**UNITED STATES**

##### **SECURITIESAND EXCHANGE COMMISSION**

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

 

**FORM 10-Q**

** **

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

**The Securities Exchange Act of 1934**

 

| **For  Quarter Ended:** | ** ** | **Commission  File Number** |
|-------------------------|------------|-----------------------------|
| **June 30,  2009** | ** ** | **333-113982**              |

 

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**AFFINITYGROUP, 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 (Section 232.405 of this chapter) during the preceding 12months (or for such shorter period that the registrant was required to submitand post such filings).

YES  o    NO  o

 

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

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

 

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

YES  o       NO  x

 

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

 
|                          |       | **Outstanding  as of**    |
|-------------------------------|------------|---------------------------|
| **Class**                     | ** ** | **August 14,  2009** |
| Common Stock, $.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 June 30, 2009 (unaudited) and December 31, 2008            | 1        |
|                                                                                                     |     |
| Unaudited Consolidated Statements of Operations   for the three months ended June 30, 2009 and 2008 | 2        |
|                                                                                                     |     |
| Unaudited Consolidated Statements of Operations   for the six months ended June 30, 2009 and 2008   | 3        |
|                                                                                                     |     |
| Unaudited Consolidated Statements of Cash Flows   for the six months ended June 30, 2009 and 2008   | 4        |
|                                                                                                     |     |
| Notes to Unaudited Consolidated Financial Statements                                                     | 5        |
|                                                                                                     |     |
| **Item 2: Management’s Discussion and Analysis of  Financial Condition and Results of Operations**  | 29       |
|                                                                                                     |     |
| **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                  | 48       |
|                                                                                                     |     |
| **Item 4: Controls and Procedures**                                                                      | 49       |
|                                                                                                     |     |
| **Part II. Other Information**                                                                      | 49       |
|                                                                                                     |     |
| **Signatures**                                                                                           | 51       |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2009 and December 31, 2008

(In thousands except shares and par value)

 
| ** **                                                                                     | ** ** | **6/30/2009**   | ** ** | **12/31/2008** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                     | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                     |       |            |       |           |       |
| CURRENT ASSETS:                                                                                |       |            |       |           |       |
| Cash and cash equivalents                                                                      |       | $               | 10,691     |           | $          | 10,608 |   |
| Accounts receivable, less  allowance for doubtful accountsof $2,317 in 2009 and $2,147 in 2008 |       | 43,025          |       | 40,191         |       |
| Inventories                                                                                    |       | 64,534          |       | 57,137         |       |
| Prepaid expenses and other  assets                                                             |       | 14,240          |       | 13,545         |       |
| Total current assets                                                                           |       | 132,490         |       | 121,481        |       |
|                                                                                           |       |            |       |           |       |
| PROPERTY AND EQUIPMENT,  net                                                                   |       | 39,767          |       | 44,077         |       |
| AFFILIATE NOTES AND  INVESTMENTS                                                               |       | 4,723           |       | 4,608          |       |
| INTANGIBLE ASSETS, net                                                                         |       | 19,232          |       | 20,754         |       |
| GOODWILL                                                                                       |       | 96,828          |       | 96,828         |       |
| DEFERRED TAX ASSETS, net                                                                       |       | 4,569           |       | 4,569          |       |
| OTHER ASSETS                                                                                   |       | 2,576           |       | 2,035          |       |
| Total assets                                                                                   |       | $               | 300,185    |           | $          | 294,352 |   |
|                                                                                           |       |            |       |           |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                           |       |            |       |           |       |
| Accounts payable                                                                               |       | $               | 43,163     |           | $          | 23,950 |   |
| Accrued interest                                                                               |       | 5,516           |       | 6,946          |       |
| Accrued income taxes                                                                           |       | 1,236           |       | 1,165          |       |
| Accrued liabilities                                                                            |       | 27,004          |       | 26,954         |       |
| Deferred revenues and  gains                                                                   |       | 61,390          |       | 60,569         |       |
| Current portion of  long-term debt                                                             |       | 123,442         |       | 12,391         |       |
| Total current liabilities                                                                      |       | 261,751         |       | 131,975        |       |
|                                                                                           |       |            |       |           |       |
| DEFERRED REVENUES AND  GAINS                                                                   |       | 35,866          |       | 35,855         |       |
| LONG-TERM DEBT, net of  current portion                                                        |       | 147,784         |       | 279,755        |       |
| OTHER LONG-TERM  LIABILITIES                                                                   |       | 28,970          |       | 33,281         |       |
|                                                                                           |       | 474,371         |       | 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                                                                     |       | 89,505          |       | 81,005         |       |
| Accumulated deficit                                                                            |       | (256,990        | )          | (257,183       | )          |
| Accumulated other  comprehensive loss                                                          |       | (6,702          | )          | (10,337        | )          |
| Total stockholder’s  deficit                                                              |       | (174,186        | )          | (186,514       | )          |
| Total liabilities and  stockholder’s deficit                                              |       | $               | 300,185    |           | $          | 294,352 |   |

 

Seenotes to consolidated financial statements.

 

1

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2009**          | ** ** | **6/30/2008** | ** ** |
|                                 |       |                   |       |   |   |
| REVENUES:                            |       |                   |       |   |   |
| Membership services                  |       | $                      | 39,197     |   | $ | 42,563 |   |
| Media                                |       | 9,363                  |       | 15,424 |   |
| Retail                               |       | 81,339                 |       | 89,742 |   |
|                                 |       | 129,899                |       | 147,729 |   |
|                                 |       |                   |       |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                   |       |   |   |
| Membership services                  |       | 24,615                 |       | 26,518 |   |
| Media                                |       | 7,396                  |       | 11,387 |   |
| Retail                               |       | 49,370                 |       | 52,332 |   |
|                                 |       | 81,381                 |       | 90,237 |   |
|                                 |       |                   |       |   |   |
| GROSS PROFIT                         |       | 48,518                 |       | 57,492 |   |
|                                 |       |                   |       |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |
| Selling, general and  administrative |       | 33,114                 |       | 40,270 |   |
| Financing expense                    |       | 1,540                  |       | — |   |
| Depreciation and  amortization       |       | 5,570                  |       | 5,037 |   |
|                                 |       | 40,224                 |       | 45,307 |   |
|                                 |       |                   |       |   |   |
| INCOME FROM OPERATIONS               |       | 8,294                  |       | 12,185 |   |
|                                 |       |                   |       |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |
| Interest income                      |       | 134                    |       | 139 |   |
| Interest expense                     |       | (7,814                 | )          | (6,050 | ) |
| Gain on derivative  instrument       |       | 665                    |       | — |   |
| Gain on debt restructure             |       | 4,678                  |       | — |   |
| Other non-operating items,  net      |       | (736                   | )          | (25 | ) |
|                                 |       | (3,073                 | )          | (5,936 | ) |
|                                 |       |                   |       |   |   |
| INCOME BEFORE INCOME TAXES           |       | 5,221                  |       | 6,249 |   |
|                                 |       |                   |       |   |   |
| INCOME TAX EXPENSE                   |       | (304                   | )          | (272 | ) |
|                                 |       |                   |       |   |   |
| NET INCOME                           |       | $                      | 4,917      |   | $ | 5,977 |   |

 

Seenotes to consolidated financial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **6/30/2009**        | ** ** | **6/30/2008** | ** ** |
| REVENUES:                            |       |                 |       |   |   |
| Membership services                  |       | $                    | 74,429     |   | $ | 78,108 |   |
| Media                                |       | 26,783               |       | 41,680 |   |
| Retail                               |       | 133,740              |       | 152,926 |   |
|                                 |       | 234,952              |       | 272,714 |   |
|                                 |       |                 |       |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                 |       |   |   |
| Membership services                  |       | 44,945               |       | 49,659 |   |
| Media                                |       | 20,880               |       | 28,604 |   |
| Retail                               |       | 80,906               |       | 89,195 |   |
|                                 |       | 146,731              |       | 167,458 |   |
|                                 |       |                 |       |   |   |
| GROSS PROFIT                         |       | 88,221               |       | 105,256 |   |
|                                 |       |                 |       |   |   |
| OPERATING EXPENSES:                  |       |                 |       |   |   |
| Selling, general and  administrative |       | 63,051               |       | 76,701 |   |
| Financing expense                    |       | 1,540                |       | — |   |
| Depreciation and  amortization       |       | 10,408               |       | 10,041 |   |
|                                 |       | 74,999               |       | 86,742 |   |
|                                 |       |                 |       |   |   |
| INCOME FROM OPERATIONS               |       | 13,222               |       | 18,514 |   |
|                                 |       |                 |       |   |   |
| NON-OPERATING ITEMS:                 |       |                 |       |   |   |
| Interest income                      |       | 264                  |       | 282 |   |
| Interest expense                     |       | (13,637              | )          | (12,110 | ) |
| Gain on derivative  instrument       |       | 685                  |       | — |   |
| Gain on debt restructure             |       | 4,678                |       | — |   |
| Other non-operating items,  net      |       | (819                 | )          | (23 | ) |
|                                 |       | (8,829               | )          | (11,851 | ) |
|                                 |       |                 |       |   |   |
| INCOME BEFORE INCOME TAXES           |       | 4,393                |       | 6,663 |   |
|                                 |       |                 |       |   |   |
| INCOME TAX EXPENSE                   |       | (700                 | )          | (571 | ) |
|                                 |       |                 |       |   |   |
| NET INCOME                           |       | $                    | 3,693      |   | $ | 6,092 |   |

 

Seenotes to consolidated financial statements.

