** **

**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** |
|--------------------------|------------|-----------------------------|
| **March 31,  2010** | ** ** | **333-124109**              |

 

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**AFFINITY GROUPHOLDING, INC.**

(Exact name ofregistrant 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)         |

 

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

SECURITIESREGISTERED 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) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

YES**  **x**        **NO  o

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (Section 232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submitand post such filings).

YES o NO o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.  (Check one):

 
| Large accelerated filer                       | o      |   | Accelerated filer         | o |
|-----------------------------------------------|--------|--------|---------------------------|---|
| Non-accelerated filer                         | x      |   | Smaller reporting company | o |
| (Do not check if a smaller reporting company) |   |   |

 

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

YES**  **o**        **NO  x

 

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

 

|                         |       | **Outstanding as of** |
|------------------------------|------------|-----------------------|
| **Class**                    | ** ** | **May 13, 2010**      |
| Common Stock, $.01 par value |       | 100                   |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

 

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**AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES**

** **

**INDEX**

 
| ** **        | ** **                                                                                               | **Page** |
|-------------------|----------------------------------------------------------------------------------------------------------|----------|
| **Part I.**  | Financial Information                                                                                    |     |
| ** **        |                                                                                                     |     |
|              | **Item 1:  Financial Statements**                                                                        |     |
|              | ** **                                                                                               |     |
|              | Consolidated Balance Sheets  as of March 31, 2010 (unaudited) and December 31, 2009            | 1        |
|              |                                                                                                     |     |
|              | Unaudited Consolidated Statements of Operations  for the three months ended March 31, 2010 and 2009 | 2        |
|              |                                                                                                     |     |
|              | Unaudited Consolidated Statements of Cash Flows  for the three months ended March 31, 2010 and 2009 | 3        |
|              |                                                                                                     |     |
|              | Notes to Unaudited Consolidated Financial Statements                                                     | 4        |
|              |                                                                                                     |     |
| ** **        | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | 18       |
| ** **        | ** **                                                                                               |     |
|              | **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                  | 31       |
|              | ** **                                                                                               |     |
|              | **Item 4: Controls and Procedures**                                                                      | 32       |
|              | ** **                                                                                               |     |
| **Part II.** | Other Information                                                                                        | 32       |
| ** **        |                                                                                                     |     |
| **Signatures**    | 33                                                                                                       |

 

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AFFINITY GROUP HOLDING, INC.AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

March 31, 2010 and December 31,2009

(In thousands except sharesand par value)

 
| ** **                                                                                      | ** ** | **3/31/2010**   | ** ** | **12/31/2009** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 5,550      |           | $          | 10,133 |   |
| Restricted cash                                                                                 |       | —          |       | 8,058          |       |
| Accounts receivable, less allowance for doubtful  accounts of $3,545 in 2010 and $3,128 in 2009 |       | 31,956          |       | 32,321         |       |
| Inventories                                                                                     |       | 53,030          |       | 49,921         |       |
| Prepaid expenses and other assets                                                               |       | 13,496          |       | 13,219         |       |
| Total current assets                                                                            |       | 104,032         |       | 113,652        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 30,973          |       | 34,276         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,686           |       | 4,837          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 16,794          |       | 14,867         |       |
| GOODWILL                                                                                        |       | 49,944          |       | 49,944         |       |
| OTHER ASSETS                                                                                    |       | 5,818           |       | 6,767          |       |
| Total assets                                                                                    |       | $               | 212,247    |           | $          | 224,343 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 20,662     |           | $          | 23,799 |   |
| Accrued interest                                                                                |       | 5,339           |       | 16,517         |       |
| Accrued income taxes                                                                            |       | 1,699           |       | 1,598          |       |
| Accrued liabilities                                                                             |       | 24,938          |       | 24,115         |       |
| Deferred revenues and gains                                                                     |       | 56,099          |       | 60,728         |       |
| Current portion of long-term debt                                                               |       | 962             |       | 892            |       |
| Total current liabilities                                                                       |       | 109,699         |       | 127,649        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 34,820          |       | 35,607         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 374,507         |       | 389,797        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 10,746          |       | 10,079         |       |
|                                                                                            |       | 529,772         |       | 563,132        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.01 par value, 3,000 shares  authorized, 100 shares issued and outstanding       |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 55,116          |       | 23,220         |       |
| Accumulated deficit                                                                             |       | (365,394        | )          | (355,010       | )          |
| Accumulated other comprehensive loss                                                            |       | (7,248          | )          | (7,000         | )          |
| Total stockholder’s deficit                                                                |       | (317,525        | )          | (338,789       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 212,247    |           | $          | 224,343 |   |

 

See notes to consolidated financial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **THREE  MONTHS ENDED** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **3/31/2010**           | ** ** | **3/31/2009** | ** ** |
|                                 |       |                    |       |   |   |
| REVENUES:                            |       |                    |       |   |   |
| Membership services                  |       | $                       | 39,574     |   | $ | 35,232 |   |
| Media                                |       | 14,683                  |       | 17,420 |   |
| Retail                               |       | 54,177                  |       | 52,401 |   |
|                                 |       | 108,434                 |       | 105,053 |   |
|                                 |       |                    |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                    |       |   |   |
| Membership services                  |       | 20,076                  |       | 20,330 |   |
| Media                                |       | 11,626                  |       | 13,484 |   |
| Retail                               |       | 32,229                  |       | 31,536 |   |
|                                 |       | 63,931                  |       | 65,350 |   |
|                                 |       |                    |       |   |   |
| GROSS PROFIT                         |       | 44,503                  |       | 39,703 |   |
|                                 |       |                    |       |   |   |
| OPERATING EXPENSES:                  |       |                    |       |   |   |
| Selling, general and administrative  |       | 30,192                  |       | 29,939 |   |
| Financing expense                    |       | 7,086                   |       | — |   |
| Depreciation and amortization        |       | 4,955                   |       | 4,964 |   |
|                                 |       | 42,233                  |       | 34,903 |   |
|                                 |       |                    |       |   |   |
| INCOME FROM OPERATIONS               |       | 2,270                   |       | 4,800 |   |
|                                 |       |                    |       |   |   |
| NON-OPERATING ITEMS:                 |       |                    |       |   |   |
| Interest income                      |       | 126                     |       | 130 |   |
| Interest expense                     |       | (12,286                 | )          | (9,042 | ) |
| (Loss) gain on derivative instrument |       | (376                    | )          | 20 |   |
| Other non-operating items, net       |       | 25                      |       | (83 | ) |
|                                 |       | (12,511                 | )          | (8,975 | ) |
|                                 |       |                    |       |   |   |
| LOSS BEFORE INCOME TAXES             |       | (10,241                 | )          | (4,175 | ) |
|                                 |       |                    |       |   |   |
| INCOME TAX EXPENSE                   |       | (143                    | )          | (396 | ) |
|                                 |       |                    |       |   |   |
| NET LOSS                             |       | $                       | (10,384    | ) | $ | (4,571 | ) |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                 | ** ** | **THREE  MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                                 | ** ** | **3/31/2010**           | ** ** | **3/31/2009** | ** ** |
|                                                                                       |       |                    |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |                    |       |   |   |
| Net loss                                                                                   |       | $                       | (10,384    | ) | $ | (4,571 | ) |
| Adjustments to reconcile net loss to net cash  (used in) provided by operating activities: |       |                    |       |   |   |
| Depreciation                                                                               |       | 2,852                   |       | 3,031 |   |
| Amortization                                                                               |       | 2,103                   |       | 1,933 |   |
| Loss (gain) on derivative instrument                                                       |       | 376                     |       | (20 | ) |
| Loss on debt restructure                                                                   |       | 279                     |       | — |   |
| Provision for losses on accounts receivable                                                |       | 391                     |       | 370 |   |
| (Gain) loss on sale of property and equipment                                              |       | (23                     | )          | 82 |   |
| Accretion of original issue discount                                                       |       | 276                     |       | 129 |   |
| Changes in operating assets and liabilities                                                |       |                    |       |   |   |
| Accounts receivable                                                                        |       | (26                     | )          | 4,073 |   |
| Inventories                                                                                |       | (3,109                  | )          | (829 | ) |
| Prepaid expenses and other assets                                                          |       | 672                     |       | (2,855 | ) |
| Accounts payable                                                                           |       | (3,137                  | )          | 7,426 |   |
| Accrued and other liabilities                                                              |       | (6,564                  | )          | (2,243 | ) |
| Deferred revenues and gains                                                                |       | (5,416                  | )          | (2,300 | ) |
| Net cash (used in) provided by operating  activities                                       |       | (21,710                 | )          | 4,226 |   |
|                                                                                       |       |                    |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                    |       |   |   |
| Capital expenditures                                                                       |       | (184                    | )          | (1,261 | ) |
| Net proceeds from sale of property and equipment                                           |       | 658                     |       | 7 |   |
| Investment in affiliate                                                                    |       | 151                     |       | 12 |   |
| Net cash provided by (used in) investing  activities                                       |       | 625                     |       | (1,242 | ) |
|                                                                                       |       |                    |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |       |                    |       |   |   |
| Contribution from parent                                                                   |       | 2,800                   |       | 11,000 |   |
| Restricted cash                                                                            |       | 8,058                   |       | — |   |
| Borrowings on debt                                                                         |       | 149,943                 |       | — |   |
| Payment of debt issue costs                                                                |       | (4,309                  | )          | 1 |   |
| Principal payments on debt                                                                 |       | (139,990                | )          | (2,321 | ) |
| Net cash provided by financing activities                                                  |       | 16,502                  |       | 8,680 |   |
|                                                                                       |       |                    |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                    |       | (4,583                  | )          | 11,664 |   |
|                                                                                       |       |                    |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                           |       | 10,133                  |       | 10,777 |   |
|                                                                                       |       |                    |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 |       | $                       | 5,550      |   | $ | 22,441 |   |

 

See notes to consolidated financial statements.

