** **

**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** |
|------------------------|------------|----------------------------|
| **June 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**             | ** ** | ** **                           |
| **Ventura, CA 93001**                    | ** ** | **(805) 667-4100**                   |
| (Address of principal executive offices) |       | (Registrant’s telephone         |
|                                     |       | 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 the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 
| ** **                    | ** ** | **Outstanding as of**   |
|-------------------------------|------------|-------------------------|
| **Class**                     | ** ** | **August 3, 2005** |
| Common Stock, $.001 par value |       | 2,000                   |

 

**DOCUMENTS INCORPORATED BY REFERENCE:  None**

 

 

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

** **

**INDEX**

 
| **Part I.**Financial  Information |                                                                                                     |
|----------------------------------------|----------------------------------------------------------------------------------------------------------|
|                                   |                                                                                                     |
|                                   | **Item 1: Financial Statements**                                                                         |   |
|                                   |                                                                                                     |
|                                   | Unaudited  Consolidated Balance Sheets as of June 30, 2005 and December 31,  2004              |   |
|                                   |                                                                                                     |   |
|                                   | Unaudited  Consolidated Statements of Operations for the three months ended June 30,  2005 and 2004 |   |
|                                   |                                                                                                     |   |
|                                   | Unaudited  Consolidated Statements of Operations for the six months ended June 30,  2005 and 2004   |   |
|                                   |                                                                                                     |   |
|                                   | Unaudited  Consolidated Statements of Cash Flows for the six months ended June 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**                         |                                                                                                     |
|                                        |                                                                                                          |  |  |

 

----

 

AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30,2005 and December 31, 2004

(InThousands)

 
| ** **                                                                                    | ** ** | **6/30/2005**   | ** ** | **12/31/2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                    |       |            |       |           |       |
| CURRENT ASSETS:                                                                               |       |            |       |           |       |
| Cash and cash  equivalents                                                                    |       | $               | 36,764     |           | $          | 24,564 |   |
| Accounts receivable,  less allowance for doubtful accounts of $1,189 in 2005 and $810 in 2004 |       | 20,926          |       | 24,228         |       |
| Inventories                                                                                   |       | 52,194          |       | 42,463         |       |
| Prepaid expenses and  other assets                                                            |       | 15,279          |       | 11,383         |       |
| Deferred tax assets,  net                                                                     |       | 6,615           |       | 6,615          |       |
| Total current assets                                                                          |       | 131,778         |       | 109,253        |       |
|                                                                                          |       |            |       |           |       |
| PROPERTY AND EQUIPMENT,  net                                                                  |       | 27,924          |       | 27,642         |       |
| AFFILIATE NOTES AND  INVESTMENTS                                                              |       | 85,742          |       | 4,752          |       |
| INTANGIBLE ASSETS, net                                                                        |       | 29,214          |       | 27,716         |       |
| GOODWILL                                                                                      |       | 148,773         |       | 148,773        |       |
| DEFERRED TAX ASSETS,  net                                                                     |       | 2,311           |       | 323            |       |
| OTHER ASSETS                                                                                  |       | 1,677           |       | 1,763          |       |
| Total assets                                                                                  |       | $               | 427,419    |           | $          | 320,222 |   |
|                                                                                          |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                               |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts payable                                                                              |       | $               | 26,799     |           | $          | 16,511 |   |
| Accrued interest                                                                              |       | 7,021           |       | 6,857          |       |
| Accrued income taxes                                                                          |       | 2,892           |       | 3,131          |       |
| Accrued liabilities                                                                           |       | 34,999          |       | 34,230         |       |
| Deferred revenues and  gains                                                                  |       | 64,028          |       | 57,661         |       |
| Current portion of  long-term debt                                                            |       | 1,911           |       | 1,676          |       |
| Total current  liabilities                                                                    |       | 137,650         |       | 120,066        |       |
|                                                                                          |       |            |       |           |       |
| DEFERRED REVENUES AND  GAINS                                                                  |       | 40,157          |       | 41,469         |       |
| LONG-TERM DEBT, net of  current portion                                                       |       | 313,196         |       | 312,660        |       |
| OTHER LONG-TERM  LIABILITIES                                                                  |       | 6,490           |       | 4,135          |       |
|                                                                                          |       | 497,493         |       | 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                                                                           |       | (151,080        | )          | (158,109       | )          |
| Total stockholder’s  deficit                                                             |       | (70,074         | )          | (158,108       | )          |
| Total liabilities and  stockholder’s deficit                                             |       | $               | 427,419    |           | $          | 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** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **6/30/2005**          | ** ** | **6/30/2004** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | **(restated-** | ** ** |
| ** **                                  | ** ** | ** **             | ** ** | **see Note 1)** | ** ** |
| REVENUES:                                   |       |                   |       |   |   |
| Membership services                         |       | $                      | 34,401     |   | $ | 36,022 |   |
| Publications                                |       | 15,301                 |       | 16,583 |   |
| Retail                                      |       | 83,510                 |       | 75,039 |   |
|                                        |       | 133,212                |       | 127,644 |   |
|                                        |       |                   |       |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                   |       |   |   |
| Membership services                         |       | 22,301                 |       | 24,342 |   |
| Publications                                |       | 10,238                 |       | 11,109 |   |
| Retail                                      |       | 50,098                 |       | 44,728 |   |
|                                        |       | 82,637                 |       | 80,179 |   |
|                                        |       |                   |       |   |   |
| GROSS PROFIT                                |       | 50,575                 |       | 47,465 |   |
|                                        |       |                   |       |   |   |
| OPERATING EXPENSES:                         |       |                   |       |   |   |
| Selling, general and  administrative        |       | 32,698                 |       | 29,564 |   |
| Depreciation and  amortization              |       | 3,820                  |       | 3,035 |   |
|                                        |       | 36,518                 |       | 32,599 |   |
|                                        |       |                   |       |   |   |
| INCOME FROM OPERATIONS                      |       | 14,057                 |       | 14,866 |   |
|                                        |       |                   |       |   |   |
| NON-OPERATING ITEMS:                        |       |                   |       |   |   |
| Interest income                             |       | 178                    |       | 178 |   |
| Interest expense                            |       | (6,360                 | )          | (6,200 | ) |
| Debt extinguishment  expense                |       | —                 |       | (419 | ) |
| Other non-operating  items, net             |       | 14                     |       | 40 |   |
|                                        |       | (6,168                 | )          | (6,401 | ) |
|                                        |       |                   |       |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 7,889                  |       | 8,465 |   |
|                                        |       |                   |       |   |   |
| INCOME TAX EXPENSE                          |       | (2,758                 | )          | (3,040 | ) |
|                                        |       |                   |       |   |   |
| NET INCOME                                  |       | $                      | 5,131      |   | $ | 5,425 |   |

 

Seenotes to consolidated financial statements.

