CampingWorld’s catalog operations also utilize a computerized management systemallowing on-line desktop access to information which previously required manualretrieval.  Screen prompts that provideproduct, promotional, and revenue potential information have allowed CampingWorld to maintain high service levels during seasonal sales peaks.

 

**Regulation**

 

Our operations are subject to varying degrees of federal, state andlocal regulation.  Specifically, ouroutbound telemarketing, direct mail, and ERS, as well as certain servicesprovided by third parties, including insurance, RV Financing, and extendedwarranty programs, are currently subject to certain regulation, and may besubjected to increased regulation in the future.  We do not believe that such federal, stateand local regulations currently have a material impact on our operations.  However, new regulatory efforts impacting ouroperations may be proposed from time to time in the future at the federal,state and local level.  There can be noassurance that such regulatory efforts will not have a material adverse effecton our ability to operate our businesses or on our results of operations.

 

 

**Competition**

 

In general, our membership clubs, retail and catalog operations andpublications compete with numerous organizations in the recreation industry fordisposable income spent on leisure activities. By offering significant membership benefits at a reasonable cost andactively marketing to club members, we believe that we have been able tomaintain a loyal following for our membership organizations as evidenced by thehigh renewal rates of our membership clubs. The products and services marketed by us compete with similar productsand services offered by other providers. However, management believes that we are able to use the large volume ofpurchases by our club members to secure attractive pricing for the products andservices marketed by us.

 

**Employees**

 

As of December 31, 2004, we had 1,631 full-time and 169 part-time orseasonal employees, consisting of 8 executives, 1,189 employees in retailoperations, 345 employees in administrative and club operations, 210 employeesin publishing and advertising sales, 12 employees in resort services and 36employees in marketing.  No employees arecovered by a collective bargaining agreement. We believe that our employee relations are good.

 

**Trademarks and Copyrights**

 

We own a variety of registered trademarks and service marks for thenames of our clubs, magazines and other publications.  We also own the copyrights to certainarticles in our publications.  We believethat our trademark and copyrights have significant value and are important to ourmarketing efforts.

 

18

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**ITEM 2:  PROPERTIES**

 

The table below sets forth certain information concerning ourproperties.  The leased propertiesgenerally provide for fixed monthly rentals with annual escalation clauses andthe lease expiration date includes all stated option periods.

 

 
| ** **                                                                                | ** ** | **Square** | ** ** | ** ** | ** ** | **Owned/** | ** ** | **Lease**      | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|
| ** **                                                                                | ** ** | **Feet**   | ** ** | **Acres**  | ** ** | **Leased** | ** ** | **Expiration** | ** ** |
| **Corporate  Headquarters:**                                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |
| Ventura, CA                                                                               |       | 74,100     |       |       |       | Leased     |       | 2029           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
| **Other  Office Facilities:**                                                             |       |       |       |       |       |       |       |           |       |
| Carson, CA  (regional publication office)                                                 |       | 10,048     |       |       |       | Leased     |       | 2006           |       |
| Denver, CO  (customer service, warehousing fulfillment, and information system functions) |       | 60,000     |       |       |       | Leased     |       | 2029           |       |
| Bowling Green,  KY (retail administrative headquarters and mail order operations)         |       | 31,278     |       |       |       | Leased     |       | 2029           |       |
| Bowling Green  Headquarters Annex                                                         | ** ** | 4,100      |       |       |       | Leased     |       | 2006           |       |
| Seattle, WA  (regional publication sales office)                                          | ** ** | 912        |       |       |       | Leased     |       | 2005           |       |
| Elkhart, IN  (regional publication sales office)                                          | ** ** | 4,076      |       |       |       | Leased     |       | 2005           |       |
| Maple Grove, MN  (Ehlert Publications Group, Inc. headquarters)                           | ** ** | 17,496     |       |       |       | Leased     |       | 2010           |       |
| Earth City, MO  (information systems functions)                                           |       | 1,769      |       |       |       | Leased     |       | 2006           |       |
| Fort Lauderdale,  Florida (regional publication office)                                   |       | 1,219      |       |       |       | Leased     |       | 2005           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
| **Distribution  Centers:**                                                                |       |       |       |       |       |       |       |           |       |
| Bowling Green,  Kentucky                                                                  |       | 104,000    |       | 6.780      |       | Leased     |       | 2005           |       |
| Bakersfield,  California                                                                  |       | 85,747     |       | 14.827     |       | Leased     |       | 2027           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
| Franklin,  Kentucky                                                                       |       | 175,000    |       | 33.000     |       | Leased     |       | 2035           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
|                                                                                      |       |       |       |       |       |       |       |           |       |
| **Camping  World Supercenter Locations:**                                                 |       |       |       |       |       |       |       |           |       |
| Tucson, AZ                                                                                |       | 12,145     |       | 2.000      |       | Leased     |       | 2018           |       |
| Mesa, AZ                                                                                  |       | 27,500     |       | 3.140      |       | Leased     |       | 2010           |       |
| Bakersfield, CA  (2)                                                                      |       | 23,325     |       | 9.940      |       | Leased     |       | 2023           |       |
| La Mirada, CA                                                                             |       | 33,479     |       | 5.501      |       | Leased     |       | 2027           |       |
| San Marcos, CA                                                                            |       | 25,522     |       | 2.212      |       | Leased     |       | 2027           |       |
| Fairfield, CA                                                                             |       | 43,434     |       | 3.780      |       | Leased     |       | 2009           |       |
| Rocklin, CA                                                                               |       | 29,085     |       | 4.647      |       | Leased     |       | 2037           |       |
| San Bernardino,  CA                                                                       |       | 18,126     |       | 1.665      |       | Leased     |       | 2012           |       |
| San Martin, CA                                                                            |       | 29,486     |       | 5.000      |       | Leased     |       | 2023           |       |
| Valencia, CA                                                                              |       | 64,410     |       | 9.231      |       | Leased     |       | 2027           |       |
| Denver, CO                                                                                |       | 27,085     |       | 4.132      |       | Leased     |       | 2037           |       |
| Ft. Myers, FL                                                                             |       | 22,886     |       | 4.217      |       | Leased     |       | 2012           |       |
| Kissimmee, FL                                                                             |       | 58,382     |       | 6.043      |       | Leased     |       | 2027           |       |
| Tampa, FL                                                                                 |       | 40,334     |       | 3.711      |       | Leased     |       | 2026           |       |
| Tallahassee, FL  (1)                                                                      |       | 8,494      |       | 12.630     |       | Leased     |       | 2024           |       |
| Bolingbrook, IL                                                                           |       | 25,126     |       | 5.299      |       | Leased     |       | 2035           |       |
| Clarksville, IN  (2)                                                                      |       | 19,480     |       | 6.291      |       | Leased     |       | 2034           |       |
| Elkhart, IN (1)                                                                           |       | 25,953     |       | 2.500      |       | Leased     |       | 2034           |       |
| Bowling Green,  KY                                                                        |       | 37,615     |       | 2.750      |       | Leased     |       | 2027           |       |
| Hammond, LA (2)                                                                           |       | 27,096     |       | 68.454     |       | Leased     |       | 2034           |       |
| ** **                                                                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** |

 

19

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| Belleville, MI         |   | 44,248 |   | 7.260  |   | Leased |   | 2025 | ** ** |
|------------------------|--------|--------|--------|--------|--------|--------|--------|------|------------|
| Rogers, MN             |   | 24,700 |   | 6.303  |   | Leased |   | 2025 |       |
| Statesville, NC  (1)   |   | 39,050 |   | 7.412  |   | Leased |   | 2024 |       |
| Bridgeport, NJ         |   | 24,581 |   | 6.920  |   | Leased |   | 2031 |       |
| Amsterdam, NY (2)      |   | 13,420 |   | 28.000 |   | Leased |   | 2032 |       |
| Henderson, NV          |   | 25,850 |   | 4.400  |   | Leased |   | 2025 |       |
| Brunswick, OH  (1)     |   | 23,233 |   | 4.087  |   | Leased |   | 2037 |       |
| Oklahoma City,  OK (2) |   | 12,500 |   | 8.219  |   | Leased |   | 2023 |       |
| Wilsonville, OR        |   | 32,850 |   | 4.653  |   | Leased |   | 2016 |       |
| Myrtle Beach, SC       |   | 38,962 |   | 5.410  |   | Leased |   | 2027 |       |
| Spartanburg, SC  (1)   |   | 11,900 |   | 19.263 |   | Leased |   | 2033 |       |
| Chattanooga, TN  (1)   |   | 9,400  |   | 10.840 |   | Leased |   | 2024 |       |
| Nashville, TN          |   | 34,478 |   | 3.238  |   | Leased |   | 2027 |       |
| Anthony, TX            |   | 7,061  |   | 32.000 |   | Leased |   | 2035 |       |
| Denton, TX             |   | 22,984 |   | 6.887  |   | Leased |   | 2037 |       |
| New Braunfels,  TX (1) |   | 43,397 |   | 19.100 |   | Leased |   | 2035 |       |
| Mission, TX            |   | 23,094 |   | 3.430  |   | Leased |   | 2015 |       |
| Draper, UT             |   | 27,675 |   | 8.031  |   | Leased |   | 2026 |       |
| Manassas, VA (2)       |   | 16,348 |   | 9.754  |   | Leased |   | 2018 |       |
| Fife, WA               |   | 35,659 |   | 5.840  |   | Leased |   | 2037 |       |

 

----

(1)            This supercenter is located with a FreedomRoadsdealership and the acreage reflects the total dealership property.

(2)            This supercenter is located with an RV dealership (otherthan a FreedomRoads dealership) and the acreage reflects the total dealership property.

 

We also lease a body shop of 10,500 square feet onapproximately 0.7 acres in Denver, Colorado, a body shop of 12,000 square feeton approximately 1.9 acres in Bellville, Michigan and other miscellaneous officeequipment.  In addition, we own 12.439acres of unimproved land adjacent to the New Braunfels, Texas Camping WorldSupercenter.

 

 

**ITEM 3: LEGAL PROCEEDINGS**

 

From time to time, we are involved inlitigation arising in the normal course of business operations.

 

In September 2004, the Company’s subsidiary,CWI, Inc., was sued in California state court by Privacy Rights Clearinghouseand Benjamin Greene in a suit alleging that CWI, Inc. was recording personalidentification information from retail customers in violation of certainCalifornia statutes.  The plaintiff seeksinjunctive relief preventing CWI, Inc. from engaging in any act or practiceconstituting unfair competition under the statutes and for statutory penaltiesand damages.  CWI, Inc. has responded tothe suit and denies that its practices violate the statutes.  The Company has not recorded a provision forloss as of the date of the accompanying financial statements.  In the opinion of management, the likelihoodof a material unfavorable outcome is not probable as of the date of theaccompanying consolidated financial statements.

 

 

**ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

None.

 

 

20

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**PART II**

 

 

**ITEM 5:  MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

Not Applicable

 

21

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**ITEM 6:  SELECTED FINANCIAL DATA**

Theselected financial data of our company for each of the five years endedDecember 31 are derived from our audited consolidated financialstatements.  Prior to April 27, 2004, AGIwas a wholly-owned subsidiary of Affinity Group Holding, Inc. (“AGHI”).  On April 27, 2004, AGHI was merged into AGI,with AGI being the surviving entity after the merger.  The merger was accounted for as a combinationof entities under common control using historical costs.  All periods have been restated to reflect theresults of operations of AGI and AGHI, prior to the April 27, 2004 merger.  Our selected financial data should be read inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and our Consolidated Financial Statements and thenotes thereto included herein.
| ** **                                                                             | ** ** | **December 31,**           | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------|------------|
| **Statement of Operations Data:**                                                      | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                                                                             | ** ** | **(dollars in thousands)** | ** ** |
| REVENUES:                                                                              |       |                       |       |   |   |   |   |   |   |   |   |
| Membership services                                                                    |       | $                          | 131,608    |   | $ | 128,664 |   | $ | 124,546 |   | $ | 119,958 |   | $ | 121,393 |   |
| Publications                                                                           |       | 77,977                     |       | 71,436 |   | 66,654 |   | 65,150 |   | 68,519 |   |
| Retail                                                                                 |       | 255,094                    |       | 225,306 |   | 239,922 |   | 220,264 |   | 215,160 |   |
|                                                                                   |       | 464,679                    |       | 425,406 |   | 431,122 |   | 405,372 |   | 405,072 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                                                          |       |                       |       |   |   |   |   |   |   |   |   |
| Membership services                                                                    |       | 84,231                     |       | 79,500 |   | 74,097 |   | 72,944 |   | 77,625 |   |
| Publications                                                                           |       | 53,042                     |       | 48,392 |   | 45,351 |   | 46,175 |   | 46,298 |   |
| Retail                                                                                 |       | 151,196                    |       | 136,137 |   | 158,265 |   | 148,244 |   | 143,018 |   |
|                                                                                   |       | 288,469                    |       | 264,029 |   | 277,713 |   | 267,363 |   | 266,941 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| GROSS PROFIT                                                                           |       | 176,210                    |       | 161,377 |   | 153,409 |   | 138,009 |   | 138,131 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| OPERATING EXPENSES:                                                                    |       |                       |       |   |   |   |   |   |   |   |   |
| Selling, general and administrative                                                    |       | 116,137                    |       | 104,066 |   | 101,608 |   | 86,050 |   | 85,513 |   |
| Restructuring charge                                                                   |       | —                     |       | 1,210 |   | 2,269 |   | — |   | — |   |
| Depreciation and amortization                                                          |       | 13,893                     |       | 10,298 |   | 9,893 |   | 16,404 |   | 16,885 |   |
|                                                                                   |       | 130,030                    |       | 115,574 |   | 113,770 |   | 102,454 |   | 102,398 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| INCOME FROM OPERATIONS                                                                 |       | 46,180                     |       | 45,803 |   | 39,639 |   | 35,555 |   | 35,733 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| NON-OPERATING ITEMS:                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                  |       | (23,239                    | )          | (18,123 | ) | (16,862 | ) | (24,234 | ) | (27,735 | ) |
| Debt extinguishment expense                                                            |       | (5,035                     | )          | (3,218 | ) | — |   | (71 | ) | — |   |
| Other non-operating income (expense), net                                              |       | 420                        |       | 201 |   | (44 | ) | (6,574 | ) | 5 |   |
|                                                                                   |       | (27,854                    | )          | (21,140 | ) | (16,906 | ) | (30,879 | ) | (27,730 | ) |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF  ACCOUNTING CHANGE |       | 18,326                     |       | 24,663 |   | 22,733 |   | 4,676 |   | 8,003 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| INCOME TAX EXPENSE                                                                     |       | (8,075                     | )          | (9,275 | ) | (9,032 | ) | (4,110 | ) | (4,700 | ) |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                   |       | 10,251                     |       | 15,388 |   | 13,701 |   | 566 |   | 3,303 |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                 |       | —                     |       | — |   | (1,742 | ) | — |   | — |   |
|                                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| NET INCOME                                                                             |       | $                          | 10,251     |   | $ | 15,388 |   | $ | 11,959 |   | $ | 566 |   | $ | 3,303 |   |

 

22

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| ** **                          | ** ** | **December 31,**           | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ** **                          | ** ** | **2004**                   | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** | **2000** | ** ** |
| ** **                          | ** ** | **(dollars in thousands)** | ** ** |
| Balance Sheet Data (at period end): |       |                       |       |   |   |   |   |   |   |   |   |
| Working capital (deficiency)        |       | $                          | (10,813    | ) | $ | (25,770 | ) | $ | (39,820 | ) | $ | (55,585 | ) | $ | (51,796 | ) |
| Total assets                        |       | 320,222                    |       | 302,862 |   | 285,960 |   | 305,622 |   | 358,374 |   |
| Deferred revenues and gains (1)     |       | 99,130                     |       | 98,410 |   | 94,475 |   | 96,162 |   | 89,968 |   |
| Total debt                          |       | 314,336                    |       | 240,127 |   | 223,001 |   | 228,316 |   | 285,486 |   |
| Total stockholder’s deficit    |       | (158,108                   | )          | (88,905 | ) | (87,548 | ) | (76,349 | ) | (76,915 | ) |
|                                     |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

 

(1) Deferred revenues representcash received by us in advance of the recognition of revenues in accordancewith accounting principles generally accepted in the United States.  Deferred revenues primarily reflect clubmembership dues, annual ERS fees, advances on third party credit card feerevenues and publication subscriptions. These revenues are recognized at the time the goods or services areprovided or over the membership period, which averages approximately 18months.  The deferred revenue balance for2004, 2003, 2002 and 2001 also include deferred gains of $10.8 million, $11.3million, $11.8 million and $12.1 million, respectively, from the real estatesale-leaseback transactions which occurred in December 2001.

 

23

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**ITEM 7: MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION**

 

 

Thefollowing tables set forth the components of the statements of operations forthe years ended December 31, 2004, 2003, and 2002 as a percentage of totalrevenues, and the comparison of those components from period to period.  The following discussion is based on ourConsolidated Financial Statements included elsewhere herein.  Our revenues are derived principally frommembership services, including club membership dues and marketing fees paid tous for services provided by third parties, from publications, includingsubscriptions and advertising, and from retail sales.

 

24

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*** ***

**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**TABLE FORPERCENTAGE COMPARISONS OF TOTAL REVENUES**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

** **

 
| ** **                                                                              | ** ** | **Percentage of**  | ** ** | **Percentage Increase/** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                                                                              | ** ** | **Total Revenues** | ** ** | **(Decrease)**           | ** ** |
| ** **                                                                              | ** ** | **2004**           | ** ** | **2003**                 | ** ** | **2002** | ** ** | **Year 2004**

**over 2003** | ** ** | **Year 2003**

**over 2002** | ** ** |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| REVENUES:                                                                               |       |               |       |                     |       |   |   |   |   |   |   |
| Membership services                                                                     |       | 28.3               | %          | 30.2                     | %          | 28.9 | % | 2.3 | % | 3.3 | % |
| Publications                                                                            |       | 16.8               | %          | 16.8                     | %          | 15.5 | % | 9.2 | % | 7.2 | % |
| Retail                                                                                  |       | 54.9               | %          | 53.0                     | %          | 55.6 | % | 13.2 | % | (6.1 | )% |
|                                                                                    |       | 100.0              | %          | 100.0                    | %          | 100.0 | % | 9.2 | % | (1.3 | )% |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                                                           |       |               |       |                     |       |   |   |   |   |   |   |
| Membership services                                                                     |       | 18.1               | %          | 18.7                     | %          | 17.2 | % | 6.0 | % | 7.3 | % |
| Publications                                                                            |       | 11.4               | %          | 11.4                     | %          | 10.5 | % | 9.6 | % | 6.7 | % |
| Retail                                                                                  |       | 32.6               | %          | 32.0                     | %          | 36.7 | % | 11.1 | % | (14.0 | )% |
|                                                                                    |       | 62.1               | %          | 62.1                     | %          | 64.4 | % | 9.3 | % | (4.9 | )% |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| GROSS PROFIT                                                                            |       | 37.9               | %          | 37.9                     | %          | 35.6 | % | 9.2 | % | 5.2 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| OPERATING EXPENSES:                                                                     |       |               |       |                     |       |   |   |   |   |   |   |
| Selling, general and administrative                                                     |       | 25.0               | %          | 24.4                     | %          | 23.6 | % | 11.6 | % | 2.4 | % |
| Restructuring charge                                                                    |       | —             |       | 0.3                      | %          | 0.5 | % | (100.0 | )% | (46.7 | )% |
| Depreciation and amortization                                                           |       | 3.0                | %          | 2.4                      | %          | 2.3 | % | 34.9 | % | 4.1 | % |
|                                                                                    |       | 28.0               | %          | 27.1                     | %          | 26.4 | % | 12.5 | % | 1.6 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| INCOME FROM OPERATIONS                                                                  |       | 9.9                | %          | 10.8                     | %          | 9.2 | % | 0.8 | % | 15.6 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| NON-OPERATING ITEMS:                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| Interest expense, net                                                                   |       | (5.0               | )%         | (4.2                     | )%         | (3.9 | )% | 28.2 | % | 7.5 | % |
| Debt extinguishment expense                                                             |       | (1.1               | )%         | (0.8                     | )%         | — |   | 56.5 | % | — |   |
| Other non-operating (expense) income, net                                               |       | 0.1                | %          | —                   |       | — |   | 109.0 | % | (556.8 | )% |
|                                                                                    |       | (6.0               | )%         | (5.0                     | )%         | (3.9 | )% | 31.8 | % | 25.0 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF ACCOUNTING  CHANGE |       | 3.9                | %          | 5.8                      | %          | 5.3 | % | (25.7 | )% | 8.5 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| INCOME TAX EXPENSE                                                                      |       | (1.7               | )%         | (2.2                     | )%         | (2.1 | )% | (12.9 | )% | 2.7 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE CUMULATIVE EFFECT OF  ACCOUNTING CHANGE              |       | 2.2                | %          | 3.6                      | %          | 3.2 | % | (33.4 | )% | 12.3 | % |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                  |       | —             |       | —                   |       | (0.4 | )% | — |   | (100.0 | )% |
|                                                                                    |       |               |       |                     |       |   |   |   |   |   |   |
| NET INCOME                                                                              |       | 2.2                | %          | 3.6                      | %          | 2.8 | % | (33.4 | )% | 28.7 | % |

 

25

----

 

**YearEnded December 31, 2004 Compared with Year Ended December 31, 2003**

 

*Revenues*

 

Revenues of $464.7 millionfor 2004 increased by approximately $39.3 million or 9.2% from the comparableperiod in 2003.

