**UNITED STATES**

##### **SECURITIES AND EXCHANGE COMMISSION**

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

###### ** **

**FORM 10-Q**

** **

**Quarterly Report Under Section 13 or 15 (d) of**

**The Securities Exchange Act of 1934**

 

| **For  Quarter Ended:**      | ** ** | **Commission  File Number** |
|------------------------------|------------|-----------------------------|
| **September 30,  2009** | ** ** | **333-124109**              |

 

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**AFFINITYGROUP HOLDING, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

SECURITIESREGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:

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

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15 (d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

 

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

 

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

YES o NO o

 

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

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

 

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

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

 

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

 

|                         |       | **Outstanding as of** |
|------------------------------|------------|-----------------------|
| **Class**                    | ** ** | **November 12, 2009** |
| Common Stock, $.01 par value |       | 100                   |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

 

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

** **

**INDEX**

 
|              |                                                                                                         | **Page**   |
|-------------------|--------------------------------------------------------------------------------------------------------------|------------|
| **Part I.**  | Financial Information                                                                                        |       |
|              |                                                                                                         |       |
|              | **Item 1:  Financial Statements**                                                                            |       |
|              |                                                                                                         |       |
|              | Consolidated Balance Sheets  as of September 30, 2009 (unaudited) and December 31, 2008            | 1          |
|              |                                                                                                         |       |
|              | Unaudited Consolidated Statements of Operations  for the three months ended September 30, 2009 and 2008 | 2          |
|              |                                                                                                         |       |
|              | Unaudited Consolidated Statements of Operations  for the nine months ended September 30, 2009 and 2008  | 3          |
|              |                                                                                                         |       |
|              | Unaudited Consolidated Statements of Cash Flows  for the nine months ended September 30, 2009 and 2008  | 4          |
|              |                                                                                                         |       |
|              | Notes to Unaudited Consolidated Financial Statements                                                         | 5          |
|              |                                                                                                         | ** ** |
|              | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**     | 28         |
|              |                                                                                                         |       |
|              | **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                      | 49         |
|              |                                                                                                         |       |
|              | **Item  4: Controls and Procedures**                                                                         | 50         |
|              | ** **                                                                                                   |       |
| **Part II.** | Other Information                                                                                            | 50         |
|              | ** **                                                                                                   |       |
| **Signatures**    | 52                                                                                                           |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2009 and December 31, 2008

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **9/30/2009**   | ** ** | **12/31/2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 10,416     |           | $          | 10,777 |   |
| Accounts receivable, less  allowance for doubtful accounts of $2,727 in 2009 and $2,147 in 2008 |       | 27,891          |       | 40,191         |       |
| Inventories                                                                                     |       | 61,032          |       | 57,137         |       |
| Prepaid expenses and other  assets                                                              |       | 18,334          |       | 13,547         |       |
| Total current assets                                                                            |       | 117,673         |       | 121,652        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT,  net                                                                    |       | 36,082          |       | 44,077         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,711           |       | 4,608          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 18,054          |       | 22,389         |       |
| GOODWILL                                                                                        |       | 49,944          |       | 96,828         |       |
| DEFERRED TAX ASSETS, net                                                                        |       | —          |       | 4,569          |       |
| OTHER ASSETS                                                                                    |       | 3,647           |       | 2,035          |       |
| Total assets                                                                                    |       | $               | 230,111    |           | $          | 296,158 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 26,390     |           | $          | 23,950 |   |
| Accrued interest                                                                                |       | 10,695          |       | 11,581         |       |
| Accrued income taxes                                                                            |       | 1,579           |       | 1,165          |       |
| Accrued liabilities                                                                             |       | 26,862          |       | 27,009         |       |
| Deferred revenues and  gains                                                                    |       | 69,769          |       | 60,569         |       |
| Current portion of  long-term debt                                                              |       | 156,691         |       | 12,391         |       |
| Total current liabilities                                                                       |       | 291,986         |       | 136,665        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND  GAINS                                                                    |       | 35,211          |       | 35,855         |       |
| LONG-TERM DEBT, net of  current portion                                                         |       | 225,276         |       | 391,487        |       |
| OTHER LONG-TERM  LIABILITIES                                                                    |       | 8,287           |       | 30,156         |       |
|                                                                                            |       | 560,760         |       | 594,163        |       |
|                                                                                            |       |            |       |           |       |
| 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                                                                      |       | 23,220          |       | 12,041         |       |
| Accumulated deficit                                                                             |       | (346,766        | )          | (299,710       | )          |
| Accumulated other  comprehensive loss                                                           |       | (7,104          | )          | (10,337        | )          |
| Total stockholder’s  deficit                                                               |       | (330,649        | )          | (298,005       | )          |
| Total liabilities and  stockholder’s deficit                                               |       | $               | 230,111    |           | $          | 296,158 |   |

 

Seenotes to consolidated financial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                             | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **9/30/2009**          | ** ** | **9/30/2008** | ** ** |
|                                   |       |                   |       |   |   |
| REVENUES:                              |       |                   |       |   |   |
| Membership services                    |       | $                      | 35,531     |   | $ | 36,610 |   |
| Media                                  |       | 8,333                  |       | 12,547 |   |
| Retail                                 |       | 81,080                 |       | 84,180 |   |
|                                   |       | 124,944                |       | 133,337 |   |
|                                   |       |                   |       |   |   |
| COSTS APPLICABLE TO  REVENUES:         |       |                   |       |   |   |
| Membership services                    |       | 23,031                 |       | 23,151 |   |
| Media                                  |       | 7,152                  |       | 10,604 |   |
| Retail                                 |       | 49,934                 |       | 49,882 |   |
|                                   |       | 80,117                 |       | 83,637 |   |
|                                   |       |                   |       |   |   |
| GROSS PROFIT                           |       | 44,827                 |       | 49,700 |   |
|                                   |       |                   |       |   |   |
| OPERATING EXPENSES:                    |       |                   |       |   |   |
| Selling, general and  administrative   |       | 34,214                 |       | 35,869 |   |
| Goodwill impairment                    |       | 46,884                 |       | 47,601 |   |
| Impairment of investment  in affiliate |       | —                 |       | 81,005 |   |
| Financing expense                      |       | 337                    |       | — |   |
| Depreciation and  amortization         |       | 5,927                  |       | 5,160 |   |
|                                   |       | 87,362                 |       | 169,635 |   |
|                                   |       |                   |       |   |   |
| LOSS FROM OPERATIONS                   |       | (42,535                | )          | (119,935 | ) |
|                                   |       |                   |       |   |   |
| NON-OPERATING ITEMS:                   |       |                   |       |   |   |
| Interest income                        |       | 128                    |       | 162 |   |
| Interest expense                       |       | (11,559                | )          | (9,276 | ) |
| Gain on derivative  instrument         |       | 114                    |       | — |   |
| Other non-operating items,  net        |       | (563                   | )          | (141 | ) |
|                                   |       | (11,880                | )          | (9,255 | ) |
|                                   |       |                   |       |   |   |
| LOSS BEFORE INCOME TAXES               |       | (54,415                | )          | (129,190 | ) |
|                                   |       |                   |       |   |   |
| INCOME TAX BENEFIT  (EXPENSE)          |       | 12,916                 |       | (270 | ) |
|                                   |       |                   |       |   |   |
| NET LOSS                               |       | $                      | (41,499    | ) | $ | (129,460 | ) |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                             | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **9/30/2009**         | ** ** | **9/30/2008** | ** ** |
|                                   |       |                  |       |   |   |
| REVENUES:                              |       |                  |       |   |   |
| Membership services                    |       | $                     | 109,960    |   | $ | 114,718 |   |
| Media                                  |       | 35,116                |       | 54,227 |   |
| Retail                                 |       | 214,820               |       | 237,106 |   |
|                                   |       | 359,896               |       | 406,051 |   |
|                                   |       |                  |       |   |   |
| COSTS APPLICABLE TO  REVENUES:         |       |                  |       |   |   |
| Membership services                    |       | 67,976                |       | 72,810 |   |
| Media                                  |       | 28,032                |       | 39,208 |   |
| Retail                                 |       | 130,840               |       | 139,077 |   |
|                                   |       | 226,848               |       | 251,095 |   |
|                                   |       |                  |       |   |   |
| GROSS PROFIT                           |       | 133,048               |       | 154,956 |   |
|                                   |       |                  |       |   |   |
| OPERATING EXPENSES:                    |       |                  |       |   |   |
| Selling, general and  administrative   |       | 97,270                |       | 112,591 |   |
| Goodwill impairment                    |       | 46,884                |       | 47,601 |   |
| Impairment of investment  in affiliate |       | —                |       | 81,005 |   |
| Financing expense                      |       | 1,877                 |       | — |   |
| Depreciation and  amortization         |       | 16,588                |       | 15,454 |   |
|                                   |       | 162,619               |       | 256,651 |   |
|                                   |       |                  |       |   |   |
| LOSS FROM OPERATIONS                   |       | (29,571               | )          | (101,695 | ) |
|                                   |       |                  |       |   |   |
| NON-OPERATING ITEMS:                   |       |                  |       |   |   |
| Interest income                        |       | 392                   |       | 444 |   |
| Interest expense                       |       | (31,639               | )          | (27,717 | ) |
| Gain on derivative  instrument         |       | 799                   |       | — |   |
| Gain on debt restructure               |       | 4,678                 |       | — |   |
| Other non-operating items,  net        |       | (1,382                | )          | (164 | ) |
|                                   |       | (27,152               | )          | (27,437 | ) |
|                                   |       |                  |       |   |   |
| LOSS BEFORE INCOME TAXES               |       | (56,723               | )          | (129,132 | ) |
|                                   |       |                  |       |   |   |
| INCOME TAX BENEFIT  (EXPENSE)          |       | 12,216                |       | (841 | ) |
|                                   |       |                  |       |   |   |
| NET LOSS                               |       | $                     | (44,507    | ) | $ | (129,973 | ) |

 

Seenotes to consolidated financial statements.

 

3

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **NINE MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                   | ** ** | **9/30/2009**         | ** ** | **9/30/2008** | ** ** |
|                                                                         |       |                  |       |   |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                       |       |                  |       |   |   |
| Net loss                                                                     |       | $                     | (44,507    | ) | $ | (129,973 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                  |       |   |   |
| Depreciation                                                                 |       | 9,892                 |       | 8,802 |   |
| Amortization                                                                 |       | 6,696                 |       | 6,652 |   |
| Impairment loss on  goodwill                                                 |       | 46,884                |       | 47,601 |   |
| Impairment loss on  investment in affiliate                                  |       | —                |       | 81,005 |   |
| Gain on derivative  instrument                                               |       | (799                  | )          | — |   |
| Gain on debt restructure                                                     |       | (4,678                | )          | — |   |
| Provision for losses on  accounts receivable                                 |       | 1,714                 |       | 881 |   |
| Deferred compensation                                                        |       | —                |       | (311 | ) |
| Deferred tax benefit                                                         |       | 4,569                 |       | — |   |
| Loss on sale of property  and equipment                                      |       | 561                   |       | 246 |   |
| Non-cash interest on AGHI  Notes                                             |       | —                |       | 1,465 |   |
| Accretion of original  issue discount                                        |       | 401                   |       | 355 |   |
| Changes in operating  assets and liabilities                                 |       |                  |       |   |   |
| Accounts receivable                                                          |       | 10,586                |       | (2,463 | ) |
| Inventories                                                                  |       | (3,895                | )          | 890 |   |
| Prepaid expenses and other  assets                                           |       | (6,399                | )          | (4,928 | ) |
| Accounts payable                                                             |       | 2,440                 |       | 2,006 |   |
| Accrued and other  liabilities                                               |       | (12,936               | )          | (5,955 | ) |
| Deferred revenues and  gains                                                 |       | 8,556                 |       | 4,002 |   |
| Net cash provided by  operating activities                                   |       | 19,085                |       | 10,275 |   |
|                                                                         |       |                  |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                       |       |                  |       |   |   |
| Capital expenditures                                                         |       | (2,481                | )          | (9,407 | ) |
| Net proceeds from sale of  property and equipment                            |       | 23                    |       | 18 |   |
| Acquisitions, net of cash  received                                          |       | —                |       | (3,409 | ) |
| Repayment of loans  receivable                                               |       | (103                  | )          | 31 |   |
| Net cash used in investing  activities                                       |       | (2,561                | )          | (12,767 | ) |
|                                                                         |       |                  |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                       |       |                  |       |   |   |
| Dividends paid                                                               |       | (2,550                | )          | (1,000 | ) |
| Contribution from parent                                                     |       | 5,000                 |       | 6,180 |   |
| Borrowings on debt                                                           |       | 18,547                |       | 33,000 |   |
| Payment of debt issue  costs                                                 |       | (2,541                | )          | (121 | ) |
| Principal payments on debt                                                   |       | (35,341               | )          | (27,972 | ) |
| Net cash (used in)  provided by financing activities                         |       | (16,885               | )          | 10,087 |   |
|                                                                         |       |                  |       |   |   |
| NET CHANGE IN CASH AND  CASH EQUIVALENTS                                     |       | (361                  | )          | 7,595 |   |
|                                                                         |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD                            |       | 10,777                |       | 8,566 |   |
|                                                                         |       |                  |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                  |       | $                     | 10,416     |   | $ | 16,161 |   |

 

See notes to consolidatedfinancial statements.

 

4

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**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation**–*The consolidated financial statements includedherein include the accounts of Affinity Group Holding, Inc. (“AGHI”), itswholly-owned subsidiary, Affinity Group, Inc. (“AGI”), and AGI’ssubsidiaries (collectively the “Company”), presented in accordance with U.S.generally accepted accounting principles, (“GAAP”), and pursuant to the rules andregulations of the Securities and Exchange Commission.  In November 2007, AGI Holding Corp. (“AGHC”)formed a holding company, AGI Intermediate Holdco, LLC (“AGII”), at which timeAGHC contributed 100% of the outstanding shares of common stock of AGHI toAGII.  AGII is the parent company ofAGHI.

 

These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2008 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.

 

*Basisfor Presentation**–*With respect to the AGHI Notes, AGIhas not paid any dividends to AGHI to fund payment of interest on the AGHINotes.  Currently, the AGI Senior CreditFacility and the AGI Indenture impose limitations on the ability ofsubsidiaries of AGHI to make dividend distributions or loans to AGHI to payinterest on the AGHI Notes.  AGHI madethe interest payments due on August 15, 2005, February 15, 2006, August 15,2006, February 15, 2007, and February 15, 2008 through the issuanceof additional notes and AGHI paid the interest on the AGHI Notes due August 15,2007, August 15, 2008 and February 15, 2009 from proceeds of capitalcontributions made by AGHI’s parent, AGHC. The Company has not paid $6.1 million of interest due August 15,2009 due to pending discussions with holders of the AGHI Notes regarding arefinancing or restructuring of the indebtedness of the Company.  As a result of not paying the $6.1 million ofinterest due August 15, 2009, the Company is currently working under theterms of a forbearance Agreement with the note holders through November 13,2009.  See Note 11 - Subsequent Events.

 

TheAGI Senior Credit Facility restricts distributions from AGI and its subsidiariesto AGHI in respect of any fiscal year to the amount based on reasonableestimates, of federal, state and local income taxes that the Borrower would berequired to pay with respect to such fiscal year calculated as if, for suchfiscal year, the Borrower were treated as a “C corporation”.

 

OnJune 5, 2009, AGI entered into an amendment to its AGI Senior CreditFacility pursuant to which the maturity date was extended from June 24,2009 to March 31, 2010, the revolving credit portion of the facility wasreduced by $10.0 million to $25.0 million, the outstanding term loan borrowingswere repaid by $8.0 million, and the borrowing rate was increased to prime

 

5

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**(1) BASISOF PRESENTATION (continued)**

 

rateplus 7.0% to 9.0% or LIBOR plus 8.0% to 10.0% with a LIBOR floor of 2.75%.  Concurrent with the June 5, 2009amendment to the AGI Senior Credit Facility, AGI obtained a $9.7 million AGISecond Lien Loan, the net proceeds of which were used to purchase $14.6 millionin principal amount of AGI Senior Subordinated Notes.  The AGI Second Lien Loan carries an interestrate of 9.0% and matures on July 31, 2010. See Note 6 - Debt.