 

2

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                  | ** ** | **SIX MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **6/30/2005**        | ** ** | **6/30/2004** | ** ** |
| ** **                                  | ** ** | ** **           | ** ** | **(restated-** | ** ** |
| ** **                                  | ** ** | ** **           | ** ** | **see Note 1)** | ** ** |
| REVENUES:                                   |       |                 |       |   |   |
| Membership services                         |       | $                    | 66,824     |   | $ | 67,541 |   |
| Publications                                |       | 32,499               |       | 33,812 |   |
| Retail                                      |       | 142,576              |       | 127,573 |   |
|                                        |       | 241,899              |       | 228,926 |   |
|                                        |       |                 |       |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                 |       |   |   |
| Membership services                         |       | 42,502               |       | 45,066 |   |
| Publications                                |       | 21,759               |       | 23,111 |   |
| Retail                                      |       | 84,392               |       | 75,538 |   |
|                                        |       | 148,653              |       | 143,715 |   |
|                                        |       |                 |       |   |   |
| GROSS PROFIT                                |       | 93,246               |       | 85,211 |   |
|                                        |       |                 |       |   |   |
| OPERATING EXPENSES:                         |       |                 |       |   |   |
| Selling, general and  administrative        |       | 62,559               |       | 54,749 |   |
| Depreciation and  amortization              |       | 7,518                |       | 6,072 |   |
|                                        |       | 70,077               |       | 60,821 |   |
|                                        |       |                 |       |   |   |
| INCOME FROM OPERATIONS                      |       | 23,169               |       | 24,390 |   |
|                                        |       |                 |       |   |   |
| NON-OPERATING ITEMS:                        |       |                 |       |   |   |
| Interest income                             |       | 344                  |       | 355 |   |
| Interest expense                            |       | (12,546              | )          | (11,624 | ) |
| Debt extinguishment  expense                |       | —               |       | (5,035 | ) |
| Other non-operating  items, net             |       | 30                   |       | 87 |   |
|                                        |       | (12,172              | )          | (16,217 | ) |
|                                        |       |                 |       |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 10,997               |       | 8,173 |   |
|                                        |       |                 |       |   |   |
| INCOME TAX EXPENSE                          |       | (3,968               | )          | (2,930 | ) |
|                                        |       |                 |       |   |   |
| NET INCOME                                  |       | $                    | 7,029      |   | $ | 5,243 |   |

 

Seenotes to consolidated financial statements.

 

3

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **SIX MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **6/30/2005**        | ** ** | **6/30/2004** | ** ** |
| ** **                                                                         | ** ** | ** **           | ** ** | **(restated-** | ** ** |
| ** **                                                                         | ** ** | ** **           | ** ** | **see Note 1)** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                             |       |                 |       |   |   |
| Net income                                                                         |       | $                    | 7,029      |   | $ | 5,243 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation                                                                       |       | 4,570                |       | 3,440 |   |
| Amortization                                                                       |       | 2,948                |       | 2,632 |   |
| Provision for losses on  accounts receivable                                       |       | 483                  |       | 1,109 |   |
| Deferred compensation                                                              |       | 1,650                |       | — |   |
| Deferred tax benefit                                                               |       | (1,988               | )          | (1,184 | ) |
| Loss (gain) on sale of  property and equipment                                     |       | 2                    |       | (1 | ) |
| Loss on early  extinguishment of debt                                              |       | —               |       | 5,035 |   |
| Changes in operating  assets and liabilities                                       |       |                 |       |   |   |
| Accounts receivable                                                                |       | 2,855                |       | 586 |   |
| Inventories                                                                        |       | (9,630               | )          | (9,666 | ) |
| Prepaid expenses and  other assets                                                 |       | (3,810               | )          | (3,299 | ) |
| Accounts payable                                                                   |       | 10,288               |       | 5,520 |   |
| Accrued and other  liabilities                                                     |       | 1,399                |       | 6,705 |   |
| Deferred revenues and  gains                                                       |       | 4,575                |       | 2,256 |   |
| Net cash provided by  operating activities                                         |       | 20,371               |       | 18,376 |   |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                             |       |                 |       |   |   |
| Capital expenditures                                                               |       | (4,827               | )          | (5,043 | ) |
| Net proceeds from sale  of property and equipment                                  |       | 27                   |       | 1 |   |
| Change in intangible  assets                                                       |       | (26                  | )          | (10 | ) |
| Investment in affiliate                                                            |       | (81,005              | )          | — |   |
| Acquisitions, net of  cash received                                                |       | (2,639               | )          | — |   |
| Loans receivable                                                                   |       | 15                   |       | (22 | ) |
| Net cash used in  investing activities                                             |       | (88,455              | )          | (5,074 | ) |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                             |       |                 |       |   |   |
| Dividends paid                                                                     |       | —               |       | (60,000 | ) |
| Contribution from  parent                                                          |       | 81,005               |       | — |   |
| Borrowings on long-term  debt                                                      |       | —               |       | 200,000 |   |
| Payment of debt issue  costs                                                       |       | (21                  | )          | (7,157 | ) |
| Principal payments of  long-term debt                                              |       | (700                 | )          | (129,088 | ) |
| Net cash provided by  financing activities                                         |       | 80,284               |       | 3,755 |   |
|                                                                               |       |                 |       |   |   |
| NET INCREASE IN CASH  AND CASH EQUIVALENTS                                         |       | 12,200               |       | 17,057 |   |
|                                                                               |       |                 |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF YEAR                                    |       | 24,564               |       | 6,115 |   |
|                                                                               |       |                 |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                        |       | $                    | 36,764     |   | $ | 23,172 |   |

 

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 ofAffinity Group Holding, Inc. (“AGH”) and AGH was a wholly-owned subsidiaryof AGI Holding 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 three months and six months ended June 30,2004 have been restated to reflect the combined financial position and resultsof operations 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 JUNE 30, 2005**     |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 34,401     |             | $          | 15,301     |       | $                | 83,510     |   | $ | 133,212 |   |
| Depreciation and  amortization                 |       | 787            |       | 542              |       | 1,770      |       | 3,099            |       |
| (Gain) loss on sale of  property and equipment |       | —         |       | (5               | )          | 3          |       | (2               | )          |
| Interest income                                |       | 1,167          |       | —           |       | 3          |       | 1,170            |       |
| Interest expense                               |       | —         |       | 69               |       | 2,622      |       | 2,691            |       |
| Segment operating  profit                      |       | 10,653         |       | 3,763            |       | 3,446      |       | 17,862           |       |
|                                           |       |           |       |             |       |       |       |             |       |
| **THREE  MONTHS ENDED JUNE 30, 2004**     |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 36,022     |             | $          | 16,583     |       | $                | 75,039     |   | $ | 127,644 |   |
| Depreciation and  amortization                 |       | 907            |       | 424              |       | 1,164      |       | 2,495            |       |
| Interest income                                |       | 636            |       | —           |       | —     |       | 636              |       |
| Interest expense                               |       | —         |       | 231              |       | 2,626      |       | 2,857            |       |
| Segment operating  profit                      |       | 9,787          |       | 4,250            |       | 3,788      |       | 17,825           |       |

