**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

**TheSecurities Exchange Act of 1934**

 

| **For Quarter Ended:**      | ** ** | **Commission File Number** |
|-----------------------------|------------|----------------------------|
| **September 30, 2010** | ** ** | **333-113982**             |

** **

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** **

**AFFINITY GROUP, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **13-3377709**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of incorporation or organization) |       | (I.R.S. Employer Identification No.) |

 

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

 

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

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

**9% Senior Subordinated Notes Due 2012**

 

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

YES  **x**       NO  o

 

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

YES  o       NO  o

 

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

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

 

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

YES  o       NO  **x**

 

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

 

| ** **                     | ** ** | **Outstanding as of** |
|--------------------------------|------------|---------------------------------|
| **Class**                      | ** ** | **October 29, 2010**  |
| Common  Stock, $.001 par value |       | 2,000                           |

 

**DOCUMENTS INCORPORATED BYREFERENCE:  None**

 

 

 

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**AFFINITY GROUP, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| ** **                             | **Page**                                                                                                     |
|----------------------------------------|--------------------------------------------------------------------------------------------------------------|
| **Part I.**Financial  Information |                                                                                                         |
| ** **                             |                                                                                                         |
|                                   | **Item  1: Financial Statements**                                                                            |   |
|                                   | ** **                                                                                                   |   |
|                                   | Consolidated Balance Sheets as of September 30,  2010 (unaudited) and December 31, 2009            | 1 |
|                                   |                                                                                                         |   |
|                                   | Unaudited Consolidated Statements of Operations for  the three months ended September 30, 2010 and 2009 | 2 |
|                                   |                                                                                                         |   |
|                                   | Unaudited Consolidated Statements of Operations for  the nine months ended September 30, 2010 and 2009  | 3 |
|                                   |                                                                                                         |   |
|                                   | Unaudited Consolidated Statements of Cash Flows for  the nine months ended September 30, 2010 and 2009  | 4 |
|                                   |                                                                                                         |   |
|                                   | Notes to Unaudited Consolidated Financial Statements                                                         | 5 |
|                                   |                                                                                                         |   |
| ** **                             | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**     | 22 |
| ** **                             | ** **                                                                                                   |   |
|                                   | **Item  3: Quantitative and Qualitative Disclosures about Market Risk**                                      | 41 |
|                                   | ** **                                                                                                   |   |
|                                   | **Item 4: Controls and Procedures**                                                                          | 42 |
|                                   | ** **                                                                                                   |   |
| **Part II. Other Information**    | 42                                                                                                           |
|                                   | ** **                                                                                                   |   |
|                                   | **Item  1A: Risk Factors**                                                                                   | 42 |
|                                   | ** **                                                                                                   |   |
|                                   | **Item 6:  Exhibit**                                                                                         | 43 |
|                                   | ** **                                                                                                   |   |
| **Signatures**                         | 44                                                                                                           |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2010 and December 31, 2009

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **9/30/2010**   | ** ** | **12/31/2009** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 10,746     |           | $          | 8,640 |   |
| Restricted cash                                                                                 |       | —          |       | 8,058          |       |
| Accounts receivable, less allowance for doubtful  accounts of $3,962 in 2010 and $3,128 in 2009 |       | 34,803          |       | 32,321         |       |
| Inventories                                                                                     |       | 61,725          |       | 49,921         |       |
| Prepaid expenses and other assets                                                               |       | 17,930          |       | 13,067         |       |
| Total current assets                                                                            |       | 125,204         |       | 112,007        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 28,325          |       | 34,276         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                                 |       | 4,798           |       | 4,837          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 12,018          |       | 13,738         |       |
| GOODWILL                                                                                        |       | 49,944          |       | 49,944         |       |
| OTHER ASSETS                                                                                    |       | 6,702           |       | 6,767          |       |
| Total assets                                                                                    |       | $               | 226,991    |           | $          | 221,569 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 21,089     |           | $          | 23,795 |   |
| Accrued interest                                                                                |       | 4,010           |       | 5,688          |       |
| Accrued income taxes                                                                            |       | 1,747           |       | 1,598          |       |
| Accrued liabilities                                                                             |       | 24,249          |       | 24,060         |       |
| Deferred revenues and gains                                                                     |       | 67,373          |       | 60,728         |       |
| Current portion of long-term debt                                                               |       | 7,097           |       | 892            |       |
| Total current liabilities                                                                       |       | 125,565         |       | 116,761        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 34,626          |       | 35,607         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 279,086         |       | 277,522        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 17,981          |       | 13,204         |       |
|                                                                                            |       | 457,258         |       | 443,094        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.001 par value, 2,000 shares  authorized, 2,000 shares issued and outstanding    |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 89,505          |       | 89,505         |       |
| Accumulated deficit                                                                             |       | (312,678        | )          | (304,031       | )          |
| Accumulated other comprehensive loss                                                            |       | (7,095          | )          | (7,000         | )          |
| Total stockholder’s deficit                                                                |       | (230,267        | )          | (221,525       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 226,991    |           | $          | 221,569 |   |

 

See notes to consolidated financial statements.

 

1

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                    | ** ** | **9/30/2009** | ** ** |
| REVENUES:                            |       |                             |       |   |   |
| Membership services                  |       | $                                | 38,010     |   | $ | 35,531 |   |
| Media                                |       | 7,395                            |       | 8,333 |   |
| Retail                               |       | 79,235                           |       | 81,080 |   |
|                                 |       | 124,640                          |       | 124,944 |   |
|                                 |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                             |       |   |   |
| Membership services                  |       | 24,413                           |       | 23,031 |   |
| Media                                |       | 5,851                            |       | 7,152 |   |
| Retail                               |       | 45,831                           |       | 49,934 |   |
|                                 |       | 76,095                           |       | 80,117 |   |
|                                 |       |                             |       |   |   |
| GROSS PROFIT                         |       | 48,545                           |       | 44,827 |   |
|                                 |       |                             |       |   |   |
| OPERATING EXPENSES:                  |       |                             |       |   |   |
| Selling, general and administrative  |       | 31,835                           |       | 34,168 |   |
| Goodwill impairment                  |       | —                           |       | 46,884 |   |
| Financing expense                    |       | 248                              |       | 337 |   |
| Depreciation and amortization        |       | 4,705                            |       | 5,800 |   |
|                                 |       | 36,788                           |       | 87,189 |   |
|                                 |       |                             |       |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 11,757                           |       | (42,362 | ) |
|                                 |       |                             |       |   |   |
| NON-OPERATING ITEMS:                 |       |                             |       |   |   |
| Interest income                      |       | 124                              |       | 128 |   |
| Interest expense                     |       | (9,895                           | )          | (8,247 | ) |
| (Loss) gain on derivative instrument |       | (178                             | )          | 114 |   |
| Other non-operating items, net       |       | 8                                |       | (399 | ) |
|                                 |       | (9,941                           | )          | (8,404 | ) |
|                                 |       |                             |       |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES    |       | 1,816                            |       | (50,766 | ) |
|                                 |       |                             |       |   |   |
| INCOME TAX (EXPENSE) BENEFIT         |       | (57                              | )          | 12,916 |   |
|                                 |       |                             |       |   |   |
| NET INCOME (LOSS)                    |       | $                                | 1,759      |   | $ | (37,850 | ) |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                   | ** ** | **9/30/2009** | ** ** |
| REVENUES:                            |       |                            |       |   |   |
| Membership services                  |       | $                               | 113,745    |   | $ | 109,960 |   |
| Media                                |       | 30,087                          |       | 35,116 |   |
| Retail                               |       | 217,824                         |       | 214,820 |   |
|                                 |       | 361,656                         |       | 359,896 |   |
|                                 |       |                            |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                            |       |   |   |
| Membership services                  |       | 67,706                          |       | 67,976 |   |
| Media                                |       | 23,459                          |       | 28,032 |   |
| Retail                               |       | 127,907                         |       | 130,840 |   |
|                                 |       | 219,072                         |       | 226,848 |   |
|                                 |       |                            |       |   |   |
| GROSS PROFIT                         |       | 142,584                         |       | 133,048 |   |
|                                 |       |                            |       |   |   |
| OPERATING EXPENSES:                  |       |                            |       |   |   |
| Selling, general and administrative  |       | 97,601                          |       | 97,219 |   |
| Goodwill impairment                  |       | —                          |       | 46,884 |   |
| Financing expense                    |       | 7,578                           |       | 1,877 |   |
| Depreciation and amortization        |       | 14,149                          |       | 16,208 |   |
|                                 |       | 119,328                         |       | 162,188 |   |
|                                 |       |                            |       |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 23,256                          |       | (29,140 | ) |
|                                 |       |                            |       |   |   |
| NON-OPERATING ITEMS:                 |       |                            |       |   |   |
| Interest income                      |       | 374                             |       | 392 |   |
| Interest expense                     |       | (28,950                         | )          | (21,884 | ) |
| (Loss) gain on derivative instrument |       | (698                            | )          | 799 |   |
| Gain on debt restructure             |       | —                          |       | 4,678 |   |
| Other non-operating items, net       |       | 30                              |       | (1,218 | ) |
|                                 |       | (29,244                         | )          | (17,233 | ) |
|                                 |       |                            |       |   |   |
| LOSS BEFORE INCOME TAXES             |       | (5,988                          | )          | (46,373 | ) |
|                                 |       |                            |       |   |   |
| INCOME TAX (BENEFIT) EXPENSE         |       | (259                            | )          | 12,216 |   |
|                                 |       |                            |       |   |   |
| NET LOSS                             |       | $                               | (6,247     | ) | $ | (34,157 | ) |

 

See notes to consolidated financial statements.

