**UNITEDSTATES**

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

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

 

**FORM 10-Q**

 

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

**The Securities Exchange Act of 1934**

 

| **For  Quarter Ended:**  | ** ** | **Commission  File Number** |
|--------------------------|------------|-----------------------------|
| **March 31,  2009** | ** ** | **333-113982**              |

 

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**AFFINITY GROUP, INC.**

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

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

**9% SeniorSubordinated Notes Due 2012**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.
| YES  x |   | NO  o |
|------------------|--------|-----------------|

 

Indicate by check mark whether the registrant has submittedelectronically and posted on its corporate Web site, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files). Yes o No x

 

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

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

 

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

 

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

** **

|                          |       | **Outstanding  as of** |
|-------------------------------|------------|------------------------|
| **Class**                     | ** ** | **June 5,  2009** |
| Common Stock, $.001 par value |       | 2,000                  |

** **

**DOCUMENTSINCORPORATED BY REFERENCE: None**

 

 

 

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**AFFINITY GROUP, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| ** **                                                                                                | **Page** |
|-----------------------------------------------------------------------------------------------------------|----------|
| **Part I.**Financial  Information                                                                    |     |
|                                                                                                      |     |
| **Item 1: Financial Statements**                                                                          |     |
|                                                                                                      |     |
| Consolidated  Balance Sheets  as of March 31, 2009 (unaudited) and December 31, 2008            | 1        |
|                                                                                                      |     |
| Unaudited  Consolidated Statements of Operations  for the three months ended March 31, 2009 and 2008 | 2        |
|                                                                                                      |     |
| Unaudited  Consolidated Statements of Cash Flows  for the three months ended March 31, 2009 and 2008 | 3        |
|                                                                                                      |     |
| Notes to Unaudited Consolidated Financial Statements                                                      | 4        |
|                                                                                                      |     |
| **Item 2: Management’s Discussion and Analysis of  Financial Condition and Results of Operations**   | 24       |
|                                                                                                      |     |
| **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                   | 38       |
|                                                                                                      |     |
| **Item 4: Controls and Procedures**                                                                       | 38       |
|                                                                                                      |     |
| **Part II. Other Information**                                                                       | 39       |
|                                                                                                      |     |
| **Signatures**                                                                                            | 40       |

 

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2009 and December 31,2008

(In thousands except sharesand par value)

 
| ** **                                                                                      | ** ** | **3/31/2009**   | ** ** | **12/31/2008** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 22,272     |           | $          | 10,608 |   |
| Accounts receivable, less allowance for doubtful  accounts of $2,187 in 2009 and $2,147 in 2008 |       | 35,748          |       | 40,191         |       |
| Inventories                                                                                     |       | 57,966          |       | 57,137         |       |
| Prepaid expenses and other assets                                                               |       | 15,824          |       | 13,545         |       |
| Total current assets                                                                            |       | 131,810         |       | 121,481        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 42,218          |       | 44,077         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                                 |       | 4,596           |       | 4,608          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 18,946          |       | 20,754         |       |
| GOODWILL                                                                                        |       | 96,828          |       | 96,828         |       |
| DEFERRED TAX ASSETS, net                                                                        |       | 4,569           |       | 4,569          |       |
| OTHER ASSETS                                                                                    |       | 2,605           |       | 2,035          |       |
| Total assets                                                                                    |       | $               | 301,572    |           | $          | 294,352 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 31,367     |           | $          | 23,950 |   |
| Accrued interest                                                                                |       | 2,582           |       | 6,946          |       |
| Accrued income taxes                                                                            |       | 1,217           |       | 1,165          |       |
| Accrued liabilities                                                                             |       | 25,718          |       | 26,954         |       |
| Deferred revenues and gains                                                                     |       | 58,129          |       | 60,569         |       |
| Current portion of long-term debt                                                               |       | 147,703         |       | 12,391         |       |
| Total current liabilities                                                                       |       | 266,716         |       | 131,975        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 35,995          |       | 35,855         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 153,027         |       | 279,755        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 33,370          |       | 33,281         |       |
|                                                                                            |       | 489,108         |       | 480,866        |       |
|                                                                                            |       |            |       |           |       |
| 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                                                                      |       | 81,005          |       | 81,005         |       |
| Accumulated deficit                                                                             |       | (258,448        | )          | (257,183       | )          |
| Accumulated other comprehensive loss                                                            |       | (10,094         | )          | (10,337        | )          |
| Total stockholder’s deficit                                                                |       | (187,536        | )          | (186,514       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 301,572    |           | $          | 294,352 |   |

 

See notes toconsolidated financial statements.

 

1

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **3/31/2009**          | ** ** | **3/31/2008** | ** ** |
| REVENUES:                                         |       |                   |       |   |   |
| Membership services                               |       | $                      | 35,232     |   | $ | 35,545 |   |
| Media                                             |       | 17,420                 |       | 26,256 |   |
| Retail                                            |       | 52,401                 |       | 63,184 |   |
|                                              |       | 105,053                |       | 124,985 |   |
|                                              |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                   |       |   |   |
| Membership services                               |       | 20,330                 |       | 23,141 |   |
| Media                                             |       | 13,484                 |       | 17,217 |   |
| Retail                                            |       | 31,536                 |       | 36,863 |   |
|                                              |       | 65,350                 |       | 77,221 |   |
|                                              |       |                   |       |   |   |
| GROSS PROFIT                                      |       | 39,703                 |       | 47,764 |   |
|                                              |       |                   |       |   |   |
| OPERATING EXPENSES:                               |       |                   |       |   |   |
| Selling, general and administrative               |       | 29,937                 |       | 36,431 |   |
| Depreciation and amortization                     |       | 4,838                  |       | 5,004 |   |
|                                              |       | 34,775                 |       | 41,435 |   |
|                                              |       |                   |       |   |   |
| INCOME FROM OPERATIONS                            |       | 4,928                  |       | 6,329 |   |
|                                              |       |                   |       |   |   |
| NON-OPERATING ITEMS:                              |       |                   |       |   |   |
| Interest income                                   |       | 130                    |       | 143 |   |
| Interest expense                                  |       | (5,823                 | )          | (6,060 | ) |
| Gain on derivative instrument                     |       | 20                     |       | — |   |
| Other non-operating items, net                    |       | (83                    | )          | 2 |   |
|                                              |       | (5,756                 | )          | (5,915 | ) |
|                                              |       |                   |       |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (828                   | )          | 414 |   |
|                                              |       |                   |       |   |   |
| INCOME TAX EXPENSE                                |       | (396                   | )          | (299 | ) |
|                                              |       |                   |       |   |   |
| NET (LOSS) INCOME                                 |       | $                      | (1,224     | ) | $ | 115 |   |

 

See notes to consolidatedfinancial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **THREE MONTHS ENDED** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                | ** ** | **3/31/2009**          | ** ** | **3/31/2008** | ** ** |
|                                                                                      |       |                   |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                   |       |   |   |
| Net (loss) income                                                                         |       | $                      | (1,224     | ) | $ | 115 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                              |       | 3,031                  |       | 2,999 |   |
| Amortization                                                                              |       | 1,807                  |       | 2,005 |   |
| Provision for losses on accounts receivable                                               |       | 370                    |       | 262 |   |
| Deferred compensation                                                                     |       | —                 |       | (300 | ) |
| Loss on sale of property and equipment                                                    |       | 82                     |       | 26 |   |
| Changes in operating assets and liabilities                                               |       |                   |       |   |   |
| Accounts receivable                                                                       |       | 4,073                  |       | 1,602 |   |
| Inventories                                                                               |       | (829                   | )          | (3,219 | ) |
| Prepaid expenses and other assets                                                         |       | (2,849                 | )          | (1,852 | ) |
| Accounts payable                                                                          |       | 7,417                  |       | 1,560 |   |
| Accrued and other liabilities                                                             |       | (5,352                 | )          | (7,683 | ) |
| Deferred revenues and gains                                                               |       | (2,300                 | )          | (3,438 | ) |
| Net cash provided by (used in) operating activities                                       |       | 4,226                  |       | (7,923 | ) |
|                                                                                      |       |                   |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                   |       |   |   |
| Capital expenditures                                                                      |       | (1,261                 | )          | (3,515 | ) |
| Net proceeds from sale of property and equipment                                          |       | 7                      |       | 1 |   |
| Investment in affiliate                                                                   |       | 12                     |       | 10 |   |
| Acquisitions, net of cash received                                                        |       | —                 |       | (3,409 | ) |
| Net cash used in investing activities                                                     |       | (1,242                 | )          | (6,913 | ) |
|                                                                                      |       |                   |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                   |       |   |   |
| Contribution from parent                                                                  |       | —                 |       | — |   |
| Borrowings on long-term debt                                                              |       | 11,000                 |       | 22,400 |   |
| Payment of debt issue costs                                                               |       | 1                      |       | — |   |
| Principal payments on short-term debt                                                     |       | (2,321                 | )          | (15,216 | ) |
| Net cash provided by financing activities                                                 |       | 8,680                  |       | 7,184 |   |
|                                                                                      |       |                   |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                   |       | 11,664                 |       | (7,652 | ) |
|                                                                                      |       |                   |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |       | 10,608                 |       | 8,357 |   |
|                                                                                      |       |                   |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |       | $                      | 22,272     |   | $ | 705 |   |

 

See notes toconsolidated financial statements.

 

3

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

*Principles of Consolidation –***The consolidated financial statements includethe accounts of Affinity Group, Inc. (“AGI”) and its subsidiaries (collectivelythe “Company”), presented in accordance with U.S. generally accepted accountingprinciples, and pursuant to the rules and regulations of the Securities andExchange Commission.  Affinity GroupHolding, Inc. (“AGHI”) is the direct parent of the Company. The ultimate parentcompany of AGHI is AGI Holding Corp. (“AGHC”), a privately-owned corporation.

 

These interimconsolidated financial statements should be read in conjunction with theCompany’s consolidated financial statements and notes in the Company’s 10-Kreport for the year ended December 31, 2008 as filed with the Securities andExchange Commission.  In the opinion ofmanagement of the Company, these consolidated financial statements contain alladjustments 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*–**The accompanying financial statementshave been prepared on the basis that the Company will continue as a goingconcern.

 

OnJune 5, 2009, the Company entered into an amendment to its Senior CreditFacility pursuant to which the maturity date was extended from June 24, 2009 toMarch 31, 2010, the revolving credit portion of the facility was reduced by$10.0 million to $25.0 million, the outstanding term loan borrowings wererepaid by $8.0 million, the financial covenants in effect through the extendedmaturity date were revised and the borrowing rate was increased to prime rateplus 7.0% or LIBOR plus 8.0% with a LIBOR floor of 2.75%.  Concurrent with the amendment to the SeniorCredit Facility, the Company obtained a $9.7 million Second Lien Loan, the netproceeds of which were used to purchase $14.6 million in principal amount ofAGI Senior Notes.  The Second Lien Loancarries an interest rate of 9.0% and matures on July 31, 2010.  See Long Term Debt Note #6.

 

Theamended Senior Credit Facility also revised the Company’s financial covenantsin effect through the extended maturity date. The Company’s forecast for 2009 anticipates compliance with all requiredcovenants throughout 2009.  Significantcost reductions have been implemented in 2008, including the elimination ofpersonnel, suspension of 401(k) employer contributions, salary cutbacks, hiringand capital expenditure spending freezes, satellite office closures, andmagazine size and frequency reductions. Further cost reductions are set to be unveiled in 2009.  The Company believes that the amended bankfinancing, new secured loans, as well as forecasted cash flow will provide thecash flow needed to continue as a going concern through at least January 1,2010.