 
| ** **                                     | ** ** | **Membership** | ** ** | ** **       | ** ** | ** ** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|----------------|------------|------------------|------------|------------|------------|------------------|------------|
| ** **                                     | ** ** | **Services**   | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **SIX  MONTHS ENDED JUNE 30, 2005**       |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 66,824     |             | $          | 32,499     |       | $                | 142,576    |   | $ | 241,899 |   |
| Depreciation and  amortization                 |       | 1,759          |       | 1,016            |       | 3,488      |       | 6,263            |       |
| (Gain) loss on sale of  property and equipment |       | —         |       | (5               | )          | 3          |       | (2               | )          |
| Interest income                                |       | 2,170          |       | —           |       | 5          |       | 2,175            |       |
| Interest expense                               |       | —         |       | 159              |       | 5,212      |       | 5,371            |       |
| Segment operating  profit                      |       | 21,012         |       | 8,191            |       | 1,788      |       | 30,991           |       |
|                                           |       |           |       |             |       |       |       |             |       |
| **SIX  MONTHS ENDED JUNE 30, 2004**       |       |           |       |             |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 67,541     |             | $          | 33,812     |       | $                | 127,573    |   | $ | 228,926 |   |
| Depreciation and  amortization                 |       | 1,811          |       | 850              |       | 2,390      |       | 5,051            |       |
| Gain on sale of  property and equipment        |       | —         |       | —           |       | 1          |       | 1                |       |
| Interest income                                |       | 1,228          |       | —           |       | 1          |       | 1,229            |       |
| Interest expense                               |       | —         |       | 504              |       | 5,237      |       | 5,741            |       |
| Segment operating  profit                      |       | 18,790         |       | 8,165            |       | 2,623      |       | 29,578           |       |

 

6

----

 

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

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **6/30/2005**          | ** ** | **6/30/2004**        | ** ** | **6/30/2005** | ** ** | **6/30/2004** | ** ** |
| **Income  From Continuing Operations Before Income Taxes**     |       |                   |       |                 |       |   |   |   |   |
| Total profit for  reportable segments                          |       | $                      | 17,862     |                 | $          | 17,825 |   | $ | 30,991 |   | $ | 29,578 |   |
| Unallocated G &  A expense                            |       | (4,591                 | )          | (4,600               | )          | (9,733 | ) | (8,592 | ) |
| Unallocated  depreciation and amortization expense             |       | (721                   | )          | (540                 | )          | (1,255 | ) | (1,021 | ) |
| Unallocated interest  expense, net of intercompany elimination |       | (3,669                 | )          | (3,343               | )          | (7,175 | ) | (5,883 | ) |
| Unallocated interest  income, net of intercompany elimination  |       | (992                   | )          | (458                 | )          | (1,831 | ) | (874 | ) |
| Unallocated debt  restructure expense                          |       | —                 |       | (419                 | )          | — |   | (5,035 | ) |
| Income from continuing  operations before income taxes         |       | $                      | 7,889      |                 | $          | 8,465 |   | $ | 10,997 |   | $ | 8,173 |   |

 

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

 
| ** **                                           | ** ** | **6/30/2005** | ** ** | **12/31/2004** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services  segment                         |       | $             | 177,256    |           | $          | 170,270 |   |
| Publications segment                                 |       | 77,403        |       | 75,731         |       |
| Retail segment                                       |       | 221,956       |       | 124,325        |       |
| Total assets for  reportable segments                |       | 476,615       |       | 370,326        |       |
| Capitalized finance  costs not allocated to segments |       | 10,153        |       | 10,951         |       |
| Corporate unallocated  assets                        |       | 15,609        |       | 13,705         |       |
| Elimination of  intersegment receivable              |       | (74,958       | )          | (74,760        | )          |
| Total assets                                         |       | $             | 427,419    |           | $          | 320,222 |   |

 

Total assets for the retail segment increased $97.6 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) and a seasonalincrease in inventory levels of the retail segment.

 

**(3) STATEMENTS OF CASH FLOWS**

 

Supplemental disclosures of cash flowinformation for the six months ended June 30 (in thousands):

 
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the  period for: |       |     |       |     |       |
| Interest                          |       | $        | 12,382     |     | $          | 8,829 |   |
| Income taxes                      |       | 5,138    |       | 2,246    |       |
|                                   |            |          |            |          |            |  |  |

 

7

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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 *PowerboatMagazine* 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.

 

There were no changes in the Company’s goodwill by business segment forthe six months ended June 30, 2005 and 2004.

 

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

 
| ** **                                       | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                       | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                             |       |                |       |       |       |             |       |       |       |
| Membership and customer  lists                   |       | 6                   |       | $          | 16,031     |             | $          | (5,513     | )          | $ | 10,518 |   |
| Resort and golf course  participation agreements |       | 23                  |       | 13,555     |       | (11,173          | )          | 2,382      |       |
| Non-compete and  deferred consulting agreements  |       | 15                  |       | 18,455     |       | (10,921          | )          | 7,534      |       |
| Deferred financing  costs                        |       | 7                   |       | 11,609     |       | (2,829           | )          | 8,780      |       |
|                                             |       |                |       | $          | 59,650     |             | $          | (30,436    | )          | $ | 29,214 |   |

 

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.  The AGHI Notes areunsecured obligations of AGHI, and

 

8

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neither AGI nor its subsidiaries haveguaranteed payment 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 its subsidiary, there are certainrestrictions on the payment of dividends under AGI’s senior secured creditfacility (the “AGI Senior Credit Facility”) and the indenture relating to AGI’s$200.0 million 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 90% by The Stephen Adams Living Trust which also indirectly owns 97.4% ofthe outstanding capital stock of AGHC and indirectly AGI.

 

Thepreferred membership interest acquired by CWFR has a face amount of $88.2million 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 with respectto membership interests other than (a) distributions with respect to thepreferred 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

 

9

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notsell, pledge or otherwise transfer the preferred membership interest.  The preferred membership interest does notprovide 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’s subsidiary,CWI, Inc., was sued in California state court by Privacy RightsClearinghouse and Benjamin Greene in a suit alleging that CWI, Inc. wasrecording personal identification information from retail customers inviolation of certain California statutes. The plaintiff seeks injunctive relief preventing CWI, Inc. fromengaging in any act or practice constituting unfair competition under the statutesand for statutory penalties and damages. CWI, Inc. has responded to the suit and denied that its practicesviolate the statutes.  In the opinion ofmanagement, the likelihood of a material unfavorable outcome is not probable asof the date of the accompanying consolidated financial statements.

