** **

**UNITEDSTATES**

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

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

###### ** **

**FORM 10-Q**

** **

**Quarterly Report Under Section 13or 15 (d) of**

**The Securities Exchange Act of1934**

 
| **For Quarter Ended:**      | ** ** | **Commission File Number** |
|-----------------------------|------------|----------------------------|
| **September 30, 2005** | ** ** | **333-113982**             |

 

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**AFFINITY GROUP, INC.**

(Exact name of registrant as specified in its charter)

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

 

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THEACT:  **NONE**

 

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

**9% Senior Subordinated Notes Due 2012**

 

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

 

YES  ý                                                        NO  o

 

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

 

YES  o                                                        NO  ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). o   YES   ý   NO

 

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

 
|                          |       | **Outstanding as of**     |
|-------------------------------|------------|---------------------------|
| **Class**                     | ** ** | **November 2, 2005** |
| 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**                                                                            |   |
|                                                                                                         |   |
| Consolidated Balance Sheets  as of September 30, 2005 (unaudited) and December 31, 2004            |   |
|                                                                                                         |   |
| Unaudited Consolidated Statements of Operations  for the three months ended September 30, 2005 and 2004 |   |
|                                                                                                         |   |
| Unaudited Consolidated Statements of Operations  for the nine months ended September 30, 2005 and 2004  |   |
|                                                                                                         |   |
| Unaudited Consolidated Statements of Cash Flows  for the nine months ended September 30, 2005 and 2004  |   |
|                                                                                                         |   |
| Notes  to Unaudited Consolidated Financial Statements                                                        |   |
|                                                                                                         |   |
| **Item 2: Management’s Discussion  and Analysis of  Financial Condition and Results of Operations**     |   |
|                                                                                                         |   |
| **Item 3: Quantitative and  Qualitative Disclosures about Market Risk**                                      |   |
|                                                                                                         |   |
| **Item 4:  Control and Procedures**                                                                          |   |
|                                                                                                         |   |
| **Part II. Other  Information**                                                                         |   |
|                                                                                                         |   |
| **Signatures**                                                                                               |   |

 

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30,2005 and December 31, 2004

(InThousands)

 
| ** **                                                                                    | ** ** | **9/30/2005**   | ** ** | **12/31/2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                    |       |            |       |           |       |
| CURRENT ASSETS:                                                                               |       |            |       |           |       |
| Cash and cash  equivalents                                                                    |       | $               | 26,616     |           | $          | 24,564 |   |
| Accounts receivable,  less allowance for doubtful accounts of $1,085 in 2005 and $810 in 2004 |       | 20,212          |       | 24,228         |       |
| Inventories                                                                                   |       | 50,107          |       | 42,463         |       |
| Prepaid expenses and  other assets                                                            |       | 16,803          |       | 11,383         |       |
| Deferred tax assets,  net                                                                     |       | 6,615           |       | 6,615          |       |
| Total current assets                                                                          |       | 120,353         |       | 109,253        |       |
|                                                                                          |       |            |       |           |       |
| PROPERTY AND EQUIPMENT,  net                                                                  |       | 29,408          |       | 27,642         |       |
| AFFILIATE NOTES AND  INVESTMENTS                                                              |       | 85,735          |       | 4,752          |       |
| INTANGIBLE ASSETS, net                                                                        |       | 27,564          |       | 27,716         |       |
| GOODWILL                                                                                      |       | 148,773         |       | 148,773        |       |
| DEFERRED TAX ASSETS,  net                                                                     |       | 3,399           |       | 323            |       |
| OTHER ASSETS                                                                                  |       | 1,632           |       | 1,763          |       |
| Total assets                                                                                  |       | $               | 416,864    |           | $          | 320,222 |   |
|                                                                                          |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                               |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts payable                                                                              |       | $               | 14,555     |           | $          | 16,511 |   |
| Accrued interest                                                                              |       | 2,422           |       | 6,857          |       |
| Accrued income taxes                                                                          |       | 910             |       | 3,131          |       |
| Accrued liabilities                                                                           |       | 34,728          |       | 34,230         |       |
| Deferred revenues and  gains                                                                  |       | 70,187          |       | 57,661         |       |
| Current portion of  long-term debt                                                            |       | 1,911           |       | 1,676          |       |
| Total current  liabilities                                                                    |       | 124,713         |       | 120,066        |       |
|                                                                                          |       |            |       |           |       |
| DEFERRED REVENUES AND  GAINS                                                                  |       | 38,991          |       | 41,469         |       |
| LONG-TERM DEBT, net of  current portion                                                       |       | 312,826         |       | 312,660        |       |
| OTHER LONG-TERM  LIABILITIES                                                                  |       | 8,672           |       | 4,135          |       |
|                                                                                          |       | 485,202         |       | 478,330        |       |
|                                                                                          |       |            |       |           |       |
| 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              |       |
| Additional paid-in  capital                                                                   |       | 81,005          |       | —         |       |
| Accumulated deficit                                                                           |       | (149,344        | )          | (158,109       | )          |
| Total stockholder’s  deficit                                                             |       | (68,338         | )          | (158,108       | )          |
| Total liabilities and  stockholder’s deficit                                             |       | $               | 416,864    |           | $          | 320,222 |   |

 

Seenotes to consolidated financial statements.

 

1

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|------------------------|------------|
| ** **                                 | ** ** | **9/30/2005**          | ** ** | **9/30/2004** | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | **(restated-** | ** ** |
| ** **                                 | ** ** | ** **             | ** ** | **see Note 1)** | ** ** |
| REVENUES:                                  |       |                   |       |   |   |
| Membership services                        |       | $                      | 35,098     |   | $ | 32,824 |   |
| Publications                               |       | 13,951                 |       | 13,367 |   |
| Retail                                     |       | 75,668                 |       | 71,422 |   |
|                                       |       | 124,717                |       | 117,613 |   |
|                                       |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                   |       |   |   |
| Membership services                        |       | 24,335                 |       | 21,546 |   |
| Publications                               |       | 10,401                 |       | 9,585 |   |
| Retail                                     |       | 45,354                 |       | 43,024 |   |
|                                       |       | 80,090                 |       | 74,155 |   |
|                                       |       |                   |       |   |   |
| GROSS PROFIT                               |       | 44,627                 |       | 43,458 |   |
|                                       |       |                   |       |   |   |
| OPERATING EXPENSES:                        |       |                   |       |   |   |
| Selling, general and  administrative       |       | 31,770                 |       | 30,557 |   |
| Depreciation and  amortization             |       | 3,930                  |       | 4,153 |   |
|                                       |       | 35,700                 |       | 34,710 |   |
|                                       |       |                   |       |   |   |
| INCOME FROM OPERATIONS                     |       | 8,927                  |       | 8,748 |   |
|                                       |       |                   |       |   |   |
| NON-OPERATING ITEMS:                       |       |                   |       |   |   |
| Interest income                            |       | 351                    |       | 200 |   |
| Interest expense                           |       | (6,506                 | )          | (6,197 | ) |
| Other non-operating  items, net            |       | 19                     |       | 438 |   |
|                                       |       | (6,136                 | )          | (5,559 | ) |
|                                       |       |                   |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 2,791                  |       | 3,189 |   |
|                                       |       |                   |       |   |   |
| INCOME TAX EXPENSE                         |       | (1,055                 | )          | (1,338 | ) |
|                                       |       |                   |       |   |   |
| NET INCOME                                 |       | $                      | 1,736      |   | $ | 1,851 |   |

 

See notes toconsolidated financial statements.

 

2

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 

| ** **                                  | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **9/30/2005**         | ** ** | **9/30/2004** | ** ** |
| ** **                                  | ** ** | ** **            | ** ** | **(restated see Note 1)** | ** ** |
| REVENUES:                                   |       |                  |       |   |   |
| Membership services                         |       | $                     | 101,922    |   | $ | 100,365 |   |
| Publications                                |       | 46,450                |       | 47,179 |   |
| Retail                                      |       | 218,244               |       | 198,995 |   |
|                                        |       | 366,616               |       | 346,539 |   |
|                                        |       |                  |       |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                  |       |   |   |
| Membership services                         |       | 66,837                |       | 66,612 |   |
| Publications                                |       | 32,160                |       | 32,696 |   |
| Retail                                      |       | 129,746               |       | 118,562 |   |
|                                        |       | 228,743               |       | 217,870 |   |
|                                        |       |                  |       |   |   |
| GROSS PROFIT                                |       | 137,873               |       | 128,669 |   |
|                                        |       |                  |       |   |   |
| OPERATING EXPENSES:                         |       |                  |       |   |   |
| Selling, general and  administrative        |       | 94,329                |       | 85,306 |   |
| Depreciation and  amortization              |       | 11,448                |       | 10,225 |   |
|                                        |       | 105,777               |       | 95,531 |   |
|                                        |       |                  |       |   |   |
| INCOME FROM OPERATIONS                      |       | 32,096                |       | 33,138 |   |
|                                        |       |                  |       |   |   |
| NON-OPERATING ITEMS:                        |       |                  |       |   |   |
| Interest income                             |       | 695                   |       | 555 |   |
| Interest expense                            |       | (19,052               | )          | (17,821 | ) |
| Debt extinguishment  expense                |       | —                |       | (5,035 | ) |
| Other non-operating  items, net             |       | 49                    |       | 525 |   |
|                                        |       | (18,308               | )          | (21,776 | ) |
|                                        |       |                  |       |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 13,788                |       | 11,362 |   |
|                                        |       |                  |       |   |   |
| INCOME TAX EXPENSE                          |       | (5,023                | )          | (4,268 | ) |
|                                        |       |                  |       |   |   |
| NET INCOME                                  |       | $                     | 8,765      |   | $ | 7,094 |   |

 

See notes toconsolidated financial statements.