 

The June 5, 2009 amendment to the AGI Senior Credit Facility alsorevised the Company’s financial covenants in effect through the extendedmaturity date.  As required by the AGISenior Credit Facility, significant cost reductions were implemented in 2008and 2009, including the elimination of personnel, suspension of 401(k) employercontributions, salary cutbacks, hiring and capital expenditure spendingfreezes, closure ofunder-performing retail stores, satellite office closures,and magazine size and frequency reductions.

 

**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issued newaccounting guidance entitled, “The FASB Accounting Standards Codification andthe Hierarchy of Generally Accepted Accounting Principles — a replacement ofFASB Statement No. 162”.  TheAccounting Standards Codification (“ASC” or “Codification”) identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with GAAP. This new guidance is effective for financial statements issued forinterim and annual periods ending after September 15, 2009.  The adoption of this guidance has changed howwe reference various elements of GAAP when preparing our financial statementdisclosures, but did not have an impact on our financial position, results ofoperations or cash flows.

 

InMay 2009, the FASB issued new accounting guidance on subsequent events.The objective of this guidance is to establish general standards of accountingfor and disclosure of events that occur after the balance sheet date but beforefinancial statements are issued or are available to be issued. This newaccounting guidance was effective for interim and annual periods ending after June 15,2009. The impact of adopting this new guidance had no effect on theaccompanying condensed consolidated financial statements.

 

InApril 2009, the FASB issued new accounting guidance on fair valuemeasurements. The new guidance impacts certain aspects of fair valuemeasurement and related disclosures. The new guidance was effective beginningin the second quarter of 2009. The adoption of this new guidance resulted inadditional interim disclosures and did not have a material effect on ourconsolidated results of operations or financial position.

 

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

 

The Company’sthree principal lines of business are Membership Services, Media, andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the

 

6

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

 

President’s Club,Camp Club 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 retailmerchandise and services for RV owners primarily through retail supercentersand mail order catalogs.  The Companyevaluates performance based on profit or loss from operations before incometaxes and unusual items.

 

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

 

7

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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 SEPTEMBER 30,  2009** |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers          |       | $              | 35,531     |       | $          | 8,333      |       | $                | 81,080     |   | $ | 124,944 |   |
| Loss on sale of property  and equipment    |       | —         |       | —     |       | (397       | )          | (397             | )          |
| Interest income                            |       | 836            |       | —     |       | —     |       | 836              |       |
| Interest expense                           |       | —         |       | 18         |       | 425        |       | 443              |       |
| Depreciation and  amortization             |       | 760            |       | 1,339      |       | 2,563      |       | 4,662            |       |
| Goodwill impairment                        |       | —         |       | 46,884     |       | —     |       | 46,884           |       |
| Segment operating profit  (loss)           |       | 10,304         |       | (48,183    | )          | 1,037      |       | (36,842          | )          |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                                 | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED SEPTEMBER 30,  2008** |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers          |       | $              | 36,610     |       | $          | 12,547     |       | $                | 84,180     |   | $ | 133,337 |   |
| Loss on sale of property  and equipment    |       | —         |       | —     |       | (160       | )          | (160             | )          |
| Interest income                            |       | 891            |       | —     |       | 5          |       | 896              |       |
| Interest expense                           |       | —         |       | 53         |       | 4,026      |       | 4,079            |       |
| Depreciation and  amortization             |       | 846            |       | 1,579      |       | 2,087      |       | 4,512            |       |
| Goodwill impairment                        |       | —         |       | —     |       | 47,601     |       | 47,601           |       |
| Impairment of investment  in affiliate     |       | —         |       | —     |       | 81,005     |       | 81,005           |       |
| Segment operating profit  (loss)           |       | 10,880         |       | (1,131     | )          | (129,518   | )          | (119,769         | )          |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30,  2009** |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers         |       | $              | 109,960    |       | $          | 35,116     |       | $                | 214,820    |   | $ | 359,896 |   |
| Loss on sale of property  and equipment   |       | —         |       | —     |       | (562       | )          | (562             | )          |
| Interest income                           |       | 2,549          |       | —     |       | 4          |       | 2,553            |       |
| Interest expense                          |       | —         |       | 65         |       | 7,166      |       | 7,231            |       |
| Depreciation and  amortization            |       | 2,378          |       | 4,003      |       | 7,389      |       | 13,770           |       |
| Goodwill impairment                       |       | —         |       | 46,884     |       | —     |       | 46,884           |       |
| Segment operating profit  (loss)          |       | 34,882         |       | (46,897    | )          | (6,665     | )          | (18,680          | )          |
|                                           |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                                | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30,  2008** |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers         |       | $              | 114,718    |       | $          | 54,227     |       | $                | 237,106    |   | $ | 406,051 |   |
| Loss on sale of property  and equipment   |       | —         |       | —     |       | (246       | )          | (246             | )          |
| Interest income                           |       | 2,712          |       | —     |       | 25         |       | 2,737            |       |
| Interest expense                          |       | —         |       | 157        |       | 12,116     |       | 12,273           |       |
| Depreciation and  amortization            |       | 2,408          |       | 4,623      |       | 6,509      |       | 13,540           |       |
| Goodwill impairment                       |       | —         |       | —     |       | 47,601     |       | 47,601           |       |
| Impairment of investment  in affiliate    |       | —         |       | —     |       | 81,005     |       | 81,005           |       |
| Segment operating profit  (loss)          |       | 34,094         |       | 5,622      |       | (138,454   | )          | (98,738          | )          |
|                                           |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 

8

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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 and nine months ended September 30,2009 and 2008 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **9/30/2009**          | ** ** | **9/30/2008**         | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** |
| **Loss From  Operations Before Income Taxes**                  |       |                   |       |                  |       |   |   |   |   |
| Total loss for reportable  segments                            |       | $                      | (36,842    | )                     | $          | (119,769 | ) | $ | (18,680 | ) | $ | (98,738 | ) |
| Unallocated G & A  expense                            |       | (3,811                 | )          | (2,842                | )          | (11,152 | ) | (10,743 | ) |
| Unallocated depreciation  and amortization expense             |       | (1,265                 | )          | (648                  | )          | (2,818 | ) | (1,914 | ) |
| Unallocated gain on sale  of equipment                         |       | 1                      |       | —                |       | 1 |   | — |   |
| Unallocated other finance  costs                               |       | (451                   | )          | —                |       | (1,105 | ) | — |   |
| Unallocated gain on  derivative instrument                     |       | 114                    |       | —                |       | 799 |   | — |   |
| Unallocated financing  expense                                 |       | (337                   | )          | —                |       | (1,877 | ) | — |   |
| Unallocated gain on debt  restructure                          |       | —                 |       | —                |       | 4,678 |   | — |   |
| Elimination of  intercompany interest income                   |       | (708                   | )          | (734                  | )          | (2,161 | ) | (2,293 | ) |
| Unallocated interest  expense, net of intercompany elimination |       | (11,116                | )          | (5,197                | )          | (24,408 | ) | (15,444 | ) |
| Loss from operations  before income taxes                      |       | $                      | (54,415    | )                     | $          | (129,190 | ) | $ | (56,723 | ) | $ | (129,132 | ) |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2009 and December 31,2008 (in thousands):

 

| ** **                                           | ** ** | **9/30/2009** | ** ** | **12/31/2008** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services  segment                         |       | $             | 210,848    |           | $          | 221,262 |   |
| Media segment                                        |       | 53,687        |       | 88,101         |       |
| Retail segment                                       |       | 104,364       |       | 110,964        |       |
| Total assets for  reportable segments                |       | 368,899       |       | 420,327        |       |
| Capitalized finance costs  not allocated to segments |       | 4,434         |       | 4,450          |       |
| Corporate unallocated  assets (liabilities)          |       | (11,820       | )          | 4,623          |       |
| Elimination of  intersegment receivable              |       | (131,402      | )          | (133,242       | )          |
| Total assets                                         |       | $             | 230,111    |           | $          | 296,158 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

Supplementaldisclosures of cash flow information for the nine months ended September 30(in thousands):

 

| ** **                                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid (received)  during the period for: |       |     |       |     |       |
| Interest                                     |       | $        | 32,261     |     | $          | 27,527 |   |
| Income taxes                                 |       | 5        |       | (3       | )          |
|                                              |            |          |            |          |            |  |  |

 

In January 2008,the Company assumed $0.6 million of liabilities and issued $0.4 million of debtin connection with the acquisition of nine RV and boat shows from MAC Events,LLC.

 

9

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**(4) STATEMENTS OF CASH FLOWS (continued)**

 

In February 2008,the Company assumed $0.5 million of liabilities and issued $0.5 million of debtin connection with the acquisition of three RV and boat shows from Mid AmericaExpositions, Inc.

 

In August 2008and February 2009, AGHI paid interest of $6.2 million on the AGHI Notesfrom the proceeds of a contribution from AGHC.

 

In December 2008,the Company recorded the fair value of the interest rate swaps in OtherLong-Term Liabilities of $12.7 million, in Accumulated Other Comprehensive Lossof $10.3 million, and ineffective portion in the statement of operations as aloss on derivative instrument of $2.4 million.

 

For the nine monthsended September 30, 2009, the Company recorded an adjustment to the fairvalue of the interest rate swap resulting in a $4.6 million decrease in OtherLong-Term Liabilities and a $3.2 million decrease in Other Comprehensive Lossand ineffective portion in the statement of operations as a non-cash gain onderivative instruments of $0.8 million.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

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

 

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

 

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

 

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

 

10

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

 

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

 

The following is asummary of changes in the Company’s goodwill by business segment, for the ninemonths ended September 30, 2009 and 2008 (in thousands):

 
| ** **                             | ** ** | **Membership  Services** | ** ** | **Media** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|----------------------------------------|------------|--------------------------|------------|-----------|------------|------------|------------|------------------|------------|
|                                   |       |                     |       |      |       |       |       |             |       |
| Balance as of  January 1, 2009    |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |
| Impairments                            |       | —                   |       | (46,884   | )          | —     |       | (46,884          | )          |
| Balance as of  September 30, 2009 |       | $                        | 49,944     |      | $          | —     |       | $                | —     |   | $ | 49,944 |   |
|                                   |       |                     |       |      |       |       |       |             |       |
| Balance as of  January 1, 2008    |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |
| Impairments                            |       | —                   |       | —    |       | (47,601    | )          | (47,601          | )          |
| Balance as of  September 30, 2008 |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |

 

The Company hasevaluated the remaining useful lives of its property and equipment andfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary.  The Companydetermined that no adjustments to the useful lives of its property andequipment or finite-lived purchased intangible assets were necessary as of September 30,2009.  Under the guidance for Goodwilland Other Intangible Assets, as issued by the FASB, goodwill impairment isdeemed to exist if the net book value of a reporting unit exceeds its estimatedfair value.  The Company’s reportingunits are generally consistent with the operating segments underlying thereporting segments identified in Note 3 – Disclosures about Segments of anEnterprise and Related Information.

 

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

 

11

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

 

Finite-lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at September 30,2009 (in thousands, except as noted):

 
| ** **                                       | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                       | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                             |       |                |       |       |       |             |       |       |       |
| Membership and customer  lists                   |       | 6                   |       | $          | 36,384     |             | $          | (25,583    | )          | $ | 10,801 |   |
| Resort and golf course  participation agreements |       | 4                   |       | 13,352     |       | (13,348          | )          | 4          |       |
| Non-compete and deferred  consulting agreements  |       | 15                  |       | 18,830     |       | (16,016          | )          | 2,814      |       |
| Deferred financing costs                         |       | 6                   |       | 16,234     |       | (11,799          | )          | 4,435      |       |
|                                             |       |                |       |       |       |             |       |       |       |
|                                             |       |                |       | $          | 84,800     |             | $          | (66,746    | )          | $ | 18,054 |   |

 

**(6) DEBT**

 

AGHI Notes

 

On March 24, 2005 in a privateplacement, AGHI issued $88.2 million principal amount of its 10-7/8% seniornotes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005.  The AGHI Notes are unsecured obligations ofAGHI and its subsidiaries have not guaranteed payment of principal or intereston the AGHI Notes.  Interest on the AGHINotes is payable semi-annually on February 15 and August 15commencing August 15, 2005 and the entire $88.2 million principal amountof the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15,2008, AGHI had the option to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date of the additional notes ($25.4 million) is March 15,2010.  AGI has not paid any dividends to AGHI to fund paymentof interest on the AGHI Notes and AGHI made the interest payments due on August 15,2005, February 15, 2006, August 15, 2006, February 15, 2007, andFebruary 15, 2008 through 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 ofcontributions made by AGHI’s parent, AGHC, of $5.9 million, $6.2 million and$6.2 million, respectively.  The Company hasnot paid $6.1 million of interest due August 15, 2009 due to pendingdiscussions with holders of the AGHI Notes regarding a refinancing orrestructuring of the indebtedness of the Company.  As a result of not paying the $6.1 million ofinterest due August 15, 2009, the Company is currently working under theterms of a forbearance agreement with the note holders through November 13,2009.  See Note 11 – SubsequentEvents.  As of September 30, 2009,$112.1 million of AGHI Notes remain outstanding.  Currently, the AGI Senior Credit Facility andthe AGI Indenture impose limitations on the ability of subsidiaries of AGHI tomake dividend distributions or loans to AGHI to pay interest on the AGHI Notes.

 

AGI Senior Credit Facility

 

On June 24, 2003, AGI entered into an Amended and Restated CreditAgreement and a

 

12

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**(6) DEBT (continued)**

 

SeniorSecured Floating Rate Note Purchase Agreement which was most recently amendedon June 5, 2009 (as amended, the “AGI Senior Credit Facility”).  The AGI Senior Credit Facility provides for arevolving credit facility of $25.0 million and term loans.  As of September 30, 2009, $9.0 millionwas outstanding under the revolving credit facility and $111.2 million wasoutstanding under the term loans. Reborrowings under the term loans are not permitted.  Interest rates float with prime and theLondon Interbank Offered Rates, (“LIBOR”), plus an applicable margin rangingfrom 9.00% to 10.00%, respectively, over the stated rates, and a LIBOR floor of2.75%.  After consideration of fixedrates under the interest rate swap agreements, (discussed in Note 7 — InterestRate Swap Agreements), as of September 30, 2009, the average interest rateon the term loans and the revolving credit facility was 17.11% and permittedborrowings under the revolving facility were $18.3 million.  AGI also pays a commitment fee of 1.0% perannum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $0.4 million.  Boththe revolving credit facility and the term loans under the AGI Senior CreditFacility mature on March 31, 2010. The funds available under the AGI Senior Credit Facility may be utilizedfor borrowings or letters of credit except a maximum of $7.5 million may beallocated to such letters of credit.  Asof September 30, 2009, AGI had letters of credit in the aggregate amountof $6.7 million outstanding.  The AGISenior Credit Facility is secured by virtually all of AGI’s assets and a pledgeof AGI’s stock and the stock of AGI’s subsidiaries.

