**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** |
|-------------------------|------------|-----------------------------|
| **September  30, 2007** | ** ** | **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)         |

 

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 check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

 

| YES  x | NO  o |
|-------------|------------|

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as defined in Rule12b-2 of the Exchange Act).

 
| Large accelerated filer       o | Accelerated filer       o | Non-accelerated filer       x |
|----------------------------------------------------------|----------------------------------------------------|--------------------------------------------------------|

 

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

 

| YES  o | NO  x |
|-------------|------------|

 

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

 

| ** **                    | ** ** | **Outstanding  as of** |
|-------------------------------|------------|------------------------|
| **Class**                     | ** ** | **November  14, 2007** |
| 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**                                                                               |       |
|                                                                                                           |       |
| Consolidated  Balance Sheets  as of September 30, 2007 (unaudited) and December 31, 2006                       |       |
|                                                                                                           |       |
| Unaudited  Consolidated Statements of Operations  for the three months ended September 30, 2007 and 2006       |       |
|                                                                                                           |       |
| Unaudited  Consolidated Statements of Operations  for the nine months ended September 30, 2007 and 2006        |       |
|                                                                                                           |       |
| Unaudited  Consolidated Statements of Cash Flows  for the nine months ended September 30, 2007 and 2006        |       |
|                                                                                                           |       |
| 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:  Controls and Procedures**                                                                     |       |
|                                                                                                           |       |
| **Part  II.   Other Information**                                                                         |       |
| * *                                                                                                       | * *   |
| **Signatures**                                                                                                 |       |

 

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September30, 2007 and December 31, 2006

(Inthousands except shares and par value)

 
| ** **                                                                                      | ** ** | **9/30/2007**   | ** ** | **12/31/2006** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 5,431      |           | $          | 15,006 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,360 in 2007 and $1,193 in 2006 |       | 24,160          |       | 27,199         |       |
| Inventories                                                                                     |       | 70,213          |       | 52,703         |       |
| Prepaid expenses and other assets                                                               |       | 19,385          |       | 12,995         |       |
| Deferred tax assets                                                                             |       | 3,316           |       | 3,203          |       |
| Total current assets                                                                            |       | 122,505         |       | 111,106        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 42,026          |       | 34,765         |       |
| INVESTMENT IN AFFILIATE                                                                         |       | 81,005          |       | 81,005         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                                 |       | 4,660           |       | 4,688          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 25,849          |       | 30,311         |       |
| GOODWILL                                                                                        |       | 144,429         |       | 144,429        |       |
| OTHER ASSETS                                                                                    |       | 1,391           |       | 1,704          |       |
| Total assets                                                                                    |       | $               | 421,865    |           | $          | 408,008 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 23,045     |           | $          | 32,577 |   |
| Accrued interest                                                                                |       | 1,983           |       | 5,936          |       |
| Accrued income taxes                                                                            |       | 1,163           |       | 1,736          |       |
| Accrued liabilities                                                                             |       | 38,045          |       | 35,663         |       |
| Deferred revenues and gains                                                                     |       | 73,771          |       | 62,906         |       |
| Current portion of long-term debt                                                               |       | 4,366           |       | 7,271          |       |
| Total current liabilities                                                                       |       | 142,373         |       | 146,089        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 38,706          |       | 37,183         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 284,118         |       | 277,884        |       |
| DEFERRED TAX LIABILITY                                                                          |       | 5,359           |       | 15,724         |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 21,008          |       | 6,511          |       |
|                                                                                            |       | 491,564         |       | 483,391        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.001 par value, 2,000 shares  authorized, 2,000 shares issued and outstanding    |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 81,005          |       | 81,005         |       |
| Accumulated deficit                                                                             |       | (150,705        | )          | (156,389       | )          |
| Total stockholder’s deficit                                                                |       | (69,699         | )          | (75,383        | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 421,865    |           | $          | 408,008 |   |

 

See notes to consolidated financialstatements.

 

1

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **9/30/2007**                    | ** ** | **9/30/2006** | ** ** |
|                                       |       |                             |       |   |   |
| REVENUES:                                  |       |                             |       |   |   |
| Membership services                        |       | $                                | 39,375     |   | $ | 34,128 |   |
| Publications                               |       | 14,864                           |       | 14,289 |   |
| Retail                                     |       | 92,189                           |       | 81,623 |   |
|                                       |       | 146,428                          |       | 130,040 |   |
|                                       |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |
| Membership services                        |       | 26,244                           |       | 22,293 |   |
| Publications                               |       | 10,867                           |       | 9,982 |   |
| Retail                                     |       | 55,812                           |       | 49,030 |   |
|                                       |       | 92,923                           |       | 81,305 |   |
|                                       |       |                             |       |   |   |
| GROSS PROFIT                               |       | 53,505                           |       | 48,735 |   |
|                                       |       |                             |       |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |
| Selling, general and administrative        |       | 38,611                           |       | 35,978 |   |
| Depreciation and amortization              |       | 4,694                            |       | 4,719 |   |
|                                       |       | 43,305                           |       | 40,697 |   |
|                                       |       |                             |       |   |   |
| INCOME FROM OPERATIONS                     |       | 10,200                           |       | 8,038 |   |
|                                       |       |                             |       |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |
| Interest income                            |       | 161                              |       | 205 |   |
| Interest expense                           |       | (6,219                           | )          | (6,189 | ) |
| Debt extinguishment expense                |       | —                           |       | (142 | ) |
| Other non-operating items, net             |       | (51                              | )          | 24 |   |
|                                       |       | (6,109                           | )          | (6,102 | ) |
|                                       |       |                             |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 4,091                            |       | 1,936 |   |
|                                       |       |                             |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (4,764                           | )          | 2,292 |   |
|                                       |       |                             |       |   |   |
| NET (LOSS) INCOME                          |       | $                                | (673       | ) | $ | 4,228 |   |

 

See notes to consolidated financialstatements.

 

2

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **9/30/2007**                   | ** ** | **9/30/2006** | ** ** |
| REVENUES:                                  |       |                            |       |   |   |
| Membership services                        |       | $                               | 111,528    |   | $ | 104,588 |   |
| Publications                               |       | 57,082                          |       | 53,976 |   |
| Retail                                     |       | 259,489                         |       | 227,349 |   |
|                                       |       | 428,099                         |       | 385,913 |   |
|                                       |       |                            |       |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                            |       |   |   |
| Membership services                        |       | 72,205                          |       | 68,416 |   |
| Publications                               |       | 38,907                          |       | 36,195 |   |
| Retail                                     |       | 157,721                         |       | 136,497 |   |
|                                       |       | 268,833                         |       | 241,108 |   |
|                                       |       |                            |       |   |   |
| GROSS PROFIT                               |       | 159,266                         |       | 144,805 |   |
|                                       |       |                            |       |   |   |
| OPERATING EXPENSES:                        |       |                            |       |   |   |
| Selling, general and administrative        |       | 112,088                         |       | 101,320 |   |
| Depreciation and amortization              |       | 14,185                          |       | 13,838 |   |
|                                       |       | 126,273                         |       | 115,158 |   |
|                                       |       |                            |       |   |   |
| INCOME FROM OPERATIONS                     |       | 32,993                          |       | 29,647 |   |
|                                       |       |                            |       |   |   |
| NON-OPERATING ITEMS:                       |       |                            |       |   |   |
| Interest income                            |       | 518                             |       | 929 |   |
| Interest expense                           |       | (18,763                         | )          | (19,529 | ) |
| Debt extinguishment expense                |       | (775                            | )          | (835 | ) |
| Other non-operating items, net             |       | 42                              |       | 77 |   |
|                                       |       | (18,978                         | )          | (19,358 | ) |
|                                       |       |                            |       |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 14,015                          |       | 10,289 |   |
|                                       |       |                            |       |   |   |
| INCOME TAX EXPENSE                         |       | (4,581                          | )          | (22,578 | ) |
|                                       |       |                            |       |   |   |
| NET INCOME (LOSS)                          |       | $                               | 9,434      |   | $ | (12,289 | ) |

 

See notes to consolidated financialstatements.

