**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

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

###### ** **

**FORM 10-Q**

** **

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

 
| **For  Quarter Ended:**  | ** ** | **Commission  File Number** |
|--------------------------|------------|-----------------------------|
| **March 31,  2005** |       | **333-113982**              |

 

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**AFFINITY GROUP, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

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

 

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

**9% SeniorSubordinated Notes Due 2012**

 

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

 

YES   **ý**                 NO  o

 

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

 

YES   **o**                 NO  ý

 

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

 
| ** **                                       | ** ** | **Outstanding as of** |
|--------------------------------------------------|------------|-----------------------|
| **Class**                                        | ** ** | **May 4, 2005**  |
| Common Stock,     $.001 par value |       | 2,000                 |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

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**AFFINITY GROUP, INC. ANDSUBSIDIARIES**

** **

**INDEX**

 
| **Part I. **Financial Information | ** **  |
|---------------------------------------------|-------------|
| ** **                                  | ** **  |
|                                        | **Item 1:** | **Financial  Statements** |   |
|                                        |        |   |
|                                        |        | Unaudited Consolidated  Balance Sheets as of March 31, 2005 and December 31, 2004 |   |
|                                        |        |   |   |
|                                        |        | Unaudited  Consolidated Statements of Operations for the three months ended  March 31, 2005 and 2004 |   |
|                                        |        |   |   |
|                                        |        | Unaudited  Consolidated Statements of Cash Flows for the three months ended  March 31, 2005 and 2004 |   |
|                                        |        |   |   |
|                                        |        | Notes to  Unaudited Consolidated Financial Statements |   |
|                                        |        |   |
| ** **                                  | **Item 2:** | **Management’s Discussion and  Analysis of Financial Condition and Results of Operations** |   |
| ** **                                  | ** **  | ** ** |
|                                        | **Item 3:** | **Quantitative and  Qualitative Disclosures about Market Risk** |   |
|                                        |        |   |
|                                        | **Item 4:** | **Control and Procedures** |   |
|                                        |        |
| **Part II.  Other  Information**  | * *    |
| * *                                    | * *    |
| **Signatures**                              |        |
|                                             |             |  |  |  |

 

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2005 and December 31,2004

(In Thousands)

 
| ** **                                                                                    | ** ** | **3/31/2005**   | ** ** | **12/31/2004** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                    | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                    |       |            |       |           |       |
| CURRENT ASSETS:                                                                               |       |            |       |           |       |
| Cash and cash equivalents                                                                     |       | $               | 19,330     |           | $          | 24,564 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,062 in 2005 and $810 in 2004 |       | 23,404          |       | 24,228         |       |
| Inventories                                                                                   |       | 48,860          |       | 42,463         |       |
| Prepaid expenses and other assets                                                             |       | 12,439          |       | 11,383         |       |
| Deferred tax assets, net                                                                      |       | 6,615           |       | 6,615          |       |
| Total current assets                                                                          |       | 110,648         |       | 109,253        |       |
|                                                                                          |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                   |       | 28,123          |       | 27,642         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                               |       | 85,750          |       | 4,752          |       |
| INTANGIBLE ASSETS, net                                                                        |       | 26,315          |       | 27,716         |       |
| GOODWILL                                                                                      |       | 148,773         |       | 148,773        |       |
| DEFERRED TAX ASSETS, net                                                                      |       | 1,017           |       | 323            |       |
| OTHER ASSETS                                                                                  |       | 1,719           |       | 1,763          |       |
| Total assets                                                                                  |       | $               | 402,345    |           | $          | 320,222 |   |
|                                                                                          |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts payable                                                                              |       | $               | 19,623     |           | $          | 16,511 |   |
| Accrued interest                                                                              |       | 2,822           |       | 6,857          |       |
| Accrued income taxes                                                                          |       | 2,259           |       | 3,131          |       |
| Accrued liabilities                                                                           |       | 34,042          |       | 34,230         |       |
| Deferred revenues and gains                                                                   |       | 59,556          |       | 57,661         |       |
| Current portion of long-term debt                                                             |       | 1,676           |       | 1,676          |       |
| Total current liabilities                                                                     |       | 119,978         |       | 120,066        |       |
|                                                                                          |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                   |       | 40,500          |       | 41,469         |       |
| LONG-TERM DEBT, net of current portion                                                        |       | 312,310         |       | 312,660        |       |
| OTHER LONG-TERM LIABILITIES                                                                   |       | 4,762           |       | 4,135          |       |
|                                                                                          |       | 477,550         |       | 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                                                                           |       | (156,211        | )          | (158,109       | )          |
| Total stockholder’s deficit                                                              |       | (75,205         | )          | (158,108       | )          |
| Total liabilities and stockholder’s deficit                                              |       | $               | 402,345    |           | $          | 320,222 |   |

 

See notes to consolidatedfinancial statements.

 

1

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** |
| ** **                                        | ** ** | ** **             | ** ** | **(restated-  see Note 1)** | ** ** |
| REVENUES:                                         |       |                   |       |   |   |
| Membership services                               |       | $                      | 32,423     |   | $ | 31,519 |   |
| Publications                                      |       | 17,198                 |       | 17,229 |   |
| Retail                                            |       | 59,066                 |       | 52,534 |   |
|                                              |       | 108,687                |       | 101,282 |   |
|                                              |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                   |       |   |   |
| Membership services                               |       | 20,201                 |       | 20,724 |   |
| Publications                                      |       | 11,521                 |       | 12,002 |   |
| Retail                                            |       | 34,294                 |       | 30,810 |   |
|                                              |       | 66,016                 |       | 63,536 |   |
|                                              |       |                   |       |   |   |
| GROSS PROFIT                                      |       | 42,671                 |       | 37,746 |   |
|                                              |       |                   |       |   |   |
| OPERATING EXPENSES:                               |       |                   |       |   |   |
| Selling, general and administrative               |       | 29,861                 |       | 25,185 |   |
| Depreciation and amortization                     |       | 3,698                  |       | 3,037 |   |
|                                              |       | 33,559                 |       | 28,222 |   |
|                                              |       |                   |       |   |   |
| INCOME FROM OPERATIONS                            |       | 9,112                  |       | 9,524 |   |
|                                              |       |                   |       |   |   |
| NON-OPERATING ITEMS:                              |       |                   |       |   |   |
| Interest income                                   |       | 166                    |       | 177 |   |
| Interest expense                                  |       | (6,186                 | )          | (5,424 | ) |
| Debt extinguishment expense                       |       | —                 |       | (4,616 | ) |
| Other non-operating items, net                    |       | 16                     |       | 47 |   |
|                                              |       | (6,004                 | )          | (9,816 | ) |
|                                              |       |                   |       |   |   |
| INCOME (LOSS) FROM OPERATIONS BEFORE INCOME TAXES |       | 3,108                  |       | (292 | ) |
|                                              |       |                   |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT                      |       | (1,210                 | )          | 110 |   |
|                                              |       |                   |       |   |   |
| NET INCOME (LOSS)                                 |       | $                      | 1,898      |   | $ | (182 | ) |

