**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**QuarterlyReport Under Section 13 or 15 (d) of**

**TheSecurities Exchange Act of 1934**

 

| **For Quarter Ended:** | ** ** | **Commission File Number** |
|------------------------|------------|----------------------------|
| **June 30, 2010** | ** ** | **333-124109**             |

 

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**AFFINITY GROUP HOLDING, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **20-2428068**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

| **2575 Vista Del Mar Drive**             | ** ** | **(805) 667-4100**           |
|------------------------------------------|------------|------------------------------|
| **Ventura, CA 93001**                    |       | (Registrant’s telephone |
| (Address of principal executive offices) |       | number, including area code) |

 

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SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THEACT:  **NONE**

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

**10-7/8% Senior Notes Due 2012**

 

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

 

YES x      NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405of this chapter) during the preceding 12 months (or for such shorter periodthat the registrant was required to submit and post such filings).

YES o NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated 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) |   |   |

 

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

YES o      NO x

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 

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

 

**DOCUMENTS INCORPORATED 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 June 30, 2010 (unaudited) and December 31, 2009            | 1        |
| ** **        |                                                                                                     |     |
| ** **        | Unaudited Consolidated Statements of Operations  for the three months ended June 30, 2010 and 2009  | 2        |
| ** **        |                                                                                                     |     |
| ** **        | Unaudited Consolidated Statements of Operations  for the six months ended June 30, 2010 and 2009    | 3        |
| ** **        |                                                                                                     |     |
| ** **        | Unaudited Consolidated Statements of Cash Flows  for the six months ended June 30, 2010 and 2009    | 4        |
| ** **        |                                                                                                     |     |
| ** **        | Notes to Unaudited Consolidated Financial Statements                                                     | 5        |
| ** **        |                                                                                                     |     |
| ** **        | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | 19       |
| ** **        |                                                                                                     |     |
| ** **        | **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                  | 36       |
| ** **        |                                                                                                     |     |
| ** **        | **Item  4: Controls and Procedures**                                                                     | 37       |
| ** **        | ** **                                                                                               |     |
| **Part II.** | Other Information                                                                                        | 37       |
| ** **        | ** **                                                                                               |     |
| ** **        | **Item 1A: Risk Factors**                                                                                | 37       |
| ** **        | ** **                                                                                               |     |
| ** **        | **Item 6: Exhibits**                                                                                     | 38       |
| ** **        | ** **                                                                                               |     |
| **Signatures**    | 39                                                                                                       |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2010 and December 31, 2009

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **6/30/2010**   | ** ** | **12/31/2009** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 12,857     |           | $          | 10,133 |   |
| Restricted cash                                                                                 |       | —          |       | 8,058          |       |
| Accounts receivable, less allowance for doubtful  accounts of $3,607 in 2010 and $3,128 in 2009 |       | 30,920          |       | 32,321         |       |
| Inventories                                                                                     |       | 66,678          |       | 49,921         |       |
| Prepaid expenses and other assets                                                               |       | 17,315          |       | 13,219         |       |
| Total current assets                                                                            |       | 127,770         |       | 113,652        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 29,468          |       | 34,276         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,815           |       | 4,837          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 14,782          |       | 14,867         |       |
| GOODWILL                                                                                        |       | 49,944          |       | 49,944         |       |
| OTHER ASSETS                                                                                    |       | 5,762           |       | 6,767          |       |
| Total assets                                                                                    |       | $               | 232,541    |           | $          | 224,343 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 30,379     |           | $          | 23,799 |   |
| Accrued interest                                                                                |       | 10,731          |       | 16,517         |       |
| Accrued income taxes                                                                            |       | 1,723           |       | 1,598          |       |
| Accrued liabilities                                                                             |       | 27,183          |       | 24,115         |       |
| Deferred revenues and gains                                                                     |       | 60,253          |       | 60,728         |       |
| Current portion of long-term debt                                                               |       | 1,037           |       | 892            |       |
| Total current liabilities                                                                       |       | 131,306         |       | 127,649        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 35,030          |       | 35,607         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 372,050         |       | 389,797        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 12,553          |       | 10,079         |       |
|                                                                                            |       | 550,939         |       | 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                                                                             |       | (366,388        | )          | (355,010       | )          |
| Accumulated other comprehensive loss                                                            |       | (7,127          | )          | (7,000         | )          |
| Total stockholder’s deficit                                                                |       | (318,398        | )          | (338,789       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 232,541    |           | $          | 224,343 |   |

 

See notes to consolidated financial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2010**          | ** ** | **6/30/2009** | ** ** |
|                                 |       |                   |       |   |   |
| REVENUES:                            |       |                   |       |   |   |
| Membership services                  |       | $                      | 38,661     |   | $ | 39,197 |   |
| Media                                |       | 8,009                  |       | 9,363 |   |
| Retail                               |       | 84,412                 |       | 81,339 |   |
|                                 |       | 131,082                |       | 129,899 |   |
|                                 |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                   |       |   |   |
| Membership services                  |       | 23,217                 |       | 24,615 |   |
| Media                                |       | 5,982                  |       | 7,396 |   |
| Retail                               |       | 49,847                 |       | 49,370 |   |
|                                 |       | 79,046                 |       | 81,381 |   |
|                                 |       |                   |       |   |   |
| GROSS PROFIT                         |       | 52,036                 |       | 48,518 |   |
|                                 |       |                   |       |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |
| Selling, general and administrative  |       | 35,641                 |       | 33,117 |   |
| Financing expense                    |       | 244                    |       | 1,540 |   |
| Depreciation and amortization        |       | 4,742                  |       | 5,697 |   |
|                                 |       | 40,627                 |       | 40,354 |   |
|                                 |       |                   |       |   |   |
| INCOME FROM OPERATIONS               |       | 11,409                 |       | 8,164 |   |
|                                 |       |                   |       |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |
| Interest income                      |       | 124                    |       | 134 |   |
| Interest expense                     |       | (12,321                | )          | (11,038 | ) |
| (Loss) gain on derivative instrument |       | (144                   | )          | 665 |   |
| Gain on debt restructure             |       | —                 |       | 4,678 |   |
| Other non-operating items, net       |       | (3                     | )          | (736 | ) |
|                                 |       | (12,344                | )          | (6,297 | ) |
|                                 |       |                   |       |   |   |
| (LOSS) INCOME BEFORE INCOME TAXES    |       | (935                   | )          | 1,867 |   |
|                                 |       |                   |       |   |   |
| INCOME TAX EXPENSE                   |       | (59                    | )          | (304 | ) |
|                                 |       |                   |       |   |   |
| NET (LOSS) INCOME                    |       | $                      | (994       | ) | $ | 1,563 |   |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                          | ** ** | **SIX MONTHS ENDED** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **6/30/2010**        | ** ** | **6/30/2009** | ** ** |
|                                |       |                 |       |   |   |
| REVENUES:                           |       |                 |       |   |   |
| Membership services                 |       | $                    | 78,235     |   | $ | 74,429 |   |
| Media                               |       | 22,692               |       | 26,783 |   |
| Retail                              |       | 138,589              |       | 133,740 |   |
|                                |       | 239,516              |       | 234,952 |   |
|                                |       |                 |       |   |   |
| COSTS APPLICABLE TO REVENUES:       |       |                 |       |   |   |
| Membership services                 |       | 43,293               |       | 44,945 |   |
| Media                               |       | 17,608               |       | 20,880 |   |
| Retail                              |       | 82,076               |       | 80,906 |   |
|                                |       | 142,977              |       | 146,731 |   |
|                                |       |                 |       |   |   |
| GROSS PROFIT                        |       | 96,539               |       | 88,221 |   |
|                                |       |                 |       |   |   |
| OPERATING EXPENSES:                 |       |                 |       |   |   |
| Selling, general and administrative |       | 65,833               |       | 63,056 |   |
| Financing expense                   |       | 7,330                |       | 1,540 |   |
| Depreciation and amortization       |       | 9,697                |       | 10,661 |   |
|                                |       | 82,860               |       | 75,257 |   |
|                                |       |                 |       |   |   |
| INCOME FROM OPERATIONS              |       | 13,679               |       | 12,964 |   |
|                                |       |                 |       |   |   |
| NON-OPERATING ITEMS:                |       |                 |       |   |   |
| Interest income                     |       | 250                  |       | 264 |   |
| Interest expense                    |       | (24,607              | )          | (20,080 | ) |
| Gain on derivative instrument       |       | (520                 | )          | 685 |   |
| Gain on debt restructure            |       | —               |       | 4,678 |   |
| Other non-operating items, net      |       | 22                   |       | (819 | ) |
|                                |       | (24,855              | )          | (15,272 | ) |
|                                |       |                 |       |   |   |
| LOSS BEFORE INCOME TAXES            |       | (11,176              | )          | (2,308 | ) |
|                                |       |                 |       |   |   |
| INCOME TAX EXPENSE                  |       | (202                 | )          | (700 | ) |
|                                |       |                 |       |   |   |
| NET LOSS                            |       | $                    | (11,378    | ) | $ | (3,008 | ) |

 

See notes to consolidated financial statements.