 

4

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**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”)  No. 141(revised 2007), “Business Combinations” (“SFAS 141(R)”).  SFAS 141(R) establishes principles andrequirements for how an acquirer recognizes and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired.  SFAS 141(R) also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  SFAS 141(R) iseffective for fiscal years beginning after December 15, 2008.  The Company adopted SFAS 141(R) in the firstquarter of fiscal 2009 and will apply the provisions of the Statement for anyacquisition after the adoption date.

 

In December 2007,the FASB issued SFAS No. 160, “Accounting and Reporting of Non-controllingInterests in Consolidated Financial Statements – an amendment of AccountingResearch Bulletin No. 51” (“SFAS 160”). This standard will significantly change the accounting and reporting forbusiness combination transactions and non-controlling (minority) interests inconsolidated financial statements, including capitalizing at the acquisitiondate the fair value acquired from in-process research and development, andre-measuring and writing down these assets, if necessary, in subsequent periodsduring their development.  This newstandard will be applied for business combinations that occur on or after January1, 2009 and presentation and disclosure requirements of SFAS 160 shall beapplied retrospectively.

 

In January 2008,the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements” (“SFAS157”).  SFAS 157 defines fair value,establishes a framework and gives guidance regarding the method used formeasuring fair value, and expands disclosures about fair valuemeasurements.  SFAS 157 requirescompanies to disclose the fair value of their financial instruments accordingto a fair value hierarchy, as defined, and may require companies to provideadditional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears.  The adoption of the provisions ofSFAS 157 did not have a material impact on the Company’s consolidated financialstatements.

 

In February 2008,the FASB issued SFAS No. 157-2 which defers the effective date of SFAS No. 157for all non-financial assets and liabilities, except those items recognized ordisclosed at fair value on an annual or more frequent recurring basis, untilyears beginning after November 15, 2008. The Company’s adoption of SFAS No. 157-2for its non-financial assets and liabilities that are not re-measured on a recurringbasis on January 1, 2008 did not have a material impact on the Company’sconsolidated financial statements.  Therewere no material re-measurements to fair value during the period ended March 31,2009, of assets and liabilities that are not measured at fair value on arecurring basis.

 

In March 2008, theFASB issued SFAS Statement No. 161 (“SFAS 161”), “Disclosures about DerivativeInstruments and Hedging Activities”. SFAS 161 requires companies withderivative instruments to disclose information that should enable financialstatement users to understand how and why a company uses derivativeinstruments, how derivative

 

5

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

 

instruments andrelated hedged items are accounted for under FASB Statement No. 133 “Accountingfor Derivative Instruments and Hedging Activities” and how derivativeinstruments and related hedged items affect a company’s financial position,financial performance and cash flows. SFAS 161 is effective for financialstatements issued for fiscal years and interim periods beginning after November15, 2008.  The disclosure requirements ofSFAS 161 were adopted January 1, 2009.

 

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

 

TheCompany’s three principal lines of business are Membership Services, Media(formerly know as Publications), and Retail. The Membership Services segment includes the operations of the Good SamClub, Coast to Coast Club, Camping World’s President’s Club, Camp Club USA, andRV Handyman Club for recreational vehicles (“RV”) owners, campers and outdoorvacationers, and the Golf Card Club for golf enthusiasts.  The Media segment  publishes a variety of publications forselected markets in the recreation and leisure industry, including generalcirculation periodicals, directories, and RV and powersports industry trademagazines, and produces outdoor recreational consumer events.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through the Camping Worldretail supercenters, mail order catalogs and its website.  The Company evaluates performance based onprofit or loss from operations before income taxes.

 

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

 

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** | ** ** |
| **QUARTER ENDED MARCH 31, 2009**      |       |           |       |       |       |       |       |             |       |
| Revenues from external customers           |       | $              | 35,232     |       | $          | 17,420     |       | $                | 52,401     |   | $ | 105,053 |   |
| Depreciation and amortization              |       | 806            |       | 1,323      |       | 2,189      |       | 4,318            |       |
| Loss on disposal of property and equipment |       | —         |       | (1         | )          | (81        | )          | (82              | )          |
| Interest income                            |       | 864            |       | —     |       | 2          |       | 866              |       |
| Interest expense                           |       | —         |       | 28         |       | 3,918      |       | 3,946            |       |
| Segment profit (loss)                      |       | 12,625         |       | 1,312      |       | (8,161     | )          | 5,776            |       |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 
| ** **                                 | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|--------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                 | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **QUARTER ENDED MARCH 31, 2008**      |       |           |       |       |       |       |       |             |       |
| Revenues from external customers           |       | $              | 35,545     |       | $          | 26,256     |       | $                | 63,184     |   | $ | 124,985 |   |
| Depreciation and amortization              |       | 737            |       | 1,463      |       | 2,352      |       | 4,552            |       |
| Loss on disposal of property and equipment |       | —         |       | —     |       | (26        | )          | (26              | )          |
| Interest income                            |       | 917            |       | —     |       | 11         |       | 928              |       |
| Interest expense                           |       | —         |       | 48         |       | 4,111      |       | 4,159            |       |
| Segment profit (loss)                      |       | 9,999          |       | 5,809      |       | (8,426     | )          | 7,382            |       |
|                                            |            |                |            |            |            |            |            |                  |            |  |  |  |  |

 

Thefollowing is a reconciliation of (loss) profit from operations to the Company’sconsolidated financial statements for the three months ended March 31,2009 and 2008 (in thousands):

 
| ** **                                                     | ** ** | **THREE MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                     | ** ** | **3/31/2009**          | ** ** | **3/31/2008** | ** ** |
| **(Loss) Profit From Operations Before Income  Taxes**         |       |                   |       |   |   |
| Total (loss) profit for reportable segments                    |       | $                      | 5,776      |   | $ | 7,382 |   |
| Unallocated G & A expense                             |       | (3,491                 | )          | (3,830 | ) |
| Unallocated depreciation and amortization expense              |       | (520                   | )          | (452 | ) |
| Unallocated gain on derivative instrument                      |       | 20                     |       | — |   |
| Elimination of intercompany interest income                    |       | (736                   | )          | (785 | ) |
| Unallocated interest expense, net of intercompany  elimination |       | (1,877                 | )          | (1,901 | ) |
| (Loss) profit from operations before income taxes              |       | $                      | (828       | ) | $ | 414 |   |

 

7

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

 

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

 
| ** **                                          | ** ** | **3/31/2009** | ** ** | **12/31/2008** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 228,375    |           | $          | 221,262 |   |
| Media segment                                       |       | 83,498        |       | 88,101         |       |
| Retail segment                                      |       | 115,574       |       | 110,964        |       |
| Total assets for reportable segments                |       | 427,447       |       | 420,327        |       |
| Capitalized finance costs not allocated to segments |       | 3,835         |       | 4,201          |       |
| Corporate unallocated assets                        |       | 2,932         |       | 3,066          |       |
| Elimination of intersegment receivable              |       | (132,642      | )          | (133,242       | )          |
| Total assets                                        |       | $             | 301,572    |           | $          | 294,352 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

Supplementaldisclosures of cash flow information for the three months ended March 31(in thousands):

 
| ** **                       | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 10,187     |     | $          | 9,337 |   |
|                                  |            |          |            |          |            |  |  |

 

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

 

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

 

In August 2008,AGHC paid the interest on the AGHI Notes of $6.2 million representing acontribution from AGHC and a payment of interest on the notes.

 

In December 2008, the Company recorded the fair value of the interestrate swaps in Other Long-Term Liabilities of $12.7 million, in AccumulatedOther Comprehensive Loss of $10.3 million, and ineffective portion in statementof operations of $2.4 million. 

 

In February 2009, AGHC paid the interest on the AGHI Notes of $6.2million representing a contribution from AGHC and a payment of interest on thenotes.

 

For the threemonths ended March 31, 2009, the Company recorded an adjustment to the fairvalue of the interest rate swap resulting in a $0.3 million decrease in bothOther Long-Term Liabilities and Other Comprehensive Loss.

 

8

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**(5) GOODWILL AND INTANGIBLE ASSETS**

 

The Companyreviews goodwill and indefinite-lived intangible assets for impairment at leastannually and more often when impairment indicators are present.  The Company performs its annual impairmenttest during the fourth quarter.  Therewere no changes in the Company’s goodwill for the three months ended March 31,2009 and 2008, and no indicators of impairment.

 

The Company hasevaluated the remaining useful lives of its property and equipment andfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary.  The Companydetermined that no adjustments to the useful lives of its property andequipment or finite-lived purchased intangible assets were necessary. UnderSFAS No. 142, Goodwill and Other Intangible Assets, (“SFAS No. 142”)goodwill impairment is deemed to exist if the net book value of a reportingunit exceeds its estimated fair value. The Company’s reporting units are generally consistent with theoperating segments underlying the reporting segments identified in Note 3 -Segment Information.

 

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

 

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

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at March 31, 2009 (in thousands, except asnoted):

 
| ** **                                      | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                   |       | $          | 36,384     |             | $          | (23,316    | )          | $ | 13,068 |   |
| Resort and golf course participation agreements |       | 4                   |       | 13,376     |       | (13,369          | )          | 7          |       |
| Non-compete and deferred consulting agreements  |       | 15                  |       | 18,830     |       | (15,408          | )          | 3,422      |       |
| Deferred financing costs                        |       | 7                   |       | 10,685     |       | (8,236           | )          | 2,449      |       |
|                                            |       |                |       | $          | 79,275     |             | $          | (60,329    | )          | $ | 18,946 |   |

 

9

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**(6) SENIOR CREDIT FACILITY**

 

On June 24, 2003, AGI entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the “Senior Credit Facility”). The Senior Credit Facility provides for a revolving credit facility of$35.0 million and term loans in the aggregate of $140.0 million.  As of March 31, 2009, $19.5 million wasoutstanding under the revolving credit facility and $126.5 million wasoutstanding under the term loans. Reborrowings under the term loans are not permitted.  The interest on borrowings under the SeniorCredit Facility was at variable rates based on the ratio of total cash flow tooutstanding indebtedness (as defined). Interest rates float with prime and the London Interbank Offered Rates,or LIBOR, plus an applicable margin ranging from 1.50% to 2.50% over the statedrates.  After consideration of fixedrates under the interest rate swap agreements, (discussed in Note 8), as of March 31,2009, the average interest rates on the term loans and the revolving creditfacility were 7.27% and 5.25%, respectively, and permitted borrowings under therevolving facility were $27.5 million. AGI also pays a commitment fee of 0.5% per annum on the unused amount ofthe revolving credit facility.  Theaggregate quarterly scheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and theterm loans mature on March 31, 2010. The funds available under the Senior Credit Facility may be utilized forborrowings or letters of credit; however, a maximum of $7.5 million may beallocated to such letters of credit.  Asof March 31, 2009, AGI had letters of credit in the aggregate amount of$7.5 million outstanding.  The SeniorCredit Facility is secured by virtually all of AGI’s assets and a pledge of AGI’sstock and the stock of AGI’s subsidiaries.

 

On September 8, 2008, the Company amended its Senior CreditFacility to permit Letters of Credit (“LC’s”) issued under the existing CreditAgreement to have an expiration or termination date on or after the revolvingcredit maturity date of June 24, 2009, limit the maximum amount of LC’s to$7.5 million, and requiring any LC’s in place 90 days prior to the revolvingcredit maturity date to be cash collateralized. As of March 31, 2009, $7.8 million of the cash balance has beenplaced in a collateral account.

