** **

** **

**UNITEDSTATES**

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

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

 

**FORM 10-Q**

 

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

**The Securities Exchange Act of 1934**

 

| **For  Quarter Ended:**      | ** ** | **Commission  File Number** |
|------------------------------|------------|-----------------------------|
| **September 30,  2008** | ** ** | **333-124109**              |

 

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**AFFINITY GROUP HOLDING, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

 

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

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

 

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

 
| YES  x |   | NO  o |
|-------------|--------|------------|

 

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

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

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).
| YES  o |   | NO  x |
|-------------|--------|------------|

 

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

 
| ** **                   | ** ** | **Outstanding as of** |
|------------------------------|------------|---------------------------------|
| **Class**                    | ** ** | **November 14, 2008** |
| Common Stock, $.01 par value |       | 100                             |

** **

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

 

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

 

**INDEX**

 
| ** **                            | **Page**                                                                                                       |
|---------------------------------------|----------------------------------------------------------------------------------------------------------------|
| **Part I.**Financial Information |                                                                                                           |
|                                  |                                                                                                           |
|                                  | **Item 1: Financial Statements**                                                                               |   |
|                                  |                                                                                                           |   |
|                                  | Consolidated Balance Sheets   as of September 30, 2008 (unaudited) and December 31, 2007             | 1 |
|                                  |                                                                                                           |   |
|                                  | Unaudited Consolidated  Statements of Operations   for the three months ended September 30, 2008 and 2007 | 2 |
|                                  |                                                                                                           |   |
|                                  | Unaudited Consolidated Statements of Operations   for the nine months ended September 30, 2008 and 2007   | 3 |
|                                  |                                                                                                           |   |
|                                  | Unaudited Consolidated Statements of Cash Flows   for the nine months ended September 30, 2008 and 2007   | 4 |
|                                  |                                                                                                           |   |
|                                  | Notes to Unaudited Consolidated Financial Statements                                                           | 5 |
|                                  |                                                                                                           |   |
| ** **                            | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**       | 21 |
|                                  |                                                                                                           |   |
|                                  | **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                        | 38 |
|                                  |                                                                                                           |   |
|                                  | **Item  4: Controls and Procedures**                                                                           | 39 |
|                                  |                                                                                                           |
| **Part II. Other Information**   | 40                                                                                                             |
|                                  |                                                                                                           |
| **Signatures**                        | 41                                                                                                             |

 

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AFFINITY GROUP HOLDING, INC.AND SUBSIDIARIES

CONSOLIDATEDBALANCE SHEETS

September 30, 2008 and December 31,2007

(In thousands except sharesand par value)

 
| ** **                                                                                      | ** ** | **9/30/2008**   | ** ** | **12/31/2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 16,161     |           | $          | 8,566 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,438 in 2008 and $1,473 in 2007 |       | 34,912          |       | 33,330         |       |
| Inventories                                                                                     |       | 63,319          |       | 64,209         |       |
| Prepaid expenses and other assets                                                               |       | 19,956          |       | 14,431         |       |
| Deferred tax assets                                                                             |       | 4,095           |       | 3,922          |       |
| Total current assets                                                                            |       | 138,443         |       | 124,458        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 44,649          |       | 44,307         |       |
| INVESTMENT IN AFFILIATE                                                                         |       | —          |       | 81,005         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,619           |       | 4,650          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 24,221          |       | 25,836         |       |
| GOODWILL                                                                                        |       | 96,828          |       | 144,429        |       |
| OTHER ASSETS                                                                                    |       | 1,803           |       | 1,979          |       |
| Total assets                                                                                    |       | $               | 310,563    |           | $          | 426,664 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 29,177     |           | $          | 27,171 |   |
| Accrued interest                                                                                |       | 5,071           |       | 6,700          |       |
| Accrued income taxes                                                                            |       | 1,292           |       | 1,189          |       |
| Accrued liabilities                                                                             |       | 32,373          |       | 36,123         |       |
| Deferred revenues and gains                                                                     |       | 72,601          |       | 65,855         |       |
| Current portion of long-term debt                                                               |       | 139,170         |       | 4,406          |       |
| Total current liabilities                                                                       |       | 279,684         |       | 141,444        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 36,852          |       | 38,535         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 265,505         |       | 392,553        |       |
| DEFERRED TAX LIABILITY                                                                          |       | 2,875           |       | 2,702          |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 21,656          |       | 22,704         |       |
|                                                                                            |       | 606,572         |       | 597,938        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.01 par value, 3,000 shares  authorized, 100 shares issued and outstanding       |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 12,041          |       | 5,861          |       |
| Accumulated deficit                                                                             |       | (303,404        | )          | (172,431       | )          |
| Accumulated other comprehensive loss                                                            |       | (4,647          | )          | (4,705         | )          |
| Total stockholder’s deficit                                                                |       | (296,009        | )          | (171,274       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 310,563    |           | $          | 426,664 |   |

 

See notes to consolidatedfinancial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                    | ** ** | **9/30/2007** | ** ** |
|                                              |       |                             |       |   |   |
| REVENUES:                                         |       |                             |       |   |   |
| Membership services                               |       | $                                | 36,610     |   | $ | 39,375 |   |
| Media                                             |       | 12,547                           |       | 14,864 |   |
| Retail                                            |       | 84,180                           |       | 92,189 |   |
|                                              |       | 133,337                          |       | 146,428 |   |
|                                              |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                             |       |   |   |
| Membership services                               |       | 23,151                           |       | 26,244 |   |
| Media                                             |       | 10,604                           |       | 10,867 |   |
| Retail                                            |       | 49,882                           |       | 55,812 |   |
|                                              |       | 83,637                           |       | 92,923 |   |
|                                              |       |                             |       |   |   |
| GROSS PROFIT                                      |       | 49,700                           |       | 53,505 |   |
|                                              |       |                             |       |   |   |
| OPERATING EXPENSES:                               |       |                             |       |   |   |
| Selling, general and administrative               |       | 35,869                           |       | 38,623 |   |
| Goodwill impairment                               |       | 47,601                           |       | — |   |
| Impairment of investment in affiliate             |       | 81,005                           |       | — |   |
| Depreciation and amortization                     |       | 5,160                            |       | 4,820 |   |
|                                              |       | 169,635                          |       | 43,443 |   |
|                                              |       |                             |       |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (119,935                         | )          | 10,062 |   |
|                                              |       |                             |       |   |   |
| NON-OPERATING ITEMS:                              |       |                             |       |   |   |
| Interest income                                   |       | 162                              |       | 161 |   |
| Interest expense                                  |       | (9,276                           | )          | (9,248 | ) |
| Other non-operating items, net                    |       | (141                             | )          | (51 | ) |
|                                              |       | (9,255                           | )          | (9,138 | ) |
|                                              |       |                             |       |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (129,190                         | )          | 924 |   |
|                                              |       |                             |       |   |   |
| INCOME TAX EXPENSE                                |       | (270                             | )          | (4,764 | ) |
|                                              |       |                             |       |   |   |
| NET LOSS                                          |       | $                                | (129,460   | ) | $ | (3,840 | ) |

 

See notes toconsolidated financial statements.

 

2

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AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(InThousands)

(Unaudited)

 
| ** **                                        | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                   | ** ** | **9/30/2007** | ** ** |
|                                              |       |                            |       |   |   |
| REVENUES:                                         |       |                            |       |   |   |
| Membership services                               |       | $                               | 114,718    |   | $ | 111,528 |   |
| Media                                             |       | 54,227                          |       | 57,082 |   |
| Retail                                            |       | 237,106                         |       | 259,489 |   |
|                                              |       | 406,051                         |       | 428,099 |   |
|                                              |       |                            |       |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                            |       |   |   |
| Membership services                               |       | 72,810                          |       | 72,205 |   |
| Media                                             |       | 39,208                          |       | 38,907 |   |
| Retail                                            |       | 139,077                         |       | 157,721 |   |
|                                              |       | 251,095                         |       | 268,833 |   |
|                                              |       |                            |       |   |   |
| GROSS PROFIT                                      |       | 154,956                         |       | 159,266 |   |
|                                              |       |                            |       |   |   |
| OPERATING EXPENSES:                               |       |                            |       |   |   |
| Selling, general and administrative               |       | 112,591                         |       | 112,138 |   |
| Goodwill impairment                               |       | 47,601                          |       | — |   |
| Impairment of investment in affiliate             |       | 81,005                          |       | — |   |
| Depreciation and amortization                     |       | 15,454                          |       | 14,564 |   |
|                                              |       | 256,651                         |       | 126,702 |   |
|                                              |       |                            |       |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (101,695                        | )          | 32,564 |   |
|                                              |       |                            |       |   |   |
| NON-OPERATING ITEMS:                              |       |                            |       |   |   |
| Interest income                                   |       | 444                             |       | 518 |   |
| Interest expense                                  |       | (27,717                         | )          | (27,750 | ) |
| Debt extinguishment expense                       |       | —                          |       | (775 | ) |
| Other non-operating items, net                    |       | (164                            | )          | 42 |   |
|                                              |       | (27,437                         | )          | (27,965 | ) |
|                                              |       |                            |       |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (129,132                        | )          | 4,599 |   |
|                                              |       |                            |       |   |   |
| INCOME TAX EXPENSE                                |       | (841                            | )          | (4,581 | ) |
|                                              |       |                            |       |   |   |
| NET (LOSS) INCOME                                 |       | $                               | (129,973   | ) | $ | 18 |   |

 

See notes to consolidated financial statements.

 

3

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AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(InThousands)

(Unaudited)

 
| ** **                                                                            | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **9/30/2008**                   | ** ** | **9/30/2007** | ** ** |
|                                                                                  |       |                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                 |       |                            |       |   |   |
| Net (loss) income                                                                     |       | $                               | (129,973   | ) | $ | 18 |   |
| Adjustments to reconcile net (loss) income to net  cash used in operating activities: |       |                            |       |   |   |
| Depreciation                                                                          |       | 8,802                           |       | 7,323 |   |
| Amortization                                                                          |       | 6,652                           |       | 7,241 |   |
| Impairment loss on goodwill                                                           |       | 47,601                          |       | — |   |
| Impairment loss on investment in affiliate                                            |       | 81,005                          |       | — |   |
| Provision for losses on accounts receivable                                           |       | 881                             |       | 904 |   |
| Deferred compensation                                                                 |       | (311                            | )          | 440 |   |
| Deferred tax expense                                                                  |       | —                          |       | 3,706 |   |
| Loss on sale of property and equipment                                                |       | 246                             |       | 73 |   |
| Loss on early extinguishment of debt                                                  |       | —                          |       | 775 |   |
| Non-cash interest on AGHI Notes                                                       |       | 1,465                           |       | 2,854 |   |
| Accretion of original issue discount                                                  |       | 355                             |       | 272 |   |
| Changes in operating assets and liabilities                                           |       |                            |       |   |   |
| Accounts receivable                                                                   |       | (2,463                          | )          | 2,135 |   |
| Inventories                                                                           |       | 890                             |       | (17,510 | ) |
| Prepaid expenses and other assets                                                     |       | (4,928                          | )          | (5,788 | ) |
| Accounts payable                                                                      |       | 2,006                           |       | (9,532 | ) |
| Accrued and other liabilities                                                         |       | (5,955                          | )          | (2,248 | ) |
| Deferred revenues and gains                                                           |       | 4,002                           |       | 11,582 |   |
| Net cash provided by operating activities                                             |       | 10,275                          |       | 2,245 |   |
|                                                                                  |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                 |       |                            |       |   |   |
| Capital expenditures                                                                  |       | (9,407                          | )          | (14,570 | ) |
| Net proceeds from sale of property and equipment                                      |       | 17                              |       | 10 |   |
| Change in intangible assets                                                           |       | 1                               |       | (14 | ) |
| Acquisitions, net of cash received                                                    |       | (3,409                          | )          | (304 | ) |
| Repayment of loans receivable                                                         |       | 31                              |       | 28 |   |
| Net cash used in investing activities                                                 |       | (12,767                         | )          | (14,850 | ) |
|                                                                                  |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                 |       |                            |       |   |   |
| Dividends paid                                                                        |       | (1,000                          | )          | (3,750 | ) |
| Contribution from parent                                                              |       | 6,180                           |       | 5,861 |   |
| Borrowings on short-term debt                                                         |       | 33,000                          |       | 53,100 |   |
| Payment of debt issue costs                                                           |       | (121                            | )          | (291 | ) |
| Principal payments of short-term debt                                                 |       | (27,972                         | )          | (51,910 | ) |
| Net cash provided by financing activities                                             |       | 10,087                          |       | 3,010 |   |
|                                                                                  |       |                            |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                               |       | 7,595                           |       | (9,595 | ) |
|                                                                                  |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      |       | 8,566                           |       | 15,238 |   |
|                                                                                  |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                            |       | $                               | 16,161     |   | $ | 5,643 |   |

 

See notes to consolidated financial statements.

