**Table of Contents**

** **

** **

** **

**UNITEDSTATES**

##### **SECURITIES AND EXCHANGE COMMISSION**

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

###### ** **

**FORM 10-Q**

** **

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

**TheSecurities Exchange Act of 1934**

 

| **For  Quarter Ended:** | ** ** | **Commission  File Number** |
|-------------------------|------------|-----------------------------|
| **June 30,  2008** | ** ** | **333-113982**              |

 

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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**

SECURITIES REGISTEREDPURSUANT TO SECTION 12 (g) OF THE ACT:

**9% SeniorSubordinated Notes Due 2012**

 

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

 

YES     x           NO    o

 

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

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

 

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

YES     o           NO    x

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| ** **                     | ** ** | **Outstanding  as of**   | ** ** |
|--------------------------------|------------|--------------------------|------------|
| **Class**                      | ** ** | **August 8,  2008** |       |
| Common Stock, $.001 par  value |       | 2,000                    |       |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

** **

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**AFFINITY GROUP, INC. AND SUBSIDIARIES**

** **

**INDEX**

 
| ** **                                                                                              | **Page** |
|---------------------------------------------------------------------------------------------------------|----------|
|                                                                                                    |     |
| **Part I.  **Financial  Information                                                      |     |
|                                                                                                    |     |
| **Item 1:  Financial Statements**                                                                       |     |
|                                                                                                    |     |
| Consolidated Balance Sheets as of  June 30, 2008 (unaudited) and December 31, 2007            | 1        |
|                                                                                                    |     |
| Unaudited Consolidated Statements  of Operations for the three months ended June 30, 2008 and 2007 | 2        |
|                                                                                                    |     |
| Unaudited Consolidated  Statements of Operations for the six months ended June 30, 2008 and 2007   | 3        |
|                                                                                                    |     |
| Unaudited Consolidated  Statements of Cash Flows for the six months ended June 30, 2008 and 2007   | 4        |
|                                                                                                    |     |
| Notes to  Unaudited Consolidated Financial Statements                                                   | 5        |
|                                                                                                    |     |
| **Item 2: Management’s Discussion and Analysis of  Financial Condition and Results of Operations** | 17       |
|                                                                                                    |     |
| **Item 3:  Quantitative and Qualitative Disclosures about Market Risk**                                 | 33       |
|                                                                                                    |     |
| **Item 4: Controls  and Procedures**                                                                    | 34       |
|                                                                                                    |     |
| **Part II. Other Information**                                                                     | 34       |
|                                                                                                    |     |
| **Signatures**                                                                                          | 35       |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2008 and December 31, 2007

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **6/30/2008**   | ** ** | **12/31/2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 7,660      |           | $          | 8,357 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,582 in 2008 and $1,473 in 2007 |       | 33,294          |       | 33,330         |       |
| Inventories                                                                                     |       | 64,493          |       | 64,209         |       |
| Prepaid expenses and other assets                                                               |       | 16,742          |       | 14,430         |       |
| Deferred tax assets                                                                             |       | 4,037           |       | 3,922          |       |
| Total current assets                                                                            |       | 126,226         |       | 124,248        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 45,895          |       | 44,307         |       |
| INVESTMENT IN AFFILIATE                                                                         |       | 81,005          |       | 81,005         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                                 |       | 4,629           |       | 4,650          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 24,452          |       | 23,695         |       |
| GOODWILL                                                                                        |       | 144,429         |       | 144,429        |       |
| OTHER ASSETS                                                                                    |       | 2,012           |       | 1,979          |       |
| Total assets                                                                                    |       | $               | 428,648    |           | $          | 424,313 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 27,087     |           | $          | 27,171 |   |
| Accrued interest                                                                                |       | 6,904           |       | 6,700          |       |
| Accrued income taxes                                                                            |       | 1,275           |       | 1,189          |       |
| Accrued liabilities                                                                             |       | 32,178          |       | 36,069         |       |
| Deferred revenues and gains                                                                     |       | 64,248          |       | 65,855         |       |
| Current portion of long-term debt                                                               |       | 139,582         |       | 4,406          |       |
| Total current liabilities                                                                       |       | 271,274         |       | 141,390        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 37,680          |       | 38,535         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 153,922         |       | 282,767        |       |
| DEFERRED TAX LIABILITY                                                                          |       | 2,817           |       | 2,702          |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 23,759          |       | 25,829         |       |
|                                                                                            |       | 489,452         |       | 491,223        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.001 par value, 2,000 shares  authorized, 2,000 shares issued and outstanding    |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 81,005          |       | 81,005         |       |
| Accumulated deficit                                                                             |       | (138,119        | )          | (143,211       | )          |
| Accumulated other comprehensive loss                                                            |       | (3,691          | )          | (4,705         | )          |
| Total stockholder’s deficit                                                                |       | (60,804         | )          | (66,910        | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 428,648    |           | $          | 424,313 |   |

 

See notes toconsolidated financial statements.

 

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** **

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                    | ** ** | **6/30/2007** | ** ** |
| REVENUES:                                  |       |                             |       |   |   |
| Membership services                        |       | $                                | 42,563     |   | $ | 38,092 |   |
| Publications                               |       | 15,424                           |       | 17,529 |   |
| Retail                                     |       | 89,742                           |       | 98,243 |   |
|                                       |       | 147,729                          |       | 153,864 |   |
|                                       |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |
| Membership services                        |       | 26,518                           |       | 24,294 |   |
| Publications                               |       | 11,387                           |       | 12,263 |   |
| Retail                                     |       | 52,332                           |       | 60,073 |   |
|                                       |       | 90,237                           |       | 96,630 |   |
|                                       |       |                             |       |   |   |
| GROSS PROFIT                               |       | 57,492                           |       | 57,234 |   |
|                                       |       |                             |       |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |
| Selling, general and administrative        |       | 40,270                           |       | 38,930 |   |
| Depreciation and amortization              |       | 5,037                            |       | 4,714 |   |
|                                       |       | 45,307                           |       | 43,644 |   |
|                                       |       |                             |       |   |   |
| INCOME FROM OPERATIONS                     |       | 12,185                           |       | 13,590 |   |
|                                       |       |                             |       |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |
| Interest income                            |       | 139                              |       | 183 |   |
| Interest expense                           |       | (6,050                           | )          | (6,345 | ) |
| Debt extinguishment expense                |       | —                           |       | — |   |
| Other non-operating items, net             |       | (25                              | )          | 44 |   |
|                                       |       | (5,936                           | )          | (6,118 | ) |
|                                       |       |                             |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 6,249                            |       | 7,472 |   |
|                                       |       |                             |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (272                             | )          | 85 |   |
|                                       |       |                             |       |   |   |
| NET INCOME                                 |       | $                                | 5,977      |   | $ | 7,557 |   |

** **

See notes toconsolidated financial statements.

