**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

**TheSecurities Exchange Act of 1934**

 

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

 

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**AFFINITY GROUP HOLDING, INC.**

(Exact name of registrant as specified in its charter)

 

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

 

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

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

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

 

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

 

YES x    NO o

 

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

YES o NO o

 

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

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

 

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

YES o     NO x

 

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

 

| ** **                    | ** ** | **Outstanding as of** |
|-------------------------------|------------|---------------------------------|
| **Class**                     | ** ** | **October 29, 2010**  |
| Common  Stock, $.01 par value |       | 100                             |

 

**DOCUMENTS INCORPORATED BY REFERENCE: None**

 

 

 

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

 

**INDEX**

 
| ** **                                                                                                    | **Page**                                                                                                 |
|---------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **Part I.**                                                                                              | Financial Information                                                                                    |   |
| ** **                                                                                                    |                                                                                                     |
|                                                                                                          | **Item  1: Financial Statements**                                                                        |   |
| ** **                                                                                                    |                                                                                                     |
| Consolidated  Balance Sheets  as of September 30, 2010 (unaudited) and December 31, 2009            | 1                                                                                                        |
|                                                                                                          |                                                                                                     |
| Unaudited  Consolidated Statements of Operations  for the three months ended September 30, 2010 and 2009 | 2                                                                                                        |
|                                                                                                          |                                                                                                     |
| Unaudited  Consolidated Statements of Operations  for the nine months ended September 30, 2010 and 2009  | 3                                                                                                        |
|                                                                                                          |                                                                                                     |
| Unaudited  Consolidated Statements of Cash Flows  for the nine months ended September 30, 2010 and 2009  | 4                                                                                                        |
|                                                                                                          |                                                                                                     |
| Notes to Unaudited Consolidated Financial Statements                                                          | 5                                                                                                        |
|                                                                                                          |                                                                                                     |
|                                                                                                          | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | 20 |
|                                                                                                          |                                                                                                     |   |
|                                                                                                          | **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                  | 40 |
|                                                                                                          |                                                                                                     |   |
|                                                                                                          | **Item 4: Controls and Procedures**                                                                      | 41 |
|                                                                                                          | ** **                                                                                               |   |
| **Part II.**                                                                                             | Other Information                                                                                        | 41 |
| ** **                                                                                                    |                                                                                                     |   |
|                                                                                                          | **Item  1A: Risk Factors**                                                                               | 41 |
|                                                                                                          |                                                                                                     |   |
|                                                                                                          | **Item 6:  Exhibits**                                                                                    | 42 |
|                                                                                                          | ** **                                                                                               |   |
| **Signatures**                                                                                                | 42                                                                                                       |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2010 and December 31, 2009

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **9/30/2010**   | ** ** | **12/31/2009** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 10,843     |           | $          | 10,133 |   |
| Restricted cash                                                                                 |       | —          |       | 8,058          |       |
| Accounts receivable, less allowance for doubtful  accounts of $3,962 in 2010 and $3,128 in 2009 |       | 34,803          |       | 32,321         |       |
| Inventories                                                                                     |       | 61,725          |       | 49,921         |       |
| Prepaid expenses and other assets                                                               |       | 18,046          |       | 13,219         |       |
| Total current assets                                                                            |       | 125,417         |       | 113,652        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 28,325          |       | 34,276         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,798           |       | 4,837          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 12,767          |       | 14,867         |       |
| GOODWILL                                                                                        |       | 49,944          |       | 49,944         |       |
| OTHER ASSETS                                                                                    |       | 6,702           |       | 6,767          |       |
| Total assets                                                                                    |       | $               | 227,953    |           | $          | 224,343 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 21,089     |           | $          | 23,799 |   |
| Accrued interest                                                                                |       | 6,595           |       | 16,517         |       |
| Accrued income taxes                                                                            |       | 1,747           |       | 1,598          |       |
| Accrued liabilities                                                                             |       | 24,305          |       | 24,115         |       |
| Deferred revenues and gains                                                                     |       | 67,373          |       | 60,728         |       |
| Current portion of long-term debt                                                               |       | 7,097           |       | 892            |       |
| Total current liabilities                                                                       |       | 128,206         |       | 127,649        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 34,626          |       | 35,607         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 366,355         |       | 389,797        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 14,856          |       | 10,079         |       |
|                                                                                            |       | 544,043         |       | 563,132        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.01 par value, 3,000 shares  authorized, 100 shares issued and outstanding       |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 58,510          |       | 23,220         |       |
| Accumulated deficit                                                                             |       | (367,506        | )          | (355,010       | )          |
| Accumulated other comprehensive loss                                                            |       | (7,095          | )          | (7,000         | )          |
| Total stockholder’s deficit                                                                |       | (316,090        | )          | (338,789       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 227,953    |           | $          | 224,343 |   |

 

See notes to consolidated financial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                    | ** ** | **9/30/2009** | ** ** |
|                                 |       |                             |       |   |   |
| REVENUES:                            |       |                             |       |   |   |
| Membership services                  |       | $                                | 38,010     |   | $ | 35,531 |   |
| Media                                |       | 7,395                            |       | 8,333 |   |
| Retail                               |       | 79,235                           |       | 81,080 |   |
|                                 |       | 124,640                          |       | 124,944 |   |
|                                 |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                             |       |   |   |
| Membership services                  |       | 24,413                           |       | 23,031 |   |
| Media                                |       | 5,851                            |       | 7,152 |   |
| Retail                               |       | 45,831                           |       | 49,934 |   |
|                                 |       | 76,095                           |       | 80,117 |   |
|                                 |       |                             |       |   |   |
| GROSS PROFIT                         |       | 48,545                           |       | 44,827 |   |
|                                 |       |                             |       |   |   |
| OPERATING EXPENSES:                  |       |                             |       |   |   |
| Selling, general and administrative  |       | 32,039                           |       | 34,214 |   |
| Goodwill impairment                  |       | —                           |       | 46,884 |   |
| Financing expense                    |       | 248                              |       | 337 |   |
| Depreciation and amortization        |       | 4,832                            |       | 5,927 |   |
|                                 |       | 37,119                           |       | 87,362 |   |
|                                 |       |                             |       |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 11,426                           |       | (42,535 | ) |
|                                 |       |                             |       |   |   |
| NON-OPERATING ITEMS:                 |       |                             |       |   |   |
| Interest income                      |       | 124                              |       | 128 |   |
| Interest expense                     |       | (12,441                          | )          | (11,559 | ) |
| (Loss) gain on derivative instrument |       | (178                             | )          | 114 |   |
| Other non-operating items, net       |       | 8                                |       | (563 | ) |
|                                 |       | (12,487                          | )          | (11,880 | ) |
|                                 |       |                             |       |   |   |
| LOSS BEFORE INCOME TAXES             |       | (1,061                           | )          | (54,415 | ) |
|                                 |       |                             |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT         |       | (57                              | )          | 12,916 |   |
|                                 |       |                             |       |   |   |
| NET LOSS                             |       | $                                | (1,118     | ) | $ | (41,499 | ) |

 

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** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                   | ** ** | **9/30/2009** | ** ** |
|                                 |       |                            |       |   |   |
| REVENUES:                            |       |                            |       |   |   |
| Membership services                  |       | $                               | 116,245    |   | $ | 109,960 |   |
| Media                                |       | 30,087                          |       | 35,116 |   |
| Retail                               |       | 217,824                         |       | 214,820 |   |
|                                 |       | 364,156                         |       | 359,896 |   |
|                                 |       |                            |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                            |       |   |   |
| Membership services                  |       | 67,706                          |       | 67,976 |   |
| Media                                |       | 23,459                          |       | 28,032 |   |
| Retail                               |       | 127,907                         |       | 130,840 |   |
|                                 |       | 219,072                         |       | 226,848 |   |
|                                 |       |                            |       |   |   |
| GROSS PROFIT                         |       | 145,084                         |       | 133,048 |   |
|                                 |       |                            |       |   |   |
| OPERATING EXPENSES:                  |       |                            |       |   |   |
| Selling, general and administrative  |       | 97,872                          |       | 97,270 |   |
| Goodwill impairment                  |       | —                          |       | 46,884 |   |
| Financing expense                    |       | 7,578                           |       | 1,877 |   |
| Depreciation and amortization        |       | 14,529                          |       | 16,588 |   |
|                                 |       | 119,979                         |       | 162,619 |   |
|                                 |       |                            |       |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 25,105                          |       | (29,571 | ) |
|                                 |       |                            |       |   |   |
| NON-OPERATING ITEMS:                 |       |                            |       |   |   |
| Interest income                      |       | 374                             |       | 392 |   |
| Interest expense                     |       | (37,048                         | )          | (31,639 | ) |
| (Loss) gain on derivative instrument |       | (698                            | )          | 799 |   |
| Gain on debt restructure             |       | —                          |       | 4,678 |   |
| Other non-operating items, net       |       | 30                              |       | (1,382 | ) |
|                                 |       | (37,342                         | )          | (27,152 | ) |
|                                 |       |                            |       |   |   |
| LOSS BEFORE INCOME TAXES             |       | (12,237                         | )          | (56,723 | ) |
|                                 |       |                            |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT         |       | (259                            | )          | 12,216 |   |
|                                 |       |                            |       |   |   |
| NET LOSS                             |       | $                               | (12,496    | ) | $ | (44,507 | ) |

 

See notes 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** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **9/30/2010**                   | ** ** | **9/30/2009** | ** ** |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (12,496    | ) | $ | (44,507 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                               |       | 8,413                           |       | 9,892 |   |
| Amortization                                                                               |       | 6,116                           |       | 6,696 |   |
| Impairment loss on goodwill                                                                |       | —                          |       | 46,884 |   |
| Gain (loss) on derivative instrument                                                       |       | 698                             |       | (799 | ) |
| Gain (loss) on debt restructure                                                            |       | 279                             |       | (4,678 | ) |
| Provision for losses on accounts receivable                                                |       | 1,266                           |       | 1,714 |   |
| Deferred compensation                                                                      |       | 3,874                           |       | — |   |
| Deferred tax benefit                                                                       |       | —                          |       | 4,569 |   |
| (Gain) loss on sale of property and equipment                                              |       | (24                             | )          | 561 |   |
| Accretion of original issue discount                                                       |       | 1,374                           |       | 401 |   |
| Changes in operating assets and liabilities                                                |       |                            |       |   |   |
| Accounts receivable                                                                        |       | (3,748                          | )          | 10,586 |   |
| Inventories                                                                                |       | (11,804                         | )          | (3,895 | ) |
| Prepaid expenses and other assets                                                          |       | (4,762                          | )          | (6,399 | ) |
| Accounts payable                                                                           |       | (2,710                          | )          | 2,440 |   |
| Accrued and other liabilities                                                              |       | (2,432                          | )          | (12,936 | ) |
| Deferred revenues and gains                                                                |       | 5,664                           |       | 8,556 |   |
| Net cash (used in) provided by operating  activities                                       |       | (10,292                         | )          | 19,085 |   |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                            |       |   |   |
| Capital expenditures                                                                       |       | (3,097                          | )          | (2,481 | ) |
| Net proceeds from sale of property and equipment                                           |       | 659                             |       | 23 |   |
| Cash paid (received) on loans to affiliate                                                 |       | 39                              |       | (103 | ) |
| Net cash used in investing activities                                                      |       | (2,399                          | )          | (2,561 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |       |                            |       |   |   |
| Dividends paid                                                                             |       | —                          |       | (2,550 | ) |
| Contribution from parent                                                                   |       | 2,800                           |       | 5,000 |   |
| Release of restricted cash                                                                 |       | 8,058                           |       | — |   |
| Borrowings on debt                                                                         |       | 153,801                         |       | 18,547 |   |
| Payment of debt issue costs                                                                |       | (4,375                          | )          | (2,541 | ) |
| Principal payments on debt                                                                 |       | (146,883                        | )          | (35,341 | ) |
| Net cash provided by (used in) financing  activities                                       |       | 13,401                          |       | (16,885 | ) |
|                                                                                       |       |                            |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                    |       | 710                             |       | (361 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                           |       | 10,133                          |       | 10,777 |   |
|                                                                                       |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 |       | $                               | 10,843     |   | $ | 10,416 |   |

 

See notes to consolidated financial statements.

