**UNITED STATES**

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

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

###### ** **

**FORM 10-Q**

** **

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

**The Securities Exchange Act of 1934**

 

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

 

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**AFFINITYGROUP HOLDING, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

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

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

 

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

 

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

 

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

YES o NO o

 

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

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

 

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

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

 

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

 

|                         |       | **Outstanding as of** |
|------------------------------|------------|-----------------------|
| **Class**                    | ** ** | **August 14, 2009**   |
| Common Stock, $.01 par value |       | 100                   |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

 

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

** **

**INDEX**

 
|              |                                                                                                     | **Page**   |
|-------------------|----------------------------------------------------------------------------------------------------------|------------|
| **Part I.**  | Financial Information                                                                                    |       |
|              |                                                                                                     |       |
|              | **Item 1:  Financial Statements**                                                                        |       |
|              |                                                                                                     |       |
|              | Consolidated  Balance Sheets   as of June 30, 2009 (unaudited) and December 31, 2008           | 1          |
|              |                                                                                                     |       |
|              | Unaudited  Consolidated Statements of Operations  for the three months ended June 30, 2009 and 2008 | 2          |
|              |                                                                                                     |       |
|              | Unaudited  Consolidated Statements of Operations  for the six months ended June 30, 2009 and 2008   | 3          |
|              |                                                                                                     |       |
|              | Unaudited  Consolidated Statements of Cash Flows  for the six months ended June 30, 2009 and 2008   | 4          |
|              |                                                                                                     |       |
|              | Notes to  Unaudited Consolidated Financial Statements                                                    | 5          |
|              |                                                                                                     | ** ** |
|              | **Item 2: Management’s Discussion and  Analysis of Financial Condition and Results of Operations**  | 26         |
|              |                                                                                                     |       |
|              | **Item 3:  Quantitative and Qualitative Disclosures about Market Risk**                                  | 45         |
|              |                                                                                                     |       |
|              | **Item 4: Controls and  Procedures**                                                                     | 46         |
|              | ** **                                                                                               |       |
| **Part II.** | Other Information                                                                                        | 46         |
|              | ** **                                                                                               |       |
| **Signatures**    | 48                                                                                                       |

 

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2009 and December 31, 2008

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **6/30/2009**   | ** ** | **12/31/2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 10,851     |           | $          | 10,777 |   |
| Accounts receivable, less  allowance for doubtful accounts of $2,317 in 2009 and $2,147 in 2008 |       | 43,025          |       | 40,191         |       |
| Inventories                                                                                     |       | 64,534          |       | 57,137         |       |
| Prepaid expenses and other  assets                                                              |       | 14,247          |       | 13,547         |       |
| Total current assets                                                                            |       | 132,657         |       | 121,652        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT,  net                                                                    |       | 39,767          |       | 44,077         |       |
| NOTE FROM AFFILIATE                                                                             |       | 4,723           |       | 4,608          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 20,614          |       | 22,389         |       |
| GOODWILL                                                                                        |       | 96,828          |       | 96,828         |       |
| DEFERRED TAX ASSETS, net                                                                        |       | 4,569           |       | 4,569          |       |
| OTHER ASSETS                                                                                    |       | 2,576           |       | 2,035          |       |
| Total assets                                                                                    |       | $               | 301,734    |           | $          | 296,158 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 43,163     |           | $          | 23,950 |   |
| Accrued interest                                                                                |       | 10,151          |       | 11,581         |       |
| Accrued income taxes                                                                            |       | 1,236           |       | 1,165          |       |
| Accrued liabilities                                                                             |       | 27,060          |       | 27,009         |       |
| Deferred revenues and  gains                                                                    |       | 61,390          |       | 60,569         |       |
| Current portion of  long-term debt                                                              |       | 148,891         |       | 12,391         |       |
| Total current liabilities                                                                       |       | 291,891         |       | 136,665        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND  GAINS                                                                    |       | 35,866          |       | 35,855         |       |
| LONG-TERM DEBT, net of  current portion                                                         |       | 234,331         |       | 391,487        |       |
| OTHER LONG-TERM  LIABILITIES                                                                    |       | 25,845          |       | 30,156         |       |
|                                                                                            |       | 587,933         |       | 594,163        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND  CONTINGENCIES                                                                  |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.01 par  value, 3,000 shares authorized, 100 shares issued and outstanding       |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 23,220          |       | 12,041         |       |
| Accumulated deficit                                                                             |       | (302,718        | )          | (299,710       | )          |
| Accumulated other  comprehensive loss                                                           |       | (6,702          | )          | (10,337        | )          |
| Total stockholder’s  deficit                                                               |       | (286,199        | )          | (298,005       | )          |
| Total liabilities and  stockholder’s deficit                                               |       | $               | 301,734    |           | $          | 296,158 |   |

 

See notes to consolidatedfinancial statements.

 

1

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2009**          | ** ** | **6/30/2008** | ** ** |
|                                 |       |                   |       |   |   |
| REVENUES:                            |       |                   |       |   |   |
| Membership services                  |       | $                      | 39,197     |   | $ | 42,563 |   |
| Media                                |       | 9,363                  |       | 15,424 |   |
| Retail                               |       | 81,339                 |       | 89,742 |   |
|                                 |       | 129,899                |       | 147,729 |   |
|                                 |       |                   |       |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                   |       |   |   |
| Membership services                  |       | 24,615                 |       | 26,518 |   |
| Media                                |       | 7,396                  |       | 11,387 |   |
| Retail                               |       | 49,370                 |       | 52,332 |   |
|                                 |       | 81,381                 |       | 90,237 |   |
|                                 |       |                   |       |   |   |
| GROSS PROFIT                         |       | 48,518                 |       | 57,492 |   |
|                                 |       |                   |       |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |
| Selling, general and  administrative |       | 33,117                 |       | 40,283 |   |
| Financing expense                    |       | 1,540                  |       | — |   |
| Depreciation and  amortization       |       | 5,697                  |       | 5,163 |   |
|                                 |       | 40,354                 |       | 45,446 |   |
|                                 |       |                   |       |   |   |
| INCOME FROM OPERATIONS               |       | 8,164                  |       | 12,046 |   |
|                                 |       |                   |       |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |
| Interest income                      |       | 134                    |       | 139 |   |
| Interest expense                     |       | (11,038                | )          | (9,259 | ) |
| Gain on derivative  instrument       |       | 665                    |       | — |   |
| Gain on debt restructure             |       | 4,678                  |       | — |   |
| Other non-operating items,  net      |       | (736                   | )          | (25 | ) |
|                                 |       | (6,297                 | )          | (9,145 | ) |
|                                 |       |                   |       |   |   |
| INCOME BEFORE INCOME TAXES           |       | 1,867                  |       | 2,901 |   |
|                                 |       |                   |       |   |   |
| INCOME TAX EXPENSE                   |       | (304                   | )          | (272 | ) |
|                                 |       |                   |       |   |   |
| NET INCOME                           |       | $                      | 1,563      |   | $ | 2,629 |   |

 

Seenotes to consolidated financial statements.

 

2

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **6/30/2009**        | ** ** | **6/30/2008** | ** ** |
|                                 |       |                 |       |   |   |
| REVENUES:                            |       |                 |       |   |   |
| Membership services                  |       | $                    | 74,429     |   | $ | 78,108 |   |
| Media                                |       | 26,783               |       | 41,680 |   |
| Retail                               |       | 133,740              |       | 152,926 |   |
|                                 |       | 234,952              |       | 272,714 |   |
|                                 |       |                 |       |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                 |       |   |   |
| Membership services                  |       | 44,945               |       | 49,659 |   |
| Media                                |       | 20,880               |       | 28,604 |   |
| Retail                               |       | 80,906               |       | 89,195 |   |
|                                 |       | 146,731              |       | 167,458 |   |
|                                 |       |                 |       |   |   |
| GROSS PROFIT                         |       | 88,221               |       | 105,256 |   |
|                                 |       |                 |       |   |   |
| OPERATING EXPENSES:                  |       |                 |       |   |   |
| Selling, general and  administrative |       | 63,056               |       | 76,722 |   |
| Financing expense                    |       | 1,540                |       | — |   |
| Depreciation and  amortization       |       | 10,661               |       | 10,294 |   |
|                                 |       | 75,257               |       | 87,016 |   |
|                                 |       |                 |       |   |   |
| INCOME FROM OPERATIONS               |       | 12,964               |       | 18,240 |   |
|                                 |       |                 |       |   |   |
| NON-OPERATING ITEMS:                 |       |                 |       |   |   |
| Interest income                      |       | 264                  |       | 282 |   |
| Interest expense                     |       | (20,080              | )          | (18,441 | ) |
| Gain on derivative  instrument       |       | 685                  |       | — |   |
| Gain on debt restructure             |       | 4,678                |       | — |   |
| Other non-operating items,  net      |       | (819                 | )          | (23 | ) |
|                                 |       | (15,272              | )          | (18,182 | ) |
|                                 |       |                 |       |   |   |
| (LOSS) INCOME BEFORE  INCOME TAXES   |       | (2,308               | )          | 58 |   |
|                                 |       |                 |       |   |   |
| INCOME TAX EXPENSE                   |       | (700                 | )          | (571 | ) |
|                                 |       |                 |       |   |   |
| NET LOSS                             |       | $                    | (3,008     | ) | $ | (513 | ) |

 

Seenotes to consolidated financial statements.

 

3

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **SIX MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                   | ** ** | **6/30/2009**        | ** ** | **6/30/2008** | ** ** |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                       |       |                 |       |   |   |
| Net loss                                                                     |       | $                    | (3,008     | ) | $ | (513 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |       |                 |       |   |   |
| Depreciation                                                                 |       | 6,525                |       | 5,881 |   |
| Amortization                                                                 |       | 4,136                |       | 4,413 |   |
| Gain on derivative  instrument                                               |       | (685                 | )          | — |   |
| Gain on debt restructure                                                     |       | (4,678               | )          | — |   |
| Provision for losses on  accounts receivable                                 |       | 799                  |       | 617 |   |
| Deferred compensation                                                        |       | —               |       | (130 | ) |
| Loss on sale of property  and equipment                                      |       | 165                  |       | 86 |   |
| Non-cash interest on AGHI  Notes                                             |       | —               |       | 1,465 |   |
| Accretion of original  issue discount                                        |       | 264                  |       | 232 |   |
| Changes in operating  assets and liabilities                                 |       |                 |       |   |   |
| Accounts receivable                                                          |       | (3,633               | )          | (581 | ) |
| Inventories                                                                  |       | (7,397               | )          | (284 | ) |
| Prepaid expenses and other  assets                                           |       | (1,241               | )          | (1,930 | ) |
| Accounts payable                                                             |       | 19,213               |       | (84 | ) |
| Accrued and other  liabilities                                               |       | 4,220                |       | 110 |   |
| Deferred revenues and  gains                                                 |       | 832                  |       | (3,523 | ) |
| Net cash provided by  operating activities                                   |       | 15,512               |       | 5,759 |   |
|                                                                         |       |                 |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                       |       |                 |       |   |   |
| Capital expenditures                                                         |       | (2,391               | )          | (7,559 | ) |
| Net proceeds from sale of  property and equipment                            |       | 11                   |       | 4 |   |
| Investment in affiliate                                                      |       | (115                 | )          | — |   |
| Acquisitions, net of cash  received                                          |       | —               |       | (3,409 | ) |
| Repayment of loans  receivable                                               |       | —               |       | 21 |   |
| Net cash used in investing  activities                                       |       | (2,495               | )          | (10,943 | ) |
|                                                                         |       |                 |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                       |       |                 |       |   |   |
| Dividends paid                                                               |       | —               |       | (1,000 | ) |
| Contribution from parent                                                     |       | 5,000                |       | — |   |
| Borrowings on debt                                                           |       | 12,000               |       | 33,000 |   |
| Payment of debt issue  costs                                                 |       | (2,541               | )          | — |   |
| Principal payments on debt                                                   |       | (27,402              | )          | (27,537 | ) |
| Net cash (used in)  provided by financing activities                         |       | (12,943              | )          | 4,463 |   |
|                                                                         |       |                 |       |   |   |
| NET CHANGE IN CASH AND  CASH EQUIVALENTS                                     |       | 74                   |       | (721 | ) |
|                                                                         |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD                            |       | 10,777               |       | 8,566 |   |
|                                                                         |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                  |       | $                    | 10,851     |   | $ | 7,845 |   |

 

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

 

These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2008 as filed with the Securitiesand Exchange Commission.  In the opinionof management of the Company, these consolidated financial statements containall adjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

 

*Basisfor Presentation**—*With respect to the AGHI Notes, AGI hasnot paid any dividends to AGHI to fund payment of interest on the AGHINotes.  Currently, the AGI Senior CreditFacility and the AGI Indenture impose limitations on the ability ofsubsidiaries of AGHI to make dividend distributions or loans to AGHI to payinterest on the AGHI Notes.  AGHI madethe interest payments due on August 15, 2005, February 15, 2006, August 15,2006, February 15, 2007, and February 15, 2008 through the issuanceof additional notes and AGHI paid the interest on the AGHI Notes due August 15,2007, August 15, 2008 and February 15, 2009 from proceeds of capitalcontributions made by AGHI’s parent, AGHC. See Note 10 of the Notes to Consolidated Financial Statements.