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                  | ** ** | **6/30/2007** | ** ** |
| REVENUES:                                  |       |                           |       |   |   |
| Membership services                        |       | $                              | 78,108     |   | $ | 72,153 |   |
| Publications                               |       | 41,680                         |       | 42,218 |   |
| Retail                                     |       | 152,926                        |       | 167,300 |   |
|                                       |       | 272,714                        |       | 281,671 |   |
|                                       |       |                           |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                           |       |   |   |
| Membership services                        |       | 49,659                         |       | 45,961 |   |
| Publications                               |       | 28,604                         |       | 28,040 |   |
| Retail                                     |       | 89,195                         |       | 101,909 |   |
|                                       |       | 167,458                        |       | 175,910 |   |
|                                       |       |                           |       |   |   |
| GROSS PROFIT                               |       | 105,256                        |       | 105,761 |   |
|                                       |       |                           |       |   |   |
| OPERATING EXPENSES:                        |       |                           |       |   |   |
| Selling, general and administrative        |       | 76,701                         |       | 73,477 |   |
| Depreciation and amortization              |       | 10,041                         |       | 9,491 |   |
|                                       |       | 86,742                         |       | 82,968 |   |
|                                       |       |                           |       |   |   |
| INCOME FROM OPERATIONS                     |       | 18,514                         |       | 22,793 |   |
|                                       |       |                           |       |   |   |
| NON-OPERATING ITEMS:                       |       |                           |       |   |   |
| Interest income                            |       | 282                            |       | 357 |   |
| Interest expense                           |       | (12,110                        | )          | (12,544 | ) |
| Debt extinguishment expense                |       | —                         |       | (775 | ) |
| Other non-operating items, net             |       | (23                            | )          | 93 |   |
|                                       |       | (11,851                        | )          | (12,869 | ) |
|                                       |       |                           |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 6,663                          |       | 9,924 |   |
|                                       |       |                           |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (571                           | )          | 183 |   |
|                                       |       |                           |       |   |   |
| NET INCOME                                 |       | $                              | 6,092      |   | $ | 10,107 |   |

 

See notes to consolidated financialstatements.

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                     | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                     | ** ** | **6/30/2008**                  | ** ** | **6/30/2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                          |       |                           |       |   |   |
| Net income                                                                     |       | $                              | 6,092      |   | $ | 10,107 |   |
| Adjustments to reconcile net income to net cash used  in operating activities: |       |                           |       |   |   |
| Depreciation                                                                   |       | 5,881                          |       | 4,846 |   |
| Amortization                                                                   |       | 4,160                          |       | 4,645 |   |
| Provision for losses on accounts receivable                                    |       | 617                            |       | 726 |   |
| Deferred compensation                                                          |       | (130                           | )          | 240 |   |
| Deferred tax benefit                                                           |       | —                         |       | (826 | ) |
| Loss (gain) on sale of property and equipment                                  |       | 86                             |       | (5 | ) |
| Loss on early extinguishment of debt                                           |       | —                         |       | 775 |   |
| Changes in operating assets and liabilities                                    |       |                           |       |   |   |
| Accounts receivable                                                            |       | (581                           | )          | 1,304 |   |
| Inventories                                                                    |       | (284                           | )          | (16,361 | ) |
| Prepaid expenses and other assets                                              |       | (1,924                         | )          | (4,244 | ) |
| Accounts payable                                                               |       | (84                            | )          | (5,001 | ) |
| Accrued and other liabilities                                                  |       | (4,527                         | )          | (1,490 | ) |
| Deferred revenues and gains                                                    |       | (3,523                         | )          | 5,208 |   |
| Net cash provided by (used in) operating activities                            |       | 5,783                          |       | (76 | ) |
|                                                                           |       |                           |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                          |       |                           |       |   |   |
| Capital expenditures                                                           |       | (7,559                         | )          | (11,167 | ) |
| Net proceeds from sale of property and equipment                               |       | 4                              |       | 10 |   |
| Change in intangible assets                                                    |       | —                         |       | (4 | ) |
| Acquisitions, net of cash received                                             |       | (3,409                         | )          | (304 | ) |
| Repayment of loans receivable                                                  |       | 21                             |       | 19 |   |
| Net cash used in investing activities                                          |       | (10,943                        | )          | (11,446 | ) |
|                                                                           |       |                           |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                          |       |                           |       |   |   |
| Dividends paid                                                                 |       | (1,000                         | )          | (3,750 | ) |
| Borrowings on short-term debt                                                  |       | 33,000                         |       | 45,000 |   |
| Payment of debt issue costs                                                    |       | —                         |       | (291 | ) |
| Principal payments of short-term debt                                          |       | (27,537                        | )          | (42,053 | ) |
| Net cash provided by (used in) financing activities                            |       | 4,463                          |       | (1,094 | ) |
|                                                                           |       |                           |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                        |       | (697                           | )          | (12,616 | ) |
|                                                                           |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                               |       | 8,357                          |       | 15,006 |   |
|                                                                           |       |                           |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                     |       | $                              | 7,660      |   | $ | 2,390 |   |

 

See notes toconsolidated financial statements.

 

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation**–*The consolidated financial statements includethe accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries(collectively the “Company”), presented in accordance with U.S. generallyaccepted accounting principles, and pursuant to the rules and regulationsof the Securities and Exchange Commission. Affinity Group Holding, Inc. (“AGHI”) is the direct parent of theCompany. The ultimate parent company of AGHI is AGI Holding Corp. (“AGHC”), aprivately-owned corporation.

 

These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2007 as filed with the Securitiesand Exchange Commission. In the opinion of management of the Company, theseconsolidated financial statements contain all adjustments of a normal recurringnature necessary to present fairly the financial position, results ofoperations and cash flows of the Company for the interim periods presented.

 

**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

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

 

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

 

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

 

election dates andreport unrealized gains and losses on items for which the fair value option hasbeen elected in earnings at each subsequent reporting date.  Eligible items include, but are not limitedto, accounts and loans receivable, available-for-sale and held-to-maturitysecurities, equity method investments, accounts payable, guarantees, issueddebt and firm commitments.  If elected,SFAS 159 would be effective for fiscal years beginning after November 15,2007.  The Company has elected not toadopt SFAS 159.

 

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

 

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

 

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

 

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

 

TheCompany’s three principal lines of business are Membership Services,Publications, and Retail.  The MembershipServices segment includes the operations of the Good Sam Club, Coast to CoastClub, Camping World’s President’s Club, Camp Club USA, and RV

 

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

 

HandymanClub for recreational vehicles (“RV”) owners, campers and outdoor vacationers,and the 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, directories, and RV and powersports industry trademagazines, and produces outdoor recreational consumer events.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through the Camping Worldretail supercenters, mail order catalogs and its website.  The Company evaluates performance based onprofit or loss from operations before income taxes.

 

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

 

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

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

 

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

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

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three and six months ended June 30,2008 and 2007 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                     | ** ** | **6/30/2008**                    | ** ** | **6/30/2007**                  | ** ** | **6/30/2008** | ** ** | **6/30/2007** | ** ** |
| **Income From Operations Before Income Taxes**                 |       |                             |       |                           |       |   |   |   |   |
| Total profit for reportable segments                           |       | $                                | 13,649     |                           | $          | 16,928 |   | $ | 21,031 |   | $ | 30,750 |   |
| Unallocated G & A expense                             |       | (4,050                           | )          | (4,225                         | )          | (7,880 | ) | (9,470 | ) |
| Unallocated depreciation and amortization expense              |       | (561                             | )          | (572                           | )          | (1,013 | ) | (1,330 | ) |
| Elimination of intercompany interest income                    |       | (774                             | )          | (2,229                         | )          | (1,559 | ) | (4,263 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (2,015                           | )          | (2,430                         | )          | (3,916 | ) | (4,988 | ) |
| Unallocated debt restructure expense                           |       | —                           |       | —                         |       | — |   | (775 | ) |
| Income from operations before income taxes                     |       | $                                | 6,249      |                           | $          | 7,472 |   | $ | 6,663 |   | $ | 9,924 |   |

 

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

 

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

 

| ** **                                          | ** ** | **6/30/2008** | ** ** | **12/31/2007** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 204,569    |           | $          | 203,836 |   |
| Publications segment                                |       | 88,877        |       | 89,074         |       |
| Retail segment                                      |       | 252,471       |       | 249,174        |       |
| Total assets for reportable segments                |       | 545,917       |       | 542,084        |       |
| Capitalized finance costs not allocated to segments |       | 4,657         |       | 5,348          |       |
| Corporate unallocated assets                        |       | 3,417         |       | 3,334          |       |
| Elimination of intersegment receivable              |       | (125,343      | )          | (126,453       | )          |
| Total assets                                        |       | $             | 428,648    |           | $          | 424,313 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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**(5) GOODWILL AND INTANGIBLE ASSETS**

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually and more often when impairment indicators are present. The Companyperforms its annual impairment test during the fourth quarter.

