**UNITED STATES**

##### **SECURITIESAND 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** |
|------------------------------|------------|-----------------------------|
| **September 30,  2008** | ** ** | **333-113982**              |

 

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**AFFINITYGROUP, INC.**

(Exact name ofregistrant as specified in its charter)

 

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

 

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

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

**9% SeniorSubordinated Notes Due 2012**

 

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

YES   x                 NO   o

 

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

 

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

 

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

YES   o                  NO   x

 

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

 
| ** **                    | ** ** | **Outstanding as of** | ** ** |
|-------------------------------|------------|---------------------------------|------------|
| **Class**                     | ** ** | **November 14, 2008** | ** ** |
| Common Stock, $.001 par value |       | 2,000                           |       |

 

**DOCUMENTSINCORPORATED BY REFERENCE:  None**

 

 

 

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**AFFINITY GROUP, INC. AND SUBSIDIARIES**

** **

**INDEX**

 
| ** **                                                                                                     | ** ** | **Page** |
|----------------------------------------------------------------------------------------------------------------|------------|----------|
| ** **                                                                                                     |       |     |
| **Part I.   **Financial  Information                                                                 |       |     |
|                                                                                                           |       |     |
| **Item 1: Financial Statements**                                                                               |       |     |
|                                                                                                           |       |     |
| Consolidated  Balance Sheets   as of September 30, 2008 (unaudited) and December 31, 2007            |       | 1        |
|                                                                                                           |       |     |
| Unaudited  Consolidated Statements of Operations   for the three months ended September 30, 2008 and 2007 |       | 2        |
|                                                                                                           |       |     |
| Unaudited  Consolidated Statements of Operations   for the nine months ended September 30, 2008 and 2007  |       | 3        |
|                                                                                                           |       |     |
| Unaudited  Consolidated Statements of Cash Flows   for the nine months ended September 30, 2008 and 2007  |       | 4        |
|                                                                                                           |       |     |
| Notes to  Unaudited Consolidated Financial Statements                                                          |       | 5        |
|                                                                                                           |       |     |
| **Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of  Operations**       |       | 25       |
|                                                                                                           |       |     |
| **Item 3:  Quantitative and Qualitative Disclosures about Market Risk**                                        |       | 43       |
|                                                                                                           |       |     |
| **Item 4: Controls  and Procedures**                                                                           |       | 44       |
|                                                                                                           |       |     |
| **Part II. Other Information**                                                                            |       | 44       |
|                                                                                                           |       |     |
| **Signatures**                                                                                                 |       | 45       |

 

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

September 30, 2008 and December 31, 2007

(In thousands except shares and par value)

 
| ** **                                                                                      | ** ** | **9/30/2008**   | ** ** | **12/31/2007** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------|------------|----------------|------------|
| ** **                                                                                      | ** ** | **(Unaudited)** | ** ** | ** **     | ** ** |
| **ASSETS**                                                                                      |       |            |       |           |       |
| CURRENT ASSETS:                                                                                 |       |            |       |           |       |
| Cash and cash equivalents                                                                       |       | $               | 15,989     |           | $          | 8,357 |   |
| Accounts receivable, less allowance for doubtful  accounts of $1,438 in 2008 and $1,473 in 2007 |       | 34,912          |       | 33,330         |       |
| Inventories                                                                                     |       | 63,319          |       | 64,209         |       |
| Prepaid expenses and other assets                                                               |       | 19,946          |       | 14,430         |       |
| Deferred tax assets                                                                             |       | 4,095           |       | 3,922          |       |
| Total current assets                                                                            |       | 138,261         |       | 124,248        |       |
|                                                                                            |       |            |       |           |       |
| PROPERTY AND EQUIPMENT, net                                                                     |       | 44,649          |       | 44,307         |       |
| INVESTMENT IN AFFILIATE                                                                         |       | —          |       | 81,005         |       |
| AFFILIATE NOTES AND INVESTMENTS                                                                 |       | 4,619           |       | 4,650          |       |
| INTANGIBLE ASSETS, net                                                                          |       | 22,460          |       | 23,695         |       |
| GOODWILL                                                                                        |       | 96,828          |       | 144,429        |       |
| OTHER ASSETS                                                                                    |       | 1,803           |       | 1,979          |       |
| Total assets                                                                                    |       | $               | 308,620    |           | $          | 424,313 |   |
|                                                                                            |       |            |       |           |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                                  |       |            |       |           |       |
| CURRENT LIABILITIES:                                                                            |       |            |       |           |       |
| Accounts payable                                                                                |       | $               | 29,177     |           | $          | 27,171 |   |
| Accrued interest                                                                                |       | 3,526           |       | 6,700          |       |
| Accrued income taxes                                                                            |       | 1,292           |       | 1,189          |       |
| Accrued liabilities                                                                             |       | 32,317          |       | 36,069         |       |
| Deferred revenues and gains                                                                     |       | 72,601          |       | 65,855         |       |
| Current portion of long-term debt                                                               |       | 139,170         |       | 4,406          |       |
| Total current liabilities                                                                       |       | 278,083         |       | 141,390        |       |
|                                                                                            |       |            |       |           |       |
| DEFERRED REVENUES AND GAINS                                                                     |       | 36,852          |       | 38,535         |       |
| LONG-TERM DEBT, net of current portion                                                          |       | 153,899         |       | 282,767        |       |
| DEFERRED TAX LIABILITY                                                                          |       | 2,875           |       | 2,702          |       |
| OTHER LONG-TERM LIABILITIES                                                                     |       | 24,781          |       | 25,829         |       |
|                                                                                            |       | 496,490         |       | 491,223        |       |
|                                                                                            |       |            |       |           |       |
| COMMITMENTS AND CONTINGENCIES                                                                   |       |            |       |           |       |
|                                                                                            |       |            |       |           |       |
| STOCKHOLDER’S DEFICIT:                                                                     |       |            |       |           |       |
| Common stock, $.001 par value, 2,000 shares  authorized, 2,000 shares issued and outstanding    |       | 1               |       | 1              |       |
| Additional paid-in capital                                                                      |       | 81,005          |       | 81,005         |       |
| Accumulated deficit                                                                             |       | (264,229        | )          | (143,211       | )          |
| Accumulated other comprehensive loss                                                            |       | (4,647          | )          | (4,705         | )          |
| Total stockholder’s deficit                                                                |       | (187,870        | )          | (66,910        | )          |
| Total liabilities and stockholder’s deficit                                                |       | $               | 308,620    |           | $          | 424,313 |   |

 

See notes to consolidatedfinancial statements.