 

Membership services revenuesfor 2004 of $131.6 million increased by approximately $2.9 million or 2.3% from2003.  This revenue increase was largelyattributable to a $2.2 million increase in extended vehicle warranty programrevenue due to continued growth in the sales of one-year renewable warrantyproducts, a $1.7 million increase in ERS revenue due to increased enrollment,and a $1.6 million increase in dealer marketing program revenue, partiallyoffset by a $1.7 million reduction in membership services revenue, primarilyassociated with reduced enrollment in the Coast to Coast Club and Golf CardClub, and a $0.9 million reduction in marketing fee income recognized on RVfinancing products.

 

Publications revenues for2004 of $78.0 million increased by approximately $6.6 million or 9.2% from2003.  This increase was primarilyattributable to a $5.5 million revenue increase due to the acquisition of threepublication titles from Poole Publications, Inc. in October 2003, a $0.9million increase in sales of the annual RV directories, a $0.7 million increasein other ancillary product revenue including ATV-related television revenuesand other outdoor event revenues, and additional advertising revenue ofapproximately $0.5 million from RV-related magazines.  These increases were partially offset by a$1.0 million revenue reduction due to the sale of archery-related publicationtitles in the third quarter of 2004.

 

Retail revenue for 2004 of$255.1 million increased $29.8 million or 13.2% from 2003.  This increase consisted of a $38.9 millionincrease in Camping World merchandise sales revenues partially offset by a $9.1million decrease in RV sales.  Theincrease in Camping World merchandise sales resulted primarily from a samestore sales increase of $16.5 million or 11.0%, and $12.5 million due to theaddition of six new retail stores.  Samestore sale calculations for a given period include only those stores that wereopen both at the end of that period and at the beginning of the precedingfiscal year.  The remainingnet increase in merchandise sales was attributable to a $5.9 million increasein mail order sales and a $4.0 million increase in other installation fees,supplies and services revenue.  The $9.1million decrease in RV sales is due to the disposition of Camping World RVSales, Inc. (“CWRV”) which was distributed to AGI Holding Corp. in the form ofa non-cash dividend in October 2003.

 

*Costs Applicable to Revenues*

 

Costs applicable to revenues totaled $288.5million in 2004, an increase of $24.4 million or 9.3% from 2003.

 

Membership services costs and expensesincreased by approximately $4.7 million or 6.0% to $84.2 million for 2004compared to $79.5 million in 2003.  This increaseconsisted of $1.5 million of marketing and program expenses associated with theincreased enrollment in the extended vehicle warranty programs and ERS programsand a $0.8 million increase in membership services costs primarily associatedwith the introduction of enhanced Coast to Coast Club member benefits includingan online reservation system.  Inaddition, dealer marketing program costs increased by $1.2 million inconjunction with increased revenue, new business development expenses increased$0.4 million, and other marketing expenses increased $0.8 million primarily dueto marketing database enhancements and membership support expenses.

 

Publicationcosts and expenses of $53.0 million for 2004 increased $4.6 million or 9.6%compared to 2003.  This increase wasprimarily attributable to the operations of the newly acquired publications**,** and costs associated with increased annual directoryrevenues, the ATV-related television program and outdoor events.  These increases were partially offset by areduction in costs due to the sale of archery-related publication titles in thethird quarter of 2004 and the discontinuation of *REV*magazine in 2003.

 

26

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Retailcosts applicable to revenues increased $15.1 million or 11.1% to $151.2 milliondue to the increased store and mail order sales. The retail gross profitmargin increased by $14.7 million, to 40.7% in 2004 from 39.6% in 2003 dueprimarily to the elimination of lower margin recreation vehicle sales as aresult of the divesture of CWRV in the fourth quarter of 2003.

 

*Operating Expenses*

 

Selling, general andadministrative expenses of $116.1 million for 2004 increased $12.1 million or11.6% over 2003.  The increased selling,general and administrative expenses resulted primarily from increased retailselling, labor and other general and administrative expenses of $13.1 million,a $2.3 million increase in deferred executive compensation, and a $0.9 millionincrease in other corporate general and administrative expenses.  These increases were partially offset by a$2.8 million reduction in executive compensation and reduced RV sales expensesof $1.4 million as a result of the divestiture of CWRV.  The management restructuring expense of $1.2million in 2003 related to the retail segment. Depreciation and amortization expenses of $13.9 million were $3.6million higher than in 2003 due primarily to increased capital expenditures atCamping World, and amortization of intangible assets associated with theacquisition of three titles from Poole Publications, Inc.

 

*Income from Operations*

 

Incomefrom operations of $46.2 million for 2004 increased $0.4 million or 0.8%compared to 2003.  This increase wasattributable to increased gross profit in the retail and publicationsoperations of $14.7 million and $1.9 million, respectively, partially offset byreduced gross profit in the membership services operations of $1.8 million andincreased operating expenses of $14.4 million.

 

*Non-Operating Items*

 

Net non-operating items for2004 were approximately $27.9 million compared to $21.1 million for 2003.  This $6.7 million increase was primarilyattributable to $5.1 million of additional interest expense from higher loanbalances associated with the issuance of the $200.0 million in 9% seniorsubordinated notes on February 18, 2004, and a $1.8 million increase in debtextinguishment expense associated with the redemption of the AGHI senior notesdue 2007 (“AGHI Notes”), partially offset by a net gain of $0.2 million onsales of various assets.

 

*Income before Income Taxes*

 

Incomebefore income taxes for 2004 was $18.3 million, or 25.7% less than 2003.  This $6.3 million decrease from the priorperiod was attributable to the increase in net interest expense of $5.1million, a $1.8 million increase in debt extinguishment expenses, partiallyoffset by the $0.4 million increase in income from operations mentioned aboveand a net gain of $0.2 million on sales of various assets.

 

*Income Tax*

 

Income taxes for 2004 of$8.1 million decreased $1.2 million from 2003. The effective tax rates for 2004 and 2003 were 44.1% and 37.6%,respectively.  The effective tax rate for2004 is higher than the statutory rate due to state taxes and the permanentdifferences created as a result of the write-off of book goodwill on the sale ofpublication assets in August 2004.  Theeffective tax rate for 2003 is higher than the statutory rate due primarily tostate taxes.

 

 

*Net Income*

 

The net income for 2004 was$10.3 million compared to $15.4 million for 2003.

 

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*Segment Profit*

 

Segmentprofit of $60.0 million for 2004 (before unallocated depreciation andamortization, general and administrative, interest, debt restructuring andincome tax expense) increased by $0.8 million, or 0.1%, from 2003.

 

Membershipservices segment profit of $39.8 million in 2004 decreased by $1.6 million, or3.8% from $41.4 million in 2003.  Thisdecrease was primarily attributable to a $2.7 million reduction in profit inthe Coast to Coast Club, a $0.9 million decrease in profit due to a reduction inmarketing fee income from RV financing products, and a $0.6 million increase indatabase and new business development expenses. These decreases were partially offset by a $1.6 million increase inprofit associated with increased enrollment and lower program expenses in theERS programs, and a $1.0 million increase in profit in the extended vehiclewarranty program.

 

Publicationsegment profit for 2004 of $19.9 million increased by $0.9 million, or 4.8%from 2003.  This increase was primarilyattributable to the acquisition of three publication titles from PoolePublications, Inc. in October 2003.

 

Retailsegment profit for 2004 of $0.3 million increased by $1.4 million, or 123.2%,over 2003.  The increased segment profit resultedprimarily from a $14.7 million increase in gross profit margin partially offsetby an $11.7 million increase in selling, general and administrative expensesand a $1.6 million increase in depreciation expense.

 

**YearEnded December 31, 2003 Compared with Year Ended December 31, 2002**

 

*Revenues*

 

Revenues of $425.4 millionfor 2003 decreased by approximately $5.7 million or 1.3% from the comparableperiod in 2002.

 

Membership services revenuesfor 2003 of $128.7 million increased by approximately $4.1 million or 3.3% from2002.  This revenue increase was largelyattributable to a marketing fee increase of approximately $2.5 million from theextended vehicle warranty program due to the continued growth in sales of one-yearwarranty products, a $2.1 million increase in marketing fee income recognizedon sales of RV financing products and vehicle insurance products, $1.2 millionfrom increased participation in member events and dealer marketing programrevenue, and $1.1 million from ERS products due to increased enrollment.  These increases were partially offset by a$1.7 million decrease in membership services revenue primarily associated withreduced enrollment in the Coast to Coast Club, and a $1.1 million reduction inmarketing fees associated with the sale of health and life insurance products.

 

Publications revenues for2003 of $71.4 million increased by $4.8 million or 7.2% from 2002.  This increase was primarily attributable to$2.5 million in revenues associated with the acquisition of Black’s Guides andBoating Industry Magazine at the end of 2002, and Poole Publication titles inOctober 2003, a $1.2 million increase in advertising and circulation revenuefor the annual RV directories, additional advertising revenue of approximately$0.6 million from RV-related magazines, and $0.5 million of advertising revenuefrom a new ATV television program airing in the second and fourth quarters of2003.

 

Retail revenue for 2003 of$225.3 million decreased $14.6 million or 6.1% from 2002.  This decrease consisted of a $10.5 milliondecrease in Camping World merchandise sales revenues and a $4.1 milliondecrease in RV sales.  The decrease inCamping World merchandise sales resulted from a $16.4

 

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million decrease in mailorder revenue as a result of reducing the catalog circulation by strategicallypromoting the catalogs to specific profitable market segments, a same storesales decrease of $0.6 million or 0.4%, which was partially offset by $3.0million of revenue associated with the addition of two new stores, and a $3.5million revenue increase for installation fees, service work and supplysales.  The $4.1 million decrease in RVsales is primarily due to the disposition of CWRV, which was distributed to AGIHolding Corp. in the form of a non-cash dividend in October 2003.

 

*Costs Applicable to Revenues*

 

Costs applicable to revenues totaled $264.0million in 2003, a decrease of $13.7 million or 4.9% from 2002.

 

Membershipservices costs and expenses increased by approximately $5.4 million or 7.3% to$79.5 million in 2003 compared to $74.1 million in 2002.  This increase was primarily associated with$4.4 million of increased expenses associated with marketing fee revenue increasesfrom the extended vehicle warranty program, ERS and vehicle insurance products,a $1.9 million increase in membership operating expenses primarily relating toonline marketing and marketing database file maintenance expenses, andincreased expenses of $0.9 million associated with increased sales in thedealer promotional programs.  Theseincreases were partially offset by a $1.8 million reduction in membershipservice costs primarily relating to reduced direct mail promotions in thePresident’s Club and reduced enrollment in the Coast to Coast Club.

 

Publicationcosts and expenses of $48.4 million for 2003 increased $3.0 million or 6.7%compared to 2002.  This increase wasprimarily attributable to the operations of the newly acquired publications,and costs associated with the new television program.

 

Retailcosts applicable to revenues decreased $22.1 million or 14.0% to $136.1 millionprimarily due to the decrease in merchandise revenue which was primarilyattributable to the 6.1% decrease in merchandise sales and a $7.1 millionincrease in vendor purchase rebates.  Theretail gross profit margin of 39.6% for 2003 increased from 34.0% in 2002.  The gross margin increase was primarilyattributable to a 31.4% drop in sales of RVs, which have lower profit margins,a $7.1 million increase in vendor purchase rebates, and a reduction in customerdiscounts from 14.1% to 11.0%.

 

*Operating Expenses*

 

Selling, general andadministrative expenses of $104.1 million for 2003 increased $2.5 million or2.4% over 2002.  The increased selling,general and administrative expenses resulted primarily from increased retailselling, labor and other general and administrative expenses of $7.5 millionpartially offset by a $5.0 million decrease in deferred executivecompensation.  The managementrestructuring expense of $1.2 million, which primarily related to the retailsegment, decreased $1.1 million from 2002. Substantially all of the restructuring charges have been paid.  Depreciation and amortization expenses of$10.3 million were $0.4 million higher than in 2002 due to increased capitalexpenditures.

 

*Income from Operations*

 

Incomefrom operations of $45.8 million for 2003 increased $6.2 million or 15.6%compared to 2002.  Increased gross profitin the retail and publications operations of $7.5 million and $1.8 million,respectively were partially offset by increased operating expenses of $1.8million and reduced gross profit in the membership services operations of $1.3million.

 

*Non-Operating Items*

 

Net non-operating items for2003 were $21.1 million compared to $16.9 million for 2002.  This $4.2 million increase was primarily dueto a $3.2 million debt restructuring charge associated with refinancing 

 

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the AGI Credit Facility onJune 24, 2003 and the redemption of $30.0 million of the AGHI Notes on July 24,2003, and a $1.3 million increase in interest expense as a result of higheraverage outstanding debt balances, partially offset by a net gain of $0.3million on sales of various assets.

 

*Income before Income Taxes*

 

Incomebefore income taxes of $24.7 million for 2003 increased $1.9 million or 8.5%compared to 2002.  This increase wasattributable to the $6.2 million increase in income from operations and $0.3million net gain on sales of various assets, partially offset by a $3.2 millionincrease in debt extinguishment expenses and $1.3 million increase in netinterest expense.

 

*Income Tax*

 

Income taxes for 2003 of$9.3 million increased $0.2 million from 2002. The effective income tax rates of 37.6% and 39.7% for 2003 and 2002,respectively, are higher than statutory rates due primarily to state taxes.

 

*Cumulative Effect of Accounting Change*

 

In accordance with thetransition provisions of Statement of Financial Accounting Standards (“SFAS”)No. 142, Goodwill and Other Intangible Assets, we recorded a non-cash charge ofapproximately $1.7 million to reduce the carrying value of the goodwillassociated solely with the Golf Card Club, which is included within theMembership Services segment.  This chargeis non-operational in nature and is reflected as a cumulative effect of anaccounting change in the accompanying Consolidated Statement of Operations.

 

*Net Income*

 

The net income for 2003 was$15.4 million compared with $12.0 million for 2002.  This increase was due to the increase inincome from operations, decreased income taxes, and the 2002 cumulative effectof accounting change, partially offset by increased non-operating expenses.

 

*Segment Profit*

 

Segmentprofit of $59.2 million for 2003 (before unallocated depreciation andamortization, general and administrative, interest, debt restructuring andincome tax expense) increased by $0.4 million, or 0.1%, from 2002.

 

Membershipservices segment profit of $41.4 million in 2003 decreased by $0.9 million or2.1% from $42.3 million in 2002.  Thisdecrease was primarily attributable to a $1.9 million increase in onlinemarketing and database expenses, a $1.4 million decrease in profit in the Coastto Coast Club, a $0.3 million decrease in profit for extended warranty productsand a $0.6 million increase in administrative and overhead expenses.  These decreases were partially offset by a$1.3 million increase in profit from the transfer of the Camping World MVPvehicle insurance program from the retail segment, a $0.8 million increase inprofit associated with the Good Sam Club, and a $1.2 million increase in profitattributable to an increase in marketing fee income from RV financing products.

 

Publicationsegment profit for 2003 of $19.0 million increased by $1.9 million or 11.1%from 2002.  This profit increase wasprimarily attributable to increased advertising and circulation revenue fromthe annual RV directories and RV-related magazines.

 

Retailsegment loss for 2003 of $1.2 million increased by $0.6 million, or 102.8%,over 2002.  The increased segment lossesresulted primarily from a $1.7 million transfer of the Camping World MVP

 

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insuranceprogram to the membership segment and a $0.4 million decrease in profit from RVsales due to the disposition of CWRV. The segment losses above were partially offset by a $0.8 millionincrease in retail sales profit and a $0.7 million increase in profit for thePresident’s Club due to a reduction in marketing expenses.

 

 

**Liquidityand Capital Resources**

*** ***

Wehave historically operated with a workingcapital deficit.  The working capitaldeficit as of December 31, 2004 and 2003 was $10.8 million and $25.8 million,respectively.  The primary reason for theworking capital deficit is the deferred revenue and gains reported undercurrent liabilities in the amount of $57.7 million and $57.3 million as ofDecember 31, 2004 and 2003, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance which is deferred and recognized as revenue over thelife of the membership.  We use netproceeds from this deferred membership revenue to lower our long-termborrowings.  We generated net cash**fromoperations of $38.4 million and $21.9million, in 2004 and 2003, respectively.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligationsand commercial commitments at December 31, 2004, in thousands.

 
| ** **                   | ** **   | **Payments Due by Period** | ** ** |
|------------------------------|--------------|----------------------------|------------|
| **(in thousands)**           | *** *** | **Total**                  | ** ** | **Year 1** | ** ** | **Years 2-3** | ** ** | **Years 4-5** | ** ** | **More than  5 years** | ** ** |
| ** **                   |         |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt               |         | $                          | 314,336    |   | $ | 1,676 |   | $ | 3,463 |   | $ | 3,421 |   | $ | 305,776 |   |
| Operating lease obligations  |         | 140,015                    |       | 12,610 |   | 21,922 |   | 16,828 |   | 88,655 |   |
| Deferred compensation        |         | 5,251                      |       | 1,452 |   | 1,332 |   | 2,067 |   | 400 |   |
|                         |         |                       |       |   |   |   |   |   |   |   |   |
| Other commercial commitments |         |                       |       |   |   |   |   |   |   |   |   |
| Letters of credit            |         | 32                         |       | 32 |   | — |   | — |   | — |   |
| Standby letters of credit    |         | 6,774                      |       | 6,774 |   | — |   | — |   | — |   |
| Subtotal                     |         | 6,806                      |       | 6,806 |   | — |   | — |   | — |   |
|                         |         |                       |       |   |   |   |   |   |   |   |   |
| Grand total                  |         | $                          | 466,408    |   | $ | 22,544 |   | $ | 26,717 |   | $ | 22,316 |   | $ | 394,831 |   |

 

OnJune 24, 2003, we entered into an Amended and Restated Credit Agreement and aSenior Secured Floating Rate Note Purchase Agreement, (as amended, our seniorcredit facility).  This senior creditfacility provides for a revolving credit facility of $35.0 million and termloans (“Term B1 and Term B2 loans”) in the aggregate of $140.0 million.  Proceeds from our senior credit facility wereused to refinance the existing senior secured indebtedness, pay a dividend of$13.7 million to our parent AGI Holding Corp. and redeem $30.0 millionprincipal amount of the AGHI Notes at 103.667% of par in 2003.  As of December 31, 2004, $32.2 million and$80.4 million were outstanding under the Term B1 and Term B2 loans,respectively.  No borrowings wereoutstanding on the revolving credit facility as of December 31, 2004.  Reborrowings under the term loans are notpermitted.  The interest on borrowingsunder our senior credit facility is at variable rates based on the ratio oftotal cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 3.50% over the stated rates. As of December 31, 2004, the average interest rate on the term loans was5.49%, and permitted borrowings under the undrawn revolving facility were $28.2million.  We also pay a commitment fee of0.5% per annum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $350,000.  Therevolving credit facility matures on June 24, 2008, and the Term B1 and Term B2loans mature on 

 

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June24, 2009.  The funds available under oursenior credit facility may be utilized for borrowings or letters of credit;however, a maximum of $12.5 million may be allocated to such letters ofcredit.  As of December 31, 2004, we hadletters of credit in the aggregate amount of $6.8 million outstanding.  Our senior credit facility is secured byvirtually all of our assets and a pledge of our stock and the stock of oursubsidiaries.  Further the senior creditfacility requires the loans to be prepaid in an amount equal to 75% of theexcess cash flow, as defined.  The balanceof the excess cash flow would be available for distribution.  As of December 31, 2004, the Company had noexcess cash flow, as defined.

 

InFebruary 2004, we issued $200.0 million aggregate principal amount of 9% SeniorSubordinated Notes due 2012 (the “Notes”). The Company completed a registered exchange of the Notes under theSecurities Act of 1933 in August 2004. The proceeds from the sale of the Notes were used to fund the tenderoffer and defeasance of the remaining $100.0 million outstanding principalamount of the AGHI Notes, prepay $25.0 million of the Term B1 and Term B2 loansunder our senior credit facility, pay a $60.0 million dividend distribution,create a $15.0 million segregated cash account, pay certain prepayment andtransaction costs and for general corporate purposes.  The amount held in this segregated account,including any earnings thereon, was available to pay stockholder dividends uponsatisfaction of a leverage test specified in our senior credit facility.  In August and November of 2004, we satisfiedthe specific leverage test and paid $3.6 million and $11.5 million individends, respectively.  The segregatedaccount replenishment requirement has been permanently eliminated.

 

InNovember 2004, we amended our senior credit facility dated June 24, 2003.  The interest rates on the Term B1 and Term B2loans were reduced by 1.00%.  Theapplicable interest margin was reduced from 4.00% to 3.00% and 3.00% to 2.00%for the LIBOR and Prime Rate loans, respectively.

 

Theindenture pursuant to which the Notes were issued contains certain restrictivecovenants relating to, but not limited to, mergers, changes in the nature ofthe business, acquisitions, additional indebtedness, sale of assets,investments, and the payment of dividends subject to certain limitations andminimum operating covenants.  We were incompliance with all debt covenants at December 31, 2004.

 

InAugust 2004, Ehlert Publishing Group, a subsidiary of the Company, sold certainpublication assets for $4.2 million.  Wepaid $0.2 million in transaction fees and recorded a $3.6 million reduction ingoodwill.  As a result of the sale, wereported a net gain of $0.4 million.

