Good Sam Enterprises 10-Q 2005 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, 2005	333-113982

AFFINITY GROUP, INC.

(Exact name of registrant as specified in its charter)

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

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

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

9% Senior Subordinated Notes Due 2012

Indicate by check mark whether the Registrant (1) has filed 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   ý     NO   o

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

YES   o     NO   ý

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

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

DOCUMENTS INCORPORATED BY REFERENCE:  None

AFFINITY GROUP, INC. AND SUBSIDIARIES

INDEX

Part I. Financial Information
	Item 1: Financial Statements
		Unaudited Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004
		Unaudited Consolidated Statements of Operations for the three months ended June 30, 2005 and 2004
		Unaudited Consolidated Statements of Operations for the six months ended June 30, 2005 and 2004
		Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004
		Notes to Unaudited Consolidated Financial Statements
	Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3: Quantitative and Qualitative Disclosures about Market Risk
	Item 4: Control and Procedures
Part II. Other Information
Signatures

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2005 and December 31, 2004

(In Thousands)

	6/30/2005			12/31/2004
	(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	36,764		$	24,564
Accounts receivable, less allowance for doubtful accounts of $1,189 in 2005 and $810 in 2004	20,926			24,228
Inventories	52,194			42,463
Prepaid expenses and other assets	15,279			11,383
Deferred tax assets, net	6,615			6,615
Total current assets	131,778			109,253
PROPERTY AND EQUIPMENT, net	27,924			27,642
AFFILIATE NOTES AND INVESTMENTS	85,742			4,752
INTANGIBLE ASSETS, net	29,214			27,716
GOODWILL	148,773			148,773
DEFERRED TAX ASSETS, net	2,311			323
OTHER ASSETS	1,677			1,763
Total assets	$	427,419		$	320,222
LIABILITIES AND STOCKHOLDER’S DEFICIT
CURRENT LIABILITIES:
Accounts payable	$	26,799		$	16,511
Accrued interest	7,021			6,857
Accrued income taxes	2,892			3,131
Accrued liabilities	34,999			34,230
Deferred revenues and gains	64,028			57,661
Current portion of long-term debt	1,911			1,676
Total current liabilities	137,650			120,066
DEFERRED REVENUES AND GAINS	40,157			41,469
LONG-TERM DEBT, net of current portion	313,196			312,660
OTHER LONG-TERM LIABILITIES	6,490			4,135
	497,493			478,330
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER’S DEFICIT:
Preferred stock, $.001 par value, 1,000 shares authorized, none issued or outstanding	—			—
Common stock, $.001 par value, 2,000 shares authorized, 2,000 shares issued and outstanding	1			1
Additional paid-in capital	81,005			—
Accumulated deficit	(151,080		)	(158,109		)
Total stockholder’s deficit	(70,074		)	(158,108		)
Total liabilities and stockholder’s deficit	$	427,419		$	320,222

See notes to consolidated financial statements.

1

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

	THREE MONTHS ENDED
	6/30/2005			6/30/2004
				(restated-
				see Note 1)
REVENUES:
Membership services	$	34,401		$	36,022
Publications	15,301			16,583
Retail	83,510			75,039
	133,212			127,644
COSTS APPLICABLE TO REVENUES:
Membership services	22,301			24,342
Publications	10,238			11,109
Retail	50,098			44,728
	82,637			80,179
GROSS PROFIT	50,575			47,465
OPERATING EXPENSES:
Selling, general and administrative	32,698			29,564
Depreciation and amortization	3,820			3,035
	36,518			32,599
INCOME FROM OPERATIONS	14,057			14,866
NON-OPERATING ITEMS:
Interest income	178			178
Interest expense	(6,360		)	(6,200		)
Debt extinguishment expense	—			(419		)
Other non-operating items, net	14			40
	(6,168		)	(6,401		)
INCOME FROM OPERATIONS BEFORE INCOME TAXES	7,889			8,465
INCOME TAX EXPENSE	(2,758		)	(3,040		)
NET INCOME	$	5,131		$	5,425

See notes to consolidated financial statements.

2

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

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

See notes to consolidated financial statements.

3

AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

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

See notes to consolidated financial statements.