 

See notes to consolidatedfinancial statements.

 

2

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(InThousands)

(Unaudited)

 
| ** **                                                                                          | ** ** | **THREE MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                          | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** |
| ** **                                                                                          | ** ** | ** **             | ** ** | **(restated-  see Note 1)** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                   |       |   |   |
| Net income (loss)                                                                                   |       | $                      | 1,898      |   | $ | (182 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                   |       |   |   |
| Depreciation                                                                                        |       | 2,274                  |       | 1,747 |   |
| Amortization                                                                                        |       | 1,424                  |       | 1,290 |   |
| Provision for losses on accounts receivable                                                         |       | 241                    |       | 533 |   |
| Deferred compensation                                                                               |       | 900                    |       | — |   |
| Deferred tax benefit                                                                                |       | (694                   | )          | (592 | ) |
| Gain on sale of property and equipment                                                              |       | (3                     | )          | (1 | ) |
| Loss on early extinguishment of debt                                                                |       | —                 |       | 4,616 |   |
| Changes in operating assets and liabilities                                                         |       |                   |       |   |   |
| Accounts receivable                                                                                 |       | 583                    |       | 929 |   |
| Inventories                                                                                         |       | (6,397                 | )          | (8,880 | ) |
| Prepaid expenses and other assets                                                                   |       | (1,012                 | )          | (2,330 | ) |
| Accounts payable                                                                                    |       | 3,112                  |       | 9,153 |   |
| Accrued and other liabilities                                                                       |       | (5,368                 | )          | 1,379 |   |
| Deferred revenues and gains                                                                         |       | 926                    |       | 888 |   |
| Net cash (used in) provided by operating activities                                                 |       | (2,116                 | )          | 8,550 |   |
|                                                                                                |       |                   |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                   |       |   |   |
| Capital expenditures                                                                                |       | (2,779                 | )          | (2,577 | ) |
| Net proceeds from sale of property and equipment                                                    |       | 27                     |       | 1 |   |
| Change in intangible assets                                                                         |       | (9                     | )          | (10 | ) |
| Investment in affiliate                                                                             |       | (81,005                | )          | — |   |
| Loans receivable                                                                                    |       | 7                      |       | (29 | ) |
| Net cash used in investing activities                                                               |       | (83,759                | )          | (2,615 | ) |
|                                                                                                |       |                   |       |   |   |
| 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                                                                         |       | (14                    | )          | (7,099 | ) |
| Principal payments of long-term debt                                                                |       | (350                   | )          | (114,161 | ) |
| Net cash provided by financing activities                                                           |       | 80,641                 |       | 18,740 |   |
|                                                                                                |       |                   |       |   |   |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                                |       | (5,234                 | )          | 24,675 |   |
|                                                                                                |       |                   |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                                      |       | 24,564                 |       | 6,115 |   |
|                                                                                                |       |                   |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                      | 19,330     |   | $ | 30,790 |   |

 

See notes to consolidated financial statements.

 

3

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principlesof Consolidation**–*The consolidated financial statements includethe accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries(collectively the “Company”) without audit, in accordance with U.S. generallyaccepted accounting principles, and pursuant to the rules and regulationsof the Securities 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 ended March 31, 2004have been restated to reflect the combined financial position and results ofoperations of AGI and AGH, prior to the April 27, 2004 merger.  In March 2005, AGHC formed a holdingcompany, Affinity Group Holding, Inc., a Delaware corporation (“AGHI”) andcontributed 100% of the outstanding shares of common stock of AGI to AGHI.  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 ABOUT SEGMENTS OF ANENTERPRISE 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 RV owners, campers and outdoor vacationers, andthe Golf Card Club for golf enthusiasts. The Publications segment publishes a variety of publications forselected markets in the recreation and leisure industry, including generalcirculation periodicals, club magazines, directories and RV industry trademagazines.  The Retail segment sells specialtyretail merchandise and services for RV owners primarily through retailsupercenters and mail order catalogs. The Company evaluates performance based on profit or loss fromoperations before income taxes.

 

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

 

4

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

 
| ** **                             | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **QUARTER ENDED MARCH 31, 2005**  |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $                        | 32,423     |             | $          | 17,198     |       | $                | 59,066     |   | $ | 108,687 |   |
| Depreciation and amortization          |       | 972                      |       | 474              |       | 1,718      |       | 3,164            |       |
| Interest income                        |       | 1,003                    |       | —           |       | 2          |       | 1,005            |       |
| Interest expense                       |       | —                   |       | 90               |       | 2,590      |       | 2,680            |       |
| Segment profit (loss)                  |       | 10,359                   |       | 4,428            |       | (1,658     | )          | 13,129           |       |
|                                   |       |                     |       |             |       |       |       |             |       |
| **QUARTER ENDED MARCH 31, 2004**  |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers       |       | $                        | 31,519     |             | $          | 17,229     |       | $                | 52,534     |   | $ | 101,282 |   |
| Depreciation and amortization          |       | 904                      |       | 426              |       | 1,226      |       | 2,556            |       |
| Gain on sale of property and equipment |       | —                   |       | —           |       | 1          |       | 1                |       |
| Interest income                        |       | 592                      |       | —           |       | 1          |       | 593              |       |
| Interest expense                       |       | —                   |       | 273              |       | 2,611      |       | 2,884            |       |
| Segment profit (loss)                  |       | 9,003                    |       | 3,915            |       | (1,165     | )          | 11,753           |       |

