**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

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

 

**FORM10-Q**

 

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

 
| **For  Quarter Ended:** | ** ** | **Commission  File Number** |
|-------------------------|------------|-----------------------------|
| **September  30, 2004** | ** ** | **333-113982**              |

 

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**AFFINITY GROUP, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

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

**9% SeniorSubordinated Notes Due 2012**

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES  o                                                        NO  ý

 

Indicate by checkmark whether the Registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act)

 

YES  o                                                        NO  ý

 

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

 
| **Class**                     | ** ** | ** ** | **Outstanding as of  November 8, 2004** | ** ** |
|-------------------------------|------------|------------|-----------------------------------------|------------|
| Common Stock, $.001 par value |       | 2,000      |                                    |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**AFFINITY GROUP, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| **Part I.**Financial Information                                                                         |                                                                                          |
|----------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                     |                                                                                          |   |
| **Item  1: Financial Statements (unaudited)**                                                            |                                                                                          |
|                                                                                                     |                                                                                          |   |
|                                                                                                     | Consolidated Balance Sheets  as of September 30, 2004 and December 31, 2003                   |   |
|                                                                                                     |                                                                                          |   |
|                                                                                                     | Consolidated  Statements of Income for the three months ended September 30, 2004 and 2003     |   |
|                                                                                                     |                                                                                          |   |
|                                                                                                     | Consolidated  Statements of Income for the nine months ended September 30, 2004 and 2003      |   |
|                                                                                                     |                                                                                          |   |
|                                                                                                     | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2004 and  2003 |   |
|                                                                                                     |                                                                                          |   |
|                                                                                                     | Notes to  Consolidated Financial Statements - September 30, 2004                              |   |
|                                                                                                     |                                                                                          |   |
| **Item  2: Management’s Discussion and Analysis of Financial Condition and Results of  Operations** |                                                                                          |
|                                                                                                     |                                                                                          |   |
| **Item  3: Quantitative and Qualitative Disclosures about Market Risk**                                  |                                                                                          |
|                                                                                                     |                                                                                          |   |
| **Item  4: Control and Procedures**                                                                      |                                                                                          |
|                                                                                                     |                                                                                          |   |
| **Part II. Other Information**                                                                           |                                                                                          |
|                                                                                                     |                                                                                          |   |
| **Signatures**                                                                                           |                                                                                          |

 

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ITEM1:

 

AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(InThousands, except share amounts)

 
| ** **                                                                                      | ** ** | **9/30/04**     | ** ** | **12/31/03**                 | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|------------------------------|------------|
| ** **                                                                                      | ** ** | **(unaudited)** | ** ** | **(restated—  Note 1)** | ** ** |
| **ASSETS**                                                                                      | ** ** | ** **      | ** ** | ** **                   | ** ** |
| CURRENT ASSETS:                                                                                 |       |            |       |                         |       |
| Cash and cash equivalents                                                                       |       | $               | 34,932     |                         | $          | 6,115 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,471 in 2004 and $1,039 in 2003 |       | 21,470          |       | 25,394                       |       |
| Inventories                                                                                     |       | 43,143          |       | 36,839                       |       |
| Prepaid expenses and other assets                                                               |       | 16,097          |       | 10,588                       |       |
| Deferred tax assets, net                                                                        |       | 4,661           |       | 4,661                        |       |
| Total current assets                                                                            |       | 120,303         |       | 83,597                       |       |
|                                                                                            |       |            |       |                         |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 27,709          |       | 27,214                       |       |
| NOTES FROM AFFILIATES                                                                           |       | 4,759           |       | 9,103                        |       |
| INTANGIBLE ASSETS, net                                                                          |       | 26,690          |       | 25,197                       |       |
| GOODWILL, net                                                                                   |       | 146,517         |       | 150,070                      |       |
| DEFERRED TAX ASSETS, net                                                                        |       | 7,861           |       | 5,306                        |       |
| OTHER ASSETS                                                                                    |       | 1,828           |       | 2,375                        |       |
| Total assets                                                                                    |       | $               | 335,667    |                         | $          | 302,862 |   |
|                                                                                            |       |            |       |                         |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |                         |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |                         |       |
| Accounts payable                                                                                |       | $               | 17,888     |                         | $          | 12,711 |   |
| Accrued interest                                                                                |       | 2,604           |       | 4,099                        |       |
| Accrued income taxes                                                                            |       | 5,653           |       | 2,883                        |       |
| Accrued liabilities                                                                             |       | 36,493          |       | 30,887                       |       |
| Deferred revenues and gains                                                                     |       | 66,406          |       | 57,309                       |       |
| Current portion of long-term debt                                                               |       | 1,478           |       | 1,478                        |       |
| Total current liabilities                                                                       |       | 130,522         |       | 109,367                      |       |
|                                                                                            |       |            |       |                         |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 40,079          |       | 41,101                       |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 312,599         |       | 238,649                      |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 2,236           |       | 2,650                        |       |
|                                                                                            |       | 485,436         |       | 391,767                      |       |
|                                                                                            |       |            |       |                         |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |                         |       |
|                                                                                            |       |            |       |                         |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |                         |       |
| 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                                                                             |       | (149,770        | )          | (88,906                      | )          |
| Total stockholder’s deficit                                                                |       | (149,769        | )          | (88,905                      | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 335,667    |                         | $          | 302,862 |   |
|                                                                                                 |            |                 |            |                              |            |  |  |  |  |

 

See notes toconsolidated financial statements.

 

1

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME  (See Note 1)

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **9/30/2004**          | ** ** | **9/30/2003** | ** ** |
| REVENUES:                                  |       |                   |       |   |   |
| Membership services                        |       | $                      | 32,824     |   | $ | 32,237 |   |
| Publications                               |       | 13,367                 |       | 11,494 |   |
| Retail                                     |       | 71,422                 |       | 66,368 |   |
|                                       |       | 117,613                |       | 110,099 |   |
|                                       |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                   |       |   |   |
| Membership services                        |       | 21,546                 |       | 21,347 |   |
| Publications                               |       | 9,585                  |       | 8,106 |   |
| Retail                                     |       | 43,024                 |       | 40,706 |   |
|                                       |       | 74,155                 |       | 70,159 |   |
|                                       |       |                   |       |   |   |
| GROSS PROFIT                               |       | 43,458                 |       | 39,940 |   |
|                                       |       |                   |       |   |   |
| OPERATING EXPENSES:                        |       |                   |       |   |   |
| Selling, general and administrative        |       | 30,557                 |       | 29,231 |   |
| Restructuring charge                       |       | —                 |       | 100 |   |
| Depreciation and amortization              |       | 4,153                  |       | 2,529 |   |
|                                       |       | 34,710                 |       | 31,860 |   |
|                                       |       |                   |       |   |   |
| INCOME FROM OPERATIONS                     |       | 8,748                  |       | 8,080 |   |
|                                       |       |                   |       |   |   |
| NON-OPERATING ITEMS:                       |       |                   |       |   |   |
| Interest expense                           |       | (6,197                 | )          | (4,778 | ) |
| Interest income                            |       | 200                    |       | 209 |   |
| Debt extinguishment expense                |       | —                 |       | (1,509 | ) |
| Other non-operating items, net             |       | 438                    |       | 256 |   |
|                                       |       | (5,559)                |       | (5,822 | ) |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 3,189                  |       | 2,258 |   |
|                                       |       |                   |       |   |   |
| INCOME TAX EXPENSE                         |       | (1,338                 | )          | (1,037 | ) |
|                                       |       |                   |       |   |   |
| NET INCOME                                 |       | $                      | 1,851      |   | $ | 1,221 |   |

 

See notes toconsolidated financial statements.