4

AFFINITY GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Unaudited)

(1) BASIS OF PRESENTATION

Principles of Consolidation – The consolidated financial statements include the accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries (collectively the “Company”), in accordance with U.S. generally accepted accounting principles, and pursuant to the rules and regulations of the Securities and Exchange Commission.  Prior to April 27, 2004, AGI was a wholly-owned subsidiary of Affinity Group Holding, Inc. (“AGH”) and AGH was a wholly-owned subsidiary of AGI Holding Corp. (“AGHC”), a privately-owned corporation.  On April 27, 2004, AGH was merged into AGI, with AGI being the surviving entity after the merger.  The merger was accounted for as a combination of entities under common control using historical costs.  The three months and six months ended June 30, 2004 have been restated to reflect the combined financial position and results of operations of AGI and AGH, prior to the April 27, 2004 merger.  In March 2005, AGHC formed a holding company, Affinity Group Holding, Inc., a Delaware corporation (“AGHI”) at which time contributed 100% of the outstanding shares of common stock of AGI to AGHI.  AGHI is the direct parent of the Company.  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, 2004 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) 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 operates the Good Sam Club, Coast to Coast Club, and Camping World’s President’s Club for recreational vehicles (“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.  The Retail segment sells specialty retail merchandise and services for RV owners primarily through retail supercenters and mail order catalogs.  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.

5

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, 2005
Revenues from external customers	$	34,401	$	15,301		$	83,510	$	133,212
Depreciation and amortization	787		542			1,770		3,099
(Gain) loss on sale of property and equipment	—		(5		)	3		(2		)
Interest income	1,167		—			3		1,170
Interest expense	—		69			2,622		2,691
Segment operating profit	10,653		3,763			3,446		17,862
THREE MONTHS ENDED JUNE 30, 2004
Revenues from external customers	$	36,022	$	16,583		$	75,039	$	127,644
Depreciation and amortization	907		424			1,164		2,495
Interest income	636		—			—		636
Interest expense	—		231			2,626		2,857
Segment operating profit	9,787		4,250			3,788		17,825

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

6

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

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

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

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

Total assets for the retail segment increased $97.6 million from December 31, 2004 primarily due to the acquisition of a preferred membership interest in FreedomRoads Holding Company, LLC, a related party, (See Note 5) and a seasonal increase in inventory levels of the retail segment.

(3) STATEMENTS OF CASH FLOWS

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

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

7

In February 2004, the Company declared and distributed a $4.4 million non-cash dividend to its ultimate parent, AGHC, consisting of notes receivable from the Adams Insurance Holding LLC, a related party.

In May 2005, the Company assumed $0.5 million of liabilities and issued $1.5 million of debt in the acquisition of the Powerboat Magazine title and related assets from Nordskog Publishing, Inc.

(4) GOODWILL AND INTANGIBLE ASSETS

The Company reviews goodwill and indefinite-lived intangible assets for impairment at least annually.  The Company performs its annual impairment review during the fourth quarter.  Based on the results of the annual impairment test, the Company determined that no impairment of goodwill existed as of December 31, 2004.

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

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

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

In April 2005, Camping World, Inc. acquired the assets of an RV catalog retailer for $0.6 million.  The acquisition price was allocated to inventory and membership and customer lists.  In May 2005, Ehlert Publishing Group, Inc. acquired the publishing assets of Nordskog Publishing, Inc. for $4.0 million.  The acquisition price was allocated primarily to membership and customer lists and non-compete agreements.

(5) RECENT EVENTS

On March 24, 2005 in a private placement, the Company’s parent, AGHI, issued $88.2 million principal amount of its 10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issue discount.  The AGHI Notes are unsecured obligations of AGHI, and

8

neither AGI nor its subsidiaries have 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 the issuance of additional notes of the same tenor as the AGHI Notes.  Any additional AGHI Notes issued in payment of interest are due in full on or before March 15, 2010.  The AGHI Notes cannot be redeemed prior to February 15, 2008.  Although the only source of the cash payment of the AGHI Notes is dividends from its subsidiary, there are certain restrictions on the payment of dividends under AGI’s senior secured credit facility (the “AGI Senior Credit Facility”) and the indenture relating to AGI’s $200.0 million in 9% Senior Subordinates Notes (“AGI Indenture”).