 

3

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                 | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **9/30/2010**                   | ** ** | **9/30/2009** | ** ** |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                      |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (6,247     | ) | $ | (34,157 | ) |
| Adjustments to reconcile net loss to net cash  (used in) provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                               |       | 8,413                           |       | 9,892 |   |
| Amortization                                                                               |       | 5,736                           |       | 6,316 |   |
| Impairment loss on goodwill                                                                |       | —                          |       | 46,884 |   |
| Loss (gain) on derivative instrument                                                       |       | 698                             |       | (799 | ) |
| Loss (gain) on debt restructure                                                            |       | 279                             |       | (4,678 | ) |
| Provision for losses on accounts receivable                                                |       | 1,266                           |       | 1,714 |   |
| Deferred compensation                                                                      |       | 3,874                           |       | — |   |
| Deferred tax benefit                                                                       |       | —                          |       | 4,569 |   |
| (Gain) loss on sale of property and equipment                                              |       | (24                             | )          | 561 |   |
| Accretion of original issue discount                                                       |       | 931                             |       | — |   |
| Changes in operating assets and liabilities:                                               |       |                            |       |   |   |
| Accounts receivable                                                                        |       | (3,748                          | )          | 10,586 |   |
| Inventories                                                                                |       | (11,804                         | )          | (3,895 | ) |
| Prepaid expenses and other assets                                                          |       | (4,798                          | )          | (6,281 | ) |
| Accounts payable                                                                           |       | (2,706                          | )          | 2,440 |   |
| Accrued and other liabilities                                                              |       | (1,230                          | )          | (22,220 | ) |
| Deferred revenues and gains                                                                |       | 5,664                           |       | 8,556 |   |
| Net cash (used in) provided by operating  activities                                       |       | (3,696                          | )          | 19,488 |   |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                      |       |                            |       |   |   |
| Capital expenditures                                                                       |       | (3,097                          | )          | (2,481 | ) |
| Net proceeds from sale of property and equipment                                           |       | 659                             |       | 23 |   |
| Cash paid (received) on loans to affiliate                                                 |       | 39                              |       | (103 | ) |
| Net cash used in investing activities                                                      |       | (2,399                          | )          | (2,561 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                      |       |                            |       |   |   |
| Dividends paid                                                                             |       | (2,400                          | )          | (7,900 | ) |
| Contribution from parent                                                                   |       | —                          |       | 8,500 |   |
| Release of restricted cash                                                                 |       | 8,058                           |       | — |   |
| Borrowings on debt                                                                         |       | 153,801                         |       | 18,547 |   |
| Payment of debt issue costs                                                                |       | (4,375                          | )          | (2,541 | ) |
| Principal payments on debt                                                                 |       | (146,883                        | )          | (35,341 | ) |
| Net cash provided by (used in) financing  activities                                       |       | 8,201                           |       | (18,735 | ) |
|                                                                                       |       |                            |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                    |       | 2,106                           |       | (1,808 | ) |
|                                                                                       |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                           |       | 8,640                           |       | 10,608 |   |
|                                                                                       |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                 |       | $                               | 10,746     |   | $ | 8,800 |   |

 

See notes to consolidated financial statements.

 

4

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** **

**AFFINITY GROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation —*The consolidated financialstatements include the accounts of Affinity Group, Inc. (“AGI”) and itssubsidiaries (collectively the “Company”), presented in accordance with U.S.generally accepted accounting principles, (“GAAP”), and pursuant to the rules andregulations of the Securities and Exchange Commission.  Affinity Group Holding, Inc., a Delawarecorporation (“AGHI”), is the direct parent of AGI.  The ultimate parent company of AGHI is AGIHolding Corp. (“AGHC”), a privately-owned corporation.

 

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

 

*Basisfor Presentation**—*On March 1,2010, AGI refinanced its existing senior credit facility ($128.9 millionaggregate principal amount outstanding as of December 31, 2009) and secondlien notes totaling $9.7 million due July 31, 2010.  The New Senior Credit Facility provides forterm loans (aggregating $144.3 million outstanding as of September 30,2010), including an original issue discount of 2%, that are payable inquarterly installments of $360,750 beginning March 1, 2011.  In addition, there are mandatory prepaymentsof the term loans from excess cash flow (as defined) of AGI and from assetsales.  The term loans under the NewSenior Credit Facility mature on the earlier of (i) March 1, 2015 or (ii) 90days prior to the maturity of either AGI’s 9% senior subordinated notes due2012 (the “Senior Notes”) ($137.8 million principal amount outstanding as of September 30,2010) or AGHI’s 10-7/8% senior notes due 2012 (the “AGHI Notes”) ($88.2 millionaggregate principal amount outstanding as of September 30, 2010).  See Note 6 — Debt.

 

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

 

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

 

5

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**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2010, the Company was required to adopt a newly issued accountingstandard which requires additional disclosure about the amounts of and reasonsfor significant transfers between levels of the fair value hierarchy discussedin Note 9 - Fair Value Measurements. This standard also clarifies existing disclosure requirements related tothe level of disaggregation of fair value measurements for each class of assetsand liabilities and disclosures about inputs and valuation techniques used tomeasure fair value for both recurring and nonrecurring Level 2 and Level 3measurements.  As this newly issuedaccounting standard only requires enhanced disclosure, the adoption of thisstandard did not impact our financial position, results of operations or cashflows.  In addition, effective forinterim and annual periods beginning after December 15, 2010, thisstandard will require additional disclosure and require an entity to presentdisaggregated information about activity in Level 3 fair value measurements ona gross basis, rather than a single amount.

 

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

 

TheCompany’s three principal lines of business are Membership Services, Media, andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, theCamp Club USA and assorted membership products and services for recreationalvehicles (“RV”) owners, campers and outdoor vacationers, and the Golf Card Clubfor golf enthusiasts.  The Media segmentpublishes a variety of publications for selected markets in the recreation andleisure industry, including general circulation periodicals, directories and RVand powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreationshows primarily focused on RV and powersports markets.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through retail supercenters,mail order catalogs and internet sales. The Company evaluates performance based on profit or loss fromoperations before income taxes and unusual items.

 

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

 

6

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

 

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

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

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

 
| ** **                               | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                               | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30, 2010** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers         |       | $              | 113,745    |       | $          | 30,087     |       | $                | 217,824    |   | $ | 361,656 |   |
| Depreciation and amortization            |       | 1,722          |       | 2,901      |       | 7,020      |       | 11,643           |       |
| Gain on sale of property and equipment   |       | —         |       | 4          |       | 23         |       | 27               |       |
| Interest income                          |       | 2,371          |       | —     |       | —     |       | 2,371            |       |
| Interest expense                         |       | —         |       | (5         | )          | 1,773      |       | 1,768            |       |
| Segment operating profit                 |       | 40,382         |       | 455        |       | 5,810      |       | 46,647           |       |
|                                          |            |                |            |            |            |            |            |                  |            |  |  |  |  |

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

 

7

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

 

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

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **9/30/2010**                    | ** ** | **9/30/2009**                   | ** ** | **9/30/2010** | ** ** | **9/30/2009** | ** ** |
|                                                           |       |                             |       |                            |       |   |   |   |   |
| **Income (loss) From Operations  Before Income Taxes**         |       |                             |       |                            |       |   |   |   |   |
| Total income for reportable segments                           |       | $                                | 16,781     |                            | $          | (36,842 | ) | $ | 46,647 |   | $ | (18,680 | ) |
| Unallocated G & A expense                             |       | (3,959                           | )          | (4,339                          | )          | (13,099 | ) | (12,329 | ) |
| Unallocated depreciation and amortization expense              |       | (691                             | )          | (1,138                          | )          | (2,506 | ) | (2,438 | ) |
| Unallocated gain on sale of equipment                          |       | —                           |       | 1                               |       | — |   | 1 |   |
| Unallocated (loss) gain on derivative instrument               |       | (178                             | )          | 114                             |       | (698 | ) | 799 |   |
| Unallocated financing expense                                  |       | (248                             | )          | (50                             | )          | (6,874 | ) | (1,590 | ) |
| Unallocated gain on debt restructure                           |       | —                           |       | —                          |       | (279 | ) | 4,678 |   |
| Elimination of intercompany interest income                    |       | (652                             | )          | (708                            | )          | (1,997 | ) | (2,161 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (9,237                           | )          | (7,804                          | )          | (27,182 | ) | (14,653 | ) |
| Income (loss) from operations before income taxes              |       | $                                | 1,816      |                            | $          | (50,766 | ) | $ | (5,988 | ) | $ | (46,373 | ) |

 