 

3

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **NINE MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **9/30/2005**         | ** ** | **9/30/2004** | ** ** |
| ** **                                                                         | ** ** | ** **            | ** ** | **(restated-** | ** ** |
| ** **                                                                         | ** ** | ** **            | ** ** | **see Note 1)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                  |       |   |   |
| Net income                                                                         |       | $                     | 8,765      |   | $ | 7,094 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation                                                                       |       | 6,838                 |       | 6,199 |   |
| Amortization                                                                       |       | 4,610                 |       | 4,026 |   |
| Provision for losses on  accounts receivable                                       |       | 505                   |       | 1,700 |   |
| Deferred compensation                                                              |       | 2,925                 |       | 1,050 |   |
| Deferred tax benefit                                                               |       | (3,076                | )          | (2,555 | ) |
| Gain on sale of property  and equipment                                            |       | (1                    | )          | (417 | ) |
| Loss on early  extinguishment of debt                                              |       | —                |       | 5,035 |   |
| Changes in operating  assets and liabilities                                       |       |                  |       |   |   |
| Accounts receivable                                                                |       | 3,547                 |       | 2,184 |   |
| Inventories                                                                        |       | (7,543                | )          | (6,304 | ) |
| Prepaid expenses and  other assets                                                 |       | (5,289                | )          | (5,451 | ) |
| Accounts payable                                                                   |       | (1,956                | )          | 5,177 |   |
| Accrued and other  liabilities                                                     |       | (4,546                | )          | 5,431 |   |
| Deferred revenues and  gains                                                       |       | 9,568                 |       | 8,393 |   |
| Net cash provided by  operating activities                                         |       | 14,347                |       | 31,562 |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                  |       |   |   |
| Capital expenditures                                                               |       | (8,579                | )          | (6,703 | ) |
| Net proceeds from sale  of property and equipment                                  |       | 30                    |       | 399 |   |
| Change in intangible  assets                                                       |       | (38                   | )          | (8 | ) |
| Investment in affiliate                                                            |       | (81,005               | )          | — |   |
| Acquisitions, net of  cash received                                                |       | (2,639                | )          | — |   |
| Net proceeds from sale  of publication assets                                      |       | —                |       | 3,939 |   |
| Loans receivable                                                                   |       | 22                    |       | (15 | ) |
| Net cash used in  investing activities                                             |       | (92,209               | )          | (2,388 | ) |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                  |       |   |   |
| Dividends paid                                                                     |       | —                |       | (63,600 | ) |
| Contribution from  parent                                                          |       | 81,005                |       | — |   |
| Borrowings on long-term  debt                                                      |       | —                |       | 200,000 |   |
| Payment of debt issue  costs                                                       |       | (21                   | )          | (7,319 | ) |
| Principal payments of  long-term debt                                              |       | (1,070                | )          | (129,438 | ) |
| Net cash provided by  (used in) financing activities                               |       | 79,914                |       | (357 | ) |
|                                                                               |       |                  |       |   |   |
| NET INCREASE IN CASH  AND CASH EQUIVALENTS                                         |       | 2,052                 |       | 28,817 |   |
|                                                                               |       |                  |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF YEAR                                    |       | 24,564                |       | 6,115 |   |
|                                                                               |       |                  |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                        |       | $                     | 26,616     |   | $ | 34,932 |   |

 

See notes to consolidatedfinancial statements.

 

4

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**AFFINITY GROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**(1) BASIS OF PRESENTATION**

 

*Principles of Consolidation**–*The consolidated financial statementsinclude the accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries(collectively the “Company”), in accordance with U.S. generally acceptedaccounting principles, and pursuant to the rules and regulations of theSecurities and Exchange Commission. Prior to April 27, 2004, AGI was a wholly-owned subsidiary of AffinityGroup Holding, Inc. (“AGH”) and AGH was a wholly-owned subsidiary of AGIHolding Corp. (“AGHC”), a privately-owned corporation.  On April 27, 2004, AGH was merged intoAGI, with AGI being the surviving entity after the merger.  The merger was accounted for as a combinationof entities under common control using historical costs.  The nine months ended September 30, 2004have been restated to reflect the combined financial position and results ofoperations of AGI and AGH, prior to the April 27, 2004 merger.  In March 2005, AGHC formed a holdingcompany, Affinity Group Holding, Inc., a Delaware corporation (“AGHI”) atwhich time contributed 100% of the outstanding shares of common stock of AGI toAGHI.  AGHI is the direct parent of theCompany.  These interim consolidatedfinancial statements should be read in conjunction with the Company’sconsolidated financial statements and notes in the Company’s 10-K report forthe year ended December 31, 2004 as filed with the Securities and ExchangeCommission.  In the opinion of managementof the Company, these consolidated financial statements contain all adjustmentsof a normal recurring nature necessary to present fairly the financialposition, results of operations and cash flows of the Company for the interimperiods presented.

 

**(2) DISCLOSURES ABOUTSEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION**

 

TheCompany’s three principal lines of business are Membership Services,Publications, and Retail.  The MembershipServices segment operates the Good Sam Club, Coast to Coast Club, and CampingWorld’s President’s Club for recreational vehicles (“RV”) owners, campers andoutdoor vacationers, and the Golf Card Club for golf enthusiasts.  The Publications segment publishes a varietyof publications for selected markets in the recreation and leisure industry,including general circulation periodicals, directories, and RV and powersports industrytrade magazines.  The Retail segmentsells specialty retail merchandise and services for RV owners primarily throughretail supercenters and mail order catalogs. The Company evaluates performance based on profit or loss fromoperations before income taxes.

 

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

 

5

----

 

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

 
| ** **                                     | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                     | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED SEPTEMBER 30, 2005** |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 35,098     |             | $          | 13,951     |       | $                | 75,668     |   | $ | 124,717 |   |
| Gain on sale of  property and equipment        |       | —         |       | —           |       | 3          |       | 3                |       |
| Interest income                                |       | 1,353          |       | —           |       | 4          |       | 1,357            |       |
| Interest expense                               |       | —         |       | 70               |       | 2,497      |       | 2,567            |       |
| Depreciation and  amortization                 |       | 882            |       | 666              |       | 1,762      |       | 3,310            |       |
| Segment profit                                 |       | 9,274          |       | 2,197            |       | 2,497      |       | 13,968           |       |
|                                           |       |           |       |             |       |       |       |             |       |
| **THREE MONTHS ENDED SEPTEMBER 30, 2004** |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 32,824     |             | $          | 13,367     |       | $                | 71,422     |   | $ | 117,613 |   |
| Gain on sale of  property and equipment        |       | —         |       | 17               |       | 1          |       | 18               |       |
| Interest income                                |       | 674            |       | —           |       | 1          |       | 675              |       |
| Interest expense                               |       | —         |       | 137              |       | 2,555      |       | 2,692            |       |
| Depreciation and  amortization                 |       | 907            |       | 464              |       | 2,195      |       | 3,566            |       |
| Segment profit                                 |       | 9,408          |       | 2,596            |       | 290        |       | 12,294           |       |

 
| ** **                                    | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                    | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30, 2005** |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers             |       | $              | 101,922    |             | $          | 46,450     |       | $                | 218,244    |   | $ | 366,616 |   |
| Gain on sale of  property and equipment       |       | —         |       | (5               | )          | 6          |       | 1                |       |
| Interest income                               |       | 3,523          |       | —           |       | 9          |       | 3,532            |       |
| Interest expense                              |       | —         |       | 229              |       | 7,709      |       | 7,938            |       |
| Depreciation and  amortization                |       | 2,641          |       | 1,682            |       | 5,250      |       | 9,573            |       |
| Segment profit                                |       | 30,286         |       | 10,388           |       | 4,285      |       | 44,959           |       |
|                                          |       |           |       |             |       |       |       |             |       |
| **NINE MONTHS ENDED SEPTEMBER 30, 2004** |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers             |       | $              | 100,365    |             | $          | 47,179     |       | $                | 198,995    |   | $ | 346,539 |   |
| Gain on sale of  property and equipment       |       | —         |       | 17               |       | 2          |       | 19               |       |
| Interest income                               |       | 1,902          |       | —           |       | 2          |       | 1,904            |       |
| Interest expense                              |       | —         |       | 641              |       | 7,792      |       | 8,433            |       |
| Depreciation and  amortization                |       | 2,718          |       | 1,314            |       | 4,585      |       | 8,617            |       |
| Segment profit                                |       | 28,198         |       | 10,761           |       | 2,913      |       | 41,872           |       |

