**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

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

###### ** **

**FORM 10-Q**

** **

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

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

 

**AFFINITY GROUP, INC.**

(Exact name of registrant as specified in itscharter)

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

 

SECURITIES REGISTERED PURSUANT TOSECTION 12 (b) OF THE ACT:  **NONE**

SECURITIES REGISTERED PURSUANT TOSECTION 12 (g) OF THE ACT:

**9% Senior Subordinated Notes Due 2012**

 

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

 

YES    o     NO  **ý**

 

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

 

YES    o     NO  **ý**

 

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

 
| **Class**                     | ** ** | **Outstanding as of  August 5, 2004** |
|-------------------------------|------------|--------------------------------------------|
| Common Stock, $.001 par value |       | 2,000                                      |

 

**DOCUMENTS INCORPORATED BY REFERENCE:  None**

 

 

----

 

**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**INDEX**

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

 

----

 

ITEM 1:

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

(In Thousands, except share amounts)

 
| ** **                                                                                      | ** ** | **6/30/04**     | ** ** | **12/31/03**                   | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|--------------------------------|------------|
| ** **                                                                                      | ** ** | **(unaudited)** | ** ** | **(restated—****Note 1)** | ** ** |
| **ASSETS**                                                                                      |       |            |       |                           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |                           |       |
| Cash and cash equivalents                                                                       |       | $               | 23,172     |                           | $          | 6,115 |   |
| Accounts receivable, less allowance for  doubtful accounts of $1,230 in 2004 and $1,039 in 2003 |       | 23,699          |       | 25,394                         |       |
| Inventories                                                                                     |       | 46,505          |       | 36,839                         |       |
| Prepaid expenses and other assets                                                               |       | 13,975          |       | 10,588                         |       |
| Deferred tax assets, net                                                                        |       | 4,661           |       | 4,661                          |       |
| Total current assets                                                                            |       | 112,012         |       | 83,597                         |       |
|                                                                                            |       |            |       |                           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 28,817          |       | 27,214                         |       |
| NOTES FROM AFFILIATES                                                                           |       | 4,766           |       | 9,103                          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 28,086          |       | 25,197                         |       |
| GOODWILL, net                                                                                   |       | 150,070         |       | 150,070                        |       |
| DEFERRED TAX ASSETS, net                                                                        |       | 6,490           |       | 5,306                          |       |
| OTHER ASSETS                                                                                    |       | 2,287           |       | 2,375                          |       |
| Total assets                                                                                    |       | $               | 332,528    |                           | $          | 302,862 |   |
|                                                                                            |       |            |       |                           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                 |       |            |       |                           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |                           |       |
| Accounts payable                                                                                |       | $               | 18,231     |                           | $          | 12,711 |   |
| Accrued interest                                                                                |       | 6,894           |       | 4,099                          |       |
| Accrued income taxes                                                                            |       | 5,119           |       | 2,883                          |       |
| Accrued liabilities                                                                             |       | 32,589          |       | 30,887                         |       |
| Deferred revenues and gains                                                                     |       | 59,884          |       | 57,309                         |       |
| Current portion of long-term debt                                                               |       | 1,478           |       | 1,478                          |       |
| Total current liabilities                                                                       |       | 124,195         |       | 109,367                        |       |
|                                                                                            |       |            |       |                           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 40,782          |       | 41,101                         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 312,949         |       | 238,649                        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 2,622           |       | 2,650                          |       |
|                                                                                            |       | 480,548         |       | 391,767                        |       |
|                                                                                            |       |            |       |                           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |                           |       |
|                                                                                            |       |            |       |                           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |                           |       |
| Preferred stock, $.001 par value, 1,000  shares authorized, none issued or outstanding          |       | —          |       | —                         |       |
| Common stock, $.001 par value, 2,000 shares  authorized, 2,000 shares issued and outstanding    |       | 1               |       | 1                              |       |
| Accumulated deficit                                                                             |       | (148,021        | )          | (88,906                        | )          |
| Total stockholder’s deficit                                                                |       | (148,020        | )          | (88,905                        | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 332,528    |                           | $          | 302,862 |   |

 

See notes to consolidated financial statements.

 

1

----

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME  (See Note 1)

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **6/30/2004**          | ** ** | **6/30/2003** | ** ** |
| REVENUES:                                  |       |                   |       |   |   |
| Membership services                        |       | $                      | 36,022     |   | $ | 35,399 |   |
| Publications                               |       | 16,583                 |       | 14,298 |   |
| Retail                                     |       | 75,039                 |       | 65,961 |   |
|                                       |       | 127,644                |       | 115,658 |   |
|                                       |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                   |       |   |   |
| Membership services                        |       | 24,342                 |       | 22,146 |   |
| Publications                               |       | 11,109                 |       | 10,086 |   |
| Retail                                     |       | 44,728                 |       | 38,765 |   |
|                                       |       | 80,179                 |       | 70,997 |   |
|                                       |       |                   |       |   |   |
| GROSS PROFIT                               |       | 47,465                 |       | 44,661 |   |
|                                       |       |                   |       |   |   |
| OPERATING EXPENSES:                        |       |                   |       |   |   |
| Selling, general and administrative        |       | 29,564                 |       | 27,104 |   |
| Restructuring charge                       |       | —                 |       | 302 |   |
| Depreciation and amortization              |       | 3,035                  |       | 2,252 |   |
|                                       |       | 32,599                 |       | 29,658 |   |
|                                       |       |                   |       |   |   |
| INCOME FROM OPERATIONS                     |       | 14,866                 |       | 15,003 |   |
|                                       |       |                   |       |   |   |
| NON-OPERATING ITEMS:                       |       |                   |       |   |   |
| Interest expense                           |       | (6,200                 | )          | (4,796 | ) |
| Interest income                            |       | 178                    |       | 194 |   |
| Debt extinguishment expense                |       | (419                   | )          | (1,709 | ) |
| Other non-operating items, net             |       | 40                     |       | 77 |   |
|                                       |       | (6,401                 | )          | (6,234 | ) |
|                                       |       |                   |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 8,465                  |       | 8,769 |   |
|                                       |       |                   |       |   |   |
| INCOME TAX EXPENSE                         |       | (3,040                 | )          | (3,225 | ) |
|                                       |       |                   |       |   |   |
| NET INCOME                                 |       | $                      | 5,425      |   | $ | 5,544 |   |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF INCOME  (See Note 1)

(In Thousands)

(Unaudited)

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **6/30/2004**        | ** ** | **6/30/2003** | ** ** |
| REVENUES:                                  |       |                 |       |   |   |
| Membership services                        |       | $                    | 67,541     |   | $ | 65,200 |   |
| Publications                               |       | 33,812               |       | 29,428 |   |
| Retail                                     |       | 127,573              |       | 113,509 |   |
|                                       |       | 228,926              |       | 208,137 |   |
|                                       |       |                 |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                 |       |   |   |
| Membership services                        |       | 45,066               |       | 39,468 |   |
| Publications                               |       | 23,111               |       | 20,490 |   |
| Retail                                     |       | 75,538               |       | 67,215 |   |
|                                       |       | 143,715              |       | 127,173 |   |
|                                       |       |                 |       |   |   |
| GROSS PROFIT                               |       | 85,211               |       | 80,964 |   |
|                                       |       |                 |       |   |   |
| OPERATING EXPENSES:                        |       |                 |       |   |   |
| Selling, general and administrative        |       | 54,749               |       | 51,362 |   |
| Restructuring charge                       |       | —               |       | 302 |   |
| Depreciation and amortization              |       | 6,072                |       | 4,852 |   |
|                                       |       | 60,821               |       | 56,516 |   |
|                                       |       |                 |       |   |   |
| INCOME FROM OPERATIONS                     |       | 24,390               |       | 24,448 |   |
|                                       |       |                 |       |   |   |
| NON-OPERATING ITEMS:                       |       |                 |       |   |   |
| Interest expense                           |       | (11,624              | )          | (9,460 | ) |
| Interest income                            |       | 355                  |       | 380 |   |
| Debt extinguishment expense                |       | (5,035               | )          | (1,709 | ) |
| Other non-operating items, net             |       | 87                   |       | 144 |   |
|                                       |       | (16,217              | )          | (10,645 | ) |
|                                       |       |                 |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 8,173                |       | 13,803 |   |
|                                       |       |                 |       |   |   |
| INCOME TAX EXPENSE                         |       | (2,930               | )          | (5,160 | ) |
|                                       |       |                 |       |   |   |
| NET INCOME                                 |       | $                    | 5,243      |   | $ | 8,643 |   |

 

See notes to consolidated financial statements.