 

3

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                 | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                 | ** ** | **6/30/2010**        | ** ** | **6/30/2009** | ** ** |
|                                                                                       |       |                 |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |                 |       |   |   |
| Net loss                                                                                   |       | $                    | (11,378    | ) | $ | (3,008 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                 |       |   |   |
| Depreciation                                                                               |       | 5,622                |       | 6,525 |   |
| Amortization                                                                               |       | 4,075                |       | 4,136 |   |
| Loss (gain) on derivative instrument                                                       |       | 520                  |       | (685 | ) |
| Loss (gain) on debt restructure                                                            |       | 279                  |       | (4,678 | ) |
| Provision for losses on accounts receivable                                                |       | 776                  |       | 799 |   |
| Deferred compensation                                                                      |       | 1,750                |       | — |   |
| (Gain) loss on sale of property and equipment                                              |       | (23                  | )          | 165 |   |
| Accretion of original issue discount                                                       |       | 817                  |       | 264 |   |
| Changes in operating assets and liabilities                                                |       |                 |       |   |   |
| Accounts receivable                                                                        |       | 625                  |       | (3,633 | ) |
| Inventories                                                                                |       | (16,757              | )          | (7,397 | ) |
| Prepaid expenses and other assets                                                          |       | (3,091               | )          | (1,241 | ) |
| Accounts payable                                                                           |       | 6,580                |       | 19,213 |   |
| Accrued and other liabilities                                                              |       | 1,131                |       | 4,220 |   |
| Deferred revenues and gains                                                                |       | (1,052               | )          | 832 |   |
| Net cash (used in) provided by operating  activities                                       |       | (10,126              | )          | 15,512 |   |
|                                                                                       |       |                 |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                 |       |   |   |
| Capital expenditures                                                                       |       | (1,449               | )          | (2,391 | ) |
| Net proceeds from sale of property and equipment                                           |       | 658                  |       | 11 |   |
| Investment in affiliate                                                                    |       | 22                   |       | (115 | ) |
| Net cash used in investing activities                                                      |       | (769                 | )          | (2,495 | ) |
|                                                                                       |       |                 |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |       |                 |       |   |   |
| Contribution from parent                                                                   |       | 2,800                |       | 5,000 |   |
| Release of restricted cash                                                                 |       | 8,058                |       | — |   |
| Borrowings on debt                                                                         |       | 151,059              |       | 12,000 |   |
| Payment of debt issue costs                                                                |       | (4,349               | )          | (2,541 | ) |
| Principal payments on debt                                                                 |       | (143,949             | )          | (27,402 | ) |
| Net cash provided by (used in) financing  activities                                       |       | 13,619               |       | (12,943 | ) |
|                                                                                       |       |                 |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                    |       | 2,724                |       | 74 |   |
|                                                                                       |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                           |       | 10,133               |       | 10,777 |   |
|                                                                                       |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 |       | $                    | 12,857     |   | $ | 10,851 |   |

 

See notes to consolidated financial statements.

 

4

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

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation —*The consolidated financialstatements included herein include the accounts of Affinity Group Holding, Inc.(“AGHI”), its wholly-owned subsidiary, Affinity Group, Inc. (“AGI”), andAGI’s subsidiaries (collectively the “Company”).  AGHI was formed on March 2, 2005, atwhich time all of the stock of AGI was contributed to AGHI from its parent, AGIHolding Corp. (“AGHC”) a privately-owned corporation.  In November 2007, AGHC formed a holdingcompany, AGI Intermediate Holdco, LLC (“AGII”), at which time AGHC contributed100% of the outstanding shares of common stock of AGHI to AGII.

 

Theseinterim consolidated financial statements should be read in conjunction withthe Company’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2009 as filed with the Securitiesand Exchange Commission.  In the opinionof management of the Company, these consolidated financial statements containall adjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

 

OnMarch 1, 2010, AGI refinanced its existing senior credit facility ($128.9million aggregate principal amount outstanding as of 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 of June 30, 2010) or the AGHI Notes ($88.2 millionaggregate principal amount outstanding as of June 30, 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 June 30, 2010, $5.9 million wasborrowed and $6.9 million of letters of credit were outstanding under the CWCredit Facility.  See Note 6 — Debt.

 

Wehave evaluated subsequent events through the date of issuance of our financialstatements in this Form 10-Q.

 

5

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**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2010, the Company was required to adopt a newly issued accountingstandard which requires additional disclosure about the amounts of and reasonsfor significant transfers between levels of the fair value hierarchy discussedin Note 8, “Fair Value Measurements”. This standard also clarifies existing disclosure requirements related tothe level of disaggregation of fair value measurements for each class of assetsand liabilities 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**

 

TheCompany’s three 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.

 

Thereportable segments are strategic business units that offer different productsand services.  They are managedseparately because each business requires different technology, managementexpertise and marketing strategies.

 

6

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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 JUNE 30, 2010** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers     |       | $              | 38,661     |       | $          | 8,009      |       | $                | 84,412     |   | $ | 131,082 |   |
| Depreciation and amortization        |       | 477            |       | 948        |       | 2,356      |       | 3,781            |       |
| Interest income                      |       | 789            |       | —     |       | —     |       | 789              |       |
| Interest expense                     |       | —         |       | (18        | )          | 586        |       | 568              |       |
| Segment operating profit             |       | 13,408         |       | 30         |       | 4,451      |       | 17,889           |       |
|                                      |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                                    | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                    | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|                                          |       |           |       |       |       |       |       |             |       |
| **THREE MONTHS ENDED JUNE 30, 2009**          |       |           |       |       |       |       |       |             |       |
| Revenues from external customers              |       | $              | 39,197     |       | $          | 9,363      |       | $                | 81,339     |   | $ | 129,899 |   |
| Depreciation and amortization                 |       | 812            |       | 1,341      |       | 2,637      |       | 4,790            |       |
| Gain (loss) on sale of property and equipment |       | —         |       | 1          |       | (84        | )          | (83              | )          |
| Interest income                               |       | 849            |       | —     |       | 2          |       | 851              |       |
| Interest expense                              |       | —         |       | 19         |       | 2,823      |       | 2,842            |       |
| Segment operating profit (loss)               |       | 11,953         |       | (26        | )          | 459        |       | 12,386           |       |
|                                               |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                             | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|----------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                             | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|                                   |       |           |       |       |       |       |       |             |       |
| **SIX MONTHS ENDED JUNE 30, 2010**     |       |           |       |       |       |       |       |             |       |
| Revenues from external customers       |       | $              | 78,235     |       | $          | 22,692     |       | $                | 138,589    |   | $ | 239,516 |   |
| Depreciation and amortization          |       | 1,118          |       | 1,891      |       | 4,620      |       | 7,629            |       |
| Gain on sale of property and equipment |       | —         |       | —     |       | 23         |       | 23               |       |
| Interest income                        |       | 1,595          |       | —     |       | —     |       | 1,595            |       |
| Interest expense                       |       | —         |       | (8         | )          | 1,118      |       | 1,110            |       |
| Segment operating profit (loss)        |       | 31,096         |       | 942        |       | (97        | )          | 31,941           |       |
|                                        |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                             | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|----------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                             | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|                                   |       |           |       |       |       |       |       |             |       |
| **SIX MONTHS ENDED JUNE 30, 2009**     |       |           |       |       |       |       |       |             |       |
| Revenues from external customers       |       | $              | 74,429     |       | $          | 26,783     |       | $                | 133,740    |   | $ | 234,952 |   |
| Depreciation and amortization          |       | 1,618          |       | 2,664      |       | 4,826      |       | 9,108            |       |
| Loss on sale of property and equipment |       | —         |       | —     |       | (165       | )          | (165             | )          |
| Interest income                        |       | 1,713          |       | —     |       | 4          |       | 1,717            |       |
| Interest expense                       |       | —         |       | 47         |       | 6,741      |       | 6,788            |       |
| Segment operating profit (loss)        |       | 24,578         |       | 1,286      |       | (7,702     | )          | 18,162           |       |
|                                        |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 

7

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

 

Thefollowing is a reconciliation of profit from operations to the Company’sconsolidated financial statements for the three months and six months ended June 30,2010 and 2009 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **6/30/2010**          | ** ** | **6/30/2009**        | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** |
|                                                           |       |                   |       |                 |       |   |   |   |   |
| **Income (loss) From Operations  Before Income Taxes**         |       |                   |       |                 |       |   |   |   |   |
| Total income for reportable segments                           |       | $                      | 17,889     |                 | $          | 12,386 |   | $ | 31,941 |   | $ | 18,162 |   |
| Unallocated G & A expense                             |       | (5,057                 | )          | (3,848               | )          | (8,782 | ) | (7,341 | ) |
| Unallocated depreciation and amortization expense              |       | (961                   | )          | (907                 | )          | (2,068 | ) | (1,553 | ) |
| Unallocated other finance costs                                |       | —                 |       | (654                 | )          | — |   | (654 | ) |
| Unallocated (loss) gain on derivative instrument               |       | (144                   | )          | 665                  |       | (520 | ) | 685 |   |
| Unallocated financing expense                                  |       | (244                   | )          | (1,540               | )          | (6,905 | ) | (1,540 | ) |
| Unallocated gain on debt restructure                           |       | —                 |       | 4,678                |       | — |   | 4,678 |   |
| Elimination of intercompany interest income                    |       | (665                   | )          | (717                 | )          | (1,345 | ) | (1,453 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (11,753                | )          | (8,196               | )          | (23,497 | ) | (13,292 | ) |
| Income (loss) from operations before income taxes              |       | $                      | (935       | )                    | $          | 1,867 |   | $ | (11,176 | ) | $ | (2,308 | ) |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of June 30, 2010 and December 31,2009 (in thousands):

 
| ** **                                  | ** ** | **6/30/2010** | ** ** | **12/31/2009** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                 |       | $             | 242,964    |           | $          | 237,597 |   |
| Media segment                               |       | 21,783        |       | 26,876         |       |
| Retail segment                              |       | 110,281       |       | 95,193         |       |
| Total assets for reportable segments        |       | 375,028       |       | 359,666        |       |
| Restricted cash                             |       | —        |       | 8,058          |       |
| Intangible assets not allocated to segments |       | 4,247         |       | 3,314          |       |
| Corporate unallocated assets                |       | 6,933         |       | 8,299          |       |
| Elimination of intersegment receivable      |       | (153,667      | )          | (154,994       | )          |
| Total assets                                |       | $             | 232,541    |           | $          | 224,343 |   |

 

8

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**(4) STATEMENTS OF CASH FLOWS**

 

Supplementaldisclosures of cash flow information for the six months ended June 30 (inthousands):

 
| ** **                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 29,576     |     | $          | 21,246 |   |
| Income taxes                     |       | —   |       | 2        |       |
|                                  |            |          |            |          |            |  |  |

 

InFebruary 2009, AGHI paid the interest of $6.2 million on the AGHI Notesfrom the proceeds of a contribution from AGHC.