 

3

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                         | ** ** | **SIX MONTHS ENDED** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **6/30/2009**        | ** ** | **6/30/2008** | ** ** |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM OPERATING  ACTIVITIES:                                             |       |                 |       |   |   |
| Net income                                                                         |       | $                    | 3,693      |   | $ | 6,092 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation                                                                       |       | 6,525                |       | 5,881 |   |
| Amortization                                                                       |       | 3,883                |       | 4,160 |   |
| Gain on derivative instrument                                                      |       | (685                 | )          | — |   |
| Gain on debt restructure                                                           |       | (4,678               | )          | — |   |
| Provision for losses on  accounts receivable                                       |       | 799                  |       | 617 |   |
| Deferred compensation                                                              |       | —               |       | (130 | ) |
| Loss on sale of property  and equipment                                            |       | 165                  |       | 86 |   |
| Changes in operating  assets and liabilities                                       |       |                 |       |   |   |
| Accounts receivable                                                                |       | (3,633               | )          | (581 | ) |
| Inventories                                                                        |       | (7,397               | )          | (284 | ) |
| Prepaid expenses and other  assets                                                 |       | (1,236               | )          | (1,924 | ) |
| Accounts payable                                                                   |       | 19,213               |       | (84 | ) |
| Accrued and other  liabilities                                                     |       | (1,960               | )          | (4,527 | ) |
| Deferred revenues and  gains                                                       |       | 832                  |       | (3,523 | ) |
| Net cash provided by  operating activities                                         |       | 15,521               |       | 5,783 |   |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM INVESTING  ACTIVITIES:                                             |       |                 |       |   |   |
| Capital expenditures                                                               |       | (2,391               | )          | (7,559 | ) |
| Net proceeds from sale of  property and equipment                                  |       | 11                   |       | 4 |   |
| Investment in affiliate                                                            |       | (115                 | )          | — |   |
| Acquisitions, net of cash  received                                                |       | —               |       | (3,409 | ) |
| Repayment of loans  receivable                                                     |       | —               |       | 21 |   |
| Net cash used in investing  activities                                             |       | (2,495               | )          | (10,943 | ) |
|                                                                               |       |                 |       |   |   |
| CASH FLOWS FROM FINANCING  ACTIVITIES:                                             |       |                 |       |   |   |
| Dividends paid                                                                     |       | (3,500               | )          | (1,000 | ) |
| Contribution from parent                                                           |       | 8,500                |       | — |   |
| Borrowings on debt                                                                 |       | 12,000               |       | 33,000 |   |
| Payment of debt issue  costs                                                       |       | (2,541               | )          | — |   |
| Principal payments on debt                                                         |       | (27,402              | )          | (27,537 | ) |
| Net cash (used in)  provided by financing activities                               |       | (12,943              | )          | 4,463 |   |
|                                                                               |       |                 |       |   |   |
| NET CHANGE IN CASH AND  CASH EQUIVALENTS                                           |       | 83                   |       | (697 | ) |
|                                                                               |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS  AT BEGINNING OF PERIOD                                  |       | 10,608               |       | 8,357 |   |
|                                                                               |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS  AT END OF PERIOD                                        |       | $                    | 10,691     |   | $ | 7,660 |   |

 

Seenotes to consolidated financial statements.

 

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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(collectively the “Company”), presented in accordance with U.S. generallyaccepted accounting principles, and pursuant to the rules and regulationsof the Securities and Exchange Commission. Affinity Group Holding, Inc. (“AGHI”) is the direct parent of theCompany. The ultimate parent company of AGHI is AGI Holding Corp. (“AGHC”), aprivately-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 Securitiesand Exchange Commission.  In the opinionof management of the Company, these consolidated financial statements containall adjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

 

*Basisfor Presentation**—*On 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 andthe borrowing rate was increased to prime rate plus 7.0% or LIBOR plus 8.0%with a LIBOR floor of 2.75%.  Concurrentwith the June 5, 2009 amendment to the Senior Credit Facility, the Companyobtained a $9.7 million Second Lien Loan, the net proceeds of which were usedto purchase $14.6 million in principal amount of the Senior SubordinatedNotes.  The Second Lien Loan carries aninterest rate of 9.0% and matures on July 31, 2010.  See Note 11 of the Notes to ConsolidatedFinancial Statements.

 

Theamended Senior Credit Facility also revised the Company’s financial covenantsin effect through the extended maturity date. Significant cost reductions were implemented in 2008 and 2009, includingthe elimination of personnel, suspension of 401(k) employer contributions,salary cutbacks, hiring and capital expenditure spending freezes, satelliteoffice closures, and magazine size and frequency reductions.

 

**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

In June 2009,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles—areplacement of FASB Statement No. 162” (“SFAS 168”), which will beeffective for interim and annual periods ending after September 15,2009.  The FASB Accounting StandardsCodification will become the source of authoritative GAAP recognized by theFASB.  Rules and interpretivereleases of the SEC under authority of federal securities laws continue to besources of authoritative GAAP for SEC registrants.  All existing FASB accounting

 

5

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

 

standards andguidance are superseded as described in SFAS 168 and instead of issuing newaccounting standards in the form of statements, FASB staff positions, andEmerging Issues Task Force (“EITF”) abstracts, the FASB will issue AccountingStandards Updates that will update the Codification.  Adoption of the Codification will not have asignificant impact on the Company’s financial statements.

 

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

 

Statement of FinancialAccounting Standards No. 165, Subsequent Events, (“SFAS 165”) is effectivefor financial statements ending after June 15, 2009.  SFAS 165 establishes general standards ofaccounting for and disclosure of subsequent events that occur after the balancesheet date.  Entities are also requiredto disclose the date through which

 

6

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**(2) RECENT ACCOUNTINGPRONOUNCEMENTS (continued)**

 

subsequent eventshave been evaluated and the basis for that date.

 

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

 

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

 

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

 

7

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

 

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

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

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

 

8

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

 

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

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED** | ** ** | **SIX MONTHS ENDED** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                    | ** ** | **6/30/2009**          | ** ** | **6/30/2008**        | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** |
| **Profit  From Operations Before Income Taxes**               |       |                   |       |                 |       |   |   |   |   |
| Total profit for  reportable segments                         |       | $                      | 12,386     |                 | $          | 13,649 |   | $ | 18,162 |   | $ | 21,031 |   |
| Unallocated G & A  expense                           |       | (3,845                 | )          | (4,050               | )          | (7,336 | ) | (7,880 | ) |
| Unallocated depreciation  and amortization expense            |       | (780                   | )          | (561                 | )          | (1,300 | ) | (1,013 | ) |
| Unallocated other finance  costs                              |       | (654                   | )          | —               |       | (654 | ) | — |   |
| Unallocated gain on  derivative instrument                    |       | 665                    |       | —               |       | 685 |   | — |   |
| Unallocated financing  expense                                |       | (1,540                 | )          | —               |       | (1,540 | ) | — |   |
| Unallocated gain on debt  restructure                         |       | 4,678                  |       | —               |       | 4,678 |   | — |   |
| Elimination of  intercompany interest income                  |       | (717                   | )          | (774                 | )          | (1,453 | ) | (1,559 | ) |
| Unallocated interest  expense, net of intercompanyelimination |       | (4,972                 | )          | (2,015               | )          | (6,849 | ) | (3,916 | ) |
| Profit from operations  before income taxes                   |       | $                      | 5,221      |                 | $          | 6,249 |   | $ | 4,393 |   | $ | 6,663 |   |

 

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

 
| ** **                                           | ** ** | **6/30/2009** | ** ** | **12/31/2008** | ** ** |
|------------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services  segment                         |       | $             | 212,712    |           | $          | 221,262 |   |
| Media segment                                        |       | 81,778        |       | 88,101         |       |
| Retail segment                                       |       | 129,343       |       | 110,964        |       |
| Total assets for  reportable segments                |       | 423,833       |       | 420,327        |       |
| Capitalized finance costs  not allocated to segments |       | 4,176         |       | 2,815          |       |
| Corporate unallocated  assets                        |       | 4,205         |       | 4,452          |       |
| Elimination of  intersegment receivable              |       | (132,029      | )          | (133,242       | )          |
| Total assets                                         |       | $             | 300,185    |           | $          | 294,352 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the  period for: |       |     |       |     |       |
| Interest                          |       | $        | 15,067     |     | $          | 11,700 |   |
| Income taxes                      |       | 2        |       | —   |       |
|                                   |            |          |            |          |            |  |  |

 

In January 2008,the Company assumed $0.6 million of liabilities and issued $0.4 million of debtin connection with the acquisition of nine RV and boat shows from MAC Events,LLC. In February 2008, the Company assumed $0.5 million of liabilities andissued $0.5 million of debt in connection with the acquisition of three RV andboat shows from Mid America Expositions, Inc.

 

9

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

 

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

 

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

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

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

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

 

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

 

10

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

 

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

 

Effective January 1,2009, the Company adopted FASB Statement No. 141(revised 2007), “BusinessCombinations” (“SFAS No. 141(R)”) which establishes principles andrequirements for ho an acquirer recognized and measures in its financialstatements the identifiable assets acquired, the liabilities assumed, anynoncontrolling interest in the acquiree and the goodwill acquired.  The Company will apply the provisions anddisclosure requirements of SFAS No. 141(R) for any acquisitions afterthe adoption date.

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at June 30, 2009 (in thousands, except asnoted):

 
| ** **                                       | ** ** | **Weighted********Average Useful********Life (in years)** | ** ** | **Gross** | ** ** | **Accumulated********Amortization** | ** ** | **Net** | ** ** |
|--------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|-------------------------------------|------------|---------|------------|
|                                             |       |                                                      |       |      |       |                                |       |    |       |
| Membership and customer  lists                   |       | 6                                                         |       | $         | 36,384     |                                | $          | (24,450 | )          | $ | 11,934 |   |
| Resort and golf course  participation agreements |       | 4                                                         |       | 13,365    |       | (13,360                             | )          | 5       |       |
| Non-compete and deferred  consulting agreements  |       | 15                                                        |       | 18,830    |       | (15,713                             | )          | 3,117   |       |
| Deferred financing costs                         |       | 5                                                         |       | 8,132     |       | (3,956                              | )          | 4,176   |       |
|                                             |       |                                                      |       | $         | 76,711     |                                | $          | (57,479 | )          | $ | 19,232 |   |

 

**(6) SENIOR CREDIT FACILITY**

 

OnJune 24, 2003, AGI entered into an Amended and Restated Credit Agreementand a Senior Secured Floating Rate Note Purchase Agreement which was mostrecently amended on June 5, 2009 (as amended, the “Senior Credit Facility”).  The Senior Credit Facility provides for arevolving credit facility of $25.0 million and term loans.  As of June 30, 2009, $3.0 million wasoutstanding under the revolving credit facility and $119.1 million wasoutstanding under the term loans. Reborrowings under the term loans are not permitted.  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 7.00% to 8.00%, respectively, over the stated rates and a LIBOR floor of2.75%.  After consideration of fixedrates under the interest rate swap agreements, (discussed in Note 9 of theNotes to Consolidated Financial Statements), as of June 30, 2009, theaverage

 

11

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

 

interestrates on the term loans and the revolving credit facility were 14.5% and 13.1%,respectively, and permitted borrowings under the revolving facility were $17.5million.  The Company also pays acommitment fee of 1.0% per annum on the unused amount of the revolving creditfacility.  The aggregate quarterlyscheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and theterm loans under the Senior Credit Facility mature on March 31, 2010.  The funds available under the Senior CreditFacility may be utilized for borrowings or letters of credit, except a maximumof $7.5 million may be allocated to such letters of credit.  As of June 30, 2009, AGI had letters ofcredit in the aggregate amount of $7.5 million outstanding.  The Senior Credit Facility is secured byvirtually all of AGI’s assets and a pledge of AGI’s stock and the stock of AGI’ssubsidiaries.