 

6

----

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three months and nine months ended September 30,2005 and 2004 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **9/30/2005**          | ** ** | **9/30/2004**         | ** ** | **9/30/2005** | ** ** | **9/30/2004** | ** ** |
| **Income From Continuing Operations Before Income Taxes**      |       |                   |       |                  |       |   |   |   |   |
| Total profit for  reportable segments                          |       | $                      | 13,968     |                  | $          | 12,294 |   | $ | 44,959 |   | $ | 41,872 |   |
| Unallocated G &  A expense                            |       | (5,612                 | )          | (4,936                | )          | (15,345 | ) | (13,528 | ) |
| Unallocated  depreciation and amortization expense             |       | (620                   | )          | (587                  | )          | (1,875 | ) | (1,608 | ) |
| Unallocated interest  expense, net of intercompany elimination |       | (3,939                 | )          | (3,503                | )          | (11,114 | ) | (9,386 | ) |
| Unallocated interest  income, net of intercompany elimination  |       | (1,006                 | )          | (477                  | )          | (2,837 | ) | (1,351 | ) |
| Unallocated gain on  sale of property and equipment            |       | —                 |       | 398                   |       | — |   | 398 |   |
| Unallocated debt  restructure expense                          |       | —                 |       | —                |       | — |   | (5,035 | ) |
| Income from continuing  operations before income taxes         |       | $                      | 2,791      |                  | $          | 3,189 |   | $ | 13,788 |   | $ | 11,362 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2005 and December 31,2004 (in thousands):

 
| ** **                                          | ** ** | **9/30/2005** | ** ** | **12/31/2004** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 173,920    |           | $          | 170,270 |   |
| Publications segment                                |       | 79,742        |       | 75,731         |       |
| Retail segment                                      |       | 212,096       |       | 124,325        |       |
| Total assets for reportable segments                |       | 465,758       |       | 370,326        |       |
| Capitalized finance costs not allocated to segments |       | 9,712         |       | 10,951         |       |
| Corporate unallocated assets                        |       | 16,701        |       | 13,705         |       |
| Elimination of intersegment receivable              |       | (75,307       | )          | (74,760        | )          |
| Total assets                                        |       | $             | 416,864    |           | $          | 320,222 |   |

 

Total assets for the retail segment increased $87.8 million from December 31,2004 primarily due to the acquisition of a preferred membership interest inFreedomRoads Holding Company, LLC, a related party (See Note 5).

 

**(3) STATEMENTS OF CASH FLOWS**

 

Supplemental disclosures of cash flowinformation for the nine months ended September 30 (in thousands):

 
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 23,487     |     | $          | 19,316 |   |
| Income taxes                     |       | 8,493    |       | 4,423    |       |
|                                  |            |          |            |          |            |  |  |

 

7

----

 

In February 2004, the Company declared and distributed a $4.4million non-cash dividend to its ultimate parent, AGHC, consisting of notesreceivable from the Adams Insurance Holding LLC, a related party.

 

In May 2005, the Company assumed $0.5 million of liabilities andissued $1.5 million of debt in the acquisition of the *Powerboat Magazine*title and related assets from Nordskog Publishing, Inc.

 

**(4) GOODWILL AND INTANGIBLE ASSETS**

 

The Company reviews goodwill and indefinite-lived intangible assets forimpairment at least annually.  TheCompany performs its annual impairment review during the fourth quarter.  Based on the results of the annual impairmenttest, the Company determined that no impairment of goodwill existed as of December 31,2004.

 

The following is a summary of changes in the Company’s goodwill bybusiness segment, for the nine months ended September 30, 2005 and 2004(in thousands):

 
| ** **                            | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
|                                  |       |                     |       |             |       |       |       |             |       |
| Balance as of January 1, 2005    |       | $                        | 54,288     |             | $          | 46,884     |       | $                | 47,601     |   | $ | 148,773 |   |
| Dispositions                          |       | —                   |       | —           |       | —     |       | —           |       |
| Balance as of September 30, 2005 |       | $                        | 54,288     |             | $          | 46,884     |       | $                | 47,601     |   | $ | 148,773 |   |
|                                  |       |                     |       |             |       |       |       |             |       |
| Balance as of January 1, 2004    |       | $                        | 54,288     |             | $          | 48,181     |       | $                | 47,601     |   | $ | 150,070 |   |
| Dispositions                          |       | —                   |       | (3,553           | )          | —     |       | (3,553           | )          |
| Balance as of September 30, 2004 |       | $                        | 54,288     |             | $          | 44,628     |       | $                | 47,601     |   | $ | 146,517 |   |

 

Finite lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at September 30,2005 (in thousands, except as noted):

 
| ** **                                      | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                   |       | $          | 16,031     |             | $          | (6,234     | )          | $ | 9,797 |   |
| Resort and golf course participation agreements |       | 23                  |       | 13,558     |       | (11,405          | )          | 2,153      |       |
| Non-compete and deferred consulting agreements  |       | 15                  |       | 18,455     |       | (11,206          | )          | 7,249      |       |
| Deferred financing costs                        |       | 7                   |       | 11,607     |       | (3,242           | )          | 8,365      |       |
|                                            |       |                |       | $          | 59,651     |             | $          | (32,087    | )          | $ | 27,564 |   |

 

8

----

 

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

 

In April 2005, Camping World, Inc. acquired the assets of anRV catalog retailer for $0.6 million. The acquisition price was allocated to inventory and membership andcustomer lists.  In May 2005, EhlertPublishing Group, Inc. acquired the publishing assets of NordskogPublishing, Inc. for $4.0 million. The acquisition price was allocated primarily to membership and customerlists and non-compete agreements.

 

**(5) RECENT EVENTS**

 

On March 24, 2005 in a privateplacement, the Company’s parent, AGHI, issued $88.2 million principal amount ofits 10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million originalissue discount.  AGHI completed aregistered exchange of the AGHI Notes under the Securities Act of 1933 on June 8,2005.  The AGHI Notes are unsecuredobligations of AGHI, and neither AGI nor its subsidiaries have guaranteedpayment of principal or interest on the AGHI Notes.  Interest on the AGHI Notes is payablesemi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and prior to February 15, 2008, AGHI may elect to payinterest on the AGHI Notes in cash or by the issuance of additional notes ofthe same tenor as the AGHI Notes.  Anyadditional AGHI Notes issued in payment of interest are due in full on orbefore March 15, 2010.  The AGHINotes cannot be redeemed prior to February 15, 2008.  Although the only source of the cash paymentof the AGHI Notes is dividends from the Company, there are certain restrictionson the payment of dividends under the Company’s senior secured credit facility(the “AGI Senior Credit Facility”) and the indenture relating to Company’s $200.0million in 9% Senior Subordinates Notes (“AGI Indenture”).

 

AGHIcontributed the net proceeds from the issuance of the AGHI Notes, approximately$81.0 million, to the Company and in turn, the Company made an equitycontribution to its wholly-owned subsidiary, Camping World, Inc. (“CampingWorld”).  Camping World then made anequity capital contribution in the same amount to its wholly-owned subsidiary,CWI, Inc. (“CWI”).  CWI created anew wholly-owned subsidiary named CWFR Capital Corp., a Delaware corporation (“CWFR”)which is an “unrestricted subsidiary” as defined under the AGHI Notes and the AGIIndenture.  Since CWFR is an unrestrictedsubsidiary, its operations are not restricted by either the AGI Indenture orthe AGHI Notes.  CWI made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat CWI received from Camping World.  CWFR used the proceeds from the equity capitalcontribution to acquire a preferred membership interest in FreedomRoads HoldingCompany, LLC (“FreedomRoads Holding”), a Minnesota limited liability companyowned

 

9

----

 

90%by The Stephen Adams Living Trust which also indirectly owns 97.4% of theoutstanding capital stock of AGHC and indirectly AGI.

 

The preferred membership interest acquired by CWFR has a face amount of$88.2 million and is entitled to receive a preferred payment from FreedomRoadsHolding at 10-7/8% per annum when and as declared by the Board of Governors ofFreedomRoads from any source legally available therefor.  Any portion of the preferred payment not paidwill accumulate and will be compounded semi-annually until paid.  FreedomRoads Holding may redeem the preferredmembership interest upon the payment of $88.2 million plus the accrued andunpaid preferred return to the date of redemption.  FreedomRoads Holding will be required toredeem the preferred membership interest at that same redemption price if thereis a sale or reorganization of the membership interests of FreedomRoads Holdingor a sale of substantially all of the assets of FreedomRoads Holding.  According to the terms of the preferredmembership interest, FreedomRoads Holding cannot make distributions withrespect to membership interests other than (a) distributions with respectto the preferred membership interest, (b) distributions for the members’estimated tax liabilities from earnings of FreedomRoads Holding and (c) distributionsin the aggregate not to exceed 50% of the amount of (i) FreedomRoadsHolding’s net profit for the period from January 1, 2005 through the endof the fiscal quarter next preceding the distribution date less (ii) theaggregate amount of tax distributions made during the period from January 1,2005 through the end of the fiscal quarter next preceding the distributiondate. CWFR may not sell, pledge or otherwise transfer the preferred membershipinterest.  The preferred membershipinterest does not provide CWFR with any voting rights in FreedomRoads Holding.  The preferred membership interest inFreedomRoads Holding is being carried at cost and is reviewed periodically forimpairment.