 

1

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AFFINITY GROUP, INC. ANDSUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                    | ** ** | **9/30/2007** | ** ** |
| REVENUES:                                         |       |                             |       |   |   |
| Membership services                               |       | $                                | 36,610     |   | $ | 39,375 |   |
| Media                                             |       | 12,547                           |       | 14,864 |   |
| Retail                                            |       | 84,180                           |       | 92,189 |   |
|                                              |       | 133,337                          |       | 146,428 |   |
|                                              |       |                             |       |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                             |       |   |   |
| Membership services                               |       | 23,151                           |       | 26,244 |   |
| Media                                             |       | 10,604                           |       | 10,867 |   |
| Retail                                            |       | 49,882                           |       | 55,812 |   |
|                                              |       | 83,637                           |       | 92,923 |   |
|                                              |       |                             |       |   |   |
| GROSS PROFIT                                      |       | 49,700                           |       | 53,505 |   |
|                                              |       |                             |       |   |   |
| OPERATING EXPENSES:                               |       |                             |       |   |   |
| Selling, general and administrative               |       | 35,858                           |       | 38,611 |   |
| Goodwill impairment                               |       | 47,601                           |       | — |   |
| Impairment of investment in affiliate             |       | 81,005                           |       | — |   |
| Depreciation and amortization                     |       | 5,033                            |       | 4,694 |   |
|                                              |       | 169,497                          |       | 43,305 |   |
|                                              |       |                             |       |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (119,797                         | )          | 10,200 |   |
|                                              |       |                             |       |   |   |
| NON-OPERATING ITEMS:                              |       |                             |       |   |   |
| Interest income                                   |       | 162                              |       | 161 |   |
| Interest expense                                  |       | (6,064                           | )          | (6,219 | ) |
| Other non-operating items, net                    |       | (141                             | )          | (51 | ) |
|                                              |       | (6,043                           | )          | (6,109 | ) |
|                                              |       |                             |       |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (125,840                         | )          | 4,091 |   |
|                                              |       |                             |       |   |   |
| INCOME TAX EXPENSE                                |       | (270                             | )          | (4,764 | ) |
|                                              |       |                             |       |   |   |
| NET LOSS                                          |       | $                                | (126,110   | ) | $ | (673 | ) |

 

See notes to consolidatedfinancial statements.

 

2

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFOPERATIONS

(In Thousands)

(Unaudited)

 
| ** **                                        | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                   | ** ** | **9/30/2007** | ** ** |
| REVENUES:                                         |       |                            |       |   |   |
| Membership services                               |       | $                               | 114,718    |   | $ | 111,528 |   |
| Media                                             |       | 54,227                          |       | 57,082 |   |
| Retail                                            |       | 237,106                         |       | 259,489 |   |
|                                              |       | 406,051                         |       | 428,099 |   |
|                                              |       |                            |       |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                            |       |   |   |
| Membership services                               |       | 72,810                          |       | 72,205 |   |
| Media                                             |       | 39,208                          |       | 38,907 |   |
| Retail                                            |       | 139,077                         |       | 157,721 |   |
|                                              |       | 251,095                         |       | 268,833 |   |
|                                              |       |                            |       |   |   |
| GROSS PROFIT                                      |       | 154,956                         |       | 159,266 |   |
|                                              |       |                            |       |   |   |
| OPERATING EXPENSES:                               |       |                            |       |   |   |
| Selling, general and administrative               |       | 112,559                         |       | 112,088 |   |
| Goodwill impairment                               |       | 47,601                          |       | — |   |
| Impairment of investment in affiliate             |       | 81,005                          |       | — |   |
| Depreciation and amortization                     |       | 15,074                          |       | 14,185 |   |
|                                              |       | 256,239                         |       | 126,273 |   |
|                                              |       |                            |       |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (101,283                        | )          | 32,993 |   |
|                                              |       |                            |       |   |   |
| NON-OPERATING ITEMS:                              |       |                            |       |   |   |
| Interest income                                   |       | 444                             |       | 518 |   |
| Interest expense                                  |       | (18,174                         | )          | (18,763 | ) |
| Debt extinguishment expense                       |       | —                          |       | (775 | ) |
| Other non-operating items, net                    |       | (164                            | )          | 42 |   |
|                                              |       | (17,894                         | )          | (18,978 | ) |
|                                              |       |                            |       |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (119,177                        | )          | 14,015 |   |
|                                              |       |                            |       |   |   |
| INCOME TAX EXPENSE                                |       | (841                            | )          | (4,581 | ) |
|                                              |       |                            |       |   |   |
| NET (LOSS) INCOME                                 |       | $                               | (120,018   | ) | $ | 9,434 |   |

 

See notes to consolidatedfinancial statements.

 

3

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AFFINITY GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OFCASH FLOWS

(In Thousands)

(Unaudited)

 
| ** **                                                                                | ** ** | **NINE MONTHS ENDED** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                | ** ** | **9/30/2008**                   | ** ** | **9/30/2007** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |       |                            |       |   |   |
| Net (loss) income                                                                         |       | $                               | (120,018   | ) | $ | 9,434 |   |
| Adjustments to reconcile net (loss) income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation                                                                              |       | 8,802                           |       | 7,323 |   |
| Amortization                                                                              |       | 6,272                           |       | 6,862 |   |
| Impairment loss on goodwill                                                               |       | 47,601                          |       | — |   |
| Impairment loss on investment in affiliate                                                |       | 81,005                          |       | — |   |
| Provision for losses on accounts receivable                                               |       | 881                             |       | 904 |   |
| Deferred compensation                                                                     |       | (311                            | )          | 440 |   |
| Deferred tax benefit                                                                      |       | —                          |       | 3,706 |   |
| Loss on sale of property and equipment                                                    |       | 246                             |       | 73 |   |
| Loss on early extinguishment of debt                                                      |       | —                          |       | 775 |   |
| Changes in operating assets and liabilities                                               |       |                            |       |   |   |
| Accounts receivable                                                                       |       | (2,463                          | )          | 2,135 |   |
| Inventories                                                                               |       | 890                             |       | (17,510 | ) |
| Prepaid expenses and other assets                                                         |       | (4,919                          | )          | (5,795 | ) |
| Accounts payable                                                                          |       | 2,006                           |       | (9,532 | ) |
| Accrued and other liabilities                                                             |       | (7,502                          | )          | (2,271 | ) |
| Deferred revenues and gains                                                               |       | 4,002                           |       | 11,582 |   |
| Net cash provided by operating activities                                                 |       | 16,492                          |       | 8,126 |   |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |       |                            |       |   |   |
| Capital expenditures                                                                      |       | (9,407                          | )          | (14,570 | ) |
| Net proceeds from sale of property and equipment                                          |       | 17                              |       | 10 |   |
| Change in intangible assets                                                               |       | 1                               |       | (14 | ) |
| Acquisitions, net of cash received                                                        |       | (3,409                          | )          | (304 | ) |
| Repayment of loans receivable                                                             |       | 31                              |       | 28 |   |
| Net cash used in investing activities                                                     |       | (12,767                         | )          | (14,850 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |       |                            |       |   |   |
| Dividends paid                                                                            |       | (1,000                          | )          | (3,750 | ) |
| Borrowings on short-term debt                                                             |       | 33,000                          |       | 53,100 |   |
| Payment of debt issue costs                                                               |       | (121                            | )          | (291 | ) |
| Principal payments on short-term debt                                                     |       | (27,972                         | )          | (51,910 | ) |
| Net cash provided by (used in) financing activities                                       |       | 3,907                           |       | (2,851 | ) |
|                                                                                      |       |                            |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                   |       | 7,632                           |       | (9,575 | ) |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                          |       | 8,357                           |       | 15,006 |   |
|                                                                                      |       |                            |       |   |   |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD                                                |       | $                               | 15,989     |   | $ | 5,431 |   |

