**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

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

**TheSecurities Exchange Act of 1934**

 

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

 

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**AFFINITY GROUP, INC.**

(Exact name of registrant as specified in its charter)

** **

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

 

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

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

**9% Senior Subordinated Notes Due 2012**

 

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

YES  **x**       NO  o

 

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

YES  o    NO  o

 

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

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

 

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

YES  o       NO  **x**

 

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

** **

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

 

**DOCUMENTS INCORPORATED BYREFERENCE:  None**

 

 

 

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**AFFINITY GROUP, INC. ANDSUBSIDIARIES**

 

**INDEX**

 
| ** **                            | ** **                                                                                               | **Page** |
|---------------------------------------|----------------------------------------------------------------------------------------------------------|----------|
| **Part I.**Financial Information |                                                                                                     |
|                                  |                                                                                                     |     |
|                                  | **Item  1: Financial Statements**                                                                        |     |
|                                  |                                                                                                     |     |
|                                  | Consolidated  Balance Sheets  as of June 30, 2010 (unaudited) and December 31, 2009            | 1        |
|                                  |                                                                                                     |     |
|                                  | Unaudited Consolidated Statements of Operations  for the three months ended June 30, 2010 and 2009  | 2        |
|                                  |                                                                                                     |     |
|                                  | Unaudited Consolidated Statements of Operations  for the six months ended June 30, 2010 and 2009    | 3        |
|                                  |                                                                                                     |     |
|                                  | Unaudited Consolidated Statements of Cash Flows  for the six months ended June 30, 2010 and 2009    | 4        |
|                                  |                                                                                                     |     |
|                                  | Notes to Unaudited Consolidated Financial Statements                                                     | 5        |
|                                  |                                                                                                     |     |
| ** **                            | **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations** | 22       |
|                                  |                                                                                                     |     |
|                                  | **Item 3: Quantitative and Qualitative Disclosures about  Market Risk**                                  | 39       |
|                                  |                                                                                                     |     |
|                                  | **Item 4: Controls and Procedures**                                                                      | 40       |
|                                  |                                                                                                     |     |
| **Part II. Other Information**   | 41                                                                                                       |
|                                  |                                                                                                     |     |
|                                  | **Item 1A: Risk Factors**                                                                                | 41       |
|                                  |                                                                                                     |     |
|                                  | **Item 6: Exhibits**                                                                                     | 41       |
|                                  |                                                                                                     |     |
| **Signatures**                        | 42                                                                                                       |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

June 30, 2010 and December 31, 2009

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **6/30/2010**   | ** ** | **12/31/2009** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 12,589     |           | $          | 8,640 |   |
| Restricted cash                                                                                 |       | —          |       | 8,058          |       |
| Accounts receivable, less allowance for doubtful  accounts of $3,607 in 2010 and $3,128 in 2009 |       | 30,920          |       | 32,321         |       |
| Inventories                                                                                     |       | 66,678          |       | 49,921         |       |
| Prepaid expenses and other assets                                                               |       | 17,150          |       | 13,067         |       |
| Total current assets                                                                            |       | 127,337         |       | 112,007        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 29,468          |       | 34,276         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                                 |       | 4,815           |       | 4,837          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 13,906          |       | 13,738         |       |
| GOODWILL                                                                                        |       | 49,944          |       | 49,944         |       |
| OTHER ASSETS                                                                                    |       | 5,762           |       | 6,767          |       |
| Total assets                                                                                    |       | $               | 231,232    |           | $          | 221,569 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S  DEFICIT**                                                 |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 30,378     |           | $          | 23,795 |   |
| Accrued interest                                                                                |       | 7,134           |       | 5,688          |       |
| Accrued income taxes                                                                            |       | 1,723           |       | 1,598          |       |
| Accrued liabilities                                                                             |       | 27,128          |       | 24,060         |       |
| Deferred revenues and gains                                                                     |       | 60,253          |       | 60,728         |       |
| Current portion of long-term debt                                                               |       | 1,037           |       | 892            |       |
| Total current liabilities                                                                       |       | 127,653         |       | 116,761        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 35,030          |       | 35,607         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 284,929         |       | 277,522        |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 15,678          |       | 13,204         |       |
|                                                                                            |       | 463,290         |       | 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                                                                             |       | (314,437        | )          | (304,031       | )          |
| Accumulated other comprehensive loss                                                            |       | (7,127          | )          | (7,000         | )          |
| Total stockholder’s deficit                                                                |       | (232,058        | )          | (221,525       | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 231,232    |           | $          | 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** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2010**          | ** ** | **6/30/2009** | ** ** |
| REVENUES:                            |       |                   |       |   |   |
| Membership services                  |       | $                      | 38,661     |   | $ | 39,197 |   |
| Media                                |       | 8,009                  |       | 9,363 |   |
| Retail                               |       | 84,412                 |       | 81,339 |   |
|                                 |       | 131,082                |       | 129,899 |   |
|                                 |       |                   |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                   |       |   |   |
| Membership services                  |       | 23,217                 |       | 24,615 |   |
| Media                                |       | 5,982                  |       | 7,396 |   |
| Retail                               |       | 49,847                 |       | 49,370 |   |
|                                 |       | 79,046                 |       | 81,381 |   |
|                                 |       |                   |       |   |   |
| GROSS PROFIT                         |       | 52,036                 |       | 48,518 |   |
|                                 |       |                   |       |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |
| Selling, general and administrative  |       | 35,599                 |       | 33,114 |   |
| Financing expense                    |       | 244                    |       | 1,540 |   |
| Depreciation and amortization        |       | 4,616                  |       | 5,570 |   |
|                                 |       | 40,459                 |       | 40,224 |   |
|                                 |       |                   |       |   |   |
| INCOME FROM OPERATIONS               |       | 11,577                 |       | 8,294 |   |
|                                 |       |                   |       |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |
| Interest income                      |       | 124                    |       | 134 |   |
| Interest expense                     |       | (9,774                 | )          | (7,814 | ) |
| (Loss) gain on derivative instrument |       | (144                   | )          | 665 |   |
| Gain on debt restructure             |       | —                 |       | 4,678 |   |
| Other non-operating items, net       |       | (3                     | )          | (736 | ) |
|                                 |       | (9,797                 | )          | (3,073 | ) |
|                                 |       |                   |       |   |   |
| INCOME BEFORE INCOME TAXES           |       | 1,780                  |       | 5,221 |   |
|                                 |       |                   |       |   |   |
| INCOME TAX EXPENSE                   |       | (59                    | )          | (304 | ) |
|                                 |       |                   |       |   |   |
| NET INCOME                           |       | $                      | 1,721      |   | $ | 4,917 |   |

 

See notes to consolidated financial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **6/30/2010**        | ** ** | **6/30/2009** | ** ** |
| REVENUES:                            |       |                 |       |   |   |
| Membership services                  |       | $                    | 75,735     |   | $ | 74,429 |   |
| Media                                |       | 22,692               |       | 26,783 |   |
| Retail                               |       | 138,589              |       | 133,740 |   |
|                                 |       | 237,016              |       | 234,952 |   |
|                                 |       |                 |       |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                 |       |   |   |
| Membership services                  |       | 43,293               |       | 44,945 |   |
| Media                                |       | 17,608               |       | 20,880 |   |
| Retail                               |       | 82,076               |       | 80,906 |   |
|                                 |       | 142,977              |       | 146,731 |   |
|                                 |       |                 |       |   |   |
| GROSS PROFIT                         |       | 94,039               |       | 88,221 |   |
|                                 |       |                 |       |   |   |
| OPERATING EXPENSES:                  |       |                 |       |   |   |
| Selling, general and administrative  |       | 65,766               |       | 63,051 |   |
| Financing expense                    |       | 7,330                |       | 1,540 |   |
| Depreciation and amortization        |       | 9,444                |       | 10,408 |   |
|                                 |       | 82,540               |       | 74,999 |   |
|                                 |       |                 |       |   |   |
| INCOME FROM OPERATIONS               |       | 11,499               |       | 13,222 |   |
|                                 |       |                 |       |   |   |
| NON-OPERATING ITEMS:                 |       |                 |       |   |   |
| Interest income                      |       | 250                  |       | 264 |   |
| Interest expense                     |       | (19,055              | )          | (13,637 | ) |
| (Loss) gain on derivative instrument |       | (520                 | )          | 685 |   |
| Gain on debt restructure             |       | —               |       | 4,678 |   |
| Other non-operating items, net       |       | 22                   |       | (819 | ) |
|                                 |       | (19,303              | )          | (8,829 | ) |
|                                 |       |                 |       |   |   |
| (LOSS) INCOME BEFORE INCOME TAXES    |       | (7,804               | )          | 4,393 |   |
|                                 |       |                 |       |   |   |
| INCOME TAX EXPENSE                   |       | (202                 | )          | (700 | ) |
|                                 |       |                 |       |   |   |
| NET (LOSS) INCOME                    |       | $                    | (8,006     | ) | $ | 3,693 |   |

 

See notes to consolidated financial statements.