 

There were nochanges in the Company’s goodwill by business segment and no indicators ofimpairment for the six months ended June 30, 2008 and 2007.

 

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

 

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

 

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

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at June 30, 2008 (in thousands, except asnoted):

 
| ** **                                      | ** ** | **Weighted**                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**       | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                          |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                             |       | $          | 36,384     |             | $          | (19,557    | )          | $ | 16,827 |   |
| Resort and golf course participation agreements |       | 4                             |       | 13,399     |       | (13,381          | )          | 18         |       |
| Non-compete and deferred consulting agreements  |       | 15                            |       | 18,830     |       | (14,494          | )          | 4,336      |       |
| Deferred financing costs                        |       | 7                             |       | 10,414     |       | (7,143           | )          | 3,271      |       |
|                                            |       |                          |       | $          | 79,027     |             | $          | (54,575    | )          | $ | 24,452 |   |

 

**(6) SENIOR CREDIT FACILITY**

 

On June 24, 2003, AGI entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the “Senior Credit Facility”). The Senior Credit Facility provides fora revolving credit facility of $35.0

 

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**(6) SENIOR CREDIT FACILITY (continued)**

 

million and term loans in the aggregate of $140.0 million. As of June 30,2008, $8.5 million was outstanding under the revolving credit facility and$127.8 million was outstanding under the term loans. Reborrowings under theterm loans are not permitted. The interest on borrowings under the SeniorCredit Facility was at variable rates based on the ratio of total cash flow tooutstanding indebtedness (as defined). Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 2.50% over the stated rates. As of June 30, 2008, theaverage interest rates on the term loans and the revolving credit facility were6.02% and 6.18%, respectively, and permitted borrowings under the revolvingfacility were $28.6 million. AGI also pays a commitment fee of 0.5% per annumon the unused amount of the revolving credit facility. The aggregate quarterlyscheduled payments on the term loans are $0.4 million. Both the revolvingcredit facility and the term loans mature on June 24, 2009. The fundsavailable under the Senior Credit Facility may be utilized for borrowings orletters of credit; however, a maximum of $12.5 million may be allocated to suchletters of credit. As of June 30, 2008, AGI had letters of credit in theaggregate amount of $6.4 million outstanding. The Senior Credit Facility issecured by virtually all of AGI’s assets and a pledge of AGI’s stock and thestock of AGI’s subsidiaries. The Company expects to replace or refinance theSenior Credit Facility well in advance of its maturity late in June 2009, andhas received a number of proposals from prospective lenders in this regard. Seethe discussion under “Liquidity and Capital Resources” under Item 2 below.

 

**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION**

 

In February 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture. The Company purchased and retired $29.9 million of the SeniorSubordinated Notes in 2006 and $17.7 million in March 2007. Interest ispayable on the remaining $152.4 million Senior Subordinated Notes twice a yearon February 15 and August 15. The Company’s present and futurerestricted subsidiaries guarantee the Senior Subordinated Notes withunconditional guarantees of payment that rank junior in right of payment totheir existing and future senior debt, but rank equal in right of payment totheir existing and future senior subordinated debt. All of the Company’ssubsidiaries have jointly and severally guaranteed the indebtedness under theSenior Subordinated Notes except for CWFR Capital Corp. Full financialstatements of the Guarantors have not been included because, pursuant to theirrespective guarantees, the Guarantors are jointly and severally liable withrespect to the Senior Subordinated Notes.

 

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** **

**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries as of and for the six months ended June 30, 2008 (inthousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 4,255      |           | $          | 3,405         |       | $                | —     |             | $          | — |   | $ | 7,660 |   |
| Accounts receivable, net                                |       | 345        |       | 158,292        |       | —        |       | (125,343         | )          | 33,294           |       |
| Inventories                                             |       | —     |       | 64,493         |       | —        |       | —           |       | 64,493           |       |
| Other current assets                                    |       | 1,940      |       | 18,839         |       | —        |       | —           |       | 20,779           |       |
| Total current assets                                    |       | 6,540      |       | 245,029        |       | —        |       | (125,343         | )          | 126,226          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 6,961      |       | 38,934         |       | —        |       | —           |       | 45,895           |       |
| Intangible assets                                       |       | 3,271      |       | 21,181         |       | —        |       | —           |       | 24,452           |       |
| Goodwill                                                |       | 67,584     |       | 76,845         |       | —        |       | —           |       | 144,429          |       |
| Investment in subsidiaries                              |       | 618,633    |       | 81,005         |       | —        |       | (699,638         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,629          |       | 81,005        |       | (40,000          | )          | 85,634           |       |
| Other assets                                            |       | 792        |       | 1,220          |       | —        |       | —           |       | 2,012            |       |
| Total assets                                            |       | $          | 743,781    |           | $          | 468,843       |       | $                | 81,005     |             | $          | (864,981 | ) | $ | 428,648 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 602        |           | $          | 26,485        |       | $                | —     |             | $          | — |   | $ | 27,087 |   |
| Accrued and other liabilities                           |       | 14,008     |       | 26,349         |       | —        |       | —           |       | 40,357           |       |
| Current portion of long-term debt                       |       | 261,623    |       | 43,302         |       | —        |       | (165,343         | )          | 139,582          |       |
| Deferred revenue and gains                              |       | 805        |       | 63,443         |       | —        |       | —           |       | 64,248           |       |
| Total current liabilities                               |       | 277,038    |       | 159,579        |       |          |       | (165,343         | )          | 271,278          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue and gains                              |       | 2,476      |       | 35,204         |       | —        |       | —           |       | 37,680           |       |
| Long-term debt                                          |       | 152,399    |       | 1,523          |       | —        |       | —           |       | 153,922          |       |
| Other long-term liabilities                             |       | 372,672    |       | (346,096       | )          | —        |       | —           |       | 26,576           |       |
| Total liabilities                                       |       | 804,585    |       | (149,790       | )          |          |       | (165,343         | )          | 489,452          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 618,633        |       | 81,005        |       | (699,638         | )          | —           |       |
| Stockholders’ deficit                              |       | (60,804    | )          | —         |       | —        |       | —           |       | (60,804          | )          |
| Total liabilities & stockholders’ deficit |       | $          | 743,781    |           | $          | 468,843       |       | $                | 81,005     |             | $          | (864,981 | ) | $ | 428,648 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                                 |       | $          | 3,558      |           | $          | 269,156       |       | $                | —     |             | $          | — |   | $ | 272,714 |   |
| Costs applicable to revenues                            |       | (7,301     | )          | (160,157       | )          | —        |       | —           |       | (167,458         | )          |
| Operating expenses                                      |       | (9,064     | )          | (77,678        | )          | —        |       | —           |       | (86,742          | )          |
| Interest expense, net                                   |       | (5,475     | )          | (6,353         | )          | —        |       | —           |       | (11,828          | )          |
| Income from investment in consolidated subsidiaries     |       | 21,495     |       | —         |       | —        |       | (21,495          | )          | —           |       |
| Other non operating income (expenses)                   |       | 3,041      |       | (3,064         | )          | —        |       | —           |       | (23              | )          |
| Income tax expense                                      |       | (162       | )          | (409           | )          | —        |       | —           |       | (571             | )          |
| Net income (loss)                                       |       | $          | 6,092      |           | $          | 21,495        |       | $                | —     |             | $          | (21,495 | ) | $ | 6,092 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                              |       | $          | (16,078    | )              | $          | 21,861        |       | $                | —     |             | $          | — |   | $ | 5,783 |   |
| Cash flows used in investing activities                 |       | (579       | )          | (10,364        | )          | —        |       | —           |       | (10,943          | )          |
| Cash flows (used in) provided by financing activities   |       | 15,575     |       | (11,112        | )          | —        |       | —           |       | 4,463            |       |
| Cash at beginning of year                               |       | 5,337      |       | 3,020          |       | —        |       | —           |       | 8,357            |       |
| Cash at end of period                                   |       | $          | 4,255      |           | $          | 3,405         |       | $                | —     |             | $          | — |   | $ | 7,660 |   |

