**UNITED STATES**

##### **SECURITIES AND EXCHANGECOMMISSION**

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

 

**FORM 10-Q**

** **

**Quarterly Report UnderSection 13 or 15 (d) of**

**The Securities Exchange Act of1934**

 

| **For Quarter Ended:**  | ** ** | **Commission File Number** |
|-------------------------|------------|----------------------------|
| **March 31, 2010** | ** ** | **333-113982**             |

 

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**AFFINITY GROUP, INC.**

(Exact name of registrant as specified in its charter)

 

| **Delaware**                             | ** ** | **13-3377709**                       |
|------------------------------------------|------------|--------------------------------------|
| (State of incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                     |       |                                 |
| **2575 Vista Del Mar Drive**             | ** ** | **(805) 667-4100**                   |
| **Ventura, CA 93001**                    |       | (Registrant’s telephone         |
| (Address of principal executive offices) |       | number, including area code)         |

 

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

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

**9% Senior Subordinated Notes Due 2012**

 

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

YES  x       NO  o

 

Indicate by check mark whether the registranthas submitted electronically and posted on its corporate Web site, if any,every Interactive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (Section 232.405 of this chapter) during the preceding12 months (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 registrantis a large accelerated filer, an accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “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 registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  o       NO  x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicabledate.

 
|                           |       | **Outstanding as of** |
|--------------------------------|------------|-----------------------|
| **Class**                      | ** ** | **May 13, 2010** |
| Common Stock, $.001 par  value |       | 2,000                 |

 

**DOCUMENTS INCORPORATED BY REFERENCE:  None**

 

 

 

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

 

**INDEX**

 
| ** **                             | ** **                                                                                                 | **Page**   |
|----------------------------------------|------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** **                                                                                                 | ** ** |
| **Part I.**Financial  Information |                                                                                                       |
| ** **                             |                                                                                                       |       |
|                                   | **Item 1: Financial Statements**                                                                           |       |
|                                   | ** **                                                                                                 |       |
|                                   | Consolidated  Balance Sheets   as of March 31, 2010 (unaudited) and December 31, 2009            | 1          |
|                                   |                                                                                                       |       |
|                                   | Unaudited  Consolidated Statements of Operations   for the three months ended March 31, 2010 and 2009 | 2          |
|                                   |                                                                                                       |       |
|                                   | Unaudited  Consolidated Statements of Cash Flows   for the three months ended March 31, 2010 and 2009 | 3          |
|                                   |                                                                                                       |       |
|                                   | Notes to Unaudited Consolidated Financial Statements                                                       | 4          |
|                                   |                                                                                                       |       |
| ** **                             | **Item 2: Management’s Discussion and Analysis of  Financial Condition and Results of Operations**    | 21         |
|                                   | ** **                                                                                                 |       |
|                                   | **Item 3:  Quantitative and Qualitative Disclosures about Market Risk**                                    | 34         |
|                                   | ** **                                                                                                 |       |
|                                   | **Item 4: Controls  and Procedures**                                                                       | 34         |
|                                   | ** **                                                                                                 |       |
| **Part II. Other Information**    | 35                                                                                                         |
|                                   |                                                                                                       |
| **Signatures**                         | 36                                                                                                         |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2010 and December 31,2009

(In thousands except shares and par value)

 
| ** **                                                                                     | ** ** | **3/31/2010**   | ** ** | **12/31/2009** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                     | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                     |       |            |       |           |       |
| CURRENT  ASSETS:                                                                               |       |            |       |           |       |
| Cash  and cash equivalents                                                                     |       | $               | 5,229      |           | $          | 8,640 |   |
| Restricted  cash                                                                               |       | —          |       | 8,058          |       |
| Accounts  receivable, less allowance for doubtful accountsof $3,545 in 2010 and $3,128 in 2009 |       | 31,956          |       | 32,321         |       |
| Inventories                                                                                    |       | 53,030          |       | 49,921         |       |
| Prepaid  expenses and other assets                                                             |       | 13,336          |       | 13,067         |       |
| Total  current assets                                                                          |       | 103,551         |       | 112,007        |       |
|                                                                                           |       |            |       |           |       |
| PROPERTY  AND EQUIPMENT, net                                                                   |       | 30,973          |       | 34,276         |       |
| AFFILIATE  NOTES AND INVESTMENTS                                                               |       | 4,686           |       | 4,837          |       |
| INTANGIBLE  ASSETS, net                                                                        |       | 15,792          |       | 13,738         |       |
| GOODWILL                                                                                       |       | 49,944          |       | 49,944         |       |
| OTHER  ASSETS                                                                                  |       | 5,818           |       | 6,767          |       |
| Total  assets                                                                                  |       | $               | 210,764    |           | $          | 221,569 |   |
|                                                                                           |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                 |       |            |       |           |       |
| CURRENT  LIABILITIES:                                                                          |       |            |       |           |       |
| Accounts  payable                                                                              |       | $               | 20,662     |           | $          | 23,795 |   |
| Accrued  interest                                                                              |       | 4,133           |       | 5,688          |       |
| Accrued  income taxes                                                                          |       | 1,699           |       | 1,598          |       |
| Accrued  liabilities                                                                           |       | 24,882          |       | 24,060         |       |
| Deferred  revenues and gains                                                                   |       | 56,099          |       | 60,728         |       |
| Current  portion of long-term debt                                                             |       | 962             |       | 892            |       |
| Total  current liabilities                                                                     |       | 108,437         |       | 116,761        |       |
|                                                                                           |       |            |       |           |       |
| DEFERRED  REVENUES AND GAINS                                                                   |       | 34,820          |       | 35,607         |       |
| LONG-TERM  DEBT, net of current portion                                                        |       | 287,536         |       | 277,522        |       |
| OTHER  LONG-TERM LIABILITIES                                                                   |       | 13,871          |       | 13,204         |       |
|                                                                                           |       | 444,664         |       | 443,094        |       |
| COMMITMENTS  AND CONTINGENCIES                                                                 |       |            |       |           |       |
|                                                                                           |       |            |       |           |       |
| STOCKHOLDER’S  DEFICIT:                                                                   |       |            |       |           |       |
| Common  stock, $.001 par value, 2,000 shares authorized, 2,000 shares issued and  outstanding  |       | 1               |       | 1              |       |
| Additional  paid-in capital                                                                    |       | 89,505          |       | 89,505         |       |
| Accumulated  deficit                                                                           |       | (316,158        | )          | (304,031       | )          |
| Accumulated  other comprehensive loss                                                          |       | (7,248          | )          | (7,000         | )          |
| Total  stockholder’s deficit                                                              |       | (233,900        | )          | (221,525       | )          |
| Total  liabilities and stockholder’s deficit                                              |       | $               | 210,764    |           | $          | 221,569 |   |

 

See notes to consolidated financial statements.

 

1

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                            | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **3/31/2010**          | ** ** | **3/31/2009** | ** ** |
|                                  |       |                   |       |   |   |
| REVENUES:                             |       |                   |       |   |   |
| Membership  services                  |       | $                      | 37,074     |   | $ | 35,232 |   |
| Media                                 |       | 14,683                 |       | 17,420 |   |
| Retail                                |       | 54,177                 |       | 52,401 |   |
|                                  |       | 105,934                |       | 105,053 |   |
| COSTS  APPLICABLE TO REVENUES:        |       |                   |       |   |   |
| Membership  services                  |       | 20,076                 |       | 20,330 |   |
| Media                                 |       | 11,626                 |       | 13,484 |   |
| Retail                                |       | 32,229                 |       | 31,536 |   |
|                                  |       | 63,931                 |       | 65,350 |   |
|                                  |       |                   |       |   |   |
| GROSS  PROFIT                         |       | 42,003                 |       | 39,703 |   |
|                                  |       |                   |       |   |   |
| OPERATING  EXPENSES:                  |       |                   |       |   |   |
| Selling,  general and administrative  |       | 30,167                 |       | 29,937 |   |
| Financing  expense                    |       | 7,086                  |       | — |   |
| Depreciation  and amortization        |       | 4,828                  |       | 4,838 |   |
|                                  |       | 42,081                 |       | 34,775 |   |
|                                  |       |                   |       |   |   |
| (LOSS)  INCOME FROM OPERATIONS        |       | (78                    | )          | 4,928 |   |
|                                  |       |                   |       |   |   |
| NON-OPERATING  ITEMS:                 |       |                   |       |   |   |
| Interest  income                      |       | 126                    |       | 130 |   |
| Interest  expense                     |       | (9,281                 | )          | (5,823 | ) |
| (Loss)  gain on derivative instrument |       | (376                   | )          | 20 |   |
| Other  non-operating items, net       |       | 25                     |       | (83 | ) |
|                                  |       | (9,506                 | )          | (5,756 | ) |
|                                  |       |                   |       |   |   |
| LOSS  BEFORE INCOME TAXES             |       | (9,584                 | )          | (828 | ) |
|                                  |       |                   |       |   |   |
| INCOME  TAX EXPENSE                   |       | (143                   | )          | (396 | ) |
|                                  |       |                   |       |   |   |
| NET  LOSS                             |       | $                      | (9,727     | ) | $ | (1,224 | ) |