 

3

----

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS  (See Note 1)

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **SIX MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **6/30/2004**        | ** ** | **6/30/2003** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                              |       |                 |       |   |   |
| Net income                                                                         |       | $                    | 5,243      |   | $ | 8,643 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                 |       |   |   |
| Debt extinguishment expense                                                        |       | 5,035                |       | 1,709 |   |
| Deferred tax benefit                                                               |       | (1,184               | )          | (384 | ) |
| Depreciation                                                                       |       | 3,440                |       | 3,048 |   |
| Amortization                                                                       |       | 2,632                |       | 1,804 |   |
| Provision for losses on accounts receivable                                        |       | 1,109                |       | 916 |   |
| Deferred compensation                                                              |       | —               |       | 1,200 |   |
| Gain on sale of property and equipment                                             |       | (1                   | )          | (30 | ) |
| Changes in operating assets and  liabilities:                                      |       |                 |       |   |   |
| Accounts receivable                                                                |       | 586                  |       | 1,768 |   |
| Inventories                                                                        |       | (9,666               | )          | (7,942 | ) |
| Prepaid expenses and other assets                                                  |       | (3,299               | )          | (2,817 | ) |
| Accounts payable                                                                   |       | 5,520                |       | 10,125 |   |
| Accrued and other liabilities                                                      |       | 6,705                |       | (2,323 | ) |
| Deferred revenues and gains                                                        |       | 2,256                |       | 4,828 |   |
| Net cash provided by operating activities                                          |       | 18,376               |       | 20,545 |   |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                              |       |                 |       |   |   |
| Capital expenditures                                                               |       | (5,043               | )          | (5,775 | ) |
| Net proceeds from sale of property and  equipment                                  |       | 1                    |       | 55 |   |
| Increase in intangible assets                                                      |       | (10                  | )          | (36 | ) |
| Loans receivable                                                                   |       | (22                  | )          | (97 | ) |
| Net cash used in investing activities                                              |       | (5,074               | )          | (5,853 | ) |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                              |       |                 |       |   |   |
| Dividends paid                                                                     |       | (60,000              | )          | (13,700 | ) |
| Borrowings on long-term debt                                                       |       | 200,000              |       | 151,975 |   |
| Payment of debt issue costs                                                        |       | (7,157               | )          | (3,947 | ) |
| Principal payments of long-term debt                                               |       | (129,088             | )          | (135,288 | ) |
| Net cash provided by (used in) financing  activities                               |       | 3,755                |       | (960 | ) |
|                                                                               |       |                 |       |   |   |
| NET INCREASE IN CASH AND CASH EQUIVALENTS                                          |       | 17,057               |       | 13,732 |   |
|                                                                               |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF  PERIOD                                  |       | 6,115                |       | 1,730 |   |
|                                                                               |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                         |       | $                    | 23,172     |   | $ | 15,462 |   |

 

See notes to consolidated financial statements.

 

4

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**AFFINITY GROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASIS OF PRESENTATION**

 

The financial statementsincluded herein include the accounts of Affinity Group, Inc. (“AGI”) and itssubsidiaries (collectively the “Company”) without audit, in accordance withaccounting principles generally accepted in the United States, and pursuant tothe rules and regulations of the Securities and Exchange Commission.  Prior to April 27, 2004, AGI was awholly-owned subsidiary of Affinity Group Holding, Inc. (“AGHI”) and AGHI was awholly-owned subsidiary of AGI Holding Corp. (“AGHC”), a privately-ownedcorporation.  On April 27, 2004,AGHI was merged into AGI, with AGI being the surviving entity after themerger.  The merger was accounted for asa combination of entities under common control using historical costs.  All periods have been restated to reflect thecombined financial position and results of operations of AGI and AGHI, prior tothe April 27, 2004 merger.  Theseinterim consolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes for the year endedDecember 31, 2003 included in Amendment No. 3 to Registration Statement onForm S-4 filed June 22, 2004. Certain balances in the prior year consolidated financial statements werereclassified to conform to the current year presentation.  In the opinion of management of the Company,these consolidated financial statements contain all adjustments of a normalrecurring nature necessary to present fairly the financial position, results ofoperations and cash flows of the Company for the interim periods presented.

 

**(2) RECENT ACCOUNTING PRONOUNCEMENTS**

 

*Consolidation of Variable Interest Entities –* In January 2003, the FinancialAccounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities, an interpretation of ARB51.”  The primary objectives of thisinterpretation were to provide guidance on the identification of entities forwhich control is achieved through means other than through voting rights(“variable interest entities”) and how to determine when and which businessenterprise (the “primary beneficiary”) should consolidate the variable interestentity.  This new model for consolidationapplies to an entity in which either (i) the equity investors (if any) do nothave a controlling financial interest; or (ii) the equity investment at risk isinsufficient to finance that entity’s activities without receiving additionalsubordinated financial support from other parties.  In addition, FIN 46 requires that the primarybeneficiary, as well as all other enterprises with a significant variableinterest in a variable interest entity, make additional disclosures.

 

5

----

 

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

 

(i)                                     *Special purpose entities (“SPEs”)and Non-SPE’s created prior to January 1, 2004.*  TheCompany must apply the provisions of FIN 46-R at the beginning of the firstinterim or annual reporting period beginning after December 15, 2004.

 

(ii)                                  *All entities, regardless ofwhether a SPE, that were created subsequent to December 31, 2003. *The provisions of FIN 46 were applicable for variable interests inentities obtained after December 31, 2003. The Company adopted FIN 46-R at March 31, 2004.

 

The adoption of the provisions applicable toSPEs and all other variable interests obtained after December 31, 2003 didnot have a material impact on the Company’s financial statements.  The Company is currently evaluating theimpact of adopting FIN 46-R applicable to *SPE’s and**Non-SPEs created prior to January 1, 2004*.

 

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

 

The Company’s threeprincipal lines of business are Membership Services, Publications, andRetail.  The Membership Services segmentoperates the Good Sam Club, Coast to Coast Club, and Camping World’sPresident’s Club for RV owners, campers and outdoor vacationers, and the GolfCard Club for golf enthusiasts.  ThePublications segment publishes a variety of publications for selected marketsin the recreation and leisure industry, including general circulationperiodicals, club magazines, directories and industry trade magazines.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through retail supercentersand mail order catalogs.  The Companyevaluates performance based on profit or loss from operations before incometaxes.

 

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

 

6

----

 

The Company does notallocate income taxes or unusual items to segments.  Financial information by reportable businesssegment is summarized as follows (in thousands):

 
| ** **                           | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|--------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **QUARTER ENDED JUNE 30, 2004** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers     |       | $                        | 36,022     |             | $          | 16,583     |       | $                | 75,039     |   | $ | 127,644 |   |
| Segment operating profit             |       | 9,787                    |       | 4,250            |       | 3,788      |       | 17,825           |       |
|                                 |       |                     |       |             |       |       |       |             |       |
| **QUARTER ENDED JUNE 30, 2003** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers     |       | $                        | 35,399     |             | $          | 14,298     |       | $                | 65,961     |   | $ | 115,658 |   |
| Segment operating profit             |       | 11,455                   |       | 3,322            |       | 3,906      |       | 18,683           |       |

 
| ** **                               | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **SIX MONTHS ENDED JUNE 30,  2004** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers         |       | $                        | 67,541     |             | $          | 33,812     |       | $                | 127,573    |   | $ | 228,926 |   |
| Segment operating profit                 |       | 18,790                   |       | 8,165            |       | 2,623      |       | 29,578           |       |
|                                     |       |                     |       |             |       |       |       |             |       |
| **SIX MONTHS ENDED JUNE 30,  2003** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers         |       | $                        | 65,200     |             | $          | 29,428     |       | $                | 113,509    |   | $ | 208,137 |   |
| Segment operating profit                 |       | 22,115                   |       | 7,069            |       | 2,564      |       | 31,748           |       |

 