 

During2004, we incurred $2.9 million of deferred executive compensation expense underour phantom stock agreements and made payments of $3.1 million on maturephantom stock agreements.  The earnedincentives under these agreements are scheduled to be paid at various timesover the next two years.  Phantom stockpayments of $1.5 million are scheduled to**be made during2005.

 

Capitalexpenditures for 2004 totaled $8.9 million compared to capital expenditures of$10.8 million in 2003.  Capitalexpenditures are anticipated to be approximately $15.7 million for 2005,primarily for new Camping World stores and equipment, information technologyand databases enhancements computer hardware upgrades and replacements, adistribution center expansion, and computer software upgrades and enhancements.

 

Managementbelieves that funds generated by operations, together with available borrowingsunder our revolving credit line, will be sufficient to meet all of ouranticipated cash requirements for the foreseeable future.

 

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**Factors Affecting Future Performance**

 

Althoughincreases in operating costs could adversely affect our operations, managementdoes not believe that inflation has had a material effect on operating profitduring the past several years.  However,fuel shortages and substantial increases in propane and gasoline costs couldhave a significant impact on our travel-related membership services andpublications revenues.  Historically suchevents have caused declines in advertisements but have not significantlyaffected club membership enrollment.  Weare unable to predict at what point fluctuating fuel prices may begin toadversely impact revenues or cash flow. We believe we will be able to partially offset any cost increases withprice increases to our members and certain cost reducing measures.

 

**Seasonality**

 

Our cash flow is highest in the summer months due to the seasonalnature of the retail segment, membership renewals and advertising prepaymentsfor the annual directories.

 

**Critical Accounting Policies**

 

*General*

 

Our discussion and analysis of our financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,we evaluate our estimates, including those related to membership programs andincentives, bad debts, inventories, intangible assets, employee healthinsurance benefits, income taxes, restructuring, contingencies andlitigation.  We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

We believe the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements.

 

*Revenue Recognition*

 

Merchandise revenue isrecognized when products are sold in the retail stores, shipped for mail andInternet orders, or when services are provided to customers.**Publication advertising and newsstand sales, net ofestimated provision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  ERS revenues are deferred and recognized overthe life of the membership.  ERS claimexpenses are recognized when incurred. Advances on third party credit card fee revenues are deferred andrecognized based primarily on a percentage of credit card receivables held bythird parties.  Membership revenue isgenerated from annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.

 

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*Accounts Receivable*

 

We estimate the collectability of our tradereceivables.  A considerable amount ofjudgment is required in assessing the ultimate realization of these receivablesincluding the current credit-worthiness of each customer.  Changes in required reserves have beenrecorded in recent periods and may occur in the future due to the marketenvironment.

 

*Inventory*

 

We state inventories at the lower of cost ormarket.  In assessing the ultimaterealization of inventories, we are required to make judgments as to futuredemand requirements and compare that with the current or committed inventorylevels.  We have recorded changes inrequired reserves in recent periods due to changes in strategic direction, suchas discontinuances of product lines as well as changes in market conditions dueto changes in demand requirements.  It ispossible that changes in required inventory reserves may continue to occur inthe future due to the market conditions.

 

*Long-Lived Assets*

 

Purchased intangible assets with finite livesare amortized using the straight-line method over the estimated economic livesof the assets, ranging from one to twenty-three years.

 

Long-lived assets, such as property, plantand equipment and purchased intangible assets with finite lives are evaluatedfor impairment whenever events or changes in circumstances indicate thecarrying value of an asset may not be recoverable in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  We assess the fair value of the assets basedon the future cash flow the assets are expected to generate and recognize animpairment loss when estimated undiscounted future cash flow expected to resultfrom the use of the asset plus net proceeds expected from disposition of theasset (if any) are less than the carrying value of the asset.  When an impairment is identified, we reducethe carrying amount of the asset to its estimated fair value based on adiscounted cash flow approach or, when available and appropriate, comparablemarket values.  We determined there wereno indicators of impairment of long-lived assets as of December 31, 2004.

 

We have evaluated the remaining useful livesof our finite-lived purchased intangible assets to determine if any adjustmentsto the useful lives were necessary or if any of these assets had indefinitelives and were therefore not subject to amortization.  We determined that no adjustments to theuseful lives of our 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*

 

Effective January 1, 2002, we adopted newaccounting standards on “Business Combinations” and “Goodwill and OtherIntangible Assets.”  In accordance withthese new standards, goodwill and intangible assets with indefinite lives areno longer amortized but instead are measured for impairment at least annuallyor when events indicate that an impairment exists.  As required by the new standards, theimpairment tests for goodwill and other indefinite-lived intangible assets areassessed for impairment using fair value measurement techniques.  Specifically, goodwill impairment isdetermined using a two-step process.  Thefirst step of the goodwill impairment test is used to identify potentialimpairment by comparing the fair value of a reporting unit with the net bookvalue (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds the carrying amount,goodwill of the reporting unit is considered not impaired and the second stepof the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds the fair value, thesecond step of the goodwill impairment test is performed to measure the amountof impairment loss, if any.  The secondstep of the 

 

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goodwill impairment test compares the impliedfair value of the reporting unit’s goodwill with the carrying amount of thatgoodwill.  If the carrying amount of thereporting unit’s goodwill exceeds the implied fair value of that goodwill, animpairment loss is recognized in an amount equal to that excess.  The implied fair value of goodwill isdetermined in the same manner as the amount of goodwill recognized in abusiness combination, accordingly the fair value of the reporting unit isallocated to all of the assets and liabilities of that unit as if the reportingunit had been acquired in a business combination and the fair value of thereporting unit was the purchase price paid to acquire the reporting unit.  The impairment test for other intangibleassets consists of a comparison of the fair value of the intangible asset withits carrying value.  If the carryingvalue of the intangible asset exceeds its fair value, an impairment loss isrecognized in an amount equal to that excess.

 

Determining the fair value of a reportingunit under the first step of the goodwill impairment test and determining thefair value of individual assets and liabilities of a reporting unit under thesecond step of the goodwill impairment test is judgmental in nature and ofteninvolves the use of significant estimates and assumptions.  These estimates and assumptions could have asignificant impact on whether or not an impairment charge is recognized andalso the extent of such charge.  Ourestimates of fair value utilized in goodwill and other indefinite-livedintangible asset tests may be based upon a number of factors, includingassumptions about the projected future cash flows, discount rate, growth rate,determination of market comparables, technological change, economic conditionsor changes to our business operations. Such changes may result in impairment charges recorded in futureperiods.

 

The fair value of our reporting units isannually determined using a combination of the income approach and the marketapproach.  Under the income approach, thefair value of a reporting unit is calculated based on the present value ofestimated future cash flows.  Future cashflows are estimated by us under the market approach, fair value is estimatedbased on market multiples of revenue or earnings for comparable companies.

 

Based on the results of the annual impairmenttests, we determined that no impairment of goodwill existed as of December 31,2004.  However, future goodwillimpairment tests could result in a charge to earnings.  We will continue to evaluate goodwill on anannual basis and whenever events and changes in circumstances indicate thatthere may be a potential impairment.

 

*Restructuring*

 

We recorded reserves inconnection with the restructuring program primarily within our retail segment.  These reserves include estimates pertaining toemployee separation costs and the settlements of contractual obligationsresulting from our actions.  Although wedo not anticipate significant changes, the actual costs may differ from theseestimates.

 

 

**ITEM 7A:  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

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#### *Interest Rate SensitivityAnalysis*

 

AtDecember 31, 2004, we had debt totaling $314.3 million, comprised of $112.5million of variable rate debt and $201.8 million of fixed rate debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorableimpact of approximately $1.1 million.

 

#### *Credit Risk*

 

We are exposed to creditrisk on accounts receivable.  We providecredit to customers in the ordinary course of business and perform ongoingcredit evaluations.  Concentrations ofcredit risk 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.

 

## **NewAccounting Standards**

 

*Consolidation of VariableInterest Entities —* In January 2003, the Financial Accounting StandardsBoard (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities, an interpretation of ARB 51.”  The primary objectives of this interpretationare to provide guidance on the identification of entities for which control isachieved through means other than through voting rights (“variable interestentities”) and how to determine when and which business enterprise (the “primarybeneficiary”) should consolidate the variable interest entity.  This new model for consolidation applies toan entity in which either (i) the equity investors (if any) do not have acontrolling financial interest; or (ii) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties.  In addition, FIN 46 requires that the primarybeneficiary, as well as all other enterprises with a significant variableinterest in a variable interest entity, make additional disclosures.  Certain disclosure requirements of FIN 46were effective for financial statements issued after January 31, 2003.

 

In December 2003, the FASB issued FIN 46(revised December 2003), “Consolidation of Variable Interest Entities” (“FIN46-R”) to address certain FIN 46 implementation issues.  The effective dates and impact of FIN 46 andFIN 46-R as related to us are as follows:

 

i.                  *Specialpurpose entities (“SPEs”) and Non-SPEs created prior to January 1, 2004.*  We must apply the provisions of FIN 46-R atthe beginning of the first interim or annual reporting period beginning afterDecember 15, 2004.

ii.               *Allentities, regardless of whether a SPE, that were created subsequent to December31, 2003. *The provisionsof FIN 46 were applicable for variable interests in entities obtained afterDecember 31, 2003.  We are required toadopt FIN 46-R at the end of the first interim or annual reporting periodending after March 15, 2004.

 

The adoption of the provisions applicable toSPEs and all other variable interests did not have a material impact on ourfinancial statements.

 

36

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###### **Disclosure Regarding Forward LookingStatements**

 

This filing contains statements that are “forwardlooking statements,” and includes, among other things, discussions of ourbusiness strategy and expectations concerning market position, futureoperations, margins, profitability, liquidity and capital resources, as well asstatements concerning the integrations of acquired operations and theachievement of financial benefits and operational efficiencies in connectionwith acquisitions.  Forward lookingstatements are included in “Business— General,” “Business— Business Strategy, “Business—RV Industry,” “Business— Operations,” “Business— Competition,” “LegalProceedings,” and in “Management’s Discussion and Analysis of FinancialCondition and Results of Operations.” Although we believe that the expectations reflected in such forwardlooking statements are reasonable, we can give no assurance that suchexpectations will prove to have been correct. Generally, these statements relate to business plans or strategies,projected or anticipated benefits or other consequences of such plans orstrategies, the number of acquisitions and projected or anticipated benefitsfrom acquisitions made by or to be made by us, or projections involvinganticipated revenues, expenses, earnings, levels of capital expenditures orother aspects of operating results.  Allphases of our operations of are subject to a number of uncertainties, risks andother influences, including consumer spending, fuel prices, general economicconditions, regulatory changes and competition, many of which are outside our control,any one of which, or a combination of which, could materially affect theresults of our operations and whether the forward looking statements made by usultimately prove to be accurate.

 

37

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**ITEM 8:  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

###### **Index to Financial Statements**

| ** **                                                                                                            |
|-----------------------------------------------------------------------------------------------------------------------|
| Report  of Independent Registered Accounting Firm                                                                     |
|  

                                                                                                         |
| Consolidated Balance Sheets  as of December 31, 2004 and 2003                                                         |
|  

                                                                                                         |
| Consolidated  Statements of Operations for the years ended December 31, 2004, 2003 and 2002                           |
|  

                                                                                                         |
| Consolidated  Statements of Stockholder’s (Deficit) Equity for the years ended December 31,  2004, 2003 and 2002 |
|  

                                                                                                         |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                           |
|  

                                                                                                         |
| Notes to  Consolidated Financial Statements                                                                           |
|                                                                                                                  |
|                                                                                                                  |

Allother financial statement schedules not listed have been omitted since therequired information is included in the consolidated financial statements, thenotes thereto or because such information is not applicable.

 

38

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**REPORTOF INDEPENDENT REGISTERED ACCOUNTING FIRM**

 

 
| To     | Board  of Directors   |
|--------|-----------------------|
|   | Affinity  Group, Inc. |

 

 

We have audited the accompanying consolidatedbalance sheets of Affinity Group, Inc. and its subsidiaries as of December 31, 2004and 2003, and the related consolidated statements of operations, stockholder’s(deficit) equity and cash flows for each of the three years in the period endedDecember 31, 2004. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our audits inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the financial statementsreferred to above present fairly, in all material respects, the consolidatedfinancial position of Affinity Group, Inc. and subsidiaries at December 31,2004 and 2003, and the consolidated results of their operations and their cashflows for each of the three years in the period ended December 31, 2004, inconformity with U.S. generally accepted accounting principles.

 

 

 
| Woodland Hills, California |   | /s/ Ernst & Young LLP |
|----------------------------|--------|---------------------------|
| February 11, 2005          |   |                      |

 

39

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2004 AND 2003 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)**

 
| ** **                                                                                    | ** ** | **2004** | ** ** | **2003**                    | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|-----------------------------|------------|
| ** **                                                                                    |       |     |       | **(restated-  see Note 1)** |       |
| **ASSETS**                                                                                    |       |     |       |                        |       |
| CURRENT ASSETS:                                                                               |       |     |       |                        |       |
| Cash and cash equivalents                                                                     |       | $        | 24,564     |                        | $          | 6,115 |   |
| Accounts receivable, less allowance for doubtful accounts of $810 in  2004 and $1,039 in 2003 |       | 24,228   |       | 25,394                      |       |
| Inventories                                                                                   |       | 42,463   |       | 36,839                      |       |
| Prepaid expenses and other assets                                                             |       | 11,383   |       | 10,588                      |       |
| Deferred tax assets, net                                                                      |       | 6,615    |       | 4,661                       |       |
| Total current assets                                                                          |       | 109,253  |       | 83,597                      |       |
|                                                                                          |       |     |       |                        |       |
| PROPERTY AND EQUIPMENT, net                                                                   |       | 27,642   |       | 27,214                      |       |
| NOTES FROM AFFILIATES                                                                         |       | 4,752    |       | 9,103                       |       |
| INTANGIBLE ASSETS, net                                                                        |       | 27,716   |       | 25,197                      |       |
| GOODWILL                                                                                      |       | 148,773  |       | 150,070                     |       |
| DEFERRED TAX ASSETS, net                                                                      |       | 323      |       | 5,306                       |       |
| OTHER ASSETS                                                                                  |       | 1,763    |       | 2,375                       |       |
| Total assets                                                                                  |       | $        | 320,222    |                        | $          | 302,862 |   |
|                                                                                          |       |     |       |                        |       |
| **LIABILITIES AND STOCKHOLDER’S (DEFICIT) EQUITY**                                       |       |     |       |                        |       |
| CURRENT LIABILITIES:                                                                          |       |     |       |                        |       |
| Accounts payable                                                                              |       | $        | 16,511     |                        | $          | 12,711 |   |
| Accrued interest                                                                              |       | 6,857    |       | 4,099                       |       |
| Accrued income taxes                                                                          |       | 3,131    |       | 2,883                       |       |
| Accrued liabilities                                                                           |       | 34,230   |       | 30,887                      |       |
| Deferred revenues and gains                                                                   |       | 57,661   |       | 57,309                      |       |
| Current portion of long-term debt                                                             |       | 1,676    |       | 1,478                       |       |
| Total current liabilities                                                                     |       | 120,066  |       | 109,367                     |       |
|                                                                                          |       |     |       |                        |       |
| DEFERRED REVENUES AND GAINS                                                                   |       | 41,469   |       | 41,101                      |       |
| LONG-TERM DEBT, net of current portion                                                        |       | 312,660  |       | 238,649                     |       |
| OTHER LONG-TERM LIABILITIES                                                                   |       | 4,135    |       | 2,650                       |       |
|                                                                                          |       | 478,330  |       | 391,767                     |       |
|                                                                                          |       |     |       |                        |       |
| COMMITMENTS AND CONTINGENCIES                                                                 |       |     |       |                        |       |
|                                                                                          |       |     |       |                        |       |
| STOCKHOLDER’S (DEFICIT) EQUITY :                                                         |       |     |       |                        |       |
| Preferred stock, $.001 par value, 1,000 shares authorized, none  issued or outstanding        |       | —   |       | —                      |       |
| Common stock, $.001 par value, 2,000 shares authorized, 2,000 shares  issued and outstanding  |       | 1        |       | 1                           |       |
| Accumulated deficit                                                                           |       | (158,109 | )          | (88,906                     | )          |
| Total stockholder’s (deficit) equity                                                     |       | (158,108 | )          | (88,905                     | )          |
| Total liabilities and stockholder’s (deficit) equity                                     |       | $        | 320,222    |                        | $          | 302,862 |   |
|                                                                                               |            |          |            |                             |            |  |  |  |  |

 

See notes to consolidated financialstatements.

 

40

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002 (IN THOUSANDS)**

 
| ** **                                                                                    | ** ** | **2004** | ** ** | **2003**                     | ** ** | **2002**                     | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|------------------------------|------------|------------------------------|------------|
|                                                                                          |       |     |       | **(restated  - see Note 1)** | ** ** | **(restated  - see Note 1)** |       |
| REVENUES:                                                                                     |       |     |       |                         |       |                         |       |
| Membership services                                                                           |       | $        | 131,608    |                         | $          | 128,664                      |       | $ | 124,546 |   |
| Publications                                                                                  |       | 77,977   |       | 71,436                       |       | 66,654                       |       |
| Retail                                                                                        |       | 255,094  |       | 225,306                      |       | 239,922                      |       |
|                                                                                          |       | 464,679  |       | 425,406                      |       | 431,122                      |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| COSTS APPLICABLE TO REVENUES:                                                                 |       |     |       |                         |       |                         |       |
| Membership services                                                                           |       | 84,231   |       | 79,500                       |       | 74,097                       |       |
| Publications                                                                                  |       | 53,042   |       | 48,392                       |       | 45,351                       |       |
| Retail                                                                                        |       | 151,196  |       | 136,137                      |       | 158,265                      |       |
|                                                                                          |       | 288,469  |       | 264,029                      |       | 277,713                      |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| GROSS PROFIT                                                                                  |       | 176,210  |       | 161,377                      |       | 153,409                      |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| OPERATING EXPENSES:                                                                           |       |     |       |                         |       |                         |       |
| Selling, general and administrative                                                           |       | 116,137  |       | 104,066                      |       | 101,608                      |       |
| Restructuring charge                                                                          |       | —   |       | 1,210                        |       | 2,269                        |       |
| Depreciation and amortization                                                                 |       | 13,893   |       | 10,298                       |       | 9,893                        |       |
|                                                                                          |       | 130,030  |       | 115,574                      |       | 113,770                      |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| INCOME FROM OPERATIONS                                                                        |       | 46,180   |       | 45,803                       |       | 39,639                       |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| NON-OPERATING ITEMS:                                                                          |       |     |       |                         |       |                         |       |
| Interest income                                                                               |       | 755      |       | 809                          |       | 2,553                        |       |
| Interest expense                                                                              |       | (23,994  | )          | (18,932                      | )          | (19,415                      | )          |
| Debt extinguishment expense                                                                   |       | (5,035   | )          | (3,218                       | )          | —                       |       |
| Other non-operating income (expense), net                                                     |       | 420      |       | 201                          |       | (44                          | )          |
|                                                                                          |       | (27,854  | )          | (21,140                      | )          | (16,906                      | )          |
|                                                                                          |       |     |       |                         |       |                         |       |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES, AND CUMULATIVE EFFECT OF  ACCOUNTING  CHANGE |       | 18,326   |       | 24,663                       |       | 22,733                       |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| INCOME TAX EXPENSE                                                                            |       | (8,075   | )          | (9,275                       | )          | (9,032                       | )          |
|                                                                                          |       |     |       |                         |       |                         |       |
| INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                          |       | 10,251   |       | 15,388                       |       | 13,701                       |       |
|                                                                                          |       |     |       |                         |       |                         |       |
| CUMULATIVE EFFECT OF ACCOUNTING CHANGE                                                        |       | —   |       | —                       |       | (1,742                       | )          |
|                                                                                          |       |     |       |                         |       |                         |       |
| NET INCOME                                                                                    |       | $        | 10,251     |                         | $          | 15,388                       |       | $ | 11,959 |   |
|                                                                                               |            |          |            |                              |            |                              |            |  |  |  |  |

 

See notes to consolidated financialstatements.