 

3

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**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation –*The consolidated financial statementsincluded herein include the accounts of Affinity Group Holding, Inc. (“AGHI”),its wholly-owned subsidiary, Affinity Group, Inc. (“AGI”), and AGI’ssubsidiaries (collectively the “Company”). AGHI was formed on March 2, 2005, at which time all of the stock ofAGI was contributed to AGHI from its parent, AGI Holding Corp. (“AGHC”) aprivately-owned corporation.  In November 2007,AGHC formed a holding company, AGI Intermediate Holdco, LLC (“AGII”), at whichtime AGHC contributed 100% of the outstanding shares of common stock of AGHI toAGII.

 

These interim consolidatedfinancial statements should be read in conjunction with the Company’sconsolidated financial statements and notes in the Company’s 10-K report forthe year ended December 31, 2009 as filed with the Securities and ExchangeCommission.  In the opinion of managementof the Company, these consolidated financial statements contain all adjustmentsof a normal recurring nature necessary to present fairly the financialposition, results of operations and cash flows of the Company for the interimperiods presented.

 

OnMarch 1, 2010, AGI refinanced its existing senior credit facility ($128.9million aggregate principal amount outstanding as at December 31, 2009)and second lien notes totaling $9.7 million due July 31, 2010.  The AGI New Senior Credit Facility providesfor term loans aggregating $144.3 million, including an original issue discountof 2%, that are payable in quarterly installments of $360,750 beginning March 1,2011.  In addition, there are mandatoryprepayments of the term loans from excess cash flow (as defined) of AGI andfrom asset sales.  The term loans underthe AGI New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either AGI’s 9% seniorsubordinated notes due 2012 (the “AGI Senior Notes”) ($137.8 million principalamount outstanding as at March 31, 2010) or the AGHI Notes ($88.2 millionaggregate principal amount outstanding as at March 31, 2010).  See Note 6 – Debt.

 

Inaddition, on March 1, 2010, AGI’s subsidiary that operates the Retailsegment Camping World, Inc. (“Camping World”) entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the AGI New Senior Credit Facility, or (iii) 120 days prior to theearlier date of maturity of the AGI Senior Notes and the AGHI Notes.  As of March 31, 2010, $8.5 million wasborrowed and $7.6 million of letters of credit were outstanding under the CWCredit Facility.  See Note 6 – Debt.

 

We have evaluated subsequent events through the date of issuance of ourfinancial statements in this Form 10-K.

 

4

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**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

In January 2010,the Company was required to adopt a newly issued accounting standard whichrequires additional disclosure about the amounts of and reasons for significanttransfers between levels of the fair value hierarchy discussed in Note 8, “FairValue Measurements”.  This standard alsoclarifies existing disclosure requirements related to the level ofdisaggregation of fair value measurements for each class of assets andliabilities and disclosures about inputs and valuation techniques used tomeasure fair value for both recurring and nonrecurring Level 2 and Level 3measurements.  As this newly issuedaccounting standard only requires enhanced disclosure, the adoption of thisstandard did not impact our financial position, results of operations or cashflows.  In addition, effective forinterim and annual periods beginning after December 15, 2010, thisstandard will require additional disclosure and require an entity to presentdisaggregated information about activity in Level 3 fair value measurements ona gross basis, rather than a single amount.

 

**(3) DISCLOSURESABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION**

 

The Company’sthree principal lines of business are Membership Services, Media, andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, CampClub USA and assorted membership products and services for recreationalvehicles (“RV”) owners, campers and outdoor vacationers, and the Golf Card Clubfor golf enthusiasts.  The Media segmentpublishes a variety of publications for selected markets in the recreation andleisure industry, including general circulation periodicals, directories and RVand powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreationshows primarily focused on RV and powersports markets.  The Retail segment sells specialty retail merchandiseand services for RV owners primarily through retail supercenters, mail ordercatalogs and internet sales.  The Companyevaluates performance based on profit or loss from operations before incometaxes and unusual items.

 

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

 

5

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

 

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

 
| ** **                                 | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED MARCH 31, 2010** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers           |       | $              | 39,574     |       | $          | 14,683     |       | $                | 54,177     |   | $ | 108,434 |   |
| Depreciation and amortization              |       | 641            |       | 943        |       | 2,264      |       | 3,848            |       |
| Gain on disposal of property and equipment |       | —         |       | —     |       | 23         |       | 23               |       |
| Interest income                            |       | 806            |       | —     |       | —     |       | 806              |       |
| Interest expense                           |       | —         |       | 10         |       | 532        |       | 542              |       |
| Segment profit (loss)                      |       | 17,688         |       | 912        |       | (4,548     | )          | 14,052           |       |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                                 | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED MARCH 31, 2009** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers           |       | $              | 35,232     |       | $          | 17,420     |       | $                | 52,401     |   | $ | 105,053 |   |
| Depreciation and amortization              |       | 806            |       | 1,323      |       | 2,189      |       | 4,318            |       |
| Loss on dispoal of property and equipment  |       | —         |       | (1         | )          | (81        | )          | (82              | )          |
| Interest income                            |       | 864            |       | —     |       | 2          |       | 866              |       |
| Interest expense                           |       | —         |       | 28         |       | 3,918      |       | 3,946            |       |
| Segment profit (loss)                      |       | 12,625         |       | 1,312      |       | (8,161     | )          | 5,776            |       |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 

Thefollowing is a reconciliation of profit from operations to the Company’sconsolidated financial statements for the three months ended March 31,2010 and 2009 (in thousands):

 
| ** **                                                     | ** ** | **THREE  MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                     | ** ** | **3/31/2010**           | ** ** | **3/31/2009** | ** ** |
| **Loss From Operations Before  Income Taxes**                  |       |                    |       |   |   |
| Total income for reportable segments                           |       | $                       | 14,052     |   | $ | 5,776 |   |
| Unallocated G & A expense                             |       | (3,725                  | )          | (3,493 | ) |
| Unallocated depreciation and amortization expense              |       | (1,107                  | )          | (646 | ) |
| Unallocated (loss) gain on derivative instrument               |       | (376                    | )          | 20 |   |
| Unallocated financing expense                                  |       | (6,382                  | )          | — |   |
| Unallocated loss on debt restructure                           |       | (279                    | )          | — |   |
| Elimination of intercompany interest income                    |       | (680                    | )          | (736 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (11,744                 | )          | (5,096 | ) |
| Loss from operations before income taxes                       |       | $                       | (10,241    | ) | $ | (4,175 | ) |

 

6

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

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of March 31, 2010 and December 31,2009 (in thousands):

 
| ** **                                  | ** ** | **3/31/2010** | ** ** | **12/31/2009** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                 |       | $             | 238,273    |           | $          | 237,597 |   |
| Media segment                               |       | 20,925        |       | 26,876         |       |
| Retail segment                              |       | 95,442        |       | 95,193         |       |
| Total assets for reportable segments        |       | 354,640       |       | 359,666        |       |
| Restricted cash                             |       | —        |       | 8,058          |       |
| Intangible assets not allocated to segments |       | 4,956         |       | 3,314          |       |
| Corporate unallocated assets                |       | 6,989         |       | 8,299          |       |
| Elimination of intersegment receivable      |       | (154,338      | )          | (154,994       | )          |
| Total assets                                |       | $             | 212,247    |           | $          | 224,343 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

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

 

| ** **                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 19,661     |     | $          | 16,367 |   |
|                                  |            |          |            |          |            |  |  |

 

For the threemonths ended March 31, 2009, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $0.3 million decrease inboth Other Long-Term Liabilities and Other Comprehensive Loss.

 

In the firstquarter of 2010, entities indirectly controlled by the Company’s soleshareholder forgave $3.6 million of interest on the AGHI Notes that was due August 15,2009 and February 15, 2010, and the interest accrued through March 31,2010.  The $3.6 million was recorded as acontribution in Additional Paid-in Capital.

 

On March 1,2010, $25.4 million of AGHI Notes that were held by an affiliate of AGHI werecontributed to Additional Paid-in Capital to AGHI, and AGHI cancelled thosenotes.

 

For the threemonths ended March 31, 2010, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $0.7 million increase inOther Long-Term Liabilities and a $0.3 million increase in Other ComprehensiveLoss and ineffective portion in the statement of operations as a non-cash losson derivative instruments of $0.4 million.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually, and more often when impairment indicators are present.  The Company performs its annual impairmenttest during the fourth quarter.

 

7

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**(5) GOODWILL AND INTANGIBLE ASSETS(continued)**

 

In the thirdquarter of 2009, the Company noted continued decline in advertising revenuecompared to historical trends, in the operations of our RV and powersportspublications, as well as flat to moderate projected growth in futureadvertising revenue as a result of continued deterioration of general economicconditions and consumer confidence. Based on the above, the Company determined that there were identifiedinterim indicators of impairment within these reporting units in the Mediasegment.