 

3

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(InThousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **NINE MONTHS ENDED** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **9/30/2007**                   | ** ** | **9/30/2006** | ** ** |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                            |       |   |   |
| Net income (loss)                                                                         |       | $                               | 9,434      |   | $ | (12,289 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                              |       | 7,323                           |       | 7,661 |   |
| Amortization                                                                              |       | 6,862                           |       | 6,177 |   |
| Provision for losses on accounts receivable                                               |       | 904                             |       | 515 |   |
| Deferred compensation                                                                     |       | 440                             |       | 920 |   |
| Deferred tax (benefit) provision                                                          |       | 3,706                           |       | 21,885 |   |
| Loss (gain) on sale of property and equipment                                             |       | 73                              |       | (13 | ) |
| Loss on early extinguishment of debt                                                      |       | 775                             |       | 835 |   |
| Changes in operating assets and liabilities                                               |       |                            |       |   |   |
| Accounts receivable                                                                       |       | 2,135                           |       | 5,100 |   |
| Inventories                                                                               |       | (17,510                         | )          | (6,129 | ) |
| Prepaid expenses and other assets                                                         |       | (5,795                          | )          | (5,404 | ) |
| Accounts payable                                                                          |       | (9,532                          | )          | 8,093 |   |
| Accrued and other liabilities                                                             |       | (2,271                          | )          | (3,097 | ) |
| Deferred revenues and gains                                                               |       | 11,582                          |       | 10,040 |   |
| Net cash provided by operating activities                                                 |       | 8,126                           |       | 34,294 |   |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                            |       |   |   |
| Capital expenditures                                                                      |       | (14,570                         | )          | (9,203 | ) |
| Net proceeds from sale of property and equipment                                          |       | 10                              |       | 124 |   |
| Change in intangible assets                                                               |       | (14                             | )          | — |   |
| Acquisitions, net of cash received                                                        |       | (304                            | )          | (2,853 | ) |
| Repayment of loans receivable                                                             |       | 28                              |       | 25 |   |
| Net cash used in investing activities                                                     |       | (14,850                         | )          | (11,907 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                            |       |   |   |
| Dividends paid                                                                            |       | (3,750                          | )          | (3,287 | ) |
| Borrowings on long-term debt                                                              |       | 53,100                          |       | — |   |
| Payment of debt issue costs                                                               |       | (291                            | )          | (12 | ) |
| Principal payments of long-term debt                                                      |       | (51,910                         | )          | (33,992 | ) |
| Net cash used in financing activities                                                     |       | (2,851                          | )          | (37,291 | ) |
|                                                                                      |       |                            |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                   |       | (9,575                          | )          | (14,904 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |       | 15,006                          |       | 24,778 |   |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |       | $                               | 5,431      |   | $ | 9,874 |   |

 

See notes to consolidated financialstatements.

 

4

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principlesof Consolidation**–*The consolidated financial statements includethe accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries (collectivelythe “Company”), presented in accordance with U.S. generally accepted accountingprinciples, and pursuant to the rules and regulations of the Securities andExchange Commission. Affinity Group Holding, Inc. (“AGHI”) is the direct parentof the Company. The parent company of AGHI is AGI Holding Corp. (“AGHC”), aprivately-owned corporation.

 

Inthe second quarter of 2006, AGHC received approval from the Internal RevenueService to change its tax status from a Subchapter C corporation to aSubchapter S corporation (“S corporation”) to be effective as of January 1,2006. The election for change in tax status to an S corporation included AGHCand all its subsidiaries with the exception of Camping World, Inc. and itswholly-owned subsidiaries, which remain Subchapter C corporations. Pursuant toSFAS 109, “Accounting for Income taxes”, a change in tax status resulting froman S corporation election requires that all deferred tax accounts be revaluedupon formal approval of the S corporation status. Accordingly, all deferred taxaccounts of AGHC and its subsidiaries, excluding Camping World, Inc. and itswholly-owned subsidiaries, were revalued to account for the tax effect for thechange to the S corporation status in the second quarter of 2006.

 

Theseinterim consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2006 as filed with the Securities andExchange Commission. In the opinion of management of the Company, theseconsolidated financial statements contain all adjustments of a normal recurringnature necessary to present fairly the financial position, results ofoperations and cash flows of the Company for the interim periods presented.

 

**(2)RECENT ACCOUNTING PRONOUNCEMENTS**

 

The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January1, 2007. At the date of adoption, the Company had $14.2 million of unrecognizedtax benefits. Accounting for the unrecognized tax benefits had no affect oncurrent period earnings or retained earnings as the liability had beenpreviously recorded and was reclassified from long-term deferred taxliabilities to other long-term liabilities. There would be no affect on theeffective tax rate if the unrecognized tax benefits were recognized. TheCompany did not have any material increases in unrecognized tax benefits in thecurrent period and does not anticipate any material increases over the nexttwelve months.

 

5

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**(2)RECENT ACCOUNTING PRONOUNCEMENTS (continued)**

 

During the thirdquarter of 2007 and for the nine months ended September 30, 2007, the Companyrecorded an additional $0.2 million and $0.6 million, respectively, of accruedinterest and penalties related to the unrecognized tax benefits. The Company’spolicy is to classify interest and penalties as income tax expense in the financialstatements.

 

The Company andits subsidiaries file income tax returns in the U.S. and various states. Withfew exceptions, the Company is no longer subject to U.S. federal, state, andlocal income tax examinations by tax authorities for years before 2002.

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements”. This standard providesguidance for using fair value to measure assets and liabilities. The standardalso responds to investors’ requests for expanded information about the extentto which companies measure assets and liabilities at fair value, theinformation used to measure fair value, and the effect of fair valuemeasurements on earnings. The standard applies whenever other standards require(or permit) assets or liabilities to be measured at fair value, but does notexpand the use of fair value in any new circumstances. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning afterNovember 15, 2007, and interim periods within those fiscal years. There arenumerous previously issued statements dealing with fair values that are amendedby SFAS No. 157. We have not evaluated the impact, if any, that the adoption ofSFAS No. 157 will have on our consolidated financial statements.

 

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

 

TheCompany’s three principal lines of business are Membership Services,Publications, and Retail. The Membership Services segment includes theoperations of the Good Sam Club, Coast to Coast Club, Camping World’s President’sClub and Camp Club USA for recreational vehicles (“RV”) owners, campers andoutdoor vacationers, and the Golf Card Club for golf enthusiasts. ThePublications segment publishes a variety of publications for selected marketsin the recreation and leisure industry, including general circulationperiodicals, directories, and RV and powersports industry trade magazines, andproduces outdoor recreational consumer events. The Retail segment sellsspecialty retail merchandise and services for RV owners primarily through theCamping World retail supercenters, mail order catalogs and its website. Forrecent events regarding the Retail segment, see Note 7 below. The Companyevaluates performance based on profit or loss from operations before incometaxes.

 

The reportablesegments are strategic business units that offer different products andservices. They are managed separately because each business requires differenttechnology, management expertise and marketing strategies.

 

6

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

 

TheCompany does not allocate income taxes or unusual items to segments. Financialinformation by reportable business segment is summarized as follows (inthousands):

 
| ** **                                | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **THREE MONTHS ENDED SEPTEMBER 30, 2007** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers          |       | $                        | 39,375     |             | $          | 14,864     |       | $                | 92,189     |   | $ | 146,428 |   |
| Loss on sale of property and equipment    |       | —                   |       | —           |       | (78        | )          | (78              | )          |
| Interest income                           |       | 2,528                    |       | —           |       | 10         |       | 2,538            |       |
| Interest expense                          |       | —                   |       | 52               |       | 3,943      |       | 3,995            |       |
| Depreciation and amortization             |       | 859                      |       | 1,304            |       | 1,955      |       | 4,118            |       |
| Segment operating profit                  |       | 11,998                   |       | 1,335            |       | 142        |       | 13,475           |       |
|                                      |       |                     |       |             |       |       |       |             |       |
| **THREE MONTHS ENDED SEPTEMBER 30, 2006** |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers          |       | $                        | 34,128     |             | $          | 14,289     |       | $                | 81,623     |   | $ | 130,040 |   |
| Interest income                           |       | 1,746                    |       | —           |       | 1          |       | 1,747            |       |
| Interest expense                          |       | —                   |       | 77               |       | 3,140      |       | 3,217            |       |
| Depreciation and amortization             |       | 915                      |       | 1,111            |       | 2,102      |       | 4,128            |       |
| Segment operating profit (loss)           |       | 10,511                   |       | 2,105            |       | (367       | )          | 12,249           |       |

 
| ** **                                    | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **NINE MONTHS ENDED SEPTEMBER 30, 2007**      |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers              |       | $                        | 111,528    |             | $          | 57,082     |       | $                | 259,489    |   | $ | 428,099 |   |
| Gain (loss) on sale of property and equipment |       | —                   |       | 5                |       | (78        | )          | (73              | )          |
| Interest income                               |       | 7,081                    |       | —           |       | 77         |       | 7,158            |       |
| Interest expense                              |       | —                   |       | 198              |       | 11,353     |       | 11,551           |       |
| Depreciation and amortization                 |       | 2,656                    |       | 3,853            |       | 5,770      |       | 12,279           |       |
| Segment profit (loss)                         |       | 35,942                   |       | 10,125           |       | (1,842     | )          | 44,225           |       |
|                                          |       |                     |       |             |       |       |       |             |       |
| **NINE MONTHS ENDED SEPTEMBER 30, 2006**      |       |                     |       |             |       |       |       |             |       |
| Revenues from external customers              |       | $                        | 104,588    |             | $          | 53,976     |       | $                | 227,349    |   | $ | 385,913 |   |
| Gain on sale of property and equipment        |       | —                   |       | 5                |       | 8          |       | 13               |       |
| Interest income                               |       | 4,685                    |       | —           |       | 7          |       | 4,692            |       |
| Interest expense                              |       | —                   |       | 258              |       | 10,119     |       | 10,377           |       |
| Depreciation and amortization                 |       | 2,714                    |       | 3,190            |       | 6,108      |       | 12,012           |       |
| Segment profit (loss)                         |       | 32,198                   |       | 11,289           |       | (4,174     | )          | 39,313           |       |

 

7

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

 

Thefollowing is a reconciliation of income from operations to the Company’sconsolidated financial statements for the three months ended and the nine monthsended September 30, 2007 and 2006 (in thousands):