 

Seenotes to consolidated financial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                 | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                 | ** ** | **3/31/2010**          | ** ** | **3/31/2009** | ** ** |
|                                                                                       |       |                   |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                   |       |   |   |
| Net  loss                                                                                  |       | $                      | (9,727     | ) | $ | (1,224 | ) |
| Adjustments  to reconcile net loss to net cash (used in) provided by operating activities: |       |                   |       |   |   |
| Depreciation                                                                               |       | 2,852                  |       | 3,031 |   |
| Amortization                                                                               |       | 1,976                  |       | 1,807 |   |
| Loss  (gain) on derivative instrument                                                      |       | 376                    |       | (20 | ) |
| Loss  on debt restructure                                                                  |       | 279                    |       | — |   |
| Provision  for losses on accounts receivable                                               |       | 391                    |       | 370 |   |
| (Gain)  loss on sale of property and equipment                                             |       | (23                    | )          | 82 |   |
| Accretion  of original issue discount                                                      |       | 131                    |       | — |   |
| Changes  in operating assets and liabilities:                                              |       |                   |       |   |   |
| Accounts  receivable                                                                       |       | (26                    | )          | 4,073 |   |
| Inventories                                                                                |       | (3,109                 | )          | (829 | ) |
| Prepaid  expenses and other assets                                                         |       | 680                    |       | (2,849 | ) |
| Accounts  payable                                                                          |       | (3,133                 | )          | 7,417 |   |
| Accrued  and other liabilities                                                             |       | (589                   | )          | (5,332 | ) |
| Deferred  revenues and gains                                                               |       | (5,416                 | )          | (2,300 | ) |
| Net  cash (used in) provided by operating activities                                       |       | (15,338                | )          | 4,226 |   |
|                                                                                       |       |                   |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                   |       |   |   |
| Capital  expenditures                                                                      |       | (184                   | )          | (1,261 | ) |
| Net  proceeds from sale of property and equipment                                          |       | 658                    |       | 7 |   |
| Investment  in affiliate                                                                   |       | 151                    |       | 12 |   |
| Net  cash provided by (used in) investing activities                                       |       | 625                    |       | (1,242 | ) |
|                                                                                       |       |                   |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                   |       |   |   |
| Dividends  paid                                                                            |       | (2,400                 | )          | — |   |
| Restricted  cash                                                                           |       | 8,058                  |       | — |   |
| Borrowings  on debt                                                                        |       | 149,943                |       | 11,000 |   |
| Payment  of debt issue costs                                                               |       | (4,309                 | )          | 1 |   |
| Principal  payments on debt                                                                |       | (139,990               | )          | (2,321 | ) |
| Net  cash provided by financing activities                                                 |       | 11,302                 |       | 8,680 |   |
|                                                                                       |       |                   |       |   |   |
| NET  CHANGE IN CASH AND CASH EQUIVALENTS                                                   |       | (3,411                 | )          | 11,664 |   |
|                                                                                       |       |                   |       |   |   |
| CASH  AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |       | 8,640                  |       | 10,608 |   |
|                                                                                       |       |                   |       |   |   |
| CASH  AND CASH EQUIVALENTS AT END OF PERIOD                                                |       | $                      | 5,229      |   | $ | 22,272 |   |

 

Seenotes to consolidated financial statements.

 

3

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

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

 

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, 2009 as filed with the Securitiesand Exchange Commission.  In the opinionof management of the Company, these consolidated financial statements containall adjustments of a normal recurring nature necessary to present fairly thefinancial position, results of operations and cash flows of the Company for theinterim periods presented.

 

*Basisfor Presentation**—*On March 1, 2010, AGI refinancedits existing senior credit facility ($128.9 million aggregate principal amountoutstanding as at December 31, 2009) and second lien notes totaling $9.7million due July 31, 2010.  The NewSenior Credit Facility provides for term loans (aggregating $144.3 millionoutstanding as of March 31, 2010), including an original issue discount of2%, that are payable in quarterly installments of $360,750 beginning March 1,2011.  In addition, there are mandatoryprepayments of the term loans from excess cash flow (as defined) of AGI andfrom asset sales.  The term loans underthe New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either AGI’s 9% seniorsubordinated notes due 2012 (the “Senior Notes”) ($137.8 million principalamount outstanding as of March 31, 2010) or AGHI’s 10-7/8% senior notesdue 2012 (the “AGHI Notes”) ($88.2 million aggregate principal amountoutstanding as of March 31, 2010). See Note 6 — Debt.

 

Inaddition, on March 1, 2010, AGI’s subsidiary that operates the Retailsegment, Camping World, Inc. (“Camping World”) entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the New Senior Credit Facility, or (iii) 120 days prior to the earlierdate of maturity of the Senior Notes and the AGHI Notes.  As of March 31, 2010, $8.5 million wasborrowed and $7.6 million of letters of credit were outstanding under the CWCredit Facility.  See Note 6 — Debt.

 

We have evaluated subsequent events through the date of issuance of ourfinancial statements in this Form 10-K.

 

4

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**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

In January 2010,the Company was required to adopt a newly issued accounting standard whichrequires additional disclosure about the amounts of and reasons for significanttransfers between levels of the fair value hierarchy discussed in Note 9, “FairValue Measurements”.  This standard alsoclarifies existing disclosure requirements related to the level ofdisaggregation of fair value measurements for each class of assets andliabilities and disclosures about inputs and valuation techniques used tomeasure fair value for both recurring and nonrecurring Level 2 and Level 3measurements.  As this newly issuedaccounting standard only requires enhanced disclosure, the adoption of thisstandard did not impact our financial position, results of operations or cashflows.  In addition, effective forinterim and annual periods beginning after December 15, 2010, thisstandard will require additional disclosure and require an entity to presentdisaggregated information about activity in Level 3 fair value measurements ona gross basis, rather than a single amount.

 

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

 

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, club magazines,directories and RV and powersports industry trade magazines.  In addition, the Media segment operatesconsumer outdoor recreation shows primarily focused on RV and powersports markets.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through retail supercenters,mail order catalogs and internet sales. The Company evaluates performance based on profit or loss fromoperations before income taxes and unusual items.

 

5

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

 

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

 

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

 
| ** **                                  | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|---------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                  | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED MARCH 31,  2010** |       |           |       |       |       |       |       |             |       |
| Revenues from external  customers           |       | $              | 37,074     |       | $          | 14,683     |       | $                | 54,177     |   | $ | 105,934 |   |
| Depreciation and  amortization              |       | 641            |       | 943        |       | 2,264      |       | 3,848            |       |
| Gain on disposal of  property and equipment |       | —         |       | —     |       | 23         |       | 23               |       |
| Interest income                             |       | 806            |       | —     |       | —     |       | 806              |       |
| Interest expense                            |       | —         |       | 10         |       | 532        |       | 542              |       |
| Segment profit (loss)                       |       | 15,188         |       | 912        |       | (4,548     | )          | 11,552           |       |
|                                             |            |                |            |            |            |            |            |                  |            |  |  |  |  |

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

 

The following is areconciliation of profit from operations to the Company’s consolidatedfinancial statements for the three months ended March 31, 2010 and 2009(in thousands):

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **3/31/2010**          | ** ** | **3/31/2009** | ** ** |
| **Loss From  Operations Before Income Taxes**                 |       |                   |       |   |   |
| Total income for  reportable segments                         |       | $                      | 11,552     |   | $ | 5,776 |   |
| Unallocated G & A  expense                           |       | (3,700                 | )          | (3,491 | ) |
| Unallocated depreciation  and amortization expense            |       | (980                   | )          | (520 | ) |
| Unallocated (loss) gain on  derivative instrument             |       | (376                   | )          | 20 |   |
| Unallocated financing  expense                                |       | (6,382                 | )          | — |   |
| Unallocated loss on debt  restructure                         |       | (279                   | )          | — |   |
| Elimination of  intercompany interest income                  |       | (680                   | )          | (736 | ) |
| Unallocated interest  expense, net of intercompanyelimination |       | (8,739                 | )          | (1,877 | ) |
| Loss from operations  before income taxes                     |       | $                      | (9,584     | ) | $ | (828 | ) |

 

6

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

 

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

 
| ** **                                   | ** ** | **3/31/2010** | ** ** | **12/31/2009** | ** ** |
|----------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services  segment                 |       | $             | 238,273    |           | $          | 237,597 |   |
| Media segment                                |       | 20,925        |       | 26,876         |       |
| Retail segment                               |       | 95,442        |       | 95,193         |       |
| Total assets for  reportable segments        |       | 354,640       |       | 359,666        |       |
| Restricted cash                              |       | —        |       | 8,058          |       |
| Intangible assets not  allocated to segments |       | 3,954         |       | 2,185          |       |
| Corporate unallocated  assets                |       | 6,508         |       | 6,654          |       |
| Elimination of  intersegment receivable      |       | (154,338      | )          | (154,994       | )          |
| Total assets                                 |       | $             | 210,764    |           | $          | 221,569 |   |

 

**(4) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the  period for: |       |     |       |     |       |
| Interest                          |       | $        | 10,836     |     | $          | 10,187 |   |
|                                   |            |          |            |          |            |  |  |

 

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

 

For the threemonths ended March 31, 2010, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $0.7 million increase inOther Long-Term Liabilities and a $0.3 million increase in Other ComprehensiveLoss and ineffective portion in the statement of operations as a non-cash losson derivative instruments of $0.4 million.