 

On June 5, 2009, the Company entered into an amendment to itsSenior Credit Facility pursuant to which the maturity date was extended from June 24,2009 to March 31, 2010, the revolving credit portion of the facility wasreduced by $10.0 million to $25.0 million, the outstanding term loan borrowingswere repaid by $8.0 million, the financial covenants in effect through theextended maturity date were revised and the borrowing rate was increased toprime rate plus 7.0% or LIBOR plus 8.0% with a LIBOR floor of 2.75%.  As a condition to the amendment, the shareholderof the Company was required to arrange for the purchase of approximately $26.6million in principal amount of the term portion of the Senior Credit Facilityby new lenders, enhance the yield to such new lenders, purchase AGHI Notes heldby one of such new lenders at a premium to the most recent market price,contribute $8.5 million in capital to the Company and guarantee two requiredprincipal payments on the term loans under the Senior Credit Facility,aggregating $15.0 million.  Inconsideration of such support, the Company entered into an option agreementwith the shareholder of the ultimate parent of the Company pursuant to whichthe Company granted such shareholder or his assigns an option, exercisable onor before March 1, 2010, to

 

10

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**(6) SENIOR CREDIT FACILITY (continued)**

 

purchase the Company’s Camping World subsidiary for $55.0 million,being the fair value of such subsidiary as determined by an appraisal ofHoulihan Smith & Company, Inc. dated as of March 1,2009.  The Company also agreed to pay theshareholder of the ultimate parent, upon successful refinancing of the Company’ssecured debt, including the Senior Credit Facility, a success fee equal inamount to the fair value, as determined by an independent financial advisor ofsuch credit support, taking into account the fair value of the option topurchase Camping World.  In the event thefair value of the Camping World purchase option exceeds the fair value of suchcredit support, the shareholder will pay the amount of such excess to theCompany.

 

Concurrent with the amendment to the Senior Credit Facility, theCompany obtained a $9.7 million Second Lien Loan, the net proceeds of whichwere used to purchase $14.6 million in principal amount of AGI SeniorNotes.  The Second Lien Loan carries aninterest rate of 9.0% and matures on July 31, 2010.

 

In addition, Company agreed to use its best efforts to secure anasset-based loan of at least $18.5 million secured by the inventory andreceivables of its subsidiary, Camping World, Inc. (the “Camping WorldFinancing”), the proceeds of which would be used to further reduce the amountsoutstanding under the Senior Credit Facility. The senior lenders agreed to subordinate their liens to such financing.  If a Camping World Financing has not beenconsummated by September 15, 2009, the borrowing rate on revolving creditloans, swing loans and terms loans increase to prime rate plus 9.0% or LIBORplus 10.0%.

 

The amended Senior Credit Facility also revised the Company’s financialcovenants in effect through the extended maturity date.  The Company’s forecast for 2009 anticipatescompliance with all required covenants throughout 2009.  Significant cost reductions have beenimplemented in 2008, including the elimination of personnel, suspension of 401(k) employercontributions, salary cutbacks, hiring and capital expenditure spendingfreezes, satellite office closures, and magazine size and frequencyreductions.  Further cost reductions areset to be unveiled in 2009.  The Companybelieves that the amended bank financing, new secured loans, as well asforecasted cash flow will provide the cash flow needed to continue as a goingconcern through at least January 1, 2010.

 

**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION**

 

In February 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  The Company purchased andretired $29.9 million of the Senior Subordinated Notes in 2006 and $17.7million in March 2007.  Interest ispayable on the remaining $152.4 million Senior Subordinated Notes twice a yearon February 15 and August 15. The Company’s present and future restricted subsidiaries guarantee theSenior Subordinated Notes with unconditional guarantees of payment that rankjunior in right of payment to their existing and future senior debt, but rankequal in right of payment to their existing and future senior

 

11

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**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION**

 

subordinated debt.  All of theCompany’s subsidiaries have jointly and severally guaranteed the indebtednessunder the Senior Subordinated 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 SeniorSubordinated Notes.

 

12

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**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries as of and for the three months ended March 31, 2009 (inthousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 20,690     |           | $          | 1,582         |       | $                | —     |             | $          | — |   | $ | 22,272 |   |
| Accounts receivable- net of allowance for               |       | 2,038      |       | 166,352        |       |          |       | (132,642         | )          | 35,748           |       |
| Inventories                                             |       | —     |       | 57,966         |       | —        |       | —           |       | 57,966           |       |
| Other current assets                                    |       | 2,821      |       | 13,003         |       | —        |       | —           |       | 15,824           |       |
| Total current assets                                    |       | 25,549     |       | 238,903        |       | —        |       | (132,642         | )          | 131,810          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 4,534      |       | 37,684         |       | —        |       | —           |       | 42,218           |       |
| Intangible assets                                       |       | 2,449      |       | 16,497         |       | —        |       | —           |       | 18,946           |       |
| Goodwill                                                |       | 67,584     |       | 29,244         |       | —        |       | —           |       | 96,828           |       |
| Investment in subsidiaries                              |       | 516,935    |       | —         |       | —        |       | (516,935         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,596          |       | —        |       | (40,000          | )          | 4,596            |       |
| Other assets                                            |       | 569        |       | 6,605          |       | —        |       | —           |       | 7,174            |       |
| Total assets                                            |       | $          | 657,620    |           | $          | 333,529       |       | $                | —     |             | $          | (689,577 | ) | $ | 301,572 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 552        |           | $          | 30,815        |       | $                | —     |             | $          | — |   | $ | 31,367 |   |
| Accrued and other liabilities                           |       | 6,906      |       | 22,611         |       | —        |       | —           |       | 29,517           |       |
| Current portion of long-term debt                       |       | 278,685    |       | 41,660         |       | —        |       | (172,642         | )          | 147,703          |       |
| Current portion of deferred revenue                     |       | 1,694      |       | 56,435         |       | —        |       | —           |       | 58,129           |       |
| Total current liabilities                               |       | 287,837    |       | 151,521        |       |          |       | (172,642         | )          | 266,716          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,384      |       | 33,611         |       | —        |       | —           |       | 35,995           |       |
| Long-term debt                                          |       | 152,399    |       | 628            |       | —        |       | —           |       | 153,027          |       |
| Other long-term liabilities                             |       | 402,536    |       | (369,166       | )          | —        |       | —           |       | 33,370           |       |
| Total liabilities                                       |       | 845,156    |       | (183,406       | )          |          |       | (172,642         | )          | 489,108          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 516,935        |       | —        |       | (516,935         | )          | —           |       |
| Stockholders’ deficit                              |       | (187,536   | )          | —         |       | —        |       | —           |       | (187,536         | )          |
| Total liabilities & stockholders’ deficit |       | $          | 657,620    |           | $          | 333,529       |       | $                | —     |             | $          | (689,577 | ) | $ | 301,572 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                                 |       | $          | 1,817      |           | $          | 103,236       |       | $                | —     |             | $          | — |   | $ | 105,053 |   |
| Costs applicable to revenues                            |       | (2,270     | )          | (63,080        | )          | —        |       | —           |       | (65,350          | )          |
| Operating expenses                                      |       | (4,068     | )          | (30,687        | )          | —        |       | —           |       | (34,755          | )          |
| Interest expense, net                                   |       | (2,613     | )          | (3,080         | )          | —        |       | —           |       | (5,693           | )          |
| Income from investment in consolidated subsidiaries     |       | 4,820      |       | —         |       | —        |       | (4,820           | )          | —           |       |
| Other non operating income (expenses)                   |       | 1,281      |       | (1,364         | )          | —        |       | —           |       | (83              | )          |
| Income tax expense                                      |       | (191       | )          | (205           | )          | —        |       | —           |       | (396             | )          |
| Net loss                                                |       | $          | (1,224     | )              | $          | 4,820         |       | $                | —     |             | $          | (4,820 | ) | $ | (1,224 | ) |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                              |       | $          | (8,164     | )              | $          | 12,390        |       | $                | —     |             | $          | — |   | $ | 4,226 |   |
| Cash flows used in investing activities                 |       | 1,759      |       | (3,001         | )          | —        |       | —           |       | (1,242           | )          |
| Cash flows (used in) provided by financing  activities  |       | 25,795     |       | (17,115        | )          | —        |       | —           |       | 8,680            |       |
| Cash at beginning of year                               |       | 1,300      |       | 9,308          |       | —        |       | —           |       | 10,608           |       |
| Cash at end of year                                     |       | $          | 20,690     |           | $          | 1,582         |       | $                | —     |             | $          | — |   | $ | 22,272 |   |

 

13

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**(7) NOTES OFFERING, GUARANTOR ANDNON-GUARANTOR FINANCIAL INFORMATION (continued)**

 

The following are summarized balance sheetstatements setting forth certain financial information concerning the GuarantorSubsidiaries as of December 31, 2008 (in thousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 1,300      |           | $          | 9,308         |       | $                | —     |             | $          | — |   | $ | 10,608 |   |
| Accounts receivable- net of allowance for               |       | 5,949      |       | 167,484        |       |          |       | (133,242         | )          | 40,191           |       |
| Inventories                                             |       | —     |       | 57,137         |       | —        |       | —           |       | 57,137           |       |
| Other current assets                                    |       | 2,231      |       | 11,314         |       | —        |       | —           |       | 13,545           |       |
| Total current assets                                    |       | 9,480      |       | 245,243        |       | —        |       | (133,242         | )          | 121,481          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 6,885      |       | 37,192         |       | —        |       | —           |       | 44,077           |       |
| Intangible assets                                       |       | 2,815      |       | 17,939         |       | —        |       | —           |       | 20,754           |       |
| Goodwill                                                |       | 67,584     |       | 29,244         |       | —        |       | —           |       | 96,828           |       |
| Investment in subsidiaries                              |       | 512,024    |       | —         |       | —        |       | (512,024         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,608          |       | —        |       | (40,000          | )          | 4,608            |       |
| Other assets                                            |       | 606        |       | 5,998          |       | —        |       | —           |       | 6,604            |       |
| Total assets                                            |       | $          | 639,394    |           | $          | 340,224       |       | $                | —     |             | $          | (685,266 | ) | $ | 294,352 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 625        |           | $          | 23,325        |       | $                | —     |             | $          | — |   | $ | 23,950 |   |
| Accrued and other liabilities                           |       | 13,873     |       | 21,192         |       | —        |       | —           |       | 35,065           |       |
| Current portion of long-term debt                       |       | 268,697    |       | (90,564        | )          | —        |       | (173,242         | )          | 4,891            |       |
| Current portion of deferred revenue                     |       | 1,073      |       | 59,496         |       | —        |       | —           |       | 60,569           |       |
| Total current liabilities                               |       | 284,268    |       | 13,449         |       |          |       | (173,242         | )          | 124,475          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,415      |       | 33,440         |       | —        |       | —           |       | 35,855           |       |
| Long-term debt                                          |       | 152,399    |       | 134,856        |       | —        |       | —           |       | 287,255          |       |
| Other long-term liabilities                             |       | 386,826    |       | (353,545       | )          | —        |       | —           |       | 33,281           |       |
| Total liabilities                                       |       | 825,908    |       | (171,800       | )          |          |       | (173,242         | )          | 480,866          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 512,024        |       |          |       | (512,024         | )          | —           |       |
| Stockholders’ deficit                              |       | (186,514   | )          | —         |       | —        |       | —           |       | (186,514         | )          |
| Total liabilities & stockholders’ deficit |       | $          | 639,394    |           | $          | 340,224       |       | $                | —     |             | $          | (685,266 | ) | $ | 294,352 |   |

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended March 31,2008 (in thousands).