 

3

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                          | ** ** | **SIX MONTHS ENDED** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                          | ** ** | **6/30/2010**        | ** ** | **6/30/2009** | ** ** |
|                                                                                                |       |                 |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |       |                 |       |   |   |
| Net (loss) income                                                                                   |       | $                    | (8,006     | ) | $ | 3,693 |   |
| Adjustments to reconcile net (loss) income to net  cash (used in) provided by operating activities: |       |                 |       |   |   |
| Depreciation                                                                                        |       | 5,622                |       | 6,525 |   |
| Amortization                                                                                        |       | 3,822                |       | 3,883 |   |
| Loss (gain) on derivative instrument                                                                |       | 520                  |       | (685 | ) |
| Loss (gain) on debt restructure                                                                     |       | 279                  |       | (4,678 | ) |
| Provision for losses on accounts receivable                                                         |       | 776                  |       | 799 |   |
| Deferred compensation                                                                               |       | 1,750                |       | — |   |
| (Gain) loss on sale of property and equipment                                                       |       | (23                  | )          | 165 |   |
| Accretion of original issue discount                                                                |       | 522                  |       | — |   |
| Changes in operating assets and liabilities:                                                        |       |                 |       |   |   |
| Accounts receivable                                                                                 |       | 625                  |       | (3,633 | ) |
| Inventories                                                                                         |       | (16,757              | )          | (7,397 | ) |
| Prepaid expenses and other assets                                                                   |       | (3,078               | )          | (1,236 | ) |
| Accounts payable                                                                                    |       | 6,583                |       | 19,213 |   |
| Accrued and other liabilities                                                                       |       | 4,716                |       | (1,960 | ) |
| Deferred revenues and gains                                                                         |       | (1,052               | )          | 832 |   |
| Net cash (used in) provided by operating  activities                                                |       | (3,701               | )          | 15,521 |   |
|                                                                                                |       |                 |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |       |                 |       |   |   |
| Capital expenditures                                                                                |       | (1,449               | )          | (2,391 | ) |
| Net proceeds from sale of property and equipment                                                    |       | 658                  |       | 11 |   |
| Investment in affiliate                                                                             |       | 22                   |       | (115 | ) |
| Net cash used in investing activities                                                               |       | (769                 | )          | (2,495 | ) |
|                                                                                                |       |                 |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |       |                 |       |   |   |
| Dividends paid                                                                                      |       | (2,400               | )          | (3,500 | ) |
| Contribution from parent                                                                            |       | —               |       | 8,500 |   |
| Release of restricted cash                                                                          |       | 8,058                |       | — |   |
| Borrowings on debt                                                                                  |       | 151,059              |       | 12,000 |   |
| Payment of debt issue costs                                                                         |       | (4,349               | )          | (2,541 | ) |
| Principal payments on debt                                                                          |       | (143,949             | )          | (27,402 | ) |
| Net cash provided by (used in) financing  activities                                                |       | 8,419                |       | (12,943 | ) |
|                                                                                                |       |                 |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                             |       | 3,949                |       | 83 |   |
|                                                                                                |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                    |       | 8,640                |       | 10,608 |   |
|                                                                                                |       |                 |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                          |       | $                    | 12,589     |   | $ | 10,691 |   |

 

See notes to consolidated financial statements.

 

4

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**AFFINITY GROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

**(1)BASIS OF PRESENTATION**

 

*Principles of Consolidation —*The consolidated financialstatements include the 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.

 

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

 

*Basisfor Presentation**—*On March 1,2010, AGI refinanced its existing senior credit facility ($128.9 millionaggregate principal amount outstanding as of December 31, 2009) and second liennotes totaling $9.7 million due July 31, 2010. The New Senior Credit Facility provides for term loans (aggregating$144.3 million outstanding as of June 30, 2010), including an original issuediscount of 2%, that are payable in quarterly installments of $360,750beginning March 1, 2011.  In addition,there are mandatory prepayments of the term loans from excess cash flow (asdefined) of AGI and from asset sales. The term loans under the New Senior Credit Facility mature on theearlier of (i) March 1, 2015 or (ii) 90 days prior to the maturity of eitherAGI’s 9% senior subordinated notes due 2012 (the “Senior Notes”) ($137.8million principal amount outstanding as of June 30, 2010) or AGHI’s 10-7/8%senior notes due 2012 (the “AGHI Notes”) ($88.2 million aggregate principalamount outstanding as of June 30, 2010). See Note 6 — Debt.

 

Inaddition, on March 1, 2010, AGI’s subsidiary that operates the Retail segment,Camping World, Inc. (“Camping World”) entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1, 2013, (ii)60 days prior to the date of maturity of the New Senior Credit Facility, or(iii) 120 days prior to the earlier date of maturity of the Senior Notes andthe AGHI Notes.  As of June 30, 2010,$5.9 million was borrowed and $6.9 million of letters of credit wereoutstanding under the CW Credit Facility. See Note 6 — Debt.

 

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

 

5

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**(2)RECENT ACCOUNTING PRONOUNCEMENTS**

 

InJanuary 2010, the Company was required to adopt a newly issued accountingstandard which requires additional disclosure about the amounts of and reasonsfor significant transfers between levels of the fair value hierarchy discussedin Note 9, “Fair Value Measurements”. This standard also clarifies existing disclosure requirements related tothe level of disaggregation of fair value measurements for each class of assetsand liabilities and disclosures about inputs and valuation techniques used tomeasure fair value for both recurring and nonrecurring Level 2 and Level 3measurements.  As this newly issuedaccounting standard only requires enhanced disclosure, the adoption of thisstandard did not impact our financial position, results of operations or cashflows.  In addition, effective forinterim and annual periods beginning after December 15, 2010, this standardwill 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)DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION**

 

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

 

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

 

6

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

 

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

 
| ** **                                     | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|------------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                     | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED JUNE 30, 2010**           |       |           |       |       |       |       |       |             |       |
| Revenues  from external customers              |       | $              | 38,661     |       | $          | 8,009      |       | $                | 84,412     |   | $ | 131,082 |   |
| Depreciation  and amortization                 |       | 477            |       | 948        |       | 2,356      |       | 3,781            |       |
| Interest  income                               |       | 789            |       | —     |       | —     |       | 789              |       |
| Interest  expense                              |       | —         |       | (18        | )          | 586        |       | 568              |       |
| Segment  operating profit                      |       | 13,408         |       | 30         |       | 4,451      |       | 17,889           |       |
|                                           |       |           |       |       |       |       |       |             |       |
| ** **                                     | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
| ** **                                     | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED JUNE 30, 2009**           |       |           |       |       |       |       |       |             |       |
| Revenues  from external customers              |       | $              | 39,197     |       | $          | 9,363      |       | $                | 81,339     |   | $ | 129,899 |   |
| Depreciation  and amortization                 |       | 812            |       | 1,341      |       | 2,637      |       | 4,790            |       |
| Gain  (loss) on sale of property and equipment |       | —         |       | 1          |       | (84        | )          | (83              | )          |
| Interest  income                               |       | 849            |       | —     |       | 2          |       | 851              |       |
| Interest  expense                              |       | —         |       | 19         |       | 2,823      |       | 2,842            |       |
| Segment  operating profit (loss)               |       | 11,953         |       | (26        | )          | 459        |       | 12,386           |       |
|                                           |       |           |       |       |       |       |       |             |       |
| ** **                                     | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
| ** **                                     | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **SIX MONTHS ENDED JUNE 30, 2010**             |       |           |       |       |       |       |       |             |       |
| Revenues  from external customers              |       | $              | 75,735     |       | $          | 22,692     |       | $                | 138,589    |   | $ | 237,016 |   |
| Depreciation  and amortization                 |       | 1,118          |       | 1,891      |       | 4,620      |       | 7,629            |       |
| Gain  on sale of property and equipment        |       | —         |       | —     |       | 23         |       | 23               |       |
| Interest  income                               |       | 1,595          |       | —     |       | —     |       | 1,595            |       |
| Interest  expense                              |       | —         |       | (8         | )          | 1,118      |       | 1,110            |       |
| Segment  operating profit (loss)               |       | 28,596         |       | 942        |       | (97        | )          | 29,441           |       |
|                                           |       |           |       |       |       |       |       |             |       |
| ** **                                     | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
| ** **                                     | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **SIX MONTHS ENDED JUNE 30, 2009**             |       |           |       |       |       |       |       |             |       |
| Revenues  from external customers              |       | $              | 74,429     |       | $          | 26,783     |       | $                | 133,740    |   | $ | 234,952 |   |
| Depreciation  and amortization                 |       | 1,618          |       | 2,664      |       | 4,826      |       | 9,108            |       |
| Loss  on sale of property and equipment        |       | —         |       | —     |       | (165       | )          | (165             | )          |
| Interest  income                               |       | 1,713          |       | —     |       | 4          |       | 1,717            |       |
| Interest  expense                              |       | —         |       | 47         |       | 6,741      |       | 6,788            |       |
| Segment  operating profit (loss)               |       | 24,578         |       | 1,286      |       | (7,702     | )          | 18,162           |       |

 

7

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

 

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

 
| ** **                                                     | ** ** | **THREE  MONTHS ENDED** | ** ** | **SIX  MONTHS ENDED** | ** ** |
|----------------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **6/30/2010**           | ** ** | **6/30/2009**         | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** |
| **Income (loss) From Operations Before Income Taxes**          |       |                    |       |                  |       |   |   |   |   |
| Total  income for reportable segments                          |       | $                       | 17,889     |                  | $          | 12,386 |   | $ | 29,441 |   | $ | 18,162 |   |
| Unallocated  G & A expense                            |       | (5,015                  | )          | (3,845                | )          | (8,715 | ) | (7,336 | ) |
| Unallocated  depreciation and amortization expense             |       | (835                    | )          | (780                  | )          | (1,815 | ) | (1,300 | ) |
| Unallocated  other finance costs                               |       | —                  |       | (654                  | )          | — |   | (654 | ) |
| Unallocated  (loss) gain on derivative instrument              |       | (144                    | )          | 665                   |       | (520 | ) | 685 |   |
| Unallocated  financing expense                                 |       | (244                    | )          | (1,540                | )          | (6,905 | ) | (1,540 | ) |
| Unallocated  gain on debt restructure                          |       | —                  |       | 4,678                 |       | — |   | 4,678 |   |
| Elimination  of intercompany interest income                   |       | (665                    | )          | (717                  | )          | (1,345 | ) | (1,453 | ) |
| Unallocated  interest expense, net of intercompany elimination |       | (9,206                  | )          | (4,972                | )          | (17,945 | ) | (6,849 | ) |
| Income  (loss) from operations before income taxes             |       | $                       | 1,780      |                  | $          | 5,221 |   | $ | (7,804 | ) | $ | 4,393 |   |

 

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

 
| ** **                                   | ** ** | **6/30/2010** | ** **    | **12/31/2009** | ** ** |
|----------------------------------------------|------------|---------------|---------------|----------------|------------|
| Membership services segment                  |       | $             |  242,964 |           | $          |  237,597 |   |
| Media  segment                               |       | 21,783        |          | 26,876         |       |
| Retail  segment                              |       | 110,281       |          | 95,193         |       |
| Total  assets for reportable segments        |       | 375,028       |          | 359,666        |       |
| Restricted  cash                             |       | —        |          | 8,058          |       |
| Intangible  assets not allocated to segments |       | 3,371         |          | 2,185          |       |
| Corporate  unallocated assets                |       | 6,500         |          | 6,654          |       |
| Elimination  of intersegment receivable      |       | (153,667      | )             | (154,994       | )          |
| Total  assets                                |       | $             | 231,232       |           | $          | 221,569 |   |

 

8

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**(4) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                       | ** ** | **2010** | ** ** | **2009** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|
| Cash paid during the period for: |       |     |       |     |       |
| Interest                         |       | $        | 17,087     |     | $          | 15,067 |   |
| Income taxes                     |       | —   |       | 2        |       |
|                                  |            |          |            |          |            |  |  |

 

Forthe six months ended June 30, 2009, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $4.9 million decrease inOther Long-Term Liabilities and a $3.6 million decrease in Other ComprehensiveLoss and ineffective portion in the statement of operations as a non-cash gainon derivative instruments of $1.3 million.