 

4

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**AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation –***The consolidated financial statements includedherein include the accounts of Affinity Group Holding, Inc. (“AGHI”), its wholly-ownedsubsidiary, Affinity Group, Inc. (“AGI”), and AGI’s subsidiaries(collectively the “Company”), presented in accordance with U.S. generallyaccepted accounting principles, and pursuant to the rules and regulationsof the Securities and Exchange Commission. In November 2007, AGI Holding Corp. (“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.  AGII is the parent company of AGHI.

 

These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2007 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.

 

**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements” (“SFAS 157”) on January 1, 2008.  The FASB delayed the effective date of SFAS157 until January 1, 2009 with respect to fair value measurementrequirements for non-financial assets and liabilities that are not re-measuredon a recurring basis.  SFAS 157 definesfair value, establishes a framework and gives guidance regarding the methodused for measuring fair value, and expands disclosures about fair valuemeasurements.  SFAS 157 requirescompanies to disclose the fair value of their financial instruments according toa fair value hierarchy, as defined, and may require companies to provideadditional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears.  The adoption of the provisions ofSFAS 157 did not have a material impact on the Company’s consolidated financialstatements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Liabilities” including an amendment of FASB Statement No. 115 (“SFAS159”).  SFAS 159 expands the use of fairvalue accounting but does not affect existing standards which requires assetsor liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providingcompanies with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. Under SFAS 159, a company may elect to use fair value to measureeligible items at specified election dates and report unrealized gains

 

5

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**(2) RECENTACCOUNTING PRONOUNCEMENTS (continued)**

 

and losses onitems for which the fair value option has been elected in earnings at eachsubsequent reporting date.  Eligibleitems include, but are not limited to, accounts and loans receivable,available-for-sale and held-to-maturity securities, equity method investments,accounts payable, guarantees, issued debt and firm commitments.  If elected, SFAS 159 would be effective forfiscal years beginning after November 15, 2007.  The Company has elected not to adopt SFAS159.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141(R)”).  SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.  SFAS 141(R) also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  SFAS 141(R) iseffective for fiscal years beginning after December 15, 2008.  The Company will adopt SFAS 141(R) inthe first quarter of fiscal 2009 and apply the provisions of the Statement forany acquisition after the adoption date.

 

In December 2007,the FASB issued SFAS No. 160, “Accounting and Reporting of Non-controllingInterests in Consolidated Financial Statements – an amendment of AccountingResearch Bulletin No. 51” (“SFAS 160”). This standard will significantlychange the accounting and reporting for business combination transactions andnon-controlling (minority) interests in consolidated financial statements,including capitalizing at the acquisition date the fair value acquired fromin-process research and development, and re-measuring and writing down theseassets, if necessary, in subsequent periods during their development. This newstandard will be applied for business combinations that occur on or after January 1,2009 and presentation and disclosure requirements of SFAS 160 shall be appliedretrospectively.

 

In March 2008,the FASB issued SFAS Statement No. 161 (“SFAS 161”), “Disclosures aboutDerivative Instruments and Hedging Activities”. SFAS 161 requires companieswith derivative instruments to disclose information that should enablefinancial statement users to understand how and why a company uses derivativeinstruments, how derivative instruments and related hedged items are accountedfor under FASB Statement No. 133 “Accounting for Derivative Instrumentsand Hedging Activities” and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. We are currentlyevaluating the impact, if any, that SFAS 161 will have on our consolidatedfinancial statements.

 

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

 

TheCompany’s three principal lines of business are Membership Services, Media(formerly known as Publications), and Retail. The Membership Services segment includes the operations of the Good SamClub, Coast to Coast Club, Camping World’s President’s Club, Camp Club USA andRV Handyman Club for recreational vehicle (“RV”) owners, campers and outdoorvacationers, and the Golf Card Club for golf enthusiasts.  The Media segment

 

6

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

 

publishesa variety of publications for selected markets in the recreation and leisureindustry, including general circulation periodicals, directories, and RV andpowersports industry trade magazines, and produces outdoor recreationalconsumer events.  The Retail segmentsells specialty retail merchandise and services for RV owners primarily throughCamping World retail supercenters, mail order catalogs and its website.  The Company evaluates performance based onprofit or loss from operations before income taxes.

 

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

 

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, 2008** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers          |       | $              | 37,344     |       | $          | 12,547     |       | $                | 83,446     |   | $ | 133,337 |   |
| Loss on sale of property and equipment    |       | —         |       | —     |       | (160       | )          | (160             | )          |
| Interest income                           |       | 891            |       | —     |       | 5          |       | 896              |       |
| Interest expense                          |       | —         |       | 53         |       | 4,026      |       | 4,079            |       |
| Depreciation and amortization             |       | 846            |       | 1,579      |       | 2,087      |       | 4,512            |       |
| Goodwill impairment                       |       | —         |       | —     |       | 47,601     |       | 47,601           |       |
| Impairment of investment in affiliate     |       | —         |       | —     |       | 81,005     |       | 81,005           |       |
| Segment operating profit (loss)           |       | 10,880         |       | (1,131     | )          | (129,518   | )          | (119,769         | )          |
|                                      |       |           |       |       |       |       |       |             |       |
| **THREE MONTHS ENDED SEPTEMBER 30, 2007** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers          |       | $              | 39,375     |       | $          | 14,864     |       | $                | 92,189     |   | $ | 146,428 |   |
| Loss on sale of property and equipment    |       | —         |       | —     |       | (78        | )          | (78              | )          |
| Interest income                           |       | 2,528          |       | —     |       | 10         |       | 2,538            |       |
| Interest expense                          |       | —         |       | 52         |       | 3,943      |       | 3,995            |       |
| Depreciation and amortization             |       | 859            |       | 1,304      |       | 1,955      |       | 4,118            |       |
| Segment operating profit                  |       | 11,998         |       | 1,335      |       | 142        |       | 13,475           |       |

 

7

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

 
| ** **                                    | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                    | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30, 2008**      |       |           |       |       |       |       |       |             |       |
| Revenues from external customers              |       | $              | 115,452    |       | $          | 54,227     |       | $                | 236,372    |   | $ | 406,051 |   |
| Loss on sale of property and equipment        |       | —         |       | —     |       | (246       | )          | (246             | )          |
| Interest income                               |       | 2,712          |       | —     |       | 25         |       | 2,737            |       |
| Interest expense                              |       | —         |       | 157        |       | 12,116     |       | 12,273           |       |
| Depreciation and amortization                 |       | 2,408          |       | 4,623      |       | 6,509      |       | 13,540           |       |
| Goodwill impairment                           |       | —         |       | —     |       | 47,601     |       | 47,601           |       |
| Impairment of investment in affiliate         |       | —         |       | —     |       | 81,005     |       | 81,005           |       |
| Segment operating profit (loss)               |       | 34,094         |       | 5,622      |       | (138,454   | )          | (98,738          | )          |
|                                          |       |           |       |       |       |       |       |             |       |
| **NINE MONTHS ENDED SEPTEMBER 30, 2007**      |       |           |       |       |       |       |       |             |       |
| Revenues from external customers              |       | $              | 111,528    |       | $          | 57,082     |       | $                | 259,489    |   | $ | 428,099 |   |
| Gain (loss) on sale of property and equipment |       | —         |       | 5          |       | (78        | )          | (73              | )          |
| Interest income                               |       | 7,081          |       | —     |       | 77         |       | 7,158            |       |
| Interest expense                              |       | —         |       | 198        |       | 11,353     |       | 11,551           |       |
| Depreciation and amortization                 |       | 2,656          |       | 3,853      |       | 5,770      |       | 12,279           |       |
| Segment operating profit (loss)               |       | 35,942         |       | 10,125     |       | (1,842     | )          | 44,225           |       |

 

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

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **9/30/2008**                    | ** ** | **9/30/2007**                   | ** ** | **9/30/2008** | ** ** | **9/30/2007** | ** ** |
| **(Loss) Profit From Operations Before Income  Taxes**        |       |                             |       |                            |       |   |   |   |   |
| Total (loss) profit for reportable segments                   |       | $                                | (119,769   | )                               | $          | 13,475 |   | $ | (98,738 | ) | $ | 44,225 |   |
| Unallocated G & A expense                            |       | (2,842                           | )          | (4,219                          | )          | (10,743 | ) | (13,727 | ) |
| Unallocated depreciation and amortization expense             |       | (648                             | )          | (702                            | )          | (1,914 | ) | (2,285 | ) |
| Elimination of intercompany interest income                   |       | (734                             | )          | (2,377                          | )          | (2,293 | ) | (6,640 | ) |
| Unallocated interest expense, net of intercompany elimination |       | (5,197                           | )          | (5,253                          | )          | (15,444 | ) | (16,199 | ) |
| Unallocated debt restructure expense                          |       | —                           |       | —                          |       | — |   | (775 | ) |
| (Loss) profit from operations before income taxes             |       | $                                | (129,190   | )                               | $          | 924 |   | $ | (129,132 | ) | $ | 4,599 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2008 and December 31,2007 (in thousands):

 
| ** **                                          | ** ** | **9/30/2008** | ** ** | **12/31/2007** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 212,909    |           | $          | 203,836 |   |
| Media segment                                       |       | 90,029        |       | 89,074         |       |
| Retail segment                                      |       | 122,840       |       | 249,174        |       |
| Total assets for reportable segments                |       | 425,778       |       | 542,084        |       |
| Capitalized finance costs not allocated to segments |       | 6,177         |       | 7,489          |       |
| Corporate unallocated assets                        |       | 3,378         |       | 3,544          |       |
| Elimination of intersegment receivable              |       | (124,770      | )          | (126,453       | )          |
| Total assets                                        |       | $             | 310,563    |           | $          | 426,664 |   |

 

8

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**(4) STATEMENTS OF CASH FLOWS**

 

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

** **
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid (received) during the period for: |       |     |       |     |       |
| Interest                                    |       | $        | 27,527     |     | $          | 28,577 |   |
| Income taxes                                |       | (3       | )          | (194     | )          |
|                                             |            |          |            |          |            |  |  |

 

In January 2007, the Company assumed $0.3 million of liabilitiesin connection with the acquisition of the Madison Boat Show from MAC Events,LLC.

 

In February 2007, the Company assumed $0.6 million of liabilitiesand issued $1.5 million of debt in connection with the acquisition of five RVand Sportsman Shows from Industrial Expositions, Inc.

 

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

 

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

 

For the ninemonths ended September 30, 2008, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $0.1 million decrease inboth Other Long-Term Liabilities and Other Comprehensive Loss.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

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

 

In the thirdquarter of 2008, the Company noted continued reduction in same store sales atCamping World, Inc. (“Camping World”) as well as deterioration of generaleconomic conditions and consumer confidence. Based on the above, the Company determined that there were identifiedindicators of impairment within the Camping World reporting unit.

 

The results of athird party valuation report (“Valuation Report”) prepared in the third quarterby a nationally recognized firm in anticipation of the potential sale ofCamping World (See Footnote 11- Recent Events) indicated that the estimatedfair value of the Camping World reporting unit was less than book value.  The excess of the carrying value over theestimated fair value of the Camping World reporting unit was primarily due tothe decline in the recreational vehicle and camping retail markets leading tolower expected future cash flows for the business and lower market comparables.In

 

9

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

 

determining thefair value, the Company used a weighted average of the income valuationapproach and market valuation approaches.

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the Camping World reporting units determined in stepone of the impairment test, to the assets and liabilities of the respectivereporting unit in accordance with SFAS No. 141 “Business Combinations”.The Company measured the impairment for the Camping World reporting unit to beequal to the carrying value of its goodwill, or $47.6 million.  The Company recorded an impairment charge of$47.6 million in the third quarter of 2008 related to Camping World, which ispart of the retail segment.

 

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

 

The Company hasevaluated the remaining useful lives of its property and equipment andfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary.  The Companydetermined that no adjustments to the useful lives of its property andequipment or finite-lived purchased intangible assets were necessary.

