Affinity Group Holding 10-Q 2007 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

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

For Quarter Ended:	Commission File Number
June 30, 2007	333-124109

AFFINITY GROUP HOLDING, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-2428068
(State of incorporation or organization)	(I.R.S. Employer Identification No.)
2575 Vista Del Mar Drive	(805) 667-4100
Ventura, CA   93001	(Registrant’s telephone
(Address of principal executive offices)	number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:  NONE

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

10-7/8% Senior 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 the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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   x NO   o

Indicate by check mark whether the registrant is 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   x

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

YES   o NO   x

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

	Outstanding as of
Class	August 13, 2007
Common Stock,    $.01 par value	100

DOCUMENTS INCORPORATED BY REFERENCE:  None

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

INDEX

Part I.  Financial Information

Item 1: Financial Statements

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2007 and December 31, 2006

(In thousands except shares and par value)

	6/30/2007			12/31/2006
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,604		$	15,238
Accounts receivable, less allowance for doubtful accounts of $1,446 in 2007 and $1,193 in 2006	25,169			27,199
Inventories	69,064			52,703
Prepaid expenses and other assets	17,790			13,006
Deferred tax assets	3,279			3,203
Total current assets	117,906			111,349
PROPERTY AND EQUIPMENT, net	41,081			34,765
INVESTMENT IN AFFILIATE	81,005			81,005
NOTE FROM AFFILIATE	4,669			4,688
INTANGIBLE ASSETS, net	30,546			32,957
GOODWILL	144,429			144,429
OTHER ASSETS	1,441			1,704
Total assets	$	421,077		$	410,897
LIABILITIES AND STOCKHOLDER’S DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	27,576		$	32,577
Accrued interest	9,736			5,936
Accrued income taxes	1,418			1,736
Accrued liabilities	35,744			35,687
Deferred revenues and gains	66,533			62,906
Current portion of long-term debt	4,698			7,271
Total current liabilities	145,705			146,113
DEFERRED REVENUES AND GAINS	39,570			37,183
LONG-TERM DEBT, net of current portion	390,731			381,510
DEFERRED TAX LIABILITY	790			15,724
OTHER LONG-TERM LIABILITIES	17,192			3,386
	593,988			583,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S DEFICIT:
Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and outstanding	1			1
Accumulated deficit	(172,912		)	(173,020		)
Total stockholder’s deficit	(172,911		)	(173,019		)
Total liabilities and stockholder’s deficit	$	421,077		$	410,897

See notes to consolidated financial statements.

1

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

	THREE MONTHS ENDED
	6/30/2007			6/30/2006
REVENUES:
Membership services	$	38,092		$	37,512
Publications	17,529			16,584
Retail	98,243			84,907
	153,864			139,003
COSTS APPLICABLE TO REVENUES:
Membership services	24,294			25,007
Publications	12,263			11,638
Retail	60,073			51,064
	96,630			87,709
GROSS PROFIT	57,234			51,294
OPERATING EXPENSES:
Selling, general and administrative	38,950			35,129
Depreciation and amortization	4,841			4,722
	43,791			39,851
INCOME FROM OPERATIONS	13,443			11,443
NON-OPERATING ITEMS:
Interest income	183			395
Interest expense	(9,365		)	(9,401		)
Debt extinguishment expense	—			(693		)
Other non-operating items, net	44			20
	(9,138		)	(9,679		)
INCOME FROM OPERATIONS BEFORE INCOME TAXES	4,305			1,764
INCOME TAX BENEFIT (EXPENSE)	85			(24,442		)
NET INCOME (LOSS)	$	4,390		$	(22,678	)

See notes to consolidated financial statements.

2

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

	SIX MONTHS ENDED
	6/30/2007			6/30/2006
REVENUES:
Membership services	$	72,153		$	70,460
Publications	42,218			39,687
Retail	167,300			145,726
	281,671			255,873
COSTS APPLICABLE TO REVENUES:
Membership services	45,961			46,123
Publications	28,040			26,213
Retail	101,909			87,467
	175,910			159,803
GROSS PROFIT	105,761			96,070
OPERATING EXPENSES:
Selling, general and administrative	73,515			65,362
Depreciation and amortization	9,744			9,372
	83,259			74,734
INCOME FROM OPERATIONS	22,502			21,336
NON-OPERATING ITEMS:
Interest income	357			724
Interest expense	(18,502		)	(18,668		)
Debt extinguishment expense	(775		)	(693		)
Other non-operating items, net	93			53
	(18,827		)	(18,584		)
INCOME FROM OPERATIONS BEFORE INCOME TAXES	3,675			2,752
INCOME TAX BENEFIT (EXPENSE)	183			(24,870		)
NET INCOME (LOSS)	$	3,858		$	(22,118	)

See notes to consolidated financial statements.

3

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

	SIX MONTHS ENDED
	6/30/2007			6/30/2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	3,858		$	(22,118	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation	4,846			5,030
Amortization	4,898			4,342
Provision for losses on accounts receivable	726			431
Deferred compensation	240			140
Deferred tax (benefit) expense	(826		)	24,432
Gain on sale of property and equipment	(5		)	(13		)
Loss on early extinguishment of debt	775			693
Non-cash interest on AGHI Notes	1,389			5,205
Accretion of original issue discount	173			123
Changes in operating assets and liabilities
Accounts receivable	1,304			3,776
Inventories	(16,361		)	(3,867		)
Prepaid expenses and other assets	(4,239		)	(3,438		)
Accounts payable	(5,001		)	9,902
Accrued and other liabilities	2,921			(212		)
Deferred revenues and gains	5,208			2,438
Net cash (used in) provided by operating activities	(94		)	26,864
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures	(11,167		)	(7,244		)
Net proceeds from sale of property and equipment	10			124
Additions to intangible assets	(4		)	(4		)
Acquisitions, net of cash received	(304		)	(1,334		)
Repayment of loans receivable	19			17
Net cash used in investing activities	(11,446		)	(8,441		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid	(3,750		)	(2,600		)
Borrowings on long-term debt	45,000			—
Payment of debt issue costs	(291		)	—
Principal payments of long-term debt	(42,053		)	(28,542		)
Net cash used in financing activities	(1,094		)	(31,142		)
NET CHANGE IN CASH AND CASH EQUIVALENTS	(12,634		)	(12,719		)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD	15,238			25,061
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	2,604		$	12,342

See notes to consolidated financial statements.

4

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) BASIS OF PRESENTATION

Principles of Consolidation –The consolidated financial statements included herein include the accounts of Affinity Group Holding, Inc. (“AGHI”), its wholly-owned subsidiary, Affinity Group, Inc. (“AGI”), and AGI’s subsidiaries (collectively the “Company”), presented in accordance with U.S. generally accepted accounting principles, and pursuant to the rules and regulations of the Securities and Exchange Commission.  The parent company of AGHI is AGI Holding Corp. (“AGHC”), a privately-owned corporation.

In the second quarter of 2006, AGHC received approval from the Internal Revenue Service to change its tax status from a Subchapter C corporation to a Subchapter S corporation (“S corporation”) to be effective as of January 1, 2006.  The election for change in tax status to an S corporation included AGHC and all its subsidiaries with the exception of Camping World, Inc. and its wholly-owned subsidiaries, which are to remain Subchapter C corporations.  Pursuant to SFAS 109, “Accounting for Income taxes”, a change in tax status resulting from an S corporation election requires that all deferred tax accounts be revalued upon formal approval of the S corporation status.  Accordingly, all deferred tax accounts of AGHC and its subsidiaries, excluding Camping World, Inc. and its wholly owned subsidiaries, were revalued to account for the tax effect for the change to the S corporation status in the second quarter of 2006.