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

 
| ** **                                  | ** ** | **9/30/2010** | ** ** | **12/31/2009** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                 |       | $             | 241,061    |           | $          | 237,597 |   |
| Media segment                               |       | 22,240        |       | 26,876         |       |
| Retail segment                              |       | 107,619       |       | 95,193         |       |
| Total assets for reportable segments        |       | 370,920       |       | 359,666        |       |
| Restricted cash                             |       | —        |       | 8,058          |       |
| Intangible assets not allocated to segments |       | 2,788         |       | 2,185          |       |
| Corporate unallocated assets                |       | 6,265         |       | 6,654          |       |
| Elimination of intersegment receivable      |       | (152,982      | )          | (154,994       | )          |
| Total assets                                |       | $             | 226,991    |           | $          | 221,569 |   |

 

8

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** **

**(4) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 29,697     |     | $          | 25,874 |   |
| Income taxes                     |       | —   |       | 5        |       |
|                                  |            |          |            |          |            |  |  |

 

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

 

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

 

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

 

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

 

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

 

Inthe third quarter of 2009, the Company noted continued decline in advertisingrevenue compared to historical trends, in the operations of our RV andpowersports publications, as well as flat to moderate projected growth infuture advertising revenue as a result of continued deterioration of generaleconomic conditions and consumer confidence. Based on the above, the Company determined that there were identifiedinterim indicators of impairment within these reporting units in the Mediasegment.

 

TheCompany performed an impairment test of the goodwill and intangible assets ofthe reporting units of our RV and powersports publications.  The impairment test indicated that theestimated fair value of these reporting units were less than book value.  The excess of the carrying value over theestimated fair value of the these reporting units was primarily due to adecline in advertising revenue leading to lower expected future cash flows forthese reporting units. In determining the fair value, the Company used anincome valuation approach.

 

9

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

 

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

 

Determiningthe fair value of a reporting unit under the first step of the goodwillimpairment test and determining the fair value of individual assets andliabilities of a reporting unit under the second step of the goodwillimpairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions 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 the goodwill impairment tests may be based upon a number offactors, including assumptions about the projected future cash flows, discountrate, growth rate, determination of market comparables, economic conditions, orchanges to the Company’s business operations. Such changes may result in impairment charges recorded in futureperiods.  Also see Note 9 — Fair ValueMeasurements.

 

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

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

 

TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary.  The Company determined thatno adjustments to the useful lives of its finite-lived purchased intangibleassets were necessary as of September 30, 2010.  Under the accounting guidance for goodwilland other intangible assets, as issued by the FASB, goodwill impairment isdeemed to exist if the net book value of a reporting unit exceeds its estimatedfair value.  The Company’s reportingunits are generally consistent with the

 

10

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

 

operatingsegments underlying the reporting segments identified in Note 3 — Disclosuresabout Segments of an Enterprise and Related Information.

 

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

 

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

 
| ** **                                      | ** ** | **Weighted**                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**       | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                          |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                             |       | $          | 35,355     |             | $          | (28,722    | )          | $ | 6,633 |   |
| Resort and golf course participation agreements |       | 4                             |       | 7          |       | (6               | )          | 1          |       |
| Non-compete and deferred consulting agreements  |       | 15                            |       | 18,650     |       | (17,022          | )          | 1,628      |       |
| Deferred financing costs                        |       | 5                             |       | 9,549      |       | (5,793           | )          | 3,756      |       |
|                                            |       |                          |       | $          | 63,561     |             | $          | (51,543    | )          | $ | 12,018 |   |

 

**(6) DEBT**

 

NewSenior Credit Facility

 

OnMarch 1, 2010, AGI entered into the Second Amended and Restated CreditAgreement (the “New Senior Credit Facility”) to refinance its existing seniorcredit facility ($128.9 million principal amount outstanding at December 31,2009) which was scheduled to mature on March 31, 2010, the second liennotes due July 31, 2010 ($9.7 million principal amount outstanding at December 31,2009), and the loan from SA Holding, LLC, (the “SA Loan”), an affiliate of theultimate shareholder of AGI, ($1.0 million principal amount outstanding at December 31,2009).  The New Senior Credit Facilityprovides for term loans aggregating $144.3 million, including an original issuediscount of 2%, and are payable in quarterly installments of $360,750 beginningMarch 1, 2011.  In addition, thereare mandatory prepayments of the term loans from excess cash flow (as defined)of AGI and from asset sales.  The termloans under the New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either Senior Notes ($137.8million principal amount outstanding as at September 30, 2010 and are dueon February 15, 2012) or the AGHI Notes ($88.2 million aggregate principalamount outstanding at September 30, 2010 and are due February 15,2012).  Interest on the term loans underthe New Senior Credit Facility floats at either 8.75% over the base rate(defined as the greater of the prime rate, federal funds rate plus 50 basispoints or 5.25%) for borrowings whose interest is based on the prime rate or10.0% over

 

11

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**(6) DEBT(continued)**

 

theLIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (see Note 8 — Interest Rate Swap Agreements), as of September 30,2010, the average annual interest rate on the term loans was 16.64%.  The New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the New Senior Credit Facilityare guaranteed by the direct and indirect subsidiaries of AGI and are securedby liens on the assets of AGI and its direct and indirect subsidiaries.  As a condition to the term loans under theNew Senior Credit Facility, $25.4 million of AGHI Notes due on March 15,2010 that were held by an affiliate of AGHI were contributed to AGHI and AGHIcancelled those notes.  As of September 30,2010, $142.3 million, net of approximately $2.0 million of unamortized originalissue discount, was outstanding on the New Senior Credit Facility.

 

CWCredit Facility

 

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

 

SeniorNotes

 

InFebruary 2004, AGI issued $200.0 million aggregate principal amount of 9%senior subordinated notes due 2012 (“Senior Notes”) pursuant to an indenture(the “AGI Indenture”).  Interest ispayable on the Senior Notes twice a year on February 15 and August 15.  AGI’s present and future restrictedsubsidiaries guarantee the Senior Notes with unconditional guarantees ofpayment that rank junior in right of payment to their existing and futuresenior debt, including indebtedness under the New Senior Credit

 

12

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**(6) DEBT(continued)**

 

Facilityand the CW Credit Facility, but rank equal in right of payment to theirexisting and future senior subordinated debt. All of the Company’s subsidiaries have jointly and severally guaranteed theindebtedness under the Senior Notes except for CWFR Capital Corp.  As of September 30, 2010, $137.8 millionof Senior Notes remain outstanding.

 

TheNew Senior Credit Facility, the CW Credit Facility and the AGI Indenturecontain certain restrictive covenants relating to, but not limited to, mergers,changes in the nature of the business, acquisitions, additional indebtedness,sale of assets, investments, and the payment of dividends subject to certainlimitations and minimum operating covenants.

 

TheNew Senior Credit Facility and the CW Credit Facility also contain certainfinancial affirmative covenants.  TheCompany was in compliance with all debt covenants at September 30, 2010.

 

**(7) NOTESOFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION**

 

TheSenior Notes issued February 2004 are due February 15, 2012 andinterest at 9% per annum is payable on currently outstanding $137.8 millionprincipal amount of Senior Notes twice a year on February 15 and August 15.  The Company’s present and future restrictedsubsidiaries guarantee the Senior Notes with unconditional guarantees ofpayment that rank junior in right of payment to their existing and futuresenior debt, including indebtedness under the New Senior Credit Facility andthe CW Credit Facility, but rank equal in right of payment to their existingand future senior subordinated debt.  Allof the Company’s subsidiaries have jointly and severally guaranteed theindebtedness under the Senior Notes except for CWFR Capital Corp.  Full financial statements of the Guarantorshave not been included because, pursuant to their respective guarantees, theGuarantors are jointly and severally liable with respect to the Senior Notes.

 

13

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**(7) NOTESOFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