 

**(6) CONTINGENCIES**

 

From time to time, the Company is involved inlitigation arising in the normal course of business operations.

 

In September 2004, the Company’ssubsidiary, CWI, Inc., was sued in California state court by PrivacyRights Clearinghouse and Benjamin Greene (the “Plaintiffs”) in a suit allegingthat CWI, Inc. was recording personal identification information fromretail customers in violation of certain California statutes.  The plaintiff sought injunctive reliefpreventing CWI, Inc. from engaging in any act or practice constitutingunfair competition under the statutes and for statutory penalties anddamages.  CWI, Inc. responded to thesuit and denied that its practices violate the statutes.  Without admitting liability or wrongdoing,CWI, Inc. and the Plaintiffs have entered into a Settlement Agreementwhich has received preliminary approval by the court.  After expiration of applicable noticeperiods, the Settlement Agreement will be subject to final approval by the court.  In the opinion of management, the terms ofthe Settlement Agreement did not have a material adverse effect on the Company’sresults of operations or financial position.

 

10

----

 

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

 

In February 2004, the Company issued$200.0 million of 9% Senior Subordinated Notes (“Notes”) due 2012 pursuant tothe AGI Indenture.  The Company’s presentrestricted subsidiaries have guaranteed, and future restricted subsidiarieswill guarantee, the Notes with unconditional guarantees of payment that rankjunior in right of payment to their existing and future senior debt, but rankequal in right of payment to their existing and future senior subordinateddebt.  CWFR is an “unrestrictedsubsidiary” under the AGI Indenture, and is not a guarantor of the Notes.  All other subsidiaries of AGI are restrictedsubsidiaries.

 

All of the Company’s restricted subsidiarieshave jointly and severally 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.

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries as of and for the nine months ended September 30, 2005 (inthousands).

 
| ** **                                               | ** ** | **AS OF SEPTEMBER 30, 2005** | ** ** |
|----------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                               | ** ** | ** **                        | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                                               | ** ** | **AGI**                           | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Cash & cash  equivalents                        |       | $                                 | 28,093     |   | $ | (1,477 | ) | $ | — |   | $ | — |   | $ | 26,616 |   |
| Accounts receivable,  net                                |       | 237                               |       | 95,282 |   | — |   | (75,307 | ) | 20,212 |   |
| Inventories                                              |       | 37                                |       | 50,070 |   | — |   | — |   | 50,107 |   |
| Other current assets                                     |       | 4,224                             |       | 19,194 |   | — |   | — |   | 23,418 |   |
| Total current assets                                     |       | 32,591                            |       | 163,069 |   | — |   | (75,307 | ) | 120,353 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Property and equipment,  net                             |       | 6,500                             |       | 22,908 |   | — |   | — |   | 29,408 |   |
| Intangible assets                                        |       | 8,430                             |       | 19,134 |   | — |   | — |   | 27,564 |   |
| Goodwill                                                 |       | 67,584                            |       | 81,189 |   | — |   | — |   | 148,773 |   |
| Investment in  subsidiaries                              |       | 502,168                           |       | 81,005 |   | — |   | (583,173 | ) | — |   |
| Affiliate note and  investments                          |       | 4,730                             |       | — |   | 81,005 |   | — |   | 85,735 |   |
| Other assets                                             |       | 10,364                            |       | (5,333 | ) | — |   | — |   | 5,031 |   |
| Total assets                                             |       | $                                 | 632,367    |   | $ | 361,972 |   | $ | 81,005 |   | $ | (658,480 | ) | $ | 416,864 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Accounts payable                                         |       | $                                 | 321        |   | $ | 14,234 |   | $ | — |   | $ | — |   | $ | 14,555 |   |
| Accrued and other  liabilities                           |       | 14,077                            |       | 23,983 |   | — |   | — |   | 38,060 |   |
| Current portion of  long-term debt                       |       | 76,707                            |       | 511 |   | — |   | (75,307 | ) | 1,911 |   |
| Current portion of  deferred revenue                     |       | 1,250                             |       | 68,937 |   | — |   | — |   | 70,187 |   |
| Total current  liabilities                               |       | 92,355                            |       | 107,665 |   |   |   | (75,307 | ) | 124,713 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Deferred revenue                                         |       | 2,816                             |       | 36,175 |   | — |   | — |   | 38,991 |   |
| Long-term debt                                           |       | 310,100                           |       | 2,726 |   | — |   | — |   | 312,826 |   |
| Other long-term  liabilities                             |       | 295,434                           |       | (286,762 | ) | — |   | — |   | 8,672 |   |
| Total liabilities                                        |       | 700,705                           |       | (140,196 | ) |   |   | (75,307 | ) | 485,202 |   |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Interdivisional equity                                   |       | —                            |       | 502,168 |   | 81,005 |   | (583,173 | ) | — |   |
| Stockholders’ deficit                               |       | (68,338                           | )          | — |   | — |   | — |   | (68,338 | ) |
|                                                     |       |                              |       |   |   |   |   |   |   |   |   |
| Total  liabilities & stockholders’ deficit |       | $                                 | 632,367    |   | $ | 361,972 |   | $ | 81,005 |   | $ | (658,480 | ) | $ | 416,864 |   |

 

11

----

 
| ** **                                             | ** ** | **NINE MONTHS ENDED SEPTEMBER 30, 2005** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                             | ** ** | ** **                                    | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                                             | ** ** | **AGI**                                       | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                                |       | $                                             | 4,648      |   | $ | 361,968 |   | $ | — |   | $ | — |   | $ | 366,616 |   |
| Costs applicable to revenues                           |       | (10,176                                       | )          | (218,567 | ) | — |   | — |   | (228,743 | ) |
| Operating expenses                                     |       | (16,820                                       | )          | (88,957 | ) | — |   | — |   | (105,777 | ) |
| Interest expense, net                                  |       | (13,951                                       | )          | (4,406 | ) | — |   | — |   | (18,357 | ) |
| Income from investment in consolidated subsidiaries    |       | 29,013                                        |       | — |   | — |   | (29,013 | ) | — |   |
| Other non operating income (expenses)                  |       | 4,448                                         |       | (4,399 | ) | — |   | — |   | 49 |   |
| Income tax benefit (expense)                           |       | 11,603                                        |       | (16,626 | ) | — |   | — |   | (5,023 | ) |
| Net income (loss)                                      |       | $                                             | 8,765      |   | $ | 29,013 |   | $ | — |   | $ | (29,013 | ) | $ | 8,765 |   |
|                                                   |       |                                          |       |   |   |   |   |   |   |   |   |
| Cash flows from operations                             |       | $                                             | (20,476    | ) | $ | 34,823 |   | $ | — |   | $ | — |   | $ | 14,347 |   |
| Cash flows used in investing activities                |       | (83,309                                       | )          | (89,905 | ) | (81,005 | ) | 162,010 |   | (92,209 | ) |
| Cash flows (used in) provided by financing  activities |       | 107,026                                       |       | 53,893 |   | 81,005 |   | (162,010 | ) | 79,914 |   |
| Cash at beginning of year                              |       | 24,852                                        |       | (288 | ) | — |   | — |   | 24,564 |   |
| Cash at end of period                                  |       | $                                             | 28,093     |   | $ | (1,477 | ) | $ | — |   | $ | — |   | $ | 26,616 |   |

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries for the three months ended September 30, 2005 (in thousands).

 
| ** **                                          | ** ** | **THREE MONTHS ENDED SEPTEMBER 30, 2005** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                          | ** ** | ** **                                     | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                                          | ** ** | **AGI**                                        | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |                                           |       |   |   |   |   |   |   |   |   |
| Revenue                                             |       | $                                              | 3,258      |   | $ | 121,459 |   | $ | — |   | $ | — |   | $ | 124,717 |   |
| Costs applicable to revenues                        |       | (4,953                                         | )          | (75,137 | ) | — |   | — |   | (80,090 | ) |
| Operating expenses                                  |       | (6,011                                         | )          | (29,689 | ) | — |   | — |   | (35,700 | ) |
| Interest expense, net                               |       | (4,945                                         | )          | (1,210 | ) | — |   | — |   | (6,155 | ) |
| Income from investment in consolidated subsidiaries |       | 8,806                                          |       | — |   | — |   | (8,806 | ) | — |   |
| Other non operating income (expenses)               |       | 1,417                                          |       | (1,398 | ) | — |   | — |   | 19 |   |
| Income tax benefit (expense)                        |       | 4,164                                          |       | (5,219 | ) | — |   | — |   | (1,055 | ) |
| Net income (loss)                                   |       | $                                              | 1,736      |   | $ | 8,806 |   | $ | — |   | $ | (8,806 | ) | $ | 1,736 |   |