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **9/30/2007**                    | ** ** | **9/30/2006**                   | ** ** | **9/30/2007** | ** ** | **9/30/2006** | ** ** |
| **Income From Operations Before Income Taxes**                |       |                             |       |                            |       |   |   |   |   |
| Total profit for reportable segments                          |       | $                                | 13,475     |                            | $          | 12,249 |   | $ | 44,225 |   | $ | 39,313 |   |
| Unallocated G & A expense                                 |       | (4,207                           | )          | (5,066                          | )          | (13,677 | ) | (13,448 | ) |
| Unallocated depreciation and amortization expense             |       | (576                             | )          | (591                            | )          | (1,906 | ) | (1,826 | ) |
| Unallocated interest income, net of intercompany elimination  |       | (2,377                           | )          | (1,542                          | )          | (6,640 | ) | (3,763 | ) |
| Unallocated interest expense, net of intercompany elimination |       | (2,224                           | )          | (2,972                          | )          | (7,212 | ) | (9,152 | ) |
| Unallocated debt restructure expense                          |       | —                           |       | (142                            | )          | (775 | ) | (835 | ) |
| Income from operations before income taxes                    |       | $                                | 4,091      |                            | $          | 1,936 |   | $ | 14,015 |   | $ | 10,289 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2007 and December 31,2006 (in thousands):

 
| ** **                                          | ** ** | **9/30/2007** | ** ** | **12/31/2006** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 182,676    |           | $          | 184,928 |   |
| Publications segment                                |       | 87,695        |       | 87,122         |       |
| Retail segment                                      |       | 250,317       |       | 225,680        |       |
| Total assets for reportable segments                |       | 520,688       |       | 497,730        |       |
| Capitalized finance costs not allocated to segments |       | 5,732         |       | 8,190          |       |
| Corporate unallocated assets                        |       | 3,280         |       | 6,353          |       |
| Elimination of intersegment receivable              |       | (107,835      | )          | (104,265       | )          |
| Total assets                                        |       | $             | 421,865    |           | $          | 408,008 |   |

 

**(4)STATEMENTS OF CASH FLOWS**

 

Supplementaldisclosures of cash flow information for the nine months ended September 30 (inthousands):

 
| ** **                                  | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid (received) during the period for: |       |     |       |     |       |
| Interest                                    |       | $        | 22,716     |     | $          | 24,240 |   |
| Income taxes                                |       | (194     | )          | 205      |       |
|                                             |            |          |            |          |            |  |  |

 

 

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

 

8

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(**5) GOODWILL AND INTANGIBLE ASSETS**

 

In February 2007,the Company assumed $0.6 million of liabilities and issued $1.5 million of debtin connection with the acquisition of five RV and Sportsman Shows fromIndustrial Expositions, Inc.

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually and more often when impairment indicators are present. The Companyperforms its annual impairment test during the fourth quarter. There were nochanges in the Company’s goodwill by business segment for the nine months endedSeptember 30, 2007 and 2006 and no indicators of impairment.

 

The Companycompleted two acquisitions in the first nine months of 2007. These acquisitionshave been accounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations,” and accordingly, the acquired assets and liabilities have beenrecorded at fair value. The allocations of purchase price to assets and liabilitiesinclude various finite-lived assets and no additional goodwill. The operationsof each entity are included in the operations of the Company as of theirrespective acquisition dates.

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at September 30, 2007 (in thousands, except asnoted):

 
| ** **                                      | ** ** | **Weighted****Average Useful  Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
|                                            |       |                                                           |       |      |       |                          |       |    |       |
| Membership and customer lists                   |       | 6                                                              |       | $         | 31,466     |                          | $          | (15,474 | )          | $ | 15,992 |   |
| Resort and golf course participation agreements |       | 23                                                             |       | 13,427    |       | (13,166                       | )          | 261     |       |
| Non-compete and deferred consulting agreements  |       | 15                                                             |       | 18,830    |       | (13,580                       | )          | 5,250   |       |
| Deferred financing costs                        |       | 7                                                              |       | 10,414    |       | (6,068                        | )          | 4,346   |       |
|                                            |       |                                                           |       | $         | 74,137     |                          | $          | (48,288 | )     | $ | 25,849 |   |

 

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

 

In February 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture. The Company purchased and retired $29.9 million of the SeniorSubordinated Notes in 2006 and $17.7 million in March 2007. Interest is payableon the remaining $152.4 million Senior Subordinated Notes twice a year onFebruary 15 and August 15. The Company’s present and future restrictedsubsidiaries guarantee the Senior Subordinated 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 existing andfuture senior

 

9

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

 

subordinated debt. All of the Company’s subsidiaries have jointly andseverally guaranteed the indebtedness under the Senior Subordinated Notesexcept for CWFR Capital Corp. Full financial statements of the Guarantors havenot been included because, pursuant to their respective guarantees, theGuarantors are jointly and severally liable with respect to the SeniorSubordinated Notes.

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the nine monthsended September 30, 2007 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                         |       | $          | 3,246      |           | $          | 2,185         |       | $                | —     |             | $          | — |   | $ | 5,431 |   |
| Accounts receivable, net                            |       | 373        |       | 131,622        |       | —        |       | (107,835         | )          | 24,160           |       |
| Inventories                                         |       | —     |       | 70,213         |       | —        |       | —           |       | 70,213           |       |
| Other current assets                                |       | 1,893      |       | 20,808         |       | —        |       | —           |       | 22,701           |       |
| Total current assets                                |       | 5,512      |       | 224,828        |       | —        |       | (107,835         | )          | 122,505          |       |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                         |       | 7,903      |       | 34,123         |       | —        |       | —           |       | 42,026           |       |
| Intangible assets                                   |       | 4,351      |       | 21,498         |       | —        |       | —           |       | 25,849           |       |
| Goodwill                                            |       | 67,584     |       | 76,845         |       | —        |       | —           |       | 144,429          |       |
| Investment in subsidiaries                          |       | 577,523    |       | 81,005         |       | —        |       | (658,528         | )          | —           |       |
| Affiliate note and investments                      |       | 40,000     |       | 4,660          |       | 81,005        |       | (40,000          | )          | 85,665           |       |
| Other assets                                        |       | 756        |       | 635            |       | —        |       | —           |       | 1,391            |       |
| Total assets                                        |       | $          | 703,629    |           | $          | 443,594       |       | $                | 81,005     |             | $          | (806,363 | ) | $ | 421,865 |   |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                    |       | $          | 1,031      |           | $          | 22,014        |       | $                | —     |             | $          | — |   | $ | 23,045 |   |
| Accrued and other liabilities                       |       | 12,191     |       | 29,000         |       | —        |       | —           |       | 41,191           |       |
| Current portion of long-term debt                   |       | 109,485    |       | 42,716         |       | —        |       | (147,835         | )          | 4,366            |       |
| Current portion of deferred revenue                 |       | 985        |       | 72,786         |       | —        |       | —           |       | 73,771           |       |
| Total current liabilities                           |       | 123,692    |       | 166,516        |       | —        |       | (147,835         | )          | 142,373          |       |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                    |       | 2,569      |       | 36,137         |       | —        |       | —           |       | 38,706           |       |
| Long-term debt                                      |       | 280,266    |       | 3,852          |       | —        |       | —           |       | 284,118          |       |
| Other long-term liabilities                         |       | 366,801    |       | (340,434       | )          | —        |       | —           |       | 26,367           |       |
| Total liabilities                                   |       | 773,328    |       | (133,929       | )          | —        |       | (147,835         | )          | 491,564          |       |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                              |       | —     |       | 577,523        |       | 81,005        |       | (658,528         | )          | —           |       |
| Stockholders’ deficit                          |       | (69,699    | )          | —         |       | —        |       | —           |       | (69,699          | )          |
| Total liabilities & stockholders’ deficit  |       | $          | 703,629    |           | $          | 443,594       |       | $                | 81,005     |             | $          | (806,363 | ) | $ | 421,865 |   |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 4,445      |           | $          | 423,654       |       | $                | —     |             | $          | — |   | $ | 428,099 |   |
| Costs applicable to revenues                        |       | (10,031    | )          | (258,802       | )          | —        |       | —           |       | (268,833         | )          |
| Operating expenses                                  |       | (15,349    | )          | (110,924       | )          | —        |       | —           |       | (126,273         | )          |
| Interest expense, net                               |       | (13,852    | )          | (4,393         | )          | —        |       | —           |       | (18,245          | )          |
| Income from investment in consolidated subsidiaries |       | 40,112     |       | —         |       | —        |       | (40,112          | )          | —           |       |
| Other non operating income (expenses)               |       | 4,375      |       | (5,108         | )          | —        |       | —           |       | (733             | )          |
| Income tax expense                                  |       | (266       | )          | (4,315         | )          | —        |       | —           |       | (4,581           | )          |
| Net income (loss)                                   |       | $          | 9,434      |           | $          | 40,112        |       | $                | —     |             | $          | (40,112 | ) | $ | 9,434 |   |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                          |       | $          | (28,660    | )              | $          | 36,786        |       | $                | —     |             | $          | — |   | $ | 8,126 |   |
| Cash flows used in investing activities             |       | (3,004     | )          | (11,846        | )          | —        |       | —           |       | (14,850          | )          |
| Cash flows (used in) provided financing activities  |       | 22,301     |       | (25,152        | )          | —        |       | —           |       | (2,851           | )          |
| Cash at beginning of year                           |       | 12,609     |       | 2,397          |       | —        |       | —           |       | 15,006           |       |
| Cash at end of period                               |       | $          | 3,246      |           | $          | 2,185         |       | $                | —     |             | $          | — |   | $ | 5,431 |   |