These interim consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes in the Company’s 10-K report for the year ended December 31, 2006 as filed with the Securities and Exchange Commission.  In the opinion of management of the Company, these consolidated financial statements contain all adjustments of a normal recurring nature necessary to present fairly the financial position, results of operations and cash flows of the Company for the interim periods presented.

(2) RECENT ACCOUNTING PRONOUNCEMENTS

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” on January 1, 2007.  At the date of adoption, the Company had $14.2 million of unrecognized tax benefits.  Accounting for the unrecognized tax benefits had no affect on current period earnings or retained earnings as the liability had been previously recorded and was reclassified from long-term deferred tax liabilities to other long-term liabilities.  There would be no affect on the effective tax rate if the unrecognized tax benefits were recognized.  The Company did not have any material increases in unrecognized tax benefits in the current period and does not anticipate any material increases over the next twelve months.

5

(2) RECENT ACCOUNTING PRONOUNCEMENTS (continued)

During the second quarter of 2007 and for the six months ended June 30, 2007, the Company recorded $0.2 million and $0.4 million, respectively, of accrued interest and penalties related to the unrecognized tax benefits.  The Company’s policy is to classify interest and penalties as income tax expense in the financial statements.

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

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.  This standard provides guidance for using fair value to measure assets and liabilities.  The standard also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings.  The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value in any new circumstances.  SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.  There are numerous previously issued statements dealing with fair values that are amended by SFAS No. 157.  We have not evaluated the impact, if any, that the adoption of SFAS No. 157 will have on our consolidated financial statements.

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

The Company’s three principal lines of business are Membership Services, Publications, and Retail.  The Membership Services segment includes the operations of the Good Sam Club, Coast to Coast Club, Camping World’s President’s Club and Camp Club USA for recreational vehicle (“RV”) owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts.  The Publications segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories, and RV and powersports industry trade magazines, and produces outdoor recreational consumer events.  The Retail segment sells specialty retail merchandise and services for RV owners primarily through Camping World retail supercenters, mail order catalogs and its website.  For recent events regarding the Retail segment, see Note 7 below.  The Company evaluates performance based on profit or loss from operations before income taxes.

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

6

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

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

	Membership
	Services		Publications		Retail		Consolidated
THREE MONTHS ENDED JUNE 30, 2007
Revenues from external customers	$	38,092	$	17,529	$	98,243	$	153,864
Depreciation and amortization	903		1,309		1,930		4,142
Gain on sale of property and equipment	—		5		—		5
Interest income	2,377		—		35		2,412
Interest expense	—		76		3,839		3,915
Segment operating profit	12,793		2,380		1,755		16,928
THREE MONTHS ENDED JUNE 30, 2006
Revenues from external customers	37,512		16,584		84,907		139,003
Depreciation and amortization	889		1,059		2,029		3,977
Gain on sale of property and equipment	—		—		2		2
Interest income	1,563		—		1		1,564
Interest expense	—		87		3,483		3,570
Segment operating profit	11,215		2,722		512		14,449

	Membership
	Services		Publications		Retail			Consolidated
SIX MONTHS ENDED JUNE 30, 2007
Revenues from external customers	$	72,153	$	42,218	$	167,300		$	281,671
Depreciation and amortization	1,797		2,549		3,815			8,161
Gain on sale of property and equipment	—		5		—			5
Interest income	4,553		—		67			4,620
Interest expense	—		146		7,410			7,556
Segment operating profit (loss)	23,944		8,790		(1,984		)	30,750
SIX MONTHS ENDED JUNE 30, 2006
Revenues from external customers	70,460		39,687		145,726			255,873
Depreciation and amortization	1,799		2,079		4,006			7,884
Gain on sale of property and equipment	—		5		8			13
Interest income	2,939		—		6			2,945
Interest expense	—		181		6,979			7,160
Segment operating profit (loss)	21,687		9,184		(3,807		)	27,064

7

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

The following is a reconciliation of income (loss) from operations to the Company’s consolidated financial statements for the six months ended June 30, (in thousands):

	THREE MONTHS ENDED						SIX MONTHS ENDED
	6/30/2007			6/30/2006			6/30/2007			6/30/2006
Income From Operations Before Taxes
Total profit for reportable segments	$	16,928		$	14,449		$	30,750		$	27,064
Unallocated G & A expense	(4,245		)	(4,247		)	(9,508		)	(8,402		)
Unallocated depreciation and amortization expense	(699		)	(745		)	(1,583		)	(1,488		)
Unallocated interest income, net of intercompany elimination	(2,229		)	(1,169		)	(4,263		)	(2,221		)
Unallocated interest expense, net of intercompany elimination	(5,450		)	(5,831		)	(10,946		)	(11,508		)
Unallocated debt restructure expense	—			(693		)	(775		)	(693		)
Income from operations before taxes	$	4,305		$	1,764		$	3,675		$	2,752

The following is a reconciliation of assets of reportable segments to the Company’s consolidated financial statements as of June 30, 2007 and December 31, 2006 (in thousands):

	6/30/2007			12/31/2006
Membership services segment	$	175,691		$	167,837
Publications segment	86,459			87,122
Retail segment	250,252			225,680
Total assets for reportable segments	512,402			480,639
Capitalized finance costs not allocated to segments	8,509			10,836
Corporate unallocated assets	6,701			6,596
Elimination of intersegment receivable	(106,535		)	(87,174		)
Total assets	$	421,077		$	410,897

(4) STATEMENTS OF CASH FLOWS

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

	2007			2006
Cash paid (received) during the period for:
Interest	$	13,140		$	10,747
Income taxes	(192		)	1,576

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

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

8

(5) GOODWILL AND INTANGIBLE ASSETS

The Company reviews goodwill and indefinite-lived intangible assets for impairment at least annually and more often when impairment indicators are present.  The Company performs its annual impairment test during the fourth quarter.  There were no changes in the Company’s goodwill by business segment for the six months ended June 30, 2007 and 2006 and no indicators of impairment.

The Company completed two acquisitions in the first quarter of 2007.  These acquisitions have been accounted for as a purchase in accordance with SFAS No. 141, “Business Combinations,” and accordingly, the acquired assets and liabilities have been recorded at fair value.  The allocations of purchase price to assets and liabilities include various finite-lived assets and no additional goodwill.  The operations of each entity are included in the operations of the Company as of their respective acquisition dates.