 

TheAGI Senior Credit Facility restricts distributions from AGI and itssubsidiaries to AGHI in respect of any fiscal year to the amount based onreasonable estimates, of federal, state and local income taxes that theBorrower would be required to pay with respect to such fiscal year calculatedas if, for such fiscal year, the Borrower were treated as a “C corporation”.

 

OnJune 5, 2009, AGI entered into an amendment to its AGI Senior CreditFacility pursuant to which the maturity date was extended from June 24,2009 to March 31, 2010, the revolving credit portion of the facility wasreduced by $10.0 million to $25.0 million, the outstanding term loan borrowingswere repaid by $8.0 million, and the borrowing rate was increased to prime rateplus 7.0% or LIBOR plus 8.0% with a LIBOR floor of 2.75%.  Concurrent with the June 5, 2009amendment to the AGI Senior Credit Facility, AGI obtained a $9.7 million SecondLien

 

5

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

 

Loan,the net proceeds of which were used to purchase $14.6 million in principalamount of AGI Senior Subordinated Notes. The Second Lien Loan carries an interest rate of 9.0% and matures on July 31,2010.  See Note 6 of the Notes toConsolidated Financial Statements.

 

The June 5, 2009 amendment to the Senior Credit Facility alsorevised the Company’s financial covenants in effect through the extendedmaturity date.  Significant costreductions were implemented in 2008 and 2009, including the elimination ofpersonnel, suspension of 401(k) employer contributions, salary cutbacks,hiring and capital expenditure spending freezes, closure of under-performing retail stores, satelliteoffice closures, and magazine size and frequency reductions.

 

**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

In June 2009,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles—areplacement of FASB Statement No. 162” (“SFAS 168”), which will beeffective for interim and annual periods ending after September 15,2009.  The FASB Accounting StandardsCodification will become the source of authoritative GAAP recognized by theFASB.  Rules and interpretivereleases of the SEC under authority of federal securities laws continue to besources of authoritative GAAP for SEC registrants.  All existing FASB accounting standards andguidance are superseded as described in SFAS 168 and instead of issuing newaccounting standards in the form of statements, FASB staff positions, andEmerging Issues Task Force (“EITF”) abstracts, the FASB will issue AccountingStandards Updates that will update the Codification.  Adoption of the Codification will not have asignificant impact on the Company’s financial statements.

 

6

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

 

During the threemonths ended June 30, 2009, the Company adopted the provisions of the FASB’sFSP SFAS No. 107-1 and Accounting Principles Board No. 28-1, “InterimDisclosures About Fair Value of Financial Instruments.”  The adoption of these provisions resulted inadditional interim disclosures and did not have a material impact on ourcondensed consolidated results of operations, financial position or cash flows.

 

Statement ofFinancial Accounting Standards No. 165, Subsequent Events, (“SFAS 165”) iseffective for financial statements ending after June 15, 2009.  SFAS 165 establishes general standards ofaccounting for and disclosure of subsequent events that occur after the balancesheet date.  Entities are also requiredto disclose the date through which subsequent events have been evaluated andthe basis for that date.

 

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

 

The Company’sthree principal lines of business are Membership Services, Media, andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, CampClub USA and assorted membership products and services for recreationalvehicles (“RV”) owners, campers and outdoor vacationers, and the Golf Card Clubfor golf enthusiasts.  The Media segmentpublishes a variety of publications for selected markets in the recreation andleisure industry, including general circulation periodicals, directories and RVand powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreationshows primarily focused on RV and powersports markets.  The

 

7

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

 

Retail segmentsells specialty retail merchandise and services for RV owners primarily throughretail supercenters and mail order catalogs. The Company evaluates performance based on profit or loss fromoperations before income taxes and unusual items.

 

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

 

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

 
| ** **                                     | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                     | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED JUNE 30, 2009**           |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 39,197     |       | $          | 9,363      |       | $                | 81,339     |   | $ | 129,899 |   |
| Depreciation and  amortization                 |       | 812            |       | 1,341      |       | 2,637      |       | 4,790            |       |
| Gain (loss) on sale of  property and equipment |       | —         |       | 1          |       | (84        | )          | (83              | )          |
| Interest income                                |       | 849            |       | —     |       | 2          |       | 851              |       |
| Interest expense                               |       | —         |       | 19         |       | 2,823      |       | 2,842            |       |
| Segment operating profit  (loss)               |       | 11,953         |       | (26        | )          | 459        |       | 12,386           |       |
|                                           |       |           |       |       |       |       |       |             |       |
| **THREE MONTHS ENDED JUNE 30, 2008**           |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers              |       | $              | 42,563     |       | $          | 15,424     |       | $                | 89,742     |   | $ | 147,729 |   |
| Depreciation and  amortization                 |       | 825            |       | 1,581      |       | 2,070      |       | 4,476            |       |
| Loss on sale of property  and equipment        |       | —         |       | —     |       | (60        | )          | (60              | )          |
| Interest income                                |       | 904            |       | —     |       | 9          |       | 913              |       |
| Interest expense                               |       | —         |       | 56         |       | 3,979      |       | 4,035            |       |
| Segment operating profit  (loss)               |       | 13,215         |       | 944        |       | (510       | )          | 13,649           |       |

 
| ** **                              | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                              | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **SIX MONTHS ENDED JUNE 30, 2009**      |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers       |       | $              | 74,429     |       | $          | 26,783     |       | $                | 133,740    |   | $ | 234,952 |   |
| Depreciation and  amortization          |       | 1,618          |       | 2,664      |       | 4,826      |       | 9,108            |       |
| Loss on sale of property  and equipment |       | —         |       | —     |       | (165       | )          | (165             | )          |
| Interest income                         |       | 1,713          |       | —     |       | 4          |       | 1,717            |       |
| Interest expense                        |       | —         |       | 47         |       | 6,741      |       | 6,788            |       |
| Segment operating profit  (loss)        |       | 24,578         |       | 1,286      |       | (7,702     | )          | 18,162           |       |
|                                    |       |           |       |       |       |       |       |             |       |
| **SIX MONTHS ENDED JUNE 30, 2008**      |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers       |       | $              | 78,108     |       | $          | 41,680     |       | $                | 152,926    |   | $ | 272,714 |   |
| Depreciation and  amortization          |       | 1,562          |       | 3,044      |       | 4,422      |       | 9,028            |       |
| Loss on sale of property  and equipment |       | —         |       | —     |       | (86        | )          | (86              | )          |
| Interest income                         |       | 1,821          |       | —     |       | 20         |       | 1,841            |       |
| Interest expense                        |       | —         |       | 104        |       | 8,090      |       | 8,194            |       |
| Segment operating profit  (loss)        |       | 23,214         |       | 6,753      |       | (8,936     | )          | 21,031           |       |

 

8

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

 

Thefollowing is a reconciliation of profit from operations to the Company’sconsolidated financial statements for the three and six months ended June 30,2009 and 2008 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                     | ** ** | **6/30/2009**          | ** ** | **6/30/2008**        | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** |
| **Profit  From Operations Before Income Taxes**                |       |                   |       |                 |       |   |   |   |   |
| Total profit for  reportable segments                          |       | $                      | 12,386     |                 | $          | 13,649 |   | $ | 18,162 |   | $ | 21,031 |   |
| Unallocated G & A  expense                            |       | (3,848                 | )          | (4,063               | )          | (7,341 | ) | (7,901 | ) |
| Unallocated depreciation  and amortization expense             |       | (907                   | )          | (687                 | )          | (1,553 | ) | (1,266 | ) |
| Unallocated other finance  costs                               |       | (654                   | )          | —               |       | (654 | ) | — |   |
| Unallocated gain on  derivative instrument                     |       | 665                    |       | —               |       | 685 |   | — |   |
| Unallocated financing  expense                                 |       | (1,540                 | )          | —               |       | (1,540 | ) | — |   |
| Unallocated gain on debt  restructure                          |       | 4,678                  |       | —               |       | 4,678 |   | — |   |
| Elimination of  intercompany interest income                   |       | (717                   | )          | (774                 | )          | (1,453 | ) | (1,559 | ) |
| Unallocated interest  expense, net of intercompany elimination |       | (8,196                 | )          | (5,224               | )          | (13,292 | ) | (10,247 | ) |
| Income (loss) from  operations before income taxes             |       | $                      | 1,867      |                 | $          | 2,901 |   | $ | (2,308 | ) | $ | 58 |   |

 

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

 

| ** **                                           | ** ** | **6/30/2009** | ** ** | **12/31/2008** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services  segment                         |       | $             | 212,712    |           | $          | 221,262 |   |
| Media segment                                        |       | 81,778        |       | 88,101         |       |
| Retail segment                                       |       | 129,343       |       | 110,964        |       |
| Total assets for  reportable segments                |       | 423,833       |       | 420,327        |       |
| Capitalized finance costs  not allocated to segments |       | 5,558         |       | 4,450          |       |
| Corporate unallocated  assets                        |       | 4,372         |       | 4,623          |       |
| Elimination of  intersegment receivable              |       | (132,029      | )          | (133,242       | )          |
| Total assets                                         |       | $             | 301,734    |           | $          | 296,158 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

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

 

| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the  period for: |       |     |       |     |       |
| Interest                          |       | $        | 21,246     |     | $          | 11,700 |   |
| Income taxes                      |       | 2        |       | —   |       |
|                                   |            |          |            |          |            |  |  |

 

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

 

9

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

 

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

 

In August 2008,AGHI paid the interest of $6.2 million on the AGHI Notes from the proceeds of acontribution from AGHC.

 

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

 

In February 2009,AGHI paid the interest of $6.2 million on the AGHI Notes from the proceeds of acontribution from AGHC.

 

For the six monthsended June 30, 2009, the Company recorded an adjustment to the fair valueof the interest rate swap resulting in a $4.9 million decrease in OtherLong-Term Liabilities and a $3.6 million decrease in Other Comprehensive Lossand ineffective portion in the statement of operations as a non-cash gain onderivative instruments of $1.3 million.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually and more often when impairment indicators are present.  The Company performs its annual impairment testduring the fourth quarter.  There were nochanges in the Company’s goodwill for the six months ended June 30, 2009and 2008, and no indicators of impairment.

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

 

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.  Under SFAS No. 142, Goodwill and OtherIntangible Assets, (“SFAS No. 142”) goodwill impairment is deemed to existif the net book value of a reporting unit exceeds its estimated fairvalue.  The Company’s

 

10

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

 

reporting unitsare generally consistent with the operating segments underlying the reportingsegments identified in Note 3 - Segment Information.

 

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.

 

Effective January 1,2009, the Company adopted FASB Statement No. 141(revised 2007), “BusinessCombinations” (“SFAS No. 141(R)”) which establishes principles and requirementsfor ho an acquirer recognized and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, any noncontrollinginterest in the acquiree and the goodwill acquired.  The Company will apply the provisions and disclosurerequirements of SFAS No. 141(R) for any acquisitions after theadoption date.

 

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

 
| ** **                                       | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                       | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                             |       |                |       |       |       |             |       |       |       |
| Membership and customer  lists                   |       | 6                   |       | $          | 36,384     |             | $          | (24,450    | )          | $ | 11,934 |   |
| Resort and golf course  participation agreements |       | 4                   |       | 13,365     |       | (13,360          | )          | 5          |       |
| Non-compete and deferred  consulting agreements  |       | 15                  |       | 18,830     |       | (15,713          | )          | 3,117      |       |
| Deferred financing costs                         |       | 6                   |       | 11,674     |       | (6,116           | )          | 5,558      |       |
|                                             |       |                |       |       |       |             |       |       |       |
|                                             |       |                |       | $          | 80,253     |             | $          | (59,639    | )          | $ | 20,614 |   |

 

**(6) DEBT**

 

AGHI Notes

 

On March 24, 2005 in a privateplacement, AGHI issued $88.2 million principal amount of its 10-7/8% seniornotes due 2012 (the “AGHI Notes”) at a $3.2 million original issuediscount.  The Company completed aregistered exchange of these AGHI Notes under the Securities Act of 1933 in June 2005.  The AGHI Notes are unsecured obligations ofAGHI and its subsidiaries have not guaranteed payment of principal or intereston the AGHI Notes.  Interest on the AGHI

 

11

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**(6) DEBT (continued)**

 

Notes is payable semi-annually on February 15and August 15 commencing August 15, 2005 and the entire $88.2 millionprincipal amount of the AGHI Notes are due in full on February 15,2012.  For interest payments on and priorto February 15, 2008, AGHI had the option to pay interest on the AGHINotes in cash or by the issuance of additional notes of the same tenor as theAGHI Notes, except the maturity date of the additional notes ($25.4 million) isMarch 15, 2010.  AGI has not paid any dividends to AGHI tofund payment of interest on the AGHI Notes and AGHI made the interest paymentsdue on August 15, 2005, February 15, 2006, August 15, 2006, February 15,2007, and February 15, 2008 through the issuance of additional notes.  AGHI paid the interest on the AGHI Notes due August 15,2007, August 15, 2008 and February 15, 2009 from proceeds ofcontributions made by AGHI’s parent, AGHC, of $5.9 million, $6.2 million and$6.2 million, respectively.  As of June 30,2009, $112.0 million of AGHI Notes remain outstanding.  Currently, the AGI Senior Credit Facility andthe AGI Indenture impose limitations on the ability of subsidiaries of AGHI tomake dividend distributions or loans to AGHI to pay interest on the AGHINotes.  See Note 10 of the Notes toConsolidated Financial Statements.