 
| ** **                                            | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                  |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                               |       | $          | 947        |           | $          | 124,038       |       | $                | —     |             | $          | — |   | $ | 124,985 |   |
| Costs applicable to revenues                          |       | (3,026     | )          | (74,195        | )          | —        |       | —           |       | (77,221          | )          |
| Operating expenses                                    |       | (4,384     | )          | (37,051        | )          | —        |       | —           |       | (41,435          | )          |
| Interest expense, net                                 |       | (2,686     | )          | (3,231         | )          | —        |       | —           |       | (5,917           | )          |
| Income from investment in consolidated subsidiaries   |       | 7,780      |       | —         |       | —        |       | (7,780           | )          | —           |       |
| Other non operating income (expenses)                 |       | 1,579      |       | (1,577         | )          | —        |       | —           |       | 2                |       |
| Income tax benefit (expense)                          |       | (95        | )          | (204           | )          | —        |       | —           |       | (299             | )          |
| Net income                                            |       | $          | 115        |           | $          | 7,780         |       | $                | —     |             | $          | (7,780 | ) | $ | 115 |   |
|                                                  |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from (used by) operations                  |       | $          | (13,843    | )              | $          | 5,920         |       | $                | —     |             | $          | — |   | $ | (7,923 | ) |
| Cash flows used in investing activities               |       | (37        | )          | (6,876         | )          | —        |       | —           |       | (6,913           | )          |
|                                                  |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows (used in) provided by financing activities |       | 8,435      |       | (1,251         | )          | —        |       | —           |       | 7,184            |       |
| Cash at beginning of year                             |       | 5,337      |       | 3,020          |       | —        |       | —           |       | 8,357            |       |
| Cash at end of period                                 |       | $          | (108       | )              | $          | 813           |       | $                | —     |             | $          | — |   | $ | 705 |   |

 

14

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**(8) INCOMETAXES**

 

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

** **
| Balance at December 31, 2008                                                        |   | $      | 14,493 |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Gross increases in unrecognized tax benefits due to  prior year positions                |   | — |   |
| Gross decreases in unrecognized tax benefits due to  prior year positions                |   | — |   |
| Gross increases in unrecognized tax benefits due to  current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due to  current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due to  settlements with taxing authorities |   | — |   |
| Gross decreases in unrecognized tax benefits due to  statute expirations                 |   | — |   |
| Other                                                                                    |   | 26     |   |
| Unrecognized tax benefits at March 31, 2009                                         |   | $      | 14,519 |   |

 

The Company accrues interest and penaltiesrelated to unrecognized tax benefits in its income tax provision.  The Company recorded interest and penaltiesof $0.3 million related to unrecognized tax benefits during the first threemonths of 2009 and the liability for penalties and interest was $2.7 million.  This amount was included in other long-termliabilities.  The Company does not expectits unrecognized tax benefits to change significantly over the next twelvemonths.

 

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

 

**(9) INTEREST RATE SWAP AGREEMENTS**

 

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

 

We recognize allof our derivative instruments as either assets or liabilities at fairvalue.  Fair value is determined inaccordance with SFAS 157 (see Note 9, “Fair Value Measurements”). Theaccounting for changes in the fair value of a derivative instrument depends onwhether it has been designated and qualifies as part of a hedging relationshipand, further, on the type of hedging relationship.  For derivatives designated as hedges underSFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”(“SFAS 133”), 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 SFAS 133 are adjusted to fair value throughcurrent earnings.

 

15

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

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (1.17% at March 31, 2009, based upon the January 31,2009 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  AGI entered into the interest rateswaps to limit the effect of increases on our floating rate debt.

 

On March 19,2008, the Company entered into a 4.5 year interest rate swap agreementeffective April 30, 2008, with a notional amount of $35.0 million fromwhich it will receiveperiodic payments at the 3 month LIBOR-based variable rate (1.17% at March 31,2009 based upon the January 31, 2009 reset date) and make periodicpayments at a fixed rate of 3.43%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap was effectivebeginning April 30, 2008 and expires on October 31, 2012.

 

Due to thepotential sale of Camping World, in the fourth quarter of 2008 a highlyeffective hedge on the $35.0 million outstanding debt by the $35.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings beginning onOctober 1, 2008.  Change in valuefrom January 1, 2009 to March 31, 2009 on the $35 million interestrate swap was $20,000.  Included in othercomprehensive loss is $0.5 million related to the $35.0 million interest rateswap which will be included in earnings when the underlying transaction beinghedged is probable not to occur.  Ahighly-effective hedge on the $100.0 million outstanding debt by the $100.0million notional amount of interest rate swap agreement is still deemed to beprobable, as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31,2012.  Changes in value from January 1,2009 to March 31, 2009 on the $100.0 million interest rate swap were $0.2million and are included as a component of other comprehensive loss instockholders’ deficit.

 

The fair value of these swaps included in other long-term liabilitieswas $12.5 million of which the $10.1 million effective portion is inaccumulated other comprehensive loss, the $2.4 million prior year ineffectiveportion is in retained earnings, and the $20,000 current year ineffectiveportion is in “Gain on derivative instrument” on the statement of operations atMarch 31, 2009.  No amounts havebeen recognized in income for the effective portion of the hedges.  The fair value of these swaps included inother long-term liabilities was $12.7 million of which $10.3 million is inaccumulated other comprehensive loss and $2.4 million in the statement ofoperations at December 31, 2008.

 

**(10) FAIR VALUE MEASUREMENTS**

 

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

 

16

----

 

**(10) FAIR VALUE MEASUREMENTS (continued)**

 

SFAS 157 establishes a three-tier fair value hierarchy, whichprioritizes the inputs used in measuring fair value.  These tiers include: Level 1, defined asobservable inputs such as quoted prices in active markets; Level 2, defined asinputs other than quoted prices in active markets that are either directly orindirectly observable; and Level 3, defined as unobservable inputs in whichlittle or no market data exists, therefore requiring an entity to develop itsown assumptions.

 

As of March 31, 2009, the Company holds interest rate swapcontracts that are required to be measured at fair value on a recurringbasis.  The Company’s interest rate swapcontracts are not traded on a public exchange. See Note 10 for further information on the interest rate swapcontracts.  The fair value of theseinterest rate swap contracts are determined based on inputs that are readilyavailable in public markets or can be derived from information available inpublicly quoted markets.  Therefore, theCompany has categorized these swap contracts as Level 2.

 

The Company recorded an impairment charge of $81.0 million in the thirdquarter of 2008 that wrote down to zero the carrying value of the preferredinterest (the “FreedomRoads Preferred Interest”) held by an indirect subsidiaryof Camping World in FreedomRoadsHolding Company, LLC (“FreedomRoads”), a holding company whosesubsidiaries sell and service new and used recreational vehicles.  The fair value of the FreedomRoads PreferredInterest was based on a third party valuation report (“Valuation Report”)prepared in the third quarter of 2008 by Houlihan Smith and Company Inc., anationally recognized firm, in anticipation of the potential sale of CampingWorld, and was recorded as a result ofdeclining performance of the recreational vehicle industry driven by overallweakening of the economy and a significant decline in consumer confidence, inaddition to limited credit available to consumers interested in purchasingrecreational vehicles.  Therefore, theCompany has categorized the FreedomRoads Preferred Interest as Level 3.

 

The Company’s liability at March 31, 2009, measured at fair valueon a recurring basis subject to the disclosure requirements of SFAS 157, was asfollows:

 
| ** **                   | ** ** | ** **    | ** ** | **Fair Value Measurements at Reporting Date Using**         | ** ** |
|------------------------------|------------|---------------|------------|-------------------------------------------------------------|------------|
| **(in thouands)**            | ** ** | ** **    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets** | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**              | ** ** | **3/31/2009** | ** ** | **(Level 1)**                                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                         |       |          |       |                                                        |       |   |   |   |   |
| Interest Rate Swap Contracts |       | $             | (12,509    | )                                                           | $          | — |   | $ | (12,509 | ) | $ | — |   |
| Investment in FreedomRoads   |       | —        |       | —                                                      |       | — |   | — |   |
|                              |            |               |            |                                                             |            |  |  |  |  |  |  |  |  |

 

17

----

 

**(****11) SUBSEQUENT EVENT**

 

On June 5, 2009, theCompany entered into an amendment to its Senior Credit Facility pursuant towhich the maturity date was extended from June 24, 2009 to March 31,2010, the revolving credit portion of the facility was reduced by $10.0 millionto $25.0 million, the outstanding term loan borrowings were repaid by $8.0million, the financial covenants in effect through the extended maturity datewere revised and the borrowing rate was increased to prime rate plus 7.0% orLIBOR plus 8.0% with a LIBOR floor of 2.75%. As a condition to the amendment, the shareholder of the Company wasrequired to arrange for the purchase of approximately $26.6 million inprincipal amount of the term portion of the Senior Credit Facility by newlenders, enhance the yield to such new lenders, purchase AGHI Notes held by oneof such new lenders at a premium to the most recent market price, contribute$8.5 million in capital to the Company and guarantee two required principalpayments on the term loans under the Senior Credit Facility, aggregating $15.0million.  In consideration of suchsupport, the Company entered into an option agreement with the shareholder ofthe ultimate parent of the Company pursuant to which the Company granted suchshareholder or his assigns an option, exercisable on or before March 1,2010, to purchase the Company’s Camping World subsidiary for $55.0 million,being the fair value of such subsidiary as determined by an appraisal ofHoulihan Smith & Company, Inc. dated as of March 1,2009.  The Company also agreed to pay theshareholder of the ultimate parent, upon successful refinancing of the Company’ssecured debt, including the Senior Credit Facility, a success fee equal in amountto the fair value, as determined by an independent financial advisor of suchcredit support, taking into account the fair value of the option to purchaseCamping World.   In the event the fairvalue of the Camping World purchase option exceeds the fair value of suchcredit support, the shareholder will pay the amount of such excess to theCompany.

 

Concurrent with theamendment to the Senior Credit Facility, the Company obtained a $9.7 millionSecond Lien Loan, the net proceeds of which were used to purchase $14.6 millionin principal amount of AGI Senior Notes. The Second Lien Loan carries an interest rate of 9.0% and matures on July 31,2010.

 

In addition, Company agreedto use its best efforts to secure an asset-based loan of at least $18.5 millionsecured by the inventory and receivables of its subsidiary, Camping World, Inc.(the “Camping World Financing”), the proceeds of which would be used to furtherreduce the amounts outstanding under the Senior Credit Facility.  The senior lenders agreed to subordinatetheir liens to such financing.  If aCamping World Financing has not been consummated by September 15, 2009,the borrowing rate on revolving credit loans, swing loans and terms loansincrease to prime rate plus 9.0% or LIBOR plus 10.0%.

 

In the event the Camping World purchaseoption is exercised and, subject to the consent of the lenders under the SeniorCredit Facility, the sale of Camping World consummated, the Company wouldintend to use the net cash proceeds from the sale of Camping World to repayindebtedness outstanding under the Senior Credit Facility, as amended.  As of March 31, 2009, an aggregate of$126.5 million was

 

18

----

 

**(****11)SUBSEQUENT EVENT (continued)**

 

outstanding under the termloans and $19.5 million was outstanding under the revolving credit facility ofthe Senior Credit Facility.

 

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

 

The following unaudited proforma condensed consolidated balance sheet as of March 31, 2009 and December 31,2008 and the statement of operations for the three months ended March 31,2009 and 2008 reflect the reclassification adjustments associated with theproposed disposal/sale of Camping World to the shareholder of the ultimateparent of the Company.  The pro formaadjustments related to the disposal are presented since the disposition did notmeet the discontinued operations reporting requirements pursuant to SFASStatement No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” (SFAS 144) as of March 31, 2009, but will meet such requirementsin 2010 when the transaction is completed. Since the transaction is a sale to an entity under common ownership withAGI such long-lived assets are considered disposed of when they are exchangedor distributed in accordance with SFAS 144. The pro forma adjustments reflect the reclassification of assets andliabilities associated with Camping World to current assets and liabilities tobe disposed of in accordance with SFAS 144 as if the reporting requirements hadbeen met at March 31, 2009.  Inaddition, the historical operating results have also been reclassified toreflect discontinued operations.