 

See notes to consolidated financial statements.

 

4

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**AFFINITYGROUP, INC. AND SUBSIDIARIES**

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**(1) BASISOF PRESENTATION**

 

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

 

These interimconsolidated financial statements should be read in conjunction with the Company’sconsolidated financial statements and notes in the Company’s 10-K report forthe year ended December 31, 2007 as filed with the Securities and ExchangeCommission.  In the opinion of managementof the Company, these consolidated financial statements contain all adjustmentsof a normal recurring nature necessary to present fairly the financialposition, results of operations and cash flows of the Company for the interimperiods presented.

 

**(2) RECENTACCOUNTING PRONOUNCEMENTS**

 

The Companyadopted the provisions of Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 157, “Fair ValueMeasurements” (“SFAS 157”) on January 1, 2008.  The FASB delayed the effective date of SFAS157 until January 1, 2009 with respect to fair value measurementrequirements for non-financial assets and liabilities that are not re-measuredon a recurring basis.  SFAS 157 definesfair value, establishes a framework and gives guidance regarding the methodused for measuring fair value, and expands disclosures about fair valuemeasurements.  SFAS 157 requirescompanies to disclose the fair value of their financial instruments accordingto a fair value hierarchy, as defined, and may require companies to provideadditional disclosures based on that hierarchy. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears.  The adoption of the provisions ofSFAS 157 did not have a material impact on the Company’s consolidated financialstatements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Liabilities” including an amendment of FASB Statement No. 115 (“SFAS159”).  SFAS 159 expands the use of fairvalue accounting but does not affect existing standards which requires assetsor liabilities to be carried at fair value. The objective of SFAS 159 is to improve financial reporting by providingcompanies with the opportunity to mitigate volatility in reported earningscaused by measuring related assets and liabilities differently without havingto apply complex hedge accounting provisions. Under SFAS 159, a company may elect to use fair value to measure eligibleitems at specified

 

5

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

 

election dates andreport unrealized gains and losses on items for which the fair value option hasbeen elected in earnings at each subsequent reporting date.  Eligible items include, but are not limitedto, accounts and loans receivable, available-for-sale and held-to-maturitysecurities, equity method investments, accounts payable, guarantees, issueddebt and firm commitments.  If elected,SFAS 159 would be effective for fiscal years beginning after November 15,2007.  The Company has elected not toadopt SFAS 159.

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS141(R)”).  SFAS 141(R) establishesprinciples and requirements for how an acquirer recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,any noncontrolling interest in the acquiree and the goodwill acquired.  SFAS 141(R) also establishes disclosurerequirements to enable the evaluation of the nature and financial effects ofthe business combination.  SFAS 141(R) iseffective for fiscal years beginning after December 15, 2008.  The Company will adopt SFAS 141(R) inthe first quarter of fiscal 2009 and apply the provisions of the Statement forany acquisition after the adoption date.

 

In December 2007,the FASB issued SFAS No. 160, “Accounting and Reporting of Non-controllingInterests in Consolidated Financial Statements – an amendment of AccountingResearch Bulletin No. 51” (“SFAS 160”). This standard will significantlychange the accounting and reporting for business combination transactions andnon-controlling (minority) interests in consolidated financial statements,including capitalizing at the acquisition date the fair value acquired fromin-process research and development, and re-measuring and writing down theseassets, if necessary, in subsequent periods during their development. This newstandard will be applied for business combinations that occur on or after January 1,2009 and presentation and disclosure requirements of SFAS 160 shall be appliedretrospectively.

 

In March 2008,the FASB issued SFAS Statement No. 161 (“SFAS 161”), “Disclosures aboutDerivative Instruments and Hedging Activities”. SFAS 161 requires companieswith derivative instruments to disclose information that should enablefinancial statement users to understand how and why a company uses derivativeinstruments, how derivative instruments and related hedged items are accountedfor under FASB Statement No. 133 “Accounting for Derivative Instrumentsand Hedging Activities” and how derivative instruments and related hedged itemsaffect a company’s financial position, financial performance and cash flows.SFAS 161 is effective for financial statements issued for fiscal years andinterim periods beginning after November 15, 2008. We are currentlyevaluating the impact, if any, that SFAS 161 will have on our consolidatedfinancial statements.

 

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

 

TheCompany’s three principal lines of business are Membership Services, Media(formerly know as Publications), and Retail. The Membership Services segment includes the operations of the Good SamClub, Coast to Coast Club, Camping World’s President’s

 

6

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

 

Club,Camp Club USA, and RV Handyman Club for recreational vehicles (“RV”) owners,campers and outdoor vacationers, and the Golf Card Club for golfenthusiasts.  The Media segment  publishes a variety of publications forselected markets in the recreation and leisure industry, including generalcirculation periodicals, directories, and RV and powersports industry trademagazines, and produces outdoor recreational consumer events.  The Retail segment sells specialty retailmerchandise and services for RV owners primarily through the Camping Worldretail supercenters, mail order catalogs and its website.  The Company evaluates performance based onprofit or loss from operations before income taxes.