 

2

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (See Note 1)

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **9/30/2004**         | ** ** | **9/30/2003** | ** ** |
| REVENUES:                                  |       |                  |       |   |   |
| Membership services                        |       | $                     | 100,365    |   | $ | 97,437 |   |
| Publications                               |       | 47,179                |       | 40,922 |   |
| Retail                                     |       | 198,995               |       | 179,877 |   |
|                                       |       | 346,539               |       | 318,236 |   |
|                                       |       |                  |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                  |       |   |   |
| Membership services                        |       | 66,612                |       | 60,815 |   |
| Publications                               |       | 32,696                |       | 28,596 |   |
| Retail                                     |       | 118,562               |       | 107,921 |   |
|                                       |       | 217,870               |       | 197,332 |   |
|                                       |       |                  |       |   |   |
| GROSS PROFIT                               |       | 128,669               |       | 120,904 |   |
|                                       |       |                  |       |   |   |
| OPERATING EXPENSES:                        |       |                  |       |   |   |
| Selling, general and administrative        |       | 85,306                |       | 80,593 |   |
| Restructuring charge                       |       | —                |       | 402 |   |
| Depreciation and amortization              |       | 10,225                |       | 7,381 |   |
|                                       |       | 95,531                |       | 88,376 |   |
|                                       |       |                  |       |   |   |
| INCOME FROM OPERATIONS                     |       | 33,138                |       | 32,528 |   |
|                                       |       |                  |       |   |   |
| NON-OPERATING ITEMS:                       |       |                  |       |   |   |
| Interest expense                           |       | (17,821               | )          | (14,238 | ) |
| Interest income                            |       | 555                   |       | 589 |   |
| Debt extinguishment expense                |       | (5,035                | )          | (3,218 | ) |
| Other non-operating items, net             |       | 525                   |       | 400 |   |
|                                       |       | (21,776)              |       | (16,467 | ) |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 11,362                |       | 16,061 |   |
|                                       |       |                  |       |   |   |
| INCOME TAX EXPENSE                         |       | (4,268                | )          | (6,197 | ) |
|                                       |       |                  |       |   |   |
| NET INCOME                                 |       | $                     | 7,094      |   | $ | 9,864 |   |

 

See notes toconsolidated financial statements.

 

3

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (See Note 1)

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **NINE MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **9/30/2004**         | ** ** | **9/30/2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 7,094      |   | $ | 9,864 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities: |       |                  |       |   |   |
| Debt extinguishment expense                                                        |       | 5,035                 |       | 3,218 |   |
| Deferred tax benefit                                                               |       | (2,555                | )          | (1,890 | ) |
| Depreciation                                                                       |       | 6,199                 |       | 4,661 |   |
| Amortization                                                                       |       | 4,026                 |       | 2,720 |   |
| Provision for losses on accounts receivable                                        |       | 1,700                 |       | 1,441 |   |
| Deferred compensation                                                              |       | 1,050                 |       | 1,200 |   |
| Gain on sale of property and equipment                                             |       | (417                  | )          | (227 | ) |
| Changes in operating assets and liabilities:                                       |       |                  |       |   |   |
| Accounts receivable                                                                |       | 2,184                 |       | 4,197 |   |
| Inventories                                                                        |       | (6,304                | )          | (6,134 | ) |
| Prepaid expenses and other assets                                                  |       | (5,451                | )          | (4,286 | ) |
| Accounts payable                                                                   |       | 5,177                 |       | 7,862 |   |
| Accrued and other liabilities                                                      |       | 5,431                 |       | 118 |   |
| Deferred revenues and gains                                                        |       | 8,393                 |       | 11,726 |   |
| Net cash provided by operating activities                                          |       | 31,562                |       | 34,470 |   |
|                                                                               |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                  |       |   |   |
| Capital expenditures                                                               |       | (6,703                | )          | (8,176 | ) |
| Net proceeds from sale of property and equipment                                   |       | 399                   |       | 252 |   |
| Change in intangible assets                                                        |       | (8                    | )          | (51 | ) |
| Loans receivable                                                                   |       | (15                   | )          | (144 | ) |
| Net proceeds from sale of publication assets                                       |       | 3,939                 |       | — |   |
| Net cash used in investing activities                                              |       | (2,388                | )          | (8,119 | ) |
|                                                                               |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                  |       |   |   |
| Dividends paid                                                                     |       | (63,600               | )          | (15,511 | ) |
| Borrowings on long-term debt                                                       |       | 200,000               |       | 181,975 |   |
| Payment of debt issue costs                                                        |       | (7,319                | )          | (3,967 | ) |
| Principal payments of long-term debt                                               |       | (129,438              | )          | (166,749 | ) |
| Net cash used in financing activities                                              |       | (357                  | )          | (4,252 | ) |
|                                                                               |       |                  |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 28,817                |       | 22,099 |   |
|                                                                               |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   |       | 6,115                 |       | 1,730 |   |
|                                                                               |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |       | $                     | 34,932     |   | $ | 23,829 |   |

 

See notes toconsolidated financial statements.

 

4

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

Thefinancial statements included herein include the accounts of Affinity Group,Inc. (“AGI”) and its subsidiaries (collectively the “Company”) without audit,in accordance with U.S. generally accepted accounting principles, and pursuantto the rules and regulations of the Securities and Exchange Commission.  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.  These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes for the year endedDecember 31, 2003 included in Amendment No. 3 to Registration Statement on FormS-4 filed June 22, 2004.  Certainbalances in the prior year consolidated financial statements were reclassifiedto conform to the current year presentation. In the opinion of management of the Company, these consolidatedfinancial statements contain all adjustments of a normal recurring naturenecessary to present fairly the financial position, results of operations andcash flows of the Company for the interim periods presented.

 

**(2)RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Consolidationof Variable Interest 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 were 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 new model for consolidationapplies to an entity in which either (i) the equity investors (if any) do nothave a controlling 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.

 

5

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In December 2003,the FASB issued FIN No. 46 (revised December 2003), “Consolidation of VariableInterest Entities” (“FIN 46-R”) to address certain FIN 46 implementationissues.  The effective dates and impactof FIN 46 and FIN 46-R as related to the Company are as follows:

 

(i)                                     *Special purpose entities (“SPEs”) and Non-SPE’s created prior toJanuary 1, 2004.*  The Companymust apply the provisions of FIN 46-R at the beginning of the first interim orannual reporting period beginning after December 15, 2004.

 

(ii)                                  *All entities, regardless of whether a SPE, that were created subsequentto December 31, 2003. *Theprovisions of FIN 46 were applicable for variable interests in entitiesobtained after December 31, 2003.  TheCompany adopted FIN 46-R at March 31, 2004.

 

The adoption ofthe provisions applicable to SPEs and all other variable interests obtainedafter December 31, 2003 did not have a material impact on the Company’sfinancial statements.  The Company iscurrently evaluating the impact of adopting FIN 46-R applicable to *SPE’s and**Non-SPEs created prior toJanuary 1, 2004.*

 

**(3) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISEAND RELATED INFORMATION**

 

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

 

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

 

6

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

 
| ** **                               | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **NINE MONTHS ENDED SEPTEMBER 30, 2004** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers         |       | $                        | 100,365    |             | $          | 47,179     |       | $                | 198,995    |   | $ | 346,539 |   |
| Gain on sale of property and equipment   |       | —                   |       | 17               |       | 2          |       | 19               |       |
| Interest income                          |       | 1,902                    |       | —           |       | 2          |       | 1,904            |       |
| Interest expense                         |       | —                   |       | 641              |       | 7,792      |       | 8,433            |       |
| Depreciation and amortization            |       | 2,718                    |       | 1,314            |       | 4,585      |       | 8,617            |       |
| Segment profit                           |       | 28,198                   |       | 10,761           |       | 2,913      |       | 41,872           |       |
|                                     |       |                     |       |             |       |       |       |             |       |
| **NINE MONTHS ENDED SEPTEMBER 30, 2003** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers         |       | $                        | 97,437     |             | $          | 40,922     |       | $                | 179,877    |   | $ | 318,236 |   |
| Gain on sale of property and equipment   |       | —                   |       | —           |       | 202        |       | 202              |       |
| Interest income                          |       | 1,962                    |       | —           |       | 2          |       | 1,964            |       |
| Interest expense                         |       | —                   |       | 868              |       | 7,191      |       | 8,059            |       |
| Depreciation and amortization            |       | 2,535                    |       | 339              |       | 3,120      |       | 5,994            |       |
| Segment profit                           |       | 31,420                   |       | 9,636            |       | 2,383      |       | 43,439           |       |

 
|                                   |   | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** |   |
|----------------------------------------|--------|--------------------------|------------|------------------|------------|------------|------------|------------------|--------|
| **QUARTER ENDED SEPTEMBER 30, 2004**   |   |                     |       |             |       |       |       |             |   |
| Revenues from external customers       |   | $                        | 32,824     |             | $          | 13,367     |       | $                | 71,422 |   | $ | 117,613 |   |
| Gain on sale of property and equipment |   | —                   |       | 17               |       | 1          |       | 18               |   |
| Interest income                        |   | 674                      |       | —           |       | 1          |       | 675              |   |
| Interest expense                       |   | —                   |       | 137              |       | 2,555      |       | 2,692            |   |
| Depreciation and amortization          |   | 907                      |       | 464              |       | 2,195      |       | 3,566            |   |
| Segment profit                         |   | 9,408                    |       | 2,596            |       | 290        |       | 12,294           |   |
|                                   |   |                     |       |             |       |       |       |             |   |
| **QUARTER ENDED SEPTEMBER 30, 2003**   |   |                     |       |             |       |       |       |             |   |
| Revenues from external customers       |   | $                        | 32,237     |             | $          | 11,494     |       | $                | 66,368 |   | $ | 110,099 |   |
| Gain on sale of property and equipment |   | —                   |       | —           |       | 197        |       | 197              |   |
| Interest income                        |   | 676                      |       | —           |       | 1          |       | 677              |   |
| Interest expense                       |   | —                   |       | 252              |       | 2,361      |       | 2,613            |   |
| Depreciation and amortization          |   | 841                      |       | 104              |       | 1,171      |       | 2,116            |   |
| Segment profit (loss)                  |   | 9,305                    |       | 2,567            |       | (181       | )          | 11,691           |   |