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three months ended March 31, (inthousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** |
| **Income From Continuing Operations Before Income  Taxes**     |       |                   |       |   |   |
| Total profit for reportable segments                           |       | $                      | 13,129     |   | $ | 11,753 |   |
| Unallocated G & A expense                             |       | (5,142                 | )          | (3,992 | ) |
| Unallocated depreciation and amortization expense              |       | (534                   | )          | (481 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (3,506                 | )          | (2,540 | ) |
| Unallocated interest income, net of intercompany  elimination  |       | (839                   | )          | (416 | ) |
| Unallocated debt restructure expense                           |       | —                 |       | (4,616 | ) |
| Income (loss) from continuing operations before income  taxes  |       | $                      | 3,108      |   | $ | (292 | ) |

 

5

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

 
| ** **                                          | ** ** | **3/31/2005** | ** ** | **12/31/2004** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 163,534    |           | $          | 170,270 |   |
| Publications segment                                |       | 76,267        |       | 75,731         |       |
| Retail segment                                      |       | 213,447       |       | 124,325        |       |
| Total assets for reportable segments                |       | 453,248       |       | 370,326        |       |
| Capitalized finance costs not allocated to segments |       | 10,556        |       | 10,951         |       |
| Corporate unallocated assets                        |       | 14,303        |       | 13,705         |       |
| Elimination of intersegment receivable              |       | (75,762       | )          | (74,760        | )          |
| Total assets                                        |       | $             | 402,345    |           | $          | 320,222 |   |

 

Total assets forthe retail segment increased $89.1 million from December 31, 2004primarily due to the acquisition of a preferred membership interest inFreedomRoads Holding Company, LLC.  (SeeNote 5)

 

**(3) STATEMENTSOF CASH FLOWS**

** **

Supplementaldisclosures of cash flow information for the three months ended March 31(in thousands):

 
| ** **                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 10,221     |     | $          | 4,434 |   |
| Income taxes                     |       | 2,673    |       | 1,657    |       |
|                                  |            |          |            |          |            |  |  |

 

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

 

**(4) GOODWILLAND INTANGIBLE ASSETS**

** **

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually.  The Company performs itsannual 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 nochanges in the Company’s goodwill by business segment, for the three monthsended March 31, 2005 and 2004.

 

6

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Finite livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at March 31, 2005 (in thousands, except asnoted):

 
| ** **                                      | ** ** | **Weighted  Average Useful  Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
|                                            |       |                                          |       |      |       |                          |       |    |       |
| Membership and customer lists                   |       | 6                                             |       | $         | 12,133     |                          | $          | (4,914  | )          | $ | 7,219 |   |
| Resort and golf course participation agreements |       | 23                                            |       | 13,553    |       | (10,946                       | )          | 2,607   |       |
| Non-compete and deferred consulting agreements  |       | 15                                            |       | 17,955    |       | (10,652                       | )          | 7,303   |       |
| Deferred financing costs                        |       | 7                                             |       | 11,601    |       | (2,415                        | )          | 9,186   |       |
|                                            |       |                                          |       | $         | 55,242     |                          | $          | (28,927 | )          | $ | 26,315 |   |

 

**(5) RECENTEVENTS**

** **

On March 24, 2005 in a private placement, the Company’s parent,AGHI, issued $88.2 million principal amount of its 10-7/8% senior notes due2012 (the “AGHI Notes”) at a $3.2 million original issue discount.  TheAGHI Notes are unsecured obligations of AGHI and neither AGI nor itssubsidiaries have guaranteed payment of principal or interest on the AGHINotes.  Interest on the AGHI Notes ispayable semi-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” 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.

 

7

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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 preferred membership interest, FreedomRoadsHolding cannot make distributions with respect to membership interests otherthan (a) distributions with respect to the preferred membership interest, (b) distributionsfor the members’ estimated tax liabilities from earnings of FreedomRoads Holdingand (c) distributions in the aggregate not to exceed 50% of the amount of (i) FreedomRoadsHolding’s net profit for the period from January 1, 2005 through the endof the fiscal quarter next preceding the distribution date less (ii) theaggregate amount of tax distributions made during the period from January 1,2005 through the end of the fiscal quarter next preceding the distributiondate.  CWFR may not sell, pledge orotherwise 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 will be reviewed periodicallyfor impairment.

 

**(6) RESTRUCTURINGCHARGES**

** **

During 2003, theCompany recorded reserves in connection with a restructuring program primarilywithin the retail segment.  Thesereserves include estimates pertaining to employee severance costs.  All severance payments have been paid as of March 31,2005.

 

The following tablereflects a summary of the severance activity for the three months ended March 31,2005 and 2004, dollars in thousands.

 
| ** **          | ** ** | **Three months ended March 31,** | ** ** |
|---------------------|------------|---------------------------------------|------------|
| ** **          | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **          | ** ** | **# of Employees**                    | ** ** | **Amount** | ** ** | **# of Employees** | ** ** | **Amount** | ** ** |
| Opening balance     |       | 1                                     |       | $ | 83 |   | 1 |   | $ | 83 |   |
| Actual terminations |       | (1                                    | )          | (83 | ) | — |   | — |   |
| Ending balance      |       | —                                |       | $ | — |   | 1 |   | $ | 83 |   |

 

8

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**(7) CONTINGENCIES**

 

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

 

In September 2004, the Company’s subsidiary, CWI, Inc., wassued in California state court by Privacy Rights Clearinghouse and BenjaminGreene in a suit alleging that CWI, Inc. was recording personalidentification information from retail customers in violation of certainCalifornia statutes.  The plaintiff seeksinjunctive relief preventing CWI, Inc. from engaging in any act orpractice constituting unfair competition under the statutes and for statutorypenalties and damages.  CWI, Inc.has responded to the suit and denied that its practices violate thestatutes.  The Company has not recorded aprovision for loss as of the date of the accompanying financialstatements.  In the opinion of management,the likelihood of a material unfavorable outcome is not probable as of the dateof the accompanying consolidated financial statements.