 

10

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

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the threemonths ended September 30, 2007 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 3,106      |           | $          | 143,322       |       | $                | —     |             | $          | — |   | $ | 146,428 |   |
| Costs applicable to revenues                        |       | (4,853     | )          | (88,070        | )          | —        |       | —           |       | (92,923          | )          |
| Operating expenses                                  |       | (4,700     | )          | (38,605        | )          | —        |       | —           |       | (43,305          | )          |
| Interest expense, net                               |       | (4,601     | )          | (1,457         | )          | —        |       | —           |       | (6,058           | )          |
| Income from investment in consolidated subsidiaries |       | 8,677      |       | —         |       | —        |       | (8,677           | )          | —           |       |
| Other non operating income (expenses)               |       | 1,727      |       | (1,778         | )          | —        |       | —           |       | (51              | )          |
| Income tax expense                                  |       | (29        | )          | (4,735         | )          |          |       |             |       | (4,764           | )          |
| Net income (loss)                                   |       | $          | (673       | )              | $          | 8,677         |       | $                | —     |             | $          | (8,677 | ) | $ | (673 | ) |

 

The following are summarized balance sheet statements setting forthcertain financial information concerning the Guarantor Subsidiaries as ofDecember 31, 2006 (in thousands).

 
| ** **                                        | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                        | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                              |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                       |       | $          | 12,609     |           | $          | 2,397         |       | $                | —     |             | $          | — |   | $ | 15,006 |   |
| Accounts receivable- net                          |       | 436        |       | 131,028        |       | —        |       | (104,265         | )          | 27,199           |       |
| Inventories                                       |       | —     |       | 52,703         |       | —        |       | —           |       | 52,703           |       |
| Other current assets                              |       | 2,439      |       | 13,759         |       | —        |       | —           |       | 16,198           |       |
| Total current assets                              |       | 15,484     |       | 199,887        |       | —        |       | (104,265         | )          | 111,106          |       |
|                                              |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                       |       | 6,581      |       | 28,184         |       | —        |       | —           |       | 34,765           |       |
| Intangible assets                                 |       | 5,816      |       | 24,495         |       | —        |       | —           |       | 30,311           |       |
| Goodwill                                          |       | 67,584     |       | 76,845         |       | —        |       | —           |       | 144,429          |       |
| Investment in subsidiaries                        |       | 530,094    |       | 81,005         |       | —        |       | (611,099         | )          | —           |       |
| Affiliate note and investments                    |       | 44,688     |       | —         |       | 81,005        |       | (40,000          | )          | 85,693           |       |
| Other assets                                      |       | 915        |       | 789            |       | —        |       | —           |       | 1,704            |       |
| Total assets                                      |       | $          | 671,162    |           | $          | 411,205       |       | $                | 81,005     |             | $          | (755,364 | ) | $ | 408,008 |   |
|                                              |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                  |       | $          | 1,305      |           | $          | 31,272        |       | $                | —     |             | $          | — |   | $ | 32,577 |   |
| Accrued and other liabilities                     |       | 13,154     |       | 30,181         |       | —        |       | —           |       | 43,335           |       |
| Current portion of long-term debt                 |       | 108,948    |       | 42,588         |       | —        |       | (144,265         | )          | 7,271            |       |
| Current portion of deferred revenue               |       | 1,386      |       | 61,520         |       | —        |       | —           |       | 62,906           |       |
| Total current liabilities                         |       | 124,793    |       | 165,561        |       |          |       | (144,265         | )          | 146,089          |       |
|                                              |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                  |       | 2,663      |       | 34,520         |       | —        |       | —           |       | 37,183           |       |
| Long-term debt                                    |       | 273,886    |       | 3,998          |       | —        |       | —           |       | 277,884          |       |
| Other long-term liabilities                       |       | 345,203    |       | (322,968       | )          | —        |       | —           |       | 22,235           |       |
| Total liabilities                                 |       | 746,545    |       | (118,889       | )          |          |       | (144,265         | )          | 483,391          |       |
| Interdivisional equity                            |       | —     |       | 530,094        |       | 81,005        |       | (611,099         | )          | —           |       |
| Stockholders’ deficit                        |       | (75,383    | )          | —         |       | —        |       | —           |       | (75,383          | )          |
| Total liabilities & stockholders’ equity |       | $          | 671,162    |           | $          | 411,205       |       | $                | 81,005     |             | $          | (755,364 | ) | $ | 408,008 |   |

 

11

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

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the nine months endedSeptember 30, 2006 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | ** **    | ** ** | ** **       | ** ** | ** **       | ** ** |
| Revenue                                             |       | $          | 4,789      |           | $          | 381,124       |       | $                | —     |             | $          | — |   | $ | 385,913 |   |
| Costs applicable to revenues                        |       | (10,657    | )          | (230,451       | )          | —        |       | —           |       | (241,108         | )          |
| Operating expenses                                  |       | (14,707    | )          | (100,451       | )          | —        |       | —           |       | (115,158         | )          |
| Interest expense, net                               |       | (12,915    | )          | (5,685         | )          | —        |       | —           |       | (18,600          | )          |
| Income from investment in consolidated subsidiaries |       | 31,591     |       | —         |       | —        |       | (31,591          | )          | —           |       |
| Other non operating income (expenses)               |       | 3,826      |       | (4,584         | )          | —        |       | —           |       | (758             | )          |
| Income tax benefit (expense)                        |       | (14,216    | )          | (8,362         | )          | —        |       | —           |       | (22,578          | )          |
| Net income (loss)                                   |       | $          | (12,289    | )              | $          | 31,591        |       | $                | —     |             | $          | (31,591 | ) | $ | (12,289 | ) |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                          |       | $          | (18,771    | )              | $          | 53,065        |       | $                | —     |             | $          | — |   | $ | 34,294 |   |
| Cash flows used in investing activities             |       | (1,995     | )          | (9,912         | )          | —        |       | —           |       | (11,907          | )          |
| Cash flows used in financing activities             |       | 3,100      |       | (40,391        | )          | —        |       | —           |       | (37,291          | )          |
| Cash at beginning of year                           |       | 26,421     |       | (1,643         | )          | —        |       | —           |       | 24,778           |       |
| Cash at end of period                               |       | $          | 8,755      |           | $          | 1,119         |       | $                | —     |             | $          | — |   | $ | 9,874 |   |

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months endedSeptember 30, 2006 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 1,189      |           | $          | 128,851       |       | $                | —     |             | $          | — |   | $ | 130,040 |   |
| Costs applicable to revenues                        |       | (3,005     | )          | (78,300        | )          | —        |       | —           |       | (81,305          | )          |
| Operating expenses                                  |       | (5,449     | )          | (35,248        | )          | —        |       | —           |       | (40,697          | )          |
| Interest expense, net                               |       | (4,514     | )          | (1,470         | )          | —        |       | —           |       | (5,984           | )          |
| Income from investment in consolidated subsidiaries |       | 12,287     |       | —         |       | —        |       | (12,287          | )          | —           |       |
| Other non operating income (expenses)               |       | 1,459      |       | (1,577         | )          | —        |       | —           |       | (118             | )          |
| Income tax benefit (expense)                        |       | 2,261      |       | 31             |       |          |       |             |       | 2,292            |       |
| Net income (loss)                                   |       | $          | 4,228      |           | $          | 12,287        |       | $                | —     |             | $          | (12,287 | ) | $ | 4,228 |   |

 

**(7)RECENT EVENTS**

 

On April 16, 2007,the Company entered into a stock purchase agreement with FreedomRoads Holding Company,LLC (“FreedomRoads”), an entity under common ownership with the Company’sultimate parent corporation, pursuant to which the Company will, subject tosatisfaction of certain conditions, sell all of the outstanding stock of itswholly-owned subsidiary Camping World, Inc. (“Camping World”) to FreedomRoadsfor $175.8 million subject to certain adjustments (the “Purchase Price”). Thetransaction is expected to close upon satisfaction of certain conditionsstipulated under the Stock Purchase Agreement dated April 16, 2007, includingFreedomRoads raising the

 

12

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**(7)RECENT EVENTS (continued)**

 

necessary funds inthe capital markets. The closing date has not been set because the currentuncertainty in the capital markets has prevented FreedomRoads from achieving adesirable capital structure to effect the acquisition. No assurance can beprovided that the appropriate financing will be obtained. The Purchase Price(including the portion paid by the assumption and discharge on the closing dateby FreedomRoads of the intercompany indebtedness owed by Camping World to theCompany) is to be paid 75% in immediately available funds at closing and 25%under a subordinated promissory note bearing interest at 11.5% per annum. TheCompany intends to use the net cash proceeds from the sale of Camping World torepay indebtedness outstanding under the Company’s term notes issued under thesenior secured floating rate note purchase agreement dated June 24, 2003, asamended, and its revolving credit line under the credit agreement dated June24, 2003, as amended, with senior lenders (collectively the “Senior SecuredCredit Facility”). As of September 30, 2007, an aggregate of $129.0 million wasoutstanding under the term loans and $7.8 million was outstanding (including$7.3 million in letters of credit) under the revolving credit facility of theSenior Secured Credit Facility.

 

On October 15,2007, the Company entered in to an interest rate swap effective October 31,2007 with a notional amount of $100.0 million. The interest rate swap carries afixed interest rate of 5.135% and matures on October 31, 2012. The Companyentered into the interest rate swap to limit the effect of increases on ourfloating rate debt.