 

In connection with the June 5, 2009amendment to its AGI Senior Credit Facility, the outstanding term loanborrowings were repaid by $8.0 million, the financial covenants in effectthrough the extended maturity date were revised and the Companycapitalized $2.5 million in fees paid to the lenders and expensed as incurred$1.9 million in legal and other fees related to the amendment.  As a condition to theamendment, the shareholder of the ultimate parent of the Company, was requiredto arrange for the purchase of $26.6 million in principal amount of the termportion of the AGI Senior Credit Facility by new lenders, enhance the yield tosuch new lenders, purchase AGHI Notes held by one of such new lenders at apremium to the most recent market price, contribute $5.0 million in capital toAGI and guarantee two required principal payments on the term loans under theAGI Senior Credit Facility, aggregating $15.0 million.  In consideration of suchsupport, the Company entered into an option agreement with the shareholder ofthe ultimate parent of the Company pursuant to which the Company granted suchshareholder or his assigns an option, exercisable on or before March 1,2010, to purchase the Company’s Camping World subsidiary, Camping World, Inc.(“Camping World”) for $55.0 million which was believed to be the then fairvalue of Camping World.  Management wasassisted in determining the fair value of such subsidiary by an independentthird party valuation firm.  See Note 10-Recent Events.  AGI also agreedto pay the shareholder of the ultimate parent, upon successful refinancing ofAGI’s secured debt, including the AGI Senior Credit Facility, a success feeequal in amount to the fair value, as determined by an independent financialadvisor of such credit support, taking into account the fair value of theoption to purchase Camping World.  In theevent the fair value of the Camping World purchase option exceeds the fairvalue of such credit support, the shareholder will pay the amount of suchexcess to AGI.

 

13

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**(6) DEBT (continued)**

 

The 10th Amendment to the AGI Senior CreditFacility requires the commitment of Stephen Adams, the Company’s ultimateshareholder, to cause loans to be made to AGI in amounts equal to the cashinterest payments on $16.0 million in aggregate principal amount of the termloans under the AGI Senor Credit Facility. In connection with that requirement, on June 10, 2009, AGI enteredinto a loan agreement with SA Holding, LLC, (“SA Holding”), which is owned byStephen Adams, pursuant to which SA Holding agreed to loan to AGI (the “SALoans”) amounts equal to the cash interest payments on $16.0 million inaggregate principal amount of term loans. The interest rate on the SA Loans is equal to the interest rate payableon the AGI Senior Credit Facility plus 2.0% per annum compounded monthly.  The SA Loans mature on the date on which theindebtedness under the AGI Senior Credit Facility is paid in full.  As of September 30, 2009, $0.6 millionof SA Loans were outstanding.

 

The amended AGI Senior Credit Facility alsorevised AGI’s financial covenants in effect through the extended maturitydate.  As of September 30, 2009, AGIwas in compliance with all covenants under the AGI Senior Credit Facility.  As required by the AGI Senior CreditFacility, significant cost reductions have been implemented in 2008 and 2009,including the elimination of personnel, suspension of 401(k) employercontributions, salary cutbacks, hiring and capital expenditure spendingfreezes, closure ofunder-performing retail stores, satellite office closures,and magazine size and frequency reductions.

 

AGISenior Subordinated Notes

 

InFebruary 2004, AGI issued $200.0 million of 9% AGI Senior SubordinatedNotes (“AGI Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  On June 8, 2006, AGIamended its Amended and Restated Credit Agreement (“AGI Senior Credit Facility”)to permit AGI to purchase up to $30.0 million of the Senior Subordinated Notesfrom time to time as and when AGI determines. AGI retired $29.9 million of the Senior Subordinated Notes in 2006. On February 27,2007, AGI amended its AGI Senior Credit Facility to permit AGI to repurchase upto an additional $50.0 million of the Senior Subordinated Notes from time totime, as and when AGI determines, through the issuance of additional term loansof up to $50.0 million under the AGI Senior Credit Facility.  On March 8, 2007, AGI purchased $17.7million of the Senior Subordinated Notes. On June 5, 2009, AGI purchased $14.6 million of the SeniorSubordinated Notes.  As of September 30,2009, $137.8 million of the Senior Subordinated Notes remain outstanding.  Interest is payable on the remaining SeniorSubordinated Notes twice a year on February 15 and August 15.  AGI’s present and future restrictedsubsidiaries will guarantee the Senior Subordinated Notes with unconditionalguarantees of payment that will rank junior in right of payment to theirexisting and future senior debt, but will rank equal in right of payment totheir existing and future senior subordinated debt.

 

Seealso Note 11 – Subsequent Events.

 

Other Debt

 

Concurrent with the June 5, 2009amendment to the AGI Senior Credit Facility, AGI obtained a $9.7 million secondlien loan (the “AGI Second Lien Loan”), the net proceeds of which were used topurchase $14.6 million in principal amount of AGI Senior SubordinatedNotes.  The AGI Second Lien Loan carriesan interest rate of 9.0% and matures on July 31, 2010.  The

 

14

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**(6) DEBT (continued)**

 

AGI Second Lien Loan is secured bysubstantially all of the assets and a pledge of the stock of AGI and is secondin priority only to the AGI Senior Credit Facility. The borrowing rate on therevolving credit loans and term loans increased to prime rate plus 9% or LIBORplus 10% as the Camping World Financing was not consummated by September 15,2009.

 

Inaddition, AGI agreed to use its best efforts to secure an asset-based loan ofat least $18.5 million secured by the inventory and receivables of itssubsidiary, Camping World, Inc. (the “Camping World Financing”), theproceeds of which would be used to further reduce the amounts outstanding underthe AGI Senior Credit Facility. Since a Camping World Financing had not beenconsummated by September 15, 2009, the borrowing rate on revolving creditloans, swing loans and terms loans increased to prime rate plus 9.0% or LIBORplus 10.0%.

 

**(7) INTEREST RATE SWAP AGREEMENTS**

 

The Company isexposed to certain risks related to its business operations. The primary risksthat we managed by using derivatives is interest rate risk. We use financialinstruments, including interest rate swap agreements, to reduce our risk tothis exposure. We do not use derivatives for speculative trading purposes andare not a party to leveraged derivatives.

 

We recognize allof our derivative instruments as either assets or liabilities at fair value. Fairvalue is determined in accordance with the accounting guidance for Fair ValueMeasurements. See Note 8 — Fair Value Measurements. The accounting for changesin the fair value of a derivative instrument depends on whether it has beendesignated and qualifies as part of a hedging relationship and, further, on thetype of hedging relationship. For derivatives designated as hedges under theaccounting guidance for derivative instruments and hedging activities, weformally assess, both at inception and periodically thereafter, whether thehedging derivatives are highly effective in offsetting changes in either thefair value or cash flows of the hedged item. Our derivatives that are notdesignated and do not qualify as hedges under accounting guidance forDerivative Instruments and Hedging Activities are adjusted to fair valuethrough current earnings.

 

Effective January 1,2009, the Company adopted the provisions of the new accounting guidance fordisclosures about derivative instruments and hedging activities. The guidancerequires that the objectives for using derivative instruments be disclosed tobetter convey the purpose of derivative use in terms of the risks that theCompany is intending to manage. This standard also requires disclosure of howderivatives and related hedged items are accounted for and how they affect theCompany’s financial statements. The adoption of the new accounting guidance didnot have a material impact on our condensed consolidated results of operations,financial position or cash flows.

 

On October 15, 2007, AGI entered into a five-year interest rateswap agreement with a notional amount of $100.0 million from which it willreceive periodic payments at the 3 month LIBOR-based variable rate (0.4875% at September 30,2009 based upon the July 31, 2009 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

 

15

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

 

agreement waseffective beginning October 31, 2007 and expires on October 31, 2012.On March 19, 2008, AGI entered into a 4.5 year interest rate swapagreement with a notional amount of $35.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.4875% at September 30,2009 based upon the July 31, 2009 reset date) and make periodic paymentsat a fixed rate of 3.430%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31. The interest rate swap waseffective beginning April 30, 2008 and expires on October 31, 2012. Thefair value of the swap agreements were zero at inception. The Company enteredinto the interest rate swap agreements to limit the effect of increases on ourfloating rate debt. The interest rate swap agreements are designated as a cashflow hedge of the variable rate interest payments due on $135.0 million of theterm loans and the revolving credit facility issued June 24, 2003, 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.

 

Due to thedisclosure of a potential sale of Camping World, in the fourth quarter of 2008a highly effective hedge on the $35.0 million outstanding debt by the $35.0million notional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible. As a result, changes inthe value of the $35.0 million interest rate swap agreement are included inearnings as a gain (loss) on derivative instrument on October 1, 2008. Includedin other comprehensive loss at September 30, 2009 is $0.4 million relatedto changes in the fair value of the $35.0 million interest rate swap prior to October 1,2008, which will be amortized over the remaining life of the interest rate swapand included in earnings as a gain (loss) on derivative instrument. On June 11,2009, the Company partially terminated the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was expensed. Thenotional amount was reduced to $20.0 million. All other terms of the interestrate swap agreement remained unchanged. As a result, the amount included inother comprehensive income related to the $35.0 million interest rate swap wasreduced prorata and included in earnings as a gain (loss) on derivativeinstrument.

 

Due to theissuance of an option to the shareholder of the ultimate parent of the Companyto purchase Camping World, in the second quarter of 2009 a portion of thehighly effective hedge on the $100.0 million outstanding debt by the $100.0million notional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible. As a result, changes inthe value of the last $20.0 million of the $100.0 million interest rate swapagreement are included in earnings beginning on June 5, 2009. Included inother comprehensive loss is $1.6 million related to the last $20.0 million ofthe $100.0 million interest rate swap which will be amortized over theremaining life of the interest rate swap and included in earnings as a gain(loss) on derivative instrument.

 

16

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

 

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

 
| **Derivatives designated as  hedging intruments under** | ** ** | ** **                  | ** ** | **Fair Value as of:** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| **Statement 133**                                       | ** ** | **Balance  Sheet Location** | ** ** | **9/30/2009**         | ** ** | **12/31/2008** | ** ** |
|                                                    |       |                        |       |                  |       |   |   |
| Interest rate swap  contracts                           |       | Other long-term liabilities |       | $                     | (8,138     | ) | $ | (12,731 | ) |
|                                                         |            |                             |            |                       |            |  |  |  |  |

 

The following isthe location and amount of gains and losses on derivative instruments in thestatement of operations for the nine months ended September 30, 2009 and2008 segregated between designated, as required by the accounting guidance forderivative instruments (in thousands):

 

Derivatives inCashflow Hedging Relationships:

 
| ** **                                                                                                   | ** ** | **Interest Rate Swap Agreements**    | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                   | ** ** | **9/30/2009**                        | ** ** | **9/30/2008** | ** ** |
| Amount of Gain or (Loss)  recognized in OCI on Derivatives                                                   |       | $                                    | (3,233     | ) | $ | 58 |   |
|                                                                                                         |       |                                 |       |   |   |
| Location of Gain (Loss)  Reclassified from Accumulated OCI into Statement of operations (Effective  Portion) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                              |            |                                      |            |  |  |  |  |

 
| ** **                                                                                                                                          | ** ** | **9/30/2009**                        | ** ** | **9/30/2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|
| Amount of Gain or (Loss)  reclassified from OCI into Statement of Operations (Effective portion)                                                    |       | $                                    | (33        | )             | $          | — |   |
|                                                                                                                                                |       |                                 |       |          |       |
| Location of Gain (Loss)  Recognized in Statement of Operations on Derivatives (Ineffective Portion and  Amount Excluded from Effectiveness Testing) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                                     |            |                                      |            |               |            |  |  |

 
| ** **                                                                                                                          | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Amount of Gain or (Loss)  recognized in income on Derivatives (Ineffective portion and amount excluded  from Effectiveness testing) |       | $             | 832        |          | $          | — |   |
|                                                                                                                                     |            |               |            |               |            |  |  |

 

**(8) FAIR VALUE MEASUREMENTS**

 

The Company adopted the new accountingguidance for fair value measurements, effective January 1, 2008, for itsfinancial assets and liabilities and effective January 1, 2009, withrespect to the fair value measurement requirements for non-financial assets andliabilities that are not remeasured on a recurring basis. The new accountingguidance defines fair value, establishes a framework and gives guidanceregarding the methods used for measuring fair value, and expands disclosuresabout fair value measurements. Under this standard, fair value is defined asthe price that would be received to sell an asset or paid to transfer aliability (i.e., the “exit price”) in an orderly transaction between marketparticipants at the measurement date. Although the adoption of new accountingguidance did not have a material

 

17

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**(8) FAIR VALUE MEASUREMENTS**

 

impact on our results of operations,financial position or cash flows, the Company is now required to provideadditional disclosures as part of its financial statements.

 

During the second quarter of 2009, theCompany adopted the provisions of the FASB’s new accounting guidance forinterim disclosures about fair value of financial instruments. The adoption ofthe new accounting guidance resulted in additional interim disclosures and didnot have a material impact on our condensed consolidated results of operations,financial position or cash flows. The new accounting guidance establishes athree-tier fair value hierarchy, which prioritizes the inputs used in measuringfair value. These tiers include: Level 1, defined as observable inputs such asquoted prices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

As of September 30, 2009, AGI holds interest rate swap agreementsthat are required to be measured at fair value on a recurring basis. AGI’sinterest rate swap agreements are not traded on a public exchange. See Note 7 -Interest Rate Swap Agreements. The fair value of these interest rate swapagreements are determined based on inputs that are readily available in publicmarkets or can be derived from information available in publicly quotedmarkets. Therefore, the Company has categorized these swap agreements as Level2.

 

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

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the reporting units of our RV and powersportspublications determined in step one of the impairment test, to the assets andliabilities of the respective reporting unit in accordance with the accountingguidance for business combinations. The Company measured the impairment forthese units to be equal to the carrying value of its goodwill, or $46.9million. The fair value of the goodwill in the Media segment is measured on anon-recurring basis, and therefore, the Company has categorized this asset asLevel 3. The Companyrecorded an impairment charge of $46.9 million in the third quarter of 2009related to these units, which is part of the Media segment.

 

Determining thefair value of a reporting unit under the first step of the goodwill impairmenttest and determining the fair value of individual assets and liabilities of areporting unit under the second step of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the extent of suchcharge. The Company’s estimates of fair value utilized in goodwill test may bebased upon a number of factors, including assumptions about the projectedfuture cash flows, discount rate, growth rate, determination of marketcomparables, economic conditions, or

 

18

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

 

changes to theCompany’s business operations. Such changes may result in impairment chargesrecorded in future periods.

 

The Company recorded an impairment charge of $81.0 million in the thirdquarter of 2008 that wrote down to zero the carrying value of the preferredinterest (the “FreedomRoads Preferred Interest”) held by an indirect subsidiaryof Camping World in FreedomRoads Holding Company, LLC (“FreedomRoads”), aholding company whose subsidiaries sell and service new and used recreationalvehicles. FreedomRoads is an affiliate under common ownership with the Company’sultimate parent. Management was assisted in determining the fair value of thepreferred interest in FreedomRoads by an independent third party valuationfirm. In anticipationof the potential sale of Camping World, the impairment charge was recorded asa result of declining performance of the recreational vehicle industry drivenby overall weakening of the economy and a significant decline in consumerconfidence, in addition to limited credit available to consumers interested inpurchasing recreational vehicles. Therefore, the Company has categorized theFreedomRoads Preferred Interest as Level 3. The impairment charge relating tothe FreedomRoads Preferred Interest was allocated to the retail operatingsegment.

 

The Company’s liabilities at September 30, 2009, measured at fairvalue on a recurring basis subject to the disclosure requirements of fair valuemeasurements, was as follows:

 
| ** **                      | ** ** | ** ** | ** ** | **Fair Value Measurements at Reporting Date Using**        | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| **(in thousands)**              | ** ** | ** ** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**                 | ** ** | **Amount** | ** ** | **(Level 1)**                                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                            |       |       |       |                                                       |       |   |   |   |   |
| As of September 30,  2009: |       |       |       |                                                       |       |   |   |   |   |
| Interest Rate Swap  Contracts   |       | $          | (8,138     | )                                                          | $          | — |   | $ | (8,138 | ) | $ | — |   |
|                            |       |       |       |                                                       |       |   |   |   |   |
| As of December 31,  2008:  |       |       |       |                                                       |       |   |   |   |   |
| Interest Rate Swap  Contracts   |       | (12,731    | )          | —                                                     |       | (12,731 | ) | — |   |
|                                 |            |            |            |                                                            |            |  |  |  |  |  |  |  |  |

 

Goodwill relatedto the Media segment was re-measured in the third quarter of 2009. The fairvalues of cash equivalents, accounts receivable and accounts payableapproximate their carrying values due to the short-term nature of thesefinancial instruments.