 

7

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Thefollowing is a reconciliation of profit from reportable segments to the Company’sconsolidated financial statements for the three months and nine months ended September30, 2004 and 2003 (in thousands):

 

 
| ** **                                                | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                | ** ** | **9/30/04**            | ** ** | **9/30/03**           | ** ** | **9/30/04** | ** ** | **9/30/03** | ** ** |
| **Income From Continuing Operations Before Income Taxes** |       |                   |       |                  |       |   |   |   |   |
| Total profit for reportable segments                      |       | $                      | 12,294     |                  | $          | 11,691 |   | $ | 41,872 |   | $ | 43,439 |   |
| Unallocated depreciation and amortization expense         |       | (587                   | )          | (413                  | )          | (1,608 | ) | (1,387 | ) |
| Unallocated G & A expense                             |       | (4,936                 | )          | (4,878                | )          | (13,528 | ) | (15,244 | ) |
| Unallocated interest expense, net                         |       | (5,984                 | )          | (4,571                | )          | (17,230 | ) | (13,648 | ) |
| Unallocated gain on sale of property and equipment        |       | 398                    |       | —                |       | 398 |   | 25 |   |
| Unallocated debt restructure expense                      |       | —                 |       | (1,509                | )          | (5,035 | ) | (3,218 | ) |
| Elimination of intersegment interest expense, net         |       | 2,004                  |       | 1,938                 |       | 6,493 |   | 6,094 |   |
| Income From Continuing Operations Before Income Taxes     |       | $                      | 3,189      |                  | $          | 2,258 |   | $ | 11,362 |   | $ | 16,061 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2004 and December 31,2003:

 
| ** **                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|
| Membership services segment                         |       | $        | 160,924    |     | $          | 145,233 |   |
| Publications segment                                |       | 74,214   |       | 77,101   |       |
| Retail segment                                      |       | 125,788  |       | 118,450  |       |
| Total assets for reportable segments                |       | 360,926  |       | 340,784  |       |
| Capitalized finance costs not allocated to segments |       | 10,893   |       | 6,313    |       |
| Corporate unallocated assets                        |       | 31,182   |       | 21,198   |       |
| Elimination of intersegment receivable              |       | (67,334  | )          | (65,433  | )          |
| Total assets                                        |       | $        | 335,667    |     | $          | 302,862 |   |

 

**(4)STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 19,316     |     | $          | 12,337 |   |
| Income taxes                     |       | 4,423    |       | 7,294    |       |
|                                  |            |          |            |          |            |  |  |

 

In February 2004,the Company declared and distributed a $4.4 million non-cash dividendconsisting of the Adams Insurance Holding LLC notes receivable.

 

8

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**(5)GOODWILL AND INTANGIBLE ASSETS**

 

SFAS No. 142requires that goodwill and intangible assets deemed to have an indefiniteuseful life be reviewed for impairment at least annually.  The Company performs its annual impairmentreview during the fourth quarter.

 

The following is asummary of changes in the Company’s goodwill by business segment, for the ninemonths ended September 30, 2004 and 2003 (in thousands):

 
| ** **                       | ** ** | **Membership Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|-------------------------|------------|------------------|------------|------------|------------|------------------|------------|
|                             |       |                    |       |             |       |       |       |             |       |
| Balance as of December 31, 2003  |       | $                       | 54,288     |             | $          | 48,181     |       | $                | 47,601     |   | $ | 150,070 |   |
| Dispositions                     |       | —                  |       | (3,553           | )          | —     |       | (3,553           | )          |
| Balance as of September 30, 2004 |       | $                       | 54,288     |             | $          | 44,628     |       | $                | 47,601     |   | $ | 146,517 |   |
|                             |       |                    |       |             |       |       |       |             |       |
| Balance as of December 31, 2002  |       | $                       | 54,288     |             | $          | 48,181     |       | $                | 48,741     |   | $ | 151,210 |   |
| Dispositions                     |       | —                  |       | —           |       | —     |       | —           |       |
| Balance as of September 30, 2003 |       | 54,288                  |       | 48,181           |       | 48,741     |       | 151,210          |       |

 

Finite livedintangible assets and related accumulated amortization consisted of thefollowing at September 30, 2004 (in thousands):

 
| ** **                                      | ** ** | **Weighted  Average Useful  Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
| Membership and customer lists                   |       | 7                                             |       | $         | 10,144     |                          | $          | (3,880  | )          | $ | 6,264 |   |
| Resort and golf course participation agreements |       | 23                                            |       | 13,550    |       | (10,483                       | )          | 3,067   |       |
| Non-compete and deferred consulting agreements  |       | 15                                            |       | 17,955    |       | (10,126                       | )          | 7,829   |       |
| Deferred financing costs                        |       | 7                                             |       | 11,128    |       | (1,598                        | )          | 9,530   |       |
|                                            |       |                                          |       | $         | 52,777     |                          | $          | (26,087 | )          | $ | 26,690 |   |

 

In August 2004,Ehlert Publishing Group, a subsidiary of the Company, sold certain publicationassets for $4.2 million.  The Companypaid $0.2 million in transaction fees and recorded a $3.6 million reduction ingoodwill.  As a result of the sale, theCompany reported a net gain of $0.4 million.

 

**(6) SUBORDINATEDNOTES**

 

On February 18, 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Notes”) due 2012. Interest is payable on the Notes twice a year on each February 15 andAugust 15, beginning August 15, 2004, and the Notes mature on February 15, 2012.  The proceeds of the issuance were used tofund the tender offer

 

9

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and call related to the $100.0 million outstanding principal amount ofthe 11% senior notes due 2007 issued by AGHI (“AGHI Notes”).  The Company used the remaining proceeds fromthe issuance of the Notes to repay $25.0 million of the AGI credit facility,pay a $60.0 million dividend distribution and pay certain prepayment andtransaction costs.  On April 1, 2004, thedefeased $14.3 million principal amount of the AGHI Notes not purchased in thetender offer was redeemed.

 

**(7) RESTRUCTURING CHARGES**

 

During 2003, the Company recorded reserves in connection with therestructuring program primarily within our retail segment.  These reserves include estimates pertainingto employee severance costs.  Although theCompany does not anticipate significant changes, the actual costs may differfrom these estimates.  The followingtable reflects a summary of the severance activity for the nine months ended September30, 2004 and 2003 and the ending reserve balance (dollars in thousands).

 
| ** **           | ** ** | **Nine months ended September 30,** | ** ** |
|----------------------|------------|-------------------------------------|------------|
| ** **           | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| ** **           | ** ** | **# of  Employees**                 | ** ** | **Amount** | ** ** | **# of  Employees** | ** ** | **Amount** | ** ** |
| Opening balance      |       | 1                                   |       | $ | 83 |   | 10 |   | $ | 560 |   |
| Planned terminations |       | —                              |       | — |   | 17 |   | 402 |   |
| Actual terminations  |       | —                              |       | — |   | (27 | ) | (914 | ) |
| Ending balance       |       | 1                                   |       | $ | 83 |   | — |   | $ | 48 |   |

 

**(8) CONTINGENCIES**

 

From time to time, the Company is involved in litigation arising in thenormal course of business operations.

 

In September 2004, the Company’s subsidiary, CWI, Inc., was sued inCalifornia state court by Private Rights Clearinghouse and Benjamin Greene in asuit alleging that CWI, Inc. was recording personal identification informationfrom retail customers in violation of certain California statutes.  The plaintiff seeks injunctive reliefpreventing CWI, Inc. from engaging in any act or practice constituting unfaircompetition under the statutes and for statutory penalties and damages.  CWI, Inc. has responded to the suit anddenies that its practices violate the statutes. The Company has not recorded a provision for loss as of the date of theaccompanying financial statements.  Inthe opinion of management, the likelihood of a material unfavorable outcome isnot probable as of the date of the accompanying consolidated financialstatements.