 

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** **

**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries for the three months ended June 30, 2008 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 2,611      |           | $          | 145,118       |       | $                | —     |             | $          | — |   | 147,729 |   |
| Costs applicable to revenues                        |       | (4,275     | )          | (85,962        | )          | —        |       | —           |       | (90,237          | )          |
| Operating expenses                                  |       | (4,680     | )          | (40,627        | )          | —        |       | —           |       | (45,307          | )          |
| Interest expense, net                               |       | (2,789     | )          | (3,122         | )          | —        |       | —           |       | (5,911           | )          |
| Income from investment in consolidated subsidiaries |       | 13,715     |       | —         |       | —        |       | (13,715          | )          | —           |       |
| Other non operating income (expenses)               |       | 1,462      |       | (1,487         | )          | —        |       | —           |       | (25              | )          |
| Income tax expense                                  |       | (67        | )          | (205           | )          | —        |       | —           |       | (272             | )          |
| Net income (loss)                                   |       | $          | 5,977      |           | $          | 13,715        |       | $                | —     |             | $          | (13,715 | ) | $ | 5,977 |   |
|                                                     |            |            |            |                |            |               |            |                  |            |                  |            |  |  |  |  |  |

 

The following are summarized balance sheetstatements setting forth certain financial information concerning the GuarantorSubsidiaries as of December 31, 2007 (in thousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 5,337      |           | $          | 3,020         |       | $                | —     |             | $          | — |   | $ | 8,357 |   |
| Accounts receivable- net                                |       | 431        |       | 159,352        |       | —        |       | (126,453         | )          | 33,330           |       |
| Inventories                                             |       | —     |       | 64,209         |       | —        |       | —           |       | 64,209           |       |
| Other current assets                                    |       | 2,481      |       | 15,871         |       | —        |       | —           |       | 18,352           |       |
| Total current assets                                    |       | 8,249      |       | 242,452        |       | —        |       | (126,453         | )          | 124,248          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 7,744      |       | 36,563         |       | —        |       | —           |       | 44,307           |       |
| Intangible assets                                       |       | 3,962      |       | 19,733         |       | —        |       | —           |       | 23,695           |       |
| Goodwill                                                |       | 67,584     |       | 76,845         |       | —        |       | —           |       | 144,429          |       |
| Investment in subsidiaries                              |       | 597,138    |       | 81,005         |       | —        |       | (678,143         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,650          |       | 81,005        |       | (40,000          | )          | 85,655           |       |
| Other assets                                            |       | 759        |       | 1,220          |       | —        |       | —           |       | 1,979            |       |
| Total assets                                            |       | $          | 725,436    |           | $          | 462,468       |       | $                | 81,005     |             | $          | (844,596 | ) | $ | 424,313 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 1,380      |           | $          | 25,791        |       | $                | —     |             | $          | — |   | $ | 27,171 |   |
| Accrued and other liabilities                           |       | 13,792     |       | 30,166         |       | —        |       | —           |       | 43,958           |       |
| Current portion of long-term debt                       |       | 128,103    |       | 42,756         |       | —        |       | (166,453         | )          | 4,406            |       |
| Current portion of deferred revenue                     |       | 2,029      |       | 63,826         |       | —        |       | —           |       | 65,855           |       |
| Total current liabilities                               |       | 145,304    |       | 162,539        |       |          |       | (166,453         | )          | 141,390          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,538      |       | 35,997         |       | —        |       | —           |       | 38,535           |       |
| Long-term debt                                          |       | 279,354    |       | 3,413          |       | —        |       | —           |       | 282,767          |       |
| Other long-term liabilities                             |       | 365,150    |       | (336,619       | )          | —        |       | —           |       | 28,531           |       |
| Total liabilities                                       |       | 792,346    |       | (134,670       | )          |          |       | (166,453         | )          | 491,223          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 597,138        |       | 81,005        |       | (678,143         | )          | —           |       |
| Stockholders’ deficit                              |       | (66,910    | )          | —         |       | —        |       |             |       | (66,910          | )          |
| Total liabilities & stockholders’ deficit |       | $          | 725,436    |           | $          | 462,468       |       | $                | 81,005     |             | $          | (844,596 | ) | $ | 424,313 |   |

 

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**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the six months ended June 30,2007 (in thousands).

 
| ** **                                            | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                               |       | $          | 1,339      |           | $          | 280,332       |       | $                | —     |             | $          | — |   | $ | 281,671 |   |
| Costs applicable to revenues                          |       | (5,178     | )          | (170,732       | )          | —        |       | —           |       | (175,910         | )          |
| Operating expenses                                    |       | (10,649    | )          | (72,319        | )          | —        |       | —           |       | (82,968          | )          |
| Interest expense, net consolidated                    |       | (9,251     | )          | (2,936         | )          | —        |       | —           |       | (12,187          | )          |
| Income from investment in consolidated subsidiaries   |       | 31,435     |       | —         |       | —        |       | (31,435          | )          | —           |       |
| Other non operating income (expenses)                 |       | 2,648      |       | (3,330         | )          | —        |       | —           |       | (682             | )          |
| Income tax (expense) benefit                          |       | (237       | )          | 420            |       | —        |       | —           |       | 183              |       |
| Net income (loss)                                     |       | $          | 10,107     |           | $          | 31,435        |       | $                | —     |             | $          | (31,435 | ) | $ | 10,107 |   |
|                                                  |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                            |       | $          | (19,715    | )              | $          | 19,639        |       | $                | —     |             | $          | — |   | $ | (76 | ) |
| Cash flows used in investing activities               |       | (2,284     | )          | (9,162         | )          | —        |       | —           |       | (11,446          | )          |
| Cash flows provided (used in) by financing activities |       | 9,071      |       | (10,165        | )          | —        |       | —           |       | (1,094           |  )    |
| Cash at beginning of year                             |       | 12,609     |       | 2,397          |       | —        |       | —           |       | 15,006           |       |
| Cash at end of period                                 |       | $          | (319       | )              | $          | 2,709         |       | $                | —     |             | $          | — |   | $ | 2,390 |   |