 

12

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The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries as of December 31, 2004 (in thousands).

 
| ** **                                              | ** ** | **AS OF DECEMBER 31, 2004** | ** ** |
|---------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                              | ** ** | ** **                       | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                                              | ** ** | **AGI**                          | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Cash & cash equivalents                        |       | $                                | 24,852     |   | $ | (288 | ) | $ | — |   | $ | — |   | $ | 24,564 |   |
| Accounts receivable, net                                |       | 173                              |       | 98,815 |   | — |   | (74,760 | ) | 24,228 |   |
| Inventories                                             |       | 55                               |       | 42,408 |   | — |   | — |   | 42,463 |   |
| Other current assets                                    |       | 5,168                            |       | 12,830 |   | — |   | — |   | 17,998 |   |
| Total current assets                                    |       | 30,248                           |       | 153,765 |   | — |   | (74,760 | ) | 109,253 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                             |       | 6,121                            |       | 21,521 |   | — |   | — |   | 27,642 |   |
| Intangible assets                                       |       | 9,661                            |       | 18,055 |   | — |   | — |   | 27,716 |   |
| Goodwill                                                |       | 67,584                           |       | 81,189 |   | — |   | — |   | 148,773 |   |
| Investment in subsidiaries                              |       | 451,280                          |       | — |   | — |   | (451,280 | ) | — |   |
| Other assets                                            |       | 13,823                           |       | (6,985 | ) | — |   | — |   | 6,838 |   |
| Total assets                                            |       | $                                | 578,717    |   | $ | 267,545 |   | $ | — |   | $ | (526,040 | ) | $ | 320,222 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                        |       | $                                | 422        |   | $ | 16,089 |   | $ | — |   | $ | — |   | $ | 16,511 |   |
| Accrued and other liabilities                           |       | 21,458                           |       | 22,760 |   | — |   | — |   | 44,218 |   |
| Current portion of long-term debt                       |       | 76,160                           |       | 276 |   | — |   | (74,760 | ) | 1,676 |   |
| Deferred revenue and gains                              |       | 1,245                            |       | 56,416 |   | — |   | — |   | 57,661 |   |
| Total current liabilities                               |       | 99,285                           |       | 95,541 |   | — |   | (74,760 | ) | 120,066 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Deferred revenue and gains                              |       | 2,908                            |       | 38,561 |   | — |   | — |   | 41,469 |   |
| Long-term debt                                          |       | 311,150                          |       | 1,510 |   | — |   | — |   | 312,660 |   |
| Other long-term liabilities                             |       | 323,482                          |       | (319,347 | ) | — |   | — |   | 4,135 |   |
| Total liabilities                                       |       | 736,825                          |       | (183,735 | ) | — |   | (74,760 | ) | 478,330 |   |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Interdivisional equity                                  |       | —                           |       | 451,280 |   | — |   | (451,280 | ) | — |   |
| Stockholders’ deficit                              |       | (158,108                         | )          | — |   | — |   | — |   | (158,108 | ) |
|                                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Total liabilities & stockholders’ deficit |       | $                                | 578,717    |   | $ | 267,545 |   | $ | — |   | $ | (526,040 | ) | $ | 320,222 |   |

 

13

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The following are summarized statementssetting forth certain financial information concerning the Guarantor Subsidiariesfor the nine months ended September 30, 2004 (in thousands).

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

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries for the three months ended September 30, 2004 (in thousands).

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

 

14

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**ITEM 2:**

 

AFFINITYGROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

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

 
| ** **                                  | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **9/30/2005**          | ** ** | **9/30/2004** | ** ** | **Inc/(Dec)** | ** ** |
|                                        |       |                   |       |   |   |   |   |
| REVENUES:                                   |       |                   |       |   |   |   |   |
| Membership services                         |       | 28.1                   | %          | 27.9 | % | 6.9 | % |
| Publications                                |       | 11.2                   | %          | 11.4 | % | 4.4 | % |
| Retail                                      |       | 60.7                   | %          | 60.7 | % | 5.9 | % |
|                                        |       | 100.0                  | %          | 100.0 | % | 6.0 | % |
|                                        |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                   |       |   |   |   |   |
| Membership services                         |       | 19.5                   | %          | 18.3 | % | 12.9 | % |
| Publications                                |       | 8.3                    | %          | 8.1 | % | 8.5 | % |
| Retail                                      |       | 36.4                   | %          | 36.7 | % | 5.4 | % |
|                                        |       | 64.2                   | %          | 63.1 | % | 8.0 | % |
|                                        |       |                   |       |   |   |   |   |
| GROSS PROFIT                                |       | 35.8                   | %          | 36.9 | % | 2.7 | % |
|                                        |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                         |       |                   |       |   |   |   |   |
| Selling, general and administrative         |       | 25.4                   | %          | 26.0 | % | 4.0 | % |
| Depreciation and amortization               |       | 3.2                    | %          | 3.5 | % | (5.4 | )% |
|                                        |       | 28.6                   | %          | 29.5 | % | 2.9 | % |
|                                        |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS                      |       | 7.2                    | %          | 7.4 | % | 2.0 | % |
|                                        |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                        |       |                   |       |   |   |   |   |
| Interest income                             |       | 0.3                    | %          | 0.2 | % | 75.5 | % |
| Interest expense                            |       | (5.3                   | )%         | (5.3 | )% | 5.0 | % |
| Other non-operating items, net              |       | —                 |       | 0.4 | % | (95.7 | )% |
|                                        |       | (5.0                   | )%         | (4.7 | )% | 10.4 | % |
|                                        |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 2.2                    | %          | 2.7 | % | (12.5 | )% |
|                                        |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                          |       | (0.8                   | )%         | (1.1 | )% | (21.2 | )% |
|                                        |       |                   |       |   |   |   |   |
| NET INCOME                                  |       | 1.4                    | %          | 1.6 | % | (6.2 | )% |

 

15

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

 
| ** **                                  | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|-----------------------|------------|
| ** **                                  | ** ** | **9/30/2005**         | ** ** | **9/30/2004** | ** ** | **Inc/(Dec)** | ** ** |
|                                        |       |                  |       |   |   |   |   |
| REVENUES:                                   |       |                  |       |   |   |   |   |
| Membership services                         |       | 27.8                  | %          | 29.0 | % | 1.6 | % |
| Publications                                |       | 12.7                  | %          | 13.6 | % | (1.5 | )% |
| Retail                                      |       | 59.5                  | %          | 57.4 | % | 9.7 | % |
|                                        |       | 100.0                 | %          | 100.0 | % | 5.8 | % |
|                                        |       |                  |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                  |       |   |   |   |   |
| Membership services                         |       | 18.2                  | %          | 19.2 | % | 0.3 | % |
| Publications                                |       | 8.8                   | %          | 9.4 | % | (1.6 | )% |
| Retail                                      |       | 35.4                  | %          | 34.3 | % | 9.4 | % |
|                                        |       | 62.4                  | %          | 62.9 | % | 5.0 | % |
|                                        |       |                  |       |   |   |   |   |
| GROSS PROFIT                                |       | 37.6                  | %          | 37.1 | % | 7.2 | % |
|                                        |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:                         |       |                  |       |   |   |   |   |
| Selling, general and administrative         |       | 25.7                  | %          | 24.6 | % | 10.6 | % |
| Depreciation and amortization               |       | 3.1                   | %          | 2.9 | % | 12.0 | % |
|                                        |       | 28.8                  | %          | 27.5 | % | 10.7 | % |
|                                        |       |                  |       |   |   |   |   |
| INCOME FROM OPERATIONS                      |       | 8.8                   | %          | 9.6 | % | (3.1 | )% |
|                                        |       |                  |       |   |   |   |   |
| NON-OPERATING ITEMS:                        |       |                  |       |   |   |   |   |
| Interest income                             |       | 0.2                   | %          | 0.2 | % | 25.2 | % |
| Interest expense                            |       | (5.2                  | )%         | (5.1 | )% | 6.9 | % |
| Debt extinguishment expense                 |       | —                |       | (1.5 | )% | (100.0 | )% |
| Other non-operating items, net              |       | —                |       | 0.1 | % | (90.7 | )% |
|                                        |       | (5.0                  | )%         | (6.3 | )% | (15.9 | )% |
|                                        |       |                  |       |   |   |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 3.8                   | %          | 3.3 | % | 21.4 | % |
|                                        |       |                  |       |   |   |   |   |
| INCOME TAX EXPENSE                          |       | (1.4                  | )%         | (1.3 | )% | 17.7 | % |
|                                        |       |                  |       |   |   |   |   |
| NET INCOME                                  |       | 2.4                   | %          | 2.0 | % | 23.6 | % |

 

16

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**RESULTSOF OPERATIONS**

** **

**Three Months Ended September 30, 2005**

**Compared With Three Months Ended September 30,2004**

 

*Revenues*

* *

Revenuesof $124.7 million for the third quarter of 2005 increased by approximately $7.1million, or 6.0%, from the comparable period in 2004.