 

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

 

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

 
| ** **                                | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **THREE MONTHS ENDED SEPTEMBER 30, 2008** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers          |       | $              | 36,610     |       | $          | 12,547     |       | $                | 84,180     |   | $ | 133,337 |   |
| Loss on sale of property and equipment    |       | —         |       | —     |       | (160       | )          | (160             | )          |
| Interest income                           |       | 891            |       | —     |       | 5          |       | 896              |       |
| Interest expense                          |       | —         |       | 53         |       | 4,026      |       | 4,079            |       |
| Depreciation and amortization             |       | 846            |       | 1,579      |       | 2,087      |       | 4,512            |       |
| Goodwill impairment                       |       | —         |       | —     |       | 47,601     |       | 47,601           |       |
| Impairment of investment in affiliate     |       | —         |       | —     |       | 81,005     |       | 81,005           |       |
| Segment operating profit (loss)           |       | 10,880         |       | (1,131     | )          | (129,518   | )          | (119,769         | )          |
|                                      |       |           |       |       |       |       |       |             |       |
| **THREE MONTHS ENDED SEPTEMBER 30, 2007** |       |           |       |       |       |       |       |             |       |
| Revenues from external customers          |       | $              | 39,375     |       | $          | 14,864     |       | $                | 92,189     |   | $ | 146,428 |   |
| Loss on sale of property and equipment    |       | —         |       | —     |       | (78        | )          | (78              | )          |
| Interest income                           |       | 2,528          |       | —     |       | 10         |       | 2,538            |       |
| Interest expense                          |       | —         |       | 52         |       | 3,943      |       | 3,995            |       |
| Depreciation and amortization             |       | 859            |       | 1,304      |       | 1,955      |       | 4,118            |       |
| Segment operating profit                  |       | 11,998         |       | 1,335      |       | 142        |       | 13,475           |       |

 

7

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

** **
| ** **                                    | ** ** | **Membership** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **       | ** ** |
|-----------------------------------------------|------------|----------------|------------|------------|------------|------------|------------|------------------|------------|
| ** **                                    | ** ** | **Services**   | ** ** | **Media**  | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
| **NINE MONTHS ENDED SEPTEMBER 30, 2008**      |       |           |       |       |       |       |       |             |       |
| Revenues from external customers              |       | $              | 114,718    |       | $          | 54,227     |       | $                | 237,106    |   | $ | 406,051 |   |
| Loss on sale of property and equipment        |       | —         |       | —     |       | (246       | )          | (246             | )          |
| Interest income                               |       | 2,712          |       | —     |       | 25         |       | 2,737            |       |
| Interest expense                              |       | —         |       | 157        |       | 12,116     |       | 12,273           |       |
| Depreciation and amortization                 |       | 2,408          |       | 4,623      |       | 6,509      |       | 13,540           |       |
| Goodwill impairment                           |       | —         |       | —     |       | 47,601     |       | 47,601           |       |
| Impairment of investment in affiliate         |       | —         |       | —     |       | 81,005     |       | 81,005           |       |
| Segment operating profit (loss)               |       | 34,094         |       | 5,622      |       | (138,454   | )          | (98,738          | )          |
|                                          |       |           |       |       |       |       |       |             |       |
| **NINE MONTHS ENDED SEPTEMBER 30, 2007**      |       |           |       |       |       |       |       |             |       |
| Revenues from external customers              |       | $              | 111,528    |       | $          | 57,082     |       | $                | 259,489    |   | $ | 428,099 |   |
| Gain (loss) on sale of property and equipment |       | —         |       | 5          |       | (78        | )          | (73              | )          |
| Interest income                               |       | 7,081          |       | —     |       | 77         |       | 7,158            |       |
| Interest expense                              |       | —         |       | 198        |       | 11,353     |       | 11,551           |       |
| Depreciation and amortization                 |       | 2,656          |       | 3,853      |       | 5,770      |       | 12,279           |       |
| Segment operating profit (loss)               |       | 35,942         |       | 10,125     |       | (1,842     | )          | 44,225           |       |

 

Thefollowing is a reconciliation of (loss) profit from operations to the Company’sconsolidated financial statements for the three and nine months ended September 30,2008 and 2007 (in thousands):

 
| ** **                                                    | ** ** | **THREE MONTHS ENDED** | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                    | ** ** | **9/30/2008**                    | ** ** | **9/30/2007**                   | ** ** | **9/30/2008** | ** ** | **9/30/2007** | ** ** |
| **(Loss) Profit From Operations Before Income  Taxes**        |       |                             |       |                            |       |   |   |   |   |
| Total (loss) profit for reportable segments                   |       | $                                | (119,769   | )                               | $          | 13,475 |   | $ | (98,738 | ) | $ | 44,225 |   |
| Unallocated G & A expense                            |       | (2,831                           | )          | (4,207                          | )          | (10,711 | ) | (13,677 | ) |
| Unallocated depreciation and amortization expense             |       | (521                             | )          | (576                            | )          | (1,534 | ) | (1,906 | ) |
| Elimination of intercompany interest income                   |       | (734                             | )          | (2,377                          | )          | (2,293 | ) | (6,640 | ) |
| Unallocated interest expense, net of intercompany elimination |       | (1,985                           | )          | (2,224                          | )          | (5,901 | ) | (7,212 | ) |
| Unallocated debt restructure expense                          |       | —                           |       | —                          |       | — |   | (775 | ) |
| (Loss) profit from operations before income taxes             |       | $                                | (125,840   | )                               | $          | 4,091 |   | $ | (119,177 | ) | $ | 14,015 |   |

 

Thefollowing is a reconciliation of assets of reportable segments to the Company’sconsolidated financial statements as of September 30, 2008 and December 31,2007 (in thousands):

 
| ** **                                          | ** ** | **9/30/2008** | ** ** | **12/31/2007** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|----------------|------------|
| Membership services segment                         |       | $             | 212,909    |           | $          | 203,836 |   |
| Media segment                                       |       | 90,029        |       | 89,074         |       |
| Retail segment                                      |       | 122,840       |       | 249,174        |       |
| Total assets for reportable segments                |       | 425,778       |       | 542,084        |       |
| Capitalized finance costs not allocated to segments |       | 4,416         |       | 5,348          |       |
| Corporate unallocated assets                        |       | 3,196         |       | 3,334          |       |
| Elimination of intersegment receivable              |       | (124,770      | )          | (126,453       | )          |
| Total assets                                        |       | $             | 308,620    |           | $          | 424,313 |   |

 

8

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**(4) STATEMENTS OF CASH FLOWS**

 

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

 
| ** **                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Cash paid (received) during the period for: |       |     |       |     |       |
| Interest                                    |       | $        | 21,348     |     | $          | 22,716 |   |
| Income taxes                                |       | (3       | )          | (194     | )          |
|                                             |            |          |            |          |            |  |  |

 

In January 2007, the Company assumed $0.3 million of liabilitiesin connection with the acquisition of the Madison Boat Show from MAC Events,LLC.

 

In February 2007, the Company assumed $0.6 million of liabilitiesand issued $1.5 million of debt in connection with the acquisition of five RVand Sportsman Shows from Industrial Expositions, Inc.

 

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

 

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

 

For the ninemonths ended September 30, 2008, the Company recorded an adjustment to thefair value of the interest rate swap resulting in a $0.1 million decrease inboth Other Long-Term Liabilities and Other Comprehensive Loss.