 

The Companyperformed an impairment test of the goodwill and intangible assets of thereporting units of our RV and powersports publications.  The impairment test indicated that theestimated fair value of these reporting units were less than book value.  The excess of the carrying value over theestimated fair value of the these reporting units was primarily due to adecline in advertising revenue leading to lower expected future cash flows forthese reporting units. In determining the fair value, the Company used anincome valuation approach.

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the reporting units of our RV and powersportspublications determined in step one of the impairment test, to the assets andliabilities of the respective reporting unit in accordance with the accountingguidance for business combinations. The Company determined the impairment forthese units to be equal to the carrying value of its goodwill, or $46.9million.  The Company recorded animpairment charge of $46.9 million in the third quarter of 2009 related tothese units, which is part of the Media segment.  The Media segment goodwill was reduced tozero.  See Indefinite-Lived IntangibleAssets under Critical Accounting Policies.

 

Determining thefair value of a reporting unit under the first step of the goodwill impairmenttest and determining the fair value of individual assets and liabilities of areporting unit under the second step of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the extent of suchcharge. The Company’s estimates of fair value utilized in the goodwillimpairment tests may be based upon a number of factors, including assumptionsabout the projected future cash flows, discount rate, growth rate,determination of market comparables, economic conditions, or changes to theCompany’s business operations. Such changes may result in impairment chargesrecorded in future periods.  Also seeNote 8 — Fair Value Measurements.

 

8

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(**5)** **GOODWILL ANDINTANGIBLE ASSETS (continued)**

 

The following is asummary of changes in the Company’s goodwill by business segment, for the threemonths ended March 31, 2010 and 2009 (in thousands):

 
| ** **                               | ** ** | **Membership  Services** | ** ** | **Media** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------|------------|------------|------------|------------------|------------|
|                                     |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                           |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to January 1, 2010 |       | (6,086                   | )          | (46,884   | )          | (47,601    | )          | (100,571         | )          |
| Balance as of January 1, 2010       |       | 49,944                   |       | —    |       | —     |       | 49,944           |       |
| Impairments                              |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of March 31, 2010        |       | $                        | 49,944     |      | $          | —     |       | $                | —     |   | $ | 49,944 |   |
|                                     |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                           |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to January 1, 2009 |       | (6,086                   | )          | —    |       | (47,601    | )          | (53,687          | )          |
| Balance as of January 1, 2009       |       | 49,944                   |       | 46,884    |       | —     |       | 96,828           |       |
| Impairments                              |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of March 31, 2009        |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary.  The Company determined that no adjustments tothe useful lives of its finite-lived purchased intangible assets were necessaryas of March 31, 2010.  Under theguidance for goodwill and other intangible assets, as issued by the FASB,goodwill impairment is deemed to exist if the net book value of a reportingunit exceeds its estimated fair value. The Company’s reporting units are generally consistent with theoperating segments underlying the reporting segments identified in Note 3 –Disclosures about Segments of an Enterprise and Related Information.

 

Effective January 1,2009, the Company adopted new accounting guidance related to businesscombinations which establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any noncontrolling interest in the acquireeand the goodwill acquired in a business combination.  The Company will apply the provisions anddisclosure requirements of the new guidelines for any acquisitions after theadoption date.

 

9

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(**5)** **GOODWILL ANDINTANGIBLE ASSETS (continued)**

 

Finite-lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at March 31, 2010(in thousands, except as noted):

 
| ** **                                      | ** ** | **Weighted**         | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average  Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life  (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                 |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                    |       | $          | 35,355     |             | $          | (27,055    | )          | $ | 8,300 |   |
| Resort and golf course participation agreements |       | 4                    |       | 8          |       | (6               | )          | 2          |       |
| Non-compete and deferred consulting agreements  |       | 15                   |       | 18,650     |       | (16,447          | )          | 2,203      |       |
| Deferred financing costs                        |       | 6                    |       | 13,024     |       | (6,735           | )          | 6,289      |       |
|                                            |       |                 |       |       |       |             |       |       |       |
|                                            |       |                 |       | $          | 67,037     |             | $          | (50,243    | )          | $ | 16,794 |   |

 

**(6) DEBT**

 

AGHI Notes

 

On March 24, 2005, in a privateplacement, the Company issued $88.2 million principal amount of its 10-7/8%senior notes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of the AGHI Notes under the Securities Act of 1933 on June 8,2005.  The AGHI Notes are unsecuredobligations of the Company, and AGI and its subsidiaries have not guaranteedpayment of principal or interest on the AGHI Notes.  Interest on the AGHI Notes is payablesemi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and before February 15, 2008, AGHI had the electionto pay interest on the AGHI Notes in cash or by the issuance of additionalnotes of the same tenor as the AGHI Notes. Any additional AGHI Notes issued in payment of interest are due in fullon or before March 15, 2010.  AGIhas not paid any dividends to AGHI to fund payment of interest on the AGHINotes and AGHI made the interest payments due on August 15, 2005, February 15,2006, August 15, 2006, February 15, 2007, and February 15, 2008through the issuance of additional notes. AGHI paid the interest on the AGHI Notes due August 15, 2007, August 15,2008 and February 15, 2009 from proceeds of capital contributions made byAGHI’s parent, AGHC, in the amount of $5.9 million, $6.2 million and $6.2million, respectively.  AGHI made theinterest payment due August 15, 2009 in January, 2010 with a $4.5 millioncash payment (a $2.8 million capital contribution from its shareholder, and$1.7 million of permitted tax distributions from AGI), and the remaining $1.7million due to related entities was forgiven and reported as an equitycontribution.  AGHI satisfied the interest payment due February 15,2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from$2.5 million received by AGHI in connection with a waiver by AGHI of certainfirst refusal rights related to AGI’s vehicle insurance business and thebalance from AGI as a permitted tax distribution) and the remaining $1.8million due to related entities was forgiven and, as such, reported as anequity contribution.  Currently, theAGI New Senior Credit Facility, CWI Credit Facility, and the AGI Indentureimpose limitations on the ability of subsidiaries of AGHI to make dividenddistributions or loans to AGHI to pay interest on the AGHI Notes.  On March 1, 2010, $25.4 million of theAGHI Notes due March

 

10

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**(6) DEBT (continued)**

 

15, 2010 that were held by an affiliate ofAGHI were contributed to the Company and the Company cancelled thosenotes.  As of March 31, 2010,approximately $87.0 million, net of $1.2 million in unamortized original issuediscount, remained outstanding on the AGHI Notes.

 

AGI New Senior Credit Facility

 

On March 1, 2010, AGI entered into the Second Amended and RestatedCredit Agreement (the “AGI New Senior Credit Facility”) to refinance the itsexisting senior credit facility ($128.9 million principal amount outstanding atDecember 31, 2009) which was scheduled to mature on March 31, 2010,the second lien notes due July 31, 2010 ($9.7 million principal amountoutstanding at December 31, 2009) and the loan (the “SA Loan”), from SAHolding, LLC, an affiliate of the ultimate shareholder of AGI, ($1.0 millionprincipal amount outstanding at December 31, 2009).  The AGI New Senior Credit Facility providesfor term loans aggregating $144.3 million, including an original issue discountof 2%, that are payable in quarterly installments of $360,750 beginning March 1,2011.  In addition, there are mandatoryprepayments of the term loans from excess cash flow (as defined) of AGI andfrom asset sales.  The term loans underthe AGI New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either AGI Senior Notes($137.8 million principal amount outstanding as at March 31, 2010 and aredue on February 15, 2012) or the AGHI Notes ($88.2 million aggregateprincipal amount outstanding at March 31, 2010 and are due February 15,2012).  Interest on the term loans underthe AGI New Senior Credit Facility floats at either 8.75% over the base rate(defined as the greater of the prime rate, federal funds rate plus 50 basispoints or 5.25%) for borrowings whose interest is based on the prime rate or10.0% over the LIBOR rate (defined as the greater of the 3 months LIBOR rate or3.0%) for borrowings whose interest is based on LIBOR.  After consideration of fixed rates under theinterest rate swap agreements, (See Note 7- Interest Rate Swap Agreements), asof March 31, 2010, the average annual interest rate on the term loans was16.83%.  The AGI New Senior CreditFacility contains affirmative covenants, including financial covenants, andnegative covenants, including a restriction on dividends or distributions byAGI to AGHI.  Borrowings under the AGINew Senior Credit Facility are guaranteed by the direct and indirectsubsidiaries of AGI and are secured by liens on the assets of AGI and itsdirect and indirect subsidiaries.  As acondition to the term loans under the AGI New Senior Credit Facility, $25.4million of AGHI Notes due on March 15, 2010 that were held by an affiliateof AGHI were contributed to AGHI and AGHI cancelled those notes.  As of March 31, 2010, $141.6 million,net of approximately $2.8 million of unamortized original issue discount, wasoutstanding on the AGI New Senior Credit Facility.