 

The following is asummary of changes in the Company’s goodwill by business segment, for the ninemonths ended September 30, 2008 and 2007 (in thousands):

 
| ** **                            | ** ** | **Membership  Services** | ** ** | **Media** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------|------------|------------|------------|------------------|------------|
|                                  |       |                     |       |      |       |       |       |             |       |
| Balance as of December 31, 2007  |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |
| Impairments                           |       | —                   |       | —    |       | (47,601    | )          | (47,601          | )          |
| Balance as of September 30, 2008 |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |
|                                  |       |                     |       |      |       |       |       |             |       |
| Balance as of December 31, 2006  |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |
| Impairments                           |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of September 30, 2007 |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |

 

Under SFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”)goodwill impairment is deemed to exist if the net book value of a reportingunit exceeds its estimated fair value. The Company’s reporting units are generally consistent with theoperating segments underlying the reporting segments identified in Note 3 -Segment Information.** **In January 2007, AGIProductions,

 

10

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**(5) GOODWILLAND INTANGIBLE ASSETS (continued)**

 

Inc. acquired aconsumer show from MAC Events, Inc. for $0.5 million.  As part of the purchase, the Company assumed$0.3 million of liabilities.  In February 2007,AGI Productions, Inc. acquired consumer shows from Industrial ExpositionInc. for $1.9 million.  As part of thepurchase, the Company issued $1.5 million of debt and assumed $0.6 million ofliabilities.

 

In January 2008,AGI Productions, Inc. acquired consumer shows from MAC Events, LLC for$3.4 million.  As part of the purchase,the Company issued $0.4 million of debt and assumed $0.6 million ofliabilities.  In February 2008, AGIProductions, Inc. acquired consumer shows from Mid America Expositions, Inc.for $1.6 million.  As part of thepurchase, the Company issued $0.5 million of debt and assumed $0.5 million ofliabilities.

 

These acquisitionshave been accounted for as a purchase in accordance with SFAS No. 141, “BusinessCombinations,” and accordingly, the acquired assets and liabilities have beenrecorded at fair value.  The allocationsof purchase price to assets and liabilities include various finite-livedintangible assets (primarily customer lists) and no additional goodwill.  The operations of each entity are included inthe operations of the Company as of their respective acquisition dates.

 

Finite-lived intangible assets, related accumulated amortization andweighted average useful life consisted of the following at September 30,2008 (in thousands, except as noted):

 
| ** **                                      | ** ** | **Weighted**                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**       | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                          |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                             |       | $          | 36,384     |             | $          | (20,997    | )          | $ | 15,387 |   |
| Resort and golf course participation agreements |       | 4                             |       | 13,396     |       | (13,383          | )          | 13         |       |
| Non-compete and deferred consulting agreements  |       | 15                            |       | 18,830     |       | (14,799          | )          | 4,031      |       |
| Deferred financing costs                        |       | 7                             |       | 14,077     |       | (9,287           | )          | 4,790      |       |
|                                            |       |                          |       |       |       |             |       |       |       |
|                                            |       |                          |       | $          | 82,687     |             | $          | (58,466    | )          | $ | 24,221 |   |

 

**(6) LONG-LIVED ASSETS**

 

In 2005, AGHI issued $88.2 million principal amount of its 10-7/8%Senior Notes due 2012 (the “AGHI Notes”) and contributed the net proceeds,approximately $81.0 million, to the Company and in turn, the Company made anequity contribution to Camping World. Camping World then made an equity capital contribution in the sameamount to its wholly-owned subsidiary, CWI, Inc. that created a newwholly-owned subsidiary named CWFR Capital Corp. (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture, and made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World. Since CWFR is an unrestricted subsidiary, its operations are notrestricted by either the AGI Indenture or the AGHI Notes.  CWFR used the proceeds from the equitycapital contribution to acquire the FreedomRoads Preferred Interest.  FreedomRoads is owned 90% by

 

11

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**(6) LONG-LIVED ASSETS (continued)**

 

The Stephen Adams Living Trust, which also indirectly owns 99.1% of theoutstanding capital stock of AGHC and indirectly AGI.

 

Based on the results of the Valuation Report, the Company recorded animpairment charge of $81.0 million in the third quarter of 2008 that wrote downto zero the carrying value of the preferred interest (the “FreedomRoadsPreferred Interest”) held by an indirect subsidiary of Camping World inFreedomRoads Holding Company, LLC (“FreedomRoads”), a holding company whosesubsidiaries sell and service new and used recreational vehicles.  The $81.0 million impairment charge wasrecorded as a result of declining performance of the recreational vehicleindustry driven by overall weakening of the economy and a significant declinein consumer confidence, in addition to limited credit available to consumersinterested in purchasing recreational vehicles.

 

**(7) DEBT**

 

Senior Subordinated Notes

 

In February 2004, AGI issued $200.0 million of 9% SeniorSubordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  On June 8, 2006, AGIamended its Amended and Restated Credit Agreement (“Senior Credit Facility”) topermit AGI to purchase up to $30.0 million of the Senior Subordinated Notesfrom time to time as and when AGI determines. AGI retired $29.9 million of the Senior Subordinated Notes in 2006. On February 27,2007, AGI amended its Senior Credit Facility to permit AGI to repurchase up toan additional $50.0 million of the Senior Subordinated Notes from time to time,as and when AGI determines, through the issuance of additional term loans of upto $50.0 million under the Senior Credit Facility.  On March 8, 2007, AGI purchased $17.7million of the Senior Subordinated Notes. As of September 30, 2008, $152.4 million of the Senior SubordinatedNotes remain outstanding.  Interest ispayable on the remaining Senior Subordinated Notes twice a year on February 15and August 15.  AGI’s present andfuture restricted subsidiaries will guarantee the Senior Subordinated Noteswith unconditional guarantees of payment that will rank junior in right ofpayment to their existing and future senior debt, but will rank equal in rightof payment to their existing and future senior subordinated debt.

 

AGHI Notes

 

On March 24, 2005 in a privateplacement, AGHI issued $88.2 million principal amount of its 10-7/8% seniornotes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005.  The AGHI Notes are unsecured obligations ofAGHI and its subsidiaries have not guaranteed payment of principal or intereston the AGHI Notes.  Interest on the AGHINotes is payable semi-annually on February 15 and August 15commencing August 15, 2005 and the entire $88.2 million principal amountof the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15,2008, AGHI had the option to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except the maturitydate of the additional notes is March 15, 2010.  On August 15, 2005, February 15,2006, August 15, 2006, February 15, 2007, and February 15, 2008the Company issued additional notes in the amount of $3.8 million, $5.0million, $5.3 million, $5.6 million, and $5.9 million, respectively.  AGHI paid the interest on the

 

12

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**(7) DEBT (continued)**

 

notes due August 15, 2007 and 2008 fromproceeds of capital contributions made by AGHC in the amount of $5.9 millionand $6.2 million, respectively.  As of September 30,2008, $111.6 million of AGHI Notes remain outstanding.

 

Senior Credit Facility

 

On June 24, 2003, AGI entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the “AGI Senior Credit Facility”). The Senior Credit Facility provides for a revolving credit facility of$35.0 million and term loans in the aggregate of $140.0 million.  As of September 30, 2008, $8.5 millionwas outstanding under the revolving credit facility and $127.4 million wasoutstanding under the term loans. Reborrowings under the term loans are not permitted.  The interest on borrowings under the AGISenior Credit Facility was at variable rates based on the ratio of total cashflow to outstanding indebtedness (as defined). Interest rates float with prime and the London Interbank Offered Rates,or LIBOR, plus an applicable margin ranging from 1.50% to 2.50% over the statedrates.  As of September 30, 2008,the average interest rates on the term loans and the revolving credit facilitywere 7.27% and 6.18%, respectively, and permitted borrowings under therevolving facility were $29.8 million. AGI also pays a commitment fee of 0.5% per annum on the unused amount ofthe revolving credit facility.  Theaggregate quarterly scheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and theterm loans mature on June 24, 2009. The funds available under the AGI Senior Credit Facility may be utilizedfor borrowings or letters of credit; however, a maximum of $7.5 million may beallocated to such letters of credit.  Asof September 30, 2008, AGI had letters of credit in the aggregate amountof $5.2 million outstanding.  The AGISenior Credit Facility is secured by virtually all of AGI’s assets and a pledgeof AGI’s stock and the stock of AGI’s subsidiaries.  The Company expects to replace or refinancethe AGI Senior Credit Facility in advance of its maturity late in June 2009,and has received a number of proposals from prospective lenders in thisregard.  See the discussion under “Liquidityand Capital Resources” under Item 2 below.

 

**(8) INCOME TAXES**

 

Thefollowing table summarizes the activity related to unrecognized tax benefits(in thousands):

** **
| Balance at December 31, 2007                                                        |   | $      | 14,390 |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| 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 beneifts due to  settlements with taxing authorities |   | — |   |
| Gross decreases in unrecognized tax benefits due to  statute expirations                 |   | — |   |
| Other                                                                                    |   | 52     |   |
| Unrecognized tax benefits at September 30, 2008                                     |   | $      | 14,442 |   |

 

13

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**(8) INCOME TAXES (continued)**

 

The Company accrues interest and penaltiesrelated to unrecognized tax benefits in its income tax provision.  The Company recorded interest and penaltiesof $0.6 million related to unrecognized tax benefits during the first ninemonths of 2008 and the liability for penalties and interest was $2.2million.  This amount was included inother long-term liabilities.  The Companydoes not expect its unrecognized tax benefits to change significantly over thenext twelve months.

 

The Company and its subsidiaries file income taxreturns in the U.S. and various states. With few exceptions, the Company is no longer subject to U.S. federal,state, and local income tax examinations by tax authorities for years before2002.

 

**(9) INTEREST RATE SWAPS AGREEMENTS**

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (2.80% at September 30, 2008 based uponthe July 31, 2008 reset date) and make periodic payments at a fixed rateof 5.135% percent, with settlement and rate reset dates every January 31, April 30,July 31, and October 31.  AGIentered into the interest rate swap to limit the effect of increases on ourfloating rate debt.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.

 

On March 19,2008, AGI entered into a 4.5 year interest rate swap agreement effective April 30,2008, with a notional amount of $35.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (2.80% at September 30,2008 based upon the July 31, 2008 reset date) and make periodic paymentsat a fixed rate of 3.43% percent, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap was effectivebeginning April 30, 2008 and expires on October 31, 2012.

 

Due to thepotential sale of Camping World, a highly effective hedge on the $35.0 millionoutstanding debt by the $35.0 million notional amount interest rate swapagreement is deemed to be no longer probable and is now deemed to be reasonablypossible.  As a result, changes in thevalue of the $35.0 million interest rate swap agreement will be included inearnings prospectively beginning October 1, 2008.  Changes in value from September 26, 2008to September 30, 2008 were immaterial. A highly-effective hedge on the $100.0 million outstanding debt by the$100.0 notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31, 2012.

 

The fair value ofthese swaps is included in other accrued liabilities and accumulated othercomprehensive loss and totaled $4.6 million and $4.7 million as of September 30,2008 and December 31, 2007, respectively.

 

14

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**(10) FAIR VALUE MEASUREMENTS**

 

The Company has adopted the provisions of SFAS 157 as of January 1,2008, for financial instruments. Although the adoption of SFAS 157 did not materially impact itsfinancial condition, results of operations, or cash flow, the Company is nowrequired to provide additional disclosures as part of its financial statements.

 

SFAS 157 establishes a three-tier fair value hierarchy, whichprioritizes 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.

 

As of September 30, 2008, AGI holds interest rate swap contractsthat are required to be measured at fair value on a recurring basis.  AGI’s interest rate swap contracts are nottraded on a public exchange.  See Note 9for further information on the interest rate swap contracts.  The fair value of these interest rate swapcontracts are determined based on inputs that are readily available in publicmarkets or can be derived from information available in publicly quotedmarkets.  Therefore, the Company hascategorized these swap contracts as Level 2. The Company’s liability at September 30, 2008, measured at fairvalue on a recurring basis subject to the disclosure requirements of SFAS 157,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**              | ** ** | **9/30/2008** | ** ** | **(Level  1)**                                                                    | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
|                         |       |          |       |                                                                              |       |   |   |   |   |
| Interest Rate Swap Contracts |       | $             | (4,647     | )                                                                                 | $          | — |   | $ | (4,647 | ) | $ | — |   |
|                              |            |               |            |                                                                                   |            |  |  |  |  |  |  |  |  |

 

**(11) RECENT EVENTS**

 

On September 26, 2008, the Company signed a non-binding outline ofterms with an institutional lender for a credit facility that would refinanceindebtedness outstanding under the Company’s senior secured credit facility atan interest rate substantially higher than the rate payable under the existingsenior secured credit facility and, *inter alia,*wouldrequire the sale by the Company of its Camping World subsidiary at its fairmarket value, which is currently estimated to be approximately $67.0million.  Execution of a definitive loanagreement is subject to numerous conditions, including completion of a duediligence investigation and completion of loan documentation and the executionof such definitive agreement is uncertain at this time. However, if the CampingWorld subsidiary were to be sold as contemplated by the non-binding outline ofterms, it is expected that the purchaser of Camping World, Inc. and itssubsidiaries would be an affiliate of the Company and the sale would be subjectto various conditions, including the purchaser’s ability to obtain financingfor the transaction.  In 

 

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**(11) RECENT EVENTS (continued)**

 

anticipation of such refinancing and sale, theCompany declared a dividend in the amount of $26.5 million to Affinity GroupHolding, Inc., the sole shareholder of the Company, and Affinity GroupHolding, Inc. declared a dividend in the amount of $24.4 million to AGIIntermediate Holdco, LLC, the sole shareholder of Affinity Group Holding, Inc,each such dividend being payable by assignment and delivery of a portion of theintercompany obligation of Camping World to the Company.  Though declared, such dividends have not beenpaid and the assigned intercompany obligation is not expected to be dischargeduntil consummation of the sale of Camping World.  The balance of the intercompany obligation ofCamping World to the Company has been contributed by the Company to the capitalof Camping World.