 

Forthe six months ended June 30, 2010, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $0.6 million increase inOther Long-Term Liabilities and a $0.1 million increase in Other ComprehensiveLoss and ineffective portion in the statement of operations as a non-cash losson derivative instruments of $0.5 million.

 

InJune 2010, the Company recorded an adjustment of $0.1 million to the currentportion of Long-term Debt, related to the Powerboat Magazine acquisition in May2005, to write-off the remaining contingency to amortization expense as the contingencywas resolved and resulted in no final payment.

 

(**5) GOODWILL AND INTANGIBLE ASSETS**

 

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

 

Determiningthe fair value of a reporting unit under the first step of the goodwillimpairment test and determining the fair value of individual assets andliabilities of a reporting unit under the second step of the goodwillimpairment test is judgmental in nature and often involves the use ofsignificant estimates and assumptions. These estimates and assumptions could have a significant impact onwhether or not an impairment charge is recognized and also the extent of suchcharge.  The Company’s estimates of fairvalue utilized in the goodwill impairment tests may be based upon a number offactors, including assumptions about the projected future cash flows, discountrate, growth rate, determination of market comparables, economic conditions, orchanges to the Company’s business operations. Such changes may result in impairment charges recorded in futureperiods.  Also see Note 9 — Fair ValueMeasurements.

 

9

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

 

Thefollowing is a summary of changes in the Company’s goodwill by businesssegment, for the six months ended June 30, 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 June 30, 2010         |       | $                        | 49,944     |      | $          | —     |       | $                | —     |   | $ | 49,944 |   |
|                                     |       |                     |       |      |       |       |       |             |       |
| Gross goodwill                           |       | $                        | 56,030     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 150,515 |   |
| Impairment prior to January 1, 2009 |       | (6,086                   | )          | —    |       | (47,601    | )          | (53,687          | )          |
| Balance as of January 1, 2009       |       | 49,944                   |       | 46,884    |       | —     |       | 96,828           |       |
| Impairments                              |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of June 30, 2009         |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |

 

TheCompany has evaluated the remaining useful lives of its finite-lived purchasedintangible assets to determine if any adjustments to the useful lives werenecessary.  The Company determined thatno adjustments to the useful lives of its finite-lived purchased intangibleassets were necessary as of June 30, 2010. Under the accounting guidance for goodwill and other intangible assets,as issued by the FASB, goodwill impairment is deemed to exist if the net bookvalue of a reporting 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.

 

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

 

10

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

 

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

 
| ** **                                      | ** ** | **Weighted**        | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**  | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                   |       | $          | 35,355     |             | $          | (27,888    | )          | $ | 7,467 |   |
| Resort and golf course participation agreements |       | 4                   |       | 7          |       | (6               | )          | 1          |       |
| Non-compete and deferred consulting agreements  |       | 15                  |       | 18,650     |       | (16,743          | )          | 1,907      |       |
| Deferred financing costs                        |       | 5                   |       | 9,523      |       | (4,992           | )          | 4,531      |       |
|                                            |       |                |       | $          | 63,535     |             | $          | (49,629    | )          | $ | 13,906 |   |

 

**(6) DEBT**

 

NewSenior Credit Facility

 

OnMarch 1, 2010, AGI entered into the Second Amended and Restated CreditAgreement (the “New Senior Credit Facility”) to refinance its existing seniorcredit facility ($128.9 million principal amount outstanding at December 31,2009) which was scheduled to mature on June 30, 2010, the second liennotes due July 31, 2010 ($9.7 million principal amount outstanding at December 31,2009), and the loan from SA Holding, LLC, (the “SA Loan”), an affiliate of theultimate shareholder of AGI, ($1.0 million principal amount outstanding at December 31,2009).  The New Senior Credit Facilityprovides for term loans aggregating $144.3 million, including an original issuediscount of 2%, and are payable in quarterly installments of $360,750 beginningMarch 1, 2011.  In addition, thereare mandatory prepayments of the term loans from excess cash flow (as defined)of AGI and from asset sales.  The termloans under the New Senior Credit Facility mature on the earlier of (i) March 1,2015 or (ii) 90 days prior to the maturity of either Senior Notes ($137.8million principal amount outstanding as at June 30, 2010 and are due on February 15,2012) or the AGHI Notes ($88.2 million aggregate principal amount outstandingat June 30, 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 June 30,2010, the average annual interest rate on the term loans was 16.76%.  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 June 30,

 

11

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**(6) DEBT(continued)**

 

2010,$141.9 million, net of approximately $2.4 million of unamortized original issuediscount, was outstanding on the New Senior Credit Facility.

 

CWCredit Facility

 

OnMarch 1, 2010, Camping World entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1,2013, (ii) 60 days prior to the date of maturity of the New Senior CreditFacility, or (iii) 120 days prior to the earlier date of maturity of theSenior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floatsat either 3.25% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whoseinterest is based on the prime rate or 3.25% over the LIBOR rate (defined asthe greater of LIBOR rate applicable to the period of the respective LIBORborrowings or 1.0%) for borrowings whose interest is based on LIBOR. As of June 30,2010, the average interest rate on the CW Credit Facility was 4.25%. Borrowingsunder the CW Credit Facility are based on the borrowing base of eligibleinventory and accounts receivable of Camping World and its subsidiaries.  The CW Credit Facility contains affirmativecovenants, including financial covenants, and negative covenants.  Borrowings under the CW Credit Facility areguaranteed by the direct and indirect subsidiaries of Camping World and aresecured by a pledge on the stock of Camping World and its direct and indirectsubsidiaries and liens on the assets of Camping World and its direct andindirect subsidiaries.  The lenders underthe New Senior Credit Facility and the CW Credit Facility have entered into anintercreditor agreement that governs their rights in the collateral that ispledged to secure their respective loans. As of June 30, 2010, $5.9 million was borrowed and $6.9 million ofletters of credit were issued under the CW Credit Facility.

 

SeniorNotes

 

InFebruary 2004, AGI issued $200.0 million aggregate principal amount of 9%senior subordinated notes due 2012 (“Senior Notes”) pursuant to an indenture(the “AGI Indenture”).  Interest ispayable on the Senior Notes twice a year on February 15 and August 15.  AGI’s present and future restrictedsubsidiaries guarantee the Senior Notes with unconditional guarantees ofpayment that rank junior in right of payment to their existing and futuresenior debt, including indebtedness under the New Senior Credit 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.  As of June 30, 2010, $137.8 million of SeniorNotes remain outstanding.

 

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

 

12

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**(6) DEBT(continued)**

 

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

 

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

 

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

 

13

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

 

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

 
| ** **                                               | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|----------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                               | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Cash &  cash equivalents                        |       | $          | 8,904      |           | $          | 3,685         |       | $                | —     |             | $          | — |   | $ | 12,589 |   |
| Accounts  receivable- net of allowance                   |       | 1,534      |       | 183,053        |       |          |       | (153,667         | )          | 30,920           |       |
| Inventories                                              |       | —     |       | 66,678         |       | —        |       | —           |       | 66,678           |       |
| Other  current assets                                    |       | 3,117      |       | 14,033         |       | —        |       | —           |       | 17,150           |       |
| Total  current assets                                    |       | 13,555     |       | 267,449        |       | —        |       | (153,667         | )          | 127,337          |       |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Property  and equipment, net                             |       | 2,903      |       | 26,565         |       | —        |       | —           |       | 29,468           |       |
| Intangible  assets                                       |       | 3,371      |       | 10,535         |       | —        |       | —           |       | 13,906           |       |
| Goodwill                                                 |       | 49,944     |       | —         |       | —        |       | —           |       | 49,944           |       |
| Investment  in subsidiaries                              |       | 678,944    |       | —         |       | —        |       | (678,944         | )          | —           |       |
| Affiliate  note and investments                          |       | 40,142     |       | 4,673          |       | —        |       | (40,000          | )          | 4,815            |       |
| Other  assets                                            |       | 4,596      |       | 1,166          |       | —        |       | —           |       | 5,762            |       |
| Total  assets                                            |       | $          | 793,455    |           | $          | 310,388       |       | $                | —     |             | $          | (872,611 | ) | $ | 231,232 |   |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Accounts  payable                                        |       | $          | 1,221      |           | $          | 29,157        |       | $                | —     |             | $          | — |   | $ | 30,378 |   |
| Accrued  and other liabilities                           |       | 11,920     |       | 24,065         |       | —        |       | —           |       | 35,985           |       |
| Current  portion of long-term debt                       |       | 154,389    |       | 40,315         |       | —        |       | (193,667         | )          | 1,037            |       |
| Current  portion of deferred revenue                     |       | 2,200      |       | 58,053         |       | —        |       | —           |       | 60,253           |       |
| Total  current liabilities                               |       | 169,730    |       | 151,590        |       |          |       | (193,667         | )          | 127,653          |       |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Deferred  revenue                                        |       | 2,230      |       | 32,800         |       | —        |       | —           |       | 35,030           |       |
| Long-term  debt                                          |       | 279,038    |       | 5,891          |       | —        |       | —           |       | 284,929          |       |
| Other  long-term liabilities                             |       | 574,515    |       | (558,837       | )          | —        |       | —           |       | 15,678           |       |
| Total  liabilities                                       |       | 1,025,513  |       | (368,556       | )          |          |       | (193,667         | )          | 463,290          |       |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional  equity                                  |       | —     |       | 678,944        |       | —        |       | (678,944         | )          | —           |       |
| Stockholders’  deficit                              |       | (232,058   | )          | —         |       | —        |       | —           |       | (232,058         | )          |
| Total  liabilities & stockholders’ deficit |       | $          | 793,455    |           | $          | 310,388       |       | $                | —     |             | $          | (872,611 | ) | $ | 231,232 |   |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                                  |       | $          | 925        |           | $          | 236,091       |       | $                | —     |             | $          | — |   | $ | 237,016 |   |
| Costs  applicable to revenues                            |       | (3,967     | )          | (139,010       | )          | —        |       | —           |       | (142,977         | )          |
| Operating  expenses                                      |       | (17,181    | )          | (65,359        | )          | —        |       | —           |       | (82,540          | )          |
| Interest  expense, net                                   |       | (19,290    | )          | 485            |       | —        |       | —           |       | (18,805          | )          |
| Income  from investment in consolidated subsidiaries     |       | 29,347     |       | —         |       | —        |       | (29,347          | )          | —           |       |
| Other  non operating income (expenses)                   |       | 2,304      |       | (2,802         | )          | —        |       | —           |       | (498             | )          |
| Income  tax expense                                      |       | (144       | )          | (58            | )          | —        |       | —           |       | (202             | )          |
| Net  income                                              |       | $          | (8,006     | )              | $          | 29,347        |       | $                | —     |             | $          | (29,347 | ) | $ | (8,006 | ) |
|                                                     |       |       |       |           |       |          |       |             |       |             |       |
| Cash  flows from operations                              |       | $          | (30,159    | )              | $          | 26,458        |       | $                | —     |             | $          | — |   | $ | (3,701 | ) |
| Cash  flows provided by (used in) investing activities   |       | (906       | )          | 137            |       | —        |       | —           |       | (769             | )          |
| Cash  flows provided by (used in) financing activities   |       | 39,567     |       | (31,148        | )          | —        |       | —           |       | 8,419            |       |
| Cash  at beginning of year                               |       | 402        |       | 8,238          |       | —        |       | —           |       | 8,640            |       |
| Cash  at end of period                                   |       | $          | 8,904      |           | $          | 3,685         |       | $                | —     |             | $          | — |   | $ | 12,589 |   |