 

13

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**ITEM 2:**

 

AFFINITYGROUP, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITIONAND RESULTS OF OPERATIONS

 

Thefollowing table is derived from the Company’s Consolidated Statements ofOperations and expresses the results from operations as a percentage ofrevenues and reflects the net increase (decrease) between periods:

 
| ** **                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **9/30/2007**                    | ** ** | **9/30/2006** | ** ** | **Inc/(Dec)** | ** ** |
| REVENUES:                                  |       |                             |       |   |   |   |   |
| Membership services                        |       | 26.9                             | %          | 26.2 | % | 15.4 | % |
| Publications                               |       | 10.2                             | %          | 11.0 | % | 4.0 | % |
| Retail                                     |       | 62.9                             | %          | 62.8 | % | 12.9 | % |
|                                       |       | 100.0                            | %          | 100.0 | % | 12.6 | % |
|                                       |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                             |       |   |   |   |   |
| Membership services                        |       | 17.9                             | %          | 17.1 | % | 17.7 | % |
| Publications                               |       | 7.4                              | %          | 7.7 | % | 8.9 | % |
| Retail                                     |       | 38.2                             | %          | 37.7 | % | 13.8 | % |
|                                       |       | 63.5                             | %          | 62.5 | % | 14.3 | % |
|                                       |       |                             |       |   |   |   |   |
| GROSS PROFIT                               |       | 36.5                             | %          | 37.5 | % | 9.8 | % |
|                                       |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                             |       |   |   |   |   |
| Selling, general and administrative        |       | 26.4                             | %          | 27.7 | % | 7.3 | % |
| Depreciation and amortization              |       | 3.2                              | %          | 3.6 | % | (0.5 | )% |
|                                       |       | 29.6                             | %          | 31.3 | % | 6.4 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 6.9                              | %          | 6.2 | % | 26.9 | % |
|                                       |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                             |       |   |   |   |   |
| Interest income                            |       | 0.1                              | %          | 0.2 | % | (21.5 | )% |
| Interest expense                           |       | (4.2                             | )%         | (4.8 | )% | 0.5 | % |
| Debt extinguishment expense                |       | —                           |       | (0.1 | )% | 100.0 | % |
| Other non-operating items, net             |       | —                           |       | — |   | (312.5 | )% |
|                                       |       | (4.1                             | )%         | (4.7 | )% | 0.1 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 2.8                              | %          | 1.5 | % | 111.3 | % |
|                                       |       |                             |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT               |       | (3.3                             | )%         | 1.8 | % | (307.9 | )% |
|                                       |       |                             |       |   |   |   |   |
| NET (LOSS) INCOME                          |       | (0.5                             | )%         | 3.3 | % | (115.9 | )% |

 

14

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

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:

 
| ** **                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------|------------|---------------------------------|------------|
| ** **                                 | ** ** | **9/30/2007**                   | ** ** | **9/30/2006** | ** ** | **Inc/(Dec)** | ** ** |
|                                       |       |                            |       |   |   |   |   |
| REVENUES:                                  |       |                            |       |   |   |   |   |
| Membership services                        |       | 26.1                            | %          | 27.1 | % | 6.6 | % |
| Publications                               |       | 13.3                            | %          | 14.0 | % | 5.8 | % |
| Retail                                     |       | 60.6                            | %          | 58.9 | % | 14.1 | % |
|                                       |       | 100.0                           | %          | 100.0 | % | 10.9 | % |
|                                       |       |                            |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:              |       |                            |       |   |   |   |   |
| Membership services                        |       | 16.9                            | %          | 17.7 | % | 5.5 | % |
| Publications                               |       | 9.1                             | %          | 9.4 | % | 7.5 | % |
| Retail                                     |       | 36.8                            | %          | 35.4 | % | 15.5 | % |
|                                       |       | 62.8                            | %          | 62.5 | % | 11.5 | % |
|                                       |       |                            |       |   |   |   |   |
| GROSS PROFIT                               |       | 37.2                            | %          | 37.5 | % | 10.0 | % |
|                                       |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                        |       |                            |       |   |   |   |   |
| Selling, general and administrative        |       | 26.2                            | %          | 26.2 | % | 10.6 | % |
| Depreciation and amortization              |       | 3.3                             | %          | 3.6 | % | 2.5 | % |
|                                       |       | 29.5                            | %          | 29.8 | % | 9.7 | % |
|                                       |       |                            |       |   |   |   |   |
| INCOME FROM OPERATIONS                     |       | 7.7                             | %          | 7.7 | % | 11.3 | % |
|                                       |       |                            |       |   |   |   |   |
| NON-OPERATING ITEMS:                       |       |                            |       |   |   |   |   |
| Interest income                            |       | 0.1                             | %          | 0.2 | % | (44.2 | )% |
| Interest expense                           |       | (4.3                            | )%         | (5.0 | )% | (3.9 | )% |
| Debt extinguishment expense                |       | (0.2                            | )%         | (0.2 | )% | 7.2 | % |
| Other non-operating items, net             |       | —                          |       | — |   | (45.5 | )% |
|                                       |       | (4.4                            | )%         | (5.0 | )% | (2.0 | )% |
|                                       |       |                            |       |   |   |   |   |
| INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | 3.3                             | %          | 2.7 | % | 36.2 | % |
|                                       |       |                            |       |   |   |   |   |
| INCOME TAX EXPENSE                         |       | (1.1                            | )%         | (5.9 | )% | (79.7 | )% |
|                                       |       |                            |       |   |   |   |   |
| NET INCOME (LOSS)                          |       | 2.2                             | %          | (3.2 | )% | 176.8 | % |

 

15

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended September 30, 2007**

**ComparedWith Three Months Ended September 30, 2006**

 

*Revenues*

 

Revenuesof $146.4 million for the third quarter of 2007 increased by $16.4 million, or12.6%, from the comparable period in 2006.

 

Membershipservices revenues of $39.4 million for the third quarter of 2007 increased by$5.2 million, or 15.4%, from the comparable period in 2006. This revenueincrease was largely attributable to member events revenue of $1.9 million dueto timing of the Good Sam Club annual rally, which occurred in the thirdquarter of 2007 versus the second quarter of 2006, a $1.2 million increase inextended vehicle warranty program revenue due to the continued growth ofcontracts in force, including warranty sales through the growing network ofGood Sam dealers, a $1.0 million revenue increase due to increased enrollmentin Camping World President’s Club, Camp Club USA and the Good Sam Club,partially offset by enrollment decreases in the Coast Club and the Golf CardClub, a $0.5 million revenue increase in emergency road service programs due toincreased enrollment, a $0.4 million increase in marketing fee revenue fromhealth and life insurance products and a $0.2 million increase from dealerprogram marketing revenue.

 

Publicationrevenues of $14.9 million for the third quarter of 2007 increased $0.6 million,or 4.0%, from the comparable period in 2006 primarily attributable to $0.8million of revenue associated with the acquisition of the publishing assets ofAmerican Guide Services, Inc. in August 2006, and $0.3 million of revenuerelating to an additional *Camping Life*issue during the quarter. These increases were partially offset by a $0.3million decrease in revenue associated with the elimination of *Cruising Rider* magazine and $0.2 million reduction inadvertising revenue for *Motorhome Magazine*.

 

Retail revenues ofapproximately $92.2 million increased $10.6 million, or 12.9%, from thecomparable period in 2006. Store merchandise sales increased approximately $8.3million over the third quarter of 2006 due to a $11.6 million revenue increasefrom the net addition of 32 new stores over the past twenty-one months,partially offset by a same store sales decrease of $3.3 million, or 6.1%,compared to a 4.8% decrease in same store sales for the third quarter of 2006. Samestore sale calculations for a given period include only those stores that wereopen both at the end of that period and at the beginning of the precedingfiscal year. Supplies and other sales increased $2.1 million, including $0.8million recorded during the period relating to the recognition of estimatedgift card breakage. Prior to third quarter of 2007 the Company had not recordedany unredeemed gift card sales into revenue. In the third quarter the Companychanged the state of jurisdiction where gift cards will be administered andcommenced accounting for estimated breakage of gift cards under the “redemptionrate method.”  In addition, productextended warranty sales increased $0.3 million and mail order sales decreased$0.1 million.

 

16

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*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $92.9 million for the third quarter of 2007, anincrease of $11.6 million, or 14.3%, from the comparable period in 2006.

 

Membershipservices costs and expenses of $26.2 million increased $4.0 million, or 17.7%,from the comparable period in 2006. This increase consisted of a $1.9 millionincrease in member events costs primarily due to timing of the Good Sam Clubannual rally, which occurred in the third quarter of 2007 versus the secondquarter of 2006, $1.2 million of incremental costs associated with increasedextended vehicle warranty program revenue and emergency roads service revenue,including incremental marketing and overhead costs associated with the growingnetwork of Good Sam dealers, a $0.5 million increase in other marketing costs,a $0.2 million increase in program costs associated with increased marketingfee revenue from health and life insurance products and a $0.2 million increasein dealer marketing program costs.

 

Publicationcosts and expenses of approximately $10.9 million for the third quarter of 2007increased $0.9 million, or 8.9%, from the comparable period in 2006. Thisincrease was attributable to $0.7 million of additional costs from the recentlyacquired American Guide Services group, a $0.2 million increase in *Motorhome Magazine* marketing costs, a $0.2 million increasein event-related expenses and $0.1 million of additional costs related to anadditional issue of *Camping Life*magazine.These increases were partially offset by reduced costs of $0.3 million relatedto discontinuing *Cruising Rider* magazine.