 

The financial statements for Camping World are different from thesegment reporting in Footnote 3 because the Camping World President’s Club andother related ancillary products are included as part of the MembershipServices segment in the segment reporting. In addition, as discussed below, interest expense is limited to debt requiredto be repaid upon consummation of this transaction.

 

The following unaudited pro forma condensed consolidated balance sheetas of September 30, 2008 and December 31, 2007 and the statement ofoperations for the nine months ended September 30, 2008 and 2007 reflectthe reclassification adjustments associated with the proposed disposal/sale ofCamping World to an affiliate of the Company The pro forma adjustments related to the disposal are presented sincethe disposition did not meet the discontinued operations reporting requirementspursuant to SFAS Statement No. 144, “Accounting for the Impairment orDisposal of Long-Lived Assets,” (SFAS 144) as of September 30, 2008, butwill meet such requirements when the transaction is completed.  Since the transaction is a sale to an entityunder common ownership with AGI such long-lived assets are considered disposedof when they are exchanged or distributed in accordance with SFAS 144.  The pro forma adjustments reflect thereclassification of assets and liabilities associated with Camping World tocurrent assets and liabilities to be disposed of in accordance with SFAS 144 asif the reporting requirements had been met at September 30, 2008.  In addition, the historical operating resultshave also been reclassified to reflect discontinued operations.

 

Corporate Expenses - The allocation to Camping World of expenses forcertain Affinity Group, Inc. corporate functions historically provided toCamping World are done in accordance with Staff Accounting Bulletin No. 55,“Allocation of Expenses and Related Disclosures in Subsidiaries’ FinancialStatements”, (“SAB 55”).  Suchallocations were made on a specific identification basis to the extent possibleand otherwise based on relative percentages, as compared to the Company’s otherbusinesses, of headcount or other appropriate methods depending on the natureof each item of cost to be allocated.

 

Interest Expense - The interest expense included in discontinuedoperations below reflects the interest allocated to Camping World based upondebt required to be repaid upon consummation of this transaction using proceedsfrom the transaction.

 

16

----

 

**(11) RECENT EVENTS (continued)**

 

The unaudited proforma balance sheet of AGHI excluding Camping World as of September 30,2008 is as follows (in thousands except shares and par value):

 
| ** **                                                                                | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **         | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                |       |           |       |                         |       |               |       |
| CURRENT ASSETS:                                                                           |       |           |       |                         |       |               |       |
| Cash and cash equivalents                                                                 |       | $              | 16,161     |                         | $          | (1,043             | )          | $ | 15,118 |   |
| Accounts receivable, net                                                                  |       | 34,912         |       | (14,300                      | )          | 20,612             |       |
| Inventories                                                                               |       | 63,319         |       | (62,486                      | )          | 833                |       |
| Prepaid expenses and other assets                                                         |       | 19,956         |       | (2,195                       | )          | 17,761             |       |
| Deferred tax assets, net                                                                  |       | 4,095          |       | (4,095                       | )          | —             |       |
| Assets of discontinued operations                                                         |       | —         |       | 106,090                      |       | 106,090            |       |
| Total current assets                                                                      |       | 138,443        |       | 21,971                       |       | 160,414            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| PROPERTY AND EQUIPMENT, net                                                               |       | 44,649         |       | (34,645                      | )          | 10,004             |       |
| NOTE FROM AFFILIATE                                                                       |       | 4,619          |       | 16,750                       |       | 21,369             |       |
| INTANGIBLE ASSETS, net                                                                    |       | 24,221         |       | (3,651                       | )          | 20,570             |       |
| GOODWILL                                                                                  |       | 96,828         |       | —                       |       | 96,828             |       |
| OTHER ASSETS                                                                              |       | 1,803          |       | (425                         | )          | 1,378              |       |
| Total assets                                                                              |       | $              | 310,563    |                         | $          | —             |       | $ | 310,563 |   |
|                                                                                      |       |           |       |                         |       |               |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                            |       |           |       |                         |       |               |       |
| CURRENT LIABILITIES:                                                                      |       |           |       |                         |       |               |       |
| Accounts payable                                                                          |       | $              | 29,177     |                         | $          | (27,485            | )          | $ | 1,692 |   |
| Accrued interest                                                                          |       | 5,071          |       | —                       |       | 5,071              |       |
| Accrued income taxes                                                                      |       | 1,292          |       | 216                          |       | 1,508              |       |
| Accrued liabilities                                                                       |       | 32,373         |       | (16,582                      | )          | 15,791             |       |
| Deferred revenues and gains                                                               |       | 72,601         |       | (7,748                       | )          | 64,853             |       |
| Current portion of long-term debt                                                         |       | 139,170        |       | (50,250                      | )          | 88,920             |       |
| Liabilities of discontinued operations                                                    |       | —         |       | 127,066                      |       | 127,066            |       |
| Total current liabilities                                                                 |       | 279,684        |       | 25,217                       |       | 304,901            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| DEFERRED REVENUES AND GAINS                                                               |       | 36,852         |       | (8,794                       | )          | 28,058             |       |
| LONG-TERM DEBT, net of current portion                                                    |       | 265,505        |       | —                       |       | 265,505            |       |
| DEFERRED TAX LIABILITY                                                                    |       | 2,875          |       | (2,875                       | )          | —             |       |
| OTHER LONG-TERM LIABILITIES                                                               |       | 21,656         |       | (13,548                      | )          | 8,108              |       |
|                                                                                      |       | 606,572        |       | —                       |       | 606,572            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| COMMITMENTS AND CONTINGENCIES                                                             |       |           |       |                         |       |               |       |
|                                                                                      |       |           |       |                         |       |               |       |
| STOCKHOLDER’S DEFICIT :                                                              |       |           |       |                         |       |               |       |
| Common stock, $.01 par value, 3,000 shares authorized,  100 shares issued and outstanding |       | 1              |       | —                       |       | 1                  |       |
| Additional paid-in capital                                                                |       | 12,041         |       |                         |       | 12,041             |       |
| Accumulated deficit                                                                       |       | (303,404       | )          | —                       |       | (303,404           | )          |
| Accumulated other comprehensive income                                                    |       | (4,647         | )          |                         |       | (4,647             | )          |
| Total stockholder’s deficit                                                          |       | (296,009       | )          | —                       |       | (296,009           | )          |
| Total liabilities and stockholder’s deficit                                          |       | $              | 310,563    |                         | $          | —             |       | $ | 310,563 |   |

 

17

----

 

**(11)RECENT EVENTS (continued)**

 

The unaudited proforma balance sheet of AGHI excluding Camping World as of December 31,2007 is as follows (in thousands except shares and par value):

 
| ** **                                                                                | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **         | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                |       |           |       |                         |       |               |       |
| CURRENT ASSETS:                                                                           |       |           |       |                         |       |               |       |
| Cash and cash equivalents                                                                 |       | $              | 8,566      |                         | $          | (3,315             | )          | $ | 5,251 |   |
| Accounts receivable, net                                                                  |       | 33,330         |       | (7,150                       | )          | 26,180             |       |
| Inventories                                                                               |       | 64,209         |       | (63,336                      | )          | 873                |       |
| Prepaid expenses and other assets                                                         |       | 14,431         |       | (2,741                       | )          | 11,690             |       |
| Deferred tax assets, net                                                                  |       | 3,922          |       | (3,922                       | )          | —             |       |
| Assets of discontinued operations                                                         |       | —         |       | 249,174                      |       | 249,174            |       |
| Total current assets                                                                      |       | 124,458        |       | 168,710                      |       | 293,168            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| PROPERTY AND EQUIPMENT, net                                                               |       | 44,307         |       | (35,232                      | )          | 9,075              |       |
| INVESTMENT IN AFFILIATE                                                                   |       | 81,005         |       | (81,005                      | )          | —             |       |
| NOTE FROM AFFILIATE                                                                       |       | 4,650          |       | —                       |       | 4,650              |       |
| INTANGIBLE ASSETS, net                                                                    |       | 25,836         |       | (4,484                       | )          | 21,352             |       |
| GOODWILL                                                                                  |       | 144,429        |       | (47,601                      | )          | 96,828             |       |
| OTHER ASSETS                                                                              |       | 1,979          |       | (388                         | )          | 1,591              |       |
| Total assets                                                                              |       | $              | 426,664    |                         | $          | —             |       | $ | 426,664 |   |
|                                                                                      |       |           |       |                         |       |               |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                            |       |           |       |                         |       |               |       |
| CURRENT LIABILITIES:                                                                      |       |           |       |                         |       |               |       |
| Accounts payable                                                                          |       | $              | 27,171     |                         | $          | (23,072            | )          | $ | 4,099 |   |
| Accrued interest                                                                          |       | 6,700          |       | —                       |       | 6,700              |       |
| Accrued income taxes                                                                      |       | 1,189          |       | 206                          |       | 1,395              |       |
| Accrued liabilities                                                                       |       | 36,123         |       | (14,866                      | )          | 21,257             |       |
| Deferred revenues and gains                                                               |       | 65,855         |       | (7,677                       | )          | 58,178             |       |
| Current portion of long-term debt                                                         |       | 4,406          |       | —                       |       | 4,406              |       |
| Liabilities of discontinued operations                                                    |       | —         |       | 69,984                       |       | 69,984             |       |
| Total current liabilities                                                                 |       | 141,444        |       | 24,575                       |       | 166,019            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| DEFERRED REVENUES AND GAINS                                                               |       | 38,535         |       | (8,952                       | )          | 29,583             |       |
| LONG-TERM DEBT, net of current portion                                                    |       | 392,553        |       | —                       |       | 392,553            |       |
| DEFERRED TAX LIABILITY                                                                    |       | 2,702          |       | (2,702                       | )          | —             |       |
| OTHER LONG-TERM LIABILITIES                                                               |       | 22,704         |       | (12,921                      | )          | 9,783              |       |
|                                                                                      |       | 597,938        |       | —                       |       | 597,938            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| 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                                                                |       | 5,861          |       | —                       |       | 5,861              |       |
| Accumulated deficit                                                                       |       | (172,431       | )          | —                       |       | (172,431           | )          |
| Accumulated other comprehensive income                                                    |       | (4,705         | )          |                         |       | (4,705             | )          |
| Total stockholder’s deficit                                                          |       | (171,274       | )          | —                       |       | (171,274           | )          |
| Total liabilities and stockholder’s deficit                                          |       | $              | 426,664    |                         | $          | —             |       | $ | 426,664 |   |

 

18

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**(11) RECENT EVENTS (continued)**

 