 

Senior Credit Facility

 

OnJune 24, 2003, AGI entered into an Amended and Restated Credit Agreementand a Senior Secured Floating Rate Note Purchase Agreement which was mostrecently amended on June 5, 2009 (as amended, the “AGI Senior CreditFacility”).  The Senior Credit Facilityprovides for a revolving credit facility of $25.0 million and term loans.  As of June 30, 2009, $3.0 million wasoutstanding under the revolving credit facility and $119.1 million wasoutstanding under the term loans. Reborrowings under the term loans are not permitted.  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 7.00% to 8.00%, respectively, over the stated rates, and a LIBOR floor of2.75%.  After consideration of fixedrates under the interest rate swap agreements, (discussed in Note 8), as of June 30,2009, the average interest rates on the term loans and the revolving creditfacility were 14.5% and 13.1%, respectively, and permitted borrowings under therevolving facility were $17.5 million. AGI also pays a commitment fee of 1.0% 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 under the Senior Credit Facility mature on March 31, 2010.  The funds available under the AGI SeniorCredit Facility may be utilized for borrowings or letters of credit except amaximum of $7.5 million may be allocated to such letters of credit.  As of June 30, 2009, AGI had letters ofcredit in the aggregate amount of $7.5 million outstanding.  The AGI Senior Credit Facility is secured byvirtually all of AGI’s assets and a pledge of AGI’s stock and the stock of AGI’ssubsidiaries.

 

In connection with the June 5, 2009amendment to its Senior Credit Facility, the outstanding term loan borrowingswere repaid by $8.0 million, the financial covenants in effect through theextended maturity date were revised and the Company capitalized $2.5million in fees paid to the lenders and expensed as incurred $1.5 million inlegal and other fees related to the amendment. As a condition to the amendment, the shareholder of the ultimate parentof the Company, was required to arrange for the purchase of $26.6 million inprincipal amount of the term portion of the AGI Senior Credit Facility by newlenders, enhance the yield to such new lenders, purchase AGHI Notes held by oneof such new lenders at a premium to the most recent market price, contribute$5.0 million in capital to AGI and guarantee two required

 

12

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**(6) DEBT (continued)**

 

principal payments on the term loans underthe AGI Senior Credit Facility, aggregating $15.0 million.  In consideration of suchsupport, the Company entered into an option agreement with the shareholder ofthe ultimate parent of the Company pursuant to which the Company granted suchshareholder or his assigns an option, exercisable on or before March 1,2010, to purchase the Company’s Camping World subsidiary for $55.0 millionwhich was believed to be the then fair value of Camping World.  Management was assisted in determining thefair value of such subsidiary by an independent third party valuationfirm.  AGI also agreed to pay theshareholder of the ultimate parent, upon successful refinancing of AGI’ssecured debt, including the AGI Senior Credit Facility, a success fee equal inamount to the fair value, as determined by an independent financial advisor ofsuch credit support, taking into account the fair value of the option topurchase Camping World.  In the event thefair value of the Camping World purchase option exceeds the fair value of suchcredit support, the shareholder will pay the amount of such excess to AGI.

 

Concurrent with the June 5, 2009amendment to the AGI Senior Credit Facility, AGI obtained a $9.7 million SecondLien Loan, the net proceeds of which were used to purchase $14.6 million inprincipal amount of AGI Senior Subordinated Notes.  The Second Lien Loan carries an interest rateof 9.0% and matures on July 31, 2010. The Second Lien Loan is secured by substantially all of the assets anda pledge of the stock of AGI and is second in priority only to the SeniorCredit Facility.

 

In addition, AGI agreed to use its bestefforts to secure an asset-based loan of at least $18.5 million secured by theinventory and receivables of its subsidiary, Camping World, Inc. (the “CampingWorld Financing”), the proceeds of which would be used to further reduce theamounts outstanding under the AGI Senior Credit Facility.  The senior lenders agreed to subordinatetheir liens to such financing.  If aCamping World Financing has not been consummated by September 15, 2009,the borrowing rate on revolving credit loans, swing loans and terms loansincrease to prime rate plus 9.0% or LIBOR plus 10.0%.  Note 9 of the Notes to Consolidated FinancialStatements.

 

SeniorSubordinated Notes

 

InFebruary 2004, AGI issued $200.0 million of 9% AGI Senior SubordinatedNotes (“AGI Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  On June 8, 2006, AGIamended its Amended and Restated Credit Agreement (“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. On June 5, 2009, AGI purchased $14.6 million of the SeniorSubordinated Notes.  As of June 30,2009, $137.8 million of the Senior Subordinated Notes remain outstanding.  Interest is payable on the remaining SeniorSubordinated Notes twice a year on February 15 and August 15.  AGI’s present and future restrictedsubsidiaries will guarantee the Senior Subordinated Notes with unconditionalguarantees of payment that will rank junior in right of payment to theirexisting and future senior debt, but will rank equal in

 

13

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**(6) DEBT (continued)**

 

rightof payment to their existing and future senior subordinated debt.  See Note 10 of the Notes to ConsolidatedFinancial Statements.

 

The amended AGI Senior Credit Facility alsorevised the Company’s financial covenants in effect through the extendedmaturity date.  As of June 30, 2009,AGI is in compliance with all covenants under the Senior Credit Facility.  Significant cost reductions have beenimplemented in 2008 and 2009, including the elimination of personnel,suspension of 401(k) employer contributions, salary cutbacks, hiring andcapital expenditure spending freezes, closure of under-performing retail stores, satelliteoffice closures, and magazine size and frequency reductions.

 

**(7) INTEREST RATE SWAP AGREEMENTS**

 

The Company isexposed to certain risks related to its business operations.  The primary risks that we managed by usingderivatives is interest rate risk.  Weuse financial instruments, including interest rate swap contracts, to reduceour risk to this exposure.  We do not usederivatives for speculative trading purposes and are not a party to leveragedderivatives.

 

We recognize allof our derivative instruments as either assets or liabilities at fairvalue.  Fair value is determined inaccordance with SFAS 157 (See Note 8 of the Notes to Consolidated FinancialStatements, “Fair Value Measurements”). The accounting for changes in the fairvalue of a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”), we formally assess, both atinception and periodically thereafter, whether the hedging derivatives arehighly effective in offsetting changes in either the fair value or cash flowsof the hedged item.  Our derivatives thatare not designated and do not qualify as hedges under SFAS 133 are adjusted tofair value through current earnings.

 

Effective January 1,2009, the Company adopted the provisions of the FASB’s Statement No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities — an amendment of FASBStatement No. 133” (“SFAS 161”). SFAS 161 requires that the objectives for using derivative instrumentsbe disclosed to better convey the purpose of derivative use in terms of therisks that the Company is intending to manage. This standard also requires disclosure of how derivatives and relatedhedged items are accounted for and how they affect the Company’s financialstatements.  The adoption of SFAS 161 didnot have a material impact on our condensed consolidated results of operations,financial position or cash flows.

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (1.039% at June 30, 2009, based upon the April 30,2009 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  AGI entered into the interest rateswaps to limit the effect of increases on our floating rate debt.

 

14

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

 

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 (1.039% at June 30,2009 based upon the April 30, 2009 reset date) and make periodic paymentsat a fixed rate of 3.43%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap was effective beginning April 30,2008 and expires on October 31, 2012.

 

On June 11,2009, the Company partially settled the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was recorded as anon-operating item in “Gain on derivative instrument” in the consolidatedstatement of operations for the quarter ended June 30, 2009.  The notional amount was reduced to $20.0million.  All other terms of the interestrate swap agreement remained unchanged. As a result, the amount included in other comprehensive loss related tothe partial termination of the $35.0 million interest rate swap was reducedprorata and included in earnings as a gain (loss) on derivative instrument.

 

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

 

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

 

The following isthe location and amounts of derivative instruments fair values in the statementof financial position segregated between designated, qualifying Statement 133hedging instruments segregated by assets and liabilities as required byStatement 161.

 

FairValues of Derivative Instruments (in thousands):

 
| **Derivatives designated as  hedging intruments under  Statement 133** | ** ** | **Balance Sheet Location**  | ** ** | **6/30/2009** | ** ** | **12/31/2008** | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------|------------|---------------|------------|----------------|------------|
|                                                                   |       |                        |       |          |       |           |       |
| Interest rate swap  contracts                                          |       | Other long-term liabilities |       | $             | (7,850     | )              | $          | (12,731 | ) |
|                                                                        |            |                             |            |               |            |                |            |  |  |

 

15

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

 

The following isthe location and amount of gains and losses on derivative instruments in thestatement of financial performance for the six months ended June 30, 2009 and2008 segregated between designated, qualifying Statement 133 hedginginstruments and those that are not, and segregated by assets and liabilities asrequired by Statement 133(R) (in thousands):

 
| **Derivatives in Statement  133 Cash Flow Hedging** | ** ** | **Amount of Gain or  (Loss) recognized in  OCI on Derivative**                                                                     | ** ** | **Location of  Gain (Loss)  Reclassified  from  Accumulated  OCI into  Statement of  Operations  (Effective**                             | ** ** | **Amount of Gain or  (Loss) reclassified from  OCI into Statement of Operations  (Effective portion)** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| **Relationships**                                   | ** ** | **6/30/2009**                                                                                                                      | ** ** | **6/30/2008**                                                                                                                             | ** ** | **Portion)**                                                                                           | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** |
| ** **                                          | ** ** | ** **                                                                                                                         | ** ** | ** **                                                                                                                                | ** ** | ** **                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest rate swap  contracts                       |       | $                                                                                                                                  | 3,635      |                                                                                                                                      | $          | (5,632                                                                                                 | )          | Gain (loss) on derivative Instrument |   | $ | (61 | ) | $ | — |   |
| ** **                                          | ** ** | ** **                                                                                                                         | ** ** | ** **                                                                                                                                | ** ** | ** **                                                                                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Derivatives in Statement  133 Cash Flow Hedging** | ** ** | **Location of Gain (Loss)  Recognized in Statement of  Operations  on Derivative  (Ineffective Portion and  Amount Excluded from** | ** ** | **Amount of Gain or (Loss)  recognized in income on  Derivative (Ineffective  portion and amount  excluded from Effectiveness  testing)** | ** ** | ** **                                                                                             | ** ** |
| **Relationships**                                   | ** ** | **Effectiveness Testing)**                                                                                                         | ** ** | **6/30/2009**                                                                                                                             | ** ** | **6/30/2008**                                                                                          | ** ** | ** ** | ** ** |
|                                                |       |                                                                                                                               |       |                                                                                                                                      |       |                                                                                                   | ** ** | ** ** | ** ** |
| Interest rate swap  contracts                       |       | Gain (loss) on  derivative Instrument                                                                                              |       | $                                                                                                                                         | 746        |                                                                                                   | $          | — | ** ** | ** ** | ** ** |
|                                                     |            |                                                                                                                                    |            |                                                                                                                                           |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |

 

**(8) FAIR VALUE MEASUREMENTS**

 

The Company adopted the provisions of FASBStatement No. 157, “Fair Value Measurements” (“SFAS 157”), effective January 1,2008, for its financial assets and liabilities and effective January 1,2009, with respect to the fair value measurement requirements for non-financialassets and liabilities that are not remeasured on a recurring basis. SFAS 157defines fair value, establishes a framework and gives guidance regarding themethods used for measuring fair value, and expands disclosures about fair valuemeasurements. Under this standard, fair value is defined as the price thatwould be received to sell an asset or paid to transfer a liability (i.e., the “exitprice”) in an orderly transaction between market participants at themeasurement date. Although the adoption of SFAS 157 did not have a materialimpact on our results of operations, financial position or cash flows, theCompany is now required to provide additional disclosures as part of itsfinancial statements.

 

During the three months ended June 30,2009, the Company adopted the provisions of the FASB’s FSP SFAS No. 107-1and Accounting Principles Board No. 28-1, “Interim Disclosures About FairValue of Financial Instruments.” The adoption of these FSP’s resulted inadditional

 

16

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

 

interim disclosures and did not have amaterial impact on our condensed consolidated results of operations, financialposition or cash flows.

 

SFAS 157 establishes a three-tier fair valuehierarchy, which prioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined as inputsother 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 June 30, 2009, AGI holds interest rate swap contracts thatare 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 7of the Notes to Consolidated Financial Statements for further information onthe interest rate swap contracts.  Thefair value of these interest rate swap contracts are determined based on inputsthat are readily available in public markets or can be derived from informationavailable in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2.

 

The Company recorded an impairment charge of $81.0 million in the thirdquarter of 2008 that wrote down to zero the carrying value of the preferredinterest (the “FreedomRoads Preferred Interest”) held by an indirect subsidiaryof Camping World in FreedomRoads Holding Company, LLC (“FreedomRoads”), aholding company whose subsidiaries sell and service new and used recreationalvehicles.  FreedomRoads is an affiliateunder common ownership with the Company’s ultimate parent.  Management was assisted in determining thefair value of the preferred interest in FreedomRoads Holding Company LLC by anindependent third party valuation firm. Inanticipation of the potential sale of Camping World, the impairment charge was recorded asa result of declining performance of the recreational vehicle industry drivenby overall weakening of the economy and a significant decline in consumerconfidence, in addition to limited credit available to consumers interested inpurchasing recreational vehicles. Therefore, the Company has categorized the FreedomRoads PreferredInterest as Level 3.  The impairmentcharge relating to the FreedomRoads Preferred Interest was not allocated to anyparticular operating segment.