 

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

 

In February 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Notes”) due 2012. The Company’s present restricted subsidiaries have guaranteed, andfuture restricted subsidiaries will guarantee, the Notes with unconditionalguarantees of payment that rank junior in right of payment to their existingand future senior debt, but rank equal in right of payment to their existingand future senior subordinated debt.

 

CWFR is an “unrestricted subsidiary” under the AGI Indenture, pursuantto which the Notes were issued, and is not a guarantor of the Notes.  All other subsidiaries of AGI are restrictedsubsidiaries.

 

All of the Company’s restricted subsidiaries have jointly and severallyguaranteed the indebtedness under the Notes. All of these subsidiaries are owned directly or indirectly 100% by theCompany.  Full financial statements ofthe Guarantors have not been included because, pursuant to their respectiveguarantees, the Guarantors are jointly and severally liable with respect to theNotes.

 

9

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the threemonths ended March 31, 2005 (in thousands).

 
| ** **                                                    | ** ** | **AS OF MARCH 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                    | ** ** | **AGI**                  | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Cash & cash equivalents                              |       | $                        | 16,899     |   | $ | 2,431 |   | $ | — |   | $ | — |   | $ | 19,330 |   |
| Accounts receivable (net of allowance for doubtful  accounts) |       | 201                      |       | 98,965 |   | — |   | (75,762 | ) | 23,404 |   |
| Inventories                                                   |       | 37                       |       | 48,823 |   | — |   | — |   | 48,860 |   |
| Other current assets                                          |       | 4,762                    |       | 14,292 |   | — |   | — |   | 19,054 |   |
| Total current assets                                          |       | 21,899                   |       | 164,511 |   | — |   | (75,762 | ) | 110,648 |   |
|                                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Property and equipment, net                                   |       | 6,049                    |       | 22,074 |   | — |   | — |   | 28,123 |   |
| Intangible assets                                             |       | 9,258                    |       | 17,057 |   | — |   | — |   | 26,315 |   |
| Goodwill                                                      |       | 67,584                   |       | 81,189 |   | — |   | — |   | 148,773 |   |
| Investment in subsidiaries                                    |       | 481,357                  |       | 81,005 |   | — |   | (562,362 | ) | — |   |
| Affiliate note and investments                                |       | 4,745                    |       | — |   | 81,005 |   | — |   | 85,750 |   |
| Other assets                                                  |       | 9,263                    |       | (6,527 | ) | — |   | — |   | 2,736 |   |
| Total assets                                                  |       | $                        | 600,155    |   | $ | 359,309 |   | $ | 81,005 |   | $ | (638,124 | ) | $ | 402,345 |   |
|                                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Accounts payable                                              |       | $                        | 68         |   | $ | 19,555 |   | $ | — |   | $ | — |   | $ | 19,623 |   |
| Accrued and other liabilities                                 |       | 16,063                   |       | 23,060 |   | — |   | — |   | 39,123 |   |
| Current portion of long-term debt                             |       | 77,162                   |       | 276 |   | — |   | (75,762 | ) | 1,676 |   |
| Current portion of deferred revenue                           |       | 2,170                    |       | 57,386 |   | — |   | — |   | 59,556 |   |
| Total current liabilities                                     |       | 95,463                   |       | 100,277 |   | — |   | (75,762 | ) | 119,978 |   |
|                                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Deferred revenue                                              |       | 2,877                    |       | 37,623 |   | — |   | — |   | 40,500 |   |
| Long-term debt                                                |       | 310,800                  |       | 1,510 |   | — |   | — |   | 312,310 |   |
| Other long-term liabilities                                   |       | 266,220                  |       | (261,458 | ) | — |   | — |   | 4,762 |   |
| Total liabilities                                             |       | 675,360                  |       | (122,048 | ) | — |   | (75,762 | ) | 477,550 |   |
|                                                          |       |                     |       |   |   |   |   |   |   |   |   |
| Interdivisional equity                                        |       | —                   |       | 481,357 |   | 81,005 |   | (562,362 | ) | — |   |
| Stockholders’ deficit                                    |       | (75,205                  | )          | — |   | — |   | — |   | (75,205 | ) |
| Total liabilities & stockholders’ deficit       |       | $                        | 600,155    |   | $ | 359,309 |   | $ | 81,005 |   | $ | (638,124 | ) | $ | 402,345 |   |

 
| ** **                                             | ** ** | **THREE MONTHS ENDED MARCH 31, 2005** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **AGI**                               | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                   |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue                                                |       | $                                     | 761        |   | $ | 107,926 |   | $ | — |   | $ | — |   | $ | 108,687 |   |
| Costs applicable to revenues                           |       | (2,613                                | )          | (63,403 | ) | — |   | — |   | (66,016 | ) |
| Operating expenses                                     |       | (5,669                                | )          | (27,890 | ) | — |   | — |   | (33,559 | ) |
| Interest income (expense), net                         |       | (4,345                                | )          | (1,675 | ) | — |   | — |   | (6,020 | ) |
| Other non operating income (expenses)                  |       | 1,543                                 |       | (1,527 | ) | — |   | — |   | 16 |   |
| Income tax benefit (expense)                           |       | 4,019                                 |       | (5,229 | ) | — |   | — |   | (1,210 | ) |
| Net income (loss)                                      |       | $                                     | (6,304     | ) | $ | 8,202 |   | $ | — |   | $ | — |   | $ | 1,898 |   |
|                                                   |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash flows from (used by) operations                   |       | $                                     | (9,253     | ) | $ | 7,137 |   | $ | — |   | $ | — |   | $ | (2,116 | ) |
| Cash flows (used in) provided by investing  activities |       | (81,584                               | )          | (83,180 | ) | (81,005 | ) | 162,010 |   | (83,759 | ) |
| Cash flows (used in) provided by financing  activities |       | 82,884                                |       | 78,762 |   | 81,005 |   | (162,010 | ) | 80,641 |   |
| Cash at beginning of year                              |       | 24,852                                |       | (288 | ) | — |   | — |   | 24,564 |   |
| Cash at end of period                                  |       | $                                     | 16,899     |   | $ | 2,431 |   | $ | — |   | $ | — |   | $ | 19,330 |   |