 

**(5) GOODWILL AND INTANGIBLE ASSETS**

 

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

 

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

 

The results of athird party valuation report (“Valuation Report”) prepared in the third quarterby a nationally recognized firm in anticipation of the potential sale ofCamping World (See Footnote 12- Recent Events) indicated that the estimatedfair value of the Camping World reporting unit was less than book value.  The excess of the carrying value over theestimated fair value of the Camping World reporting unit was primarily due tothe decline in the recreational vehicle and camping retail markets leading tolower expected future cash flows for the business and lower market comparables.In determining the fair value, the Company used a weighted average of theincome valuation approach and market valuation approaches.

 

9

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

 

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

 

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

 

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

 

The following is asummary of changes in the Company’s goodwill by business segment, for the ninemonths ended September 30, 2008 and 2007 (in thousands):

 
| ** **                            | ** ** | **Membership  Services** | ** ** | **Media** | ** ** | **Retail** | ** ** | **Consolidated** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------|------------|------------|------------|------------------|------------|
|                                  |       |                     |       |      |       |       |       |             |       |
| Balance as of December 31, 2007  |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |
| Impairments                           |       | —                   |       | —    |       | (47,601    | )          | (47,601          | )          |
| Balance as of September 30, 2008 |       | $                        | 49,944     |      | $          | 46,884     |       | $                | —     |   | $ | 96,828 |   |
|                                  |       |                     |       |      |       |       |       |             |       |
| Balance as of December 31, 2006  |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |
| Impairments                           |       | —                   |       | —    |       | —     |       | —           |       |
| Balance as of September 30, 2007 |       | $                        | 49,944     |      | $          | 46,884     |       | $                | 47,601     |   | $ | 144,429 |   |

 

Under SFAS No. 142,Goodwill and Other Intangible Assets, (“SFAS No. 142”) goodwill impairmentis deemed to exist if the net book value of a reporting unit exceeds itsestimated fair value.  The Company’sreporting units are generally consistent with the operating segments underlyingthe reporting segments identified in Note 3 - Segment Information.

 

10

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

 

In January 2007,AGI Productions, Inc. acquired a consumer show from MAC Events, Inc.for $0.5 million.  As part of thepurchase, the Company assumed $0.3 million of liabilities.  In February 2007, AGI Productions, Inc.acquired consumer shows from Industrial Exposition Inc. for $1.9 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.6 million of liabilities.

 

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

 

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

 

Finite-livedintangible assets, related accumulated amortization and weighted average usefullife consisted of the following at September 30, 2008 (in thousands,except as noted):

 
| ** **                                      | ** ** | **Weighted**                  | ** ** | ** ** | ** ** | ** **       | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|------------|------------|------------------|------------|------------|------------|
| ** **                                      | ** ** | **Average Useful**       | ** ** | ** ** | ** ** | **Accumulated**  | ** ** | ** ** | ** ** |
| ** **                                      | ** ** | **Life (in years)** | ** ** | **Gross**  | ** ** | **Amortization** | ** ** | **Net**    | ** ** |
|                                            |       |                          |       |       |       |             |       |       |       |
| Membership and customer lists                   |       | 6                             |       | $          | 36,384     |             | $          | (20,997    | )          | $ | 15,387 |   |
| Resort and golf course participation agreements |       | 4                             |       | 13,396     |       | (13,383          | )          | 13         |       |
| Non-compete and deferred consulting agreements  |       | 15                            |       | 18,830     |       | (14,799          | )          | 4,031      |       |
| Deferred financing costs                        |       | 7                             |       | 10,535     |       | (7,506           | )          | 3,029      |       |
|                                            |       |                          |       | $          | 79,145     |             | $          | (56,685    | )          | $ | 22,460 |   |

 

**(6) LONG-LIVED ASSETS**

 

In 2005, AGHI issued $88.2 million principal amount of its 10-7/8%Senior Notes due 2012 (the “AGHI Notes”) and contributed the net proceeds,approximately $81.0 million, to the Company and in turn, the Company made anequity contribution to Camping World. Camping World then made an equity capital contribution in the sameamount to its wholly-owned subsidiary, CWI, Inc. that created a newwholly-owned subsidiary named CWFR Capital Corp. (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture, and made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World. Since CWFR is an unrestricted subsidiary, its operations are notrestricted by either the AGI Indenture or the

 

11

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**(6) LONG-LIVED ASSETS (continued)**

 

AGHI Notes.  CWFR used theproceeds from the equity capital contribution to acquire the FreedomRoadsPreferred Interest.  FreedomRoads isowned 90% by The Stephen Adams Living Trust, which also indirectly owns 99.1%of the outstanding capital stock of AGHC and indirectly AGI.

 

Based on the results of the Valuation Report, the Company recorded animpairment charge of $81.0 million in the third quarter of 2008 that wrote downto zero the carrying value of the preferred interest (the “FreedomRoadsPreferred Interest”) held by an indirect subsidiary of Camping World inFreedomRoads Holding Company, LLC (“FreedomRoads”), a holding company whosesubsidiaries sell and service new and used recreational vehicles.  The $81.0 million impairment charge wasrecorded as a result of declining performance of the recreational vehicleindustry driven by overall weakening of the economy and a significant declinein consumer confidence, in addition to limited credit available to consumersinterested in purchasing recreational vehicles.

 

**(7) SENIOR CREDIT FACILITY**

 

On June 24, 2003, AGI entered into an Amended and Restated CreditAgreement and a Senior Secured Floating Rate Note Purchase Agreement (asamended, the “Senior Credit Facility”). The Senior Credit Facility provides for a revolving credit facility of$35.0 million and term loans in the aggregate of $140.0 million.  As of September 30, 2008, $8.5 millionwas outstanding under the revolving credit facility and $127.4 million wasoutstanding under the term loans. Reborrowings under the term loans are not permitted.  The interest on borrowings under the Senior CreditFacility was at variable rates based on the ratio of total cash flow tooutstanding indebtedness (as defined). Interest rates float with prime and the London Interbank Offered Rates,or LIBOR, plus an applicable margin ranging from 1.50% to 2.50% over the statedrates.  As of September 30, 2008,the average interest rates on the term loans and the revolving credit facilitywere 7.27% and 6.18%, respectively, and permitted borrowings under therevolving facility were $29.8 million. AGI also pays a commitment fee of 0.5% per annum on the unused amount ofthe revolving credit facility.  Theaggregate quarterly scheduled payments on the term loans are $0.4 million.  Both the revolving credit facility and theterm loans mature on June 24, 2009. The funds available under the Senior Credit Facility may be utilized forborrowings or letters of credit; however, a maximum of $7.5 million may beallocated to such letters of credit.  Asof September 30, 2008, AGI had letters of credit in the aggregate amountof $5.2 million outstanding.  The SeniorCredit Facility is secured by virtually all of AGI’s assets and a pledge of AGI’sstock and the stock of AGI’s subsidiaries. The Company expects to replace or refinance the Senior Credit Facilityin advance of its maturity date in June 2009, and has received a number ofproposals from prospective lenders in this regard.  See the discussion under “Liquidity andCapital Resources” under Item 2 below.