 

10

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** **

**(9) NOTES OFFERING AND GUARANTOR FINANCIALINFORMATION**

 

In February 2004, the Company issued the Notes described in Note 6above.  The Company completed aregistered exchange of the Notes under the Securities Act of 1933 on August 18,2004.  The Company’s present restrictedsubsidiaries, jointly and severally, have guaranteed the Notes with full and unconditionalguarantees of payment that rank junior in right of payment to their existingand future senior debt, but rank equal in right of payment to their existingand future senior subordinated debt.  Inthe future, if the Company has any other restricted subsidiaries, such futurerestricted subsidiaries will be required to provide the same guaranty of theNotes described in the preceding sentence.

 

All of the Company’s subsidiaries, jointly and severally, have fullyand unconditionally guaranteed the indebtedness under the Notes.  All of these subsidiaries are owned directlyor indirectly 100% by the Company.  Fullfinancial statements of the Guarantors have not been included because, pursuantto their respective guarantees, the Guarantors are jointly and severally liablewith respect to the Notes.

 

11

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the nine monthsended September 30, 2004 (in thousands).

 
| ** **                                                    | ** ** | **AS OF SEPTEMBER 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **AGI**                      | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
| Cash & cash equivalents                                   |       | $                            | 32,495     |   | $ | 2,437 |   | $ | — |   | $ | 34,932 |   |
| Accounts receivable (net of allowance for doubtful  accounts) |       | 215                          |       | 88,589 |   | (67,334 | ) | 21,470 |   |
| Inventories                                                   |       | 37                           |       | 43,106 |   | — |   | 43,143 |   |
| Other current assets                                          |       | 3,390                        |       | 17,368 |   | — |   | 20,758 |   |
| Total current assets                                          |       | 36,137                       |       | 151,500 |   | (67,334 | ) | 120,303 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Property and equipment, net                                   |       | 6,112                        |       | 21,597 |   | — |   | 27,709 |   |
| Intangible assets                                             |       | 9,611                        |       | 17,079 |   | — |   | 26,690 |   |
| Goodwill                                                      |       | 67,584                       |       | 78,933 |   | — |   | 146,517 |   |
| Investment in subsidiaries                                    |       | 443,584                      |       | — |   | (443,584 | ) | — |   |
| Other assets                                                  |       | 13,137                       |       | 1,311 |   | — |   | 14,448 |   |
| Total assets                                                  |       | $                            | 576,165    |   | $ | 270,420 |   | $ | (510,918 | ) | $ | 335,667 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Accounts payable                                              |       | $                            | 293        |   | $ | 17,595 |   | $ | — |   | $ | 17,888 |   |
| Accrued and other liabilities                                 |       | 19,927                       |       | 24,823 |   | — |   | 44,750 |   |
| Current portion of long-term debt                             |       | 68,734                       |       | 78 |   | (67,334 | ) | 1,478 |   |
| Current portion of deferred revenue                           |       | 1,036                        |       | 65,370 |   | — |   | 66,406 |   |
| Total current liabilities                                     |       | 89,990                       |       | 107,866 |   | (67,334 | ) | 130,522 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Deferred revenue                                              |       | 2,939                        |       | 37,140 |   | — |   | 40,079 |   |
| Long-term debt                                                |       | 311,500                      |       | 1,099 |   | — |   | 312,599 |   |
| Other long-term liabilities                                   |       | 321,505                      |       | (319,269 | ) | — |   | 2,236 |   |
| Total liabilities                                             |       | 725,934                      |       | (173,164 | ) | (67,334 | ) | 485,436 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Interdivisional equity                                        |       | —                       |       | 443,584 |   | (443,584 | ) | — |   |
| Stockholders’ deficit                                    |       | (149,769                     | )          | — |   | — |   | (149,769 | ) |
| Total liabilities & stockholders’ equity             |       | $                            | 576,165    |   | $ | 270,420 |   | $ | (510,918 | ) | $ | 335,667 |   |
|                                                               |            |                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                            | ** ** | **NINE MONTHS ENDED SEPTEMBER 30, 2004** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **AGI**                                  | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
| Revenue                                               |       | $                                        | 4,527      |   | $ | 342,012 |   | $ | — |   | $ | 346,539 |   |
| Costs applicable to revenues                          |       | (10,516                                  | )          | (207,354 | ) | — |   | (217,870 | ) |
| Operating expenses                                    |       | (14,977                                  | )          | (80,554 | ) | — |   | (95,531 | ) |
| Interest income (expense), net                        |       | (10,737                                  | )          | (6,529 | ) | — |   | (17,266 | ) |
| Other non operating income (expenses)                 |       | 710                                      |       | (5,220 | ) | — |   | (4,510 | ) |
| Income tax benefit (expense)                          |       | 11,768                                   |       | (16,036 | ) | — |   | (4,268 | ) |
| Net income (loss)                                     |       | $                                        | (19,225    | ) | $ | 26,319 |   | $ | — |   | $ | 7,094 |   |
|                                                  |       |                                     |       |   |   |   |   |   |   |
| Cash flows from operations                            |       | $                                        | (13,387    | ) | $ | 44,949 |   | $ | — |   | $ | 31,562 |   |
| Cash flows used in investing activities               |       | (770                                     | )          | (1,618 | ) | — |   | (2,388 | ) |
| Cash flows (used in) provided by financing activities |       | 41,803                                   |       | (42,160 | ) | — |   | (357 | ) |
| Cash at beginning of year                             |       | 4,849                                    |       | 1,266 |   | — |   | 6,115 |   |
| Cash at end of year                                   |       | $                                        | 32,495     |   | $ | 2,437 |   | $ | — |   | $ | 34,932 |   |

 

12

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended September30, 2004 (in thousands).

 
| ** **                            | ** ** | **THREE MONTHS ENDED SEPTEMBER 30, 2004** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **AGI**                                   | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
| Revenue                               |       | $                                         | 1,040      |   | $ | 116,573 |   | $ | — |   | $ | 117,613 |   |
| Costs applicable to revenues          |       | (2,794                                    | )          | (71,361 | ) | — |   | (74,155 | ) |
| Operating expenses                    |       | (5,683                                    | )          | (29,027 | ) | — |   | (34,710 | ) |
| Interest income (expense), net        |       | (3,978                                    | )          | (2,019 | ) | — |   | (5,997 | ) |
| Other non operating income (expenses) |       | 2,016                                     |       | (1,578 | ) | — |   | 438 |   |
| Income tax benefit (expense)          |       | 3,699                                     |       | (5,037 | ) | — |   | (1,338 | ) |
| Net income (loss)                     |       | $                                         | (5,700     | ) | $ | 7,551 |   | $ | — |   | $ | 1,851 |   |

 

13

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of December 31, 2003 asrestated, see Note 1 (in thousands).

 
| ** **                                                    | ** ** | **AS OF DECEMBER 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **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 |   |

 

14

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the nine months endedSeptember 30, 2003 (in thousands).

 
| ** **                                            | ** ** | **NINE MONTHS ENDED SEPTEMBER 30, 2003** | ** ** |
|-------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                            | ** ** | **AGI**                                  | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                  |       |                                     |       |   |   |   |   |   |   |
| Revenue                                               |       | $                                        | 5,958      |   | $ | 312,278 |   | $ | — |   | $ | 318,236 |   |
| Costs applicable to revenues                          |       | (10,054                                  | )          | (187,278 | ) | — |   | (197,332 | ) |
| Operating expenses                                    |       | (15,963                                  | )          | (72,413 | ) | — |   | (88,376 | ) |
| Interest income (expense), net                        |       | (7,554                                   | )          | (6,095 | ) | — |   | (13,649 | ) |
| Other non operating income (expenses)                 |       | 1,489                                    |       | (4,307 | ) | — |   | (2,818 | ) |
| Income tax benefit (expense)                          |       | 9,985                                    |       | (16,182 | ) | — |   | (6,197 | ) |
| Net income (loss)                                     |       | $                                        | (16,139    | ) | $ | 26,003 |   | $ | — |   | $ | 9,864 |   |
|                                                  |       |                                     |       |   |   |   |   |   |   |
| Cash flows from operations                            |       | 2,598                                    |       | 31,872 |   | — |   | $ | 34,470 |   |
| Cash flows (used in) provided by investing activities |       | (2,951                                   | )          | (5,168 | ) | — |   | (8,119 | ) |
| Cash flows (used in) provided by financing activities |       | 20,812                                   |       | (25,064 | ) | — |   | (4,252 | ) |
| Cash at beginning of year                             |       | 120                                      |       | 1,610 |   | — |   | 1,730 |   |
| Cash at end of year                                   |       | $                                        | 20,579     |   | $ | 3,250 |   | $ | — |   | $ | 23,829 |   |
|                                                       |            |                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended September30, 2003 (in thousands).