 

41

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF STOCKHOLDER’S (DEFICIT) EQUITY**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003 AND 2002**

**(INTHOUSANDS, EXCEPT SHARE AMOUNTS)**
| ** **                    | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | ** **  | ** ** |
|-------------------------------|------------|------------------|------------|-------------------------|------------|-----------------|------------|-------------|------------|
| ** **                    | ** ** | **Shares**       | ** ** | **Amount**              | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| ** **                    | ** ** | ** **       | ** ** | ** **              | ** ** | ** **      | ** ** | ** **  | ** ** | ** ** | ** ** |
| BALANCES AT JANUARY 1, 2002   |       | 2,000            |       | $                       | 1          |            | $          | 12,021      |       | $ | (88,371 | ) | $ | (76,349 | ) |
| (restated- see Note 1)        |       |             |       |                    |       |            |       |        |       |   |   |
|                          |       |             |       |                    |       |            |       |        |       |   |   |
| Dividends                     |       | —           |       | —                  |       | (10,000         | )          | (13,158     | )          | (23,158 | ) |
| Net income                    |       | —           |       | —                  |       | —          |       | 11,959      |       | 11,959 |   |
| BALANCES AT DECEMBER 31, 2002 |       | 2,000            |       | 1                       |       | 2,021           |       | (89,570     | )          | (87,548 | ) |
| (restated- see Note 1)        |       |             |       |                    |       |            |       |        |       |   |   |
|                          |       |             |       |                    |       |            |       |        |       |   |   |
| Dividends                     |       | —           |       | —                  |       | (2,021          | )          | (14,724     | )          | (16,745 | ) |
| Net income                    |       | —           |       | —                  |       | —          |       | 15,388      |       | 15,388 |   |
| BALANCES AT DECEMBER 31, 2003 |       | 2,000            |       | 1                       |       | —          |       | (88,906     | )          | (88,905 | ) |
| (restated- see Note 1)        |       |             |       |                    |       |            |       |        |       |   |   |
|                          |       |             |       |                    |       |            |       |        |       |   |   |
| Dividends                     |       | —           |       | —                  |       | —          |       | (79,454     | )          | (79,454 | ) |
| Net income                    |       | —           |       | —                  |       | —          |       | 10,251      |       | 10,251 |   |
| BALANCES AT DECEMBER 31, 2004 |       | 2,000            |       | $                       | 1          |            | $          | —      |       | $ | (158,109 | ) | $ | (158,108 | ) |
|                               |            |                  |            |                         |            |                 |            |             |            |  |  |  |  |  |  |  |

 

See notes to consolidated financialstatements.

 

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THEYEARS ENDED DECEMBER 31, 2004, 2003, AND 2002 (IN THOUSANDS)**

 
| ** **                                                                         | ** ** | **2004**   | ** ** | **2003**                    | ** ** | **2002**                    | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                         | ** ** | ** ** | ** ** | **(restated - see Note 1)** | ** ** | **(restated - see Note 1)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |       |       |                        |       |                        |       |
| Net income                                                                         |       | $          | 10,251     |                        | $          | 15,388                      |       | $ | 11,959 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |       |       |                        |       |                        |       |
| Cumulative effect of accounting change                                             |       | —     |       | —                      |       | 1,742                       |       |
| Deferred tax provision (benefit)                                                   |       | 2,274      |       | (122                        | )          | 865                         |       |
| Depreciation                                                                       |       | 8,433      |       | 6,380                       |       | 6,030                       |       |
| Amortization                                                                       |       | 5,460      |       | 3,918                       |       | 3,863                       |       |
| Provision for losses on accounts receivable                                        |       | 585        |       | 1,611                       |       | 1,319                       |       |
| Deferred compensation                                                              |       | 2,950      |       | 700                         |       | 5,700                       |       |
| (Gain) loss on sale of property and equipment                                      |       | (435       | )          | (210                        | )          | 40                          |       |
| Loss on early extinguishment of debt                                               |       | 5,035      |       | 3,218                       |       | —                      |       |
| Changes in operating assets and liabilities (net  of purchased businesses):        |       |       |       |                        |       |                        |       |
| Accounts receivable                                                                |       | 547        |       | (1,765                      | )          | (5,765                      | )          |
| Inventories                                                                        |       | (5,624     | )          | (5,033                      | )          | 259                         |       |
| Prepaid expenses and other assets                                                  |       | (427       | )          | (1,060                      | )          | 389                         |       |
| Accounts payable                                                                   |       | 3,800      |       | 1,663                       |       | (6,506                      | )          |
| Accrued and other liabilities                                                      |       | 4,774      |       | (5,242                      | )          | (733                        | )          |
| Deferred revenues and gains                                                        |       | 743        |       | 2,404                       |       | (1,817                      | )          |
| Net cash provided by operating activities                                          |       | 38,366     |       | 21,850                      |       | 17,345                      |       |
|                                                                               |       |       |       |                        |       |                        |       |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |       |       |                        |       |                        |       |
| Capital expenditures                                                               |       | (8,869     | )          | (10,810                     | )          | (10,710                     | )          |
| Net proceeds from sale of property and equipment                                   |       | 420        |       | 294                         |       | 25                          |       |
| Change in intangible assets                                                        |       | (22        | )          | (66                         | )          | (81                         | )          |
| Loans receivable                                                                   |       | (8         | )          | (192                        | )          | (1,941                      | )          |
| Sale of publication assets                                                         |       | 3,939      |       | —                      |       | —                      |       |
| Acquisitions, net of cash received                                                 |       | (2,599     | )          | (3,733                      | )          | (683                        | )          |
| Net cash used in investing activities                                              |       | (7,139     | )          | (14,507                     | )          | (13,390                     | )          |
|                                                                               |       |       |       |                        |       |                        |       |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |       |       |                        |       |                        |       |
| Dividends paid                                                                     |       | (75,096    | )          | (13,700                     | )          | —                      |       |
| Borrowings on long-term debt                                                       |       | 200,000    |       | 181,976                     |       | 130,654                     |       |
| Payment of debt issue costs                                                        |       | (7,777     | )          | (4,107                      | )          | (90                         | )          |
| Principal payments of long-term debt                                               |       | (129,905   | )          | (167,127                    | )          | (135,969                    | )          |
| Net cash used in financing activities                                              |       | (12,778    | )          | (2,958                      | )          | (5,405                      | )          |
|                                                                               |       |       |       |                        |       |                        |       |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               |       | 18,449     |       | 4,385                       |       | (1,450                      | )          |
|                                                                               |       |       |       |                        |       |                        |       |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                     |       | 6,115      |       | 1,730                       |       | 3,180                       |       |
|                                                                               |       |       |       |                        |       |                        |       |
| CASH AND CASH EQUIVALENTS AT END OF YEAR                                           |       | $          | 24,564     |                        | $          | 6,115                       |       | $ | 1,730 |   |

 

See notes to consolidated financialstatements.

 

43

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**AFFINITY GROUP, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED DECEMBER 31, 2004, 2003 AND 2002**

 

 

1.                             SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES

 

                                      *Principles of Consolidation—*Theconsolidated financial statements include the accounts of Affinity Group, Inc.(“AGI”) and its subsidiaries (collectively the “Company”).  Prior to April 27, 2004, AGI was awholly-owned subsidiary of Affinity Group Holding, Inc. (“AGHI”) and AGHI was awholly-owned subsidiary of AGI Holding Corp. (“AGHC”), a privately-ownedcorporation.  On April 27, 2004, AGHI wasmerged into AGI, with AGI being the surviving entity after the merger.  The merger was accounted for as a combinationof entities under common control using historical costs.  All periods have been restated to reflect thecombined financial position and results of operations of AGI and AGHI, prior tothe April 27, 2004 merger.  Allsignificant intercompany transactions and balances have been eliminated.

 

*                                     **Description of the Business—*TheCompany is a membership-based direct marketing company which sells clubmemberships, products, services, and publications to selected affinity groupsprimarily in North America.** The Company markets club memberships,merchandise and services to RV owners, and camping and golf enthusiasts.  In addition, the Company operates 39 retailoutlets and a mail order business selling RV accessories, supplies andservices.  The stores are located throughoutthe United States.  The Company alsopublishes magazines, directories and books.

 

*                                     **Use of Estimates—*Thepreparation of the Company’s consolidated financial statements in conformitywith accounting principles generally accepted in the United States requires theCompany’s management to make estimates and assumptions that affect the amountsreported in these financial statements and accompanying notes.  Actual results could differ from thoseestimates.

 

*                                     **Cash and Cash Equivalents—*TheCompany considers all short-term, highly liquid investments purchased with amaturity date of three months or less to be cash equivalents.  The carrying amount approximates fair valuebecause of the short maturity of these instruments.

 

*                                     **Concentration of Credit Risk—*TheCompany is potentially subject to concentrations of credit risk in accountsreceivable.  Concentrations of creditrisk with respect to accounts receivable is limited due to the large number ofcustomers and their geographical dispersion.

 

*                                     **Inventories—*Inventoriesare stated at lower of cost or market. Effective July 1, 2002, the Company changed its inventory costing methodfrom Last-in, First-out (“LIFO”) to First-in, First-out (“FIFO”).  The Company made this change to eliminate theadministrative costs of identifying goods and maintaining separate accountingrecords combined with the two methods being materially the same for severalyears.  This accounting change was notmaterial to the December 31, 2002 financial statements.  The FIFO values approximate the currentmarket cost.  Inventories consist ofretail travel and leisure specialty merchandise.

 

44

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*Propertyand Equipment—*Property and equipmentare recorded at cost.  Depreciation ofproperty and equipment is provided using the straight-line method over thefollowing estimated useful lives of the assets:

| ** **              | ** ** | **Years** |
|-------------------------|------------|-----------|
| Leasehold improvements  |       | 3-27      |
| Furniture and equipment |       | 3-12      |
| Software                |       | 3-5       |

 

                                     Leaseholdimprovements are amortized over their useful lives or the remaining term of therespective lease, whichever is shorter.

 

                                      *Goodwill and Other Intangible Assets*—EffectiveJanuary 1, 2002, goodwill is no longer amortized but is instead reviewed atleast annually for impairment, and more often when impairment indicators arepresent.  The finite-lived intangibleassets consisting of membership customer lists, resort and golf courseagreements, non-compete and deferred consulting agreements, and deferredfinancing costs have weighted average useful lives of approximately 6 years, 23years, 15 years and 7 years, respectively.

 

                                      *Long-term Debt—*Thefair value of the Company’s long-term debt is estimated based on the quotedmarket prices for the same or similar issues or on the current rates offeredfor debt of the same or similar remaining maturities.  The fair value of the Company’s long-termdebt was $330.3 million as of December 31, 2004.

 

                                      *Revenue Recognition—*Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and Internet orders, or when services are provided to customers.* *Emergency RoadService (“ERS”) revenues are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Royaltyrevenue is earned under the terms of an arrangement with a third party creditcard provider based on a percentage of the Company’s outstanding credit cardbalances with such third party credit card provider.  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 theactuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit, typically three months based on historical actual responserates.  Renewal expenses are expensed atthe time related materials are mailed. Recognized revenues and profit are subject to revisions as themembership progresses to completion. Revisions to membership period estimates would change the amount ofincome and expense amortized in future accounting periods. At December 31, 2004 and 2003, $5.3 million and $4.6 million ofadvertising expenses have been capitalized as direct-response advertising, ofwhich $2.8 million and $2.1 million, respectively, were reported as assets and$2.5 million in each year were reported net of related deferred revenue.  Advertising expenses for 2004, 2003, and 2002were $28.1 million, $27.3 million, and $30.8 million, respectively.

 

                                      *Publications Revenue and Expense—*Newsstandsales of publications and related expenses are recorded at the time ofdelivery, net of estimated provision for returns.  Subscription sales of publications arereflected in income over the lives of the subscriptions.  The related selling expenses are expensed asincurred.  Advertising revenues andrelated expenses are recorded at the time of delivery.  Subscription and newsstand revenues andexpenses related to annual publications are deferred until the publications aredistributed.

 

45

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*Vendor Allowances*—The Company receives rebates from vendors pursuant toseveral different types of programs. Vendor consideration is accounted for in accordance with Emerging IssuesTask Force Issue No. 02-16, “Accounting by a Customer (Including a Reseller)for Certain Consideration Received From a Vendor” (EITF 02-16) and as such ischaracterized as a reduction of the inventory cost and related cost of saleswhen the inventory is sold.

 

*Shipping andHandling Fees and Costs**—*The Company reports shipping and handling costs billed tocustomers as a component of revenues, and related costs are reported as acomponent of cost applicable to revenues.

 

*MajorCustomers—*Included in the Membership Services Segment isrevenue in the amount of $20.2 million, $20.3 million, and $17.8 million, forthe years 2004, 2003 and 2002, respectively, which was received under contractsfrom one customer of the Company.

 

*RestructuringCharge—*TheCompany incurred restructuring charges of $1.2 million in 2003 and $2.3 millionin 2002.  These charges were primarilyattributable to a management restructuring in the retail segment.

 

Thefollowing is a summary of the restructuring accrual activity for the yearsended December 31, 2004 and 2003 (in thousands)

 

| ** **               | ** ** | **Years ended December 31,** | ** ** |
|--------------------------|------------|------------------------------|------------|
| ** **               | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| Opening balance          |       | $                            | 83         |   | $ | 560 |   |
| Additions                |       | —                       |       | 1,210 |   |
| Charges against reserves |       | —                       |       | (1,687 | ) |
| Ending balance           |       | $                            | 83         |   | $ | 83 |   |

 

A summary of the severance activity forthe years ended December 31, 2004 and 2003 follows (dollar amounts inthousands):

 
| ** **           | ** ** | **Years ended December 31,** | ** ** |
|----------------------|------------|------------------------------|------------|
| ** **           | ** ** | **2004**                     | ** ** | **2003** | ** ** |
| ** **           | ** ** | **# of**                     | ** ** | ** ** | ** ** | **# of** | ** ** | ** ** | ** ** |
| ** **           | ** ** | **Employees**                | ** ** | **Amount** | ** ** | **Employees** | ** ** | **Amount** | ** ** |
| Opening balance      |       | 1                            |       | $ | 83 |   | 10 |   | $ | 560 |   |
| Planned terminations |       | —                       |       | — |   | 19 |   | 1,210 |   |
| Actual terminations  |       | —                       |       | — |   | (28 | ) | (1,687 | ) |
| Ending balance       |       | 1                            |       | $ | 83 |   | 1 |   | $ | 83 |   |

 

*RecentAccounting Pronouncements:*

 

*Consolidation of VariableInterest Entities—*In January 2003, theFinancial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN46”), “Consolidation of Variable Interest Entities, an interpretation of ARB51.”  The primary objectives of thisinterpretation are to provide guidance on the identification of entities forwhich control is achieved through means other than through voting rights (“variableinterest entities”) and how to determine when and which business enterprise(the “primary beneficiary”) should consolidate the variable interestentity.  This

 

46

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newmodel for consolidation applies to an entity in which either (i) the equityinvestors (if any) do not have a controlling financial interest; or (ii) theequity investment at risk is insufficient to finance that entity’s activitieswithout receiving additional subordinated financial support from otherparties.  In addition, FIN 46 requiresthat the primary beneficiary, as well as all other enterprises with asignificant variable interest in a variable interest entity, make additionaldisclosures.  Certain disclosurerequirements of FIN 46 were effective for financial statements issued after January31, 2003.

 

InDecember 2003, the FASB issued FIN 46 (revised December 2003), “Consolidationof Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46implementation issues.  The effectivedates and impact of FIN 46 and FIN 46-R as related to the Company are asfollows:

 

(i)                         *Specialpurpose entities (“SPEs”) and Non-SPEs created prior to January 1, 2004.*  The Company must apply the provisions of FIN46-R at the beginning of the first interim or annual reporting period beginningafter December 15, 2004.

(ii)                      *All entities, regardless ofwhether a SPE, that were created subsequent to December 31, 2003. *The provisions of FIN 46were applicable for variable interests in entities obtained after December 31,2003.  The Company is required to adoptFIN 46-R at the end of the first interim or annual reporting period endingafter March 15, 2004.

 

Theadoption of the provisions applicable to SPEs and all other variable interestsdid not have a material impact on the Company’s financial statements.

 

2.                    PROPERTY ANDEQUIPMENT

 

                                      Propertyand equipment consisted of the following at December 31 (in thousands):
| ** **                                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------------|------------|----------|------------|----------|------------|
|                                             |       |     |       |     |       |
| Land                                             |       | $        | 477        |     | $          | 477 |   |
| Building and improvements                        |       | 6,906    |       | 6,153    |       |
| Furniture and equipment                          |       | 39,930   |       | 38,109   |       |
| Software                                         |       | 15,128   |       | 15,641   |       |
| Systems development and construction in progress |       | 2,068    |       | 6,285    |       |
|                                             |       | 64,509   |       | 66,665   |       |
| Less: accumulated depreciation                   |       | (36,867  | )          | (39,451  | )          |
|                                             |       | $        | 27,642     |     | $          | 27,214 |   |

 

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3.                             GOODWILLAND OTHER INTANGIBLE ASSETS

 

Asummary of changes in the carrying amount of goodwill by business segmentconsisted of the following at December 31 (in thousands):
| ** **                      | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|---------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
|                            |       |                     |       |             |       |       |       |             |       |
| Balance as of January 1, 2003   |       | $                        | 54,288     |             | $          | 48,181     |       | $                | 48,741     |   | $ | 151,210 |   |
| Dispositions                    |       | —                   |       | —           |       | (1,140     | )          | (1,140           | )          |
| Balance as of December 31, 2003 |       | 54,288                   |       | 48,181           |       | 47,601     |       | 150,070          |       |
| Acquisitions                    |       | —                   |       | 2,256            |       | —     |       | 2,256            |       |
| Dispositions                    |       | —                   |       | (3,553           | )          | —     |       | (3,553           | )          |
| Balance as of December 31, 2004 |       | $                        | 54,288     |             | $          | 46,884     |       | $                | 47,601     |   | $ | 148,773 |   |

 

Finite lived intangible assets and relatedaccumulated amortization consisted of the following at December 31 (inthousands):

| ** **                                      | ** ** | **2004**   | ** ** |
|-------------------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net** | ** ** |
|                                            |       |       |       |   |   |   |   |
| Membership and customer lists                   |       | $          | 12,133     |   | $ | (4,404 | ) | $ | 7,729 |   |
| Resort and golf course participation agreements |       | 13,548     |       | (10,710 | ) | 2,838 |   |
| Non-compete and deferred consulting agreements  |       | 17,955     |       | (10,391 | ) | 7,564 |   |
| Deferred financing costs                        |       | 11,587     |       | (2,002 | ) | 9,585 |   |
|                                            |       | $          | 55,223     |   | $ | (27,507 | ) | $ | 27,716 |   |
|                                                 |            |            |            |  |  |  |  |  |  |  |  |  |

 

| ** **                                      | ** ** | **2003**   | ** ** |
|-------------------------------------------------|------------|------------|------------|
| ** **                                      | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net** | ** ** |
|                                            |       |       |       |   |   |   |   |
| Membership and customer lists                   |       | $          | 10,393     |   | $ | (2,628 | ) | $ | 7,765 |   |
| Resort and golf course participation agreements |       | 13,555     |       | (9,772 | ) | 3,783 |   |
| Non-compete and deferred consulting agreements  |       | 17,980     |       | (9,294 | ) | 8,686 |   |
| Deferred financing costs                        |       | 8,005      |       | (3,042 | ) | 4,963 |   |
|                                            |       | $          | 49,933     |   | $ | (24,736 | ) | $ | 25,197 |   |
|                                                 |            |            |            |  |  |  |  |  |  |  |  |  |

 

 

Theaggregate future five-year amortization of finite lived intangibles at December31, 2004 is as follows (in thousands):         

 

| 2005       |   | $     | 5,676  |
|------------|--------|-------|--------|
| 2006       |   | 5,662 |
| 2007       |   | 5,524 |
| 2008       |   | 4,321 |
| 2009       |   | 2,226 |
| Thereafter |   | 4,307 |
| Total      |   | $     | 27,716 |
|            |        |       |        |  |

 

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Under SFAS No. 142, Goodwilland Other Intangible Assets, (“SFAS No. 142”) goodwill impairment is deemed toexist if the net book value of a reporting unit exceeds its estimated fairvalue.  The Company’s reporting units aregenerally consistent with the operating segments underlying the reportingsegments identified in Note 12- Segment Information.  This methodology differs from the Company’sprevious policy, as permitted under accounting standards existing at that time,of using undiscounted cash flows on an enterprise-wide basis to determine ifgoodwill is recoverable.

 

In accordance with thetransition provisions of SFAS No. 142, the Company recorded a non-cash chargeof approximately $1.7 million to reduce the carrying value of its goodwill in2002.  The SFAS No. 142 goodwillimpairment is associated solely with goodwill of the Golf Card Club, which isincluded in the Membership Services segment. Such charge is reflected as a cumulative effect of an accounting changein the accompanying consolidated statement of operations in 2002.  In calculating the impairment charge, the fairvalue of the impaired reporting units underlying the segments was estimatedusing either a discounted cash flow methodology or recent comparabletransactions.  The Company performed itsannual impairment test of its goodwill and intangible assets during the fourthquarter of 2004.  Based on this test, theCompany determined that no impairment charges were required as of December 31,2004.

 

In October 2003, the Company distributed Camping World RVSales, Inc. to AGHC.  The $1.2 milliondistribution was recorded at its net book value which approximates fair marketvalue.  This distribution resulted in a$1.1 million reduction of goodwill.

 

In August 2004, the Company’s subsidiary Ehlert PublishingGroup, Inc. sold certain publication assets for $4.2 million in cash.  The Company paid $0.2 million in transactionfees related to the sales and recorded a $3.6 million reduction ingoodwill.  As a result of the sale, theCompany recorded a net gain of $0.4 million. Approximately $3.6 million of goodwill was allocated to this reportingunit and was therefore a part of the carrying amount of the net assets disposedof in determining the gain.

 

In December 2004, Ehlert Publishing Group, Inc. acquired thestock of ARU, Inc., a producer of consumer outdoor recreation shows.  As part of the purchase, the Company issued$0.7 million of purchase debt and assumed $0.4 million of liabilities.  Goodwill in the amount of $2.3 million wasrecorded upon the acquisition.

