** **

**UNITEDSTATES**

##### **SECURITIESAND EXCHANGE COMMISSION**

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

 

**FORM 10-Q**

 

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

 
| **For Quarter Ended:** | ** ** | **Commission  File Number** |
|------------------------|------------|-----------------------------|
| **March 31, 2006**     | ** ** | **333-113982**              |

 

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

** **

YES   ý                                                                 NO  o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-accelerated filer(as defined in Rule 12b-2 of the Exchange Act).

 
| Large accelerated filer | o |   | Accelerated filer | o |   | Non-accelerated filer | **ý** |
|-------------------------|---|--------|-------------------|---|--------|-----------------------|------------|

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES   o                                                                 NO  ý

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 
| ** **                     | ** ** | ** ** | **Outstanding as of** |
|--------------------------------|------------|------------|---------------------------------|
| **Class**                      | ** ** | ** ** | **May 8, 2006**       |
| Common Stock, $.001 par  value |       |       | 2,000                           |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

** **

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** **

**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| **Part I.**Financial Information |                                                                                                    |
|----------------------------------|---------------------------------------------------------------------------------------------------------|
|                             |                                                                                                    |
|                             | **Item 1: Financial Statements**                                                                        |   |
|                             |                                                                                                    |
|                             | Consolidated  Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005                     |   |
|                             |                                                                                                    |
|                             | Unaudited  Consolidated Statements of Operations for the three months ended March 31,  2006 and 2005    |   |
|                             |                                                                                                    |
|                             | Unaudited  Consolidated Statements of Cash Flows for the three months ended March 31,  2006 and 2005    |   |
|                             |                                                                                                    |
|                             | Notes  to Unaudited Consolidated Financial Statements                                                   |   |
|                             |                                                                                                    |
| ** **                       | **Item 2: Management’s  Discussion and Analysis of Financial Condition and Results of Operations** |   |
|                             |                                                                                                    |
|                             | **Item 3: Quantitative and  Qualitative Disclosures about Market Risk**                                 |   |
|                             |                                                                                                    |
|                             | **Item  4: Control and Procedures**                                                                     |   |
|                             |                                                                                                    |
| **Part  II. Other Information**  |                                                                                                    |
|                             |                                                                                                    |
| **Signatures**                   |                                                                                                    |
|                                  |                                                                                                         |  |  |

 

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** **

AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March31, 2006 and December 31, 2005

(InThousands)

 
| ** **                                                                                     | ** ** | **3/31/2006**   | ** ** | **12/31/2005** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                     | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                     |       |            |       |           |       |
| CURRENT ASSETS:                                                                                |       |            |       |           |       |
| Cash and cash  equivalents                                                                     |       | $               | 19,829     |           | $          | 24,778 |   |
| Accounts  receivable, less allowance for doubtful accounts of $1,149 in 2006 and $952  in 2005 |       | 24,625          |       | 26,508         |       |
| Inventories                                                                                    |       | 48,440          |       | 47,039         |       |
| Prepaid expenses  and other assets                                                             |       | 14,150          |       | 11,218         |       |
| Deferred tax  assets, net                                                                      |       | 4,995           |       | 4,995          |       |
| Total current  assets                                                                          |       | 112,039         |       | 114,538        |       |
|                                                                                           |       |            |       |           |       |
| PROPERTY AND  EQUIPMENT, net                                                                   |       | 31,120          |       | 29,843         |       |
| INVESTMENT IN  AFFILIATE                                                                       |       | 81,005          |       | 81,005         |       |
| AFFILIATE NOTES  AND INVESTMENTS                                                               |       | 4,713           |       | 4,722          |       |
| INTANGIBLE  ASSETS, net                                                                        |       | 34,970          |       | 34,572         |       |
| GOODWILL                                                                                       |       | 144,429         |       | 144,429        |       |
| DEFERRED TAX  ASSETS, net                                                                      |       | 5,046           |       | 4,620          |       |
| OTHER ASSETS                                                                                   |       | 1,687           |       | 1,731          |       |
| Total assets                                                                                   |       | $               | 415,009    |           | $          | 415,460 |   |
|                                                                                           |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                |       |            |       |           |       |
| CURRENT  LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts payable                                                                               |       | $               | 18,577     |           | $          | 12,683 |   |
| Accrued interest                                                                               |       | 2,790           |       | 6,897          |       |
| Accrued income  taxes                                                                          |       | —          |       | 465            |       |
| Accrued  liabilities                                                                           |       | 35,395          |       | 34,094         |       |
| Deferred revenues  and gains                                                                   |       | 60,645          |       | 60,994         |       |
| Current portion  of long-term debt                                                             |       | 4,821           |       | 6,136          |       |
| Total current  liabilities                                                                     |       | 122,228         |       | 121,269        |       |
|                                                                                           |       |            |       |           |       |
| DEFERRED  REVENUES AND GAINS                                                                   |       | 38,638          |       | 37,926         |       |
| DEFERRED TAX  LIABILITY                                                                        |       | —          |       | —         |       |
| LONG-TERM DEBT,  net of current portion                                                        |       | 312,410         |       | 313,864        |       |
| OTHER LONG-TERM  LIABILITIES                                                                   |       | 5,834           |       | 8,766          |       |
|                                                                                           |       | 479,110         |       | 481,825        |       |
|                                                                                           |       |            |       |           |       |
| 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                                                                           |       | (145,107        | )          | (147,371       | )          |
| Total  stockholder’s deficit                                                              |       | (64,101         | )          | (66,365        | )          |
| Total  liabilities and stockholder’s deficit                                              |       | $               | 415,009    |           | $          | 415,460 |   |

 

See notes to consolidatedfinancial statements.

 