 

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

 

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

 

In the thirdquarter of 2009, the Company noted continued decline in advertising revenuecompared to historical trends, in the operations of our RV and powersportspublications, as well as flat to moderate projected growth in futureadvertising revenue as a result of continued deterioration of general economicconditions and consumer confidence. Based on the above, the Company determined that there were identifiedinterim indicators of impairment within these reporting units in the Mediasegment.

 

7

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

 

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

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the reporting units of our RV and powersportspublications determined in step one of the impairment test, to the assets andliabilities of the respective reporting unit in accordance with the accountingguidance for business combinations.  TheCompany determined the impairment for these units to be equal to the carryingvalue of its goodwill, or $46.9 million. The Company recorded an impairment charge of $46.9 million in the thirdquarter of 2009 related to these units, which is part of the Mediasegment.  The Media segment goodwill wasreduced to zero.  See Indefinite-LivedIntangible Assets under Critical Accounting Policies.

 

Determining thefair value of a reporting unit under the first step of the goodwill impairmenttest and determining the fair value of individual assets and liabilities of areporting unit under the second step of the goodwill impairment test isjudgmental in nature and often involves the use of significant estimates andassumptions.  These estimates andassumptions could have a significant impact on whether or not an impairmentcharge is recognized and also the extent of such charge.  The Company’s estimates of fair valueutilized in the goodwill impairment tests may be based upon a number offactors, including assumptions about the projected future cash flows, discountrate, growth rate, determination of market comparables, economic conditions, orchanges to the Company’s business operations. Such changes may result in impairment charges recorded in futureperiods.  Also see Note 9 — Fair ValueMeasurements.

 

8

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

 

The following is asummary of changes in the Company’s goodwill by business segment, for the threemonths ended March 31, 2010 and 2009 (in thousands):

 
| ** **                                | ** ** | **Membership  Services** | ** ** | **Media** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------|------------|------------|------------|------------------|------------|
|                                      |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                            |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to  January 1, 2010 |       | (6,086                   | )          | (46,884   | )          | (47,601    | )          | (100,571         | )          |
| Balance as of  January 1, 2010       |       | 49,944                   |       | —    |       | —     |       | 49,944           |       |
| Impairments                               |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of  March 31, 2010        |       | $                        | 49,944     |      | $          | —     |       | $                | —     |   | $ | 49,944 |   |
|                                      |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                            |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to  January 1, 2009 |       | (6,086                   | )          | —    |       | (47,601    | )          | (53,687          | )          |
| Balance as of  January 1, 2009       |       | 49,944                   |       | 46,884    |       | —     |       | 96,828           |       |
| Impairments                               |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of  March 31, 2009        |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary.  The Company determined that no adjustments tothe useful lives of its finite-lived purchased intangible assets were necessaryas of March 31, 2010.  Under theaccounting guidance for goodwill and other intangible assets, as issued by theFASB, goodwill impairment is deemed to exist if the net book value of areporting unit exceeds its estimated fair value.  The Company’s reporting units are generallyconsistent with the operating segments underlying the reporting segmentsidentified in Note 3 — Disclosures about Segments of an Enterprise and RelatedInformation.

 

Effective January 1,2009, the Company adopted new accounting guidance related to businesscombinations which establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, any noncontrolling interest in the acquireeand the goodwill acquired in a business combination.  The Company will apply the provisions anddisclosure requirements of the new guidelines for any acquisitions after theadoption date.

 

9

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

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at March 31, 2010 (in thousands, except asnoted):

 
| ** **                                       | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                       | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                             |       |                |       |       |       |             |       |       |       |
| Membership and customer  lists                   |       | 6                   |       | $          | 35,355     |             | $          | (27,055    | )          | $ | 8,300 |   |
| Resort and golf course  participation agreements |       | 4                   |       | 8          |       | (6               | )          | 2          |       |
| Non-compete and deferred  consulting agreements  |       | 15                  |       | 18,650     |       | (16,447          | )          | 2,203      |       |
| Deferred financing costs                         |       | 5                   |       | 9,482      |       | (4,195           | )          | 5,287      |       |
|                                             |       |                |       | $          | 63,495     |             | $          | (47,703    | )          | $ | 15,792 |   |

 

**(6) DEBT**

 

New Senior Credit Facility

 

On March 1, 2010, AGI entered into the Second Amended and RestatedCredit Agreement (the “New Senior Credit Facility”) to refinance its existingsenior credit facility ($128.9 million principal amount outstanding at December 31,2009) which was scheduled to mature on March 31, 2010, the second liennotes due July 31, 2010 ($9.7 million principal amount outstanding at December 31,2009), and the loan (the “SA Loan”), from SA Holding, LLC, an affiliate of theultimate shareholder of AGI, ($1.0 million principal amount outstanding at December 31,2009).  The New Senior Credit Facilityprovides for term loans aggregating $144.3 million, including an original issuediscount of 2%, and are payable in quarterly installments of $360,750 beginningMarch 1, 2011.  In addition, thereare mandatory prepayments of the term loans from excess cash flow (as defined)of AGI and from asset sales.  The termloans under the New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either Senior Notes ($137.8million principal amount outstanding as at March 31, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat March 31, 2010 and are due February 15, 2012).  Interest on the term loans under the NewSenior Credit Facility floats at either 8.75% over the base rate (defined asthe greater of the prime rate, federal funds rate plus 50 basis points or5.25%) for borrowings whose interest is based on the prime rate or 10.0% overthe LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (See Note 8- Interest Rate Swap Agreements), as of March 31,2010, the average annual interest rate on the term loans was 16.83%.  The New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the New Senior CreditFacility are guaranteed by the direct and indirect subsidiaries of AGI and aresecured by liens on the assets of AGI and its direct and indirect subsidiaries.  As a condition to the term loans under theNew Senior Credit Facility, $25.4 million of AGHI Notes due on March 15,2010 that were held by an affiliate of AGHI were contributed to AGHI and AGHIcancelled those notes.  As of March 31,

 

10

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**(6) DEBT (continued)**

 

2010, $141.6 million, net of approximately $2.8 million of unamortizedoriginal issue discount, was outstanding on the New Senior Credit Facility.

 

CW Credit Facility

 

In addition, on March 1, 2010, Camping World entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the New Senior Credit Facility, or (iii) 120 days prior to the earlierdate of maturity of the Senior Notes and the AGHI Notes.  Interest under the revolving loans under theCW Credit Facility floats at either 3.25% over the base rate (defined as thegreater of the prime rate, federal funds rate plus 50 basis points or 1 monthLIBOR) for borrowings whose interest is based on the prime rate or 3.25% overthe LIBOR rate (defined as the greater of LIBOR rate applicable to the periodof the respective LIBOR borrowings or 1.0%) for borrowings whose interest isbased on LIBOR. As of March 31, 2010, the average interest rate on the CWCredit Facility was 4.25%. Borrowings under the CW Credit Facility are based onthe borrowing base of eligible inventory and accounts receivable of CampingWorld and its subsidiaries.  The CWCredit Facility contains affirmative covenants, including financial covenants,and negative covenants.  Borrowings underthe CW Credit Facility are guaranteed by the direct and indirect subsidiariesof Camping World and are secured by a pledge on the stock of Camping World andits direct and indirect subsidiaries and liens on the assets of Camping Worldand its direct and indirect subsidiaries. The lenders under the New Senior Credit Facility and the CW CreditFacility have entered into an intercreditor agreement that governs their rightsin the collateral that is pledged to secure their respective loans.  As of March 31, 2010, $8.5 million wasborrowed and $7.6 million of letters of credit were issued under the CW CreditFacility.

 

Senior Notes

 

In February 2004, AGI issued $200.0 million aggregate principalamount of 9% senior subordinated notes due 2012 (“Senior Notes”) pursuant to anindenture (the “AGI Indenture”). Interest is payable on the Senior Notes twice a year on February 15and August 15.  AGI’s present andfuture restricted subsidiaries guarantee the Senior Notes with unconditionalguarantees of payment that rank junior in right of payment to their existingand future senior debt, including indebtedness under the New Senior CreditFacility and the CW Credit Facility, but rank equal in right of payment totheir existing and future senior subordinated debt.  All of the Company’s subsidiaries havejointly and severally guaranteed the indebtedness under the Senior Notes exceptfor CWFR Capital Corp.  As of March 31,2010, $137.8 million of Senior Notes remain outstanding.  The fair value of the Senior Notes, based onthe quoted market price at March 31, 2010, was $96.5 million.

 

The New Senior Credit Facility, the CW Credit Facility and the AGIIndenture contain 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.