Thefollowing are summarized statements setting forth certain financial informationconcerning the Guarantor Subsidiaries as of and for the nine months ended September 30,2010 (in thousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 9,918      |           | $          | 828           |       | $                | —     |             | $          | — |   | $ | 10,746 |   |
| Accounts receivable- net of allowance                   |       | 598        |       | 187,187        |       |          |       | (152,982         | )          | 34,803           |       |
| Inventories                                             |       | —     |       | 61,725         |       | —        |       | —           |       | 61,725           |       |
| Other current assets                                    |       | 2,103      |       | 15,827         |       | —        |       | —           |       | 17,930           |       |
| Total current assets                                    |       | 12,619     |       | 265,567        |       | —        |       | (152,982         | )          | 125,204          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 3,037      |       | 25,288         |       | —        |       | —           |       | 28,325           |       |
| Intangible assets                                       |       | 2,788      |       | 9,230          |       | —        |       | —           |       | 12,018           |       |
| Goodwill                                                |       | 49,944     |       | —         |       | —        |       | —           |       | 49,944           |       |
| Investment in subsidiaries                              |       | 695,867    |       | —         |       | —        |       | (695,867         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,798          |       | —        |       | (40,000          | )          | 4,798            |       |
| Other assets                                            |       | 4,551      |       | 2,151          |       | —        |       | —           |       | 6,702            |       |
| Total assets                                            |       | $          | 808,806    |           | $          | 307,034       |       | $                | —     |             | $          | (888,849 | ) | $ | 226,991 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 21         |           | $          | 21,068        |       | $                | —     |             | $          | — |   | $ | 21,089 |   |
| Accrued and other liabilities                           |       | 8,484      |       | 21,522         |       | —        |       | —           |       | 30,006           |       |
| Current portion of long-term debt                       |       | 154,064    |       | 46,015         |       | —        |       | (192,982         | )          | 7,097            |       |
| Current portion of deferred revenue                     |       | 639        |       | 66,734         |       | —        |       | —           |       | 67,373           |       |
| Total current liabilities                               |       | 163,208    |       | 155,339        |       |          |       | (192,982         | )          | 125,565          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,199      |       | 32,427         |       | —        |       | —           |       | 34,626           |       |
| Long-term debt                                          |       | 279,086    |       | —         |       | —        |       | —           |       | 279,086          |       |
| Other long-term liabilities                             |       | 594,580    |       | (576,599       | )          | —        |       | —           |       | 17,981           |       |
| Total liabilities                                       |       | 1,039,073  |       | (388,833       | )          |          |       | (192,982         | )          | 457,258          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 695,867        |       | —        |       | (695,867         | )          | —           |       |
| Stockholders’ deficit                              |       | (230,267   | )          | —         |       | —        |       | —           |       | (230,267         | )          |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Total liabilities & stockholders’ deficit |       | $          | 808,806    |           | $          | 307,034       |       | $                | —     |             | $          | (888,849 | ) | $ | 226,991 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                                 |       | $          | 3,258      |           | $          | 358,398       |       | $                | —     |             | $          | — |   | $ | 361,656 |   |
| Costs applicable to revenues                            |       | (7,507     | )          | (211,565       | )          | —        |       | —           |       | (219,072         | )          |
| Operating expenses                                      |       | (22,432    | )          | (96,896        | )          | —        |       | —           |       | (119,328         | )          |
| Interest expense, net                                   |       | (29,179    | )          | 603            |       | —        |       | —           |       | (28,576          | )          |
| Income from investment in consolidated  subsidiaries    |       | 46,270     |       | —         |       | —        |       | (46,270          | )          | —           |       |
| Other non operating income (expenses)                   |       | 3,517      |       | (4,185         | )          | —        |       | —           |       | (668             | )          |
| Income tax expense                                      |       | (174       | )          | (85            | )          | —        |       | —           |       | (259             | )          |
| Net income                                              |       | $          | (6,247     | )              | $          | 46,270        |       | $                | —     |             | $          | (46,270 | ) | $ | (6,247 | ) |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                              |       | $          | (45,904    | )              | $          | 42,208        |       | $                | —     |             | $          | — |   | $ | (3,696 | ) |
| Cash flows provided by (used in) investing  activities  |       | (1,250     | )          | (1,149         | )          | —        |       | —           |       | (2,399           | )          |
| Cash flows provided by (used in) financing  activities  |       | 56,670     |       | (48,469        | )          | —        |       | —           |       | 8,201            |       |
| Cash at beginning of year                               |       | 402        |       | 8,238          |       | —        |       | —           |       | 8,640            |       |
| Cash at end of period                                   |       | $          | 9,918      |           | $          | 828           |       | $                | —     |             | $          | — |   | $ | 10,746 |   |

 

14

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**(7) NOTESOFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

Thefollowing are summarized statements setting forth certain financial informationconcerning the Guarantor Subsidiaries as of and for the three months ended September 30,2010 (in thousands).

 
| ** **                                           | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                              |       | $          | 2,333      |           | $          | 122,307       |       | $                | —     |             | $          | — |   | $ | 124,640 |   |
| Costs applicable to revenues                         |       | (3,540     | )          | (72,555        | )          | —        |       | —           |       | (76,095          | )          |
| Operating expenses                                   |       | (5,251     | )          | (31,537        | )          | —        |       | —           |       | (36,788          | )          |
| Interest expense, net                                |       | (9,889     | )          | 118            |       | —        |       | —           |       | (9,771           | )          |
| Income from investment in consolidated  subsidiaries |       | 16,923     |       | —         |       | —        |       | (16,923          | )          | —           |       |
| Other non operating income (expenses)                |       | 1,213      |       | (1,383         | )          | —        |       | —           |       | (170             | )          |
| Income tax expense                                   |       | (30        | )          | (27            | )          | —        |       | —           |       | (57              | )          |
| Net income                                           |       | $          | 1,759      |           | $          | 16,923        |       | $                | —     |             | $          | (16,923 | ) | $ | 1,759 |   |

 

Thefollowing are summarized balance sheet statements setting forth certainfinancial information concerning the Guarantor Subsidiaries as of December 31,2009 (in thousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 402        |           | $          | 8,238         |       | $                | —     |             | $          | — |   | $ | 8,640 |   |
| Restricted cash                                         |       | 8,058      |       | —         |       | —        |       | —           |       | 8,058            |       |
| Accounts receivable- net of allowance                   |       | 1,363      |       | 185,952        |       | —        |       | (154,994         | )          | 32,321           |       |
| Inventories                                             |       | —     |       | 49,921         |       | —        |       | —           |       | 49,921           |       |
| Other current assets                                    |       | 2,210      |       | 10,857         |       | —        |       | —           |       | 13,067           |       |
| Total current assets                                    |       | 12,033     |       | 254,968        |       | —        |       | (154,994         | )          | 112,007          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 2,913      |       | 31,363         |       | —        |       | —           |       | 34,276           |       |
| Intangible assets                                       |       | 2,185      |       | 11,553         |       | —        |       | —           |       | 13,738           |       |
| Goodwill                                                |       | 49,944     |       | —         |       | —        |       | —           |       | 49,944           |       |
| Investment in subsidiaries                              |       | 649,597    |       | —         |       | —        |       | (649,597         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,837          |       | —        |       | (40,000          | )          | 4,837            |       |
| Other assets                                            |       | 4,683      |       | 2,084          |       | —        |       | —           |       | 6,767            |       |
| Total assets                                            |       | $          | 761,355    |           | $          | 304,805       |       | $                | —     |             | $          | (844,591 | ) | $ | 221,569 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 984        |           | $          | 22,811        |       | $                | —     |             | $          | — |   | $ | 23,795 |   |
| Accrued and other liabilities                           |       | 10,677     |       | 20,669         |       | —        |       | —           |       | 31,346           |       |
| Current portion of long-term debt                       |       | 154,994    |       | 40,892         |       | —        |       | (194,994         | )          | 892              |       |
| Current portion of deferred revenue                     |       | 738        |       | 59,990         |       | —        |       | —           |       | 60,728           |       |
| Total current liabilities                               |       | 167,393    |       | 144,362        |       |          |       | (194,994         | )          | 116,761          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,292      |       | 33,315         |       | —        |       | —           |       | 35,607           |       |
| Long-term debt                                          |       | 277,427    |       | 95             |       | —        |       | —           |       | 277,522          |       |
| Other long-term liabilities                             |       | 535,768    |       | (522,564       | )          | —        |       | —           |       | 13,204           |       |
| Total liabilities                                       |       | 982,880    |       | (344,792       | )          |          |       | (194,994         | )          | 443,094          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 649,597        |       | —        |       | (649,597         | )          | —           |       |
| Stockholders’ deficit                              |       | (221,525   | )          | —         |       | —        |       | —           |       | (221,525         | )          |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Total liabilities & stockholders’ deficit |       | $          | 761,355    |           | $          | 304,805       |       | $                | —     |             | $          | (844,591 | ) | $ | 221,569 |   |

 

15

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**(7) NOTESOFFERING, GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

Thefollowing are summarized statements setting forth certain financial informationconcerning the Guarantor Subsidiaries for the nine months ended September 30,2009 (in thousands).