 

Membershipservices revenues of $35.1 million for the third quarter of 2005 increased byapproximately $2.3 million, or 6.9%, from the comparable period in 2004.  This increase was largely attributable to a$2.2 million increase in member events revenue due to the timing of the GreatNorth American Rally, which occurred in the second quarter of 2004 versus thethird quarter of 2005, a $1.5 million increase in extended vehicle warrantyprogram revenue, due to continued growth in the sales of one-year warrantyproducts, and increased enrollment in the emergency road service programs.  These increases were partially offset by a$0.7 million decrease in dealer program marketing revenue, a $0.4 million reductionin membership services revenue, primarily associated with reduced enrollment inthe Coast to Coast Club and Golf Card Club, and a $0.3 million reduction inmarketing fee income recognized on RV financing products.

 

Publicationrevenues of $14.0 million for the third quarter of 2005 increased $0.6 million,or 4.4%, from the comparable period in 2004. This increase was primarily due to a $0.5 increase in advertisingrevenue for the recreational vehicle related titles, a$0.4 million increase in revenue due to a magazine title acquired in May 2005,*Powerboat Magazine,*and a $0.3 millionrevenue increase from additional issues of powersports magazine titles.  These increases were partially offset by a $0.6million reduction in revenue due to the disposition of archery-relatedpublication titles in the third quarter of 2004.

 

Retail revenues of $75.7 million increased $4.2million, or 5.9%, over the third quarter of 2004.  Store merchandise sales increased $3.8million over the third quarter of 2004 primarily due to a $3.6 million revenueincrease from the addition of eight new stores over the past eighteenmonths.  Same store sales increased $0.2million, or 0.4%, compared to a 6.1% increase in the third quarter of2004.  Same store sale calculations for agiven period include only those stores that were open both at the end of thatperiod and at the beginning of the preceding fiscal year.  Additionally, revenue from other installationfees, supplies and services revenue increased $0.4 million.

 

*Costs Applicable to Revenues*

* *

Costsapplicable to revenues totaled $80.1 million for the third quarter of 2005, anincrease of $5.9 million, or 8.0%, from the comparable period in 2004.

 

Membership services costs and expenses of $24.3million increased approximately $2.8 million, or 12.9%, from the third quarterof 2004.  This increase consisted of a$2.0 million

 

17

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increase primarily due to event timing, a $1.1million increase in marketing costs and program expenses associated withincreased enrollment in the extended vehicle warranty and emergency roadservice programs, partially offset by a $0.3 million decrease in membershipservices costs, primarily due to reduced marketing expenses in the Coast to CoastClub and the Golf Card Club.

 

Publication costs and expenses of $10.4 millionfor the third quarter of 2005 increased $0.8 million, or 8.5%, from thecomparable period in 2004 primarily due to increased costs attributable to thenewly acquired magazine title, *Powerboat Magazine,*andconsumer shows purchased through the acquisition of ARU Inc. (“ARU”) in December 2004,and reduced operating expenses for various titles.  These increases were partially offset by thedisposition of archery-related titles in the third quarter of 2004.

 

Retail costs applicable to revenues increased$2.3 million, or 5.4%, to $45.4 million primarily due to new storeopenings.  The retail gross profit marginof 40.1% for the third quarter of 2005 increased from 39.8% from the comparableperiod in 2004 primarily due to favorable freight and other vendor credits inthe third quarter of 2005.

 

*Operating Expenses*

* *

Selling, general and administrative expenses of$31.8 million for the third quarter of 2005 increased $1.2 million compared tothe third quarter of 2004 primarily due to increases in retail selling, generaland administrative expenses of approximately $0.5 million consisting mostly ofan increase in retail labor, a $0.2 million increase in deferred executivecompensation and a $0.5 million increase in other executive wages and hurricanerelief contributions.

 

Depreciation and amortization expense of $3.9million for the third quarter of 2005 remained relatively unchanged from theprior year, decreasing approximately $0.2 million versus the comparable periodin the 2004.

 

*Income from Operations*

* *

Incomefrom operations for the third quarter of 2005 of $8.9 million increased $0.2million compared to the third quarter of 2004 primarily due to increased grossprofit from the retail operations of $1.9 million partially offset by increasedoperating expenses of $1.0 million and reduced gross profit from the membershipservices and publications operations of $0.5 million and $0.2 million,respectively.

 

*Non-Operating Items*

* *

Non-operating items were $6.1 million for thethird quarter of 2005, compared to $5.6 million for the same period in2004.  This $0.5 million increase was dueto a $0.3 million increase in interest expense resulting from higher interestrates and a $0.4 million gain on sale of assets in 2004 partially offset bya $0.2 million increase in interest income.

 

18

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* *

*Income before Income Taxes*

* *

Income before income taxes for the third quarterof 2005 was $2.8 million, or $0.4 million lower than the third quarter of2004.  This decrease was attributable to$0.3 million of additional interest expense, and a $0.4 million gain on sale ofassets in 2004, partially offset by a $0.2 million increase in income fromoperations and a $0.1 million decrease in other non-operating items.

 

*Income Tax Expense*

* *

TheCompany recorded approximately $1.1 million of income tax expense for the thirdquarter of 2005, a decrease of $0.3 million from the third quarter of2004.  The effective tax rates for thethird quarter of 2005 and 2004 were 37.8% and 42.0%.  The effective tax rates are higher thanstatutory rates primarily due to state taxes.

 

# *NetIncome*

# * *

Net income in the third quarter of 2005 was $1.7million compared to a net income of $1.9 million for the same period in 2004.

 

*Segment Profit*

* *

Segment profit of approximately $14.0 million for 2005 (beforeunallocated depreciation and amortization, general and administrative,interest, debt restructuring, and income tax expense) increased $1.7 millionfrom the comparable period in 2004.

 

Membership services segment profit of $9.3 million for the thirdquarter of 2005 decreased $0.1 million, or 1.4%, from the third quarter of2004.  This decrease is largelyattributable to a $0.3 million decrease in marketing fee income recognized onRV financing products, a $0.3 million increase in new product developmentexpenses, a $0.2 million decrease in dealer marketing profit and a $0.2 millionincrease in other operating expenses, partially offset by a $0.5 millionincrease in profit from the extended warranty program, and a $0.4 millionincrease in profit from emergency road service products.

 

Publication segment profit of $2.2 million for the third quarter of2005 decreased by $0.4 million, or 15.4%, from the third quarter of 2004.  This decrease was primarily attributable toreduced profit for the outdoor powersports publications due to reduced issuespublished, increased book sizes, timing of various titles, and a reduction inprofit related to the disposition of the archery related titles, partiallyoffset by an increase in profit from the recreational vehicle related titles.

 

Retail segment profit of $2.5 million for the third quarter of 2005increased by $2.2 million, or 761.0%, from the third quarter of 2004.  The increase in segment profit resulted primarily from a $2.3 millionincrease in gross profit, and a $0.4 million reduction in depreciation expense,partially offset by a $0.5 million increase in selling, general andadministrative expenses.

 

19

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**Nine Months Ended September 30, 2005**

**Compared With Nine Months Ended September 30,2004**

 

*Revenues*

* *

Revenuesof $366.6 million for the first nine months of 2005 increased by approximately$20.1 million, or 5.8%, from the comparable period in 2004.

 

Membershipservices revenues of $101.9 million for the first nine months of 2005 increasedby approximately $1.6 million, or 1.6%, from the comparable period in2004.  This revenue increase was largelyattributable to a $3.6 million increase in extended vehicle warranty programrevenue due to continued growth in the sales of one-year warranty products, anda $1.0 million increase in emergency road service revenue due to increasedenrollment, partially offset by a $1.4 million reduction in membership servicesrevenue, primarily associated with reduced enrollment in the Coast to CoastClub and Golf Card Club, a $1.0 million reduction in marketing fee incomerecognized on RV financing, and a $0.6 million reduction in dealer programmarketing revenue.

 

Publicationrevenues of $46.5 million for the first nine months of 2005 decreased $0.7million, or 1.5%, from the comparable period in 2004 primarily resulting from a$2.0 million revenue reduction due to the disposition of archery-relatedpublication titles in the third quarter of 2004, a $0.7 million reduction inrevenue from reduced promotion of the campground atlas, a $0.8 millionreduction associated with reduced issues of snow and regional publications, anda $0.3 million reduction in ad revenue for the motorcycle titles.  These decreases were partially offset by a $1.8million revenue increase associated with the acquisition of consumer shows,acquired through the acquisition of ARU in December 2004and the newly acquired *Powerboat Magazine*title, a $0.9 million increase in advertising revenue in the recreationalvehicle related titles and $0.4 million revenue increase in the powersportsrelated titles due to the timing of issues published.