The following is areconciliation of profit from reportable segments to the Company’s consolidatedfinancial statements for the three months and six months ended June 30,2004 and 2003 (in thousands):

 
| ** **                                         | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                         | ** ** | **6/30/04**            | ** ** | **6/30/03**          | ** ** | **6/30/04** | ** ** | **6/30/03** | ** ** |
| Total profit for reportable segments               |       | $                      | 17,825     |                 | $          | 18,683 |   | $ | 29,578 |   | $ | 31,748 |   |
| Unallocated depreciation and amortization expense  |       | (540                   | )          | (426                 | )          | (1,021 | ) | (974 | ) |
| Unallocated G & A expense                      |       | (4,600                 | )          | (5,265               | )          | (8,592 | ) | (10,366 | ) |
| Unallocated interest expense, net                  |       | (6,010                 | )          | (4,599               | )          | (11,246 | ) | (9,077 | ) |
| Unallocated loss on sale of property and equipment |       | —                 |       | —               |       | — |   | 25 |   |
| Unallocated debt restructure expense               |       | (419                   | )          | (1,709               | )          | (5,035 | ) | (1,709 | ) |
| Elimination of intersegment interest expense, net  |       | 2,209                  |       | 2,085                |       | 4,489 |   | 4,156 |   |
| Income From Continuing Operations Before Income    |       |                   |       |                 |       |   |   |   |   |
| Taxes                                              |       | $                      | 8,465      |                 | $          | 8,769 |   | $ | 8,173 |   | $ | 13,803 |   |

 

7

----

 

The following is areconciliation of assets of reportable segments to the Company’s consolidatedfinancial statements as of June 30, 2004 and December 31, 2003:

 
| ** **                                           | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Membership services segment                          |       | $        | 148,790    |     | $          | 145,233 |   |
| Publications segment                                 |       | 74,841   |       | 77,101   |       |
| Retail segment                                       |       | 131,467  |       | 118,450  |       |
| Total assets for reportable segments                 |       | 355,098  |       | 340,784  |       |
| Capitalized finance costs not allocated to  segments |       | 11,118   |       | 6,313    |       |
| Corporate unallocated assets                         |       | 32,973   |       | 21,198   |       |
| Elimination of intersegment receivable               |       | (66,661  | )          | (65,433  | )          |
| Total assets                                         |       | $        | 332,528    |     | $          | 302,862 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

Supplemental disclosuresof cash flow information for the six months ended June 30 (in thousands):

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 8,829      |     | $          | 9,767 |   |
| Income taxes                     |       | 2,246    |       | 5,109    |       |
|                                  |            |          |            |          |            |  |  |

 

In February 2004, the Company declared and distributed a $4.4million non-cash dividend consisting of the Adams Insurance Holding LLC notereceivable.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

SFAS No. 142 requires that goodwill and intangible assets deemed tohave an indefinite useful life be reviewed for impairment at leastannually.  The Company performs itsannual impairment review during the fourth quarter.  No changes were made in the carrying amountof the Company’s goodwill during the first six months of 2003 or 2004.

 

8

----

 

The following is a summary of the Company’s goodwill by businesssegment, as of June 30, 2004 and 2003 (in thousands):

 
| ** **                       | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
|                             |       |                     |       |             |       |       |       |             |       |
| Balance as of June 30, 2004 |       | $                        | 54,288     |             | $          | 48,181     |       | $                | 47,601     |   | $ | 150,070 |   |
| Balance as of June 30, 2003 |       | 54,288                   |       | 48,181           |       | 48,741     |       | 151,210          |       |
|                                  |            |                          |            |                  |            |            |            |                  |            |  |  |  |  |

 

Finite lived intangible assets and related accumulated amortizationconsisted of the following at June 30, 2004 (in thousands):

 
| ** **                                       | ** ** | **Weighted  Average Useful****Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
|                                             |       |                                            |       |      |       |                          |       |    |       |
| Membership and customer lists                    |       | 7                                               |       | $         | 10,393     |                          | $          | (3,494  | )          | $ | 6,899 |   |
| Resort and golf course participation  agreements |       | 23                                              |       | 13,558    |       | (10,249                       | )          | 3,309   |       |
| Non-compete and deferred consulting  agreements  |       | 15                                              |       | 17,980    |       | (9,866                        | )          | 8,114   |       |
| Deferred financing costs                         |       | 8                                               |       | 10,967    |       | (1,203                        | )          | 9,764   |       |
|                                             |       |                                            |       | $         | 52,898     |                          | $          | (24,812 | )          | $ | 28,086 |   |

 

**(6) RECENT EVENTS**

 

On February 18, 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Notes”) due 2012. Interest is payable on the Notes twice a year on each February 15 andAugust 15, beginning August 15, 2004, and the Notes mature on February 15,2012.  The proceeds of the issuance wereused to fund the tender offer and call related to the $100.0 millionoutstanding principal amount of the 11% senior notes due 2007 issued by AGHI(“AGHI Notes”).  The Company used theremaining proceeds from the issuance of the Notes to repay $25.0 million of theAGI credit facility, pay a $60.0 million dividend distribution and pay certainprepayment and transaction costs.  OnApril 1, 2004, the defeased $14.3 million principal amount of the AGHI Notesnot purchased in the tender offer was redeemed. On April 27, 2004, AGHI merged with AGI and AGI became the survivingentity in the merger.

 

9

----

 

**(7) RESTRUCTURING CHARGES**

 

During 2003, the Company recorded reserves in connection with therestructuring program primarily within our retail segment.  These reserves include estimates pertainingto employee severance costs.  Althoughthe Company does not anticipate significant changes, the actual costs maydiffer from these estimates.  Thefollowing table reflects a summary of the severance activity for the six monthsended June 30, 2004 and 2003 and the ending reserve balance (dollars inthousands).

 
| ** **           | ** ** | **Six months ended June 30,** | ** ** |
|----------------------|------------|------------------------------------|------------|
| ** **           | ** ** | **2004**                           | ** ** | **2003** | ** ** |
| ** **           | ** ** | **# of  Employees**                | ** ** | **Amount** | ** ** | **# of  Employees** | ** ** | **Amount** | ** ** |
| Opening balance      |       | 1                                  |       | $ | 83 |   | 10 |   | $ | 560 |   |
| Planned terminations |       | —                             |       | — |   | 16 |   | 302 |   |
| Actual terminations  |       | —                             |       | — |   | (26 | ) | (787 | ) |
| Ending balance       |       | 1                                  |       | $ | 83 |   | — |   | $ | 75 |   |

 

**(8) NOTES OFFERING AND GUARANTOR FINANCIAL INFORMATION**

 

In February 2004, the Company issued the Notes described in Note 6above.  The Company is in the process ofconsummating a registered exchange of the Notes under the Securities Act of1933.  The Company’s present restrictedsubsidiaries, jointly and severally, have guaranteed the Notes with full andunconditional 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.  In the future, if the Companyhas any other restricted subsidiaries, such future restricted subsidiaries willbe required to provide the same guaranty of the Notes described in thepreceding sentence.

 

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

 

10

----

 

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

 
| ** **                                                    | ** ** | **AS OF JUNE 30, 2004** | ** ** |
|---------------------------------------------------------------|------------|------------------------------|------------|
| ** **                                                    | ** ** | **AGI**                      | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Cash & cash equivalents                                   |       | $                            | 22,449     |   | $ | 723 |   | $ | — |   | $ | 23,172 |   |
| Accounts receivable (net of allowance for  doubtful accounts) |       | 358                          |       | 90,002 |   | (66,661 | ) | 23,699 |   |
| Inventories                                                   |       | 37                           |       | 46,468 |   | — |   | 46,505 |   |
| Other current assets                                          |       | 3,593                        |       | 15,043 |   | — |   | 18,636 |   |
| Total current assets                                          |       | 26,437                       |       | 152,236 |   | (66,661 | ) | 112,012 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Property and equipment, net                                   |       | 6,170                        |       | 22,647 |   | — |   | 28,817 |   |
| Intangible assets                                             |       | 9,848                        |       | 18,238 |   | — |   | 28,086 |   |
| Goodwill                                                      |       | 67,584                       |       | 82,486 |   | — |   | 150,070 |   |
| Investment in subsidiaries                                    |       | 436,033                      |       | — |   | (436,033 | ) | — |   |
| Other assets                                                  |       | 11,124                       |       | 2,419 |   | — |   | 13,543 |   |
| Total assets                                                  |       | $                            | 557,196    |   | $ | 278,026 |   | $ | (502,694 | ) | $ | 332,528 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Accounts payable                                              |       | $                            | 105        |   | $ | 18,126 |   | $ | — |   | $ | 18,231 |   |
| Accrued and other liabilities                                 |       | 22,280                       |       | 22,322 |   | — |   | 44,602 |   |
| Current portion of long-term debt                             |       | 68,061                       |       | 78 |   | (66,661 | ) | 1,478 |   |
| Current portion of deferred revenue                           |       | 1,060                        |       | 58,824 |   | — |   | 59,884 |   |
| Total current liabilities                                     |       | 91,506                       |       | 99,350 |   | (66,661 | ) | 124,195 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Deferred revenue                                              |       | 2,970                        |       | 37,812 |   | — |   | 40,782 |   |
| Long-term debt                                                |       | 311,850                      |       | 1,099 |   | — |   | 312,949 |   |
| Other long-term liabilities                                   |       | 298,890                      |       | (296,268 | ) | — |   | 2,622 |   |
| Total liabilities                                             |       | 705,216                      |       | (158,007 | ) | (66,661 | ) | 480,548 |   |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Interdivisional equity                                        |       | —                       |       | 436,033 |   | (436,033 | ) | — |   |
| Stockholders’ deficit                                    |       | (148,020                     | )          | — |   | — |   | (148,020 | ) |
|                                                          |       |                         |       |   |   |   |   |   |   |
| Total liabilities & stockholders’  equity            |       | $                            | 557,196    |   | $ | 278,026 |   | $ | (502,694 | ) | $ | 332,528 |   |