 

CW Credit Facility

 

In addition, on March 1, 2010, Camping World entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the AGI New Senior Credit Facility, or (iii) 120 days prior to theearlier date of maturity of the AGI Senior Notes and the AGHI Notes.  Interest under the revolving loans under theCW Credit Facility floats at either 3.25% over the base rate (defined as thegreater of the prime rate, federal funds rate plus 50 basis points or 1 monthLIBOR) for borrowings whose interest is based on the prime rate or 3.25% overthe LIBOR rate (defined as the

 

11

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**(6) DEBT (continued)**

 

greater of LIBOR rate applicable to the period of the respective LIBORborrowings or 1.0%) for borrowings whose interest is based on LIBOR. As of March 31,2010, the average interest rate on the CW Credit Facility was 4.25%.  Borrowings under the CW Credit Facility arebased on the borrowing base of eligible inventory and accounts receivable ofCamping World and its subsidiaries.  TheCW Credit Facility contains affirmative covenants, including financialcovenants, and negative covenants. Borrowings under the CW Credit Facility are guaranteed by the direct andindirect subsidiaries of Camping World and are secured by a pledge on the stockof Camping World and its direct and indirect subsidiaries and liens on theassets of Camping World and its direct and indirect subsidiaries.  The lenders under the AGI New Senior CreditFacility and the CW Credit Facility have entered into an intercreditoragreement that governs their rights in the collateral that is pledged to securetheir respective loans.  As of March 31,2010, $8.5 million was borrowed and $7.6 million of letters of credit wereissued under the CW Credit Facility.

 

AGISenior Notes

 

In February 2004, AGI issued $200.0 million aggregate principalamount of 9% senior subordinated notes due 2012 (“AGI Senior Notes”) pursuantto an indenture (the “AGI Indenture”). AGI completed a registered exchange of the AGI Senior Notes under theSecurities Act of 1933 in August 2004. Interest is payable on the AGI Senior Notes twice a year on February 15and August 15.  AGI’s present andfuture restricted subsidiaries guarantee the AGI Senior Notes withunconditional guarantees of payment that rank junior in right of payment to theirexisting and future senior debt, including indebtedness under the AGI NewSenior Credit Facility and the CW Credit Facility, but rank equal in right ofpayment to their existing and future senior subordinated debt.  All of AGI’s subsidiaries have jointly andseverally guaranteed the indebtedness under the AGI Senior Notes except forCWFR Capital Corp.  As of March 31,2010, $137.8 million of AGI Senior Notes remain outstanding.  The fair value of the AGI Senior Notes, basedon the quoted market price at March 31, 2010, was $96.5 million.

 

The AGI New Senior Credit Facility, the CW Credit Facility and the AGIIndenture contain certain restrictive covenants relating to, but not limitedto, mergers, changes in the nature of the business, acquisitions, additionalindebtedness, sale of assets, investments, and the payment of dividends subjectto certain limitations and minimum operating covenants.  The AGI New Senior Credit Facility and the CWCredit Facility also contain certain financial affirmative covenants.  The Company was in compliance with all debtcovenants at March 31, 2010.

 

**(7) INTEREST RATE SWAP AGREEMENTS**

 

The Company isexposed to certain risks related to its business operations.  The primary risks that we managed by usingderivatives is interest rate risk.  Weuse financial instruments, including interest rate swap agreements, to reduceour risk to this exposure.  We do not usederivatives for speculative trading purposes and are not a party to leveragedderivatives. We recognize all of our derivative instruments as either assets orliabilities at fair value.  Fair value isdetermined in accordance with the accounting guidance for Fair ValueMeasurements.  See Note 8 — Fair ValueMeasurements.  The accounting for changesin the fair value of a

 

12

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**(7) INTERESTRATE SWAP AGREEMENTS (continued)**

 

derivativeinstrument depends on whether it has been designated and qualifies as part of ahedging relationship and, further, on the type of hedging relationship.  For derivatives designated as hedges under theaccounting guidance for derivative instruments and hedging activities, weformally assess, both at inception and periodically thereafter, whether thehedging derivatives are highly effective in offsetting changes in either thefair value or cash flows of the hedged item. Our derivatives that are not designated and do not qualify as hedgesunder the accounting guidance for derivative instruments and hedging activitiesare adjusted to fair value through current earnings.

 

Effective January 1,2009, the Company adopted the provisions of the new accounting guidance fordisclosures about derivative instruments and hedging activities.  The guidance requires that the objectives forusing derivative instruments be disclosed to better convey the purpose ofderivative use in terms of the risks that the Company is intending tomanage.  This standard also requiresdisclosure of how derivatives and related hedged items are accounted for andhow they affect the Company’s financial statements.  The adoption of the new guidance did not havea material impact on our condensed consolidated results of operations,financial position or cash flows.

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.7 million of which approximately $7.2million is in accumulated other comprehensive loss, and $1.4 million in thestatement of operations with $0.4 million in the period ended March 31,2010.  The fair value of these swapsincluded in other long-term liabilities was $8.1 million of which $7.0 millionis in accumulated other comprehensive loss and $0.7 million in the statement ofoperations at December 31, 2009. See Note 8 — Fair Value Measurements.

 

Due to the potential sale of Camping World in September 2008, ahighly effective hedge on the cash flows related to the $35.0 millionoutstanding debt by the $35.0

 

13

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**(7) INTEREST RATE SWAP AGREEMENTS (continued)**

 

million notional amount interest rate swap agreement was deemed to beno longer probable and was deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings as a gain(loss) on derivative instrument on October 1, 2008.  Included in other comprehensive loss is $0.4million related to changes in the fair value of the $35.0 million interest rateswap prior to October 1, 2008 which will be amortized over the remaininglife of the interest rate swap and included in earnings as a gain (loss) onderivative instrument.

 

On June 11,2009, the Company partially terminated the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was expensed.  The notional amount was reduced to $20.0million.  All other terms of the interestrate swap agreement remained unchanged. As a result, the amount included in other comprehensive loss related tothe $35.0 million interest rate swap was reduced prorata and included inearnings as a gain (loss) on derivative instrument.

 

Due to theissuance of an option to the shareholder of the ultimate parent of the Companyto purchase Camping World, in the second quarter of 2009, which option wassubsequently terminated, a portion of the highly effective hedge on the cashflows related to the $100.0 million outstanding debt by the $100.0 millionnotional amount interest rate swap agreement was deemed to be no longer probableand was deemed to be reasonably possible. As a result, changes in the value of the last $20.0 million of the$100.0 million interest rate swap agreement are included in earnings beginningon June 5, 2009.  Included in othercomprehensive loss is $1.6 million related to the last $20.0 million of the$100.0 million interest rate swap which will be amortized over the remaininglife of the interest rate swap and included in earnings as a gain (loss) onderivative instrument.

 

The following isthe location and amounts of derivative instruments fair values in the statementof financial position segregated between designated, qualifying hedginginstruments segregated by assets and liabilities as required by accountingguidance.

 
| **Derivatives  designated as  hedging intruments under** | ** ** | ** **                   | ** ** | **Fair  Value as of:** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|------------------------|------------|
| **Statement  133**                                       | ** ** | **Balance  Sheet Location**  | ** ** | **3/31/2010**          | ** ** | **12/31/2009** | ** ** |
|                                                     |       |                         |       |                   |       |   |   |
| Interest rate swap contracts                             |       | Other  long-term liabilities |       | $                      | (8,714     | ) | $ | (8,090 | ) |
|                                                          |            |                              |            |                        |            |  |  |  |  |

 

14

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**(7) INTEREST RATE SWAP AGREEMENTS (continued)**

 

The following isthe location and amount of gains and losses on derivative instruments in thestatement of operations for the three months ended March 31, 2010 and 2009segregated between designated, qualifying hedging instruments and those thatare not, and segregated by assets and liabilities as required by the accountingguidance for derivative instruments (in thousands):

 

Derivatives in Cashflow Hedging Relationships:

 
| ** **                                                                                                                                          | ** ** | **Interest  Rate Swap Agreements**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                                          | ** ** | **3/31/2010**                         | ** ** | **3/31/2009** | ** ** |
| Amount of Gain or (Loss) recognized in Other  Comprehensive Loss on Derivatives                                                                     |       | $                                     | (342       | ) | $ | 168 |   |
|                                                                                                                                                |       |                                  |       |   |   |
| Location of Gain (Loss) Reclassified from  Accumulated Other Comprehensive Loss into Statement of Operations (Effective  portion)                   |       | Gain  (loss) on derivative Instrument |       |
|                                                                                                                                                |       |                                  |       |   |   |
| ** **                                                                                                                                          | ** ** | **3/31/2010**                         | ** ** | **3/31/2009** | ** ** |
|                                                                                                                                                |       |                                  |       |   |   |
| Amount of Gain or (Loss) reclassified from Other  Comprehensive Loss into Statement of Operations (Effective portion)                               |       | $                                     | (94        | ) | $ | 34 |   |
|                                                                                                                                                |       |                                  |       |   |   |
| Location of Gain (Loss) Recognized in Statement of  Operations on Derivatives (Ineffective portion and amount excluded from  effectiveness testing) |       | Gain  (loss) on derivative Instrument |       |
|                                                                                                                                                |       |                                  |       |   |   |
| ** **                                                                                                                                          | ** ** | **3/31/2010**                         | ** ** | **3/31/2009** | ** ** |
| Amount of Gain or (Loss) recognized in income on  Derivatives (Ineffective portion and amount excluded from effectiveness  testing)                 |       | $                                     | (282       | ) | $ | (14 | ) |

 

**(8) FAIR VALUE MEASUREMENTS**

 

Accounting guidance for fair valuemeasurements establishes a three-tier fair value hierarchy, which prioritizesthe inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such asquoted prices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

As of March 31, 2010, the Company holdsinterest rate swap contracts that are required to be measured at fair value ona recurring basis.  The Company’sinterest rate swap contracts are not traded on a public exchange.  See Note 7 Interest Rate Swap Agreements forfurther information on the interest rate swap contracts.  The fair value of these interest rate swapcontracts are determined based on inputs that are readily available in publicmarkets or can be derived from information available in publicly quotedmarkets.  Therefore, the Company hascategorized these swap contracts as Level 2.