 

Retailcosts applicable to revenues increased approximately $6.7 million, or 13.8%, to$55.8 million primarily as a result of 32 new stores opened over the pasttwenty-one months. The retail gross profit margin of 39.5% for the thirdquarter of 2007 decreased from 39.9% for the comparable period in 2006primarily due to a shift in product mix to slightly lower margin products, andmargin compression caused by a combination of competitive pricing and higherunit costs.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $38.6 million for thethird quarter of 2007 increased $2.6 million compared to the third quarter of2006. This increase was due to an increase in retail selling and general andadministrative expenses of approximately $3.3 million consisting of increasesin selling, real property and labor expenses primarily due to new storeopenings, partially offset by $0.6 million of reduced deferred executivecompensation and a $0.1 million reduction in miscellaneous general andadministrative expenses.

 

Depreciationand amortization expense of $4.7 million remained unchanged from the prioryear.

 

*Incomefrom Operations*

 

Incomefrom operations for the third quarter of 2007 totaling $10.2 million increased$2.2 million compared to the third quarter of 2006. This increase was primarilydue to

 

17

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increasedgross profit for retail and membership services operations of $3.8 million and$1.3 million, respectively, partially offset by increased operating expenses of$2.6 million and reduced gross profit for the publications operations of $0.3million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $6.1 million for the third quarter of 2007 remainedunchanged compared to the same period in 2006. The $0.1 million decrease indebt extinguishment expense associated with the retirement of SeniorSubordinated Notes in 2006, was offset by a $0.1 million increase in othernon-operating items.

 

*Incomebefore Income Taxes*

 

Incomebefore income taxes for the third quarter of 2007 was $4.1 million, or $2.2million higher than the third quarter of 2006. This increase was attributableto the $2.2 million increase in income from operations mentioned above.

 

*IncomeTax (Expense) Benefit*

 

TheCompany recorded a $4.8 million income tax expense for the third quarter of2007, compared to a $2.3 million income tax benefit for the third quarter of2006. The expense increase was primarily due to the Company’s increase inits valuation allowance of $4.2 million for the third quarter of 2007 as it wasdetermined that the Company would have insufficient taxable income in thecurrent, carryback, or carryforward periods under the tax laws to realize thefuture tax benefit of its deferred tax assets. The change was also due to AGHC’sS corporation change of tax status election effective for the second quarter of2006, which included AGI and all its subsidiaries, with the exception ofCamping World, Inc. and its wholly-owned subsidiaries which will remainSubchapter C corporations.  As a result, all deferred tax assets andliabilities were revalued with the exception of those related to Camping World,Inc. and its wholly-owned subsidiaries and other potential built-in gains.

 

# *Net (Loss) Income*

# * *

Netloss in the third quarter of 2007 was $0.7 million compared to net income of$4.2 million for the same period in 2006 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

Segment profit of$13.5 million for the third quarter of 2007 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)increased $1.2 million, or 10.0%, from the comparable period in 2006.

 

Membershipservices segment profit of approximately $12.0 million for the third quarter of2007 increased $1.5 million, or 14.1%, from the comparable period in 2006. Thisincrease was largely attributable to a $1.0 million increase in profit fromemergency road service products, a $0.3 million increase in profit from healthand life insurance products, and a $0.2 million increase in profit from theextended vehicle warranty programs.

 

18

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Publicationsegment profit of $1.3 million for the third quarter of 2007 decreased $0.8million, or 36.6%, from the comparable period in 2006. This decrease waslargely attributed to $0.5 million of additional general and administrativeexpenses related to the consumer shows acquired over the last 21 months and a$0.3 million decrease in profit for *Motorhome Magazine.*

 

Retail segmentprofit increased $0.5 million, or 138.7% from the third quarter of 2006 to aprofit of $0.2 million in 2007. This increase in segment profit resulted primarily from a $4.6 millionincrease in gross profit margin, partially offset by a $3.3 million increase in selling, general andadministrative expenses primarily related to the increase in new stores, and an$0.8 million increase in interest expense.

 

**NineMonths Ended September 30, 2007**

**ComparedWith Nine Months Ended September 30, 2006**

 

*Revenues*

 

Revenuesof $428.1 million for the first nine months of 2007 increased by $42.2 million,or 10.9%, from the comparable period in 2006.

 

Membershipservices revenues of $111.5 million for the first nine months of 2007 increasedby $6.9 million, or 6.6%, from the comparable period in 2006. This revenueincrease was largely attributable to a $3.1 million increase in extendedvehicle warranty program revenue due to the continued growth of contracts inforce, including warranty sales through the growing network of Good Samdealers, a $2.1 million revenue increase in membership services primarily dueto increased enrollment in the Camping World President’s Club and the Camp ClubUSA, partially offset by reduced enrollment in the Golf Card Club and Coast toCoast Club, a $1.1 million revenue increase in emergency road service programsdue to increased enrollment, a $0.6 million increase in marketing fee revenuefrom health and life insurance products, and a $0.6 million increase in dealerprogram marketing revenue. These increases were partially offset by a $0.6million revenue reduction due to the elimination of the RV Today televisionprogram.

 

Publicationrevenues of $57.1 million for the first nine months of 2007 increased $3.1million, or 5.8%, from the comparable period in 2006 primarily attributable to $2.4million of revenue associated with the acquisition of the publishing assets ofAmerican Guide Services, Inc. in August 2006 and $2.1 million of revenueassociated with consumer shows acquired in the last twenty-one months. Theseincreases were partially offset by a $0.5 million decrease in campground atlasrevenue, which is scheduled for its bi-annual update and reprint in 2008, a$0.4 million decrease in advertising revenue for *MotorhomeMagazine*, a $0.3 million revenue decrease for the motorcyclemagazine group due to the elimination of the *CruisingRider* title partially offset by an advertising revenue increase for *Rider Magazine*, and a $0.2 million revenue decrease due toseven fewer issues of *Snow Week*magazine in 2007.

 

Retailrevenues of $259.5 million increased approximately $32.2 million, or 14.1%,from the comparable period in 2006. Store merchandise sales for the first ninemonths of

 

19

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2007increased approximately $25.6 million over the comparable period in 2006 due toa $32.1 million revenue increase from a net addition of 32 new stores over thepast twenty-one months, partially offset by a same store sales decrease of $6.6million, or 4.2%, compared to a 5.0% decrease in same store sales for the firstnine months of 2006. Same store sale calculations for a given period includeonly those stores that were open both at the end of that period and at thebeginning of the preceding fiscal year. Supplies and other sales increased $4.3million, including $0.8 million recorded during the period relating to therecognition of estimated gift card breakage. In addition, installation andservice work increased $1.1 million, product extended warranty sales increased$1.1 million and mail order sales increased $0.1 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $268.8 million for the first nine months of2007, an increase of $27.7 million, or 11.5%, from the comparable period in2006.

 

Membershipservices costs and expenses of $72.2 million increased $3.8 million, or 5.5%,from the comparable period in 2006. This increase was attributable to $2.4million of additional costs associated with increased extended vehicle warrantyprogram revenue, including incremental marketing and overhead costs associatedwith the growing network of Good Sam authorized dealers, $0.5 million ofadditional dealer program marketing costs, $0.4 million of additionalmiscellaneous overhead costs, $0.3 million of additional program costsassociated with increased marketing fee revenue from health and life insuranceproducts, and $0.3 million of net additional membership services costsassociated with increased membership in the Camping World President’s Club andCamp Club USA, partially offset by reduced membership in the Coast Club and theGolf Card Club. This decrease was partially offset by $0.6 million of reducedcosts resulting from the elimination of the RV Today television program.

 

Publicationcosts and expenses of $38.9 million for the first nine months of 2007 increased$2.7 million, or 7.5%, from the comparable period in 2006. This increase wasattributable to $2.4 million of incremental costs from the recently acquiredAffinity Guest Services Group, and $1.6 million of costs associated with therecently acquired consumer shows, partially offset by a $0.6 million reductionin costs related to the elimination of the *Cruising Rider*title, reduced campground atlas costs of $0.4 million resulting from reducedsales, and reduced costs of $0.3 million associated with fewer issues of *Snow Week* magazine.

 

Retailcosts applicable to revenues increased approximately $21.2 million, or 15.5%,to $157.7 million primarily as a result of 32 new stores opened over the pasttwenty-one months. The retail gross profit margin of 39.2% for the first nine monthsof 2007 decreased from 40.0% for the comparable period in 2006 primarily due toa shift in product mix to slightly lower margin products and margin compressioncaused by a combination of competitive pricing and higher unit costs.

 

20

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*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $112.1 million for thefirst nine months of 2007 increased $10.8 million compared to the first ninemonths of 2006. This increase was largely attributable to an increase in retailselling and general and administrative expenses of approximately $9.9 millionconsisting of increases in selling, labor and real property expenses primarilydue to new store openings and other marketing programs, $0.9 million ofarbitration expenses in connection with our asserted claim to a right of firstrefusal in connection with the sale of General Motors Acceptance Corporation,the insurance provider for the RV vehicle insurance offered by our MembershipServices segment, which claim was rejected by the arbitration panel, and $0.8million of costs associated with the recently acquired consumer shows. Theseincreases were partially offset by a $0.5 million reduction in deferredexecutive compensation and a $0.3 million reduction in other general andadministrative expenses.