 

11

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**(6) DEBT (continued)**

 

The New Senior Credit Facility and the CW Credit Facility also containcertain financial affirmative covenants. The Company was in compliance with all debt covenants at March 31,2010.

 

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

 

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

 

12

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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 March 31, 2010 (in thousands).

 
| ** **                                               | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash  equivalents                        |       | $          | 5,781      |           | $          | (552          | )          | $                | —     |             | $          | — |   | $ | 5,229 |   |
| Accounts receivable- net  of allowance                   |       | 1,273      |       | 185,021        |       |          |       | (154,338         | )          | 31,956           |       |
| Inventories                                              |       | —     |       | 53,030         |       | —        |       | —           |       | 53,030           |       |
| Other current assets                                     |       | 2,387      |       | 10,949         |       | —        |       | —           |       | 13,336           |       |
| Total current assets                                     |       | 9,441      |       | 248,448        |       | —        |       | (154,338         | )          | 103,551          |       |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment,  net                             |       | 2,644      |       | 28,329         |       | —        |       | —           |       | 30,973           |       |
| Intangible assets                                        |       | 3,954      |       | 11,838         |       | —        |       | —           |       | 15,792           |       |
| Goodwill                                                 |       | 49,944     |       | —         |       | —        |       | —           |       | 49,944           |       |
| Investment in subsidiaries                               |       | 661,149    |       | —         |       | —        |       | (661,149         | )          | —           |       |
| Affiliate note and  investments                          |       | 40,000     |       | 4,686          |       | —        |       | (40,000          | )          | 4,686            |       |
| Other assets                                             |       | 4,638      |       | 1,180          |       | —        |       | —           |       | 5,818            |       |
| Total assets                                             |       | $          | 771,770    |           | $          | 294,481       |       | $                | —     |             | $          | (855,487 | ) | $ | 210,764 |   |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                         |       | $          | 1,382      |           | $          | 19,280        |       | $                | —     |             | $          | — |   | $ | 20,662 |   |
| Accrued and other  liabilities                           |       | 8,357      |       | 22,357         |       | —        |       | —           |       | 30,714           |       |
| Current portion of  long-term debt                       |       | 154,699    |       | 40,601         |       | —        |       | (194,338         | )          | 962              |       |
| Current portion of  deferred revenue                     |       | 1,026      |       | 55,073         |       | —        |       | —           |       | 56,099           |       |
| Total current liabilities                                |       | 165,464    |       | 137,311        |       |          |       | (194,338         | )          | 108,437          |       |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                         |       | 2,261      |       | 32,559         |       | —        |       | —           |       | 34,820           |       |
| Long-term debt                                           |       | 279,008    |       | 8,528          |       | —        |       | —           |       | 287,536          |       |
| Other long-term  liabilities                             |       | 558,937    |       | (545,066       | )          | —        |       | —           |       | 13,871           |       |
| Total liabilities                                        |       | 1,005,670  |       | (366,668       | )          |          |       | (194,338         | )          | 444,664          |       |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                   |       | —     |       | 661,149        |       | —        |       | (661,149         | )          | —           |       |
| Stockholders’ deficit                               |       | (233,900   | )          | —         |       | —        |       | —           |       | (233,900         | )          |
| Total  liabilities & stockholders’ deficit |       | $          | 771,770    |           | $          | 294,481       |       | $                | —     |             | $          | (855,487 | ) | $ | 210,764 |   |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                                  |       | $          | 553        |           | $          | 105,381       |       | $                | —     |             | $          | — |   | $ | 105,934 |   |
| Costs applicable to  revenues                            |       | (2,054     | )          | (61,877        | )          | —        |       | —           |       | (63,931          | )          |
| Operating expenses                                       |       | (11,298    | )          | (30,783        | )          | —        |       | —           |       | (42,081          | )          |
| Interest expense, net                                    |       | (9,419     | )          | 264            |       | —        |       | —           |       | (9,155           | )          |
| Income from investment in  consolidated subsidiaries     |       | 11,552     |       | —         |       | —        |       | (11,552          | )          | —           |       |
| Other non operating income  (expenses)                   |       | 1,053      |       | (1,404         | )          | —        |       | —           |       | (351             | )          |
| Income tax expense                                       |       | (114       | )          | (29            | )          | —        |       | —           |       | (143             | )          |
| Net (loss) income                                        |       | $          | (9,727     | )              | $          | 11,552        |       | $                | —     |             | $          | (11,552 | ) | $ | (9,727 | ) |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                               |       | $          | (20,921    | )              | $          | 5,583         |       | $                | —     |             | $          | — |   | $ | (15,338 | ) |
| Cash flows provided by  (used in) investing activities   |       | (138       | )          | 763            |       | —        |       | —           |       | 625              |       |
| Cash flows provided by  (used in) financing activities   |       | 26,438     |       | (15,136        | )          | —        |       | —           |       | 11,302           |       |
| Cash at beginning of year                                |       | 402        |       | 8,238          |       | —        |       | —           |       | 8,640            |       |
| Cash at end of period                                    |       | $          | 5,781      |           | $          | (552          | )          | $                | —     |             | $          | — |   | $ | 5,229 |   |

 

13

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

 

The following are summarized balance sheet statements setting forthcertain financial information concerning the Guarantor Subsidiaries as of December 31,2009 (in thousands).

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

 

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 for the three months ended March 31,2009 (in thousands).

 
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                                |       | $          | 1,817      |           | $          | 103,236       |       | $                | —     |             | $          | — |   | $ | 105,053 |   |
| Costs applicable to  revenues                          |       | (2,270     | )          | (63,080        | )          | —        |       | —           |       | (65,350          | )          |
| Operating expenses                                     |       | (4,068     | )          | (30,707        | )          | —        |       | —           |       | (34,775          | )          |
| Interest expense, net                                  |       | (2,613     | )          | (3,080         | )          | —        |       | —           |       | (5,693           | )          |
| Income from investment in  consolidated subsidiaries   |       | 4,820      |       | —         |       | —        |       | (4,820           | )          | —           |       |
| Other non operating income  (expenses)                 |       | 1,281      |       | (1,344         | )          | —        |       | —           |       | (63              | )          |
| Income tax expense                                     |       | (191       | )          | (205           | )          | —        |       | —           |       | (396             | )          |
| Net (loss) income                                      |       | $          | (1,224     | )              | $          | 4,820         |       | $                | —     |             | $          | (4,820 | ) | $ | (1,224 | ) |
|                                                   |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                             |       | $          | (8,164     | )              | $          | 12,390        |       | $                | —     |             | $          | — |   | $ | 4,226 |   |
| Cash flows provided by  (used in) investing activities |       | 1,759      |       | (3,001         | )          | —        |       | —           |       | (1,242           | )          |
| Cash flows provided by  (used in) financing activities |       | 25,795     |       | (17,115        | )          | —        |       | —           |       | 8,680            |       |
| Cash at beginning of year                              |       | 1,300      |       | 9,308          |       | —        |       | —           |       | 10,608           |       |
| Cash at end of period                                  |       | $          | 20,690     |           | $          | 1,582         |       | $                | —     |             | $          | — |   | $ | 22,272 |   |

 

**(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 agreements, 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 the accounting guidance for Fair Value Measurements.  See Note 9 — Fair Value Measurements.  The accounting for changes in the fair valueof a derivative instrument depends on whether it has been designated andqualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under the accounting guidance for Derivative Instrumentsand Hedging Activities, we formally assess, both at inception and periodicallythereafter, whether the hedging derivatives are highly effective in offsettingchanges in either the fair value or cash flows of the hedged item.  Our derivatives that are not designated anddo not qualify as hedges under the accounting guidance for DerivativeInstruments and Hedging Activities are adjusted to fair value through currentearnings.

 

Effective January 1,2009, the Company adopted the provisions of the new accounting guidance forDisclosures about Derivative Instruments and Hedging Activities.  The

 

15

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

 

guidance requiresthat the objectives for using derivative instruments be disclosed to betterconvey the purpose of derivative use in terms of the risks that the Company isintending to manage.  This standard alsorequires disclosure of how derivatives and related hedged items are accountedfor and how they affect the Company’s financial statements.  The adoption of the new guidance did not havea material impact on our condensed consolidated results of operations,financial position or cash flows.

 

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 (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, with settlementand 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.  The fair value of the swap agreements werezero at inception.  The Company enteredinto the interest rate swap agreements to limit the effect of increases on ourfloating rate debt.  The interest rateswap agreements are designated as a cash flow hedge of the variable rateinterest payments due on $135.0 million of the term loans, and accordingly,gains and losses on the fair value of the interest rate swap agreements arereported in accumulated other comprehensive loss and reclassified to earningsin the same period in which the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of these swapsincluded in other long-term liabilities was $8.7 million of which approximately$7.2 million is in accumulated other comprehensive loss, and $1.4 million inthe statement of operations with $0.4 million in the period ended March 31,2010.  The fair value of these swapsincluded in other long-term liabilities was $8.1 million of which $7.0 millionis in accumulated other comprehensive loss and $0.7 million in the statement ofoperations at December 31, 2009. See Note 9 — Fair Value Measurements.