 

14

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

 

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

 
| ** **                                           | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                              |       | $          | 372        |           | $          | 130,710       |       | $                | —     |             | $          | — |   | $ | 131,082 |   |
| Costs  applicable to revenues                        |       | (1,913     | )          | (77,133        | )          | —        |       | —           |       | (79,046          | )          |
| Operating  expenses                                  |       | (6,162     | )          | (34,576        | )          | —        |       | —           |       | (40,738          | )          |
| Interest  expense, net                               |       | (9,871     | )          | 221            |       | —        |       | —           |       | (9,650           | )          |
| Income  from investment in consolidated subsidiaries |       | 17,795     |       | —         |       | —        |       | (17,795          | )          | —           |       |
| Other  non operating income (expenses)               |       | 1,530      |       | (1,398         | )          | —        |       | —           |       | 132              |       |
| Income  tax expense                                  |       | (30        | )          | (29            | )          | —        |       | —           |       | (59              | )          |
| Net  income                                          |       | $          | 1,721      |           | $          | 17,795        |       | $                | —     |             | $          | (17,795 | ) | $ | 1,721 |   |

 

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

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

 

15

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

 

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

 
| ** **                                             | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|--------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                             | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                                |       | $          | 3,600      |           | $          | 231,352       |       | $                | —     |             | $          | — |   | $ | 234,952 |   |
| Costs  applicable to revenues                          |       | (5,891     | )          | (140,840       | )          | —        |       | —           |       | (146,731         | )          |
| Operating  expenses                                    |       | (10,461    | )          | (64,538        | )          | —        |       | —           |       | (74,999          | )          |
| Interest  expense, net                                 |       | (8,302     | )          | (5,071         | )          | —        |       | —           |       | (13,373          | )          |
| Income  from investment in consolidated subsidiaries   |       | 17,768     |       | —         |       | —        |       | (17,768          | )          | —           |       |
| Other  non operating income (expenses)                 |       | 7,266      |       | (2,722         | )          | —        |       | —           |       | 4,544            |       |
| Income  tax expense                                    |       | (287       | )          | (413           | )          | —        |       | —           |       | (700             | )          |
| Net  income                                            |       | $          | 3,693      |           | $          | 17,768        |       | $                | —     |             | $          | (17,768 | ) | $ | 3,693 |   |
|                                                   |       |       |       |           |       |          |       |             |       |             |       |
| Cash  flows from operations                            |       | $          | (18,076    | )              | $          | 33,597        |       | $                | —     |             | $          | — |   | $ | 15,521 |   |
| Cash  flows provided by (used in) investing activities |       | 1,760      |       | (4,255         | )          | —        |       | —           |       | (2,495           | )          |
| Cash  flows provided (used in) by financing activities |       | 21,632     |       | (34,575        | )          | —        |       | —           |       | (12,943          | )          |
| Cash  at beginning of year                             |       | 1,300      |       | 9,308          |       | —        |       | —           |       | 10,608           |       |
| Cash  at end of year                                   |       | $          | 6,616      |           | $          | 4,075         |       | $                | —     |             | $          | — |   | $ | 10,691 |   |

 

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

 
| ** **                                           | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                           | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                              |       | $          | 1,783      |           | $          | 128,116       |       | $                | —     |             | $          | — |   | $ | 129,899 |   |
| Costs  applicable to revenues                        |       | (3,621     | )          | (77,760        | )          | —        |       | —           |       | (81,381          | )          |
| Operating  expenses                                  |       | (6,393     | )          | (33,831        | )          | —        |       | —           |       | (40,224          | )          |
| Interest  expense, net                               |       | (5,689     | )          | (1,991         | )          | —        |       | —           |       | (7,680           | )          |
| Income  from investment in consolidated subsidiaries |       | 12,948     |       | —         |       | —        |       | (12,948          | )          | —           |       |
| Other  non operating income (expenses)               |       | 5,985      |       | (1,378         | )          | —        |       | —           |       | 4,607            |       |
| Income  tax expense                                  |       | (96        | )          | (208           | )          | —        |       | —           |       | (304             | )          |
| Net  income                                          |       | $          | 4,917      |           | $          | 12,948        |       | $                | —     |             | $          | (12,948 | ) | $ | 4,917 |   |

 

**(8) INTEREST RATE SWAP AGREEMENTS**

 

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

 

Werecognize all of our derivative instruments as either assets or liabilities atfair value.  Fair value is determined inaccordance with the accounting guidance for Fair Value Measurements.  See Note 9 — Fair Value Measurements.  The accounting for changes in

 

16

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

 

thefair value of a derivative instrument depends on whether it has been designatedand qualifies as part of a hedging relationship and, further, on the type ofhedging relationship.  For derivativesdesignated as hedges under the accounting guidance for derivative instrumentsand hedging activities, we formally assess, both at inception and periodicallythereafter, whether the hedging derivatives are highly effective in offsettingchanges in either the fair value or cash flows of the hedged item.  Our derivatives that are not designated anddo not qualify as hedges under the accounting guidance for derivativeinstruments and hedging activities are adjusted to fair value through currentearnings.

 

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

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30,2010 based upon the April 30, 2010 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31. The interest rate swap agreement was effective beginning October 31,2007 and expires on October 31, 2012. On March 19, 2008, AGI entered into a 4.5 year interest rate swapagreement with a notional amount of $35.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30,2010 based upon the April 30, 2010 reset date) and make periodic paymentsat a fixed rate of 3.430%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The 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$7.1 million is in accumulated other comprehensive loss, and $1.1 millionincluded in retained earnings and $0.5 million in the statement of operationsin the period ended June 30, 2010. The fair value of these swaps included in other long-term liabilitieswas $8.1 million of which $7.0 million is in accumulated other comprehensiveloss and $1.1 million in the statement of operations in aggregate periodsthrough December 31, 2009.  See Note9 — Fair Value Measurements.

 

17

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

 

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

 

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

 

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

 

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

 
| **Derivatives  designated as  hedging intruments under** | ** ** | ** **                   | ** ** | **Fair Value as of:** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|-----------------------|------------|
| **Statement  133**                                       | ** ** | **Balance Sheet Location**   | ** ** | **6/30/2010**         | ** ** | **12/31/2009** | ** ** |
|                                                     |       |                         |       |                  |       |   |   |
| Interest rate swap contracts                             |       | Other  long-term liabilities |       | $                     | (8,737     | ) | $ | (8,090 | ) |
|                                                          |            |                              |            |                       |            |  |  |  |  |

 

18

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

 

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

 

Derivatives in Cash Flow HedgingRelationships:

 
| ** **                                                                                                                        | ** ** | **Interest Rate Swap Agreements**    | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                        | ** ** | **6/30/2010**                        | ** ** | **6/30/2009** | ** ** |
| Amount of Gain or (Loss) recognized in Other  Comprehensive Loss on Derivatives                                                   |       | $                                    | (316       | ) | $ | 3,574 |   |
|                                                                                                                              |       |                                 |       |   |   |
| Location of Gain (Loss) reclassified from  Accumulated Other Comprehensive Loss into Statement of Operations (Effective  Portion) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                   |            |                                      |            |  |  |  |  |

 
| ** **                                                                                                                                   | ** ** | **6/30/2010**                        | ** ** | **6/30/2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|---------------|------------|
| Amount of Loss reclassified from Other  Comprehensive Loss into Statement of Operations (Effective portion)                                  |       | $                                    | (189       | )             | $          | (61 | ) |
|                                                                                                                                         |       |                                 |       |          |       |
| Location of Loss Recognized in Statement of  Operations on Derivatives (Ineffective portion and amount excluded from  effectiveness testing) |       | Gain (loss) on derivative Instrument |       |
|                                                                                                                                              |            |                                      |            |               |            |  |  |

 
| ** **                                                                                                                          | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|---------------|------------|
| Amount of Gain or (Loss) recognized in income on  Derivatives (Ineffective portion and amount excluded from effectiveness  testing) |       | $             | (331       | )             | $          | 746 |   |
|                                                                                                                                     |            |               |            |               |            |  |  |

 

**(9) FAIR VALUE MEASUREMENTS**

 

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

 

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

 

19

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

 

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

 
| ** **                      | ** ** | ** ** | ** ** | **Fair Value Measurements at Reporting Date Using**        | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| **(in  thousands)**             | ** ** | ** ** | ** ** | **Quoted Prices in  Active Markets for  Identical Assets** | ** ** | **Significant Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**                 | ** ** | **Amount** | ** ** | **(Level 1)**                                              | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                            |       |       |       |                                                       |       |   |   |   |   |
| As of June 30, 2010:       |       |       |       |                                                       |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | $          | (8,737     | )                                                          | $          | — |   | $ | (8,737 | ) | $ | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                     |       | — |   | — |   |
|                            |       |       |       |                                                       |       |   |   |   |   |
| As of December 31, 2009:   |       |       |       |                                                       |       |   |   |   |   |
| Interest Rate Swap Contracts    |       | (8,090     | )          | —                                                     |       | (8,090 | ) | — |   |
| FreedomRoads Preferred Interest |       | —     |       | —                                                     |       | — |   | — |   |
|                                 |            |            |            |                                                            |            |  |  |  |  |  |  |  |  |

 

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

 

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

 