 

The Company’s liabilities at June 30, 2009, measured at fair valueon a recurring basis subject to the disclosure requirements of SFAS 157, was asfollows:

 
| ** **                       | ** ** | ** **    | ** ** | **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**                  | ** ** | **6/30/2009** | ** ** | **(Level  1)**                                             | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
|                             |       |          |       |                                                       |       |   |   |   |   |
| Interest Rate Swap  Contracts    |       | $             | (7,850     | )                                                          | $          | — |   | $ | (7,850 | ) | $ | — |   |
| FreedomRoads Preferred  Interest |       | —        |       | —                                                     |       | — |   | — |   |
|                                  |            |               |            |                                                            |            |  |  |  |  |  |  |  |  |

 

There were nomaterial remeasurements to fair value during the six months ended June 30,2009 and 2008 of assets and liabilities that are not measured at fair value ona recurring basis.

 

17

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

 

The fair values ofcash equivalents, accounts receivable and accounts payable approximate theircarrying values due to the short-term nature of these financial instruments.

 

The following table presents the reported carrying value and fair valueinformation for the Company’s AGHI Notes, AGI Senior Subordinated Notes, andSenior Credit Facility. The fair values shown for the AGHI Notes and AGI SeniorSubordinated Notes are based on quoted prices in active markets for identicalassets (Level 1) (in thousands):

 

| ** **                     | ** ** | **6/30/2009** | ** ** | **12/31/2008** | ** ** |
|--------------------------------|------------|---------------|------------|----------------|------------|
| ** **                     | ** ** | **Cost**      | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| AGHI Notes                     |       | $             | 111,996    |           | $          | 50,398 |   | $ | 111,732 |   | $ | 50,279 |   |
| AGI Senior Subordinated  Notes |       | 137,824       |       | 88,207         |       | 152,399 |   | 80,771 |   |
| Senior Credit Facility         |       | 122,127       |       | 122,127        |       | 134,455 |   | 134,455 |   |
|                                |            |               |            |                |            |  |  |  |  |  |  |  |  |

 

**(9) RECENT EVENTS**

 

On June 5, 2009, the Company enteredinto an option agreement with the shareholder of its ultimate parent to whichthe Company granted such shareholder or his assigns an option, exercisable onor before March 1, 2010, to purchase the Company’s Camping Worldsubsidiary for $55.0 million. In the event the Camping World purchase option isexercised and, subject to the consent of the lenders under the Senior CreditFacility, the sale of Camping World consummated, the Company would intend touse the net cash proceeds from the sale of Camping World to repay indebtednessoutstanding under the Senior Credit Facility, as amended.  As of June 30, 2009, an aggregate of$119.1 million was outstanding under the term loans and $3.0 million wasoutstanding under the revolving credit facility of the Senior Credit Facility.

 

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

 

The following unaudited proforma condensed consolidated balance sheet as of June 30, 2009 and December 31,2008 and the statement of operations for the six months ended June 30,2009 and 2008 reflect the reclassification adjustments associated with theproposed disposal/sale of Camping World to the shareholder of the ultimateparent of the Company.  The pro formaadjustments relate to the disposal are presented since the disposition did notmeet the discontinued operations reporting requirements pursuant to SFASStatement No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” (SFAS 144) as of June 30, 2009, but are expected tomeet such requirements if 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 June 30, 2009.

 

18

----

 

**(9) RECENT EVENTS(continued)**

 

In addition, the historicaloperating results have also been reclassified to reflect discontinuedoperations.

 

Corporate Expenses - Theallocation to Camping World of expenses for certain Affinity Group, Inc.corporate functions historically provided to Camping World are done inaccordance with Staff Accounting Bulletin No. 55, “Allocation of Expensesand Related Disclosures in Subsidiaries’ Financial Statements”, (“SAB 55”).  Such allocations were made on a specificidentification basis to the extent possible and otherwise based on relativepercentages, as compared to the Company’s other businesses, of headcount orother appropriate methods depending on the nature of each item of cost to beallocated.

 

Interest Expense - The interestexpense included in discontinued operations below reflects the interestallocated to Camping World based upon debt required to be repaid uponconsummation of this transaction.

 

19

----

 

**(9) ****RECENTEVENTS (continued)**

 

The unaudited pro formabalance sheet of AGHI reclassifying Camping World as of June 30, 2009 toassets and liabilities of discontinued operations is as follows (in thousandsexcept shares and par value):

 
| ** **                                                                                | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                |       |           |       |                    |       |          |       |
| CURRENT ASSETS:                                                                           |       |           |       |                    |       |          |       |
| Cash and cash equivalents                                                                 |       | $              | 10,851     |                    | $          | (4,290        | )          | $ | 6,561 |   |
| Accounts receivable, net                                                                  |       | 43,025         |       | (18,987                 | )          | 24,038        |       |
| Inventories                                                                               |       | 64,534         |       | (63,830                 | )          | 704           |       |
| Prepaid expenses and other  assets                                                        |       | 14,247         |       | (1,965                  | )          | 12,282        |       |
| Assets of discontinued  operations                                                        |       | —         |       | 129,343                 |       | 129,343       |       |
| Total current assets                                                                      |       | 132,657        |       | 40,271                  |       | 172,928       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| PROPERTY AND EQUIPMENT,  net                                                              |       | 39,767         |       | (31,535                 | )          | 8,232         |       |
| NOTE FROM AFFILIATE                                                                       |       | 4,723          |       | —                  |       | 4,723         |       |
| INTANGIBLE ASSETS, net                                                                    |       | 20,614         |       | (2,869                  | )          | 17,745        |       |
| GOODWILL                                                                                  |       | 96,828         |       | —                  |       | 96,828        |       |
| DEFERRED TAX ASSETS, net                                                                  |       | 4,569          |       | (4,569                  | )          | —        |       |
| OTHER ASSETS                                                                              |       | 2,576          |       | (1,298                  | )          | 1,278         |       |
| Total assets                                                                              |       | $              | 301,734    |                    | $          | —        |       | $ | 301,734 |   |
|                                                                                      |       |           |       |                    |       |          |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                           |       |           |       |                    |       |          |       |
| CURRENT LIABILITIES:                                                                      |       |           |       |                    |       |          |       |
| Accounts payable                                                                          |       | $              | 43,163     |                    | $          | (41,501       | )          | $ | 1,662 |   |
| Accrued interest                                                                          |       | 10,151         |       | —                  |       | 10,151        |       |
| Accrued income taxes                                                                      |       | 1,236          |       | 458                     |       | 1,694         |       |
| Accrued liabilities                                                                       |       | 27,060         |       | (14,104                 | )          | 12,956        |       |
| Deferred revenues and  gains                                                              |       | 61,390         |       | (7,594                  | )          | 53,796        |       |
| Current portion of  long-term debt                                                        |       | 148,891        |       | —                  |       | 148,891       |       |
| Liabilities of  discontinued operations                                                   |       | —         |       | 85,572                  |       | 85,572        |       |
| Total current liabilities                                                                 |       | 291,891        |       | 22,831                  |       | 314,722       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| DEFERRED REVENUES AND  GAINS                                                              |       | 35,866         |       | (8,428                  | )          | 27,438        |       |
| LONG-TERM DEBT, net of  current portion                                                   |       | 234,331        |       | —                  |       | 234,331       |       |
| OTHER LONG-TERM  LIABILITIES                                                              |       | 25,845         |       | (14,403                 | )          | 11,442        |       |
|                                                                                      |       | 587,933        |       | —                  |       | 587,933       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| COMMITMENTS AND  CONTINGENCIES                                                            |       |           |       |                    |       |          |       |
|                                                                                      |       |           |       |                    |       |          |       |
| STOCKHOLDER’S DEFICIT :                                                              |       |           |       |                    |       |          |       |
| Common stock, $.01 par  value, 3,000 shares authorized, 100 shares issued and outstanding |       | 1              |       | —                  |       | 1             |       |
| Additional paid-in capital                                                                |       | 23,220         |       |                    |       | 23,220        |       |
| Accumulated deficit                                                                       |       | (302,718       | )          | —                  |       | (302,718      | )          |
| Accumulated other  comprehensive income                                                   |       | (6,702         | )          |                    |       | (6,702        | )          |
| Total stockholder’s  deficit                                                         |       | (286,199       | )          | —                  |       | (286,199      | )          |
| Total liabilities and  stockholder’s deficit                                         |       | $              | 301,734    |                    | $          | —        |       | $ | 301,734 |   |

 

20

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**(9) ****RECENT EVENTS (continued)**

 

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

 
| ** **                                                                                | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                |       |           |       |                    |       |          |       |
| CURRENT ASSETS:                                                                           |       |           |       |                    |       |          |       |
| Cash and cash equivalents                                                                 |       | $              | 10,777     |                    | $          | (842          | )          | $ | 9,935 |   |
| Accounts receivable, net                                                                  |       | 40,191         |       | (9,084                  | )          | 31,107        |       |
| Inventories                                                                               |       | 57,137         |       | (55,908                 | )          | 1,229         |       |
| Prepaid expenses and other  assets                                                        |       | 13,547         |       | (2,476                  | )          | 11,071        |       |
| Assets of discontinued  operations                                                        |       | —         |       | 110,964                 |       | 110,964       |       |
| Total current assets                                                                      |       | 121,652        |       | 42,654                  |       | 164,306       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| PROPERTY AND EQUIPMENT,  net                                                              |       | 44,077         |       | (34,022                 | )          | 10,055        |       |
| NOTE FROM AFFILIATE                                                                       |       | 4,608          |       | —                  |       | 4,608         |       |
| INTANGIBLE ASSETS, net                                                                    |       | 22,389         |       | (3,391                  | )          | 18,998        |       |
| GOODWILL                                                                                  |       | 96,828         |       | —                  |       | 96,828        |       |
| DEFERRED TAX ASSETS, net                                                                  |       | 4,569          |       | (4,569                  | )          | —        |       |
| OTHER ASSETS                                                                              |       | 2,035          |       | (672                    | )          | 1,363         |       |
| Total assets                                                                              |       | $              | 296,158    |                    | $          | —        |       | $ | 296,158 |   |
|                                                                                      |       |           |       |                    |       |          |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                           |       |           |       |                    |       |          |       |
| CURRENT LIABILITIES:                                                                      |       |           |       |                    |       |          |       |
| Accounts payable                                                                          |       | $              | 23,950     |                    | $          | (19,383       | )          | $ | 4,567 |   |
| Accrued interest                                                                          |       | 11,581         |       | —                  |       | 11,581        |       |
| Accrued income taxes                                                                      |       | 1,165          |       | 372                     |       | 1,537         |       |
| Accrued liabilities                                                                       |       | 27,009         |       | (10,864                 | )          | 16,145        |       |
| Deferred revenues and  gains                                                              |       | 60,569         |       | (7,254                  | )          | 53,315        |       |
| Current portion of  long-term debt                                                        |       | 12,391         |       | —                  |       | 12,391        |       |
| Liabilities of  discontinued operations                                                   |       | —         |       | 59,536                  |       | 59,536        |       |
| Total current liabilities                                                                 |       | 136,665        |       | 22,407                  |       | 159,072       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| DEFERRED REVENUES AND  GAINS                                                              |       | 35,855         |       | (8,500                  | )          | 27,355        |       |
| LONG-TERM DEBT, net of  current portion                                                   |       | 391,487        |       | —                  |       | 391,487       |       |
| OTHER LONG-TERM  LIABILITIES                                                              |       | 30,156         |       | (13,907                 | )          | 16,249        |       |
|                                                                                      |       | 594,163        |       | —                  |       | 594,163       |       |
|                                                                                      |       |           |       |                    |       |          |       |
| COMMITMENTS AND  CONTINGENCIES                                                            |       |           |       |                    |       |          |       |
|                                                                                      |       |           |       |                    |       |          |       |
| STOCKHOLDER’S DEFICIT :                                                              |       |           |       |                    |       |          |       |
| Common stock, $.01 par  value, 3,000 shares authorized, 100 shares issued and outstanding |       | 1              |       | —                  |       | 1             |       |
| Additional paid-in capital                                                                |       | 12,041         |       |                    |       | 12,041        |       |
| Accumulated deficit                                                                       |       | (299,710       | )          | —                  |       | (299,710      | )          |
| Accumulated other  comprehensive income                                                   |       | (10,337        | )          |                    |       | (10,337       | )          |
| Total stockholder’s  deficit                                                         |       | (298,005       | )          | —                  |       | (298,005      | )          |
| Total liabilities and  stockholder’s deficit                                         |       | $              | 296,158    |                    | $          | —        |       | $ | 296,158 |   |

 

21

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**(9) ****RECENT EVENTS (continued)**

 