 

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

 

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

 

19

----

 

**(****11)SUBSEQUENT EVENT (continued)**

 

The unaudited pro formabalance sheet of AGI reclassifying Camping World as of March 31, 2009 toassets and liabilities of discontinued operations is as follows (in thousandsexcept shares and par value):

 
| ** **                                                                                   | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                   | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                   |       |           |       |                    |       |          |       |
| CURRENT ASSETS:                                                                              |       |           |       |                    |       |          |       |
| Cash and cash equivalents                                                                    |       | $              | 22,272     |                    | $          | (1,246        | )          | $ | 21,026 |   |
| Accounts receivable, net                                                                     |       | 35,748         |       | (11,644                 | )          | 24,104        |       |
| Inventories                                                                                  |       | 57,966         |       | (57,122                 | )          | 844           |       |
| Prepaid expenses and other assets                                                            |       | 15,824         |       | (3,611                  | )          | 12,213        |       |
| Assets of discontinued operations                                                            |       | —         |       | 115,574                 |       | 115,574       |       |
| Total current assets                                                                         |       | 131,810        |       | 41,951                  |       | 173,761       |       |
|                                                                                         |       |           |       |                    |       |          |       |
| PROPERTY AND EQUIPMENT, net                                                                  |       | 42,218         |       | (32,955                 | )          | 9,263         |       |
| NOTE FROM AFFILIATE                                                                          |       | 4,596          |       | —                  |       | 4,596         |       |
| INTANGIBLE ASSETS, net                                                                       |       | 18,946         |       | (3,130                  | )          | 15,816        |       |
| GOODWILL                                                                                     |       | 96,828         |       | —                  |       | 96,828        |       |
| DEFERRED TAX ASSET                                                                           |       | 4,569          |       | (4,569                  | )          | —        |       |
| OTHER ASSETS                                                                                 |       | 2,605          |       | (1,297                  | )          | 1,308         |       |
| Total assets                                                                                 |       | $              | 301,572    |                    | $          | —        |       | $ | 301,572 |   |
|                                                                                         |       |           |       |                    |       |          |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                               |       |           |       |                    |       |          |       |
| CURRENT LIABILITIES:                                                                         |       |           |       |                    |       |          |       |
| Accounts payable                                                                             |       | $              | 31,367     |                    | $          | (28,127       | )          | $ | 3,240 |   |
| Accrued interest                                                                             |       | 2,582          |       | —                  |       | 2,582         |       |
| Accrued income taxes                                                                         |       | 1,217          |       | 414                     |       | 1,631         |       |
| Accrued liabilities                                                                          |       | 25,718         |       | (12,749                 | )          | 12,969        |       |
| Deferred revenues and gains                                                                  |       | 58,129         |       | (7,133                  | )          | 50,996        |       |
| Current portion of long-term debt                                                            |       | 147,703        |       | —                  |       | 147,703       |       |
| Liabilities of discontinued operations                                                       |       | —         |       | 70,224                  |       | 70,224        |       |
| Total current liabilities                                                                    |       | 266,716        |       | 22,629                  |       | 289,345       |       |
|                                                                                         |       |           |       |                    |       |          |       |
| DEFERRED REVENUES AND GAINS                                                                  |       | 35,995         |       | (8,475                  | )          | 27,520        |       |
| LONG-TERM DEBT, net of current portion                                                       |       | 153,027        |       | —                  |       | 153,027       |       |
| OTHER LONG-TERM LIABILITIES                                                                  |       | 33,370         |       | (14,154                 | )          | 19,216        |       |
|                                                                                         |       | 489,108        |       | —                  |       | 489,108       |       |
|                                                                                         |       |           |       |                    |       |          |       |
| 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                                                                   |       | 81,005         |       | —                  |       | 81,005        |       |
| Accumulated deficit                                                                          |       | (258,448       | )          | —                  |       | (258,448      | )          |
| Accumulated other comprehensive income                                                       |       | (10,094        | )          | —                  |       | (10,094       | )          |
| Total stockholder’s deficit                                                             |       | (187,536       | )          | —                  |       | (187,536      | )          |
| Total liabilities and stockholder’s deficit                                             |       | $              | 301,572    |                    | $          | —        |       | $ | 301,572 |   |

 

20

----

 

**(****11) SUBSEQUENT EVENT (continued)**

 

The unaudited pro forma balance sheet of AGI reclassifying CampingWorld as of December 31, 2008 to assets and liabilities of discontinuedoperations is as follows (in thousands except shares and par value):

 
| ** **                                                                                   | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                                   | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                   |       |           |       |                    |       |          |       |
| CURRENT ASSETS:                                                                              |       |           |       |                    |       |          |       |
| Cash and cash equivalents                                                                    |       | $              | 10,608     |                    | $          | (842          | )          | $ | 9,766 |   |
| Accounts receivable, less allowance for doubtbul  accounts                                   |       | 40,191         |       | (9,084                  | )          | 31,107        |       |
| Inventories                                                                                  |       | 57,137         |       | (55,908                 | )          | 1,229         |       |
| Prepaid expenses and other assets                                                            |       | 13,545         |       | (2,476                  | )          | 11,069        |       |
| Assets of discontinued operations                                                            |       | —         |       | 110,964                 |       | 110,964       |       |
| Total current assets                                                                         |       | 121,481        |       | 42,654                  |       | 164,135       |       |
|                                                                                         |       |           |       |                    |       |          |       |
| PROPERTY AND EQUIPMENT, net                                                                  |       | 44,077         |       | (34,022                 | )          | 10,055        |       |
| NOTE FROM AFFILIATE                                                                          |       | 4,608          |       | —                  |       | 4,608         |       |
| INTANGIBLE ASSETS, net                                                                       |       | 20,754         |       | (3,391                  | )          | 17,363        |       |
| GOODWILL                                                                                     |       | 96,828         |       | —                  |       | 96,828        |       |
| DEFERRED TAX ASSETS, net                                                                     |       | 4,569          |       | (4,569                  | )          | —        |       |
| OTHER ASSETS                                                                                 |       | 2,035          |       | (672                    | )          | 1,363         |       |
| Total assets                                                                                 |       | $              | 294,352    |                    | $          | —        |       | $ | 294,352 |   |
|                                                                                         |       |           |       |                    |       |          |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                               |       |           |       |                    |       |          |       |
| CURRENT LIABILITIES:                                                                         |       |           |       |                    |       |          |       |
| Accounts payable                                                                             |       | $              | 23,950     |                    | $          | (19,383       | )          | $ | 4,567 |   |
| Accrued interest                                                                             |       | 6,946          |       | —                  |       | 6,946         |       |
| Accrued income taxes                                                                         |       | 1,165          |       | 372                     |       | 1,537         |       |
| Accrued liabilities                                                                          |       | 26,954         |       | (10,864                 | )          | 16,090        |       |
| Deferred revenues and gains                                                                  |       | 60,569         |       | (7,254                  | )          | 53,315        |       |
| Current portion of long-term debt                                                            |       | 12,391         |       | —                  |       | 12,391        |       |
| Liabilities of discontinued operations                                                       |       | —         |       | 59,536                  |       | 59,536        |       |
| Total current liabilities                                                                    |       | 131,975        |       | 22,407                  |       | 154,382       |       |
|                                                                                         |       |           |       |                    |       |          |       |
| DEFERRED REVENUES AND GAINS                                                                  |       | 35,855         |       | (8,500                  | )          | 27,355        |       |
| LONG-TERM DEBT, net of current portion                                                       |       | 279,755        |       | —                  |       | 279,755       |       |
| DEFERRED TAX LIABILITY                                                                       |       | —         |       | —                  |       | —        |       |
| OTHER LONG-TERM LIABILITIES                                                                  |       | 33,281         |       | (13,907                 | )          | 19,374        |       |
|                                                                                         |       | 480,866        |       | —                  |       | 480,866       |       |
|                                                                                         |       |           |       |                    |       |          |       |
| 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                                                                   |       | 81,005         |       | —                  |       | 81,005        |       |
| Accumulated deficit                                                                          |       | (257,183       | )          | —                  |       | (257,183      | )          |
| Accumulated other comprehensive income                                                       |       | (10,337        | )          |                    |       | (10,337       | )          |
| Total stockholder’s deficit                                                             |       | (186,514       | )          | —                  |       | (186,514      | )          |
| Total liabilities and stockholder’s deficit                                             |       | $              | 294,352    |                    | $          | —        |       | $ | 294,352 |   |

 

21

----

 

**(****11) SUBSEQUENT EVENT (continued)**

 

Unaudited pro forma information relating to theoperations of AGI reclassifying Camping World for the three months ended March 31,2009 to discontinued operations is as follows (in thousands):

 
| ** **                                                                                | ** ** | ** **     | ** **   | **Reclassification of** | ** ** | ** **    | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|--------------|-------------------------|------------|---------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** **   | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                                      |       |           |         |                    |       |          |       |
| REVENUES:                                                                                 |       |           |         |                    |       |          |       |
| Membership services                                                                       |       | $              |  35,232 |                    | $          |  (4,119  | )          | $ |  31,113 |   |
| Media                                                                                     |       | 17,420         |         | —                  |       | 17,420        |       |
| Retail                                                                                    |       | 52,401         |         | (52,401                 | )          | —        |       |
|                                                                                      |       | 105,053        |         | (56,520                 | )          | 48,533        |       |
|                                                                                      |       |           |         |                    |       |          |       |
| COSTS APPLICABLE TO REVENUES:                                                             |       |           |         |                    |       |          |       |
| Membership services                                                                       |       | 20,330         |         | (653                    | )          | 19,677        |       |
| Media                                                                                     |       | 13,484         |         | —                  |       | 13,484        |       |
| Retail                                                                                    |       | 31,536         |         | (31,536                 | )          | —        |       |
|                                                                                      |       | 65,350         |         | (32,189                 | )          | 33,161        |       |
|                                                                                      |       |           |         |                    |       |          |       |
| GROSS PROFIT                                                                              |       | 39,703         |         | (24,331                 | )          | 15,372        |       |
|                                                                                      |       |           |         |                    |       |          |       |
| OPERATING EXPENSES:                                                                       |       |           |         |                    |       |          |       |
| Selling, general and administrative                                                       |       | 29,937         |         | (25,414                 | )          | 4,523         |       |
| Depreciation and amortization                                                             |       | 4,838          |         | (2,189                  | )          | 2,649         |       |
|                                                                                      |       | 34,775         |         | (27,603                 | )          | 7,172         |       |
|                                                                                      |       |           |         |                    |       |          |       |
| INCOME FROM OPERATIONS                                                                    |       | 4,928          |         | 3,272                   |       | 8,200         |       |
|                                                                                      |       |           |         |                    |       |          |       |
| NON-OPERATING ITEMS:                                                                      |       |           |         |                    |       |          |       |
| Interest income                                                                           |       | 130            |         | (2                      | )          | 128           |       |
| Interest expense                                                                          |       | (5,823         | )            | 928                     |       | (4,895        | )          |
| Gain on derivative instrument                                                             |       | 20             |         | —                  |       | 20            |       |
| Other non-operating items                                                                 |       | (83            | )            | 81                      |       | (2            | )          |
|                                                                                      |       | (5,756)        |         | 1,007                   |       | (4,749        | )          |
|                                                                                      |       |           |         |                    |       |          |       |
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS |       | (828           | )            | 4,279                   |       | 3,451         |       |
|                                                                                      |       |           |         |                    |       |          |       |
| INCOME TAX EXPENSE                                                                        |       | (396           | )            | 205                     |       | (191          | )          |
|                                                                                      |       |           |         |                    |       |          |       |
| (LOSS) INCOME FROM CONTINUING OPERATIONS                                                  |       | (1,224         | )            | 4,484                   |       | 3,260         |       |
|                                                                                      |       |           |         |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                                   |       |           |         |                    |       |          |       |
| Loss from operations of discontinued Camping World, Inc.                             |       | —         |         | (4,279                  | )          | (4,279        | )          |
| Income tax benefit                                                                        |       | —         |         | (205                    | )          | (205          | )          |
| Loss on discontinued operations                                                           |       | —         |         | (4,484                  | )          | (4,484        | )          |
|                                                                                      |       |           |         |                    |       |          |       |
| NET LOSS                                                                                  |       | $              |  (1,224 | )                       | $          |  —  |       | $ |  (1,224 | ) |