 

Due to thepotential sale of Camping World in September 2008, a highly effectivehedge on the cash flows related to the $35.0 million outstanding debt by the$35.0 million notional amount interest rate swap agreement was deemed to be nolonger probable and was 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 as a gain(loss) on derivative instrument on October 1, 2008.  Included in other comprehensive loss is $0.4million related to changes in the fair value of the $35.0 million interest rateswap prior to October 1, 2008 which will be amortized over the remaininglife of the interest rate swap and included in earnings as a gain (loss) onderivative instrument.

 

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

 

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 loss related tothe $35.0 million interest rate swap was reduced prorata and included inearnings 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, which option wassubsequently terminated, a portion of the highly effective hedge on the cashflows related to the $100.0 million outstanding debt by the $100.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and was deemed to be reasonably possible.  As a result, changes in the value of the last$20.0 million of the $100.0 million interest rate swap agreement are includedin earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last$20.0 million of the $100.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument.

 

The following isthe location and amounts of derivative instruments fair values in the statementof financial position segregated between designated, qualifying hedginginstruments segregated by assets and liabilities as required by accountingguidance.

 
| **Derivatives designated as  hedging intruments under** | ** ** | ** **                  | ** ** | **Fair Value as of:** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| **Statement 133**                                       | ** ** | **Balance Sheet Location**  | ** ** | **3/31/2010**         | ** ** | **12/31/2009** | ** ** |
|                                                    |       |                        |       |                  |       |   |   |
| Interest rate swap  contracts                           |       | Other long-term liabilities |       | $                     | (8,714     | ) | $ | (8,090 | ) |
|                                                         |            |                             |            |                       |            |  |  |  |  |

 

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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 operations for the three months ended March 31, 2010 and 2009segregated between designated, qualifying hedging instruments and those thatare not, and segregated by assets and liabilities as required by the accountingguidance for derivative instruments (in thousands):

 

Derivatives in Cashflow Hedging Relationships:

 
| ** **                                                                                                                        | ** ** | **Interest Rate Swap Agreements**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **3/31/2010**                        | ** ** | **3/31/2009** | ** ** |
| Amount of Gain or (Loss)  recognized in Other Comprehensive Loss on Derivatives                                                   |       | $                                    | (342       | ) | $ | 168 |   |
|                                                                                                                              |       |                                 |       |   |   |
| Location of Gain (Loss)  Reclassified from Accumulated Other Comprehensive Loss into Statement of  Operations (Effective portion) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                   |            |                                      |            |  |  |  |  |

 
| ** **                                                                                                                                          | ** ** | **3/31/2010**                        | ** ** | **3/31/2009** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|
| Amount of Gain or (Loss)  reclassified from Other Comprehensive Loss into Statement of Operations  (Effective portion)                              |       | $                                    | (94        | )             | $          | 34 |   |
|                                                                                                                                                |       |                                 |       |          |       |
| Location of Gain (Loss)  Recognized in Statement of Operations on Derivatives (Ineffective portion and  amount excluded from effectiveness testing) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                                     |            |                                      |            |               |            |  |  |

 
| ** **                                                                                                                          | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Amount of Gain or (Loss)  recognized in income on Derivatives (Ineffective portion and amount excluded  from effectiveness testing) |       | $             | (282       | )             | $          | (14 | ) |
|                                                                                                                                     |            |               |            |               |            |  |  |

 

**(9) FAIR VALUE MEASUREMENTS**

 

Accounting guidance for fair valuemeasurements establishes a three-tier fair value hierarchy, which prioritizesthe inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such asquoted prices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

As of March 31, 2010, the Company holdsinterest rate swap contracts that are required to be measured at fair value ona recurring basis.  The Company’sinterest rate swap contracts are not traded on a public exchange.  See Note 8 Interest Rate Swap Agreements forfurther information on the interest rate swap contracts.  The fair value of these interest rate swapcontracts are determined based on inputs that are readily available in publicmarkets or can be derived from information available in publicly quotedmarkets.  Therefore, the Company hascategorized these swap contracts as Level 2.

 

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

 

The Company’s liabilities at March 31, 2010, measured at fairvalue on a recurring basis subject to the disclosure requirements of fair valuemeasurements, was as follows:

 
| ** **                       | ** ** | ** ** | ** ** | **Fair Value Measurements at Reporting Date Using**        | ** ** |
|----------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| **(in thousands)**               | ** ** | ** ** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**                  | ** ** | **Amount** | ** ** | **(Level 1)**                                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                             |       |       |       |                                                       |       |   |   |   |   |
| As of March 31, 2010:       |       |       |       |                                                       |       |   |   |   |   |
| Interest Rate Swap  Contracts    |       | $          | (8,714     | )                                                          | $          | — |   | $ | (8,714 | ) | $ | — |   |
| FreedomRoads Preferred  Interest |       | —     |       | —                                                     |       | — |   | — |   |
| Media Goodwill                   |       | —     |       | —                                                     |       | — |   | — |   |
|                             |       |       |       |                                                       |       |   |   |   |   |
| As of December 31,  2009:   |       |       |       |                                                       |       |   |   |   |   |
| Interest Rate Swap  Contracts    |       | (8,090     | )          | —                                                     |       | (8,090 | ) | — |   |
| FreedomRoads Preferred  Interest |       | —     |       | —                                                     |       | — |   | — |   |
| Retail Goodwill                  |       | —     |       | —                                                     |       | — |   | — |   |
|                                  |            |            |            |                                                            |            |  |  |  |  |  |  |  |  |

 

The fair value ofthe interest rate swap contracts was calculated using the income method basedon quoted interest rates.

 

There have been notransfers of assets or liabilities between the fair value measurement levelsand there were no material remeasurements to fair value during the three monthsended March 31, 2010 and 2009 of assets and liabilities that are not measuredat fair value on a recurring basis.

 

The following table presents the reported carrying value and fair valueinformation for the Senior Notes, New Senior Credit Facility and CW CreditFacility.  The fair values shown belowfor the Senior Notes are based on quoted prices in the market for identicalassets (Level 1), and the fair value shown for the Senior Credit Facility andthe CW Credit Facility are based on indirect observable inputs (Level 2) (inthousands):

 
| ** **                 | ** ** | **3/31/2010** | ** ** | **12/31/2009** | ** ** |
|----------------------------|------------|---------------|------------|----------------|------------|
| ** **                 | ** ** | **Cost**      | ** ** | **Fair Value** | ** ** | **Cost** | ** ** | **Fair Value** | ** ** |
| Senior Notes               |       | $             | 137,824    |           | $          | 96,477 |   | $ | 137,824 |   | $ | 93,893 |   |
| New Senior Credit Facility |       | 141,545       |       | 141,545        |       | 128,856 |   | 122,425 |   |
| CW Credit Facility         |       | 8,528         |       | 8,528          |       | — |   | — |   |
|                            |            |               |            |                |            |  |  |  |  |  |  |  |  |

 

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**(10) ****INCOME TAXES**

 

The followingtable summarizes the activity related to unrecognized tax benefits (inthousands):

 
| Balance at January 1,  2010                                                         |   | $      | 1,339  |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Gross increases in  unrecognized tax benefits due to prior year positions                |   | — |   |
| Gross decreases in  unrecognized tax benefits due to prior year positions                |   | — |   |
| Gross increases in  unrecognized tax benefits due to current year positions              |   | — |   |
| Gross decreases in  unrecognized tax benefits due to current year positions              |   | — |   |
| Gross decreases in  unrecognized tax benefits due to settlements with taxing authorities |   | — |   |
| Gross decreases in  unrecognized tax benefits due to statute expirations                 |   | — |   |
| Other                                                                                    |   | 2      |   |
| Unrecognized tax benefits  at March 31, 2010                                        |   | $      | 1,341  |   |

 

The Companyaccrues interest and penalties related to unrecognized tax benefits in itsincome tax provision.  The Companyreversed accrued interest and penalties of $2.0 million related to decreases inunrecognized tax benefits during the first three months of 2010.  As of March 31, 2010, the liability forpenalties and interest was $0.5 million. The Company expects its unrecognizedtax benefits to decrease by $1.3 million over the next nine months.