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

 
| ** **                 | ** ** | **6/30/2010**      | ** ** | **12/31/2009** | ** ** |
|----------------------------|------------|--------------------|------------|----------------|------------|
| ** **                 | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** | **Carrying Value** | ** ** | **Fair Value** | ** ** |
| New Senior Credit Facility |       | $                  | 141,936    |           | $          | 141,936 |   | $ | 128,856 |   | $ | 122,425 |   |
| CW Credit Facility         |       | 5,891              |       | 5,891          |       | — |   | — |   |
| Senior Notes               |       | 137,824            |       | 102,334        |       | 137,824 |   | 93,893 |   |
|                            |            |                    |            |                |            |  |  |  |  |  |  |  |  |

 

20

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**(10) INCOME TAXES**

 

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

 
| Balance at January 1, 2010                                                          |   | $      | 1,339  |   |
|------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| Gross increases in unrecognized tax benefits due  to prior year positions                |   | — |   |
| Gross decreases in unrecognized tax benefits due  to prior year positions                |   | — |   |
| Gross increases in unrecognized tax benefits due  to current year positions              |   | — |   |
| Gross decreases in unrecognized tax benefits due  to current year positions              |   | — |   |
| Gross decreases in unrecognized tax beneifts due  to settlements with taxing authorities |   | — |   |
| Gross decreases in unrecognized tax benefits due  to statute expirations                 |   | — |   |
| Other                                                                                    |   | 5      |   |
| Unrecognized tax benefits at June 30, 2010                                          |   | $      | 1,344  |   |

 

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

 

The Company and its subsidiariesfile income tax returns in the U.S. federal jurisdiction and variousstates.  With few exceptions, the Companyis no longer subject to U.S. federal and state examinations by tax authoritiesfor fiscal years prior to fiscal 2006 and 2005, respectively.  There currently is an Internal RevenueService examination of one of the Company’s wholly owned subsidiaries forfiscal year 2008.

 

21

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**ITEM 2:**

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **THREE MONTHS ENDED** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **6/30/2010**          | ** ** | **6/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                   |       |   |   |   |   |
| REVENUES:                            |       |                   |       |   |   |   |   |
| Membership services                  |       | 29.5                   | %          | 30.2 | % | (1.4 | )% |
| Media                                |       | 6.1                    | %          | 7.2 | % | (14.5 | )% |
| Retail                               |       | 64.4                   | %          | 62.6 | % | 3.8 | % |
|                                 |       | 100.0                  | %          | 100.0 | % | 0.9 | % |
|                                 |       |                   |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                   |       |   |   |   |   |
| Membership services                  |       | 17.7                   | %          | 18.9 | % | (5.7 | )% |
| Media                                |       | 4.6                    | %          | 5.7 | % | (19.1 | )% |
| Retail                               |       | 38.0                   | %          | 38.0 | % | 1.0 | % |
|                                 |       | 60.3                   | %          | 62.6 | % | (2.9 | )% |
|                                 |       |                   |       |   |   |   |   |
| GROSS PROFIT                         |       | 39.7                   | %          | 37.4 | % | 7.3 | % |
|                                 |       |                   |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                   |       |   |   |   |   |
| Selling, general and administrative  |       | 27.2                   | %          | 25.5 | % | 7.5 | % |
| Financing expense                    |       | 0.2                    | %          | 1.2 | % | (84.2 | )% |
| Depreciation and amortization        |       | 3.5                    | %          | 4.3 | % | (17.1 | )% |
|                                 |       | 30.9                   | %          | 31.0 | % | 0.6 | % |
|                                 |       |                   |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 8.8                    | %          | 6.4 | % | 39.6 | % |
|                                 |       |                   |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                   |       |   |   |   |   |
| Interest income                      |       | 0.1                    | %          | 0.1 | % | (7.5 | )% |
| Interest expense                     |       | (7.4                   | )%         | (6.0 | )% | 25.1 | % |
| (Loss) gain on derivative instrument |       | (0.1                   | )%         | 0.5 | % | (121.7 | )% |
| Gain on debt restructure             |       | —                 |       | 3.6 | % | (100.0 | )% |
| Other non-operating items, net       |       | —                 |       | (0.6 | )% | (99.6 | )% |
|                                 |       | (7.4                   | )%         | (2.4 | )% | 218.8 | % |
|                                 |       |                   |       |   |   |   |   |
| INCOME BEFORE INCOME TAXES           |       | 1.4                    | %          | 4.0 | % | (65.9 | )% |
|                                 |       |                   |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.1                   | )%         | (0.2 | )% | (80.6 | )% |
|                                 |       |                   |       |   |   |   |   |
| NET INCOME                           |       | 1.3                    | %          | 3.8 | % | (65.0 | )% |

 

22

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AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                           | ** ** | **SIX MONTHS ENDED** | ** ** |
|--------------------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **6/30/2010**        | ** ** | **6/30/2009** | ** ** | **Inc/(Dec)** | ** ** |
|                                 |       |                 |       |   |   |   |   |
| REVENUES:                            |       |                 |       |   |   |   |   |
| Membership services                  |       | 32.0                 | %          | 31.7 | % | 1.8 | % |
| Media                                |       | 9.6                  | %          | 11.4 | % | (15.3 | )% |
| Retail                               |       | 58.4                 | %          | 56.9 | % | 3.6 | % |
|                                 |       | 100.0                | %          | 100.0 | % | 0.9 | % |
|                                 |       |                 |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:        |       |                 |       |   |   |   |   |
| Membership services                  |       | 18.3                 | %          | 19.1 | % | (3.7 | )% |
| Media                                |       | 7.4                  | %          | 8.9 | % | (15.7 | )% |
| Retail                               |       | 34.6                 | %          | 34.5 | % | 1.4 | % |
|                                 |       | 60.3                 | %          | 62.5 | % | (2.6 | )% |
|                                 |       |                 |       |   |   |   |   |
| GROSS PROFIT                         |       | 39.7                 | %          | 37.5 | % | 6.6 | % |
|                                 |       |                 |       |   |   |   |   |
| OPERATING EXPENSES:                  |       |                 |       |   |   |   |   |
| Selling, general and administrative  |       | 27.7                 | %          | 26.8 | % | 4.3 | % |
| Financing expense                    |       | 3.1                  | %          | 0.7 | % | 376.0 | % |
| Depreciation and amortization        |       | 4.0                  | %          | 4.4 | % | (9.3 | )% |
|                                 |       | 34.8                 | %          | 31.9 | % | 10.1 | % |
|                                 |       |                 |       |   |   |   |   |
| INCOME FROM OPERATIONS               |       | 4.9                  | %          | 5.6 | % | (13.0 | )% |
|                                 |       |                 |       |   |   |   |   |
| NON-OPERATING ITEMS:                 |       |                 |       |   |   |   |   |
| Interest income                      |       | 0.1                  | %          | 0.1 | % | (5.3 | )% |
| Interest expense                     |       | (8.1                 | )%         | (5.8 | )% | 39.7 | % |
| (Loss) gain on derivative instrument |       | (0.2                 | )%         | 0.3 | % | (175.9 | )% |
| Gain on debt restructure             |       | —               |       | 2.0 | % | (100.0 | )% |
| Other non-operating items, net       |       | —               |       | (0.3 | )% | (102.7 | )% |
|                                 |       | (8.2                 | )%         | (3.7 | )% | 118.6 | % |
|                                 |       |                 |       |   |   |   |   |
| (LOSS) INCOME BEFORE INCOME TAXES    |       | (3.3                 | )%         | 1.9 | % | (277.6 | )% |
|                                 |       |                 |       |   |   |   |   |
| INCOME TAX EXPENSE                   |       | (0.1                 | )%         | (0.3 | )% | (71.1 | )% |
|                                 |       |                 |       |   |   |   |   |
| NET (LOSS) INCOME                    |       | (3.4                 | )%         | 1.6 | % | (316.8 | )% |

 

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended June 30, 2010**

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

 

*Revenues*

 

Revenuesof $131.1 million for the second quarter of 2010 increased by $1.2 million, or0.9%, from the comparable period in 2009.

 

MembershipServices revenues of $38.7 million for the second quarter of 2010 decreased$0.5 million, or 1.4%, from the comparable period in 2009.  This revenue decrease was largelyattributable to a $1.4 million reduction in member events revenue due to timingof the Good Sam Club annual rally, which occurred in the second quarter of 2009versus the third quarter of 2010 and a $0.3 million revenue reduction due toreduced membership in the Coast Club and Golf Card Club, partially offset by a$0.5 million increase in extended vehicle warranty program revenue, resultingfrom continued policy growth, and emergency road service revenue, a $0.4million increase in advertising revenue for the President’s Club publication,RV View, and a $0.3 million increase in marketing fee revenue from health andlife insurances products.

 

Mediarevenues of $8.0 million for the second quarter of 2010 decreased $1.4 million,or 14.5%, from the comparable period in 2009. This decrease was primarily attributable to a $1.2 million reduction inrevenue from our outdoor power sports magazines related to reduced issuespublished, and a $0.2 million reduction in advertising revenue related to thecampground guides in the second quarter of 2010 compared to the second quarterof 2009.

 

Retailrevenues of $84.4 million increased by $3.1 million, or 3.8%, from thecomparable period in 2009.  Storemerchandise sales increased $2.2 million from the second quarter of 2009 due toa same store sales increase of $3.2 million, or 5.3%, compared to a 6.5% decreasein same store sales for the second quarter of 2009, and a $0.1 million revenueincrease from the opening of one new store over the past eighteen monthspartially offset by decreased revenue from discontinued stores of $1.1 million.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Also, installation and service fees increased$0.8 million, supplies and other sales increased $0.5 million, and mail orderand internet sales decreased $0.4 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $79.0 million for the second quarter of 2010, adecrease of $2.3 million, or 2.9%, from the comparable period in 2009.

 

MembershipServices costs applicable to revenues of $23.2 million decreased $1.4 million,or 5.7%, from the comparable period in 2009. This decrease consisted of a $1.7 million expense reduction related totiming of the annual rally, and a $0.3 million reduction in wage-relatedexpenses, partially offset by a $0.6 million increase in

 

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emergencyroad service and extended vehicle warranty program costs relating to increasedrevenue.

 

Mediacosts applicable to revenues of $6.0 million for the second quarter of 2010decreased $1.4 million, or 19.1%, from the comparable period in 2009 primarilyrelated to a $0.8 million expense reduction from the outdoor power sportsmagazine group resulting from reduced issues published, a $0.3 million expensereduction in the RV magazine group and a $0.3 million reduction in costsrelated to the annual directories.