Finite-lived intangible assets, related accumulated amortization and weighted average useful life consisted of the following at June 30, 2007 (in thousands, except as noted):

	Weighted
	Average Useful			Accumulated
	Life (in years)	Gross		Amortization			Net
Membership and customer lists	6	$	31,552	$	(14,179	)	$	17,373
Resort and golf course participation agreements	23	13,442		(12,946		)	496
Non-compete and deferred consulting agreements	15	18,830		(13,276		)	5,554
Deferred financing costs	7	13,956		(6,833		)	7,123
		$	77,780	$	(47,234	)	$	30,546

(6) DEBT

AGHI Notes

On March 24, 2005 in a private placement, AGHI issued $88.2 million principal amount of its 10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issue discount.  The Company completed a registered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005.  The AGHI Notes are unsecured obligations of AGHI and its subsidiaries have not guaranteed payment of principal or interest on the AGHI Notes.  Interest on the AGHI Notes is payable semi-annually on February 15 and August 15 commencing August 15, 2005 and the entire $88.2 million principal amount of the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15, 2008, AGHI may elect to pay interest on the AGHI Notes in cash or by issuance of additional notes of the same tenor as the AGHI Notes, except the maturity date of the additional notes is March 15, 2010.  The Company elected to issue additional notes in lieu of cash payments.  On August 15, 2005, February 15, 2006, August 15, 2006 and February 15, 2007 the Company issued

9

(6) DEBT (continued)

additional notes in the amount of $3.8 million, $5.0 million, $5.3 million and $5.6 million, respectively.  The Company plans to pay the interest on the notes due August 15, 2008 from the proceeds of a contribution to be made by its parent, AGHC.

Senior Subordinated Notes

In February 2004, AGI issued $200.0 million of 9% Senior Subordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGI Indenture.  On June 8, 2006, AGI amended its Amended and Restated Credit Agreement (“Senior Credit Facility”) to permit AGI to purchase up to $30.0 million of the Senior Subordinated Notes from time to time as and when AGI determines.  AGI purchased and retired $24.8 million, $4.9 million, and $0.2 million of the Senior Subordinated Notes in June, July and August of 2006, respectively.  On February 27, 2007, AGI amended its Senior Credit Facility to permit AGI to repurchase up to an additional $50.0 million of the Senior Subordinated Notes from time to time, as and when AGI determines, through the issuance of additional term loans of up to $50.0 million under the Senior Credit Facility.  On March 8, 2007, the AGI purchased $17.7 million of the Senior Subordinated Notes.  As of June 30, 2007, $152.4 million of the Senior Subordinated Notes remain outstanding.  Interest is payable on the remaining Senior Subordinated Notes twice a year on February 15 and August 15.  AGI’s present and future restricted subsidiaries will guarantee the Senior Subordinated Notes with unconditional guarantees of payment that will rank junior in right of payment to their existing and future senior debt, but will rank equal in right of payment to their existing and future senior subordinated debt.

(7) RECENT EVENTS

On April 16, 2007, AGI entered into a stock purchase agreement with FreedomRoads Holding Company, LLC (“FreedomRoads”), an entity under common ownership with the Company’s ultimate parent corporation, pursuant to which the Company will, subject to satisfaction of certain conditions described below, sell all of the outstanding stock of its wholly-owned subsidiary Camping World, Inc. (“Camping World”) to FreedomRoads for $175.8 million subject to certain adjustments (the “Purchase Price”).  The transaction is expected to close upon satisfaction of certain conditions stipulated under the Stock Purchase Agreement dated April 16, 2007.  The closing date has not been set but is projected to be on or before October 31, 2007.  The Purchase Price (including the portion paid by the assumption and discharge on the closing date by FreedomRoads of the intercompany indebtedness owed by Camping World to AGI) will be paid 75% in immediately available funds at closing and 25% under a subordinated promissory note bearing interest at 11.5% per annum.  AGI intends to use the net cash proceeds from the sale of Camping World to repay indebtedness outstanding under AGI’s term notes issued under the senior secured floating rate note purchase agreement dated June 24, 2003, as amended, and its revolving credit line under the credit agreement dated June 24, 2003, as amended, with senior lenders (collectively the “Senior Secured Credit Facility”).  As of June 30, 2007, an aggregate of $129.4 million was outstanding under the term loans and $8.8 million was outstanding (including $7.3 million in letters of credit) under the revolving credit facility of the Senior Secured Credit Facility.

10

(7) RECENT EVENTS (continued)

The financial statements for Camping World are different from the segment reporting in Footnote 3 because the Camping World President’s Club and other related ancillary products are included as part of the membership services segment in the segment reporting.

The following unaudited pro forma condensed consolidated balance sheet as of June 30, 2007 and December 31, 2006 and the statement of operations for the six months ended June 30, 2007 and 2006 reflects the reclassification adjustments associated with the proposed disposal/sale of Camping World to FreedomRoads.  The pro forma adjustments related to the disposal are presented since the disposition did not meet the discontinued operations reporting requirements pursuant to SFAS Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, (SFAS 144) as of June 30, 2007, but will meet such requirements in 2007 when the transaction is completed.  Since the transaction is a sale to an entity under common ownership with AGI such long-lived assets are considered disposed of when they are exchanged or distributed in accordance with SFAS 144.  The pro forma adjustments reflect the reclassification of assets and liabilities associated with Camping World to current assets and liabilities to be disposed of in accordance with SFAS 144 as if the reporting requirements had been met at June 30, 2007.  In addition, the historical operating results have also been reclassified to reflect discontinued operations.

Corporate Expenses - The allocation to Camping World of expenses for certain Affinity Group, Inc. corporate functions historically provided to Camping World are done in accordance with Staff Accounting Bulletin No. 55, “Allocation of Expenses and Related Disclosures in Subsidiaries’ Financial Statements”, (“SAB 55”).  Such allocations were made on a specific identification basis to the extent possible and otherwise based on relative percentages, as compared to the Company’s other businesses, of headcount or other appropriate methods depending on the nature of each item of cost to be allocated.

Interest Expense - The interest expense included in discontinued operations below reflects the interest allocated to Camping World based upon debt required to be repaid upon consummation of this transaction.

11

(7) RECENT EVENTS (continued)

Unaudited pro forma information relating to the operations of AGHI excluding Camping World for the six months ended June 30, 2007 is as follows (in thousands):

	2007			Reclassification of			2007
	Historical			Camping World			Pro Forma
REVENUES:
Membership services	$	72,153		$	(8,965	)	$	63,188
Publications	42,218			—			42,218
Retail	167,300			(167,300		)	—
	281,671			(176,265		)	105,406
COSTS APPLICABLE TO REVENUES:
Membership services	45,961			(2,204		)	43,757
Publications	28,040			—			28,040
Retail	101,909			(101,909		)	—
	175,910			(104,113		)	71,797
GROSS PROFIT	105,761			(72,152		)	33,609
OPERATING EXPENSES:
Selling, general and administrative	73,515			(61,829		)	11,686
Depreciation and amortization	9,744			(3,815		)	5,929
	83,259			(65,644		)	17,615
INCOME FROM OPERATIONS	22,502			(6,508		)	15,994
NON-OPERATING ITEMS:
Interest income	357			(67		)	290
Interest expense	(18,502		)	5,236			(13,266		)
Debt extinguishment expense	(775		)	—			(775		)
Other non-operating items	93			—			93
	(18,827		)	5,169			(13,658		)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS	3,675			(1,339		)	2,336
INCOME TAX BENEFIT (EXPENSE)	183			(420		)	(237		)
INCOME FROM CONTINUING OPERATIONS	3,858			(1,759		)	2,099
DISCONTINUED OPERATIONS
Income from operations of discontinued Camping World, Inc.	—			1,339			1,339
Income tax expense	—			420			420
Income on discontinued operations	—			1,759			1,759
NET INCOME	$	3,858		$	—		$	3,858

12

(7) RECENT EVENTS (continued)

Unaudited pro forma information relating the operations of AGHI excluding Camping World for the six months ended June 30, 2006 is as follows (in thousands):