 

In connection with the June 5, 2009 amendment to its Senior CreditFacility, the outstanding term loan borrowings were repaid by $8.0 million, thefinancial covenants in effect through the extended maturity date were revised,and the Company capitalized $2.5 million in fees paid to the lenders andexpensed as incurred $1.5 million in legal and other fees related to theamendment.  As a condition to theamendment, the shareholder of the ultimate parent of the Company was requiredto arrange for the purchase of approximately $26.6 million in principal amountof the 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 shareholder or hisassigns an option, exercisable on or before March 1, 2010, to purchase theCompany’s Camping World subsidiary for $55.0 million which was believed to bethe then fair value of Camping World. Management was assisted in determining the fair value of such subsidiaryby an independent third party valuation firm. The Company also agreed to pay the shareholder of the ultimate parent,upon successful refinancing of the Company’s secured debt, including the SeniorCredit Facility, a success fee equal in amount to the fair value, as determinedby an independent financial advisor of such credit support, taking into accountthe fair 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 the June 5, 2009 amendment to the Senior CreditFacility, the Company obtained a $9.7 million Second Lien Loan, the net proceedsof which were used to purchase $14.6 million in principal amount of SeniorSubordinated Notes.  The Second Lien Loancarries an interest rate of 9.0% and matures on July 31, 2010.  The Second Lien Loan is secured bysubstantially all of the assets and a pledge of the stock of AGI and is secondin priority only to the Senior Credit Facility.

 

12

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

 

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.  As of June 30, 2009, the Company is incompliance with all covenants under the Senior Credit Facility.  Significant cost reductions have beenimplemented in 2008 and 2009, including the elimination of personnel,suspension of 401(k) employer contributions, salary cutbacks, hiring andcapital expenditure spending freezes, satellite office closures, and magazinesize and frequency reductions.

 

**(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIALINFORMATION**

 

InFebruary 2004, the Company issued $200.0 million of 9% Senior SubordinatedNotes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  The Company purchased andretired $29.9 million of the Senior Subordinated Notes in 2006, $17.7 millionin March 2007, and $14.6 million in June 2009.  Interest is payable on the remaining $137.8million Senior Subordinated Notes twice a year on February 15 and August 15.  The Company’s present and future restrictedsubsidiaries guarantee the Senior Subordinated Notes with unconditionalguarantees of payment that rank junior in right of payment to their existingand future senior debt, but rank equal in right of payment to their existingand future senior subordinated debt.  Allof the Company’s subsidiaries have jointly and severally guaranteed theindebtedness under the Senior Subordinated Notes except for CWFR CapitalCorp.  Full financial statements of theGuarantors have not been included because, pursuant to their respectiveguarantees, the Guarantors are jointly and severally liable with respect to theSenior Subordinated Notes.

 

13

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**(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIALINFORMATION (continued)**

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the six monthsended June 30, 2009 (in thousands).

 
| ** **                                               | ** ** | **AGI**  | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| Cash & cash  equivalents                        |       | $        | 6,616      |           | $          | 4,075               |       | $                | —     |                  | $          | — |   | $ | 10,691 |   |
| Accounts receivable- net  of allowance                   |       | 2,378    |       | 172,676        |       |                |       | (132,029         | )          | 43,025                |       |
| Inventories                                              |       | —   |       | 64,534         |       | —              |       | —           |       | 64,534                |       |
| Other current assets                                     |       | 1,761    |       | 12,479         |       | —              |       | —           |       | 14,240                |       |
| Total current assets                                     |       | 10,755   |       | 253,764        |       | —              |       | (132,029         | )          | 132,490               |       |
|                                                     |       |     |       |           |       |                |       |             |       |                  |       |
| Property and equipment,  net                             |       | 3,977    |       | 35,790         |       | —              |       | —           |       | 39,767                |       |
| Intangible assets                                        |       | 4,175    |       | 15,057         |       | —              |       | —           |       | 19,232                |       |
| Goodwill                                                 |       | 67,584   |       | 29,244         |       | —              |       | —           |       | 96,828                |       |
| Investment in subsidiaries                               |       | 669,097  |       | —         |       | —              |       | (669,097         | )          | —                |       |
| Affiliate note and  investments                          |       | 40,000   |       | 4,723          |       | —              |       | (40,000          | )          | 4,723                 |       |
| Other assets                                             |       | 558      |       | 6,587          |       | —              |       | —           |       | 7,145                 |       |
| Total assets                                             |       | $        | 796,146    |           | $          | 345,165             |       | $                | —     |                  | $          | (841,126 | ) | $ | 300,185 |   |
|                                                     |       |     |       |           |       |                |       |             |       |                  |       |
| Accounts payable                                         |       | $        | 452        |           | $          | 42,711              |       | $                | —     |                  | $          | — |   | $ | 43,163 |   |
| Accrued and other  liabilities                           |       | 10,254   |       | 23,502         |       | —              |       | —           |       | 33,756                |       |
| Current portion of  long-term debt                       |       | 254,156  |       | 41,315         |       | —              |       | (172,029         | )          | 123,442               |       |
| Current portion of  deferred revenue                     |       | 567      |       | 60,823         |       | —              |       | —           |       | 61,390                |       |
| Total current liabilities                                |       | 265,429  |       | 168,351        |       |                |       | (172,029         | )          | 261,751               |       |
|                                                     |       |     |       |           |       |                |       |             |       |                  |       |
| Deferred revenue                                         |       | 2,353    |       | 33,513         |       | —              |       | —           |       | 35,866                |       |
| Long-term debt                                           |       | 147,541  |       | 243            |       | —              |       | —           |       | 147,784               |       |
| Other long-term  liabilities                             |       | 555,009  |       | (526,039       | )          | —              |       | —           |       | 28,970                |       |
| Total liabilities                                        |       | 970,332  |       | (323,932       | )          |                |       | (172,029         | )          | 474,371               |       |
|                                                     |       |     |       |           |       |                |       |             |       |                  |       |
| Interdivisional equity                                   |       | —   |       | 669,097        |       | —              |       | (669,097         | )          | —                |       |
| Stockholders’ deficit                               |       | (174,186 | )          | —         |       | —              |       | —           |       | (174,186              | )          |
| Total  liabilities & stockholders’ deficit |       | $        | 796,146    |           | $          | 345,165             |       | $                | —     |                  | $          | (841,126 | ) | $ | 300,185 |   |
|                                                     |       |     |       |           |       |                |       |             |       |                  |       |
| Revenue                                                  |       | $        | 3,600      |           | $          | 231,352             |       | $                | —     |                  | $          | — |   | $ | 234,952 |   |
| Costs applicable to  revenues                            |       | (5,891   | )          | (140,840       | )          | —              |       | —           |       | (146,731              | )          |
| Operating expenses                                       |       | (10,461  | )          | (64,538        | )          | —              |       | —           |       | (74,999               | )          |
| Interest expense, net                                    |       | (8,302   | )          | (5,071         | )          | —              |       | —           |       | (13,373               | )          |
| Income from investment in  consolidated subsidiaries     |       | 17,768   |       | —         |       | —              |       | (17,768          | )          | —                |       |
| Other non operating income  (expenses)                   |       | 7,266    |       | (2,722         | )          | —              |       | —           |       | 4,544                 |       |
| Income tax expense                                       |       | (287     | )          | (413           | )          | —              |       | —           |       | (700                  | )          |
| Net income                                               |       | $        | 3,693      |           | $          | 17,768              |       | $                | —     |                  | $          | (17,768 | ) | $ | 3,693 |   |
|                                                     |       |     |       |           |       |                |       |             |       |                  |       |
| Cash flows from operations                               |       | $        | (18,076    | )              | $          | 33,597              |       | $                | —     |                  | $          | — |   | $ | 15,521 |   |
| Cash flows provided by  (used in) investing activities   |       | 1,760    |       | (4,255         | )          | —              |       | —           |       | (2,495                | )          |
| Cash flows provided by  (used in) financing activities   |       | 21,632   |       | (34,575        | )          | —              |       | —           |       | (12,943               | )          |
| Cash at beginning of year                                |       | 1,300    |       | 9,308          |       | —              |       | —           |       | 10,608                |       |
| Cash at end of year                                      |       | $        | 6,616      |           | $          | 4,075               |       | $                | —     |                  | $          | — |   | $ | 10,691 |   |

 

14

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**(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIALINFORMATION (continued)**

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries as of and for the threemonths ended June 30, 2009 (in thousands).

 
| ** **                                           | ** ** | **AGI** | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|------------------------------------------------------|------------|---------|------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| Revenue                                              |       | $       | 1,783      |           | $          | 128,116             |       | $                | —     |                  | $          | — |   | $ | 129,899 |   |
| Costs applicable to  revenues                        |       | (3,621  | )          | (77,760        | )          | —              |       | —           |       | (81,381               | )          |
| Operating expenses                                   |       | (6,393  | )          | (33,851        | )          | —              |       | —           |       | (40,244               | )          |
| Interest expense, net                                |       | (5,689  | )          | (1,991         | )          | —              |       | —           |       | (7,680                | )          |
| Income from investment in  consolidated subsidiaries |       | 12,948  |       | —         |       | —              |       | (12,948          | )          | —                |       |
| Other non operating income  (expenses)               |       | 5,985   |       | (1,358         | )          | —              |       | —           |       | 4,627                 |       |
| Income tax expense                                   |       | (96     | )          | (208           | )          |                |       |             |       | (304                  | )          |
| Net income                                           |       | $       | 4,917      |           | $          | 12,948              |       | $                | —     |                  | $          | (12,948 | ) | $ | 4,917 |   |

 

The following are summarized balance sheet statements setting forthcertain financial information concerning the Guarantor Subsidiaries as of December 31,2008 (in thousands).