 

Retailcosts applicable to revenues increased $0.5 million, or 1.0%, to $49.8million.  The retail gross profit marginof 40.9% for the second quarter of 2010 increased from 39.3% for the comparableperiod in 2009 primarily due to selective price increases on high volumeproducts.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $35.6 million for the second quarter of2010 increased $2.5 million compared to the second quarter of 2009.  This increase was due to a $1.7 million increasein deferred executive compensation under the 2010 Phantom Stock agreements, anda $0.8 million increase in retail general and administrative expenses,primarily related to labor costs.

 

Forthe second quarter of 2010, financing expense of $0.2 million was incurred forlegal and other costs related to the New Senior Credit Facility entered into onMarch 1, 2010, which was expensed in accordance with accounting guidancefor debtors accounting for a modification or exchange of debt instruments.  Financing expense of $1.5 million for secondquarter of 2009 related to legal and other costs incurred associated with theamendment dated June 5, 2009 to the then senior secured credit facility.

 

Depreciationand amortization expense of $4.6 million decreased $1.0 million from the prioryear primarily due to reduced amortization of intangible assets associated withprior acquisitions, and reduced capital expenditures.

 

*Incomefrom Operations*

 

Incomefrom operations for the second quarter of 2010 totaled $11.6 million comparedto income from operations of $8.3 million for the second quarter of 2009.  This $3.3 million increase was primarily theresult of increased gross profit for the Retail and Membership Servicessegments of $2.6 million, and $0.9 million, respectively, reduced financingexpense of $1.3 million, and reduced operating expenses of $0.2 million.  These increases were partially offset by a$1.7 million increase in deferred executive compensation.

 

*Non-OperatingItems*

 

Non-operatingexpenses of approximately $9.8 million for the second quarter of 2010 increased$6.7 million compared to the second quarter of 2009 due to the $4.7 milliongain on purchase of the $14.6 million of Senior Notes in the second quarter of2009, a 

 

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$1.9million increase in interest expense relating to higher interest rates, and an$0.8 million reduction of gain on derivative instrument related to the interestrate swap agreements.  These increaseswere partially offset by a $0.7 million reduction in other non-operatingexpenses.

 

*Incomebefore Income Tax*

 

Incomebefore income tax for the second quarter of 2010 was $1.8 million, or $3.4million less than the second quarter of 2009. This decreased was attributable to the $6.7 million increase innon-operating items mentioned above for the second quarter of 2010 that wasonly partially offset by the $3.3 million increase in income from operations inthe second quarter of 2010.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.1 million for thesecond quarter of 2010, compared to $0.3 million income tax expense for thesecond quarter of 2009.

 

*Net income*

 

Netincome in the second quarter of 2010 was $1.7 million compared to $4.9 millionfor the same period in 2009 mainly due to the reasons discussed above.

 

*SegmentProfit (Loss)*

 

TheCompany’s three principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, 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.

 

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

 

Membershipservices segment profit of $13.4 million for the second quarter of 2010increased $1.5 million, or 12.2%, from the comparable period in 2009.  This increase was largely attributable to a$0.4 million increase in profit from the Good Sam Club related to reducedmarketing and administrative expense, a $0.4 million increase in President’sClub segment profit related to increased advertising revenue in its RV Viewmagazine, a 

 

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$0.4million increase in profit from marketing fee revenue related to health andlife insurance products, and a $0.3 million increase in segment profit relatedto overhead cost savings.

 

Mediasegment profit of approximately $30,000 for the second quarter of 2010 remainedrelatively unchanged from the comparable period in 2009.  Increased segment profit from the RV magazinegroups of approximately $0.2 million, related to reduced costs, was offset byreduced segment profit from consumer events, relating to reduced number ofevents.

 

Retailsegment profit of $4.5 million for the second quarter of 2010 increased $4.0million compared the $0.5 million segment profit for the second quarter of2009.  This increase in segment profitwas the result of a $2.3 million increase in gross profit margin, a $2.2million decrease in allocated interest expense, and a $0.3 million decrease indepreciation and amortization expense, partially offset by a $0.8 millionincrease in selling, general and administrative expenses.

 

**SixMonths Ended June 30, 2010**

**ComparedWith Six Months Ended June 30, 2009**

 

Revenuesof $237.0 million for the first six months of 2010 increased by $2.1 million,or 0.9%, from the comparable period in 2009.

 

MembershipServices revenues of $75.7 million for the first six months of 2010 increased$1.3 million, or 1.8%, from the comparable period in 2009.  This revenue increase was largelyattributable to a $2.1 million revenue increase related to vehicle insuranceproducts primarily related to a $2.5 million fee received in the first quarteras a result of waiving our right of first refusal regarding the sale of thethird party partner, an $0.8 million increase in extended vehicle warrantyprogram revenue resulting from continued policy growth, a $0.7 million increasein various other ancillary products, a $0.5 million increase in advertisingrevenue for the President’s Club publication, RV View, and a $0.4 millionincrease in revenue from emergency road service products.  These increases were partially offset by a$1.4 million reduction in member events revenue due to timing of the Good SamClub annual rally, which occurred in the second quarter of 2009 versus thethird quarter of 2010, a $1.2 million revenue decrease due to the terminationof the brand usage licensing fee charged to FreedomRoads Holding LLC and itssubsidiaries (collectively “FreedomRoads”) in December 2009, and a $0.6million decrease due to reduced membership for the Coast Club and Golf CardClub.

 

Mediarevenues of $22.7 million for the first six months of 2010 decreased $4.1million, or 15.3%, from the comparable period in 2009.  This decrease was primarily attributable to a$2.5 million reduction in revenue from our outdoor power sports magazinesrelated to reduced issues published, a $0.6 million reduction in RV related publicationrevenue primarily attributable to reduced advertising and circulation revenue,and a $1.0 million reduction in exhibitor revenue resulting from six fewerconsumer shows in the first six months of 2010 compared to the first six monthsof 2009.

 

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Retailrevenues of $138.6 million increased by $4.8 million, or 3.6%, from thecomparable period in 2009.  Storemerchandise sales increased $2.0 million from the first six months of 2009 dueto a same store sales increase of $3.4 million, or 3.4%, compared to an 11.0%decrease in same store sales for the first six months of 2009, and a $0.2million revenue increase from the opening of one new store over the pasteighteen months, partially offset by decreased revenue from discontinued storesof $1.6 million.  Same store salecalculations for a given period include only those stores that were open bothat the end of that period and at the beginning of the preceding fiscalyear.  Also, mail order and internet salesincreased $1.0 million, installation and service fees increased $1.0 millionand supplies and other sales increased $0.8 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $143.0 million for the first six months of 2010,a decrease of $3.8 million, or 2.6%, from the comparable period in 2009.

 

MembershipServices costs applicable to revenues of $43.3 million decreased $1.7 million,or 3.7%, from the comparable period in 2009. This decrease consisted of a $1.7 million reduction in member eventscosts related to event timing, a $0.7 million reduction in wage-relatedexpenses, and a $0.5 million reduction in marketing and program costs relatedto reduced membership in the Coast Club and Golf Card Club, partially offset bya $1.0 million increase in costs associated with the extended vehicle warrantyprogram and emergency road services, related to increased revenue, and a $0.2million increase in vehicle insurance marketing fees.

 

Mediacosts applicable to revenues of $17.6 million for the first six months of 2010decreased $3.3 million, or 15.7%, from the comparable period in 2009 primarilyrelated to a $1.9 million reduction in magazine expenses resulting from reducedissues published and reduced magazine sizes, a $0.7 million reduction in costsrelated to reduced consumer shows revenue, and a $0.7 million reduction inwage-related costs.

 

Retailcosts applicable to revenues increased $1.2 million, or 1.4%, to $82.1million.  The retail gross profit marginof 40.8% for the first six months of 2010 increased from 39.5% for thecomparable period in 2009 primarily due to selective price increases on highvolume products.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of $65.8 million for the first six monthsof 2010 increased $2.7 million compared to the first six months of 2009.  This increase was due to a $1.7 millionincrease in deferred executive compensation under the 2010 Phantom Stockagreements and a $1.0 million increase in retail general and administrative expensesconsisting primarily of increases in labor and property taxes.

 

Forthe first six months of 2010, financing expense of $7.3 million was incurredfor legal and other costs related to the New Senior Credit Facility enteredinto on March 1, 2010, which was expensed in accordance with accountingguidance for debtors accounting for a modification or exchange of debtinstruments.  Financing expense of $1.5million for 

 

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firstsix months of 2009 related to legal and other costs incurred associated withthe amendment dated June 5, 2009 to the then senior secured creditfacility.

 

Depreciationand amortization expense of $9.4 million decreased $1.0 million from the prioryear primarily due to reduced amortization of intangible assets associated withprior acquisitions, and reduced capital expenditures partially offset byincreased amortization related to the New Senior Credit Facility re-financing.

 

*Incomefrom Operations*

 

Incomefrom operations for the first six months of 2010 totaled $11.5 million comparedto $13.2 million for the first six months of 2009.  This $1.7 million decrease was primarily theresult of increased financing expense of $5.8 million in the first six monthsof 2010, $1.7 million of deferred executive compensation, and reduced grossprofit for the Media segment of $0.8 million, partially offset by increasedgross profit for the Retail and Membership Service segments of $3.6 million and$3.0 million, respectively.

 

*Non-OperatingItems*

 

Non-operatingexpenses of approximately $19.3 million for the first six months of 2010increased $10.5 million compared to the first six months of 2009 due to a $5.4million increase in interest expense relating to higher interest rates, a $4.7million gain on purchase of the $14.6 million Senior Notes in the secondquarter of 2009, and a $1.2 million increase in reduction in gain on derivativeinterest rate swap agreements, partially offset by an $0.8 million decrease inother non-operating expenses.  See Note 8— Interest Rate Swap Agreements.

 

*(Loss)Income before Income Tax*

 

Lossbefore income tax for the first six months of 2010 was $7.8 million, comparedto income before income taxes for the first six months of 2009 of $4.4million.  This $12.2 million reductionwas attributable to the $1.7 million decrease in income from operations and a$10.5 million increase in non-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.2 million for the firstsix months of 2010, compared to $0.7 million income tax expense for the firstsix months of 2009.

 

*Net loss*

 

Netloss in the first six months of 2010 was $8.0 million compared to a $3.7million net income for the same period in 2009 mainly due to the reasonsdiscussed above.

 

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*SegmentProfit (Loss)*

 

TheCompany’s three principal lines of business are Membership Services, Media andRetail.  The Membership Services segmentoperates the Good Sam Club, the Coast to Coast Club, the President’s Club, 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.