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended June 30,2007 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 509        |           | $          | 153,355       |       | $                | —     |             | $          | — |   | $ | 153,864 |   |
| Costs applicable to revenues                        |       | (2,351     | )          | (94,279        | )          | —        |       | —           |       | (96,630          | )          |
| Operating expenses                                  |       | (4,738     | )          | (38,906        | )          | —        |       | —           |       | (43,644          | )          |
| Interest expense, net                               |       | (4,659     | )          | (1,503         | )          | —        |       | —           |       | (6,162           | )          |
| Income from investment in consolidated subsidiaries |       | 17,183     |       | —         |       | —        |       | (17,183          | )          | —           |       |
| Other non operating income (expenses)               |       | 1,737      |       | (1,693         | )          | —        |       | —           |       | 44               |       |
| Income tax (expense) benefit                        |       | (124       | )          | 209            |       | —        |       | —           |       | 85               |       |
| Net income (loss)                                   |       | $          | 7,557      |           | $          | 17,183        |       | $                | —     |             | $          | (17,183 | ) | $ | 7,557 |   |

 

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** **

**(8) INCOMETAXES**

 

Thefollowing table summarizes the activity related to unrecognized tax benefits:

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

 

TheCompany accrues interest and penalties related to unrecognized tax benefits inits income tax provision. The Company recorded interest and penalties of $0.4million related to unrecognized tax benefits during the first six months of2008 and the liability for penalties and interest was $2.0 million. This amountwas included in other long-term liabilities. The Company does not expect itsunrecognized tax benefits to change significantly over the next twelve months.

 

TheCompany and its subsidiaries file income tax returns in the U.S. and variousstates. With few exceptions, the Company is no longer subject to U.S. federal,state, and local income tax examinations by tax authorities for years before2002.

 

**(9) INTEREST RATE SWAP AGREEMENTS**

 

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

 

On March 19,2008, the Company entered into a 4.5 year interest rate swap agreementeffective April 30, 2008, with a notional amount of $35.0 million fromwhich it will receive periodic payments at the 3 month LIBOR-based variablerate (2.90% at June 30, 2008 based upon the April 30, 2008 resetdate) and make periodic payments at a fixed rate of 3.43%, with settlement andrate reset dates every January 31, April 30, July 31, and October 31.The interest rate swap was effective beginning April 30, 2008 and expireson October 31, 2012.

 

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**(9) INTEREST RATE SWAP AGREEMENTS (continued)**

 

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

 

**(10) FAIR VALUE MEASUREMENTS**

 

The Company has adopted the provisions of SFAS 157 as of January 1,2008, for financial instruments. Although the adoption of SFAS 157 did notmaterially impact its financial condition, results of operations, or cash flow,the Company is now required to provide additional disclosures as part of itsfinancial statements.

 

SFAS 157 establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value. These tiers include: Level1, defined as observable inputs such as quoted prices in active markets; Level2, defined as inputs other than quoted prices in active markets that are eitherdirectly or indirectly observable; and Level 3, defined as unobservable inputsin which little or no market data exists, therefore requiring an entity todevelop its own assumptions.

 

As of June 30, 2008, the Company holds interest rate swapcontracts that are required to be measured at fair value on a recurring basis. TheCompany’s interest rate swap contracts are not traded on a public exchange. Thefair value of these interest rate swap contracts are determined based on inputsthat are readily available in public markets or can be derived from informationavailable in publicly quoted markets. Therefore, the Company has categorizedthese swap contracts as Level 2.

 

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

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

 

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**Item 2:**

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

The following table is derived from the Company’s ConsolidatedStatements of Operations and expresses the results from operations as apercentage of revenues and reflects the net increase (decrease) between periods:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                    | ** ** | **6/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
| ** **                                 | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| REVENUES:                                  |       |                             |       |   |   |   |   |
| Membership services                        |       | 28.8                             | %          | 24.8 | % | 11.7 | % |
| Publications                               |       | 10.4                             | %          | 11.4 | % | (12.0 | )% |
| Retail                                     |       | 60.8                             | %          | 63.8 | % | (8.7 | )% |
|                                       |       | 100.0                            | %          | 100.0 | % | (4.0 | )% |
|                                       |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |   |   |
| Membership services                        |       | 18.0                             | %          | 15.8 | % | 9.2 | % |
| Publications                               |       | 7.7                              | %          | 8.0 | % | (7.1 | )% |
| Retail                                     |       | 35.4                             | %          | 39.0 | % | (12.9 | )% |
|                                       |       | 61.1                             | %          | 62.8 | % | (6.6 | )% |
|                                       |       |                             |       |   |   |   |   |
| GROSS PROFIT                               |       | 38.9                             | %          | 37.2 | % | 0.5 | % |
|                                       |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |   |   |
| Selling, general and administrative        |       | 27.3                             | %          | 25.3 | % | 3.4 | % |
| Depreciation and amortization              |       | 3.4                              | %          | 3.1 | % | 6.9 | % |
|                                       |       | 30.7                             | %          | 28.4 | % | 3.8 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 8.2                              | %          | 8.8 | % | (10.3 | )% |
|                                       |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |   |   |
| Interest income                            |       | 0.1                              | %          | 0.1 | % | (24.0 | )% |
| Interest expense                           |       | (4.1                             | )%         | (4.0 | )% | (4.6 | )% |
| Other non-operating items, net             |       | —                           |       | — |   | (156.8 | )% |
|                                       |       | (4.0                             | )%         | (3.9 | )% | (3.0 | )% |
|                                       | ** ** | ** **                       | ** ** | ** ** |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES | ** ** | 4.2                              | %          | 4.9 | % | (16.4 | )% |
|                                       |       |                             |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (0.2                             | )%         | — |   | (420.0 | )% |
|                                       |       |                             |       |   |   |   |   |
| NET INCOME                                 |       | 4.0                              | %          | 4.9 | % | (20.9 | )% |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following table is derived from the Company’s ConsolidatedStatements of Operations and expresses the results from operations as apercentage of revenues and reflects the net increase (decrease) betweenperiods:

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| ** **                                 | ** ** | **6/30/2008**                  | ** ** | **6/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                           |       |   |   |   |   |
| REVENUES:                                  |       |                           |       |   |   |   |   |
| Membership services                        |       | 28.6                           | %          | 25.6 | % | 8.3 | % |
| Publications                               |       | 15.3                           | %          | 15.0 | % | (1.3 | )% |
| Retail                                     |       | 56.1                           | %          | 59.4 | % | (8.6 | )% |
|                                       |       | 100.0                          | %          | 100.0 | % | (3.2 | )% |
|                                       |       |                           |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                           |       |   |   |   |   |
| Membership services                        |       | 18.2                           | %          | 16.3 | % | 8.0 | % |
| Publications                               |       | 10.5                           | %          | 10.0 | % | 2.0 | % |
| Retail                                     |       | 32.7                           | %          | 36.2 | % | (12.5 | )% |
|                                       |       | 61.4                           | %          | 62.5 | % | (4.8 | )% |
|                                       | ** ** | ** **                     |       |   |   |   |   |
| GROSS PROFIT                               |       | 38.6                           | %          | 37.5 | % | (0.5 | )% |
|                                       |       |                           |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                           |       |   |   |   |   |
| Selling, general and administrative        |       | 28.1                           | %          | 26.0 | % | 4.4 | % |
| Depreciation and amortization              |       | 3.7                            | %          | 3.4 | % | 5.8 | % |
|                                       |       | 31.8                           | %          | 29.4 | % | 4.5 | % |
|                                       |       |                           |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 6.8                            | %          | 8.1 | % | (18.8 | )% |
|                                       |       |                           |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                           |       |   |   |   |   |
| Interest income                            |       | 0.1                            | %          | 0.1 | % | (21.0 | )% |
| Interest expense                           |       | (4.5                           | )%         | (4.4 | )% | (3.5 | )% |
| Debt extinguishment expense                |       | —                         |       | (0.3 | )% | (100.0 | )% |
| Other non-operating items, net             |       | —                         |       | — |   | (124.7 | )% |
|                                       |       | (4.4                           | )%         | (4.6 | )% | (7.9 | )% |
|                                       | ** ** | ** **                     | ** ** | ** ** |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES | ** ** | 2.4                            | %          | 3.5 | % | (32.9 | )% |
|                                       |       |                           |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (0.2                           | )%         | 0.1 | % | (412.0 | )% |
|                                       |       |                           |       |   |   |   |   |
| NET INCOME                                 |       | 2.2                            | %          | 3.6 | % | (39.7 | )% |