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

 
| ** **                                                                                | ** ** | **2009**       | ** ** | **Reclassification of** | ** ** | **2009**      | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                                      |       |           |       |                    |       |          |       |
| REVENUES:                                                                                 |       |           |       |                    |       |          |       |
| Membership services                                                                       |       | $              | 74,429     |                    | $          | (8,897        | )          | $ | 65,532 |   |
| Media                                                                                     |       | 26,783         |       | —                  |       | 26,783        |       |
| Retail                                                                                    |       | 133,740        |       | (133,740                | )          | —        |       |
|                                                                                      |       | 234,952        |       | (142,637                | )          | 92,315        |       |
|                                                                                      |       |           |       |                    |       |          |       |
| COSTS APPLICABLE TO REVENUES:                                                             |       |           |       |                    |       |          |       |
| Membership services                                                                       |       | 44,945         |       | (1,707                  | )          | 43,238        |       |
| Media                                                                                     |       | 20,880         |       | —                  |       | 20,880        |       |
| Retail                                                                                    |       | 80,906         |       | (80,906                 | )          | —        |       |
|                                                                                      |       | 146,731        |       | (82,613                 | )          | 64,118        |       |
|                                                                                      |       |           |       |                    |       |          |       |
| GROSS PROFIT                                                                              |       | 88,221         |       | (60,024                 | )          | 28,197        |       |
|                                                                                      |       |           |       |                    |       |          |       |
| OPERATING EXPENSES:                                                                       |       |           |       |                    |       |          |       |
| Selling, general and  administrative                                                      |       | 63,056         |       | (54,295                 | )          | 8,761         |       |
| Financing expense                                                                         |       | 1,540          |       | —                  |       | 1,540         |       |
| Depreciation and  amortization                                                            |       | 10,661         |       | (4,826                  | )          | 5,835         |       |
|                                                                                      |       | 75,257         |       | (59,121                 | )          | 16,136        |       |
|                                                                                      |       |           |       |                    |       |          |       |
| INCOME FROM OPERATIONS                                                                    |       | 12,964         |       | (903                    | )          | 12,061        |       |
|                                                                                      |       |           |       |                    |       |          |       |
| NON-OPERATING ITEMS:                                                                      |       |           |       |                    |       |          |       |
| Interest income                                                                           |       | 264            |       | (4                      | )          | 260           |       |
| Interest expense                                                                          |       | (20,080        | )          | 1,933                   |       | (18,147       | )          |
| Debt restructuring expense                                                                |       | 685            |       | —                  |       | 685           |       |
| Gain on derivative  instrument                                                            |       | 4,678          |       | —                  |       | 4,678         |       |
| Other non-operating items                                                                 |       | (819           | )          | 165                     |       | (654          | )          |
|                                                                                      |       | (15,272        | )          | 2,094                   |       | (13,178       | )          |
|                                                                                      |       |           |       |                    |       |          |       |
| LOSS (INCOME) FROM  CONTINUING OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |       | (2,308         | )          | 1,191                   |       | (1,117        | )          |
|                                                                                      |       |           |       |                    |       |          |       |
| INCOME TAX EXPENSE                                                                        |       | (700           | )          | 413                     |       | (287          | )          |
|                                                                                      |       |           |       |                    |       |          |       |
| LOSS FROM CONTINUING  OPERATIONS                                                          |       | (3,008         | )          | 1,604                   |       | (1,404        | )          |
|                                                                                      |       |           |       |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                                   |       |           |       |                    |       |          |       |
| Loss from operations of  discontinued Camping World, Inc.                            |       | —         |       | (1,191                  | )          | (1,191        | )          |
| Income tax expense                                                                        |       | —         |       | (413                    | )          | (413          | )          |
| Loss on discontinued  operations                                                          |       | —         |       | (1,604                  | )          | (1,604        | )          |
|                                                                                      |       |           |       |                    |       |          |       |
| NET LOSS                                                                                  |       | $              | (3,008     | )                       | $          | —        |       | $ | (3,008 | ) |

 

22

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**(9) ****RECENT EVENTS (continued)**

 

Unaudited proforma information relating the operations of AGHI reclassifying Camping Worldfor the six months ended June 30, 2008 to discontinued operations is asfollows (in thousands):

 
| ** **                                                                         | ** ** | **2008**       | ** ** | **Reclassification of** | ** ** | **2008**      | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                         | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                               |       |           |       |                    |       |          |       |
| REVENUES:                                                                          |       |           |       |                    |       |          |       |
| Membership services                                                                |       | $              | 78,108     |                    | $          | (9,884        | )          | $ | 68,224 |   |
| Media                                                                              |       | 41,680         |       | —                  |       | 41,680        |       |
| Retail                                                                             |       | 152,926        |       | (152,926                | )          | —        |       |
|                                                                               |       | 272,714        |       | (162,810                | )          | 109,904       |       |
|                                                                               |       |           |       |                    |       |          |       |
| COSTS APPLICABLE TO  REVENUES:                                                     |       |           |       |                    |       |          |       |
| Membership services                                                                |       | 49,659         |       | (2,601                  | )          | 47,058        |       |
| Media                                                                              |       | 28,604         |       | —                  |       | 28,604        |       |
| Retail                                                                             |       | 89,195         |       | (89,195                 | )          | —        |       |
|                                                                               |       | 167,458        |       | (91,796                 | )          | 75,662        |       |
|                                                                               |       |           |       |                    |       |          |       |
| GROSS PROFIT                                                                       |       | 105,256        |       | (71,014                 | )          | 34,242        |       |
|                                                                               |       |           |       |                    |       |          |       |
| OPERATING EXPENSES:                                                                |       |           |       |                    |       |          |       |
| Selling, general and  administrative                                               |       | 76,722         |       | (66,111                 | )          | 10,611        |       |
| Depreciation and  amortization                                                     |       | 10,294         |       | (4,422                  | )          | 5,872         |       |
|                                                                               |       | 87,016         |       | (70,533                 | )          | 16,483        |       |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM OPERATIONS                                                             |       | 18,240         |       | (481                    | )          | 17,759        |       |
|                                                                               |       |           |       |                    |       |          |       |
| NON-OPERATING ITEMS:                                                               |       |           |       |                    |       |          |       |
| Interest income                                                                    |       | 282            |       | (20                     | )          | 262           |       |
| Interest expense                                                                   |       | (18,441        | )          | 1,499                   |       | (16,942       | )          |
| Other non-operating items                                                          |       | (23            | )          | 86                      |       | 63            |       |
|                                                                               |       | (18,182        | )          | 1,565                   |       | (16,617       | )          |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |       | 58             |       | 1,084                   |       | 1,142         |       |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME TAX EXPENSE                                                                 |       | (571           | )          | 409                     |       | (162          | )          |
|                                                                               |       |           |       |                    |       |          |       |
| (LOSS) INCOME FROM  CONTINUING OPERATIONS                                          |       | (513           | )          | 1,493                   |       | 980           |       |
|                                                                               |       |           |       |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                            |       |           |       |                    |       |          |       |
| Loss from operations of  discontinued Camping World, Inc.                     |       | —         |       | (1,084                  | )          | (1,084        | )          |
| Income tax expense                                                                 |       | —         |       | (409                    | )          | (409          | )          |
| Loss on discontinued  operations                                                   |       | —         |       | (1,493                  | )          | (1,493        | )          |
|                                                                               |       |           |       |                    |       |          |       |
| NET LOSS                                                                           |       | $              | (513       | )                       | $          | —        |       | $ | (513 | ) |

 

23

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**(10) SUBSEQUENT EVENTS**

 

The Company hascompleted an evaluation of all subsequent events through August 14, 2009 andconcluded, that except as disclosed below, no other subsequent events haveoccurred that would require recognition in the Company’s Consolidated FinancialStatements or disclosed in the Notes to the Consolidated Financial Statements.

 

The Company has engaged a financial advisor to seek equity capitalwhich would permit a possible refinancing or restructuring of the Senior CreditFacility ($119.1 million principal amount of term loans and $3.0 millionprincipal amount under the revolving credit line under the Senior CreditFacility on June 30, 2009), AGI’s Second Lien Loan indebtedness ($9.7million principal outstanding on June 30, 2009), AGI’s Senior SubordinatedNotes due 2012 ($137.8 million principal outstanding on June 30, 2009) andthe AGHI Notes due 2012 ($112.0 million principal outstanding on June 30,2009).  AGI and AGHI have receivedpreliminary written proposals from a number of potential equity investors, someof whom have performed business due diligence. AGI and AGHI are actively pursuing four of such proposals.  They involve new cash equity investments ofbetween $50.0 million and $90.0 million. All proposals contemplate, as a condition to the equity investment, thatthe Company’s Camping World subsidiary would be sold to an affiliate and that asignificant part of the proceeds of the equity investment would be used to makean offer to holders of the AGI Senior Subordinated Notes due 2012 and/or theAGHI Notes due 2012 to exchange their current security for a combination ofcash and new bonds with an extended maturity date and a lower face amount.  In view thereof, AGHI intends to defer theinterest payment ($6.2 million) due on August 15, 2009 on the AGHI Notes.

 

Under the terms of the AGHI Notes, the Company is afforded a 30-daygrace period from the interest payment date before non-payment constitutes anevent of default under such notes. During such 30-day grace period, the Company intends to discuss withbondholders possible alternative capital structures after a presumed cashequity investment, including possible discounts for early payment and possibleexchanges of existing securities for new securities with an extended maturitydate or other terms acceptable to the Company and its bondholders.

 

As a result of restrictions in the AGI Senior Credit Facility, AGI isblocked from making distributions to AGHI for the purpose of paying interest onthe AGHI Notes.  For the two most recentinterest payments, AGHI has made the interest payment using the proceeds of acapital contribution from AGHI’s parent. There can be no assurance that AGHI’s parent will fund the interestpayment on the AGHI Notes by the end of the 30-day grace period.

 

There can be no assurance that the Company will be able to implement anew capital structure to repay or refinance the AGI Senior Credit Facility, AGI’sSecond Lien Loan indebtedness, the AGI Senior Subordinated Notes or the AGHINotes before the final maturity of the AGI Senior Credit Facility in March 2010,the maturity of AGI’s Second Lien Loan indebtedness in July 2010, thematurity of the AGI Senior Subordinated Notes in February 2012, or thematurity of the AGHI Notes, $25.4 million of which mature in March 2010and the balance in February 2012. If the Company is not able to refinance or replace any such debt beforeits scheduled maturity, the holders of such debt will be entitled to

 

24

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**(10) SUBSEQUENT EVENTS**

 

exercise their respective remedies including, in the case of secureddebt, to sell the collateral securing the repayment thereof.  In as much as the indebtedness owned underthe AGI Senior Credit Facility and AGI’s Second Lien Loan indebtedness issecured, it would be repaid before funds are available to discharge anyunsecured or subordinated obligations.

 

25

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**ITEM2:**

AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2009**          | ** ** | **6/30/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| REVENUES:                            |       |                   |       |   |   |   |   |
| Membership services                  |       | 30.2                   | %          | 28.8 | % | (7.9 | )% |
| Media                                |       | 7.2                    | %          | 10.4 | % | (39.3 | )% |
| Retail                               |       | 62.6                   | %          | 60.8 | % | (9.4 | )% |
|                                 |       | 100.0                  | %          | 100.0 | % | (12.1 | )% |
|                                 |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                   |       |   |   |   |   |
| Membership services                  |       | 18.9                   | %          | 18.0 | % | (7.2 | )% |
| Media                                |       | 5.7                    | %          | 7.7 | % | (35.0 | )% |
| Retail                               |       | 38.0                   | %          | 35.4 | % | (5.7 | )% |
|                                 |       | 62.6                   | %          | 61.1 | % | (9.8 | )% |
|                                 |       |                   |       |   |   |   |   |
| GROSS PROFIT                         |       | 37.4                   | %          | 38.9 | % | (15.6 | )% |
|                                 |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |   |   |
| Selling, general and  administrative |       | 25.5                   | %          | 27.2 | % | (17.8 | )% |
| Financing expense                    |       | 1.2                    | %          | — |   | 100.0 | % |
| Depreciation and  amortization       |       | 4.4                    | %          | 3.5 | % | 10.3 | % |
|                                 |       | 31.1                   | %          | 30.7 | % | (11.2 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 6.3                    | %          | 8.2 | % | (32.2 | )% |
|                                 |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |   |   |
| Interest income                      |       | 0.1                    | %          | 0.1 | % | (3.6 | )% |
| Interest expense                     |       | (8.5                   | )%         | (6.3 | )% | 19.2 | % |
| Gain on derivative  instrument       |       | 0.5                    | %          | — |   | 100.0 | % |
| Gain on debt restructure             |       | 3.6                    | %          | — |   | 100.0 | % |
| Other non-operating items,  net      |       | (0.6                   | )%         | — |   | 2844.0 | % |
|                                 |       | (4.9                   | )%         | (6.2 | )% | (31.1 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES           |       | 1.4                    | %          | 2.0 | % | (35.6 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.2                   | )%         | (0.2 | )% | 11.8 | % |
|                                 |       |                   |       |   |   |   |   |
| NET INCOME                           |       | 1.2                    | %          | 1.8 | % | (40.5 | )% |

 