 

Forthe six months ended June 30, 2009, the Company recorded an adjustment tothe fair value of the interest rate swap resulting in a $4.9 million decreasein Other Long-Term Liabilities and a $3.6 million decrease in OtherComprehensive Loss and ineffective portion in the statement of operations as anon-cash gain on derivative instruments of $1.3 million.

 

Inthe first quarter 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 1,2010.  The $3.6 million was recorded as acontribution in Additional Paid-in Capital.

 

OnMarch 1, 2010, $25.4 million of AGHI Notes that were held by an affiliateof AGHI were contributed and recorded as a contribution in Additional Paid-inCapital, and AGHI cancelled those notes.

 

Forthe six months ended June 30, 2010, the Company recorded an adjustment tothe fair value of the interest rate swap resulting in a $0.6 million increasein Other Long-Term Liabilities and a $0.1 million increase in OtherComprehensive Loss and ineffective portion in the statement of operations as anon-cash loss on derivative instruments of $0.5 million.

 

InJune 2010, the Company recorded an adjustment of $0.1 million to thecurrent portion of Long-term Debt, related to the Powerboat Magazineacquisition in May 2005, to write-off the remaining contingency toamortization expense as the contingency was resolved and resulted in no finalpayment.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

TheCompany reviews goodwill and indefinite-lived intangible assets for impairmentat least annually, and more often when impairment indicators are present.  The Company performs its annual impairmenttest during the fourth quarter.

 

Determiningthe fair value of a reporting unit under the first step of the goodwillimpairment test and determining the fair value of individual assets andliabilities of a reporting unit under the second step of the goodwillimpairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand also the extent of

 

9

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(**5)** **GOODWILL AND INTANGIBLEASSETS (continued)**

 

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.

 

Thefollowing is a summary of changes in the Company’s goodwill by businesssegment, for the six months ended June 30, 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 June 30, 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 June 30, 2009         |       | $                         | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |

 

TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary.  The Company determined thatno adjustments to the useful lives of its finite-lived purchased intangibleassets were necessary as of June 30, 2010. Under the accounting guidance for goodwill and other intangible assets,as issued by the FASB, goodwill impairment is deemed to exist if the net bookvalue of a reporting unit exceeds its estimated fair value.  The Company’s reporting units are generallyconsistent with the operating segments underlying the reporting segmentsidentified in Note 3 — Disclosures about Segments of an Enterprise and RelatedInformation.

 

EffectiveJanuary 1, 2009, the Company adopted new accounting guidance related tobusiness combinations which establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and 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.

 

10

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

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at June 30, 2010 (in thousands, except asnoted):

 
| ** **                                      | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                   |       | $          | 35,355     |             | $          | (27,888    | )          | $ | 7,467 |   |
| Resort and golf course participation agreements |       | 4                   |       | 7          |       | (6               | )          | 1          |       |
| Non-compete and deferred consulting agreements  |       | 15                  |       | 18,650     |       | (16,743          | )          | 1,907      |       |
| Deferred financing costs                        |       | 6                   |       | 13,064     |       | (7,657           | )          | 5,407      |       |
|                                            |       |                |       |       |       |             |       |       |       |
|                                            |       |                |       | $          | 67,076     |             | $          | (52,294    | )          | $ | 14,782 |   |

 

**(6) DEBT**

 

AGHINotes

 

OnMarch 24, 2005, in a private placement, the Company issued $88.2 millionprincipal 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 the AGHI Notes under theSecurities Act of 1933 on June 8, 2005. The AGHI Notes are unsecured obligations of the Company, and AGI 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 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 theinterest payment due February 15, 2010 on March 5, 2010 with $4.4million in cash (funded, in part, from $2.5 million received by AGHI inconnection with a waiver by AGHI of certain first refusal rights related to AGI’svehicle insurance business and the balance from AGI as a permitted taxdistribution) and the remaining $1.8 million due to related entities wasforgiven and, as such, reported as an equity contribution.  Currently, the AGI New Senior CreditFacility, CWI Credit Facility, and the AGI Indenture impose limitations on theability of subsidiaries of AGHI to make dividend distributions or loans to AGHIto pay interest on the AGHI Notes.  On March 1,2010, $25.4 million of the AGHI Notes due March

 

11

----

 

**(6) DEBT (continued)**

 

15,2010 that were held by an affiliate of AGHI were contributed to the Company andthe Company cancelled those notes.  As ofJune 30, 2010, $87.1 million, net of $1.1 million in unamortized originalissue discount, remained outstanding on the AGHI Notes.

 

AGI New Senior Credit Facility

 

OnMarch 1, 2010, AGI entered into the Second Amended and Restated CreditAgreement (the “AGI New Senior Credit Facility”) to refinance its existingsenior credit facility ($128.9 million principal amount outstanding at December 31,2009) which was scheduled to mature on March 31, 2010, the second liennotes due July 31, 2010 ($9.7 million principal amount outstanding at December 31,2009) and the loan from SA Holding, LLC, (the “SA Loan”), an affiliate of theultimate shareholder of AGI, ($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 Senior CreditFacility 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 June 30, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat June 30, 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 swap agreements,(see Note 7- Interest Rate Swap Agreements), as of June 30, 2010, theaverage annual interest rate on the term loans was 16.76%.  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 indirectsubsidiaries.  As a condition to the termloans under the AGI New Senior Credit Facility, $25.4 million of AGHI Notes dueon March 15, 2010 that were held by an affiliate of AGHI were contributedto AGHI and AGHI cancelled those notes. As of June 30, 2010, $141.9 million, net of approximately $2.4million of unamortized original issue discount, was outstanding on the AGI NewSenior Credit Facility.

 

CW Credit Facility

 

OnMarch 1, 2010, Camping World entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1,2013, (ii) 60 days prior to the date of maturity of the AGI New SeniorCredit Facility, or (iii) 120 days prior to the earlier date of maturityof the AGI Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floatsat either 3.25% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whoseinterest is based on the prime rate or 3.25% over the LIBOR rate (defined asthe greater of LIBOR rate

 

12

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**(6) DEBT (continued)**

 

applicableto the period of the respective LIBOR borrowings or 1.0%) for borrowings whoseinterest is based on LIBOR. As of June 30, 2010, the average interest rateon the CW Credit Facility was 4.25%. Borrowings under the CW Credit Facility are based on the borrowing baseof eligible inventory and accounts receivable of Camping World and itssubsidiaries.  The CW Credit Facilitycontains affirmative covenants, including financial covenants, and negativecovenants.  Borrowings under the CWCredit Facility are guaranteed by the direct and indirect subsidiaries ofCamping World and are secured by a pledge on the stock of Camping World and itsdirect and indirect subsidiaries and liens on the assets of Camping World andits direct and indirect subsidiaries. The lenders under the AGI New Senior Credit Facility and the CW CreditFacility have entered into an intercreditor agreement that governs their rightsin the collateral that is pledged to secure their respective loans.  As of June 30, 2010, $5.9 million wasborrowed and $6.9 million of letters of credit were issued under the CW CreditFacility.

 

AGISenior Notes

 

InFebruary 2004, AGI issued $200.0 million aggregate principal amount of 9%senior subordinated notes due 2012 (“AGI Senior Notes”) pursuant to anindenture (the “AGI Indenture”).  AGIcompleted a registered exchange of the AGI Senior Notes under the SecuritiesAct 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 totheir existing 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 June 30,2010, $137.8 million of AGI Senior Notes remain outstanding.  The AGI New Senior Credit Facility, the CWCredit Facility and the AGI Indenture contain certain restrictive covenantsrelating to, but not limited to, mergers, changes in the nature of thebusiness, acquisitions, additional indebtedness, sale of assets, investments,and the payment of dividends subject to certain limitations and minimumoperating covenants.  The AGI New SeniorCredit Facility and the CW Credit Facility also contain certain financialaffirmative covenants.  The Company wasin compliance with all debt covenants at June 30, 2010.

 

**(7) INTEREST RATE SWAP AGREEMENTS**

 

TheCompany is exposed 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 Value Measurements.  The accounting for changes in the fair valueof a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under the accounting guidance for derivative instrumentsand hedging activities, we formally assess, both at inception and periodicallythereafter, whether the hedging derivatives are highly effective in offsettingchanges in either the fair value or cash

 

13

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

 

flowsof the hedged item.  Our derivatives thatare not designated and do not qualify as hedges under the accounting guidancefor derivative instruments and hedging activities are adjusted to fair valuethrough current earnings.

 

EffectiveJanuary 1, 2009, the Company adopted the provisions of the new accountingguidance for disclosures about derivative instruments and hedgingactivities.  The guidance requires thatthe objectives for using derivative instruments be disclosed to better conveythe purpose of derivative use in terms of the risks that the Company isintending to manage.  This standard alsorequires disclosure of how derivatives and related hedged items are accountedfor and how 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.

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30,2010 based upon the April 30, 2010 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap agreement waseffective beginning October 31, 2007 and expires on October 31, 2012.  On March 19, 2008, AGI entered into a4.5 year interest rate swap agreement with a notional amount of $35.0 millionfrom which it will receive periodic payments at the 3 month LIBOR-basedvariable rate (0.3378% at June 30, 2010 based upon the April 30, 2010reset 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 $7.1million is in accumulated other comprehensive loss, and $1.1 million includedin retained earnings and $0.5 million in the statement of operations in theperiod ended June 30, 2010.  Thefair value of these swaps included in other long-term liabilities was $8.1 millionof which $7.0 million is in accumulated other comprehensive loss and $1.1million in the statement of operations in aggregate periods through December 31,2009.  See Note 8 — Fair ValueMeasurements.

 

Dueto the potential sale of Camping World in September 2008, a highlyeffective hedge on the cash flows related to the $35.0 million notional amountinterest rate swap agreement was deemed to be no longer probable and was deemedto be reasonably possible.  As a result,changes in the value of the $35.0 million interest rate swap agreement areincluded in earnings as a gain (loss) on derivative instrument on October 1,2008.  Included in other comprehensiveloss is $0.4 million related to changes in the fair value of the $35.0 million

 

14

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

 

interestrate swap prior to October 1, 2008 which will be amortized over theremaining life of the interest rate swap and included in earnings as a gain(loss) on derivative instrument.