 
| ** **                            | ** ** | **THREE MONTHS ENDED JUNE 30, 2004** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **AGI**                                   | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
| Revenue                               |       | $                                         | 2,491      |   | $ | 125,153 |   | $ | — |   | $ | 127,644 |   |
| Costs applicable to revenues          |       | (4,685                                    | )          | (75,494 | ) | — |   | (80,179 | ) |
| Operating expenses                    |       | (4,988                                    | )          | (27,611 | ) | — |   | (32,599 | ) |
| Interest income (expense), net        |       | (3,802                                    | )          | (2,220 | ) | — |   | (6,022 | ) |
| Other non operating income (expenses) |       | 1,356                                     |       | (1,735 | ) | — |   | (379 | ) |
| Income tax benefit (expense)          |       | 3,497                                     |       | (6,537 | ) | — |   | (3,040 | ) |
| Net income (loss)                     |       | $                                         | (6,131     | ) | $ | 11,556 |   | $ | — |   | $ | 5,425 |   |

 

11

----

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the six months endedJune 30, 2004 (in thousands).

 
| ** **                                             | ** ** | **SIX MONTHS ENDED JUNE 30, 2004** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **AGI**                                 | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
| Revenue                                                |       | $                                       | 3,487      |   | $ | 225,439 |   | $ | — |   | $ | 228,926 |   |
| Costs applicable to revenues                           |       | (7,722                                  | )          | (135,993 | ) | — |   | (143,715 | ) |
| Operating expenses                                     |       | (9,294                                  | )          | (51,527 | ) | — |   | (60,821 | ) |
| Interest income (expense), net                         |       | (6,759                                  | )          | (4,510 | ) | — |   | (11,269 | ) |
| Other non operating income (expenses)                  |       | (1,306                                  | )          | (3,642 | ) | — |   | (4,948 | ) |
| Income tax benefit (expense)                           |       | 8,069                                   |       | (10,999 | ) | — |   | (2,930 | ) |
| Net income (loss)                                      |       | $                                       | (13,525    | ) | $ | 18,768 |   | $ | — |   | $ | 5,243 |   |
|                                                   |       |                                    |       |   |   |   |   |   |   |
| Cash flows from operations                             |       | $                                       | (4,074     | ) | $ | 22,450 |   | $ | — |   | $ | 18,376 |   |
| Cash flows used in investing activities                |       | (568                                    | )          | (4,506 | ) | — |   | (5,074 | ) |
| Cash flows (used in) provided by financing  activities |       | 22,242                                  |       | (18,487 | ) | — |   | 3,755 |   |
| Cash at beginning of year                              |       | 4,849                                   |       | 1,266 |   | — |   | 6,115 |   |
| Cash at end of year                                    |       | $                                       | 22,449     |   | $ | 723 |   | $ | — |   | $ | 23,172 |   |

 

12

----

 

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

 
| ** **                                                    | ** ** | **AS OF DECEMBER 31, 2003** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                    | ** ** | **AGI**                          | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                          |       |                             |       |   |   |   |   |   |   |
| Cash & cash equivalents                                   |       | $                                | 4,849      |   | $ | 1,266 |   | $ | — |   | $ | 6,115 |   |
| Accounts receivable (net of allowance for  doubtful accounts) |       | 351                              |       | 90,476 |   | (65,433 | ) | 25,394 |   |
| Inventories                                                   |       | 67                               |       | 36,772 |   | — |   | 36,839 |   |
| Other current assets                                          |       | 4,057                            |       | 11,192 |   | — |   | 15,249 |   |
| Total current assets                                          |       | 9,324                            |       | 139,706 |   | (65,433 | ) | 83,597 |   |
|                                                          |       |                             |       |   |   |   |   |   |   |
| Property and equipment, net                                   |       | 6,894                            |       | 20,320 |   | — |   | 27,214 |   |
| Intangible assets                                             |       | 5,056                            |       | 20,141 |   | — |   | 25,197 |   |
| Goodwill                                                      |       | 67,584                           |       | 82,486 |   | — |   | 150,070 |   |
| Investment in subsidiaries                                    |       | 411,822                          |       | — |   | (411,822 | ) | — |   |
| Other assets                                                  |       | 14,774                           |       | 2,010 |   | — |   | 16,784 |   |
| Total assets                                                  |       | $                                | 515,454    |   | $ | 264,663 |   | $ | (477,255 | ) | $ | 302,862 |   |
|                                                          |       |                             |       |   |   |   |   |   |   |
| Accounts payable                                              |       | $                                | 411        |   | $ | 12,300 |   | $ | — |   | $ | 12,711 |   |
| Accrued and other liabilities                                 |       | 16,653                           |       | 21,216 |   | — |   | 37,869 |   |
| Current portion of long-term debt                             |       | 66,833                           |       | 78 |   | (65,433 | ) | 1,478 |   |
| Current portion of deferred revenue                           |       | 3,585                            |       | 53,724 |   | — |   | 57,309 |   |
| Total current liabilities                                     |       | 87,482                           |       | 87,318 |   | (65,433 | ) | 109,367 |   |
|                                                          |       |                             |       |   |   |   |   |   |   |
| Deferred revenue                                              |       | 3,110                            |       | 37,991 |   | — |   | 41,101 |   |
| Long-term debt                                                |       | 237,550                          |       | 1,099 |   | — |   | 238,649 |   |
| Other long-term liabilities                                   |       | 276,217                          |       | (273,567 | ) | — |   | 2,650 |   |
| Total liabilities                                             |       | 604,359                          |       | (147,159 | ) | (65,433 | ) | 391,767 |   |
|                                                          |       |                             |       |   |   |   |   |   |   |
| Interdivisional equity                                        |       | —                           |       | 411,822 |   | (411,822 | ) | — |   |
| Stockholders’ equity (deficit)                           |       | (88,905                          | )          | — |   | — |   | (88,905 | ) |
| Total liabilities & stockholders’  equity            |       | $                                | 515,454    |   | $ | 264,663 |   | $ | (477,255 | ) | $ | 302,862 |   |

 

13

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

 
| ** **                            | ** ** | **THREE MONTHS ENDED JUNE 30, 2003** | ** ** |
|---------------------------------------|------------|-------------------------------------------|------------|
| ** **                            | ** ** | **AGI**                                   | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                  |       |                                      |       |   |   |   |   |   |   |
| Revenue                               |       | $                                         | 3,373      |   | $ | 112,285 |   | $ | — |   | $ | 115,658 |   |
| Costs applicable to revenues          |       | (4,524                                    | )          | (66,473 | ) | — |   | (70,997 | ) |
| Operating expenses                    |       | (5,553                                    | )          | (24,105 | ) | — |   | (29,658 | ) |
| Interest income (expense), net        |       | (2,516                                    | )          | (2,086 | ) | — |   | (4,602 | ) |
| Other non operating income (expenses) |       | 15                                        |       | (1,647 | ) | — |   | (1,632 | ) |
| Income tax benefit (expense)          |       | 3,465                                     |       | (6,690 | ) | — |   | (3,225 | ) |
| Net income (loss)                     |       | $                                         | (5,740     | ) | $ | 11,284 |   | $ | — |   | $ | 5,544 |   |

 