 

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

 

In February 2004, the Company issued $200.0million of 9% Senior Subordinated Notes (“Notes”) due 2012 pursuant to the AGIIndenture.  The Company’s present restrictedsubsidiaries have guaranteed, and future restricted subsidiaries will guarantee,the Notes with unconditional guarantees of payment that rank junior in right ofpayment to their existing and future senior debt, but rank equal in right ofpayment to their existing and future senior subordinated debt.

 

CWFR is an “unrestricted subsidiary” underthe 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.

 

10

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

 
| ** **                                               | ** ** | **AS OF JUNE 30, 2005** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | ** **                   | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                                               | ** ** | **AGI**                      | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                     |       |                         |       |   |   |   |   |   |   |   |   |
| Cash & cash  equivalents                        |       | $                            | 30,707     |   | $ | 6,057 |   | $ | — |   | $ | — |   | $ | 36,764 |   |
| Accounts receivable,  net                                |       | 313                          |       | 95,571 |   | — |   | (74,958 | ) | 20,926 |   |
| Inventories                                              |       | 37                           |       | 52,157 |   | — |   | — |   | 52,194 |   |
| Other current assets                                     |       | 5,405                        |       | 16,489 |   | — |   | — |   | 21,894 |   |
| Total current assets                                     |       | 36,462                       |       | 170,274 |   | — |   | (74,958 | ) | 131,778 |   |
|                                                     |       |                         |       |   |   |   |   |   |   |   |   |
| Property and equipment,  net                             |       | 6,230                        |       | 21,694 |   | — |   | — |   | 27,924 |   |
| Intangible assets                                        |       | 8,847                        |       | 20,367 |   | — |   | — |   | 29,214 |   |
| Goodwill                                                 |       | 67,584                       |       | 81,189 |   | — |   | — |   | 148,773 |   |
| Investment in  subsidiaries                              |       | 493,362                      |       | 81,005 |   | — |   | (574,367 | ) | — |   |
| Affiliate note and  investments                          |       | 4,737                        |       | — |   | 81,005 |   | — |   | 85,742 |   |
| Other assets                                             |       | 10,142                       |       | (6,154 | ) | — |   | — |   | 3,988 |   |
| Total assets                                             |       | $                            | 627,364    |   | $ | 368,375 |   | $ | 81,005 |   | $ | (649,325 | ) | $ | 427,419 |   |
|                                                     |       |                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                         |       | $                            | 232        |   | $ | 26,567 |   | $ | — |   | $ | — |   | $ | 26,799 |   |
| Accrued and other  liabilities                           |       | 20,903                       |       | 24,009 |   | — |   | — |   | 44,912 |   |
| Current portion of  long-term debt                       |       | 76,358                       |       | 511 |   | — |   | (74,958 | ) | 1,911 |   |
| Deferred revenue and  gains                              |       | 3,153                        |       | 60,875 |   | — |   | — |   | 64,028 |   |
| Total current  liabilities                               |       | 100,646                      |       | 111,962 |   | — |   | (74,958 | ) | 137,650 |   |
|                                                     |       |                         |       |   |   |   |   |   |   |   |   |
| Deferred revenue and  gains                              |       | 2,847                        |       | 37,310 |   | — |   | — |   | 40,157 |   |
| Long-term debt                                           |       | 310,450                      |       | 2,746 |   | — |   | — |   | 313,196 |   |
| Other long-term  liabilities                             |       | 283,495                      |       | (277,005 | ) | — |   | — |   | 6,490 |   |
| Total liabilities                                        |       | 697,438                      |       | (124,987 | ) | — |   | (74,958 | ) | 497,493 |   |
|                                                     |       |                         |       |   |   |   |   |   |   |   |   |
| Interdivisional equity                                   |       | —                       |       | 493,362 |   | 81,005 |   | (574,367 | ) | — |   |
| Stockholders’ deficit                               |       | (70,074                      | )          | — |   | — |   | — |   | (70,074 | ) |
|                                                     |       |                         |       |   |   |   |   |   |   |   |   |
| Total liabilities &  stockholders’ deficit |       | $                            | 627,364    |   | $ | 368,375 |   | $ | 81,005 |   | $ | (649,325 | ) | $ | 427,419 |   |

 

11

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| ** **                                             | ** ** | **SIX MONTHS ENDED JUNE 30,  2005** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                             | ** ** | ** **                               | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                                             | ** ** | **AGI**                                  | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                                |       | $                                        | 1,390      |   | $ | 240,509 |   | $ | — |   | $ | — |   | $ | 241,899 |   |
| Costs applicable to  revenues                          |       | (5,223                                   | )          | (143,430 | ) | — |   | — |   | (148,653 | ) |
| Operating expenses                                     |       | (10,809                                  | )          | (59,268 | ) | — |   | — |   | (70,077 | ) |
| Interest expense, net                                  |       | (9,006                                   | )          | (3,196 | ) | — |   | — |   | (12,202 | ) |
| Other non operating  income (expenses)                 |       | 3,031                                    |       | (3,001 | ) | — |   | — |   | 30 |   |
| Income tax benefit  (expense)                          |       | 7,439                                    |       | (11,407 | ) | — |   | — |   | (3,968 | ) |
| Net income (loss)                                      |       | $                                        | (13,178    | ) | $ | 20,207 |   | $ | — |   | $ | — |   | $ | 7,029 |   |
|                                                   |       |                                     |       |   |   |   |   |   |   |   |   |
| Cash flows from  operations                            |       | $                                        | (9,010     | ) | $ | 29,381 |   | $ | — |   | $ | — |   | $ | 20,371 |   |
| Cash flows (used in)  provided by investing activities |       | (82,405                                  | )          | (87,055 | ) | (81,005 | ) | 162,010 |   | (88,455 | ) |
| Cash flows (used in)  provided by financing activities |       | 97,270                                   |       | 64,019 |   | 81,005 |   | (162,010 | ) | 80,284 |   |
| Cash at beginning of  year                             |       | 24,852                                   |       | (288 | ) | — |   | — |   | 24,564 |   |
| Cash at end of year                                    |       | $                                        | 30,707     |   | $ | 6,057 |   | $ | — |   | $ | — |   | $ | 36,764 |   |

 