AGHI contributed the net proceeds from the issuance of the AGHI Notes, approximately $81.0 million, to the Company and in turn, the Company made an equity contribution to its wholly-owned subsidiary, Camping World, Inc. (“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” as defined 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 CWI received from Camping World.  CWFR used the proceeds from the equity capital contribution to acquire a preferred membership interest in FreedomRoads Holding Company, LLC (“FreedomRoads Holding”), 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 AGI.

The preferred membership interest acquired by CWFR has a face amount of $88.2 million and is entitled to receive a preferred payment from FreedomRoads Holding at 10-7/8% per annum when and as declared by the Board of Governors of FreedomRoads from any source legally available therefor.  Any portion of the preferred payment not paid will accumulate and will be compounded semi-annually until paid.  FreedomRoads Holding may redeem the preferred membership interest upon the payment of $88.2 million plus the accrued and unpaid preferred return to the date of redemption.  FreedomRoads Holding will be required to redeem the preferred membership interest at that same redemption price if there is a sale or reorganization of the membership interests of FreedomRoads Holding or a sale of substantially all of the assets of FreedomRoads Holding.  According to the terms of the preferred membership interest, FreedomRoads Holding cannot make distributions with respect to membership interests other than (a) distributions with respect to the preferred membership interest, (b) distributions for the members’ estimated tax liabilities from earnings of FreedomRoads Holding and (c) distributions in the aggregate not to exceed 50% of the amount of (i) FreedomRoads Holding’s net profit for the period from January 1, 2005 through the end of the fiscal quarter next preceding the distribution date less (ii) the aggregate amount of tax distributions made during the period from January 1, 2005 through the end of the fiscal quarter next preceding the distribution date.  CWFR may

9

not sell, pledge or otherwise transfer the preferred membership interest.  The preferred membership interest does not provide CWFR with any voting rights in FreedomRoads Holding.  The preferred membership interest in FreedomRoads Holding is being carried at cost and is reviewed periodically for impairment.

(6) CONTINGENCIES

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

In September 2004, the Company’s subsidiary, CWI, Inc., was sued in California state court by Privacy Rights Clearinghouse and Benjamin Greene in a suit alleging that CWI, Inc. was recording personal identification information from retail customers in violation of certain California statutes.  The plaintiff seeks injunctive relief preventing CWI, Inc. from engaging in any act or practice constituting unfair competition under the statutes and for statutory penalties and damages.  CWI, Inc. has responded to the suit and denied that its practices violate the statutes.  In the opinion of management, the likelihood of a material unfavorable outcome is not probable as of the date of the accompanying consolidated financial statements.

(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION

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

CWFR is an “unrestricted subsidiary” under the AGI Indenture, and is not a guarantor of the Notes.  All other subsidiaries of AGI are restricted subsidiaries.

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

10

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries as of and for the six months ended June 30, 2005 (in thousands).

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

11

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

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the three months ended June 30, 2005 (in thousands).

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

12

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

	AS OF DECEMBER 31, 2004
							NON-					AGI
	AGI			GUARANTORS			GUARANTOR		ELIMINATIONS			CONSOLIDATED
Cash & cash equivalents	$	24,852		$	(288	)	$	—	$	—		$	24,564
Accounts receivable, net	173			98,815			—		(74,760		)	24,228
Inventories	55			42,408			—		—			42,463
Other current assets	5,168			12,830			—		—			17,998
Total current assets	30,248			153,765			—		(74,760		)	109,253
Property and equipment, net	6,121			21,521			—		—			27,642
Intangible assets	9,661			18,055			—		—			27,716
Goodwill	67,584			81,189			—					148,773
Investment in subsidiaries	451,280			—			—		(451,280		)	—
Other assets	13,823			(6,985		)	—		—			6,838
Total assets	$	578,717		$	267,545		$	—	$	(526,040	)	$	320,222
Accounts payable	$	422		$	16,089		$	—	$	—		$	16,511
Accrued and other liabilities	21,458			22,760			—		—			44,218
Current portion of long-term debt	76,160			276			—		(74,760		)	1,676
Deferred revenue and gains	1,245			56,416			—		—			57,661
Total current liabilities	99,285			95,541			—		(74,760		)	120,066
Deferred revenue and gains	2,908			38,561			—		—			41,469
Long-term debt	311,150			1,510			—		—			312,660
Other long-term liabilities	323,482			(319,347		)	—		—			4,135
Total liabilities	736,825			(183,735		)	—		(74,760		)	478,330
Interdivisional equity	—			451,280			—		(451,280		)	—
Stockholders’ deficit	(158,108		)	—			—		—			(158,108		)
Total liabilities & stockholders’ equity	$	578,717		$	267,545		$	—	$	(526,040	)	$	320,222

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The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the six months ended June 30, 2004 (in thousands).