 
| ** **                                               | ** ** | **AGI**  | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| Cash & cash  equivalents                        |       | $        | 1,300      |           | $          | 9,308               |       | $                | —     |                  | $          | — |   | $ | 10,608 |   |
| Accounts receivable- net  of allowance                   |       | 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 |   |

 

15

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**(7) NOTES OFFERING, GUARANTOR AND NON-GUARANTOR FINANCIALINFORMATION (continued)**

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the six months ended June 30,2008 (in thousands).

 
| ** **                                             | ** ** | **AGI** | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|--------------------------------------------------------|------------|---------|------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
| Revenue                                                |       | $       | 3,558      |           | $          | 269,156             |       | $                | —     |                  | $          | — |   | $ | 272,714 |   |
| Costs applicable to  revenues                          |       | (7,301  | )          | (160,157       | )          | —              |       | —           |       | (167,458              | )          |
| Operating expenses                                     |       | (9,064  | )          | (77,678        | )          | —              |       | —           |       | (86,742               | )          |
| Interest expense, net                                  |       | (5,475  | )          | (6,353         | )          | —              |       | —           |       | (11,828               | )          |
| Income from investment in  consolidated subsidiaries   |       | 21,495  |       | —         |       | —              |       | (21,495          | )          | —                |       |
| Other non operating income  (expenses)                 |       | 3,041   |       | (3,064         | )          | —              |       | —           |       | (23                   | )          |
| Income tax expense                                     |       | (162    | )          | (409           | )          | —              |       | —           |       | (571                  | )          |
| Net income (loss)                                      |       | $       | 6,092      |           | $          | 21,495              |       | $                | —     |                  | $          | (21,495 | ) | $ | 6,092 |   |
|                                                   |       |    |       |           |       |                |       |             |       |                  |       |
| Cash flows from operations                             |       | $       | (16,078    | )              | $          | 21,861              |       | $                | —     |                  | $          | — |   | $ | 5,783 |   |
| Cash flows used in  investing activities               |       | (579    | )          | (10,364        | )          | —              |       | —           |       | (10,943               | )          |
| Cash flows (used in)  provided by financing activities |       | 15,575  |       | (11,112        | )          | —              |       | —           |       | 4,463                 |       |
| Cash at beginning of year                              |       | 5,337   |       | 3,020          |       | —              |       | —           |       | 8,357                 |       |
| Cash at end of period                                  |       | $       | 4,255      |           | $          | 3,405               |       | $                | —     |                  | $          | — |   | $ | 7,660 |   |

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended June 30,2008 (in thousands).

 
| ** **                                           | ** ** | **AGI** | ** ** | **GUARANTORS** | ** ** | **NON-  GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **AGI  CONSOLIDATED** | ** ** |
|------------------------------------------------------|------------|---------|------------|----------------|------------|---------------------|------------|------------------|------------|-----------------------|------------|
|                                                 |       |    |       |           |       |                |       |             |       |                  |       |
| Revenue                                              |       | $       | 2,611      |           | $          | 145,118             |       | $                | —     |                  | $          | — |   | 147,729 |   |
| Costs applicable to  revenues                        |       | (4,275  | )          | (85,962        | )          | —              |       | —           |       | (90,237               | )          |
| Operating expenses                                   |       | (4,680  | )          | (40,627        | )          | —              |       | —           |       | (45,307               | )          |
| Interest expense, net                                |       | (2,789  | )          | (3,122         | )          | —              |       | —           |       | (5,911                | )          |
| Income from investment in  consolidated subsidiaries |       | 13,715  |       | —         |       | —              |       | (13,715          | )          | —                |       |
| Other non operating income  (expenses)               |       | 1,462   |       | (1,487         | )          | —              |       | —           |       | (25                   | )          |
| Income tax expense                                   |       | (67     | )          | (205           | )          | —              |       | —           |       | (272                  | )          |
| Net income                                           |       | $       | 5,977      |           | $          | 13,715              |       | $                | —     |                  | $          | (13,715 | ) | $ | 5,977 |   |
|                                                      |            |         |            |                |            |                     |            |                  |            |                       |            |  |  |  |  |  |

 

**(8) 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 of the Notes to Consolidated FinancialStatements, “Fair Value Measurements”). The accounting for

 

16

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

 

changes in thefair value of a derivative instrument depends on whether it has been designatedand qualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under SFAS No. 133 “Accounting for DerivativeInstruments and Hedging Activities” (“SFAS 133”), we formally assess, both atinception and periodically thereafter, whether the hedging derivatives arehighly effective in offsetting changes in either the fair value or cash flowsof the hedged item.  Our derivatives thatare not designated and do not qualify as hedges under SFAS 133 are adjusted tofair value through current earnings.

 

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

 

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

 

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 receive periodic payments at the 3 month LIBOR-basedvariable rate (1.039% at June 30, 2009 based upon the April 30, 2009reset date) and make periodic payments at a fixed rate of 3.43%, withsettlement 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.

 

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

 

Due to thepotential sale of Camping World, in the fourth quarter of 2008 a highlyeffective hedge on the $35.0 million outstanding debt by the $35.0 million notional

 

17

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

 

amount interestrate swap agreement was deemed to be no longer probable and is now deemed to bereasonably possible.  As a result,changes in the value of the $35.0 million interest rate swap agreement areincluded in earnings beginning on October 1, 2008.  Included in other comprehensive loss is $0.4million related to the $35.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument.

 

Due to the issuance of an option to the shareholder of the ultimateparent of the Company to purchase Camping World, in the second quarter of 2009a portion of the highly effective hedge on the $100.0 million outstanding debtby the $100.0 million notional amount interest rate swap agreement was deemedto be no longer probable and is now deemed to be reasonably possible.  As a result, changes in the value of the last$20.0 million of the $100.0 million interest rate swap agreement are includedin earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last$20.0 million of the $100.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument.

 

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

 

Fair Values of Derivative Instruments (in thousands):

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

 

18

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

 

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

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

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

 

**(9) FAIR VALUE MEASUREMENTS**

 

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

 

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

 

19

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

 

resulted in additional interim disclosuresand did not have a material impact on our condensed consolidated results ofoperations, financial position or cash flows. SFAS 157 establishes a three-tierfair value hierarchy, which prioritizes the inputs used in measuring fairvalue.  These tiers include: Level 1,defined as observable inputs such as quoted prices in active markets; Level 2,defined as inputs other than quoted prices in active markets that are eitherdirectly or indirectly observable; and Level 3, defined as unobservable inputsin which little or no market data exists, therefore requiring an entity todevelop its own assumptions.

 

As of June 30, 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 8 of the Notes to Consolidated Financial Statements for furtherinformation on the interest rate swap contracts.  The fair value of these interest rate swapcontracts are determined based on inputs that are readily available in publicmarkets or can be derived from information available in publicly quotedmarkets.  Therefore, the Company hascategorized these swap contracts as Level 2.

 

The Company recorded an impairment charge of $81.0 million in the thirdquarter of 2008 that wrote down to zero the carrying value of the preferredinterest (the “FreedomRoads Preferred Interest”) held by an indirect subsidiaryof Camping World in FreedomRoads Holding Company, LLC (“FreedomRoads”), aholding company whose subsidiaries sell and service new and used recreationalvehicles.  FreedomRoads is an affiliateunder common ownership with the Company’s ultimate parent.  Management was assisted in determining thefair value of the preferred interest in FreedomRoads Holding Company LLC by anindependent third party valuation firm. Inanticipation of the potential sale of Camping World, the 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.  Therefore, the Company has categorized theFreedomRoads Preferred Interest as Level 3. The impairment charge relating to the FreedomRoads Preferred Interestwas not allocated to any particular operating segment.

 

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

 
| ** **                      | ** ** | ** **    | ** ** | **Fair Value Measurements at Reporting Date Using**            | ** ** |
|---------------------------------|------------|---------------|------------|----------------------------------------------------------------|------------|
| **(in thouands)**               | ** ** | ** **    | ** ** | **Quoted Prices in   Active Markets   for Identical   Assets** | ** ** | **Significant   Other   Observable   Inputs** | ** ** | **Significant   Unobservable   Inputs** | ** ** |
| **Description**                 | ** ** | **6/30/2009** | ** ** | **(Level 1)**                                                  | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                            |       |          |       |                                                           |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | $             | (7,850     | )                                                              | $          | — |   | $ | (7,850 | ) | $ | — |   |
| FreedomRoads Preferred Interest |       | —        |       | —                                                         |       | — |   | — |   |
|                                 |            |               |            |                                                                |            |  |  |  |  |  |  |  |  |

 

20

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

 

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

 

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

 

The following table presents the reported carrying value and fair valueinformation for the Company’s Senior Subordinated Notes, and Senior CreditFacility.  The fair values shown for theSenior Subordinated Notes shown below are based on quoted prices in activemarkets for identical assets (Level 1) (in thousands):

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

 

**(10) ****RECENT EVENTS**

 

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

 

The financial statements for Camping Worldare different from the segment reporting in Note 3 because the Camping WorldPresident’s Club and other related ancillary products are included as part ofthe membership services segment in the segment reporting.

 

The following unaudited pro forma condensedconsolidated balance sheet as of June 30, 2009 and December 31, 2008and the statement of operations for the six months ended June 30, 2009 and2008 reflect the reclassification adjustments associated with the proposeddisposal/sale of Camping World to the shareholder of the ultimate parent of theCompany.  The pro forma adjustmentsrelate to the disposal are presented since the disposition did not meet thediscontinued operations reporting requirements pursuant to SFAS Statement No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144) asof June 30, 2009, but are expected to meet such requirements if thetransaction is completed.  Since thetransaction is a sale to an entity under common

 

21

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**(10) ****RECENTEVENTS (continued)**

 

ownership with AGI such long-lived assets areconsidered disposed of when they are exchanged or distributed in accordancewith SFAS 144.  The pro forma adjustmentsreflect the reclassification of assets and liabilities associated with CampingWorld to current assets and liabilities to be disposed of in accordance withSFAS 144 as if the reporting requirements had been met at June 30,2009.  In addition, the historicaloperating results have also been reclassified to reflect discontinuedoperations.

 

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

 

Interest Expense - The interest expenseincluded in discontinued operations below reflects the interest allocated toCamping World based upon debt required to be repaid upon consummation of thistransaction.