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

 
| ** **                             | ** ** | **THREE MONTHS ENDED JUNE 30,  2005** | ** ** |
|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | **NON-** | ** ** | ** ** | ** ** | **AGI** | ** ** |
| ** **                             | ** ** | **AGI**                                    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                   |       |                                       |       |   |   |   |   |   |   |   |   |
| Revenue                                |       | $                                          | 629        |   | $ | 132,583 |   | $ | — |   | $ | — |   | $ | 133,212 |   |
| Costs applicable to  revenues          |       | (2,610                                     | )          | (80,027 | ) | — |   | — |   | (82,637 | ) |
| Operating expenses                     |       | (5,140                                     | )          | (31,378 | ) | — |   | — |   | (36,518 | ) |
| Interest expense, net                  |       | (4,661                                     | )          | (1,521 | ) | — |   | — |   | (6,182 | ) |
| Other non operating  income (expenses) |       | 1,488                                      |       | (1,474 | ) | — |   | — |   | 14 |   |
| Income tax benefit  (expense)          |       | 3,420                                      |       | (6,178 | ) | — |   | — |   | (2,758 | ) |
| Net income (loss)                      |       | $                                          | (6,874     | ) | $ | 12,005 |   | $ | — |   | $ | — |   | $ | 5,131 |   |

 

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’ equity |       | $                                | 578,717    |   | $ | 267,545 |   | $ | — |   | $ | (526,040 | ) | $ | 320,222 |   |

 

13

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

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

 

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

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

 

14

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**ITEM 2:**

 

AFFINITYGROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL

CONDITIONAND RESULTS OF OPERATIONS

 

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

 
| ** **                                  | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **6/30/2005**          | ** ** | **6/30/2004** | ** ** | **Inc/(Dec)** | ** ** |
|                                        |       |                   |       |   |   |   |   |
| REVENUES:                                   |       |                   |       |   |   |   |   |
| Membership services                         |       | 25.8                   | %          | 28.2 | % | (4.5 | )% |
| Publications                                |       | 11.5                   | %          | 13.0 | % | (7.7 | )% |
| Retail                                      |       | 62.7                   | %          | 58.8 | % | 11.3 | % |
|                                        |       | 100.0                  | %          | 100.0 | % | 4.4 | % |
|                                        |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                   |       |   |   |   |   |
| Membership services                         |       | 16.7                   | %          | 19.1 | % | (8.4 | )% |
| Publications                                |       | 7.7                    | %          | 8.7 | % | (7.8 | )% |
| Retail                                      |       | 37.6                   | %          | 35.0 | % | 12.0 | % |
|                                        |       | 62.0                   | %          | 62.8 | % | 3.1 | % |
|                                        |       |                   |       |   |   |   |   |
| GROSS PROFIT                                |       | 38.0                   | %          | 37.2 | % | 6.6 | % |
|                                        |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                         |       |                   |       |   |   |   |   |
| Selling, general and  administrative        |       | 24.5                   | %          | 23.2 | % | 10.6 | % |
| Depreciation and  amortization              |       | 2.9                    | %          | 2.4 | % | 25.9 | % |
|                                        |       | 27.4                   | %          | 25.6 | % | 12.0 | % |
|                                        |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS                      |       | 10.6                   | %          | 11.6 | % | (5.4 | )% |
|                                        |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                        |       |                   |       |   |   |   |   |
| Interest income                             |       | 0.1                    | %          | 0.2 | % | — |   |
| Interest expense                            |       | (4.8                   | )%         | (4.9 | )% | 2.6 | % |
| Debt extinguishment  expense                |       | —                 |       | (0.3 | )% | (100.0 | )% |
| Other non-operating  items, net             |       | —                 |       | — |   | (65.0 | )% |
|                                        |       | (4.7                   | )%         | (5.0 | )% | (3.6 | )% |
|                                        |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 5.9                    | %          | 6.6 | % | (6.8 | )% |
|                                        |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                          |       | (2.0                   | )%         | (2.3 | )% | (9.3 | )% |
|                                        |       |                   |       |   |   |   |   |
| NET INCOME                                  |       | 3.9                    | %          | 4.3 | % | (5.4 | )% |

 

15

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

 
| ** **                                  | ** ** | **SIX MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|----------------------|------------|
| ** **                                  | ** ** | **6/30/2005**        | ** ** | **6/30/2004** | ** ** | **Inc/(Dec)** | ** ** |
|                                        |       |                 |       |   |   |   |   |
| REVENUES:                                   |       |                 |       |   |   |   |   |
| Membership services                         |       | 27.6                 | %          | 29.5 | % | (1.1 | )% |
| Publications                                |       | 13.4                 | %          | 14.8 | % | (3.9 | )% |
| Retail                                      |       | 59.0                 | %          | 55.7 | % | 11.8 | % |
|                                        |       | 100.0                | %          | 100.0 | % | 5.7 | % |
|                                        |       |                 |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:              |       |                 |       |   |   |   |   |
| Membership services                         |       | 17.6                 | %          | 19.7 | % | (5.7 | )% |
| Publications                                |       | 9.0                  | %          | 10.1 | % | (5.9 | )% |
| Retail                                      |       | 34.9                 | %          | 33.0 | % | 11.7 | % |
|                                        |       | 61.5                 | %          | 62.8 | % | 3.4 | % |
|                                        |       |                 |       |   |   |   |   |
| GROSS PROFIT                                |       | 38.5                 | %          | 37.2 | % | 9.4 | % |
|                                        |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                         |       |                 |       |   |   |   |   |
| Selling, general and  administrative        |       | 25.8                 | %          | 23.9 | % | 14.3 | % |
| Depreciation and  amortization              |       | 3.1                  | %          | 2.6 | % | 23.8 | % |
|                                        |       | 28.9                 | %          | 26.5 | % | 15.2 | % |
|                                        |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS                      |       | 9.6                  | %          | 10.7 | % | (5.0 | )% |
|                                        |       |                 |       |   |   |   |   |
| NON-OPERATING ITEMS:                        |       |                 |       |   |   |   |   |
| Interest income                             |       | 0.1                  | %          | 0.2 | % | (3.1 | )% |
| Interest expense                            |       | (5.2                 | )%         | (5.1 | )% | 7.9 | % |
| Debt extinguishment  expense                |       | —               |       | (2.2 | )% | (100.0 | )% |
| Other non-operating  items, net             |       | —               |       | — |   | (65.5 | )% |
|                                        |       | (5.1                 | )%         | (7.1 | )% | (24.9 | )% |
|                                        |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS  BEFORE INCOME TAXES |       | 4.5                  | %          | 3.6 | % | 34.6 | % |
|                                        |       |                 |       |   |   |   |   |
| INCOME TAX EXPENSE                          |       | (1.6                 | )%         | (1.3 | )% | 35.4 | % |
|                                        |       |                 |       |   |   |   |   |
| NET INCOME                                  |       | 2.9                  | %          | 2.3 | % | 34.1 | % |

 

16

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**RESULTSOF OPERATIONS**

** **

**Three Months Ended June 30, 2005**

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

 

*Revenues*

 

Revenuesof $133.2 million for the second quarter of 2005 increased by approximately $5.6million, or 4.4%, from the comparable period in 2004.