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

The following are summarized statements setting forth certain financial information concerning the Guarantor Subsidiaries for the three months ended June 30, 2004 (in thousands).

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

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ITEM 2:

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

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

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RESULTS OF OPERATIONS

Three Months Ended June 30, 2005

Compared With Three Months Ended June 30, 2004

Revenues

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

Membership services revenues of $34.4 million for the second quarter of 2005 decreased by approximately $1.6 million, or 4.5%, from the comparable period in 2004.  This revenue decrease was largely attributable to a $1.8 million decrease in member events revenue due to the timing of the Great North American Rally, which occurred in the second quarter of 2004 versus the third quarter of 2005, a $0.4 million reduction in membership services revenue, primarily associated with reduced enrollment in the Coast to Coast Club and Golf Card Club, a $0.5 million reduction in marketing fee income recognized on RV financing products and a $0.3 million decrease in dealer program marketing revenue, partially offset by a $1.0 million increase in extended vehicle warranty program revenue due to continued growth in the sales of one-year warranty products, and a $0.4 million increase in emergency road service revenue due to increased enrollment.

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

Retail revenues of $83.5 million increased $8.5 million, or 11.3%, over the second quarter of 2004.  Store merchandise sales increased $8.5 million over the second quarter of 2004 due to a same store sales increase of $4.3 million or 8.4%, compared to a 10.7% increase in the second quarter of 2004, and a $4.2 million revenue increase from the addition of eight new stores over the past eighteen months.  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.  Additionally, a $0.6 million decrease in mail order revenue was offset by increases in other installation fees, supplies and services revenue.

Costs Applicable to Revenues

Costs applicable to revenues totaled $82.6 million for the second quarter of 2005, an increase of $2.5 million, or 3.1%, from the comparable period in 2004.

17

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

Publication costs and expenses of $10.2 million for the second quarter of 2005 decreased $0.9 million from the comparable period in 2004 primarily due to the disposition of archery-related titles in the third quarter of 2004, and a reduction in costs associated with reduced atlas marketing and a reduction in the number of regional issues published, partially offset by increased costs attributable to the newly acquired magazine title, Powerboat Magazine.

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

Operating Expenses

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

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

Income from Operations

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

18

Non-Operating Items

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

Income before Income Taxes

Income before income taxes for the second quarter of 2005 was $7.9 million, or $0.6 million lower than the second quarter of 2004.  This decrease was attributable to a $0.8 million decrease in income from operations, and $0.2 million of additional interest expense, partially offset by a $0.4 million reduction in debt extinguishment expense.

Income Tax Expense

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

Net Income

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

Segment Profit

Segment profit of approximately $17.9 million for 2005 (before unallocated depreciation and amortization, general and administrative, interest, debt restructuring, and income tax expense) increased $0.1 million from the comparable period in 2004.

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

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

19

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

Six Months Ended June 30, 2005

Compared With Six Months Ended June 30, 2004

Revenues

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

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

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

Retail revenues of $142.6 million increased $15.0 million, or 11.8%, over the first six months of 2004.  Store merchandise sales increased $14.2 million over the first six months of 2004 due to a same store sales increase of $6.6 million or 7.3%, compared to a 12.0% increase in the first six months of 2004, and a $7.6 million revenue increase from the addition of eight new stores over the past eighteen months.  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, retail revenue increased $0.8 million due to increases in other installation fees, supplies and services revenue.

20

Costs Applicable to Revenues

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

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

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

Retail costs applicable to revenues increased $8.9 million, or 11.7%, to $84.4 million primarily due to increased store sales.  The retail gross profit margin of 40.8% for the first six months of 2005 remained unchanged from the comparable period in 2004.

Operating Expenses

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

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

Income from Operations

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

21

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

Non-Operating Items

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

Income before Income Taxes

Income before income taxes for the first six months of 2005 was $11.0 million, or $2.8 million higher than the first six months of 2004.  This increase was attributable to a $5.0 million reduction in debt extinguishment expense from the prior period that was only partially offset by $1.0 million of additional interest expense and a $1.2 million decrease in income from operations for the current period.