 

 

4.                             ACCRUEDLIABILITIES

 

Accruedliabilities consisted of the following at December 31 (in thousands):

 

| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Compensation and benefits |       | $12,018  |       | $10,833  |       |
| Other accruals            |       | 22,212   |       | 20,054   |       |
|                      |       | $34,230  |       | $30,887  |       |

 

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5.                             LONG-TERMDEBT

 

                                      Thefollowing reflects outstanding long-term debt as of December 31 (in thousands):

 

| ** **                  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |
| AGHI Notes                  |       | $        | —     |     | $          | 100,000 |   |
| AGI Senior Notes            |       | 200,000  |       | —   |       |
| AGI Credit Facility:        |       |     |       |     |       |
| Term B1                     |       | 32,157   |       | 39,700   |       |
| Term B2                     |       | 80,393   |       | 99,250   |       |
| Other long-term obligations |       | 1,786    |       | 1,177    |       |
|                        |       | 314,336  |       | 240,127  |       |
| Less: current portion       |       | (1,676   | )          | (1,478   | )          |
|                        |       | $        | 312,660    |     | $          | 238,649 |   |

 

On June 24, 2003, the Company entered into an Amendedand Restated Credit Agreement and a Senior Secured Floating Rate Note PurchaseAgreement (“AGI Credit Facility”) providing for term loans (“Term B1 and TermB2 loans”) in the aggregate of $140.0 million and a revolving credit facilityof $35.0 million.  Proceeds from the AGICredit Facility were used to refinance the existing senior securedindebtedness, pay dividends of $13.7 million to AGI’s parent, AGI HoldingCorp., and redeem $30.0 million of AGHI Notes at 103.667% of par as ofJuly 24, 2003.  The funds available underthe revolving credit line of the AGI Credit Facility may be utilized forborrowings or letters of credit; however,a maximum of $12.5 million may be allocated to such letters of credit.  Re-borrowings under the Term Loans are notpermitted.  The interest on borrowingsunder the AGI Credit Facility is at variable rates based on the ratio of totalcash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates (“LIBOR”), plus an applicable margin rangingfrom 1.50% to 3.50% over the stated rates. AGI also pays a commitment fee of 0.5% per annum on the unused amount ofthe revolving credit line.  Further, theAGI Credit Facility requires the loans to be prepaid in an amount equal to 75%of the excess cash flow, as defined.  Thebalance of the excess cash flow would be available for distribution.  As of December 31, 2004, the Company had noexcess cash flow, as defined.  The AGICredit Facility is secured by substantially all the assets and a pledge of thestock of AGI.  As of the refinancingdate, the Company incurred a $1.7 million debt extinguishment chargerepresenting the write-off of unamortized deferred financing cost associatedwith the prior financing facility.

 

The Company also announced on June 24, 2003 thatnotice was given on the same date, to note holders of record, to redeem $30.0million of the AGHI Notes.  Theredemption date was July 24, 2003.  Thenotes were redeemed at 103.667% of par plus accrued interest to the date ofredemption.  The redemption was funded byborrowings under the AGI Credit Facility. The bond redemption premium and the pro rata amount of unamortizeddeferred financing costs in the amount of $1.1 million and $0.4 million,respectively, were recognized as of the redemption date.

 

OnFebruary 18, 2004, the Company issued $200.0 million of 9% Senior SubordinatedNotes (“AGI Senior Notes”) due 2012. Interest is payable on the AGI Senior Notes twice a year on eachFebruary 15 and August 15, beginning August 15, 2004, and the AGI Senior Notesmature on February 15, 2012.  Theproceeds of the issuance were used to fund the tender offer and defeasance ofthe remaining $100.0 million outstanding principal amount of the AGHI Notes.  The Company used the remaining proceeds fromthe issuance of the AGI Senior Notes to prepay $25.0 million of the AGI CreditFacility, pay a $60.0 million dividend distribution, create a $15.0 millionsegregated cash account, pay certain prepayment and transaction costs and forgeneral

 

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corporate purposes.   Thebond redemption premium, consent fee and the unamortized deferred financingcosts in the amount of $1.7 million, $1.7 million, and $1.1 million,respectively, were recognized as of the redemption date.  The Company also incurred a $0.5 million debtextinguishment charge representing the pro rata unamortized deferred financingcosts associated with the prepayment of the AGI Credit Facility.

 

In November 2004, the Company amended the AGI CreditFacility dated June 24, 2003 to reduce the interest rates on the term loans inboth agreements by 1.00%.  The amendmentsreduced the applicable interest margin from 4.00% to 3.00% and 3.00% to 2.00%for the LIBOR and Prime Rate loans, respectively.

 

As of December 31, 2004, $32.2 million and $80.4million were outstanding under the Term B1 and Term B2 loans,respectively.  As of December 31, 2004,the average interest rate on the Term B1 and Term B2 loans was 5.49%, andpermitted borrowings under the undrawn revolving line were $28.2 million.  The Company had commercial and standbyletters of credit in the aggregate amount of $6.8 million outstanding as ofDecember 31, 2004.  The aggregatequarterly scheduled payments on the term loans are $0.35 million.  The revolving credit facility matures on June24, 2008, and the Term B1 and Term B2 loans mature on June 24, 2009.

 

Theindenture pursuant to which the AGI Senior Notes were issued contains certainrestrictive covenants relating to, but not limited to, mergers, changes in thenature of the business, acquisitions, additional indebtedness, sale of assetsand investments, and the payment of dividends subject to certain limitationsand minimum operating covenants.  TheCompany was in compliance with all debt covenants at December 31, 2004.

 

Theaggregate future maturities of long-term debt at December 31, 2004 are asfollows (in thousands):

 

| 2005       |   | $       | 1,676   |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 1,713   |    |
| 2007       |   | 1,750   |    |
| 2008       |   | 1,790   |    |
| 2009       |   | 1,631   |    |
| Thereafter |   | 305,776 |    |
| Total      |   | $       | 314,336 |   |

 

6.                             INCOMETAXES

 

                                      Thecomponents of the Company’s income tax expense from operations for the yearended December 31, consisted of (in thousands):

 

| ** **         | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:           |       |     |       |     |       |     |       |
| Federal            |       | $        | 5,090      |     | $          | 8,249    |       | $ | 7,174 |   |
| State              |       | 711      |       | 1,148    |       | 993      |       |
| Deferred           |       | 2,274    |       | (122     | )          | 865      |       |
| Income tax expense |       | $        | 8,075      |     | $          | 9,275    |       | $ | 9,032 |   |

 

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A reconciliation of incometax expense from operations to the federal statutory rate for the year endedDecember 31 is as follows (in thousands):

 
| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |     |       |
| Income taxes computed at federal statutory rate |       | $        | 6,413      |     | $          | 8,633    |       | $ | 7,957 |   |
| State income taxes - net of federal benefit     |       | 550      |       | 740      |       | 682      |       |
| Permanent difference:                           |       |     |       |     |       |     |       |
| Disposition of book goodwill                    |       | 1,334    |       | —   |       | —   |       |
| Other                                           |       | (222     | )          | (98      | )          | 393      |       |
| Income tax expense                              |       | $        | 8,075      |     | $          | 9,275    |       | $ | 9,032 |   |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes and operating loss and tax creditcarryforwards.  Significant itemscomprising the net deferred tax asset at December 31 are (in thousands):

 

| ** **                                      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
| **Deferred tax liabilities:**                   |       |     |       |     |       |
| Management incentive                            |       | $        | (3,254     | )        | $          | (3,159 | ) |
| Accelerated depreciation                        |       | (2,194   | )          | (843     | )          |
| Prepaid expenses                                |       | (3,046   | )          | (2,822   | )          |
| Intangible assets                               |       | (1,901   | )          | (1,860   | )          |
| Basis difference on building and land           |       | (13,286  | )          | (12,501  | )          |
| Other                                           |       | (285     | )          | (265     | )          |
|                                            |       | (23,966  | )          | (21,450  | )          |
|                                            |       |     |       |     |       |
| **Deferred tax assets:**                        |       |     |       |     |       |
| Intangible assets                               |       | 434      |       | 863      |       |
| Deferred revenues                               |       | 7,765    |       | 11,287   |       |
| Accrual for employee benefits and severance     |       | 2,895    |       | 2,135    |       |
| Accrual for deferred phantom stock compensation |       | 1,995    |       | 2,040    |       |
| Charitable contribution carryforward            |       | 1,512    |       | 1,623    |       |
| Claims reserves                                 |       | 3,447    |       | 2,184    |       |
| Reserve for resort cards/ points                |       | 1,382    |       | 1,661    |       |
| Deferred compensation                           |       | 9,251    |       | 7,804    |       |
| Bad debt reserve                                |       | 832      |       | 432      |       |
| Other reserves                                  |       | 2,427    |       | 2,441    |       |
|                                            |       | 31,940   |       | 32,470   |       |
|                                            |       |     |       |     |       |
| Valuation allowance                             |       | (1,036   | )          | (1,053   | )          |
|                                            |       |     |       |     |       |
| Net deferred tax assets                         |       | $        | 6,938      |     | $          | 9,967 |   |
|                                                 |            |          |            |          |            |  |  |  |

 

TheCompany and its subsidiaries are parties to a tax-sharing agreement with theCompany’s parent; however, taxes are determined on a separate companybasis.  As part of the tax-sharingagreement, AGHC is compensated for its usable share of separate company federaltax losses.  As such, accrued incometaxes on the balance sheet are due AGHC. At December 31, 2004, the

 

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Companyhad general charitable contribution carryovers of approximately $4.0million.  The valuation allowance isprimarily related to the charitable contribution carryforward.  The amount of the valuation allowance isreviewed periodically as to adequacy to reduce deferred tax assets to theirexpected realizable values.

 

7.                             COMMITMENTS,CONTINGENCIES

 

*                                     **Leases*— The Company holds certain property and equipmentunder rental agreements and operating leases which have varying expirationdates.  Future minimum annual fixedrentals under operating leases having an original term of more than one year asof December 31, 2004 are as follows (in thousands):

 

| 2005       |   | $      | 12,610  |   |
|------------|--------|--------|---------|--------|
| 2006       |   | 11,429 |    |
| 2007       |   | 10,493 |    |
| 2008       |   | 8,766  |    |
| 2009       |   | 8,062  |    |
| Thereafter |   | 88,655 |    |
| Total      |   | $      | 140,015 |   |
|            |        |        |         |        |  |

 

During 2004, 2003 and2002, respectively, approximately $12.5 million, $11.8 million, and $11.5million of rent expense was charged to costs and expenses.

 

On December 5, 2001, theCompany sold eleven real estate properties to eleven separate wholly-ownedsubsidiaries of AGRP Holding Corp., a wholly-owned subsidiary of the Company’sparent, AGI Holding Corp., for $52.3 million in cash and a notereceivable.  The properties have beenleased back to the Company on a triple net basis.  Both the sales price and lease rates werebased on market rates determined by third party independent appraisers engagedby the mortgage lender and approved by the AGI Senior Credit Facility agentbank.  These leases have an initial term of25 to 27 years with two five-year options at the then current market rent.  The leases are classified as operating leasesin accordance with SFAS No. 13 “Accounting for Leases.”  Land and buildings with a net book valuetotaling $45.8 million have been removed from the balance sheet.  The transaction resulted in a net gain of$6.1 million consisting of a $12.1 million gain on certain properties and a$6.0 million loss on other properties. In accordance with accounting principles generally accepted in theUnited States, the $6.0 million loss has been recognized upon the date of salein the statement of operations and the $12.1 million gain has been deferred andwill be credited to income as rent expense adjustments over the leaseterms.  The average net annual leasepayments over the lives of the leases are $3.4 million.

 

*Litigation*— From time to time, TheCompany is involved in litigation arising in the normal course of businessoperations.

 

In September 2004, theCompany’s subsidiary, CWI, Inc., was sued in California state court by PrivacyRights Clearinghouse and Benjamin Greene in a suit alleging that CWI, Inc. wasrecording personal identification information from retail customers inviolation of certain California statutes. The plaintiff seeks injunctive relief preventing CWI, Inc. from engagingin any act or practice constituting unfair competition under the statutes andfor statutory penalties and damages. CWI, Inc. has responded to the suit and denies that its practicesviolate the statutes.  The Company hasnot recorded a provision for loss as of the date of the accompanying financialstatements.  In the opinion ofmanagement, the likelihood of a material unfavorable outcome is not probable asof the date of the accompanying consolidated financial statements.

 

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TheCompany does not believe that the ultimate determination of this case will havea material adverse effect on the results of operations or financial position.

 

*EmploymentAgreements*— TheCompany has employment agreements with certain officers.  The agreements include, among other things,approximately one year’s severance pay beyond the termination date.

 

 

8.                             RELATED-PARTYTRANSACTIONS

 

In conjunction with the saleof real estate properties to an affiliate on December 5, 2001, the Companyaccepted $4.8 million of the purchase price in the form of ten-year balloonnote receivable yielding 11% per annum, with monthly payments of approximately$46,000.

 

Certaindirectors of the Company are partners in partnerships and shareholders ofcorporations that lease facilities to the Company under long-term leases.  For the years ended December 31, 2004, 2003and 2002, payments under these leases were approximately $7.1 million, $7.0million, and $7.0 million, respectively. Future commitments under these leases total approximately $103.0million.  The leases expire at variousdates from December 2005 through July 2029, subject to the Company’s right toexercise renewal options.

 

The Company has entered intovarious agreements with FreedomRoads, LLC, which is owned by entitiescontrolled by the Company’s Chairman. These agreements include facility leases and product marketing and salesagreements.  At December 31, 2004, theCompany leased six properties from FreedomRoads.  Total payments under these leases for 2004were approximately $0.2 million, and future commitments under these leasestotal approximately $4.1 million.  Theleases expire at various dates from August 2013 through January 2015.  For 2004, lease payments received from FreedomRoadsfor subleased property from the Company were approximately $0.6 million, andfuture payments to be received under these subleases total approximately $4.3million.  Payments under the productmarketing and sales agreements were approximately $3.7 million and $0.1 millionfor 2004 and 2003 respectively.

 

In March 2002, the Companyreceived a royalty payment of $1.5 million from Holiday RV Superstores, Inc.,doing business as Recreation USA, (“Recreation USA”).  This non-refundable payment granted RecreationUSA a limited non-exclusive license to use the Good Sam trademarks.  When the Company entered into the agreementwith Recreation USA, the Chairman beneficially owned through entitiescontrolled by him approximately 57% of the then outstanding common stock ofRecreation USA after taking into account conversion and exercise of hisbeneficially owned securities in Recreation USA.  The Company was recording the royalty paymentinto income in a level amount ratably over the three-year term of the license.  The agreement with Recreation USA terminatedin October 2003 and, as a result, the unamortized balance of the royaltyagreement was recognized as revenue in the fourth quarter of 2003.

 

On May 15, 2002, StephenAdams, the Company’s Chairman, sold his 96.1% shareholder interest in theparent company of National Alliance Insurance Company (“NAIC”) to an unrelatedthird-party insurance company.  NAIC is aregulated property and casualty insurance company domiciled in the state ofMissouri with active licenses in 39 other states.  Its principal book of business is derived bymarketing insurance to the President’s Club members.  Under the terms of an exclusive marketingagreement entered into December 31, 1998, the Company earns a marketing feebased upon annual premiums received by NAIC from the sale of its

 

54

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insurance products toPresident’s Club members.  As part of thesale, the expiration date of the agreement was modified to conclude on May 15,2012.  The Company earned $1.3 million inmarketing fees from January 1, 2002 through the May 15, 2002 sale date.

 

 

9.                             STATEMENTSOF CASH FLOWS

 

                                      Supplementaldisclosures of cash flow information for December 31 (in thousands):

| ** **                     | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Cash paid during the year for: |       |     |       |     |       |     |       |
| Interest                       |       | $        | 21,236     |     | $          | 18,733   |       | $ | 20,080 |   |
| Income taxes                   |       | 5,552    |       | 9,569    |       | 8,273    |       |
|                                |            |          |            |          |            |          |            |  |  |  |

 

TheCompany entered into the following non-cash investing and financingtransactions:

**                                     ****       2004:**

InFebruary 2004, the Company declared and distributed a $4.4 million non-cashdividend consisting of the Adams Insurance Holding LLC notes receivable.

                                                                              TheCompany assumed $0.4 million in liabilities and issued $0.7 million of purchasedebt in the acquisition of ARU, Inc.

**                                     ****       2003:**

                                       TheCompany declared and made the following non-cash dividend distributions; 1)split-dollar life insurance policies valued at $1.8 million, which approximatedthe cash surrender value of the policies, and 2) stock of Camping World RVSales, Inc., totaling $1.2 million representing its then net book value whichapproximated fair market value.

**                                      **TheCompany assumed $1.6 million of liabilities and issued $1.2 million of purchasedebt in the acquisition of the publishing assets of Poole Publications, Inc.

**                                     ****       2002:**

                                       TheCompany assumed $0.2 million of liabilities in the acquisition of publicationtitles.

 

 

10.                       BENEFITPLAN

 

The Company sponsors adeferred savings and profit sharing plan (the “401(k) Plan”) qualified underSection 401(a) and 401(k) of the Internal Revenue Codes of 1986, as amended(the “Code”).  All employees over age 21are eligible to join the 401(k) Plan on the first day of each month followingtheir date of employment.  Eligibleemployees may contribute up to 15% of their salary subject to an annual maximumestablished under the Code.  In 2004, theCompany elected a Safe Harbor Matching Contribution for the employer match andset the employer match, which vests upon contribution, at an amount equal to100% of the first 4% of the employee’s contribution.  Effective June 1, 2003, employees may deferup to 60% of their eligible compensation up to IRS limits.  The Company’s contributions to the plantotaled approximately $1.5 million, $1.3 million and $1.4 million for 2004,2003, and 2002, respectively.

 

 

55

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11.                       DEFERREDPHANTOM STOCK COMPENSATION

 

                                      TheCompany has deferred compensation agreements with certain officers.  The agreements provide for payment to theofficers upon their termination, death, disability, or sale of the Company.  Deferred compensation is included in otherlong-term liabilities except for amounts expected to be paid in 2005, whichhave been classified in current liabilities. This deferred compensation is subject to vesting under the terms of theindividual agreements.  Vesting periodsrange from 20% per year over a five-year period to immediate vesting uponentering an agreement.  The Companyincurred deferred compensation expense of $3.0 million, $0.7 million, and $5.7million, respectively, for 2004, 2003 and 2002.

 

12.                       SEGMENTINFORMATION

 

TheCompany’s three principal lines of business are Membership Services,Publications, and Retail.  The MembershipServices segment operates the Good Sam Club, the Coast to Coast Club, and thePresident’s Club for RV owners, campers and outdoor vacationers, and the GolfCard Club for golf enthusiasts.  ThePublications segment publishes a variety of publications for selected marketsin the recreation and leisure industry, including general circulationperiodicals, club magazines, directories and RV and powersports industry trademagazines.  The Retail segment sellsspecialty retail merchandise and services for RV owners primarily throughretail supercenters and mail order catalogs. The Company evaluates performance based on profit or loss fromoperations before income taxes.

 

The reportable segments are strategicbusiness units that offer different products and services.  They are managed separately because eachbusiness requires different technology, management expertise and marketingstrategies.  Most of the businesses wereacquired as a unit, and the management at the time of acquisition was retained.