 

15

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**(8) FAIR VALUE MEASUREMENTS (continued)**

 

The Company’s liabilities at March 31, 2010, measured at fairvalue on a recurring basis subject to the disclosure requirements of fair valuemeasurements, was as follows:

 
| ** **                      | ** ** | ** ** | ** ** | **Fair  Value Measurements at Reporting Date Using**        | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------------|------------|
| **(in  thousands)**             | ** ** | ** ** | ** ** | **Quoted  Prices in  Active Markets for  Identical Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**                 | ** ** | **Amount** | ** ** | **(Level  1)**                                              | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
|                            |       |       |       |                                                        |       |   |   |   |   |
| As of March 31, 2010:      |       |       |       |                                                        |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | $          | (8,714     | )                                                           | $          | — |   | $ | (8,714 | ) | $ | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                      |       | — |   | — |   |
| Media Goodwill                  |       | —     |       | —                                                      |       | — |   | — |   |
|                            |       |       |       |                                                        |       |   |   |   |   |
| As of December 31, 2009:   |       |       |       |                                                        |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | (8,090     | )          | —                                                      |       | (8,090 | ) | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                      |       | — |   | — |   |
| Retail Goodwill                 |       | —     |       | —                                                      |       | — |   | — |   |
|                                 |            |            |            |                                                             |            |  |  |  |  |  |  |  |  |

 

The fair value ofthe interest rate swap contracts was calculated using the income method basedon quoted interest rates.

 

There have been notransfers of assets or liabilities between the fair value measurement levelsand there were no material remeasurements to fair value during the three monthsended March 31, 2010 and 2009 of assets and liabilities that are not measuredat fair value on a recurring basis.

 

The following table presents the reported carrying value and fair valueinformation for the AGI Senior Notes, AGI New Senior Credit Facility and the CWCredit Facility.  The fair values shownbelow for the AGHI Notes and the AGI Senior Notes are based on quoted prices inthe market for identical assets (Level 1), and the fair value shown for the AGINew Senior Credit Facility and the CW Credit Facility are based on indirectobservable inputs (Level 2) (in thousands):

 
| ** **                     | ** ** | **3/31/2010** | ** ** | **12/31/2009**  | ** ** |
|--------------------------------|------------|---------------|------------|-----------------|------------|
| ** **                     | ** ** | **Cost**      | ** ** | **Fair  Value** | ** ** | **Cost** | ** ** | **Fair  Value** | ** ** |
| AGHI Notes                     |       | $             | 86,971     |            | $          | 34,788 |   | $ | 112,275 |   | $ | 44,770 |   |
| AGI Senior Notes               |       | 137,824       |       | 96,477          |       | 137,824 |   | 93,893 |   |
| AGI New Senior Credit Facility |       | 141,545       |       | 141,545         |       | 128,856 |   | 122,425 |   |
| CW Credit Facility             |       | 8,528         |       | 8,528           |       | — |   | — |   |
|                                |            |               |            |                 |            |  |  |  |  |  |  |  |  |

 

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**(9) ****INCOME TAXES**

 

The followingtable summarizes the activity related to unrecognized tax benefits (inthousands):

 
| Balance at January 1, 2010                                                          |   | $      | 1,339  |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Gross increases in unrecognized tax benefits due  to prior year positions                |   | — |   |
| Gross decreases in unrecognized tax benefits due  to prior year positions                |   | — |   |
| Gross increases in unrecognized tax benefits due  to current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due  to current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due to  settlements with taxing authorities |   | — |   |
| Gross decreases in unrecognized tax benefits due  to statute expirations                 |   | — |   |
| Other                                                                                    |   | 2      |   |
| Unrecognized tax benefits at March 31, 2010                                         |   | $      | 1,341  |   |

 

The Companyaccrues interest and penalties related to unrecognized tax benefits in itsincome tax provision.  The Companyreversed accrued interest and penalties of $2.0 million related to decreases inunrecognized tax benefits during the first three months of 2010.  As of March 31, 2010, the liability forpenalties and interest was $0.5 million. The Company expects its unrecognizedtax benefits to decrease by $1.3 million over the next nine months.

 

The Company andits subsidiaries file income tax returns in the U.S. federal jurisdiction andvarious states.  With few exceptions, theCompany is no longer subject to U.S. federal and state examinations by taxauthorities for fiscal years prior to fiscal 2005 and 2005, respectively.  There currently is an Internal RevenueService examination of the Company’s wholly owned subsidiary, Camping World, Inc.,for fiscal year 2008.

 

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**ITEM 2:**

 

AFFINITY GROUP HOLDING, INC.AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OFOPERATIONS

 

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

 
| ** **                           | ** ** | **THREE  MONTHS ENDED** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **3/31/2010**           | ** ** | **3/31/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                    |       |   |   |   |   |
| REVENUES:                            |       |                    |       |   |   |   |   |
| Membership services                  |       | 36.5                    | %          | 33.5 | % | 12.3 | % |
| Media                                |       | 13.5                    | %          | 16.6 | % | (15.7 | )% |
| Retail                               |       | 50.0                    | %          | 49.9 | % | 3.4 | % |
|                                 |       | 100.0                   | %          | 100.0 | % | 3.2 | % |
|                                 |       |                    |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                    |       |   |   |   |   |
| Membership services                  |       | 18.5                    | %          | 19.5 | % | (1.2 | )% |
| Media                                |       | 10.7                    | %          | 12.8 | % | (13.8 | )% |
| Retail                               |       | 29.8                    | %          | 29.9 | % | 2.2 | % |
|                                 |       | 59.0                    | %          | 62.2 | % | (2.2 | )% |
|                                 |       |                    |       |   |   |   |   |
| GROSS PROFIT                         |       | 41.0                    | %          | 37.8 | % | 12.1 | % |
|                                 |       |                    |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                    |       |   |   |   |   |
| Selling, general and administrative  |       | 27.8                    | %          | 28.5 | % | 0.8 | % |
| Financing expense                    |       | 6.5                     | %          | — |   | 100.0 | % |
| Depreciation and amortization        |       | 4.6                     | %          | 4.7 | % | (0.2 | )% |
|                                 |       | 38.9                    | %          | 33.2 | % | 21.0 | % |
|                                 |       |                    |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 2.1                     | %          | 4.6 | % | (52.7 | )% |
|                                 |       |                    |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                    |       |   |   |   |   |
| Interest income                      |       | 0.1                     | %          | 0.1 | % | (3.1 | )% |
| Interest expense                     |       | (11.3                   | )%         | (8.6 | )% | 35.9 | % |
| (Loss) gain on derivative instrument |       | (0.3                    | )%         | — |   | (100.0 | )% |
| Other non-operating items, net       |       | —                  |       | (0.1 | )% | (130.1 | )% |
|                                 |       | (11.5                   | )%         | (8.6 | )% | 39.4 | % |
|                                 |       |                    |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES             |       | (9.4                    | )%         | (4.0 | )% | 145.3 | % |
|                                 |       |                    |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.2                    | )%         | (0.4 | )% | (63.9 | )% |
|                                 |       |                    |       |   |   |   |   |
| NET LOSS                             |       | (9.6                    | )%         | (4.4 | )% | 127.2 | % |

 

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended March 31, 2010**

**ComparedWith Three Months Ended March 31, 2009**

 

*Revenues*

 

Revenuesof $108.4 million for the first quarter of 2010 increased by $3.4 million, or3.2%, from the comparable period in 2009.

 

MembershipServices revenues of $39.6 million for the first quarter of 2010 increased $4.3million, or 12.3%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $4.7 million revenue increase related to vehicle insuranceproducts primarily related to a $5.0 million fee received as a result ofwaiving our right of first refusal regarding the sale of the third partypartner, a$0.4 million increase in extended vehiclewarranty program revenue resulting from continued policy growth and strongrenewals, a $0.3 million increase in Good Sam Club revenue, a $0.3 millionincrease in revenue from emergency road service products, and a $0.1 million increasein various other ancillary products. These increases were partially offset by a$1.2 million revenue decrease due to the termination of the brand usagelicensing fee charged to FreedomRoads Holding LLC and its subsidiaries(collectively “FreedomRoads”) in December 2009, and a $0.3 milliondecrease due to reduced membership for the Coast Club and Golf Card Club.

 

Mediarevenues of $14.7 million for the first quarter of 2010 decreased $2.7 million,or 15.7%, from the comparable period in 2009. This decrease was primarily attributable to a $1.3 million reduction inrevenue from our outdoor power sports magazines related to reduced advertisingrevenue and reduced issues published, a $0.5 million reduction in RV relatedpublication revenue primarily attributable to reduced advertising revenue, anda $1.1 million reduction in exhibitor revenue resulting from six fewer consumershows in the first quarter of 2010 compared to the first quarter of 2009.  These decreases were partially offset by a$0.2 million increase in RV book sales.