 

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** **

**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended June 30, 2008Compared With Three Months Ended June 30, 2007**

 

*Revenues*

 

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

 

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

 

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

 

Retail revenues ofapproximately $89.7 million decreased $8.5 million, or 8.7%, from thecomparable period in 2007.  Storemerchandise sales decreased approximately $7.3 million over the second quarterof 2007 due to a same store sales decrease of $9.8 million, or 15.0%, comparedto a 5.0% decrease in same store sales for the second quarter of 2007,partially offset by a $2.5 million revenue increase from the opening of 22 newstores over the past eighteen months. Same store sale calculations for a given period include only thosestores that were open both at the end of that period and at the beginning ofthe preceding fiscal year.  Further,supplies and other sales increased $2.1 million, and mail order sales decreased$3.3 million.

 

*CostsApplicable to Revenues*

 

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

 

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

 

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

 

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

 

*OperatingExpenses*

 

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

 

Depreciationand amortization expense of $5.0 million increased $0.3 million from the prioryear primarily due to increased depreciation from the retail store openings andincreased amortization of intangible assets associated with the 2008 purchaseof consumer events.

 

*Incomefrom Operations*

 

Incomefrom operations for the second quarter of 2008 totaling $12.2 million decreased$1.4 million compared to the second quarter of 2007.  This decrease was primarily due to increasedoperating expenses of $1.6 million and reduced gross profit for publicationsand retail operations of $1.2 million and $0.8 million, respectively, partiallyoffset by increased gross profit for the membership services operations of $2.2million.

 

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*Non-OperatingItems*

 

Non-operatingitems of approximately $6.0 million for the second quarter of 2008 decreased$0.2 million compared to the second quarter of 2007 due to a $0.3 milliondecrease in net interest expense resulting from reduced interest ratespartially offset by a $0.1 million loss on sale of retail assets.

 

*Incomebefore Income Taxes*

 

Incomebefore income taxes for the second quarter of 2008 was $6.2 million, or $1.2million lower than the second quarter of 2007. This decrease was attributable to the $1.4 million decrease in incomefrom operations and $0.2 million of reduced non-operating items mentionedabove.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.3 million for thesecond quarter of 2008, compared to a $0.1 million tax benefit for the secondquarter of 2007.

 

# *Net Income*

# * *

Netincome in the second quarter of 2008 was $6.0 million compared to net income of$7.6 million for the same period in 2007 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

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

 

Membershipservices segment profit of approximately $13.2 million for the second quarterof 2008 increased $0.4 million, or 3.3%, from the comparable period in2007.  This increase was largelyattributable to a $0.9 million increase in profit from the extended vehiclewarranty programs, a $0.6 million increase in segment profit from Coast Cluband Golf Club, associated with reduced marketing expenses, and a $0.5 millionincrease in profit from health and life insurance products.  These increases were partially offset by a$1.3 million decrease in profit from emergency road service products primarilydue to reduced intercompany interest income, and a $0.3 million of reduced feeincome recognized on vehicle insurance products.

 

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

 

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Retail segmentprofit decreased $2.3 million, or 129.1% from the second quarter of 2007 to aloss of $0.5 million for the second quarter of 2008.  This increase in segment loss resulted primarily from a $1.5 million increase in selling, general andadministrative expenses primarily related to the increase in new stores, $0.5million decrease in gross profit margin, a $0.2 million increase indepreciation expense and a $0.1 million increase in interest expense.

 

**SixMonths Ended June 30, 2008Compared With Six Months Ended June 30, 2007**

 

*Revenues*

 

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

 

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

 

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

 

Retail revenues ofapproximately $152.9 million decreased $14.4 million, or 8.6%, from thecomparable period in 2007.  Store merchandisesales decreased approximately $12.7 million over the first six months of 2007due to a same store sales decrease of $18.3 million, or 15.7%, compared to a3.3% decrease in same store sales for the first six months of 2007, partiallyoffset by a $5.6 million revenue increase from the opening of 22 new storesover the past eighteen months.  Samestore sale calculations for a given period include only those stores that wereopen both at the end of that period and at the

 

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beginning of thepreceding fiscal year.  Supplies andother sales increased $3.0 million, and mail order sales decreased $4.7million.

 

*CostsApplicable to Revenues*

 

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

 

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

 

Publicationcosts and expenses of approximately $28.6 million for the first six months of2008 increased $0.6 million, or 2.0%, from the comparable period in 2007.  This increase was attributable to $1.3million of additional costs related primarily to the consumer shows purchased overthe past eighteen months and $0.3 million of additional campground atlas costsassociated with increased revenue, partially offset by $0.3 million of reducedproduction costs for the RV-related publications, $0.3 million of reduced costsrelated to the annual directories, and $0.4 million of reduced costs primarilyrelating to issue timing of *Touring Rider*magazine.

 

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

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $76.7 million for thefirst six months of 2008 increased $3.2 million compared to the first sixmonths of 2007.  This increase was due toan increase in retail selling and general and administrative expenses ofapproximately $4.2 million primarily consisting of increases in labor and real propertyexpenses primarily due to new store openings, and a $0.3 million increaserelated to the consumer show acquisitions. These increases were partially offset by a $0.9 million reduction inarbitration expense recorded in 2007 in connection with our asserted claim to aright of first refusal in connection with the sale of General Motors AcceptanceCorporation, the insurance provider for the RV vehicle insurance offered by ourMembership Services segment, which claim was rejected by the arbitration panel,and a $0.4 million reduction in deferred executive compensation expense.

 

Depreciationand amortization expense of $10.0 million increased $0.6 million from the prioryear primarily due to increased depreciation from the retail store openings and

 

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increasedamortization of intangible assets associated with the 2008 purchase of consumerevents.

 

*Incomefrom Operations*

 

Incomefrom operations for the first six months of 2008 totaling $18.5 milliondecreased $4.3 million compared to the first six months of 2007.  This decrease was primarily due to increasedoperating expenses of $3.8 million and reduced gross profit for retail andpublications operations of $1.7 million and $1.1 million, respectively,partially offset by increased gross profit for the membership services operationsof $2.3 million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $11.8 million for the first six months of 2008 decreased$1.0 million compared to the first six months of 2007 due to $0.8 million ofdebt extinguishment expense associated with the retirement of SeniorSubordinated Notes in 2007, and a $0.3 million decrease in net interestexpense, partially offset by a $0.1 million loss on sale of retail assets.