 

 

56

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The Company does not allocateincome taxes or unusual items to segments. Financial information by reportable business segment is summarized asfollows (in thousands):

 
| ** **                             | ** ** | **Membership Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|-------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **YEAR ENDED DECEMBER 31, 2004**       |       |                    |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $                       | 131,608    |             | $          | 77,977     |       | $                | 255,094    |   | $ | 464,679 |   |
| Gain on sale of property and equipment |       | —                  |       | 13               |       | 22         |       | 35               |       |
| Interest income                        |       | 2,831                   |       | —           |       | 4          |       | 2,835            |       |
| Interest expense                       |       | —                  |       | 674              |       | 10,221     |       | 10,895           |       |
| Depreciation and amortization          |       | 3,643                   |       | 1,811            |       | 6,243      |       | 11,697           |       |
| Segment profit                         |       | 39,822                  |       | 19,881           |       | 269        |       | 59,972           |       |
| Segment assets                         |       | 170,270                 |       | 75,731           |       | 124,325    |       | 370,326          |       |
| Expenditures for segment assets        |       | 1,455                   |       | 1,228            |       | 6,091      |       | 8,774            |       |
|                                   |       |                    |       |             |       |       |       |             |       |
| **YEAR ENDED DECEMBER 31, 2003**       |       |                    |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $                       | 128,664    |             | $          | 71,436     |       | $                | 225,306    |   | $ | 425,406 |   |
| Gain on sale of property and equipment |       | —                  |       | —           |       | 185        |       | 185              |       |
| Interest income                        |       | 2,640                   |       | —           |       | 3          |       | 2,643            |       |
| Interest expense                       |       | —                  |       | 1,138            |       | 9,642      |       | 10,780           |       |
| Depreciation and amortization          |       | 3,365                   |       | 725              |       | 4,404      |       | 8,494            |       |
| Segment profit (loss)                  |       | 41,407                  |       | 18,968           |       | (1,158     | )          | 59,217           |       |
| Segment assets                         |       | 145,233                 |       | 77,101           |       | 118,450    |       | 340,784          |       |
| Expenditures for segment assets        |       | 2,003                   |       | 979              |       | 7,567      |       | 10,549           |       |
|                                   |       |                    |       |             |       |       |       |             |       |
| **YEAR ENDED DECEMBER 31, 2002**       |       |                    |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $                       | 124,546    |             | $          | 66,654     |       | $                | 239,922    |   | $ | 431,122 |   |
| Loss on sale of property and equipment |       | —                  |       | —           |       | (40        | )          | (40              | )          |
| Interest income                        |       | 2,631                   |       | —           |       | 3          |       | 2,634            |       |
| Interest expense                       |       | —                  |       | 1,641            |       | 8,438      |       | 10,079           |       |
| Depreciation and amortization          |       | 2,635                   |       | 261              |       | 4,590      |       | 7,486            |       |
| Segment profit (loss)                  |       | 42,274                  |       | 17,079           |       | (571       | )          | 58,782           |       |
| Segment assets                         |       | 132,897                 |       | 71,434           |       | 110,459    |       | 314,790          |       |
| Expenditures for segment assets        |       | 2,184                   |       | 1,235            |       | 6,251      |       | 9,670            |       |
|                                        |            |                         |            |                  |            |            |            |                  |            |  |  |  |  |  |  |  |

 

 

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The following is a summary of the reconciliations of reportablesegments to the consolidated financial statements for the years ended December31, 2004, 2003 and 2002 (in thousands):

 
| ** **                                                                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| **Gain/ (Loss) on Sale of Property and Equipment**                                                     |       |     |       |     |       |     |       |
| Total gain/(loss) on sale for reportable segments                                                      |       | $        | 35         |     | $          | 185      |       | $ | (40 | ) |
| Other non-allocated gain                                                                               |       | 397      |       | 25       |       | —   |       |
| Total gain/(loss) on sale of property and equipment                                                    |       | $        | 432        |     | $          | 210      |       | $ | (40 | ) |
|                                                                                                   |       |     |       |     |       |     |       |
| **Interest Income**                                                                                    |       |     |       |     |       |     |       |
| Total interest income for reportable segments                                                          |       | $        | 2,835      |     | $          | 2,643    |       | $ | 2,634 |   |
| Elimination of intersegment interest income                                                            |       | (2,829   | )          | (2,638   | )          | (2,627   | )          |
| Other non-allocated interest income                                                                    |       | 749      |       | 804      |       | 2,546    |       |
| Total interest income                                                                                  |       | $        | 755        |     | $          | 809      |       | $ | 2,553 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| **Interest Expense**                                                                                   |       |     |       |     |       |     |       |
| Total interest expense for reportable segments                                                         |       | $        | 10,895     |     | $          | 10,780   |       | $ | 10,079 |   |
| Elimination of intersegment interest expense                                                           |       | (10,843  | )          | (10,764  | )          | (10,079  | )          |
| Other non-allocated interest expense                                                                   |       | 23,942   |       | 18,916   |       | 19,415   |       |
| Total interest expense                                                                                 |       | $        | 23,994     |     | $          | 18,932   |       | $ | 19,415 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| **Depreciation and Amortization**                                                                      |       |     |       |     |       |     |       |
| Total depreciation and amortization for reportable segments                                            |       | $        | 11,697     |     | $          | 8,494    |       | $ | 7,486 |   |
| Unallocated depreciation and amortization expense                                                      |       | 2,196    |       | 1,804    |       | 2,407    |       |
| Total consolidated depreciation and amortization                                                       |       | $        | 13,893     |     | $          | 10,298   |       | $ | 9,893 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| **Income From Continuing Operations Before Income Taxes,  and Cumulative Effect of Accounting Change** |       |     |       |     |       |     |       |
| Total profit for reportable segments                                                                   |       | $        | 59,972     |     | $          | 59,217   |       | $ | 58,782 |   |
| Unallocated depreciation and amortization expense                                                      |       | (2,196   | )          | (1,804   | )          | (2,407   | )          |
| Unallocated G & A expense                                                                          |       | (19,633  | )          | (19,571  | )          | (24,225  | )          |
| Unallocated interest expense, net                                                                      |       | (23,193  | )          | (18,112  | )          | (16,869  | )          |
| Unallocated loss on sale of property and equipment                                                     |       | 397      |       | 25       |       | —   |       |
| Unallocated debt restructure expense                                                                   |       | (5,035   | )          | (3,218   | )          | —   |       |
| Elimination of intersegment interest expense, net                                                      |       | 8,014    |       | 8,126    |       | 7,452    |       |
| income from continuing operations before income                                                        |       |     |       |     |       |     |       |
| taxes                                                                                                  |       | $        | 18,326     |     | $          | 24,663   |       | $ | 22,733 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| **Assets**                                                                                             |       |     |       |     |       |     |       |
| Total assets for reportable segments                                                                   |       | $        | 370,326    |     | $          | 340,784  |       | $ | 314,790 |   |
| Capitalized finance costs not allocated to segments                                                    |       | 10,951   |       | 6,313    |       | 5,595    |       |
| Corporate unallocated assets                                                                           |       | 13,705   |       | 21,198   |       | 22,648   |       |
| Elimination of intersegment receivable                                                                 |       | (74,760  | )          | (65,433  | )          | (57,073  | )          |
| Consolidated total                                                                                     |       | $        | 320,222    |     | $          | 302,862  |       | $ | 285,960 |   |
|                                                                                                   |       |     |       |     |       |     |       |
| **Capital Expenditures**                                                                               |       |     |       |     |       |     |       |
| Total expenditures for assets for reportable segments                                                  |       | $        | 8,774      |     | $          | 10,549   |       | $ | 9,670 |   |
| Other asset expenditures                                                                               |       | 95       |       | 261      |       | 1,040    |       |
| Total capital expenditures                                                                             |       | $        | 8,869      |     | $          | 10,810   |       | $ | 10,710 |   |

 

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13.                      SELECTED QUARTERLYINFORMATION (UNAUDITED)

 

The following is a summary of selectedquarterly information for the years ended December 31, 2004, 2003 and 2002 (inthousands):

 
| ** **                                           | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|---------------|------------|--------------|------------|-------------------|------------|------------------|------------|
| ** **                                           | ** ** | **2004**      | ** ** | **2004**     | ** ** | **2004**          | ** ** | **2004**         | ** ** |
|                                                 |       |          |       |         |       |              |       |             |       |
| Total revenue                                        |       | $             | 101,282    |         | $          | 127,644           |       | $                | 117,613    |   | $ | 118,140 |   |
| Gross profit                                         |       | 37,746        |       | 47,465       |       | 43,458            |       | 47,541           |       |
| Income before cumulative effect of accounting change |       | (182          | )          | 5,425        |       | 1,851             |       | 3,157            |       |
| Net income (loss)                                    |       | (182          | )          | 5,425        |       | 1,851             |       | 3,157            |       |
|                                                      |            |               |            |              |            |                   |            |                  |            |  |  |  |  |

 
| ** **                                           | ** ** | **March  31,** | ** ** | **June 30,** | ** ** | **September  30,** | ** ** | **December  31,** | ** ** |
|------------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2003**       | ** ** | **2003**     | ** ** | **2003**           | ** ** | **2003**          | ** ** |
|                                                 |       |           |       |         |       |               |       |              |       |
| Total revenue                                        |       | $              | 92,479     |         | $          | 115,658            |       | $                 | 110,099    |   | $ | 107,170 |   |
| Gross profit                                         |       | 36,303         |       | 44,661       |       | 39,940             |       | 40,473            |       |
| Income before cumulative effect of accounting change |       | 3,099          |       | 5,544        |       | 1,221              |       | 5,524             |       |
| Net income                                           |       | 3,099          |       | 5,544        |       | 1,221              |       | 5,524             |       |
|                                                      |            |                |            |              |            |                    |            |                   |            |  |  |  |  |

 
| ** **                                           | ** ** | **March  31,** | ** ** | **June 30,** | ** ** | **September  30,** | ** ** | **December  31,** | ** ** |
|------------------------------------------------------|------------|----------------|------------|--------------|------------|--------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2002**       | ** ** | **2002**     | ** ** | **2002**           | ** ** | **2002**          | ** ** |
|                                                 |       |           |       |         |       |               |       |              |       |
| Total revenue                                        |       | $              | 96,860     |         | $          | 121,752            |       | $                 | 112,302    |   | $ | 100,208 |   |
| Gross profit                                         |       | 34,329         |       | 41,788       |       | 38,984             |       | 38,308            |       |
| Income before cumulative effect of accounting change |       | 2,818          |       | 5,053        |       | 2,374              |       | 3,456             |       |
| Net income                                           |       | 2,818          |       | 3,311        |       | 2,374              |       | 3,456             |       |
|                                                      |            |                |            |              |            |                    |            |                   |            |  |  |  |  |

 

 

59

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14.                      VALUATION ANDQUALIFYING ACCOUNTS

 
| **(in  thousands)**                        | ** ** | **Balance at Beginning of Period** | ** ** | **Additions Charged to Costs and Expenses** | ** ** | **Deductions** | ** ** | **Balance at End of Period** | ** ** |
|--------------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|----------------|------------|------------------------------|------------|
|                                       |       |                               |       |                                        |       |           |       |                         |       |
| Description:                               |       |                               |       |                                        |       |           |       |                         |       |
|                                       |       |                               |       |                                        |       |           |       |                         |       |
| Year ended December 31, 2004:              |       |                               |       |                                        |       |           |       |                         |       |
| Allowance for doubtful accounts receivable |       | $                                  | 1,039      |                                        | $          | 585            |       | $                            | 814        | (a) | $ | 810 |   |
|                                       |       |                               |       |                                        |       |           |       |                         |       |
| Year ended December 31, 2003:              |       |                               |       |                                        |       |           |       |                         |       |
| Allowance for doubtful accounts receivable |       | 1,202                              |       | 1,611                                       |       | 1,774          | (a)        | 1,039                        |       |
|                                       |       |                               |       |                                        |       |           |       |                         |       |
| Year ended December 31, 2002:              |       |                               |       |                                        |       |           |       |                         |       |
| Allowance for doubtful accounts receivable |       | 1,587                              |       | 1,319                                       |       | 1,704          | (a)        | 1,202                        |       |
|                                            |            |                                    |            |                                             |            |                |            |                              |            |  |  |  |  |

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(a)                        Accountsdetermined to be uncollectable and charged against allowance account, net of collectionon accounts previously charged against allowance account.

 

 

15.                     NOTES OFFERING AND GUARANTORFINANCIAL INFORMATION

 

InFebruary 2004, the Company completed an offering of $200.0 million 9% SeniorSubordinated Notes (“AGI Senior Notes”) due in 2012.  Interest is payable on the Notes twice a yearon each February 15 and August 15, beginning August 15, 2004.  The Company’s present and future restrictedsubsidiaries will guarantee the AGI Senior Notes with unconditional guaranteesof payment that will rank junior in right of payment to their existing andfuture senior debt, but will rank equal in right of payment to their existingand future senior subordinated debt.

 

Allof the Company’s subsidiaries have jointly and severally guaranteed theindebtedness under the AGI Senior Notes. Full financial statements of the Guarantors have not been includedbecause, pursuant to their respective guarantees, the Guarantors are jointlyand severally liable with respect to the AGI Senior Notes.

 

60

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Thefollowing are summarized statements setting forth certain financial informationconcerning the Guarantor Subsidiaries as of and for the year ended December 31,2004 (in thousands).

 
| ** **                                                   | ** ** | **AGI**  | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|--------------------------------------------------------------|------------|----------|------------|----------------|------------|------------------|------------|-----------------------|------------|
|                                                         |       |     |       |           |       |             |       |                  |       |
| Cash & cash equivalents                                  |       | $        | 24,852     |           | $          | (288             | )          | $                     | —     |   | $ | 24,564 |   |
| Accounts receivable (net of allowance for doubtful accounts) |       | 173      |       | 98,815         |       | (74,760          | )          | 24,228                |       |
| Inventories                                                  |       | 55       |       | 42,408         |       | —           |       | 42,463                |       |
| Other current assets                                         |       | 5,168    |       | 12,830         |       | —           |       | 17,998                |       |
| Total current assets                                         |       | 30,248   |       | 153,765        |       | (74,760          | )          | 109,253               |       |
|                                                         |       |     |       |           |       |             |       |                  |       |
| Property and equipment, net                                  |       | 6,121    |       | 21,521         |       | —           |       | 27,642                |       |
| Intangible assets                                            |       | 9,661    |       | 20,311         |       | —           |       | 29,972                |       |
| Goodwill                                                     |       | 67,584   |       | 78,933         |       |             |       | 146,517               |       |
| Investment in subsidiaries                                   |       | 451,280  |       | —         |       | (451,280         | )          | —                |       |
| Other assets                                                 |       | 13,823   |       | (6,985         | )          | —           |       | 6,838                 |       |
| Total assets                                                 |       | $        | 578,717    |           | $          | 267,545          |       | $                     | (526,040   | ) | $ | 320,222 |   |
|                                                         |       |     |       |           |       |             |       |                  |       |
| Accounts payable                                             |       | $        | 422        |           | $          | 16,089           |       | $                     | —     |   | $ | 16,511 |   |
| Accrued and other liabilities                                |       | 21,458   |       | 22,760         |       | —           |       | 44,218                |       |
| Current portion of long-term debt                            |       | 76,160   |       | 276            |       | (74,760          | )          | 1,676                 |       |
| Current portion of deferred revenue                          |       | 1,245    |       | 56,416         |       | —           |       | 57,661                |       |
| Total current liabilities                                    |       | 99,285   |       | 95,541         |       | (74,760          | )          | 120,066               |       |
|                                                         |       |     |       |           |       |             |       |                  |       |
| Deferred revenue                                             |       | 2,908    |       | 38,561         |       | —           |       | 41,469                |       |
| Long-term debt                                               |       | 311,150  |       | 1,510          |       | —           |       | 312,660               |       |
| Other long-term liabilities                                  |       | 323,482  |       | (319,347       | )          | —           |       | 4,135                 |       |
| Total liabilities                                            |       | 736,825  |       | (183,735       | )          | (74,760          | )          | 478,330               |       |
|                                                         |       |     |       |           |       |             |       |                  |       |
| Interdivisional equity                                       |       | —   |       | 451,280        |       | (451,280         | )          | —                |       |
| Stockholders’ deficit                                   |       | (158,108 | )          | —         |       | —           |       | (158,108              | )          |
| Total liabilities & stockholders’ equity            |       | $        | 578,717    |           | $          | 267,545          |       | $                     | (526,040   | ) | $ | 320,222 |   |
|                                                         |       |     |       |           |       |             |       |                  |       |
| Revenue                                                      |       | $        | 5,499      |           | $          | 459,180          |       | $                     | —     |   | $ | 464,679 |   |
| Costs applicable to revenues                                 |       | (13,364  | )          | (275,105       | )          | —           |       | (288,469              | )          |
| Operating expenses                                           |       | (21,816  | )          | (108,214       | )          | —           |       | (130,030              | )          |
| Interest income (expense), net                               |       | (15,179  | )          | (8,060         | )          | —           |       | (23,239               | )          |
| Other non operating income (expenses)                        |       | 2,376    |       | (6,991         | )          | —           |       | (4,615                | )          |
| Income tax benefit (expense)                                 |       | 18,720   |       | (26,795        | )          | —           |       | (8,075                | )          |
| Net income (loss)                                            |       | $        | (23,764    | )              | $          | 34,015           |       | $                     | —     |   | $ | 10,251 |   |
|                                                         |       |     |       |           |       |             |       |                  |       |
| Cash flows from operations                                   |       | $        | (15,565    | )              | $          | 53,931           |       | $                     | —     |   | $ | 38,366 |   |
| Cash flows used in investing activities                      |       | (1,435   | )          | (5,704         | )          | —           |       | (7,139                | )          |
| Cash flows (used in) provided by financing activities        |       | 37,003   |       | (49,781        | )          | —           |       | (12,778               | )          |
| Cash at beginning of year                                    |       | 4,849    |       | 1,266          |       | —           |       | 6,115                 |       |
| Cash at end of year                                          |       | $        | 24,852     |           | $          | (288             | )          | $                     | —     |   | $ | 24,564 |   |

 

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The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries as of and for the year ended December 31, 2003 (in thousands).

 
| ** **                                                   | ** ** | **AGI** | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI CONSOLIDATED** | ** ** |
|--------------------------------------------------------------|------------|---------|------------|----------------|------------|------------------|------------|----------------------|------------|
|                                                         |       |    |       |           |       |             |       |                 |       |
| Cash & cash equivalents                                  |       | $       | 4,849      |           | $          | 1,266            |       | $                    | —     |   | $ | 6,115 |   |
| Accounts receivable (net of allowance for doubtful accounts) |       | 351     |       | 90,476         |       | (65,433          | )          | 25,394               |       |
| Inventories                                                  |       | 67      |       | 36,772         |       | —           |       | 36,839               |       |
| Other current assets                                         |       | 4,057   |       | 11,192         |       | —           |       | 15,249               |       |
| Total current assets                                         |       | 9,324   |       | 139,706        |       | (65,433          | )          | 83,597               |       |
|                                                         |       |    |       |           |       |             |       |                 |       |
| Property and equipment, net                                  |       | 6,894   |       | 20,320         |       | —           |       | 27,214               |       |
| Intangible assets                                            |       | 5,056   |       | 20,141         |       | —           |       | 25,197               |       |
| Goodwill                                                     |       | 67,584  |       | 82,486         |       | —           |       | 150,070              |       |
| Investment in subsidiaries                                   |       | 411,822 |       | —         |       | (411,822         | )          | —               |       |
| Other assets                                                 |       | 14,774  |       | 2,010          |       | —           |       | 16,784               |       |
| Total assets                                                 |       | $       | 515,454    |           | $          | 264,663          |       | $                    | (477,255   | ) | $ | 302,862 |   |
|                                                         |       |    |       |           |       |             |       |                 |       |
| Accounts payable                                             |       | $       | 411        |           | $          | 12,300           |       | $                    | —     |   | $ | 12,711 |   |
| Accrued and other liabilities                                |       | 16,653  |       | 21,216         |       | —           |       | 37,869               |       |
| Current portion of long-term debt                            |       | 66,833  |       | 78             |       | (65,433          | )          | 1,478                |       |
| Current portion of deferred revenue                          |       | 3,585   |       | 53,724         |       | —           |       | 57,309               |       |
| Total current liabilities                                    |       | 87,482  |       | 87,318         |       | (65,433          | )          | 109,367              |       |
|                                                         |       |    |       |           |       |             |       |                 |       |
| Deferred revenue                                             |       | 3,110   |       | 37,991         |       | —           |       | 41,101               |       |
| Long-term debt                                               |       | 237,550 |       | 1,099          |       | —           |       | 238,649              |       |
| Other long-term liabilities                                  |       | 276,217 |       | (273,567       | )          | —           |       | 2,650                |       |
| Total liabilities                                            |       | 604,359 |       | (147,159       | )          | (65,433          | )          | 391,767              |       |
|                                                         |       |    |       |           |       |             |       |                 |       |
| Interdivisional equity                                       |       | —  |       | 411,822        |       | (411,822         | )          | —               |       |
| Stockholders’ equity (deficit)                          |       | (88,905 | )          | —         |       | —           |       | (88,905              | )          |
| Total liabilities & stockholders’ equity            |       | $       | 515,454    |           | $          | 264,663          |       | $                    | (477,255   | ) | $ | 302,862 |   |
|                                                         |       |    |       |           |       |             |       |                 |       |
| Revenue                                                      |       | $       | 7,276      |           | $          | 418,130          |       | $                    | —     |   | $ | 425,406 |   |
| Costs applicable to revenues                                 |       | (12,885 | )          | (251,144       | )          | —           |       | (264,029             | )          |
| Operating expenses                                           |       | (21,156 | )          | (94,418        | )          | —           |       | (115,574             | )          |
| Interest income (expense), net                               |       | (9,986  | )          | (8,137         | )          | —           |       | (18,123              | )          |
| Other non operating income (expenses)                        |       | 3,195   |       | (6,212         | )          | —           |       | (3,017               | )          |
| Income tax benefit (expense)                                 |       | 8,813   |       | (18,088        | )          | —           |       | (9,275               | )          |
| Net income (loss)                                            |       | $       | (24,743    | )              | $          | 40,131           |       | $                    | —     |   | $ | 15,388 |   |
|                                                         |       |    |       |           |       |             |       |                 |       |
| Cash flows from operations                                   |       | $       | (16,565    | )              | $          | 38,415           |       | $                    | —     |   | $ | 21,850 |   |
| Cash flows (used in) provided by investing activities        |       | (7,938  | )          | (10,676        | )          | —           |       | (18,614              | )          |
| Cash flows (used in) provided by financing activities        |       | 29,225  |       | (28,076        | )          | —           |       | 1,149                |       |
| Cash at beginning of year                                    |       | 127     |       | 1,603          |       | —           |       | 1,730                |       |
| Cash at end of year                                          |       | $       | 4,849      |           | $          | 1,266            |       | $                    | —     |   | $ | 6,115 |   |

 

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Thefollowing are summarized statements setting forth certain financial informationconcerning the Guarantor Subsidiaries for the year ended December 31, 2002 (inthousands).