 

4

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** **

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

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

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

 

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

 

OnMarch 1, 2010, AGI refinanced its existing senior credit facility ($128.9million aggregate principal amount outstanding as of December 31, 2009)and second lien notes totaling $9.7 million due July 31, 2010.  The AGI New Senior Credit Facility providesfor term loans aggregating $144.3 million, including an original issue discountof 2%, that are payable in quarterly installments of $360,750 beginning March 1,2011.  In addition, there are mandatoryprepayments of the term loans from excess cash flow (as defined) of AGI andfrom asset sales.  The term loans underthe AGI New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either AGI’s 9% seniorsubordinated notes due 2012 (the “AGI Senior Notes”) ($137.8 million principalamount outstanding as of September 30, 2010) or the AGHI Notes ($88.2million aggregate principal amount outstanding as of September 30,2010).  See Note 6 — Debt.

 

Inaddition, on March 1, 2010, AGI’s subsidiary that operates the Retailsegment, Camping World, Inc. (“Camping World”), entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the AGI New Senior Credit Facility, or (iii) 120 days prior to theearlier date of maturity of the AGI Senior Notes and the AGHI Notes.  As of September 30, 2010, $5.7 millionwas borrowed and $8.6 million of letters of credit were outstanding under theCW Credit Facility.  See Note 6 — Debt.

 

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

 

5

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**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2010, the Company was required to adopt a newly issued accountingstandard which requires additional disclosure about the amounts of and reasonsfor significant transfers between levels of the fair value hierarchy discussedin Note 8 - Fair Value Measurements. This standard also clarifies existing disclosure requirements related tothe level of disaggregation of fair value measurements for each class of assetsand liabilities and disclosures about inputs and valuation techniques used tomeasure fair value for both recurring and nonrecurring Level 2 and Level 3measurements.  As this newly issued accountingstandard only requires enhanced disclosure, the adoption of this standard didnot impact our financial position, results of operations or cash flows.  In addition, effective for interim and annualperiods beginning after December 15, 2010, this standard will requireadditional disclosure and require an entity to present disaggregatedinformation about activity in Level 3 fair value measurements on a gross basis,rather than a single amount.

 

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

 

TheCompany’s three principal lines of business are Membership Services, Media, andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, theCamp 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 supercenters,mail order catalogs and internet sales. The Company evaluates performance based on profit or loss fromoperations before income taxes and unusual items.

 

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

 

6

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

 

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

 
| ** **                                 | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED SEPTEMBER 30,  2010** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers           |       | $              | 38,010     |       | $          | 7,395      |       | $                | 79,235     |   | $ | 124,640 |   |
| Depreciation and amortization              |       | 604            |       | 1,010      |       | 2,400      |       | 4,014            |       |
| Gain on sale of property and equipment     |       | —         |       | 4          |       | —     |       | 4                |       |
| Interest income                            |       | 776            |       | —     |       | —     |       | 776              |       |
| Interest expense                           |       | —         |       | 3          |       | 655        |       | 658              |       |
| Segment operating profit (loss)            |       | 11,361         |       | (487       | )          | 5,907      |       | 16,781           |       |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

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

 
| ** **                                | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30,  2010** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers          |       | $              | 116,245    |       | $          | 30,087     |       | $                | 217,824    |   | $ | 364,156 |   |
| Depreciation and amortization             |       | 1,722          |       | 2,901      |       | 7,020      |       | 11,643           |       |
| Gain on sale of property and equipment    |       | —         |       | 4          |       | 23         |       | 27               |       |
| Interest income                           |       | 2,371          |       | —     |       | —     |       | 2,371            |       |
| Interest expense                          |       | —         |       | (5         | )          | 1,773      |       | 1,768            |       |
| Segment operating profit                  |       | 42,882         |       | 455        |       | 5,810      |       | 49,147           |       |
|                                           |            |                |            |            |            |            |            |                  |            |  |  |  |  |

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

 

7

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

 

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

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **9/30/2010**                    | ** ** | **9/30/2009**                   | ** ** | **9/30/2010** | ** ** | **9/30/2009** | ** ** |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| **Income (loss) From Operations  Before Income Taxes**         |       |                             |       |                            |       |   |   |   |   |
| Total income for reportable segments                           |       | $                                | 16,781     |                            | $          | (36,842 | ) | $ | 49,147 |   | $ | (18,680 | ) |
| Unallocated G & A expense                             |       | (4,163                           | )          | (4,549                          | )          | (13,370 | ) | (12,544 | ) |
| Unallocated depreciation and amortization expense              |       | (818                             | )          | (1,265                          | )          | (2,886 | ) | (2,818 | ) |
| Unallocated gain on sale of equipment                          |       | —                           |       | 1                               |       | — |   | 1 |   |
| Unallocated (loss) gain on derivative instrument               |       | (178                             | )          | 114                             |       | (698 | ) | 799 |   |
| Unallocated financing expense                                  |       | (248                             | )          | (50                             | )          | (6,874 | ) | (1,590 | ) |
| Unallocated gain on debt restructure                           |       | —                           |       | —                          |       | (279 | ) | 4,678 |   |
| Elimination of intercompany interest income                    |       | (652                             | )          | (708                            | )          | (1,997 | ) | (2,161 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (11,783                          | )          | (11,116                         | )          | (35,280 | ) | (24,408 | ) |
| Income (loss) from operations before income taxes              |       | $                                | (1,061     | )                               | $          | (54,415 | ) | $ | (12,237 | ) | $ | (56,723 | ) |

 

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

 
| ** **                                  | ** ** | **9/30/2010** | ** ** | **12/31/2009** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                 |       | $             | 241,061    |           | $          | 237,597 |   |
| Media segment                               |       | 22,240        |       | 26,876         |       |
| Retail segment                              |       | 107,619       |       | 95,193         |       |
| Total assets for reportable segments        |       | 370,920       |       | 359,666        |       |
| Restricted cash                             |       | —        |       | 8,058          |       |
| Intangible assets not allocated to segments |       | 3,537         |       | 3,314          |       |
| Corporate unallocated assets                |       | 6,478         |       | 8,299          |       |
| Elimination of intersegment receivable      |       | (152,982      | )          | (154,994       | )          |
| Total assets                                |       | $             | 227,953    |           | $          | 224,343 |   |

 

8

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**(4) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 38,555     |     | $          | 32,261 |   |
| Income taxes                     |       | —   |       | 5        |       |
|                                  |            |          |            |          |            |  |  |

 

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

 

Forthe nine months ended September 30, 2009, the Company recorded anadjustment to the fair value of the interest rate swap resulting in a $4.6million decrease in Other Long-Term Liabilities and a $3.2 million decrease inOther Comprehensive Loss and ineffective portion in the statement of operationsas a non-cash gain on derivative instruments of $0.8 million.

 

Inthe first quarter of 2010, entities indirectly controlled by the Company’s soleshareholder forgave $3.6 million of interest on the AGHI Notes that was due August 15,2009 and February 15, 2010, and the interest accrued through March 1,2010.  The $3.6 million was recorded as acontribution to the Company in Additional Paid-in Capital.

 

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

 

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

 

Forthe nine months ended September 30, 2010, the Company recorded anadjustment to the fair value of the interest rate swap resulting in a $0.8million increase in Other Long-Term Liabilities and a $0.1 million increase inOther Comprehensive Loss and a $0.7 million non-cash loss in the statement ofoperations for the ineffective portion.

 

OnSeptember 16, 2010, AGHI satisfied the interest payment due August 15,2010 with $3.4 million in cash, funded by its shareholder, paid September 16,2010 to institutional holders holding an aggregate of $61.8 million of our AGHINotes within the “grace” period consented to by such holders for payment of theinterest.  The $3.4 million payment wasreported as an equity contribution.

 

9

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**(5) GOODWILL AND INTANGIBLE ASSETS**

 

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

 

Inthe third quarter of 2009, the Company noted continued decline in advertisingrevenue compared 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.

 

TheCompany performed an impairment test of the goodwill and intangible assets ofthe reporting 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 thesereporting units. In determining the fair value, the Company used an incomevaluation approach.

 

Inperforming the second step of the goodwill impairment test, the Companyallocated the estimated fair values of the reporting units of our RV andpowersports publications determined in step one of the impairment test, to theassets and liabilities of the respective reporting unit in accordance with theaccounting guidance for business combinations. The Company determined theimpairment for these units to be equal to the carrying value of its goodwill,or $46.9 million.  The Company recordedan impairment charge of $46.9 million in the third quarter of 2009 related tothese units, which is part of the Media segment.

 

Determiningthe fair value of a reporting unit under the first step of the goodwillimpairment test and determining the fair value of individual assets andliabilities of a reporting unit under the second step of the goodwillimpairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions couldhave a significant impact on whether or not an impairment charge is recognizedand also the extent of such charge. The Company’s estimates of fair valueutilized in the goodwill impairment tests may be based upon a number offactors, including assumptions about the projected future cash flows, discountrate, growth rate, determination of market comparables, economic conditions, orchanges to the Company’s business operations. Such changes may result inimpairment charges recorded in future periods.

 

10

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

 

Thefollowing is a summary of changes in the Company’s goodwill by businesssegment, for the nine months ended September 30, 2010 and 2009 (inthousands):

 
| ** **                               | ** ** | **Membership  Services** | ** ** | **Media** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-----------|------------|------------|------------|------------------|------------|
|                                     |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                           |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to January 1, 2010 |       | (6,086                   | )          | (46,884   | )          | (47,601    | )          | (100,571         | )          |
| Balance as of January 1, 2010       |       | 49,944                   |       | —    |       | —     |       | 49,944           |       |
| Impairments                              |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of September 30, 2010    |       | $                        | 49,944     |      | $          | —     |       | $                | —     |   | $ | 49,944 |   |
|                                     |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                           |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to January 1, 2009 |       | (6,086                   | )          | —    |       | (47,601    | )          | (53,687          | )          |
| Balance as of January 1, 2009       |       | 49,944                   |       | 46,884    |       | —     |       | 96,828           |       |
| Impairments                              |       | —                   |       | (46,884   | )          | —     |       | (46,884          | )          |
| Balance as of September 30, 2009    |       | $                        | 49,944     |      | $          | —     |       | $                | —     |   | $ | 49,944 |   |

 

TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary.  The Company determined thatno adjustments to the useful lives of its finite-lived purchased intangibleassets were necessary as of September 30, 2010.  Under the accounting 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.