 

The following table presents the reported carrying value and fair valueinformation for the Company’s AGHI Notes, AGI Senior Subordinated Notes, andAGI Senior Credit Facility. The fair values shown below for the AGHI Notes andthe Senior Subordinated Notes are based on quoted prices in the market foridentical assets (Level 1), and the fair value shown for the

 

19

----

 

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

 

is based on significant unobservable inputs (Level 3) (in thousands):

 
| ** **                     | ** ** | **9/30/2009** | ** ** | **12/31/2008** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **Cost**      | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| AGHI Notes                     |       | $             | 112,133    |           | $          | 50,460 |   | $ | 111,732 |   | $ | 50,279 |   |
| AGI Senior Subordinated  Notes |       | 137,824       |       | 96,477         |       | 152,399 |   | 80,771 |   |
| Senior Credit Facility         |       | 120,212       |       | 120,212        |       | 134,455 |   | 134,455 |   |
|                                |            |               |            |                |            |  |  |  |  |  |  |  |  |

 

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

 

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

 
| Balance at December 31,  2008                                                            |   | $       | 14,493 |   |
|------------------------------------------------------------------------------------------|--------|---------|--------|--------|
| 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                 |   | (14,571 | )      |
| Other                                                                                    |   | 78      |   |
| Unrecognized tax benefits  at September 30, 2009                                         |   | $       | — |   |

 

The Companyaccrues interest and penalties related to unrecognized tax benefits in itsincome tax provision. The Company reversed accrued interest and penalties of$2.5 million related to unrecognized tax benefits during the first nine monthsof 2009 and the entire liability for penalties and interest was eliminated. Thisamount was originally included in other long-term liabilities.

 

The Company andits subsidiaries file income tax returns in the U.S. and various states. Withfew exceptions, the Company is no longer subject to U.S. federal, state, andlocal income tax examinations by tax authorities for years before 2006.

 

**(10) RECENT EVENTS**

 

On June 5, 2009, the Company enteredinto an option agreement with the shareholder of its ultimate parent to whichthe Company granted such shareholder or his assigns an option, exercisable onor before March 1, 2010, to purchase the Company’s Camping Worldsubsidiary for $55.0 million. In the event the Camping World purchase option isexercised and, subject to the consent of the lenders under the AGI SeniorCredit Facility, the sale of Camping World consummated, the Company wouldintend to use the net cash proceeds from the sale of Camping World to repayindebtedness outstanding under the AGI Senior Credit Facility, as

 

20

----

 

**(10) RECENT EVENTS (continued)**

 

amended. As of September 30, 2009, anaggregate of $111.2 million was outstanding under the term loans and $9.0million was outstanding under the revolving credit facility of the AGI SeniorCredit Facility.

 

The financial statements forCamping World are different from the segment reporting in Note 3 because theCamping World President’s Club and other related ancillary products are includedas part of the Membership Services segment in the segment reporting.

 

The following unaudited proforma condensed consolidated balance sheet as of September 30, 2009 and December 31,2008 and the statement of operations for the nine months ended September 30,2009 and 2008 reflect the reclassification adjustments associated with theproposed disposal/sale of Camping World to the shareholder of the ultimateparent of the Company. The pro forma adjustments relate to the disposal arepresented since the disposition did not meet the discontinued operationsreporting requirements pursuant to new accounting guidance for Accounting forthe Impairment or Disposal of Long-Lived Assets as of September 30, 2009,but are expected to meet such requirements if the transaction is completed. Sincethe transaction is a sale to an entity under common ownership with AGI suchlong-lived assets are considered disposed of when they are exchanged ordistributed in accordance with new accounting guidance. The pro forma adjustmentsreflect the reclassification of assets and liabilities associated with CampingWorld to current assets and liabilities to be disposed of in accordance withnew accounting guidance as if the reporting requirements had been met at September 30,2009. In addition, the historical operating results have also been reclassifiedto reflect discontinued operations.

 

Corporate Expenses - Theallocation to Camping World of expenses for certain Affinity Group, Inc.corporate functions historically provided to Camping World are done inaccordance with new accounting guidance for Allocation of Expenses and RelatedDisclosures in Subsidiaries’ Financial Statements. Such allocations were madeon a specific identification basis to the extent possible and otherwise based onrelative percentages, as compared to the Company’s other businesses, ofheadcount or other appropriate methods depending on the nature of each item ofcost to be allocated.

 

Interest Expense - Theinterest expense included in discontinued operations below reflects theinterest allocated to Camping World based upon debt required to be repaid uponconsummation of this transaction.

 

21

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**(10) ****RECENTEVENTS (continued)**

 

The unaudited pro formabalance sheet of AGHI reclassifying Camping World as of September 30, 2009to assets and liabilities of discontinued operations is as follows (inthousands except shares and par value):

 
| ** **                                                                                | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                |       |           |       |                    |       |          |       |
| CURRENT ASSETS:                                                                           |       |           |       |                    |       |          |       |
| Cash and cash equivalents                                                                 |       | $              | 10,416     |                    | $          | (3,259        | )          | $ | 7,157 |   |
| Accounts receivable, net                                                                  |       | 27,891         |       | (5,118                  | )          | 22,773        |       |
| Inventories                                                                               |       | 61,032         |       | (60,363                 | )          | 669           |       |
| Prepaid expenses and other  assets                                                        |       | 18,334         |       | (1,943                  | )          | 16,391        |       |
| Assets of discontinued  operations                                                        |       | —         |       | 104,364                 |       | 104,364       |       |
| Total current assets                                                                      |       | 117,673        |       | 33,681                  |       | 151,354       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| PROPERTY AND EQUIPMENT,  net                                                              |       | 36,082         |       | (28,809                 | )          | 7,273         |       |
| NOTE FROM AFFILIATE                                                                       |       | 4,711          |       | —                  |       | 4,711         |       |
| INTANGIBLE ASSETS, net                                                                    |       | 18,054         |       | (2,609                  | )          | 15,445        |       |
| GOODWILL                                                                                  |       | 49,944         |       | —                  |       | 49,944        |       |
| OTHER ASSETS                                                                              |       | 3,647          |       | (2,263                  | )          | 1,384         |       |
| Total assets                                                                              |       | $              | 230,111    |                    | $          | —        |       | $ | 230,111 |   |
|                                                                                      |       |           |       |                    |       |          |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                           |       |           |       |                    |       |          |       |
| CURRENT LIABILITIES:                                                                      |       |           |       |                    |       |          |       |
| Accounts payable                                                                          |       | $              | 26,390     |                    | $          | (23,564       | )          | $ | 2,826 |   |
| Accrued interest                                                                          |       | 10,695         |       | —                  |       | 10,695        |       |
| Accrued income taxes                                                                      |       | 1,579          |       | 138                     |       | 1,717         |       |
| Accrued liabilities                                                                       |       | 26,862         |       | (13,257                 | )          | 13,605        |       |
| Deferred revenues and  gains                                                              |       | 69,769         |       | (8,104                  | )          | 61,665        |       |
| Current portion of  long-term debt                                                        |       | 156,691        |       | —                  |       | 156,691       |       |
| Liabilities of  discontinued operations                                                   |       | —         |       | 53,042                  |       | 53,042        |       |
| Total current liabilities                                                                 |       | 291,986        |       | 8,255                   |       | 300,241       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| DEFERRED REVENUES AND  GAINS                                                              |       | 35,211         |       | (8,255                  | )          | 26,956        |       |
| LONG-TERM DEBT, net of  current portion                                                   |       | 225,276        |       | —                  |       | 225,276       |       |
| OTHER LONG-TERM  LIABILITIES                                                              |       | 8,287          |       | —                  |       | 8,287         |       |
|                                                                                      |       | 560,760        |       | —                  |       | 560,760       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| 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                                                                |       | 23,220         |       |                    |       | 23,220        |       |
| Accumulated deficit                                                                       |       | (346,766       | )          | —                  |       | (346,766      | )          |
| Accumulated other  comprehensive income                                                   |       | (7,104         | )          |                    |       | (7,104        | )          |
| Total stockholder’s  deficit                                                         |       | (330,649       | )          | —                  |       | (330,649      | )          |
| Total liabilities and  stockholder’s deficit                                         |       | $              | 230,111    |                    | $          | —        |       | $ | 230,111 |   |

 

22

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**(10) ****RECENT EVENTS (continued)**

 

The unaudited proforma balance sheet of AGHI reclassifying Camping World as of December 31,2008 to assets and liabilities of discontinued operations is as follows (inthousands except shares and par value):

 
| ** **                                                                                | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                |       |           |       |                    |       |          |       |
| CURRENT ASSETS:                                                                           |       |           |       |                    |       |          |       |
| Cash and cash equivalents                                                                 |       | $              | 10,777     |                    | $          | (842          | )          | $ | 9,935 |   |
| Accounts receivable, net                                                                  |       | 40,191         |       | (9,084                  | )          | 31,107        |       |
| Inventories                                                                               |       | 57,137         |       | (55,908                 | )          | 1,229         |       |
| Prepaid expenses and other  assets                                                        |       | 13,547         |       | (2,476                  | )          | 11,071        |       |
| Assets of discontinued  operations                                                        |       | —         |       | 110,964                 |       | 110,964       |       |
| Total current assets                                                                      |       | 121,652        |       | 42,654                  |       | 164,306       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| PROPERTY AND EQUIPMENT,  net                                                              |       | 44,077         |       | (34,022                 | )          | 10,055        |       |
| NOTE FROM AFFILIATE                                                                       |       | 4,608          |       | —                  |       | 4,608         |       |
| INTANGIBLE ASSETS, net                                                                    |       | 22,389         |       | (3,391                  | )          | 18,998        |       |
| GOODWILL                                                                                  |       | 96,828         |       | —                  |       | 96,828        |       |
| DEFERRED TAX ASSETS, net                                                                  |       | 4,569          |       | (4,569                  | )          | —        |       |
| OTHER ASSETS                                                                              |       | 2,035          |       | (672                    | )          | 1,363         |       |
| Total assets                                                                              |       | $              | 296,158    |                    | $          | —        |       | $ | 296,158 |   |
|                                                                                      |       |           |       |                    |       |          |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                           |       |           |       |                    |       |          |       |
| CURRENT LIABILITIES:                                                                      |       |           |       |                    |       |          |       |
| Accounts payable                                                                          |       | $              | 23,950     |                    | $          | (19,383       | )          | $ | 4,567 |   |
| Accrued interest                                                                          |       | 11,581         |       | —                  |       | 11,581        |       |
| Accrued income taxes                                                                      |       | 1,165          |       | 372                     |       | 1,537         |       |
| Accrued liabilities                                                                       |       | 27,009         |       | (10,864                 | )          | 16,145        |       |
| Deferred revenues and  gains                                                              |       | 60,569         |       | (7,254                  | )          | 53,315        |       |
| Current portion of  long-term debt                                                        |       | 12,391         |       | —                  |       | 12,391        |       |
| Liabilities of  discontinued operations                                                   |       | —         |       | 59,536                  |       | 59,536        |       |
| Total current liabilities                                                                 |       | 136,665        |       | 22,407                  |       | 159,072       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| DEFERRED REVENUES AND  GAINS                                                              |       | 35,855         |       | (8,500                  | )          | 27,355        |       |
| LONG-TERM DEBT, net of  current portion                                                   |       | 391,487        |       | —                  |       | 391,487       |       |
| OTHER LONG-TERM  LIABILITIES                                                              |       | 30,156         |       | (13,907                 | )          | 16,249        |       |
|                                                                                      |       | 594,163        |       | —                  |       | 594,163       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| 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                                                                |       | 12,041         |       |                    |       | 12,041        |       |
| Accumulated deficit                                                                       |       | (299,710       | )          | —                  |       | (299,710      | )          |
| Accumulated other  comprehensive income                                                   |       | (10,337        | )          |                    |       | (10,337       | )          |
| Total stockholder’s  deficit                                                         |       | (298,005       | )          | —                  |       | (298,005      | )          |
| Total liabilities and  stockholder’s deficit                                         |       | $              | 296,158    |                    | $          | —        |       | $ | 296,158 |   |

 

23

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**(10) ****RECENT EVENTS (continued)**

 

Unaudited pro forma information relating to the operations of AGHIreclassifying Camping World for the nine months ended September 30, 2009to discontinued operations is as follows (in thousands):

 
| ** **                                                                       | ** ** | **2009**       | ** ** | **Reclassification of** | ** ** | **2009**      | ** ** |
|----------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                       | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                             |       |           |       |                    |       |          |       |
| REVENUES:                                                                        |       |           |       |                    |       |          |       |
| Membership services                                                              |       | $              | 109,960    |                    | $          | (13,102       | )          | $ | 96,858 |   |
| Media                                                                            |       | 35,116         |       | —                  |       | 35,116        |       |
| Retail                                                                           |       | 214,820        |       | (214,820                | )          | —        |       |
|                                                                             |       | 359,896        |       | (227,922                | )          | 131,974       |       |
|                                                                             |       |           |       |                    |       |          |       |
| COSTS APPLICABLE TO  REVENUES:                                                   |       |           |       |                    |       |          |       |
| Membership services                                                              |       | 67,976         |       | (2,359                  | )          | 65,617        |       |
| Media                                                                            |       | 28,032         |       | —                  |       | 28,032        |       |
| Retail                                                                           |       | 130,840        |       | (130,840                | )          | —        |       |
|                                                                             |       | 226,848        |       | (133,199                | )          | 93,649        |       |
|                                                                             |       |           |       |                    |       |          |       |
| GROSS PROFIT                                                                     |       | 133,048        |       | (94,723                 | )          | 38,325        |       |
|                                                                             |       |           |       |                    |       |          |       |
| OPERATING EXPENSES:                                                              |       |           |       |                    |       |          |       |
| Selling, general and  administrative                                             |       | 97,270         |       | (83,822                 | )          | 13,448        |       |
| Financing expense                                                                |       | 1,877          |       | —                  |       | 1,877         |       |
| Goodwill impairment                                                              |       | 46,884         |       | —                  |       | 46,884        |       |
| Depreciation and  amortization                                                   |       | 16,588         |       | (7,389                  | )          | 9,199         |       |
|                                                                             |       | 162,619        |       | (91,211                 | )          | 71,408        |       |
|                                                                             |       |           |       |                    |       |          |       |
| LOSS FROM OPERATIONS                                                             |       | (29,571        | )          | (3,512                  | )          | (33,083       | )          |
|                                                                             |       |           |       |                    |       |          |       |
| NON-OPERATING ITEMS:                                                             |       |           |       |                    |       |          |       |
| Interest income                                                                  |       | 392            |       | (4                      | )          | 388           |       |
| Interest expense                                                                 |       | (31,803        | )          | 3,430                   |       | (28,373       | )          |
| Debt restructuring expense                                                       |       | 799            |       | —                  |       | 799           |       |
| Gain on derivative  instrument                                                   |       | 4,678          |       | —                  |       | 4,678         |       |
| Other non-operating items                                                        |       | (1,218         | )          | 562                     |       | (656          | )          |
|                                                                             |       | (27,152        | )          | 3,988                   |       | (23,164       | )          |
|                                                                             |       |           |       |                    |       |          |       |
| LOSS FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |       | (56,723        | )          | 476                     |       | (56,247       | )          |
|                                                                             |       |           |       |                    |       |          |       |
| INCOME TAX BENEFIT                                                               |       | 12,216         |       | (9,101                  | )          | 3,115         |       |
|                                                                             |       |           |       |                    |       |          |       |
| LOSS FROM CONTINUING  OPERATIONS                                                 |       | (44,507        | )          | (8,625                  | )          | (53,132       | )          |
|                                                                             |       |           |       |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                          |       |           |       |                    |       |          |       |
| Loss from operations of  discontinued Camping World, Inc.                   |       | —         |       | (476                    | )          | (476          | )          |
| Income tax benefit                                                               |       | —         |       | 9,101                   |       | 9,101         |       |
| Gain on discontinued  operations                                                 |       | —         |       | 8,625                   |       | 8,625         |       |
|                                                                             |       |           |       |                    |       |          |       |
| NET LOSS                                                                         |       | $              | (44,507    | )                       | $          | —        |       | $ | (44,507 | ) |