 
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                                |       | $          | 4,100      |           | $          | 355,796       |       | $                | —     |             | $          | — |   | $ | 359,896 |   |
| Costs applicable to revenues                           |       | (7,888     | )          | (218,960       | )          | —        |       | —           |       | (226,848         | )          |
| Operating expenses                                     |       | (15,968    | )          | (146,220       | )          | —        |       | —           |       | (162,188         | )          |
| Interest expense, net                                  |       | (16,814    | )          | (4,678         | )          | —        |       | —           |       | (21,492          | )          |
| Income from investment in consolidated  subsidiaries   |       | (9,374     | )          | —         |       | —        |       | 9,374            |       | —           |       |
| Other non operating income (expenses)                  |       | 8,672      |       | (4,413         | )          | —        |       | —           |       | 4,259            |       |
| Income tax benefit (expense)                           |       | 3,115      |       | 9,101          |       | —        |       | —           |       | 12,216           |       |
| Net income                                             |       | $          | (34,157    | )              | $          | (9,374        | )          | $                | —     |             | $          | 9,374 |   | $ | (34,157 | ) |
|                                                   |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                             |       | $          | (15,488    | )              | $          | 34,976        |       | $                | —     |             | $          | — |   | $ | 19,488 |   |
| Cash flows provided by (used in) investing  activities |       | 1,663      |       | (4,224         | )          | —        |       | —           |       | (2,561           | )          |
| Cash flows provided (used in) by financing  activities |       | 17,543     |       | (36,278        | )          | —        |       | —           |       | (18,735          | )          |
| Cash at beginning of year                              |       | 1,300      |       | 9,308          |       | —        |       | —           |       | 10,608           |       |
| Cash at end of period                                  |       | $          | 5,018      |           | $          | 3,782         |       | $                | —     |             | $          | — |   | $ | 8,800 |   |

 

Thefollowing are summarized statements setting forth certain financial informationconcerning the Guarantor Subsidiaries for the three months ended September 30,2009 (in thousands).

 
| ** **                                           | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                              |       | $          | 500        |           | $          | 124,444       |       | $                | —     |             | $          | — |   | $ | 124,944 |   |
| Costs applicable to revenues                         |       | (1,997     | )          | (78,120        | )          | —        |       | —           |       | (80,117          | )          |
| Operating expenses                                   |       | (5,507     | )          | (81,682        | )          | —        |       | —           |       | (87,189          | )          |
| Interest expense, net                                |       | (8,512     | )          | 393            |       | —        |       | —           |       | (8,119           | )          |
| Income from investment in consolidated  subsidiaries |       | (27,142    | )          | —         |       | —        |       | 27,142           |       | —           |       |
| Other non operating income (expenses)                |       | 1,406      |       | (1,691         | )          | —        |       | —           |       | (285             | )          |
| Income tax benefit (expense)                         |       | 3,402      |       | 9,514          |       | —        |       | —           |       | 12,916           |       |
| Net income                                           |       | $          | (37,850    | )              | $          | (27,142       | )          | $                | —     |             | $          | 27,142 |   | $ | (37,850 | ) |

 

**(8) INTEREST RATE SWAP AGREEMENTS**

 

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

 

16

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** **

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

 

Werecognize all of our derivative instruments as either assets or liabilities atfair value.  Fair value is determined inaccordance with the accounting guidance for Fair Value Measurements.  See Note 9 — Fair Value Measurements.  The accounting for changes in the fair valueof a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and, further, on the type of hedgingrelationship.  For derivatives designatedas hedges under the accounting guidance for derivative instruments and hedgingactivities, we formally assess, both at inception and periodically thereafter,whether the hedging derivatives are highly effective in offsetting changes ineither the fair value or cash flows of the hedged item.  Our derivatives that are not designated anddo not qualify as hedges under the accounting guidance for derivativeinstruments and hedging activities are adjusted to fair value through currentearnings.

 

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

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.475% at September 30,2010 based upon the July 31, 2010 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap agreement waseffective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.475% at September 30, 2010 based upon the July 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.9 million of which approximately $7.1million is in accumulated other comprehensive loss, and $1.1 million includedin retained earnings and $0.7 million in the statement of operations in theperiod ended September 30, 2010. The fair value of these swaps included in other long-term liabilitieswas $8.1 million of which $7.0 million is in accumulated other comprehensiveloss and $1.1 million

 

17

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(**8)** **INTEREST RATE SWAPAGREEMENTS (continued)**

 

inthe statement of operations in aggregate periods through December 31,2009.  See Note 9 — Fair ValueMeasurements.

 

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

 

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

 

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

 

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

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

 

18

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

 

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

 

Derivativesin Cash Flow Hedging Relationships:

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

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

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

 

**(9) FAIR VALUE MEASUREMENTS**

 

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

 

Asof September 30, 2010, the Company holds interest rate swap contracts thatare required to be measured at fair value on a recurring basis.  The Company’s interest rate swap contractsare not traded on a public exchange.  SeeNote 8 Interest Rate Swap Agreements for further information on the interestrate swap contracts.  The fair value ofthese interest rate swap contracts are determined based on inputs that arereadily available in public markets or can be derived from informationavailable in publicly quoted markets. Therefore, the Company has categorized these swap contracts as Level 2.

 

19

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** **

**(9) FAIR VALUE MEASUREMENTS (continued)**

 

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

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

 

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

 

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

 

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

 
| ** **                 | ** ** | **9/30/2010**           | ** ** | **12/31/2009**      | ** ** |
|----------------------------|------------|-------------------------|------------|---------------------|------------|
| ** **                 | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| Senior Notes               |       | $                       | 137,824    |                | $          | 102,679 |   | $ | 137,824 |   | $ | 93,893 |   |
| New Senior Credit Facility |       | 142,345                 |       | 142,345             |       | 128,856 |   | 122,425 |   |
| CW Credit Facility         |       | 5,700                   |       | 5,700               |       | — |   | — |   |
|                            |            |                         |            |                     |            |  |  |  |  |  |  |  |  |

 

20

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**(10) INCOME TAXES**

 

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

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

 

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

 

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

 

**(11) SUBSEQUENT EVENT**

 

In October 2010, theCompany, Camping World and FreedomRoads Holding Company, LLC (“FreedomRoads”),an affiliate of the Company that is the leading North American dealer in newRVs, entered into the second amended and restated cooperative resourcesagreement pursuant to which the parties, subject to the terms of the amendedagreement, make their databases available to the other parties for their respectivebusinesses, and market and advertise each other’s businesses in theirrespective marketing channels.  Pursuantto the amended agreement, for the quarterly license fee specified in theagreement, the Company licenses the use of its Camping World trademarks toFreedomRoads in the United States in connection with the RV sales, service andparts operations of FreedomRoads.  Theterm of the agreement is for 25 years, subject to certain early terminationprovisions, including a change of control of any of the parties.  The parties made the amended agreementeffective January 1, 2010.

 

21

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**ITEM 2:**

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                    | ** ** | **9/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                             |       |   |   |   |   |
| REVENUES:                            |       |                             |       |   |   |   |   |
| Membership services                  |       | 30.5                             | %          | 28.4 | % | 7.0 | % |
| Media                                |       | 5.9                              | %          | 6.7 | % | (11.3 | )% |
| Retail                               |       | 63.6                             | %          | 64.9 | % | (2.3 | )% |
|                                 |       | 100.0                            | %          | 100.0 | % | (0.2 | )% |
|                                 |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                             |       |   |   |   |   |
| Membership services                  |       | 19.6                             | %          | 18.4 | % | 6.0 | % |
| Media                                |       | 4.7                              | %          | 5.7 | % | (18.2 | )% |
| Retail                               |       | 36.8                             | %          | 40.0 | % | (8.2 | )% |
|                                 |       | 61.1                             | %          | 64.1 | % | (5.0 | )% |
|                                 |       |                             |       |   |   |   |   |
| GROSS PROFIT                         |       | 38.9                             | %          | 35.9 | % | 8.3 | % |
|                                 |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                             |       |   |   |   |   |
| Selling, general and administrative  |       | 25.5                             | %          | 27.3 | % | (6.8 | )% |
| Goodwill impairment                  |       | —                           |       | 37.5 | % | (100.0 | )% |
| Financing expense                    |       | 0.2                              | %          | 0.3 | % | (26.4 | )% |
| Depreciation and amortization        |       | 3.8                              | %          | 4.7 | % | (18.9 | )% |
|                                 |       | 29.5                             | %          | 69.8 | % | (57.8 | )% |
|                                 |       |                             |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 9.4                              | %          | (33.9 | )% | (127.8 | )% |
|                                 |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                             |       |   |   |   |   |
| Interest income                      |       | 0.1                              | %          | 0.1 | % | (3.1 | )% |
| Interest expense                     |       | (7.9                             | )%         | (6.6 | )% | 20.0 | % |
| (Loss) gain on derivative instrument |       | (0.1                             | )%         | 0.1 | % | (256.1 | )% |
| Other non-operating items, net       |       | —                           |       | (0.3 | )% | (102.0 | )% |
|                                 |       | (7.9                             | )%         | (6.7 | )% | 18.3 | % |
|                                 |       |                             |       |   |   |   |   |
| INCOME (LOSS) BEFORE INCOME TAXES    |       | 1.5                              | %          | (40.6 | )% | (103.6 | )% |
|                                 |       |                             |       |   |   |   |   |
| INCOME TAX (EXPENSE) BENEFIT         |       | (0.1                             | )%         | 10.3 | % | (100.4 | )% |
|                                 |       |                             |       |   |   |   |   |
| NET INCOME (LOSS)                    |       | 1.4                              | %          | (30.3 | )% | (104.6 | )% |

 