 

22

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**(10) ****RECENTEVENTS (continued)**

 

The unaudited pro forma balance sheet of AGIreclassifying Camping World as of June 30, 2009 to assets and liabilitiesof discontinued operations is as follows (in thousands except shares and parvalue):

 
| ** **                                                                                  | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **    | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|---------------|------------|
| ** **                                                                                  | ** ** | **Historical** | ** ** | **Camping World**            | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                  |       |           |       |                         |       |          |       |
| CURRENT ASSETS:                                                                             |       |           |       |                         |       |          |       |
| Cash and cash equivalents                                                                   |       | $              | 10,691     |                         | $          | (4,290        | )          | $ | 6,401 |   |
| Accounts receivable, net                                                                    |       | 43,025         |       | (18,987                      | )          | 24,038        |       |
| Inventories                                                                                 |       | 64,534         |       | (63,830                      | )          | 704           |       |
| Prepaid expenses and other  assets                                                          |       | 14,240         |       | (1,965                       | )          | 12,275        |       |
| Assets of discontinued  operations                                                          |       | —         |       | 129,343                      |       | 129,343       |       |
| Total current assets                                                                        |       | 132,490        |       | 40,271                       |       | 172,761       |       |
|                                                                                        |       |           |       |                         |       |          |       |
| PROPERTY AND EQUIPMENT,  net                                                                |       | 39,767         |       | (31,535                      | )          | 8,232         |       |
| NOTE FROM AFFILIATE                                                                         |       | 4,723          |       | —                       |       | 4,723         |       |
| INTANGIBLE ASSETS, net                                                                      |       | 19,232         |       | (2,869                       | )          | 16,363        |       |
| GOODWILL                                                                                    |       | 96,828         |       | —                       |       | 96,828        |       |
| DEFERRED TAX ASSET                                                                          |       | 4,569          |       | (4,569                       | )          | —        |       |
| OTHER ASSETS                                                                                |       | 2,576          |       | (1,298                       | )          | 1,278         |       |
| Total assets                                                                                |       | $              | 300,185    |                         | $          | —        |       | $ | 300,185 |   |
|                                                                                        |       |           |       |                         |       |          |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                             |       |           |       |                         |       |          |       |
| CURRENT LIABILITIES:                                                                        |       |           |       |                         |       |          |       |
| Accounts payable                                                                            |       | $              | 43,163     |                         | $          | (41,501       | )          | $ | 1,662 |   |
| Accrued interest                                                                            |       | 5,516          |       | —                       |       | 5,516         |       |
| Accrued income taxes                                                                        |       | 1,236          |       | 458                          |       | 1,694         |       |
| Accrued liabilities                                                                         |       | 27,004         |       | (14,104                      | )          | 12,900        |       |
| Deferred revenues and  gains                                                                |       | 61,390         |       | (7,594                       | )          | 53,796        |       |
| Current portion of  long-term debt                                                          |       | 123,442        |       | —                       |       | 123,442       |       |
| Liabilities of  discontinued operations                                                     |       | —         |       | 85,572                       |       | 85,572        |       |
| Total current liabilities                                                                   |       | 261,751        |       | 22,831                       |       | 284,582       |       |
|                                                                                        |       |           |       |                         |       |          |       |
| DEFERRED REVENUES AND  GAINS                                                                |       | 35,866         |       | (8,428                       | )          | 27,438        |       |
| LONG-TERM DEBT, net of  current portion                                                     |       | 147,784        |       | —                       |       | 147,784       |       |
| OTHER LONG-TERM  LIABILITIES                                                                |       | 28,970         |       | (14,403                      | )          | 14,567        |       |
|                                                                                        |       | 474,371        |       | —                       |       | 474,371       |       |
|                                                                                        |       |           |       |                         |       |          |       |
| COMMITMENTS AND  CONTINGENCIES                                                              |       |           |       |                         |       |          |       |
|                                                                                        |       |           |       |                         |       |          |       |
| STOCKHOLDER’S DEFICIT :                                                                |       |           |       |                         |       |          |       |
| Common stock, $.001 par  value, 2,000shares  authorized, 2,000 sharesissued and outstanding |       | 1              |       | —                       |       | 1             |       |
| Additional paid-in capital                                                                  |       | 89,505         |       | —                       |       | 89,505        |       |
| Accumulated deficit                                                                         |       | (256,990       | )          | —                       |       | (256,990      | )          |
| Accumulated other  comprehensive income                                                     |       | (6,702         | )          | —                       |       | (6,702        | )          |
| Total stockholder’s  deficit                                                           |       | (174,186       | )          | —                       |       | (174,186      | )          |
| Total liabilities and  stockholder’s deficit                                           |       | $              | 300,185    |                         | $          | —        |       | $ | 300,185 |   |

 

23

----

 

**(10) ****RECENT EVENTS (continued)**

 

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

 
| ** **                                                                                  | ** ** | **Historical** | ** ** | **Reclassification of  Camping World** | ** ** | **Pro Forma** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------|------------|----------------------------------------|------------|---------------|------------|
| **ASSETS**                                                                                  |       |           |       |                                   |       |          |       |
| CURRENT ASSETS:                                                                             |       |           |       |                                   |       |          |       |
| Cash and cash equivalents                                                                   |       | $              | 10,608     |                                   | $          | (842          | )          | $ | 9,766 |   |
| Accounts receivable, less  allowance fordoubtbul  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       |       |
| 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, 2,000shares  authorized, 2,000 sharesissued 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 |   |

 

24

----

 

**(10) ****RECENTEVENTS (continued)**

 

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

 
| ** **                                                                         | ** ** | **2009**       | ** ** | **Reclassification of** | ** ** | **2009**      | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                         | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                               |       |           |       |                    |       |          |       |
| REVENUES:                                                                          |       |           |       |                    |       |          |       |
| Membership services                                                                |       | $              | 74,429     |                    | $          | (8,897        | )          | $ | 65,532 |   |
| Media                                                                              |       | 26,783         |       | —                  |       | 26,783        |       |
| Retail                                                                             |       | 133,740        |       | (133,740                | )          | —        |       |
|                                                                               |       | 234,952        |       | (142,637                | )          | 92,315        |       |
|                                                                               |       |           |       |                    |       |          |       |
| COSTS APPLICABLE TO  REVENUES:                                                     |       |           |       |                    |       |          |       |
| Membership services                                                                |       | 44,945         |       | (1,707                  | )          | 43,238        |       |
| Media                                                                              |       | 20,880         |       | —                  |       | 20,880        |       |
| Retail                                                                             |       | 80,906         |       | (80,906                 | )          | —        |       |
|                                                                               |       | 146,731        |       | (82,613                 | )          | 64,118        |       |
|                                                                               |       |           |       |                    |       |          |       |
| GROSS PROFIT                                                                       |       | 88,221         |       | (60,024                 | )          | 28,197        |       |
|                                                                               |       |           |       |                    |       |          |       |
| OPERATING EXPENSES:                                                                |       |           |       |                    |       |          |       |
| Selling, general and  administrative                                               |       | 63,051         |       | (54,295                 | )          | 8,756         |       |
| Financing expenses                                                                 |       | 1,540          |       | —                  |       | 1,540         |       |
| Depreciation and  amortization                                                     |       | 10,408         |       | (4,826                  | )          | 5,582         |       |
|                                                                               |       | 74,999         |       | (59,121                 | )          | 15,878        |       |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM OPERATIONS                                                             |       | 13,222         |       | (903                    | )          | 12,319        |       |
|                                                                               |       |           |       |                    |       |          |       |
| NON-OPERATING ITEMS:                                                               |       |           |       |                    |       |          |       |
| Interest income                                                                    |       | 264            |       | (4                      | )          | 260           |       |
| Interest expense                                                                   |       | (13,637        | )          | 1,933                   |       | (11,704       | )          |
| Debt restructuring expense                                                         |       | 4,678          |       | —                  |       | 4,678         |       |
| Gain on derivative  instrument                                                     |       | 685            |       | —                  |       | 685           |       |
| Other non-operating items                                                          |       | (819           | )          | 165                     |       | (654          | )          |
|                                                                               |       | (8,829         | )          | 2,094                   |       | (6,735        | )          |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |       | 4,393          |       | 1,191                   |       | 5,584         |       |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME TAX EXPENSE                                                                 |       | (700           | )          | 413                     |       | (287          | )          |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM CONTINUING  OPERATIONS                                                 |       | 3,693          |       | 1,604                   |       | 5,297         |       |
|                                                                               |       |           |       |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                            |       |           |       |                    |       |          |       |
| Loss from operations of  discontinued Camping World, Inc.                     |       | —         |       | (1,191                  | )          | (1,191        | )          |
| Income tax expense                                                                 |       | —         |       | (413                    | )          | (413          | )          |
| Loss on discontinued operations                                                    |       | —         |       | (1,604                  | )          | (1,604        | )          |
|                                                                               |       |           |       |                    |       |          |       |
| NET INCOME                                                                         |       | $              | 3,693      |                    | $          | —        |       | $ | 3,693 |   |

 

25

----

 

**(10) ****RECENT EVENTS (continued)**

 