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

 
| ** **                                             | ** ** | **SIX MONTHS ENDED JUNE 30, 2003** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                             | ** ** | **AGI**                                 | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                   |       |                                    |       |   |   |   |   |   |   |
| Revenue                                                |       | $                                       | 4,615      |   | $ | 203,522 |   | $ | — |   | $ | 208,137 |   |
| Costs applicable to revenues                           |       | (7,213                                  | )          | (119,960 | ) | — |   | (127,173 | ) |
| Operating expenses                                     |       | (10,924                                 | )          | (45,592 | ) | — |   | (56,516 | ) |
| Interest income (expense), net                         |       | (4,923                                  | )          | (4,157 | ) | — |   | (9,080 | ) |
| Other non operating income (expenses)                  |       | 1,368                                   |       | (2,933 | ) | — |   | (1,565 | ) |
| Income tax benefit (expense)                           |       | 6,461                                   |       | (11,621 | ) | — |   | (5,160 | ) |
| Net income (loss)                                      |       | $                                       | (10,616    | ) | $ | 19,259 |   | $ | — |   | $ | 8,643 |   |
|                                                   |       |                                    |       |   |   |   |   |   |   |
| Cash flows from operations                             |       | (3,196                                  | )          | 23,741 |   | — |   | $ | 20,545 |   |
| Cash flows (used in) provided by investing  activities |       | (2,491                                  | )          | (3,362 | ) | — |   | (5,853 | ) |
| Cash flows (used in) provided by financing  activities |       | 19,746                                  |       | (20,706 | ) | — |   | (960 | ) |
| Cash at beginning of year                              |       | 127                                     |       | 1,603 |   | — |   | 1,730 |   |
| Cash at end of year                                    |       | $                                       | 14,186     |   | $ | 1,276 |   | $ | — |   | $ | 15,462 |   |

 

14

----

 

ITEM 2:

 

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 Income and expresses the results from operations as a percentageof revenues and reflects the net increase (decrease) between periods:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **6/30/2004**          | ** ** | **6/30/2003** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                   |       |   |   |   |   |
| REVENUES:                                  |       |                   |       |   |   |   |   |
| Membership services                        |       | 28.2                   | %          | 30.6 | % | 1.8 | % |
| Publications                               |       | 13.0                   | %          | 12.4 | % | 16.0 | % |
| Retail                                     |       | 58.8                   | %          | 57.0 | % | 13.8 | % |
|                                       |       | 100.0                  | %          | 100.0 | % | 10.4 | % |
|                                       |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                   |       |   |   |   |   |
| Membership services                        |       | 19.1                   | %          | 19.2 | % | 9.9 | % |
| Publications                               |       | 8.7                    | %          | 8.7 | % | 10.1 | % |
| Retail                                     |       | 35.0                   | %          | 33.5 | % | 15.4 | % |
|                                       |       | 62.8                   | %          | 61.4 | % | 12.9 | % |
|                                       |       |                   |       |   |   |   |   |
| GROSS PROFIT                               |       | 37.2                   | %          | 38.6 | % | 6.3 | % |
|                                       |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                   |       |   |   |   |   |
| Selling, general and administrative        |       | 23.2                   | %          | 23.4 | % | 9.1 | % |
| Restructuring charge                       |       | —                 |       | 0.3 | % | (100.0 | )% |
| Depreciation and amortization              |       | 2.4                    | %          | 1.9 | % | 34.8 | % |
|                                       |       | 25.6                   | %          | 25.6 | % | 9.9 | % |
|                                       |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 11.6                   | %          | 13.0 | % | (0.9 | )% |
|                                       |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                   |       |   |   |   |   |
| Interest expense                           |       | (4.9                   | )%         | (4.2 | )% | 29.3 | % |
| Interest income                            |       | 0.2                    | %          | 0.2 | % | (8.2 | )% |
| Debt extinguishment expense                |       | (0.3                   | )%         | (1.5 | )% | (75.5 | )% |
| Other non-operating items, net             |       | —                 |       | 0.1 | % | (48.1 | )% |
|                                       |       | (5.0                   | )%         | (5.4 | )% | 2.7 | % |
|                                       |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 6.6                    | %          | 7.6 | % | (3.5 | )% |
|                                       |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (2.3                   | )%         | (2.8 | )% | (5.7 | )% |
|                                       |       |                   |       |   |   |   |   |
| NET INCOME                                 |       | 4.3                    | %          | 4.8 | % | (2.1 | )% |

 

15

----

 

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

 
| ** **                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------|------------|
| ** **                                 | ** ** | **6/30/2004**        | ** ** | **6/30/2003** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                 |       |   |   |   |   |
| REVENUES:                                  |       |                 |       |   |   |   |   |
| Membership services                        |       | 29.5                 | %          | 31.3 | % | 3.6 | % |
| Publications                               |       | 14.8                 | %          | 14.1 | % | 14.9 | % |
| Retail                                     |       | 55.7                 | %          | 54.6 | % | 12.4 | % |
|                                       |       | 100.0                | %          | 100.0 | % | 10.0 | % |
|                                       |       |                 |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                 |       |   |   |   |   |
| Membership services                        |       | 19.7                 | %          | 19.0 | % | 14.2 | % |
| Publications                               |       | 10.1                 | %          | 9.8 | % | 12.8 | % |
| Retail                                     |       | 33.0                 | %          | 32.3 | % | 12.4 | % |
|                                       |       | 62.8                 | %          | 61.1 | % | 13.0 | % |
|                                       |       |                 |       |   |   |   |   |
| GROSS PROFIT                               |       | 37.2                 | %          | 38.9 | % | 5.2 | % |
|                                       |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                 |       |   |   |   |   |
| Selling, general and administrative        |       | 23.9                 | %          | 24.7 | % | 6.6 | % |
| Restructuring charge                       |       | —               |       | 0.2 | % | (100.0 | )% |
| Depreciation and amortization              |       | 2.6                  | %          | 2.3 | % | 25.1 | % |
|                                       |       | 26.5                 | %          | 27.2 | % | 7.6 | % |
|                                       |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 10.7                 | %          | 11.7 | % | (0.2 | )% |
|                                       |       |                 |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                 |       |   |   |   |   |
| Interest expense                           |       | (5.1                 | )%         | (4.5 | )% | 22.9 | % |
| Interest income                            |       | 0.2                  | %          | 0.2 | % | (6.6 | )% |
| Debt extinguishment expense                |       | (2.2                 | )%         | (0.8 | )% | 194.6 | % |
| Other non-operating items, net             |       | —               |       | — |   | (39.6 | )% |
|                                       |       | (7.1                 | )%         | (5.1 | )% | 52.3 | % |
|                                       |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 3.6                  | %          | 6.6 | % | (40.8 | )% |
|                                       |       |                 |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (1.3                 | )%         | (2.4 | )% | (43.2 | )% |
|                                       |       |                 |       |   |   |   |   |
| NET INCOME                                 |       | 2.3                  | %          | 4.2 | % | (39.3 | )% |

 

16

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**RESULTSOF OPERATIONS**

** **

**Three Months Ended June 30, 2004**

**Compared With Three Months Ended June 30, 2003**

 

*Revenues*

 

Revenues of $127.6 million for thesecond quarter of 2004 increased by approximately $12.0 million or 10.4% fromthe comparable period in 2003.

 

Membership services revenues of$36.0 million for the second quarter of 2004 increased by approximately$0.6 million or 1.8% from the comparable period in 2003.  This revenue increase was largelyattributable to an $0.8 million increase in extended vehicle warranty programrevenue due to continued growth in the sales of one-year warranty products, a$0.4 million increase in emergency road service revenue due to increasedenrollment and a $0.4 million increase in dealer program marketing revenue.  These revenue increases were partially offsetby a $0.5 million reduction in revenue from reduced member events participationand a $0.5 million membership services revenue reduction associated withreduced enrollment in the Coast to Coast Club and Golf Card International.

 

Publication revenues of $16.6 millionfor the second quarter of 2004 increased $2.3 million or 16.0% from thecomparable period in 2003 primarily due to the acquisition of three publicationtitles from Poole Publications, Inc. in October 2003 and anadditional issue of American Rider Magazine, partially offset by the reductionof revenue resulting from the discontinuation of REV Magazine in 2003.

 

Retail revenues of $75.0 millionincreased $9.1 million or 13.8% over the second quarter of 2003.  This variance consisted of a$12.0 million or 19.1% increase in Camping World merchandise salespartially offset by a $2.9 million decrease in recreational vehicle salesdue to the divestiture of Camping World RV Sales, Inc. in the fourthquarter of 2003.  Store merchandise salesincreased $4.6 million due to a same store sales increase of 10.7%, compared toa decrease of 5.3% for the second quarter of 2003, and $4.0 million due to theaddition of six new retail stores.  Samestore sale calculations for a given period include only those stores that wereopen both at the end of that period and at the beginning of the precedingfiscal year.  The remaining net increasein merchandise sales was attributable to a $2.7 million increase in mailorder sales and a $0.7 million increase in other installation fees,supplies and services revenue.

 

*Costs Applicable to Revenues*

 

Costs applicable to revenues totaled$80.2 million for the second quarter of 2004, an increase of$9.2 million or 12.9% from the comparable period in 2003.