 

*Incomebefore Income Taxes*

 

Incomebefore income taxes for the first six months of 2008 was $6.7 million, or $3.3million lower than the first six months of 2007.  This decrease was attributable to the $4.3million decrease in income from operations and $1.0 million of decreasednon-operating items mentioned above.

 

*IncomeTax Expense*

 

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

 

# *Net Income*

# * *

Netincome in the first six months of 2008 was $6.1 million compared to net incomeof $10.1 million for the same period in 2007 mainly due to the reasonsdiscussed above.

 

*SegmentProfit (Loss)*

 

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

 

Membershipservices segment profit of approximately $23.2 million for the first six monthsof 2008 decreased $0.7 million, or 3.0%, from the comparable period in2007.  This decrease was largelyattributable to a $2.3 million decrease in profit from emergency road serviceproducts primarily due to reduced intercompany interest income, a $0.6 milliondecrease in profit from vehicle insurance products, a $0.6 million increase inmarketing related to new club and new product development and a $0.5 million increasein

 

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miscellaneousonline development and overhead expense, partially offset by a $1.4 millionincrease in profit from the extended vehicle warranty programs, a $1.0 millionincrease in profit from health and life insurance products, and a $0.9 increasein segment profit for Coast Club and Golf Club due to decreased marketing,depreciation and amortization expense.

 

Publicationsegment profit of $6.8 million for the first six months of 2008 decreased $2.0million, or 23.2%, from the comparable period in 2007.  This decrease was largely attributed to a$1.1 million decrease in segment profit related to our outdoor powersportsmagazine group, primarily relating to reduced advertising ad revenue, a $0.6million decrease in profit in the RV-related publications, and a $0.3 milliondecrease in segment profit from annual directories*.*

 

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

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany has historically operated with a working capital deficit.  The working capital deficit as of June 30,2008 and December 31, 2007 was $145.0 million and $17.1 million,respectively.  The primary reason for theincrease in working capital deficit for 2008 is the classification of thedebt associated with the Amended and Restated Credit Agreement totaling $136.3million as a current liability, since the credit facility matures June 24,2009.  Deferred revenue and gains reported undercurrent liabilities was $64.2 million and $65.9 million as of June 30,2008 and December 31, 2007, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  The Company uses netproceeds from this deferred membership revenue to lower its long-termborrowings.  The Company anticipates thatit will be able to refinance or replace the existing credit facility before itsmaturity on June 24, 2009 and, assuming such refinancing, will havesufficient funds from its operations together with available borrowing underthe replacement credit facility to meet all of the Company’s debt service,capital requirements and working capital needs over the next twelve months.

 

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*Contractual Obligations andCommercial Commitments*

 

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

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Total**                                 | ** ** | **Balance of  2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  2012** | ** ** | **Thereafter** | ** ** |
|                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |       | $                                         | 356,808    |   | $ | 12,296 |   | $ | 171,454 |   | $ | 173,058 |   | $ | — |   |
| Operating lease obligations        |       | 206,696                                   |       | 10,533 |   | 39,867 |   | 34,588 |   | 121,708 |   |
| Deferred compensation              |       | 1,605                                     |       | 31 |   | 1,461 |   | 113 |   | — |   |
| Standby letters of credit          |       | 6,406                                     |       | 5,906 |   | 500 |   | — |   | — |   |
| Grand total                        |       | $                                         | 571,515    |   | $ | 28,766 |   | $ | 213,282 |   | $ | 207,759 |   | $ | 121,708 |   |

 

On June 24,2003, the Company entered into an Amended and Restated Credit Agreement and aSenior Secured Floating Rate Note Purchase Agreement (as amended, the “SeniorCredit Facility”).  The Senior CreditFacility provides for a revolving credit facility of $35.0 million and termloans in the aggregate of $140.0 million. As of June 30, 2008, $8.5 million was outstanding under therevolving credit facility and $127.8 million was outstanding under the termloans.  Reborrowings under the term loansare not permitted.  The interest onborrowings under the Senior Credit Facility was at variable rates based on theratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 2.50% over the stated rates. As of June 30, 2008, the average interest rates on the term loansand the revolving credit facility were 6.02% and 6.18%, respectively, andpermitted borrowings under the revolving facility were $28.6 million.  The Company also pays a commitment fee of0.5% per annum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $0.4 million.  Boththe revolving credit facility and the term loans mature on June 24,2009.  The funds available under theSenior Credit Facility may be utilized for borrowings or letters of credit;however, a maximum of $12.5 million may be allocated to such letters ofcredit.  As of June 30, 2008, theCompany had letters of credit in the aggregate amount of $6.4 million outstanding.  The Senior Credit Facility is secured byvirtually all of the Company’s assets and a pledge of the Company’s stock andthe stock of the Company’s subsidiaries.

 

In February 2004,the Company issued $200.0 million aggregate principal amount of 9% SeniorSubordinated Notes due 2012 (“Senior Subordinated Notes”).  The Company completed a registered exchangeof the Senior Subordinated Notes under the Securities Act of 1933 in August 2004.

 

On March 3,2006, AGI amended its Senior Credit Facility to revise the definition ofConsolidated Fixed Charges Ratio and Permitted Tax Distributions.  This amendment allows the Company todistribute taxes to its ultimate parent based on its stand-alone tax obligationrather than the tax obligation of its parent, AGHI, until such time that AGHIpays interest on its 10 7/8% Senior Notes in cash instead of by the issuance ofadditional

 

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notes and AGImakes a distribution to AGHI for purposes of paying that cash interest.  For the six months ended June 30, 2008and 2007, the Company distributed $1.0 million and $3.7 million, respectively,in the form of dividends to AGHI to fund the Company’s tax obligations.  Further, the Company amended the SeniorCredit Facility’s covenant restrictions with affiliates to permit a jointventure arrangement between Camping World and FreedomRoads Holding Company, LLC(“FreedomRoads”), an affiliate of the Company.

 

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

 

On March 8,2007, the Company purchased $17.7 million of the Senior SubordinatedNotes.  The Company funded the purchasethrough the issuance of the $25.0 million in additional incremental term loansas permitted under the February 27, 2007 amendment to the Senior CreditFacility.  The balance of the $25.0million issued was used to pay down the Company’s revolving credit facility by$6.5 million and to pay associated loan fees and transaction expenses.  The terms on the additional incremental loansare consistent with the remaining term loan outstanding under the Senior CreditFacility.  As of June 30, 2008,$152.4 million of Senior Subordinated Notes remain outstanding.

 

The AGI Indenturepursuant to which the AGI Senior Subordinated Notes were issued and the SeniorCredit Facility contain certain restrictive covenants relating to, but notlimited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  The Company was in compliance with all debtcovenants at June 30, 2008.

 

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

 

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On March 24,2005 in a private placement, AGHI, the Company’s parent, issued $88.2 millionprincipal amount of the 10-7/8% senior notes due February 15, 2012 (the “AGHINotes”).  Interest on the AGHI notes ispayable semi-annually on February 15 and August 15.  For interest payments on and prior to February 15,2008, AGHI had the election to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date is March 15, 2010. AGI has not paid any dividends to AGHI to fund payment of interest onthe AGHI Notes and AGHI made the interest payments due on August 15, 2005,February 15, 2006, August 15, 2006, February 15, 2007, and February 15,2008 through the issuance of additional notes. AGHI paid the interest on the AGHI Notes due August 15, 2007 of$5.9 million from proceeds of a $5.9 million contribution made by AGHI’sparent, AGHC.