 

Retail revenues of$54.2 million increased by $1.8 million, or 3.4 %, from the comparable periodin 2009.  Store merchandise salesdecreased $0.2 million from the first quarter of 2009 due to decreased revenuefrom discontinued stores of $0.5 million partially offset by a same store salesincrease of $0.2 million, or 0.6%, compared to a 17.0% decrease in same storesales for the first quarter of 2009, and a $0.1 million revenue increase fromthe opening of one new store over the past fifteen months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Also, mail order and internet sales increased$1.4 million, installation and service fees increased $0.3 million and suppliesand other sales increased $0.3 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $63.9 million for the first quarter of 2010, adecrease of $1.4 million, or 2.2%, from the comparable period in 2009.

 

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MembershipServices costs applicable to revenues of $20.1 million decreased $0.3 million,or 1.2%, from the comparable period in 2009. This decrease consisted of a $0.4 million reduction in wage-relatedexpenses, and a $0.3 million reduction in marketing and program costs relatedreduced membership in the Coast Club and Golf Card Club, partially offset by a$0.4 million increase in emergency road services and extended vehicle warrantyprogram costs.

 

Mediacosts applicable to revenues of $11.6 million for the first quarter of 2010decreased $1.9 million, or 13.8%, from the comparable period in 2009 primarilyrelated to a $0.9 million reduction in magazine expenses resulting from reducedissues published, a $0.7 million reduction in costs related to reduced consumershows revenue, and a $0.5 million reduction in wage-related costs.  These decreases were partially offset by $0.2million of additional costs related to increase book revenue.

 

Retailcosts applicable to revenues increased $0.7 million, or 2.2%, to $32.2million.  The retail gross profit marginof 40.5% for the first quarter of 2010 increased from 39.8% for the comparableperiod in 2009 primarily due to selective price increases and vendorconcessions.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $30.2 million for the first quarter of2010 increased $0.3 million compared to the first quarter of 2009.  This increase was primarily due to anincrease in retail general and administrative expenses consisting primarily ofincreases in real and personal property taxes partially offset by a decrease inretail selling expenses.

 

Forthe first quarter of 2010, financing expense of $7.1 million was incurred forlegal and other costs related to the AGI New Senior Credit Facility enteredinto on March 1, 2010, which was expensed in accordance with accountingguidance for debtors accounting for a modification or exchange of debtinstruments.

 

Depreciationand amortization expense of $5.0 million remained unchanged from the prior yearprimarily due to reducedamortization of intangible assets associated with prior acquisitions andreduced capital expenditures, offset by increased amortization related to the AGINew Senior Credit Facility re-financing.

 

*Incomefrom Operations*

 

Incomefrom operations for the first quarter of 2010 totaled $2.3 million compared to$4.8 million for the first quarter of 2009. This $2.5 million decrease was primarily the result of $7.1 million offinancing expense in the first quarter of 2010, reduced gross profit for theMedia segment of $0.9 million and increased operating expenses of $0.2million.  These decreases were partiallyoffset by increased gross profit for the Membership Services and Retailsegments of $4.6 million and $1.1 million, respectively.

 

*Non-OperatingItems*

 

Non-operatingitems of $12.5 million for the first quarter of 2010 increased $3.5 millioncompared to the first quarter of 2009 due to a $3.2 million increase ininterest expense relating

 

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to higher interestrates and an increase in debt, and a $0.4 million increase in loss onderivative interest rate swap agreements partially offset by a gain on sale ofequipment of $0.1 million.  See Note 7 —Interest Rate Swap Agreements.

 

*LossBefore Income Tax*

 

Lossbefore income tax for the first quarter of 2010 was approximately $10.3million, or approximately $6.0 million more than the loss before income tax forthe first quarter of 2009.  Thisincreased loss was attributable to the $2.5 million decrease in income fromoperations and the $3.5 million increase in non-operating items mentionedabove.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.1 million for the firstquarter of 2010, compared to $0.4 million income tax expense for the firstquarter of 2009.

 

# *Net loss*

# * *

Netloss in the first quarter of 2010 was $10.4 million compared to a $4.6 millionnet loss for the same period in 2009 mainly due to the reasons discussed above.

 

*SegmentProfit (Loss)*

 

The Company’s threeprincipal lines of business are Membership Services, Media and Retail.  The Membership Services segment operates theGood Sam Club, the Coast to Coast Club, the President’s Club, Camp Club USA andassorted membership products and services for RV owners, campers and outdoorvacationers, and the Golf Card Club for golf enthusiasts.  The Media segment publishes a variety ofpublications for selected markets in the recreation and leisure industry,including general circulation periodicals, directories, and RV and powersportsindustry trade magazines.  In addition,the Media segment operates consumer outdoor recreation shows primarily focusedon RV and powersports markets.  The Retailsegment sells specialty retail merchandise and services for RV owners primarilythrough retail supercenters and mail order catalogs.  The Company evaluates performance based onprofit or loss from operations before income taxes and unusual items.

 

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

 

Membershipservices segment profit of $17.7 million for the first quarter of 2010increased $5.1 million, or 40.1%, from the comparable period in 2009.  This increase was largely attributable to a$4.6 million increase in vehicle insurance profit primarily related to a $5.0million fee received as a result of waiving our right of first refusalregarding the sale of the third party partner, a $0.9 million increase inprofit from the Good Sam Club related to increased membership terms, a $0.4million increase in profit from emergency road service products, a $0.3 millionincrease in segment profit from various ancillary products, and a $0.1 millionincrease in profit related to reduced marketing and program expenses in theCoast to Coast 

 

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Club and Golf CardClub.  These increases were partiallyoffset by a $1.2 million decrease in segment profit relating to reduced brandusage licensing fees from FreedomRoads.

 

Media segmentprofit decreased $0.4 million, or 30.5%, to $0.9 million for the first quarterof 2010 from the comparable period in 2009. This decrease in segment profit resulted primarily from a $0.2 milliondecrease in segment profit from our RV publications, and a $0.2 milliondecrease in segment profit from our consumer shows group.

 

Retail segmentloss was $4.5 million for the first quarter of 2010 compared to a loss of $8.2million for the first quarter of 2009.  Thisapproximately $3.6 million reduction in segment loss was the result of a $3.4million decrease in allocated interest expense and a $0.8 million increase ingross profit margin, partially offset by $0.4 million of financing expense anda $0.2 million increase in selling, general and administrative expenses.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company hashistorically operated with a working capital deficit.  The working capital deficit as of March 31,2010 and December 31, 2009 was $5.7 million and $14.0 million,respectively.  The primary reason for theworking capital deficit was the deferred revenue and gains reported undercurrent liabilities of $56.1 million and $60.7 million, as of March 31,2010 and December 31, 2009, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  The Company uses netproceeds from this deferred membership revenue to lower its borrowings.

 

In 2009, theCompany engaged a financial advisor to assist in refinancing or restructuringof the AGI Senior Notes ($137.8 million principal outstanding at March 31,2010 and maturing on February 15, 2012) and the AGHI Notes ($87.0 millionprincipal outstanding at March 31, 2010 and maturing on February 15,2012).  AGHI deferred payment of theinterest on the AGHI Notes that was due on August 15, 2009.  The indenture governing the AGHI Notesprovides a 30-day grace period for the payment of interest.  Before the end of the grace period, AGHIreceived consent letters for extending such grace period from certaininstitutional holders of the AGHI Notes holding in the aggregate $65.8 millionprincipal amount of the AGHI Notes and from non-institutional holders holdingin the aggregate $46.6 million principal amount of the AGHI Notes and paid theinterest of the remaining AGHI Notes. The aggregate principal amount of the AGHI Notes outstanding was then$113.6 million so the holders executing the consents held 98.9% of theoutstanding principal amount of the AGHI Notes. Pursuant to the consent letters from the institutional holders, AGHIagreed to pay the legal fees for a law firm to represent the institutionalholders. In addition, AGHI paid a consent fee equal 1⁄4 of 1% of the principalamount to the institutional holders who signed a consent letter, or anaggregate of $164,600.  No consent feewas paid to the non-institutional holders. AGHI satisfied the August 15, 2009 interest payment in January,2010 with $4.5 million in cash (funded, in part, from a $2.8 million capitalcontribution from its shareholder, and $1.7 million of permitted taxdistributions from AGI), and the remaining $1.7 million due to related entitieswas forgiven and, as such, reported as an equity contribution.  AGHI satisfied the interest payment due February 15,2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from$2.5 million received by AGHI in connection with a waiver by AGHI of certainfirst refusal rights related to AGI’s vehicle 

 

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insurance businessand the balance from AGI as a permitted tax distribution) and the remaining$1.8 million due to related entities was forgiven and, as such, reported as anequity contribution.  As a condition tofunding of the AGI New Senior Credit Facility, AGHI acquired $25.4 million ofAGHI Notes due on March 15, 2010 that were held by an affiliate of AGHI,contributed them to AGHI, and cancelled those notes, thereby reducing the  approximately $112.3 million of AGHI Notesoutstanding as of December 31, 2009 to approximately $87.0 million as of March 31,2010.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at March 31, 2010.  Thistable includes principal and future interest due under our debt agreementsbased on interest rates as of March  31, 2010 and assumes debt obligationswill be held to maturity.

 
| ** **                  | ** ** | **Payments  Due by Period** | ** ** |
|-----------------------------|------------|-----------------------------|------------|
| **(in thousands)**          | ** ** | **Total**                   | ** ** | **2010** | ** ** | **2011  and  2012** | ** ** | **2013  and  2014** | ** ** | **Thereafter** | ** ** |
|                        |       |                        |       |   |   |   |   |   |   |   |   |
| Debt and future interest    |       | $                           | 469,005    |   | $ | 31,356 |   | $ | 437,649 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 215,003                     |       | 17,186 |   | 41,589 |   | 35,438 |   | 120,790 |   |
| Standby letters of credit   |       | 7,610                       |       | 7,610 |   | — |   | — |   | — |   |
| Grand total                 |       | $                           | 691,618    |   | $ | 56,152 |   | $ | 479,238 |   | $ | 35,438 |   | $ | 120,790 |   |

 

In accordance withtheir respective loan agreements, the maturity dates of the AGI New SeniorCredit Facility and the CW Credit Facility accelerate to mature 90 days and 120days, respectively, prior to maturity of the AGI Senior Notes and the AGHINotes.  The Debt and future interestdisclosed above assumes the AGI Senior Notes and AGHI Notes, both due February 15,2012, are not extended.