 

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Membership services costs and expenses of$24.3 million increased approximately $2.2 million or 9.9% from thesecond quarter of 2003.  This increaseconsisted of $1.0 million of marketing and program expenses associatedwith the increased enrollment in the extended vehicle warranty and emergencyroad service programs, a $0.5 million increase in Good Sam Club marketingexpenses, a $0.4 million increase in membership services costs primarilyrelated to the introduction of new member benefits, including an expandedreservation system for Coast to Coast Club, and a $0.3 million increase indealer marketing program costs.

 

Publication costs and expenses of$11.1 million for the second quarter of 2004 increased $1.0 millionor 10.1% from the comparable period in 2003 primarily due to the acquisition ofpublication titles from Poole Publications, Inc. in October 2003,partially offset by reduced costs associated with the elimination of REVMagazine.

 

Retail costs applicable to revenues increased$6.0 million or 15.4% to $44.7 million primarily due to increasedstore and mail order sales.  The retailgross profit margin of 40.4% for the second quarter of 2004 decreased from41.2% from the comparable period in 2003 due to additional customer discounts,and vendor price increases that were only partially offset by the cessation oflower margin recreational vehicle sales as a result of the divestiture ofCamping World RV Sales, Inc.

 

*Operating Expenses*

 

Selling, general and administrative expensesof $29.6 million for the second quarter of 2004 increased$2.5 million or 9.1% compared to the second quarter of 2003 primarily dueto increased retail labor, selling, general and administrative expenses ofapproximately $3.6 million and a $0.4 million increase in other generaland administrative expenses, partially offset by a $1.0 million reductionin executive compensation, and a $0.5 million decrease in selling, general andadministrative expenses due to the divestiture of Camping World RV Sales,Inc.  The management restructuringexpense in 2003 of $0.3 million related primarily to the retail segment.  Depreciation and amortization expenses of$3.0 million increased $0.8 million over the prior year due primarilyto increased depreciation on capital expenditures at Camping World andamortization of intangible costs associated with the acquisition of threetitles from Poole Publications, Inc. in October 2003.

 

*Income from Operations*

 

Income from operations of $14.9 million forthe second quarter of 2004 decreased $0.1 million or 0.9% over the secondquarter of 2003 primarily due to increased operating expenses of$2.9 million and reduced gross profit in the membership servicesoperations of $1.6 million, partially offset by increased gross profit forthe retail and publications operations of $3.1 million and$1.3 million, respectively.

 

*Non-Operating Items*

 

Non-operating expenses were $6.4 millionfor the second quarter of 2004 compared to $6.2 million for the same periodin 2003.  This $0.2 million increasewas primarily due to $1.4 million of additional net interest expenseattributable to higher loan balances associated with

 

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the senior credit facility restructuring inJune 2003, and the issuance of $200.0 million in 9% seniorsubordinated notes on February 18, 2004, and a net $1.3 millionreduction in debt extinguishment expense associated with the 2003 and 2004credit facility restructurings.

 

*Income before Income Taxes*

 

Income before income taxes for the secondquarter of 2004 was $8.5 million, or 3.5% less than the second quarter of2003.  This $0.3 million decreasewas attributable to the $0.1 million reduction in income from operations and a$0.2 million net increase in non-operating items as mentioned above.

 

*Income Tax Expense*

 

The Company recognized approximately$3.0 million of income tax expense for the second quarter of 2004 comparedto $3.2 million for the second quarter of 2003.  The effective tax rates for the secondquarter of 2004 and 2003 were 35.9% and 36.8%, respectively.  The effective tax rate for both periods ishigher than the statutory rate primarily due to state taxes.

 

*Net Income*

 

Net income in the second quarter of 2004 was$5.4 million compared to $5.5 million for the same period in 2003.

 

*Segment Profit*

 

Segment profit of $17.8 million for thesecond quarter of 2004 (before unallocated depreciation and amortization,interest, debt restructuring, general and administrative, and income tax expense)decreased $0.9 million or 4.6% for the comparable period in 2003.

 

Membership services segment profit decreased$1.7 million or 14.6% to $9.8 million for the second quarter of 2004compared to the same period in 2003. This decrease is largely attributable to a $0.7 million decrease insegment profit associated with Coast to Coast Club, a $0.7 milliondecrease in profit primarily associated with increased Good Sam Club marketingcosts, and a $0.3 million decrease from reduced member events participation.

 

Publication segment profit of$4.3 million for the second quarter of 2004 increased by $0.9 millionor 27.9% from 2003.  This increase wasprimarily attributable to the acquisition of three publication titles fromPoole Publications, Inc. in October 2003.

 

Retail segment profit of $3.8 millionfor the second quarter of 2004 decreased by $0.1 million or 3.0% from2003.  This decrease resulted primarilyfrom a lower gross profit margin and increases in selling, general andadministrative expenses, interest expense and depreciation, partially offset byan increase in retail sales.

 

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**Six Months Ended June 30, 2004**

**Compared With Six Months Ended June 30, 2003**

 

*Revenues*

 

Revenues of $228.9 million for the firstsix months of 2004 increased by approximately $20.8 million or 10.0% fromthe comparable period in 2003.

 

Membership services revenues of$67.5 million for the first six months of 2004 increased by approximately$2.3 million or 3.6% from the comparable period in 2003.  This revenue increase was largelyattributable to a $1.8 million increase in extended vehicle warrantyprogram revenue due to continued growth in the sales of one-year warrantyproducts, an $0.8 million increase in emergency road service revenue dueto increased enrollment, and a $0.7 million increase in dealer marketingprogram revenue, partially offset by a $0.6 million reduction in membershipservices revenue, associated with reduced enrollment in the Coast to Coast Cluband Golf Card International, and a $0.4 million reduction in member eventsrevenue due to reduced member events participation.

 

Publication revenues of $33.8 millionfor the first six months of 2004 increased $4.4 million or 14.9% from thecomparable period in 2003.  This increasewas primarily associated with a $3.9 million revenue increase due to theacquisition of three publication titles from Poole Publications, Inc. anda $0.5 million increase in sales of the annual RV directories.

 

Retail revenues of $127.6 millionincreased $14.1 million or 12.4% over the first six months of 2003.  This variance consisted of a$19.5 million or 18.1% increase in Camping World merchandise salespartially offset by a $5.4 million decrease in recreational vehicle salesdue to the divestiture of Camping World RV Sales, Inc. in the fourthquarter of 2003.  Store merchandise salesincreased $9.2 million due to a same store sales increase of 12.0%,compared to a decrease of 5.9% in the first six months of 2003, and $5.5million due to the addition of six new retail stores.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  The remaining net increase in merchandisesales was attributable to a $3.5 million increase in mail order sales anda $1.3 million increase in other installation fees, supplies and servicesrevenue.

 

*Costs Applicable to Revenues*

 

Costs applicable to revenues totaled$143.7 million for the first six months of 2004, an increase of$16.5 million or 13.0% from the comparable period in 2003.

 

Membership services costs and expenses of$45.1 million increased approximately $5.6 million or 14.2%, from thefirst six months of 2003.  This increaseconsisted of $1.6 million of marketing and program expenses associatedwith the increased enrollment in the extended vehicle warranty programs, a$1.5 million increase in membership services costs primarily associatedwith the introduction of new Coast to Coast Club member benefits including anexpanded reservation system and increased

 

20

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marketing efforts for the Good Sam Club, and$0.6 million of additional expenses associated with increased emergency roadservice programs.  In addition, othermarketing expenses increased $1.0 million primarily due to new businessdevelopment, marketing database enhancements and membership support expenses,dealer marketing program costs increased $0.6 million, and marketing costsassociated with vehicle insurance products increased $0.3 million.

 

Publication costs and expenses of$23.1 million for the first six months of 2004 increased $2.6 millionfrom the comparable period in 2003 primarily due to the acquisition ofpublication titles from Poole Publications, Inc. partially offset by thediscontinuation of Rev Magazine at the end of 2003.

 

Retail costs applicable to revenues increased$8.3 million or 12.4% to $75.5 million primarily due to increasedstore and mail order sales.  The retailgross profit margin of 40.8% for the first six months of 2004 was unchangedfrom the comparable period in 2003 because the effect of the cessation of lowermargin recreation vehicle sales as a result of the divesture of Camping WorldRV Sales, Inc. approximately offset the effect of increased customerdiscounts, and vendor price increases.