Unaudited pro forma information relating to the operations of AGHIexcluding Camping World for the nine months ended September 30, 2008 is asfollows (in thousands):

 
| ** **                                                                       | ** ** | **2008**       | ** ** | **Reclassification of** | ** ** | **2008**           | ** ** |
|----------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                       | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                             |       |           |       |                         |       |               |       |
| REVENUES:                                                                        |       |           |       |                         |       |               |       |
| Membership services                                                              |       | $              | 115,452    |                         | $          | (15,031            | )          | $ | 100,421 |   |
| Media                                                                            |       | 54,227         |       | —                       |       | 54,227             |       |
| Retail                                                                           |       | 236,372        |       | (236,372                     | )          | —             |       |
|                                                                             |       | 406,051        |       | (251,403                     | )          | 154,648            |       |
|                                                                             |       |           |       |                         |       |               |       |
| COSTS APPLICABLE TO REVENUES:                                                    |       |           |       |                         |       |               |       |
| Membership services                                                              |       | 72,810         |       | (3,573                       | )          | 69,237             |       |
| Media                                                                            |       | 39,208         |       | —                       |       | 39,208             |       |
| Retail                                                                           |       | 139,077        |       | (139,077                     | )          | —             |       |
|                                                                             |       | 251,095        |       | (142,650                     | )          | 108,445            |       |
|                                                                             |       |           |       |                         |       |               |       |
| GROSS PROFIT                                                                     |       | 154,956        |       | (108,753                     | )          | 46,203             |       |
|                                                                             |       |           |       |                         |       |               |       |
| OPERATING EXPENSES:                                                              |       |           |       |                         |       |               |       |
| Selling, general and administrative                                              |       | 112,591        |       | (97,922                      | )          | 14,669             |       |
| Impairment of goodwill                                                           |       | 47,601         |       | (47,601                      | )          | —             |       |
| Impairment of long-lived assets                                                  |       | 81,005         |       | (81,005                      | )          | —             |       |
| Depreciation and amortization                                                    |       | 15,454         |       | (6,509                       | )          | 8,945              |       |
|                                                                             |       | 256,651        |       | (233,037                     | )          | 23,614             |       |
|                                                                             |       |           |       |                         |       |               |       |
| (LOSS) INCOME FROM OPERATIONS                                                    |       | (101,695       | )          | 124,284                      |       | 22,589             |       |
|                                                                             |       |           |       |                         |       |               |       |
| NON-OPERATING ITEMS:                                                             |       |           |       |                         |       |               |       |
| Interest income                                                                  |       | 444            |       | (25                          | )          | 419                |       |
| Interest expense                                                                 |       | (27,717        | )          | 2,754                        |       | (24,963            | )          |
| Other non-operating items                                                        |       | (164           | )          | 246                          |       | 82                 |       |
|                                                                             |       | (27,437        | )          | 2,975                        |       | (24,462            | )          |
|                                                                             |       |           |       |                         |       |               |       |
| LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES  AND DISCONTINUED OPERATIONS |       | (129,132       | )          | 127,259                      |       | (1,873             | )          |
|                                                                             |       |           |       |                         |       |               |       |
| INCOME TAX BENEFIT (EXPENSE)                                                     |       | (841           | )          | 615                          |       | (226               | )          |
|                                                                             |       |           |       |                         |       |               |       |
| LOSS FROM CONTINUING OPERATIONS                                                  |       | (129,973       | )          | 127,874                      |       | (2,099             | )          |
|                                                                             |       |           |       |                         |       |               |       |
| DISCONTINUED OPERATIONS                                                          |       |           |       |                         |       |               |       |
| Loss from operations of discontinued Camping World, Inc.                    |       | —         |       | (127,259                     | )          | (127,259           | )          |
| Income tax benefit                                                               |       | —         |       | (615                         | )          | (615               | )          |
| Loss on discontinued operations                                                  |       | —         |       | (127,874                     | )          | (127,874           | )          |
|                                                                             |       |           |       |                         |       |               |       |
| NET LOSS                                                                         |       | $              | (129,973   | )                            | $          | —             |       | $ | (129,973 | ) |

 

19

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**(11) RECENT EVENTS (continued)**

 

Unaudited proforma information relating the operations of AGHI excluding Camping World forthe nine months ended September 30, 2007 is as follows (in thousands):

 
| ** **                                                                               | ** ** | **2007**       | ** ** | **Reclassification of** | ** ** | **2007**           | ** ** |
|------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                               | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                                     |       |           |       |                         |       |               |       |
| REVENUES:                                                                                |       |           |       |                         |       |               |       |
| Membership services                                                                      |       | $              | 111,528    |                         | $          | (13,684            | )          | $ | 97,844 |   |
| Media                                                                                    |       | 57,082         |       | —                       |       | 57,082             |       |
| Retail                                                                                   |       | 259,489        |       | (259,489                     | )          | —             |       |
|                                                                                     |       | 428,099        |       | (273,173                     | )          | 154,926            |       |
|                                                                                     |       |           |       |                         |       |               |       |
| COSTS APPLICABLE TO REVENUES:                                                            |       |           |       |                         |       |               |       |
| Membership services                                                                      |       | 72,205         |       | (3,152                       | )          | 69,053             |       |
| Media                                                                                    |       | 38,907         |       | —                       |       | 38,907             |       |
| Retail                                                                                   |       | 157,721        |       | (157,721                     | )          | —             |       |
|                                                                                     |       | 268,833        |       | (160,873                     | )          | 107,960            |       |
|                                                                                     |       |           |       |                         |       |               |       |
| GROSS PROFIT                                                                             |       | 159,266        |       | (112,300                     | )          | 46,966             |       |
|                                                                                     |       |           |       |                         |       |               |       |
| OPERATING EXPENSES:                                                                      |       |           |       |                         |       |               |       |
| Selling, general and administrative                                                      |       | 112,138        |       | (95,202                      | )          | 16,936             |       |
| Depreciation and amortization                                                            |       | 14,564         |       | (5,770                       | )          | 8,794              |       |
|                                                                                     |       | 126,702        |       | (100,972                     | )          | 25,730             |       |
|                                                                                     |       |           |       |                         |       |               |       |
| INCOME FROM OPERATIONS                                                                   |       | 32,564         |       | (11,328                      | )          | 21,236             |       |
|                                                                                     |       |           |       |                         |       |               |       |
| NON-OPERATING ITEMS:                                                                     |       |           |       |                         |       |               |       |
| Interest income                                                                          |       | 518            |       | (77                          | )          | 441                |       |
| Interest expense                                                                         |       | (27,750        | )          | 3,000                        |       | (24,750            | )          |
| Debt extinguishment expense                                                              |       | (775           | )          | —                       |       | (775               | )          |
| Other non-operating items                                                                |       | 42             |       | 78                           |       | 120                |       |
|                                                                                     |       | (27,965        | )          | 3,001                        |       | (24,964            | )          |
|                                                                                     |       |           |       |                         |       |               |       |
| INCOME(LOSS) FROM CONTINUING OPERATIONS BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS |       | 4,599          |       | (8,327                       | )          | (3,728             | )          |
|                                                                                     |       |           |       |                         |       |               |       |
| INCOME TAX EXPENSE                                                                       |       | (4,581         | )          | (4,315                       | )          | (8,896             | )          |
|                                                                                     |       |           |       |                         |       |               |       |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                                                 |       | 18             |       | (12,642                      | )          | (12,624            | )          |
|                                                                                     |       |           |       |                         |       |               |       |
| DISCONTINUED OPERATIONS                                                                  |       |           |       |                         |       |               |       |
| Income from operations of discontinued Camping World, Inc.                          |       | —         |       | 8,327                        |       | 8,327              |       |
| Income tax expense                                                                       |       | —         |       | 4,315                        |       | 4,315              |       |
| Income on discontinued operations                                                        |       | —         |       | 12,642                       |       | 12,642             |       |
|                                                                                     |       |           |       |                         |       |               |       |
| NET INCOME                                                                               |       | $              | 18         |                         | $          | —             |       | $ | 18 |   |

 

20

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**ITEM 2:**

 

AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITIONAND 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** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                    | ** ** | **9/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                              |       |                             |       |   |   |   |   |
| REVENUES:                                         |       |                             |       |   |   |   |   |
| Membership services                               |       | 27.5                             | %          | 26.9 | % | (7.0 | )% |
| Media                                             |       | 9.4                              | %          | 10.2 | % | (15.6 | )% |
| Retail                                            |       | 63.1                             | %          | 62.9 | % | (8.7 | )% |
|                                              |       | 100.0                            | %          | 100.0 | % | (8.9 | )% |
|                                              |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                             |       |   |   |   |   |
| Membership services                               |       | 17.4                             | %          | 17.9 | % | (11.8 | )% |
| Media                                             |       | 8.0                              | %          | 7.4 | % | (2.4 | )% |
| Retail                                            |       | 37.3                             | %          | 38.2 | % | (10.6 | )% |
|                                              |       | 62.7                             | %          | 63.5 | % | (10.0 | )% |
|                                              |       |                             |       |   |   |   |   |
| GROSS PROFIT                                      |       | 37.3                             | %          | 36.5 | % | (7.1 | )% |
|                                              |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                               |       |                             |       |   |   |   |   |
| Selling, general and administrative               |       | 26.8                             | %          | 26.4 | % | (7.1 | )% |
| Goodwill impairment                               |       | 35.7                             | %          | — |   | n/a |   |
| Impairment of investment in affiliate             |       | 60.8                             | %          | — |   | n/a |   |
| Depreciation and amortization                     |       | 3.9                              | %          | 3.2 | % | 7.1 | % |
|                                              |       | 127.2                            | %          | 29.6 | % | 290.5 | % |
|                                              |       |                             |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (89.9                            | )%         | 6.9 | % | n/a |   |
|                                              |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                              |       |                             |       |   |   |   |   |
| Interest income                                   |       | 0.1                              | %          | 0.1 | % | 0.6 | % |
| Interest expense                                  |       | (7.0                             | )%         | (6.3 | )% | 0.3 | % |
| Other non-operating items, net                    |       | (0.1                             | )%         | — |   | 176.5 | % |
|                                              |       | (7.0                             | )%         | (6.2 | )% | 1.3 | % |
|                                              |       |                             |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (96.9                            | )%         | 0.6 | % | n/a |   |
|                                              |       |                             |       |   |   |   |   |
| INCOME TAX EXPENSE                                |       | (0.2                             | )%         | (3.2 | )% | (94.3 | )% |
|                                              |       |                             |       |   |   |   |   |
| NET LOSS                                          |       | (97.1                            | )%         | (2.6 | )% | n/a |   |

 

21

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AFFINITYGROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITIONAND 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** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                   | ** ** | **9/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                              |       |                            |       |   |   |   |   |
| REVENUES:                                         |       |                            |       |   |   |   |   |
| Membership services                               |       | 28.3                            | %          | 26.1 | % | 2.9 | % |
| Media                                             |       | 13.4                            | %          | 13.3 | % | (5.0 | )% |
| Retail                                            |       | 58.3                            | %          | 60.6 | % | (8.6 | )% |
|                                              |       | 100.0                           | %          | 100.0 | % | (5.2 | )% |
|                                              |       |                            |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                            |       |   |   |   |   |
| Membership services                               |       | 17.9                            | %          | 16.9 | % | 0.8 | % |
| Media                                             |       | 9.7                             | %          | 9.1 | % | 0.8 | % |
| Retail                                            |       | 34.2                            | %          | 36.8 | % | (11.8 | )% |
|                                              |       | 61.8                            | %          | 62.8 | % | (6.6 | )% |
|                                              |       |                            |       |   |   |   |   |
| GROSS PROFIT                                      |       | 38.2                            | %          | 37.2 | % | (2.7 | )% |
|                                              |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                               |       |                            |       |   |   |   |   |
| Selling, general and administrative               |       | 27.8                            | %          | 26.2 | % | 0.4 | % |
| Goodwill impairment                               |       | 11.7                            | %          | — |   | n/a |   |
| Impairment of investment in affiliate             |       | 19.9                            | %          | — |   | n/a |   |
| Depreciation and amortization                     |       | 3.8                             | %          | 3.4 | % | 6.1 | % |
|                                              |       | 63.2                            | %          | 29.6 | % | 102.6 | % |
|                                              |       |                            |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (25.0                           | )%         | 7.6 | % | (412.3 | )% |
|                                              |       |                            |       |   |   |   |   |
| NON-OPERATING ITEMS:                              |       |                            |       |   |   |   |   |
| Interest income                                   |       | 0.1                             | %          | 0.1 | % | (14.3 | )% |
| Interest expense                                  |       | (6.9                            | )%         | (6.4 | )% | (0.1 | )% |
| Debt extinguishment expense                       |       | —                          |       | (0.2 | )% | (100.0 | )% |
| Other non-operating items, net                    |       | —                          |       | — |   | (490.5 | )% |
|                                              |       | (6.8                            | )%         | (6.5 | )% | (1.9 | )% |
|                                              |       |                            |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (31.8                           | )%         | 1.1 | % | n/a |   |
|                                              |       |                            |       |   |   |   |   |
| INCOME TAX EXPENSE                                |       | (0.2                            | )%         | (1.1 | )% | (81.6 | )% |
|                                              |       |                            |       |   |   |   |   |
| NET (LOSS) INCOME                                 |       | (32.0                           | )%         | — |   | n/a |   |

 

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended September 30, 2008**

**ComparedWith Three Months Ended September 30, 2007**

 

*Revenues*

 

Revenuesof $133.3 million for the third quarter of 2008 decreased by $13.1 million, or8.9%, from the comparable period in 2007.