 

OnJune 11, 2009, the Company partially terminated the $35.0 million interestrate swap, subject to a partial termination fee of $0.6 million which wasexpensed.  The notional amount wasreduced to $20.0 million.  All otherterms of the interest rate swap agreement remained unchanged.  As a result, the amount included in othercomprehensive loss related to the $35.0 million interest rate swap was reducedprorata and included in earnings as a gain (loss) on derivative instrument.

 

Dueto the issuance of an option to the shareholder of the ultimate parent of theCompany to purchase Camping World, in the second quarter of 2009, a portion ofthe highly effective hedge on the cash flows related to 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 comprehensive loss is $1.6 million related to the last$20.0 million of the $100.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument.

 

Thefollowing is the location and amounts of derivative instruments fair values inthe statement of financial position segregated between designated, qualifyinghedging instruments segregated by assets and liabilities as required byaccounting guidance.

 
| **Derivatives  designated as   hedging intruments under** | ** ** | ** **                   | ** ** | **Fair Value as of:** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------|------------|
| **Statement  133**                                        | ** ** | **Balance Sheet Location**   | ** ** | **6/30/2010**         | ** ** | **12/31/2009** | ** ** |
|                                                      |       |                         |       |                  |       |   |   |
| Interest rate swap contracts                              |       | Other  long-term liabilities |       | $                     | (8,737     | ) | $ | (8,090 | ) |
|                                                           |            |                              |            |                       |            |  |  |  |  |

 

15

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

 

Thefollowing is the location and amount of gains and losses on derivativeinstruments in the statement of operations for the six months ended June 30,2010 and 2009 segregated between designated, qualifying hedging instruments andthose that are not, and segregated by assets and liabilities as required by theaccounting guidance for derivative instruments (in thousands):

 

Derivativesin Cashflow Hedging Relationships:

 
| ** **                                                                                                                        | ** ** | **Interest Rate Swap Agreements**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **6/30/2010**                        | ** ** | **6/30/2009** | ** ** |
| Amount of Gain or (Loss) recognized in Other  Comprehensive Income on Derivatives                                                 |       | $                                    | (316       | ) | $ | 3,574 |   |
|                                                                                                                              |       |                                 |       |   |   |
| Location of Gain (Loss) Reclassified from  Accumulated Other Comprehensive Loss into Statement of Operations (Effective  portion) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                   |            |                                      |            |  |  |  |  |

 
| ** **                                                                                                                                   | ** ** | **6/30/2010**                        | ** ** | **6/30/2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|
| Amount of Loss reclassified from Other  Comprehensive Loss into Statement of Operations (Effective portion)                                  |       | $                                    | (189       | )             | $          | (61 | ) |
|                                                                                                                                         |       |                                 |       |          |       |
| Location of Loss Recognized in Statement of  Operations on Derivatives (Ineffective portion and amount excluded from  effectiveness testing) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                              |            |                                      |            |               |            |  |  |

 
| ** **                                                                                                                          | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Amount of Gain or (Loss) recognized in income on  Derivatives (Ineffective portion and amount excluded from effectiveness  testing) |       | $             | (331       | )             | $          | 746 |   |
|                                                                                                                                     |            |               |            |               |            |  |  |

 

**(8) FAIR VALUE MEASUREMENTS**

 

Accountingguidance for fair value measurements establishes a three-tier fair valuehierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined asinputs other than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as unobservable inputs in whichlittle or no market data exists, therefore requiring an entity to develop itsown assumptions.

 

Asof June 30, 2010, the Company holds interest rate swap contracts that arerequired to be measured at fair value on a recurring basis.  The Company’s interest rate swap contractsare not traded on a public exchange.  SeeNote 7 Interest Rate Swap Agreements for further information on the interestrate swap contracts.  The fair value ofthese interest rate swap contracts are determined based on inputs that arereadily available in public markets or can be derived from informationavailable in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2.

 

16

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

 

The Company’s liabilities atJune 30, 2010, measured at fair value on a recurring basis subject to thedisclosure requirements of fair value measurements, 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 June 30, 2010:       |       |       |       |                                                         |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | $          | (8,737     | )                                                            | $          | — |   | $ | (8,737 | ) | $ | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                       |       | — |   | — |   |
|                            |       |       |       |                                                         |       |   |   |   |   |
| As of December 31, 2009:   |       |       |       |                                                         |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | (8,090     | )          | —                                                       |       | (8,090 | ) | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                       |       | — |   | — |   |
|                                 |            |            |            |                                                              |            |  |  |  |  |  |  |  |  |

 

The fair value of theinterest rate swap contracts was calculated using the income method based onquoted interest rates.

 

There have been no transfersof assets or liabilities between the fair value measurement levels and therewere no material remeasurements to fair value during the six months ended June 30,2010 and 2009 of assets and liabilities that are not measured at fair value ona recurring basis.

 

The following table presentsthe reported carrying value and fair value information for the AGI SeniorNotes, AGI New Senior Credit Facility and the CW Credit Facility.  The fair values shown below for the AGHINotes and the AGI Senior Notes are based on quoted prices in the market foridentical assets (Level 1), and the fair value shown for the AGI New SeniorCredit Facility and the CW Credit Facility are based on indirect observableinputs (Level 2) (in thousands):

 
| ** **                     | ** ** | **6/30/2010** | ** ** | **12/31/2009** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **Cost**      | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| AGHI Notes                     |       | $             | 87,121     |           | $          | 34,522 |   | $ | 112,275 |   | $ | 44,770 |   |
| AGI New Senior Credit Facility |       | 141,936       |       | 141,936        |       | 128,856 |   | 122,425 |   |
| CW Credit Facility             |       | 5,891         |       | 5,891          |       | — |   | — |   |
| AGI Senior Notes               |       | 137,824       |       | 137,824        |       | 137,824 |   | 93,893 |   |
|                                |            |               |            |                |            |  |  |  |  |  |  |  |  |

 

17

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**(9) INCOME TAXES**

 

The following tablesummarizes the activity related to unrecognized tax benefits (in thousands):

 
| 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                                                                                    |   | 5      |   |
| Unrecognized tax benefits at June 30, 2010                                          |   | $      | 1,344  |   |

 

The Company accrues interestand penalties related to unrecognized tax benefits in its income taxprovision.  The Company reversed accruedinterest and penalties of $2.0 million related to decreases in unrecognized taxbenefits in 2009.  As of June 30,2010, the liability for penalties and interest was $0.6 million. The Companyexpects its unrecognized tax benefits to decrease by $1.3 million over the nexttwelve months.

 

The Company and itssubsidiaries 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 2006 and 2005, respectively.  There currently is an Internal RevenueService examination of one of the Company’s wholly owned subsidiaries forfiscal year 2008.

 

18

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**ITEM 2:**

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2010**          | ** ** | **6/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| REVENUES:                            |       |                   |       |   |   |   |   |
| Membership services                  |       | 29.5                   | %          | 30.2 | % | (1.4 | )% |
| Media                                |       | 6.1                    | %          | 7.2 | % | (14.5 | )% |
| Retail                               |       | 64.4                   | %          | 62.6 | % | 3.8 | % |
|                                 |       | 100.0                  | %          | 100.0 | % | 0.9 | % |
|                                 |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                   |       |   |   |   |   |
| Membership services                  |       | 17.7                   | %          | 18.9 | % | (5.7 | )% |
| Media                                |       | 4.6                    | %          | 5.7 | % | (19.1 | )% |
| Retail                               |       | 38.0                   | %          | 38.0 | % | 1.0 | % |
|                                 |       | 60.3                   | %          | 62.6 | % | (2.9 | )% |
|                                 |       |                   |       |   |   |   |   |
| GROSS PROFIT                         |       | 39.7                   | %          | 37.4 | % | 7.3 | % |
|                                 |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |   |   |
| Selling, general and administrative  |       | 27.2                   | %          | 25.5 | % | 7.6 | % |
| Financing expense                    |       | 0.2                    | %          | 1.2 | % | (84.2 | )% |
| Depreciation and amortization        |       | 3.6                    | %          | 4.4 | % | (16.8 | )% |
|                                 |       | 31.0                   | %          | 31.1 | % | 0.7 | % |
|                                 |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 8.7                    | %          | 6.3 | % | 39.7 | % |
|                                 |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |   |   |
| Interest income                      |       | 0.1                    | %          | 0.1 | % | (7.5 | )% |
| Interest expense                     |       | (9.4                   | )%         | (8.5 | )% | 11.6 | % |
| (Loss) gain on derivative instrument |       | (0.1                   | )%         | 0.5 | % | (121.7 | )% |
| Gain on debt restructure             |       | —                 |       | 3.6 | % | -100.0 | % |
| Other non-operating items, net       |       | —                 |       | (0.6 | )% | (99.6 | )% |
|                                 |       | (9.4                   | )%         | (4.9 | )% | 96.0 | % |
|                                 |       |                   |       |   |   |   |   |
| (LOSS) INCOME BEFORE INCOME TAXES    |       | (0.7                   | )%         | 1.4 | % | (150.1 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.1                   | )%         | (0.2 | )% | (80.6 | )% |
|                                 |       |                   |       |   |   |   |   |
| NET (LOSS) INCOME                    |       | (0.8                   | )%         | 1.2 | % | (163.6 | )% |

 