26

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AFFINITY GROUP HOLDING, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **6/30/2009**        | ** ** | **6/30/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                 |       |   |   |   |   |
| REVENUES:                            |       |                 |       |   |   |   |   |
| Membership services                  |       | 31.7                 | %          | 28.6 | % | (4.7 | )% |
| Media                                |       | 11.4                 | %          | 15.3 | % | (35.7 | )% |
| Retail                               |       | 56.9                 | %          | 56.1 | % | (12.5 | )% |
|                                 |       | 100.0                | %          | 100.0 | % | (13.8 | )% |
|                                 |       |                 |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                 |       |   |   |   |   |
| Membership services                  |       | 19.1                 | %          | 18.2 | % | (9.5 | )% |
| Media                                |       | 8.9                  | %          | 10.5 | % | (27.0 | )% |
| Retail                               |       | 34.5                 | %          | 32.7 | % | (9.3 | )% |
|                                 |       | 62.5                 | %          | 61.4 | % | (12.4 | )% |
|                                 |       |                 |       |   |   |   |   |
| GROSS PROFIT                         |       | 37.5                 | %          | 38.6 | % | (16.2 | )% |
|                                 |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                 |       |   |   |   |   |
| Selling, general and  administrative |       | 26.8                 | %          | 28.1 | % | (17.8 | )% |
| Financing expense                    |       | 0.7                  | %          | — |   | 100.0 | % |
| Depreciation and  amortization       |       | 4.5                  | %          | 3.8 | % | 3.6 | % |
|                                 |       | 32.0                 | %          | 31.9 | % | (13.5 | )% |
|                                 |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 5.5                  | %          | 6.7 | % | (28.9 | )% |
|                                 |       |                 |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                 |       |   |   |   |   |
| Interest income                      |       | 0.1                  | %          | 0.1 | % | (6.4 | )% |
| Interest expense                     |       | (8.6                 | )%         | (6.8 | )% | 8.9 | % |
| Gain on derivative  instrument       |       | 0.3                  | %          | — |   | 100.0 | % |
| Gain on debt restructure             |       | 2.0                  | %          | — |   | 100.0 | % |
| Other non-operating items,  net      |       | (0.3                 | )%         | — |   | 3460.9 | % |
|                                 |       | (6.5                 | )%         | (6.7 | )% | (16.0 | )% |
|                                 |       |                 |       |   |   |   |   |
| (LOSS) INCOME BEFORE  INCOME TAXES   |       | (1.0                 | )%         | — |   | (4079.3 | )% |
|                                 |       |                 |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.3                 | )%         | (0.2 | )% | 22.6 | % |
|                                 |       |                 |       |   |   |   |   |
| NET LOSS                             |       | (1.3                 | )%         | (0.2 | )% | 486.4 | % |

 

27

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended June 30, 2009**

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

 

*Revenues*

 

Revenuesof $129.9 million for the second quarter of 2009 decreased by $17.8 million, or12.1%, from the comparable period in 2008.

 

Membershipservices revenues of approximately $39.2 million for the second quarter of 2009decreased $3.4 million, or 7.9%, from the comparable period in 2008.  This revenue decrease was largelyattributable to a $2.3 million reduction in member publication advertising revenueand reduced membership file size for the Coast Club and Golf Card Club, an $0.8million reduction in revenue from member events, a $0.5 million decrease inother ancillary product revenue, and a $0.4 million decrease in marketing feeincome for vehicle insurance products. These decreases were partially offset by increased extended vehiclewarranty program revenue of $0.6 million resulting from continued policy growthand strong renewals.

 

Mediarevenues of $9.4 million for the second quarter of 2009 decreased $6.1 million,or 39.3%, from the comparable period in 2008. This decrease was primarily attributable to a $2.8 million reduction inrevenue in the outdoor power sports magazines related to decreased advertisingrevenue, a $2.3 million reduction in RV related publications, primarilyattributable to decreased advertising revenue, a $0.5 million reduction inconsumer show revenue due to reduced exhibitor attendance, and a $0.5 millionreduction in advertising revenue related to the campground guides.

 

Retail revenues of$81.4 million decreased by $8.4 million, or 9.4 %, from the comparable periodin 2008.  Store merchandise salesdecreased $4.6 million from the second quarter of 2008 due to a same storesales decrease of $4.0 million, or 6.5%, compared to a 15.0% decrease in samestore sales for the second quarter of 2008, and discontinued store revenue of$2.2 million, was partially offset by a $1.6 million revenue increase from theopening of seven new stores over the past eighteen months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Further, mail order sales decreased $0.4million, installation and service fees decreased $0.9 million and supplies andother sales decreased $2.5 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $81.4 million for the second quarter of 2009, adecrease of $8.9 million, or 9.8%, from the comparable period in 2008.

 

Membershipservices costs and expenses of approximately $24.6 million decreased $1.9million, or 7.2%, from the comparable period in 2008.  This decrease consisted of $0.6 million ofreduced member magazine costs, a $0.4 million reduction in wage-related expenses,a $0.4 million reduction in marketing costs related to vehicle insuranceproducts, a $0.3 million 

 

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decreasein member events costs related to reduced revenue and a $0.2 million decreasein other ancillary product expenses.

 

Mediacosts and expenses of $7.4 million for the second quarter of 2009 decreased$4.0 million, or 35.0%, from the comparable period in 2008 primarily related toa $1.7 million reduction in magazine expenses resulting from decreasedcirculation and production costs, a $1.5 million reduction wage-related costs,a $0.6 million reduction in consumer show costs related to reduced revenue, anda $0.2 million reduction in costs related to campground guides.

 

Retailcosts applicable to revenues decreased $3.0 million, or 5.7%, to $49.4 millionprimarily as a result of the decrease in retail revenue.  The retail gross profit margin of 39.3% forthe second quarter of 2009 decreased from 41.7% for the comparable period in2008 primarily due to new, discounted “value pricing” adopted on over 1,000products.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $33.1 million for thesecond quarter of 2009 decreased $7.2 million compared to the second quarter of2008.  This decrease was due to a $6.1million decrease in retail general and administrative expenses consistingprimarily of decreases in labor and selling expenses, a $0.7 million reductionin wage related expenses, a $0.6 million expense reduction in the consumershows group relating to discontinued consulting agreements and management feesand $0.3 million in other general and administrative expenses.  These decreases were partially offset by anincrease of $0.5 million in professional fees.

 

Financingexpense of $1.5 million in second quarter of 2009 related to legal and othercosts incurred relating to the amendment to the credit facility dated June 5,2009, which was expensed in accordance with EITF 96-19, “Debtors Accounting fora Modification or Exchange of Debt Instruments.”

 

Depreciationand amortization expense of $5.7 million increased $0.5 million from the prioryear primarily dueto depreciation of a retail supply chainsystem installed in 2009.

 

*Incomefrom Operations*

 

Incomefrom operations for the second quarter of 2009 totaling $8.2 million decreased$3.9 million compared to the second quarter of 2008.  This decrease was primarily due to reducedgross profit for retail, media and membership services operations of $5.4million, $2.1 million and $1.5 million, respectively, partially offset byreduced operating expenses of $5.1 million.

 

*Non-OperatingItems*

 

Non-operatingitems of $6.3 million for the second quarter of 2009 decreased approximately$2.9 million compared to the second quarter of 2008 due to a $4.7 million gainon purchase of the $14.6 million Senior Subordinated Notes with the proceedsfrom the $9.7 million Second Lien Loan and a $0.7 million gain on derivativeinterest rate swap agreements (See Note 7 of the Notes to Consolidated FinancialStatements), partially

 

29

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offset by a $1.8million increase in net interest expense relating to higher interest rates and$0.7 million of other refinance costs.

 

*IncomeBefore Income Tax*

 

Incomefrom operations before income tax for the second quarter of 2009 was $1.9million, or $1.0 million lower than the second quarter of 2008.  This decrease was attributable to the $3.9million decrease in income from operations and $2.9 million of reducednon-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.3 million for thesecond quarter of 2009, compared to $0.3 million for the second quarter of2008.

 

# *Net Income*

# * *

Netincome in the second quarter of 2009 was $1.6 million compared to net income of$2.6 million for the same period in 2008 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

The Company’sthree principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, CampClub USA and assorted membership products and services for RV owners, campersand outdoor vacationers, and the Golf Card Club for golf enthusiasts.  The Media segment publishes a variety ofpublications for selected markets in the recreation and leisure industry,including general circulation periodicals, directories, and RV and powersportsindustry trade magazines.  In addition,the Media segment operates consumer outdoor recreation shows primarily focusedon RV and powersports markets.  TheRetail segment sells specialty retail merchandise and services for RV ownersprimarily through retail supercenters and mail order catalogs.  The Company evaluates performance based onprofit or loss from operations before income taxes and unusual items.

 

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

 

Membershipservices segment profit of $12.0 million for the second quarter of 2009decreased $1.3 million, or 9.5%, from the comparable period in 2008.  This decrease was largely attributable to a$1.3 million decrease in segment profit from member publications primarily dueto decreased advertising revenue, a $0.5 million decrease in segment profitfrom member events, a $0.4 million decrease in segment profit from vehicleinsurance products and a $0.4 million decrease in segment profit from a declinein Coast to Coast Club and Golf Card Club membership fees, partially offset bya $0.7 million increase in profit from the extended vehicle warranty programs,associated with increased renewal revenue and a $0.6 million reduction inwage-related overhead expenses.

 

30

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Media segmentprofit decreased $1.0 million, or 102.8%, to a loss of $26,000 for the secondquarter of 2009 decreased from the comparable period in 2008.  This decrease was largely attributed to a$2.0 million decrease in profit in the RV-related publications primarilyrelated to reduced advertising revenue, partially offset by a $0.7 millionincrease in segment profit from our consumer shows group and a $0.3 millionreduction in segment overhead expenses.

 

Retail segmentprofit increased $1.0 million from the second quarter of 2008 to $0.4 millionfor the second quarter of 2009.  This increasein segment profit resulted primarily from a $6.1 million decrease in selling, general andadministrative expenses, a $1.2 million decrease in interest expense, partiallyoffset by a $5.7 million decrease in gross profit margin and a $0.6 millionincrease in depreciation and amortization expense.

 

**Six MonthsEnded June 30, 2009**

**ComparedWith Six Months Ended June 30, 2008**

 

*Revenues*

 

Revenuesof $235.0 million for the first six months of 2009 decreased by $37.8 million,or 13.8%, from the comparable period in 2008.

 

Membershipservices revenues of approximately $74.4 million for the first six months of2009 decreased $3.7 million, or 4.7%, from the comparable period in 2008.  This revenue decrease was largelyattributable to a $3.7 million reduction in revenue for the membership servicesclubs, largely due to reduced advertising revenue in member publications andreduced file size in the Coast to Coast Club and Golf Card Club, a $1.1 millionreduction in member events revenue, a $0.8 million decrease in marketing feeincome for vehicle insurance products, a $0.6 million reduction in dealerprogram marketing revenue and a $0.5 million reduction in other variousancillary products.  These decreases werepartially offseta $1.8 million increase in extended vehiclewarranty program revenueresulting from continued growth and strongrenewals of contracts in force and a $1.2 million brand usage licensing fee chargedto FreedomRoads Holding LLC and its subsidiaries (collectively “FreedomRoads”).  The Cooperative Resources Agreement was datedJanuary 1, 2008 and requires payment by FreedomRoads of an annual feebased on revenue, as defined, in exchange for the right to use the CampingWorld logos, trademarks, and trade names granted by AGI.  This brand usage license fee of $1.3 millionrecognized from FreedomRoads in the second quarter of 2009 has been fullyreserved due to the uncertainty of its collectability.

 

Mediarevenues of $26.8 million for the first six months of 2009 decreased $14.9million, or 35.7%, from the comparable period in 2008.  This decrease was primarily attributable to a$5.9 million reduction in revenue from the outdoor power sports magazinesrelated to reduced advertising revenue and reduced published issues of boatingand ATV magazines, a $4.3 million reduction in consumer show revenue mainly dueto reduced exhibitor attendance, a $3.6 million reduction in RV-relatedmagazines largely due to reduced advertising revenue, a $0.6 million reductionin revenue associated with our campground guides and a $0.5 million reductionin revenue from the annual campground directories.

 

31

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Retail revenues ofapproximately $133.8 million decreased by $19.2 million, or 12.5%, from thecomparable period in 2008.  Storemerchandise sales decreased $12.5 million from the first six months of 2008 dueto a same store sales decrease of $12.0 million, or 11.0%, compared to a 15.7%decrease in same store sales for the first six months of 2008, and discontinuedstore revenue of $3.3 million, was partially offset by a $2.8 million revenueincrease from the opening of seven new stores over the past eighteenmonths.  Same store sale calculations fora given period include only those stores that were open both at the end of thatperiod and at the beginning of the preceding fiscal year.  Also, mail order sales decreased $1.5million, installation and service fees decreased $1.6 million and supplies andother sales decreased $3.6 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $146.7 million for the first six months of 2009,a decrease of $20.7 million, or 12.4%, from the comparable period in 2008.

 

Membershipservices costs and expenses of $44.9 million decreased $4.7 million, or 9.5%,from the comparable period in 2008.  Thisdecrease consisted of $1.7 million of reduced marketing and member publicationcosts related to the Good Sam Club, Coast to Coast Club and Golf Card Club, a$1.1 million reduction in wage-related expenses, a $0.9 million reduction inmarketing costs related to vehicle insurance products, a $0.7 million reductionin costs related to various other ancillary products, a $0.5 million decreasein events costs related to reduced revenue, a $0.4 million reduction in dealerprogram marketing costs related to reduced revenue and $0.3 million of reducedcosts in emergency road service programs. These increases were partially offset by $0.4 million of incrementalcosts associated with increased extended vehicle warranty program revenue and a$0.5 million increase in costs associated with a revised marketing feestructure in the health related insurance programs.