 

EffectiveJanuary 1, 2009, the Company adopted new accounting guidance related tobusiness combinations which establishes principles and requirements for how anacquirer recognizes and measures in its financial statements the identifiableassets acquired, the liabilities assumed, any noncontrolling interest in theacquiree and the goodwill acquired in a business combination.  The Company will apply the provisions anddisclosure requirements of the new guidelines for any acquisitions after theadoption date.

 

11

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

 

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

 
| ** **                                      | ** ** | **Weighted**                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**       | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                          |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                             |       | $          | 35,355     |             | $          | (28,722    | )          | $ | 6,633 |   |
| Resort and golf course participation agreements |       | 4                             |       | 7          |       | (6               | )          | 1          |       |
| Non-compete and deferred consulting agreements  |       | 15                            |       | 18,650     |       | (17,022          | )          | 1,628      |       |
| Deferred financing costs                        |       | 6                             |       | 13,091     |       | (8,586           | )          | 4,505      |       |
|                                            |       |                          |       |       |       |             |       |       |       |
|                                            |       |                          |       | $          | 67,103     |             | $          | (54,336    | )          | $ | 12,767 |   |

 

**(6) DEBT**

 

AGHINotes

 

OnMarch 24, 2005, in a private placement, the Company issued $88.2 millionprincipal amount of its 10-7/8% senior notes due 2012 (the “AGHI Notes”) at a$3.2 million original issue discount. The Company completed a registered exchange of the AGHI Notes under theSecurities Act of 1933 on June 8, 2005. The AGHI Notes are unsecured obligations of the Company, and AGI and itssubsidiaries have not guaranteed payment of principal or interest on the AGHINotes.  Interest on the AGHI Notes ispayable semi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and before February 15, 2008, AGHI had the electionto pay interest on the AGHI Notes in cash or by the issuance of additionalnotes of the same tenor as the AGHI Notes. Any additional AGHI Notes issued in payment of interest are due in fullon or before March 15, 2010.  AGIhas not paid any dividends to AGHI to fund payment of interest on the AGHINotes and AGHI made the interest payments due on August 15, 2005, February 15,2006, August 15, 2006, February 15, 2007, and February 15, 2008through the issuance of additional notes. AGHI paid the interest on the AGHI Notes due August 15, 2007, August 15,2008 and February 15, 2009 from proceeds of capital contributions made byAGHI’s parent, AGHC, in the amount of $5.9 million, $6.2 million and $6.2million, respectively.  AGHI made theinterest payment due August 15, 2009 in January, 2010 with a $4.5 millioncash payment (a $2.8 million capital contribution from its shareholder, and$1.7 million of permitted tax distributions from AGI), and the remaining $1.7million due to related entities was forgiven and reported as an equitycontribution.

 

AGHIsatisfied the interest payment due February 15, 2010 on March 5, 2010with $4.4 million in cash (funded, in part, from $2.5 million received by AGHIin connection with a waiver by AGHI of certain first refusal rights related toAGI’s vehicle insurance business and the balance from AGI as a permitted taxdistribution) and the remaining $1.8 million due to related entities wasforgiven and, as such, reported as an equity contribution.  On March 1, 2010, $25.4 million of theAGHI Notes due March 15, 2010 that were held by an affiliate of AGHI were

 

12

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**(6) DEBT (continued)**

 

contributedto the Company and the Company cancelled those notes.  AGHI satisfied the interest payment due August 15,2010 with $3.4 million in cash, funded by its shareholder, paid September 16,2010 to institutional holders holding an aggregate of $61.8 million of our AGHINotes within the “grace” period consented to by such holders for payment of theinterest.  The $3.4 million payment wasreported as an equity contribution. Previously, the Company also paid the indenture trustee interest in theamount of $15,000 for the holders of the AGHI Notes that had not beenidentified to the Company.  The remainingholders of the AGHI Notes extended the payment date for the interest due on August 15,2010 to February 15, 2011. Currently, the AGI New Senior Credit Facility, CWI 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 AGHINotes.  As of September 30, 2010,$87.3 million, net of $0.9 million in unamortized original issue discount,remained outstanding on the AGHI Notes.

 

AGI New Senior Credit Facility

 

OnMarch 1, 2010, AGI entered into the Second Amended and Restated CreditAgreement (the “AGI New Senior Credit Facility”) to refinance its existingsenior credit facility ($128.9 million principal amount outstanding at December 31,2009) which was scheduled to mature on March 31, 2010, the second liennotes due July 31, 2010 ($9.7 million principal amount outstanding at December 31,2009) and the loan from SA Holding, LLC, (the “SA Loan”), an affiliate of theultimate shareholder of AGI, ($1.0 million principal amount outstanding at December 31,2009).  The AGI New Senior CreditFacility provides for term loans aggregating $144.3 million, including anoriginal issue discount of 2%, that are payable in quarterly installments of$360,750 beginning March 1, 2011. In addition, there are mandatory prepayments of the term loans fromexcess cash flow (as defined) of AGI and from asset sales.  The term loans under the AGI New SeniorCredit Facility mature on the earlier of (i) March 1, 2015 or (ii) 90days prior to the maturity of either AGI Senior Notes ($137.8 million principalamount outstanding as at September 30, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat September 30, 2010 and are due February 15, 2012).  Interest on the term loans under the AGI NewSenior Credit Facility floats at either 8.75% over the base rate (defined asthe greater of the prime rate, federal funds rate plus 50 basis points or5.25%) for borrowings whose interest is based on the prime rate or 10.0% overthe LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (see Note 7 — Interest Rate Swap Agreements), as of September 30,2010, the average annual interest rate on the term loans was 16.64%.  The AGI New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the AGI New Senior CreditFacility are guaranteed by the direct and indirect subsidiaries of AGI and aresecured by liens on the assets of AGI and its direct and indirectsubsidiaries.  As a condition to the termloans under the AGI New Senior Credit Facility, $25.4 million of AGHI Notes dueon March 15, 2010 that were held by an affiliate of AGHI were contributedto AGHI and AGHI cancelled those notes. As of September 30, 2010, $142.3 million, net of approximately $2.0million of unamortized original issue discount, was outstanding on the AGI NewSenior Credit Facility.

 

13

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** **

**(6) DEBT (continued)**

 

CW Credit Facility

 

OnMarch 1, 2010, Camping World entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1,2013, (ii) 60 days prior to the date of maturity of the AGI New SeniorCredit Facility, or (iii) 120 days prior to the earlier date of maturityof the AGI Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floatsat either 3.25% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whoseinterest is based on the prime rate or 3.25% over the LIBOR rate (defined asthe greater of LIBOR rate applicable to the period of the respective LIBOR borrowingsor 1.0%) for borrowings whose interest is based on LIBOR. As of September 30,2010, the average interest rate on the CW Credit Facility was 4.25%.  Borrowings under the CW Credit Facility arebased on the borrowing base of eligible inventory and accounts receivable ofCamping World and its subsidiaries.  TheCW Credit Facility contains affirmative covenants, including financialcovenants, and negative covenants. Borrowings under the CW Credit Facility are guaranteed by the direct andindirect subsidiaries of Camping World and are secured by a pledge on the stockof Camping World and its direct and indirect subsidiaries and liens on theassets of Camping World and its direct and indirect subsidiaries.  The lenders under the AGI New Senior CreditFacility and the CW Credit Facility have entered into an intercreditoragreement that governs their rights in the collateral that is pledged to securetheir respective loans.  As of September 30,2010, $5.7 million was borrowed and $8.6 million of letters of credit wereissued under the CW Credit Facility.

 

AGISenior Notes

 

InFebruary 2004, AGI issued $200.0 million aggregate principal amount of 9%senior subordinated notes due 2012 (“AGI Senior Notes”) pursuant to anindenture (the “AGI Indenture”).  AGIcompleted a registered exchange of the AGI Senior Notes under the SecuritiesAct of 1933 in August 2004. Interest is payable on the AGI Senior Notes twice a year on February 15and August 15.  AGI’s present andfuture restricted subsidiaries guarantee the AGI Senior Notes withunconditional guarantees of payment that rank junior in right of payment totheir existing and future senior debt, including indebtedness under the AGI NewSenior Credit Facility and the CW Credit Facility, but rank equal in right ofpayment to their existing and future senior subordinated debt.  All of AGI’s subsidiaries have jointly andseverally guaranteed the indebtedness under the AGI Senior Notes except forCWFR Capital Corp.  As of September 30,2010, $137.8 million of AGI Senior Notes remain outstanding.  The AGI New Senior Credit Facility, the CWCredit Facility and the AGI Indenture contain certain restrictive covenantsrelating to, but not limited to, mergers, changes in the nature of the business,acquisitions, additional indebtedness, sale of assets, investments, and thepayment of dividends subject to certain limitations and minimum operatingcovenants.  The AGI New Senior CreditFacility and the CW Credit Facility also contain certain financial affirmativecovenants.  The Company was in compliancewith all debt covenants at September 30, 2010.

 

14

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**(7) INTEREST RATE SWAP AGREEMENTS**

 

TheCompany is exposed to certain risks related to its business operations.  The primary risk that we managed by usingderivatives is interest rate risk.  Weuse financial instruments, including interest rate swap agreements, to reduceour risk to this exposure.  We do not usederivatives for speculative trading purposes and are not a party to leveragedderivatives. We recognize all of our derivative instruments as either assets orliabilities at fair value.  Fair value isdetermined in accordance with the accounting guidance for Fair ValueMeasurements.  See Note 8 — Fair ValueMeasurements.  The accounting for changesin the fair value of a derivative instrument depends on whether it has beendesignated and qualifies as part of a hedging relationship and, further, on thetype of hedging relationship.  Forderivatives designated as hedges under the accounting guidance for derivativeinstruments and hedging activities, we formally assess, both at inception andperiodically thereafter, whether the hedging derivatives are highly effectivein offsetting changes in either the fair value or cash flows of the hedgeditem.  Our derivatives that are notdesignated and do not qualify as hedges under the accounting guidance forderivative instruments and hedging activities are adjusted to fair valuethrough current earnings.

 

EffectiveJanuary 1, 2009, the Company adopted the provisions of the new accountingguidance for disclosures about derivative instruments and hedgingactivities.  The guidance requires thatthe objectives for using derivative instruments be disclosed to better conveythe purpose of derivative use in terms of the risks that the Company isintending to manage.  This standard alsorequires disclosure of how derivatives and related hedged items are accountedfor and how they affect the Company’s financial statements.  The adoption of the new guidance did not havea material impact on our condensed consolidated results of operations,financial position or cash flows.