1

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AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                  | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** |
|                                        |       |                             |       |   |   |
| REVENUES:                                   |       |                             |       |   |   |
| Membership  services                        |       | $                                | 32,948     |   | $ | 32,423 |   |
| Publications                                |       | 23,103                           |       | 17,198 |   |
| Retail                                      |       | 60,819                           |       | 59,066 |   |
|                                        |       | 116,870                          |       | 108,687 |   |
|                                        |       |                             |       |   |   |
| COSTS APPLICABLE  TO REVENUES:              |       |                             |       |   |   |
| Membership  services                        |       | 21,116                           |       | 20,201 |   |
| Publications                                |       | 14,575                           |       | 11,521 |   |
| Retail                                      |       | 36,403                           |       | 34,294 |   |
|                                        |       | 72,094                           |       | 66,016 |   |
|                                        |       |                             |       |   |   |
| GROSS PROFIT                                |       | 44,776                           |       | 42,671 |   |
|                                        |       |                             |       |   |   |
| OPERATING  EXPENSES:                        |       |                             |       |   |   |
| Selling, general  and administrative        |       | 30,228                           |       | 29,861 |   |
| Depreciation and  amortization              |       | 4,524                            |       | 3,698 |   |
|                                        |       | 34,752                           |       | 33,559 |   |
|                                        |       |                             |       |   |   |
| INCOME FROM  OPERATIONS                     |       | 10,024                           |       | 9,112 |   |
|                                        |       |                             |       |   |   |
| NON-OPERATING  ITEMS:                       |       |                             |       |   |   |
| Interest income                             |       | 329                              |       | 166 |   |
| Interest expense                            |       | (6,640                           | )          | (6,186 | ) |
| Other  non-operating items, net             |       | 33                               |       | 16 |   |
|                                        |       | (6,278                           | )          | (6,004 | ) |
|                                        |       |                             |       |   |   |
| INCOME FROM  OPERATIONS BEFORE INCOME TAXES |       | 3,746                            |       | 3,108 |   |
|                                        |       |                             |       |   |   |
| INCOME TAX  EXPENSE                         |       | (1,482                           | )          | (1,210 | ) |
|                                        |       |                             |       |   |   |
| NET INCOME                                  |       | $                                | 2,264      |   | $ | 1,898 |   |

 

See notes toconsolidated financial statements.

 

2

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** **

AFFINITYGROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(InThousands)

(Unaudited)

 
| ** **                                                                                   | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** |
|                                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                       |       |                             |       |   |   |
| Net income                                                                                   |       | $                                | 2,264      |   | $ | 1,898 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                             |       |   |   |
| Depreciation                                                                                 |       | 2,494                            |       | 2,274 |   |
| Amortization                                                                                 |       | 2,030                            |       | 1,424 |   |
| Provision for  losses on accounts receivable                                                 |       | 276                              |       | 241 |   |
| Deferred  compensation                                                                       |       | —                           |       | 900 |   |
| Deferred tax  benefit                                                                        |       | (426                             | )          | (694 | ) |
| Gain on sale of  property and equipment                                                      |       | (11                              | )          | (3 | ) |
| Changes in  operating assets and liabilities                                                 |       |                             |       |   |   |
| Accounts  receivable                                                                         |       | 1,607                            |       | 583 |   |
| Inventories                                                                                  |       | (1,401                           | )          | (6,397 | ) |
| Prepaid expenses  and other assets                                                           |       | (2,631                           | )          | (1,012 | ) |
| Accounts payable                                                                             |       | 5,894                            |       | 3,112 |   |
| Accrued and other  liabilities                                                               |       | (6,203                           | )          | (5,368 | ) |
| Deferred  revenues and gains                                                                 |       | (640                             | )          | 926 |   |
| Net cash  provided by (used in) operating activities                                         |       | 3,253                            |       | (2,116 | ) |
|                                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                       |       |                             |       |   |   |
| Capital  expenditures                                                                        |       | (3,780                           | )          | (2,779 | ) |
| Net proceeds  from sale of property and equipment                                            |       | 52                               |       | 27 |   |
| Change in  intangible assets                                                                 |       | (3                               | )          | (9 | ) |
| Investment in  affiliate                                                                     |       | —                           |       | (81,005 | ) |
| Acquisitions,  net of cash received                                                          |       | (1,334                           | )          | — |   |
| Loans receivable                                                                             |       | 9                                |       | 7 |   |
| Net cash used in  investing activities                                                       |       | (5,056                           | )          | (83,759 | ) |
|                                                                                         |       |                             |       |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                       |       |                             |       |   |   |
| Contribution  from parent                                                                    |       | —                           |       | 81,005 |   |
| Payment of debt  issue costs                                                                 |       | —                           |       | (14 | ) |
| Principal  payments of long-term debt                                                        |       | (3,146                           | )          | (350 | ) |
| Net cash (used  in) provided by financing activities                                         |       | (3,146                           | )          | 80,641 |   |
|                                                                                         |       |                             |       |   |   |
| NET DECREASE IN  CASH AND CASH EQUIVALENTS                                                   |       | (4,949                           | )          | (5,234 | ) |
|                                                                                         |       |                             |       |   |   |
| CASH AND CASH  EQUIVALENTS AT BEGINNING OF YEAR                                              |       | 24,778                           |       | 24,564 |   |
|                                                                                         |       |                             |       |   |   |
| CASH AND CASH  EQUIVALENTS AT END OF PERIOD                                                  |       | $                                | 19,829     |   | $ | 19,330 |   |

 

See notes to consolidatedfinancial statements.

 

3

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**AFFINITY GROUP, INC. ANDSUBSIDIARIES**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**(1) BASIS OF PRESENTATION**

 

*Principles of Consolidation –***The consolidated financial statements includethe accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries (collectivelythe “Company”), in accordance with U.S. generally accepted accountingprinciples, and pursuant to the rules and regulations of the Securities and ExchangeCommission.  In March 2005, AffinityGroup Holding Corp. (“AGHC”) formed a holding company, Affinity Group Holding,Inc., a Delaware corporation (“AGHI”) at which time contributed 100% of theoutstanding shares of common stock of AGI to AGHI.  AGHI is the direct parent of theCompany.  These interim consolidatedfinancial statements should be read in conjunction with the Company’sconsolidated financial statements and notes in the Company’s 10-K report forthe year ended December 31, 2005 as filed with the Securities and ExchangeCommission.  In the opinion of managementof the Company, these consolidated financial statements contain all adjustmentsof a normal recurring nature necessary to present fairly the financialposition, results of operations and cash flows of the Company for the interimperiods presented.

 

**(2) DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISEAND RELATED INFORMATION**

 

The Company’s threeprincipal lines of business are Membership Services, Publications, andRetail.  The Membership Services segmentoperates the Good Sam Club, Coast to Coast Club, 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.  The Publications segment publishes a varietyof publications for selected markets in the recreation and leisure industry,including general circulation periodicals, club magazines, directories, and RV andpowersports industry trade magazines, and produces outdoor recreational consumerevents.  The Retail segment sells specialtyretail merchandise and services for RV owners primarily through the CampingWorld retail supercenters, mail order catalogs and its website.  The Company evaluates performance based onprofit or loss from operations before income taxes.