 

10

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of December 31, 2004(in thousands).

 
| ** **                                                    | ** ** | **AS OF DECEMBER 31, 2004** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **AGI**                     | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                          |       |                        |       |   |   |   |   |   |   |
| Cash & cash equivalents                              |       | $                           | 24,852     |   | $ | (288 | ) | $ | — |   | $ | 24,564 |   |
| Accounts receivable (net of allowance for doubtful  accounts) |       | 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 |   |
| Current portion of deferred revenue                           |       | 1,245                       |       | 56,416 |   | — |   | 57,661 |   |
| Total current liabilities                                     |       | 99,285                      |       | 95,541 |   | (74,760 | ) | 120,066 |   |
|                                                          |       |                        |       |   |   |   |   |   |   |
| Deferred revenue                                              |       | 2,908                       |       | 38,561 |   | — |   | 41,469 |   |
| Long-term debt                                                |       | 311,150                     |       | 1,510 |   | — |   | 312,660 |   |
| Other long-term liabilities                                   |       | 323,482                     |       | (319,347 | ) | — |   | 4,135 |   |
| Total liabilities                                             |       | 736,825                     |       | (183,735 | ) | (74,760 | ) | 478,330 |   |
|                                                          |       |                        |       |   |   |   |   |   |   |
| Interdivisional equity                                        |       | —                      |       | 451,280 |   | (451,280 | ) | — |   |
| Stockholders’ deficit                                    |       | (158,108                    | )          | — |   | — |   | (158,108 | ) |
| Total liabilities & stockholders’ deficit       |       | $                           | 578,717    |   | $ | 267,545 |   | $ | (526,040 | ) | $ | 320,222 |   |

 

11

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The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended March 31,2004 (in thousands).

 
| ** **                                             | ** ** | **THREE MONTHS ENDED MARCH 31, 2004** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                             | ** ** | **AGI**                               | ** ** | **GUARANTORS** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
| Revenue                                                |       | $                                     | 996        |   | $ | 100,286 |   | $ | — |   | $ | 101,282 |   |
| Costs applicable to revenues                           |       | (3,037                                | )          | (60,499 | ) | — |   | (63,536 | ) |
| Operating expenses                                     |       | (4,306                                | )          | (23,916 | ) | — |   | (28,222 | ) |
| Interest income (expense), net                         |       | (2,957                                | )          | (2,290 | ) | — |   | (5,247 | ) |
| Other non operating income (expenses)                  |       | (2,662                                | )          | (1,907 | ) | — |   | (4,569 | ) |
| Income tax benefit (expense)                           |       | 4,572                                 |       | (4,462 | ) | — |   | 110 |   |
| Net income (loss)                                      |       | $                                     | (7,394     | ) | $ | 7,212 |   | $ | — |   | $ | (182 | ) |
|                                                   |       |                                  |       |   |   |   |   |   |   |
| Cash flows from (used by) operations                   |       | $                                     | (3,617     | ) | $ | 12,167 |   | $ | — |   | $ | 8,550 |   |
| Cash flows (used in) provided by investing  activities |       | 52                                    |       | (2,667 | ) | — |   | (2,615 | ) |
| Cash flows (used in) provided by financing activities  |       | 28,298                                |       | (9,558 | ) | — |   | 18,740 |   |
| Cash at beginning of year                              |       | 4,849                                 |       | 1,266 |   | — |   | 6,115 |   |
| Cash at end of period                                  |       | $                                     | 29,582     |   | $ | 1,208 |   | $ | — |   | $ | 30,790 |   |

 

12

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**ITEM2****:**

 

AFFINITY GROUP, INC. ANDSUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

The following table is derived from the Company’sConsolidated Statements of Operations and expresses the results from operationsas a percentage of revenues and reflects the net increase (decrease) betweenperiods:

 
| ** **                          | ** ** | **THREE MONTHS ENDED** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| ** **                          | ** ** | **3/31/2005**          | ** ** | **3/31/2004** | ** ** | **Inc/(Dec)** | ** ** |
|                                |       |                   |       |   |   |   |   |
| REVENUES:                           |       |                   |       |   |   |   |   |
| Membership services                 |       | 29.8                   | %          | 31.1 | % | 2.9 | % |
| Publications                        |       | 15.8                   | %          | 17.0 | % | (0.2 | )% |
| Retail                              |       | 54.4                   | %          | 51.9 | % | 12.4 | % |
|                                |       | 100.0                  | %          | 100.0 | % | 7.3 | % |
|                                |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:       |       |                   |       |   |   |   |   |
| Membership services                 |       | 18.6                   | %          | 20.5 | % | (2.5 | )% |
| Publications                        |       | 10.6                   | %          | 11.9 | % | (4.0 | )% |
| Retail                              |       | 31.5                   | %          | 30.3 | % | 11.3 | % |
|                                |       | 60.7                   | %          | 62.7 | % | 3.9 | % |
|                                |       |                   |       |   |   |   |   |
| GROSS PROFIT                        |       | 39.3                   | %          | 37.3 | % | 13.0 | % |
|                                |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                 |       |                   |       |   |   |   |   |
| Selling, general and administrative |       | 27.5                   | %          | 24.9 | % | 18.6 | % |
| Depreciation and amortization       |       | 3.4                    | %          | 3.0 | % | 21.8 | % |
|                                |       | 30.9                   | %          | 27.9 | % | 18.9 | % |
|                                |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS              |       | 8.4                    | %          | 9.4 | % | (4.3 | )% |
|                                |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                |       |                   |       |   |   |   |   |
| Interest income                     |       | 0.2                    | %          | 0.2 | % | (6.2 | )% |
| Interest expense                    |       | (5.7                   | )%         | (5.4 | )% | 14.0 | % |
| Debt extinguishment expense         |       | —                 |       | (4.5 | )% | (100.0 | )% |
| Other non-operating items, net      |       | —                 |       | — |   | (66.0 | )% |
|                                |       | (5.5                   | )%         | (9.7 | )% | (38.8 | )% |
|                                |       |                   |       |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES   |       | 2.9                    | %          | (0.3 | )% | 1164.4 | % |
|                                |       |                   |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT        |       | (1.2                   | )%         | 0.1 | % | 1200.0 | % |
|                                |       |                   |       |   |   |   |   |
| NET INCOME (LOSS)                   |       | 1.7                    | %          | (0.2 | )% | 1142.9 | % |