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.475% at September 30,2010 based upon the July 31, 2010 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap agreement waseffective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.475% at September 30, 2010 based upon the July 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.9 million of which approximately $7.1million is in accumulated other comprehensive loss, and $1.1 million includedin retained

 

15

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

 

earningsand $0.7 million in the statement of operations in the period ended September 30,2010.  The fair value of these swapsincluded in other long-term liabilities was $8.1 million of which $7.0 millionis in accumulated other comprehensive loss and $1.1 million in the statement ofoperations in aggregate periods through December 31, 2009.  See Note 8 — Fair Value Measurements.

 

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

 

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

 

Dueto the issuance of an option to the shareholder of the ultimate parent of theCompany to purchase Camping World, in the second quarter of 2009, a portion ofthe highly effective hedge on the cash flows related to the $100.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and was deemed to be reasonably possible.  As a result, changes in the value of the last$20.0 million of the $100.0 million interest rate swap agreement are includedin earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last$20.0 million of the $100.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument.

 

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

 
| **Derivatives designated as  hedging intruments under** | ** ** | ** **                           | ** ** | **Fair Value as of:** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| **Statement 133**                                                      | ** ** | **Balance Sheet Location** | ** ** | **9/30/2010**                        | ** ** | **12/31/2009** | ** ** |
|                                                                        |       |                                 |       |                                 |       |   |   |
| Interest rate swap contracts                                                |       | Other  long-term liabilities         |       | $                                    | (8,883     | ) | $ | (8,090 | ) |
|                                                                             |            |                                      |            |                                      |            |  |  |  |  |

 

16

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

 

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

 

Derivatives in Cashflow Hedging Relationships:

 
| ** **                                                                                                                        | ** ** | **Interest Rate Swap Agreements** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **9/30/2010**                                    | ** ** | **9/30/2009** | ** ** |
| Amount of Loss recognized in Other Comprehensive  Loss on Derivatives                                                             |       | $                                                | (376       | ) | $ | (3,233 | ) |
|                                                                                                                              |       |                                             |       |   |   |
| Location of Gain (Loss) Reclassified from  Accumulated Other Comprehensive Loss into Statement of Operations (Effective  portion) |       | Gain (loss) on derivative Instrument             |       |
|                                                                                                                                   |            |                                                  |            |  |  |  |  |

 
| ** **                                                                                                                                   | ** ** | **9/30/2010**                        | ** ** | **9/30/2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|
| Amount of Loss reclassified from Other  Comprehensive Loss into Statement of Operations (Effective portion)                                  |       | $                                    | (281       | )             | $          | (33 | ) |
|                                                                                                                                         |       |                                 |       |          |       |
| Location of Loss Recognized in Statement of  Operations on Derivatives (Ineffective portion and amount excluded from  effectiveness testing) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                              |            |                                      |            |               |            |  |  |

 
| ** **                                                                                                                          | ** ** | **9/30/2010** | ** ** | **9/30/2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Amount of Gain or (Loss) recognized in income on  Derivatives (Ineffective portion and amount excluded from effectiveness  testing) |       | $             | (417       | )             | $          | 832 |   |
|                                                                                                                                     |            |               |            |               |            |  |  |

 

**(8) FAIR VALUE MEASUREMENTS**

 

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

 

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

 

17

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

 

The Company’s liabilities atSeptember 30, 2010, measured at fair value on a recurring basis subject tothe disclosure requirements of fair value measurements, was as follows:

 
| ** **                      | ** ** | ** ** | ** ** | **Fair Value Measurements at Reporting Date Using**   | ** ** |
|---------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------|------------|
| **(in thousands)**         | ** ** | ** ** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**                 | ** ** | **Amount** | ** ** | **(Level 1)**                                                                  | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                            |       |       |       |                                                                                |       |   |   |   |   |
| As of September 30, 2010:  |       |       |       |                                                                                |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | $          | (8,883     | )                                                                                   | $          | — |   | $ | (8,883 | ) | $ | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                                              |       | — |   | — |   |
|                            |       |       |       |                                                                                |       |   |   |   |   |
| As of December 31, 2009:   |       |       |       |                                                                                |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | (8,090     | )          | —                                                                              |       | (8,090 | ) | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                                              |       | — |   | — |   |
|                                 |            |            |            |                                                                                     |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

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

 
| ** **                     | ** ** | **9/30/2010** | ** ** | **12/31/2009**      | ** ** |
|--------------------------------|------------|---------------|------------|---------------------|------------|
| ** **                     | ** ** | **Cost**      | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| AGI Senior Notes               |       | $             | 137,824    |                | $          | 102,679 |   | $ | 137,824 |   | $ | 93,893 |   |
| AGHI Notes                     |       | 87,269        |       | 41,802              |       | 112,275 |   | 44,770 |   |
| AGI New Senior Credit Facility |       | 142,345       |       | 142,345             |       | 128,856 |   | 122,425 |   |
| CW Credit Facility             |       | 5,700         |       | 5,700               |       | — |   | — |   |
|                                |            |               |            |                     |            |  |  |  |  |  |  |  |  |

 

18

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**(9) INCOME TAXES**

 

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

 
| Balance at January 1, 2010                                                          |   | $      | 1,339  |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Gross increases in unrecognized tax benefits due  to prior year positions                |   | — |   |
| Gross decreases in unrecognized tax benefits due  to prior year positions                |   | — |   |
| Gross increases in unrecognized tax benefits due  to current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due  to current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due  to settlements with taxing authorities |   | — |   |
| Gross decreases in unrecognized tax benefits due  to statute expirations                 |   | (3     | )      |
| Other                                                                                    |   | 8      |   |
| Unrecognized tax benefits at September 30,  2010                                    |   | $      | 1,344  |   |

 

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

 

The Company and itssubsidiaries file income tax returns in the U.S. federal jurisdiction andvarious states.  With few exceptions, theCompany is no longer subject to U.S. federal and state examinations by taxauthorities for fiscal years prior to fiscal 2006 and 2005, respectively.  There currently is an Internal RevenueService examination of one of the Company’s wholly owned subsidiaries forfiscal year 2008.

 

**(10) SUBSEQUENT EVENT**

 

In October 2010, theCompany, Camping World and FreedomRoads Holding Company, LLC (“FreedomRoads”),an affiliate of the Company that is the leading North American dealer in newRVs, entered into the second amended and restated cooperative resourcesagreement pursuant to which the parties, subject to the terms of the amendedagreement, make their databases available to the other parties for theirrespective businesses, and market and advertise each other’s businesses intheir respective marketing channels. Pursuant to the amended agreement, for the quarterly license feespecified in the agreement, AGI licenses the use of its Camping World trademarksto FreedomRoads in the United States in connection with the RV sales, serviceand parts operations of FreedomRoads, The term of the agreement is for 25 years, subject to certain earlytermination provisions, including a change of control of any of theparties.  The parties made the amendedagreement effective January 1, 2010.

 

19

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**ITEM 2:**

 

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

** **

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

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                    | ** ** | **9/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                             |       |   |   |   |   |
| REVENUES:                            |       |                             |       |   |   |   |   |
| Membership services                  |       | 30.5                             | %          | 28.4 | % | 7.0 | % |
| Media                                |       | 5.9                              | %          | 6.7 | % | (11.3 | )% |
| Retail                               |       | 63.6                             | %          | 64.9 | % | (2.3 | )% |
|                                 |       | 100.0                            | %          | 100.0 | % | (0.2 | )% |
|                                 |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                             |       |   |   |   |   |
| Membership services                  |       | 19.6                             | %          | 18.4 | % | 6.0 | % |
| Media                                |       | 4.7                              | %          | 5.7 | % | (18.2 | )% |
| Retail                               |       | 36.8                             | %          | 40.0 | % | (8.2 | )% |
|                                 |       | 61.1                             | %          | 64.1 | % | (5.0 | )% |
|                                 |       |                             |       |   |   |   |   |
| GROSS PROFIT                         |       | 38.9                             | %          | 35.9 | % | 8.3 | % |
|                                 |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                             |       |   |   |   |   |
| Selling, general and administrative  |       | 25.6                             | %          | 27.4 | % | (6.4 | )% |
| Goodwill impairment                  |       | —                           |       | 37.5 | % | (100.0 | )% |
| Financing expense                    |       | 0.2                              | %          | 0.3 | % | (26.4 | )% |
| Depreciation and amortization        |       | 3.9                              | %          | 4.7 | % | (18.5 | )% |
|                                 |       | 29.7                             | %          | 69.9 | % | (57.5 | )% |
|                                 |       |                             |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 9.2                              | %          | (34.0 | )% | (126.9 | )% |
|                                 |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                             |       |   |   |   |   |
| Interest income                      |       | 0.1                              | %          | 0.1 | % | (3.1 | )% |
| Interest expense                     |       | (10.0                            | )%         | (9.3 | )% | 7.6 | % |
| (Loss) gain on derivative instrument |       | (0.2                             | )%         | 0.1 | % | (256.1 | )% |
| Other non-operating items, net       |       | —                           |       | (0.5 | )% | (101.4 | )% |
|                                 |       | (10.1                            | )%         | (9.6 | )% | 5.1 | % |
|                                 |       |                             |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES             |       | (0.9                             | )%         | (43.6 | )% | (98.1 | )% |
|                                 |       |                             |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT         |       | —                           |       | 10.4 | % | (100.4 | )% |
|                                 |       |                             |       |   |   |   |   |
| NET LOSS                             |       | (0.9                             | )%         | (33.2 | )% | (97.3 | )% |

 

20

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                   | ** ** | **9/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                            |       |   |   |   |   |
| REVENUES:                            |       |                            |       |   |   |   |   |
| Membership services                  |       | 31.9                            | %          | 30.6 | % | 5.7 | % |
| Media                                |       | 8.3                             | %          | 9.8 | % | (14.3 | )% |
| Retail                               |       | 59.8                            | %          | 59.6 | % | 1.4 | % |
|                                 |       | 100.0                           | %          | 100.0 | % | 1.2 | % |
|                                 |       |                            |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                            |       |   |   |   |   |
| Membership services                  |       | 18.6                            | %          | 18.9 | % | (0.4 | )% |
| Media                                |       | 6.5                             | %          | 7.8 | % | (16.3 | )% |
| Retail                               |       | 35.1                            | %          | 36.3 | % | (2.2 | )% |
|                                 |       | 60.2                            | %          | 63.0 | % | (3.4 | )% |
|                                 |       |                            |       |   |   |   |   |
| GROSS PROFIT                         |       | 39.8                            | %          | 37.0 | % | 9.0 | % |
|                                 |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                            |       |   |   |   |   |
| Selling, general and administrative  |       | 26.8                            | %          | 27.1 | % | 0.6 | % |
| Goodwill impairment                  |       | —                          |       | 13.0 | % | (100.0 | )% |
| Financing expense                    |       | 2.1                             | %          | 0.5 | % | 303.7 | % |
| Depreciation and amortization        |       | 4.0                             | %          | 4.6 | % | (12.4 | )% |
|                                 |       | 32.9                            | %          | 45.2 | % | (26.2 | )% |
|                                 |       |                            |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 6.9                             | %          | (8.2 | )% | (184.9 | )% |
|                                 |       |                            |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                            |       |   |   |   |   |
| Interest income                      |       | 0.1                             | %          | 0.1 | % | (4.6 | )% |
| Interest expense                     |       | (10.2                           | )%         | (8.8 | )% | 17.1 | % |
| (Loss) gain on derivative instrument |       | (0.2                            | )%         | 0.2 | % | (187.4 | )% |
| Gain on debt restructure             |       | —                          |       | 1.3 | % | (100.0 | )% |
| Other non-operating items, net       |       | —                          |       | (0.4 | )% | (102.2 | )% |
|                                 |       | (10.3                           | )%         | (7.6 | )% | 37.5 | % |
|                                 |       |                            |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES             |       | (3.4                            | )%         | (15.8 | )% | (78.4 | )% |
|                                 |       |                            |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT         |       | 0.0                             | %          | 3.4 | % | (102.1 | )% |
|                                 |       |                            |       |   |   |   |   |
| NET LOSS                             |       | (3.4                            | )%         | (12.4 | )% | (71.9 | )% |

 

21

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended September 30, 2010**

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

 

*Revenues*

 

Revenuesof $124.6 million for the third quarter of 2010 decreased by $0.3 million, or0.2%, from the comparable period in 2009.