 

*Operating Expenses*

 

Selling, general and administrative expensesof $54.7 million for the first six months of 2004 increased$3.4 million compared to the first six months of 2003 primarily due to a$6.0 million increase in retail labor, selling and general and administrativeexpenses, and $0.4 million of other increased general and administrativeexpenses, partially offset by a $2.1 million reduction in executive compensation,and reduced RV sales expenses of $0.9 million as a result of the divestiture ofCamping World RV Sales, Inc. Depreciation and amortization expenses of $6.1 million increased$1.2 million over the prior year due primarily to increased depreciationon capital expenditures at Camping World, and amortization of intangible assetsassociated with the acquisition of three titles from PoolePublications, Inc.

 

*Income from Operations*

 

Income from operations for the first sixmonths of 2004 of $24.4 million decreased $0.1 million over the same period in2003 primarily due to reduced gross profit in the membership servicesoperations of $3.3 million and increased operating expenses of$4.3 million partially offset by increased gross profit for the retail andpublications operations of $5.7 million and $1.8 million,respectively.

 

*Non-Operating Items*

 

Non-operating expenses were$16.2 million for the first six months of 2004 compared to$10.6 million for the same period in 2003. This $5.6 million increase was primarily due to $2.2 millionof additional net interest expense from higher loan balances associated withthe senior credit facility restructuring in June 2003, and the issuance ofthe $200.0 million in 9% senior subordinated notes on February 18,2004, and a

 

21

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$3.3 million increase in debtextinguishment expense associated with the 2003 and 2004 credit facilityrestructurings.

 

*Income before Income Taxes*

 

Income before income taxes for the first sixmonths of 2004 was $8.2 million, or 40.8% less than the first six monthsof 2003.  This $5.6 million decreasefrom the prior period was attributable to the $0.1 million decrease inoperating profit mentioned above, increased net interest expense of $2.2 millionand the $3.3 million increase in debt extinguishment expenses.

 

*Income Tax Expense*

 

The Company recognized approximately$2.9 million of income tax expense for the first six months of 2004compared to $5.2 million for the first six months of 2003, producing aneffective tax rate of 35.8% and 37.4% for first six months of 2004 and 2003,respectively.  The effective tax ratesare higher than statutory rates primarily due to state taxes.

 

*Net Income*

 

The net income in the first six months of 2004 was $5.2 millioncompared to $8.6 million for the same period in 2003.

 

*Segment Profit*

 

Segment profit of $29.6 million for thefirst six months of 2004 (before unallocated depreciation and amortization,interest, debt restructuring, general and administrative, and income taxexpense) decreased $2.2 million or 6.8% from the comparable period in2003.

 

Membership services segment profit decreased$3.3 million or 15.0% to $18.8 million for the first six months of2004.  This decrease is largelyattributable to a $2.0 million decrease in Coast to Coast Club profit, an$0.8 million decrease in profit primarily associated with increased Good SamClub marketing efforts, and a $0.5 million increase in other marketingcosts.

 

Publication segment profit of$8.2 million for the first six months of 2004 increased by$1.1 million or 15.5% from 2003. This increase was primarily attributable to the acquisition of threepublication titles from Poole Publications, Inc. in October 2003.

 

Retail segment profit of $2.6 millionfor the first six months of 2004 remained unchanged from the prior yearprimarily due to the increase in retail sales offset by increases in selling,general and administrative expenses, interest expense and depreciation.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

We historically have operated with a working capital deficit.  The working capital deficit as of June 30,2004 and December 31, 2003 was $12.2 million and $25.8 million,respectively.  The primary reason for theworking capital deficit is the deferred revenue and gains reported undercurrent liabilities in the amount of $59.9 million and $57.3 million as of June30, 2004 and December 31, 2003, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  We use net proceeds fromthis deferred membership revenue to lower our long-term borrowings.  We generated net cash from operations of$18.4 million and $20.5 million for the first six months of 2004 and 2003,respectively.  The following tablereflects the Company’s contractual obligations and commercial commitments atJune 30, 2004, in thousands.

 
| ** **                               | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                      | ** ** | **Total**                  | ** ** | **Balance  of 2004** | ** ** | **2005 and  2006** | ** ** | **2007 and  2008** | ** ** | **More than  5 years** | ** ** |
|                                     |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                           |       | $                          | 314,427    |   | $ | 778 |   | $ | 3,041 |   | $ | 3,228 |   | $ | 307,380 |   |
| Operating lease obligations              |       | 128,145                    |       | 6,154 |   | 22,136 |   | 16,850 |   | 83,005 |   |
| Deferred compensation                    |       | 4,996                      |       | 2,729 |   | 2,267 |   | — |   | — |   |
| Standby and commercial letters of credit |       | 5,788                      |       | 5,438 |   | 350 |   | — |   | — |   |
| Grand total                              |       | $                          | 453,356    |   | $ | 15,099 |   | $ | 27,794 |   | $ | 20,078 |   | $ | 390,385 |   |

 

On June 24, 2003, we entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement, which wasamended on February 18, 2004, (collectively, our senior creditfacility).  This senior credit facilityprovides for a revolving credit facility of $35.0 million and term loans(“Term B1 and Term B2”) in the aggregate of $140.0 million.  Proceeds from our senior credit facility wereused to refinance the existing senior secured indebtedness, pay a dividend of$13.7 million to our parent AGI Holding Corp. and redeem $30.0 millionprincipal amount of the AGHI Notes at 103.667% of par in 2003.  As of June 30, 2004, $32.4 millionand $80.9 million were outstanding under the Term B1 and Term B2 loans,respectively.  No borrowings were outstandingon the revolving credit facility as of June 30, 2004.  Reborrowings under the term loans are notpermitted.  The interest on borrowingsunder our senior credit facility is at variable rates based on the ratio oftotal cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 4.00% over the stated rates. As of June 30, 2004, the average interest rate on the term loanswas 5.29%, and permitted borrowings under the undrawn revolving facility were$29.2 million.  We also pay acommitment fee of 0.5% per annum on the unused amount of the revolving creditfacility.  The aggregate quarterlyscheduled payments on the term loans are $350,000.  The revolving credit facility matures onJune 24, 2008, and the Term B1 and Term B2 loans mature on June 24,2009.  The funds available under oursenior credit facility may be utilized for borrowings or letters of credit;however, a maximum of $12.5 million may be allocated to such letters ofcredit.  As of June 30, 2004, we hadletters of credit in the aggregate amount of $5.8 million outstanding.

 

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Our senior credit facility is secured by virtually all of our assetsand a pledge of our stock and the stock of our subsidiaries.

 

In February 2004, we issued$200.0 million aggregate principal amount of our 9% Senior SubordinatedNotes due 2012 (the “Notes”).  TheCompany is in the process of consummating a registered exchange of these Notesunder the Securities Act of 1933.  Theproceeds from the sale of the Notes were used to fund the tender offer anddefeasance of the remaining $100.0 million outstanding principal amount ofthe 11% senior notes due 2007 issued by AGHI (the “AGHI Notes”), prepay$25.0 million of the Term B1 and Term B2 loans under our senior creditfacility, pay a $60.0 million dividend distribution, create a$15.0 million segregated cash account, pay certain prepayment andtransaction costs and be available for general corporate purposes.  As of June 30, 2004, the cash balance inthe segregated account was $15.0 million. If we use the segregated account for purposes other than to fundstockholder dividends, the amount which we may borrow under the revolvingcredit line of our senior credit facility will be reduced by an equal amount,and we may elect or be required to replenish this segregated account from timeto time under the terms of our senior credit facility.  In addition, the amount held in thissegregated account, including any earnings thereon, will be available to paystockholder dividends upon satisfaction of a leverage test specified in oursenior credit facility.  Based on thesenior credit facility leverage test as of June 30, 2004, the Company mayand intends to pay a $3.6 million dividend on or before August 15, 2004.  Should this dividend be paid, the segregatedaccount replenishment requirement will be permanently reduced by the dividendamount.

 

The indenture pursuant to which the Noteswere issued contains certain restrictive covenants relating to, but not limitedto, mergers, changes in the nature of the business, acquisitions, additionalindebtedness, sale of assets and investments, and certain limitations of thepayment of dividends by the Company, including achievement of certain minimumoperating financial covenants.  TheCompany was compliance with all debt covenants at June 30, 2004.

 

For the six months ended June 30, 2004,we did not incur deferred executive compensation expense under our phantomstock agreements.  The earned incentivesunder these agreements are scheduled to be paid at various times over the nextfive years.  Phantom stock payments of$2.7 million are scheduled to be made over the remainder of the calendaryear.