 

24

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**(10) ****RECENT EVENTS (continued)**

 

Unaudited proforma information relating the operations of AGHI reclassifying Camping Worldfor the nine months ended September 30, 2008 to discontinued operations isas follows (in thousands):

 
| ** **                                                                       | ** ** | **2008**       | ** ** | **Reclassification of** | ** ** | **2008**      | ** ** |
|----------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                       | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                             |       |           |       |                    |       |          |       |
| REVENUES:                                                                        |       |           |       |                    |       |          |       |
| Membership services                                                              |       | $              | 114,718    |                    | $          | (14,297       | )          | $ | 100,421 |   |
| Media                                                                            |       | 54,227         |       | —                  |       | 54,227        |       |
| Retail                                                                           |       | 237,106        |       | (237,106                | )          | —        |       |
|                                                                             |       | 406,051        |       | (251,403                | )          | 154,648       |       |
|                                                                             |       |           |       |                    |       |          |       |
| COSTS APPLICABLE TO  REVENUES:                                                   |       |           |       |                    |       |          |       |
| Membership services                                                              |       | 72,810         |       | (3,573                  | )          | 69,237        |       |
| Media                                                                            |       | 39,208         |       | —                  |       | 39,208        |       |
| Retail                                                                           |       | 139,077        |       | (139,077                | )          | —        |       |
|                                                                             |       | 251,095        |       | (142,650                | )          | 108,445       |       |
|                                                                             |       |           |       |                    |       |          |       |
| GROSS PROFIT                                                                     |       | 154,956        |       | (108,753                | )          | 46,203        |       |
|                                                                             |       |           |       |                    |       |          |       |
| OPERATING EXPENSES:                                                              |       |           |       |                    |       |          |       |
| Selling, general and  administrative                                             |       | 112,591        |       | (97,922                 | )          | 14,669        |       |
| Goodwill impairment                                                              |       | 47,601         |       | (47,601                 | )          | —        |       |
| Impairment of long-lived  assets                                                 |       | 81,005         |       | (81,005                 | )          | —        |       |
| Depreciation and  amortization                                                   |       | 15,454         |       | (6,509                  | )          | 8,945         |       |
|                                                                             |       | 256,651        |       | (233,037                | )          | 23,614        |       |
|                                                                             |       |           |       |                    |       |          |       |
| LOSS FROM OPERATIONS                                                             |       | (101,695       | )          | 124,284                 |       | 22,589        |       |
|                                                                             |       |           |       |                    |       |          |       |
| NON-OPERATING ITEMS:                                                             |       |           |       |                    |       |          |       |
| Interest income                                                                  |       | 444            |       | (25                     | )          | 419           |       |
| Interest expense                                                                 |       | (27,717        | )          | 2,243                   |       | (25,474       | )          |
| Other non-operating items                                                        |       | (164           | )          | (246                    | )          | (410          | )          |
|                                                                             |       | (27,437        | )          | 1,972                   |       | (25,465       | )          |
|                                                                             |       |           |       |                    |       |          |       |
| LOSS FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |       | (129,132       | )          | 126,256                 |       | (2,876        | )          |
|                                                                             |       |           |       |                    |       |          |       |
| INCOME TAX EXPENSE                                                               |       | (841           | )          | 615                     |       | (226          | )          |
|                                                                             |       |           |       |                    |       |          |       |
| LOSS FROM CONTINUING  OPERATIONS                                                 |       | (129,973       | )          | 126,871                 |       | (3,102        | )          |
|                                                                             |       |           |       |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                          |       |           |       |                    |       |          |       |
| Loss from operations of  discontinued Camping World, Inc.                   |       | —         |       | (126,256                | )          | (126,256      | )          |
| Income tax expense                                                               |       | —         |       | (615                    | )          | (615          | )          |
| Loss on discontinued  operations                                                 |       | —         |       | (126,871                | )          | (126,871      | )          |
|                                                                             |       |           |       |                    |       |          |       |
| NET LOSS                                                                         |       | $              | (129,973   | )                       | $          | —        |       | $ | (129,973 | ) |

 

25

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**(11) SUBSEQUENT EVENTS**

 

The Company hascompleted an evaluation of all subsequent events through November 12, 2009and concluded, that except as disclosed below, no other subsequent events haveoccurred that would require recognition in the Company’s Consolidated FinancialStatements or disclosed in the Notes to the Consolidated Financial Statements.

 

The Company hasengaged a financial advisor to seek capital to permit a possible refinancing orrestructuring of the AGI Senior Credit Facility ($111.2 million principalamount of the term loans and $9.0 million principal amount under the revolvingcredit line under the AGI Senior Credit Facility on September 30, 2009),the AGI Second Lien Loan indebtedness ($9.7 million principal outstanding on September 30,2009), the AGI Senior Subordinated Notes due 2012 ($137.8 million principaloutstanding on September 30, 2009) and the AGHI Notes due 2012 ($112.1million principal outstanding on September 30, 2009).  The Company has received preliminary writtenproposals from a number of potential capital sources, some of whom haveperformed business due diligence.

 

The Company hasengaged in discussions with the holders of the AGHI Notes and the holders ofother indebtedness of the Company regarding a refinancing or restructuring ofthe indebtedness of the Company.  As partof those discussions, AGHI has deferred payment of the interest on the AGHINotes that was due on August 15, 2009. The indenture governing the AGHI Notes provides a 30-day grace periodfor the payment of interest.  On September 14,2009, AGHI received consent letters for the payment deferral from certaininstitutional holders of the AGHI Notes holding in the aggregate $65.8 millionprincipal amount of the AGHI Notes outstanding and consent letters for thepayment deferral from certain non-institutional holders of the AGHI Notesholding in the aggregate $46.6 million principal amount of the AGHI Notes outstanding.  The aggregate principal amount of the AGHINotes outstanding is $113.6 million so the holders executing the consents hold98.9% of the outstanding principal amount of the AGHI Notes.  Pursuant to the consent letters from theinstitutional holders, AGHI agreed to pay the legal fees for a law firm torepresent the institutional holders in connection with such discussions and haspaid a $150,000 retainer to that law firm. In addition, AGHI has 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. The institutional holders have extended the most recent interest paymentdate on their AGHI Notes until November 13, 2009.  The non-institutional holders have extendedthe most recent interest payment date on their AGHI Notes until five businessdays after the termination of the consents from the institutional holders.  On September 14, 2009, AGHI paid theinterest on the remaining $1.3 million principal amount of AGHI Notes that areoutstanding and for which payment deferral consent was not obtained.

 

As a result of restrictions in the AGI Senior Credit Facility, AGI isblocked from making distributions to AGHI for the purpose of paying interest onthe AGHI Notes.  For the two most recentinterest payments, AGHI has made the interest payments using the proceeds of acapital contribution from AGHI’s parent. There can be no assurance that AGHI’s parent will fund the interestpayment on the AGHI Notes by the end of the deferral period.

 

26

----

 

**(11) SUBSEQUENT EVENTS (continued)**

 

There can be no assurance that the Company and AGI will be able toimplement a new capital structure to repay or refinance the AGI Senior CreditFacility, the AGI Second Lien Loan indebtedness, the AGI Senior SubordinatedNotes or the AGHI Notes before the final maturity of the AGI Senior CreditFacility in March 2010, the maturity of the AGI Second Lien Loanindebtedness in July 2010, the maturity of the AGI Senior SubordinatedNotes in February 2012, or the maturity of the AGHI Notes, $25.4 millionof which matures in March 2010 and the balance in February 2012.   If the Company and AGI are not able torefinance or replace any such debt before its scheduled maturity, the holdersof such debt will be entitled to exercise their respective remedies including,in the case of secured debt, to sell the collateral securing the repaymentthereof.  In as much as the indebtednessowned under the AGI Senior Credit Facility and the AGI Second Lien Loanindebtedness is secured, this debt would have to be repaid before funds areavailable to discharge any unsecured or subordinated obligations.

 

27

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**ITEM 2:**

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

The following table is derived from the Company’s ConsolidatedStatements of Operations and expresses the results from operations as apercentage of revenues and reflects the net increase (decrease) betweenperiods:

 
| ** **                             | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **9/30/2009**          | ** ** | **9/30/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                   |       |                   |       |   |   |   |   |
| REVENUES:                              |       |                   |       |   |   |   |   |
| Membership services                    |       | 28.4                   | %          | 27.5 | % | (2.9 | )% |
| Media                                  |       | 6.7                    | %          | 9.4 | % | (33.6 | )% |
| Retail                                 |       | 64.9                   | %          | 63.1 | % | (3.7 | )% |
|                                   |       | 100.0                  | %          | 100.0 | % | (6.3 | )% |
|                                   |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:         |       |                   |       |   |   |   |   |
| Membership services                    |       | 18.4                   | %          | 17.4 | % | (0.5 | )% |
| Media                                  |       | 5.7                    | %          | 8.0 | % | (32.6 | )% |
| Retail                                 |       | 40.0                   | %          | 37.4 | % | 0.1 | % |
|                                   |       | 64.1                   | %          | 62.7 | % | (4.2 | )% |
|                                   |       |                   |       |   |   |   |   |
| GROSS PROFIT                           |       | 35.9                   | %          | 37.3 | % | (9.8 | )% |
|                                   |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                    |       |                   |       |   |   |   |   |
| Selling, general and  administrative   |       | 27.4                   | %          | 26.8 | % | (4.6 | )% |
| Goodwill impairment                    |       | 37.5                   | %          | 35.7 | % | (1.5 | )% |
| Impairment of investment  in affiliate |       | —                 |       | 60.8 | % | (100.0 | )% |
| Financing expense                      |       | 0.3                    | %          | — |   | 100.0 | % |
| Depreciation and  amortization         |       | 4.7                    | %          | 3.9 | % | 14.9 | % |
|                                   |       | 69.9                   | %          | 127.2 | % | (48.5 | )% |
|                                   |       |                   |       |   |   |   |   |
| LOSS FROM OPERATIONS                   |       | (34.0                  | )%         | (89.9 | )% | (64.5 | )% |
|                                   |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                   |       |                   |       |   |   |   |   |
| Interest income                        |       | 0.1                    | %          | 0.1 | % | (21.0 | )% |
| Interest expense                       |       | (9.3                   | )%         | (7.0 | )% | 24.6 | % |
| Gain on derivative  instrument         |       | 0.1                    | %          | — |   | 100.0 | % |
| Other non-operating items,  net        |       | (0.5                   | )%         | (0.1 | )% | 299.3 | % |
|                                   |       | (9.6                   | )%         | (7.0 | )% | 28.4 | % |
|                                   |       |                   |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES               |       | (43.6                  | )%         | (96.9 | )% | (57.9 | )% |
|                                   |       |                   |       |   |   |   |   |
| INCOME TAX BENEFIT  (EXPENSE)          |       | 10.4                   | %          | (0.2 | )% | (4883.7 | )% |
|                                   |       |                   |       |   |   |   |   |
| NET LOSS                               |       | (33.2                  | )%         | (97.1 | )% | (67.9 | )% |

 

28

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

The following table is derived from the Company’s ConsolidatedStatements of Operations and expresses the results from operations as apercentage of revenues and reflects the net increase (decrease) betweenperiods:

 
| ** **                             | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------|------------|-----------------------|------------|
| ** **                             | ** ** | **9/30/2009**         | ** ** | **9/30/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                   |       |                  |       |   |   |   |   |
| REVENUES:                              |       |                  |       |   |   |   |   |
| Membership services                    |       | 30.6                  | %          | 28.3 | % | (4.1 | )% |
| Media                                  |       | 9.8                   | %          | 13.4 | % | (35.2 | )% |
| Retail                                 |       | 59.6                  | %          | 58.3 | % | (9.4 | )% |
|                                   |       | 100.0                 | %          | 100.0 | % | (11.4 | )% |
|                                   |       |                  |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:         |       |                  |       |   |   |   |   |
| Membership services                    |       | 18.9                  | %          | 17.9 | % | (6.6 | )% |
| Media                                  |       | 7.8                   | %          | 9.7 | % | (28.5 | )% |
| Retail                                 |       | 36.3                  | %          | 34.2 | % | (5.9 | )% |
|                                   |       | 63.0                  | %          | 61.8 | % | (9.7 | )% |
|                                   |       |                  |       |   |   |   |   |
| GROSS PROFIT                           |       | 37.0                  | %          | 38.2 | % | (14.1 | )% |
|                                   |       |                  |       |   |   |   |   |
| OPERATING EXPENSES:                    |       |                  |       |   |   |   |   |
| Selling, general and  administrative   |       | 27.1                  | %          | 27.8 | % | (13.6 | )% |
| Goodwill impairment                    |       | 13.0                  | %          | 11.7 | % | (1.5 | )% |
| Impairment of investment  in affiliate |       | —                |       | 19.9 | % | (100.0 | )% |
| Financing expense                      |       | 0.5                   | %          | — |   | 100.0 | % |
| Depreciation and  amortization         |       | 4.6                   | %          | 3.8 | % | 7.3 | % |
|                                   |       | 45.2                  | %          | 63.2 | % | (36.6 | )% |
|                                   |       |                  |       |   |   |   |   |
| LOSS FROM OPERATIONS                   |       | (8.2                  | )%         | (25.0 | )% | (70.9 | )% |
|                                   |       |                  |       |   |   |   |   |
| NON-OPERATING ITEMS:                   |       |                  |       |   |   |   |   |
| Interest income                        |       | 0.1                   | %          | 0.1 | % | (11.7 | )% |
| Interest expense                       |       | (8.8                  | )%         | (6.9 | )% | 14.2 | % |
| Gain on derivative instrument          |       | 0.2                   | %          | — |   | 100.0 | % |
| Gain on debt restructure               |       | 1.3                   | %          | — |   | 100.0 | % |
| Other non-operating items, net         |       | (0.4                  | )%         | — |   | 742.7 | % |
|                                   |       | (7.6                  | )%         | (6.8 | )% | (1.0 | )% |
|                                   |       |                  |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES               |       | (15.8                 | )%         | (31.8 | )% | (56.1 | )% |
|                                   |       |                  |       |   |   |   |   |
| INCOME TAX BENEFIT  (EXPENSE)          |       | 3.4                   | %          | (0.2 | )% | (1552.6 | )% |
|                                   |       |                  |       |   |   |   |   |
| NET LOSS                               |       | (12.4                 | )%         | (32.0 | )% | (65.8 | )% |

 

29

----

 

**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended September 30, 2009**

**ComparedWith Three Months Ended September 30, 2008**

 

*Revenues*

 

Revenuesof $124.9 million for the third quarter of 2009 decreased by $8.4 million, or6.3%, from the comparable period in 2008.

 

MembershipServices revenues of $35.5 million for the third quarter of 2009 decreased $1.1million, or 2.9%, from the comparable period in 2008.  This revenue decrease was largelyattributable to a $0.7 million reduction in member publication advertisingrevenue, a $0.2 million decrease due to reduced membership for the Coast Cluband Golf Card Club, a $0.4 million reduction in revenue from emergency roadservice products, a $0.3 million decrease in marketing fee income for vehicleinsurance products and a $0.2 million reduction in revenue from memberevents.  These decreases were partially offset by increased extended vehiclewarranty program revenue of $0.7 million resulting from continued policy growthand strong renewals.