 

MembershipServices revenues of $38.0 million for the third quarter of 2010 increased $2.5million, or 7.0%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $1.8 million increase in member events revenue due to timingof the Good Sam Club annual rally, which occurred in the second quarter of 2009versus the third quarter of 2010, a $0.6 million increase in extended vehiclewarranty program revenue, resulting from continued policy growth, and a $0.4million increase in emergency road service revenue due to a price increase,partially offset by a $0.3 million revenue reduction due to reduced membershipin the Coast to Coast Club and the Golf Card Club.

 

Mediarevenues of $7.4 million for the third quarter of 2010 decreased $0.9 million,or 11.3%, from the comparable period in 2009. This decrease was primarily attributable to a $0.6 million reduction inrevenue from our outdoor power sports magazines related to decliningadvertising revenue causing the reduction of two issues published, a $0.2million reduction in show revenue related to expected reduced exhibitor revenuecausing the cancellation of two consumer shows, and a $0.1 million advertisingrevenue reduction in RV-related magazines.

 

Retailrevenues of $79.2 million decreased by $1.8 million, or 2.3%, from thecomparable period in 2009.  Storemerchandise sales decreased $1.9 million from the third quarter of 2009 due toa same store sales decrease of $1.1 million, or 1.8%, compared to a 0.3%decrease in same store sales for the third quarter of 2009, and decreasedrevenue from discontinued stores of $0.8 million.  Same store sales were down in the quarter asa result of weaker sales in July and August, especially in California,Nevada, Arizona, Florida, and the northwest United States.  Two stores were closed in the last twenty-onemonths in order to reduce fixed operating costs and to consolidate operationswithin the respective trade areas.  Samestore sale calculations for a given period include only those stores that wereopen both at the end of that period and at the beginning of the precedingfiscal year.  Also, installation andservice fees increased $0.1 million, supplies and other sales increased $0.3million, and mail order and internet sales decreased $0.3 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $76.1 million for the third quarter of 2010, adecrease of $4.0 million, or 5.0%, from the comparable period in 2009.

 

MembershipServices costs applicable to revenues of $24.4 million increased $1.4 million,or 6.0%, from the comparable period in 2009. This increase consisted of a $1.6 million expense increase related totiming of the annual rally, and a $0.4 million increase in emergency roadservice and extended vehicle warranty program costs relating to increasedrevenue from those 

 

22

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programs,partially offset by a $0.2 million reduction in wage-related expenses and a$0.4 million reduction in the Coast to Coast Club and the Golf Club costs,related to reduced enrollment.

 

Mediacosts applicable to revenues of $5.9 million for the third quarter of 2010decreased $1.3 million, or 18.2%, from the comparable period in 2009 primarilyrelated to a $0.5 million expense reduction from the outdoor power sportsmagazine group resulting from reduced issues published, a $0.3 millionreduction in advertising in the RV magazine group, a $0.3 million reduction inwage-related expenses and a $0.2 million reduction in show expenses related tothe cancellation of two shows.  Thesecost reductions in the magazine and show groups were taken as cost savingsmeasures because expected revenues from these products were not anticipated tocover expected costs.

 

Retailcosts applicable to revenues decreased $4.1 million, or 8.2%, to $45.8million.  The retail gross profit marginof 42.2% for the third quarter of 2010 increased from 38.4% for the comparableperiod in 2009. The decrease in retail costs was directly attributable to animprovement in product gross margins and an increase in sales of high marginproduct protection plan products.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $32.0 million for the third quarter of2010 decreased $2.2 million compared to the third quarter of 2009.  This decrease was primarily due to a $2.9million decrease in retail general and administrative expenses, primarilyrelated to reduced labor, property taxes and rent, a $1.0 million reimbursementof legal expenses related to the collection of a 2000 judgement for suchexpenses that was lien on real estate owned by the obligor that was received inthe quarter, and a $0.5 million reduction in professional fees, partiallyoffset by a $2.1 million increase in deferred executive compensation under the2010 Phantom Stock agreements and  $0.1million increase in other general and administrative expenses.

 

TheCompany recorded a non-cash goodwill impairment charge of $46.9 million in thethird quarter of 2009 related to our RV and powersports publications, which ispart of the Media segment.

 

Forthe third quarter of 2010, financing expense of $0.2 million was incurred forlegal and other costs related to the New Senior Credit Facility entered into onMarch 1, 2010, which was expensed in accordance with accounting guidancefor debtors accounting for a modification or exchange of debt instruments.  Financing expense of $0.3 million for thethird quarter of 2009 related to legal and other costs incurred associated withthe amendment dated June 5, 2009 to the then senior secured creditfacility.

 

Depreciationand amortization expense of $4.8 million decreased $1.1 million from the prioryear primarily due to completed amortization of intangible assets associatedwith prior acquisitions, and a reduced level of capital expenditures since2008.

 

23

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*Income(Loss) from Operations*

 

Incomefrom operations for the third quarter of 2010 totaled $11.4 million compared toloss from operations of $42.5 million for the third quarter of 2009.  This approximately $54.0 million change fromthe third quarter of 2009 was primarily the result of a $46.9 million assetimpairment charge in the Media segment in the third quarter of 2009 and thefollowing favorable changes in the third quarter of 2010 compared to the thirdquarter of 2009: a $5.4 million reduction in operating expenses for the thirdquarter of 2010, increases in gross profit for the Retail, Membership Servicesand Media segments of $2.2 million, $1.1 million and $0.4 million,respectively, for the third quarter of 2010, and reduced financing expense of$0.1 million for the third quarter of 2010, that were only partially offset bya $2.1 million increase in deferred executive compensation.

 

*Non-OperatingItems*

 

Non-operatingexpenses of $12.4 million for the third quarter of 2010 increased $0.6 millioncompared to the third quarter of 2009 due to a $0.9 million increase ininterest expense relating to both higher interest rates on the Company’s debtand an increase in average debt balances, and a $0.3 million negative change inthe loss/gain on derivative instrument related to the interest rate swapagreements, partially offset by a $0.6 million improvement in othernon-operating items, principally the loss on sale of retail equipment in thethird quarter of 2009.

 

*Lossbefore Income Tax*

 

Lossbefore income tax for the third quarter of 2010 was $1.1 million, compared to aloss before income tax of $54.4 million for the third quarter of 2009.  This $53.4 million favorable change wasattributable to the $54.0 million increase in income from operations in thethird quarter of 2010 only partially offset by an increase in non-operatingitems of approximately $0.6 million mentioned above.

 

*IncomeTax Expense (Benefit)*

 

TheCompany recorded income tax expense of approximately $57,000 for the thirdquarter of 2010, compared to $12.9 million income tax benefit for the thirdquarter of 2009.  This change was aresult of a reversal of unrecognized tax benefits, reversal of accrued interestand penalties related to unrecognized tax benefits and a decrease in thevaluation allowance against deferred tax assets in the third quarter of 2009.

 

*Net loss*

 

Netloss in the third quarter of 2010 was $1.1 million compared to a loss of $41.5million for the same period in 2009 mainly due to the reasons discussed above.

 

*SegmentProfit (Loss)*

 

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

 

24

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thePresident’s Club, the Camp Club USA and assorted membership products andservices for 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, andRV and 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.

 

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

 

Membershipservices segment profit of $11.4 million for the third quarter of 2010increased $1.1 million, or 10.3%, from the comparable period in 2009.  This increase was largely attributable to a$0.7 million increase in profit from the Good Sam Club related to reducedmarketing and administrative expense, a $0.3 million increase in profit frommember events due to the timing of the Good Sam rally, and a $0.3 millionincrease in segment profit in the Coast to Coast Club and the Golf Club due toreduced marketing and program costs, partially offset by a $0.2 millionincrease marketing expense for other ancillary products.

 

Mediasegment loss of $0.5 million for the third quarter of 2010 was reduced $47.7million from the third quarter of 2009 due to the $46.9 million assetimpairment charge in the Media segment in the third quarter of 2009, andincreased segment profit from the RV magazine group and the powersport magazinegroup of $0.4 million and $0.4 million, respectively.

 

Retailsegment profit of $5.9 million for the third quarter of 2010 increased $4.9million compared to the $1.0 million segment profit for the third quarter of2009.  This increase in segment profitresulted from a $2.9 million decrease in selling, general and administrativeexpenses, a $1.7 million increase in gross profit margin, and a $0.5 millionreduction in loss on sale of equipment, partially offset by a $0.2 millionincrease in allocated interest expense.

 

**NineMonths Ended September 30, 2010**

**ComparedWith Nine Months Ended September 30, 2009**

 

*Revenues*

 

Revenuesof $364.2 million for the first nine months of 2010 increased by $4.3 million,or 1.2%, from the comparable period in 2009.

 

MembershipServices revenues of $116.2 million for the first nine months of 2010 increased$6.3 million, or 5.7%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $4.4 million increase related to vehicle insurance productsprimarily related to a $5.0 million fee received in the first quarter as aresult of our waiving our right of first refusal regarding the sale of thevehicle insurance business by a third party provider, a $1.4 million increasein extended vehicle warranty program revenue resulting from continued policygrowth, an $0.8 million increase in revenue from emergency road serviceproducts primarily

 

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dueto a price increase, a $0.7 million increase in marketing fee revenue fromhealth and life insurance products, a $0.4 million revenue increase inadvertising revenue in Highways Magazine, RV View, the Good Sam Club andPresident’s Club publications, a $0.4 million increase in member events revenueand a $0.3 million revenue increase in credit card royalties.  These increases were partially offset by a$0.9 million decrease due to reduced membership in the Coast to Coast Club andthe Golf Card Club, and a $1.2 million revenue decrease due to the terminationof the brand usage licensing fee charged to FreedomRoads Holding LLC and itssubsidiaries (collectively “FreedomRoads”) in December 2009.  Subsequent to September 30, 2010,FreedomRoads, Camping World and the Company entered into a Second Amended andRestated Cooperative Resources Agreement providing for an annual license fee of$3.75 million paid in quarter installments. See Footnote 10 — Subsequent Event.