 

Membershipservices revenues of $36.6 million for the third quarter of 2008 decreased $2.8million, or 7.0%, from the comparable period in 2007.  This revenue decrease was largelyattributable to a decrease in member events revenue of $2.5 million due totiming of the Good Sam Club annual rally, which occurred in the second quarterof 2008 versus the third quarter of 2007, a $1.3 million reduction in revenuefor the Good Sam Club, Coast Club and Golf Club resulting from reducedmembership file size, and reduced advertising revenue in member publications,and a $0.5 million decrease in marketing fee income for vehicle insuranceproducts.  These decreases were partiallyoffset by increased extended vehicle warranty program revenue resulting from$0.8 million of income from underwriting profit sharing, and $0.7 million fromthe continued growth of contracts in force.

 

Mediarevenues of $12.5 million for the third quarter of 2008 decreased $2.3 million,or 15.6%, from the comparable period in 2007. This decrease was primarily attributable to $0.9 million of reducedadvertising revenue in the RV-related magazine group, $0.7 million of reducedadvertising revenue in the outdoor power sports magazine group, $0.5 million ofreduced revenue from the campground guides and annual directories, and $0.2million of reduced consumer show revenue.

 

Retail revenues ofapproximately $84.2 million decreased by approximately $8.0 million, or 8.7%,from the comparable period in 2007. Store merchandise sales decreased $7.0 million from the third quarter of2007 due to a same store sales decrease of $8.5 million, or 14.3%, compared toa 6.1% decrease in same store sales for the third quarter of 2007, partiallyoffset by a $1.5 million revenue increase from the opening of 23 new storesover the past twenty-one months.  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.  Further, mail order salesdecreased $2.2 million, and supplies and other sales increased $1.2 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $83.6 million for the third quarter of 2008, adecrease of $9.3 million, or 9.5%, from the comparable period in 2007.

 

Membershipservices costs and expenses of approximately $23.1 million decreased $3.1million, or 11.8%, from the comparable period in 2007.  This decrease consisted of $2.3 million ofreduced expense associated with timing of the Good Sam Club annual rally, $0.9million of reduced marketing costs related to the Good Sam Club, Coast to CoastClub and Golf Card Club, and a $0.2 million reduction in marketing costsrelated to vehicle insurance 

 

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products.  These decreases in membership services costswere partially offset by $0.3 million of incremental costs associated withincreased extended vehicle warranty program revenue.

 

Mediacosts and expenses of $10.6 million for the third quarter of 2008 decreased$0.3 million, or 2.4%, from the comparable period in 2007 primarily related todecreased circulation and production costs of RV-related magazines and outdoorpowersports magazines.

 

Retailcosts applicable to revenues decreased $5.9 million, or 10.6%, to $49.9 millionprimarily as a result of the decrease in retail revenue.  The retail gross profit margin of 40.2% forthe third quarter of 2008 increased from 39.5% for the comparable period in2007 primarily due to general price increases.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $35.9 million for thethird quarter of 2008 decreased $2.8 million compared to the third quarter of2007.  This decrease was due to a $1.6million decrease in retail general and administrative expenses consisting ofdecreases in labor, selling and other general and administrative expenses partiallyoffset by increased facilities rent due to new store openings.  In addition, professional fees were reduced$0.5 million, deferred executive compensation was reduced $0.5 million, andother general and administrative expenses were reduced $0.2 million.

 

The $47.6 millionnon-cash goodwill impairment charge was based on the Valuation Report preparedin anticipation of the potential sale of Camping World that determined that thecarrying value of the goodwill associated with Camping World exceeded its estimatedfair value.  The $81.0 million non-cashlong-lived asset impairment charge was also based on the Valuation Reportprepared in anticipation of the potential sale of Camping World that determinedthe carrying value of the preferred interest in FreedomRoads Holding Company,LLC, held by an indirect subsidiary of Camping World, exceeded its estimatedfair value.

 

Depreciationand amortization expense of approximately $5.1 million increased approximately$0.4 million from the prior year primarily due to increased depreciation fromthe retail store openings and increased amortization of intangible assetsassociated with the 2008 purchase of consumer events.

 

*(Loss)Income from Operations*

 

Lossfrom operations for the third quarter of 2008 totaling $119.9 million increased$130.0 million compared to the third quarter of 2007.  This decrease in income from operations wasprimarily due to the valuation impairments to goodwill and our investment inaffiliate totaling $128.6 million and reduced gross profit for retail and mediaoperations of $2.8 million and $2.1 million, respectively, partially offset byreduced operating expenses of $2.4 million and increased gross profit for themembership services operations of $1.1 million.

 

*Non-OperatingItems*

 

Non-operatingitems of $9.3 million for the third quarter of 2008 increased $0.1 millioncompared to the third quarter of 2007 due to a loss on sale of retail assets.

 

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*(Loss)Income before Income Taxes*

 

Lossbefore income taxes for the third quarter of 2008 was $129.2 million, or $130.1million lower than the third quarter of 2007. This decrease was attributable to the $130.0 million decrease in incomefrom operations and $0.1 million of non-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.3 million for the thirdquarter of 2008, compared to $4.8 million for the third quarter of 2007.

 

# *Net Loss*

 

Netloss in the third quarter of 2008 was $129.5 million compared to net loss of$3.8 million for the same period in 2007 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

Segment loss of$119.8 million for the third quarter of 2008 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)increased $133.2 million from the comparable period in 2007.

 

Membershipservices segment profit of $10.9 million for the third quarter of 2008decreased $1.1 million, or 9.3%, from the comparable period in 2007.  This decrease was largely attributable to a$1.5 million decrease in profit from emergency road service products primarilydue to reduced intercompany interest income resulting from a lower averageinterest rate, a $0.5 million increase in marketing and online servicesexpenses, a $0.4 million decrease in profit recognized on vehicle insuranceproducts, and a $0.3 million decrease in profit due to the timing of the GoodSam Club annual rally.  These decreases werepartially offset by a $1.3 million increase in profit from the extended vehiclewarranty programs, and a $0.3 million increase in segment profit from CoastClub and Golf Club, associated with reduced marketing expenses.

 

Media segment lossof approximately $1.2 million for the third quarter of 2008 increased $2.4million, or 184.7%, from the comparable period in 2007.  This increased loss was largely attributed toa $0.8 million decrease in profit in the RV-related publications related toreduced advertising revenue, a $0.6 million decrease in segment profit from ourconsumer shows group primarily related to amortization from the consumer showsacquired in 2008, a $0.5 million decrease in segment profit related to ouroutdoor powersports magazine group, primarily driven by reduced advertisingrevenue, a $0.4 million decrease in profit for the campground guides and annualdirectories, and $0.1 million of increased marketing expense for new products*.*

 

Retail segmentloss increased $129.7 million from the third quarter of 2007 to a loss of$129.5 million for the third quarter of 2008. This increase insegment loss resulted primarily from the Camping World goodwill impairment andthe FreedomRoads Preferred Interest impairment totaling $128.6 million, a $2.3million decrease in gross profit margin, a $0.2 million increase in 

 

25

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depreciation expense, a $0.1 million increase in loss on sale ofequipment, and a $0.1 million increase in interest expense, partiallyoffset by a $1.6 milliondecrease in selling, general and administrative expenses.

 

**NineMonths Ended September 30, 2008**

**ComparedWith Nine Months Ended September 30, 2007**

 

*Revenues*

 

Revenuesof $406.1 million for the first nine months of 2008 decreased by $22.0 million,or 5.2%, from the comparable period in 2007.

 

Membershipservices revenues of $114.7 million for the first nine months of 2008 increasedby approximately $3.2 million, or 2.9%, from the comparable period in2007.  This revenue increase was largelyattributable to a $3.9 million increase in extended vehicle warranty programrevenue due to the continued growth of contracts in force and underwritingprofit sharing, a $1.5 million increase in marketing fee revenue from healthand life insurance products, a $0.7 million revenue increase in emergency roadservice programs due to increased average enrollment.  These increases were partially offset by amembership services revenue reduction of $1.2 million due to enrollmentdecreases in the Coast to Coast Club and the Golf Card Club, a $1.0 milliondecrease in fee income recognized on vehicle insurance products, and a $0.7million reduction in fee income from other products and services.

 

Mediarevenues of $54.2 million for the first nine months of 2008 decreasedapproximately $2.8 million, or 5.0%, from the comparable period in 2007primarily attributable to a $2.2 million revenue reduction from the outdoorpower sports magazine group primarily associated with reduced advertisingrevenue, a $1.8 million reduction from the RV magazine group primarilyassociated with reduced advertising revenue, a $0.6 million revenue reductionassociated with the annual directories, and a $0.3 million revenue reductionassociated with reduced book sales. These decreases were partially offset by $2.1 million of incrementalrevenue primarily associated with nine RV and boat shows purchased from MACEvents, LLC in January 2008 and three RV and boat shows purchased from MidAmerica Expositions, Inc. in February 2008.

 

Retail revenues ofapproximately $237.1 million decreased $22.4 million, or 8.6%, from thecomparable period in 2007.  Storemerchandise sales decreased approximately $19.7 million over the first ninemonths of 2007 due to a same store sales decrease of $26.1 million, or 15.0%,compared to a 4.2% decrease in same store sales for the first nine months of2007, partially offset by a $6.4 million revenue increase from the opening of23 new stores over the past twenty-one months. Same store sale calculations for a given period include only thosestores that were open both at the end of that period and at the beginning ofthe preceding fiscal year.  Supplies andother sales increased $4.1 million, and mail order sales decreased $6.8million.

 

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*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $251.1 million for the first nine months of2008, a decrease of approximately $17.7 million, or 6.6%, from the comparableperiod in 2007.

 

Membershipservices costs and expenses of $72.8 million increased $0.6 million, or 0.8%,from the comparable period in 2007.  Thisincrease consisted of $1.7 million of additional costs associated withincreased extended vehicle warranty program revenue and emergency road servicerevenue and a $0.7 million increase in program costs associated with increasedmarketing fee revenue from health and life insurance products.  In addition, membership services costsdecreased approximately $1.5 million primarily due to a net reduction in clubmarketing and program costs, and a $0.3 million reduction in costs related toreduced vehicle insurance revenue.

 

Mediacosts and expenses of approximately $39.2 million for the first nine months of2008 increased $0.3 million, or 0.8%, from the comparable period in 2007.  This increase was attributable to $1.3million of additional costs related primarily to the consumer shows purchasedin 2008, partially offset by $1.0 million of reduced costs for the outdoorpower sports publications and the RV-related publications primarily associatedwith reduced book sizes and lower circulation.

 

Retailcosts applicable to revenues decreased $18.6 million, or 11.8%, to $139.1million primarily as a result of the decrease in retail revenue.  The retail gross profit margin of 41.3% forthe first nine months of 2008 increased from 39.2% for the comparable period in2007 primarily due to general price increases.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $112.6 million for thefirst nine months of 2008 increased $0.5 million compared to the first ninemonths of 2007.  This increase was due toan increase in retail selling and general and administrative expenses ofapproximately $2.7 million primarily associated with increased facility rentrelating to new store openings, and a $0.5 million increase related to theconsumer show acquisitions.  Theseincreases were partially offset by a $0.9 million reduction in arbitrationexpense recorded in 2007 in connection with our asserted claim to a right offirst refusal in connection with the sale of General Motors AcceptanceCorporation, the insurance provider for the RV vehicle insurance offered by ourMembership Services segment, which claim was rejected by the arbitration panel,a $1.0 million reduction in executive compensation, and a $0.8 millionreduction in professional fees.

 

The $47.6 millionnon-cash goodwill impairment charge was based on the Valuation Report preparedin anticipation of the potential sale of Camping World that determined that thecarrying value of the goodwill associated with Camping World exceeded itsestimated fair value.  The $81.0 millionnon-cash long-lived asset impairment charge was also based on the ValuationReport prepared in anticipation of the potential sale of Camping World thatdetermined the carrying value of the preferred interest in FreedomRoads HoldingCompany, LLC, held by an indirect subsidiary of Camping World, exceeded itsestimated fair value.

 

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Depreciationand amortization expense of $15.5 million increased $0.9 million from the prioryear primarily due to increased depreciation from the retail store openings andincreased amortization of intangible assets associated with the 2008 purchaseof consumer events, partially offset by completed amortization for Coastmembership and customer lists in December, 2007.