	2006			Reclassification of			2006
	Historical			Camping World			Pro Forma
REVENUES:
Membership services	$	70,460		$	(7,713	)	$	62,747
Publications	39,687			—			39,687
Retail	145,726			(145,726		)	—
	255,873			(153,439		)	102,434
COSTS APPLICABLE TO REVENUES:
Membership services	46,123			(2,219		)	43,904
Publications	26,213			—			26,213
Retail	87,467			(87,467		)	—
	159,803			(89,686		)	70,117
GROSS PROFIT	96,070			(63,753		)	32,317
OPERATING EXPENSES:
Selling, general and administrative	65,362			(56,000		)	9,362
Depreciation and amortization	9,372			(4,006		)	5,366
	74,734			(60,006		)	14,728
INCOME FROM OPERATIONS	21,336			(3,747		)	17,589
NON-OPERATING ITEMS:
Interest income	724			(6		)	718
Interest expense	(18,668		)	4,891			(13,777		)
Debt extinguishment expense	(693		)	—			(693		)
Other non-operating items	53			8			61
	(18,584		)	4,893			(13,691		)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND DISCONTINUED OPERATIONS	2,752			1,146			3,898
INCOME TAX EXPENSE	(24,870		)	(672		)	(25,542		)
LOSS FROM CONTINUING OPERATIONS	(22,118		)	474			(21,644		)
DISCONTINUED OPERATIONS
Loss from operations of discontinued Camping World, Inc.	—			(1,146		)	(1,146		)
Income tax benefit	—			672			672
Loss on discontinued operations	—			(474		)	(474		)
NET LOSS	$	(22,118	)	$	—		$	(22,118	)

13

(7) RECENT EVENTS (continued)

The unaudited pro forma balance sheet of AGHI excluding Camping World as of June 30, 2007 is as follows (in thousands except shares and par value):

				Reclassification of
	Historical			Camping World			Pro Forma
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	2,604		$	(2,604	)	$	—
Accounts receivable, net	25,169			(6,715		)	18,454
Inventories	69,064			(68,636		)	428
Prepaid expenses and other assets	17,790			(2,776		)	15,014
Deferred tax assets, net	3,279			(3,279		)	—
Assets of discontinued operations	—			250,252			250,252
Total current assets	117,906			166,242			284,148
PROPERTY AND EQUIPMENT, net	41,081			(31,978		)	9,103
INVESTMENT IN AFFILIATE	81,005			(81,005		)	—
NOTE FROM AFFILIATE	4,669			—			4,669
INTANGIBLE ASSETS, net	30,546			(5,090		)	25,456
GOODWILL	144,429			(47,601		)	96,828
OTHER ASSETS	1,441			(529		)	912
Total assets	$	421,077		$	39		$	421,116
LIABILITIES AND STOCKHOLDER’S DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	27,576		$	(24,623	)	$	2,953
Accrued interest	9,736			—			9,736
Accrued income taxes	1,418			(29		)	1,389
Accrued liabilities	35,744			(18,830		)	16,914
Deferred revenues and gains	66,533			(7,558		)	58,975
Current portion of long-term debt	4,698			—			4,698
Liabilities of discontinued operations	—			73,410			73,410
Total current liabilities	145,705			22,370			168,075
DEFERRED REVENUES AND GAINS	39,570			(9,253		)	30,317
LONG-TERM DEBT, net of current portion	390,731			—			390,731
DEFERRED TAX LIABILITY	790			(790		)	—
OTHER LONG-TERM LIABILITIES	17,192			(12,288		)	4,904
	593,988			39			594,027
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S DEFICIT :
Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and outstanding	1			—			1
Accumulated deficit	(172,912		)	—			(172,912		)
Total stockholder’s deficit	(172,911		)	—			(172,911		)
Total liabilities and stockholder’s deficit	$	421,077		$	39		$	421,116

14

(7) RECENT EVENTS (continued)

The unaudited pro forma balance sheet of AGHI excluding Camping World as of December 31, 2006 is as follows (in thousands except shares and par value):

	Historical			Reclassification of Camping World			Pro Forma
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	15,238		$	(3,288	)	$	11,950
Accounts receivable, net	27,199			(3,742		)	23,457
Inventories	52,703			(51,736		)	967
Prepaid expenses and other assets	13,006			(2,451		)	10,555
Deferred tax assets, net	3,203			(3,203		)	—
Assets of discontinued operations	—			225,680			225,680
Total current assets	111,349			161,260			272,609
PROPERTY AND EQUIPMENT, net	34,765			(26,341		)	8,424
INVESTMENT IN AFFILIATE	81,005			(81,005		)	—
NOTE FROM AFFILIATE	4,688			—			4,688
INTANGIBLE ASSETS, net	32,957			(5,695		)	27,262
GOODWILL	144,429			(47,601		)	96,828
OTHER ASSETS	1,704			(618		)	1,086
Total assets	$	410,897		$	—		$	410,897
LIABILITIES AND STOCKHOLDER’S DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	32,577		$	(25,129	)	$	7,448
Accrued interest	5,936			—			5,936
Accrued income taxes	1,736			(535		)	1,201
Accrued liabilities	35,687			(17,722		)	17,965
Deferred revenues and gains	62,906			(7,030		)	55,876
Current portion of long-term debt	7,271			—			7,271
Liabilities of discontinued operations	—			72,557			72,557
Total current liabilities	146,113			22,141			168,254
DEFERRED REVENUES AND GAINS	37,183			(9,071		)	28,112
LONG-TERM DEBT, net of current portion	381,510			—			381,510
DEFERRED TAX LIABILITY	15,724			(12,916		)	2,808
OTHER LONG-TERM LIABILITIES	3,386			(154		)	3,232
	583,916			—			583,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S DEFICIT :
Common stock, $.01 par value, 3,000 shares authorized, 100 shares issued and outstanding	1			—			1
Accumulated deficit	(173,020		)	—			(173,020		)
Total stockholder’s deficit	(173,019		)	—			(173,019		)
Total liabilities and stockholder’s deficit	$	410,897		$	—		$	410,897

15

ITEM 2:

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following table is derived from the Company’s Consolidated Statements of Operations and expresses the results from operations as a percentage of revenues and reflects the net increase (decrease) between periods:

	THREE MONTHS ENDED
	6/30/2007		6/30/2006		Inc/(Dec)
REVENUES:
Membership services	24.8	%	27.0	%	1.5	%
Publications	11.4	%	11.9	%	5.7	%
Retail	63.8	%	61.1	%	15.7	%
	100.0	%	100.0	%	10.7	%
COSTS APPLICABLE TO REVENUES:
Membership services	15.8	%	18.0	%	(2.9	)%
Publications	8.0	%	8.4	%	5.4	%
Retail	39.0	%	36.7	%	17.6	%
	62.8	%	63.1	%	10.2	%
GROSS PROFIT	37.2	%	36.9	%	11.6	%
OPERATING EXPENSES:
Selling, general and administrative	25.4	%	25.3	%	10.9	%
Depreciation and amortization	3.1	%	3.4	%	2.5	%
	28.5	%	28.7	%	9.9	%
INCOME FROM OPERATIONS	8.7	%	8.2	%	17.5	%
NON-OPERATING ITEMS:
Interest income	0.1	%	0.3	%	(53.7	)%
Interest expense	(6.0	)%	(6.7	)%	(0.4	)%
Debt extinguishment expense	—		(0.5	)%	(100.0	)%
Other non-operating items, net	—		—		120.0	%
	(5.9	)%	(6.9	)%	(5.6	)%
INCOME FROM OPERATIONS BEFORE INCOME TAXES	2.8	%	1.3	%	144.0	%
INCOME TAX BENEFIT (EXPENSE)	0.1	%	(17.6	)%	(100.3	)%
NET INCOME (LOSS)	2.9	%	(16.3	)%	119.4	%