 

Mediarevenues of $30.1 million for the first nine months of 2010 decreased $5.0million, or 14.3%, from the comparable period in 2009.  This decrease was primarily attributable to a$3.1 million reduction in revenue from our outdoor power sports magazines.  Anticipated declining advertising revenuesresulted in management reducing issues published by twelve issues for the firstnine months of 2010 versus the comparable period in 2009.  Declining exhibitor revenue commitmentsresulted in management canceling eight consumer shows, resulting in a $1.2million reduction in exhibitor revenue in the first nine months of 2010compared to the first nine months of 2009. In addition, advertising and circulation revenue was reduced $0.7million for the RV magazine group.

 

Retailrevenues of $217.8 million increased by $3.0 million, or 1.4%, from thecomparable period in 2009.  Storemerchandise sales increased $0.1 million from the first nine months of 2009 dueto a same store sales increase of $2.4 million, or 1.5%, compared to a 7.3%decrease in same store sales for the first nine months of 2009, and a $0.1million revenue increase from the opening of one new store over the pasttwenty-one months, partially offset by decreased revenue from discontinuedstores of $2.4 million.  Two stores wereclosed in the last twenty-one months in order to reduce fixed operating costsand to consolidate operations within the respective trade areas.  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, installation and service fees increased$1.1 million, mail order and internet sales increased $0.7 million, andsupplies and other sales increased $1.1 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $219.1 million for the first nine months of2010, a decrease of $7.8 million, or 3.4%, from the comparable period in 2009.

 

MembershipServices costs applicable to revenues of $67.7 million decreased $0.3 million,or 0.4%, from the comparable period in 2009. This decrease consisted of a $0.9 million reduction in marketing andprogram costs related to reduced membership in the Coast to Coast Club and theGolf Card Club, a $0.9 million reduction in wage-related expenses, a $0.3million reduction in overhead expenses and a $0.2 million reduction in memberevents costs.  These reductions werepartially offset by a $1.4 million increase in costs associated with theextended vehicle warranty program and emergency road services, and a $0.6million increase in vehicle insurance marketing costs, all related to increasedrevenue.

 

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Mediacosts applicable to revenues of $23.5 million for the first nine months of 2010decreased $4.6 million, or 16.3%, from the comparable period in 2009 primarilyrelated to a $2.7 million reduction in magazine expenses resulting from reducedissues published and reduced magazine sizes, a $1.0 million reduction inwage-related costs, and a $0.9 million reduction in costs related to reducedconsumer shows revenue.  These costreductions in the magazine and show groups were taken as cost savings measuresbecause expected revenues from these products were not anticipated to coverexpected costs.

 

Retailcosts applicable to revenues decreased $2.9 million, or 2.2%, to $127.9million.  The retail gross profit marginof 41.3% for the first nine months of 2010 increased from 39.1% for thecomparable period in 2009.  The decreasein retail costs was directly attributable to an improvement in product grossmargins and an increase in sales of high margin product protection planproducts.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $97.9 million for the first nine monthsof 2010 increased $0.6 million compared to the first nine months of 2009.  This increase was due to a $3.9 million increasein deferred executive compensation under the 2010 Phantom Stock agreements anda $0.5 million increase in other general and administrative expenses, partiallyoffset by a $1.0 million reimbursement of legal expenses related to thecollection of a 2000 judgement for such expenses that was lien on real estateowned by the obligor that was received in the third quarter, a $0.9 millionreduction in professional fees and a $1.9 million decrease in retail generaland administrative expenses consisting primarily of decreases in labor andadvertising expense.

 

TheCompany recorded a non-cash goodwill impairment charge of $46.9 million in thethird quarter of 2009 related to our RV and powersports publications, which ispart of the Media segment.

 

Forthe first nine months of 2010, financing expense of $7.6 million was incurredfor closing fees, legal and consulting costs related to the New Senior CreditFacility entered into on March 1, 2010, which was expensed in accordancewith accounting guidance for debtors accounting for a modification or exchangeof debt instruments.  Financing expenseof $1.9 million for first nine months of 2009 related to legal and other costsincurred associated with the amendment dated June 5, 2009 to the thensenior secured credit facility.

 

Depreciationand amortization expense of $14.5 million decreased $2.1 million from the prioryear primarily due to completed amortization of intangible assets associatedwith prior acquisitions, and a reduced level of capital expenditures since2008.

 

*Income(Loss) from Operations*

 

Incomefrom operations for the first nine months of 2010 totaled $25.1 millioncompared to loss from operation of $29.6 million for the first nine months of2009.  This $54.7 million change wasprimarily the result the $46.9 million asset impairment charge in the thirdquarter of 2009 and the following favorable changes in the first nine months of2010 compared to the

 

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firstnine months of 2009: increased gross profit for the Retail and MembershipService segments of $5.9 million and $6.6 million, respectively, and reducedoperating expenses of $5.4 million, partially offset by increased financingexpense of $5.7 million, a $3.9 million increase in deferred executivecompensation, and reduced gross profit for the Media segment of $0.5 million.

 

*Non-OperatingItems*

 

Non-operatingexpenses of $37.3 million for the first nine months of 2010 increased $10.2million compared to the first nine months of 2009 due to a $5.3 millionincrease in interest expense relating to higher interest rates and increaseddebt, a $4.7 million gain on purchase of the $14.6 million Senior Notes in thesecond quarter of 2009, and a $1.5 million negative change in the loss/gain onderivative instruments related to the interest rate swap agreements, partiallyoffset by a $0.7 million decrease in other non-operating expenses and a $0.6million loss on sale of retail assets in the first nine months of 2009.  See Note 7 — Interest Rate Swap Agreements.

 

*Lossbefore Income Tax*

 

Lossbefore income tax for the first nine months of 2010 was $12.2 million, comparedto $56.7 million for the first nine months of 2009.  This $44.5 million favorable change wasattributable to the $54.7 million increase in income from operations, partiallyoffset by a $10.2 million increase in non-operating items mentioned above.

 

*IncomeTax Expense (Benefit)*

 

TheCompany recorded income tax expense of approximately $0.3 million for the firstnine months of 2010, compared to $12.2 million income tax benefit for the firstnine months of 2009.  This change was aresult of a reversal of unrecognized tax benefits, reversal of accrued interestand penalties related to unrecognized tax benefits and a decrease in thevaluation allowance against deferred tax assets in the first nine months of2009.

 

*Net loss*

 

Netloss in the first nine months of 2010 was $12.5 million compared to a $44.5million for the same period in 2009 mainly due to the reasons discussed above.

 

*SegmentProfit (Loss)*

 

TheCompany’s three principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, theCamp Club USA and assorted membership products and services for RV owners,campers and outdoor vacationers, and the Golf Card Club for golfenthusiasts.  The Media segment publishesa variety of publications for selected markets in the recreation and leisureindustry, including general circulation periodicals, directories, and RV andpowersports industry trade magazines.  Inaddition, the Media segment operates consumer outdoor recreation showsprimarily focused on RV and powersports markets.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through retail 

 

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supercentersand mail order catalogs.  The Companyevaluates performance based on profit or loss from operations before incometaxes and unusual items.

 

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

 

Membershipservices segment profit of $42.9 million for the first nine months of 2010increased $8.0 million, or 22.9%, from the comparable period in 2009.  This increase was largely attributable to a$3.8 million increase in vehicle insurance profit primarily related to a $5.0million fee received as a result of waiving our right of first refusalregarding the sale of the third party partner combined with reduced marketingfee revenue, a $1.2 million increase in segment profit in the Good Sam Clubrelated to reduced marketing and administrative expenses, an $0.8 millionincrease in profit related to savings in overhead and wage-related expenses, a$0.7 million increase in profit related to the timing of the member events, a$0.7 million increase in advertising revenue in the member publications, a $0.7million increase in marketing fee revenue from credit cards and health and lifeinsurance products, a $0.5 million increase in profit from the extended vehiclewarranty program and emergency road service products, a $0.4 million increasein profit related to reduced marketing and program expenses in the Coast toCoast Club and the Golf Card Club, and a $0.4 million increase in segmentprofit from various other ancillary product revenue.  These increases were partially offset by a$1.2 million decrease in segment profit relating to reduced brand usagelicensing fees from FreedomRoads.

 

Mediasegment profit improved to $0.5 million for the first nine months of 2010 froma loss of $46.9 million for comparable period in 2009.  This improvement resulted primarily from a$46.9 million goodwill impairment charge in 2009 in the Media segment, and thefollowing favorable changes for the 2010 period: a $0.5 million increase insegment profit in the RV magazine group, and $0.4 million increase in segment profitin the powersports magazine group, partially offset by a $0.4 million decreasein segment profit from the consumer shows group.

 

Retailsegment profit was $5.8 million for the first nine months of 2010 compared to aloss of $6.7 million for the first nine months of 2009.  This $12.5 million improvement was the resultof a $5.4 million decrease in allocated interest expense, a $4.7 millionincrease in gross profit margin, a $1.9 million decrease in selling, generaland administrative expenses and a $0.5 million decrease in depreciation andamortization expense.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany historically operates with a working capital deficit.  Working capital deficit was $2.8 million and$14.0 million as of September 30, 2010 and December 31, 2009,respectively.  The primary reason for ourworking capital deficit is the deferred revenue and gains reported undercurrent liabilities of $67.4 million and $60.7 million, as of September 30,2010 and December 31, 2009, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships and service contracts in advance, which is amortized over the lifeof the membership or contract period. The Company uses net proceeds from this deferred revenue to lower itsborrowings.