 

13

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**RESULTS OF OPERATIONS**

** **

**ThreeMonths Ended March 31, 2005**

**ComparedWith Three Months Ended March 31, 2004**

** **

*Revenues*

* *

Revenuesof $108.7 million for the first quarter of 2005 increased by approximately $7.4million, or 7.3%, from the comparable period in 2004.

 

Membershipservices revenues of $32.4 million for the first quarter of 2005 increased byapproximately $0.9 million, or 2.9%, from the comparable period in 2004.  This revenue increase was largelyattributable to a $1.2 million increase in extended vehicle warranty programrevenue due to continued growth in the sales of one-year warranty products, anda $0.3 million increase in emergency road service revenue due to increasedenrollment, partially offset by a $0.3 million reduction in marketing feeincome recognized on RV financing products and a $0.3 million reduction inmembership services revenue, primarily associated with reduced enrollment inthe Coast to Coast Club and Golf Card Club.

 

Publicationrevenues of $17.2 million for the first quarter of 2005 remained unchanged fromthe comparable period in 2004 primarily due to a $1.0 million revenue increase associatedwith consumer shows acquired through the acquisition of ARU, Inc.,(“ARU”) in December 2004, offset by a $0.6 million reduction in revenue fromthe timing of annual directory shipments and reduced promotion of the atlas, anda $0.4 million revenue reduction due to the disposition of archery-relatedpublication titles in the third quarter of 2004.

 

Retailrevenues of $59.1 million increased $6.5 million, or 12.4%, over the first quarterof 2004.  Store merchandise sales increased$5.7 million over the first quarter of 2004 due to a same store sales increaseof $2.3 million or 5.9%, compared to a 13.7% increase in the first quarter of2004, and a $3.4 million revenue increase from the addition of eight new storesat various times over the past fifteen months. Same store sale calculations for a given period include only thosestores that were open both at the end of that period and at the beginning ofthe preceding fiscal year.  The remainingnet increase in retail revenue was attributable to a $0.8 million increase in otherinstallation fees, supplies and services revenue.

 

*CostsApplicable to Revenues*

* *

Costsapplicable to revenues totaled $66.0 million for the first quarter of 2005, an increaseof $2.5 million, or 3.9%, from the comparable period in 2004.

 

Membershipservices costs and expenses of $20.2 million decreased approximately $0.5million, or 2.5%, from the first quarter of 2004.  This decrease consisted of a $0.6 million decreasein membership services costs, primarily due to reduced marketing and programsexpenses of the Coast to Coast Club and Golf Card Club and increased Good SamClub

 

14

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marketingcosts due to the timing of promotions, and a $0.4 million decrease in other marketingexpenses, partially offset by a $0.5 million increase in marketing costs andprogram expenses associated with increased enrollment in the extended vehiclewarranty programs.

 

Publicationcosts and expenses of $11.5 million for the first quarter of 2005 decreased $0.5million from the comparable period in 2004 primarily due to a reduction in costsassociated with reduced annual directory and atlas sales, and the dispositionof archery-related titles in the third quarter of 2004 partially offset by costsattributable to the newly acquired operations of ARU.

 

Retailcosts applicable to revenues increased $3.5 million, or 11.3%, to $34.3 millionprimarily due to increased store sales.  Theretail gross profit margin of 41.9% for the first quarter of 2005 increasedfrom 41.4% from the comparable period in 2004.

 

*OperatingExpenses*

* *

Selling,general and administrative expenses of $29.9 million for the first quarter of2005 increased $4.7 million compared to the first quarter of 2004 primarily dueto increased retail  selling and generaland administrative expenses of approximately $3.5 million consisting of $2.2million of increased in retail labor, $0.3 million of increased sellingexpenses, $0.3 million of increased rent expense, $0.7 million of increasedtraining and other retail general and administrative expenses, a $0.9 million increasein deferred executive compensation and a $0.3 million increase in other generaland administrative expenses.  Depreciationand amortization expenses of $3.7 million increased approximately $0.6 millionover the prior year due primarily to increased depreciation on capitalexpenditures at Camping World and amortization of intangible costs associatedwith the issuance of $200.0 million in 9% Senior Subordinated Notes in February 2004.

 

*Incomefrom Operations*

 

Incomefrom operations for the first quarter of 2005 of $9.1 million decreased $0.4million compared to the first quarter of 2004 primarily due to increasedoperating expenses of $5.3 million partially offset by increased gross profitfor the retail, membership services and publications operations of $3.0 million,$1.4 million and $0.5 million, respectively.

 

*Non-OperatingItems*

* *

Non-operatingitems were $6.0 million for the first quarter of 2005, compared to $9.8 millionfor the same period in 2004.  This $3.8million decrease was due to a $4.6 million reduction in debt extinguishmentexpenses associated with the redemption of the AGH senior notes due 2007 partiallyoffset by $0.8 million of additional interest expense from higher loan balancesassociated with the issuance of $200.0 million in 9% Senior Subordinated Notes inFebruary 2004.

 

15

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*Incomebefore Income Taxes*

* *

Incomebefore income taxes for the first quarter of 2005 was $3.1 million, or $3.4million higher than the first quarter of 2004. This increase was attributable to a $4.6 million reduction in debtextinguishment expense from the prior period that was only partially offset by$0.8 million of additional interest expense and a $0.4 million decrease in incomefrom operations for the current period.