19

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                          | ** ** | **SIX MONTHS ENDED** | ** ** |
|-------------------------------------|------------|----------------------|------------|
| ** **                          | ** ** | **6/30/2010**        | ** ** | **6/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                |       |                 |       |   |   |   |   |
| REVENUES:                           |       |                 |       |   |   |   |   |
| Membership services                 |       | 32.6                 | %          | 31.7 | % | 5.1 | % |
| Media                               |       | 9.5                  | %          | 11.4 | % | (15.3 | )% |
| Retail                              |       | 57.9                 | %          | 56.9 | % | 3.6 | % |
|                                |       | 100.0                | %          | 100.0 | % | 1.9 | % |
|                                |       |                 |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:       |       |                 |       |   |   |   |   |
| Membership services                 |       | 18.1                 | %          | 19.1 | % | (3.7 | )% |
| Media                               |       | 7.3                  | %          | 8.9 | % | (15.7 | )% |
| Retail                              |       | 34.3                 | %          | 34.5 | % | 1.4 | % |
|                                |       | 59.7                 | %          | 62.5 | % | (2.6 | )% |
|                                |       |                 |       |   |   |   |   |
| GROSS PROFIT                        |       | 40.3                 | %          | 37.5 | % | 9.4 | % |
|                                |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                 |       |                 |       |   |   |   |   |
| Selling, general and administrative |       | 27.5                 | %          | 26.8 | % | 4.4 | % |
| Financing expense                   |       | 3.1                  | %          | 0.7 | % | 376.0 | % |
| Depreciation and amortization       |       | 4.0                  | %          | 4.5 | % | (9.0 | )% |
|                                |       | 34.6                 | %          | 32.0 | % | 10.1 | % |
|                                |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS              |       | 5.7                  | %          | 5.5 | % | 5.5 | % |
|                                |       |                 |       |   |   |   |   |
| NON-OPERATING ITEMS:                |       |                 |       |   |   |   |   |
| Interest income                     |       | 0.1                  | %          | 0.1 | % | (5.3 | )% |
| Interest expense                    |       | (10.3                | )%         | (8.6 | )% | 22.5 | % |
| Gain on derivative instrument       |       | (0.2                 | )%         | 0.3 | % | (175.9 | )% |
| Gain on debt restructure            |       | —               |       | 2.0 | % | (100.0 | )% |
| Other non-operating items, net      |       | —               |       | (0.3 | )% | (102.7 | )% |
|                                |       | (10.4                | )%         | (6.5 | )% | 62.7 | % |
|                                |       |                 |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES            |       | (4.7                 | )%         | (1.0 | )% | 384.2 | % |
|                                |       |                 |       |   |   |   |   |
| INCOME TAX BENEFIT (EXPENSE)        |       | (0.1                 | )%         | (0.3 | )% | (71.1 | )% |
|                                |       |                 |       |   |   |   |   |
| NET LOSS                            |       | (4.8                 | )%         | (1.3 | )% | 278.3 | % |

 

20

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 **RESULTS OF OPERATIONS**

 

**ThreeMonths Ended June 30, 2010**

**ComparedWith Three Months Ended June 30, 2009**

 

*Revenues*

 

Revenuesof $131.1 million for the second quarter of 2010 increased by $1.2 million, or0.9%, from the comparable period in 2009.

 

MembershipServices revenues of $38.7 million for the second quarter of 2010 decreased$0.5 million, or 1.4%, from the comparable period in 2009.  This revenue decrease was largelyattributable to a $1.4 million reduction in member events revenue due to timingof the Good Sam Club annual rally, which occurred in the second quarter of 2009versus the third quarter of 2010 and a $0.3 million revenue reduction due toreduced membership in the Coast Club and Golf Card Club, partially offset by a$0.5 million increase in extended vehicle warranty program revenue, resultingfrom continued policy growth, and emergency road service revenue, a $0.4million increase in advertising revenue for the President’s Club publication,RV View, and a $0.3 million increase in marketing fee revenue from health andlife insurances products.

 

Mediarevenues of $8.0 million for the second quarter of 2010 decreased $1.4 million,or 14.5%, from the comparable period in 2009. This decrease was primarily attributable to a $1.2 million reduction inrevenue from our outdoor power sports magazines related to reduced issuespublished, and a $0.2 million reduction in advertising revenue related to thecampground guides in the second quarter of 2010 compared to the second quarterof 2009.

 

Retailrevenues of $84.4 million increased by $3.1 million, or 3.8%, from thecomparable period in 2009.  Storemerchandise sales increased $2.2 million from the second quarter of 2009 due toa same store sales increase of $3.2 million, or 5.3%, compared to a 6.5%decrease in same store sales for the second quarter of 2009, and a $0.1 millionrevenue increase from the opening of one new store over the past eighteenmonths partially offset by decreased revenue from discontinued stores of $1.1million.  Same store sale calculationsfor a given period include only those stores that were open both at the end ofthat period and at the beginning of the preceding fiscal year.  Also, installation and service fees increased$0.8 million, supplies and other sales increased $0.5 million, and mail orderand internet sales decreased $0.4 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $79.0 million for the second quarter of 2010, adecrease of $2.3 million, or 2.9%, from the comparable period in 2009.

 

MembershipServices costs applicable to revenues of $23.2 million decreased $1.4 million,or 5.7%, from the comparable period in 2009. This decrease consisted of a $1.7 million expense reduction related totiming of the annual rally, and a $0.3 million reduction in wage-relatedexpenses, partially offset by a $0.6 million increase in emergency road serviceand extended vehicle warranty program costs relating to increased revenue.

 

21

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Mediacosts applicable to revenues of $6.0 million for the second quarter of 2010decreased $1.4 million, or 19.1%, from the comparable period in 2009 primarilyrelated to a $0.8 million expense reduction from the outdoor power sportsmagazine group resulting from reduced issues published, a $0.3 million expensereduction in the RV magazine group and a $0.3 million reduction in costsrelated to the annual directories.

 

Retailcosts applicable to revenues increased $0.5 million, or 1.0%, to $49.8million.  The retail gross profit marginof 40.9% for the second quarter of 2010 increased from 39.3% for the comparableperiod in 2009 primarily due to selective price increases on high volumeproducts.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $35.6 million for the second quarter of2010 increased $2.5 million compared to the second quarter of 2009.  This increase was due to a $1.7 millionincrease in deferred executive compensation under the 2010 Phantom Stockagreements, and a $0.8 million increase in retail general and administrativeexpenses, primarily related to labor costs.

 

Forthe second quarter of 2010, financing expense of $0.2 million was incurred forlegal and other costs related to the New Senior Credit Facility entered into onMarch 1, 2010, which was expensed in accordance with accounting guidancefor debtors accounting for a modification or exchange of debt instruments.  Financing expense of $1.5 million for second quarterof 2009 related to legal and other costs incurred associated with the amendmentdated June 5, 2009 to the then senior secured credit facility.

 

Depreciationand amortization expense of $4.7 million decreased $1.0 million from the prioryear primarily due to reduced amortization of intangible assets associated withprior acquisitions, and reduced capital expenditures.

 

*Incomefrom Operations*

 

Incomefrom operations for the second quarter of 2010 totaled $11.4 million comparedto income from operations of $8.1 million for the second quarter of 2009.  This $3.2 million increase was primarily theresult of increased gross profit for the Retail and Membership Servicessegments of $2.6 million, and $0.9 million, respectively, reduced financingexpense of $1.3 million, and reduced operating expenses of $0.1 million.  These increases were partially offset by a$1.7 million increase in deferred executive compensation.

 

*Non-OperatingItems*

 

Non-operatingexpenses of approximately $12.3 million for the second quarter of 2010increased $6.0 million compared to the second quarter of 2009 due to the $4.7million gain on purchase of the $14.6 million of AGI Senior Notes in the secondquarter of 2009, a $1.2 million increase in interest expense relating to higherinterest rates, and $0.8 million of reduced gain on derivative interest rateswap agreements.  These increases werepartially offset by a $0.7 million reduction in other non-operating charges.

 

22

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*(Loss)income before Income Tax*

 

Lossbefore income tax for the second quarter of 2010 was $0.9 million, compared toincome of $1.9 million for the second quarter of 2009.  This decrease in income of $2.8 million wasattributable a $6.0 million increase in non-operating items mentioned above forthe second quarter of 2010 that was only partially offset by the $3.2 millionincrease in income from operations in the second quarter of 2010.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.1 million for thesecond quarter of 2010, compared to $0.3 million income tax expense for thesecond quarter of 2009.

 

*Net (loss) income*

 

Netloss in the second quarter of 2010 was $1.0 million compared to net income of$1.6 million for the same period in 2009 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

TheCompany’s three 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 RV owners, campersand outdoor vacationers, 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.  TheRetail segment sells specialty retail merchandise and services for RV ownersprimarily through retail supercenters and mail order catalogs.  The Company evaluates performance based onprofit or loss from operations before income taxes and unusual items.

 

Thereportable segments are strategic business units that offer different productsand services.  They are managedseparately because each business required different technology, managementexpertise and marketing strategies.

 

Membershipservices segment profit of $13.4 million for the second quarter of 2010increased $1.5 million, or 12.2%, from the comparable period in 2009.  This increase was largely attributable to a$0.4 million increase in profit from the Good Sam Club related to reducedmarketing and administrative expense, a $0.4 million increase in President’sClub segment profit related to increased advertising revenue in its RV Viewmagazine, a $0.4 million increase in profit from marketing fee revenue relatedto health and life insurance products, and a $0.3 million increase in segmentprofit related to overhead cost savings.

 

Mediasegment profit of approximately $30,000 for the second quarter of 2010 remainedrelatively unchanged from the comparable period in 2009.  Increased segment profit from the RV magazinegroups of approximately $0.2 million, related to reduced costs, was offset byreduced segment profit from consumer events, relating to reduced number ofevents.

 

23

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Retailsegment profit of $4.5 million for the second quarter of 2010 increased $4.0million compared the $0.5 million segment profit for the second quarter of2009.  This increase in segment profitwas the result of a $2.3 million increase in gross profit margin, a $2.2million decrease in allocated interest expense, and a $0.3 million decrease indepreciation and amortization expense, partially offset by a $0.8 millionincrease in selling, general and administrative expenses.

 

**SixMonths Ended June 30, 2010**

**ComparedWith Six Months Ended June 30, 2009**

 

Revenuesof $239.5 million for the first six months of 2010 increased by $4.6 million,or 1.9%, from the comparable period in 2009.