 

Membershipservices revenues of $34.4 million for the second quarter of 2005 decreased byapproximately $1.6 million, or 4.5%, from the comparable period in 2004.  This revenue decrease was largelyattributable to a $1.8 million decrease in member events revenue due to thetiming of the Great North American Rally, which occurred in the second quarter of2004 versus the third quarter of 2005, a $0.4 million reduction in membershipservices revenue, primarily associated with reduced enrollment in the Coast toCoast Club and Golf Card Club, a $0.5 million reduction in marketing fee incomerecognized on RV financing products and a $0.3 million decrease in dealerprogram marketing revenue, partially offset by a $1.0 million increase inextended vehicle warranty program revenue due to continued growth in the salesof one-year warranty products, and a $0.4 million increase in emergency roadservice revenue due to increased enrollment.

 

Publicationrevenues of $15.3 million for the second quarter of 2005 decreased $1.3 million,or 7.7%, from the comparable period in 2004 This decrease was primarily due to a $0.9million reduction in revenue due to the disposition of archery-relatedpublication titles in the third quarter of 2004, and a $0.4 million decrease inmotorcycle and regional publications revenue due to a reduction in the numberof issues published in the quarter, and a $0.2 million decrease in revenue fromthe reduced distribution of the campground atlas, partially offset by a $0.2million increase in revenue due to a new magazine title acquired in May 2005,*Powerboat Magazine*.

 

Retail revenues of $83.5 million increased $8.5million, or 11.3%, over the second quarter of 2004.  Store merchandise sales increased $8.5million over the second quarter of 2004 due to a same store sales increase of $4.3million or 8.4%, compared to a 10.7% increase in the second quarter of 2004, anda $4.2 million revenue increase from the addition of eight new stores over thepast eighteen months.  Same store salecalculations for a given period include only those stores that were open bothat the end of that period and at the beginning of the preceding fiscalyear.  Additionally, a $0.6 million decreasein mail order revenue was offset by increases in other installation fees, suppliesand services revenue.

 

*Costs Applicable to Revenues*

 

Costsapplicable to revenues totaled $82.6 million for the second quarter of 2005, anincrease of $2.5 million, or 3.1%, from the comparable period in 2004.

 

17

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Membership services costs and expenses of $22.3million decreased approximately $2.0 million, or 8.4%, from the second quarterof 2004.  This decrease consisted of a$1.7 million decrease primarily due to the timing of member events, a $0.6 milliondecrease in membership services costs, primarily due to reduced marketing expensesin the Coast to Coast Club and the Golf Card Club, a $0.2 million decrease in othermarketing expenses, and a $0.2 million decrease in dealer marketing expenses, partiallyoffset by a $0.7 million increase in marketing costs and program expensesassociated with increased enrollment in the extended vehicle warranty andemergency road service programs.

 

Publication costs and expenses of $10.2 millionfor the second quarter of 2005 decreased $0.9 million from the comparable periodin 2004 primarily due to the disposition of archery-related titles in the thirdquarter of 2004, and a reduction in costs associated with reduced atlas marketingand a reduction in the number of regional issues published, partially offset byincreased costs attributable to the newly acquired magazine title, *Powerboat Magazine*.

 

Retail costs applicable to revenues increased $5.4million, or 12.0%, to $50.1 million primarily due to increased store sales.  The retail gross profit margin of 40.0% forthe second quarter of 2005 decreased from 40.4% from the comparable period in 2004primarily due to the increased use of merchandising and marketing discounts inthe second quarter of 2005.

 

*Operating Expenses*

 

Selling, general and administrative expenses of$32.7 million for the second quarter of 2005 increased $3.1 million compared tothe second quarter of 2004 primarily due to increased retail selling andgeneral and administrative expenses of approximately $3.1 million consisting ofa $2.1 million increase in retail labor, a $0.3 million increase in sellingexpenses, a $0.3 million increase in rent expense, and a $0.4 million increasein training and other retail general and administrative expenses.  Further, a $0.7 million increase in deferred executivecompensation was offset by a $0.7 million reduction in executive wages andconsulting expenses.

 

Depreciation and amortization expense of $3.8million for the second quarter of 2005 increased approximately $0.8 millionover the prior year primarily due to increased depreciation on capitalexpenditures at Camping World and the amortization of intangible assetsassociated with the acquisition of consumer trade shows, acquired through theacquisition of ARU, Inc. (“ARU”) in December 2004,and*Powerboat Magazine*.

 

*Income from Operations*

 

Incomefrom operations for the second quarter of 2005 of $14.1 million decreased $0.8million compared to the second quarter of 2004 primarily due to increasedoperating expenses of $3.9 million and reduced gross profit from the publicationsoperations of $0.4 million, partially offset by increased gross profit from theretail and membership services operations of $3.1 million and $0.4 million,respectively.

 

18

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*Non-Operating Items*

 

Non-operating items were $6.2 million for the secondquarter of 2005, compared to $6.4 million for the same period in 2004.  This $0.2 million decrease was due to a $0.4million reduction in debt extinguishment expenses associated with theredemption of the AGH senior notes due 2007 partially offset by $0.2 million ofadditional interest expense resulting from higher interest rates.

 

*Income before Income Taxes*

 

Income before income taxes for the secondquarter of 2005 was $7.9 million, or $0.6 million lower than the second quarterof 2004.  This decrease was attributableto a $0.8 million decrease in income from operations, and $0.2 million ofadditional interest expense, partially offset by a $0.4 million reduction indebt extinguishment expense.

 

*Income Tax Expense*

 

TheCompany recorded approximately $2.8 million of income tax expense for the secondquarter of 2005, a decrease of $0.3 million over the second quarter of 2004.  The effective tax rates for the secondquarter of 2005 and 2004 were 35.0% and 35.9%. The effective tax rates are higher than statutory rates primarily due tostate taxes.

 

# *NetIncome*

# * *

Net income in the second quarter of 2005 was $5.1million compared to a net income of $5.4 million for the same period in 2004.

 

*Segment Profit*

 

Segment profit of approximately $17.9 million for 2005 (before unallocateddepreciation and amortization, general and administrative, interest, debtrestructuring, and income tax expense) increased $0.1 million from thecomparable period in 2004.

 

Membership services segment profit increased $0.9 million, or 8.8%, to$10.7 million for the second quarter of 2005. This increase is largely attributable to a $0.7 million increase inprofit from emergency road service products, $0.4 million increase in profitfrom the extended warranty program, and a $0.3 million increase in profit fromthe Coast to Coast Club and Golf Card Club, partially offset by a $0.5 milliondecrease in profit from RV Financing products.

 

Publication segment profit of $3.8 million for the second quarter of 2005decreased by $0.5 million, or 11.5%, from 2004. This decrease was primarily attributable to a $0.3 million reduction inprofit due to the timing of magazine issues for the motorcycle andpowersports-related publications, $0.1 million of incremental expensesassociated with the consumer shows acquired through the acquisition of ARU in December 2004,and a $0.1 million reduction in profit related to the disposition of thearchery-related titles.