16

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The following table is derived from the Company’s Consolidated Statements of Operations and expresses the results from operations as a percentage of revenues and reflects the net increase (decrease) between periods:

	SIX MONTHS ENDED
	6/30/2007		6/30/2006		Inc/(Dec)
REVENUES:
Membership services	25.6	%	27.5	%	2.4	%
Publications	15.0	%	15.5	%	6.4	%
Retail	59.4	%	57.0	%	14.8	%
	100.0	%	100.0	%	10.1	%
COSTS APPLICABLE TO REVENUES:
Membership services	16.3	%	18.0	%	(0.4	)%
Publications	10.0	%	10.2	%	7.0	%
Retail	36.2	%	34.3	%	16.5	%
	62.5	%	62.5	%	10.1	%
GROSS PROFIT	37.5	%	37.5	%	10.1	%
OPERATING EXPENSES:
Selling, general and administrative	26.0	%	25.5	%	12.5	%
Depreciation and amortization	3.5	%	3.7	%	4.0	%
	29.5	%	29.2	%	11.4	%
INCOME FROM OPERATIONS	8.0	%	8.3	%	5.5	%
NON-OPERATING ITEMS:
Interest income	0.1	%	0.3	%	(50.7	)%
Interest expense	(6.5	)%	(7.2	)%	(0.9	)%
Debt extinguishment expense	(0.3	)%	(0.3	)%	11.8	%
Other non-operating items, net	—		—		75.5	%
	(6.7	)%	(7.2	)%	1.3	%
INCOME FROM OPERATIONS BEFORE INCOME TAXES	1.3	%	1.1	%	33.5	%
INCOME TAX BENEFIT (EXPENSE)	0.1	%	(9.7	)%	(100.7	)%
NET INCOME (LOSS)	1.4	%	(8.6	)%	117.4	%

17

RESULTS OF OPERATIONS

Three Months Ended June 30, 2007

Compared With Three Months Ended June 30, 2006

Revenues

Revenues of $153.9 million for the second quarter of 2007 increased by $14.9 million, or 10.7%, from the comparable period in 2006.

Membership services revenues of $38.1 million for the second quarter of 2007 increased by $0.6 million, or 1.5%, from the comparable period in 2006.  This revenue increase was largely attributable to a $1.4 million increase in extended vehicle warranty program revenue due to the continued growth of contracts in force, an $0.8 million revenue increase due to increased enrollment in Camping World President’s Club and Camp Club USA partially offset by enrollment decreases in the Coast to Coast Club and the Golf Club, a $0.3 million revenue increase in emergency road service programs due to increased enrollment and a $0.2 million increase in dealer program marketing revenue.  These increases were partially offset by a reduction in member events revenue of $1.9 million due to timing of the Good Sam Club annual rally, which will occur in the third quarter of 2007 versus the second quarter of 2006, and a $0.2 million revenue reduction due to the elimination of the RV Today television program.

Publication revenues of $17.5 million for the second quarter of 2007 increased approximately $1.0 million, or 5.7%, from the comparable period in 2006 primarily attributable to $1.0 million of revenue associated with the acquisition of the publishing assets of American Guide Services, Inc. in August 2006, and $0.5 million of revenue associated with consumer shows acquired in the last eighteen months.  These increases were partially offset by a $0.2 million decrease in book revenue and a $0.3 million revenue decrease due to moving the publication dates of two boating magazine issues and one camping magazine issue to the third quarter of 2007.

Retail revenues of approximately $98.3 million increased approximately $13.3 million, or 15.7%, from the comparable period in 2006.  Store merchandise sales increased approximately $10.3 million over the second quarter of 2006 due to a $13.2 million revenue increase from the addition of 32 new stores over the past eighteen months, partially offset by a same store sales decrease of $2.9 million, or 5.0%, compared to a 7.5% decrease in same store sales for the second quarter of 2006.  Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year.  In addition, supplies and other sales increased $1.5 million, installation and service work increased $0.6 million, product extended warranty sales increased $0.5 million and mail order sales increased $0.4 million.

Costs Applicable to Revenues

Costs applicable to revenues totaled $96.6 million for the second quarter of 2007, an increase of $8.9 million, or 10.2%, from the comparable period in 2006.

18

Membership services costs and expenses of $24.3 million decreased $0.7 million, or 2.9%, from the comparable period in 2006.  This decrease consisted of a $2.1 million reduction in member events costs primarily due to timing of the Good Sam Club annual rally, which will occur in the third quarter of 2007 versus the second quarter of 2006, and a $0.3 million reduction of costs due to the elimination of the RV Today television program, partially offset by $0.9 million of incremental costs associated with increased extended vehicle warranty program revenue and emergency roads service revenue and $0.8 million of additional membership services costs associated with increased enrollment in the Camping World President’s Club and Camp Club USA, in addition to reduced production costs for the Good Sam member publication, Highways Magazine due to reduced paper costs and reduced book sizes.

Publication costs and expenses of approximately $12.2 million for the second quarter of 2007 increased $0.6 million, or 5.4%, from the comparable period in 2006.  This increase was attributable to $0.9 million of additional costs from the recently acquired American Guide Services group, and $0.2 million of costs associated with the recently acquired consumer shows, partially offset by reduced book costs of $0.3 million associated with lower book sales, and a $0.2 million reduction resulting from fewer issues of camping and boating group magazines.

Retail costs applicable to revenues increased approximately $9.0 million, or 17.6%, to $60.1 million primarily as a result of 32 new stores opened over the past eighteen months.  The retail gross profit margin of 38.9% for the second quarter of 2007 decreased from 39.9% for the comparable period in 2006 primarily due to a shift in product mix to slightly lower margin products, and margin compression caused by a combination of competitive pricing and higher unit costs.

Operating Expenses

Selling, general and administrative expenses of approximately $38.9 million for the second quarter of 2007 increased $3.8 million compared to the second quarter of 2006.  This increase was due to an increase in retail selling and general and administrative expenses of approximately $3.5 million consisting of increases in selling, real property and labor expenses primarily due to new store openings, and $0.3 million of costs associated with the recently acquired consumer shows.

Depreciation and amortization expense of $4.8 million increased approximately $0.1 million over the prior year primarily due to increased amortization of intangible assets associated with the recent acquisitions.

Income from Operations

Income from operations for the second quarter of 2007 totaling $13.4 million increased $2.0 million compared to the second quarter of 2006.  This increase was primarily due to increased gross profit for retail, membership services and publications operations of $4.3 million, $1.3 million and $0.3 million, respectively, partially offset by increased operating expenses of $3.9 million.

19

Non-Operating Items

Non-operating items of approximately $9.1 million for the second quarter of 2007 decreased $0.5 million compared to the same period in 2006.  This decrease was primarily due to a $0.7 million decrease in debt extinguishment expense associated with the retirement of Senior Subordinated Notes in 2006, partially offset by a $0.2 million decrease in interest income.