 

Depreciationand amortization expense of $14.2 million increased approximately $0.3 millionover the prior year primarily due to increased amortization of intangibleassets associated with the recent acquisitions.

 

*Incomefrom Operations*

 

Incomefrom operations for the first nine months of 2007 totaling $33.0 millionincreased $3.3 million compared to the first nine months of 2006. This increasewas primarily due to increased gross profit for retail, membership services andpublications operations of $10.9 million, $3.1 million and $0.4 million,respectively, partially offset by increased operating expenses of $11.1million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $19.0 million for the first nine months of 2007decreased $0.4 million compared to the same period in 2006. This decrease wasprimarily due to a $0.8 million decrease in interest expense in 2007 resultingfrom a decrease in average interest rates, partially offset by a $0.4 milliondecrease in interest income.

 

*Incomebefore Income Taxes*

 

Incomebefore income taxes for the first nine months of 2007 was $14.0 million, or$3.7 million higher than the first nine months of 2006. This increase wasattributable to the $3.3 million increase in income from operations for thecurrent period and $0.4 million of reduced non-operating items.

 

*IncomeTax Expense*

 

TheCompany recorded approximately $4.6 million of income tax expense for the firstnine months of 2007, compared to a $22.6 million income tax expense for thefirst nine months of 2006. This expense decrease was primarily due to AGHC’s Scorporation change of tax status election effective for the second quarter of2006, which included AGI

 

21

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andall its subsidiaries, with the exception of Camping World, Inc. and itswholly-owned subsidiaries which will remain Subchapter C corporations. As aresult, all deferred tax assets and liabilities were revalued with theexception of those related to Camping World, Inc. and its wholly-ownedsubsidiaries and other potential built-in gains. Further, the company increasedits valuation allowance by $4.2 million for the third quarter of 2007 as it wasdetermined that the Company would have insufficient taxable income in thecurrent, carryback, or carryforward periods under the tax laws to realize thefuture tax benefit of its deferred tax assets.

 

# *Net Income (Loss)*

# * *

Netincome for the first nine months of 2007 was $9.4 million compared to a netloss of $12.3 million for the same period in 2006 mainly due to the reasonsdiscussed above.

 

*SegmentProfit (Loss)*

 

Segment profit of$44.2 million for the first nine months of 2007 (before unallocateddepreciation and amortization, general and administrative, interest, and incometax expense) increased $4.9 million, or 12.5%, from the comparable period in2006.

 

Membershipservices segment profit of approximately $35.9 million for the first ninemonths of 2007 increased $3.7 million, or 11.6%, from the comparable period in2006. This increase was largely attributable to a $2.7 million increase inprofit from emergency road service products, a $0.5 million increase in profitfrom the extended vehicle warranty programs, a $0.4 million increase in profitfrom health and life insurance products, and a $0.4 million increase in profitfrom Camp Club USA, partially offset by a $0.3 million loss for the Coast Cluband Golf Card Club.

 

Publicationsegment profit of $10.1 million for the first nine months of 2007 decreasedapproximately $1.2 million, or 10.3%, from the comparable period in 2006. Thisdecrease was largely attributed to a $0.6 million decrease in profit for*Motorhome Magazine*due to their reduced advertising revenueand increased marketing costs, and a $0.6 increase in amortization ofintangible assets associated with the consumer shows acquired over the lasttwenty-one months.

 

Retail segmentloss decreased $2.3 million, or 55.9% from the first nine months of 2006 to aloss of approximately $1.8 million in the first nine months of 2007. This decrease in segment loss resultedprimarily from a $13.1 million increase in gross profit margin, and a $0.3 million decrease in depreciationexpenses, partially offset by a $9.9million increase in selling, general and administrative expenses primarilyrelated to the increase in new stores and a $1.2 million increase in interestexpense.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany has historically operated with a working capital deficit. The workingcapital deficit as of September 30, 2007 and December 31, 2006 was $19.9million and $35.0 million, respectively. The primary reason for the workingcapital deficit is the deferred

 

22

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revenueand gains reported under current liabilities in the amount of $73.8 million and$62.9 million as of September 30, 2007 and December 31, 2006, respectively. Deferredrevenue is primarily comprised of cash collected for club memberships inadvance, which is amortized over the life of the membership. The Company usesnet proceeds from this deferred membership revenue to lower its long-termborrowings. Management believes that funds generated by operations togetherwith available borrowings under the Company’s revolving credit line will besufficient to meet all of the Company’s debt service requirements, capitalrequirements and working capital needs over the next twelve months. Further,management believes that the change in the tax status to a Subchapter Scorporation in 2006 for the Company and all its subsidiaries, with theexception of Camping World, Inc. and its wholly-owned subsidiaries, has notlimited the Company’s ability to issue debt through the capital markets but maylimit the ability of the Company to raise funds in the equity market.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at September 30, 2007. This table includes principal and futureinterest due under our debt agreements based on interest rates as of September30, 2007 and assumes debt obligations will be held to maturity.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Total**                                 | ** ** | **Balance of  2007** | ** ** | **2008 and  2009** | ** ** | **2010 and  2011** | ** ** | **Thereafter** | ** ** |
|                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |       | $                                         | 371,170    |   | $ | 8,440 |   | $ | 175,086 |   | $ | 28,387 |   | $ | 159,257 |   |
| Operating lease obligations        |       | 183,733                                   |       | 4,519 |   | 33,616 |   | 30,538 |   | 115,060 |   |
| Deferred compensation              |       | 4,430                                     |       | 853 |   | 3,137 |   | 294 |   | 146 |   |
| Standby letters of credit          |       | 7,254                                     |       | 6,254 |   | 1,000 |   | — |   | — |   |
| Grand total                        |       | $                                         | 566,587    |   | $ | 20,066 |   | $ | 212,839 |   | $ | 59,219 |   | $ | 274,463 |   |

 

On June 24, 2003,the Company entered into an Amended and Restated Credit Agreement and a SeniorSecured Floating Rate Note Purchase Agreement (as amended, the “Senior CreditFacility”). The Senior Credit Facility provides for a revolving credit facilityof $35.0 million and term loans in the aggregate of $140.0 million. As ofSeptember 30 2007, $129.0 million was outstanding under the term loans and $0.5million was outstanding under the revolving credit facility. Reborrowings underthe term loans are not permitted. The interest on borrowings under the SeniorCredit Facility was at variable rates based on the ratio of total cash flow tooutstanding indebtedness (as defined). Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 2.50% over the stated rates. As of September 30, 2007, theaverage interest rates on the term loans and the revolving credit facility were7.63% and 10.00%, respectively, and permitted borrowings under the undrawnrevolving facility were $27.2 million. The Company also pays a commitment feeof 0.5% per annum on the unused amount of the revolving credit facility. Theaggregate quarterly scheduled payments on the term loans are $0.4 million. Boththe revolving credit facility and the term loans mature on June 24, 2009. Thefunds available under the Senior Credit Facility may be utilized for borrowingsor letters of credit; however, a maximum of $12.5 million may be allocated tosuch letters of credit. As of September 30, 

 

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2007, the Companyhad letters of credit in the aggregate amount of $7.3 million outstanding. TheSenior 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 $200.0 million aggregate principal amount of 9% SeniorSubordinated Notes due 2012 (“Senior Subordinated Notes”). The Companycompleted a registered exchange of the Senior Subordinated Notes under theSecurities Act of 1933 in August 2004.

 

On March 3, 2006,AGI amended its Senior Credit Facility to revise the definition of ConsolidatedFixed Charges Ratio and Permitted Tax Distributions. This amendment allows theCompany to distribute taxes to its ultimate parent based on its stand-alone taxobligation rather than the tax obligation of its parent, AGHI, until such timethat AGHI pays interest on its 10 7/8% Senior Notes in cash instead of by theissuance of additional notes. Further, the Company amended the Senior CreditFacility’s covenant restrictions with affiliates to permit a joint venturearrangement between Camping World and FreedomRoads, an affiliate of theCompany.

 

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

 

On March 8, 2007,the Company purchased $17.7 million of the Senior Subordinated Notes. TheCompany funded the purchase through the issuance of the $25.0 million inadditional incremental term loans as permitted under the February 27, 2007amendment to the Senior Credit Facility. The balance of the $25.0 millionissued was used to pay down the Company’s revolving credit facility by $6.5million and to pay associated loan fees and transaction expenses. The terms onthe additional incremental loans are consistent with the remaining term loanoutstanding under the Senior Credit Facility. As of September 30, 2007, $152.4million of Senior Subordinated Notes remain outstanding.

 

On October 15,2007, the Company entered in to an interest rate swap effective October 31,2007 with a notional amount of $100.0 million. The interest rate swap carries afixed interest rate of 5.135% and matures on October 31, 2012. The Companyentered into the interest rate swap to limit the effect of increases on ourfloating rate debt.

 

The AGI Indenturepursuant to which the AGI Senior Subordinated Notes were issued and the SeniorCredit Facility contain certain restrictive covenants relating to, but notlimited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants. TheCompany was in compliance with all debt covenants at September 30, 2007.