 

Capital expenditures for the first six monthsof 2004 totaled $5.0 million, a decrease of $0.7 million from thefirst six months of 2003.  Additionalcapital expenditures of $5.4 million are anticipated for the balance of2004, primarily for new Camping World stores and equipment, informationtechnology and database enhancements, computer hardware upgrades andreplacements, and computer software upgrades and enhancements.

 

Management believes that funds generated byoperations, together with available borrowings under our revolving credit line,will be sufficient to meet all of our anticipated cash requirements for theforeseeable future.

 

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**CRITICAL ACCOUNTING POLICIES**

 

The Company’s discussion and analysis of its financial condition andresults of operations are based upon the Company’s consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires the Company tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,the Company evaluates its estimates, including those related to membershipprograms and incentives, bad debts, inventories, intangible assets, employeehealth insurance benefits, income taxes, restructuring, and contingencies andlitigation.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

The Company believes the following critical accounting policies affectits more significant judgments and estimates used in the preparation of itsconsolidated financial statements.

 

*Revenue Recognition*

 

Merchandise revenue is recognized whenproducts are sold in the retail stores or shipped for mail and Internet orders,or when services are provided to customers. Publication advertising and newsstand sales, net of estimated provisionfor returns, are recorded at time of delivery. Subscription sales of publications are deferred and recognized over thelives of the subscriptions.  EmergencyRoad Service (“ERS”) revenues are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Royaltyrevenue is earned under the terms of an arrangement with a third party creditcard provider based on a percentage of the Company’s outstanding credit cardbalances with this third party credit card provider.  Membership revenue is generated from annual,multi-year and lifetime memberships.  Therevenue and expenses associated with these memberships are deferred andamortized over the membership period. For lifetime memberships, an 18-year period is used, which is theactuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit, typically three months based on historical actual responserates.  Renewal expenses are expensed asthe related materials are mailed. Recognized revenues and profit are subject to revisions as themembership progresses to completion. Revisions to membership period estimates would change the amount ofincome and expense amortized in future accounting periods.

 

*Accounts Receivable*

 

We estimate the collectability of our tradereceivables.  A considerable amount ofjudgment is required in assessing the ultimate realization of these receivablesincluding the current credit-worthiness of each customer.  Changes in required reserves have

 

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been recorded in recent periods and may occurin the future due to the market environment.

 

*Inventory*

 

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

 

*Long-Lived Assets*

 

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

 

Long-lived assets, such as property, plantand equipment and purchased intangible assets with finite lives are evaluatedfor impairment whenever events or changes in circumstances indicate thecarrying value of an asset may not be recoverable in accordance with SFASNo. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  We assess the fair value of theassets based on the future cash flow the assets are expected to generate andrecognize an impairment loss when estimated undiscounted future cash flowexpected to result from the use of the asset plus net proceeds expected fromdisposition of the asset (if any) are less than the carrying value of theasset.  When an impairment is identified,we reduce the carrying amount of the asset to its estimated fair value based ona discounted cash flow approach or, when available and appropriate, comparablemarket values.  We determined there wereno indicators of impairment of long-lived assets as of December 31, 2003.

 

We have evaluated the remaining useful livesof our finite-lived purchased intangible assets to determine if any adjustmentsto the useful lives were necessary or if any of these assets had indefinitelives and were therefore not subject to amortization.  We determined that no adjustments to theuseful lives of our finite-lived purchased intangible assets werenecessary.  The finite-lived purchasedintangible assets consist of membership customer lists, resort and golf courseagreements, non-compete and deferred consulting agreements and deferredfinancing costs which have weighted average useful lives of approximately7 years, 23 years, 15 years and 8 years, respectively.

 

*Indefinite Lived Intangible Assets*

 

Effective January 1, 2002, we adoptednew accounting standards on “Business Combinations” and “Goodwill and OtherIntangible Assets.”  In accordance withthese new standards, goodwill and intangible assets with indefinite lives areno longer

 

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amortized but instead are measured forimpairment at least annually or when events indicate that an impairmentexists.  As required by the newstandards, the impairment tests for goodwill and other indefinite-livedintangible assets are assessed for impairment using fair value measurementtechniques.  Specifically, goodwillimpairment is determined using a two-step process.  The first step of the goodwill impairmenttest is used to identify potential impairment by comparing the fair value of areporting unit with the net book value (or carrying amount), including goodwill.  If the fair value of the reporting unitexceeds the carrying amount, goodwill of the reporting unit is considered notimpaired and the second step of the impairment test is unnecessary.  If the carrying amount of the reporting unitexceeds the fair value, the second step of the goodwill impairment test isperformed to measure the amount of impairment loss, if any.  The second step of the goodwill impairmenttest compares the implied fair value of the reporting unit’s goodwill with thecarrying amount of that goodwill.  If thecarrying amount of the reporting unit’s goodwill exceeds the implied fair valueof that goodwill, an impairment loss is recognized in an amount equal to thatexcess.  The implied fair value ofgoodwill is determined in the same manner as the amount of goodwill recognizedin a business combination, accordingly the fair value of the reporting unit isallocated to all of the assets and liabilities of that unit as if the reportingunit had been acquired in a business combination and the fair value of thereporting unit was the purchase price paid to acquire the reporting unit.  The impairment test for other intangibleassets consists of a comparison of the fair value of the intangible asset withits carrying value.  If the carrying valueof the intangible asset exceeds its fair value, an impairment loss isrecognized in an amount equal to that excess.

 

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

 

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

 

Based on the results of the annual impairmenttests, we determined that no impairment of goodwill existed as ofDecember 31, 2003.  However, futuregoodwill impairment tests could result in a charge to earnings.  We will continue to evaluate goodwill on anannual basis and whenever events and changes in circumstances indicate thatthere may be a potential impairment.

 

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*Restructuring*

 

We recorded reserves in connection with therestructuring program primarily within our retail segment.  These reserves include estimates pertainingto employee separation costs.  Althoughwe do not anticipate significant changes, the actual costs may differ fromthese estimates.

 

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

 

*Interest Rate Risks*

 

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

 

*Credit Risks*

 

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

 

**ITEM 4:CONTROL AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form10-Q, the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s Presidentand Chief Executive Officer and the Company’s Senior Vice President and ChiefFinancial Officer, of the effectiveness of the design and operation of theCompany’s disclosure controls and procedures pursuant to Regulation 13a-14under the Securities Exchange Act of 1934. Based upon that evaluation, the Company’s President and Chief ExecutiveOfficer along with the Company’s Senior Vice President and Chief FinancialOfficer concluded that the Company’s disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe Company’s periodic SEC filings. There have been no significant changes in the Company’s internalcontrols or in other factors that could significantly affect these controlssubsequent to the date the Company carried out its evaluation.

 

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**PARTII:  OTHER INFORMATION**

 

Items 1 through 5 have been omitted since no events occurred withrespect to these items.

 

Item 6.                                          Exhibitsand Reports on Form 8-K

 

(a)                                  Exhibits.

 

Exhibit 4.10 – Second Amendment to CreditAgreement dated as of June 30, 2004 among Affinity Group, Inc., theguarantors party thereto, the lenders party thereto, Canadian Imperial Bank ofCommerce, as syndication agent, Canadian Imperial Bank of Commerce, asadministrative agent, and General Electric Capital Corporation, asdocumentation agent.

 

Exhibit 4.11 – Second Amendment to NotePurchase Agreement dated as of June 30, 2004 among Affinity Group, Inc.,the guarantors party thereto, the lenders party thereto, Canadian Imperial Bankof Commerce, as syndication agent, Canadian Imperial Bank of Commerce, asadministrative agent, and General Electric Capital Corporation, asdocumentation agent.

 

Exhibit 31.1 – Certification of ChiefExecutive Officer (Section 302 Certification).

 

Exhibit 31.2 – Certification of ChiefFinancial Officer (Section 302 Certification).

 

Exhibit 32.1 – Certification of ChiefExecutive Officer (Section 906 Certification).

 

Exhibit 32.2 – Certification of ChiefFinancial Officer (Section 906 Certification).

 

Exhibit 99.3 – Affinity Group Code ofProfessional Conduct

 

(b)                                 Reports on Form 8-K.

 

None.

 

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**SIGNATURES:**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrants have duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** **                      | ** ** | ** ** | **AFFINITY GROUP, INC.**                                           |   |
|---------------------------------|------------|------------|--------------------------------------------------------------------|--------|
| ** **                      | ** ** | ** ** | ** **                                                         |   |
|                            |       |       |                                                               |   |
|                            |       |       | /s/        Thomas F. Wolfe |   |
| Date:  August 5, 2004 |       |       | Thomas F. Wolfe                                                    |   |
|                            |       |       | Senior Vice President and  Chief Financial Officer                 |   |

 

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