 

22

----

 

**(****11) SUBSEQUENT EVENT (continued)**

 

Unaudited pro forma information relating the operations of AGIreclassifying Camping World for the three months ended March 31, 2008 todiscontinued operations is as follows (in thousands):

 
| ** **                                                                         | ** ** | ** **     | ** **   | **Reclassification of** | ** ** | ** **    | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|--------------|-------------------------|------------|---------------|------------|
| ** **                                                                         | ** ** | **Historical** | ** **   | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                               |       |           |         |                    |       |          |       |
| REVENUES:                                                                          |       |           |         |                    |       |          |       |
| Membership services                                                                |       | $              |  35,545 |                    | $          |  (4,437  | )          | $ |  31,108 |   |
| Media                                                                              |       | 26,256         |         | —                  |       | 26,256        |       |
| Retail                                                                             |       | 63,184         |         | (63,184                 | )          | —        |       |
|                                                                               |       | 124,985        |         | (67,621                 | )          | 57,364        |       |
|                                                                               |       |           |         |                    |       |          |       |
| COSTS APPLICABLE TO REVENUES:                                                      |       |           |         |                    |       |          |       |
| Membership services                                                                |       | 23,141         |         | (957                    | )          | 22,184        |       |
| Media                                                                              |       | 17,217         |         | —                  |       | 17,217        |       |
| Retail                                                                             |       | 36,863         |         | (36,863                 | )          | —        |       |
|                                                                               |       | 77,221         |         | (37,820                 | )          | 39,401        |       |
|                                                                               |       |           |         |                    |       |          |       |
| GROSS PROFIT                                                                       |       | 47,764         |         | (29,801                 | )          | 17,963        |       |
|                                                                               |       |           |         |                    |       |          |       |
| OPERATING EXPENSES:                                                                |       |           |         |                    |       |          |       |
| Selling, general and administrative                                                |       | 36,431         |         | (31,150                 | )          | 5,281         |       |
| Depreciation and amortization                                                      |       | 5,004          |         | (2,352                  | )          | 2,652         |       |
|                                                                               |       | 41,435         |         | (33,502                 | )          | 7,933         |       |
|                                                                               |       |           |         |                    |       |          |       |
| INCOME FROM OPERATIONS                                                             |       | 6,329          |         | 3,701                   |       | 10,030        |       |
|                                                                               |       |           |         |                    |       |          |       |
| NON-OPERATING ITEMS:                                                               |       |           |         |                    |       |          |       |
| Interest income                                                                    |       | 143            |         | (11                     | )          | 132           |       |
| Interest expense                                                                   |       | (6,060         | )            | 1,032                   |       | (5,028        | )          |
| Other non-operating items                                                          |       | 2              |         | 26                      |       | 28            |       |
|                                                                               |       | (5,915         | )            | 1,047                   |       | (4,868        | )          |
|                                                                               |       |           |         |                    |       |          |       |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME  TAXES AND DISCONTINUED OPERATIONS |       | 414            |         | 4,748                   |       | 5,162         |       |
|                                                                               |       |           |         |                    |       |          |       |
| INCOME TAX EXPENSE                                                                 |       | (299           | )            | 204                     |       | (95           | )          |
|                                                                               |       |           |         |                    |       |          |       |
| INCOME FROM CONTINUING OPERATIONS                                                  |       | 115            |         | 4,952                   |       | 5,067         |       |
|                                                                               |       |           |         |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                            |       |           |         |                    |       |          |       |
| Income from operations of discontinued Camping World, Inc.                    |       | —         |         | (4,748                  | )          | (4,748        | )          |
| Income tax benefit                                                                 |       | —         |         | (204                    | )          | (204          | )          |
| Income on discontinued operations                                                  |       | —         |         | (4,952                  | )          | (4,952        | )          |
|                                                                               |       |           |         |                    |       |          |       |
| NET INCOME                                                                         |       | $              |  115    |                    | $          |  —  |       | $ |  115 |   |

 

23

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**ITEM 2:**

 

AFFINITYGROUP, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITIONAND RESULTS OF OPERATIONS

 

The following table isderived from the Company’s Consolidated Statements of Operations and expressesthe results from operations as a percentage of revenues and reflects the netincrease (decrease) between periods:

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **3/31/2009**          | ** ** | **3/31/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                              |       |                   |       |   |   |   |   |
| REVENUES:                                         |       |                   |       |   |   |   |   |
| Membership services                               |       | 33.5                   | %          | 28.4 | % | (0.9 | )% |
| Media                                             |       | 16.6                   | %          | 21.0 | % | (33.7 | )% |
| Retail                                            |       | 49.9                   | %          | 50.6 | % | (17.1 | )% |
|                                              |       | 100.0                  | %          | 100.0 | % | (15.9 | )% |
|                                              |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                   |       |   |   |   |   |
| Membership services                               |       | 19.4                   | %          | 18.5 | % | (12.1 | )% |
| Media                                             |       | 12.8                   | %          | 13.8 | % | (21.7 | )% |
| Retail                                            |       | 30.0                   | %          | 29.5 | % | (14.5 | )% |
|                                              |       | 62.2                   | %          | 61.8 | % | (15.4 | )% |
|                                              |       |                   |       |   |   |   |   |
| GROSS PROFIT                                      |       | 37.8                   | %          | 38.2 | % | (16.9 | )% |
|                                              |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                               |       |                   |       |   |   |   |   |
| Selling, general and administrative               |       | 28.5                   | %          | 29.1 | % | (17.8 | )% |
| Depreciation and amortization                     |       | 4.6                    | %          | 4.0 | % | (3.3 | )% |
|                                              |       | 33.1                   | %          | 33.1 | % | (16.1 | )% |
|                                              |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS                            |       | 4.7                    | %          | 5.1 | % | (22.1 | )% |
|                                              |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                              |       |                   |       |   |   |   |   |
| Interest income                                   |       | 0.1                    | %          | 0.1 | % | (9.1 | )% |
| Interest expense                                  |       | (5.5                   | )%         | (4.9 | )% | (3.9 | )% |
| Gain on derivative instrument                     |       | —                 |       | — |   | nm |   |
| Other non-operating items, net                    |       | (0.1                   | )%         | — |   | nm |   |
|                                              |       | (5.5                   | )%         | (4.8 | )% | (2.7 | )% |
|                                              |       |                   |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (0.8                   | )%         | 0.3 | % | (300.0 | )% |
|                                              |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                                |       | (0.4                   | )%         | (0.2 | )% | 32.4 | % |
|                                              |       |                   |       |   |   |   |   |
| NET (LOSS) INCOME                                 |       | (1.2                   | )%         | 0.1 | % | (1164.3 | )% |

 

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended March 31, 2009**

**ComparedWith Three Months Ended March 31, 2008**

 

*Revenues*

 

Revenuesof $105.1 million for the first quarter of 2009 decreased by $19.9 million, or15.9%, from the comparable period in 2008.

 

Membershipservices revenues of approximately $35.3 million for the first quarter of 2009decreased $0.3 million, or 0.9%, from the comparable period in 2008.  This revenue decrease was largelyattributable to a $1.5 million reduction in revenue for the Good Sam Club,Coast to Coast Club and Golf Card Club resulting from reduced membership filesize, and reduced advertising revenue in member publications, a $0.4 milliondecrease in marketing fee income for vehicle insurance products, a $0.4 millionreduction in revenue for consumer events and a $0.3 million reduction in dealerprogram marketing revenue.  Thesedecreases were partially offseta $1.2 million quarterly brand usage licensing fee charged to FreedomRoadsHolding LLC and its subsidiaries (collectively “FreedomRoads”), and increasedextended vehicle warranty programrevenue of $1.1 million resulting from continued growth and strong renewals ofcontracts in force.

 

Mediarevenues of $17.4 million for the first quarter of 2009 decreased $8.8 million,or 33.7%, from the comparable period in 2008. This decrease was primarily attributable to a $3.8 million reduction inconsumer show revenue mainly due to reduced exhibitor attendance, a $4.6million reduction in advertising revenue in the outdoor power sports magazinesand the RV-related magazines, and a $0.4 million reduction in revenue from theannual campground directories and atlas.

 

Retailrevenues of $52.4 million decreased by $10.8 million, or 17.1%, from thecomparable period in 2008.  Storemerchandise sales decreased $7.8 million from the first quarter of 2008 due toa same store sales decrease of $7.9 million, or 17.0%, compared to a 16.5%decrease in same store sales for the first quarter of 2008, and discontinuedstore revenue of $1.0 million, was partially offset by a $1.1 million revenueincrease from the opening of 6 new stores over the past fifteen months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Further, mail order sales decreased $1.1million, installation and service fees decreased $0.7 million and supplies andother sales decreased $1.2 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $65.4 million for the first quarter of 2009, adecrease of $11.9 million, or 15.4%, from the comparable period in 2008.

 

Membershipservices costs and expenses of approximately $20.4 million decreased $2.8million, or 12.1%, from the comparable period in 2008.  This decrease consisted of $1.1 million ofreduced marketing, program and overhead costs related to the Good Sam Club,

 

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CampClub USA, Coast to Coast Club and Golf Card Club, a $1.0 million reduction invarious overhead costs and wage-related expenses, a $0.5 million reduction inmarketing costs related to vehicle insurance products, a $0.3 million decreasein events costs related to reduced revenue, and a $0.2 million reduction indealer program marketing costs related to reduced revenue.  These decreases in membership services costswere partially offset by $0.3 million of incremental costs associated withincreased extended vehicle warranty program revenue.

 

Mediacosts and expenses of $13.5 million for the first quarter of 2009 decreased$3.7 million, or 21.7%, from the comparable period in 2008 primarily related toreduced costs of $2.0 million in the RV-related magazines and outdoorpowersports magazines resulting from decreased circulation and production costs,reduced consumer show costs of $1.1 million related to reduced revenue, a $0.6million reduction in costs related to the annual campground directories andatlas.

 

Retailcosts applicable to revenues decreased $5.3 million, or 14.5%, to $31.5 millionprimarily as a result of the decrease in retail revenue.  The retail gross profit margin of 39.8% forthe first quarter of 2009 decreased from 41.7% for the comparable period in2008 primarily due to general price decreases.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $29.9 million for thefirst quarter of 2009 decreased $6.5 million compared to the first quarter of2008.  This decrease was due to a $5.7million decrease in retail general and administrative expenses consisting ofdecreases in labor, selling and other general and administrative expenses.  In addition, other general and administrativeexpense reductions resulted in savings of $1.1 million, partially offset by a2008 deferred executive compensation adjustment of $0.3 million.

 

Depreciationand amortization expense of $4.8 million decreased approximately $0.1 millionfrom the prior year primarilydue to completed amortization of the Poole customer list in September 2008.

 

*Incomefrom Operations*

 

Incomefrom operations for the first quarter of 2009 totaling $4.9 million decreased$1.4 million compared to the first quarter of 2008.  This decrease was primarily due to reducedgross profit for retail and media operations of $5.5 million and $5.1 million,respectively, partially offset by reduced operating expenses of $6.7 millionand increased gross profit for the membership services operations of $2.5million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $5.7 million for the first quarter of 2009 decreased$0.2 million compared to the first quarter of 2008 due to a decrease in netinterest expense resulting from reduced interest rates.

 

26

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*(Loss)Income before Income Taxes*

 

Lossbefore income taxes for the first quarter of 2009 was $0.8 million, or $1.2million lower than the first quarter of 2008. This decrease was attributable to the $1.4 million decrease in incomefrom operations and $0.2 million of reduced non-operating items mentionedabove.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.4 million for the firstquarter of 2009, compared to $0.3 million for the first quarter of 2008.