 

Retail revenues of $218.2 million increased$19.2 million, or 9.7%, over the first nine months of 2004.  Store merchandise sales increased $18.1million over the first nine months of 2004 due to a same store sales increaseof $6.8 million or 4.9%, compared to a 9.9% increase in the first nine monthsof 2004, and an $11.3 million revenue increase from the addition of eight newstores over the past twenty-one months. Same store sale calculations for a given period include only thosestores that were open both at the end of that period and at the beginning ofthe preceding fiscal year.  In addition,retail revenue increased $1.1 million due to increases in other installationfees, supplies and services revenue.

 

20

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* *

*Costs Applicable to Revenues*

* *

Costsapplicable to revenues totaled $228.7 million for the first nine months of2005, an increase of $10.9 million, or 5.0%, from the comparable period in2004.

 

Membership services costs and expenses of $66.8million increased approximately $0.2 million, or 0.3%, from the first ninemonths of 2004.  This increase consistedof a $2.4 million increase in marketing costs and program expenses associatedwith increased enrollment in the extended vehicle warranty and emergency roadservice programs, partially offset by a $1.5 million decrease in membershipservices costs, primarily due to reduced marketing and program expenses of theCoast to Coast Club and Golf Card Club, and a $0.7 million reduction in dealermarketing expenses associated with reduced revenue.

 

Publication costs and expenses of $32.2 millionfor the first nine months of 2005 decreased $0.5 million from the comparableperiod in 2004 primarily due to a $1.7 million reduction from the dispositionof archery-related titles in the third quarter of 2004, a $0.9 millionreduction in costs associated with the campground atlas, and a $0.5 millionreduction associated with reduced issues of the regional publications.  These decreases were partially offset by $1.6million of additional costs attributable to the newly acquired operations ofARU and the *Powerboat Magazine* title and a $1.0million increase in operating expenses of the powersports related titles.

 

Retail costs applicable to revenues increased$11.2 million, or 9.4%, to $129.7 million primarily due to the opening of eightnew stores over the past twenty-one months. The retail gross profit margin of 40.6% for the first nine months of2005 increased slightly from 40.4% for the comparable period in 2004.

 

*Operating Expenses*

* *

Selling, general and administrative expenses ofapproximately $94.3 million for the first nine months of 2005 increased $9.0million compared to the first nine months of 2004 primarily due to an increasein retail selling and general and administrative expenses of approximately $7.1million consisting of increases in retail labor, real property expenses,personal property expenses, and training and other retail general andadministrative expenses of $4.8 million, $0.9 million, $0.4 million and $1.0million, respectively, and a $1.9 million increase in deferred executivecompensation expense.

 

Depreciation and amortization expense of $11.4million increased approximately $1.2 million over the prior year primarily dueto increased depreciation on capital expenditures at Camping World andamortization of intangible assets associated with the purchase of ARU and *Powerboat Magazine*, and costs associated with the issuanceof $200.0 million in 9% Senior Subordinated Notes in February 2004.

 

21

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* *

*Income from Operations*

* *

Incomefrom operations for the first nine months of 2005 totaling $32.1 milliondecreased $1.0 million compared to the first nine months of 2004.  This decrease is primarily due to increasedoperating expenses of $10.2 million and reduced gross profit for thepublications operations of $0.2 million, partially offset by increased grossprofit for the retail and membership services operations of $8.0 million and$1.4 million, respectively.

 

*Non-Operating Items*

* *

Non-operating items were $18.3 million for thefirst nine months of 2005, compared to $21.8 million for the same period in2004.  This $3.5 million decreasecomprises of a $5.0 million reduction in debt extinguishment expensesassociated with the redemption in 2004 of the AGH senior notes due 2007, and a$0.1 million increase in interest income, partially offset by approximately$1.2 million of additional interest expense in 2005 due to an increase inaverage interest rates and a higher loan balance associated with the issuanceof the Notes, and a $0.4 million gain on sale of assets in 2004.

 

*Income before Income Taxes*

* *

Income before income taxes for the first ninemonths of 2005 was $13.8 million, or $2.4 million higher than the first ninemonths of 2004.  This increase wasattributable to a $5.0 million reduction in debt extinguishment expense fromthe prior period partially offset by a $1.0 million decrease in income fromoperations for the current period, a $1.2 million increase in interest expenseand a $0.4 million reduction in other non-operating items.

 

*Income Tax Expense*

* *

The company recorded $5.0 million of income tax expense for the firstnine months of 2005, an increase of $0.8 million from the first nine months of2004.  The effective tax rates for thefirst nine months of 2005 and 2004 were 36.4% and 37.6%, respectively.  The effective tax rate in 2005 was lower than2004 due to a decrease in the company’s valuation allowance.  Overall, the effective tax rates are higherthan statutory rates due to state taxes.

 

# *NetIncome*

# * *

Net income in the first nine months of 2005 was$8.8 million compared to $7.1 million for the same period in 2004.

 

*Segment Profit*

* *

Segment profit of $45.0 million for the first nine months of 2005(before unallocated depreciation and amortization, general and administrative,interest, debt restructuring, and income tax expense) increased $3.1 million,or 7.4%, from the comparable period in 2004.

 

Membership services segment profit of $30.3 million for the first ninemonths of 2005 increased $2.1 million, or 7.4%, from the comparable period in2004.  This increase is

 

22

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largely attributable to a $1.7 million increase in profit fromemergency road service products, a $1.8 million increase in profit from theextended warranty program, a $0.8 million increase in profit from the Coast toCoast Club and Golf Card Club, partially offset by a $1.0 million decrease inprofit from marketing fee income recognized on RV financing products and a $0.3million decrease in profit in the Good Sam Club member publication, *Highways Magazine*, due to increased production costs, a $0.6million increase in other new product development expenses and a $0.2 milliondecrease in dealer program marketing profit.

 

Publication segment profit of $10.4 million for the first nine monthsof 2005 decreased $0.4 million from the comparable period in 2004.  Reduced profit in the powersport publicationswas partially offset by an increase in profit associated with the consumershows acquired through the acquisition of ARU in December 2004.

 

Retail segment profit of $4.3 million for the first nine months of 2005increased by $1.4 million, or 47.1% from the comparable period in 2004.  The increased profit resulted primarily from a $9.1 million increase ingross profit margin partially offset by a $7.1 million increase in selling,general and administrative expenses, and a $0.6 million increase indepreciation expense.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has historically operated with a workingcapital deficit.  The working capitaldeficit as of September 30, 2005 and December 31, 2004 was $4.4million and $10.8 million, respectively. The primary reason for the working capital deficit is the deferredrevenue and gains reported under current liabilities in the amount of $70.2million and $57.7 million as of September 30, 2005 and December 31,2004, respectively.  Deferred revenue isprimarily comprised of cash collected for club memberships in advance, which isamortized over the life of the membership. The Company uses net proceeds from this deferred membership revenue tolower its long-term borrowings. Management believes that funds generated by operations together withavailable borrowings under the Company’s revolving credit line will besufficient to meet all of the Company’s debt service requirements and capitalrequirements over the next twelve months.

 

23

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* *

*Contractual Obligations andCommercial Commitments*

* *

The following table reflects the Company’scontractual obligations and commercial commitments by maturity period at September 30,2005, in thousands.

 
| ** **                                | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                       | ** ** | **Total**                  | ** ** | **Balance of  2005** | ** ** | **2006 and  2007** | ** ** | **2008 and  2009** | ** ** | **Thereafter** | ** ** |
|                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                            |       | $                          | 314,737    |   | $ | 647 |   | $ | 3,962 |   | $ | 109,589 |   | $ | 200,539 |   |
| Operating lease  obligations              |       | 131,995                    |       | 3,143 |   | 22,768 |   | 17,043 |   | 89,041 |   |
| Deferred compensation                     |       | 7,288                      |       | 564 |   | 2,163 |   | 3,883 |   | 678 |   |
| Standby and commercial letters  of credit |       | 7,198                      |       | 5,929 |   | 1,269 |   | — |   | — |   |
| Grand total                               |       | $                          | 461,218    |   | $ | 10,283 |   | $ | 30,162 |   | $ | 130,515 |   | $ | 290,258 |   |
|                                           |            |                            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

On June 24, 2003, the Company entered into an Amended and RestatedCredit Agreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the AGI Senior Credit Facility). The AGI Senior Credit Facility provides for a revolving credit facilityof $35.0 million and term loans (“Term B1 and Term B2 loans”) in the aggregateof $140.0 million.  Proceeds from the AGISenior Credit Facility were used to refinance the existing senior securedindebtedness, pay a dividend of $13.7 million to the Company’s ultimate parentAGI Holding Corp. and redeem $30.0 million principal amount of the AGH Notes at103.667% of par in 2003.  As of September 30,2005, $31.9 million and $79.6 million were outstanding under the Term B1 andTerm B2 loans, respectively.  Noborrowings were outstanding on the revolving credit facility as of September 30,2005.  Reborrowings under the term loansare not permitted.  The interest onborrowings under the AGI Senior Credit Facility is at variable rates based onthe ratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin ranging from1.50% to 3.50% over the stated rates.  Asof September 30, 2005, the average interest rate on the term loans was6.84%, and permitted borrowings under the undrawn revolving facility were $27.8million.  The Company also pays 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 on June 24,2008, and the Term B1 and Term B2 loans mature on June 24, 2009.  The funds available under the AGI SeniorCredit Facility may be utilized for borrowings or letters of credit; however, amaximum of $12.5 million may be allocated to such letters of credit.  As of September 30, 2005, the Companyhad letters of credit in the aggregate amount of $7.2 million outstanding.  The AGI Senior Credit Facility is secured byvirtually all of the Company’s assets and a pledge of the Company’s stock andthe stock of the Company’s subsidiaries.