 

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

 

Membershipservices segment profit of $28.6 million for the first six months of 2010increased $4.0 million, or 16.3%, from the comparable period in 2009.  This increase was largely attributable to a$1.8 million increase in vehicle insurance profit primarily related to a $2.5million fee received as a result of waiving our right of first refusalregarding the sale of the third party partner, a $1.2 million increase insegment profit from various ancillary products revenue and cost reductions, a$0.9 million increase in profit from the Good Sam Club related to reducedmarketing and administrative expenses, a $0.5 million increase in profit fromthe extended vehicle warranty program and emergency road service products, a$0.4 million increase in segment profit related to member events timing, a $0.3million increase in segment profit relating to the additional advertisingrevenue in the President’s Club publication, RV View, and a $0.1 millionincrease in profit related to reduced marketing and program expenses in theCoast to Coast Club and Golf Card Club. These increases were partially offset by a $1.2 million decrease insegment profit relating to reduced brand usage licensing fees fromFreedomRoads.

 

Mediasegment profit decreased $0.3 million, or 26.7%, to $0.9 million for the firstsix months of 2010 from the comparable period in 2009.  This decrease in segment profit resultedprimarily from a $0.3 million decrease in segment profit from our consumershows group.

 

Retailsegment loss was $0.1 million for the first six months of 2010 compared to aloss of $7.7 million for the first six months of 2009.  This $7.6 million improvement was the resultof a $5.6 million decrease in allocated interest expense, a $3.0 million increasein gross profit margin and a $0.4 million reduction in amortization expense,partially offset by a $1.0 million increase in selling, general andadministrative expenses, and $0.4 million of financing expense.

 

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**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany historically operates with a working capital deficit.  The working capital deficit as of June 30,2010 and December 31, 2009 was $0.3 million and $4.8 million,respectively.  The primary reason for theworking capital deficit was the deferred revenue and gains reported undercurrent liabilities of $60.3 million and $60.7 million, as of June 30,2010 and December 31, 2009, respectively. Deferred revenue is primarily comprised of cash collected for clubmemberships and service contracts in advance, which is amortized over the lifeof the membership or contract period. The Company uses net proceeds from this deferred revenue to lower itsborrowings.

 

In2009, the Company and its parent, AGHI, engaged a financial advisor to assistin refinancing or restructuring of the Senior Notes ($137.8 million principaloutstanding at June 30, 2010 and maturing on February 15, 2012) andthe AGHI Notes ($87.1 million principal outstanding at June 30, 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$113.6 million so the holders executing the consents held 98.9% of theoutstanding principal amount of the AGHI Notes. Pursuant to the consent letters from the institutional holders, AGHIagreed to pay the legal fees for a law firm to represent the institutionalholders. In addition, AGHI paid a consent fee equal 1⁄4 of 1% of the principalamount to the institutional holders who signed a consent letter, or anaggregate of $164,600.  No consent feewas paid to the non-institutional holders. AGHI satisfied the August 15, 2009 interest payment in January,2010 with $4.5 million in cash (funded, in part, from a $2.8 million capitalcontribution from its shareholder, and the balance from AGI as a permitted taxdistributions), and the remaining $1.7 million due to related entities wasforgiven and, as such, reported as an equity contribution.  AGHI satisfied the interest payment due February 15,2010 on March 5, 2010 with $4.4 million in cash (funded, in part, from$2.5 million received by AGHI in connection with a waiver by AGHI of certainfirst refusal rights related to AGI’s vehicle insurance business and thebalance from AGI as a permitted tax distribution) and the remaining $1.8million due to related entities was forgiven and, as such, reported as anequity contribution.  As a condition tofunding of the New Senior Credit Facility, AGHI acquired $25.4 million of AGHINotes due on March 15, 2010 that were held by an affiliate of AGHI, andcontributed them by the affiliate to AGHI, and AGHI then cancelled those notes,thereby reducing the approximately $112.3 million of AGHI Notes outstanding asof December 31, 2009 to approximately $87.0 million as of March 31, 2010.

 

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*Contractual Obligations and Commercial Commitments*

 

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

 
| ** **                  | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------|------------|----------------------------|------------|
| **(in thousands)**          | ** ** | **Total**                  | ** ** | **2010** | ** ** | **2011 and  2012** | ** ** | **2013 and  2014** | ** ** | **Thereafter** | ** ** |
|                        |       |                       |       |   |   |   |   |   |   |   |   |
| Debt and future interest    |       | $                          | 346,689    |   | $ | 18,641 |   | $ | 328,048 |   | $ | — |   | $ | — |   |
| Operating lease obligations |       | 215,286                    |       | 11,511 |   | 42,950 |   | 36,660 |   | 124,165 |   |
| Standby letters of credit   |       | 6,891                      |       | 4,891 |   | 2,000 |   | — |   | — |   |
| Grand total                 |       | $                          | 568,866    |   | $ | 35,043 |   | $ | 372,998 |   | $ | 36,660 |   | $ | 124,165 |   |

 

Inaccordance with their respective loan agreements, the maturity dates of the NewSenior Credit Facility and the CW Credit Facility accelerate to mature 90 daysand 120 days, respectively, prior to maturity of the Senior Notes and the AGHINotes.  The Debt and future interestdisclosed above assumes the Senior Notes and AGHI Notes, both due February 15,2012, are not extended.

 

NewSenior Credit Facility

 

OnMarch 1, 2010, the Company entered into the New Senior Credit Facility torefinance the existing senior credit facility ($128.9 million aggregateprincipal amount outstanding at December 31, 2009) which was scheduled tomature on June 30, 2010, the second lien notes due July 31, 2010($9.7 million principal amount outstanding at December 31, 2009), and theSA Loan ($1.0 million principal amount outstanding at December 31,2009).  The New Senior Credit Facilityprovides for term loans aggregating $144.3 million, including an original issuediscount of 2%, that are payable in quarterly installments of $360,750beginning March 1, 2011.  Inaddition, there are mandatory prepayments of the term loans from excess cashflow (as defined) of AGI and from asset sales. The term loans under the New Senior Credit Facility mature on theearlier of (i) March 1, 2015 or (ii) 90 days prior to thematurity of either the Senior Notes ($137.8 million principal amountoutstanding as at June 30, 2010 and are due on February 15, 2012) orthe AGHI Notes ($88.2 million aggregate principal amount outstanding at June 30,2010 and are due February 15, 2012). Interest on the term loans under the New Senior Credit Facility floatsat either 8.75% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 5.25%) for borrowings whose interestis based on the prime rate or 10.0% over the LIBOR rate (defined as the greaterof the 3 months LIBOR rate or 3.0%) for borrowings whose interest is based onLIBOR.  After consideration of fixed ratesunder the interest rate swap agreements, (See Note 8- Interest Rate SwapAgreements), as of June 30, 2010, the average annual interest rate on theterm loans was 16.76%.  The New SeniorCredit Facility contains affirmative covenants, including financial covenants,and negative covenants, including a restriction on dividends or distributionsby AGI to AGHI.  Borrowings under the NewSenior Credit Facility are guaranteed by the direct and indirect subsidiariesof AGI and are secured by liens on the assets of AGI and its direct andindirect subsidiaries.  As a condition tothe term loans under the New Senior Credit Facility, $25.4 million of AGHINotes due on March 15, 2010

 

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thatwere held by an affiliate of AGHI were contributed to AGHI and AGHI cancelledthose notes.  As of June 30, 2010,$141.9 million, net of approximately $2.4 million of unamortized original issuediscount, was outstanding on the New Senior Credit Facility.  Restricted cash of $8.1 million was releasedfrom its restriction on March 1, 2010, when the existing credit facilitywas refinanced.

 

CWCredit Facility

 

OnMarch 1, 2010, Camping World also entered into a credit agreement (the “CWCredit Facility”) providing for an asset based lending facility of up to $22.0million, of which $10.0 million is available for letters of credit and $12.0million is available for revolving loans. The CW Credit Facility matures on the earlier of (i) March 1,2013, (ii) 60 days prior to the date of maturity of the New Senior CreditFacility, or (iii) 120 days prior to the earlier date of maturity of theSenior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floatsat either 3.25% over the base rate (defined as the greater of the prime rate,federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whoseinterest is based on the prime rate or 3.25% over the LIBOR rate (defined asthe greater of LIBOR rate applicable to the period of the respective LIBORborrowings or 1.0%) for borrowings whose interest is based on LIBOR. As of June 30,2010, the average interest rate on the CW Credit Facility was 4.25%. Borrowingsunder the CW Credit Facility are based on the borrowing base of eligibleinventory and accounts receivable of Camping World and its subsidiaries.  The CW Credit Facility contains affirmativecovenants, including financial covenants, and negative covenants.  Borrowings under the CW Credit Facility areguaranteed by the direct and indirect subsidiaries of Camping World and aresecured by a pledge on the stock of Camping World and its direct and indirectsubsidiaries and liens on the assets of Camping World and its direct andindirect subsidiaries.  The lenders underthe New Senior Credit Facility and the CW Credit Facility have entered into anintercreditor agreement that governs their rights in the collateral that ispledged to secure their respective loans. As of June 30, 2010, $5.9 million was borrowed and $6.9 million ofletters of credit were issued under the CW Credit Facility.

 

SeniorNotes

 

InFebruary 2004, AGI issued $200.0 million of Senior Notes pursuant to theAGI Indenture.  Interest at the rate of9% per annum is due on the Senior Notes on February 15 and August 15.  The Senior Notes mature on February 15,2012.  As of June 30, 2010, $137.8million of Senior Notes remained outstanding. The fair value of the Senior Notes, based on the quoted market price at June 30,2010, was $102.3 million.

 

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

 

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Interest Rate Swap Agreements

 

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

 

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

 

EffectiveJanuary 1, 2009, the Company adopted the provisions of the new accountingguidance for Disclosures about Derivative Instruments and Hedging Activities.  The guidance requires that the objectives forusing derivative instruments be disclosed to better convey the purpose ofderivative use in terms of the risks that the Company is intending to manage.  This standard also requires disclosure of howderivatives and related hedged items are accounted for and how they affect theCompany’s financial statements.  Theadoption of the new guidance did not have a material impact on our condensedconsolidated results of operations, financial position or cash flows.