 

# *Net (Loss) Income*

# * *

Netloss in the first quarter of 2009 was $1.2 million compared to net income of$0.1 million for the same period in 2008 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

Segmentprofit of $5.8 million for the first quarter of 2009 (before unallocateddepreciation and amortization, general and administrative, interest, and incometax expense) decreased $1.6 million from the comparable period in 2008.

 

Membershipservices segment profit of $12.6 million for the first quarter of 2009increased $2.6 million, or 26.3%, from the comparable period in 2008.  This increase was largely attributable to a$1.2 million brand licensing fee charged to FreedomRoads, a $1.1 millionincrease in profit from the extended vehicle warranty programs, associated withreduced marketing expenses, and $0.5 million of reduced overhead expenses,partially offset by a $0.2 million decrease in segment profit from Coast toCoast Club and Golf Card Club.

 

Mediasegment profit of approximately $1.3 million for the first quarter of 2009decreased $4.5 million, or 77.4%, from the comparable period in 2008.  This decrease was largely attributed to a$2.4 million decrease in segment profit from our consumer shows group primarilyrelated to reduced exhibitor revenue, a $1.1 million decrease in segment profitrelated to our outdoor powersports magazine group, primarily driven by reducedadvertising revenue, and a $1.0 million decrease in profit in the RV-relatedpublications primarily related to reduced advertising revenue.

 

Retailsegment loss decreased $0.3 million from the first quarter of 2008 to a loss ofapproximately $8.1 million for the first quarter of 2009.  This decrease in segmentloss resulted primarily from a $5.8 million decrease in gross profit margin,offset by a $5.7 million decrease in selling, general and administrative expenses,a $0.2 million decrease in interest expense, and a $0.2 million decrease indepreciation and amortization expense.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company hashistorically operated with a working capital deficit.  The working capital deficit as of March 31,2009 and December 31, 2008 was $134.9 million and $10.5 million,respectively.  The primary reason for theincrease in working capital deficit for 2009 is the classification of the debt associatedwith the Amended and Restated Credit Agreement totaling $146.1 million as acurrent liability, since the credit facility matures March 31, 2010. Deferred revenue and gains reported under current liabilities as of March 31,2009 and December 31, 2008 were $58.1 million and $60.6 million,respectively.  Deferred revenue isprimarily comprised of cash collected for club memberships in advance, which isamortized over the life of the membership. The Company uses net proceeds from this deferred membership revenue tolower its long-term borrowings.  TheCompany anticipates that it will be able to refinance or replace the existingcredit facility before its maturity on March 31, 2010 and, assuming suchrefinancing, will have sufficient funds from its operations together withavailable borrowing under the replacement credit facility to meet all of theCompany’s debt service, capital requirements and working capital needs over thenext twelve months.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligationsand commercial commitments at March 31, 2009.  This table includes principal and futureinterest due under our debt agreements based on interest rates as of March 31,2009 and assumes debt obligations will be held to maturity.

 
| ** **                         | ** **   | **Payments Due by Period** | ** ** |
|------------------------------------|--------------|----------------------------|------------|
| **(in thousands)**                 | *** *** | **Total**                  | ** ** | **Balance of   2009** | ** ** | **2010 and   2011** | ** ** | **2012 and   2013** | ** ** | **Thereafter** | ** ** |
|                               |         |                       |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |         | $                          | 355,315    |   | $ | 27,817 |   | $ | 154,426 |   | $ | 13,815 |   | $ | 159,257 |   |
| Operating lease obligations        |         | 228,808                    |       | 17,282 |   | 43,752 |   | 36,629 |   | 131,145 |   |
| Standby letters of credit          |         | 7,467                      |       | 7,467 |   | — |   | — |   | — |   |
| Grand total                        |         | $                          | 591,590    |   | $ | 52,566 |   | $ | 198,178 |   | $ | 50,444 |   | $ | 290,402 |   |

 

SeniorCredit Facility

OnJune 24, 2003, the Company entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the “Senior Credit Facility”). The Senior Credit Facility, as amended, provides for a revolving creditfacility of $35.0 million and term loans in the aggregate of $140.0million.  As of March 31, 2009,$19.5 million was outstanding under the revolving credit facility and $126.5million was outstanding under the term loans. Reborrowings under the term loans are not permitted.  The interest on borrowings under the SeniorCredit Facility was at variable rates based on the ratio of total cash flow tooutstanding indebtedness (as defined). Interest rates float with prime and the London Interbank Offered Rates,or LIBOR, plus an applicable margin ranging from 1.50% to 2.50% over the statedrates.  After consideration of fixedrates under the interest rate swap agreements, (discussed in Note 8), as of March 31,2009, the average interest rates on the term loans and the revolving creditfacility were 7.27% and 5.25%, respectively, and permitted borrowings

 

28

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under therevolving facility were $27.5 million. The Company also pays a commitment fee of 0.5% per annum on the unusedamount of the revolving credit facility. The aggregate quarterly scheduled payments on the term loans are $0.4million.  Both the revolving creditfacility and the term loans mature on March 31, 2010.  The funds available under the Senior CreditFacility may be utilized for borrowings or letters of credit; however, amaximum of $7.5 million may be allocated to such letters of credit.  As of March 31, 2009, the Company hadletters of credit in the aggregate amount of $7.5 million outstanding.  The Senior Credit Facility is secured byvirtually all of the Company’s assets and a pledge of the Company’s stock andthe stock of the Company’s subsidiaries.

 

On March 3,2006, AGI amended its Senior Credit Facility to revise the definition ofConsolidated Fixed Charges Ratio and Permitted Tax Distributions.  This amendment allows the Company todistribute taxes to its ultimate parent based on its stand-alone tax obligationrather than the tax obligation of its parent, AGHI, until such time that AGHIpays interest on its 10 7/8% Senior Notes in cash instead of by the issuance ofadditional notes and AGI makes a distribution to AGHI for purposes of payingthat cash interest.  For the three monthsended March 31, 2009 and 2008, the Company did not distribute dividends toAGHI to fund the Company’s tax obligations. Further, the Company amended the Senior Credit Facility’s covenantrestrictions with affiliates to permit a joint venture arrangement betweenCamping World and FreedomRoads Holding Company, LLC (“FreedomRoads”), anaffiliate of the Company.

 

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

 

On June 5, 2009, the Companyentered into an amendment to its Senior Credit Facility pursuant to which thematurity date was extended from June 24, 2009 to March 31, 2010, therevolving credit portion of the facility was reduced by $10.0 million to $25.0million, the outstanding term loan borrowings were repaid by $8.0 million, thefinancial covenants in effect through the extended maturity date were revisedand the borrowing rate was increased to prime rate plus 7.0% or LIBOR plus 8.0%with a LIBOR floor of 2.75%.  As acondition to the amendment, the shareholder of the Company was required toarrange for the purchase of approximately $26.6 million in principal amount ofthe term portion of the Senior Credit Facility by new lenders, enhance theyield to such new lenders, purchase AGHI Notes held by one of such new lendersat a premium to the most recent market price, contribute $8.5 million incapital to the Company and guarantee two required principal payments on theterm loans under the Senior Credit Facility, aggregating $15.0 million.  In consideration of such support, the Companyentered into an option agreement with the shareholder of the ultimate parent ofthe Company pursuant to which the Company granted such

 

29

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shareholder or his assignsan option, exercisable on or before March 1, 2010, to purchase the Company’sCamping World subsidiary for $55.0 million, being the fair value of suchsubsidiary as determined by an appraisal of Houlihan Smith & Company, Inc.dated as of March 1, 2009.  The Companyalso agreed to pay the shareholder of the ultimate parent, upon successfulrefinancing of the Company’s secured debt, including the Senior CreditFacility, a success fee equal in amount to the fair value, as determined by anindependent financial advisor of such credit support, taking into account thefair value of the option to purchase Camping World.  In the event the fair value of the CampingWorld purchase option exceeds the fair value of such credit support, theshareholder will pay the amount of such excess to the Company.

 

Concurrent with theamendment to the Senior Credit Facility, the Company obtained a $9.7 millionSecond Lien Loan, the net proceeds of which were used to purchase $14.6 millionin principal amount of AGI Senior Notes. The Second Lien Loan carries an interest rate of 9.0% and matures on July 31,2010.

 

In addition, Company agreedto use its best efforts to secure an asset-based loan of at least $18.5 millionsecured by the inventory and receivables of its subsidiary, Camping World, Inc.(the “Camping World Financing”), the proceeds of which would be used to furtherreduce the amounts outstanding under the Senior Credit Facility.  The senior lenders agreed to subordinatetheir liens to such financing.  If aCamping World Financing has not been consummated by September 15, 2009,the borrowing rate on revolving credit loans, swing loans and terms loansincrease to prime rate plus 9.0% or LIBOR plus 10.0%.

 

The amended Senior CreditFacility also revised the Company’s financial covenants in effect through theextended maturity date.  The Company’sforecast for 2009 anticipates compliance with all required covenants throughout2009.  Significant cost reductions havebeen implemented in 2008, including the elimination of personnel, suspension of401(k) employer contributions, salary cutbacks, hiring and capitalexpenditure spending freezes, satellite office closures, and magazine size andfrequency reductions.  Further costreductions are set to be unveiled in 2009. The Company believes that the amended bank financing, new secured loans,as well as forecasted cash flow will provide the cash flow needed to continueas a going concern through at least January 1, 2010.

 

SeniorSubordinated Notes

In February 2004,the Company issued $200.0 million aggregate principal amount of 9% SeniorSubordinated Notes due 2012 (“Senior Subordinated Notes”).  The Company completed a registered exchangeof the Senior Subordinated Notes under the Securities Act of 1933 in August 2004.

 

On June 8,2006, AGI amended its Senior Credit Facility to permit AGI to purchase up to$30.0 million of the Senior Subordinated Notes from time to time as and whenthe Company determines.  During 2006 AGIpurchased $29.9 million of the Senior Subordinated Notes. The purchases ofthese notes were made with available cash, and the notes purchased have beenretired.

 

30

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On March 8, 2007,the Company purchased $17.7 million of the Senior Subordinated Notes.  The Company funded the purchase through theissuance of the $25.0 million in additional incremental term loans as permittedunder the February 27, 2007 amendment to the Senior Credit Facility.  The balance of the $25.0 million issued wasused to pay down the Company’s revolving credit facility by $6.5 million and topay associated loan fees and transaction expenses.  The terms on the additional incremental loansare consistent with the remaining term loan outstanding under the Senior CreditFacility.  As of March 31, 2009, $152.4million of Senior Subordinated Notes remain outstanding.

 

The AGI Indenturepursuant to which the Senior Subordinated Notes were issued and the SeniorCredit Facility contain certain restrictive covenants relating to, but notlimited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  There was no event of default under the AGIIndenture at March 31, 2009.

 

AGHI Notes

On March 24, 2005in a private placement, AGHI, the Company’s parent, issued $88.2 millionprincipal amount of the 10-7/8% senior notes due February 15, 2012 (the “AGHINotes”).  Interest on the AGHI notes ispayable semi-annually on February 15 and August 15.  For interest payments on and prior to February15, 2008, AGHI had the election to pay interest on the AGHI Notes in cash or bythe issuance of additional notes of the same tenor as the AGHI Notes, exceptthe maturity date of the additional notes ($25.4 million) is March 15,2010.  AGI has not paid any dividends toAGHI to fund payment of interest on the AGHI Notes and AGHI made the interestpayments due on August 15, 2005, February 15, 2006, August 15, 2006, February 15,2007, and February 15, 2008 through the issuance of additional notes.  AGHI paid the interest on the AGHI Notes due August15, 2007, August 15, 2008 and February 15, 2009 from proceeds of contributionsmade by AGHI’s parent, AGHC, of $5.9 million, $6.2 million and $6.2 million,respectively.  If the source of the cashpayment of the AGHI Notes is dividends from AGI, its wholly-owned subsidiary,there are certain restrictions on the payment of dividends under the AGI SeniorCredit Facility and the AGI Indenture. As of March 31, 2009, $111.9 million of AGHI Notes remain outstanding.