 

12

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

 

In February 2004, the Company issued $200.0 million of 9% SeniorSubordinated Notes (“Senior Subordinated Notes”) due 2012 pursuant to the AGIIndenture.  The Company purchased andretired $29.9 million of the Senior Subordinated Notes in 2006 and $17.7million in March 2007.  Interest ispayable on the remaining $152.4 million Senior Subordinated Notes twice a yearon February 15 and August 15. The Company’s present and future restricted subsidiaries guarantee theSenior Subordinated Notes with unconditional guarantees of payment that rankjunior in right of payment to their existing and future senior debt, but rankequal in right of payment to their existing and future senior subordinateddebt.  All of the Company’s subsidiarieshave jointly and severally guaranteed the indebtedness under the SeniorSubordinated Notes except for CWFR Capital Corp.  Full financial statements of the Guarantorshave not been included because, pursuant to their respective guarantees, theGuarantors are jointly and severally liable with respect to the SeniorSubordinated Notes.

 

13

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

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries as of and for the nine months ended September 30, 2008 (inthousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 14,362     |           | $          | 1,627         |       | $                | —     |             | $          | — |   | $ | 15,989 |   |
| Accounts receivable, net                                |       | 861        |       | 158,821        |       | —        |       | (124,770         | )          | 34,912           |       |
| Inventories                                             |       | —     |       | 63,319         |       | —        |       | —           |       | 63,319           |       |
| Other current assets                                    |       | 1,876      |       | 22,165         |       | —        |       | —           |       | 24,041           |       |
| Total current assets                                    |       | 17,099     |       | 245,932        |       | —        |       | (124,770         | )          | 138,261          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 6,886      |       | 37,763         |       | —        |       | —           |       | 44,649           |       |
| Intangible assets                                       |       | 3,030      |       | 19,430         |       | —        |       | —           |       | 22,460           |       |
| Goodwill                                                |       | 67,584     |       | 29,244         |       | —        |       | —           |       | 96,828           |       |
| Investment in subsidiaries                              |       | 499,507    |       | —         |       | —        |       | (499,507         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,619          |       | —        |       | (40,000          | )          | 4,619            |       |
| Other assets                                            |       | 602        |       | 1,201          |       | —        |       | —           |       | 1,803            |       |
| Total assets                                            |       | $          | 634,708    |           | $          | 338,189       |       | $                | —     |             | $          | (664,277 | ) | $ | 308,620 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 251        |           | $          | 28,926        |       | $                | —     |             | $          | — |   | $ | 29,177 |   |
| Accrued and other liabilities                           |       | 10,055     |       | 27,080         |       | —        |       | —           |       | 37,135           |       |
| Current portion of long-term debt                       |       | 260,637    |       | 43,303         |       | —        |       | (164,770         | )          | 139,170          |       |
| Current portion of deferred revenue                     |       | 800        |       | 71,801         |       | —        |       | —           |       | 72,601           |       |
| Total current liabilities                               |       | 271,743    |       | 171,110        |       |          |       | (164,770         | )          | 278,083          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,446      |       | 34,406         |       | —        |       | —           |       | 36,852           |       |
| Long-term debt                                          |       | 152,399    |       | 1,500          |       | —        |       | —           |       | 153,899          |       |
| Other long-term liabilities                             |       | 395,990    |       | (368,334       | )          | —        |       | —           |       | 27,656           |       |
| Total liabilities                                       |       | 822,578    |       | (161,318       | )          |          |       | (164,770         | )          | 496,490          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 499,507        |       |          |       | (499,507         | )          | —           |       |
| Stockholders’ deficit                              |       | (187,870   | )          | —         |       | —        |       | —           |       | (187,870         | )          |
| Total liabilities & stockholders’ deficit |       | $          | 634,708    |           | $          | 338,189       |       | $                | —     |             | $          | (664,277 | ) | $ | 308,620 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                                 |       | $          | 4,229      |           | $          | 401,822       |       | $                | —     |             | $          | — |   | $ | 406,051 |   |
| Costs applicable to revenues                            |       | (10,028    | )          | (241,067       | )          | —        |       | —           |       | (251,095         | )          |
| Operating expenses                                      |       | (12,672    | )          | (162,562       | )          | (81,005       | )          | —           |       | (256,239         | )          |
| Interest expense, net                                   |       | (8,194     | )          | (9,536         | )          | —        |       | —           |       | (17,730          | )          |
| Income from investment in consolidated subsidiaries     |       | (97,631    | )          | —         |       | —        |       | 97,631           |       | —           |       |
| Other non operating income (expenses)                   |       | 4,504      |       | (4,668         | )          | —        |       | —           |       | (164             | )          |
| Income tax expense                                      |       | (226       | )          | (615           | )          | —        |       | —           |       | (841             | )          |
| Net income (loss)                                       |       | $          | (120,018   | )              | $          | (16,626       | )          | $                | (81,005    | )                | $          | 97,631 |   | $ | (120,018 | ) |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                              |       | $          | (26,777    | )              | $          | 43,269        |       | $                | —     |             | $          | — |   | $ | 16,492 |   |
| Cash flows used in investing activities                 |       | (1,171     | )          | (11,596        | )          | —        |       | —           |       | (12,767          | )          |
| Cash flows (used in) provided by financing activities   |       | 36,973     |       | (33,066        | )          | —        |       | —           |       | 3,907            |       |
| Cash at beginning of year                               |       | 5,337      |       | 3,020          |       | —        |       | —           |       | 8,357            |       |
| Cash at end of period                                   |       | $          | 14,362     |           | $          | 1,627         |       | $                | —     |             | $          | — |   | $ | 15,989 |   |

 

14

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

 