 

MembershipServices revenues of $78.2 million for the first six months of 2010 increased$3.8 million, or 5.1%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $4.6 million revenue increase related to vehicle insuranceproducts primarily related to a $5.0 million fee received in the first quarteras a result of waiving our right of first refusal regarding the sale of thethird party partner, an $0.8 million increase in extended vehicle warrantyprogram revenue resulting from continued policy growth, a $0.7 million increasein various other ancillary products, a $0.5 million increase in advertisingrevenue for the President’s Club publication, RV View, and a $0.4 millionincrease in revenue from emergency road service products.  These increases were partially offset by a$1.4 million reduction in member events revenue due to timing of the Good SamClub annual rally, which occurred in the second quarter of 2009 versus thethird quarter of 2010, a $1.2 million revenue decrease due to the terminationof the brand usage licensing fee charged to FreedomRoads Holding LLC and itssubsidiaries (collectively “FreedomRoads”) in December 2009, and a $0.6million decrease due to reduced membership for the Coast Club and Golf CardClub.

 

Mediarevenues of $22.7 million for the first six months of 2010 decreased $4.1million, or 15.3%, from the comparable period in 2009.  This decrease was primarily attributable to a$2.5 million reduction in revenue from our outdoor power sports magazinesrelated to reduced issues published, a $0.6 million reduction in RV relatedpublication revenue primarily attributable to reduced advertising andcirculation revenue, and a $1.0 million reduction in exhibitor revenueresulting from six fewer consumer shows in the first six months of 2010compared to the first six months of 2009.

 

Retailrevenues of $138.6 million increased by $4.8 million, or 3.6%, from thecomparable period in 2009.  Storemerchandise sales increased $2.0 million from the first six months of 2009 dueto a same store sales increase of $3.4 million, or 3.4%, compared to an 11.0%decrease in same store sales for the first six months of 2009, and a $0.2million revenue increase from the opening of one new store over the pasteighteen months, partially offset by decreased revenue from discontinued storesof $1.6 million.  Same store salecalculations for a given period include only those stores that were open bothat the end of that period and at the beginning of the preceding fiscalyear.  Also, mail order and internetsales increased $1.0 million, installation and service fees increased $1.0million and supplies and other sales increased $0.8 million.

 

24

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*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $143.0 million for the first six months of 2010,a decrease of $3.8 million, or 2.6%, from the comparable period in 2009.

 

MembershipServices costs applicable to revenues of $43.3 million decreased $1.7 million,or 3.7%, from the comparable period in 2009. This decrease consisted of a $1.7 million reduction in member eventscosts related to event timing, a $0.7 million reduction in wage-relatedexpenses, and a $0.5 million reduction in marketing and program costs relatedto reduced membership in the Coast Club and Golf Card Club, partially offset bya $1.0 million increase in costs associated with the extended vehicle warrantyprogram and emergency road services, related to increased revenue, and a $0.2million increase in vehicle insurance marketing fees.

 

Mediacosts applicable to revenues of $17.6 million for the first six months of 2010decreased $3.3 million, or 15.7%, from the comparable period in 2009 primarilyrelated to a $1.9 million reduction in magazine expenses resulting from reducedissues published and reduced magazine sizes, a $0.7 million reduction in costs relatedto reduced consumer shows revenue, and a $0.7 million reduction in wage-relatedcosts.

 

Retailcosts applicable to revenues increased $1.2 million, or 1.4%, to $82.1million.  The retail gross profit marginof 40.8% for the first six months of 2010 increased from 39.5% for thecomparable period in 2009 primarily due to selective price increases on highvolume products.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $65.8 million for the first six monthsof 2010 increased $2.8 million compared to the first six months of 2009.  This increase was due to a $1.7 millionincrease in deferred executive compensation under the 2010 Phantom Stockagreements, a $1.0 million increase in retail general and administrativeexpenses consisting primarily of increases in labor and property taxes, and a$0.1 million increase in other general and administrative expenses.

 

Forthe first six months of 2010, financing expense of $7.3 million was incurredfor legal 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.  Financing expense of $1.5million for first six months of 2009 related to legal and other costs incurredassociated with the amendment dated June 5, 2009 to the then seniorsecured credit facility.

 

Depreciationand amortization expense of $9.7 million decreased $1.0 million from the prioryear primarily due to reduced amortization of intangible assets associated withprior acquisitions, and reduced capital expenditures partially offset byincreased amortization related to the New Senior Credit Facility re-financing.

 

25

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*Incomefrom Operations*

 

Incomefrom operations for the first six months of 2010 totaled $13.7 million comparedto $13.0 million for the first six months of 2009.  This $0.7 million increase was primarily theresult of increased financing expense of $5.8 million in the first six monthsof 2010, $1.7 million of deferred executive compensation, and reduced grossprofit for the Media segment of $0.8 million, partially offset by increasedgross profit for the Retail and Membership Service segments of $3.6 million and$5.4 million, respectively.

 

*Non-OperatingItems*

 

Non-operatingexpenses of approximately $24.9 million for the first six months of 2010increased $9.6 million compared to the first six months of 2009 due to a $4.5million increase in interest expense relating to higher interest rates, a $4.7million gain on purchase of the $14.6 million AGI Senior Notes in the secondquarter of 2009, and a $1.2 million reduced gain on derivative interest rateswap agreements, partially offset by an $0.8 million reduction in othernon-operating expenses .  See Note 7 —Interest Rate Swap Agreements.

 

*Lossbefore Income Tax*

 

Lossbefore income tax for the first six months of 2010 was $11.2 million, comparedto loss before income taxes for the first six months of 2009 of $2.3million.  This increased loss wasattributable to the $0.7 million increase in income from operations and the$9.6 million increase in non-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.2 million for the firstsix months of 2010, compared to $0.7 million income tax expense for the firstsix months of 2009.

 

*Net loss*

 

Netloss in the first six months of 2010 was $11.4 million compared to a $3.0million net loss for the same period in 2009 mainly due to the reasonsdiscussed above.

 

*SegmentProfit (Loss)*

 

TheCompany’s three 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 RV owners, campersand outdoor vacationers, 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.  TheRetail segment sells specialty retail merchandise and services for RV ownersprimarily through retail supercenters and mail order catalogs.  The Company evaluates performance based onprofit or loss from operations before income taxes and unusual items.

 

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Thereportable segments are strategic business units that offer different productsand services.  They are managedseparately because each business required different technology, managementexpertise and marketing strategies.

 

Membershipservices segment profit of $31.1 million for the first six months of 2010increased $4.0 million, or 16.3%, from the comparable period in 2009.  This increase was largely attributable to a$4.3 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 $1.2 million increase insegment profit from various ancillary products revenue and cost reductions, a$0.9 million increase in profit from the Good Sam Club related to reducedmarketing and administrative expenses, a $0.5 million increase in profit fromthe extended vehicle warranty program and emergency road service products, a$0.4 million increase in segment profit related to member events timing, a $0.3million increase in segment profit relating to the additional advertisingrevenue in the President’s Club publication, RV View, and a $0.1 millionincrease in profit related to reduced marketing and program expenses in theCoast to Coast Club and Golf Card Club. These increases were partially offset by a $1.2 million decrease insegment profit relating to reduced brand usage licensing fees fromFreedomRoads.

 

Mediasegment profit decreased $0.3 million, or 26.7%, to $0.9 million for the firstsix months of 2010 from the comparable period in 2009.  This decrease in segment profit resultedprimarily from a $0.3 million decrease in segment profit from our consumershows group.

 

Retailsegment loss was $0.1 million for the first six months of 2010 compared to aloss of $7.7 million for the first six months of 2009.  This $7.6 million improvement was the resultof a $5.6 million decrease in allocated interest expense, a $3.0 millionincrease in gross profit margin and a $0.4 million reduction in amortizationexpense, partially offset by a $1.0 million increase in selling, general andadministrative expenses, and $0.4 million of financing expense.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany historically operates with a working capital deficit.  The working capital deficit as of June 30,2010 and December 31, 2009 was $3.5 million and $14.0 million,respectively.  The primary reason for theworking capital deficit was the deferred revenue and gains reported undercurrent liabilities of $60.3 million and $60.7 million, as of June 30,2010 and December 31, 2009, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships and service contracts in advance, which is amortized over the lifeof the membership or contract period. The Company uses net proceeds from this deferred revenue to lower itsborrowings.

 

In2009, the Company engaged a financial advisor to assist in refinancing orrestructuring of the AGI Senior Notes ($137.8 million principal outstanding at June 30,2010 and maturing on February 15, 2012) and the AGHI Notes ($87.1 millionprincipal outstanding at June 30, 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 

 

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period,AGHI received 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 insurance business and thebalance from AGI as a permitted tax distribution) and the remaining $1.8 milliondue to related entities was forgiven and, as such, reported as an equitycontribution.  As a condition to fundingof the AGI New Senior Credit Facility, AGHI acquired $25.4 million of AGHINotes due on March 15, 2010 that were held by an affiliate of AGHI, andcontributed them by the affiliate to AGHI, and AGHI then cancelled those notes,thereby reducing the approximately $112.3 million of AGHI Notes outstanding asof December 31, 2009 to approximately $87.1 million as of June 30,2010.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligationsand commercial commitments at June 30, 2010.  This table includes principal and futureinterest due under our debt agreements based on interest rates as of June 30,2010 and assumes debt obligations will be held to maturity.

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **(in thousands)**          | ** ** | **Total**                  | ** ** | **2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  2014** | ** ** | **Thereafter** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |
| Debt and future interest    |       | $                          | 453,673    |   | $ | 23,037 |   | $ | 430,636 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 215,286                    |       | 11,511 |   | 42,950 |   | 36,660 |   | 124,165 |   |
| Standby letters of credit   |       | 6,891                      |       | 4,891 |   | 2,000 |   | — |   | — |   |
| Grand total                 |       | $                          | 675,850    |   | $ | 39,439 |   | $ | 475,586 |   | $ | 36,660 |   | $ | 124,165 |   |

 

Inaccordance with their respective loan agreements, the maturity dates of the AGINew Senior Credit Facility and the CW Credit Facility accelerate to mature 90days and 120 days, respectively, prior to maturity of the AGI Senior Notes andthe AGHI Notes.  The Debt and futureinterest disclosed above assumes the AGI Senior Notes and AGHI Notes, both due February 15,2012, are not extended.