 

Interest Rate Swap Agreements

On October 15, 2007, the Company entered into a five-year interest rateswap agreement with a notional amount of $100.0 million from which it willreceive periodic payments at the 3 month LIBOR-based variable rate (1.17% at March31, 2009 based upon the January 1, 2009 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  On March19, 2008, the Company entered into a 4.5 year interest rate swap agreement witha notional amount of $35.0 million from which it will receive periodic paymentsat the 3 month LIBOR-based variable rate (1.17% at March 31, 2009 based uponthe January 31, 2009 reset date) and make periodic payments at a fixed rate of3.430%, with settlement and rate reset dates every January 31, April 30, July 31,and October 31.  The fair value of theswap contracts were zero at inception. The interest rate swap was effective beginning April 30, 2008 andexpires on October 31, 2012.  The Companyentered into the interest rate swap contracts to limit the effect of increaseson our floating rate debt.

 

31

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The interest rate swap contracts are designated as a cash flow hedge ofthe variable rate interest payments due on $135.0 million of the term loans andthe revolving credit facility issued June 24, 2003, and accordingly, gainsand losses on the fair value of the interest rate swap agreements are reportedin accumulated other comprehensive loss and reclassified to earnings in thesame period in which the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of these swapsincluded in other long-term liabilities was $12.5 million of which $10.1 millionis in accumulated other comprehensive loss, $2.4 million in retained earnings,and $20,000 in the statement of operations at March 31, 2009.  The fair value of these swaps included inother long-term liabilities was $12.7 million of which $10.3 million is inaccumulated other comprehensive loss and $2.4 million in the statement ofoperations at December 31, 2008.

 

Due to thepotential sale of Camping World, in the fourth quarter of 2008 a highlyeffective hedge on the $35.0 million outstanding debt by the $35.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings beginningon October 1, 2008.  Change in valuefrom January 1, 2009 to March 31, 2009 on the $35.0 million interestrate swap was $20,000.  Included in othercomprehensive loss is $0.5 million related to the $35.0 million interest rateswap which will be included in earnings when the underlying transaction beinghedged is probable not to occur.  Ahighly-effective hedge on the $100.0 million outstanding debt by the $100.0million notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31,2012.  Changes in value from January 1,2009 to March 31, 2009 on the $100.0 million interest rate swap were $0.2million and are included as a component of other comprehensive loss instockholders’ deficit.

 

Other ContractualObligations and Commercial Commitments

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

 

For the threemonths ended March 31, 2009, the Company incurred no deferred executivecompensation expense under the phantom stock agreements, and made payments of$1.4 million under the terms of the vested phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next four years.  No phantom stock payments are scheduled to**be made for the remainder of 2009.

 

Capital expendituresfor the first three months of 2009 totaling $1.3 million decreased $2.3 millionfrom the first three months of 2008 primarily due to a slow down of new retailstore openings.  Additional capitalexpenditures of $2.2 million are anticipated for the balance of 2009 primarilyfor one more Camping World store and equipment, software enhancements,information technology upgrades and further website development.

 

32

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**CRITICALACCOUNTING POLICIES**

 

*General*

 

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

 

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

 

*Revenue Recognition*

 

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

 

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*Accounts Receivable*

 

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

 

*Inventory*

 

The Company statesinventories at the lower of cost or market. In assessing the ultimate realization of inventories, the Company isrequired to make judgments as to future demand requirements and compare thatwith the current or committed inventory levels. The Company has recorded changes in required reserves in recent periodsdue to changes in strategic direction, such as discontinuances of product linesas well as changes in market conditions due to changes in demandrequirements.  It is possible thatchanges in required inventory reserves may continue to occur in the future dueto the market conditions.

 

*Long-LivedAssets*

 

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

 

Long-lived assets,such as property, plant and equipment and purchased intangible assets withfinite lives are evaluated for impairment whenever events or changes incircumstances indicate the carrying value of an asset may not be recoverable inaccordance with SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  The Companyassesses the fair value of the assets based on the future cash flow the assetsare expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.

 

In 2005, AGHI issued $88.2 million principal amount of its 10-7/8%Senior Notes due 2012 (the “AGHI Notes”) and contributed the net proceeds,approximately $81.0 million, to the Company and in turn, the Company made anequity contribution to Camping World. Camping World then made an equity capital contribution in the sameamount to its wholly-owned subsidiary, CWI, Inc. that created a newwholly-owned subsidiary named CWFR Capital Corp. (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture, and made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World. Since CWFR is an unrestricted subsidiary, its operations are not restrictedby either the AGI Indenture or the AGHI Notes. CWFR used the proceeds from the equity capital contribution to acquirethe FreedomRoads Preferred Interest. FreedomRoads is owned 90% by The Stephen Adams 

 

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Living Trust, which also indirectly owns 100% of the outstandingcapital stock of AGHC and indirectly AGI.

 

Based on theresults of the Valuation Report, the Company recorded an impairment charge of$81.0 million in the third quarter of 2008 that wrote down to zero the carryingvalue of the preferred interest (the “FreedomRoads Preferred Interest”) held byan indirect subsidiary of Camping World in FreedomRoads Holding Company, LLC (“FreedomRoads”),a holding company whose subsidiaries sell and service new and used recreationalvehicles.  The $81.0 million impairmentcharge was recorded as a result of declining performance of the recreationalvehicle industry driven by overall weakening of the economy and a significantdecline in consumer confidence, in addition to limited credit available toconsumers interested in purchasing recreational vehicles.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible assets were necessary.  Thefinite-lived purchased intangible assets consist of membership customer lists,resort and golf course agreements, non-compete and deferred consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 4 years, 15 years and 7 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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

 

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

 

The results of theValuation Report prepared in the third quarter of 2008 indicated that theestimated fair value of the Camping World reporting unit was less than bookvalue.  The excess of the carrying valueover the estimated fair value of the Camping World reporting unit was primarilydue to the decline in the recreational vehicle and camping retail marketsleading to lower expected future cash flows for the business and lower marketcomparables. In determining the fair value, the Company used a weighted averageof the income valuation approach and market valuation approaches.

 

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

 

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

 

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

 

*AccumulatedOther Comprehensive Loss*

 

Accumulatedother comprehensive loss consists of unrealized losses on cash flowhedges.  At March 31, 2009,accumulated other comprehensive loss was $10.1 million.

 

*Derivative Financial Instruments –***The Company accounts for derivative instruments and hedgingactivities in accordance with SFAS No. 133, “Accounting for Derivative 

 

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Instruments and Hedging Activities” (“SFAS 133”).  All derivatives are recognized on the balancesheet at their fair value.  On the datethat the Company enters into a derivative contract, management formallydocuments all relationships between hedging instruments and hedged items, aswell as risk management objectives and strategies for undertaking various hedgetransactions.

 

Changes in the fair value of a derivativethat is highly effective and that is designated and qualifies as a cash flowhedge (a “swap”), to the extent that the hedge is effective, are recorded inaccumulated other comprehensive loss, until earnings are affected by thevariability of cash flows of the hedged transaction.  The Company measures effectiveness of theswap at each quarter end using the Hypothetical Derivative Method.  Under this method, hedge effectiveness ismeasured based on a comparison of the change in fair value of the actual swapdesignated as the hedging instrument and the change in fair value of thehypothetical swap which would have the terms that identically match thecritical terms of the hedged cash flows from the anticipated debtissuance.  The amount of ineffectiveness,if any, recorded in earnings would be equal to the excess of the cumulativechange in the fair value of the swap over the cumulative change in the fairvalue of the plain vanilla swap lock, as defined in the accountingliterature.  Once a swap is settled, theeffective portion is amortized over the estimated life of the hedge item.

 

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

 

Due to thepotential sale of Camping World, in the fourth quarter of 2008 a highly effectivehedge on the $35.0 million outstanding debt by the $35.0 million notionalamount interest rate swap agreement was deemed to be no longer probable and isnow deemed to be reasonably possible.  Asa result, changes in the value of the $35.0 million interest rate swapagreement are included in earnings beginning on October 1, 2008.  Change in value from January 1, 2009 to March 31,2009 on the $35 million interest rate swap was $20,000.  A highly-effective hedge on the $100.0million outstanding debt by the $100.0 million notional amount of interest rateswap agreement is still deemed to be probable as the Company will maintain itsLIBOR-based debt at a minimum of $100.0 million until the interest swap expiredate of October 31, 2012.  Changesin value from January 1, 2009 to March 31, 2009 on the $100.0 millioninterest rate swap were $0.2 million and are included as a component of othercomprehensive loss in stockholders’ deficit.

 

*FairValue Measurements*

 

As discussed in Note 2 to the unauditedcondensed consolidated financial statements, the Company adopted the provisionsof Statement 157 effective January 1, 2008.  The Company has determined that it utilizesobservable (Level 2) inputs in determining the fair value of its interest rateswap contracts which totaled $12.5 million at March 31, 2009.

 

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*IncomeTaxes*

 

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

 

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

 

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

 

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

 

*InterestRate Sensitivity Analysis*

 

At March 31,2009, we had debt totaling $300.7 million, comprised of $11.0 million ofvariable rate debt and $289.7 million of fixed rate debt, comprised of $135.0million of debt fixed through the interest rate swap agreements, $152.4 millionof Senior Notes and $2.3 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 $0.1 million.

 

*CreditRisk*

 

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

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the

 

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Company’s management, including the President and Chief ExecutiveOfficer and the Senior Vice President and Chief Financial Officer, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to Regulation 13a-15e under the Securities Exchange Actof 1934, as amended.  Based upon thatevaluation, the President and Chief Executive Officer along with the SeniorVice 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 March 31,2009, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A:RISK FACTORS**

 

The Senior CreditFacility matures on March 31, 2010. As of March 31, 2009, there was $146.0 million outstanding underthe Senior Credit Facility and it is secured by a lien on all of the Company’sassets and a pledge of the Company’s stock and the stock of itssubsidiaries.  Although the Company iscurrently seeking to refinance or replace the Senior Credit Facility and hasreceived a number of proposals from prospective lenders, there can be noassurance that the Senior Credit Facility will be refinanced or replaced priorto its maturity.  The availability offinancing is limited due to the current uncertainties in the capitalmarkets.  In addition, the currentgeneral conditions in the U.S. economy had an adverse impact on the Company’soperations because consumers are reducing discretionary spending, includingspending on the recreational activities offered by the Company, and businessesare reducing advertising and marketing expenditures which have adverselyaffected the advertising revenues received by the Company.  As a result, it may be even more difficultfor the Company to refinance or replace the Senior Credit Facility due to thecurrent deterioration in the Company’s operating results.  If the Company is not able to refinance orreplace the Senior Credit Facility prior to its maturity on March 31,2010, the lenders will be entitled to exercise their remedies to sell thecollateral securing the repayment of the Senior Credit Facility, including theCompany’s assets, the stock of the Company and the stock of the Company’ssubsidiaries.  Since the indebtednessowned under the Senior Credit Facility is secured, it would be repaid beforeany of the unsecured or subordinated obligations of the Company and itssubsidiaries.  It is also possible thatthe interest rate payable on a new credit facility will be higher than theinterest rates under the current Senior Credit Facility as amended June 5,2009 which will adversely affect the Company’s cash flow and profitability (orincrease losses).

 

**ITEM 5: OTHER INFORMATION**

 

None.

 

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**SIGNATURES:**

 

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

 

 
| ** **              | **AFFINITY GROUP, INC.**                          |
|-------------------------|---------------------------------------------------|
|                    |                                              |
|                    |                                              |
|                    | /s/ Thomas F. Wolfe                               |
| Date: June 5, 2009 | Thomas F. Wolfe                                   |
|                    | Senior Vice President and Chief Financial Officer |

 

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