 

Mediacosts and expenses of $20.9 million for the first six months of 2009 decreased$7.7 million, or 27.0%, from the comparable period in 2008 primarily related toreduced costs of $2.9 million in magazine circulation and production costs, a$2.5 million reduction in wage related expenses, a $1.7 million reductionrelated to consumer show costs, including reduced site rental, outside servicesand promotion expense related to fewer exhibitors, a $0.5 million reduction inmostly marketing costs related to the annual campground directories and a $0.1million reduction related to reduced campground guide revenue.

 

Retailcosts applicable to revenues decreased $8.3 million, or 9.3%, to $80.9 millionprimarily as a result of the decrease in retail revenue.  The retail gross profit margin of 39.5% forthe first six months of 2009 decreased from 41.7% for the comparable period in2008 primarily due to decreased ad sales and new, discounted “value pricing”adopted on over 1,000 products.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $63.1 million for thefirst six months of 2009 decreased $13.6 million compared to the first sixmonths of 2008.  This decrease was due toan $11.8 million decrease in retail general and administrative expensesprimarily consisting decreases in labor and selling expenses.  In addition, wage related

 

32

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expensesavings were $1.0 million in the other two segments and the consumer showsgroup in the media segment had an $0.8 million reduction in general andadministrative expenses related to discontinued consulting agreements andmanagement fees.

 

Forthe first six months of 2009, financing expense of $1.5 million was incurredfor legal and other costs related to the amendment to the credit facility datedJune 5, 2009, which were expensed in accordance with EITF 96-19, “DebtorsAccounting for a Modification or Exchange of Debt Instruments.”

 

Depreciationand amortization expense of $10.7 million increased $0.4 million primarily dueto the commencement of depreciation of a retail supply chain project installedin 2009.

 

*IncomeFrom Operations*

 

Incomefrom operations for the first six months of 2009 totaling $13.0 milliondecreased $5.3 million compared to the first six months of 2008.  This decrease was primarily due to reducedgross profit for retail and media operations of $10.9 million, and $7.2million, respectively, partially offset by reduced operating expenses ofapproximately $11.8 million and increased gross profit for the membershipservices operations of $1.0 million.

 

*Non-OperatingItems*

 

Non-operatingitems of $15.3 million for the first six months of 2009 decreased $2.9 millioncompared to the first six months of 2008 due to a $4.7 million gain on purchaseof the $14.6 million Senior Subordinated Notes with the proceeds from the $9.7million Second Lien Loan and a $0.7 million gain on derivative interest rateswap agreements (See Note 7 of the Notes to Consolidated Financial Statements),partially offset by a $1.6 million increase in net interest expense resultingfrom increased interest rates, $0.8 million of refinance costs, and a $0.1million loss on sale of retail equipment.

 

*(Loss) Incomebefore Income Taxes*

 

Lossfrom operations before income taxes for the first six months of 2009 was $2.3million, or an increase of $2.4 million from the first six months of 2008.  This increased loss was attributable to the$5.3 million decrease in income from operations and $2.9 million of reducednon-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.7 million for the firstsix months of 2009, compared to $0.6 million for the first six months of 2008.

 

# *Net (Loss) Income*

 

Netloss in the first six months of 2009 was $3.0 million compared to $0.5 millionfor the same period in 2008 primarily due to the reasons discussed above.

 

33

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*SegmentProfit (Loss)*

 

The Company’sthree principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, CampClub USA and assorted membership products and services for RV owners, campersand outdoor vacationers, and the Golf Card Club for golf enthusiasts.  The Media segment publishes a variety ofpublications for selected markets in the recreation and leisure industry,including general circulation periodicals, directories, and RV and powersportsindustry trade magazines.  In addition,the Media segment operates consumer outdoor recreation shows primarily focusedon RV and powersports markets.  TheRetail segment sells specialty retail merchandise and services for RV ownersprimarily through retail supercenters and mail order catalogs.  The Company evaluates performance based onprofit or loss from operations before income taxes and unusual items.

 

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

 

Membershipservices segment profit of $24.6 million for the first six months of 2009increased $1.4 million, or 5.9%, from the comparable period in 2008.  This increase was largely attributable to a$1.7 million increase in profit from the extended vehicle warranty program,associated with reduced marketing expenses, a $1.2 million brand licensing feecharged to FreedomRoads in March 2009 and a $0.7 million reduction inwage-related overhead expenses, partially offset by a $0.8 million decrease insegment profit from the Good Sam Club, primarily relating to reducedadvertising revenue in the member publication, a $0.6 million decrease insegment profit from member events resulting from reduced attendance, a $0.4million decrease in segment profit in Coast to Coast Club and Golf Card Clubdue to reduced enrollment and a $0.4 million decrease in segment profit inhealth related ancillary products.

 

Media segmentprofit of approximately $1.3 million for the first six months of 2009 decreasedapproximately $5.4 million, or 81.0%, from the comparable period in 2008.  This decrease was largely attributed to a$2.7 million decrease in segment profit from the RV-related publicationsprimarily related to attributable to reduced advertising revenue, a $1.6million decrease in segment profit from our consumer shows group primarilyrelated to reduced exhibitor revenue, and a $1.1 million decrease in segmentprofit from our outdoor powersports magazine group, primarily attributable toreduced advertising revenue and fewer issues published.

 

Retail segmentloss decreased $1.2 million from the first six months of 2008 to a loss ofapproximately $7.7 million for the first six months of 2009.  This decrease in segmentloss resulted primarily from an $11.8 million decrease in selling, general and administrative expensesand a $1.3 million decrease in interest expense partially offset by an $11.5million decrease in gross profit margin, and a $0.4 million increase indepreciation and amortization expense.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company hashistorically operated with a working capital deficit.  The working capital deficit as of June 30,2009 and December 31, 2008 was $159.2 million and $15.0 million,respectively.  The primary reason for theincrease in working capital deficit for 2009 is the classification of the debtassociated with the Amended and Restated Credit Agreement and AGHI Notestotaling $148.9 million as a current liability.  Deferredrevenue and gains reported under current liabilities was $61.4 million and$60.6 million as of June 30, 2009 and December 31, 2008,respectively.  Deferred revenue isprimarily comprised of cash collected for club memberships in advance, which isamortized over the life of the membership. The Company uses net proceeds from this deferred membership revenue tolower its borrowings.  The Companyanticipates that it will be able to refinance or replace the existing creditfacility before its maturity on March 31, 2010 and, assuming suchrefinancing, will have sufficient funds from its operations together withavailable borrowing under the replacement credit facility to meet all of theCompany’s debt service, capital requirements and working capital needs over thenext twelve months.

 

The Company has engaged a financial advisor to seek equity capitalwhich would permit a possible refinancing or restructuring of the Senior CreditFacility ($119.1 million principal amount of term loans and $3.0 millionprincipal amount under the revolving credit line under the Senior CreditFacility on June 30, 2009), AGI’s Second Lien Loan indebtedness ($9.7million principal outstanding on June 30, 2009), AGI’s Senior SubordinatedNotes due 2012 ($137.8 million principal outstanding on June 30, 2009) andthe AGHI Notes due 2012 ($112.0 million principal outstanding on June 30,2009).  AGI and AGHI have receivedpreliminary written proposals from a number of potential equity investors, someof whom have performed business due diligence. AGI and AGHI are actively pursuing four of such proposals.  They involve new cash equity investments ofbetween $50,000,000 and $90,000,000.  Allproposals contemplate, as a condition to the equity investment, that the Company’sCamping World subsidiary would be sold to an affiliate and that a significantpart of the proceeds of the equity investment would be used to make an offer toholders of the AGI Senior Subordinated Notes due 2012 and/or the AGHI Notes due2012 to exchange their current security for a combination of cash and new bondswith an extended maturity date and a lower face amount.  In view thereof the Company intends to deferthe interest payment ($6.2 million) due on August 15, 2009 on the AGHINotes.

 

Under the terms of the AGHI Notes, the Company is afforded a 30-daygrace period from the interest payment date before non-payment constitutes anevent of default under such notes. During such 30-day grace period, the Company intends to discuss withbondholders possible alternative capital structures after a presumed cashequity investment, including possible discounts for early payment and possibleexchanges of existing securities for new securities with an extended maturitydate or other terms acceptable to the Company and its bondholders.

 

As a result of restrictions in the AGI Senior Credit Facility, AGI isblocked from making distributions to 

 

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AGHI for the purpose of paying interest on the AGHI Notes.  For the two most recent interest payments,AGHI has made the interest payments using the proceeds of capital contributionsfrom AGHI’s parent.  There can be noassurance that AGHI’s parent will fund the interest payments due on the AGHINotes as it has for the two most recent interest payments.

 

There can be no assurance that the Company will be able to implement anew capital structure to repay or refinance the AGI Senior Credit Facility, AGI’sSecond Lien Loan indebtedness, the AGI Senior Subordinated Notes or the AGHINotes before the final maturity of the AGI Senior Credit Facility in March 2010,the maturity of AGI’s Second Lien Loan indebtedness in July 2010, thematurity of the AGI Senior Subordinated Notes in February 2012, or thematurity of the AGHI Notes, $25.4 million of which mature in March 2010and the balance in February 2012.  If the Company is not able to refinance or replace any such debt beforeits scheduled maturity, the holders of such debt will be entitled to exercisetheir respective remedies including, in the case of secured debt, to sell thecollateral securing the repayment thereof. In as much as the indebtedness owned under the AGI Senior CreditFacility and AGI’s Second Lien Loan indebtedness is secured, it would be repaidbefore funds are available to discharge any unsecured or subordinatedobligations.

 

*Contractual Obligations andCommercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at June 30, 2009.  Thistable includes principal and future interest due under our debt agreementsbased on interest rates as of June 30, 2009 and assumes debt obligationswill be held to maturity.

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| **(in  thousands)**          | ** ** | **Total**                  | ** ** | **2009** | ** ** | **2010 and  2011** | ** ** | **2012 and  2013** | ** ** | **Thereafter** | ** ** |
|                         |       |                       |       |   |   |   |   |   |   |   |   |
| Debt and future interest     |       | $                          | 472,702    |   | $ | 30,262 |   | $ | 204,034 |   | $ | 238,406 |   | $ | — |   |
| Operating lease  obligations |       | 233,467                    |       | 11,797 |   | 45,096 |   | 37,973 |   | 138,601 |   |
| Standby letters of credit    |       | 7,467                      |       | 5,467 |   | 2,000 |   | — |   | — |   |
| Grand total                  |       | $                          | 713,636    |   | $ | 47,526 |   | $ | 251,130 |   | $ | 276,379 |   | $ | 138,601 |   |

 

AGI Senior CreditFacility

 

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, as amended by the amendment on June 5, 2009, provides for arevolving credit facility of $25.0 million and term loans.  As of June 30, 2009, $119.1 million wasoutstanding under the term loans and $3.0 million was outstanding under therevolving credit facility.  Reborrowingsunder the term loans are not permitted. Interest rates float with prime and the London Interbank Offered Rates,or LIBOR, plus an applicable margin ranging from 7.00% to 8.00%, respectively,over the stated rates, and a LIBOR floor of 2.75%.  After consideration of fixed rates under theinterest rate swap agreements, (discussed in Note 8 of the Notes to FinancialStatements), as of June 30, 2009, the average interest rates on the termloans and the revolving credit facility were 14.5% and 13.1%, respectively, andpermitted borrowings under the revolving facility were $17.5 million.  AGI also pays a 

 

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commitment fee of1.0% per annum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $0.4 million.  Boththe revolving credit facility and the term loans mature on March 31,2010.  The funds available under the AGISenior Credit Facility may be utilized for borrowings or letters of credit;however, a maximum of $7.5 million may be allocated to such letters ofcredit.  As of June 30, 2009, AGIhad letters of credit in the aggregate amount of $7.5 million outstanding.  The AGI Senior Credit Facility is secured byvirtually all of the AGI’s assets and a pledge of AGI’s stock and the stock ofthe AGI’s subsidiaries.

 

OnMarch 3, 2006, AGI amended its Senior Credit Facility to revise thedefinition of Consolidated Fixed Charges Ratio and Permitted TaxDistributions.  This amendment allows theCompany to distribute taxes to its ultimate parent based on its stand-alone taxobligation rather than the tax obligation of its parent, AGHI, until such timethat AGHI pays interest on its 10 7/8% Senior Notes due 2012 (“AGHI Notes”) incash instead of by the issuance of additional notes and AGI makes adistribution to AGHI for purposes of paying that cash interest.  For the six months ended June 30, 2009and 2008, the Company did not distribute dividends to AGHI to fund the Company’stax obligations.  Further, AGI amendedthe AGI Senior Credit Facility’s covenant restrictions with affiliates topermit a joint venture arrangement between Camping World and FreedomRoads, anaffiliate of the Company.