22

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AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **NINE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **9/30/2010**                   | ** ** | **9/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                            |       |   |   |   |   |
| REVENUES:                            |       |                            |       |   |   |   |   |
| Membership services                  |       | 31.5                            | %          | 30.5 | % | 3.4 | % |
| Media                                |       | 8.3                             | %          | 9.8 | % | (14.3 | )% |
| Retail                               |       | 60.2                            | %          | 59.7 | % | 1.4 | % |
|                                 |       | 100.0                           | %          | 100.0 | % | 0.5 | % |
|                                 |       |                            |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                            |       |   |   |   |   |
| Membership services                  |       | 18.7                            | %          | 18.9 | % | (0.4 | )% |
| Media                                |       | 6.5                             | %          | 7.8 | % | (16.3 | )% |
| Retail                               |       | 35.4                            | %          | 36.3 | % | (2.2 | )% |
|                                 |       | 60.6                            | %          | 63.0 | % | (3.4 | )% |
|                                 |       |                            |       |   |   |   |   |
| GROSS PROFIT                         |       | 39.4                            | %          | 37.0 | % | 7.2 | % |
|                                 |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                            |       |   |   |   |   |
| Selling, general and administrative  |       | 27.0                            | %          | 27.0 | % | 0.4 | % |
| Goodwill impairment                  |       | —                          |       | 13.0 | % | (100.0 | )% |
| Financing expense                    |       | 2.1                             | %          | 0.6 | % | 303.7 | % |
| Depreciation and amortization        |       | 3.9                             | %          | 4.5 | % | (12.7 | )% |
|                                 |       | 33.0                            | %          | 45.1 | % | (26.4 | )% |
|                                 |       |                            |       |   |   |   |   |
| INCOME (LOSS) FROM OPERATIONS        |       | 6.4                             | %          | (8.1 | )% | (179.8 | )% |
|                                 |       |                            |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                            |       |   |   |   |   |
| Interest income                      |       | 0.1                             | %          | 0.1 | % | (4.6 | )% |
| Interest expense                     |       | (8.0                            | )%         | (6.1 | )% | 32.3 | % |
| (Loss) gain on derivative instrument |       | (0.2                            | )%         | 0.2 | % | (187.4 | )% |
| Gain on debt restructure             |       | —                          |       | 1.3 | % | (100.0 | )% |
| Other non-operating items, net       |       | —                          |       | (0.3 | )% | (102.5 | )% |
|                                 |       | (8.1                            | )%         | (4.8 | )% | 69.7 | % |
|                                 |       |                            |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES             |       | (1.7                            | )%         | (12.9 | )% | (87.1 | )% |
|                                 |       |                            |       |   |   |   |   |
| INCOME TAX (BENEFIT) EXPENSE         |       | —                          |       | 3.4 | % | (102.1 | )% |
|                                 |       |                            |       |   |   |   |   |
| NET LOSS                             |       | (1.7                            | )%         | (9.5 | )% | (81.7 | )% |

 

23

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended September 30, 2010**

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

 

*Revenues*

 

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

 

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

 

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

 

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

 

*CostsApplicable to Revenues*

 

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

 

24

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MembershipServices costs applicable to revenues of $24.4 million increased $1.4 million,or 6.0%, from the comparable period in 2009. This increase consisted of a $1.6 million expense increase related totiming of the annual rally, and a $0.4 million increase in emergency roadservice and extended vehicle warranty program costs relating to increasedrevenue from those programs, partially offset by a $0.2 million reduction inwage-related expenses and a $0.4 million reduction in the Coast to Coast Club andthe Golf Club costs, related to reduced enrollment.

 

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

 

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

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $31.8 million for the third quarter of2010 decreased $2.3 million compared to the third quarter of 2009.  This decrease was primarily due to a $2.9million decrease in retail general and administrative expenses, primarilyrelated to reduced labor, property taxes and rent, a $1.0 million reimbursementof legal expenses related to the collection of a 2000 judgement for suchexpenses that was lien on real estate owned by the obligor that was received inthe quarter, and a $0.5 million reduction in professional fees, partiallyoffset by a $2.1 million increase in deferred executive compensation under the2010 Phantom Stock agreements.

 

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

 

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

 

Depreciationand amortization expense of $4.7 million decreased $1.1 million from the prioryear primarily due to completed amortization of intangible assets associatedwith prior acquisitions, and a reduced level of capital expenditures since2008.

 

25

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*Income(Loss) from Operations*

 

Incomefrom operations for the third quarter of 2010 totaled $11.8 million compared toloss from operations of $42.4 million for the third quarter of 2009.  This change of approximately $54.1 millionfrom the third quarter of 2009 was primarily the result of a $46.9 millionasset impairment charge in the Media segment in the third quarter of 2009 andthe following favorable changes in the third quarter of 2010 compared to thethird quarter of 2009: a $5.5 million reduction in operating expenses for thethird quarter of 2010, increases in gross profit for the Retail, MembershipServices and Media segments of $2.2 million, $1.1 million and $0.4 million,respectively, for the third quarter of 2010, and reduced financing expense of$0.1 million for the third quarter of 2010, that were only partially offset bya $2.1 million increase in deferred executive compensation.

 

*Non-OperatingItems*

 

Non-operatingexpenses of approximately $9.9 million for the third quarter of 2010 increased$1.5 million compared to the third quarter of 2009 due to a $1.6 millionincrease in interest expense relating to both higher interest rates on theCompany’s debt and an increase in average debt balances, and a $0.3 millionnegative change in the loss/gain on derivative instrument related to theinterest rate swap agreements, partially offset by a $0.4 million improvementin other non-operating items, principally the loss on sale of retail equipmentin the third quarter of 2009.

 

*Income (loss)before Income Tax*

 

Incomebefore income tax for the third quarter of 2010 was $1.8 million, compared to aloss before income tax of $50.8 million for the third quarter of 2009.  This $52.6 million favorable change wasattributable to the $54.1 million increase in income from operations in thethird quarter of 2010 only partially offset by the $1.5 increase innon-operating items mentioned above.

 

*IncomeTax Expense (Benefit)*

 

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

 

*Net income (loss)*

 

Netincome in the third quarter of 2010 was $1.8 million compared to a loss of$37.9 million for the same period in 2009 mainly due to the reasons discussedabove.

 

26

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*SegmentProfit (Loss)*

 

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

 

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

 

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

 

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

 

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

 

**Ninemonths Ended September 30, 2010**

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

 

*Revenues*

 

Revenuesof $361.7 million for the first nine months of 2010 increased by $1.8 million,or 0.5%, from the comparable period in 2009.

 

27

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MembershipServices revenues of $113.7 million for the first nine months of 2010 increased$3.8 million, or 3.4%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $1.9 million increase related to vehicle insurance productsprimarily related to a $2.5 million fee received in the first quarter as aresult of our waiving our right of first refusal regarding the sale of thevehicle insurance business by a third party provider, a $1.4 million increasein extended vehicle warranty program revenue resulting from continued policygrowth, an $0.8 million increase in revenue from emergency road serviceproducts primarily due to a price increase, a $0.7 million increase inmarketing fee revenue from health and life insurance products, a $0.4 millionrevenue increase in advertising revenue in Highways Magazine, RV View, the GoodSam Club and President’s Club publications, a $0.4 million increase in memberevents revenue and a $0.3 million revenue increase in credit cardroyalties.  These increases werepartially offset by a $0.9 million decrease due to reduced membership in theCoast to Coast Club and the Golf Card Club, and a $1.2 million revenue decreasedue to the termination of the brand usage licensing fee charged to FreedomRoadsHolding LLC and its subsidiaries (collectively “FreedomRoads”) in December 2009.  Subsequent to September 30, 2010,FreedomRoads, Camping World and the Company entered into a Second Amended andRestated Cooperative Resources Agreement providing for an annual license fee of$3.75 million paid in quarter installments. See Footnote 11 — Subsequent Event.

 

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

 

Retailrevenues of $217.8 million increased by $3.0 million, or 1.4%, from thecomparable period in 2009.  Storemerchandise sales increased $0.1 million from the first nine months of 2009 dueto a same store sales increase of $2.4 million, or 1.5%, compared to a 7.3%decrease in same store sales for the first nine months of 2009, and a $0.1million revenue increase from the opening of one new store over the pasttwenty-one months, partially offset by decreased revenue from discontinuedstores of $2.4 million.  Two stores wereclosed in the last twenty-one months in order to reduce fixed operating costsand to consolidate operations within the respective trade areas.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Also, installation and service fees increased$1.1 million, mail order and internet sales increased $0.7 million, andsupplies and other sales increased $1.1 million.

 

28

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*CostsApplicable to Revenues*

 

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

 

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

 

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

 

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

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $97.6 million for the first nine monthsof 2010 increased $0.4 million compared to the first nine months of 2009.  This increase was due to a $3.9 millionincrease in deferred executive compensation under the 2010 Phantom Stockagreements and a $0.3 million increase in other general and administrativeexpenses, partially offset by a $1.0 million reimbursement of legal expensesrelated to the collection of a 2000 judgement for such expenses that was lienon real estate owned by the obligor that was received in the third quarter,$0.9 million reduction in professional fees and a $1.9 million decrease inretail general and administrative expenses consisting primarily of decreases inlabor and advertising expense.

 

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

 

29

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

 

Depreciationand amortization expense of $14.1 million decreased $2.1 million from the prioryear primarily due to completed amortization of intangible assets associatedwith prior acquisitions, and a reduced level of capital expenditures since 2008.