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

 
| ** **                                                                         | ** ** | **2008**       | ** ** | **Reclassification of** | ** ** | **2008**      | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|-------------------------|------------|---------------|------------|
| ** **                                                                         | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                               |       |           |       |                    |       |          |       |
| REVENUES:                                                                          |       |           |       |                    |       |          |       |
| Membership services                                                                |       | $              | 78,108     |                    | $          | (9,884        | )          | $ | 68,224 |   |
| Media                                                                              |       | 41,680         |       | —                  |       | 41,680        |       |
| Retail                                                                             |       | 152,926        |       | (152,926                | )          | —        |       |
|                                                                               |       | 272,714        |       | (162,810                | )          | 109,904       |       |
|                                                                               |       |           |       |                    |       |          |       |
| COSTS APPLICABLE TO  REVENUES:                                                     |       |           |       |                    |       |          |       |
| Membership services                                                                |       | 49,659         |       | (2,601                  | )          | 47,058        |       |
| Media                                                                              |       | 28,604         |       | —                  |       | 28,604        |       |
| Retail                                                                             |       | 89,195         |       | (89,195                 | )          | —        |       |
|                                                                               |       | 167,458        |       | (91,796                 | )          | 75,662        |       |
|                                                                               |       |           |       |                    |       |          |       |
| GROSS PROFIT                                                                       |       | 105,256        |       | (71,014                 | )          | 34,242        |       |
|                                                                               |       |           |       |                    |       |          |       |
| OPERATING EXPENSES:                                                                |       |           |       |                    |       |          |       |
| Selling, general and  administrative                                               |       | 76,701         |       | (66,111                 | )          | 10,590        |       |
| Depreciation and  amortization                                                     |       | 10,041         |       | (4,422                  | )          | 5,619         |       |
|                                                                               |       | 86,742         |       | (70,533                 | )          | 16,209        |       |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM OPERATIONS                                                             |       | 18,514         |       | (481                    | )          | 18,033        |       |
|                                                                               |       |           |       |                    |       |          |       |
| NON-OPERATING ITEMS:                                                               |       |           |       |                    |       |          |       |
| Interest income                                                                    |       | 282            |       | (20                     | )          | 262           |       |
| Interest expense                                                                   |       | (12,110        | )          | 1,499                   |       | (10,611       | )          |
| Other non-operating items                                                          |       | (23            | )          | 86                      |       | 63            |       |
|                                                                               |       | (11,851        | )          | 1,565                   |       | (10,286       | )          |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM CONTINUING  OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |       | 6,663          |       | 1,084                   |       | 7,747         |       |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME TAX EXPENSE                                                                 |       | (571           | )          | 409                     |       | (162          | )          |
|                                                                               |       |           |       |                    |       |          |       |
| INCOME FROM CONTINUING  OPERATIONS                                                 |       | 6,092          |       | 1,493                   |       | 7,585         |       |
|                                                                               |       |           |       |                    |       |          |       |
| DISCONTINUED OPERATIONS                                                            |       |           |       |                    |       |          |       |
| Loss from operations of  discontinued Camping World, Inc.                     |       | —         |       | (1,084                  | )          | (1,084        | )          |
| Income tax expense                                                                 |       | —         |       | (409                    | )          | (409          | )          |
| Loss on discontinued  operations                                                   |       | —         |       | (1,493                  | )          | (1,493        | )          |
|                                                                               |       |           |       |                    |       |          |       |
| NET INCOME                                                                         |       | $              | 6,092      |                    | $          | —        |       | $ | 6,092 |   |

 

**(11)SUBSEQUENT EVENTS**

 

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

 

The Company andits parent, AGHI, have engaged a financial advisor to seek equity capital whichwould permit a possible refinancing or restructuring of the Senior CreditFacility ($119.1 million principal amount of the term loans and $3.0 millionprincipal amount under the revolving credit line under the Senior CreditFacility on June 30, 2009), AGI’s Second Lien Loan indebtedness ($9.7million principal

 

26

----

 

**(11)SUBSEQUENT EVENTS (continued)**

 

outstanding on June 30,2009), the AGI Senior Subordinated Notes due 2012 ($137.8 million principaloutstanding on June 30, 2009) and the AGHI Notes due 2012 ($112.0 millionprincipal outstanding on June 30, 2009). The Company has received preliminary written proposals from a number ofpotential equity investors, some of whom have performed business duediligence.  AGI and AGHI are activelypursuing four of such proposals.  Theyinvolve new cash equity investments of between $50.0 million and $90.0 million.  All proposals contemplate, as a condition tothe equity investment, that the Company’s Camping World subsidiary would besold to an affiliate and that a significant part of the proceeds of the equityinvestment would be used to make an offer to holders of the AGI SeniorSubordinated Notes due 2012 and/or the AGHI Notes due 2012 to exchange theircurrent security for a combination of cash and new bonds with an extendedmaturity date and a lower face amount. In view thereof, AGHI intends to defer the interest payment ($6.2million) due on August 15, 2009 on the AGHI Notes.

 

Under the terms ofthe AGHI Notes, the Company is afforded a 30-day grace period from the interestpayment date before non-payment constitutes an event of default under suchnotes.  During such 30-day grace period,AGHI intends to discuss with bondholders possible alternative capitalstructures after a presumed cash equity investment, including possiblediscounts for early payment and possible exchanges of existing securities fornew securities with an extended maturity date or other terms acceptable to AGHIand its bondholders.

 

As a result ofrestrictions in the Senior Credit Facility, AGI is blocked from makingdistributions to AGHI for the purpose of paying interest on the AGHINotes.  For the two most recent interestpayments, AGHI has made the interest payments using the proceeds of a capitalcontribution from AGHI’s parent.  Therecan be no assurance that AGHI’s parent will fund the interest payment on theAGHI Notes by the end of the 30-day grace period.

 

There can be noassurance that the Company and AGHI will be able to implement a new capitalstructure to repay or refinance the Senior Credit Facility, AGI’s Second LienLoan indebtedness, the AGI Senior Subordinated Notes or the AGHI Notes beforethe final maturity of the Senior Credit Facility in March 2010, thematurity of AGI’s Second Lien Loan indebtedness in July 2010, the maturityof the AGI Senior Subordinated Notes in February 2012, or the maturity ofthe AGHI Notes, $25.4 million of which mature in March 2010 and thebalance in February 2012.   If theCompany or AGHI is not able to refinance or replace any such debt before itsscheduled maturity, the holders of such debt will be entitled to exercise theirrespective remedies including, in the case of

 

27

----

 

**(11)SUBSEQUENT EVENTS (continued)**

 

secured debt, to sellthe collateral securing the repayment thereof. In as much as the indebtedness owned under the Senior Credit Facilityand AGI’s Second Lien Loan indebtedness is secured, it would be repaid beforefunds are available to discharge any unsecured or subordinated obligations.

 

28

----

 

**ITEM 2:**

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION ANDRESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2009**          | ** ** | **6/30/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| REVENUES:                            |       |                   |       |   |   |   |   |
| Membership services                  |       | 30.2                   | %          | 28.8 | % | (7.9 | )% |
| Media                                |       | 7.2                    | %          | 10.4 | % | (39.3 | )% |
| Retail                               |       | 62.6                   | %          | 60.8 | % | (9.4 | )% |
|                                 |       | 100.0                  | %          | 100.0 | % | (12.1 | )% |
|                                 |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                   |       |   |   |   |   |
| Membership services                  |       | 18.9                   | %          | 18.0 | % | (7.2 | )% |
| Media                                |       | 5.7                    | %          | 7.7 | % | (35.0 | )% |
| Retail                               |       | 38.0                   | %          | 35.4 | % | (5.7 | )% |
|                                 |       | 62.6                   | %          | 61.1 | % | (9.8 | )% |
|                                 |       |                   |       |   |   |   |   |
| GROSS PROFIT                         |       | 37.4                   | %          | 38.9 | % | (15.6 | )% |
|                                 |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |   |   |
| Selling, general and  administrative |       | 25.5                   | %          | 27.3 | % | (17.8 | )% |
| Financing expense                    |       | 1.2                    | %          | — |   | 100.0 | % |
| Depreciation and  amortization       |       | 4.3                    | %          | 3.4 | % | 10.6 | % |
|                                 |       | 31.0                   | %          | 30.7 | % | (11.2 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 6.4                    | %          | 8.2 | % | (31.9 | )% |
|                                 |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |   |   |
| Interest income                      |       | 0.1                    | %          | 0.1 | % | (3.6 | )% |
| Interest expense                     |       | (6.0                   | )%         | (4.1 | )% | 29.2 | % |
| Gain on derivative  instrument       |       | 0.5                    | %          | — |   | 100.0 | % |
| Gain on debt restructure             |       | 3.6                    | %          | — |   | 100.0 | % |
| Other non-operating items,  net      |       | (0.6                   | )%         | — |   | 2488.0 | % |
|                                 |       | (2.4                   | )%         | (4.0 | )% | (48.2 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES           |       | 4.0                    | %          | 4.2 | % | (16.5 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.2                   | )%         | (0.2 | )% | 11.8 | % |
|                                 |       |                   |       |   |   |   |   |
| NET INCOME                           |       | 3.8                    | %          | 4.0 | % | (17.7 | )% |

 

29

----

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **6/30/2009**        | ** ** | **6/30/2008** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                 |       |   |   |   |   |
| REVENUES:                            |       |                 |       |   |   |   |   |
| Membership services                  |       | 31.7                 | %          | 28.6 | % | (4.7 | )% |
| Media                                |       | 11.4                 | %          | 15.3 | % | (35.7 | )% |
| Retail                               |       | 56.9                 | %          | 56.1 | % | (12.5 | )% |
|                                 |       | 100.0                | %          | 100.0 | % | (13.8 | )% |
|                                 |       |                 |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:       |       |                 |       |   |   |   |   |
| Membership services                  |       | 19.1                 | %          | 18.2 | % | (9.5 | )% |
| Media                                |       | 8.9                  | %          | 10.5 | % | (27.0 | )% |
| Retail                               |       | 34.5                 | %          | 32.7 | % | (9.3 | )% |
|                                 |       | 62.5                 | %          | 61.4 | % | (12.4 | )% |
|                                 |       |                 |       |   |   |   |   |
| GROSS PROFIT                         |       | 37.5                 | %          | 38.6 | % | (16.2 | )% |
|                                 |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                 |       |   |   |   |   |
| Selling, general and  administrative |       | 26.8                 | %          | 28.1 | % | (17.8 | )% |
| Financing expense                    |       | 0.7                  | %          | — |   | 100.0 | % |
| Depreciation and  amortization       |       | 4.4                  | %          | 3.7 | % | 3.7 | % |
|                                 |       | 31.9                 | %          | 31.8 | % | (13.5 | )% |
|                                 |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 5.6                  | %          | 6.8 | % | (28.6 | )% |
|                                 |       |                 |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                 |       |   |   |   |   |
| Interest income                      |       | 0.1                  | %          | 0.1 | % | (6.4 | )% |
| Interest expense                     |       | (5.8                 | )%         | (4.5 | )% | 12.6 | % |
| Gain on derivative  instrument       |       | 0.3                  | %          | — |   | 100.0 | % |
| Gain on debt restructure             |       | 2.0                  | %          | — |   | 100.0 | % |
| Other non-operating items,  net      |       | (0.3                 | )%         | — |   | 3460.9 | % |
|                                 |       | (3.7                 | )%         | (4.4 | )% | (25.5 | )% |
|                                 |       |                 |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES           |       | 1.9                  | %          | 2.4 | % | (34.1 | )% |
|                                 |       |                 |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.3                 | )%         | (0.2 | )% | 22.6 | % |
|                                 |       |                 |       |   |   |   |   |
| NET INCOME                           |       | 1.6                  | %          | 2.2 | % | (39.4 | )% |

 

30

----

 

**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended June 30, 2009**

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

 

*Revenues*

 

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

 

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

 

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

 

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

 

*CostsApplicable to Revenues*

 

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

 

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

 

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products,a $0.3 million decrease in member events costs related to reduced revenue and a$0.2 million decrease in other ancillary product expenses.