The following are summarized statementssetting forth certain financial information concerning the GuarantorSubsidiaries for the three months ended September 30, 2008 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 671        |           | $          | 132,666       |       | $                | —     |             | $          | — |   | 133,337 |   |
| Costs applicable to revenues                        |       | (2,727     | )          | (80,910        | )          | —        |       | —           |       | (83,637          | )          |
| Operating expenses                                  |       | (3,608     | )          | (84,884        | )          | (81,005       | )          | —           |       | (169,497         | )          |
| Interest expense, net                               |       | (2,719     | )          | (3,183         | )          | —        |       | —           |       | (5,902           | )          |
| Income from investment in consolidated subsidiaries |       | (119,126   | )          | —         |       | —        |       | 119,126          |       | —           |       |
| Other non operating income (expenses)               |       | 1,463      |       | (1,604         | )          | —        |       | —           |       | (141             | )          |
| Income tax expense                                  |       | (64        | )          | (206           | )          | —        |       | —           |       | (270             | )          |
| Net income (loss)                                   |       | $          | (126,110   | )              | $          | (38,121       | )          | $                | (81,005    | )                | $          | 119,126 |   | $ | (126,110 | ) |
|                                                     |            |            |            |                |            |               |            |                  |            |                  |            |  |  |  |  |  |

 

The following are summarized balance sheetstatements setting forth certain financial information concerning the GuarantorSubsidiaries as of December 31, 2007 (in thousands).

 
| ** **                                              | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|---------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                              | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Cash & cash equivalents                        |       | $          | 5,337      |           | $          | 3,020         |       | $                | —     |             | $          | — |   | $ | 8,357 |   |
| Accounts receivable- net                                |       | 431        |       | 159,352        |       | —        |       | (126,453         | )          | 33,330           |       |
| Inventories                                             |       | —     |       | 64,209         |       | —        |       | —           |       | 64,209           |       |
| Other current assets                                    |       | 2,481      |       | 15,871         |       | —        |       | —           |       | 18,352           |       |
| Total current assets                                    |       | 8,249      |       | 242,452        |       | —        |       | (126,453         | )          | 124,248          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Property and equipment, net                             |       | 7,744      |       | 36,563         |       | —        |       | —           |       | 44,307           |       |
| Intangible assets                                       |       | 3,962      |       | 19,733         |       | —        |       | —           |       | 23,695           |       |
| Goodwill                                                |       | 67,584     |       | 76,845         |       | —        |       | —           |       | 144,429          |       |
| Investment in subsidiaries                              |       | 597,138    |       | 81,005         |       | —        |       | (678,143         | )          | —           |       |
| Affiliate note and investments                          |       | 40,000     |       | 4,650          |       | 81,005        |       | (40,000          | )          | 85,655           |       |
| Other assets                                            |       | 759        |       | 1,220          |       | —        |       | —           |       | 1,979            |       |
| Total assets                                            |       | $          | 725,436    |           | $          | 462,468       |       | $                | 81,005     |             | $          | (844,596 | ) | $ | 424,313 |   |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Accounts payable                                        |       | $          | 1,380      |           | $          | 25,791        |       | $                | —     |             | $          | — |   | $ | 27,171 |   |
| Accrued and other liabilities                           |       | 13,792     |       | 30,166         |       | —        |       | —           |       | 43,958           |       |
| Current portion of long-term debt                       |       | 128,103    |       | 42,756         |       | —        |       | (166,453         | )          | 4,406            |       |
| Current portion of deferred revenue                     |       | 2,029      |       | 63,826         |       | —        |       | —           |       | 65,855           |       |
| Total current liabilities                               |       | 145,304    |       | 162,539        |       |          |       | (166,453         | )          | 141,390          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Deferred revenue                                        |       | 2,538      |       | 35,997         |       | —        |       | —           |       | 38,535           |       |
| Long-term debt                                          |       | 279,354    |       | 3,413          |       | —        |       | —           |       | 282,767          |       |
| Other long-term liabilities                             |       | 365,150    |       | (336,619       | )          | —        |       | —           |       | 28,531           |       |
| Total liabilities                                       |       | 792,346    |       | (134,670       | )          |          |       | (166,453         | )          | 491,223          |       |
|                                                    |       |       |       |           |       |          |       |             |       |             |       |
| Interdivisional equity                                  |       | —     |       | 597,138        |       | 81,005        |       | (678,143         | )          | —           |       |
| Stockholders’ deficit                              |       | (66,910    | )          | —         |       | —        |       | —           |       | (66,910          | )          |
| Total liabilities & stockholders’ deficit |       | $          | 725,436    |           | $          | 462,468       |       | $                | 81,005     |             | $          | (844,596 | ) | $ | 424,313 |   |

 

15

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

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the nine months ended September 30,2007 (in thousands).

 
| ** **                                            | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-------------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                            | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
| Revenue                                               |       | $          | 4,445      |           | $          | 423,654       |       | $                | —     |             | $          | — |   | $ | 428,099 |   |
| Costs applicable to revenues                          |       | (10,031    | )          | (258,802       | )          | —        |       | —           |       | (268,833         | )          |
| Operating expenses                                    |       | (15,349    | )          | (110,924       | )          | —        |       | —           |       | (126,273         | )          |
| Interest expense, net                                 |       | (13,852    | )          | (4,393         | )          | —        |       | —           |       | (18,245          | )          |
| Income from investment in consolidated subsidiaries   |       | 40,112     |       | —         |       | —        |       | (40,112          | )          | —           |       |
| Other non operating income (expenses)                 |       | 4,375      |       | (5,108         | )          | —        |       | —           |       | (733             | )          |
| Income tax (expense) benefit                          |       | (266       | )          | (4,315         | )          | —        |       | —           |       | (4,581           | )          |
| Net income (loss)                                     |       | $          | 9,434      |           | $          | 40,112        |       | $                | —     |             | $          | (40,112 | ) | $ | 9,434 |   |
|                                                  |       |       |       |           |       |          |       |             |       |             |       |
| Cash flows from operations                            |       | $          | (28,660    | )              | $          | 36,786        |       | $                | —     |             | $          | — |   | $ | 8,126 |   |
| Cash flows used in investing activities               |       | (3,004     | )          | (11,846        | )          | —        |       | —           |       | (14,850          | )          |
| Cash flows provided (used in) by financing activities |       | 22,301     |       | (25,152        | )          | —        |       | —           |       | (2,851           | )          |
| Cash at beginning of year                             |       | 12,609     |       | 2,397          |       | —        |       | —           |       | 15,006           |       |
| Cash at end of period                                 |       | $          | 3,246      |           | $          | 2,185         |       | $                | —     |             | $          | — |   | $ | 5,431 |   |

 

The following are summarized statements setting forth certain financialinformation concerning the Guarantor Subsidiaries for the three months ended September 30,2007 (in thousands).