Income before Income Taxes

Income before income taxes for the second quarter of 2007 was $4.3 million, or $2.5 million higher than the second quarter of 2006.  This increase was attributable to the $2.0 million increase in income from operations for the current period and $0.5 million of reduced non-operating items.

Income Tax Benefit (Expense)

The Company recorded a $0.1 million income tax benefit for the second quarter of 2007, compared to a $24.4 million income tax expense for the second quarter of 2006.  This expense decrease was primarily due to AGHC’s S corporation change of tax status election effective for the second quarter of 2006, which included AGI and all its subsidiaries, with the exception of Camping World, Inc. and its wholly-owned subsidiaries which will remain Subchapter C corporations.  As a result, all deferred tax assets and liabilities were revalued with the exception of those related to Camping World, Inc. and its wholly-owned subsidiaries and other potential built-in gains.

Net Income (Loss)

Net income in the second quarter of 2007 was $4.3 million compared to a net loss of $22.7 million for the same period in 2006 mainly due to the reasons discussed above.

Segment Profit (Loss)

Segment profit of $16.9 million for the second quarter of 2007 (before unallocated depreciation and amortization, general and administrative, interest, and income tax expense) increased $2.5 million, or 17.2%, from the comparable period in 2006.

Membership services segment profit of approximately $12.8 million for the second quarter of 2007 increased $1.6 million, or 14.1%, from the comparable period in 2006.  This increase was largely attributable to a $1.0 million increase in profit from emergency road service products, a $0.4 million increase in profit from the extended vehicle warranty programs, a $0.3 million increase in profit from reduced book sizes in Highways Magazine and $0.2 million increase in profit for Camp Club USA, partially offset by a $0.3 million decrease in profit in the Coast to Coast Club.

Publication segment profit of $2.4 million for the second quarter of 2007 decreased $0.3 million, or 12.6%, from the comparable period in 2006.  This decrease was largely attributed to a decrease in profit related to the consumer shows acquired over the last 18 months due to increased amortization of intangible assets.

20

Retail segment profit increased $1.2 million, or 242.8% from the second quarter of 2006 to approximately $1.7 million in the second quarter of 2007.  This increase in segment profit resulted primarily from a $5.0 million increase in gross profit margin, partially offset by a $3.5 million increase in selling, general and administrative expenses primarily related to the increase in new stores, and a $0.3 million increase in interest expense.

Six Months Ended June 30, 2007

Compared With Six Months Ended June 30, 2006

Revenues

Revenues of $281.7 million for the first six months of 2007 increased by $25.8 million, or 10.1%, from the comparable period in 2006.

Membership services revenues of $72.2 million for the first six months of 2007 increased by $1.7 million, or 2.4%, from the comparable period in 2006.  This revenue increase was largely attributable to a $1.9 million increase in extended vehicle warranty program revenue due to the continued growth of contracts in force, a $1.2 million revenue increase in membership services primarily due to increased enrollment in the Camping World President’s Club, and increased enrollment in Camp Club USA, partially offset by reduced enrollment in the Golf Club and Coast to Coast Club, a $0.6 million revenue increase in emergency road service programs due to increased enrollment, and a $0.3 million increase in dealer program marketing revenue.  These increases were partially offset by a reduction in member events revenue of $1.8 million primarily due to timing of the Good Sam Club annual rally, which will occur in the third quarter of 2007 versus the second quarter of 2006, and a $0.5 million revenue reduction due to the elimination of the RV Today television program.

Publication revenues of $42.2 million for the first six months of 2007 increased $2.5 million, or 6.4%, from the comparable period in 2006 primarily attributable to $2.2 million of revenue associated with consumer shows acquired in the last eighteen months, and $1.6 million from revenue associated with the acquisition of the publishing assets of American Guide Services, Inc. in August 2006.  These increases were partially offset by a $0.5 million decrease in campground atlas revenue, which is scheduled for its bi-annual update and reprint in 2008, a $0.6 million revenue decrease due to moving the publication dates of two boating magazine issues and one camping magazine issue to the third quarter, and a $0.2 million revenue decrease due to five fewer issues of Snow Week magazines in 2007.

Retail revenues of $167.3 million increased approximately $21.6 million, or 14.8%, from the comparable period in 2006.  Store merchandise sales for the first six months of 2007 increased approximately $17.2 million over the comparable period in 2006 due to a $20.7 million revenue increase from the addition of 32 new stores over the past eighteen months, partially offset by a same store sales decrease of $3.5 million, or 3.3%, compared to a 5.1% decrease in same store sales for the first six months of 2006.  Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year.  In addition, installation and service work increased

21

$1.1 million, supplies and other sales increased $2.2 million, product extended warranty sales increased $0.8 million and mail order sales increased $0.3 million.

Costs Applicable to Revenues

Costs applicable to revenues totaled $175.9 million for the first six months of 2007, an increase of $16.1 million, or 10.1%, from the comparable period in 2006.

Membership services costs and expenses of $46.0 million decreased $0.2 million, or 0.4%, from the comparable period in 2006.  This decrease was attributable to a $1.9 million reduction in member events costs primarily due to timing of the Good Sam Club annual rally, which will occur in the third quarter of 2007 versus the second quarter of 2006, and $0.5 million of reduced costs due to the elimination of the RV Today television program.  These decreases were partially offset by $1.7 million of additional costs associated with increased extended vehicle warranty program revenue and emergency roads service revenue, $0.3 million of additional dealer program marketing costs, and $0.2 million of additional membership services costs associated with increased membership in the Camping World President’s Club and Camp Club USA, partially offset by reduced production costs of Highways Magazine due to reduced paper costs and reduced book sizes.

Publication costs and expenses of $28.0 million for the first six months of 2007 increased $1.8 million, or 7.0%, from the comparable period in 2006.  This increase was attributable to $1.7 million from the recently acquired American Guide Services group, and $1.4 million of costs associated with the recently acquired consumer shows, partially offset by reduced campground atlas costs of $0.4 million resulting from reduced sales, reduced operating costs of $0.3 million for the motorcycle magazine group, reduced costs of $0.3 million associated with fewer issues of Snow Week magazine, and reduced costs of $0.3 million due to moving the publication date of two boating issues and one camping issue to the third quarter.

Retail costs applicable to revenues increased approximately $14.5 million, or 16.5%, to $101.9 million primarily as a result of 32 new stores opened over the past eighteen months.  The retail gross profit margin of 39.1% for the first six months of 2007 decreased from 40.0% for the comparable period in 2006 primarily due to a shift in product mix to slightly lower margin products and margin compression caused by a combination of competitive pricing and higher unit costs.

Operating Expenses

Selling, general and administrative expenses of approximately $73.5 million for the first six months of 2007 increased $8.2 million compared to the first six months of 2006.  This increase was due to an increase in retail selling and general and administrative expenses of approximately $6.6 million consisting of increases in selling, labor and real property expenses primarily due to new store openings and other marketing programs, $0.9 million of arbitration expenses in connection with our asserted claim to a right of first refusal in connection with the sale of General Motors Acceptance Corporation, the insurance provider for the RV vehicle insurance offered by our Membership Services segment, which claim was rejected by the arbitration panel, $0.6 million of costs associated with the recently acquired consumer shows and $0.1 million of other general and administrative expenses.

22

Depreciation and amortization expense of approximately $9.8 million increased approximately $0.4 million over the prior year primarily due to increased amortization of intangible assets associated with the recent acquisitions.