 

*(Loss)Income from Operations*

 

Lossfrom operations for the first nine months of 2008 totaling $101.7 milliondecreased $134.3 million compared to the first nine months of 2007.  This decrease in income from operations wasdue to the valuation impairments to goodwill and our investment in affiliatetotaling $128.6 million, reduced gross profit for retail and media operationsof $3.7 million and $3.2 million, respectively, and increased operatingexpenses of $1.4 million, partially offset by increased gross profit for themembership services operations of $2.6 million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $27.4 million for the first nine months of 2008decreased approximately $0.6 million compared to the first nine months of 2007due to $0.8 million of debt extinguishment expense associated with theretirement of Senior Subordinated Notes in 2007, partially offset by a $0.2million loss on sale of retail assets.

 

*(Loss)Income before Income Taxes*

 

Lossbefore income taxes for the first nine months of 2008 was $129.1 million, orapproximately $133.7 million lower than the first nine months of 2007.  This decrease was attributable to the $134.3million decrease in income from operations and $0.6 million of decreasednon-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded an income tax expense of approximately $0.9 million for thefirst nine months of 2008, compared to $4.6 million for the first nine monthsof 2007.

 

# *Net (Loss) Income*

 

Netloss in the first nine months of 2008 was $130.0 million compared to net incomeof $0.0 million for the same period in 2007 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

Segment loss of$98.7 million for the first nine months of 2008 (before unallocateddepreciation and amortization, general and administrative, interest, and incometax expense) increased $143.0 million, or 323.3%, from the comparable period in2007.

 

Membershipservices segment profit of $34.1 million for the first nine months of 2008decreased $1.8 million, or 5.1%, from the comparable period in 2007.  This decrease was largely attributable to a$3.8 million decrease in profit from emergency road service products 

 

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primarily due toreduced intercompany interest income resulting from a lower average interestrate, a $1.1 million increase in marketing expenses and new club development, a$0.9 million decrease in profit from vehicle insurance products, and a $0.4million increase in miscellaneous online development expexses.  These changes reducing membership segmentprofit were partially offset by a $2.7 million increase in profit from theextended vehicle warranty programs, a $1.3 increase in segment profit for CoastClub and Golf Club due to decreased marketing, depreciation and amortizationexpense, and a $1.1 million increase in profit from health and life insuranceproducts.

 

Media segmentprofit of $5.6 million for the first nine months of 2008 decreased $4.5million, or 44.5%, from the comparable period in 2007.  This decrease was largely attributed to a$1.5 million decrease in segment profit related to our outdoor powersportsmagazine group, primarily relating to reduced advertising revenue, a $1.4million decrease in profit in the RV-related publications due to reducedadvertising revenue, a $0.5 million increase in product development andoverhead expense, a $0.5 million decrease in segment profit from annualdirectories, a $0.5 million decrease in segment profit from increasedamortization from our consumer shows group primarily related to the consumershows acquired in 2008, and a $0.1 million increase in depreciation expense.

 

Retail segmentloss increased approximately $136.6 million from the first nine months of 2007to a loss of approximately $138.4 million for the first nine months of2008.  This increase in segment loss resultedprimarily from the Camping World goodwill impairment and the FreedomRoadsPreferred Interest impairment totaling $128.6 million, a $3.6 million decreasein gross profit margin, a $2.7million increase in selling, general and administrative expenses primarilyrelated to the increase in new stores, a $0.8 million increase in depreciationexpense, a $0.7 million increase in interest expense, and a $0.2 million losson sale of equipment.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany has historically operated with a working capital deficit.  The working capital deficit as of September 30,2008 and December 31, 2007 was $141.2 million and $17.0 million,respectively.  The primary reason for theincrease in working capital deficit for 2008 is the classification of thedebt associated with the Amended and Restated Credit Agreement totaling $136.9million as a current liability, since the credit facility matures June 24,2009.  Deferred revenue and gains reported undercurrent liabilities was $72.6 million and $65.9 million as of September 30,2008 and December 31, 2007, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  The Company uses net proceedsfrom this deferred membership revenue to lower its long-term borrowings.  The Company anticipates that it will be ableto refinance or replace the existing credit facility before its maturity on June 24,2009 and, assuming such refinancing, will have sufficient funds from itsoperations together with available borrowing under the replacement creditfacility to meet all of the Company’s debt service, capital requirements andworking capital needs over the next twelve months.

 

Although, on September 26, 2008, the Companysigned a non-binding outline of terms with an institutional lender for a creditfacility that would refinance indebtedness outstanding under the Company’ssenior secured credit facility, execution of a definitive agreement with 

 

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such institutional lender is uncertain. If a definitive agreement were to be reached, the Company expects thenew senior credit facility (i) will permit borrowings significantly belowthe maximum amount of senior indebtedness permitted under the AGI Indenture forthe Senior Subordinated Notes and the indenture under which the AGHI Notes wereissued and (ii) the interest rate payable will be substantially higherthan the rate payable under the existing senior secured credit facility.  If a definitive agreement is reached, fundingwould be subject to several conditions, including the sale by the Company ofits Camping World subsidiary at its fair market value, which is currentlyestimated to be approximately $67.0 million based upon the valuation reportreferred to in Footnotes 5 and 6, completion of a due diligence investigationand completion of loan documentation. The purchaser of Camping World is expected to be an affiliate of theCompany and the sale would be subject to various conditions, including thepurchaser’s ability to obtain financing for the transaction.  In anticipation of such refinancing and sale,the Company declared a dividend in the amount of $26.5 million to AffinityGroup Holding, Inc., the sole shareholder of the Company, and AffinityGroup Holding, Inc. declared a dividend in the amount of $24.4 million toAGI Intermediate Holdco, LLC, the sole shareholder of Affinity Group Holding,Inc, each such dividend being payable by assignment and delivery of a portionof the intercompany obligation of Camping World to the Company.  Though declared, such dividends have not beenpaid and the assigned intercompany obligation is not expected to be dischargeduntil consummation of the sale of Camping World.  The balance of the intercompany obligation ofCamping World to the Company has been contributed by the Company to the capitalof Camping World.

 

*Contractual Obligations andCommercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at September 30, 2008. This table includes principal and future interest due under our debtagreements based on interest rates as of September 30, 2008 and assumesdebt obligations will be held to maturity.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Total**                                 | ** ** | **Balance of  2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  2012** | ** ** | **Thereafter** | ** ** |
|                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |       | $                                         | 515,185    |   | $ | 12,976 |   | $ | 222,411 |   | $ | 279,798 |   | $ | — |   |
| Operating lease obligations        |       | 212,513                                   |       | 5,417 |   | 41,128 |   | 35,815 |   | 130,153 |   |
| Deferred compensation              |       | 1,400                                     |       | 6 |   | 1,394 |   | — |   | — |   |
| Standby letters of credit          |       | 5,217                                     |       | 2,537 |   | 2,680 |   | — |   | — |   |
| Grand total                        |       | $                                         | 734,315    |   | $ | 20,936 |   | $ | 267,613 |   | $ | 315,613 |   | $ | 130,153 |   |

 

On June 24,2003, AGI entered into an Amended and Restated Credit Agreement and a SeniorSecured Floating Rate Note Purchase Agreement (as amended, the “AGI SeniorCredit Facility”).  The AGI Senior CreditFacility provides for a revolving credit facility of $35.0 million and termloans in the aggregate of $140.0 million. As of September 30, 2008, $127.4 million was outstanding under theterm loans and $8.5 million was outstanding under the revolving creditfacility.  Reborrowings under the termloans are not permitted.  The interest onborrowings under the AGI Senior Credit Facility is at variable rates based onthe ratio of total cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 

 

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2.50% over thestated rates.  As of September 30,2008, the average interest rates on the term loans and the revolving creditfacility were 7.27% and 6.18%, respectively, and permitted borrowings under therevolving facility were $29.8 million. AGI also pays a commitment fee of 0.5% per annum on the unused amount ofthe revolving credit facility.  Theaggregate quarterly scheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and theterm loans mature on June 24, 2009. The funds available under the AGI Senior Credit Facility may be utilizedfor borrowings or letters of credit; however, a maximum of $7.5 million may beallocated to such letters of credit.  Asof September 30, 2008, AGI had letters of credit in the aggregate amountof $5.2 million outstanding.  The AGISenior Credit Facility is secured by virtually all of the AGI’s assets and apledge of AGI’s stock and the stock of the AGI’s subsidiaries.

 

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

 

On March 3,2006, AGI amended its Senior Credit Facility to revise the definition ofConsolidated Fixed Charges Ratio and Permitted Tax Distributions.  This amendment allows the Company todistribute taxes to its ultimate parent based on its stand-alone tax obligationrather than the tax obligation of its ultimate parent, AGHI, until such timethat AGHI pays interest on its 10 7/8% Senior Notes in cash instead of by theissuance of additional notes and AGI makes a distribution to AGHI for purposesof paying that cash interest.  For thenine months ended September 30, 2008 and 2007, the Company distributed$1.0 million and $3.7 million, respectively, in the form of dividends to itsultimate parent to fund the Company’s tax obligations.  Further, AGI amended the AGI Senior CreditFacility’s covenant restrictions with affiliates to permit a joint venturearrangement between Camping World and FreedomRoads, an affiliate of theCompany.

 

On February 27,2007, AGI amended its AGI Senior Credit Facility to extend the maturity of therevolving credit facility from June 24, 2008 to June 24, 2009,increase the consolidated senior leverage ratio from 1.9 to 3.5 times EBITDA,as defined, and fix the consolidated total leverage ratio at 5.0 times EBITDA,as defined.  Further, the amendmentpermits AGI to repurchase up to an additional $50.0 million of the SeniorSubordinated Notes from time to time as and when AGI determines through theissuance of additional term loans of up to $50.0 million.  Any loan amounts not used for the repurchaseof the Senior Subordinated Notes may be used for acquisitions or repayrevolving credit loans.

 

On March 8,2007, AGI purchased $17.7 million of the Senior Subordinated Notes.  AGI funded the purchase through the issuanceof the $25.0 million in additional incremental term loans as permitted underthe February 27, 2007 amendment to the AGI Senior Credit Facility.  The balance of the $25.0 million issued wasused to pay down AGI’s revolving credit facility by $6.5 million and to payassociated loan fees and transaction expenses. The terms on the additional incremental loans are consistent with theremaining term loan outstanding under the AGI Senior Credit Facility.  As of September 30, 2008, $152.4 millionof Senior Subordinated Notes remain outstanding.

 

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The AGI Indenture,pursuant to which the AGI Senior Subordinated Notes were issued, and the AGISenior Credit Facility contain certain restrictive covenants relating to, butnot limited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  AGI was in compliance with all debt covenantsat September 30, 2008.

 

On March 24,2005, in a private placement, AGHI issued $88.2 million principal amount of its10-7/8% senior notes due 2012 (the “AGHI Notes”) at a $3.2 million originalissue discount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005. The AGHI Notes are unsecured obligationsof the Company and its subsidiaries have not guaranteed payment of principal orinterest on the AGHI Notes.  Interest onthe AGHI Notes is payable semi-annually on February 15 and August 15commencing August 15, 2005 and the entire $88.2 million principal amountof the AGHI Notes are due in full on February 15, 2012.  For interest payments on and prior to February 15,2008, AGHI had the election to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date is March 15, 2010. AGI has not paid any dividends to AGHI to fund payment of interest onthe AGHI Notes and AGHI made the interest payments due on August 15, 2005,February 15, 2006, August 15, 2006, February 15, 2007, and February 15,2008 through the issuance of additional notes. The Company paid the interest on the AGHI Notes due August 15, 2007of $5.9 million from proceeds of a $5.9 million contribution made by AGHI’sparent, AGHC.  The Company paid theinterest on the AGHI Notes due August 15, 2008 of $6.2 million fromproceeds of a $6.2 million contribution made by AGHC.  If the source of the cash payment of the AGHINotes is dividends from AGI, its wholly-owned subsidiary, there are certainrestrictions on the payment of dividends under the AGI Senior Credit Facilityand the AGI Indenture.

 

The Companycontributed the net proceeds from the issuance of the AGHI Notes, approximately$81.0 million, to AGI and in turn, AGI made an equity contribution to itswholly-owned subsidiary, Camping World. Camping World then made an equity capital contribution in the sameamount to its wholly-owned subsidiary, CWI, Inc. (“CWI”).  CWI created a new wholly-owned subsidiarynamed CWFR Capital Corp., a Delaware corporation (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture.  Since CWFR is an unrestricted subsidiary, itsoperations are not restricted by either the AGI Indenture or the AGHINotes.  CWI made an equity capitalcontribution to CWFR in an equal amount to the capital contribution that itreceived from Camping World.  CWFR usedthe proceeds from the equity capital contribution to acquire a preferredmembership interest in FreedomRoads, a Minnesota limited liability companyowned 90% by The Stephen Adams Living Trust, which also indirectly owns 99.1%of the outstanding capital stock of AGHC and indirectly AGHI.  The Company recorded an impairment charge of$81.0 million in the third quarter of 2008 that wrote down to zero the carryingvalue of this preferred membership interest.