 

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

 

4

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

 
| ** **                              | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|-----------------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **QUARTER  ENDED MARCH 31, 2006**       |       |                     |       |             |       |       |       |             |       |
| Revenues from  external customers       |       | $                        | 32,948     |             | $          | 23,103     |       | $                | 60,819     |   | $ | 116,870 |   |
| Depreciation and  amortization          |       | 910                      |       | 1,020            |       | 1,977      |       | 3,907            |       |
| Gain on sale of  property and equipment |       | —                   |       | 5                |       | 6          |       | 11               |       |
| Interest income                         |       | 1,376                    |       | —           |       | 5          |       | 1,381            |       |
| Interest expense                        |       | —                   |       | 94               |       | 3,496      |       | 3,590            |       |
| Segment profit  (loss)                  |       | 10,472                   |       | 6,462            |       | (4,319     | )          | 12,615           |       |
|                                         |            |                          |            |                  |            |            |            |                  |            |  |  |  |  |

 
| ** **                        | ** ** | **Membership  Services** | ** ** | **Publications** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|-----------------------------------|------------|--------------------------|------------|------------------|------------|------------|------------|------------------|------------|
| **QUARTER  ENDED MARCH 31, 2005** |       |                     |       |             |       |       |       |             |       |
| Revenues from  external customers |       | $                        | 32,423     |             | $          | 17,198     |       | $                | 59,066     |   | $ | 108,687 |   |
| Depreciation and  amortization    |       | 972                      |       | 474              |       | 1,718      |       | 3,164            |       |
| Interest income                   |       | 1,003                    |       | —           |       | 2          |       | 1,005            |       |
| Interest expense                  |       | —                   |       | 90               |       | 2,590      |       | 2,680            |       |
| Segment profit  (loss)            |       | 10,359                   |       | 4,428            |       | (1,658     | )          | 13,129           |       |
|                                   |            |                          |            |                  |            |            |            |                  |            |  |  |  |  |

 

The following is a reconciliationof income from operations to the Company’s consolidated financial statementsfor the three months ended March 31, 2006 and 2005 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                     | ** ** | **3/31/2006**                    | ** ** | **3/31/2005** | ** ** |
| **Income  From Operations Before Taxes**                       |       |                             |       |   |   |
| Total profit for  reportable segments                          |       | $                                | 12,615     |   | $ | 13,129 |   |
| Unallocated G  & A expense                                 |       | (4,150                           | )          | (5,142 | ) |
| Unallocated  depreciation and amortization expense             |       | (617                             | )          | (534 | ) |
| Unallocated  interest income, net of intercompany elimination  |       | (1,052                           | )          | (839 | ) |
| Unallocated  interest expense, net of intercompany elimination |       | (3,050                           | )          | (3,506 | ) |
| Income from  operations before taxes                           |       | $                                | 3,746      |   | $ | 3,108 |   |

 

5

----

 

The following is a reconciliationof assets of reportable segments to the Company’s consolidated financialstatements as of March 31, 2006 and December 31, 2005 (in thousands):

 
| ** **                                           | ** ** | **3/31/2006** | ** ** | **12/31/2005** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership  services segment                         |       | $             | 171,493    |           | $          | 162,562 |   |
| Publications  segment                                |       | 88,425        |       | 89,104         |       |
| Retail segment                                       |       | 213,258       |       | 207,736        |       |
| Total assets for  reportable segments                |       | 473,176       |       | 459,402        |       |
| Capitalized  finance costs not allocated to segments |       | 9,142         |       | 9,568          |       |
| Corporate  unallocated assets                        |       | 18,034        |       | 16,376         |       |
| Elimination of  intersegment receivable              |       | (85,343       | )          | (69,886        | )          |
| Total assets                                         |       | $             | 415,009    |           | $          | 415,460 |   |

 

**(3) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during  the period for: |       |     |       |     |       |
| Interest                          |       | $        | 10,747     |     | $          | 10,221 |   |
| Income taxes                      |       | 2,622    |       | 2,673    |       |
|                                   |            |          |            |          |            |  |  |

 

In February 2006, the Company assumed $1.4 million of liabilities andissued $0.4 million of debt in the acquisition of Plus Events consumer showsand related assets of H & S Productions, LLC.

 

**(4) GOODWILL AND INTANGIBLEASSETS**

 

The Company reviews goodwill and indefinite-lived intangible assets forimpairment at least annually.  TheCompany performs its annual impairment test during the fourth quarter.  Based on the results of this test, werecorded an impairment charge of $4.3 million in 2005 related to the Golf Card Club,which is included in the membership services segment.

 

There were no changes in the Company’s goodwill by business segment forthe three months ended March 31, 2006 and 2005.

 

6

----

 

Finite lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at March 31, 2006 (inthousands, except as noted):

 
| ** **                                       | ** ** | **Weighted  Average Useful  Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------|------------|-------------------------------|------------|---------|------------|
|                                             |       |                                                         |       |      |       |                          |       |    |       |
| Membership and  customer lists                   |       | 6                                                            |       | $         | 26,939     |                          | $          | (8,081  | )          | $ | 18,858 |   |
| Resort and golf  course participation agreements |       | 23                                                           |       | 13,531    |       | (11,851                       | )          | 1,680   |       |
| Non-compete and  deferred consulting agreements  |       | 15                                                           |       | 18,455    |       | (11,778                       | )          | 6,677   |       |
| Deferred  financing costs                        |       | 7                                                            |       | 11,851    |       | (4,096                        | )          | 7,755   |       |
|                                             |       |                                                         |       | $         | 70,776     |                          | $          | (35,806 | )          | $ | 34,970 |   |

 

**(5) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION**

 

In February2004, the Company issued $200.0 million of 9% Senior Subordinated Notes (“AGISenior Notes”) due 2012 pursuant to the AGI Indenture.  Interest is payable on the AGI Senior Notestwice a year on February 15 and August 15. The Company’s present and future restricted subsidiaries will guaranteethe AGI Senior Notes with unconditional guarantees of payment that will rankjunior in right of payment to their existing and future senior debt, but will rankequal in right of payment to their existing and future senior subordinated debt.

 

All of theCompany’s subsidiaries have jointly and severally guaranteed the indebtednessunder the AGI Senior Notes except for CWFR Capital Corp.  Full financial statements of the Guarantorshave not been included because, pursuant to their respective guarantees, theGuarantors are jointly and severally liable with respect to the AGI Senior Notes.