 
| ** **                            | ** ** | **THREE MONTHS ENDED SEPTEMBER 30, 2003** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **AGI**                                   | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                  |       |                                      |       |   |   |   |   |   |   |
| Revenue                               |       | $                                         | 1,343      |   | $ | 108,756 |   | $ | — |   | $ | 110,099 |   |
| Costs applicable to revenues          |       | (2,841                                    | )          | (67,318 | ) | — |   | (70,159 | ) |
| Operating expenses                    |       | (5,039                                    | )          | (26,821 | ) | — |   | (31,860 | ) |
| Interest income (expense), net        |       | (2,631                                    | )          | (1,938 | ) | — |   | (4,569 | ) |
| Other non operating income (expenses) |       | 121                                       |       | (1,374 | ) | — |   | (1,253 | ) |
| Income tax benefit (expense)          |       | 3,524                                     |       | (4,561 | ) | — |   | (1,037 | ) |
| Net income (loss)                     |       | $                                         | (5,523     | ) | $ | 6,744 |   | $ | — |   | $ | 1,221 |   |

 

15

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ITEM2:

AFFINITY GROUP, INC. ANDSUBSIDIARIES

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

The following table isderived from the Company’s Consolidated Statements of Income and expresses theresults from operations as a percentage of revenues and reflects the net increase(decrease) between periods:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **9/30/2004**          | ** ** | **9/30/2003** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                   |       |   |   |   |   |
| REVENUES:                                  |       |                   |       |   |   |   |   |
| Membership services                        |       | 27.9                   | %          | 29.3 | % | 1.8 | % |
| Publications                               |       | 11.4                   | %          | 10.4 | % | 16.3 | % |
| Retail                                     |       | 60.7                   | %          | 60.3 | % | 7.6 | % |
|                                       |       | 100.0                  | %          | 100.0 | % | 6.8 | % |
|                                       |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                   |       |   |   |   |   |
| Membership services                        |       | 18.3                   | %          | 19.4 | % | 0.9 | % |
| Publications                               |       | 8.1                    | %          | 7.4 | % | 18.2 | % |
| Retail                                     |       | 36.7                   | %          | 36.9 | % | 5.7 | % |
|                                       |       | 63.1                   | %          | 63.7 | % | 5.7 | % |
| GROSS PROFIT                               |       | 36.9                   | %          | 36.3 | % | 8.8 | % |
|                                       |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                   |       |   |   |   |   |
| Selling, general and administrative        |       | 26.0                   | %          | 26.6 | % | 4.5 | % |
| Restructuring charge                       |       | —                 |       | 0.1 | % | (100.0 | )% |
| Depreciation and amortization              |       | 3.5                    | %          | 2.3 | % | 64.2 | % |
|                                       |       | 29.5                   | %          | 29.0 | % | 8.9 | % |
|                                       |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 7.4                    | %          | 7.3 | % | 8.3 | % |
|                                       |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                   |       |   |   |   |   |
| Interest expense                           |       | (5.3                   | )%         | (4.3 | )% | 29.7 | % |
| Interest income                            |       | 0.2                    | %          | 0.2 | % | (4.3 | )% |
| Debt extinguishment expense                |       | —                 |       | (1.4 | )% | (100.0 | )% |
| Other non-operating items, net             |       | 0.4                    | %          | 0.2 | % | 71.1 | % |
|                                       |       | (4.7                   | )%         | (5.3 | )% | (4.5 | )% |
|                                       |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 2.7                    | %          | 2.0 | % | 41.2 | % |
|                                       |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (1.1                   | )%         | (0.9 | )% | 29.0 | % |
|                                       |       |                   |       |   |   |   |   |
| NET INCOME                                 |       | 1.6                    | %          | 1.1 | % | 51.6 | % |

 

16

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The following table is derived from the Company’s ConsolidatedStatements of Income and expressesthe results from operations as a percentage of revenues and reflects the netincrease (decrease) between periods:

 
| ** **                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **9/30/2004**         | ** ** | **9/30/2003** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                  |       |   |   |   |   |
| REVENUES:                                  |       |                  |       |   |   |   |   |
| Membership services                        |       | 29.0                  | %          | 30.6 | % | 3.0 | % |
| Publications                               |       | 13.6                  | %          | 12.9 | % | 15.3 | % |
| Retail                                     |       | 57.4                  | %          | 56.5 | % | 10.6 | % |
|                                       |       | 100.0                 | %          | 100.0 | % | 8.9 | % |
|                                       |       |                  |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                  |       |   |   |   |   |
| Membership services                        |       | 19.2                  | %          | 19.1 | % | 9.5 | % |
| Publications                               |       | 9.4                   | %          | 9.0 | % | 14.3 | % |
| Retail                                     |       | 34.3                  | %          | 33.9 | % | 9.9 | % |
|                                       |       | 62.9                  | %          | 62.0 | % | 10.4 | % |
|                                       |       |                  |       |   |   |   |   |
| GROSS PROFIT                               |       | 37.1                  | %          | 38.0 | % | 6.4 | % |
|                                       |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                  |       |   |   |   |   |
| Selling, general and administrative        |       | 24.6                  | %          | 25.4 | % | 5.8 | % |
| Restructuring charge                       |       | —                |       | 0.1 | % | (100.0 | )% |
| Depreciation and amortization              |       | 2.9                   | %          | 2.3 | % | 38.5 | % |
|                                       |       | 27.5                  | %          | 27.8 | % | 8.1 | % |
|                                       |       |                  |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 9.6                   | %          | 10.2 | % | 1.9 | % |
|                                       |       |                  |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                  |       |   |   |   |   |
| Interest expense                           |       | (5.1                  | )%         | (4.5 | )% | 25.2 | % |
| Interest income                            |       | 0.2                   | %          | 0.2 | % | (5.8 | )% |
| Debt extinguishment expense                |       | (1.5                  | )%         | (1.0 | )% | 56.5 | % |
| Other non-operating items, net             |       | 0.1                   | %          | 0.1 | % | 31.3 | % |
|                                       |       | (6.3                  | )%         | (5.2 | )% | 32.2 | % |
|                                       |       |                  |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 3.3                   | %          | 5.0 | % | (29.3 | )% |
|                                       |       |                  |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (1.3                  | )%         | (1.9 | )% | (31.1 | )% |
|                                       |       |                  |       |   |   |   |   |
| NET INCOME                                 |       | 2.0                   | %          | 3.1 | % | (28.1 | )% |

 

17

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**RESULTS OF OPERATIONS**

 

**Three Months Ended September 30,2004**

**Compared With Three Months EndedSeptember 30, 2003**

 

*Revenues*

 

Revenues of$117.6 million for the third quarter of 2004 increased by approximately$7.5 million or 6.8% from the comparable period in 2003.

 

Membershipservices revenues of $32.8 million for the third quarter of 2004 increasedby approximately $0.6 million or 1.8% from the comparable period in 2003.  This revenue increase was attributable to an$0.8 million increase in extended vehicle warranty and emergency road serviceproduct revenues due to increased enrollment, a $0.7 million increase in dealerprogram marketing revenue, a $0.3 million increase in marketing fee incomerecognized on sales of vehicle insurance products, and a $0.3 million increasein various other ancillary product revenues. These revenue increases were partially offset by a $0.7 millionreduction in marketing fee income recognized on sales of RV financing productsand a $0.8 million membership services revenue reduction primarily associatedwith reduced enrollment in the Coast to Coast Club and Golf Card International.

 

Publicationrevenues of $13.4 million for the third quarter of 2004 increased$1.9 million or 16.3% from the comparable period in 2003 primarily due toan $0.8 million increase from the acquisition of three publication titles fromPoole Publications, Inc. in October 2003, a $0.7 million and $0.2million increase in revenue primarily due to timing of issues of Snowmobile andBoating Industry magazines, respectively, and $0.2 million of revenue from anew all-terrain vehicle television program.

 

Retail revenues of$71.4 million increased $5.1 million or 7.6% over the third quarter of2003.  This variance consisted of an$8.7 million or 13.9% increase in Camping World merchandise salespartially offset by a $3.7 million decrease in recreational vehicle salesdue to the divestiture of Camping World RV Sales, Inc. in the fourthquarter of 2003.  Store merchandise salesincreased $6.8 million due to a same store sales increase of 6.1%, compared toan increase of 1.7% for the third quarter of 2003, and $4.1 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 remaining net increasein merchandise sales was attributable to a $0.9 million increase in mailorder sales and a $1.0 million increase in other installation fees,supplies and services revenue.