 

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In2009, the Company engaged a financial advisor to assist in refinancing orrestructuring of the AGI Senior Notes ($137.8 million principal outstanding at September 30,2010 and maturing on February 15, 2012) and the AGHI Notes ($87.3 millionprincipal outstanding at September 30, 2010 and maturing on February 15,2012).  AGHI deferred payment of theinterest on the AGHI Notes that was due on August 15, 2009.  The indenture governing the AGHI Notes providesa 30-day grace period for the payment of interest.  Before the end of the grace period, AGHIreceived consent letters for extending such grace period from certaininstitutional holders of the AGHI Notes holding in the aggregate $65.8 millionprincipal amount of the AGHI Notes and from non-institutional holders holdingin the aggregate $46.6 million principal amount of the AGHI Notes and paid theinterest of the remaining AGHI Notes. The aggregate principal amount of the AGHI Notes outstanding was then$113.6 million so the holders executing the consents held 98.9% of theoutstanding principal amount of the AGHI Notes. Pursuant to the consent letters from the institutional holders, AGHIagreed to pay the legal fees for a law firm to represent the institutionalholders. In addition, AGHI paid a consent fee equal 1⁄4 of 1% of the principalamount to the institutional holders who signed a consent letter, or anaggregate of $164,600.  No consent feewas paid to the non-institutional holders. AGHI satisfied the August 15, 2009 interest payment in January,2010 with $4.5 million in cash (funded, in part, from a $2.8 million capitalcontribution from its shareholder, and $1.7 million of permitted taxdistributions from AGI), and the remaining $1.7 million due to related entitieswas forgiven and, as such, reported as an equity contribution.  AGHI satisfied the interest payment due February 15,2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from$2.5 million received by AGHI in connection with a waiver by AGHI of certainfirst refusal rights related to AGI’s vehicle insurance business and thebalance from AGI as a permitted tax distribution) and the remaining $1.8million due to related entities was forgiven and, as such, reported as anequity contribution.  As a condition tofunding of the AGI New Senior Credit Facility, on March 1, 2010, AGHIacquired $25.4 million of AGHI Notes due on March 15, 2010 that were heldby an affiliate of AGHI, as a contribution from the affiliate, and AGHI thencancelled those notes, thereby reducing the approximately $112.3 million ofAGHI Notes outstanding as of December 31, 2009 to approximately $87.0million as of March 31,, 2010.  AGHIsatisfied the interest payment due August 15, 2010 with $3.4 million incash, funded by its shareholder, paid September 16, 2010 to institutionalholders holding an aggregate of $61.8 million of our AGHI Notes within the “grace”period consented to by such holders for payment of the interest.  Previously, the Company also paid the indenturetrustee interest in the amount of $15,000 for the holders of the AGHI Notesthat had not been identified to the Company. The remaining holders of the AGHI Notes extended the payment date forthe interest due on August 15, 2010 to February 15, 2011.

 

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*Contractual Obligations and Commercial Commitments*

 

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

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**     | ** ** | **Total**                                 | ** ** | **2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  2014** | ** ** | **Thereafter** | ** ** |
|                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt and future interest    |       | $                                         | 437,962    |   | $ | 6,286 |   | $ | 431,676 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 218,219                                   |       | 5,786 |   | 42,892 |   | 36,154 |   | 133,387 |   |
| Standby letters of credit   |       | 8,565                                     |       | 4,065 |   | 4,500 |   | — |   | — |   |
| Grand total                 |       | $                                         | 664,746    |   | $ | 16,137 |   | $ | 479,068 |   | $ | 36,154 |   | $ | 133,387 |   |

 

Inaccordance with their respective loan agreements, if the maturity of the SeniorNotes and AGHI Notes is not extended, or if the Senior Notes and AGHI Noteshave not been repaid or refinanced, the AGI New Senior Credit Facility matures90 days prior to maturity of the AGI Senior Notes and the AGHI Notes, and theCW Credit Facility matures 60 days prior to the maturity of the AGI New SeniorCredit Facility.  The Debt and futureinterest disclosed above assumes the AGI Senior Notes and AGHI Notes, both due February 15,2012, are not extended.

 

AGHINotes

 

OnMarch 24, 2005, in a private placement, the Company issued $88.2 millionprincipal amount of its 10-7/8% senior notes due 2012 (the “AGHI Notes”) at a$3.2 million original issue discount. The Company completed a registered exchange of the AGHI Notes under theSecurities Act of 1933 on June 8, 2005. The AGHI Notes are unsecured obligations of the Company, and AGI and itssubsidiaries have not guaranteed payment of principal or interest on the AGHINotes.  Interest on the AGHI Notes ispayable semi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and before February 15, 2008, AGHI had the electionto pay interest on the AGHI Notes in cash or by the issuance of additionalnotes of the same tenor as the AGHI Notes. Any additional AGHI Notes issued in payment of interest are due in fullon or before March 15, 2010.  AGIhas not paid any dividends to AGHI to fund payment of interest on the AGHINotes and AGHI made the interest payments due on August 15, 2005, February 15,2006, August 15, 2006, February 15, 2007, and February 15, 2008through the issuance of additional notes. AGHI paid the interest on the AGHI Notes due August 15, 2007, August 15,2008 and February 15, 2009 from proceeds of capital contributions made byAGHI’s parent, AGHC, in the amount of $5.9 million, $6.2 million and $6.2million, respectively.  AGHI made theinterest payment due August 15, 2009 in January, 2010 with a $4.5 millioncash payment (a $2.8 million capital contribution from its shareholder, and$1.7 million of permitted tax distributions from AGI), and the remaining $1.7million due to related entities was forgiven and reported as an equitycontribution.  AGHI satisfied theinterest payment due February 15, 2010 on March 5, 2010 with $4.4million in cash (funded, in part, from $2.5 million received by AGHI inconnection with a waiver by AGHI of certain first refusal rights related to AGI’svehicle insurance business and the balance from AGI as a permitted taxdistribution) and the

 

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remaining$1.8 million due to related entities was forgiven and, as such, reported as anequity contribution.  On March 1,2010, $25.4 million of the AGHI Notes due March 15, 2010 that were held byan affiliate of AGHI were contributed to the Company and the Company cancelledthose notes.  AGHI satisfied the interestpayment due August 15, 2010 with $3.4 million in cash, funded by itsshareholder, paid September 16, 2010 to institutional holders holding anaggregate of $61.8 million of our AGHI Notes within the “grace” periodconsented to by such holders for payment of the interest.  Previously, the Company also paid theindenture trustee interest in the amount of $15,000 for the holders of the AGHINotes that had not been identified to the Company.  The remaining holders of the AGHI Notesextended the payment date for the interest due on August 15, 2010 to February 15,2011.  Currently, the AGI New SeniorCredit Facility, CWI Credit Facility, and the AGI Indenture impose limitationson the ability of subsidiaries of AGHI to make dividend distributions or loansto AGHI to pay interest on the AGHI Notes. As of September 30, 2010, $87.3 million, net of $0.9 million inunamortized original issue discount, remained outstanding on the AGHI Notes.

 

Thenext interest payment date on the AGHI Notes is February 15, 2011 and theamount of interest then due is $6.2 million. Under the terms of the AGI New Senior Credit Facility, AGI is notcurrently able to pay dividends or otherwise provide funds to the Company tomake such interest payment and, consequently, as of the filing of this Reporton Form 10-Q, we do not have sufficient funds to make the February 15,2011 interest payment on the AGHI Notes. The interest payments payable August 15, 2007, August 15,2008, February 15, 2009, August 15, 2009, February 15, 2010 and August 15,2010, were funded by the Company’s parent, AGHC through capital contributionsto AGHI.  Per the filing of an 8-K dated September 16,2010, the Company has received a commitment from its parent, AGHC, to providefunds for the interest payment due February 15, 2011.

 

Underthe terms of the AGHI Notes, the Company is afforded a 30-day grace period fromthe interest payment date before non-payment constitutes an event of defaultunder such notes.  If the interestpayment is not made by the end of the grace period and no extension or otheragreement is reached with the holders of the AGHI Notes, the trustee under theindenture under which the AGHI Notes were issued can declare an event ofdefault and the trustee must declare an event of default if the holders of 25%or more in principal amount of the AGHI Notes request that the trustee declarean event of default.  The AGI New CreditFacility and the CW Credit Facility include cross-default provisions that wouldresult in an event of default under those debt instruments if an event ofdefault occurs under the AGHI Notes. Upon an event of default, the holders of such debt instruments will beentitled to exercise their respective remedies including, in the case ofsecured debt, to sell the collateral securing the repayment thereof.  In as much as the indebtedness owned underthe AGI New Senior Credit Facility and the CW Credit Facility is secured, itwould be repaid before funds are available to discharge any unsecured orsubordinated obligations.  Because we area holding company, except to the extent that we have priority or equal claimsagainst our subsidiaries as a creditor, our obligations under the AGHI Notes areeffectively subordinated to the obligations of our subsidiaries, including theAGI Senior Notes and trade payables of our subsidiaries.

 

AGINew Senior Credit Facility

 

OnMarch 1, 2010, AGI entered into the AGI New Senior Credit Facility torefinance the existing senior credit facility ($128.9 million aggregateprincipal amount outstanding at

 

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December 31,2009) which was scheduled to mature on March 31, 2010, the second liennotes due July 31, 2010 ($9.7 million principal amount outstanding at December 31,2009), and the SA Loan ($1.0 million principal amount outstanding at December 31,2009).  The AGI New Senior CreditFacility provides for term loans aggregating $144.3 million, including anoriginal issue discount of 2%, that are payable in quarterly installments of$360,750 beginning March 1, 2011. In addition, there are mandatory prepayments of the term loans fromexcess cash flow (as defined) of AGI and from asset sales.  The term loans under the AGI New Senior CreditFacility mature on the earlier of (i) March 1, 2015 or (ii) 90days prior to the maturity of either the AGI Senior Notes ($137.8 millionprincipal amount outstanding as at September 30, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat September 30, 2010 and are due February 15, 2012).  Interest on the term loans under the AGI NewSenior Credit Facility floats at either 8.75% over the base rate (defined asthe greater of the prime rate, federal funds rate plus 50 basis points or5.25%) for borrowings whose interest is based on the prime rate or 10.0% overthe LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (See Note 7- Interest Rate Swap Agreements), as of September 30,2010, the average annual interest rate on the term loans was 16.64%.  The AGI New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the AGI New Senior CreditFacility are guaranteed by the direct and indirect subsidiaries of AGI and aresecured by liens on the assets of AGI and its direct and indirectsubsidiaries.  As a condition to the termloans under the AGI New Senior Credit Facility, $25.4 million of AGHI Notes dueon March 15, 2010 that were held by an affiliate of AGHI were contributedto AGHI, and AGHI cancelled those notes. As of September 30, 2010, $142.3 million, net of approximately $2.0million of unamortized original issue discount, was outstanding on the AGI NewSenior Credit Facility.  Restricted cashof $8.1 million was released from its restriction on March 1, 2010, whenthe existing credit facility was refinanced.

 

CW Credit Facility

 

OnMarch 1, 2010, Camping World entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1,2013, (ii) 60 days prior to the date of maturity of the AGI New SeniorCredit Facility, or (iii) 120 days prior to the earlier date of maturityof the AGI Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floatsat either 3.25% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whoseinterest is based on the prime rate or 3.25% over the LIBOR rate (defined asthe greater of LIBOR rate applicable to the period of the respective LIBORborrowings or 1.0%) for borrowings whose interest is based on LIBOR.  As of September 30, 2010, the averageinterest rate on the CW Credit Facility was 4.25%.  Borrowings under the CW Credit Facility arebased on the borrowing base of eligible inventory and accounts receivable ofCamping World and its subsidiaries.  TheCW Credit Facility contains affirmative covenants, including financialcovenants, and negative covenants. Borrowings under the CW Credit Facility are guaranteed by the direct andindirect subsidiaries of Camping World and are secured by a pledge on the stockof Camping World and its direct and indirect subsidiaries and liens on theassets of Camping World and its direct and indirect subsidiaries.  The lenders under the AGI New

 

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SeniorCredit Facility and the CW Credit Facility have entered into an intercreditoragreement that governs their rights in the collateral that is pledged to securetheir respective loans.  As of September 30,2010, $5.7 million was borrowed and $8.6 million of letters of credit wereissued under the CW Credit Facility.