 

7

----

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the threemonths ended March 31, 2006 (in thousands).

 
| ** **                                             | ** ** | **AS OF MARCH 31, 2006** | ** ** |
|--------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                             | ** ** | **AGI**                                      | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash & cash  equivalents                           |       | $                                            | 19,105     |   | $ | 724 |   | $ | — |   | $ | — |   | $ | 19,829 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts  receivable, net                              |       | 268                                          |       | 109,700 |   | — |   | (85,343 | ) | 24,625 |   |
| Inventories                                            |       | —                                       |       | 48,440 |   | — |   | — |   | 48,440 |   |
| Other current  assets                                  |       | 5,901                                        |       | 13,244 |   | — |   | — |   | 19,145 |   |
| Total current  assets                                  |       | 25,274                                       |       | 172,108 |   | — |   | (85,343 | ) | 112,039 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Property and  equipment, net                           |       | 5,940                                        |       | 25,180 |   | — |   | — |   | 31,120 |   |
| Intangible  assets                                     |       | 7,811                                        |       | 27,159 |   | — |   | — |   | 34,970 |   |
| Goodwill                                               |       | 67,584                                       |       | 76,845 |   | — |   | — |   | 144,429 |   |
| Investment in  subsidiaries                            |       | 494,369                                      |       | 81,005 |   | — |   | (575,374 | ) | — |   |
| Affiliate note  and investments                        |       | 45,645                                       |       | — |   | 81,005 |   | (40,932 | ) | 85,718 |   |
| Other assets                                           |       | 11,056                                       |       | (4,323 | ) | — |   | — |   | 6,733 |   |
| Total assets                                           |       | $                                            | 657,679    |   | $ | 377,974 |   | $ | 81,005 |   | $ | (701,649 | ) | $ | 415,009 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Accounts payable                                       |       | $                                            | 303        |   | $ | 18,274 |   | $ | — |   | $ | — |   | $ | 18,577 |   |
| Accrued and  other liabilities                         |       | 15,186                                       |       | 22,999 |   | — |   | — |   | 38,185 |   |
| Current portion  of long-term debt                     |       | 88,018                                       |       | 43,078 |   | — |   | (126,275 | ) | 4,821 |   |
| Deferred revenue  and gains                            |       | 2,402                                        |       | 58,243 |   | — |   | — |   | 60,645 |   |
| Total current  liabilities                             |       | 105,909                                      |       | 142,594 |   | — |   | (126,275 | ) | 122,228 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Deferred revenue  and gains                            |       | 2,754                                        |       | 35,884 |   | — |   | — |   | 38,638 |   |
| Long-term debt                                         |       | 306,850                                      |       | 5,560 |   | — |   | — |   | 312,410 |   |
| Other long-term  liabilities                           |       | 306,267                                      |       | (300,433 | ) | — |   | — |   | 5,834 |   |
| Total liabilities                                      |       | 721,780                                      |       | (116,395 | ) | — |   | (126,275 | ) | 479,110 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Interdivisional  equity                                |       | —                                       |       | 494,369 |   | 81,005 |   | (575,374 | ) | — |   |
| Stockholders’  deficit                            |       | (64,101                                      | )          | — |   | — |   | — |   | (64,101 | ) |
| Total  liabilities & stockholders’ deficit    |       | $                                            | 657,679    |   | $ | 377,974 |   | $ | 81,005 |   | $ | (701,649 | ) | $ | 415,009 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Revenue                                                |       | $                                            | 935        |   | $ | 115,935 |   | $ | — |   | $ | — |   | $ | 116,870 |   |
| Costs applicable  to revenues                          |       | (2,841                                       | )          | (69,253 | ) | — |   | — |   | (72,094 | ) |
| Operating  expenses                                    |       | (4,572                                       | )          | (30,180 | ) | — |   | — |   | (34,752 | ) |
| Interest  expense, net                                 |       | (4,102                                       | )          | (2,209 | ) | — |   | — |   | (6,311 | ) |
| Income from  Investment in consolidated subsidiaries   |       | 7,746                                        |       | — |   | — |   | (7,746 | ) | — |   |
| Other non  operating income (expenses)                 |       | 1,510                                        |       | (1,477 | ) | — |   | — |   | 33 |   |
| Income tax  benefit (expense)                          |       | 3,588                                        |       | (5,070 | ) | — |   | — |   | (1,482 | ) |
| Net income                                             |       | $                                            | 2,264      |   | $ | 7,746 |   | $ | — |   | $ | (7,746 | ) | $ | 2,264 |   |
|                                                   |       |                                         |       |   |   |   |   |   |   |   |   |
| Cash flows from  (used by) operations                  |       | $                                            | (11,943    | ) | $ | 15,196 |   | $ | — |   | $ | — |   | $ | 3,253 |   |
| Cash flows (used  in) provided by investing activities |       | (1,646                                       | )          | (3,410 | ) | — |   | — |   | (5,056 | ) |
| Cash flows (used  in) provided by financing activities |       | 6,273                                        |       | (9,419 | ) | — |   | — |   | (3,146 | ) |
| Cash at  beginning of year                             |       | 26,421                                       |       | (1,643 | ) | — |   | — |   | 24,778 |   |
| Cash at end of  period                                 |       | $                                            | 19,105     |   | $ | 724 |   | $ | — |   | $ | — |   | $ | 19,829 |   |

 

8

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The following are summarized balance sheet statements setting forthcertain financial information concerning the Guarantor Subsidiaries as ofDecember 31, 2005 (in thousands).

 
| ** **                                         | ** ** | **AGI** | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|----------------------------------------------------|------------|---------|------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| Cash & cash  equivalents                       |       | $       | 26,421     |           | $          | (1,643              | )          | $                | —     |                  | $          | — |   | $ | 24,778 |   |
| Accounts  receivable, net                          |       | 317     |       | 96,077         |       | —              |       | (69,886          | )          | 26,508                |       |
| Inventories                                        |       | —  |       | 47,039         |       | —              |       | —           |       | 47,039                |       |
| Other current  assets                              |       | 4,769   |       | 11,444         |       | —              |       | —           |       | 16,213                |       |
| Total current  assets                              |       | 31,507  |       | 152,917        |       | —              |       | (69,886          | )          | 114,538               |       |
|                                               |       |    |       |           |       |                |       |             |       |                  |       |
| Property and  equipment, net                       |       | 5,680   |       | 24,163         |       | —              |       | —           |       | 29,843                |       |
| Intangible  assets                                 |       | 8,245   |       | 26,327         |       | —              |       | —           |       | 34,572                |       |
| Goodwill                                           |       | 67,584  |       | 76,845         |       | —              |       | —           |       | 144,429               |       |
| Investment in  subsidiaries                        |       | 468,270 |       | 81,005         |       | —              |       | (549,275         | )          | —                |       |
| Affiliate note  and investments                    |       | 44,795  |       | —         |       | 81,005              |       | (40,073          | )          | 85,727                |       |
| Other assets                                       |       | 11,844  |       | (5,493         | )          | —              |       | —           |       | 6,351                 |       |
| Total assets                                       |       | $       | 637,925    |           | $          | 355,764             |       | $                | 81,005     |                  | $          | (659,234 | ) | $ | 415,460 |   |
|                                               |       |    |       |           |       |                |       |             |       |                  |       |
| Accounts payable                                   |       | $       | 985        |           | $          | 11,698              |       | $                | —     |                  | $          | — |   | $ | 12,683 |   |
| Accrued and  other liabilities                     |       | 18,932  |       | 22,524         |       | —              |       | —           |       | 41,456                |       |
| Current portion  of long-term debt                 |       | 72,561  |       | 43,534         |       | —              |       | (109,959         | )          | 6,136                 |       |
| Current portion  of deferred revenue               |       | 1,592   |       | 59,402         |       | —              |       | —           |       | 60,994                |       |
| Total current  liabilities                         |       | 94,070  |       | 137,158        |       |                |       | (109,959         | )          | 121,269               |       |
|                                               |       |    |       |           |       |                |       |             |       |                  |       |
| Deferred revenue                                   |       | 2,785   |       | 35,141         |       | —              |       | —           |       | 37,926                |       |
| Long-term debt                                     |       | 308,475 |       | 5,389          |       | —              |       | —           |       | 313,864               |       |
| Other long-term  liabilities                       |       | 298,960 |       | (290,194       | )          | —              |       | —           |       | 8,766                 |       |
| Total  liabilities                                 |       | 704,290 |       | (112,506       | )          |                |       | (109,959         | )          | 481,825               |       |
|                                               |       |    |       |           |       |                |       |             |       |                  |       |
| Interdivisional  equity                            |       | —  |       | 468,270        |       | 81,005              |       | (549,275         | )          | —                |       |
| Stockholders’  deficit                        |       | (66,365 | )          | —         |       | —              |       | —           |       | (66,365               | )          |
|                                               |       |    |       |           |       |                |       |             |       |                  |       |
| Total  liabilities & stockholder’s equity |       | $       | 637,925    |           | $          | 355,764             |       | $                | 81,005     |                  | $          | (659,234 | ) | $ | 415,460 |   |