 

*Costs Applicable to Revenues*

 

Costs applicableto revenues totaled $74.2 million for the third quarter of 2004, an increase of$4.0 million or 5.7% from the comparable period in 2003.

 

18

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Membershipservices costs and expenses of $21.5 million increased approximately$0.2 million or 0.9% from the third quarter of 2003.  This increase consisted of a$0.5 million increase in dealer marketing program costs and a $0.3 millionincrease in Good Sam Club marketing expenses, partially offset by a$0.3 million reduction in program costs for the emergency road servicesprograms and a $0.3 reduction in marketing costs associated with the vehicleinsurance programs.

 

Publication costsand expenses of $9.6 million for the third quarter of 2004 increased$1.5 million or 18.2% from the comparable period in 2003 primarily due tothe acquisition of publication titles from Poole Publications, Inc. inOctober 2003, the additional issue of Snowmobile and Boating Industrymagazines, and the all-terrain vehicle television program.

 

Retail costsapplicable to revenues increased $2.3 million or 5.7% to $43.0 millionprimarily due to increased store and mail order sales.  The retail gross profit margin of 39.8% forthe third quarter of 2004 increased from 38.7% from the comparable period in2003 primarily due to the cessation of lower margin recreational vehicle salesas a result of the divestiture of Camping World RV Sales, Inc. in thefourth quarter of 2003.

 

*Operating Expenses*

 

Selling, generaland administrative expenses of $30.6 million for the third quarter of 2004increased $1.3 million or 4.5% compared to the third quarter of 2003 primarilydue to a net increase in retail labor, selling, general and administrativeexpenses of approximately $1.7 million partially offset by a $0.4 milliondecrease in selling, general and administrative expense due to the divestitureof Camping World RV Sales, Inc. Depreciation and amortization expenses of $4.2 million increased$1.6 million over the prior year due primarily to increased depreciationon capital expenditures at Camping World, amortization of intangible costsassociated with the acquisition of three titles from PoolePublications, Inc. in October 2003 and amortization of deferredfinancing costs associated with the credit facility restructuring in June 2003,and the issuance of $200.0 million in 9% senior subordinated notes on February18, 2004.

 

*Income from Operations*

 

Income fromoperations of $8.7 million for the third quarter of 2004 increased $0.7 millionor 8.3% over the third quarter of 2003 primarily due to increased gross profitfor the retail, publications and membership services operations of $2.7million, $0.4 million and $0.4 million, respectively, partially offset by increasedoperating expenses of $2.8 million.

 

*Non-Operating Items*

 

Non-operatingexpenses of $5.6 million for the third quarter of 2004 decreased $0.3million primarily due to a net $1.5 million reduction in debtextinguishment expense associated with the 2003 credit facility restructuringand a $0.2 million reduction of other non-operating items, partially offset by$1.4 million of additional net interest expense 

 

19

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attributable tohigher a loan balance associated with the issuance of the senior subordinatednotes.

 

*Income before Income Taxes*

 

Income beforeincome taxes for the third quarter of 2004 was $3.2 million, or 41.2% more thanthe third quarter of 2003.  This $0.9million increase was attributable to the $0.7 million increase in income fromoperations and a $0.2 million net increase in non-operating items as mentionedabove.

 

*Income Tax Expense*

 

The Companyrecognized approximately $1.3 million of income tax expense for the thirdquarter of 2004 compared to $1.0 million for the third quarter of2003.  The effective tax rates for thethird quarter of 2004 and 2003 were 42.0% and 45.9%, respectively.  The effective tax rate for both periods ishigher than the statutory rate primarily due to state taxes.

 

*Net Income*

 

Net income in thethird quarter of 2004 was $1.9 million compared to $1.2 million for the sameperiod in 2003.

 

*Segment Profit*

 

Segment profit of$12.3 million for the third quarter of 2004 (before unallocated depreciationand amortization, interest, debt restructuring, general and administrative, andincome tax expense) increased $0.6 million or 5.2% for the comparableperiod in 2003.

 

Membershipservices segment profit increased $0.1 million or 1.1% to$9.4 million for the third quarter of 2004 compared to the same period in2003.  This increase is largelyattributable to a $0.9 million increase in profit associated with increasedenrollment and lower program costs for the emergency road service products, anda $0.2 million increase in dealer program marketing profit, partiallyoffset by a $0.7 million decrease in segment profit associated with Coastto Coast Club, and a $0.3 million decrease in Good Sam Club operating profit,primarily relating to increased marketing costs.

 

Publicationsegment profit of $2.6 million for the third quarter of 2004 remainedunchanged from 2003.  The operatingprofit from the additional Snowmobile and Boating Industry magazine issues wasoffset by a net loss on the recently purchased Poole Publications.

 

Retail segmentprofit of $0.3 million for the third quarter of 2004 increased by$0.5 million from 2003 primarily due to increased operating profit fromincreased same store sales and sales from new stores, partially offset byincreases in interest, depreciation and other non-operating items.

 

20

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**Nine Months Ended September 30,2004**

**Compared With Nine Months EndedSeptember 30, 2003**

 

*Revenues*

 

Revenues of$346.5 million for the first nine months of 2004 increased by approximately$28.3 million or 8.9% from the comparable period in 2003.

 

Membershipservices revenues of $100.4 million for the first nine months of 2004increased by approximately $2.9 million or 3.0% from the comparable periodin 2003.  This revenue increase waslargely attributable to a $1.9 million increase in extended vehiclewarranty program revenue due to continued growth in the sales of one-yearwarranty products, a $1.4 million increase in emergency road servicerevenue due to increased enrollment, and a $1.4 million increase in dealermarketing program revenue, partially offset by a $1.2 million reduction inmembership services revenue, primarily associated with reduced enrollment inthe Coast to Coast Club and Golf Card International, and a $0.6 millionreduction in marketing fee income recognized on RV financing products.

 

Publicationrevenues of $47.2 million for the first nine months of 2004 increased$6.3 million or 15.3% from the comparable period in 2003.  This increase was primarily associated with a$5.0 million revenue increase due to the acquisition of three publicationtitles from Poole Publications, Inc. in October 2003 and a $0.4 millionincrease in sales of the annual RV directories, a $0.5 million increase inrevenue due to issue timing of our Snowmobile magazine, and a $0.4 millionincrease in ATV-related television revenues and other magazine revenues.

 

Retail revenues of$199.0 million increased $19.1 million or 10.6% over the first ninemonths of 2003.  This variance consistedof a $28.2 million or 16.5% increase in Camping World merchandise salespartially offset by a $9.1 million decrease in recreational vehicle salesdue to the divestiture of Camping World RV Sales, Inc. in the fourthquarter of 2003.  Store merchandise salesincreased $21.4 million due to a same store sales increase of 9.9%, compared toa decrease of 3.2% in the first nine months of 2003, and $9.6 million due tothe addition of six new retail stores. Same store sale calculations for a given period include only those storesthat were open both at the end of that period and at the beginning of thepreceding fiscal year.  The remaining netincrease in merchandise sales was attributable to a $4.4 million increasein mail order sales and a $2.4 million increase in other installationfees, supplies and services revenue.

 

*Costs Applicable to Revenues*

 

Costs applicableto revenues totaled $217.9 million for the first nine months of 2004, anincrease of $20.5 million or 10.4% from the comparable period in 2003.

 

Membership servicescosts and expenses of $66.6 million increased approximately$5.8 million or 9.5%, from the first nine months of 2003.  This increase consisted of $2.1 millionof marketing and program expenses associated with the increased enrollment inthe extended vehicle warranty programs and emergency roads service 

 

21

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programs, a$1.3 million increase in membership services costs primarily associatedwith the introduction of new Coast to Coast Club member benefits including anexpanded reservation system and increased marketing expenses for the Good SamClub.  In addition, dealer marketingprogram costs increased $1.1 million, other marketing expenses increased$0.9 million primarily due to marketing database enhancements and membershipsupport expenses, and marketing expenses increased $0.4 million for the vehicleinsurance programs.

 

Publication costsand expenses of $32.7 million for the first nine months of 2004 increased$4.1 million from the comparable period in 2003 primarily due to theacquisition of publication titles from Poole Publications, Inc.

 

Retail costsapplicable to revenues increased $10.6 million or 9.9% to $118.6 millionprimarily due to increased store and mail order sales.  The retail gross profit margin of 40.4% forthe first nine months of 2004 was slightly higher than the comparable period in2003 primarily due to the cessation of lower margin recreation vehicle sales asa result of the divesture of Camping World RV Sales, Inc. (“CWRV”) in thefourth quarter of 2003 partially offset by additional customer discounts andvendor price increases.  Excluding theeffect of CWRV, the retail gross margin for 2003 was 41.1%.