 

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AGHINotes

 

OnMarch 24, 2005, in a private placement, the Company issued $88.2 millionprincipal 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 the AGHI Notes under theSecurities Act of 1933 on June 8, 2005. The AGHI Notes are unsecured obligations of the Company, and AGI 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 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 theinterest payment due February 15, 2010 on March 5, 2010 with $4.4million in cash (funded, in part, from $2.5 million received by AGHI inconnection with a waiver by AGHI of certain first refusal rights related to AGI’svehicle insurance business and the balance from AGI as a permitted taxdistribution) and the remaining $1.8 million due to related entities wasforgiven and, as such, reported as an equity contribution.  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 the Company cancelled those notes.  Currently, the AGI New Senior CreditFacility, CWI Credit Facility, and the AGI Indenture impose limitations on theability of subsidiaries of AGHI to make dividend distributions or loans to AGHIto pay interest on the AGHI Notes.  As ofJune 30, 2010, $87.1 million, net of $1.1 million in unamortized originalissue discount, remained outstanding on the AGHI Notes.

 

Thenext interest payment date on the AGHI Notes is August 15, 2010 and theamount of interest then due is $4.8 million. Under the terms of the AGI New Senior Credit Facility, AGI is notcurrently able to pay dividends or otherwise provide funds to the Company tomake such interest payment and, consequently, as of the filing of this Reporton Form 10-Q, we do not have sufficient funds to make the August 15,2010 interest payment on the AGHI Notes. Although for the interest payments payable August 15, 2007, August 15,2008, February 15, 2009, August 15, 2009 and February 15, 2010,the Company’s parent, AGHC, has made capital contributions to AGHI in amountsnecessary to fund those interest payments, as of the filing of this Report onForm 10-Q, the Company has not received a commitment from its parent,AGHC, to provide funds for the interest payment due August 15, 2010.  There can be no assurance that the Company’sparent company will loan or otherwise provide funds to the Company in an amountsufficient to make such interest payment.

 

Underthe terms of the AGHI Notes, the Company is afforded a 30-day grace period fromthe interest payment date before non-payment constitutes an event of defaultunder such notes.  If the interest payment is not made by the end of thegrace period and no extension or other agreement is reached with the holders ofthe AGHI Notes, the trustee under the indenture under which the AGHI Notes wereissued can declare an event of default and the trustee must declare an event ofdefault if the holders of 25% or more in principal amount of the AGHI Notesrequest that the trustee declare an event of default.  The AGI New Credit Facility and the CW CreditFacility include cross-default provisions that would result in an event ofdefault under those debt instruments if an event of default occurs under theAGHI Notes.  Upon an event of default,the holders of such debt instruments will be entitled to exercise theirrespective remedies including, in the case of secured debt, to sell thecollateral securing the repayment thereof.  In as much as the indebtednessowned under the AGI New Senior Credit Facility and the CW Credit Facility issecured, it would be repaid before funds are available to discharge anyunsecured or subordinated obligations. Because we are a holding company, except to the extent that we havepriority or equal claims against our subsidiaries as a creditor, ourobligations under the AGHI Notes are effectively subordinated to theobligations of our subsidiaries, including the AGI Senior Notes and tradepayables of our subsidiaries.

 

AGINew Senior Credit Facility

 

OnMarch 1, 2010, AGI entered into the AGI New Senior Credit Facility torefinance the existing senior credit facility ($128.9 million aggregateprincipal amount outstanding at December 31, 2009) which was scheduled tomature on March 31, 2010, the second lien notes due July 31, 2010($9.7 million principal amount outstanding at December 31, 2009), and theSA 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 Senior CreditFacility mature on the earlier of (i) March 1, 2015 or (ii) 90days prior to the maturity of either the AGI Senior Notes ($137.8 millionprincipal amount outstanding as at June 30, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat June 30, 2010 and are due February 15, 2012).  Interest on 

 

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theterm loans under the AGI New Senior Credit Facility floats at either 8.75% overthe base rate (defined as the greater of the prime rate, federal funds rateplus 50 basis points or 5.25%) for borrowings whose interest is based on theprime rate or 10.0% over the LIBOR rate (defined as the greater of the 3 monthsLIBOR rate or 3.0%) 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 June 30, 2010, the average annual interest rate on the term loans was16.76%.  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 June 30, 2010, $141.9 million, netof approximately $2.4 million of unamortized original issue discount, wasoutstanding 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.

 

CW Credit Facility

 

OnMarch 1, 2010, Camping World entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1,2013, (ii) 60 days prior to the date of maturity of the AGI New SeniorCredit Facility, or (iii) 120 days prior to the earlier date of maturityof the AGI Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floatsat either 3.25% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whoseinterest is based on the prime rate or 3.25% over the LIBOR rate (defined asthe 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 June 30, 2010, the averageinterest 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 June 30,2010, $5.9 million was borrowed and $6.9 million of letters of credit wereissued under the CW Credit Facility.

 

AGISenior Notes

 

InFebruary 2004, AGI issued $200.0 million of AGI Senior Notes pursuant tothe AGI Indenture.  Interest at the rateof 9% per annum is due on the AGI Senior Notes on February 15 and August 15.  The AGI Senior Notes mature on February 15,2012.  As of June 30, 2010, $137.8million of AGI Senior Notes remained outstanding.  The fair value of the AGI Senior Notes, basedon the quoted market price at June 30, 2010, was $102.3 million.

 

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TheAGI New Senior Credit Facility, the CW Credit Facility and the AGI Indenturecontain certain restrictive covenants relating to, but not limited to, mergers,changes in the nature of the business, acquisitions, additional indebtedness,sale of assets, investments, and the payment of dividends subject to certainlimitations and minimum operating covenants. The AGI New Senior Credit Facility and the CW Credit Facility alsocontain certain financial and minimum operating covenants.  The Company was in compliance with all debtcovenants at June 30, 2010.

 

Interest Rate Swap Agreements

 

TheCompany is exposed 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 leveraged derivatives.We recognize all of our derivative instruments as either assets or liabilitiesat fair value.  Fair value is determinedin accordance with the accounting guidance for Fair Value Measurements.  See Note 8 — Fair Value Measurements.  The accounting for changes in the fair valueof a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under the accounting guidance for derivative instrumentsand hedging activities, we formally assess, both at inception and periodicallythereafter, whether the hedging derivatives are highly effective in offsettingchanges in either the fair value or cash flows of the hedged item.  Our derivatives that are not designated anddo not qualify as hedges under the accounting guidance for derivativeinstruments and hedging activities are adjusted to fair value through currentearnings.

 

EffectiveJanuary 1, 2009, the Company adopted the provisions of the new accountingguidance for disclosures about derivative instruments and hedgingactivities.  The guidance requires thatthe objectives for using derivative instruments be disclosed to better conveythe purpose of derivative use in terms of the risks that the Company isintending to manage.  This standard alsorequires disclosure of how derivatives and related hedged items are accountedfor and how 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.

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30,2010 based upon the April 30, 2010 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap agreement waseffective 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 (0.3378% at June 30, 2010 based upon the April 30,2010 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 

 

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cashflow hedge of the variable rate interest payments due on $135.0 million of theterm loans, and accordingly, gains and losses on the fair value of the interestrate swap agreements 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 $7.1million is in accumulated other comprehensive loss, and $1.1 million includedin retained earnings and $0.5 million in the statement of operations in theperiod ended June 30, 2010.  Thefair value of these swaps included in other long-term liabilities was $8.1million of which $7.0 million is in accumulated other comprehensive loss and$1.1 million in the statement of operations in aggregate periods through December 31,2009.

 

Dueto the potential sale of Camping World in September 2008, a highlyeffective hedge on the cash flows related to the $35.0 million notional amountinterest rate swap agreement was deemed to be no longer probable and was deemedto be reasonably possible.  As a result,changes in the value of the $35.0 million interest rate swap agreement areincluded in earnings as a gain (loss) on derivative instrument on October 1,2008.  Included in other comprehensiveloss is $0.4 million related to changes in the fair value of the $35.0 millioninterest rate swap prior to October 1, 2008, which will be amortized overthe remaining life of the interest rate swap and included in earnings as a gain(loss) on derivative instrument.

 

OnJune 11, 2009, the Company partially terminated the $35.0 million interestrate swap, subject to a partial termination fee of $0.6 million which wasexpensed.  The notional amount wasreduced to $20.0 million.  All otherterms of the interest rate swap agreement remained unchanged.  As a result, the amount included in othercomprehensive loss related to the $35.0 million interest rate swap was reducedprorata and included in earnings as a gain (loss) on derivative instrument.

 

Dueto the issuance of an option to the shareholder of the ultimate parent of theCompany to purchase Camping World, in the second quarter of 2009, which optionwas subsequently terminated, a portion of the highly effective hedge on thecash flows related to the $100.0 million notional amount interest rate swapagreement was deemed to be no longer probable and was deemed to be reasonablypossible.  As a result, changes in thevalue of the last $20.0 million of the $100.0 million interest rate swapagreement are included in earnings beginning on June 5, 2009.  Included in other comprehensive loss is $1.6million related to the last $20.0 million of the $100.0 million interest rateswap which will be amortized over the remaining life of the interest rate swapand included in earnings as a gain (loss) on derivative instrument.

 

OtherContractual Obligations and Commercial Commitments

 

Forthe six months ended June 30, 2010, the Company incurred $1.7 million ofdeferred executive compensation expense under the phantom stock agreements, andmade no payments under 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 six months of 2010 totaling $1.4 million decreased$0.9 million from the first six months of 2009 primarily due to the curtailmentof new retail store openings.  Additionalcapital expenditures of $2.8 million are anticipated for the balance of 

 

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2010primarily for software enhancements, information technology upgrades andfurther website development.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

Thediscussion and analysis of the Company’s financial condition and results ofoperations are based upon the Company’s consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of these financial statements requires the Company to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  On an on-going basis,the Company evaluates its estimates, including those related to membershipprograms and incentives, bad debts, inventories, intangible assets, employeehealth insurance benefits, income taxes, restructuring, contingencies andlitigation.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

TheCompany believes the following critical accounting policies affect the moresignificant judgments and estimates used in the preparation of the Company’sconsolidated financial statements.