 

In February 2004, the Company issued $200.0million aggregate principal amount of 9% Senior Subordinated Notes due 2012(the “Notes”).  Interest is payable onthe Notes twice a year on each February 15 and August 15, beginning August 15,2004, and the Notes mature on February 15, 2012.  The proceeds from the sale of the Notes wereused to fund the tender offer and defeasance of the remaining $100.0 millionoutstanding principal amount of the AGH Notes, prepay $25.0 million of the TermB1 and Term B2 loans under

 

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the AGI Senior Credit Facility, pay a $60.0million dividend distribution, create a $15.0 million segregated cash account,pay certain prepayment and transaction costs and for general corporatepurposes.  The amount held in thissegregated account, including any earnings thereon, was available to paystockholder dividends upon satisfaction of a leverage test specified in the AGISenior Credit Facility.  In August andNovember of 2004, the Company satisfied the specific leverage test andpaid $3.6 million and $11.5 million in dividends, respectively.  The segregated account replenishmentrequirement has been permanently eliminated.

 

In November 2004, the Company amended theAGI Senior Credit Facility dated June 24, 2003.  The interest rates on the Term B1 and Term B2loans were reduced by 1.00%.  Theapplicable interest margin on the LIBOR and Prime Rate loans was reduced from4.00% to 3.00% and 3.00% to 2.00%, respectively.

 

The AGI Indenture pursuant to which the Notes were issued and the AGISenior Credit Facility contain certain restrictive covenants relating to, butnot limited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  The Company was in compliance with all debtcovenants at September 30, 2005.

 

In March 2005, AGHI, the Company’s parent, issued $88.2 millionprincipal amount of its 10-7/8% senior notes due February 15, 2012 (the “AGHINotes”).  Interest on the AGHI notes ispayable semi-annually on February 15 and August 15.  For interest payments on and prior to February 15,2008, AGHI may elect to pay interest on the AGHI Notes in cash or by issuanceof additional notes of the same tenor as the AGHI Notes, except the maturitydate is March 15, 2010.  AGI has notpaid any dividends to AGHI to fund payment of interest on the AGHI Notes andAGHI made the interest payment due on August 15, 2005 through issuance ofadditional notes.

 

In April 2005, Camping World, Inc. acquired the assets of amail order catalog retailer specializing in recreational vehicle merchandisefor $0.6 million.  In May 2005, theEhlert Publishing Group, Inc. acquired the *PowerboatMagazine* title and related assets from Nordskog Publishing, Inc.for $4.0 million.  As part of thepurchase, the Company issued $1.5 million of debt and assumed $0.5 million ofliabilities.

 

For the nine months ended September 30, 2005, the Company incurred$2.9 million of deferred executive compensation expense under the phantom stockagreements and made payments of $0.9 million on the pay-out provisions ofexisting phantom stock agreements.  Theearned incentives under these agreements are scheduled to be paid at varioustimes over the next seven years.  Phantomstock payments of $0.6 million are scheduled to**bemade over the remainder of the calendar year.

 

Capital expenditures for the first nine months of 2005 totaling $8.6million increased $1.9 million from the first nine months of 2004.  Additional capital expenditures of $3.9million are anticipated for the balance of 2005, primarily for new CampingWorld stores and equipment, a distribution center expansion, and computerhardware and software upgrades and enhancements.

 

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**CRITICAL ACCOUNTING POLICIES**

 

*General*

* *

The discussion and analysis of the Company’s 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, employee healthinsurance benefits, income taxes, restructuring, 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 affectthe more significant judgments and estimates used in the preparation of theCompany’s consolidated financial statements.

 

*Revenue Recognition*

* *

Merchandise revenue is recognized whenproducts are sold in the retail stores, shipped for mail and internet orders,or when services are provided to customers. Publication advertising andnewsstand sales, net of estimated provision for returns, are recorded at timeof delivery.  Subscription sales ofpublications are deferred and recognized over the lives of thesubscriptions.  Revenues from theemergency road service program (“ERS”) are deferred and recognized over thelife of the membership.  ERS claimexpenses are recognized when incurred. Advances on third party credit card fee revenues are deferred and recognizedbased primarily on a percentage of credit card receivables held by thirdparties.  Membership revenue is generatedfrom annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimates wouldchange the amount of income and expense amortized in future accounting periods.

 

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* *

*Accounts Receivable*

* *

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

 

*Inventory*

* *

The Company states inventories at the lower of cost or market.  In assessing the ultimate realization ofinventories, the Company is required to make judgments as to future demandrequirements and compare that with the current or committed inventorylevels.  The Company has recorded changesin required reserves in recent periods due to changes in strategic direction,such as discontinuances of product lines as well as changes in marketconditions due to changes in demand requirements.  It is possible that changes in requiredinventory reserves may continue to occur in the future due to the marketconditions.

 

*Long-Lived Assets*

* *

Purchased intangible assets with finite lives are amortized using thestraight-line method over the estimated economic lives of the assets, rangingfrom one to twenty-three years.

 

Long-lived assets, such as property, plant and equipment and purchasedintangible assets with finite lives are evaluated for impairment wheneverevents or changes in circumstances indicate the carrying value of an asset maynot be recoverable in accordance with SFAS No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets.” The Company assesses the fair value of the assets based on the futurecash flow the assets are expected to generate and recognize an impairment losswhen estimated undiscounted future cash flow expected to result from the use ofthe asset plus net proceeds expected from disposition of the asset (if any) areless than the carrying value of the asset. When an impairment is identified, the Company reduces the carryingamount of the asset to its estimated fair value based on a discounted cash flowapproach or, when available and appropriate, comparable market values.  The Company determined there were no indicatorsof impairment of long-lived assets as of December 31, 2004 or September 30,2005.

 

The Company has evaluated the remaining useful lives of itsfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary or if any of these assets had indefinite lives andwere therefore not subject to amortization. The Company determined that no adjustments to the useful lives of itsfinite-lived purchased intangible assets were necessary.  The finite-lived purchased intangible assetsconsist of membership customer lists, resort and golf course agreements,non-compete and deferred consulting agreements and deferred financing costswhich have weighted average useful lives of approximately 6 years, 23 years, 15years and 7 years, respectively.

 

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* *

*Indefinite Lived Intangible Assets*

* *

The Company evaluates indefinite lived intangible assets for impairmentat least annually or when events indicate that an impairment exists in accordancewith SFAS No. 142.  The impairmenttest for goodwill and other indefinite-lived intangible assets is calculatedannually using fair value measurement techniques.

 

Determining the fair value of a reporting unit and the fair value ofindividual assets and liabilities of a reporting unit is judgmental in natureand often involves 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.  TheCompany’s estimates of fair value utilized in goodwill and otherindefinite-lived intangible asset tests may be based upon a number of factors,including assumptions about the projected future cash flows, discount rate,growth rate, determination of market comparables, technological change,economic conditions or changes to the Company’s business operations.  Such changes may result in impairment chargesrecorded in future periods.

 

The fair value of the Company’s reporting units is annually determinedusing a combination of the income approach and the market approach.  Under the income approach, the fair value ofa reporting unit is calculated based on the present value of estimated futurecash flows.  Future cash flows are estimatedby the Company under the market approach, fair value is estimated based onmarket multiples of revenue or earnings for comparable companies.

 

Based on the results of the annual impairment tests, the Companydetermined that no impairment of goodwill existed as of December 31,2004.  However, future goodwillimpairment tests could result in a charge to earnings.  The Company will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

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

 

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

 

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

 

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* *

*InterestRate Sensitivity Analysis*

* *

At September 30,2005, we had debt totaling $314.7 million, comprised of $111.5 million ofvariable rate debt and $203.2 million of fixed rate debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorableimpact of approximately $1.1 million.

 

*CreditRisk*

* *

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

 

**ITEM 4: CONTROL AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-14 under the SecuritiesExchange Act of 1934.  Based upon thatevaluation, the President and Chief Executive Officer along with the SeniorVice President and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to material informationrelating to the Company (including its consolidated subsidiaries) required tobe included in the periodic SEC filings. There have been no significant 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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**PART II:  OTHER INFORMATION**

 

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: November 2, 2005 | Thomas F. Wolfe           |
|                        | Senior Vice President and |
|                        | Chief Financial Officer   |

 

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