 

*Operating Expenses*

 

Selling, generaland administrative expenses of $85.3 million for the first nine months of2004 increased $4.7 million compared to the first nine months of 2003primarily due to a $7.6 million increase in retail labor, selling and generaland administrative expenses, and a $0.5 million increase in other general andadministrative expenses, partially offset by a $2.0 million reduction inexecutive compensation, and reduced RV sales expenses of $1.4 million as aresult of the divestiture of Camping World RV Sales, Inc.  Depreciation and amortization expenses of$10.2 million increased $2.8 million over the prior year due primarily toincreased depreciation on capital expenditures at Camping World, andamortization of intangible assets associated with the acquisition of threetitles from Poole Publications, Inc.

 

*Income from Operations*

 

Income fromoperations for the first nine months of 2004 of $33.1 million increased $0.6million over the same period in 2003 primarily due to increased gross profitfrom the retail and publications operations of $8.5 million and $2.2 million,respectively, partially offset by increased operating expenses of $7.2 millionand reduced gross profit in the membership services operations of $2.9 million.

 

*Non-Operating Items*

 

Non-operatingexpenses were $21.8 million for the first nine months of 2004 compared to$16.5 million for the same period in 2003. This $5.3 million increase was primarily due to $3.6 million ofadditional interest expense from higher loan balances associated with thesenior credit facility restructuring in June 2003 and the issuance of the$200.0 million in 9% senior subordinated notes on February 18, 2004, anda $1.8 million 

 

22

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increase in debtextinguishment expense associated with the issuance of the senior subordinatednotes, partially offset by a $0.1 million increase in other non-operatingitems.

 

*Income before Income Taxes*

 

Income beforeincome taxes for the first nine months of 2004 was $11.4 million, or 29.3% lessthan the first nine months of 2003.  This$4.7 million decrease from the prior period was attributable to theincreased net interest expense of $3.6 million, and a $1.8 million increase indebt extinguishment expenses, partially offset by the $0.6 million increase inincome from operations mentioned above,

 

*Income Tax Expense*

 

The Companyrecognized approximately $4.3 million of income tax expense for the firstnine months of 2004 compared to $6.2 million for the first nine months of2003, producing an effective tax rate of 37.6% and 38.6% for first nine monthsof 2004 and 2003, respectively.  Theeffective tax rates are higher than statutory rates primarily due to statetaxes.

 

*Net Income*

 

The net income in the first nine months of2004 was $7.1 million compared to $9.9 million for the same period in 2003.

 

*Segment Profit*

 

Segment profit of$41.9 million for the first nine months of 2004 (before unallocateddepreciation and amortization, interest, debt restructuring, general andadministrative, and income tax expense) decreased $1.6 million or 3.6%from the comparable period in 2003.

 

Membershipservices segment profit decreased $3.2 million, or 10.3%, to $28.2 million forthe first nine months of 2004.  Thisdecrease is largely attributable to a $2.7 million decrease in Coast toCoast Club profit, a $1.1 million decrease in profit in the Good Sam Club,primarily marketing expenses relating to increased enrollment, and a $0.7million decrease in profit recognized on RV financing products, partiallyoffset by a $1.1 million increase in profit primarily associated with increasedenrollment in the emergency road service products, and a $0.2 millionincrease dealer marketing profit.

 

Publicationsegment profit of $10.8 million for the first nine months of 2004increased by $1.1 million, or 11.7%, from 2003.  This increase was primarily attributable to a$0.4 million increase from sales of the annual RV Directories, a $0.4 millionincrease in profit from RV-related publications, and $0.3 million increase inprofit from an additional Snowmobile issue.

 

Retail segmentprofit of $2.9 million for the first nine months of 2004 increased $0.5million or 22.2% from the prior year primarily due to increased operatingprofit from 

 

23

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increased retailsales partially offset by increases in interest, depreciation and othernon-operating items.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

We historicallyhave operated with a working capital deficit. The working capital deficit as of September 30, 2004 andDecember 31, 2003 was $10.2 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 $66.4 million and $57.3 millionas of September 30, 2004 and December 31, 2003, respectively.  Deferred revenue is primarily comprised ofcash collected for club memberships in advance, which is amortized over thelife of the membership.  We use netproceeds from this deferred membership revenue to lower our long-termborrowings.  We generated net cash fromoperations of $31.6 million and $34.5 million for the first ninemonths of 2004 and 2003, respectively.  The following table reflects the Company’scontractual obligations and commercial commitments at September 30, 2004, inthousands.

 

| ** **                                | ** ** | **Payments Due by Period** |       |
|-------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                        | ** ** | **Total**                  | ** ** | **Balance of  2004** | ** ** | **2005 and  2006** | ** ** | **2007 and  2008** | ** ** | **More than 5  years** | ** ** |
|                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                            |       | $                          | 314,077    |   | $ | 428 |   | $ | 3,041 |   | $ | 3,227 |   | $ | 307,381 |   |
| Operating lease  obligations              |       | 127,035                    |       | 3,098 |   | 22,350 |   | 17,581 |   | 84,006 |   |
| Deferred compensation                     |       | 5,315                      |       | 1,965 |   | 1,859 |   | 994 |   | 497 |   |
| Standby and commercial letters  of credit |       | 5,774                      |       | 4,929 |   | 845 |   | — |   | — |   |
| Grand total                               |       | $                          | 452,201    |   | $ | 10,420 |   | $ | 28,095 |   | $ | 21,802 |   | $ | 391,884 |   |

 

On June 24,2003, we entered into an Amended and Restated Credit Agreement and a SeniorSecured Floating Rate Note Purchase Agreement, which was amended onFebruary 18, 2004, (collectively, our senior credit facility).  This senior credit facility provides for arevolving credit facility of $35.0 million and term loans (“Term B1 andTerm B2”) 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 million principal amount of the AGHI Notes at 103.667% of par in2003.  As of September 30, 2004,$32.3 million and $80.6 million were outstanding under the Term B1 andTerm B2 loans, respectively.  Noborrowings were outstanding on the revolving credit facility as ofSeptember 30, 2004.  Reborrowingsunder the term loans are not permitted. The interest on borrowings under our senior credit facility is atvariable rates based on the ratio of total cash flow to outstanding indebtedness(as defined).  Interest rates float withprime and the London Interbank Offered Rates, or LIBOR, plus an applicablemargin ranging from 1.50% to 4.00% over the stated rates.  As of September 30, 2004, the averageinterest rate on the term loans was 5.91%, and permitted borrowings under theundrawn revolving facility were $29.2 million.  We also pay a commitment fee of 0.5% perannum on the unused amount of the revolving credit facility.  The aggregate 

 

24

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quarterlyscheduled payments on the term loans are $350,000.  The revolving credit facility matures onJune 24, 2008, and the Term B1 and Term B2 loans mature on June 24,2009.  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 September 30, 2004, we hadletters of credit in the aggregate amount of $5.8 millionoutstanding.  Our senior credit facilityis secured by virtually all of our assets and a pledge of our stock and thestock of our subsidiaries.

 

InFebruary 2004, we issued $200.0 million aggregate principal amount ofour 9% Senior Subordinated Notes due 2012 (the “Notes”).  The Company completed a registered exchangeof these Notes under the Securities Act of 1933 in August 2004.  The proceeds from the sale of the Notes wereused to fund the tender offer and defeasance of the remaining$100.0 million outstanding principal amount of the 11% senior notes due2007 issued by AGHI (the “AGHI Notes”), prepay $25.0 million of the TermB1 and Term B2 loans under our senior credit facility, pay a $60.0 milliondividend distribution, create a $15.0 million segregated cash account, paycertain prepayment and transaction costs and be available for general corporatepurposes.  As of September 30, 2004, thecash balance in the segregated account including interest was $11.5million.  If we use the segregatedaccount for purposes other than to fund stockholder dividends, the amount whichwe may borrow under the revolving credit line of our senior credit facilitywill be reduced by an equal amount, and we may elect or be required toreplenish this segregated account from time to time under the terms of oursenior credit facility.  In addition, theamount held in this segregated account, including any earnings thereon, will beavailable to pay stockholder dividends upon satisfaction of a leverage testspecified in our senior credit facility. In August 2004, the Company satisfied the specific leverage test andpaid a $3.6 million dividend.  Based onthe senior credit facility leverage test as of September 30, 2004, the Companymay and intends to pay the remaining dividend available of $11.4 million plusaccrued interest of approximately $0.1 million on or before November 15,2004.  Should this dividend be paid, thesegregated account replenishment requirement will be permanently eliminated.