 

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

 

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

 

*OperatingExpenses*

 

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

 

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

 

Depreciationand amortization expense of $5.6 million increased $0.5 million from the prioryear primarily dueto depreciation of a retail supply chainsystem installed in 2009.

 

*Incomefrom Operations*

 

Incomefrom operations for the second quarter of 2009 totaling $8.3 million decreased$3.9 million compared to the second quarter of 2008.  This decrease was primarily due to reducedgross profit for retail, media and membership services operations of $5.4million, $2.1 million and $1.5 million, respectively, partially offset byreduced operating expenses of $5.1 million.

 

*Non-OperatingItems*

 

Non-operatingitems of $3.1 million for the second quarter of 2009 decreased $2.9 million comparedto the second quarter of 2008 due to a $4.7 million gain on purchase of the$14.6 million Senior Subordinated Notes with the proceeds from the $9.7 millionSecond Lien Loan and a $0.7 million gain on derivative interest rate swapagreements (See Note 

 

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8 of the Notes toConsolidated Financial Statements) partially offset by a $1.8 million increasein net interest expense relating to higher interest rates and $0.7 million ofother refinance costs.

 

*IncomeBefore Income Tax*

 

Incomebefore income tax for the second quarter of 2009 was $5.2 million, or $1.0million lower than the second quarter of 2008. This decrease was attributable to the $3.9 million decrease in incomefrom operations and $2.9 million of reduced non-operating items mentionedabove.

 

*IncomeTax Expense*

 

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

 

# *Net Income*

# * *

Netincome in the second quarter of 2009 was $4.9 million compared to net income of$6.0 million for the same period in 2008 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

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

 

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

 

Membershipservices segment profit of $12.0 million for the second quarter of 2009decreased $1.3 million, or 9.5%, from the comparable period in 2008.  This decrease was largely attributable to a$1.3 million decrease in segment profit from member publications primarily dueto decreased advertising revenue, a $0.5 million decrease in segment profitfrom member events, a $0.4 million decrease in segment profit from vehicle insuranceproducts and a $0.4 million decrease in segment profit from a decline in Coastto Coast Club and Golf Card Club membership fees, partially offset by a $0.7million increase in 

 

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profit from the extendedvehicle warranty programs, associated with increased renewal revenue and a $0.6million reduction in wage-related overhead expenses.

 

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

 

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

 

**SixMonths Ended June 30, 2009**

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

 

*Revenues*

 

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

 

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

 

Mediarevenues of $26.8 million for the first six months of 2009 decreased $14.9million, or 35.7%, from the comparable period in 2008.  This decrease was primarily attributable to a$5.9 million reduction in revenue from the outdoor power sports magazinesrelated to reduced advertising revenue and reduced published issues of boatingand ATV magazines, a $4.3 million reduction in consumer show revenue mainly dueto reduced 

 

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exhibitorattendance, a $3.6 million reduction in RV-related magazines largely due toreduced advertising revenue, a $0.6 million reduction in revenue associatedwith our campground guides and a $0.5 million reduction in revenue from theannual campground directories.

 

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

 

*CostsApplicable to Revenues*

 

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

 

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

 

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

 

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

 

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*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $63.1 million for thefirst six months of 2009 decreased $13.6 million compared to the first sixmonths of 2008.  This decrease was due toan $11.8 million decrease in retail general and administrative expensesprimarily consisting decreases in labor and selling expenses.  In addition, wage related expense savingswere $1.0 million in the other two segments and the consumer shows group in themedia segment had an $0.8 million reduction in general and administrativeexpenses related to discontinued consulting agreements and management fees.

 

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

 

Depreciationand amortization expense of $10.4 million increased $0.4 million primarily dueto the commencement of depreciation of a retail supply chain project installedin 2009.

 

*IncomeFrom Operations*

 

Incomefrom operations for the first six months of 2009 totaling $13.2 milliondecreased $5.3 million compared to the first six months of 2008.  This decrease was primarily due to reducedgross profit for retail and media operations of $10.9 million, and $7.2million, respectively, partially offset by reduced operating expenses ofapproximately $11.8 million and increased gross profit for the membershipservices operations of $1.0 million.

 

*Non-OperatingItems*

 

Non-operatingitems of $8.8 million for the first six months of 2009 decreased $3.0 millioncompared to the first six months of 2008 due to a $4.7 million gain on purchaseof the $14.6 million Senior Subordinated Notes with the proceeds from the $9.7million Second Lien Loan and a $0.7 million gain on derivative interest rateswap agreements (See Note 8 of the Notes to Consolidated Financial Statements),partially offset by a $1.5 million increase in net interest expense resultingfrom increased interest rates, $0.8 million of refinance costs, and a $0.1million loss on sale of retail equipment.

 

*Incomebefore Income Taxes*

 

Incomebefore income taxes for the first six months of 2009 was $4.4 million, or $2.0million lower than the first six months of 2008.  This decrease was attributable to the $5.3million decrease in income from operations and the $3.0 million reduction innon-operating items mentioned above.

 

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* *

*IncomeTax Expense*

 

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

 

# *Net Income*

# * *

Netincome in the first six months of 2009 was $3.7 million compared to $6.1million for the same period in 2008 primarily due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

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

 

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

 

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

 

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

 

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outdoorpowersports magazine group, primarily attributable to reduced advertisingrevenue and fewer issues published.

 

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

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company has historically operated with a working capitaldeficit.  The working capital deficit asof June 30, 2009 and December 31, 2008 was $129.3 million and $10.5million, respectively.  The primaryreason for the increase in working capital deficit for 2009 is the classificationof the debt associated with the Amended Senior Credit Facility due March 31,2010 totaling $123.4 million as a current liability.  Deferred revenue and gains reported undercurrent liabilities as of June 30, 2009 and December 31, 2008 were$61.4 million and $60.6 million, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships in advance, which is amortized over the life of themembership.  The Company uses netproceeds from this deferred membership revenue to lower its borrowings.

 

The Company and its parent, AGHI, have engaged a financial advisor toseek equity capital which would permit a possible refinancing or restructuringof the Senior Credit Facility ($119.1 million principal amount of term loansand $3.0 million principal amount under the revolving credit line under theSenior Credit Facility on June 30, 2009), AGI’s Second Lien Loanindebtedness ($9.7 million principal outstanding on June 30, 2009), theAGI Senior Subordinated Notes due 2012 ($137.8 million principal outstanding onJune 30, 2009) and the AGHI Notes due 2012 ($112.0 million principaloutstanding on June 30, 2009).  TheCompany has received preliminary written proposals from a number of potentialequity investors, some of whom have performed business due diligence.  AGI and AGHI are actively pursuing four ofsuch proposals.  They involve new cashequity investments of between $50,000,000 and $90,000,000.  All proposals contemplate, as a condition tothe equity investment, that the Company’s Camping World subsidiary would besold to an affiliate and that a significant part of the proceeds of the equityinvestment would be used to make an offer to holders of the AGI SeniorSubordinated Notes due 2012 and/or the AGHI Notes due 2012 to exchange theircurrent security for a combination of cash and new bonds with an extendedmaturity date and a lower face amount. In view thereof, AGHI intends to defer the interest payment ($6.2million) due on August 15, 2009 on the AGHI Notes.

 

Under the terms of the AGHI Notes, AGHI is afforded a 30-day graceperiod from the interest payment date before non-payment constitutes an eventof default under such notes.  During such30-day grace period, AGHI intends to discuss with bondholders possible

 

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alternative capital structures after a presumed cash equity investment,including possible discounts for early payment and possible exchanges ofexisting securities for new securities with an extended maturity date or otherterms acceptable to AGHI and its bondholders.

 

As a result of restrictions in the Senior Credit Facility, AGI isblocked from making distributions to AGHI for the purpose of paying interest onthe AGHI Notes.  For the two most recentinterest payments, AGHI has made the interest payments using the proceeds ofcapital contributions from AGHI’s parent. There can be no assurance that AGHI’sparent will fund the interest payments on the AGHI Notes by the end of the30-day grace period.

 

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

 

*Contractual Obligations andCommercial Commitments*

 

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

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| **(in  thousands)**          | ** ** | **Total**                  | ** ** | **2009** | ** ** | **2010 and  2011** | ** ** | **2012 and  2013** | ** ** | **Thereafter** | ** ** |
|                         |       |                       |       |   |   |   |   |   |   |   |   |
| Debt and future interest     |       | $                          | 321,975    |   | $ | 24,082 |   | $ | 153,867 |   | $ | 144,026 |   | $ | — |   |
| Operating lease  obligations |       | 233,467                    |       | 11,797 |   | 45,096 |   | 37,973 |   | 138,601 |   |
| Standby letters of credit    |       | 7,467                      |       | 5,467 |   | 2,000 |   | — |   | — |   |
| Grand total                  |       | $                          | 562,909    |   | $ | 41,346 |   | $ | 200,963 |   | $ | 181,999 |   | $ | 138,601 |   |

 

Senior CreditFacility

 

On June 24,2003, the Company entered into an Amended and Restated Credit Agreement and aSenior Secured Floating Rate Note Purchase Agreement (as amended, the “SeniorCredit Facility”).  The Senior CreditFacility, as amended by the amendment on June 5, 2009, provides for arevolving credit facility of $25.0 million and term loans.  