 

9

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The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries for the three months ended March 31, 2005 (in thousands).

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

 

**(6) RECENT EVENTS**

 

On March 6, 2006, Camping World, Inc. (“CampingWorld”), a wholly-owned subsidiary of Affinity Group, Inc., entered intoa Joint Venture Agreement with FreedomRoads Holding Company, LLC, a Minnesotalimited liability company (“FreedomRoads”). FreedomRoads is indirectly owned andcontrolled by Stephen Adams, the Chairman and indirect controlling shareholderof Affinity Group, Inc.   FreedomRoads, through its wholly-ownedsubsidiaries, owns and operates RV dealerships, currently operating 52locations across the United States.  TheJoint Venture Agreement providesthat Camping World and FreedomRoads are to act cooperatively with a view tomaximizing synergies and to locate, establish and utilize mutually beneficialrelationships that are available only to the parties acting together that wouldnot otherwise be available to either party independently.

 

On March 7, 2006, the Company’s ultimateparent (“AGHC”) made a Subchapter S corporation election effective for 2006,which included AGHI, AGI and its subsidiaries with the exception of CampingWorld, Inc. and its wholly owned subsidiaries, which will remain Subchapter Ccorporations.  Once the election isapproved by the Internal Revenue Service, the tax provision reported in thecurrent period will be reversed and all deferred tax assets and liabilities willbe eliminated with the exception of those related to Camping World, Inc. andits wholly owned subsidiaries and other potential built in gains.  Management is currently analyzing the effectof the Subchapter S corporation election in the first quarter of 2006 andestimates that the tax provision would have been between $24 and $27 millionduring the period.  Distributions toshareholders will be limited to the federal and state income taxes which wouldhave been paid had AGI and its subsidiaries remained a Subchapter Ccorporation.

 

10

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**ITEM 2:**

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND 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** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **3/31/2006**          | ** ** | **3/31/2005** | ** ** | **Inc/(Dec)** | ** ** |
|                                        |       |                   |       |   |   |   |   |
| REVENUES:                                   |       |                   |       |   |   |   |   |
| Membership  services                        |       | 28.2                   | %          | 29.8 | % | 1.6 | % |
| Publications                                |       | 19.8                   | %          | 15.8 | % | 34.3 | % |
| Retail                                      |       | 52.0                   | %          | 54.4 | % | 3.0 | % |
|                                        |       | 100.0                  | %          | 100.0 | % | 7.5 | % |
|                                        |       |                   |       |   |   |   |   |
| COSTS APPLICABLE  TO REVENUES:              |       |                   |       |   |   |   |   |
| Membership  services                        |       | 18.1                   | %          | 18.6 | % | 4.5 | % |
| Publications                                |       | 12.5                   | %          | 10.6 | % | 26.5 | % |
| Retail                                      |       | 31.1                   | %          | 31.5 | % | 6.1 | % |
|                                        |       | 61.7                   | %          | 60.7 | % | 9.2 | % |
|                                        |       |                   |       |   |   |   |   |
| GROSS PROFIT                                |       | 38.3                   | %          | 39.3 | % | 4.9 | % |
|                                        |       |                   |       |   |   |   |   |
| OPERATING  EXPENSES:                        |       |                   |       |   |   |   |   |
| Selling, general  and administrative        |       | 25.8                   | %          | 27.5 | % | 1.2 | % |
| Depreciation and  amortization              |       | 3.9                    | %          | 3.4 | % | 22.3 | % |
|                                        |       | 29.7                   | %          | 30.9 | % | 3.6 | % |
|                                        |       |                   |       |   |   |   |   |
| INCOME FROM  OPERATIONS                     |       | 8.6                    | %          | 8.4 | % | 10.0 | % |
|                                        |       |                   |       |   |   |   |   |
| NON-OPERATING  ITEMS:                       |       |                   |       |   |   |   |   |
| Interest income                             |       | 0.3                    | %          | 0.2 | % | 98.2 | % |
| Interest expense                            |       | (5.7                   | )%         | (5.7 | )% | 7.3 | % |
| Other non-operating  items, net             |       | —                 |       | — |   | 106.3 | % |
|                                        |       | (5.4                   | )%         | (5.5 | )% | 4.6 | % |
|                                        |       |                   |       |   |   |   |   |
| INCOME FROM  OPERATIONS BEFORE INCOME TAXES |       | 3.2                    | %          | 2.9 | % | 20.5 | % |
|                                        |       |                   |       |   |   |   |   |
| INCOME TAX  EXPENSE                         |       | (1.3                   | )%         | (1.2 | )% | 22.5 | % |
|                                        |       |                   |       |   |   |   |   |
| NET INCOME                                  |       | 1.9                    | %          | 1.7 | % | 19.3 | % |

 

11

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended March 31, 2006Compared With Three Months Ended March 31, 2005**

 

*Revenues*

 

Revenues of $116.9 million for the first three months of 2006 increasedby approximately $8.2 million, or 7.5%, from the comparable period in 2005.

 

Membership services revenues of $33.0 million for the first threemonths of 2006 increased by approximately $0.5 million, or 1.6%, from thecomparable period in 2005. This revenue increase was largely attributable to a$0.9 million increase in extended vehicle warranty program revenue due to thecontinued growth of contracts in force, and a $0.2 million revenue increase inemergency road service programs due to increased enrollment, partially offsetby a $0.4 million reduction in dealer advertising program marketing revenue anda $0.2 million net reduction in membership services revenue, resultingprimarily from reduced enrollment in the Coast to Coast and Golf Card Clubs.