 

*IncomeTax Expense*

* *

TheCompany recognized approximately $1.2 million of income tax expense for the firstquarter of 2005 compared to a $0.1 million tax benefit for the first quarter of2004.  The effective tax rates are higherthan statutory rates primarily due to state taxes.

 

# *Net Income*

# * *

Netincome in the first quarter of 2005 was $1.9 million compared to a net loss of $0.2million for the same period in 2004.

 

*SegmentProfit*

* *

Segment profit of$13.1 million for 2005 (before unallocated depreciation and amortization, generaland administrative, interest, debt restructuring, and income tax expense) increased$1.4 million, or 11.7%, for the comparable period in 2004.

 

Membershipservices segment profit increased $1.4 million, or 15.1%, to $10.4 million for thefirst quarter of 2005.  This increase islargely attributable to a $0.8 million increase in profit from the extendedwarranty program, a $0.7 million increase in profit from the Coast to CoastClub and Golf Card Club, and a $0.6 million increase in profit from emergencyroad service products, partially offset by a $0.4 million decrease in profit inthe Good Sam Club attributable to the timing of marketing promotions and a $0.3million decrease in profit from RV financing products.

 

Publicationsegment profit of $4.4 million for the first quarter of 2005 increased by $0.5million, or 13.1%, from 2004.  Thisincrease was primarily attributable to the consumer shows in the first quarterof 2005 acquired through the acquisition of ARU in December 2004.

 

Retail segment lossof $1.7 million for the first quarter of 2005 increased by $0.5 million, or 42.3%,from a loss of $1.2 million in 2004.  The increased segment loss resulted primarilyfrom a $3.5 million increase in gross profit margin offset by a $3.5 millionincrease in selling, general and administrative expenses and other allocatedexpenses and a $0.5 million increase in depreciation expense.

 

16

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**LIQUIDITYAND CAPITAL RESOURCES**

** **

TheCompany has historically operated with a working capital deficit.  The working capital deficit as of March 31,2005 and December 31, 2004 was $9.3 million and $10.8 million,respectively.  The primary reason for theworking capital deficit is the deferred revenue and gains reported undercurrent liabilities in the amount of $59.6 million and $57.7 million as of March 31,2005 and December 31, 2004, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  The Company uses netproceeds from this deferred membership revenue to lower its long-termborrowings.  For the first quarter of2005 the net cash used in operations was $2.1 million, versus net cash providedby operations of $8.6 million for the first three months of 2004.  This $10.7 million decrease in net cashprovided by operations was primarily the result of an increase in interest paidprimarily associated with the issuance of $200.0 million in 9% SeniorSubordinated Notes in February 2004, and a reduction in the growth of accounts payable due to thetiming of payments to achieve incremental product discounts.  Managementbelieves that funds generated by operations together with available borrowingsunder the Company’s revolving credit line will be sufficient to meet all of theCompany’s debt service requirements and capital requirements over the nexttwelve months.

 

*Contractual Obligations and Commercial Commitments*

* *

The following table reflects the Company’s contractual obligations andcommercial commitments at March 31, 2005, in thousands.

 
| ** **                               | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------------|------------|----------------------------|------------|
| **(in  thousands)**                      | ** ** | **Total**                  | ** ** | **Balance of  2005** | ** ** | **2006 and  2007** | ** ** | **2008 and  2009** | ** ** | **Thereafter** | ** ** |
|                                     |       |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt                           |       | $                          | 313,986    |   | $ | 1,326 |   | $ | 3,463 |   | $ | 108,971 |   | $ | 200,226 |   |
| Operating lease obligations              |       | 137,670                    |       | 9,638 |   | 22,004 |   | 16,986 |   | 89,042 |   |
| Deferred compensation                    |       | 5,263                      |       | 564 |   | 1,554 |   | 2,596 |   | 549 |   |
| Standby and commercial letters of credit |       | 7,322                      |       | 6,872 |   | 450 |   | — |   | — |   |
| Grand total                              |       | $                          | 464,241    |   | $ | 18,400 |   | $ | 27,471 |   | $ | 128,553 |   | $ | 289,817 |   |

 

On June 24,2003, the Company entered into an Amended and Restated Credit Agreement and aSenior Secured Floating Rate Note Purchase Agreement (as amended, the AGI SeniorCredit Facility).  The AGI Senior Credit Facilityprovides for a revolving credit facility of $35.0 million and term loans (“TermB1 and Term B2 loans”) in the aggregate of $140.0 million.  Proceeds from the AGI Senior Credit Facilitywere used to refinance the existing senior secured indebtedness, pay a dividendof $13.7 million to the Company’s ultimate parent AGI Holding Corp. and redeem$30.0 million principal amount of the AGH Notes at 103.667% of par in2003.  As of March 31, 2005, $32.1million and $80.1 million were outstanding under the Term B1 and Term B2 loans,respectively.  No borrowings wereoutstanding on the revolving credit facility as of March 31, 2005.  Reborrowings under the term loans are notpermitted.  The interest on borrowingsunder the AGI Senior Credit Facility is at variable rates based on the ratio oftotal cash flow to

 

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outstanding indebtedness(as defined).  Interest rates float withprime and the London Interbank Offered Rates, or LIBOR, plus an applicablemargin ranging from 1.50% to 3.50% over the stated rates.  As of March 31, 2005, the averageinterest rate on the term loans was 5.82%, and permitted borrowings under theundrawn revolving facility were $27.7 million. The Company also pays a commitment fee of 0.5% per annum on the unusedamount of the revolving credit facility. The aggregate quarterly scheduled payments on the term loans are$350,000.  The revolving credit facilitymatures on June 24, 2008, and the Term B1 and Term B2 loans mature on June 24,2009.  The funds available under the AGISenior Credit Facility may be utilized for borrowings or letters of credit;however, a maximum of $12.5 million may be allocated to such letters ofcredit.  As of March 31, 2005, theCompany had letters of credit in the aggregate amount of $7.3 millionoutstanding.  The AGI Senior Credit Facilityis secured by virtually all of the Company’s assets and a pledge of the Company’sstock and the stock of the Company’s subsidiaries.