 

*Income(Loss) from Operations*

 

Incomefrom operations for the first nine months of 2010 totaled $23.3 millioncompared to loss from operation of $29.1 million for the first nine months of2009.  This $52.4 million change wasprimarily the result the $46.9 million asset impairment charge in the thirdquarter of 2009 and the following favorable changes in the first nine months of2010 compared to the first nine months of 2009: increased gross profit for theRetail and Membership Service segments of $5.9 million and $4.1 million,respectively, and reduced operating expenses of $5.6 million, partially offsetby increased financing expense of $5.7 million, a $3.9 million increase indeferred executive compensation, and reduced gross profit for the Media segmentof $0.5 million.

 

*Non-OperatingItems*

 

Non-operatingexpenses of approximately $29.2 million for the first nine months of 2010increased $12.0 million compared to the first nine months of 2009 due to a $7.1million increase in interest expense relating to higher interest rates andincreased debt, a $4.7 million gain on purchase of the $14.6 million SeniorNotes in the second quarter of 2009, and a $1.5 million negative change in theloss/gain on derivative instruments related to the interest rate swap agreements,partially offset by a $0.7 million decrease in other non-operating expenses anda $0.6 million loss on sale of retail assets in the first nine months of2009.  See Note 8 — Interest Rate SwapAgreements.

 

*Lossbefore Income Tax*

 

Lossbefore income tax for the first nine months of 2010 was $6.0 million, comparedto $46.4 million for the first nine months of 2009.  This $40.4 million favorable change wasattributable to the $52.4 million increase in income from operations, partiallyoffset by a $12.0 million increase in non-operating items mentioned above.

 

*IncomeTax Expense (Benefit)*

 

TheCompany recorded income tax expense of approximately $0.3 million for the firstnine months of 2010, compared to $12.2 million income tax benefit for the firstnine months of 2009.  This change was aresult of a reversal of unrecognized tax benefits, reversal of accrued interestand penalties related to unrecognized tax benefits and a 

 

30

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decreasein the valuation allowance against deferred tax assets in the first nine monthsof 2009.

 

*Net loss*

 

Netloss in the first nine months of 2010 was $6.2 million compared to a loss of$34.2 million for the same period in 2009 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

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

 

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

 

Membershipservices segment profit of $40.4 million for the first nine months of 2010increased $5.5 million, or 15.8%, from the comparable period in 2009.  This increase was largely attributable to a$1.3 million increase in vehicle insurance profit primarily related to a $2.5million fee received as a result of waiving our right of first refusalregarding the sale of the third party partner combined with reduced marketingfee revenue, a $1.2 million increase in segment profit in the Good Sam Clubrelated to reduced marketing and administrative expenses, an $0.8 millionincrease in profit related to savings in overhead and wage-related expenses, a$0.7 million increase in profit related to the timing of the member events, a$0.7 million increase in advertising revenue in the member publications, a $0.7million increase in marketing fee revenue from credit cards and health and lifeinsurance products, a $0.5 million increase in profit from the extended vehiclewarranty program and emergency road service products, a $0.4 million increasein profit related to reduced marketing and program expenses in the Coast toCoast Club and the Golf Card Club, and a $0.4 million increase in segmentprofit from various other ancillary product revenue.  These increases were partially offset by a$1.2 million decrease in segment profit relating to reduced brand usagelicensing fees from FreedomRoads.

 

Mediasegment profit improved to $0.5 million for the first nine months of 2010 froma loss of $46.9 million for comparable period in 2009.  This improvement resulted primarily from a$46.9 million goodwill impairment charge in 2009 in the Media segment, and the 

 

31

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followingfavorable changes for the 2010 period: a $0.5 million increase in segmentprofit in the RV magazine group, and $0.4 million increase in segment profit inthe powersports magazine group, partially offset by a $0.4 million decrease insegment profit from the consumer shows group.

 

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

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany historically operates with a working capital deficit.  Working capital deficit was $0.4 million and$4.8 million as of September 30, 2010 and December 31, 2009,respectively.  The primary reason forworking capital deficit is the deferred revenue and gains reported undercurrent liabilities, amounting to $67.4 million and $60.7 million, as of September 30,2010 and December 31, 2009, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships and service contracts in advance, which is amortized over the lifeof the membership or contract period. The Company uses net proceeds from this deferred revenue to lower itsborrowings.

 

In2009, the Company and its parent, AGHI, engaged a financial advisor to assistin refinancing or restructuring of the Senior Notes ($137.8 million principaloutstanding at September 30, 2010 and maturing on February 15, 2012)and the AGHI Notes ($87.3 million principal outstanding at September 30,2010 and maturing February 15, 2012). AGHI deferred payment of the interest on the AGHI Notes that was due on August 15,2009.  The indenture governing the AGHINotes provides a 30 day grace period for the payment of interest.  Before the end of the grace period, AGHIreceived consent letters for extending such grace period from certaininstitutional holders of the AGHI Notes holding in the aggregate $65.8 millionprincipal amount of the AGHI Notes and from non-institutional holders holdingin the aggregate $46.6 million principal amount of the AGHI Notes and paid theinterest of the remaining AGHI Notes. The aggregate principal amount of the AGHI Notes outstanding was then$113.6 million so the holders executing the consents held 98.9% of theoutstanding principal amount of the AGHI Notes. Pursuant to the consent letters from the institutional holders, AGHIagreed to pay the legal fees for a law firm to represent the institutionalholders. In addition, AGHI paid a consent fee equal 1⁄4 of 1% of the principalamount to the institutional holders who signed a consent letter, or anaggregate of $164,600.  No consent feewas paid to the non-institutional holders. AGHI satisfied the August 15, 2009 interest payment in January,2010 with $4.5 million in cash (funded, in part, from a $2.8 million capitalcontribution from its shareholder, and the balance from AGI as a permitted taxdistributions), and the remaining $1.7 million due to related entities wasforgiven and, as such, reported as an equity contribution.  AGHI satisfied the interest payment due February 15,2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from$2.5 million received by AGHI in connection with a waiver by AGHI of certainfirst refusal rights related to AGI’s vehicle insurance business and thebalance from 

 

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AGIas a permitted tax distribution) and the remaining $1.8 million due to relatedentities was forgiven and, as such, reported as an equity contribution.  As a condition to funding of the New SeniorCredit Facility, on March 1, 2010, AGHI acquired $25.4 million of AGHINotes due on March 15, 2010 that were held by an affiliate of AGHI, as acontribution from the affiliate, and AGHI then cancelled those notes, therebyreducing the approximately $112.3 million of AGHI Notes outstanding as of December 31,2009 to approximately $87.0 million as of March 31, 2010.  AGHI satisfied the interest payment due August 15,2010 with $3.4 million in cash funded from its shareholder, paid September 16,2010 to institutional holders holding an aggregate of $61.8 million of our AGHINotes within the “grace” period consented to by such holders for payment of theinterest.  The payment of $3.4 millionwas reported as an equity contribution. Previously, the Company also paid the indenture trustee interest in theamount of $15,000 for the holders of the AGHI Notes that had not been identifiedto the Company.  The remaining holders ofthe AGHI Notes extended the payment date for the interest due on August 15,2010 to February 15, 2011.

 

*Contractual Obligations and Commercial Commitments*

 

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

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**     | ** ** | **Total**                                 | ** ** | **2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  2014** | ** ** | **Thereafter** | ** ** |
|                        |       |                                      |       |   |   |   |   |   |   |   |   |
| Debt and future interest    |       | $                                         | 333,987    |   | $ | 6,286 |   | $ | 327,701 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 218,219                                   |       | 5,786 |   | 42,892 |   | 36,154 |   | 133,387 |   |
| Standby letters of credit   |       | 8,565                                     |       | 4,065 |   | 4,500 |   | — |   | — |   |
| Grand total                 |       | $                                         | 560,771    |   | $ | 16,137 |   | $ | 375,093 |   | $ | 36,154 |   | $ | 133,387 |   |

 

Inaccordance with their respective loan agreements, if the maturity of the SeniorNotes and AGHI Notes is not extended, or if the Senior Notes and AGHI Noteshave not been repaid or refinanced, the New Senior Credit Facility matures 90days prior to maturity of the Senior Notes and the AGHI Notes, and the CWCredit Facility matures 60 days prior to the maturity of the New Senior CreditFacility.  The debt and future interestdisclosed above assumes the Senior Notes and AGHI Notes, both due February 15,2012, are not extended.

 

NewSenior Credit Facility

 

OnMarch 1, 2010, the Company entered into the New Senior Credit Facility torefinance the existing senior credit facility ($128.9 million aggregateprincipal amount outstanding at December 31, 2009) which was scheduled tomature on March 31, 2010, the second lien notes due July 31, 2010($9.7 million principal amount outstanding at December 31, 2009), and theSA Loan ($1.0 million principal amount outstanding at December 31,2009).  The New Senior Credit Facilityprovides for term loans aggregating $144.3 million, including an original issuediscount of 2%, that are payable in quarterly installments of $360,750beginning March 1, 2011.  Inaddition, there are mandatory prepayments of the

 

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termloans from excess cash flow (as defined) of AGI and from asset sales.  The term loans under the New Senior CreditFacility mature on the earlier of (i) March 1, 2015 or (ii) 90days prior to the maturity of either the Senior Notes ($137.8 million principalamount outstanding as at September 30, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat September 30, 2010 and are due February 15, 2012).  Interest on the term loans under the New SeniorCredit Facility floats at either 8.75% over the base rate (defined as thegreater of the prime rate, federal funds rate plus 50 basis points or 5.25%)for borrowings whose interest is based on the prime rate or 10.0% over theLIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (See Note 8- Interest Rate Swap Agreements), as of September 30,2010, the average annual interest rate on the term loans was 16.64%.  The New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the New Senior CreditFacility are guaranteed by the direct and indirect subsidiaries of AGI and aresecured by liens on the assets of AGI and its direct and indirectsubsidiaries.  As a condition to the termloans under the New Senior Credit Facility, $25.4 million of AGHI Notes due on March 15,2010 that were held by an affiliate of AGHI were contributed to AGHI and AGHIcancelled those notes.  As of September 30,2010, $142.3 million, net of approximately $2.0 million of unamortized originalissue discount, was outstanding on the New Senior Credit Facility.  Restricted cash of $8.1 million was releasedfrom its restriction on March 1, 2010, when the existing credit facilitywas refinanced.