 

AGHI Notes

 

On March 24, 2005, in a private placement, AGHI issued $88.2million 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 underthe Securities Act of 1933 in June 2005. The AGHI Notes are unsecured obligations of the Company and itssubsidiaries have not guaranteed payment of principal or interest on the AGHINotes.  Interest on the AGHI Notes ispayable semi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and prior to February 15, 2008, AGHI had the electionto pay interest on the AGHI Notes in cash or by the issuance of additionalnotes of the same tenor as the AGHI Notes, except the maturity date of theadditional notes ($25.4 million) is March 15, 2010.  AGI has not paid any dividends to AGHI tofund payment of interest on the AGHI Notes and AGHI made the interest paymentsdue on August 15, 2005, February 15, 2006, August 15, 2006, February 15,2007, and February 15, 2008 through the issuance of additional notes.  The Company paid the interest on the AGHINotes due August 15, 2007, August 15, 2008 and February 15, 2009from proceeds of contributions made by AGHI’s parent, AGHC, of $5.9 million,$6.2 million and $6.2 million, respectively. AGHI made the interest payment due August 15, 2009 in January,2010 with a $4.5 million cash payment (a $2.8 million capital contribution fromits shareholder, and $1.7 million of permitted tax 

 

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distributions from AGI), and the remaining$1.7 million due to related entities was forgiven and reported as an equitycontribution.  AGHI satisfied the interest payment due February 15,2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from$2.5 million received by AGHI in connection with a waiver by AGHI of certainfirst refusal rights related to AGI’s vehicle insurance business and thebalance from AGI as a permitted tax distribution) and the remaining $1.8million due to related entities was forgiven and, as such, reported as anequity contribution.  Currently, theAGI New Senior Credit Facility, CWI Revolver, and the AGI Indenture imposelimitations on the ability of subsidiaries of AGHI to make dividenddistributions or loans to AGHI to pay interest on the AGHI Notes.  On March 1, 2010, $25.4 million of theAGHI Notes due March 15, 2010 that were held by an affiliate of AGHI werecontributed to the Company and cancelled. As of March 31, 2010, approximately $87.0 million, net of $1.2million in unamortized original issue discount, remained outstanding on theAGHI Notes.  The fair value of the AGHI Notes, based on thequoted market price at March 31, 2010, was $34.8 million.

 

AGI New SeniorCredit Facility

 

On March 1, 2010, AGI entered into the AGI New Senior CreditFacility to refinance the existing senior credit facility ($128.9 millionaggregate principal amount outstanding at December 31, 2009) which wasscheduled to mature on March 31, 2010, the second lien notes due July 31,2010 ($9.7 million principal amount outstanding at December 31, 2009), andthe SA Loan ($1.0 million principal amount outstanding at December 31,2009).  The AGI New Senior CreditFacility provides for term loans aggregating $144.3 million, including anoriginal issue discount of 2%, that are payable in quarterly installments of$360,750 beginning March 1, 2011. In addition, there are mandatory prepayments of the term loans fromexcess cash flow (as defined) of AGI and from asset sales.  The term loans under the AGI New SeniorCredit Facility mature on the earlier of (i) March 1, 2015 or (ii) 90days prior to the maturity of either AGI Senior Notes ($137.8 million principalamount outstanding as at March 31, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat March 31, 2010 and are due February 15, 2012).  Interest on the term loans under the AGI NewSenior Credit Facility floats at either 8.75% over the base rate (defined asthe greater of the prime rate, federal funds rate plus 50 basis points or5.25%) for borrowings whose interest is based on the prime rate or 10.0% overthe LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (See Note 7- Interest Rate Swap Agreements), as of March 31,2010, the average annual interest rate on the term loans was 16.83%.  The AGI New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the AGI New Senior CreditFacility are guaranteed by the direct and indirect subsidiaries of AGI and aresecured by liens on the assets of AGI and its direct and indirect subsidiaries.  As a condition to the term loans under theAGI New Senior Credit Facility, $25.4 million of AGHI Notes due on March 15,2010 that were held by an affiliate of AGHI were contributed to AGHI and AGHIcancelled those notes.  As of March 31,2010, $141.6 million, net of approximately $2.8 million of unamortized originalissue discount, was outstanding on the AGI New Senior Credit Facility.  Restricted cash of $8.1 million was releasedfrom its restriction on March 1, 2010, when the existing credit facilitywas refinanced.

 

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CW Credit Facility

 

In addition, on March 1, 2010, Camping World entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the AGI New Senior Credit Facility, or (iii) 120 days prior to theearlier date of maturity of the AGI Senior Notes and the AGHI Notes.  Interest under the revolving loans under theCW Credit Facility floats at either 3.25% over the base rate (defined as thegreater of the prime rate, federal funds rate plus 50 basis points or 1 monthLIBOR) for borrowings whose interest is based on the prime rate or 3.25% overthe LIBOR rate (defined as the greater of LIBOR rate applicable to the periodof the respective LIBOR borrowings or 1.0%) for borrowings whose interest is basedon LIBOR.  As of March 31, 2010, theaverage interest rate on the CW Credit Facility was 4.25%.  Borrowings under the CW Credit Facility arebased on the borrowing base of eligible inventory and accounts receivable ofCamping World and its subsidiaries.  TheCW Credit Facility contains affirmative covenants, including financialcovenants, and negative covenants. Borrowings under the Camping World Credit Agreement are guaranteed bythe direct and indirect subsidiaries of Camping World and are secured by apledge on the stock of Camping World and its direct and indirect subsidiariesand liens on the assets of Camping World and its direct and indirectsubsidiaries.  The lenders under the AGINew Senior Credit Facility and the CW Credit Facility have entered into anintercreditor agreement that governs their rights in the collateral that ispledged to secure their respective loans. As of March 31, 2010, $8.5 million was borrowed and $7.6 million ofletters of credit were issued under the CW Credit Facility.

 

AGI Senior Notes

 

In February 2004, AGI issued $200.0 million of AGI Senior Notespursuant to the AGI Indenture.  Interestat the rate of 9% per annum is due on the AGI Senior Notes on February 15and August 15.  The AGI Senior Notesmature on February 15, 2012.  As of March 31,2010, $137.8 million of AGI Senior Notes remained outstanding.  The fair value of the AGI Senior Notes, basedon the quoted market price at March 31, 2010, was $96.5 million.

 

The AGI New Senior Credit Facility, the CW Credit Facility and the AGIIndenture contain certain restrictive covenants relating to, but not limitedto, mergers, changes in the nature of the business, acquisitions, additionalindebtedness, sale of assets, investments, and the payment of dividends subjectto certain limitations and minimum operating covenants.  The AGI New Senior Credit Facility and the CWCredit Facility also contain certain financial and minimum operatingcovenants.  The Company was in compliancewith all debt covenants at March 31, 2010.

 

Interest Rate Swap Agreements

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month 

 

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LIBOR-basedvariable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.7 million of which approximately $7.2million is in accumulated other comprehensive loss, and $1.4 million in thestatement of operations with $0.4 million in the period ended March 31,2010.  The fair value of these swapsincluded in other long-term liabilities was $8.1 million of which $7.0 millionis in accumulated other comprehensive loss and $0.7 million in the statement ofoperations at December 31, 2009. See Note 8 — Fair Value Measurements.

 

Due to thepotential sale of Camping World in September 2008, a highly effectivehedge on the cash flows related to the $35.0 million outstanding debt by the$35.0 million notional amount interest rate swap agreement was deemed to be nolonger probable and was deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings as a gain(loss) on derivative instrument on October 1, 2008.  Included in other comprehensive loss is $0.4million related to changes in the fair value of the $35.0 million interest rateswap prior to October 1, 2008 which will be amortized over the remaininglife of the interest rate swap and included in earnings as a gain (loss) onderivative instrument.

 

On June 11,2009, the Company partially terminated the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was expensed.  The notional amount was reduced to $20.0million.  All other terms of the interestrate swap agreement remained unchanged. As a result, the amount included in other comprehensive loss related tothe $35.0 million interest rate swap was reduced prorata and included inearnings as a gain (loss) on derivative instrument.