Income Tax Expense

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

Net Income

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

Segment Profit

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

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

22

Publication segment profit of $8.2 million for the first six months of 2005 remained unchanged from the comparable period in 2004.  Reduced profit in the motorcycle publications was offset by an increase in profit associated with the consumer shows acquired through the acquisition of ARU in December 2004 and the purchase of the Powerboat Magazine.

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

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically operated with a working capital deficit.  The working capital deficit as of June 30, 2005 and December 31, 2004 was $5.9 million and $10.8 million, respectively.  The primary reason for the working capital deficit is the deferred revenue and gains reported under current liabilities in the amount of $64.0 million and $57.7 million as of June 30, 2005 and December 31, 2004, 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 and capital requirements over the next twelve months.

Contractual Obligations and Commercial Commitments

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

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

On June 24, 2003, the Company entered into an Amended and 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 (“Term B1 and Term B2 loans”) in the aggregate of $140.0 million.  Proceeds from the AGI Senior Credit Facility were used to refinance the existing senior secured indebtedness, pay a dividend of $13.7 million to the

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Company’s ultimate parent AGI Holding Corp. and redeem $30.0 million principal amount of the AGH Notes at 103.667% of par in 2003.  As of June 30, 2005, $32.0 million and $79.9 million were outstanding under the Term B1 and Term B2 loans, respectively.  No borrowings were outstanding on the revolving credit facility as of June 30, 2005.  Reborrowings under the term loans are not permitted.  The interest on borrowings under the AGI 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 3.50% over the stated rates.  As of June 30, 2005, the average interest rate on the term loans was 6.14%, and permitted borrowings under the undrawn revolving facility were $27.6 million.  The Company 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 $350,000.  The revolving credit facility matures on June 24, 2008, and the Term B1 and Term B2 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, 2005, the Company had letters of credit in the aggregate amount of $7.4 million outstanding.  The AGI Senior Credit Facility is secured by virtually all of the Company’s assets and a pledge of the Company’s stock and the stock of the Company’s subsidiaries.

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

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

The AGI Indenture pursuant to which the 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.  The Company was in compliance with all debt covenants at June 30, 2005.

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In April 2005, Camping World, Inc. acquired the assets of a mail order catalog retailer specializing in recreational vehicle merchandise for $0.6 million.  In May 2005, the Ehlert Publishing Group, Inc. acquired the Powerboat Magazine title and related assets from Nordskog Publishing, Inc. for $4.0 million.  As part of the purchase, the Company issued $1.5 million of purchase debt and assumed $0.5 million of liabilities.

For the six months ended June 30, 2005, the Company incurred $1.6 million of deferred executive compensation expense under the phantom stock agreements and made payments of $0.9 million on the pay-out provisions of existing phantom stock agreements.  The earned incentives under these agreements are scheduled to be paid at various times over the next seven years.  Phantom stock payments of $0.6 million are scheduled tobe made over the remainder of the calendar year.

Capital expenditures for the first six months of 2005 totaling $4.8 million decreased $0.2 million from the first six months of 2004.  Additional capital expenditures of $8.0 million are anticipated for the balance of 2005, primarily for new Camping World stores and equipment, information technology and database enhancements, computer hardware upgrades and replacements, a distribution center expansion, and computer software upgrades and enhancements.

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.

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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.

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

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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, 2004 or June 30, 2005.

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.  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.

Based on the results of the annual impairment tests, the Company determined that no impairment of goodwill existed as of December 31, 2004.  However, 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.

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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.

Interest Rate Sensitivity Analysis

At June 30, 2005, we had debt totaling $315.1 million, comprised of $111.8 million of variable rate debt and $203.3 million of fixed rate debt.  Holding other variables constant (such as debt levels), the earnings and cash flow, the impact of a one-percentage point increase/ decrease in interest rates would have an unfavorable/ favorable impact of approximately $1.1 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: CONTROL AND PROCEDURES

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with 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.

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PART II:  OTHER INFORMATION

None

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SIGNATURES:

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

	AFFINITY GROUP, INC.
	/s/ Thomas F. Wolfe
Date: August 3, 2005	Thomas F. Wolfe
	Senior Vice President and
	Chief Financial Officer

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