 

Publicationrevenues of $23.1 million for the first three months of 2006 increased $5.9million, or 34.3%, from the comparable period in 2005 primarily attributable to$4.8 million of revenue from the consumershows acquired in December 2005 and the consumer shows acquired from H &S Productions, LLC in February 2006, $0.6 million of revenue primarilyresulting from an additional issue of ATV Magazine in the first quarter 2006,$0.5 million of revenue relating to *Powerboat Magazine*acquiredin May 2005, and $0.5 million of revenue primarily associated with anupdated edition of the campground atlas. These revenue increases were partiallyoffset by a $0.3 million decrease in advertising revenue for theRV-related titles and a $0.2 million decrease related to a reduction in thenumber of issues of *SnowGoer* in thefirst quarter of 2006.

 

Retail revenues of $60.8 million increased $1.8million, or 3.0%, over the first three months of 2005. Store merchandise salesincreased approximately $1.8 million over the first three months of 2005 due toa $2.6 million revenue increase from the addition of seven new stores over thepast fifteen months, partially offset by a same store sales decrease of $0.8million or 1.8%, compared to a 5.9% increase in the first three months of 2005.Same store sale calculations for a given period include only those stores thatwere open both at the end of that period and at the beginning of the precedingfiscal year.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $72.1 million for the first three months of2006, an increase of $6.1 million, or 9.2%, from the comparable period in 2005.

 

Membership services costs and expenses of $21.1million increased approximately $0.9 million, or 4.5%, from the first threemonths of 2005. This increase consisted of

 

12

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$0.7 million of marketing and program expensesassociated with increased enrollment in the extended vehicle warranty programs,$0.4 million of incremental marketing and fulfillment costs relating to thestart-up of a new discount camping club, Camp Club USA, and $0.2 million ofadditional marketing expenses for the vehicle insurance programs, partiallyoffset by a $0.4 million reduction in dealer marketing expenses associated withreduced revenue.

 

Publication costs and expenses of $14.6 millionfor the first three months of 2006 increased $3.1 million, or 26.5%, from thecomparable period in 2005 primarily due to a $2.1 million increase relating tothe recent consumer show acquisitions, $0.6 million of additional costsattributable to the newly acquired *Powerboat Magazine*title, $0.3 million of additional costs associated with the additional issue of*ATV Magazine*, and $0.4 million ofadditional costs associated with an updated edition of the campground atlas.These increases were partially offset by $0.2 million of reduced production andmarketing costs for the RV-related magazines, and $0.1 million of reduced costsrelating to a reduction in the number of issues of *SnowGoer*magazine.

 

Retail costs applicable to revenues increased$2.1 million, or 6.1%, to $36.4 million primarily due to a decrease in theretail gross profit margin and an increase in sales due to the seven new storesopened over the past fifteen months. The retail gross profit margin of 40.1%for the first three months of 2006 decreased from 41.9 % for the comparableperiod in 2005 primarily due to lower sales of higher margin products.

 

*OperatingExpenses*

 

Selling, general and administrative expenses ofapproximately $30.2 million for the first three months of 2006 increased $0.4million compared to the first three months of 2005 primarily due to an increasein retail selling and general and administrative expenses of approximately $1.1million consisting of increases in wages, operating insurance, travel andtraining, and other retail general and administrative expenses, and a $0.2million increase due to the recent consumer show acquisitions, partially offsetby a $0.9 million decrease in deferred executive compensation expense.

 

Depreciation and amortization expense of $4.5million increased approximately $0.8 million over the prior year primarily dueto increased depreciation on capital expenditures at Camping World, andamortization of intangible assets associated with the purchase of *Powerboat Magazine*in May 2005 and the acquisition ofconsumer shows in December 2005 and February 2006.

 

*Incomefrom Operations*

 

Incomefrom operations for the first three months of 2006 totaling $10.0 millionincreased $0.9 million compared to the first three months of 2005. Thisincrease was primarily due to increased gross profit for the publicationsoperations of $2.9 million partially offset by increased operating expenses of$1.2 million and reduced gross profit for the retail and membership servicesoperations of $0.4 million and $0.4 million, respectively.

 

13

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*Non-OperatingItems*

 

Non-operating items were $6.3 million for thefirst three months of 2006, compared to $6.0 million for the same period in2005. This $0.3 million increase comprises of $0.5 million of additionalinterest expense in 2006 due to increased average interest rates partiallyoffset by a $0.2 million increase in interest income.

 

*Incomebefore Income Taxes*

 

Income before income taxes for the first threemonths of 2006 was $3.7 million, or $0.6 million higher than the first threemonths of 2005. This increase was attributable to a $0.9 million increase inincome from operations for the current period, partially offset by a $0.3million increase in net interest expense.

 

*IncomeTax Expense*

 

TheCompany recognized approximately $1.5 million of income tax expense for thefirst quarter of 2006 compared to $1.2 million for the same period in 2005. Theeffective tax rates are higher than statutory rates primarily due to statetaxes.

 

# *NetIncome*

# * *

Net income in the first three months of 2006 was$2.3 million compared to $1.9 million for the same period in 2005.

 

*SegmentProfit*

 

Segment profit of $12.6million for the first three months of 2006 (before unallocated depreciation andamortization, general and administrative, interest, and income tax expense)decreased $0.5 million, or 3.9%, from the comparable period in 2005.

 

Membership servicessegment profit of approximately $10.5 million for the first three months of2006 increased $0.1 million, or 1.1%, from the comparable period in 2005. Thisincrease was largely attributable to a $0.5 million increase in profit fromemergency road service products, and a $0.2 million increase in profit from theextended vehicle warranty programs, partially offset by a $0.2 million decreasein profit recognized on RV financing products, and a $0.4 million decrease inprofit for Camp Club USA due to marketing expenses for the new club.

 

Publication segmentprofit of $6.5 million for the first three months of 2006 increased $2.0million, or 45.9%, from the comparable period in 2005. This increase waslargely attributable to a $2.0 million profit increase for the newly acquired showgroup, and a $0.2 million increase in profit from the additional issue of *ATV Magazine*, partially offset by a $0.2 million decrease inprofit for the RV-related magazines.