 

19

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Retail segment profit of $3.4 million for the second quarter of 2005 decreasedby $0.3 million, or 9.0%, from the second quarter of 2004.  The decrease in segment profit resulted primarily from a $2.8 millionincrease in selling, general and administrative expenses and other allocatedexpenses primarily related to the increase in retail labor, and a $0.6 millionincrease in depreciation expense partially offset by a $3.1 million increase ingross profit margin.

 

**Six Months Ended June 30, 2005**

**Compared With Six Months Ended June 30, 2004**

 

*Revenues*

 

Revenuesof $241.9 million for the first six months of 2005 increased by approximately $13.0million, or 5.7%, from the comparable period in 2004.

 

Membershipservices revenues of $66.8 million for the first six months of 2005 decreasedby approximately $0.7 million, or 1.1%, from the comparable period in2004.  This revenue decrease was largelyattributable to $2.0 million decrease in member events revenue primarily due tothe timing of the Great North American Rally, which occurred in the secondquarter of 2004 versus the third quarter of 2005, a $1.0 million reduction inmembership services revenue, primarily associated with reduced enrollment inthe Coast to Coast Club and Golf Card Club, and a $0.7 million reduction inmarketing fee income recognized on RV financing, partially offset by a $2.3million increase in extended vehicle warranty program revenue due to continuedgrowth in the sales of one-year warranty products, and a $0.7 million increasein emergency road service revenue due to increased enrollment.

 

Publicationrevenues of $32.5 million for the first six months of 2005 decreased $1.3million, or 3.9%, from the comparable period in 2004 primarily resulting from a$1.3 million revenue reduction due to the disposition of archery-relatedpublication titles in the third quarter of 2004, a $0.8 million reduction inrevenue from reduced promotion of the campground atlas and the timing of annualdirectory shipments, and a $0.6 million reduction associated with reducedissues of motorcycle and regional publications, partially offset by a $1.4million revenue increase associated with the acquisition of consumer shows,acquired through the acquisition of ARU in December 2004and the newly acquired *Powerboat Magazine*title.

 

Retail revenues of $142.6 million increased $15.0million, or 11.8%, over the first six months of 2004.  Store merchandise sales increased $14.2million over the first six months of 2004 due to a same store sales increase of$6.6 million or 7.3%, compared to a 12.0% increase in the first six months of2004, and a $7.6 million revenue increase from the addition of eight new storesover the past eighteen months.  Samestore sale calculations for a given period include only those stores that were openboth at the end of that period and at the beginning of the preceding fiscalyear.  In addition, retail revenue increased$0.8 million due to increases in other installation fees, supplies and servicesrevenue.

 

20

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*Costs Applicable to Revenues*

 

Costsapplicable to revenues totaled $148.7 million for the first six months of 2005,an increase of $4.9 million, or 3.4%, from the comparable period in 2004.

 

Membership services costs and expenses of $42.5million decreased approximately $2.6 million, or 5.7%, from the first sixmonths of 2004.  This decrease consistedof a $1.9 million cost decrease due to the timing of member events, a $1.3million decrease in membership services costs, primarily due to reducedmarketing and programs expenses of the Coast to Coast Club and Golf Card Clubpartially offset by an increase in production costs for the Good Sam memberpublication, *Highways Magazine*, and a $0.7million decrease in other new product development costs and overhead expenses,partially offset by a $1.3 million increase in marketing costs and programexpenses associated with increased enrollment in the extended vehicle warrantyprograms.

 

Publication costs and expenses of $21.8 millionfor the first six months of 2005 decreased $1.4 million from the comparableperiod in 2004 primarily due to a $1.2 million reduction from the dispositionof archery-related titles in the third quarter of 2004, and a $1.0 million reductionin costs associated with reduced atlas promotions and reduced annual directory revenue,partially offset by $0.8 million of additional costs attributable to the newlyacquired operations of ARU and the *Powerboat Magazine*title.

 

Retail costs applicable to revenues increased $8.9million, or 11.7%, to $84.4 million primarily due to increased storesales.  The retail gross profit margin of40.8% for the first six months of 2005 remained unchanged from the comparableperiod in 2004.

 

*Operating Expenses*

 

Selling, general and administrative expenses of approximately$62.5 million for the first six months of 2005 increased $7.8 million comparedto the first six months of 2004 primarily due to an increase in retail sellingand general and administrative expenses of approximately $6.6 millionconsisting of a $4.3 million increase in retail labor, a $0.7 million increasein selling expenses, a $0.6 million increase in rent expense, and a $1.0million increase in training and other retail general and administrativeexpenses, a $1.6 million increase in deferred executive compensation expense partiallyoffset by a $0.4 million decrease in other general and administrative expenses.

 

Depreciation and amortization expense of $7.5million increased approximately $1.5 million over the prior year primarily due toincreased depreciation on capital expenditures at Camping World andamortization of intangible assets associated with the operations of ARU, the purchaseof *Powerboat Magazine*, and costs associatedwith the issuance of $200.0 million in 9% Senior Subordinated Notes in February 2004.

 

*Income from Operations*

 

Incomefrom operations for the first six months of 2005 of $23.2 million decreased $1.2million compared to the first six months of 2004 primarily due to increasedoperating expenses of $9.3 million, partially offset by increased gross profitfor the retail, membership

 

21

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services,and publications operations of $6.1 million, $1.9 million and $0.1 million,respectively.

 

*Non-Operating Items*

 

Non-operating items were $12.2 million for thefirst six months of 2005, compared to $16.2 million for the same period in2004.  This $4.0 million decrease comprisesof a $5.0 million reduction in debt extinguishment expenses associated with theredemption in 2004 of the AGH senior notes due 2007, partially offset by approximately$1.0 million of additional interest expense in 2005 from higher loan balancesassociated with the issuance of the Notes.

 

*Income before Income Taxes*

 

Income before income taxes for the first six monthsof 2005 was $11.0 million, or $2.8 million higher than the first six months of2004.  This increase was attributable toa $5.0 million reduction in debt extinguishment expense from the prior periodthat was only partially offset by $1.0 million of additional interest expenseand a $1.2 million decrease in income from operations for the current period.

 

*Income Tax Expense*

 

TheCompany recorded approximately $4.0 million of income tax expense for the firstsix months of 2005, an increase of approximately $1.0 million from the firstsix months of 2004.  The effective taxrates for the first six months of 2005 and 2004 were 36.1% and 35.8%,respectively.  The effective tax ratesare higher than statutory rates primarily due to state taxes.

 

# *NetIncome*

# * *

Net income in the first six months of 2005 was $7.0million compared to $5.2 million for the same period in 2004.

 

*Segment Profit*

 

Segment profit of $31.0 million for the first six months of 2005(before unallocated depreciation and amortization, general and administrative,interest, debt restructuring, and income tax expense) increased $1.4 million,or 4.8%, from the comparable period in 2004.