 

 
| ** **                                            | ** ** | **AGI** | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI CONSOLIDATED** | ** ** |
|-------------------------------------------------------|------------|---------|------------|----------------|------------|------------------|------------|----------------------|------------|
|                                                  |       |    |       |           |       |             |       |                 |       |
| Revenue                                               |       | $       | 6,539      |           | $          | 424,583          |       | $                    | —     |   | $ | 431,122 |   |
| Costs applicable to revenues                          |       | (10,372 | )          | (267,341       | )          | —           |       | (277,713             | )          |
| Operating expenses                                    |       | (25,464 | )          | (88,306        | )          | —           |       | (113,770             | )          |
| Interest income (expense), net                        |       | (9,417  | )          | (7,445         | )          | —           |       | (16,862              | )          |
| Other non operating income (expenses)                 |       | 4,920   |       | (4,964         | )          | —           |       | (44                  | )          |
| Income tax benefit (expense)                          |       | 12,862  |       | (21,894        | )          | —           |       | (9,032               | )          |
| Cumulative effect of accounting change                |       | -       |       | (1,742         | )          |             |       | (1,742               | )          |
| Net income (loss)                                     |       | $       | (20,932    | )              | $          | 32,891           |       | $                    | —     |   | $ | 11,959 |   |
|                                                  |       |    |       |           |       |             |       |                 |       |
| Cash flows from operations                            |       | $       | (15,198    | )              | $          | 32,543           |       | $                    | —     |   | $ | 17,345 |   |
| Cash flows (used in) provided by investing activities |       | (5,502  | )          | (7,978         | )          | —           |       | (13,480              | )          |
| Cash flows (used in) provided by financing activities |       | 20,694  |       | (26,009        | )          | —           |       | (5,315               | )          |
| Cash at beginning of year                             |       | 133     |       | 3,047          |       | —           |       | 3,180                |       |
| Cash at end of year                                   |       | $       | 127        |           | $          | 1,603            |       | $                    | —     |   | $ | 1,730 |   |
|                                                       |            |         |            |                |            |                  |            |                      |            |  |  |  |  |  |  |

 

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**ITEM 9: CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

None

 

**ITEM 9A: CONTROLS AND PROCEDURES**

 

Within 90 days prior to thefiling of this Annual Report on Form 10-K, we carried out an evaluation, underthe supervision and with the participation of our management, including ourPresident and Chief Executive Officer and our Senior Vice President and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures (as defined in Rule 13a-15(e) of theSecurities Exchange Act of 1934, as amended) as of the end of the periodcovered by this report.  Based upon thatevaluation, our President and Chief Executive Officer, along with our SeniorVice President and Chief Financial Officer, concluded that our disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to our Company (including our consolidated subsidiaries)required to be included in our periodic SEC filings.  No changes have occurred during the periodcovered by this report or since the evaluation date that would have a materialeffect on the disclosure controls and procedures.

 

 

**ITEM 9B: OTHER INFORMATION**

 

None

 

 

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**PART III**

 

**ITEM 10:  DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Ourexecutive officers and directors are as follows:
| **Name**             | ** ** | **Age** | ** ** | **Position**                                                            |
|----------------------|------------|---------|------------|-------------------------------------------------------------------------|
| Michael A. Schneider |       | 50      |       | President, Chief Executive  Officer and Director                        |
| Mark J. Boggess      |       | 48      |       | President, Chief Executive  Officer of Camping World, Inc. and Director |
| Thomas F. Wolfe      |       | 43      |       | Senior Vice President and  Chief Financial Officer                      |
| Michael Blumer       |       | 59      |       | Senior Vice President                                                   |
| Murray S. Coker      |       | 64      |       | Senior Vice President                                                   |
| Laura A. James       |       | 48      |       | Senior Vice President/  Human Resources and Administration              |
| Brent Moody          |       | 43      |       | Senior Vice President/  General Counsel and Business Development        |
| Prabhuling Patel     |       | 58      |       | Senior Vice President                                                   |
| Stephen Adams        |       | 67      |       | Chairman of the Board of  Directors                                     |
| Wayne Boysen         |       | 74      |       | Director                                                                |
| John Ehlert          |       | 59      |       | Director                                                                |
| David Frith-Smith    |       | 59      |       | Director                                                                |
| David B. Garvin      |       | 61      |       | Director                                                                |
| Joe McAdams          |       | 61      |       | Director                                                                |
| George Parker        |       | 65      |       | Director                                                                |

 

Michael A. Schneider became our President andChief Executive Officer as of January 1, 2004. Prior to that time, Mr. Schneider had been our Chief Operating Officersince 1996.  Prior thereto, Mr. Schneiderserved as our Senior Vice President and General Counsel since January 1993 andwas responsible for administrative areas, development of new corporate venturesand portions of the RV publication business and the advertising and salesdepartments.  Prior to January 1993 andsince 1977, Mr. Schneider has held a variety of senior management positions inour publication business.

 

Mark J. Boggess became the President andChief Executive Officer of our Camping World subsidiary as of January 1,2004.  Prior to that time, Mr. Boggesshad been our Senior Vice President and Chief Financial Officer since June 1993.  From June 1992 through May 1993, Mr. Boggesswas Vice President and Chief Financial Officer of Hypro Corporation, aprivately owned manufacturer of fluid transfer pumps.  From June 1989 through June 1992, Mr. Boggesswas Treasurer of Adams Communications Corporation, a holding company controlledby Stephen Adams which owned television and radio station operations throughoutthe United States.  Mr. Boggess is also amember of the board of directors and an owner of a small percentage interest inFreedomRoads Holding.

 

Thomas F. Wolfe became our Senior VicePresident and Chief Financial Officer as of January 1, 2004.   Prior to that time, Mr. Wolfe had been ourVice President and Controller since 1997. From 1991 to 1997, Mr. Wolfe was Vice President of Finance ofConvenience Management Group, a privately owned distributor of petroleumproducts and equipment.  From 1989 to1991, Mr. Wolfe was Vice President and Controller of First City Properties,Inc.  Prior to 1989, and since 1983, Mr.Wolfe held a variety of staff and management positions at Deloitte & ToucheLLP.

 

Michael Blumer has been our Senior VicePresident since January 1998.  Prior to1998 and since 1996, Mr. Blumer served as Chief Information Officer atPrimedia, Inc. and prior to that post he served as Senior Vice President ofInformation Technology at The Hamilton Group from 1992 to 1996.  Prior to 1992, he

 

 

 

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also served in information technologymanagement positions at The Franklin Mint, American Express and the FederalReserve Bank of New York.

 

Murray S. Coker is currently our Senior VicePresident-Marketing and oversees the marketing of all of our products, servicesand clubs.  He joined Camping World in1978 and has served in various management positions including VicePresident-Mail Order, Vice President-Direct Marketing and Senior VicePresident-Marketing.   Prior to joiningCamping World, Mr. Coker was a consultant specializing in retail systems forManagement Design Associates and Deloitte & Touche LLP.  He was the Data Systems Product Line Managerfor Pitney Bowes’ Monarch Marketing Systems Division and a Systems Engineer forIBM Corporation.

 

Laura A. James became our Senior VicePresident/ Human Resources and Administration as of January 1, 2004.  Prior to that time, Ms. James served as VicePresident/ Human Resources and Administration since 1996.  Ms. James also served as interim VicePresident/ Finance from December 1996 to September 1997.  Prior to 1996, Ms. James served in variousmanagement and staff positions at the Company.

 

Brent Moody became our Senior Vice President/General Counsel and Business Development as of January 1, 2004.  He joined Camping World in 2002 and sincethat time had served Camping World as Vice President and General Counsel andSenior Vice President/ General Counsel and Business Development.  Prior to that time and since 1998, Mr. Moodywas a shareholder of the law firm of Greenberg Traurig, P.A.  From 1996 to 1998, Mr. Moody served as Vice Presidentand Assistant General Counsel for Blockbuster, Inc.

 

Prabhuling Patel was appointed Senior VicePresident of Products & Services as of May 1, 2004. Mr. Patel was theSenior Vice President & General Manager of the outsourcing business ofMessage Media, Inc., an email marketing company, from 2000 to 2002.  Prior to 2000 he was President of theTelecommunications, Energy & Cable Division of Experian, a credit bureauand direct marketing services company. He served in senior executive positions running various businesses atMetromail Corporation which was in the direct marketing services business.  Mr. Patel also held a number of executivelevel positions in marketing, finance, IT, business development, and businessstrategy at Citigroup, Cigna, Household International and Montgomery Ward.

 

Stephen Adams has been the Chairman of ourBoard of Directors since December 1988. Mr. Adams is also chairman of the board of directors and a 90% owner ofFreedomRoads Holding which, through its 100% owned affiliates, operates RVdealerships throughout the United States. In addition, Mr. Adams is the chairman of the board of directors and thecontrolling shareholder of Adams Outdoor Advertising, Inc., the managinggeneral partner of Adams Outdoor Advertising Limited Partnership.  Mr. Adams also holds a 95% interest inAffinity Bank Holdings, Inc.

 

Wayne Boysen was our Senior Vice Presidentsince June 1991 until his retirement on January 1, 1996 and has supervised thestaff of the risk management divisions of businesses owned by Stephen Adams,including our risk management division since July 1988.  In addition, from 1995 until December 1998,Mr. Boysen served as chairman of the board of directors of Affinity Bank andchairman of the board of directors of Affinity Insurance Group, Inc.  From 1966 through July 1988, Mr. Boysen ownedor managed insurance agencies and provided consulting services to property andcasualty insurance agencies.  Mr. Boysenhas been a member of our Board of Directors since 1993.

 

John Ehlert is the founder of EhlertPublishing Group, Inc. which we acquired in 1997, and served as its Presidentand Chief Executive Officer since 1976 until its acquisition.  Mr. Ehlert serves on the board of directorsof various trade, private and charitable organizations.

 

 

 

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David Frith-Smith has served as managingpartner of Biller, Frith-Smith & Archibald, Certified Public Accountantssince 1988.  Mr. Frith-Smith was aprincipal with Maidy Biller Frith-Smith & Brenner, Certified Public Accountantsfrom 1984 to 1988, and with Maidy and Lederman, Certified Public Accountantsfrom 1980 to 1984.  Mr. Frith-Smith hasbeen a member of our Board of Directors since November 1996.  Mr. Frith-Smith is also a director of AdamsOutdoor Advertising Inc., the managing general partner of Adams Outdoor AdvertisingLimited Partnership, which is controlled by Stephen Adams, and various privateand non-profit corporations.

 

David B. Garvin founded Camping World in 1966and served as President of Camping World from 1966 to 1986 and served as itschairman of the board of directors from 1986 to 1997.  We acquired Camping World in 1997.

 

George Parker is the Senior Associate Deanfor Academic Affairs and Director of the MBA Program at the Graduate School ofBusiness at Stanford University.  Priorto 1973, Mr. Parker was an Assistant/Associate Professor of Finance at theGraduate School of Business at Columbia University.  He currently serves on the board of directorsfor various companies including Continental Airlines, Inc., Tejon Ranch Co.,iShares, Inc., Threshold Pharmaceuticals, Inc. and Converium Holding AG.  He also provides consulting services tovarious corporations and banks on financial management and corporate strategy,and has had numerous financial management works published.

 

Joe McAdams is currently a member of ourBoard of Directors and was our President and Chief Executive Officer from July1991 until the end of 2003.  Prior toJuly 1991 and since December of 1988, Mr. McAdams was President of AdamsPublishing Corporation, a newspaper and magazine publishing company controlledby Mr. Adams.  From October 1987 throughNovember 1988, Mr. McAdams was President and Publisher of Southern CaliforniaPublishing Co.  Prior to October 1987 andsince 1961, Mr. McAdams has held various management positions with publishingand direct marketing companies, including Senior Vice President and ChiefOperating Officer of ADVO Systems, Inc. from August 1981 to April 1983.  Mr. McAdams currently serves on the board ofdirectors of Equity Lifestyle Properties, Inc. and Liberty Group Publishing,Inc.

 

Directors are elected for terms of one yearor until their successors have been duly elected.  There are no family relationships between anyof the directors and/or executive officers.

 

**AuditCommittee**

 

We have designated an Audit Committee, which assists the Board ofDirectors in fulfilling its fiduciary responsibilities by overseeing ourfinancial reporting and public disclosure activities.  The current members of the Audit Committee areWayne Boysen, David Frith-Smith and Michael A. Schneider.  Mr. Frith-Smith has been determined by theBoard of Directors to be an “Audit Committee Financial Expert” as that term hasbeen defined by the Securities and Exchange Commission.

 

We are not a listed issuer under the Securities Exchange Act of 1934,as amended (the “Act”), and thus are not subject to the audit committeeindependence requirements set forth in Rule 10A-3 of the Act.  Nevertheless, we recognize that the membersof our Audit Committee do not meet the independence requirements as set forthin that rule.  Mr. Schneider currentlyserves as our President and Chief Executive Officer and Messrs. Boysen andFrith-Smith provide professional services to our Chairman, Stephen Adams, orbusinesses controlled by Mr. Adams. Despite their lack of independence, we believe that the members of ourAudit Committee effectively assist the Board of Directors in its oversight ofthe integrity of our financial statements, our compliance with legal andregulatory requirements, the independent auditor’s qualifications andindependence, the responsibilities, performance, budget and the performance ofour independent auditor.

 

 

 

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**Code ofProfessional Conduct**

 

We have adopted a Code of Professional Conductthat applies to our Principal Executive Officer, Principal Financial Officer,Principal Accounting Officer and all other employees.  This Code of Professional Conduct is postedon our website at www.affinitygroup.com and may be found as follows:

 

•                  From our mainweb page, first click on “About AGI,”

 

•                  Then, click on “Codeof Conduct.”

 

 

 

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**ITEM 11:  EXECUTIVE COMPENSATION**

 

**Executive Compensation**

 

Thefollowing table provides certain summary information concerning thecompensation paid by us to our Chief Executive Officer and each of the****four other highest compensated executive officers who wereofficers at December 31, 2004, for the fiscal years ending December 31, 2004,2003, and 2002.

 

**SUMMARYCOMPENSATION TABLE**

 
| ** **                      | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Other Annual** | ** ** | **All Other**          | ** ** |
|---------------------------------|------------|------------|------------|-------------------------|------------|------------------|------------|------------------------|------------|
| **Name and Principal Position** | ** ** | **Year**   | ** ** | **Salary**              | ** ** | **Bonus(1)**     | ** ** | **Compensation(1)(2)** | ** ** | **Compensation(3)** | ** ** |
| ** **                      | ** ** | ** ** | ** ** | ** **              | ** ** | ** **       | ** ** | ** **             | ** ** | ** ** | ** ** |
| Michael A. Schneider            |       | 2004       |       | $                       | 100,000    |             | $          | 645,080                |       | $ | 492,702 | (4) | $ | 8,764 |   |
| President,                      |       | 2003       |       | 210,000                 |       | 290,055          |       |                   |       | 8,660 |   |
| Chief Executive Officer         |       | 2002       |       | 210,000                 |       | 287,505          |       | 499,376                | (5)        | 8,445 |   |
|                            |       |       |       |                    |       |             |       |                   |       |   |   |
| Mark J. Boggess,                |       | 2004       |       | 100,000                 |       | 646,521          |       | 563,870                | (4)        | 8,564 |   |
| President, Chief Executive      |       | 2003       |       | 155,140                 |       | 362,569          |       |                   |       | 8,580 |   |
| Officer of Camping World        |       | 2002       |       | 211,415                 |       | 143,753          |       |                   |       | 8,685 |   |
|                            |       |       |       |                    |       |             |       |                   |       |   |   |
| Murray S. Coker                 |       | 2004       |       | 196,000                 |       | 198,990          |       | 315,371                | (4)        | 9,305 |   |
| Senior Vice President           |       | 2003       |       | 196,000                 |       | 191,436          |       |                   |       | 9,028 |   |
|                            |       | 2002       |       | 196,000                 |       | 189,753          |       |                   |       | 7,382 |   |
|                            |       |       |       |                    |       |             |       |                   |       |   |   |
| Thomas F. Wolfe                 |       | 2004       |       | 181,132                 |       | 167,353          |       |                   |       | 8,364 |   |
| Senior Vice President,          |       | 2003       |       | 151,358                 |       | 40,608           |       |                   |       | 7,696 |   |
| Chief Operating Officer         |       | 2002       |       | 146,946                 |       | 40,950           |       |                   |       | 6,397 |   |
|                            |       |       |       |                    |       |             |       |                   |       |   |   |
| Peter Klein                     |       | 2004       |       | 218,000                 |       | 96,029           |       |                   |       | 6,668 |   |
| Senior Vice President of        |       | 2003       |       | 192,212                 |       | 66,418           |       |                   |       | 1,991 |   |
| Camping World                   |       | 2002       |       | 64,039                  |       | 25,055           |       | 24,726                 | (6)        | 56 |   |
|                                 |            |            |            |                         |            |                  |            |                        |            |  |  |  |  |  |  |

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(1)                      Compensation defined as “Bonus” and “Other Annual Compensation” iseligible, at the election of the employee, to be contributed to the AGHC KeyEmployee Security Option Plan (“KEYSOP”). See “Agreements with Executive Officers.”

(2)                      Personal benefits are the lesser of (i) 10% of total annual salaryand bonus (ii) $50,000, except as described in Note (3) below.

(3)                      Represents company contributions to 401(k), split dollar life insuranceeconomic benefit and personal use of Company assets.

(4)                      Under the termsof the phantom stock agreements, Mr. Schneider received $492,702, Mr. Boggessreceived $563,870, and Mr. Coker received $315,371 in 2004.  All payments were contributed to the KEYSOP.

(5)                      Underthe terms of the phantom stock agreements, Mr. Schneider received $499,376 in2002.  These payments were contributed tothe KEYSOP.

 

We do not have any outstanding stock options or restricted stockgrants.  We have phantom stock agreementsand a non-qualified deferred compensation plan for certain of itsofficers.  See “Agreements with ExecutiveOfficers.”

 

(6)                      Representsrelocation for employee hired in 2002.

 

 

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**Agreements with Executive Officers**

 

UntilDecember 31, 2003, we and Mr. Adams were parties to an amended employmentagreement providing for his employment as the Chairman of our Board ofDirectors.  That agreement terminatedeffective December 31, 2003, following completion of the AGI seniorsubordinated note offering.

EffectiveJanuary 1999, we introduced the KEYSOP for key employees of AGI and itssubsidiaries.  This non-qualifieddeferred compensation plan allows key employees the option to contributespecific compensation, including bonuses, incentive compensation, and phantomstock payments to the KEYSOP. Contributions to the KEYSOP from AGI employees totaled $4.0 million,$4.6 million and $8.9 million in 2004, 2003 and 2002, respectively.

 

In January 1992, we introduceda phantom stock incentive program for key employees.  Since that time, certain employees have beengranted awards at various interest levels and over varying vestingperiods.  The value of the phantom stockinterest is based on the increase in the value of the Company over the basevalue at the award date.  In accordancewith the formula set forth in the agreements, which formula approximates amultiple of operating profits and is intended to approximate the fair marketvalue of the Company, earned incentives are paid in three annual installmentsfollowing the earlier of termination of employment, sale of the Company, orfive years after the initial grant of the phantom stock interest.  The phantom stock agreements also set forththe terms of employment for the executive.

 

As ofDecember 31, 2004, the aggregate accrued liability under the phantom stockincentive program was approximately $5.3 million, of which $1.5 million hasbeen reflected as current in the financial statements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next two years.   During 2004, we incurred deferred executivecompensation expense of $3.0 million under the phantom stock agreements.  Phantom stock payments of $3.1 million weremade during the 2004.

Thefollowing table sets forth the current awards outstanding under the Company’sphantom stock incentive program as of December 31, 2004.  
| **Officer/Director**   | ** ** | **Full  Interest** | ** ** | **Vested  Amount** | ** ** |
|------------------------|------------|--------------------|------------|--------------------|------------|
| Michael A. Schneider   |       | 2.50               | %          | 2.50               | %          |
| Mark J. Boggess        |       | 2.50               | %          | 2.50               | %          |
| Murray S. Coker        |       | 1.00               | %          | 0.96               | %          |
| Thomas F. Wolfe        |       | 0.33               | %          | 0.07               | %          |
| Laura A. James         |       | 0.10               | %          | 0.02               | %          |
| Prabhuling Patel       |       | 0.10               | %          | —             | %          |
| Grant E. Miller        |       |               | (1)        |               | (1)        |
| Marcos Strafacce-Costa |       |               | (2)        |               | (2)        |
| Scott Ellison          |       |               | (2)        |               | (2)        |
| Cynthia A. McGrath     |       |               | (2)        |               | (2)        |
| Kenneth Marshall       |       |               | (3)        |               | (3)        |
| Chad Selvidge          |       |               | (3)        |               | (3)        |
| Peter Klein, Jr.       |       |               | (3)        |               | (3)        |
| Brent Moody            |       |               | (3)        |               | (3)        |

 

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(1)                      The phantom stock interestrelates only to our Camp Coast to Coast, Inc. subsidiary.  The full interest ranges from 1.65% of theincrease in 

 

 

 

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                                    that subsidiary’s value to 15.00% of theincrease in that subsidiary’s value depending upon the level of theincrease.  The full interest vests inequal portions over a five year period.

 

(2)                      The phantom stock interestrelates only to our Camp Coast to Coast, Inc. subsidiary.  The full interest ranges from 0.35% of theincrease in that subsidiary’s value to 3.35% of the increase in that subsidiary’svalue depending upon the level of the increase. The full interest vests in equal portions over a five year period.