 

AGISenior Notes

 

InFebruary 2004, AGI issued $200.0 million of AGI Senior Notes pursuant tothe AGI Indenture.  Interest at the rateof 9% per annum is due on the AGI Senior Notes on February 15 and August 15.  The AGI Senior Notes mature on February 15,2012.  As of September 30, 2010,$137.8 million of AGI Senior Notes remained outstanding.  The fair value of the AGI Senior Notes, basedon the quoted market price at September 30, 2010, was $102.7 million.

 

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

 

Interest Rate Swap Agreements

 

TheCompany is exposed to certain risks related to its business operations.  The primary risks that we managed by usingderivatives is interest rate risk.  Weuse financial instruments, including interest rate swap agreements, to reduceour risk to this exposure.  We do not usederivatives for speculative trading purposes and are not a party to leveragedderivatives. We recognize all of our derivative instruments as either assets orliabilities at fair value.  Fair value isdetermined in accordance with the accounting guidance for Fair ValueMeasurements.  See Note 8 — Fair ValueMeasurements.  The accounting for changesin the fair value of a derivative instrument depends on whether it has beendesignated and qualifies as part of a hedging relationship and, further, on thetype of hedging relationship.  Forderivatives designated as hedges under the accounting guidance for derivativeinstruments and hedging activities, we formally assess, both at inception andperiodically thereafter, whether the hedging derivatives are highly effectivein offsetting changes in either the fair value or cash flows of the hedgeditem.  Our derivatives that are notdesignated and do not qualify as hedges under the accounting guidance forderivative instruments and hedging activities are adjusted to fair valuethrough current earnings.

 

EffectiveJanuary 1, 2009, the Company adopted the provisions of the new accountingguidance for disclosures about derivative instruments and hedgingactivities.  The guidance requires thatthe objectives for using derivative instruments be disclosed to better conveythe purpose of derivative use in terms of the risks that the Company isintending to manage.  This standard alsorequires disclosure of how derivatives and related hedged items are accountedfor and how they affect the Company’s financial statements.  The adoption of the new guidance did not havea material impact on our condensed consolidated results of operations,financial position or cash flows.

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month

 

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LIBOR-basedvariable rate (0.475% at September 30, 2010 based upon the July 31,2010 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.475% at September 30, 2010 based upon the July 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.9 million of which approximately $7.1million is in accumulated other comprehensive loss, and $1.1 million includedin retained earnings and $0.7 million in the statement of operations in theperiod ended September 30, 2010. The fair value of these swaps included in other long-term liabilitieswas $8.1 million of which $7.0 million is in accumulated other comprehensiveloss and $1.1 million in the statement of operations in aggregate periodsthrough December 31, 2009.

 

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

 

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

 

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

 

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remaininglife of the interest rate swap and included in earnings as a gain (loss) onderivative instrument.

 

OtherContractual Obligations and Commercial Commitments

 

Forthe nine months ended September 30, 2010, the Company incurred $3.9million of deferred executive compensation expense under the phantom stockagreements, and made no payments under the terms of the vested phantom stockagreements.  No phantom stock paymentsare scheduled to**be made for the remainder of2010.

 

Capitalexpenditures for the first nine months of 2010 totaling $3.1 million increased$0.6 million from the first nine months of 2009 primarily due to thecurtailment of new retail store openings. Additional capital expenditures of $1.8 million are anticipated for thebalance of 2010 primarily for software enhancements, information technologyupgrades and further website development.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

Thediscussion and analysis of the Company’s financial condition and results ofoperations are based upon the Company’s consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of these financial statements requires the Company to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related 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.

 

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

 

*RevenueRecognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and Internet orders, or when services are provided to customers.  Publication advertising and newsstand sales,net of estimated provision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of the contract.  ERS claim expenses are recognized whenincurred.  Advances on third party creditcard fee revenues are deferred and recognized based primarily on a percentageof credit card receivables held by third parties.  Membership revenue is generated from annual,multi-year and lifetime memberships.  Therevenue and expenses

 

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associatedwith these memberships are deferred and amortized over the membershipperiod.  For lifetime memberships, an18-year period is used, which is the actuarially determined estimatedfulfillment period.  Promotionalexpenses, consisting primarily of direct mail advertising, are deferred andexpensed over the period of expected future benefit.  Renewal expenses are expensed at the time relatedmaterials are mailed.  Recognizedrevenues and profit are subject to revisions as the membership progresses tocompletion.  Revisions to membershipperiod estimates would change the amount of income and expense amortized infuture accounting periods.  Revenue andrelated expenses for consumer shows are recognized when the show occurs.

 

*AccountsReceivable*

 

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

 

*Inventory*

 

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

 

*Long-LivedAssets*

 

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

 

Long-livedassets, such as property, plant and equipment and purchased intangible assetswith finite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with new accounting guidance for accounting for the impairment ordisposal of long-lived assets.  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.

 

TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary or if any of these assets had indefinite lives and were therefore notsubject to amortization.  The Companydetermined that no adjustments to the useful lives of its finite-livedpurchased intangible assets were necessary. The finite-lived purchased intangible assets consist of membership

 

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customerlists, resort and golf course agreements, non-compete and deferred consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 4 years, 15 years and 6 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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

 

Inthe third quarter of 2009, the Company noted continued reduction in advertisingrevenue in the operations of our RV and powersports publications, as well asflat to moderate 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.

 

TheCompany performed an impairment test of the goodwill and intangible assets ofthe reporting 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.

 

Inperforming the second step of the goodwill impairment test, the Companyallocated the estimated fair values of the reporting units of our RV andpowersports publications determined in step one of the impairment test, to theassets and liabilities of the respective reporting unit in accordance with newaccounting guidance for Business Combinations. The Company measured theimpairment for these units to be equal to the carrying value of its goodwill,or $46.9 million.

 

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TheCompany recorded an impairment charge of $46.9 million in the third quarter of2009 related to these units, which is part of the Media segment.

 

TheCompany has evaluated the remaining useful lives of its property and equipmentand finite-lived purchased intangible assets to determine if any adjustments tothe useful lives were necessary.  TheCompany determined that no adjustments to the useful lives of its property andequipment or finite-lived purchased intangible assets were necessary. Futuregoodwill impairment tests could result in a charge to earnings.  The Company will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

*Derivative Financial Instruments*

 

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

 

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

 

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

 

*Fair Value Measurements*

 

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

 

TheCompany has determined that it utilizes observable (Level 2) inputs indetermining the fair

 

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valueof its interest rate swap agreements. The Company has determined that it utilizes unobservable (Level 3)inputs in determining the fair value of its FreedomRoads Preferred Interest,and Media and Retail segment goodwill.

 

*IncomeTaxes*

 

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

 

**ITEM 3:  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

*Interest Rate SensitivityAnalysis*

 

At September 30, 2010, the total debt of theCompany was $373.5 million, $148.0 million of variable rate debt comprised of$142.3 million of term loans under the New Senior Credit Facility, of which$120.0 million is fixed through the interest rate swap agreements, and $5.7million under the CW Credit Facility. Fixed rate debt of $225.5 million is comprised of $137.8 million of AGISenior Notes, $87.3 million of AGHI Notes and $0.4 million of purchasedebt.  Holding other variables constant(such as debt levels), the earnings and cash flow impact of a one-percentagepoint increase/ decrease in interest rates would have an unfavorable/ favorableimpact of approximately $0.3 million.

 

*Credit Risk*

 

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

 

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**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over Financial Reporting

 

Within90 days prior to the filing of this Quarterly Report on Form 10-Q, theCompany carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-15(e) under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, the President and Chief Executive Officeralong with the Senior Vice President and Chief Financial Officer concluded thatthe disclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the periodic SEC filings.  Management determined that, as of September 30,2010, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II:  OTHER INFORMATION**

 

**ITEM 1A: RISK FACTORS**

 

Inaddition to Risk Factors described under Item 1A — Risk Factors, in the Company’sannual report on Form 10-K for the year ended December 31, 2009, thefollowing additional risk factors supplement the Risks Relating to Our Debt:

 

*Oursenior secured indebtedness could mature in the fourth quarter of 2011 if weare not able to refinance or extend the maturity date of our AGI Senior Notesand the AGHI Notes which mature on February 15, 2012.*

 

Inaccordance with their respective loan agreements, if the maturity of the SeniorNotes and AGHI Notes is not extended, or if the Senior Notes and AGHI Noteshave not been repaid or refinanced, the AGI New Senior Credit Facility matures90 days prior to maturity of the AGI Senior Notes and the AGHI Notes, and theCW Credit Facility matures 60 days prior to the maturity of the AGI New SeniorCredit Facility.  The AGI Senior Notesand AGHI Notes are due on February 15, 2012.  Although the Company is currently seeking torefinance, extend or replace these notes, there can be no assurance that thesenotes will be refinanced, extended or replaced prior to the accelerated duedates of the AGI New Senior Credit Facility and CW Credit Facility.  The availability of financing may be limiteddue to the current uncertainties in the capital markets and the current generalconditions in the U.S. economy.  As aresult, it may be even more difficult for the Company to refinance, extend orreplace the AGI Senior Notes and AGHI Notes. If the Company is not able to refinance, extend or replace the AGISenior Notes and AGHI Notes prior to the early maturity dates of the AGI NewSenior Credit Facility and the CW Credit Facility, the lenders under the AGINew Senior Credit Facility and the CW Credit Facility will be entitled toexercise their remedies to sell the collateral securing the repayment of theAGI New Senior Credit Facility and CW Credit Facility, including the Company’sassets, the stock of the Company and the stock of the Company’ssubsidiaries.  Since the indebtednessowed under the AGI New Senior Credit Facility and CW Credit Facility issecured, it would be repaid before any of the unsecured or subordinatedobligations of the

 

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Companyand its subsidiaries.  It is alsopossible that the interest rate payable on any new borrowings will be higherthan the interest rates under the current AGI Senior Notes and AGHI Notes,which would adversely affect the Company’s cash flow and profitability (orincrease losses).

 

**ITEM 6: EXHIBITS**

 

Exhibits:

 

Exhibit 10.43— Second Amended and Restated Cooperative Resources Agreement dated January1, 2010

 

**SIGNATURES:**

 

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

 

 
|                         | **AFFINITY  GROUP HOLDING, INC.** |
|------------------------------|----------------------------------------|
|                         |                                   |
|                         |                                   |
|                         | /s/  Thomas F. Wolfe                   |
| Date:  October 29, 2010 | Thomas  F. Wolfe                       |
|                         | Senior  Vice President and             |
|                         | Chief  Financial Officer               |

 

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