 

CWCredit Facility

 

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

 

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SeniorNotes

 

InFebruary 2004, AGI issued $200.0 million of Senior Notes pursuant to theAGI Indenture.  Interest at the rate of9% per annum is due on the Senior Notes on February 15 and August 15.  The Senior Notes mature on February 15,2012.  As of September 30, 2010,$137.8 million of Senior Notes remained outstanding.  The fair value of the Senior Notes, based onthe quoted market price at September 30, 2010, was $102.7 million.

 

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

 

Interest Rate Swap Agreements

 

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

 

Werecognize all of our derivative instruments as either assets or liabilities atfair value.  Fair value is determined inaccordance with the accounting guidance for Fair Value Measurements.  See Note 9 — Fair Value Measurements.  The accounting for changes in the fair valueof a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under the accounting guidance for derivative instrumentsand hedging activities, we formally assess, both at inception and periodicallythereafter, whether the hedging derivatives are highly effective in offsettingchanges in either the fair value or cash flows of the hedged item.  Our derivatives that are not designated anddo not qualify as hedges under the accounting guidance for derivativeinstruments and hedging activities are adjusted to fair value through currentearnings.

 

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

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.475% at September 30,2010 based upon the July

 

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31,2010 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, 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 (0.475% at September 30, 2010 based upon the July 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.9 million of which approximately $7.1million is in accumulated other comprehensive loss, and $1.1 million includedin retained earnings and $0.7 million in the statement of operations in theperiod ended September 30, 2010. The fair value of these swaps included in other long-term liabilitieswas $8.1 million of which $7.0 million is in accumulated other comprehensiveloss and $1.1 million in the statement of operations in aggregate periodsthrough December 31, 2009.  See Note9 — Fair Value Measurements.

 

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

 

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

 

Dueto the issuance of an option to the shareholder of the ultimate parent of theCompany to purchase Camping World, in the third quarter of 2009, which optionwas subsequently terminated, a portion of the highly effective hedge on thecash flows related to the $100.0 million notional amount interest rate swapagreement was deemed to be no longer probable and was deemed to be 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

 

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includedin earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last$20.0 million of the $100.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument

 

OtherContractual Obligations and Commercial Commitments

 

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

 

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

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

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

 

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

 

*RevenueRecognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and Internet orders, or when services are provided to customers.Publication advertising and newsstand sales, net of estimated provision forreturns, are recorded at time of delivery. Subscription sales of publications are deferred and recognized over thelives of the subscriptions.  Revenues fromthe emergency road service program (“ERS”) are deferred and recognized over thelife of the contract.  ERS claim expensesare

 

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recognizedwhen incurred.  Advances on third partycredit card fee revenues are deferred and recognized based primarily on apercentage of 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.

 

*AccountsReceivable*

 

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

 

*Inventory*

 

TheCompany states inventories at the lower of cost or market.  In assessing the ultimate realization ofinventories, the Company is required to make judgments as to future demandrequirements and compare that with the current or committed inventory levels.  The Company has recorded changes in requiredreserves in recent periods due to changes in strategic direction, such asdiscontinuances of product lines as well as changes in market conditions due tochanges in demand requirements.  It ispossible that changes in required inventory reserves may continue to occur inthe future due to the market conditions.

 

*Long-LivedAssets*

 

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

 

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

 

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TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary or if any of these assets had indefinite lives and were therefore notsubject to amortization.  The Companydetermined that no adjustments to the useful lives of its finite-livedpurchased intangible assets were necessary. The finite-lived purchased intangible assets consist of membershipcustomer lists, resort and golf course agreements, non-compete and deferredconsulting agreements and deferred financing costs which have weighted averageuseful lives of approximately 6 years, 4 years, 15 years and 5 years,respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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

 

Inthe third quarter of 2009, the Company noted continued reduction in advertisingrevenue in the operations of our RV and powersports publications, as well asflat to moderate projected growth in future advertising revenue as a result ofcontinued deterioration of general economic conditions and consumerconfidence.  Based on the above, theCompany determined that there were identified indicators of impairment withinthese reporting units in the Media segment.

 

TheCompany performed an impairment test of the goodwill and intangible assets ofthe reporting units of our RV and powersports publications.  The impairment test indicated that theestimated fair value of these reporting units were less than book value.  The excess of the carrying value over theestimated fair value of the these reporting units was primarily due to thedecline in the recreational vehicle and camping retail markets leading to lower

 

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expectedfuture cash flows for the business. In determining the fair value, the Companyused an income valuation approach.

 

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

 

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

 

*Derivative Financial Instruments*

 

Asdiscussed in Note 8 — Interest Rate Swap Agreements, the Company accounts forderivative instruments and hedging activities in accordance with new accountingguidance for Accounting for Derivative Instruments and Hedging Activities.  All derivatives are recognized on the balancesheet at their fair value.  On the datethat the Company enters into a derivative contract, management formally documentsall relationships between hedging instruments and hedged items, as well as riskmanagement 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.

 

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*Fair Value Measurements*

 

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

 

TheCompany has determined that it utilizes observable (Level 2) inputs indetermining the fair value of its interest rate swap agreements.  The Company has determined that it utilizesunobservable (Level 3) inputs in determining the fair value of its FreedomRoadsPreferred Interest, and Media and Retail segment goodwill.

 

*IncomeTaxes*

 

Significantjudgment is required in determining the Company’s tax provision and inevaluating its tax positions.  TheCompany establishes accruals for certain tax contingencies when, despite the beliefthat 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 MARKETRISK**

 

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

 

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

 

*Interest Rate SensitivityAnalysis*

 

At September 30, 2010, the total debt of theCompany was $286.2 million, including $148.0 million of variable rate debtcomprised of $142.3 million of term loans under the New Senior Credit Facility,of which $120.0 million is fixed through the interest rate swap agreements, and$5.7 million under the CW Credit Facility. Fixed rate debt of $138.2

 

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million is comprised of $137.8 million of SeniorNotes and approximately $0.4 million of purchase debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorableimpact of approximately $0.3 million.

 

*Credit Risk*

 

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

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over Financial Reporting

 

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

 

**PART II:  OTHER INFORMATION**

 

**ITEM 1A: RISK FACTORS**

 

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

 

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

 

Inaccordance with their respective loan agreements, if the maturity of the SeniorNotes and AGHI Notes is not extended, or if the Senior Notes and AGHI Noteshave not been repaid or refinanced, the New Senior Credit Facility matures 90days prior to maturity of the Senior Notes and the AGHI Notes, and the CWCredit Facility matures 60 days prior to the maturity of the New Senior CreditFacility.  The Senior Notes and AGHINotes are due on February 15, 2012. Although the Company and its parent, AGHI, are currently

 

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seekingto refinance, extend or replace these notes, there can be no assurance thatthese notes will be refinanced, extended or replaced prior to the accelerateddue dates of the New Senior Credit Facility and CW Credit Facility.  The availability of financing may be limiteddue to the current uncertainties in the capital markets and the current generalconditions in the U.S. economy.  As aresult, it may be even more difficult for the Company and AGHI to refinance,extend or replace the Senior Notes and AGHI Notes.  If we are not able to refinance, extend orreplace the Senior Notes and AGHI Notes prior to the early maturity dates ofthe New Senior Credit Facility and the CW Credit Facility, the lenders underthe New Senior Credit Facility and the CW Credit Facility will be entitled toexercise their remedies to sell the collateral securing the repayment of theNew Senior Credit Facility and CW Credit Facility, including the Company’sassets, the stock of the Company and the stock of the Company’ssubsidiaries.  Since the indebtednessowed under the New Senior Credit Facility and CW Credit Facility is secured, itwould be repaid before any of the unsecured or subordinated obligations of theCompany and its subsidiaries.  It is alsopossible that the interest rate payable on any new borrowings will be higherthan the interest rates under the current Senior Notes and AGHI Notes, whichwould adversely affect the Company’s cash flow and profitability (or increaselosses).

 

**ITEM 6: EXHIBITS**

 

Exhibits:

 

Exhibit 10.43— Second Amended and Restated Cooperative Resources Agreement dated January 1,2010

 

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**SIGNATURES:**

 

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

 

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

 

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