 

(3)                      The phantom stock interestrelates only to our Camping World, Inc. subsidiary.  The full interest for each executive rangesfrom 1.45% of the increase in that subsidiary’s value to 2.25% of the increasein that subsidiary’s value depending upon the level of the increase.  The full interest vests in equal portionsover a five year period.

 

The executive’s base salary andannual bonus are determined from time to time by the Board of Directors.  In the event the executive’s employment isterminated without cause, the phantom stock agreements provide for severancebenefits of up to one year’s base salary plus the accrued bonus for the year inwhich such termination occurs.

 

**Compensation Committee Interlockand Insider Participation**

The Company’s Board of Directors determinesthe compensation of the executive officers. The executive officers of the Company that serve on the Board ofDirectors are Michael A. Schneider and Mark J. Boggess.

 

Messrs. Garvin, McAdams, Boggess, Coker and Blumerare partners in various partnerships that lease nine facilities under long-termleases to Camping World.  For the yearsended December 31, 2004, 2003 and 2002, payments under these leases were approximately$3.67 million, $3.57 million and $3.54 million, respectively.  The leases expire during the period December2005 and December 2015, subject to the right of Camping World to exerciserenewal options.  We believe that suchleases contain lease terms as favorable as lease terms that would be obtainedfrom independent third parties.

 

On December 5, 2001, the Company sold eleven realestate properties to eleven separate wholly-owned subsidiaries of AGRP HoldingCorp., a wholly-owned subsidiary of the Company’s parent, AGI Holding Corp.,for $52.3 million in cash and a note receivable.  The properties have been leased back to theCompany on a triple net basis.  Both thesales price and lease rates were based on market rates determined by thirdparty independent appraisers engaged by the mortgage lender and approved by theAGI Senior Credit Facility agent bank. These leases have an initial term of 25 to 27 years with two five-yearoptions at the then current market rent*. *Payments under these leases were$3.4 million in 2004.

 

 

**BonusPlan**

Weannually adopt bonus programs for employees. Bonus payments are made based on achievement of specified operatingresults and/or objectives.

 

**401 (k)Savings and Profit Plan**

Wesponsor a deferred savings and profit sharing plan (the “401(k) Plan”)qualified under Section 401(a) and 401(k) of the Internal Revenue Code of 1986,as amended (the “Code”).  All employeesover age 21 who have completed one year of service (minimum of 1,000 hours) areeligible to participate in the 401(k) Plan. For the plan 2004 year, we elected a Safe Harbor Matching Contributionfor the employer match and set the employer match, which vests uponcontribution, at an amount equal to 100% of the

 

 

 

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first4% of the employee’s contribution. Employees may defer up to 60% of their eligible compensation up to IRSlimits.

** **

**Other Benefit Plan**

Our employees receive certainmedical and dental benefits during their employment.  One of our predecessors also providedeligible employees with medical, dental and life insurance coverage afterretirement.  The estimated future costsassociated with such coverage to retirees are reserved as a liability in ourconsolidated financial statements. Current employees are not provided medical and dental benefits uponretirement.

 

**Director Compensation**

We pay directors who are notemployees (Messrs. Boysen, Ehlert, Frith-Smith, Garvin, McAdams and Parker)director fees of $1,800 per month.  Wealso pay directors who are not employees who are members of our audit committeea quarterly fee of $1,250.

 

**Report on Executive Compensation**

Our executive compensation program is tied closely to ourperformance and aimed at enabling us to attract and retain the best possible executivetalent.  Accordingly, the Board ofDirectors seeks to significantly correlate the level of executive compensation,when taken as a whole, with the level of our performance, and it seeks tocompensate its executives in a manner that is reasonably competitive with thatavailable to executives in comparable companies, including membership servicescompanies and other highly leveraged companies with comparable operatingincome.  These goals are accomplishedthrough the use of a combination of annual bonus payments and phantom stockgrants in conjunction with base compensation.

MichaelA. Schneider became our President and Chief Executive Officer as of January 1,2004.  Mr. Schneider’s compensationpackage was determined by the Board based on negotiations with Mr. Schneidertaking into account the compensation packages of chief executive officers ofsimilarly situated companies and our performance objectives.  For 2004, Mr. Schneider received a basesalary and he received a bonus based on his assigned percentage of ouroperating income and the achievement of specified operating results.  In addition, Mr. Schneider has been grantedphantom stock interests in order to provide him with an incentive to enhanceour long-term value.  See a descriptionof the phantom stock incentive program for key employees under “Agreements withExecutive Officers.”  Standard employeemedical and dental benefits and participation in the 401(k) Plan are alsoavailable to Mr. Schneider.

Our other executive officers received base salariesfor 2004 which the Board has set at levels which are believed by the Board tobe reasonably competitive with the salary level of executives in comparablecompanies.  The executive officers alsoreceived bonuses based on their respective assigned percentages of ouroperating income or the operations in which the executive is employed.  The percentage assigned to each executiveofficer depends upon the level of his or her responsibilities.  In addition, the other executive officersreceived phantom stock grants, standard employee medical and dental benefitsand participation in the 401(k) Plan.

 

 

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**ITEM 12:  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

Ourcompany is a wholly-owned subsidiary of AGI Holding Corp. (“AGHC”), aprivately-owned corporation.  Thefollowing table sets forth, as of December 31, 2004, certain information withrespect to the beneficial ownership of the Common Stock of AGHC by eachshareholder who is known to us to beneficially own more than 5% of theoutstanding shares, each executive officer and the current sole director ofAGHC, and all of our executive officers and directors as a group.

 

| **Name and Address of Beneficial Owner**                      | ** ** | **Number of Shares  of Stock Owned (1)** | ** ** | **Percent of  Common Stock** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| Stephen Adams  2575 Vista Del Mar Drive  Ventura, CA 93001    |       | 1,407.7                                  | (2)        | 97.41                        | %          |
| All executive officers and directors as a group  (15 persons) |       | 1,407.7                                  |       | 97.41                        | %          |

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(1)               Except as otherwiseindicated, the beneficial owners have sole voting and investment power withrespect to the shares in the table.

(2)               Does not include 37.5 sharesowned by members of the Adams’ family who do not reside with him and as towhich Mr. Adams disclaims beneficial ownership.

 

**ITEM 13:  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

Certain members of our Board of Directors,including the Chairman of the Board, are partners in partnerships andshareholders of corporations that lease facilities to us under long-termleases.  For the years ended December 31,2004, 2003 and 2002, payments under these leases were approximately $7.1million, $7.0 million, and $7.0 million, respectively.  Future commitments under these leases totalapproximately $103.0 million.  The leasesexpire at various dates from December 2005 through July 2029, subject to ourright to exercise renewal options.

 

In connection with our effort to expand thenumber of Camping World stores by developing retail alliances with RVdealerships across North America, we have established seven Camping Worldstores alongside or within RV dealerships owned through entities controlled bythe Chairman of our Board of Directors, Stephen Adams, and we expect to openadditional Camping World stores alongside or within such RV dealerships in thefuture.  Total payments under theseleases for 2004 were approximately $0.2 million, and future commitments underthese leases total approximately $4.1 million. The leases expire at various dates from August 2013 through January 2015.  We also sublease properties to these entitiesand sell products and services to them. For 2004, lease payments received fromFreedomRoads for the subleased properties were approximately $0.6 million, andfuture payments to be received under these subleases total approximately $4.3million.  Payments under the productmarketing and sales agreements with these entities were approximately $3.7million and $0.1 million for 2004 and 2003 respectively.

 

On December 5, 2001, we sold eleven realestate properties to eleven separate wholly-owned subsidiaries of AGRP HoldingCorp, a wholly-owned subsidiary of our parent, AGHC, which is owned

 

 

 

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97.4% by Mr. Adams, for $52.3 million in cashand a $4.8 million note receivable.  Theproperties have been leased back to us on a triple net basis. These leases areclassified as operating leases and the average net annual lease payments overthe lives of the leases are $3.4 million. The $4.8 million note receivable yields 11% per annum, with monthlypayments of $46,000 and a ten-year balloon due December 2011.

 

In March 2002, we received a royalty paymentof $1.5 million from Holiday RV Superstores, Inc., doing business as RecreationUSA, (“Recreation USA”).  Thisnon-refundable payment grants Recreation USA a limited non-exclusive license touse the Company’s Good Sam trademarks. When the Company entered into the agreement with Recreation USA, ourChairman beneficially owned, through entities controlled by him, approximately57% of the then outstanding common stock of Recreation USA after taking intoaccount conversion and exercise of his beneficially-owned securities inRecreation USA.  We recorded the royaltypayment into income in a level amount ratably over the three-year term of thelicense.  The agreement with RecreationUSA was terminated in October 2003 and, as a result, the unamortized balance ofthe royalty agreement was recognized as revenue in the fourth quarter of 2003.

 

For a description of the employment,consulting, non-competition, management incentive and phantom stock agreementswith the Company and persons serving as an executive officer or director of theCompany see “Executive Compensation - Agreements with Executive Officers” and “ExecutiveCompensation - Committee Interlock and Insider Participation.”

 

For a description of leases which of oursubsidiaries have with partnerships in which a director of our company has apartnership interest, see “Executive Compensation - Compensation CommitteeInterlock and Insider Participation.”

 

**ITEM 14: PRINCIPAL ACCOUNTINGFEES AND SERVICES**

 

The Audit Committee of the Board of Directorshas engaged Ernst & Young LLP as independent auditors to examine ouraccounts for the fiscal year ending December 31, 2004.

 

**Audit Fees**

Theaggregate audit fees paid to Ernst & Young LLP for the fiscal years endedDecember 31, 2004 and December 31, 2003, were $256,680 and $311,140,respectively.   These fees includeamounts for the audit of the Company’s consolidated annual financialstatements, stand alone audits of certain subsidiaries, and the reviews of theconsolidated financial statements included in the Company’s Quarterly Reportson Form 10-Q, including services related thereto such as attest services andconsents.

 

**Audit-RelatedFees**

The aggregate audit-related fees paid toErnst & Young LLP for the fiscal years 2004 and 2003 were $17,700 and $0,respectively.  These fees related to****specific analysis of accounting treatments and generalassistance with the implementation of the SEC rules pursuant to theSarbanes-Oxley Act of 2002.

 

**TaxFees**

The aggregate fees billed by Ernst &Young LLP for tax services rendered for the fiscal years 2004 and 2003 were$27,374 and $33,848, respectively.  Thefees paid in each of those years primarily related to tax planning and complianceservices.

 

 

 

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**AllOther Fees**

There were no other fees paid to Ernst &Young LLP for the years ended December 31, 2004 and December 31, 2003.

 

**AuditCommittee Pre-Approval Requirements**

The Audit Committee has the sole authority toreview in advance and grant any pre-approvals of (i) all auditing services tobe provided by the independent auditor, (ii) all significant non-audit servicesto be provided by the independent auditors as permitted by Section 10A of theSecurities Exchange Act of 1934, and (iii) all fees and the terms of engagementwith respect to such services.  All auditand non-audit services performed by Ernst & Young LLP during fiscal 2004were pre-approved pursuant to the procedures outlined above.

 

 

 

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**PART IV**

 

 

**ITEM 15:  EXHIBITS, FINANCIALSTATEMENT SCHEDULES**

 

                                                (a) (1)                 Consolidatedfinancial statements are included in Item 8 hereto.

 

                                                (a) (2)                 Consolidatedfinancial statement schedules are included in Item 8 hereto.

 

                                                (a) (3)                 Listing ofExhibits:

 

                                                                                                The exhibitsrequired to be a part of this report are listed in the Index to Exhibits whichfollows the signature page.

 

                                                (b)                                 Exhibits:

 

                                                                                                Included inItem 15 (a) (3) above.

 

                                                (c)                                  FinancialStatement Schedules

 

                                                                                                Included inItem 15 (a) (2) above.

 

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized, in the City of Ventura, State ofCalifornia on March 4, 2005.

 

AFFINITYGROUP, INC.

 
| By                      | /s/ Michael A. Schneider |   |
|-------------------------|--------------------------|--------|
| Michael A. Schneider    |                     |
| Chief Executive Officer |                     |
|                         |                          |        |  |

 

 

Pursuantto the requirements of the Securities Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant in the capacitiesand on the dates indicated.

 
| /s/ Thomas F. Wolfe |   Senior Vice  President and                    | March  4, 2005 |
|---------------------|-----------------------------------------------------------|----------------|
| Thomas  F. Wolfe    |   Chief  Financial Officer                      |           |
|                |   (Principal  Financial and Accounting Officer) |           |
|                |                                                      |           |
| *                   |   President/  Chief Executive Officer of        | March  4, 2005 |
| Mark  J. Boggess    |   Camping World                                 |           |
|                |                                                      |           |
| *                   |   Director                                      | March  4, 2005 |
| Stephen  Adams      |                                                      |           |
|                |                                                      |           |
| *                   |   Director                                      | March  4, 2005 |
| David  Frith-Smith  |                                                      |           |
|                |                                                      |           |
| *                   |   Director                                      | March  4, 2005 |
| Wayne  Boysen       |                                                      |           |

 

 

 

 

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| *                        |   Director | March  4, 2005 |
|--------------------------|----------------------|----------------|
| David  B. Garvin         |                 |           |
|                     |                 |           |
| *                        |   Director | March  4, 2005 |
| John  Elhert             |                 |           |
|                     |                 |           |
| *                        |   Director | March  4, 2005 |
| George  Parker           |                 |           |
|                     |                 |           |
|                     |                 |           |
| By:  /s/ Thomas F. Wolfe |                 | March  4, 2005 |
| (Thomas  F. Wolfe        |                 |           |
| Attorney-in-Fact)        |                 |           |

 

Thomas F. Wolfe, pursuant to Powers of Attorney executed by each of theofficers and directors listed above whose name is marked by an “*” and filed asan exhibit hereto, by signing his name hereto does hereby sign and execute thisReport of Affinity Group, Inc. on behalf of each of such officers and directorsin the capacities in which the names of each appear above.

 

 

 

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**AFFINITY GROUP, INC.**

 

**EXHIBIT INDEX TO ANNUAL REPORT**

**ON FORM 10-K**

 

**For Fiscal Year Ended December 31, 2004**

 
| ** **                                                                                                                                                                                            | ** ** | **Regulation S-K Exhibit Table Reference** | ** ** | **Sequential Page No.** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------|
| Certificate of Incorporation of Affinity Group, Inc. (1)                                                                                                                                              |       | 3.1                                        |       |                    |
| Bylaws of Affinity Group, Inc. (1)                                                                                                                                                                    |       | 3.2                                        |       |                    |
| Certificate of Ownership and Merger (1)                                                                                                                                                               |       | 3.3                                        |       |                    |
| Indenture (including form of 9% Senior Subordinated Notes due 2012)  dated as of February 18, 2004 among Affinity Group, Inc., the Guarantors  named therein and The Bank of New York, as Trustee (1) |       | 4.5                                        |       |                    |
| Registration Rights Agreement dated as of February 18, 2004 among  Affinity Group, Inc., the Guarantors named herein and CIBC World Markets  Corp., as Initial Purchaser (1)                          |       | 4.6                                        |       |                    |
| Tax Sharing Agreement among Affinity Group Holding, Inc., Affinity  Group, Inc. and its subsidiaries, as amended (1)                                                                                  |       | 10.1                                       |       |                    |
| Form of Phantom Stock Agreement between certain executives and  Affinity Group, Inc. (1)                                                                                                              |       | 10.2                                       |       |                    |
| Form of Phantom Stock Agreements between certain executives and CWI,  Inc. (1)                                                                                                                        |       | 10.3                                       |       |                    |
| Form of Phantom Stock Agreements between certain executives and Camp  Coast to Coast, Inc. (1)                                                                                                        |       | 10.4                                       |       |                    |
| Working Agreements and Service Agreements with National General  Insurance Contract, as amended (1)                                                                                                   |       | 10.6                                       |       |                    |
| 401(k) Savings and Investment Plan (1)                                                                                                                                                                |       | 10.7                                       |       |                    |
| Form of Indemnification Agreement for persons consenting to serve as  directors (1)                                                                                                                   |       | 10.8                                       |       |                    |
| Unsecured Promissory Note of AGRP Holding Corp., dated December 5,  2001 (1)                                                                                                                          |       | 10.9                                       |       |                    |
| Amended and Restated Marketing Agreement, dated March 15, 2002 by and  between Camping World, Inc. and National General Insurance Company (1)                                                         |       | 10.10                                      |       |                    |

 

 

 

 

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| Amended and Restated Credit Agreement dated  as of June 24, 2003 among Affinity Group, Inc., the guarantors party thereto,  the lenders party thereto, Canadian Imperial Bank of Commerce, as syndication  agent, Fleet National Bank, as administrative agent, and General Electric  Capital Corporation, as documentation agent (1)                                                               |   | 10.11 |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Senior Secured Floating  Rate Note Purchase Agreement dated as of June 24, 2003 among Affinity Group,  Inc., the guarantors party thereto, the noteholders party thereto, Canadian  Imperial Bank of Commerce, as syndication agent, Fleet National Bank, as  administrative agent and General Electric Capital Corporation, as  documentation agent (1)                                            |   | 10.12 |   |   |
| First Amendment to Credit  Agreement dated as of February 18, 2004 among Affinity Group, Inc., the  guarantors party thereto, the lenders party thereto, Canadian Imperial Bank  of Commerce, as syndication agent, Canadian Imperial Bank of Commerce, as  administrative agent and successor to Fleet National Bank, and General  Electric Capital Corporation, as documentation agent (1)        |   | 10.13 |   |   |
| First Amendment to Note  Purchase Agreement dated as of February 18, 2004 among Affinity Group, Inc.,  the guarantors party thereto, the lenders party thereto, Canadian Imperial  Bank of Commerce, as syndication agent, Canadian Imperial Bank of Commerce,  as administrative agent and successor to Fleet National Bank, and General  Electric Capital Corporation, as documentation agent (1) |   | 10.14 |   |   |
| Second Amendment to Credit  Agreement dated as of June 30, 2004 among Affinity Group, Inc., the  guarantors party thereto, the lenders party thereto, Canadian Imperial Bank  of Commerce, as syndication agent, Canadian Imperial Bank of Commerce, as  administrative agent and successor to Fleet National Bank, and General  Electric Capital Corporation, as documentation agent (2)           |   | 10.15 |   |   |
| Second Amendment to Note  Purchase Agreement dated as of June 30, 2004 among Affinity Group, Inc., the  guarantors party thereto, the lenders party thereto, Canadian Imperial Bank  of Commerce, as syndication agent, Canadian Imperial Bank of Commerce, as  administrative agent and successor to Fleet National Bank, and General  Electric Capital Corporation, as documentation agent (2)    |   | 10.16 |   |   |
| Third Amendment to Credit  Agreement dated as of November 12, 2004 among Affinity Group, Inc., the  guarantors party thereto, the lenders party thereto, Canadian Imperial Bank  of Commerce, as syndication agent, Canadian Imperial Bank of Commerce, as  administrative agent and successor to Fleet National Bank, and General  Electric Capital Corporation, as documentation agent (4)        |   | 10.17 |   |   |

 

 

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| Third Amendment to Note  Purchase Agreement dated as of November 12, 2004 among Affinity Group, Inc.,  the guarantors party thereto, the lenders party thereto, Canadian Imperial  Bank of Commerce, as syndication agent, Canadian Imperial Bank of Commerce,  as administrative agent and successor to Fleet National Bank, and General  Electric Capital Corporation, as documentation agent (4) |   | 10.18 |   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------|--------|--------|
| Agreement with Cross  Country Motor Club, Inc. dated September 7, 2004 (3)                                                                                                                                                                                                                                                                                                                          |   | 10.19 |   |   |
| Lease Agreement for  distribution center in Franklin, Kentucky                                                                                                                                                                                                                                                                                                                                      |   | 10.20 |   |   |
| Subsidiaries of the  Registrant                                                                                                                                                                                                                                                                                                                                                                     |   | 21    |   |   |
| Powers of Attorney                                                                                                                                                                                                                                                                                                                                                                                  |   | 24.1  |   |   |
| Certification of President  and Chief Executive Officer                                                                                                                                                                                                                                                                                                                                             |   | 31.1  |   |   |
| Certification of Senior  Vice President and Chief Financial Officer                                                                                                                                                                                                                                                                                                                                 |   | 31.2  |   |   |
| Statement Pursuant to 18  U.S.C. Section 1350                                                                                                                                                                                                                                                                                                                                                       |   | 32.1  |   |   |
| Statement Pursuant to 18  U.S.C. Section 1350                                                                                                                                                                                                                                                                                                                                                       |   | 32.2  |   |   |
| Affinity Group Code of  Professional Conduct (2)                                                                                                                                                                                                                                                                                                                                                    |   | 99.1  |   |   |

 

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(1)               Filed with the Company’sRegistration Statement No. 333-113982 and incorporated by reference herein.

(2)               Filed with the Company’s Reporton Form 10-Q for the quarter ended June 30, 2004 and incorporated by referenceherein.

(3)               Filed with the Company’s Reporton Form 8-K dated September 9, 2004 and incorporated by reference herein.

(4)               Filed with the Company’s Reporton Form 8-K dated November 16, 2004 and incorporated by reference herein.

 

 

A copy of any of these exhibits will be furnished at a reasonable costto any person upon receipt from such person of a written request for suchexhibit.  Such request should be sent toAffinity Group, Inc., 2575 Vista Del Mar Drive, Ventura, CA   93001, Attention:  Chief Financial Officer.

 

 

 

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