 

OnJune 5, 2009, AGI entered into an amendment to its AGI Senior CreditFacility pursuant to which the maturity date was extended from June 24,2009 to March 31, 2010, the revolving credit portion of the facility wasreduced by $10.0 million to $25.0 million, the outstanding term loan borrowingswere repaid by $8.0 million, the financial covenants in effect through theextended maturity date were revised and the borrowing rate was increased toprime rate plus 7.0% or LIBOR plus 8.0% with a LIBOR floor of 2.75%.  The Company capitalized $2.5million in fees paid to the lenders and expensed as incurred $1.5 million inlegal and other fees related to the amendment. As a condition to the amendment, the shareholder of the ultimate parentof the Company, was required to arrange for the purchase of $26.6 million inprincipal amount of the term portion of the AGI Senior Credit Facility by newlenders, enhance the yield to such new lenders, purchase AGHI Notes held by oneof such new lenders at a premium to the most recent market price, contribute $5.0million in capital to AGI, and guarantee two required principal paymentson the term loans under the AGI Senior Credit Facility, aggregating $15.0million.  In consideration of suchsupport, AGI entered into an option agreement with the shareholder of theultimate parent of the Company pursuant to which AGI granted such shareholderor his assigns an option, exercisable on or before March 1, 2010 to purchasethe Company’s Camping World subsidiary for $55.0 million.  Management was assisted in determining thefair value of such subsidiary by an independent third party valuationfirm.  AGI also agreed to pay theshareholder of the ultimate parent, upon successful refinancing of AGI’ssecured debt, including the AGI Senior Credit Facility, a success fee equal inamount to the fair value, as determined by an independent financial advisor ofsuch credit support, taking into account the fair value of the option topurchase Camping World.  In the event thefair value of the Camping World purchase option exceeds the fair value of suchcredit support, the shareholder will pay the amount of such excess to AGI.

 

Concurrentwith the June 5, 2009 amendment to the AGI Senior Credit Facility, AGIobtained a $9.7 million Second Lien Loan, the net proceeds of which were usedto purchase $14.6 million 

 

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inprincipal amount of AGI Senior Subordinated Notes.  The Second Lien Loan carries an interest rateof 9.0% and matures on July 31, 2010.

 

Inaddition, AGI agreed to use its best efforts to secure an asset-based loan ofat least $18.5 million secured by the inventory and receivables of itssubsidiary, Camping World, Inc. (the “Camping World Financing”), theproceeds of which would be used to further reduce the amounts outstanding underthe AGI Senior Credit Facility.  Thesenior lenders agreed to subordinate their liens to such financing.  If a Camping World Financing has not beenconsummated by September 15, 2009, the borrowing rate on revolving creditloans, swing loans and terms loans increase to prime rate plus 9.0% or LIBORplus 10.0%.  See Note 9 of the Notes toConsolidated Financial Statements.

 

Theamended AGI Senior Credit Facility also revised AGI’s financial covenants ineffect through the extended maturity date. Significant cost reductions have been implemented in 2008 and 2009, includingthe elimination of personnel, suspension of 401(k) employer contributions,salary cutbacks, hiring and capital expenditure spending freezes, closure ofunder-performing retail stores, satellite office closures, and magazine sizeand frequency reductions.

 

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

 

AGI SeniorSubordinated Notes

 

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

 

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

 

On March 8,2007, AGI purchased $17.7 million of the AGI Senior Subordinated Notes.  AGI funded the purchase through the issuanceof the $25.0 million in additional incremental term loans as permitted underthe February 27, 2007 amendment to the AGI Senior Credit Facility.  The balance of the $25.0 million issued wasused to pay down AGI’s revolving credit facility by $6.5 million and to payassociated loan fees and transaction expenses. The terms on the additional incremental loans are consistent with theremaining term loan outstanding under the AGI Senior Credit Facility.  On June 5, 2009, the Company purchased$14.6 million of the Senior Subordinated Notes. The Company funded the purchase through the issuance of a $9.7 millionSecond Lien Loan.  As of June 30,2009, $137.8 million of Senior Subordinated Notes remain outstanding.  The fair value of the AGI Senior SubordinatedNotes, based on the quoted market price at June 30, 2009, was $88.2million.

 

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

 

AGHI Notes

 

On March 24, 2005, in a private placement, AGHI issued $88.2million principal amount of its 10-7/8% senior notes due 2012 (the “AGHI Notes”)at a $3.2 million original issue discount. The Company completed a registered exchange of these AGHI Notes underthe Securities Act of 1933 in June 2005. The AGHI Notes are unsecured obligations of the Company and itssubsidiaries have not guaranteed payment of principal or interest on the AGHINotes.  Interest on the AGHI Notes ispayable semi-annually on February 15 and August 15 commencing August 15,2005 and the entire $88.2 million principal amount of the AGHI Notes are due infull on February 15, 2012.  Forinterest payments on and prior to February 15, 2008, AGHI had the electionto pay interest on the AGHI Notes in cash or by the issuance of additionalnotes of the same tenor as the AGHI Notes, except the maturity date of theadditional notes ($25.4 million) is March 15, 2010.  AGI has not paid any dividends to AGHI tofund payment of interest on the AGHI Notes and AGHI made the interest paymentsdue on August 15, 2005, February 15, 2006, August 15, 2006, February 15,2007, and February 15, 2008 through the issuance of additional notes.  The Company paid the interest on the AGHINotes due August 15, 2007, August 15, 2008 and February 15, 2009from proceeds of contributions made by AGHI’s parent, AGHC, of $5.9 million,$6.2 million and $6.2 million, respectively. If the source of the cash payment of the AGHI Notes is dividends fromAGI, its wholly-owned subsidiary, there are certain restrictions on the paymentof dividends under the AGI Senior Credit Facility and the AGI Indenture.  As of June 30, 2009, $112.0 million ofAGHI Notes remain outstanding.  The fairvalue of the AGHI Notes, based on the quoted market price at June 30,2009, was $50.4 million.  Currently, theAGI Senior Credit Facility and the AGI Indenture impose limitations on theability of subsidiaries of AGHI to make dividend distributions or loans to AGHIto pay interest on the AGHI Notes.  SeeNote 10 of the Notes to Consolidated Financial Statements.

 

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

 

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quarter of 2008 thatwrote down to zero the carrying value of the preferred membership interest.

 

Interest Rate Swap Agreements

 

On October 15, 2007, AGI entered into a five-year interest rateswap agreement with a notional amount of $100.0 million from which it willreceive periodic payments at the 3 month LIBOR-based variable rate (1.039% at June 30,2009 based upon the April 30, 2009 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31 and expires on October 31,2012.  On March 19, 2008, AGI enteredinto a 4.5 year interest rate swap agreement with a notional amount of $35.0million from which it will receive periodic payments at the 3 month LIBOR-basedvariable rate (1.039% at June 30, 2009 based upon the April 30, 2009reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swap contractswere zero at inception.  The Companyentered into the interest rate swap contracts to limit the effect of increaseson our floating rate debt.  The interestrate swap contracts are designated as a cash flow hedge of the variable rateinterest payments due on $135.0 million of the term loans and the revolvingcredit facility issued June 24, 2003, and accordingly, gains and losses onthe fair value of the interest rate swap agreements are reported in accumulatedother comprehensive loss and reclassified to earnings in the same period inwhich the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of these swapsincluded in other long-term liabilities was $7.9 million of which $6.7 millionis in accumulated other comprehensive loss, and $0.7 million in the statementof operations at June 30, 2009.  Thefair value of these swaps included in other long-term liabilities was $12.7million of which $10.3 million is in accumulated other comprehensive loss and$2.4 million in the statement of operations at December 31, 2008.

 

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

 

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

 

On June 11,2009, the Company partially terminated the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was expensed.  The 

 

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notional amountwas reduced to $20.0 million.  All otherterms of the interest rate swap agreement remained unchanged.  As a result, the amount included in othercomprehensive income related to the $35.0 million interest rate swap wasreduced prorata and included in earnings as gain (loss) on derivativeinstrument.

 

Other ContractualObligations and Commercial Commitments

 

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

 

For the six monthsended June 30, 2009, the Company incurred no deferred executivecompensation expense under the phantom stock agreements, and made payments of$1.4 million under the terms of the vested phantom stock agreements.  Any earned incentives under these agreementsare scheduled to be paid at various times over the next four years.  No phantom stock payments are scheduled to**be made for the remainder of 2009.

 

Capitalexpenditures for the first six months of 2009 totaling $2.4 million decreased$5.2 million from the first six months of 2008 primarily due to a curtailmentof new retail store openings.  Additionalcapital expenditures of $1.1 million are anticipated for the balance of 2009primarily for software enhancements, information technology upgrades andfurther website development.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

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

 

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*Revenue Recognition*

 

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

 

*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 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 demandrequirements.  It is possible thatchanges in required inventory reserves may continue to occur in the future dueto the market conditions.

 

*Long-LivedAssets*

 

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

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with 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 

 

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generate andrecognize an impairment loss when estimated undiscounted future cash flowexpected to result from the use of the asset plus net proceeds expected fromdisposition of the asset (if any) are less than the carrying value of theasset.  When an impairment is identified,the Company reduces the carrying amount of the asset to its estimated fairvalue based on a discounted cash flow approach or, when available andappropriate, comparable market values.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible 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 6 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

The Companyevaluates indefinite-lived intangible assets for impairment at least annuallyor when events indicate that an impairment exists in accordance with 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.

 

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.

 

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*AccumulatedOther Comprehensive Loss*

 

Accumulatedother comprehensive loss consists of unrealized losses on cash flowhedges.  At June 30, 2009,accumulated other comprehensive loss was $6.7 million.

 

*Derivative Financial Instruments*

 

Asdiscussed in Note 7, the Company accounts for derivative instruments andhedging activities in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”).  All derivatives are recognized on the balancesheet at their fair value.  On the datethat the Company enters into a derivative contract, management formallydocuments all relationships between hedging instruments and hedged items, as wellas risk management objectives and strategies for undertaking various hedgetransactions.

 

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

 

The Company utilizes derivative financial instrumentsto manage its exposure to interest rate risks. The Company does not enter into derivative financial instruments fortrading purposes.

 

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

 

Due to thepotential sale of Camping World, in the fourth quarter of 2008 a highly effectivehedge on the $35.0 million outstanding debt by the $35.0 million notionalamount interest rate swap agreement was deemed to be no longer probable and isnow deemed to be reasonably possible.  Asa result, changes in the value of the $35.0 million interest rate swapagreement are included in earnings beginning on October 1, 2008.  Included in other comprehensive loss at June 30,2009 is $0.4 million related to changes in the fair value of the $35.0 millioninterest rate swap prior to October 1, 2008 which will be amortized overthe remaining life of the interest rate swap and included in earnings as gain(loss) on derivative instrument.

 

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

 

*FairValue Measurements*

 

As discussed in Note 2 of the Notes toConsolidated Financial Statements, the Company adopted the provisions ofStatement 157 effective January 1, 2008. The Company has determined that it utilizes observable (Level 2) inputsin determining the fair value of its interest rate swap contracts which totaled$7.9 million at June 30, 2009.

 

*Income Taxes*

 

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

 

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

 

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.

 

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 June 30,2009, we had debt totaling $383.2 million, comprised of $2.1 million ofvariable rate debt and $381.1 million of fixed rate debt, comprised of $120.0million of debt fixed through the interest rate swap agreements, $137.8 millionof AGI Senior Subordinated Notes, $9.7 million of Second Lien Loan, $112.0million of AGHI Notes and $1.6 million of purchase debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow 

 

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impact of a one-percentagepoint increase/ decrease in interest rates would have an unfavorable/ favorableimpact of $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**

 

Managements’ Report on Internal Control over FinancialReporting

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-15(e) under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, the President and Chief Executive Officeralong with the Senior Vice President and Chief Financial Officer concluded thatthe disclosure controls and procedures are effective in timely alerting them tomaterial information relating to the Company (including its consolidatedsubsidiaries) required to be included in the periodic SEC filings.  Management determined that, as of June 30,2009, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A: RISK FACTORS**

 

The AGI SeniorCredit Facility matures on March 31, 2010. As of June 30, 2009, there was $122.1 million outstanding under theAGI Senior Credit Facility and it is secured by a lien on all of the Company’sassets and a pledge of the Company’s stock and the stock of itssubsidiaries.  Although the Company iscurrently seeking to refinance or replace the AGI Senior Credit Facility andhas received certain proposals or indications of interest from prospectivelenders, there can be no assurance that the Senior Credit Facility will berefinanced or replaced prior to its maturity. The availability of financing is limited due to the currentuncertainties in the capital markets.  Inaddition, the current general conditions in the U.S. economy had an adverseimpact on the Company’s operations because consumers are reducing discretionaryspending, including spending on the recreational activities offered by theCompany, and businesses are reducing advertising and marketing expenditures whichhave adversely affected the advertising revenues received by the Company.  As a result, it may be even more difficultfor the Company to refinance or replace the AGI Senior Credit Facility due tothe current deterioration in the Company’s operating results and the prospectsfor the business segments in which the Company operates.  If the Company is not able to refinance orreplace the Senior Credit Facility prior to its maturity on March 31,2010, the lenders will be entitled to exercise their remedies to 

 

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sell thecollateral securing the repayment of the AGI Senior Credit Facility, includingthe Company’s assets, the stock of the Company and the stock of the Company’ssubsidiaries.  Since the indebtednessowned under the AGI Senior Credit Facility is secured, it would be repaidbefore any of the unsecured or subordinated obligations of the Company and itssubsidiaries.  It is also possible thatthe interest rate payable on a new credit facility will be higher than theinterest rates under the current AGI Senior Credit Facility as amended June 5,2009  which will adversely affect theCompany’s cash flow and profitability (or increase losses).  See Note 10 of Notes to ConsolidatedFinancial Statements.

 

**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:  August 14, 2009 | Thomas F. Wolfe                   |
|                             | Senior Vice  President and        |
|                             | Chief Financial Officer           |

 

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