 

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

 

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**ITEM2:**

 

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** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **3/31/2010**          | ** ** | **3/31/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                  |       |                   |       |   |   |   |   |
| REVENUES:                             |       |                   |       |   |   |   |   |
| Membership services                   |       | 35.0                   | %          | 33.5 | % | 5.2 | % |
| Media                                 |       | 13.9                   | %          | 16.6 | % | (15.7 | )% |
| Retail                                |       | 51.1                   | %          | 49.9 | % | 3.4 | % |
|                                  |       | 100.0                  | %          | 100.0 | % | 0.8 | % |
|                                  |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO  REVENUES:        |       |                   |       |   |   |   |   |
| Membership services                   |       | 19.0                   | %          | 19.4 | % | (1.2 | )% |
| Media                                 |       | 11.0                   | %          | 12.8 | % | (13.8 | )% |
| Retail                                |       | 30.3                   | %          | 30.0 | % | 2.2 | % |
|                                  |       | 60.3                   | %          | 62.2 | % | (2.2 | )% |
|                                  |       |                   |       |   |   |   |   |
| GROSS PROFIT                          |       | 39.7                   | %          | 37.8 | % | 5.8 | % |
|                                  |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                   |       |                   |       |   |   |   |   |
| Selling, general and  administrative  |       | 28.5                   | %          | 28.5 | % | 0.8 | % |
| Financing expense                     |       | 6.7                    | %          | — |   | 100.0 | % |
| Depreciation and  amortization        |       | 4.6                    | %          | 4.6 | % | (0.2 | )% |
|                                  |       | 39.8                   | %          | 33.1 | % | 21.0 | % |
|                                  |       |                   |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS         |       | (0.1                   | )%         | 4.7 | % | (101.6 | )% |
|                                  |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                  |       |                   |       |   |   |   |   |
| Interest income                       |       | 0.1                    | %          | 0.1 | % | (3.1 | )% |
| Interest expense                      |       | (8.7                   | )%         | (5.5 | )% | 59.4 | % |
| (Loss) gain on derivative  instrument |       | (0.4                   | )%         | — |   | (1980.0 | )% |
| Other non-operating items,  net       |       | —                 |       | (0.1 | )% | (130.1 | )% |
|                                  |       | (9.0                   | )%         | (5.5 | )% | 65.1 | % |
|                                  |       |                   |       |   |   |   |   |
| LOSS BEFORE INCOME TAXES              |       | (9.1                   | )%         | (0.8 | )% | 1057.5 | % |
|                                  |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                    |       | (0.1                   | )%         | (0.4 | )% | (63.9 | )% |
|                                  |       |                   |       |   |   |   |   |
| NET LOSS                              |       | (9.2                   | )%         | (1.2 | )% | 694.7 | % |

 

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended March 31, 2010**

**ComparedWith Three Months Ended March 31, 2009**

 

*Revenues*

 

Revenuesof $105.9 million for the first quarter of 2010 increased by $0.9 million, or0.8%, from the comparable period in 2009.

 

MembershipServices revenues of $37.1 million for the first quarter of 2010 increased $1.8million, or 5.2%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $2.2 million revenue increase related to vehicle insuranceproducts primarily related to a $2.5 million fee received as a result ofwaiving our right of first refusal regarding the sale of the third partypartner, a$0.4 million increase in extended vehiclewarranty program revenue resulting from continued policy growth and strongrenewals, a $0.3 million increase in Good Sam Club revenue, a $0.3 millionincrease in revenue from emergency road service products, and a $0.1 millionincrease in various other ancillary products. These increases were partially offset by a$1.2 million revenue decrease due to the termination of the brand usagelicensing fee charged to FreedomRoads Holding LLC and its subsidiaries(collectively “FreedomRoads”) in December 2009, and a $0.3 milliondecrease due to reduced membership for the Coast Club and Golf Card Club.

 

Mediarevenues of $14.7 million for the first quarter of 2010 decreased $2.7 million,or 15.7%, from the comparable period in 2009. This decrease was primarily attributable to a $1.3 million reduction inrevenue from our outdoor power sports magazines related to reduced advertisingrevenue and reduced issues published, a $0.5 million reduction in RV relatedpublication revenue primarily attributable to reduced advertising revenue, anda $1.1 million reduction in exhibitor revenue resulting from six fewer consumershows in the first quarter of 2010 compared to the first quarter of 2009.  These decreases were partially offset by a$0.2 million increase in RV book sales.

 

Retail revenues of$54.2 million increased by $1.8 million, or 3.4%, from the comparable period in2009.  Store merchandise sales decreased$0.2 million from the first quarter of 2009 due to decreased revenue fromdiscontinued stores of $0.5 million partially offset by a same store salesincrease of $0.2 million, or 0.6%, compared to a 17.0% decrease in same storesales for the first quarter of 2009, and a $0.1 million revenue increase fromthe opening of one new store over the past fifteen months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Also, mail order and internet sales increased$1.4 million, installation and service fees increased $0.3 million and suppliesand other sales increased $0.3 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $63.9 million for the first quarter of 2010, adecrease of $1.4 million, or 2.2%, from the comparable period in 2009.

 

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MembershipServices costs applicable to revenues of $20.1 million decreased $0.3 million,or 1.2%, from the comparable period in 2009. This decrease consisted of a $0.4 million reduction in wage-relatedexpenses, and a $0.3 million reduction in marketing and program costs relatedto reduced membership in the Coast Club and Golf Card Club, partially offset bya $0.4 million increase in emergency road services and extended vehiclewarranty program costs.

 

Mediacosts applicable to revenues of $11.6 million for the first quarter of 2010decreased $1.9 million, or 13.8%, from the comparable period in 2009 primarilyrelated to a $0.9 million reduction in magazine expenses resulting from reducedissues published, a $0.7 million reduction in costs related to reduced consumershows revenue, and a $0.5 million reduction in wage-related costs.  These decreases were partially offset by $0.2million of additional costs related to increase book revenue.

 

Retailcosts applicable to revenues increased $0.7 million, or 2.2%, to $32.2million.  The retail gross profit marginof 40.5% for the first quarter of 2010 increased from 39.8% for the comparableperiod in 2009 primarily due to selective price increases and vendorconcessions.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $30.2 million for the first quarter of2010 increased $0.2 million compared to the first quarter of 2009.  This increase was due to an increase inretail general and administrative expenses consisting primarily of increases inreal and personal property taxes partially offset by a decrease in retailselling expenses.

 

Forthe first quarter of 2010, financing expense of $7.1 million was incurred forlegal and other costs related to the New Senior Credit Facility entered into onMarch 1, 2010, which was expensed in accordance with accounting guidancefor debtors accounting for a modification or exchange of debt instruments.

 

Depreciationand amortization expense of $4.8 million decreased $0.1 million from the prioryear primarily dueto reduced amortization of intangible assetsassociated with prior acquisitions, and reduced capital expenditures partially offset by increasedamortization related to the New Senior Credit Facility re-financing.

 

*(Loss)Income from Operations*

 

Lossfrom operations for the first quarter of 2010 totaled $0.1 million compared toincome from operations of $4.9 million for the first quarter of 2009.  This $5.0 million decrease was primarily theresult of $7.1 million of financing expense in the first quarter of 2010, reducedgross profit for the Media segment of $0.9 million and increased operatingexpenses of $0.2 million.  Thesedecreases were partially offset by increased gross profit for the MembershipServices and Retail segments of $2.1 million and $1.1 million, respectively.

 

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*Non-OperatingItems*

 

Non-operatingitems of approximately $9.5 million for the first quarter of 2010 increased$3.8 million compared to the first quarter of 2009 due to a $3.5 millionincrease in interest expense relating to higher interest rates and an increasein debt, and a $0.4 million increase in loss on derivative interest rate swapagreements, partially offset by a $0.1 million gain on sale of equipment.  See Note 8 — Interest Rate Swap Agreements.

 

*LossBefore Income Tax*

 

Lossbefore income tax for the first quarter of 2010 was $9.6 million, or $8.8million more than the loss before income tax for the first quarter of2009.  This increased loss wasattributable to the $5.0 million increase in loss from operations and a $3.8million increase in non-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.1 million for the firstquarter of 2010, compared to $0.4 million income tax expense for the firstquarter of 2009.

 

# *Net loss*

 

Netloss in the first quarter of 2010 was $9.7 million compared to $1.2 million netloss for the same period in 2009 mainly due to the reasons discussed above.

 

*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 and services.  They are managed separately because eachbusiness required different technology, management expertise and marketingstrategies.

 

Membershipservices segment profit of $15.2 million for the first quarter of 2010increased $2.6 million, or 20.3%, from the comparable period in 2009.  This increase was largely attributable to a$2.1 million increase in vehicle insurance profit primarily related to 

 

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a $2.5 million feereceived as a result of waiving our right of first refusal regarding the saleof the third party partner, a $0.9 million increase in profit from the Good SamClub related to increased membership terms, a $0.4 million increase in profitfrom emergency road service products, a $0.3 million increase in segment profitfrom various ancillary products, and a $0.1 million increase in profit relatedto reduced marketing and program expenses in the Coast to Coast Club and GolfCard Club.  These increases were partiallyoffset by a $1.2 million decrease in segment profit relating to reduced brandusage licensing fees from FreedomRoads.

 

Media segmentprofit decreased $0.4 million, or 30.5%, to $0.9 million for the first quarterof 2010 from the comparable period in 2009. This decrease in segment profit resulted primarily from a $0.2 milliondecrease in segment profit from our RV publications, and a $0.2 milliondecrease in segment profit from our consumer shows group.