 

Mediarevenues of $8.3 million for the third quarter of 2009 decreased $4.2 million,or 33.6%, from the comparable period in 2008. This decrease was primarily attributable to a $2.0 million reduction inrevenue in the outdoor power sports magazines and a $2.0 million reduction inRV related publication revenue primarily attributable to decreased advertisingrevenue, and reduced issues published. In addition, two fewer consumer shows in the third quarter resulted in a$0.2 million reduction in exhibitor revenue.

 

Retail revenues of$81.1 million decreased by $3.1 million, or 3.7 %, from the comparable periodin 2008.  Store merchandise salesdecreased $1.1 million from the third quarter of 2008 due to a same store salesdecrease of $0.2 million, or 0.3%, compared to a 14.3% decrease in same storesales for the third quarter of 2008, and decreased revenue from discontinuedstores of $1.9 million, was partially offset by a $1.0 million revenue increasefrom the opening of seven new stores over the past twenty-one months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Also, mail order sales decreased $0.5million, installation and service fees increased $0.5 million and supplies andother sales decreased $2.0 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $80.1 million for the third quarter of 2009, adecrease of $3.5 million, or 4.2%, from the comparable period in 2008.

 

MembershipServices costs applicable to revenues of $23.0 million decreased $0.1 million,or 0.5%, from the comparable period in 2008. This decrease consisted of a $0.9 million reduction in wage-relatedexpenses and overhead costs, and a $0.3 million reduction in marketing costsrelated to vehicle insurance products, partially offset by a $0.7 millionincrease 

 

30

----

 

inemergency road services claims costs and $0.4 million of additional expensesrelated to increased extended vehicle warranty revenue.

 

Mediacosts applicable to revenues of $7.2 million for the third quarter of 2009 decreased$3.5 million, or 32.6%, from the comparable period in 2008 primarily related toa $1.8 million reduction in magazine expenses resulting from decreasedcirculation and production costs, a $1.0 million reduction in wage-relatedcosts, a $0.5 million reduction in overhead costs, and a $0.2 million reductionin costs related to reduced consumer shows revenue.

 

Retailcosts applicable to revenues increased $0.1 million, or 0.1%, to $49.9million.  The retail gross profit marginof 38.4% for the third quarter of 2009 decreased from 40.7% for the comparableperiod in 2008 primarily due to lower prices on high volume products.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $34.2 million for the third quarter of2009 decreased $1.7 million compared to the third quarter of 2008.  This decrease was due to a $2.2 milliondecrease in retail general and administrative expenses consisting primarily ofdecreases in labor and selling expenses, and a $0.4 million reduction in wagerelated expenses, partially offset by a $0.9 million increase in other generaland administrative expenses, primarily related to professional fees.

 

TheCompany recorded a non-cash goodwill impairment charge of $46.9 million in thethird quarter of 2009 related to the reporting units of our RV and powersportspublications, which is part of the Media segment.  The Company recorded a non-cash goodwillimpairment charge of $47.6 million in the third quarter of 2008 based onmanagement’s evaluation, prepared in anticipation of the potential sale ofCamping World, that determined the carrying value of the goodwill associatedwith Camping World exceeded the estimated fair value of Camping World inanticipation of the potential sale of Camping World, which encompasses the entireRetail segment, and to a lesser extent, part of the Membership Servicessegment.  The Company also recorded an$81.0 million non-cash long-lived asset impairment charge in the third quarterof 2008 relating to the carrying value of the preferred interest inFreedomRoads Holding Company, LLC, held by an indirect subsidiary of CampingWorld, exceeding its estimated fair value.

 

Forthe third quarter of 2009, financing expense of $0.3 million was incurred forlegal and other costs related to the amendment to the credit facility dated June 5,2009, which were expensed in accordance with accounting guidance for debtorsaccounting for a modification or exchange of debt instruments.

 

Depreciationand amortization expense of $5.9 million increased $0.8 million from the prioryear primarily dueto depreciation of a retail supply chainsystem installed in 2009.

 

*Loss fromOperations*

 

Lossfrom operations for the third quarter of 2009 totaled $42.5 million compared toa loss from operations of $119.9 million for the third quarter of 2008.  This decreased loss was primarily the resultof the $81.0 million asset impairment charge in the 2008 quarter, a net 

 

31

----

 

decreasein goodwill impairment of $0.7 million from the 2008 quarter to the 2009quarter, and $0.3 million of financing expense in the 2009 quarter.  Operationally, reduced gross profit for theRetail, Membership Services and Media segments of $3.2 million, $0.9 millionand $0.8 million, respectively, was partially offset by reduced operatingexpenses of $0.9 million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $11.9 million for the third quarter of 2009 increased$2.6 million compared to the third quarter of 2008 due to a $2.3 millionincrease in net interest expense relating to higher interest rates, a $0.2million loss on sale of retail equipment, and $0.2 million of othernon-operating charges partially offset by a $0.1 million gain on derivativeinterest rate swap agreements See Note 7 — Interest Rate Swap Agreements.

 

*LossBefore Income Tax*

 

Lossbefore income tax for the third quarter of 2009 was $54.4 million, or $74.8million lower than the third quarter of 2008. This decreased loss was attributable to the $77.4 million decrease inloss from operations and $2.6 million of increased non-operating itemsmentioned above.

 

*IncomeTax (Benefit) Expense*

 

TheCompany recorded income tax benefit of approximately $12.9 million for thethird quarter of 2009, compared to $0.3 million income tax expense for thethird quarter of 2008. The difference is due to the reversal of unrecognizedtax benefits, reversal of accrued interest and penalties related tounrecognized tax benefits, and decrease in the valuation allowance againstdeferred tax assets.

 

# *Net loss*

# * *

Netloss in the third quarter of 2009 was $41.5 million compared to $129.5 millionfor the same period in 2008 mainly due to the reasons discussed above.

 

*SegmentProfit (Loss)*

 

The Company’sthree principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, CampClub USA and assorted membership products and services for 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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The reportablesegments are strategic business units that offer different products and services.  They are managed separately because eachbusiness required different technology, management expertise and marketingstrategies.

 

MembershipServices segment profit of $10.3 million for the third quarter of 2009decreased $0.6 million, or 5.3%, from the comparable period in 2008.  This decrease was largely attributable to a$0.7 million decrease in segment profit from emergency road service products, a$0.5 million decrease in segment profit from a decline in Coast to Coast Cluband Golf Card Club membership fees and $0.3 million of reduced memberpublication segment profit primarily relating to reduced advertising revenue,partially offset by a $0.4 million increase in profit from the extended vehiclewarranty programs, associated with increased renewal revenue, $0.3 million ofreduced overhead expenses and $0.2 million of reduced depreciation expense.

 

Media segment lossincreased $47.1 million to a loss of $48.2 million for the third quarter of2009 from the comparable period in 2008. This decrease in segment profit resulted primarily from the $46.9million non-cash goodwill impairment charge, a $0.3 million decrease in segmentprofit from our consumer shows group and a $0.2 million decrease in segmentprofit from our publishing, primarily due to reduced advertising revenue,partially offset by a $0.3 million reduction in amortization expense.

 

Retail segmentprofit was $1.0 million for the third quarter of 2009 compared to a loss of$129.5 million for the third quarter of 2008. This improvement in segment profit resulted primarily from CampingWorld goodwill impairment and FreedomRoads Preferred Interest impairmenttotaling $128.6 million in 2008, a $2.3 million decrease in selling, general andadministrative expenses, and a $3.6 million decrease in interest expense, whichwere partially offset by a $3.2 million decrease in gross profit margin, a $0.5million increase in depreciation and amortization expense and a $0.2 millionincrease in loss on sale of equipment.

 

**NineMonths Ended September 30, 2009**

**ComparedWith Nine Months Ended September 30, 2008**

 

*Revenues*

 

Revenuesof $359.9 million for the first nine months of 2009 decreased by $46.2 million,or 11.4%, from the comparable period in 2008.

 

MembershipServices revenues of $110.0 million for the first nine months of 2009 decreased$4.8 million, or 4.1%, from the comparable period in 2008.  This revenue decrease was largelyattributable to a $2.9 million reduction in revenue due to reduced advertisingrevenue in member publications, a $1.4 million decrease in membership revenuedue to reduced file size in the Coast to Coast Club and Golf Card Club, a $1.3million reduction in member events revenue, a $1.1 million decrease inmarketing fee income for vehicle insurance products, a $0.6 million reduction indealer program marketing revenue, a $0.6 million reduction in emergency roadservice revenue and a $0.6 million reduction in other various ancillaryproducts.  These decreases were partiallyoffset a $2.5 millionincrease in extended vehicle warranty programrevenueresulting from continued growth and strongrenewals of contracts in force and a $1.2 million brand usage licensing fee chargedto FreedomRoads Holding LLC and 

 

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its subsidiaries (collectively “FreedomRoads”).  Pursuant to the Cooperative ResourcesAgreement dated January 1, 2008, payment is required by FreedomRoads of anannual fee based on revenue, as defined, in exchange for the right to use theCamping World logos, trademarks, and trade names granted by AGI.  The brand usage license fee of $1.2 millionrecognized from FreedomRoads in the second and third quarters of 2009 has beenfully reserved due to the uncertainty of its collectability.

 

Mediarevenues of $35.1 million for the first nine months of 2009 decreased $19.1million, or 35.2%, from the comparable period in 2008.  This decrease was primarily attributable to a$7.4 million reduction in revenue from the outdoor power sports magazinesprimarily related to reduced advertising revenue and reduced published issuesof boating and ATV magazines, a $6.3 million reduction in advertising revenuefrom RV-related magazines, a $4.4 million reduction in consumer show revenuemainly due to reduced exhibitor attendance, a $0.6 million reduction in revenueassociated with our campground guides and a $0.4 million reduction in revenuefrom the annual campground directories.

 

Retail revenues of$214.8 million decreased by $22.3 million, or 9.4%, from the comparable periodin 2008.  Store merchandise salesdecreased $13.5 million from the first nine months of 2008 due to a same storesales decrease of $12.1 million, or 7.3%, compared to a 15.0% decrease in samestore sales for the first nine months of 2008, and discontinued store revenueof $5.2 million, was partially offset by a $3.8 million revenue increase fromthe opening of seven new stores over the past twenty-one months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Further, mail order sales decreased $2.0million, installation and service fees decreased $1.0 million and supplies andother sales decreased $5.8 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled approximately $226.9 million for the first ninemonths of 2009, a decrease of $24.2 million, or 9.7%, from the comparableperiod in 2008.

 

MembershipServices costs applicable to revenues of $68.0 million decreased $4.8 million,or 6.6%, from the comparable period in 2008. This decrease consisted of a $1.6 million reduction in wage-relatedexpenses, a $1.3 million reduction in marketing costs related to vehicleinsurance products, a $1.2 million reduction in costs related to various otherancillary products and overhead decreases, a $1.1 million reduction in memberpublication costs, a $0.6 million decrease in events costs related to reducedrevenue, a $0.4 million reduction in dealer program marketing costs related toreduced revenue, and a $0.3 million decrease in marketing costs for Camp ClubUSA primarily related to reduced mailings. These decreases were partially offset by $1.3 million of incrementalcosts associated with increased extended vehicle warranty program revenue and$0.4 million of increased emergency road service program costs.

 

Mediacosts applicable to revenues of $28.0 million for the first nine months of 2009decreased $11.2 million, or 28.5%, from the comparable period in 2008 primarilyrelated to reduced costs of $4.5 million in magazine circulation and productioncosts, a $3.5 million reduction in wage related expenses, a $1.9 millionreduction related to consumer show costs, 

 

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includingreduced site rental, outside services and promotion expense related to fewerexhibitors, a $0.5 million reduction in mostly marketing costs related to theannual campground directories, a $0.5 million reduction in other overheadexpenses and a $0.3 million reduction related to reduced campground guiderevenue.

 

Retailcosts applicable to revenues of $130.9 million for the first nine months of2009 decreased $8.2 million, or 5.9%, from the comparable period in 2009primarily as a result of the decrease in retail revenue.  The retail gross profit margin of 39.1% forthe first nine months of 2009 decreased from 41.3% for the comparable period in2008 primarily due to decreased ad sales, a new, discounted “value pricing”adopted on over 1,000 products and price increases from key vendors.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $97.3 million for the first nine monthsof 2009 decreased $15.3 million compared to the first nine months of 2008.  This decrease was due to a $14.1 milliondecrease in retail general and administrative expenses primarily consistingdecreases in labor and selling expenses. In addition, wage-related expense savings were $1.4 million in the othertwo segments, the consumer shows group in the Media segment had a $1.1 millionreduction in general and administrative expenses related to discontinuedconsulting agreements and management fees, and other expenses were reduced $0.4million.  These decreases were partiallyoffset by an increase of $1.7 million in corporate professional fees.

 

TheCompany recorded a non-cash goodwill impairment charge of $46.9 million in thethird quarter of 2009 related to the reporting units of our RV and powersportspublications, which is part of the Media segment.  The Company recorded a non-cash goodwillimpairment charge of $47.6 million in the third quarter of 2008 based onmanagement’s evaluation, prepared in anticipation of the potential sale ofCamping World, that determined the carrying value of the goodwill associatedwith Camping World exceeded the estimated fair value Camping World, whichencompasses the entire Retail segment, and to a lesser extent, part of theMembership Services segment.  The Companyfurther recorded an $81.0 million non-cash long-lived asset impairment chargein the third quarter of 2008 relating to the carrying value of the preferredinterest in FreedomRoads Holding Company, LLC, held by an indirect subsidiaryof Camping World, exceeding its estimated fair value.

 

Forthe first nine months of 2009, financing expense of $1.9 million was incurredfor legal and other costs related to the amendment to the AGI Senior CreditFacility dated June, 2009, which were expensed in accordance with accountingguidance for debtors accounting for a modification or exchange of debtinstruments.

 

Depreciationand amortization expense of $16.6 million increased $1.1 million primarily dueto the commencement of depreciation of a retail supply chain project installedin 2009.

 

*Loss FromOperations*

 

Lossfrom operations for the first nine months of 2009 totaling $29.6 millioncompared to a loss from operation of $101.7 million for the first nine monthsof 2008.  This $72.1 million loss 

 

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reductionwas primarily the result of the $81.0 million asset impairment charge in 2008and a $0.7 million net decrease in goodwill impairment charges from the 2008period to the 2009 period, partially offset by $1.9 million of financingexpense in 2009.  Operationally, theremaining loss reduction resulted from reduced operating expenses ofapproximately $14.1 million and increased gross profit for the MembershipServices segment of $0.1 million partially offset by reduced gross profit forRetail and Media segments of $14.0 million, and $7.9 million, respectively.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $27.1 million for the first nine months of 2009decreased $0.3 million from the first nine months of 2008 due to a $4.7 milliongain on purchase of the $14.6 million Senior Subordinated Notes in the secondquarter of 2009, and an $0.8 million gain on derivative interest rate swapagreements, (see Note 7 Interest Rate Swap Agreements) partially offset by a$4.0 million increase in net interest expense resulting from increased interestrates, $0.9 million of other non-operating charges, and a $0.3 million loss onsale of retail equipment.

 

*Lossbefore Income Taxes*

 

Lossbefore income taxes for the first nine months of 2009 was $56.7 million, or$72.4 million lower than the loss before income taxes for the first nine monthsof 2008.  This decrease was attributableto the $72.1 million of reduced loss from operations and a $0.3 milliondecrease in non-operating items.

 

*IncomeTax Benefit (Expense)*

 

TheCompany recorded income tax benefit of approximately $12.2 million for thefirst nine months of 2009, compared to $0.8 million of income tax expense forthe first nine months of 2008.  Thedifference is due to the recognition of previously unrecognized tax benefits,reversal of accrued interest and penalties related to the previouslyunrecognized tax benefits, and decrease in the valuation allowance againstdeferred tax assets.