 

OnOctober 15, 2007, AGI entered into a five-year interest rate swapagreement with a notional amount of $100.0 million from which it will receiveperiodic payments at the 3 month LIBOR-based variable rate (0.3378% at June 30,2010 based upon the April 30, 2010 reset date) and make periodic paymentsat a fixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  The interest rate swap agreement waseffective beginning October 31, 2007 and expires on October 31,2012.  On March 19, 2008, AGIentered into a 4.5 year interest rate swap agreement with a notional amount of$35.0 million from which it will receive periodic payments at the 3 monthLIBOR-based variable rate (0.3378% at June 30, 2010 based upon the April 30,2010 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 and reclassifiedto earnings in the same period in which the hedged interest payment affectsearnings.  The interest rate swapagreements expire on October 31, 2012. The fair value of these swaps included in other long-term

 

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liabilitieswas $8.7 million of which approximately $7.1 million is in accumulated othercomprehensive loss, and $1.1 million included in retained earnings and $0.5million in the statement of operations in the period ended June 30, 2010.  The fair value of these swaps included inother long-term liabilities was $8.1 million of which $7.0 million is in accumulatedother comprehensive loss and $1.1 million in the statement of operations inaggregate periods through December 31, 2009. See Note 9 — Fair Value Measurements.

 

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

 

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

 

Dueto the issuance of an option to the shareholder of the ultimate parent of theCompany to purchase Camping World, in the second quarter of 2009, which optionwas subsequently terminated, a portion of the highly effective hedge on thecash flows related to the $100.0 million notional amount interest rate swapagreement was deemed to be no longer probable and was deemed to be reasonablypossible.  As a result, changes in thevalue of the last $20.0 million of the $100.0 million interest rate swapagreement are included in earnings beginning on June 5, 2009.  Included in other comprehensive loss is $1.6million related to the last $20.0 million of the $100.0 million interest rateswap which will be amortized over the remaining life of the interest rate swapand included in earnings as a gain (loss) on derivative instrument

 

OtherContractual Obligations and Commercial Commitments

 

Forthe six months ended June 30, 2010, the Company incurred $1.7 million ofdeferred executive compensation expense under the phantom stock agreements, andmade no payments under 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 six months of 2010 totaling $1.4 million decreased$0.9 million from the first six months of 2009 primarily due to the curtailmentof new retail store openings.  Additionalcapital expenditures of $2.8 million are anticipated for the balance of 2010primarily for software enhancements, information technology upgrades andfurther website development.

 

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**CRITICALACCOUNTING POLICIES**

 

*General*

 

Thediscussion and analysis of the Company’s financial condition and results ofoperations are based upon the Company’s consolidated financial statements, whichhave been prepared in accordance with accounting principles generally acceptedin the United States.  The preparation ofthese financial statements requires the Company to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities.  On an on-going basis, the Company evaluatesits estimates, including those related to membership programs and incentives, baddebts, inventories, intangible assets, employee health insurance benefits,income taxes, restructuring, contingencies and litigation.  The Company bases its estimates on historicalexperience and on various other assumptions that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under different assumptionsor conditions.

 

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

 

*RevenueRecognition*

 

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

 

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*AccountsReceivable*

 

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

 

*Inventory*

 

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

 

*Long-LivedAssets*

 

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

 

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

 

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

 

*Indefinite-LivedIntangible Assets*

 

TheCompany evaluates indefinite-lived intangible assets for impairment at leastannually or when events indicate that an impairment exists in accordance withaccounting 

 

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guidancefor goodwill and other intangibles.  Theimpairment test for goodwill and other indefinite-lived intangible assets iscalculated annually using fair value measurement techniques.

 

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

 

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

 

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

 

*Derivative Financial Instruments*

 

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

 

Changes in the fair value of a derivative that ishighly effective and that is designated and qualifies as a cash flow hedge (a “swap”),to the extent that the hedge is effective, are recorded in accumulated othercomprehensive loss, until earnings are affected by the variability of cashflows of the hedged transaction.  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 a 

 

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swap is settled, the effective portion is amortizedover the estimated life of the hedge item.

 

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

 

*Fair Value Measurements*

 

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

 

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

 

*IncomeTaxes*

 

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

 

**ITEM 3:  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

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*Interest Rate SensitivityAnalysis*

 

At June 30, 2010, the total debt of the Company was$286.0 million, including $147.8 million of variable rate debt comprised of$141.9 million of term loans under the New Senior Credit Facility, of which$120.0 million is fixed through the interest rate swap agreements, and $5.9million under the CW Credit Facility. Fixed rate debt of $138.2 million is comprised of $137.8 million ofSenior Notes and approximately $0.4 million of purchase debt.  Holding other variables constant (such asdebt levels), the earnings and cash flow impact of a one-percentage pointincrease/ decrease in interest rates would have an unfavorable/ favorableimpact of approximately $0.3 million.

 

*Credit Risk*

 

We are exposed to credit risk on accountsreceivable.  We provide credit tocustomers in the ordinary course of business and perform ongoing creditevaluations.  Concentrations of creditrisk with respect to trade receivables are limited due to the number ofcustomers comprising our customer base. We currently believe our allowance for doubtful accounts is sufficientto cover customer credit risks.

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Managements’ Report on Internal Control over Financial Reporting

 

Within90 days prior to the filing of this Quarterly Report on Form 10-Q, the Companycarried out an evaluation, under the supervision and with the participation ofthe Company’s management, including the President and Chief Executive Officerand the Senior Vice President and Chief Financial Officer, of the effectivenessof the design and operation of the Company’s disclosure controls and procedurespursuant to Regulation 13a-15e under the Securities Exchange Act of 1934, asamended.  Based upon that evaluation, thePresident and Chief Executive Officer along with the Senior Vice President andChief Financial Officer concluded that the disclosure controls and proceduresare effective in timely alerting them to material information relating to theCompany (including its consolidated subsidiaries) required to be included inthe periodic SEC filings.  Managementdetermined that, as of June 30, 2010, there have been no significant changes inthe Company’s internal control over financial reporting or in other factorsthat could significantly affect these controls subsequent to the date theCompany carried out its evaluation.

 

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**PART II:  OTHER INFORMATION.**

 

**ITEM 1A: RISK FACTORS**

 

Inaddition to Risk Factors described under Item 1A — Risk Factors, in theCompany’s annual report on Form 10-K for the year ended December 31,2009, the following additional risk factors supplement the Risks Relating toOur Debt:

 

*Thematurity of our senior secured indebtedness could accelerate in the fourthquarter of 2011 if we are not able to refinance or extend the maturity date ofour Senior Notes and the AGHI Notes which mature on February 15, 2012.*

 

Inaccordance with their respective loan agreements, the maturity dates of the NewSenior Credit Facility and the CW Credit Facility accelerate to mature 90 daysand 120 days, respectively, prior to maturity of the Senior Notes and the AGHINotes.  The Senior Notes and AGHI Notesare due on February 15, 2012. Although the Company and its parent, AGHI, are currently seeking torefinance, extend or replace these notes, there can be no assurance that thesenotes will be refinanced, extended or replaced prior to the accelerated duedates of the New Senior Credit Facility and CW Credit Facility.  The availability of financing may be limiteddue to the current uncertainties in the capital markets and the current generalconditions in the U.S. economy.  As aresult, it may be even more difficult for the Company and AGHI to refinance,extend or replace the Senior Notes and AGHI Notes.  If we are not able to refinance, extend orreplace the Senior Notes and AGHI Notes prior to the accelerated maturity datesof the New Senior Credit Facility and the CW Credit Facility, the lenders underthe New Senior Credit Facility and the CW Credit Facility will be entitled toexercise their remedies to sell the collateral securing the repayment of theNew Senior Credit Facility and CW Credit Facility, including the Company’sassets, the stock of the Company and the stock of the Company’s subsidiaries.  Since the indebtedness owed under the NewSenior Credit Facility and CW Credit Facility is secured, it would be repaidbefore any of the unsecured or subordinated obligations of the Company and itssubsidiaries.  It is also possible thatthe interest rate payable on any new borrowings will be higher than theinterest rates under the current Senior Notes and AGHI Notes, which wouldadversely affect the Company’s cash flow and profitability (or increaselosses).

 

*Thenext interest payment date on the AGHI Notes is August 15, 2010 and theamount of interest then due on the AGHI Notes is $4.8 million.  Under the terms of the New Senior CreditFacility, we are not currently able to pay dividends or otherwise provide fundsto AGHI to enable AGHI to make such interest payment and, consequently, as ofthe filing of this Report on Form 10-Q, AGHI does not have sufficientfunds to make the August 15, 2010 interest payment on the AGHI Notes.  Although for the interest payments payableAugust 15, 2007, August 15, 2008, February 15, 2009, August 15,2009 and February 15, 2010, AGHI’s parent, AGHC, has made capitalcontributions to AGHI in amounts necessary to fund those interest payments,there can be no assurance that AGHC will loan or otherwise provide funds to AGHIin an amount sufficient to make the interest payment due August 15, 2010.*

 

Asof June 30, 2010, approximately $87.1 million, net of $1.1 million inunamortized original issue discount, remained outstanding on the AGHINotes.  The next interest payment date onthe AGHI Notes is August 15, 2010 and the amount of interest then due is$4.8 million.  Under the terms of the NewSenior Credit Facility, we are not currently able to pay dividends or otherwiseprovide funds to AGHI to make such interest payment and, consequently, as ofthe filing of this Report on Form 10-Q, AGHI does not have sufficientfunds to make the August 15, 2010 interest payment on the AGHI Notes.  Although for the interest payments payableAugust 15, 2007, August 15, 2008, February 15, 2009, August 15,2009 and February 15, 2010, AGHI’s parent, AGHC, has made capitalcontributions to AGHI in amounts necessary to fund those interest payments, asof the filing of this Report on Form 10-Q, AGHI has not received acommitment from its parent, AGHC, to provide funds for the interest payment dueAugust 15, 2010.  There can be noassurance that AGHI’s parent company will loan or otherwise provide funds tothe Company in an amount sufficient to make such interest payment.

 

**ITEM 6: EXHIBITS**

 

Exhibits:

 

Exhibit 10.40– Form of Phantom Stock Agreement between certain executives and AffinityGroup, Inc., dated January 1, 2010.

 

Exhibit 10.41– Audit Committee Charter revision dated June 15, 2010.

 

Exhibit 10.42– First Amendment and Limited Waiver to Second Amended and Restated CreditAgreement dated August 12, 2010 among Affinity Group, Inc., asborrower and as a credit party, the credit parties hereto, the lenders partyhereto and Wilmington Trust FSB, as Administrative Agent.

 

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**SIGNATURES:**

 

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

 

 
|                        | **AFFINITY  GROUP, INC.**                          |
|-----------------------------|----------------------------------------------------|
|                        |                                               |
|                        |                                               |
|                        | /s/  Thomas F. Wolfe                               |
| Date:  August 13, 2010 | Thomas  F. Wolfe                                   |
|                        | Senior  Vice President and Chief Financial Officer |

 

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