 

Retail segmentloss was $4.5 million for the first quarter of 2010 compared to a loss of $8.2million for the first quarter of 2009.  This $3.6million reduction in segment loss was the result of a $3.4 million decrease inallocated interest expense and a $0.8 million increase in gross profit margin,partially offset by $0.4 million of financing expense and a $0.2 millionincrease in selling, general and administrative expenses.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The Company hashistorically operated with a working capital deficit.  The working capital deficit as of March 31,2010 and December 31, 2009 was $4.9 million and $4.8 million,respectively.  The primary reason for theworking capital deficit was the deferred revenue and gains reported undercurrent liabilities of $56.1 million and $60.7 million, as of March 31,2010 and December 31, 2009, 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.

 

In 2009, theCompany and its parent, AGHI, engaged a financial advisor to assist inrefinancing or restructuring of the Senior Notes ($137.8 million principaloutstanding at March 31, 2010 and maturing on February 15, 2012) andthe AGHI Notes ($87.0 million principal outstanding at March 31, 2010 andmaturing February 15, 2012).  AGHIdeferred payment of the interest on the AGHI Notes that was due on August 15,2009.  The indenture governing the AGHINotes provides a 30 day grace period for the payment of interest.  Before the end of the grace period, AGHIreceived consent letters for extending such grace period from certaininstitutional holders of the AGHI Notes holding in the aggregate $65.8 millionprincipal amount of the AGHI Notes and from non-institutional holders holdingin the aggregate $46.6 million principal amount of the AGHI Notes and paid theinterest of the remaining AGHI Notes. The aggregate principal amount of the AGHI Notes outstanding was then $113.6million so the holders executing the consents held 98.9% of the outstandingprincipal amount of the AGHI Notes. Pursuant to the consent letters from the institutional holders, AGHIagreed to pay the legal fees for a law firm to represent the institutionalholders. In addition, AGHI paid a consent fee equal 1⁄4 of 1% of the principalamount to the 

 

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institutionalholders who signed a consent letter, or an aggregate of $164,600.  No consent fee was paid to thenon-institutional holders.  AGHIsatisfied the August 15, 2009 interest payment in January, 2010 with $4.5million in cash (funded, in part, from a $2.8 million capital contribution fromits shareholder, and the balance from AGI as a permitted tax distributions),and the remaining $1.7 million due to related entities was forgiven and, assuch, reported as an equity contribution. AGHI satisfied the interest payment due February 15, 2010 on March 5,2010 with $4.4 million in cash (funded, in part, from $2.5 million received byAGHI in connection with a waiver by AGHI of certain first refusal rightsrelated to AGI’s vehicle insurance business and the balance from AGI as apermitted tax distribution) and the remaining $1.8 million due to relatedentities was forgiven and, as such, reported as an equity contribution.  As a condition to funding of the New SeniorCredit Facility, AGHI acquired $25.4 million of AGHI Notes due on March 15,2010 that were held by an affiliate of AGHI, contributed them to AGHI, andcancelled those notes, thereby reducing the approximately $112.3 million ofAGHI Notes outstanding as of December 31, 2009 to approximately $87.0million as of March 31, 2010.

 

*Contractual Obligations and Commercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at March 31, 2010.  Thistable includes principal and future interest due under our debt agreementsbased on interest rates as of March 31, 2010 and assumes debt obligationswill be held to maturity.

 
| ** **                   | ** ** | **Payments Due by Period** | ** ** |
|------------------------------|------------|----------------------------|------------|
| **(in thousands)**           | ** ** | **Total**                  | ** ** | **2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  2014** | ** ** | **Thereafter** | ** ** |
|                         |       |                       |       |   |   |   |   |   |   |   |   |
| Debt and future interest     |       | $                          | 356,087    |   | $ | 25,177 |   | $ | 330,910 |   | $ | — |   | $ | — |   |
| Operating lease  obligations |       | 215,003                    |       | 17,186 |   | 41,589 |   | 35,438 |   | 120,790 |   |
| Standby letters of credit    |       | 7,610                      |       | 7,610 |   | — |   | — |   | — |   |
| Grand total                  |       | $                          | 578,700    |   | $ | 49,973 |   | $ | 372,499 |   | $ | 35,438 |   | $ | 120,790 |   |

 

In accordance withtheir respective loan agreements, the maturity dates of the New Senior CreditFacility and the CW Credit Facility accelerate to mature 90 days and 120 days,respectively, prior to maturity of the Senior Notes and the AGHI Notes.  The Debt and future interest disclosed aboveassumes the Senior Notes and AGHI Notes, both due February 15, 2012, arenot extended.

 

New Senior CreditFacility

 

On March 1, 2010, the Company entered into the New Senior CreditFacility to refinance the existing senior credit facility ($128.9 millionaggregate principal amount outstanding at December 31, 2009) which wasscheduled to mature on March 31, 2010, the second lien notes due July 31,2010 ($9.7 million principal amount outstanding at December 31, 2009), andthe SA Loan ($1.0 million principal amount outstanding at December 31,2009).  The New Senior Credit Facilityprovides for term loans aggregating $144.3 million, including an original issuediscount of 2%, that are payable in quarterly installments of $360,750beginning March 1, 2011.  Inaddition, there are mandatory prepayments of the term loans from excess cashflow (as defined) of AGI and from asset sales. The term 

 

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loans under the New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either Senior Notes ($137.8million principal amount outstanding as at March 31, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat March 31, 2010 and are due February 15, 2012).  Interest on the term loans under the NewSenior Credit Facility floats at either 8.75% over the base rate (defined asthe greater of the prime rate, federal funds rate plus 50 basis points or5.25%) for borrowings whose interest is based on the prime rate or 10.0% overthe LIBOR rate (defined as the greater of the 3 months LIBOR rate or 3.0%) forborrowings whose interest is based on LIBOR. After consideration of fixed rates under the interest rate swapagreements, (See Note 8- Interest Rate Swap Agreements), as of March 31,2010, the average annual interest rate on the term loans was 16.83%.  The New Senior Credit Facility containsaffirmative covenants, including financial covenants, and negative covenants,including a restriction on dividends or distributions by AGI to AGHI.  Borrowings under the New Senior CreditFacility are guaranteed by the direct and indirect subsidiaries of AGI and aresecured by liens on the assets of AGI and its direct and indirectsubsidiaries.  As a condition to the termloans under the New Senior Credit Facility, $25.4 million of AGHI Notes due on March 15,2010 that were held by an affiliate of AGHI were contributed to AGHI and AGHIcancelled those notes.  As of March 31,2010, $141.6 million, net of approximately $2.8 million of unamortized originalissue discount, was outstanding on the New Senior Credit Facility.  Restricted cash of $8.1 million was releasedfrom its restriction on March 1, 2010, when the existing credit facilitywas refinanced.

 

CW Credit Facility

 

In addition, on March 1, 2010, Camping World entered into a creditagreement (the “CW Credit Facility”) providing for an asset based lendingfacility of up to $22.0 million, of which $10.0 million is available forletters of credit and $12.0 million is available for revolving loans.  The CW Credit Facility matures on the earlierof (i) March 1, 2013, (ii) 60 days prior to the date of maturityof the New Senior Credit Facility, or (iii) 120 days prior to the earlierdate of maturity of the Senior Notes and the AGHI Notes.  Interest under the revolving loans under theCW Credit Facility floats at either 3.25% over the base rate (defined as thegreater of the prime rate, federal funds rate plus 50 basis points or 1 monthLIBOR) for borrowings whose interest is based on the prime rate or 3.25% overthe LIBOR rate (defined as the greater of LIBOR rate applicable to the periodof the respective LIBOR borrowings or 1.0%) for borrowings whose interest isbased on LIBOR. As of March 31, 2010, the average interest rate on the CWCredit Facility was 4.25%. Borrowings under the CW Credit Facility are based onthe borrowing base of eligible inventory and accounts receivable of CampingWorld and its subsidiaries.  The CWCredit Facility contains affirmative covenants, including financial covenants,and negative covenants.  Borrowings underthe Camping World Credit Agreement are guaranteed by the direct and indirectsubsidiaries of Camping World and are secured by a pledge on the stock ofCamping World and its direct and indirect subsidiaries and liens on the assetsof Camping World and its direct and indirect subsidiaries.  The lenders under the New Senior CreditFacility and the CW Credit Facility have entered into an intercreditoragreement that governs their rights in the collateral that is pledged to securetheir respective loans.  As of March 31,2010, $8.5 million was borrowed and $7.6 million of letters of credit wereissued under the CW Credit Facility.

 

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Senior Notes

 

In February 2004,AGI issued $200.0 million of Senior Notes pursuant to the AGI Indenture.  Interest at the rate of 9% per annum is dueon the Senior Notes on February 15 and August 15.  The Senior Notes mature on February 15,2012.  As of March 31, 2010, $137.8million of Senior Notes remained outstanding. The fair value of the Senior Notes, based on the quoted market price at March 31,2010, was $96.5 million.

 

The New Senior Credit Facility, the CW Credit Facility and the AGIIndenture contain 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.  The New Senior Credit Facility and the CWCredit Facility also contain certain financial and minimum operatingcovenants.  The Company was in compliancewith all debt covenants at March 31, 2010.