 

# *Net Loss*

# * *

Netloss in the first nine months of 2009 was $44.5 million compared to $130.0million for the same period in 2008 primarily due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

The Company’sthree principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, CampClub USA and assorted membership products and services for 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, includinggeneral circulation periodicals, directories, and RV and powersports industrytrade magazines.  In addition, the Mediasegment operates consumer outdoor recreation shows primarily focused on RV andpowersports markets.  The Retail segmentsells 

 

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specialty retailmerchandise and services for RV owners primarily through retail supercentersand mail order catalogs.  The Companyevaluates performance based on profit or loss from operations before incometaxes and unusual items.

 

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

 

MembershipServices segment profit of $34.9 million for the first nine months of 2009increased $0.8 million, or 2.3%, from the comparable period in 2008.  This increase was largely attributable to a$2.2 million increase in profit from the extended vehicle warranty program,associated with increased revenue, a $1.2 million brand licensing fee chargedto FreedomRoads in March 2009 and a $0.6 million decrease in overheadexpenses, partially offset by $1.3 million of reduced member publicationsegment profit primarily relating to reduced advertising revenue, a $1.1million decrease in segment profit relating to vehicle insurance products, andan $0.8 million decrease in segment profit in Coast to Coast Club and Golf CardClub due to reduced member enrollment.

 

Media segment lossof $46.9 million for the first nine months of 2009 represents an increased lossof $52.5 million from the comparable period in 2008.  This segment loss was largely attributed to anon-cash goodwill impairment charge of $46.9 million in the third quarter of2009 related to our RV and powersports publications, a $4.0 million decrease insegment profit from the RV-related publications primarily related toattributable to reduced advertising revenue, a $2.2 million decrease in segmentprofit from our outdoor powersports magazine group, primarily attributable toreduced advertising revenue and fewer issues published, and a $0.9 milliondecrease in segment profit from our consumer shows group primarily related toreduced exhibitor revenue.  Thesedecreases were partially offset by a $1.0 million reduction in overheadexpenses and a $0.5 million segment profit increase for annual directories.

 

Retail segmentloss decreased $131.8 million from the first nine months of 2008 to a loss of$6.7 million for the first nine months of 2009. This decrease in segment loss resulted primarily from an $81.0 million non-cash long-livedasset impairment charge in the third quarter of 2008 relating to the carryingvalue of the preferred interest in FreedomRoads Holding Company, LLC, held byan indirect subsidiary of Camping World, a non-cash goodwill impairment chargeof $47.6 million in the third quarter of 2008 related to the potential sale ofCamping World, a $14.1 million decrease in selling, general and administrativeexpenses and a $5.0 million decrease in interest expense, partially offset by a$14.7 million decrease in gross profit margin, a $0.9 million increase indepreciation and amortization expense and a $0.3 increase in loss on sale ofequipment.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company hashistorically operated with a working capital deficit.  The working capital deficit as of September 30,2009 and December 31, 2008 was $174.3 million and $15.0 million,respectively.  The primary reason for theincrease in working capital deficit for 2009 is the classification of the debt underwith the AGI Senior Credit Facility, the AGI Second Lien Loan and a portion ofthe AGHI Notes totaling $155.4 million as a current liability. Deferred 

 

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revenue and gainsreported under current liabilities was $69.8 million and $60.6 million as of September 30,2009 and December 31, 2008, respectively. Deferred revenue is primarily comprised of cash collected for club membershipsin advance, which is amortized over the life of the membership.  The Company uses net proceeds from thisdeferred membership revenue to lower its borrowings.  The Company anticipates that it will be ableto refinance or replace the existing credit facility before its maturity on March 31,2010 and, assuming such refinancing, will have sufficient funds from itsoperations together with available borrowing under the replacement creditfacility to meet all of the Company’s debt service, capital requirements andworking capital needs over the next twelve months.

 

The Company hasengaged a financial advisor to seek capital to permit a possible refinancing orrestructuring of the AGI Senior Credit Facility ($111.2 million principalamount of the term loans and $9.0 million principal amount under the revolvingcredit line under the AGI Senior Credit Facility on September 30, 2009),the AGI Second Lien Loan indebtedness ($9.7 million principal outstanding on September 30,2009), the AGI Senior Subordinated Notes due 2012 ($137.8 million principaloutstanding on September 30, 2009) and the AGHI Notes due 2012 ($112.1million principal outstanding on September 30, 2009 of which $25.4 millionis due March 2010).  The Company hasreceived preliminary written proposals from a number of potential capitalsources, some of whom have performed business due diligence.

 

The Company hasengaged in discussions with the holders of the AGHI Notes and the holders ofother indebtedness of the Company regarding a refinancing or restructuring ofthe indebtedness of the Company and its parent, AGHI.  As part of those discussions, AGHI hasdeferred payment of the interest on the AGHI Notes that was due on August 15,2009.  The indenture governing the AGHINotes provides a 30-day grace period for the payment of interest.  On September 14, 2009, AGHI receivedconsent letters for the payment deferral from certain institutional holders ofthe AGHI Notes holding in the aggregate $65.8 million principal amount of theAGHI Notes outstanding and consent letters for the payment deferral fromcertain non-institutional holders of the AGHI Notes holding in the aggregate$46.6 million principal amount of the AGHI Notes outstanding.  The aggregate principal amount of the AGHINotes outstanding is $113.6 million so the holders executing the consents hold98.9% of the outstanding principal amount of the AGHI Notes.  Pursuant to the consent letters from theinstitutional holders, AGHI agreed to pay the legal fees for a law firm torepresent the institutional holders in connection with such discussions and haspaid a $150,000 retainer to that law firm. In addition, AGHI has paid a consent fee equal 1⁄4 of 1% of the principalamount to the institutional holders who signed a consent letter, or an aggregateof $164,600.  No consent fee was paid tothe non-institutional holders.  Theinstitutional holders have extended the most recent interest payment date ontheir AGHI Notes until November 13, 2009. The non-institutional holders have extended the most recent interestpayment date on their AGHI Notes until five business days after the terminationof the consents from the institutional holders. On September 14, 2009, AGHI paid the interest on the remaining $1.3million principal amount of AGHI Notes that are outstanding and for whichpayment deferral consent was not obtained.

 

As a result ofrestrictions in the AGI Senior Credit Facility, AGI is blocked from makingdistributions to AGHI for the purpose of paying interest on the AGHINotes.  For the two most recent interestpayments, AGHI has made the interest payments using the proceeds 

 

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of a capitalcontribution from AGHI’s parent.  Therecan be no assurance that AGHI’s parent will fund the interest payment on theAGHI Notes by the end of the deferral period. There can be no assurance that the Company will be able to implement anew capital structure to repay or refinance the AGI Senior Credit Facility, theAGI Second Lien Loan indebtedness, the AGI Senior Subordinated Notes or theAGHI Notes before the final maturity of the AGI Senior Credit Facility in March 2010,the maturity of the AGI Second Lien Loan indebtedness in July 2010, thematurity of the AGI Senior Subordinated Notes in February 2012, or the maturityof the AGHI Notes, $25.4 million of which mature in March 2010 and thebalance in February 2012.   If theCompany is not able to refinance or replace any such debt before its scheduledmaturity, the holders of such debt 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 indebtedness owned under the AGI Senior CreditFacility and the AGI Second Lien Loan indebtedness is secured, it would berepaid before funds are available to discharge any unsecured or subordinatedobligations.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at September 30, 2009. This table includes principal and future interest due under our debtagreements based on interest rates as of September 30, 2009 and assumesdebt obligations will be held to maturity.

 
| ** **                   | ** **   | **Payments Due by Period** | ** ** |
|------------------------------|--------------|----------------------------|------------|
| **(in thousands)**           | *** *** | **Total**                  | ** ** | **2009** | ** ** | **2010 and  2011** | ** ** | **2012 and  2013** | ** ** | **Thereafter** | ** ** |
|                         |         |                       |       |   |   |   |   |   |   |   |   |
| Debt and future interest     |         | $                          | 465,094    |   | $ | 15,670 |   | $ | 211,018 |   | $ | 238,406 |   | $ | — |   |
| Operating lease  obligations |         | 226,328                    |       | 5,834 |   | 44,435 |   | 37,745 |   | 138,314 |   |
| Standby letters of credit    |         | 6,673                      |       | 4,673 |   | 2,000 |   | — |   | — |   |
| Grand total                  |         | $                          | 698,095    |   | $ | 26,177 |   | $ | 257,453 |   | $ | 276,151 |   | $ | 138,314 |   |

 

AGHI Notes

 

On March 24,2005, in a private placement, AGHI issued $88.2 million principal amount of its10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million originalissue discount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005.  The AGHI Notes are unsecured obligations ofthe Company and its subsidiaries have not guaranteed payment of principal orinterest on the AGHI Notes.  Interest onthe AGHI Notes is payable semi-annually on February 15 and August 15commencing August 15, 2005 and the entire $88.2 million principal amountof the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15,2008, AGHI had the election to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date of the additional notes ($25.4 million) is March 15,2010.  AGI has not paid any dividends toAGHI to fund payment of interest on the AGHI Notes and AGHI made the interestpayments due on August 15, 2005, February 15, 2006, August 15,2006, February 15, 2007, and February 15, 2008 through the issuanceof additional notes.  The Company paidthe interest on the AGHI Notes due August 15, 2007, August 15, 2008and February 15, 2009 from proceeds of contributions made by AGHI’sparent, AGHC, of $5.9 million, 

 

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$6.2 million and$6.2 million, respectively.  The Company hasnot paid $6.1 million of interest due August 15, 2009 due to pendingdiscussions with holders of the AGHI Notes regarding a refinancing orrestructuring of the indebtedness of the Company.  As a result of not paying the $6.1 million ofinterest due August 15, 2009, the Company is currently working under theterms of a forbearance agreement with the note holders through November 13,2009.  The holders of the AGHI Notes forwhich interest has been deferred have consented to the extension of the mostrecent interest payment date on their AGHI Notes.  See Note 11 — Subsequent Events.  If the source of the cash payment of the AGHI Notes isdividends from AGI, its wholly-owned subsidiary, there are certain restrictionson the payment of dividends under the AGI Senior Credit Facility and the AGIIndenture.  As of September 30,2009, $112.0 million of AGHI Notes remain outstanding.  The fair value of the AGHI Notes, based onthe quoted market price at September 30, 2009, was $50.5 million.  Currently, the AGI Senior Credit Facility andthe AGI Indenture impose limitations on the ability of subsidiaries of AGHI tomake dividend distributions or loans to AGHI to pay interest on the AGHI Notes.

 

The Companycontributed the net proceeds from the issuance of the AGHI Notes, approximately$81.0 million, to AGI and in turn, AGI made an equity contribution to itswholly-owned subsidiary, Camping World. Camping World then made an equity capital contribution in the sameamount to its wholly-owned subsidiary, CWI, Inc. (“CWI”).  CWI created a new wholly-owned subsidiarynamed CWFR Capital Corp., a Delaware corporation (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture.  Since CWFR is an unrestricted subsidiary, itsoperations are not restricted by either the AGI Indenture or the AGHINotes.  CWI made an equity capitalcontribution to CWFR in an equal amount to the capital contribution that itreceived from Camping World.  CWFR usedthe proceeds from the equity capital contribution to acquire a preferredmembership interest in FreedomRoads, a Minnesota limited liability companyowned 90% by The Stephen Adams Living Trust, which also indirectly owns 100% ofthe outstanding capital stock of AGHC and indirectly AGHI.  The Company recorded an impairment charge of$81.0 million in the third quarter of 2008 that wrote down to zero the carryingvalue of the preferred membership interest.

 

AGI Senior CreditFacility

 

OnJune 24, 2003, AGI entered into an Amended and Restated Credit Agreementand a Senior Secured Floating Rate Note Purchase Agreement which was mostrecently amended on June 5, 2009 (as amended, the “AGI Senior CreditFacility”).  The AGI Senior CreditFacility provides for a revolving credit facility of $25.0 million and termloans.  As of September 30, 2009,$9.0 million was outstanding under the revolving credit facility and $111.2million was outstanding under the term loans. Reborrowings under the term loans are not permitted.  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 9.00% to 10.00%, respectively, over the stated rates, and a LIBOR floor of2.75%.  After consideration of fixed ratesunder the interest rate swap agreements, (discussed in Note 7 — Interest RateSwap Agreements), as of September 30, 2009, the average interest rate onthe term loans and the revolving credit facility was 17.11% and permittedborrowings under the revolving facility were $18.3 million.  AGI also pays a commitment fee of 1.0% perannum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $0.4 million.  Boththe revolving credit facility and the term loans under the AGI Senior CreditFacility mature on

 

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March 31,2010.  The funds available under the AGISenior Credit Facility may be utilized for borrowings or letters of creditexcept a maximum of $7.5 million may be allocated to such letters of credit.  As of September 30, 2009, AGI hadletters of credit in the aggregate amount of $6.7 million outstanding.  The AGI Senior Credit Facility is secured byvirtually all of AGI’s assets and a pledge of AGI’s stock and the stock of AGI’ssubsidiaries.

 

OnMarch 3, 2006, AGI amended its AGI Senior Credit Facility to revise thedefinition of Consolidated Fixed Charges Ratio and Permitted TaxDistributions.  This amendment allows theCompany to distribute taxes to its ultimate parent based on its stand-alone taxobligation rather than the tax obligation of its parent, AGHI, until such timethat AGHI pays interest on AGHI Notes in cash instead of by the issuance ofadditional notes and AGI makes a distribution to AGHI for purposes of payingthat cash interest.  Further, AGI amendedthe AGI Senior Credit Facility’s covenant restrictions with affiliates topermit a joint venture arrangement between Camping World and FreedomRoads, anaffiliate of the Company.

 

OnJune 5, 2009, AGI entered into an amendment to its AGI Senior CreditFacility pursuant to which the maturity date was extended from June 24,2009 to March 31, 2010, the revolving credit portion of the facility wasreduced by $10.0 million to $25.0 million, the outstanding term loan borrowingswere repaid by $8.0 million, the financial covenants in effect through theextended maturity date were revised and the borrowing rate was increased toprime rate plus 7.0% or LIBOR plus 8.0% with a LIBOR floor of 2.75%.  The Company capitalized $2.5million in fees paid to the lenders and expensed as incurred $1.9 million in legaland other fees related to the amendment. As a condition to the amendment, the shareholder of the ultimate parentof the Company, was required to arrange for the purchase of $26.6 million inprincipal amount of the term portion of the AGI Senior Credit Facility by newlenders, enhance the yield to such new lenders, purchase AGHI Notes held by oneof such new lenders at a premium to the most recent market price, contribute $5.0million in capital to AGI, and guarantee two required principal paymentson the term loans under the AGI Senior Credit Facility, aggregating $15.0million.  In consideration of suchsupport, AGI entered into an option agreement with the shareholder of theultimate parent of the Company pursuant to which AGI granted such shareholderor his assigns an option, exercisable on or before March 1, 2010 to purchasethe Company’s Camping World subsidiary for $55.0 million.  Management was assisted in determining thefair value of such subsidiary by an independent third party valuation firm.  AGI also agreed to pay theshareholder of the ultimate parent, upon successful refinancing of AGI’ssecured debt, including the AGI Senior Credit Facility, a success fee equal inamount to the fair value, as determined by an independent financial advisor ofsuch credit support, taking into account the fair value of the option topurchase Camping World.  In the event thefair value of the Camping World purchase option exceeds the fair value of suchcredit support, the shareholder will pay the amount of such excess to AGI.

 

Theamended AGI Senior Credit Facility also revised AGI’s financial covenants ineffect through the extended maturity date. As required by the AGI Senior Credit Facility, significant costreductions have been implemented in 2008 and 2009, including the elimination ofpersonnel, suspension of 401(k) employer contributions, salary cutbacks,hiring and capital expenditure spending freezes, closure of under-performingretail stores, satellite office closures, and magazine size and frequency reductions.