Income from Operations

Income from operations for the first six months of 2007 totaling $22.5 million increased $1.2 million compared to the first six months of 2006.  This increase was primarily due to increased gross profit for retail, membership services and publications operations of $7.1 million, $1.9 million and $0.7 million, respectively, partially offset by increased operating expenses of $8.5 million.

Non-Operating Items

Non-operating items of approximately $18.8 million for the first six months of 2007 increased $0.2 million compared to the same period in 2006.  This increase was primarily due to a $0.3 million decrease in interest income, and a $0.1 million increase in debt extinguishment expense, partially offset by a $0.2 million increase in interest expense.

Income before Income Taxes

Income before income taxes for the first six months of 2007 was $3.7 million, or approximately $0.9 million higher than the first six months of 2006.  This increase was attributable to the $1.2 million increase in income from operations for the current period partially offset by approximately $0.2 million of increased non-operating items.

Income Tax Benefit (Expense)

The Company recorded a $0.2 million income tax benefit for the first six months of 2007, compared to a $24.9 million income tax expense for the first six months of 2006.  This expense decrease was primarily due to AGHC’s S corporation change of tax status election effective for the second quarter of 2006, which included AGI and all its subsidiaries, with the exception of Camping World, Inc. and its wholly-owned subsidiaries which will remain Subchapter C corporations.  As a result, all deferred tax assets and liabilities were revalued with the exception of those related to Camping World, Inc. and its wholly-owned subsidiaries and other potential built-in gains.

Net Income (Loss)

Net income in the first six months of 2007 was $3.9 million compared to a net loss of $22.1 million for the same period in 2006 mainly due to the reasons discussed above.

Segment Profit (Loss)

Segment profit of $30.8 million for the first six months of 2007 (before unallocated depreciation and amortization, general and administrative, interest, and income tax expense) increased $3.7 million, or 13.6%, from the comparable period in 2006.

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Membership services segment profit of $23.9 million for the first six months of 2007 increased $2.3 million, or 10.4%, from the comparable period in 2006.  This increase was largely attributable to a $1.8 million increase in profit from emergency road service products, a $0.3 million increase in profit from the extended vehicle warranty programs, and $0.5 million of reduced production costs for Highways Magazine due to reduced paper costs and reduced book sizes, partially offset by a $0.3 million loss for the Coast to Coast Club.

Publication segment profit of $8.8 million for the first six months of 2007 decreased approximately $0.4 million, or 4.4%, from the comparable period in 2006.  This decrease was largely attributed to an increase in amortization of intangible assets associated with the consumer shows acquired over the last 18 months, and a reduction in boating magazine issues published due to timing.

Retail segment loss decreased $1.8 million, or 47.9% from the first six months of 2006 to a loss of approximately $1.9 million in the first six months of 2007.  This decrease in segment loss resulted primarily from an $8.6 million increase in gross profit margin, and a $0.2 million decrease in depreciation expenses, partially offset by a $6.6 million increase in selling, general and administrative expenses primarily related to the increase in new stores and a $0.4 million increase in interest expense.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically operated with a working capital deficit.  The working capital deficit as of June 30, 2007 and December 31, 2006 was $27.8 million and $34.8 million, respectively.  The primary reason for the working capital deficit is the deferred revenue and gains reported under current liabilities in the amount of $66.5 million and $62.9 million as of June 30, 2007 and December 31, 2006, respectively.  Deferred revenue is primarily comprised of cash collected for club memberships in advance, which is amortized over the life of the membership.  The Company uses net proceeds from this deferred membership revenue to lower its long-term borrowings.  Management believes that funds generated by operations together with available borrowings under the Company’s revolving credit line will be sufficient to meet all of the Company’s debt service requirements, capital requirements and working capital needs over the next twelve months.  Further, management believes that the change in the tax status to a Subchapter S corporation in 2006 for the Company and all its subsidiaries, with the exception of Camping World, Inc. and its wholly-owned subsidiaries, has not limited the Company’s ability to issue debt through the capital markets but may limit the ability of the Company to raise funds in the equity market.

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Contractual Obligations and Commercial Commitments

The following table reflects our contractual obligations and commercial commitments at June 30, 2007.  This table includes principal and future interest due under our debt agreements based on interest rates as of June 30, 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	$	551,668	$	20,418	$	203,191	$	74,086	$	253,973
Operating lease obligations	171,440		8,456		30,612		27,644		104,728
Deferred compensation	4,255		878		3,137		160		80
Standby letters of credit	7,254		6,754		500		—		—
Grand total	$	734,617	$	36,506	$	237,440	$	101,890	$	358,781

On June 24, 2003, AGI entered into an Amended and Restated Credit Agreement and a Senior Secured Floating Rate Note Purchase Agreement (as amended, the “AGI Senior Credit Facility”).  The AGI Senior Credit Facility provides for a revolving credit facility of $35.0 million and term loans in the aggregate of $140.0 million.  As of June 30, 2007, $129.4 million was outstanding under the term loans and $1.5 million was outstanding under the revolving credit facility.  Reborrowings under the term loans are not permitted.  The interest on borrowings under the AGI Senior Credit Facility is at variable rates based on the ratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and the London Interbank Offered Rates, or LIBOR, plus an applicable margin ranging from 1.50% to 2.50% over the stated rates.  As of June 30, 2007, the average interest rates on the term loans and the revolving credit facility were 7.84% and 10.00%, respectively, and permitted borrowings under the undrawn revolving facility were $26.2 million.  AGI also pays a commitment fee of 0.5% per annum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and the term loans mature on June 24, 2009.  The funds available under the AGI Senior Credit Facility may be utilized for borrowings or letters of credit; however, a maximum of $12.5 million may be allocated to such letters of credit.  As of June 30, 2007, AGI had letters of credit in the aggregate amount of $7.3 million outstanding.  The AGI Senior Credit Facility is secured by virtually all of the AGI’s assets and a pledge of AGI’s stock and the stock of the AGI’s subsidiaries.

In February 2004, AGI issued $200.0 million aggregate principal amount of 9% Senior Subordinated Notes due 2012 (“AGI Senior Subordinated Notes”).  AGI completed a registered exchange of the AGI Senior Subordinated Notes under the Securities Act of 1933 in August 2004.

On March 3, 2006, AGI amended its Senior Credit Facility to revise the definition of Consolidated Fixed Charges Ratio and Permitted Tax Distributions.  This amendment allows the Company to distribute taxes to its ultimate parent based on its stand-alone tax obligation rather than the tax obligation of its parent, AGHI, until such time that AGHI pays interest on its 10 7/8% Senior Notes in cash instead of by the issuance of additional notes.  Further, the Company amended the Senior Credit Facility’s covenant restrictions with affiliates to permit a

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joint venture arrangement between Camping World and FreedomRoads, an affiliate of the Company.

On February 27, 2007, AGI amended its Senior Credit Facility to extend the maturity of the revolving credit facility from June 24, 2008 to June 24, 2009, increase the consolidated 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 AGI to repurchase up to an additional $50.0 million of the Senior Subordinated Notes from time to time as and when AGI determines through the issuance of additional term loans of up to $50.0 million.  Any loan amounts not used for the repurchase of the Senior Subordinated Notes may be used for acquisitions or repay revolving credit loans.