 

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

 

On April 16,2007, the Company entered into a stock purchase agreement with FreedomRoads, anentity under common ownership with the Company’s ultimate parent corporation,pursuant to which the Company agreed, subject to satisfaction of certainconditions, to sell all of the outstanding stock of its wholly-owned subsidiaryCamping World, Inc. (“Camping World”) to FreedomRoads for $175.8 millionsubject to certain adjustments. The transactions contemplated by the purchaseagreement were not consummated within the time periods contemplated by thepurchase agreement because the uncertainty in the capital markets preventedFreedomRoads from achieving a desirable capital structure to effect theacquisition.  Although Freedom Roads andthe Company may enter into a new purchase agreement on substantially the sameterms if the capital markets become more favorable, no assurance can beprovided that the appropriate financing will be obtained, the purchase pricewill not change, or such new agreement will be made.

 

On October 15,2007, the Company entered into a five-year interest rate swap agreement with anotional amount of $100.0 million from which it will receive periodic paymentsat the 3 month LIBOR-based variable rate (2.90% at June 30, 2008 basedupon the April 30, 2008 reset date) and make periodic payments at a fixedrate of 5.135%, with settlement and rate reset dates every January 31, April 30,July 31, and October 31.  On March 19,2008, the Company entered into an interest rate swap agreement with a notionalamount of $35.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (2.90% at June 30, 2008 based upon the April 30,2008 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The fair value ofthe swap contracts were zero at inception. The interest rate swap was effective beginning April 30, 2008 andexpires on October 31, 2012.  TheCompany entered into the interest rate swap contracts to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap contracts are designated as a cash flow hedge of thevariable rate interest payments due on $135 million of the term loans and therevolving credit facility issued June 24, 2003, and accordingly, gains and

 

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losses on the fairvalue of the interest rate swap agreements are reported in accumulated othercomprehensive loss and reclassified to earnings in the same period in which thehedged interest payment affects earnings. The interest rate swap agreements expire on October 31, 2012.  The fair value of the swap contracts areincluded in other accrued liabilities and totaled $3.7 million and $4.7 millionas of June 30, 2008 and December 31, 2007, respectively.

 

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

 

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

 

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

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives,bad debts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources.  Actualresults may differ from these estimates under different assumptions orconditions.

 

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

 

*Revenue Recognition*

 

Merchandise revenue is recognized when products are sold in the retailstores, shipped for mail and Internet orders, or when services are provided tocustomers. Publication advertising and newsstand sales, net of estimatedprovision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Advances onthird party credit card fee revenues are deferred and recognized basedprimarily on a percentage of credit card receivables held by thirdparties.  Membership revenue is generatedfrom annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.  Revenue and related expensesfor consumer shows are recognized when the show occurs.

 

*Accounts Receivable*

 

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

 

*Inventory*

 

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

 

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*Long-LivedAssets*

 

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

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  The Companyassesses the fair value of the assets based on the future cash flow the assetsare expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When an impairmentis identified, the Company reduces the carrying amount of the asset to itsestimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.  The Company determined there were noindicators of impairment of long-lived assets as of December 31, 2007 or June 30,2008.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible assets were necessary.  Thefinite-lived purchased intangible assets consist of membership customer lists,resort and golf course agreements, non-compete and deferred consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 4 years, 15 years and 7 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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The fair value ofthe Company’s reporting units is annually determined using a combination of theincome approach and the market approach. Under the income approach, the fair value of a reporting unit iscalculated based on the present value of estimated future cash flows.  Future cash flows are estimated by theCompany under the market approach, fair value is estimated based on marketmultiples of revenue or earnings for comparable companies.

 

Future goodwillimpairment tests could result in a charge to earnings.  The Company will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

*AccumulatedOther Comprehensive Loss*

 

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

 

*Derivative Financial Instruments**–*The Company accounts for derivative instruments andhedging activities in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”).  All derivatives are recognized on the balancesheet at their fair value.  On the datethat the Company enters into a derivative contract, management formallydocuments all relationships between hedging instruments and hedged items, aswell as risk management objectives and strategies for undertaking various hedgetransactions.

 

Changes in the fair value of a derivativethat is highly effective and that is designated and qualifies as a cash flowhedge (a “swap”), to the extent that the hedge is effective, are recorded inaccumulated other comprehensive loss, until earnings are affected by thevariability of cash flows of the hedged transaction.  The Company measures effectiveness of theswap at each quarter end using the Hypothetical Derivative Method.  Under this method, hedge effectiveness ismeasured based on a comparison of the change in fair value of the actual swapdesignated as the hedging instrument and the change in fair value of thehypothetical swap which would have the terms that identically match thecritical terms of the hedged cash flows from the anticipated debtissuance.  The amount of ineffectiveness,if any, recorded in earnings would be equal to the excess of the cumulativechange in the fair value of the swap over the cumulative change in the fairvalue of the plain vanilla swap lock, as defined in the accountingliterature.  Once a swap is settled, theeffective portion is amortized over the estimated life of the hedge item.

 

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

 

*FairValue Measurements*

 

As discussed in Note 2 to the unauditedcondensed consolidated financial statements, the Company adopted the provisionsof Statement 157 effective January 1, 2008.  The Company has determined that it utilizesobservable (Level 2) inputs in determining the 

 

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fair value of its interest rate swapcontracts which totaled $3.7 million at June 30, 2008.

 

*IncomeTaxes*

 

Significant judgment is required in determining the Company’s taxprovision and in evaluating its tax positions. The Company establishes accruals for certain tax contingencies when,despite the belief that the Company’s tax return positions are fully supported,the Company believes that certain positions may be challenged and that theCompany’s positions may not be fully sustained. The tax contingency accruals are adjusted in light of changing facts andcircumstances, such as the progress of tax audits, case law and emerginglegislation.  The Company’s tax provisionincludes the impact of tax contingency accruals and changes to the accruals,including related interest and penalties, as considered appropriate bymanagement.

 

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

 

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

 

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

 

*InterestRate Sensitivity Analysis*

 

At June 30,2008, we had debt totaling $293.5 million, comprised of $1.3 million ofvariable rate debt and $292.2 million of fixed rate debt, comprised of $135.0million of debt fixed through the interest rate swap agreements, $152.4 millionof Senior Notes and $4.8 million of purchase debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorableimpact of less than $0.1 million.  Thenew interest rate swap agreement dated March 19, 2008 to fix an additional$35.0 million of debt was effective in April 30, 2008.

 

*CreditRisk*

 

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

 

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**ITEM 4: CONTROLS AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-15e under the SecuritiesExchange Act of 1934, as amended.  Basedupon that evaluation, the President and Chief Executive Officer along with theSenior Vice President and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the periodic SEC filings.  Management determined that, as of June 30,2008, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A:RISK FACTORS**

 

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

 

**ITEM 5: OTHER INFORMATION**

 

None.

 

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**SIGNATURES:**

 

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

 

 
| ** **                | **AFFINITY GROUP, INC.**  |
|---------------------------|---------------------------|
|                      |                      |
|                      |                      |
|                      | /s/ Thomas F. Wolfe       |
| Date: August 8, 2008 | Thomas F. Wolfe           |
|                      | Senior Vice President and |
|                      | Chief Financial Officer   |

 

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