 

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As of June 30,2009, $3.0 million was outstanding under the revolving credit facility and$119.1 million was outstanding under the term loans.  Reborrowings under the term loans are notpermitted.  Interest rates float withprime and the London Interbank Offered Rates, or LIBOR, plus an applicablemargin ranging from 7.00% to 8.00%, respectively, over the stated rates, and aLIBOR floor of 2.75%.  Afterconsideration of fixed rates under the interest rate swap agreements,(discussed in Note 8 of the Notes to Financial Statements), as of June 30,2009, the average interest rates on the term loans and the revolving creditfacility were 14.5% and 13.1%, respectively, and permitted borrowings under therevolving facility were $17.5 million. The Company also pays a commitment fee of 1.0% 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 June 30, 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, theCompany amended the 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 six monthsended June 30, 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 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%. The Company capitalized $2.5 million in fees paid to the lenders and expensedas incurred $1.5 million in legal and other fees related to the amendment.  As a condition to the amendment, theshareholder of the ultimate parent of the Company was required to arrange forthe purchase of approximately $26.6 million in principal amount of the termportion of the Senior Credit Facility by new lenders, enhance the yield to suchnew lenders, purchase AGHI Notes held by one of such new lenders at a premiumto the most recent market price, contribute $8.5 million in capital to the Companyand guarantee two required principal payments on the term loans under theSenior Credit Facility, aggregating $15.0 million.  In consideration of such support, the Companyentered into an option agreement with the shareholder of the 

 

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ultimate parent of theCompany pursuant to which the Company granted such shareholder or his assignsan option, exercisable on or before March 1, 2010, to purchase the Company’sCamping World subsidiary for $55.0 million. Management was assisted in determining the fair value of such subsidiaryby an independent third party valuation firm. The Company also agreed to pay the shareholder of the ultimate parent,upon successful refinancing of the Company’s secured debt, including the SeniorCredit Facility, a success fee equal in amount to the fair value, as determinedby an independent financial advisor of such credit support, taking into accountthe fair 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 the June 5,2009 amendment to the Senior Credit Facility, the Company obtained a $9.7million Second Lien Loan, the net proceeds of which were used to purchase $14.6million in principal amount of Senior Subordinated Notes.  The Second Lien Loan carries an interest rateof 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%.  See Note 10 of the Notes to ConsolidatedFinancial Statements

 

The June 5, 2009amendment to the Senior Credit Facility also revised the Company’s financialcovenants in effect through the extended maturity date.  Significant cost reductions have beenimplemented in 2008 and 2009, including the elimination of personnel,suspension of 401(k) employer contributions, salary cutbacks, hiring andcapital expenditure spending freezes, satellite office closures, and magazinesize and frequency reductions.

 

The Senior CreditFacility contains certain restrictive covenants relating to, but not limitedto, mergers, changes in the nature of the business, acquisitions, additionalindebtedness, sale of assets, investments, and the payment of dividends subjectto certain limitations and minimum operating covenants.  There was no event of default under theSenior Credit Facility at June 30, 2009.

 

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 

 

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SubordinatedNotes. The purchases of these notes were made with available cash, and thenotes purchased have been retired.

 

On March 8,2007, the Company purchased $17.7 million of the Senior SubordinatedNotes.  The Company funded the purchasethrough the issuance of the $25.0 million in additional incremental term loansas permitted under the February 27, 2007 amendment to the Senior CreditFacility.  The balance of the $25.0million issued was used to pay down the Company’s revolving credit facility by$6.5 million and to pay associated loan fees and transaction expenses.  The terms on the additional incremental loansare consistent with the remaining term loan outstanding under the Senior CreditFacility. On June 5, 2009, the Company purchased $14.6 million of theSenior Subordinated Notes.  The Companyfunded the purchase through the issuance of a $9.7 million Second LienLoan.  As of June 30, 2009, $137.8million of Senior Subordinated Notes remain outstanding.  The fair value of the Senior SubordinatedNotes, based on the quoted market price at June 30, 2009, was $88.2million.

 

The AGI Indenturepursuant to which the Senior Subordinated Notes were issued contains certainrestrictive covenants relating to, but not limited to, mergers, changes in thenature of the business, acquisitions, additional indebtedness, sale of assets,investments, and the payment of dividends subject to certain limitations andminimum operating covenants.  There wasno event of default under the AGI Indenture at June 30, 2009.

 

AGHI Notes

 

On March 24,2005 in 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 February 15,2008, AGHI had the election to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date 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 issuanceof additional notes.  AGHI paid theinterest on the AGHI Notes due August 15, 2007, August 15, 2008 and February 15,2009 from proceeds of contributions made by AGHI’s parent, AGHC, of $5.9million, $6.2 million and $6.2 million, respectively.  If the source of the cash payment of the AGHINotes is dividends from AGI, its wholly-owned subsidiary, there are certainrestrictions on the payment of dividends under the AGI Senior Credit Facilityand the AGI Indenture.  As of June 30,2009, $112.0 million of AGHI Notes, including $25.4 million due in March, 2010,remain outstanding.  See Note 11 of theNotes to Consolidated Financial Statements.

 

Interest Rate Swap Agreements

 

On October 15, 2007, the Company entered into a five-year interestrate swap agreement with a notional amount of $100.0 million from which it willreceive periodic payments at the 3 month LIBOR-based variable rate (1.039% at June 30,2009 based upon the April 30, 2009 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31 and 

 

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

 

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

 

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

 

On June 11,2009, the Company partially terminated the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was expensed.  The notional amount was reduced to $20.0million.  All other terms of the interestrate swap agreement remained unchanged. As a result, the amount included in other comprehensive income relatedto the $35.0 million interest rate swap was reduced prorata and included inearnings as a gain (loss) on derivative instrument.

 

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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 America Expositions, Inc.for $1.6 million.  As part of thepurchase, the Company issued $0.5 million in debt and assumed $0.5 million inliabilities.

 

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

 

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

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

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

 

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

 

*Revenue Recognition*

 

Merchandiserevenue is recognized when products are sold in the retail stores, shipped formail and Internet orders, or when services are provided to customers.Publication advertising and newsstand sales, net of estimated provision forreturns, are recorded at 

 

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

 

*Accounts Receivable*

 

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

 

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net proceedsexpected from disposition of the asset (if any) are less than the carryingvalue of the asset.  When an impairmentis identified, the Company reduces the carrying amount of the asset to itsestimated fair value based on a discounted cash flow approach or, when availableand appropriate, comparable market values.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject to amortization.  The Company determined that no adjustments tothe useful lives of its finite-lived purchased intangible assets werenecessary.  The finite-lived purchasedintangible assets consist of membership customer lists, resort and golf courseagreements, non-compete and deferred consulting agreements and deferredfinancing costs which have weighted average useful lives of approximately 6years, 4 years, 15 years and 5 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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

 

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

 

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*AccumulatedOther Comprehensive Loss*

 

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

 

*Derivative Financial Instruments*

 

Asdiscussed in Note 8, the Company accounts for derivative instruments andhedging activities in accordance with SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”).  All derivatives are recognized on the balancesheet at their fair value.  On the datethat the Company enters into a derivative contract, management formallydocuments all relationships between hedging instruments and hedged items, aswell as risk management objectives and strategies for undertaking various hedgetransactions.

 

Changes in the fair value of a derivative that ishighly effective and that is designated and qualifies as a cash flow hedge (a “swap”),to the extent that the hedge is effective, are recorded in accumulated othercomprehensive loss, until earnings are affected by the variability of cashflows of the hedged transaction.  The Companymeasures effectiveness of the swap at each quarter end using the HypotheticalDerivative Method.  Under this method,hedge effectiveness is measured based on a comparison of the change in fairvalue of the actual swap designated as the hedging instrument and the change infair value of the hypothetical swap which would have the terms that identicallymatch the critical 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 highlyeffective hedge on the $35.0 million outstanding debt by the $35.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and is now deemed to be reasonably possible.  As a result, changes in the value of the$35.0 million interest rate swap agreement are included in earnings beginningon October 1, 2008.  Included inother comprehensive loss is $0.4 million related to the $35.0 million interestrate swap which will be amortized over the remaining life of the interest rateswap and included in earnings as a gain (loss) on derivative instrument.

 

Due to the issuance of an option to the shareholder of the ultimateparent of the Company to purchase Camping World, in the second quarter of 2009a portion of the highly effective hedge on the $100.0 million outstanding debtby the $100.0 million notional amount interest rate swap agreement was deemedto be no longer probable and is now deemed to be reasonably possible.  As a result, changes in the value of the last$20.0 million of the $100.0 million interest rate swap agreement are includedin earnings 

 

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

 

On June 11,2009, the Company partially terminated the $35.0 million interest rate swap,subject to a partial termination fee of $0.6 million which was recorded toearnings.  The notional amount wasreduced to $20.0 million.  All otherterms of the interest rate swap agreement remained unchanged.  As a result, the amount included in othercomprehensive income related to the $35.0 million interest rate swap wasreduced prorata and included in earnings as a gain (loss) on derivativeinstrument.

 

*FairValue Measurements*

 

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

 

*IncomeTaxes*

 

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

 

**ITEM 3: QUANTITATIVE 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.

 

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*InterestRate Sensitivity Analysis*

 

At June 30,2009, we had debt totaling $271.2 million, comprised of $2.1 million ofvariable rate debt and $269.1 million of fixed rate debt, comprised of $120.0million of debt fixed through the interest rate swap agreements, $137.8 millionof Senior Subordinated Notes, $9.7 million of Second Lien Loan, and $1.6million of purchase debt.  Holding othervariables constant (such as debt levels), the earnings and cash flow impact of aone-percentage point increase/ decrease in interest rates would have anunfavorable/ favorable impact of loss than $0.1 million.

 

*CreditRisk*

 

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

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over FinancialReporting

 

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

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A:RISK FACTORS**

 

The Senior CreditFacility matures on March 31, 2010. As of June 30, 2009, there was $122.1 million outstanding under theSenior 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 certain proposals or indications of interest from prospective lenders,there can be no assurance that the Senior Credit Facility will be refinanced orreplaced prior to its maturity.  Theavailability of financing is limited due to the current uncertainties in thecapital markets.  In addition, thecurrent general conditions in the U.S. economy had an adverse impact on theCompany’s operations because consumers are reducing discretionary spending,including spending on the recreational activities offered by 

 

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the Company, andbusinesses are reducing advertising and marketing expenditures which haveadversely affected 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 and the prospects forthe business segments in which the Company operates.  If the Company is not able to refinance orreplace the Senior Credit Facility prior to its maturity on March 31,2010, the lenders will be entitled to exercise their remedies to 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).  See Note 11 of theNotes to Consolidated Financial Statements.

 

**ITEM 5:OTHER INFORMATION**

 

None.

 

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**SIGNATURES:**

 

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

 

 
| ** **                             | **AFFINITY  GROUP, INC.**  |
|----------------------------------------|----------------------------|
| ** **                             | ** **                 |
|                                   |                       |
|                                   | /s/ Thomas F.  Wolfe       |
| Date:  August 14,  2009 | Thomas F. Wolfe            |
|                                   | Senior Vice  President and |
|                                   | Chief Financial Officer    |

 

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