 

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On March 24, 2005,AGHI, the Company’s parent, issued $88.2 million principal amount of the10-7/8% senior notes due February 15, 2012 (the “AGHI Notes”). Interest onthe AGHI notes is payable semi-annually on February 15 and August 15. 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, except the maturity date is March 15, 2010. AGIhas not paid any dividends to AGHI to fund payment of interest on the AGHINotes and AGHI made the interest payments due on August 15, 2005, February 15,2006, August 15, 2006 and February 15, 2007 through of additional notes. AGHIpaid the interest on the notes due August 15, 2007 from proceeds of a $5.9million contribution made by AGHI’s parent, AGHC.

 

In February 2006,AGI Productions, Inc., a subsidiary of Ehlert Publishing, Inc., acquired theconsumer shows and related assets of H & S Productions, LLC for $2.5million. As part of the purchase, the Company issued $0.4 million of debt andassumed $1.0 million of liabilities. In August 2006, TL Enterprises, Inc.acquired the consumer park guides and related assets of American GuideServices, Inc. for $1.0 million. As part of the purchase, the Company issued$0.1 million of debt and assumed $0.3 million of liabilities. In September2006, AGI Productions, Inc. acquired the consumer shows and related assets ofApple Rock Advertising and Promotions, Inc. for $1.5 million. As part of thepurchase, the Company issued $0.5 million of debt and assumed $0.4 million ofliabilities.

 

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

 

For the ninemonths ended September 30, 2007, the Company incurred $0.4 million of deferredexecutive compensation expense under the phantom stock agreements, and madepayments of $2.5 million under the terms of the vested phantom stock agreements.The earned incentives under these agreements are scheduled to be paid atvarious times over the next five years. Phantom stock payments of $0.9 millionare scheduled to**be made for the remainder of2007.

 

Capitalexpenditures for the first nine months of 2007 totaling $14.6 million increased$5.4 million from the first nine months of 2006 primarily due to the additionof fifteen new retail stores. Additional capital expenditures of $3.6 millionare anticipated for the balance of 2007 primarily for two new retail stores,relocation of one retail store, existing retail store upgrades, informationtechnology, inventory system replacement, and computer hardware and softwareupgrades and enhancements.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have

 

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been prepared inaccordance with accounting principles generally accepted in the United States. Thepreparation of these financial statements requires the Company to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, the Company evaluates its estimates,including those related to membership programs and incentives, bad debts,inventories, intangible assets, employee health insurance benefits, incometaxes, restructuring, contingencies and litigation. 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 resultsmay differ from these estimates under different assumptions 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 ofpublications are deferred and recognized over the lives of the subscriptions. Revenuesfrom the emergency road service program (“ERS”) are deferred and recognizedover the life of the membership. ERS claim expenses are recognized whenincurred. Advances on third party credit card fee revenues are deferred andrecognized based primarily on a percentage of credit card receivables held bythird parties. Membership revenue is generated from annual, multi-year andlifetime memberships. The revenue and expenses associated with thesememberships are deferred and amortized over the membership period. For lifetimememberships, an 18-year period is used, which is the actuarially determinedestimated fulfillment period. Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit. Renewal expenses are expensed at the time related materials aremailed. Recognized revenues and profit are subject to revisions as themembership progresses to completion. Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.

 

*Accounts Receivable*

 

The Companyestimates the collectability of its trade receivables. A considerable amount ofjudgment is required in assessing the ultimate realization of these receivablesincluding the current credit-worthiness of each customer. Changes in requiredreserves have been recorded in recent periods and may occur in the future dueto the market environment.

 

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*Inventory*

 

The Company statesinventories at the lower of cost or market. In assessing the ultimaterealization of inventories, the Company is required to make judgments as tofuture demand requirements and compare that with the current or committedinventory levels. The Company has recorded changes in required reserves inrecent periods due to changes in strategic direction, such as discontinuancesof product lines as well as changes in market conditions due to changes indemand requirements. It is possible that changes in required inventory reservesmay continue to occur in the future due to the market 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 Disposal ofLong-Lived Assets.”  The Company assessesthe fair value of the assets based on the future cash flow the assets areexpected to generate and recognize an impairment loss when estimated undiscountedfuture cash flow expected to result from the use of the asset plus net proceedsexpected from disposition of the asset (if any) are less than the carryingvalue of the asset. When an impairment is identified, the Company reduces thecarrying amount of the asset to its estimated fair value based on a discountedcash flow approach or, when available and appropriate, comparable market values.The Company determined there were no indicators of impairment of long-livedassets as of December 31, 2006 or September 30, 2007.

 

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 determined that no adjustments to the useful lives ofits finite-lived purchased intangible assets were necessary. The finite-livedpurchased intangible assets consist of membership customer lists, resort andgolf course agreements, non-compete and deferred consulting agreements anddeferred financing costs which have weighted average useful lives ofapproximately 6 years, 23 years, 15 years and 7 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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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 assumptionscould have a significant impact on whether or not an impairment charge isrecognized and also the extent of such charge. The Company’s estimates of fairvalue utilized in goodwill and other indefinite-lived intangible asset testsmay be based upon a number of factors, including assumptions about theprojected future cash flows, discount rate, growth rate, determination ofmarket comparables, technological change, economic conditions or changes to theCompany’s business operations. Such changes may result in impairment chargesrecorded in future periods.

 

The fair value ofthe Company’s reporting units is annually determined using a combination of theincome approach and the market approach. Under the income approach, the fairvalue of a reporting unit is calculated based on the present value of estimatedfuture cash flows. Future cash flows are estimated by the Company under themarket approach, fair value is estimated based on market multiples of revenueor earnings for comparable companies.

 

Future goodwillimpairment tests could result in a charge to earnings. The Company willcontinue to evaluate goodwill on an annual basis and whenever events andchanges in circumstances indicate that there may be a potential impairment.

 

*IncomeTaxes*

 

Significant judgment is required in determining the Company’s taxprovision and in evaluating its tax positions. The Company establishes accrualsfor certain tax contingencies when, despite the belief that the Company’s taxreturn positions are fully supported, the Company believes that certainpositions may be challenged and that the Company’s positions may not be fullysustained. The tax contingency accruals are adjusted in light of changing factsand circumstances, such as the progress of tax audits, case law and emerginglegislation. The Company’s tax provision includes the impact of tax contingencyaccruals and changes to the accruals, including related interest and penalties,as considered appropriate by management.

 

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

 

We are exposed to market risks relating tofluctuations in interest rates. Our objective of financial risk management is tominimize the negative impact of interest rate fluctuations on our earnings andcash flows. Interest rate risk is managed through the use of a combination offixed and variable interest debt as well as the periodic use of interest ratecollar contracts.

 

The following information discusses thesensitivity 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-looking disclosures are selective in nature and onlyaddress the potential impacts from financial instruments. They do not includeother 

 

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potential effects which could impact ourbusiness as a result of these interest rate fluctuations.

 

*Interest Rate SensitivityAnalysis*

 

At September 30, 2007, we had debt totaling$288.5 million, comprised of $29.5 million of variable rate debt and $259.0million of fixed rate debt. Holding other variables constant (such as debtlevels), the earnings and cash flow impact of a one-percentage point increase/decrease in interest rates would have an unfavorable/ favorable impact ofapproximately $0.3 million.

 

*Credit Risk*

 

We are exposed to credit risk on accountsreceivable. We provide credit to customers in the ordinary course of businessand perform ongoing credit evaluations. Concentrations of credit risk withrespect to trade receivables are limited due to the number of customerscomprising our customer base. We currently believe our allowance for doubtfulaccounts is sufficient to cover customer credit risks.

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Within 90 daysprior to the filing of this Quarterly Report on Form 10-Q, the Company carriedout an evaluation, under the supervision and with the participation of the Company’smanagement, including the President and Chief Executive Officer and the SeniorVice President and Chief Financial Officer, of the effectiveness of the designand operation of the Company’s disclosure controls and procedures pursuant toRegulation 13a-14 under the Securities Exchange Act of 1934. Based upon thatevaluation, the President and Chief Executive Officer along with the SeniorVice President and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the periodic 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.

 

**PART II: OTHER INFORMATION.**

 

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

 
| Item 6. |   | Exhibits and Reports  on Form 8-K                                                                             |
|---------|--------|---------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                          |
| (a)     |   | Exhibits.                                                                                                     |
|    |   |                                                                                                          |
|    |   | Exhibit 10.28 –  Agreement with Brickell Financial Services Motor Club, Inc. dated September  28, 2007.* |
|    |   |                                                                                                          |
|    |   | Exhibit 31.1 –  Certification of Chief Executive Officer (Section 302 Certification).                    |
|    |   |                                                                                                          |
|    |   | Exhibit 31.2 –  Certification of Chief Financial Officer (Section 302 Certification).                    |
|    |   |                                                                                                          |
|    |   | Exhibit 32.1 –  Certification of Chief Executive Officer (Section 906 Certification).                    |
|    |   |                                                                                                          |
|    |   | Exhibit 32.2 –  Certification of Chief Financial Officer (Section 906 Certification).                    |
|    |   |                                                                                                          |
| (b)     |   | Reports on Form  8-K.                                                                                         |
|    |   |                                                                                                          |
|    |   | None.                                                                                                         |
|         |        |                                                                                                               |  |

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* Deletedinformation has been omitted pursuant to a confidentiality request submitted tothe commission.

 

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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: November  14, 2007 | Thomas F. Wolfe            |
|                     | Senior Vice  President and |
|                     | Chief Financial  Officer   |

 

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