 

Retail segment loss of$4.3 million for the first three months of 2006 increased by $2.6 million, or160.5% from the comparable period in 2005. The increase resulted primarily from a $0.4million decrease in gross profit margin, a $1.1 million increase in selling,

 

14

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general and administrative expenses, a $0.2 million increase in depreciationexpense and a $0.9 million increase in interest expense relating tointercompany debt upon issue of the Camping World, Inc. $40.0 million dividenddeclared and paid in the form of a note December 23, 2005.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company has historically operated with a workingcapital deficit. The working capital deficit as of March 31, 2006 and December 31,2005 was $10.2 million and $6.7 million, respectively. The primary reason forthe working capital deficit is the deferred revenue and gains reported undercurrent liabilities in the amount of $60.6 million and $61.0 million as of March 31,2006 and December 31, 2005, respectively. Deferred revenue is primarilycomprised of cash collected for club memberships in advance, which is amortizedover the life of the membership. The Company uses net proceeds from thisdeferred membership revenue to lower its long-term borrowings. Managementbelieves that funds generated by operations together with available borrowingsunder the Company’s revolving credit line will be sufficient to meet all of theCompany’s debt service requirements and capital requirements over the nexttwelve months.

 

*Contractual Obligations and Commercial Commitments*

 

Thefollowing table reflects our contractual obligations and commercial commitmentsat March 31, 2006. This table includes principal and future interest dueunder our debt agreements based on interest rates as of March 31, 2006 andassumes debt obligations will be held to maturity.

 
| ** **                                | ** ** | **Payments Due by Period** | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**                   | ** ** | **Total**                                 | ** ** | **Balance of  2006** | ** ** | **2007 and  2008** | ** ** | **2009 and  2010** | ** ** | **Thereafter** | ** ** |
|                                      |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt  and future interest       |       | $                                         | 449,071    |   | $ | 22,684 |   | $ | 59,552 |   | $ | 146,585 |   | $ | 220,250 |   |
| Operating lease  obligations              |       | 135,161                                   |       | 9,834 |   | 21,373 |   | 17,476 |   | 86,478 |   |
| Deferred  compensation                    |       | 5,240                                     |       | — |   | 4,192 |   | 1,048 |   | — |   |
| Standby and  commercial letters of credit |       | 7,581                                     |       | 7,231 |   | 350 |   | — |   | — |   |
| Grand total                               |       | $                                         | 597,053    |   | $ | 39,749 |   | $ | 85,467 |   | $ | 165,109 |   | $ | 306,728 |   |

 

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 of March 31,2006, $109.5 million was outstanding under the term loans. No borrowings wereoutstanding on the revolving credit facility as of March 31, 2006.Reborrowings under the term loans are not permitted. The interest on borrowingsunder the Senior Credit Facility is at variable rates based on the ratio oftotal cash flow to outstanding indebtedness (as defined). Interest rates floatwith prime and the London Interbank Offered Rates, or LIBOR, plus an applicablemargin ranging from 1.50% to 2.50% over the stated rates. As

 

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of March 31, 2006,the average interest rate on the term loans was 7.32%, and permitted borrowingsunder the undrawn revolving facility were $27.4 million. The Company also paysa commitment fee of 0.5% per annum on the unused amount of the revolving creditfacility. The aggregate quarterly scheduled payments on the term loans are$350,000. The revolving credit facility matures on June 24, 2008, and theterm loans mature on June 24, 2009. The funds available under the SeniorCredit Facility may be utilized for borrowings or letters of credit;however, a maximum of $12.5 million may be allocated to such letters ofcredit. As of March 31, 2006, the Company had letters of credit in theaggregate amount of $7.6 million outstanding. The Senior Credit Facility issecured by virtually all of the Company’s assets and a pledge of the Company’sstock and the stock of the Company’s subsidiaries.

 

On March 3, 2006, AffinityGroup, Inc. amended its Senior Credit Facility to revise the definition ofConsolidated Fixed Charges Ratio and Permitted Tax Distributions. Thisamendment allows AGI to pass up taxes based on its stand-alone tax obligationrather than the tax obligation of its parent, AGHI, until such time that AGHIpays interest on its 10 7/8% Senior Notes in cash instead of by the issuance ofadditional notes. Further, Affinity Group, Inc. amended the Senior CreditFacility’s covenant restrictions with affiliates to permit a joint venturearrangement between Camping World and FreedomRoads Holding Company, anaffiliate of the Company.

 

On March 6, 2006, Camping World, Inc. (“Camping World”), a wholly-ownedsubsidiary of Affinity Group, Inc., entered into a Joint Venture Agreement withFreedomRoads Holding Company, LLC, a Minnesota limited liability company(“FreedomRoads”). FreedomRoads is indirectly owned and controlled by StephenAdams, the Chairman and indirect controlling shareholder of Affinity Group,Inc. FreedomRoads, through its wholly-owned subsidiaries, owns and operates RVdealerships, currently operating 52 locations across the United States. TheJoint Venture Agreement provides that Camping World and FreedomRoads are to actcooperatively with a view to maximizing synergies and to locate, establish andutilize mutually beneficial relationships that are available only to theparties acting together that would not otherwise be available to either partyindependently.

 

In February 2004, weissued $200.0 million aggregate principal amount of 9% Senior SubordinatedNotes due 2012 (the “AGI Senior Notes”). The Company completed a registeredexchange of the AGI Senior Notes under the Securities Act of 1933 in August 2004.The proceeds from the sale of the AGI Senior Notes were used to fund the tenderoffer and defeasance of the remaining $100.0 million outstanding principalamount of the AGH Notes, prepay $25.0 million of the Term Loans under ourSenior Credit Facility, pay a $60.0 million dividend distribution, create a$15.0 million segregated cash account, pay certain prepayment and transactioncosts and for general corporate purposes. The amount held in this segregatedaccount, including any earnings thereon, was available to pay stockholderdividends upon satisfaction of a leverage test specified in our Senior CreditFacility. In August and November of 2004, we satisfied the specificleverage test and paid $3.6 million and $11.5 million in dividends,respectively.

 

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The AGI Indenturepursuant to which the Notes were issued and the AGI Senior Credit Facilitycontain certain restrictive covenants relating to, but not limited to, mergers,changes in the nature of the business, acquisitions, additional indebtedness,sale of assets, investments, and the payment of dividends subject to certainlimitations and minimum operating covenants. The Company was in compliance withall debt covenants at March 31, 2006.

 

In March 2005, AGHI,the Company’s parent, issued $88.2 million principal amount of the 10-7/8%senior notes due February 15, 2012 (the “AGHI Notes”). Interest on theAGHI notes is payable semi-annually on February 15 and August 15. Forinterest payments on and prior to February 15, 2008, AGHI may electto pay interest on the AGHI Notes in cash or by issuance of additional notes ofthe same tenor as the AGHI Notes, except the maturity date is March 15,2010. AGI has not paid any dividends to AGHI to fund payment of interest on theAGHI Notes and AGHI made the interest payments due on August 15, 2006 and February 15,2006 through issuance of additional notes. AGI expects to issue additionalnotes of the same tenor as the AGHI Notes through February 15, 2008 to payinterest on the AGHI Notes when and as such interest is due.