 

*RevenueRecognition*

 

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 the contract.  ERS claim expenses are recognized whenincurred.  Advances on third party creditcard fee revenues are deferred and recognized based primarily on a percentageof credit card receivables held by third parties.  Membership revenue is generated from annual,multi-year and lifetime memberships.  Therevenue and expenses associated with these memberships are deferred andamortized over the membership period. For lifetime memberships, an 18-year period is used, which is theactuarially 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.

 

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*AccountsReceivable*

 

TheCompany estimates 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*

 

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

 

*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-livedassets, such as property, plant and equipment and purchased intangible assetswith finite 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.  The Companyassesses the fair value of the assets based on the future cash flow the assetsare 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.

 

TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary or if any of these assets had indefinite lives and were therefore notsubject to amortization.  The Companydetermined that no adjustments to the useful lives of its finite-livedpurchased intangible assets were necessary. The finite-lived purchased intangible assets consist of membership customerlists, resort and golf course agreements, non-compete and deferred consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 4 years, 15 years and 6 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

TheCompany evaluates indefinite-lived intangible assets for impairment at leastannually or when events indicate that an impairment exists in accordance withaccounting guidance for goodwill and other intangibles.  The impairment test for goodwill and otherindefinite-lived intangible assets is calculated annually using fair valuemeasurement techniques.

 

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Determiningthe fair 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.  Suchchanges may result in impairment charges recorded in future periods.

 

Thefair value of the Company’s reporting units is annually determined using acombination of the income approach and the market approach.  Under the income approach, the fair value ofa reporting unit is calculated based on the present value of estimated futurecash flows.  Future cash flows areestimated by the Company under the market approach, fair value is estimatedbased on market multiples of revenue or earnings for comparable companies.

 

Futuregoodwill impairment 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.

 

*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, as wellas 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 the cumulativechange in the fair value of the plain vanilla swap lock, as defined in theaccounting literature.  Once a swap issettled, the effective portion is amortized over the estimated life of thehedge 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.

 

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*Fair Value Measurements*

 

Accountingguidance for fair value measurements establishes a three-tier fair valuehierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined asinputs other than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as unobservable inputs in whichlittle or no market data exists, therefore requiring an entity to develop itsown assumptions.

 

TheCompany has determined that it utilizes observable (Level 2) inputs indetermining the fair value of its interest rate swap agreements.  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.

 

*IncomeTaxes*

 

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:  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risks relating tofluctuations in interest rates.  Ourobjective of financial risk management is to minimize the negative impact ofinterest rate fluctuations on our earnings and cash flows.  Interest rate risk is managed through the useof a combination of fixed and variable interest debt as well as the periodicuse of interest rate collar agreements.

 

The following information discusses the sensitivityto our earnings.  The range of changeschosen for this analysis reflects our view of changes which are reasonablypossible over a one-year period.  Theseforward-looking disclosures are selective in nature and only address thepotential impacts from financial instruments. They do not include other potential effects which could impact ourbusiness as a result of these interest rate fluctuations.

 

*Interest Rate SensitivityAnalysis*

 

At June 30, 2010, the total debt of the Companywas $373.1 million, $147.8 million of variable rate debt comprised of $141.9million of term loans under the New Senior Credit Facility, of which $120.0million is fixed through the interest rate swap agreements, and $5.9 millionunder the CW Credit Facility.  Fixed ratedebt of $225.3 million is comprised of $137.8 million of AGI Senior Notes,$87.1 million of AGHI Notes and $0.4 million of purchase debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-

 

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percentage point increase/ decrease in interestrates would have an unfavorable/ favorable impact of approximately $0.3million.

 

*Credit Risk*

 

We are exposed to credit risk on accountsreceivable.  We provide credit tocustomers in the ordinary course of business and perform ongoing creditevaluations.  Concentrations of creditrisk with respect to trade receivables are limited due to the number ofcustomers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficientto cover customer credit risks.

** **

**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over Financial Reporting

 

Within90 days prior to the filing of this Quarterly Report on Form 10-Q, theCompany 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 June 30,2010, 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 1A: RISK FACTORS**

 

Inaddition to Risk Factors described under Item 1A — Risk Factors, in theCompany’s annual report on Form 10-K for the year ended December 31,2009, the following additional risk factors supplement the Risks Relating toOur Debt:

 

*Thematurity of our senior secured indebtedness could accelerate in the fourthquarter of 2011 if we are not able to refinance or extend the maturity date ofthe AGI Senior Notes and the AGHI Notes which mature on February 15, 2012.*

 

Inaccordance with their respective loan agreements, the maturity dates of the AGINew Senior Credit Facility and the CW Credit Facility accelerate to mature 90days and 120 days, respectively, prior to maturity of the AGI Senior Notes andthe AGHI Notes.  The AGI Senior Notes andAGHI Notes are due on February 15, 2012. Although the Company is currently seeking to refinance, extend orreplace these notes, there can be no assurance that these notes will berefinanced, extended or replaced prior to the accelerated due dates of the AGINew Senior Credit Facility and CW Credit Facility.  The availability of financing may be limiteddue to the current uncertainties in the capital markets and the current generalconditions in the U.S. economy.  As a result,it may be even more difficult for the Company to refinance, extend or replacethe AGI Senior Notes and AGHI Notes.  Ifthe Company is not able to refinance, extend or replace the AGI Senior Notesand AGHI Notes prior to the accelerated maturity dates of the AGI New SeniorCredit Facility and the CW Credit Facility, the lenders under the AGI NewSenior Credit Facility and the CW Credit Facility will be entitled to exercisetheir remedies to sell the collateral securing the repayment of the AGI New SeniorCredit Facility and CW Credit Facility, including the Company’s assets, thestock of the Company and the stock of the Company’s subsidiaries.  Since the indebtedness owed under the AGI NewSenior Credit Facility and CW Credit Facility is secured, it would be repaidbefore any of the unsecured or subordinated obligations of the Company and itssubsidiaries.  It is also possible thatthe interest rate payable on any new borrowings will be higher than theinterest rates under the current AGI Senior Notes and AGHI Notes, which wouldadversely affect the Company’s cash flow and profitability (or increaselosses).

 

*Thenext interest payment date on the AGHI Notes is August 15, 2010 and theamount of interest then due on the AGHI Notes is $4.8 million.  Under the terms of the AGI New Senior CreditFacility, AGI is not currently able to pay dividends or otherwise provide fundsto the Company to enable the Company to make such interest payment and,consequently, as of the filing of this Report on Form 10-Q, we do not havesufficient funds to make the August 15, 2010 interest payment on the AGHINotes.  Although for the interestpayments payable August 15, 2007, August 15, 2008, February 15,2009, August 15, 2009 and February 15, 2010, the Company’s parent,AGHC, has made capital contributions to the Company in amounts necessary tofund those interest payments, there can be no assurance that the Company’sparent company will loan or otherwise provide funds to the Company in an amountsufficient to make the interest payment due August 15, 2010.*

 

Asof June 30, 2010, approximately $87.1 million, net of $1.1 million inunamortized original issue discount, remained outstanding on the AGHINotes.  The next interest 

 

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paymentdate on the AGHI Notes is August 15, 2010 and the amount of interest thendue is $4.8 million.  Under the terms ofthe AGI New Senior Credit Facility, AGI is not currently able to pay dividendsor otherwise provide funds to the Company to make such interest payment and,consequently, as of the filing of this Report on Form 10-Q, we do not havesufficient funds to make the August 15, 2010 interest payment on the AGHINotes.  Although for the interestpayments payable August 15, 2007, August 15, 2008, February 15,2009, August 15, 2009 and February 15, 2010, the Company’s parent,AGHC, has made capital contributions to the Company in amounts necessary tofund those interest payments, as of the filing of this Report on Form 10-Q,the Company has not received a commitment from its parent, AGHC, to providefunds for the interest payment due August 15, 2010.  There can be no assurance that the Company’sparent company will loan or otherwise provide funds to the Company in an amountsufficient to make such interest payment.

 

Underthe terms of the AGHI Notes, the Company is afforded a 30-day grace period fromthe interest payment date before non-payment constitutes an event of defaultunder such notes.  If the interest payment is not made by the end of thegrace period and no extension or other agreement is reached with the holders ofthe AGHI Notes, the trustee under the indenture under which the AGHI Notes wereissued can declare an event of default and the trustee must declare an event ofdefault if the holders of 25% or more in principal amount of the AGHI Notesrequest that the trustee declare an event of default.  The AGI New Credit Facility and the CW CreditFacility include cross-default provisions that would result in an event ofdefault under those debt instruments if an event of default occurs under theAGHI Notes.  Upon an event of default,the holders of such debt instruments will be entitled to exercise theirrespective remedies including, in the case of secured debt, to sell thecollateral securing the repayment thereof.  In as much as the indebtednessowned under the AGI New Senior Credit Facility and the CW Credit Facility issecured, it would be repaid before funds are available to discharge anyunsecured or subordinated obligations. Because we are a holding company, except to the extent that we havepriority or equal claims against our subsidiaries as a creditor, ourobligations under the AGHI Notes are effectively subordinated to theobligations of our subsidiaries, including the AGI Senior Notes and tradepayables of our subsidiaries.

 

**ITEM 6: EXHIBITS**

 

Exhibits:

 

Exhibit 10.40– Form of Phantom Stock Agreement between certain executives and AffinityGroup, Inc., dated January 1, 2010.

 

Exhibit 10.41– Audit Committee Charter revision dated June 15, 2010.

 

Exhibit 10.42– First Amendment and Limited Waiver to Second Amended and Restated CreditAgreement dated August 12, 2010 among Affinity Group, Inc., asborrower and as a credit party, the credit parties hereto, the lenders partyhereto and Wilmington Trust FSB, as Administrative Agent.

 

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**SIGNATURES:**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrantshave duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.

 

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

 

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