 

The indenturepursuant to which the Notes were issued contains certain restrictive covenantsrelating to, but not limited to, mergers, changes in the nature of thebusiness, acquisitions, additional indebtedness, sale of assets andinvestments, and certain limitations of the payment of dividends by theCompany, including achievement of certain minimum operating financialcovenants.  The Company was in compliancewith all debt covenants at June 30, 2004.

 

In August 2004,Ehlert Publishing Group, a subsidiary of the Company, sold certain publicationassets for $4.2 million.  The Companypaid $0.2 million in transaction fees and recorded a $3.6 million reduction ingoodwill.  As a result of the sale, theCompany reported a net gain of $0.4 million.

 

For the ninemonths ended September 30, 2004, the Company incurred $1.1 million of deferredexecutive compensation expense under our phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next seven years.  Phantom stock payments of $2.0 millionare scheduled to be made over the remainder of the current calendar year.

 

25

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Capitalexpenditures for the first nine months of 2004 totaled $6.7 million, adecrease of $1.5 million from the first nine months of 2003.  Additional capital expenditures of$3.7 million are anticipated for the balance of 2004, primarily for newCamping World stores and equipment, information technology and databaseenhancements, computer hardware upgrades and replacements, and computersoftware 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.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company’s discussionand analysis of its financial condition and results of operations are basedupon the Company’s consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the United States.  The preparation of these financial statementsrequires the Company to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities.  Onan on-going basis, the Company evaluates its estimates, including those relatedto membership programs and incentives, bad debts, inventories, intangibleassets, employee health insurance benefits, income taxes, restructuring, andcontingencies and litigation.  TheCompany bases its estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions.

 

The Company believes thefollowing critical accounting policies affect its more significant judgmentsand estimates used in the preparation of its consolidated financial statements.

 

*Revenue Recognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores or shippedfor mail and Internet orders, or when services are provided to customers.  Publication advertising and newsstand sales,net of estimated provision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Emergency Road Service (“ERS”) revenues aredeferred and recognized over the life of the membership.  ERS claim expenses are recognized whenincurred.  Royalty revenue is earnedunder the terms of an arrangement with a third party credit card provider basedon a percentage of the Company’s outstanding credit card balances with thisthird party credit card provider. Membership revenue is generated from annual, multi-year andlifetime memberships.  The revenue andexpenses associated with these memberships are deferred and amortized over themembership period.  For lifetimememberships, an 18-year period is 

 

26

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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 asthe 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.

 

*Accounts Receivable*

 

We estimate thecollectibility of our trade receivables. A considerable amount of judgment is required in assessing the ultimaterealization of these receivables including the current credit-worthinessof each customer.  Changes in requiredreserves have been recorded in recent periods and may occur in the future dueto the market environment.

 

*Inventory*

 

We stateinventories at the lower of cost or market. In assessing the ultimate realization of inventories, we are required tomake judgments as to future demand requirements and compare that with thecurrent or committed inventory levels. We have recorded changes in required reserves in recent periods due tochanges in strategic direction, such as discontinuances of product lines aswell as changes in market conditions due to changes in demand requirements.  It is possible that changes in requiredinventory reserves may continue to occur in the future due to the marketconditions.

 

*Long-Lived Assets*

 

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

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  We assess thefair value of the assets based on the future cash flow the assets are expectedto generate and recognize an impairment loss when estimated undiscounted futurecash flow expected to result from the use of the asset plus net proceedsexpected from disposition of the asset (if any) are less than the carryingvalue of the asset.  When an impairmentis identified, we reduce the carrying amount of the asset to its estimated fairvalue based on a discounted cash flow approach or, when available andappropriate, comparable market values. We determined there were no indicators of impairment of long-livedassets as of December 31, 2003.

 

We have evaluatedthe remaining useful lives of our finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of 

 

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these assets hadindefinite lives 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 approximately7 years, 23 years, 15 years and 7 years, respectively.

 

*Indefinite Lived Intangible Assets*

 

Goodwill andintangible assets with indefinite lives are measured for impairment at leastannually or when events indicate that an impairment exists.  The impairment tests for goodwill and otherindefinite-lived intangible assets are assessed for impairment using fairvalue measurement techniques. Specifically, goodwill impairment is determined using a two-stepprocess.  The first step of the goodwillimpairment test is used to identify potential impairment by comparing the fairvalue of a reporting unit with the net book value (or carrying amount),including goodwill.  If the fair value ofthe reporting unit exceeds the carrying amount, goodwill of the reporting unitis considered not impaired and the second step of the impairment test isunnecessary.  If the carrying amount ofthe reporting unit exceeds the fair value, the second step of the goodwillimpairment test is performed to measure the amount of impairment loss, ifany.  The second step of the goodwillimpairment test compares the implied fair value of the reporting unit’sgoodwill with the carrying amount of that goodwill.  If the carrying amount of the reportingunit’s goodwill exceeds the implied fair value of that goodwill, an impairmentloss 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 intangible assetsconsists of a comparison of the fair value of the intangible asset with itscarrying value.  If the carrying value ofthe intangible asset exceeds its fair value, an impairment loss is recognizedin an amount equal to that excess.

 

Determining thefair value of a reporting unit under the first step of the goodwill impairmenttest and determining the fair value of individual assets and liabilities of areporting unit under the second step of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions.  These estimates andassumptions could have a significant impact on whether or not an impairmentcharge is recognized and also the extent of such charge.  Our estimates of fair value utilized in goodwilland other indefinite-lived intangible asset tests may be based upon anumber of factors, including assumptions about the projected future cash flows,discount rate, growth rate, determination of market comparables, technologicalchange, economic conditions or changes to our business operations.  Such changes may result in impairment chargesrecorded in future periods.

 

The fair value ofour reporting units was determined using a combination of the income approachand the market approach.  Under the incomeapproach, the fair value of a reporting unit is calculated based on the presentvalue of estimated future cash flows.

 

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Future cash flowsare estimated by us under the market approach, fair value is estimated based onmarket multiples of revenue or earnings for comparable companies.

 

Based on theresults of the annual impairment tests, we determined that no impairment ofgoodwill existed as of December 31, 2003. However, future goodwill impairment tests could result in a charge toearnings.  We will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

*Restructuring*

 

We recordedreserves in connection with the restructuring program primarily within ourretail segment.  These reserves includeestimates pertaining to employee separation costs.  Although we do not anticipate significantchanges, the actual costs may differ from these estimates.

 

**ITEM 3****:  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

* *

*Interest Rate Risks*

 

Refer to thedisclosure in our Registration Statement on Form S-4 filed with theSecurities and Exchange Commission.  Wedo not believe that the risk we face related to interest rate changes ismaterially different than it was at the date of the Registration Statement.

* *

*Credit Risks*

 

Refer to thedisclosure in our Registration Statement on Form S-4 filed with theSecurities and Exchange Commission.  Wedo not believe that the risk we face related to credit risk is materiallydifferent than it was at the date of the Registration Statement.

 

**ITEM 4****: CONTROLAND PROCEDURES**

 

Within 90 days prior tothe filing of this Quarterly Report on Form 10-Q, the Company carried out anevaluation, under the supervision and with the participation of the Company’smanagement, including the Company’s President and Chief Executive Officer andthe Company’s Senior Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Regulation 13a-14 under the Securities Exchange Actof 1934.  Based upon that evaluation, theCompany’s President and Chief Executive Officer along with the Company’s SeniorVice President and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the Company’s periodic SECfilings.  There have been no significantchanges in the Company’s internal controls or in other factors that couldsignificantly affect these controls subsequent to the date the Company carriedout its evaluation.

 

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

 

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

 

Item 6.                                     Exhibitsand Reports on Form 8-K

 

(a)                                  Exhibits.

 

Exhibit 31.1 –Certification of Chief Executive Officer (Section 302 Certification).

 

Exhibit 31.2 –Certification of Chief Financial Officer (Section 302 Certification).

 

Exhibit 32.1 –Certification of Chief Executive Officer (Section 906 Certification).

 

Exhibit 32.2 –Certification of Chief Financial Officer (Section 906 Certification).

 

(b)                                 Reportson Form 8-K.

 

None.

 

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**SIGNATURES:**

 

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

 
|                   | **AFFINITY GROUP, INC.**                            |
|------------------------|-----------------------------------------------------|
|                   |                                                |
|                   |                                                |
|                   | /s/   Thomas F. Wolfe                     |   |
| Date: November 8, 2004 | Thomas F. Wolfe                                     |
|                   | Senior Vice President  and  Chief Financial Officer |

 

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