 

In April 2005,Camping World, Inc. acquired the assets of a mail order catalog retailerspecializing in recreational vehicle merchandise for $0.6 million. In May 2005,the Ehlert Publishing Group, Inc. acquired the *PowerboatMagazine* title and related assets from Nordskog Publishing, Inc.for $4.0 million. As part of the purchase, the Company issued $1.5 millionof debt and assumed $0.5 million of liabilities. In December 2005, AGIProductions, Inc., a subsidiary of Ehlert Publishing Group, Inc., acquiredthe consumer outdoor recreation show assets of Royal Productions, Inc. for$8.5 million.

 

In February 2006,Ehlert Publishing, Inc. acquired the consumer shows and related assets ofH & S Productions, LLC for $2.5 million. As part of the purchase,the Company issued $0.4 million of debt and assumed $1.4 million ofliabilities.

 

For the three monthsended March 31, 2006, the Company did not incur deferred executivecompensation expense under the phantom stock agreements and made payments of$0.8 million on the pay-out provisions of existing phantom stock agreements.The earned incentives under these agreements are scheduled to be paid atvarious times over the next five years. There are no phantom stock paymentsscheduled to**be made for the remainder of 2006.

 

Capital expenditures forthe first three months of 2006 totaling $3.8 million increased $1.0 millionfrom the first three months of 2005. Additional capital expenditures of $13.9million are anticipated for the balance of 2006, primarily for fifteen toseventeen new Camping World stores, updating existing store fronts, andcomputer hardware and software upgrades and enhancements.

 

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**CRITICALACCOUNTING POLICIES**

 

*General*

 

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requires theCompany to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives,bad debts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation. The Company basesits estimates on historical experience and on various other assumptions thatare believed to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.

 

The Company believes thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of the Company’s consolidated financialstatements.

 

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*Revenue Recognition*

 

Merchandise revenue is recognized whenproducts are sold in the retail stores, shipped for mail and internet orders,or when services are provided to customers. Publication advertising andnewsstand sales, net of estimated provision for returns, are recorded at timeof delivery. Subscription sales of publications are deferred and recognizedover the lives of the subscriptions. Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of the membership.ERS claim expenses are recognized when incurred. Advances on third party creditcard fee revenues are deferred and recognized based primarily on a percentageof credit card receivables held by third parties. Membership revenue isgenerated from annual, multi-year and lifetime memberships. The revenue andexpenses associated with these memberships are deferred and amortized over themembership period. For lifetime memberships, an 18-year period is used, whichis the actuarially determined estimated fulfillment period. Promotionalexpenses, consisting primarily of direct mail advertising, are deferred andexpensed over the period of expected future benefit. Renewal expenses areexpensed at the time related materials are mailed. Recognized revenues andprofit are subject to revisions as the membership progresses to completion.Revisions to membership period estimates would change the amount of income and expenseamortized in future accounting periods.

 

*Accounts Receivable*

 

The Company estimates thecollectability of its trade receivables. A considerable amount of judgment isrequired in assessing the ultimate realization of these receivables includingthe current credit-worthiness of each customer. Changes in required reserveshave been recorded in recent periods and may occur in the future due tothe market environment.

 

*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*

 

Purchased intangibleassets with finite lives are amortized using the straight-line method over theestimated economic lives of the assets, ranging from one to twenty-three years.

 

Long-lived assets, suchas property, plant and equipment and purchased intangible assets with finitelives are evaluated for impairment whenever events or changes in

 

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circumstances indicatethe carrying value of an asset may not be recoverable in accordance withSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets.”  The Company assesses the fairvalue of the assets based on the future cash flow the assets are expected togenerate and recognize an impairment loss when estimated undiscounted futurecash 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 marketvalues. The Company determined there were no indicators of impairment oflong-lived assets as of December 31, 2005 or March 31, 2006.

 

The Company has evaluatedthe remaining useful lives of its finite-lived purchased intangible assets todetermine if any adjustments to the useful lives were necessary or if any ofthese 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.

 

*IndefiniteLived Intangible Assets*

 

The Company evaluatesindefinite lived intangible assets for impairment at least annually or whenevents indicate that an impairment exists in accordance with SFAS No. 142.The impairment test for goodwill and other indefinite-lived intangible assets iscalculated annually using fair value measurement techniques.

 

Determining the fairvalue 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 tests may bebased upon a number of factors, including assumptions about the projectedfuture cash flows, discount rate, growth rate, determination of marketcomparables, technological change, economic conditions or changes to the Company’sbusiness operations. Such changes may result in impairment chargesrecorded in future periods.

 

The fair value of theCompany’s reporting units is annually determined using a combination of theincome approach and the market approach. Under the income approach, the 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.

 

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Based on the results ofthe annual impairment tests, the Company recorded an impairment charge of $4.3million in 2005 related to Golf Card Club, which is included in the membershipservices segment. Future goodwill impairment tests could result in a charge toearnings. The Company will continue to evaluate goodwill on an annual basis andwhenever events and changes in circumstances indicate that there may be apotential impairment.

 

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

 

We are exposed to market risks relating tofluctuations in interest rates. Our objective of financial risk management isto minimize the negative impact of interest rate fluctuations on our earningsand cash flows. Interest rate risk is managed through the use of a combinationof fixed and variable interest debt as well as the periodic use of interestrate collar contracts.

 

The following information discusses the sensitivityto our earnings. The range of changes chosen for this analysis reflects ourview of changes which are reasonably possible over a one-year period. Theseforward-looking disclosures are selective in nature and only address thepotential impacts from financial instruments. They do not include otherpotential effects which could impact our business as a result of these interestrate fluctuations.

 

*Interest Rate SensitivityAnalysis*

 

At March 31, 2006, we had debt totaling $317.2million, comprised of $109.5 million of variable rate debt and $207.7 millionof fixed rate debt. Holding other variables constant (such as debt levels), theearnings and cash flow impact of a one-percentage point increase/ decrease ininterest rates would have an unfavorable/ favorable impact of approximately$1.1 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:CONTROL AND PROCEDURES**

 

Within 90 days prior tothe filing of this Quarterly Report on Form 10-Q, the Company carried outan 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 that

 

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evaluation, the Presidentand Chief Executive Officer along with the Senior Vice President and ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe periodic SEC filings. There have been no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date the Company carried out its evaluation.

 

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**PART II:  OTHER INFORMATION.**

 

None.

 

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**SIGNATURES:**

 

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

 

 
|                         | **AFFINITY  GROUP, INC.** |
|------------------------------|--------------------------------|
|                         |                           |
|                         |                           |
|                         | /s/ Thomas F.  Wolfe           |   |
| Date:  May 8, 2006 | Thomas F. Wolfe                |
|                         | Senior Vice  President and     |
|                         | Chief Financial  Officer       |

 

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