 

Due to theissuance of an option to the shareholder of the ultimate parent of the Companyto purchase Camping World, in the second quarter of 2009, which option wassubsequently terminated, a portion of the highly effective hedge on the cashflows related to the $100.0 million outstanding debt by the $100.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and was deemed to be reasonably possible.  As a result, changes in the value of the last$20.0 million of the $100.0 million interest rate swap agreement are includedin earnings beginning on June 5, 2009. Included in other

 

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comprehensive lossis $1.6 million related to the last $20.0 million of the $100.0 millioninterest rate swap which will be amortized over the remaining life of theinterest rate swap and included in earnings as a gain (loss) on derivativeinstrument.

 

Other ContractualObligations and Commercial Commitments

 

For the threemonths ended March 31, 2010, the Company incurred no deferred executivecompensation expense under the phantom stock agreements, and made no paymentsunder the terms of the vested phantom stock agreements.  No phantom stock payments are scheduled to**be made for the remainder of 2010.

 

Capitalexpenditures for the first three months of 2010 totaling $0.2 million decreased$1.1 million from the first three months of 2009 primarily due to thecurtailment of new retail store openings. Additional capital expenditures of $4.0 million are anticipated for thebalance of 2010 primarily for software enhancements, information technologyupgrades and further website development.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives,bad debts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for making judgmentsabout the carrying values of assets and liabilities that are not readilyapparent from other sources.  Actualresults may differ from these estimates under different assumptions orconditions.

 

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

 

*Revenue Recognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail 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 aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Advances onthird party credit card fee revenues are deferred and recognized basedprimarily on a percentage of credit card receivables held by thirdparties.  Membership 

 

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revenueis generated from annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.  Revenue and related expensesfor consumer shows are recognized when the show occurs.

 

*Accounts Receivable*

 

The Companyestimates the collectability of its trade receivables.  A considerable amount of judgment is requiredin assessing the ultimate realization of these receivables including thecurrent credit-worthiness of each customer.

 

*Inventory*

 

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

 

*Long-LivedAssets*

 

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

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with new accounting guidance for accounting for the impairment ordisposal of long-lived assets.  TheCompany assesses the fair value of the assets based on the future cash flow theassets are expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible 

 

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assets werenecessary.  The finite-lived purchasedintangible assets consist of membership customer lists, resort and golf courseagreements, non-compete and deferred consulting agreements and deferredfinancing costs which have weighted average useful lives of approximately 6years, 4 years, 15 years and 6 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

The Companyevaluates indefinite-lived intangible assets for impairment at least annuallyor when events indicate that an impairment exists in accordance with accountingguidance for goodwill and other intangibles. The impairment test for goodwill and other indefinite-lived intangibleassets is calculated annually using fair value measurement techniques.

 

Determining thefair value of a reporting unit and the fair value of individual assets andliabilities of a reporting unit is judgmental in nature and often involves theuse of significant estimates and assumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the extent of suchcharge.  The Company’s estimates of fairvalue utilized in goodwill and other indefinite-lived intangible asset testsmay be based upon a number of factors, including assumptions about theprojected future cash flows, discount rate, growth rate, determination ofmarket comparables, technological change, economic conditions or changes to theCompany’s business operations.  Such changesmay result in impairment charges recorded in future periods.

 

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

 

In the thirdquarter of 2009, the Company noted continued reduction in advertising revenuein the operations of our RV and powersports publications, as well as flat tomoderate projected growth in future advertising revenue as a result ofcontinued deterioration of general economic conditions and consumerconfidence.  Based on the above, theCompany determined that there were identified indicators of impairment withinthese reporting units in the Media segment.

 

The Companyperformed an impairment test of the goodwill and intangible assets of thereporting units of our RV and powersports publications.  The impairment test indicated that theestimated fair value of these reporting units were less than book value.  The excess of the carrying value over theestimated fair value of the these reporting units was primarily due to thedecline in the recreational vehicle and camping retail markets leading to lowerexpected future cash flows for the business. In determining the fair value, theCompany used an income valuation approach.

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the reporting units of our RV and powersportspublications determined in step one of the impairment test, to the assets andliabilities of the respective reporting unit in accordance with new accountingguidance for Business Combinations. The Company measured the impairment forthese units to be equal to the carrying value of its goodwill, or $46.9million.  

 

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The Companyrecorded an impairment charge of $46.9 million in the third quarter of 2009related to these units, which is part of the Media segment.

 

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

 

*AccumulatedOther Comprehensive Loss*

 

Changes in thefair value of derivatives designated as highly effective cash flow hedges arerecorded in Accumulated Other Comprehensive Loss.  At March 31, 2010, Accumulated OtherComprehensive Loss was $7.2 million.

 

*Derivative Financial Instruments*

 

Asdiscussed in Note 7 — Interest Rate Swap Agreements, the Company accounts forderivative instruments and hedging activities in accordance with new accountingguidance for Accounting for Derivative Instruments and Hedging Activities.  All derivatives are recognized on the balancesheet at their fair value.  On the datethat the Company enters into a derivative contract, management formallydocuments all relationships between hedging instruments and hedged items, aswell as risk management objectives and strategies for undertaking various hedgetransactions.

 

Changes in the fair value of a derivative that ishighly effective and that is designated and qualifies as a cash flow hedge (a “swap”),to the extent that the hedge is effective, are recorded in accumulated othercomprehensive loss, until earnings are affected by the variability of cashflows of the hedged transaction.  TheCompany measures effectiveness of the swap at each quarter end using theHypothetical Derivative Method.  Underthis method, hedge effectiveness is measured based on a comparison of thechange in fair value of the actual swap designated as the hedging instrumentand the change in fair value of the hypothetical swap which would have theterms that identically match the critical terms of the hedged cash flows fromthe anticipated debt issuance.  Theamount of ineffectiveness, if any, recorded in earnings would be equal to theexcess of the cumulative change in the fair value of the swap over thecumulative change in the fair value of the plain vanilla swap lock, as definedin the accounting literature.  Once aswap is settled, the effective portion is amortized over the estimated life ofthe hedge item.

 

The Company utilizes derivative financialinstruments to manage its exposure to interest rate risks.  The Company does not enter into derivativefinancial instruments for trading purposes.

 

*FairValue Measurements*

 

Accounting guidance for fair valuemeasurements establishes a three-tier fair value hierarchy, which prioritizesthe inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such asquoted prices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

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The Company has determined that it utilizesobservable (Level 2) inputs in determining the fair value of its interest rateswap agreements which totaled $8.7 million at March 31, 2010.  The Company has determined that it utilizesunobservable (Level 3) inputs in determining the fair value of its FreedomRoadsPreferred Interest, and Media and Retail segment goodwill.

 

*Income Taxes*

 

Significantjudgment is required in determining the Company’s tax provision and inevaluating its tax positions.  TheCompany establishes accruals for certain tax contingencies when, despite thebelief that the Company’s tax return positions are fully supported, the Companybelieves that certain positions may be challenged and that the Company’spositions may not be fully sustained. The tax contingency accruals are adjusted in light of changing facts andcircumstances, such as the progress of tax audits, case law and emerginglegislation.  The Company’s tax provisionincludes the impact of tax contingency accruals and changes to the accruals,including related interest and penalties, as considered appropriate bymanagement.

 

**ITEM 3:  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed tomarket risks relating to fluctuations in interest rates.  Our objective of financial risk management isto minimize the negative impact of interest rate fluctuations on our earningsand cash flows.  Interest rate risk ismanaged through the use of a combination of fixed and variable interest debt aswell as the periodic use of interest rate collar agreements.

 

The followinginformation discusses the sensitivity to our earnings.  The range of changes chosen for this analysisreflects our view of changes which are reasonably possible over a one-yearperiod.  These forward-lookingdisclosures are selective in nature and only address the potential impacts fromfinancial instruments.  They do notinclude other potential effects which could impact our business as a result ofthese interest rate fluctuations.

 

*InterestRate Sensitivity Analysis*

 

At March 31,2010, the total debt of the Company was $375.5 million, including $150.1million of variable rate debt comprised of $141.6 million of term loans underthe AGI New Senior Credit Facility, of which $120.0 million is fixed throughthe interest rate swap agreements, and $8.5 million under the CW CreditFacility.  Fixed rate debt of $225.4 millionis comprised of $137.8 million of AGI Senior Notes, $87.0 million of AGHI Notesand $0.6 million of purchase debt. Holding other variables constant (such as debt levels), the earnings andcash flow impact of a one-percentage point increase/ decrease in interest rateswould have no impact as the variable debt is fixed by a minimum interest rateas defined in the respective agreements.

 

*CreditRisk*

 

We are exposed tocredit risk on accounts receivable.  Weprovide credit to customers in the ordinary course of business and performongoing credit evaluations. Concentrations of credit risk with respect to trade receivables arelimited due to the number of customers comprising 

 

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our customerbase.  We currently believe our allowancefor doubtful accounts is sufficient to cover customer credit risks.

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over FinancialReporting

 

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 theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-15(e) under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, the President and Chief Executive Officeralong with the Senior Vice President and Chief Financial Officer concluded thatthe disclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the periodic SEC filings.  Management determined that, as of March 31,2010, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 5: OTHER INFORMATION**

 

None.

 

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**SIGNATURES:**

 

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

 

 
|                     | **AFFINITY  GROUP HOLDING, INC.** |
|--------------------------|-----------------------------------|
|                     | ** **                        |
|                     |                              |
|                     | /s/ Thomas F.  Wolfe              |
| Date:  May 13, 2010 | Thomas F. Wolfe                   |
|                     | Senior Vice  President and        |
|                     | Chief Financial  Officer          |

 

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