 

Interest Rate Swap Agreements

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 5.135%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap agreement was effective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of $35.0million from which it will receive periodic payments at the 3 month LIBOR-basedvariable rate (0.2486% at March 31, 2010 based upon the January 31,2010 reset date) and make periodic payments at a fixed rate of 3.430%, withsettlement and rate reset dates every January 31, April 30, July 31,and October 31.  The interest rateswap was effective beginning April 30, 2008 and expires on October 31,2012.  The fair value of the swapagreements were zero at inception.  TheCompany entered into the interest rate swap agreements to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap agreements are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans, andaccordingly, gains and losses on the fair value of the interest rate swapagreements are reported in accumulated other comprehensive loss andreclassified to earnings in the same period in which the hedged interestpayment affects earnings.  The interestrate swap agreements expire on October 31, 2012.  The fair value of these swaps included inother long-term liabilities was $8.7 million of which approximately $7.2million is in accumulated other comprehensive loss, and $1.4 million in thestatement of operations with $0.4 million in the period ended March 31,2010.  The fair value of these swapsincluded in other long-term liabilities was $8.1 million of which $7.0 millionis in accumulated other comprehensive loss and $0.7 million in the statement ofoperations at December 31, 2009. See Note 9 — Fair Value Measurements.

 

Due to thepotential sale of Camping World in September 2008, a highly effectivehedge on the cash flows related to the $35.0 million outstanding debt by the$35.0 million notional amount interest rate swap agreement was deemed to be nolonger probable and was 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 as a gain(loss)

 

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on derivativeinstrument on October 1, 2008. Included in other comprehensive loss is $0.4 million related to changesin 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.

 

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 loss related tothe $35.0 million interest rate swap was reduced prorata and included inearnings 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, which option wassubsequently terminated, a portion of the highly effective hedge on the cashflows related to the $100.0 million outstanding debt by the $100.0 millionnotional amount interest rate swap agreement was deemed to be no longerprobable and was deemed to be reasonably possible.  As a result, changes in the value of the last$20.0 million of the $100.0 million interest rate swap agreement are includedin earnings beginning on June 5, 2009. Included in other comprehensive loss is $1.6 million related to the last$20.0 million of the $100.0 million interest rate swap which will be amortizedover the remaining life of the interest rate swap and included in earnings as again (loss) on derivative instrument.

 

Other ContractualObligations and Commercial Commitments

 

For the threemonths ended March 31, 2010, the Company incurred no deferred executivecompensation expense under the phantom stock agreements, and made no paymentsunder the terms of the vested phantom stock agreements.  No phantom stock payments are scheduled to**be made for the remainder of 2010.

 

Capitalexpenditures for the first three months of 2010 totaling $0.2 million decreased$1.1 million from the first three months of 2009 primarily due to thecurtailment of new retail store openings. Additional capital expenditures of $4.0 million are anticipated for thebalance of 2010 primarily for software enhancements, information technologyupgrades and further 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 

 

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programs andincentives, bad debts, inventories, intangible assets, employee healthinsurance benefits, income taxes, restructuring, contingencies andlitigation.  The Company bases itsestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions.

 

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. Publicationadvertising and newsstand sales, net of estimated provision for returns, arerecorded at time of delivery. Subscription sales of publications are deferred and recognized over thelives of the subscriptions.  Revenuesfrom the emergency road service program (“ERS”) are deferred and recognizedover the life of the membership.  ERSclaim expenses are recognized when incurred. Advances on third party credit card fee revenues are deferred andrecognized based primarily on a percentage of credit card receivables held bythird parties.  Membership revenue isgenerated from annual, multi-year and lifetime memberships.  The revenue and expenses associated withthese memberships are deferred and amortized over the membership period.  For lifetime memberships, an 18-year periodis used, which is the actuarially determined estimated fulfillment period.  Promotional expenses, consisting primarily ofdirect mail advertising, are deferred and expensed over the period of expectedfuture benefit.  Renewal expenses areexpensed at the time related materials are mailed.  Recognized revenues and profit are subject torevisions as the membership progresses to completion.  Revisions to membership period estimateswould change the amount of income and expense amortized in future accountingperiods.  Revenue and related expensesfor consumer shows are recognized when the show occurs.

 

*Accounts Receivable*

 

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

 

*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 that 

 

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changes inrequired inventory reserves may continue to occur in the future due to themarket 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 new accounting guidance for accounting for the impairment ordisposal of long-lived assets.  TheCompany assesses the fair value of the assets based on the future cash flow theassets are expected to generate and recognize an impairment loss when estimatedundiscounted future cash flow expected to result from the use of the asset plusnet proceeds expected from disposition of the asset (if any) are less than thecarrying value of the asset.  When animpairment is identified, the Company reduces the carrying amount of the assetto its estimated fair value based on a discounted cash flow approach or, whenavailable and appropriate, comparable market values.

 

The Company hasevaluated the remaining useful lives of its finite-lived purchased intangibleassets to determine if any adjustments to the useful lives were necessary or ifany of these assets had indefinite lives and were therefore not subject toamortization.  The Company determinedthat no adjustments to the useful lives of its finite-lived purchasedintangible assets were necessary.  Thefinite-lived purchased intangible assets consist of membership customer lists,resort and golf course agreements, non-compete and deferred consultingagreements and deferred financing costs which have weighted average usefullives of approximately 6 years, 4 years, 15 years and 5 years, respectively.

 

*Indefinite-LivedIntangible Assets*

 

The Companyevaluates indefinite-lived intangible assets for impairment at least annuallyor when events indicate that impairment exists in accordance with accountingguidance for goodwill and other intangibles. The impairment test for goodwill and other indefinite-lived intangibleassets is calculated 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.

 

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

 

In the thirdquarter of 2009, the Company noted continued reduction in advertising revenuein the operations of our RV and powersports publications, as well as flat tomoderate projected growth in future advertising revenue as a result ofcontinued deterioration of general economic conditions and consumerconfidence.  Based on the above, theCompany determined that there were identified indicators of impairment withinthese reporting units in the Media segment.

 

The Companyperformed an impairment test of the goodwill and intangible assets of thereporting units of our RV and powersports publications.  The impairment test indicated that theestimated fair value of these reporting units were less than book value.  The excess of the carrying value over theestimated fair value of the these reporting units was primarily due to thedecline in the recreational vehicle and camping retail markets leading to lowerexpected future cash flows for the business. In determining the fair value, theCompany used an income valuation approach.

 

In performing thesecond step of the goodwill impairment test, the Company allocated theestimated fair values of the reporting units of our RV and powersportspublications determined in step one of the impairment test, to the assets andliabilities of the respective reporting unit in accordance with new accountingguidance for Business Combinations. The Company measured the impairment forthese units to be equal to the carrying value of its goodwill, or $46.9million.  The Company recorded animpairment charge of $46.9 million in the third quarter of 2009 related tothese units, which is part of the Media segment.

 

Future goodwillimpairment tests could result in a charge to earnings.  The Company will continue to evaluategoodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

*AccumulatedOther Comprehensive Loss*

 

Changes in thefair value of derivatives designated as highly effective cash flow hedges arerecorded in Accumulated Other Comprehensive Loss.  At March 31, 2010, Accumulated OtherComprehensive Loss was $7.2 million.

 

*Derivative Financial Instruments*

 

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

 

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betweenhedging instruments and hedged items, as well as risk management objectives andstrategies for undertaking various hedge transactions.

 

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

 

*FairValue Measurements*

 

Accounting guidance for fair valuemeasurements establishes a three-tier fair value hierarchy, which prioritizesthe inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such asquoted prices in active markets; Level 2, defined as inputs other than quotedprices in active markets that are either directly or indirectly observable; andLevel 3, defined as unobservable inputs in which little or no market dataexists, therefore requiring an entity to develop its own assumptions.

 

The Company has determined that it utilizesobservable (Level 2) inputs in determining the fair value of its interest rateswap agreements which totaled $8.7 million at March 31, 2010.  The Company has determined that it utilizesunobservable (Level 3) inputs in determining the fair value of its FreedomRoadsPreferred Interest, and Media and Retail segment goodwill.

 

*IncomeTaxes*

 

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

 

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**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 agreements.

 

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

 

*InterestRate Sensitivity Analysis*

 

At March 31,2010, the total debt of the Company was $288.5 million, including $150.1million of variable rate debt comprised of $141.6 million of term loans underthe New Senior Credit Facility, of which $120.0 million is fixed through theinterest rate swap agreements, and $8.5 million under the CW CreditFacility.  Fixed rate debt of $138.4 millionis comprised of $137.8 million of Senior Notes and $0.6 million of purchasedebt.  Holding other variables constant(such as debt levels), the earnings and cash flow impact of a one-percentagepoint increase/ decrease in interest rates would have no impact as the variabledebt is fixed by a minimum interest rate as defined in the respectiveagreements.

 

*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 

 

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SEC filings.  Managementdetermined that, as of March 31, 2010, there have been no significantchanges in the Company’s internal control over financial reporting or in otherfactors that could significantly affect these controls subsequent to the datethe Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**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:  May 13, 2010 | Thomas F. Wolfe                                    |
|                     | Senior Vice  President and Chief Financial Officer |

 

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