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (2.80% at September 30, 2008 based uponthe July 31, 2008 reset date) and make periodic payments at a fixed rateof 5.135%, with settlement and rate reset dates every January 31, April 30,July 31, and October 31.  On March 19,2008, AGI entered into an interest rate swap agreement with a notional amountof $35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (2.80% at September 30, 

 

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2008 based uponthe July 31, 2008 reset date) and make periodic payments at a fixed rateof 3.430%, with settlement and rate reset dates every January 31, April 30,July 31, and October 31.  Theinterest rate swap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapcontracts were zero at inception.  TheCompany entered into the interest rate swap contracts to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap contracts are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans and therevolving credit facility issued June 24, 2003, and accordingly, gains andlosses on the fair value of the interest rate swap agreements are reported inaccumulated other comprehensive loss and reclassified to earnings in the sameperiod in which the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of the swap contractsare included in other accrued liabilities and totaled $4.6 million and $4.7million as of September 30, 2008 and December 31, 2007, respectively.

 

Due to thepotential sale of Camping World, a highly effective hedge on the $35.0 millionoutstanding debt by the $35.0 million notional amount interest rate swapagreement is deemed to be no longer probable and is now deemed to be reasonablypossible.  As a result, changes in thevalue of the $35.0 million interest rate swap agreement will be included inearnings prospectively beginning October 1, 2008.  Changes in value from September 26, 2008to September 30, 2008 were immaterial. A highly-effective hedge on the $100.0 million outstanding debt by the$100.0 notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31, 2012.

 

In January 2007,AGI Productions, Inc. acquired a consumer show from MAC Events, Inc.for $0.5 million.  As part of thepurchase, the Company assumed $0.3 million of liabilities.  In February 2007, AGI Productions, Inc.acquired consumer shows from Industrial Exposition Inc. for $1.9 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.6 million of liabilities.

 

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

 

For the ninemonths ended September 30, 2008, the Company incurred $0.1 million ofdeferred executive compensation benefit under the phantom stock agreements, andmade payments of $1.8 million under the terms of the vested phantom stockagreements.  The earned incentives underthese agreements are scheduled to be paid at various times over the next fouryears.  Phantom stock payments totaling$6,000 are scheduled to**be made forthe remainder of 2008.

 

Capitalexpenditures for the first nine months of 2008 totaling $9.4 million decreased$5.2 million from the first nine months of 2007 primarily due to a slow down ofnew retail store openings.  Additionalcapital expenditures of $2.6 million are anticipated for the balance of 2008primarily for information technology, a retail warehouse management system,computer hardware, and membership system and online upgrades.

 

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**CRITICALACCOUNTING POLICIES**

 

*General*

 

The discussion andanalysis of the Company’s financial condition and results of operations arebased upon the Company’s consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires the Company to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives,bad debts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

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

 

*Revenue Recognition*

 

Merchandise revenue is recognized when products are sold in the retailstores, shipped for mail and Internet orders, or when services are provided tocustomers.  Publication advertising andnewsstand sales, net of estimated provision for returns, are recorded at timeof delivery.  Subscription sales ofpublications are deferred and recognized over the lives of thesubscriptions.  Revenues from theemergency road service program (“ERS”) are deferred and recognized over thelife of the membership.  ERS claimexpenses are recognized when incurred. Advances on third party credit card fee revenues are deferred andrecognized based primarily on a percentage of credit card receivables held bythird parties.  Membership revenue isgenerated from annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.  Revenue and related expensesfor consumer shows are recognized when the show occurs.

 

*Accounts Receivable*

 

The Companyestimates the collectability of its trade receivables.  A considerable amount of judgment is requiredin assessing the ultimate realization of these receivables including the 

 

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currentcredit-worthiness of each customer. Changes in required reserves have been recorded in recent periods andmay occur in the future due to the market environment.

 

*Inventory*

 

The Company statesinventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company isrequired to make judgments as to future demand requirements and compare thatwith the current or committed inventory levels. The Company has recorded changes in required reserves in recent periodsdue to changes in strategic direction, such as discontinuances of product linesas well as changes in market conditions 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-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  The Companyassesses the fair value of the assets based on the future cash flow the assetsare expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.

 

In 2005, AGHI issued $88.2 million principal amount of its 10-7/8%Senior Notes due 2012 (the “AGHI Notes”) and contributed the net proceeds,approximately $81.0 million, to the Company and in turn, the Company made anequity contribution to Camping World. Camping World then made an equity capital contribution in the same amountto its wholly-owned subsidiary, CWI, Inc. that created a new wholly-ownedsubsidiary named CWFR Capital Corp. (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture, and made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World. Since CWFR is an unrestricted subsidiary, its operations are notrestricted by either the AGI Indenture or the AGHI Notes.  CWFR used the proceeds from the equitycapital contribution to acquire the FreedomRoads Preferred Interest.  FreedomRoads is owned 90% by The StephenAdams Living Trust, which also indirectly owns 99.1% of the outstanding capitalstock of AGHC and indirectly AGI.

 

Based on theresults of the Valuation Report, the Company recorded an impairment charge of$81.0 million in the third quarter of 2008 that wrote down to zero the carryingvalue of the preferred interest (the “FreedomRoads Preferred Interest”) held byan indirect subsidiary of Camping World in FreedomRoads Holding Company, LLC (“FreedomRoads”),a holding company whose subsidiaries sell and service new and used recreationalvehicles.  The $81.0 

 

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million impairmentcharge was recorded as a result of declining performance of the recreationalvehicle industry driven by overall weakening of the economy and a significantdecline in consumer confidence, in addition to limited credit available toconsumers interested in purchasing recreational vehicles.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible assets were necessary.  Thefinite-lived purchased intangible assets consist of membership customer lists,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 7 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

The Companyevaluates indefinite-lived intangible assets for impairment at least annuallyor when events indicate that an impairment exists in accordance with SFAS No. 142,“Goodwill and Other Intangibles.”  Theimpairment test for goodwill and other indefinite-lived intangible assets iscalculated annually using fair value measurement techniques.

 

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

 

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

 

In the thirdquarter of 2008, the Company noted continued reduction in same store sales atCamping World, Inc. (“Camping World”) as well as deterioration of generaleconomic conditions and consumer confidence. Based on the above, the Company determined that there were identifiedindicators of impairment in the Camping World reporting unit.

 

The results of athird party valuation report (“Valuation Report”) prepared in the third quarterby a nationally recognized firm in anticipation of the potential sale ofCamping World (see Footnote 11- Recent Events) indicated that the estimatedfair value of the Camping World reporting unit was less than book value.  The excess of the carrying value over theestimated fair value of the Camping World reporting unit was primarily due tothe decline in the recreational vehicle 

 

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and camping retailmarkets leading to lower expected future cash flows for the business and lowermarket comparables. In determining the fair value, the Company used a weightedaverage of the income valuation approach and market valuation approaches.

 

In performing thesecond step of the goodwill impairment test, the Company allocated the estimatedfair values of the Camping World reporting units determined in step one of theimpairment test, to the assets and liabilities of the respective reporting unitin accordance with SFAS No. 141 “Business Combinations”. The Companymeasured the impairment for the Camping World reporting unit to be equal to thecarrying value of its goodwill, or $47.6 million.  The Company recorded an impairment charge of$47.6 million in the third quarter of 2008 related to Camping World, which ispart of the retail segment.

 

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

 

The Company hasevaluated the remaining useful lives of its property and equipment andfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary.  The Companydetermined that no adjustments to the useful lives of its property andequipment or finite-lived purchased intangible assets were necessary. 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.

 

*AccumulatedOther Comprehensive Loss*

 

Accumulatedother comprehensive loss consists of unrealized losses on cash flowhedges.  At September 30, 2008,accumulated other comprehensive loss was $4.6 million.

 

*Derivative Financial Instruments*

 

The Company accounts for derivative instruments and hedging activitiesin accordance with SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” (“SFAS 133”). All derivatives are recognized on the balance sheet at their fairvalue.  On the date that the Companyenters into a derivative contract, management formally documents all relationshipsbetween hedging instruments and hedged items, as well as risk managementobjectives and strategies for undertaking various hedge transactions.

 

Changes in the fair value of a derivativethat is highly effective and that is designated and qualifies as a cash flowhedge (a “swap”), to the extent that the hedge is effective, are recorded inaccumulated other comprehensive loss, until earnings are affected by the 

 

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variability of cash flows of the hedged transaction.  The Company measures effectiveness of theswap at each quarter end using the Hypothetical Derivative Method.  Under this method, hedge effectiveness ismeasured based on a comparison of the change in fair value of the actual swapdesignated as the hedging instrument and the change in fair value of thehypothetical swap which would have the terms that identically match thecritical terms of the hedged cash flows from the anticipated debtissuance.  The amount of ineffectiveness,if any, recorded in earnings would be equal to the excess of the cumulativechange in the fair value of the swap over the cumulative change in the fairvalue of the plain vanilla swap lock, as defined in the accountingliterature.  Once a swap is settled, theeffective portion is amortized over the estimated life of the hedge item.

 

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

 

Due to thepotential sale of Camping World, a highly effective hedge on the $35.0 millionoutstanding debt by the $35.0 million notional amount interest rate swapagreement is deemed to be no longer probable and is now deemed to be reasonablypossible.  As a result, changes in thevalue of the $35.0 million interest rate swap agreement will be included inearnings prospectively beginning October 1, 2008.  Changes in value from September 26, 2008to September 30, 2008 were immaterial. A highly-effective hedge on the $100.0 million outstanding debt by the$100.0 notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31, 2012.

 

*FairValue Measurements*

 

As discussed in Note 2 to the unauditedcondensed consolidated financial statements, the Company adopted the provisionsof Statement 157 effective January 1, 2008.  The Company has determined that it utilizesobservable (Level 2) inputs in determining the fair value of its interest rateswap contracts which totaled $4.6 million at September 30, 2008.

 

*Income Taxes*

 

Significant judgment is required in determining the Company’s taxprovision and in evaluating its tax positions. The Company establishes accruals for certain tax contingencies when,despite the belief that the Company’s tax return positions are fully supported,the Company believes that certain positions may be challenged and that theCompany’s positions may not be fully sustained.  The tax contingencyaccruals are adjusted in light of changing facts and circumstances, such as theprogress of tax audits, case law and emerging legislation.  The Company’s tax provision includes theimpact of tax contingency accruals and changes to the accruals, includingrelated interest and penalties, as considered appropriate by management.

 

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

 

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

 

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

 

*InterestRate Sensitivity Analysis*

 

At September 30,2008, we had debt totaling $404.7 million, comprised of $0.9 million ofvariable rate debt and $403.8 million of fixed rate debt, comprised of $135.0million of debt fixed through the interest rate swap agreements, $152.4 millionof Senior Notes, $111.6 million of AGHI Notes and $4.8 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 less than $0.1 million.

 

*CreditRisk*

 

We are exposed tocredit risk on accounts receivable.  Weprovide credit to customers in the ordinary course of business and performongoing credit evaluations. Concentrations of credit risk with respect to trade receivables arelimited due to the number of customers comprising our customer base.  We currently believe our allowance fordoubtful accounts is sufficient to cover customer credit risks.

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with 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 the SecuritiesExchange Act of 1934, as amended.  Basedupon that evaluation, the President and Chief Executive Officer along with theSenior Vice President and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the periodic SEC filings.  Management determined that, as of September 30,2008, 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.

 

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**PART II: OTHER INFORMATION.**

 

**ITEM 1A:RISK FACTORS**

 

The AGI SeniorCredit Facility matures on June 24, 2009. Although AGI is currently seeking to refinance or replace this creditfacility and has received a number of proposals from prospective lenders, therecan be no assurance that the AGI Senior Credit Facility will be refinanced orreplaced prior to its maturity.  It isalso expected that the interest rate payable on a new credit facility will behigher than the interest rates under the current AGI Senior Credit Facility.

 

**ITEM 5:OTHER INFORMATION**

 

None.

 

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**SIGNATURES:**

 

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

 

 
| ** **                          | ** ** | **AFFINITY GROUP HOLDING, INC.** |
|-------------------------------------|------------|----------------------------------|
|                                |       |                             |
|                                |       |                             |
|                                |       | /s/ Thomas F. Wolfe              |
| Date:   November 14, 2008 |       | Thomas F. Wolfe                  |
|                                |       | Senior Vice President and        |
|                                |       | Chief Financial Officer          |

 

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