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

The AGI Indenture, pursuant to which the AGI Senior Subordinated Notes were issued, and the AGI Senior Credit Facility contain 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 certain limitations and minimum operating covenants.  AGI was in compliance with all debt covenants at June 30, 2007.

On March 24, 2005 in a private placement, AGHI issued $88.2 million principal amount of its 10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issue discount.  The Company completed a registered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005.  The AGHI Notes are unsecured obligations of the Company and its subsidiaries have not guaranteed payment of principal or interest on the AGHI Notes.  Interest on the AGHI Notes is payable semi-annually on February 15 and August 15 commencing August 15, 2005 and the entire $88.2 million principal amount of the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15, 2008, AGHI may elect to pay interest on the AGHI Notes in cash or by issuance of additional notes of the 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 the AGHI Notes and AGHI made the interest payments due on August 15, 2005, February 15, 2006, August 15, 2006 and February 15, 2007 through issuance of additional notes.  The company plans to pay the interest on the notes due August 15, 2008 from the proceeds of a contribution to be made by AGHI’s parent, AGHC.  If the source of the cash payment of the AGHI Notes is dividends from AGI, its wholly-owned subsidiary, there are certain restrictions on the payment of dividends under the AGI Senior Credit Facility and the AGI Indenture.

The AGHI Indenture contains certain restrictive covenants relating to, but not limited to, mergers, changes in the nature of the business, acquisitions, additional indebtedness, sale of

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assets, investments, and the payment of dividends subject to certain limitations and minimum operating covenants.  AGHI was in compliance with all debt covenants at June 30, 2007.

The Company contributed the net proceeds from the issuance of the AGHI Notes, approximately $81.0 million, to AGI and in turn, AGI made an equity contribution to its wholly-owned subsidiary, Camping World.  Camping World then made an equity capital contribution in the same amount to its wholly-owned subsidiary, CWI, Inc. (“CWI”).  CWI created a new wholly-owned subsidiary named CWFR Capital Corp., a Delaware corporation (“CWFR”) which is an “unrestricted subsidiary” under the AGHI Notes, and the AGI Indenture.  Since CWFR is an unrestricted subsidiary, its operations are not restricted by either the AGI Indenture or the AGHI Notes.  CWI made an equity capital contribution to CWFR in an equal amount to the capital contribution that it received from Camping World.  CWFR used the proceeds from the equity capital contribution to acquire a preferred membership interest in FreedomRoads, a Minnesota limited liability company owned 90% by The Stephen Adams Living Trust, which also indirectly owns 97.4% of the outstanding capital stock of AGHC and indirectly AGHI.

In February 2006, AGI Productions, Inc., a subsidiary of Ehlert Publishing, Inc., acquired the consumer shows and related assets of H & S Productions, LLC for $2.5 million.  As part of the purchase, the Company issued $0.4 million of debt and assumed $1.0 million of liabilities.  In August 2006, TL Enterprises, Inc. acquired the consumer park guides and related assets of American Guide Services, 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 September 2006, AGI Productions, Inc. acquired the consumer shows and related assets of Apple Rock Advertising and Promotions, Inc. for $1.5 million.  As part of the purchase, the Company issued $0.5 million of debt and assumed $0.4 million of liabilities.

In January 2007, AGI Productions, Inc. acquired a consumer show from MAC Events, Inc. for $0.5 million.  As part of the purchase, the Company assumed $0.3 million of liabilities.  In February 2007, AGI Productions, Inc. acquired consumer shows from Industrial Exposition 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 six months ended June 30, 2007, the Company incurred $0.2 million of deferred executive compensation expense under the phantom stock agreements and made payments of $2.4 million on the payout provisions of mature phantom stock agreements.  The earned incentives under these agreements are scheduled to be paid at various times over the next five years.  Phantom stock payments of $0.9 million are scheduled to be made for the remainder of 2007.

Capital expenditures for the first six months of 2007 totaling $11.2 million increased $3.9 million from the first six months of 2006 primarily due to the addition of thirteen new retail stores.  Additional capital expenditures of $5.2 million are anticipated for the balance of 2007 primarily for two new retail stores, relocation of one retail store, existing retail store upgrades, information technology, inventory system replacement, and computer hardware and software upgrades and enhancements.

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CRITICAL ACCOUNTING POLICIES

General

The discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and 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, income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements.

Revenue Recognition

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

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Accounts Receivable

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

Inventory

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

Long-Lived Assets

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

Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  The Company assesses the fair value of the assets based on the future cash flow the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset.  When an impairment is identified, the Company reduces the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values.  The Company determined there were no indicators of impairment of long-lived assets as of December 31, 2006 or June 30, 2007.

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

Indefinite-Lived Intangible Assets

The Company evaluates indefinite-lived intangible assets for impairment at least annually or when events indicate that an impairment exists in accordance with SFAS No. 142, “Goodwill

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and Other Intangibles.”  The impairment test for goodwill and other indefinite-lived intangible assets is calculated annually using fair value measurement techniques.

Determining the fair value of a reporting unit and the fair value of individual assets and liabilities of a reporting unit is judgmental in nature and often involves the use of significant estimates and assumptions.  These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge.  The Company’s estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, technological change, economic conditions or changes to the Company’s business operations.  Such changes may result in impairment charges recorded in future periods.

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

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

Income Taxes

Significant judgment is required in determining the Company’s tax provision and in evaluating its tax positions.  The Company establishes accruals for certain tax contingencies when, despite the belief that the Company’s tax return positions are fully supported, the Company believes that certain positions may be challenged and that the Company’s positions may not be fully sustained.  The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation.  The Company’s tax provision includes the impact of tax contingency accruals 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 to fluctuations in interest rates.  Our objective of financial risk management is to minimize the negative impact of interest rate fluctuations on our earnings and cash flows.  Interest rate risk is managed through the use of a combination of fixed and variable interest debt as well as the periodic use of interest rate collar contracts.

The following information discusses the sensitivity to our earnings.  The range of changes chosen for this analysis reflects our view of changes which are reasonably possible over a one-year period.  These forward-looking disclosures are selective in nature and only address the potential impacts from financial instruments.  They do not include other potential effects which could impact our business as a result of these interest rate fluctuations.

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Interest Rate Sensitivity Analysis

At June 30, 2007, we had debt totaling $395.4 million, comprised of $130.9 million of variable rate debt and $264.5 million of fixed rate debt.  Holding other variables constant (such as debt levels), the earnings and cash flow impact of a one-percentage point increase/ decrease in interest rates would have an unfavorable/ favorable impact of approximately $1.3 million.

Credit Risk

We are exposed to credit risk on accounts receivable.  We provide credit to customers in the ordinary course of business and perform ongoing credit evaluations.  Concentrations of credit risk with respect to trade receivables are limited due to the number of customers comprising our customer base.  We currently believe our allowance for doubtful accounts is sufficient to cover customer credit risks.

ITEM 4: CONTROLS AND PROCEDURES

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Regulation 13a-14 under the Securities Exchange Act of 1934.  Based upon that evaluation, the President and Chief Executive Officer along with the Senior Vice President and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the periodic SEC filings.  There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date the Company carried out its evaluation.

PART II:  OTHER INFORMATION

None

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SIGNATURES:

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	AFFINITY GROUP HOLDING, INC.
	/s/ Thomas F. Wolfe
Date:  August 13, 2007	Thomas F. Wolfe
	Senior Vice President and
	Chief Financial Officer

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