 

In February 2004, the Company issued $200.0 million aggregateprincipal amount of 9% Senior Subordinated Notes due 2012 (the “Notes”).  Interest is payable on the Notes twice a yearon each February 15 and August 15, beginning August 15, 2004,and the Notes mature on February 15, 2012. The Company completed a registered exchange of the Notes under theSecurities Act of 1933 in August 2004. The proceeds from the sale of the Notes were used to fund the tenderoffer and defeasance of the remaining $100.0 million outstanding principalamount of the AGH Notes, prepay $25.0 million of the Term B1 and Term B2 loansunder the AGI Senior Credit Facility, pay a $60.0 million dividenddistribution, create a $15.0 million segregated cash account, pay certainprepayment and transaction costs and for general corporate purposes.  The amount held in this segregated account,including any earnings thereon, was available to pay stockholder dividends uponsatisfaction of a leverage test specified in the AGI Senior Credit Facility.  In August and November of 2004, theCompany satisfied the specific leverage test and paid $3.6 million and $11.5million in dividends, respectively.  Thesegregated account replenishment requirement has been permanently eliminated.

 

In November 2004, the Company amended the AGI Senior Credit Facilitydated June 24, 2003.  The interestrates on the Term B1 and Term B2 loans were reduced by 1.00%.  The applicable interest margin was reducedfrom 4.00% to 3.00% and 3.00% to 2.00% for the LIBOR and Prime Rate loans,respectively.

 

The AGI Indenturepursuant to which the Notes were issued and the AGI Senior Credit Facility containcertain restrictive covenants relating to, but not limited to, mergers, changesin the nature of the business, acquisitions, additional indebtedness, sale ofassets, investments, and the payment of dividends subject to certainlimitations and minimum operating covenants. The Company was in compliance with all debt covenants at March 31,2005.

 

For the threemonths ended March 31, 2005, the Company incurred $0.9 million of deferredexecutive compensation expense under the phantom stock agreements and madepayments of $0.9 million on mature phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next

 

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seven years.  Phantom stock payments of $0.6 million arescheduled to**be made over the remainder of thecalendar year.

 

Capitalexpenditures for the first three months of 2005 totaling $2.8 million increased$0.2 million from the first three months of 2004.  Additional capital expenditures of $11.9million 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.

 

**CRITICALACCOUNTING POLICIES**

** **

*General*

* *

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluates itsestimates, including those related to membership programs and incentives, baddebts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

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

 

*Revenue Recognition*

* *

Merchandise revenue is recognized when products are sold in the retailstores, shipped for mail and internet orders, or when services are provided tocustomers. Publication advertising and newsstand sales, net of estimatedprovision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Advances onthird party credit card fee revenues are deferred and recognized based primarilyon a percentage of credit card receivables held by third parties.  Membership revenue is generated from annual,multi-year and lifetime memberships.  Therevenue and expenses associated with these memberships are deferred andamortized over the membership period. For lifetime memberships, an 18-year period is used, which is theactuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and

 

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expensed over the period of expected future benefit.  Renewal expenses are expensed at the timerelated materials are mailed.  Recognizedrevenues and profit are subject to revisions as the membership progresses tocompletion.  Revisions to membershipperiod estimates would change the amount of income and expense amortized infuture accounting periods.

 

*Accounts Receivable*

* *

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

 

*Inventory*

* *

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

 

*Long-LivedAssets*

* *

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

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  The Companyassesses the fair value of the assets based on the future cash flow the assetsare expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When 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 March 31,2005.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible assets were necessary.  Thefinite-lived purchased intangible assets consist of membership customer lists,resort and golf course agreements, non-compete and deferred

 

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consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 23 years, 15 years and 7 years, respectively.

 

*IndefiniteLived Intangible Assets*

* *

The Companyevaluates indefinite lived intangible assets for impairment at least annuallyor when events indicate that an impairment exists in accordance with SFAS No. 142.  The impairment test for goodwill and otherindefinite-lived intangible assets is calculated annually using fair valuemeasurement techniques.

 

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

 

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

 

Based on theresults of the annual impairment tests, the Company determined that noimpairment of goodwill existed as of December 31, 2004.  However, future goodwill impairment testscould result in a charge to earnings.  TheCompany will continue to evaluate goodwill on an annual basis and wheneverevents and changes in circumstances indicate that there may be a potential impairment.

 

*Restructuring*

* *

The Companyrecorded reserves in connection with the restructuring program primarily withinthe retail segment.  These reservesinclude estimates pertaining to employee separation costs and the settlementsof contractual obligations resulting from the Company’s actions.  Although the Company does not anticipatesignificant changes, the actual costs may differ from these estimates.

 

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**ITEM 3****:  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

*Interest Rate Risks*

* *

Refer to the disclosure in our 2004 Annual Report on Form 10-K.  The Company does not believe that the risk itfaces related to interest rate changes is materially different than it was atthe date of the Annual Report.

 

*Credit Risks*

* *

Refer to the disclosure in our 2004 Annual Report on Form 10-K.  The Company does not believe that the risk itfaces related to credit risk is materially different than it was at the date ofthe Annual Report.

 

**ITEM 4****: CONTROL AND PROCEDURES**

** **

Within 90 daysprior to the filing of this Quarterly Report on Form 10-Q, the Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the President and Chief Executive Officerand the Senior Vice President and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls and procedurespursuant to Regulation 13a-14 under the Securities Exchange Act of 1934.  Based upon that evaluation, the President andChief Executive Officer along with the Senior Vice President and ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included in theperiodic SEC filings.  There have been nosignificant changes in the Company’s internal controls or in other factors thatcould significantly affect these controls subsequent to the date the Companycarried out its evaluation.

 

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

 

None

 

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**SIGNATURES:**

 

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

 

 
|                    | **AFFINITY  GROUP, INC.**  |
|-------------------------|----------------------------|
|                    |                       |
|                    |                       |
|                    | /s/ Thomas F.  Wolfe       |   |
| Date:  May 4, 2005 | Thomas F. Wolfe            |
|                    | Senior Vice  President and |
|                    | Chief Financial  Officer   |

 

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