 

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The 10th Amendmentto the AGI Senior Credit Facility requires the commitment of Stephen Adams, AGI’sultimate shareholder, to cause loans to be made to AGI in amounts equal to thecash interest payments on $16.0 million in aggregate principal amount of theterm loans.  In connection with thatrequirement, on June 10, 2009, AGI entered into a loan agreement with SAHolding, LLC, (“SA Holding”), which is owned by Stephen Adams, pursuant to whichSA Holding agreed to loan to AGI (the “SA Loans”) amounts equal to the cashinterest payments on $16.0 million in aggregate principal amount of termloans.  The interest rate on the SA Loansis equal to the interest rate payable on the AGI Senior Credit Facility plus2.0% per annum compounded monthly.  TheSA Loans mature on the date on which the indebtedness under the AGI SeniorCredit Facility is paid in full.  As of September 30,2009, $0.6 million of SA Loans were outstanding.

 

The AGI SeniorCredit Facility contains certain restrictive covenants relating to, but notlimited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  There was no event of default under the AGISenior Credit Facility at September 30, 2009.

 

AGI SeniorSubordinated Notes

 

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

 

On June 8,2006, AGI amended its AGI Senior Credit Facility to permit AGI to purchase upto $30.0 million of the AGI Senior Subordinated Notes from time to time as andwhen the Company determines.  During2006, AGI purchased $29.9 million of the AGI Senior Subordinated Notes. Thepurchases of these notes were made with available cash, and the notes purchasedhave been retired.

 

On March 8,2007, AGI purchased $17.7 million of the AGI Senior Subordinated Notes.  AGI funded the purchase through the issuanceof the $25.0 million in additional incremental term loans as permitted underthe February 27, 2007 amendment to the AGI Senior Credit Facility.  The balance of the $25.0 million issued wasused to pay down AGI’s revolving credit facility by $6.5 million and to payassociated loan fees and transaction expenses. The terms on the additional incremental loans are consistent with theremaining term loan outstanding under the AGI Senior Credit Facility.  On June 5, 2009, the Company purchased$14.6 million of the Senior Subordinated Notes. The Company funded the purchase through the issuance of a $9.7 millionAGI Second Lien Loan.  As of September 30,2009, $137.8 million of Senior Subordinated Notes remain outstanding.  The fair value of the AGI Senior SubordinatedNotes, based on the quoted market price at September 30, 2009, was $96.5million.

 

The AGI Indenture,pursuant to which the AGI Senior Subordinated Notes were issued, containscertain restrictive covenants relating to, but not limited to, mergers, changesin the nature of the business, acquisitions, additional indebtedness, sale of assets,investments, and the payment of dividends subject to certain limitations andminimum operating covenants.

 

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Interest Rate Swap Agreements

 

On October 15, 2007, AGI entered into a five-year interest rateswap agreement with a notional amount of $100.0 million from which it willreceive periodic payments at the 3 month LIBOR-based variable rate (0.4875% at September 30,2009 based upon the July 31, 2009 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 (0.4875% at September 30, 2009 based upon the July 31,2009 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans and therevolving credit facility issued June 24, 2003, and accordingly, gains andlosses on the fair value of the interest rate swap agreements are reported inaccumulated other comprehensive loss and reclassified to earnings in the sameperiod in which the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of these swapsincluded in other long-term liabilities was $8.1 million of which $7.1 millionis in accumulated other comprehensive gain, and $0.8 million in the statementof operations at September 30, 2009. The fair value of these swaps included in other long-term liabilitieswas $12.7 million of which $10.3 million is in accumulated other comprehensiveloss and $2.4 million in the statement of operations at December 31,2008.  See Note 8 — Interest Rate SwapAgreements.

 

Due to thedisclosure of a potential sale of Camping World, in the fourth quarter of 2008a highly effective hedge on the $35.0 million outstanding debt by the $35.0million notional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings as a gain(loss) on derivative instrument on October 1, 2008.  Included in other comprehensive loss at September 30,2009 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.

 

Due to theissuance of an option to the shareholder of the ultimate parent of the Companyto purchase Camping World, in the second quarter of 2009 a portion of thehighly effective hedge on the $100.0 million outstanding debt by the $100.0million notional amount interest rate swap agreement was deemed to be no longerprobable and is now 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.

 

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

 

Other Debt

 

Concurrentwith the June 5, 2009 amendment to the AGI Senior Credit Facility, AGIobtained a $9.7 million AGI Second Lien Loan, the net proceeds of which wereused to purchase $14.6 million in principal amount of AGI Senior SubordinatedNotes.  The AGI Second Lien Loan carriesan interest rate of 9.0% and matures on July 31, 2010.

 

Inaddition, AGI agreed to use its best efforts to secure an asset-based loan ofat least $18.5 million secured by the inventory and receivables of itssubsidiary, Camping World, Inc. (the “Camping World Financing”), theproceeds of which would be used to further reduce the amounts outstanding underthe AGI Senior Credit Facility.  Since aCamping World Financing had not been consummated by September 15, 2009,the borrowing rate on revolving credit loans, swing loans and terms loansincreased to prime rate plus 9.0% or LIBOR plus 10.0%.  See Note 10 Recent Events.

 

Other ContractualObligations and Commercial Commitments

 

In January 2008,AGI Productions, Inc. acquired nine consumer shows from MAC Events, LLCfor $3.4 million.  As part of thepurchase, the Company issued $0.4 million of debt and assumed $0.6 million inliabilities.  In February 2008, AGIProductions, Inc. acquired three consumer shows from Mid AmericaExpositions, Inc. for $1.6 million. As part of the purchase, the Company issued $0.5 million in debt andassumed $0.5 million in liabilities.

 

For the ninemonths ended September 30, 2009, the Company incurred no deferredexecutive compensation expense under the phantom stock agreements, and madepayments of $1.4 million under the terms of the vested phantom stockagreements.  Any earned incentives underthese agreements are scheduled to be paid at various times over the next fouryears.  No phantom stock payments arescheduled to**be made for the remainder of 2009.

 

Capitalexpenditures for the first nine months of 2009 totaling $2.5 million decreased$6.9 million from the first nine months of 2008 primarily due to thecurtailment of new retail store openings. Additional capital expenditures of $0.1 million are anticipated for thebalance of 2009 primarily for software enhancements, information technologyupgrades and further website development.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Company to make estimates and 

 

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judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives,bad debts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

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

 

*Revenue Recognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and Internet orders, or when services are provided to customers.  Publication advertising and newsstand sales,net of estimated provision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of themembership.  ERS claim expenses arerecognized when incurred.  Advances onthird party credit card fee revenues are deferred and recognized basedprimarily on a percentage of credit card receivables held by thirdparties.  Membership revenue is generatedfrom annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.  Revenue and related expensesfor consumer shows are recognized when the show occurs.

 

*Accounts Receivable*

 

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

 

*Inventory*

 

The Company statesinventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company isrequired to make judgments as to future demand requirements and compare thatwith the current or committed inventory levels. The Company has recorded changes in required reserves in recent periodsdue to changes in strategic 

 

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direction, such asdiscontinuances of product lines as well as changes in market conditions due tochanges in demand requirements.  It ispossible that changes in required inventory reserves may continue to occur inthe future due to the market conditions.

 

*Long-LivedAssets*

 

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

 

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

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject to amortization.  The Company determined that no adjustments tothe useful lives of its finite-lived purchased intangible assets werenecessary.  The finite-lived purchasedintangible assets consist of membership customer lists, resort and golf courseagreements, non-compete and deferred consulting agreements and deferredfinancing costs which have weighted average useful lives of approximately 6years, 4 years, 15 years and 6 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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

 

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

 

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

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the reporting units of our RV and powersportspublications determined in step one of the impairment test, to the assets andliabilities of the respective reporting unit in accordance with new accountingguidance for Business Combinations. The Company measured the impairment forthese units to be equal to the carrying value of its goodwill, or $46.9million.  The Company recorded animpairment charge of $46.9 million in the third quarter of 2009 related tothese units, which is part of the Media segment.

 

The Company has evaluatedthe remaining useful lives of its property and equipment and finite-livedpurchased intangible assets to determine if any adjustments to the useful liveswere necessary.  The Company determinedthat no adjustments to the useful lives of its property and equipment orfinite-lived purchased intangible assets were necessary. Future goodwillimpairment tests could result in a charge to earnings.  The Company will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

*AccumulatedOther Comprehensive Loss*

 

Accumulatedother comprehensive loss consists of unrealized losses on cash flowhedges.  At September 30, 2009,accumulated other comprehensive loss was $7.1 million.

 

*Derivative Financial Instruments*

 

Asdiscussed in Note 7 — Interest Rate Swap Agreement, 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 

 

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hedgeditems, as well as risk management objectives and strategies for undertakingvarious hedge transactions.

 

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

 

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

 

On June 11,2009, the Company partially settled the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was recorded toearnings in Gain on derivative.  Thenotional amount was reduced to $20.0 million. All other terms of the interest rate swap agreement remained unchanged.  As a result, the amount included in othercomprehensive loss related to the partial termination of the $35.0 millioninterest rate swap was reduced prorata and included in earnings as a gain(loss) on derivative instrument.

 

Due to thedisclosure of a potential sale of Camping World in the fourth quarter of 2008,a highly effective hedge on the $35.0 million outstanding debt by the $35.0million notional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings beginningon October 1, 2008.  Included inother comprehensive loss at September 30, 2009 is $0.4 million related tochanges in the fair value of the $35.0 million interest rate swap prior to October 1,2008, which will be amortized over the remaining life of the interest rate swapand included in earnings as gain (loss) on derivative instrument.

 

Due to theissuance of an option to the shareholder of the ultimate parent of the Companyto purchase Camping World, in the second quarter of 2009 a portion of thehighly effective hedge on the $100.0 million outstanding debt by the $100.0million notional amount interest rate swap agreement was deemed to be no longerprobable and is now 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 asgain (loss) on derivative instrument. See Note 8 — Interest Rate Swap Agreements.

 

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*Fair Value Measurements*

 

As discussed in Note 2 — Recent AccountingPronouncements, the Company adopted accounting guidance effective on Fair ValueMeasurements.  The Company has determinedthat it utilizes observable (Level 2) inputs in determining the fair value ofits interest rate swap agreements which totaled $8.1 million at September 30,2009.  The Company has determined that itutilizes unobservable (Level 3) inputs in determining the fair value of itsFreedomRoads Preferred Interest and Media segment goodwill which each totaled$0.0 million at September 30, 2009.

 

*Income Taxes*

 

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

 

**ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

Thefollowing information discusses the sensitivity to our earnings.  The range of changes chosen for this analysisreflects our view of changes which are reasonably possible over a one-yearperiod.  These forward-lookingdisclosures are selective in nature and only address the potential impacts fromfinancial instruments.  They do not includeother potential effects which could impact our business as a result of theseinterest rate fluctuations.

 

*InterestRate Sensitivity Analysis*

 

AtSeptember 30, 2009, we had debt totaling $382.0 million, comprised of $0.8million of variable rate debt and $381.2 million of fixed rate debt, comprisedof $120.0 million of debt fixed through the interest rate swap agreements,$137.8 million of AGI Senior Subordinated Notes, $9.7 million of the AGI SecondLien Loan, $112.1 million of AGHI Notes and $1.6 million of purchase debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorableimpact of less than $0.1 million.

 

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*CreditRisk*

 

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

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over FinancialReporting

 

Within 90 days prior to the filing of this QuarterlyReport on Form 10-Q, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe President and Chief Executive Officer and the Senior Vice President andChief Financial Officer, of the effectiveness of the design and operation ofthe Company’s disclosure controls and procedures pursuant to Regulation 13a-15(e) underthe Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the President andChief Executive Officer along with the Senior Vice President and ChiefFinancial Officer concluded that the disclosure controls and procedures areeffective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe periodic SEC filings.  Managementdetermined that, as of September 30, 2009, there have been no significantchanges in the Company’s internal control over financial reporting or in otherfactors that could significantly affect these controls subsequent to the datethe Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A:RISK FACTORS**

 

The AGI SeniorCredit Facility matures on March 31, 2010. As of September 30, 2009, there was $120.2 million outstandingunder the AGI Senior Credit Facility and it is secured by a lien on all of theassets of AGI and its subsidiaries and a pledge of the stock of AGI and itssubsidiaries.  The AGI Second Lien Loanmatures on July 31, 2010.  As of September 30,2009, there was $9.7 million outstanding under the AGI Second Lien Loan and itis secured by a second lien on the assets and stock of AGI and itssubsidiaries.  In addition, $25.4 millionof the AGHI Notes mature in March 2010 and are unsecured.  Although the Company is currently seeking torefinance or replace the AGI Senior Credit Facility and has received certainproposals or indications of interest from prospective lenders, there can be noassurance that the AGI Senior Credit Facility will be refinanced or replacedprior to its maturity.  The availabilityof financing is limited due to the current uncertainties in the capitalmarkets.  In addition, the currentgeneral conditions in the U.S. economy had an adverse impact on the Company’soperations because consumers are reducing discretionary spending, includingspending on the recreational activities offered by the Company, and businessesare reducing advertising and marketing expenditures which have adverselyaffected the advertising revenues received by the Company.  As a result, it may be even more difficultfor the Company to refinance or replace the AGI Senior Credit Facility due tothe current deterioration in the Company’s operating results and the prospectsfor the business segments in which the Company operates.  If the Company is not able to refinance orreplace the AGI Senior Credit Facility prior to its maturity on March 31, 

 

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2010, the lenderswill be entitled to exercise their remedies to sell the collateral securing therepayment of the AGI Senior Credit Facility, including the Company’s assets,the stock of the Company and the stock of the Company’s subsidiaries.  Since the indebtedness owned under the AGISenior Credit Facility is secured, it would be repaid before any of theunsecured or subordinated obligations of the Company and its subsidiaries.  It is also possible that the interest ratepayable on a new credit facility will be higher than the interest rates underthe current AGI Senior Credit Facility as amended June 5, 2009  which will adversely affect the Company’scash flow and profitability (or increase losses).  See Note 11 — Subsequent Events.

 

The ability of theCompany and AGI to replace or refinance the AGI Senior Credit Facility may alsodepend on the ability of the Company to replace, refinance or modify the AGISecond Lien Loan in the principal amount of $9.7 million as of September 30,2009 that matures on July 31, 2010, and the AGI Senior Subordinated Notesin the principal amount of $137.8 million as of September 30, 2009 thatmature on February 15, 2012, and on the ability of AGHI to replace,refinance or modify the AGHI Senior Notes in the principal amount of $112.1 asof September 30, 2009 of which $25.4 million mature in March 2010 andthe balance in February 2012, since these other debt instruments mature inproximity to the maturity of the AGI Senior Credit Facility, or the ability ofthe Company or AGI to repay such debt when due is an important factor in anynew capital structure for the Company and AGI.

 

If the Company orAGI is not able to refinance or replace any such debt before its scheduledmaturity, the holders of such debt 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 indebtedness owned under the AGI Senior CreditFacility and the AGI Second Lien Loan indebtedness is secured, it would berepaid before funds are available to discharge any unsecured or subordinatedobligations.

 

**ITEM 5: OTHER INFORMATION**

 

Items 1 through 5have been omitted since no events occurred with respect to these items.

 

Item 6.               Exhibits and Reports on Form 8-K

 
| (a)    | Exhibits.                                                                               |
|--------|-----------------------------------------------------------------------------------------|
|   |                                                                                    |
|   | Exhibit 10.34  — Loan Agreement with SA Holding LLC dated June 10, 2009  |
|   | Exhibit 10.35  — Promissory Note with SA Holding LLC dated June 10, 2009 |
|   |                                                                                    |
| (b)    | Reports on  Form 8-K.                                                              |
|   |                                                                                    |
|   | None.                                                                                   |

 

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**SIGNATURES:**

 

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

 

 
|                               | **AFFINITY  GROUP HOLDING, INC.** |
|------------------------------------|-----------------------------------|
|                               | ** **                        |
|                               |                              |
|                               | /s/ Thomas F.  Wolfe              |
| Date:  November 12, 2009 | Thomas F. Wolfe                   |
|                               | Senior Vice  President and        |
|                               | Chief Financial  Officer          |

 

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