 

Membership services segment profit increased $2.2 million, or 11.8%, to$21.0 million for the first six months of 2005. This increase is largely attributable to a $1.3 million increase inprofit from emergency road service products, $1.2 million increase in profitfrom the extended warranty program, a $1.0 million increase in profit from theCoast to Coast Club and Golf Card Club, partially offset by a $0.7 milliondecrease in profit from RV financing products and a $0.3 million decrease inprofit in the Good Sam member publication, *Highways Magazine*,due to increased production costs and a $0.3 million increase in other newproduct development expenses.

 

22

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Publication segment profit of $8.2 million for the first six months of2005 remained unchanged from the comparable period in 2004.  Reduced profit in the motorcycle publicationswas offset by an increase in profit associated with the consumer shows acquiredthrough the acquisition of ARU in December 2004 and the purchase of the *Powerboat Magazine*.

 

Retail segment profit of $1.8 million for the first six months of 2005 decreasedby $0.8 million, or 31.8%, from a profit of $2.6 million in 2004.  The decreased profit resulted primarily from a $5.8 million increase inselling, general and administrative expenses and other allocated expenses, anda $1.1 million increase in depreciation expense, partially offset by a $6.1million increase in gross profit margin.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The Company has historically operated with a workingcapital deficit.  The working capitaldeficit as of June 30, 2005 and December 31, 2004 was $5.9 millionand $10.8 million, respectively.  Theprimary reason for the working capital deficit is the deferred revenue andgains reported under current liabilities in the amount of $64.0 million and $57.7million as of June 30, 2005 and December 31, 2004, respectively.  Deferred revenue is primarily comprised ofcash collected for club memberships in advance, which is amortized over thelife of the membership.  The Company usesnet proceeds from this deferred membership revenue to lower its long-termborrowings.  Management believes thatfunds generated by operations together with available borrowings under theCompany’s revolving credit line will be sufficient to meet all of the Company’sdebt service requirements and capital requirements over the next twelve months.

 

*Contractual Obligations andCommercial Commitments*

 

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

 
| ** **                                | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| **(in thousands)**                        | ** ** | **Total**                  | ** ** | **Balance of  2005** | ** ** | **2006 and  2007** | ** ** | **2008 and  2009** | ** ** | **Thereafter** | ** ** |
|                                      |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                            |       | $                          | 315,107    |   | $ | 1,017 |   | $ | 3,962 |   | $ | 109,589 |   | $ | 200,539 |   |
| Operating lease  obligations              |       | 134,914                    |       | 6,263 |   | 22,613 |   | 16,997 |   | 89,041 |   |
| Deferred compensation                     |       | 6,013                      |       | 564 |   | 1,768 |   | 3,061 |   | 620 |   |
| Standby and commercial  letters of credit |       | 7,354                      |       | 6,904 |   | 450 |   | — |   | — |   |
| Grand total                               |       | $                          | 463,388    |   | $ | 14,748 |   | $ | 28,793 |   | $ | 129,647 |   | $ | 290,200 |   |

 

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

 

23

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Company’s ultimate parent AGI Holding Corp. and redeem $30.0 millionprincipal amount of the AGH Notes at 103.667% of par in 2003.  As of June 30, 2005, $32.0 million and $79.9million were outstanding under the Term B1 and Term B2 loans,respectively.  No borrowings wereoutstanding on the revolving credit facility as of June 30, 2005.  Reborrowings under the term loans are not permitted.  The interest on borrowings under the AGI SeniorCredit Facility is at variable rates based on the ratio of total cash flow tooutstanding indebtedness (as defined). Interest rates float with prime and the London Interbank Offered Rates,or LIBOR, plus an applicable margin ranging from 1.50% to 3.50% over the statedrates.  As of June 30, 2005, theaverage interest rate on the term loans was 6.14%, and permitted borrowingsunder the undrawn revolving facility were $27.6 million.  The Company also pays a commitment fee of0.5% per annum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $350,000.  Therevolving credit facility matures on June 24, 2008, and the Term B1 andTerm B2 loans mature on June 24, 2009. The funds available under the AGI Senior Credit Facility may be utilizedfor borrowings or letters of credit; however, a maximum of $12.5 million may beallocated to such letters of credit.  Asof June 30, 2005, the Company had letters of credit in the aggregateamount of $7.4 million outstanding.  The AGISenior Credit Facility is secured by virtually all of the Company’s assets anda pledge of the Company’s stock and the 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 Company completed a registered exchangeof the Notes under the Securities Act of 1933 in August 2004.  The proceeds from the sale of the Notes wereused to fund the tender offer and defeasance of the remaining $100.0 millionoutstanding principal amount of the AGH Notes, prepay $25.0 million of the TermB1 and Term B2 loans under the AGI Senior Credit Facility, pay a $60.0 milliondividend distribution, create a $15.0 million segregated cash account, paycertain 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 the AGISenior 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 AGI SeniorCredit Facility contain certain restrictive covenants relating to, but notlimited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  The Company was in compliance with all debtcovenants at June 30, 2005.

 

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In April 2005, Camping World, Inc. acquired the assets of amail order catalog retailer specializing in recreational vehicle merchandise for$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 purchase debt and assumed $0.5million of liabilities.

 

For the six months ended June 30, 2005, the Company incurred $1.6million 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 six months of 2005 totaling $4.8million decreased $0.2 million from the first six months of 2004.  Additional capital expenditures of $8.0million are anticipated for the balance of 2005, primarily for new CampingWorld stores and equipment, information technology and database enhancements,computer hardware upgrades and replacements, a distribution center expansion, andcomputer software upgrades and enhancements.

 

**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, theCompany evaluates its estimates, including those related to membership programsand 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.

 

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*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 expected futurebenefit.  Renewal expenses are expensedat the time related materials are mailed. Recognized revenues and profit are subject to revisions as themembership progresses to completion. Revisions to membership period estimates would change the amount ofincome and expense amortized in future accounting periods.

 

*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 required inventoryreserves may continue to occur in the future due to the market conditions.

 

*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

 

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expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.  The Company determined there were noindicators of impairment of long-lived assets as of December 31, 2004 or June 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.

 

*Indefinite Lived Intangible Assets*

 

The Company evaluates indefinite lived intangible assets for impairmentat least annually or when events indicate that an impairment exists inaccordance with 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.

 

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**ITEM 3:  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

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

 

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

 

*InterestRate Sensitivity Analysis*

 

At June 30,2005, we had debt totaling $315.1 million, comprised of $111.8 million of variablerate debt and $203.3 million of fixed rate debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow, the impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorable impactof 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 Senior VicePresident and Chief Financial Officer concluded that the disclosure controlsand 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: August 3, 2005 | Thomas F. Wolfe           |
|                      | Senior Vice President and |
|                      | Chief Financial Officer   |

 

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