 
| ** **                                          | ** ** | ** ** | ** ** | ** **     | ** ** | **NON-**      | ** ** | ** **       | ** ** | **AGI**          | ** ** |
|-----------------------------------------------------|------------|------------|------------|----------------|------------|---------------|------------|------------------|------------|------------------|------------|
| ** **                                          | ** ** | **AGI**    | ** ** | **GUARANTORS** | ** ** | **GUARANTOR** | ** ** | **ELIMINATIONS** | ** ** | **CONSOLIDATED** | ** ** |
|                                                |       |       |       |           |       |          |       |             |       |             |       |
| Revenue                                             |       | $          | 3,106      |           | $          | 143,322       |       | $                | —     |             | $          | — |   | $ | 146,428 |   |
| Costs applicable to revenues                        |       | (4,853     | )          | (88,070        | )          | —        |       | —           |       | (92,923          | )          |
| Operating expenses                                  |       | (4,700     | )          | (38,605        | )          | —        |       | —           |       | (43,305          | )          |
| Interest expense, net                               |       | (4,601     | )          | (1,457         | )          | —        |       | —           |       | (6,058           | )          |
| Income from investment in consolidated subsidiaries |       | 8,677      |       | —         |       | —        |       | (8,677           | )          | —           |       |
| Other non operating income (expenses)               |       | 1,727      |       | (1,778         | )          | —        |       | —           |       | (51              | )          |
| Income tax expense                                  |       | (29        | )          | (4,735         | )          |          |       |             |       | (4,764           | )          |
| Net income (loss)                                   |       | $          | (673       | )              | $          | 8,677         |       | $                | —     |             | $          | (8,677 | ) | $ | (673 | ) |

 

16

----

 

**(9) INCOMETAXES**

 

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

** **
| Balance at December 31, 2007                                                             |   | $      | 14,390 |   |
|-----------------------------------------------------------------------------------------------|--------|--------|--------|--------|
| 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                                                                                         |   | 78     |   |
| Unrecognized tax benefits at September 30, 2008                                          |   | $      | 14,468 |   |

 

The Company accrues interest and penaltiesrelated to unrecognized tax benefits in its income tax provision.  The Company recorded interest and penaltiesof $0.6 million related to unrecognized tax benefits during the first ninemonths of 2008 and the liability for penalties and interest was $2.2million.  This amount was included inother long-term liabilities.  The Companydoes not expect its unrecognized tax benefits to change significantly over thenext twelve months.

 

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

 

**(10) INTEREST RATE SWAP AGREEMENTS**

 

On October 15,2007, AGI entered into a five-year interest rate swap agreement with a notionalamount of $100.0 million from which it will receive periodic payments at the 3month LIBOR-based variable rate (2.80% at September 30, 2008 based uponthe July 31, 2008 reset date) and make periodic payments at a fixed rateof 5.135%, with settlement and rate reset dates every January 31, April 30,July 31, and October 31.  Theinterest rate swap agreement was effective beginning October 31, 2007 andexpires on October 31, 2012.  AGIentered into the interest rate swaps to limit the effect of increases on ourfloating rate debt.

 

On March 19,2008, the Company entered into a 4.5 year interest rate swap agreementeffective April 30, 2008, with a notional amount of $35.0 million fromwhich it will receive periodic payments at the 3 month LIBOR-based variablerate (2.80% at September 30, 2008 based upon the July 31, 2008 resetdate) and make periodic payments at a fixed rate of 3.43%, with settlement andrate 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.

 

17

----

 

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

 

Due to thepotential sale of Camping World, a highly effective hedge on the $35.0 millionoutstanding debt by the $35.0 million notional amount interest rate swapagreement is deemed to be no longer probable and is now deemed to be reasonablypossible.  As a result, changes in thevalue of the $35.0 million interest rate swap agreement will be included inearnings prospectively beginning October 1, 2008.  Changes in value from September 26, 2008to September 30, 2008 were immaterial. A highly-effective hedge on the $100.0 million outstanding debt by the$100.0 notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of $100.0million until the interest swap expire date of October 31, 2012.

 

The fair value ofthese swaps is included in other accrued liabilities and accumulated othercomprehensive loss and was $4.6 million and $4.7 million as of September 30,2008 and December 31, 2007, respectively.

 

**(11) FAIR VALUE MEASUREMENTS**

 

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

 

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

 

As of September 30, 2008, the Company holds interest rate swapcontracts that are required to be measured at fair value on a recurringbasis.  The Company’s interest rate swapcontracts are not traded on a public exchange. See Note 10 for further information on the interest rate swapcontracts.  The fair value of theseinterest rate swap contracts are determined based on inputs that are readilyavailable in public markets or can be derived from information available inpublicly quoted markets.  Therefore, theCompany has categorized these swap contracts as Level 2.  The Company’s liability at September 30,2008, measured at fair value on a recurring basis subject to the disclosurerequirements of SFAS 157, was as follows:

 
| ** **                   | ** ** | ** **    | ** ** | **Fair Value Measurements at Reporting Date Using** | ** ** |
|------------------------------|------------|---------------|------------|-----------------------------------------------------------------------------------|------------|
| **(in thouands)**       | ** ** | ** **    | ** ** | **Quoted Prices in  Active Markets  for Identical  Assets**   | ** ** | **Significant  Other  Observable  Inputs** | ** ** | **Significant  Unobservable  Inputs** | ** ** |
| **Description**              | ** ** | **9/30/2008** | ** ** | **(Level 1)**                                                                | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                         |       |          |       |                                                                              |       |   |   |   |   |
| Interest Rate Swap Contracts |       | $             | (4,647     | )                                                                                 | $          | — |   | $ | (4,647 | ) | $ | — |   |
|                              |            |               |            |                                                                                   |            |  |  |  |  |  |  |  |  |

 

18

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**(12)RECENT EVENTS**

 

On September 26, 2008, the Company signed a non-binding outline ofterms with an institutional lender for a credit facility that would refinanceindebtedness outstanding under the Company’s senior secured credit facility atan interest rate substantially higher than the rate payable under the existingsenior secured credit facility and, *inter alia,*wouldrequire the sale by the Company of its Camping World subsidiary at its fairmarket value, which is currently estimated to be approximately $67.0million.  Execution of a definitive loanagreement is subject to numerous conditions, including completion of a duediligence investigation and completion of loan documentation and the executionof such definitive agreement is uncertain at this time. However, if the CampingWorld subsidiary were to be sold as contemplated by the non-binding outline ofterms, it is expected that the purchaser of Camping World, Inc. and itssubsidiaries would be an affiliate of the Company and the sale would be subjectto various conditions, including the purchaser’s ability to obtain financingfor the transaction.  In anticipation of such refinancing and sale, theCompany declared a dividend in the amount of $26,500,000 to Affinity GroupHolding, Inc., the sole shareholder of the Company, and Affinity GroupHolding, Inc. declared a dividend in the amount of $24,400,000 to AGIIntermediate Holdco, LLC, the sole shareholder of Affinity Group Holding, Inc,each such dividend being payable by assignment and delivery of a portion of theintercompany obligation of Camping World to the Company.  Though declared, such dividends have not beenpaid and the assigned intercompany obligation is not expected to be dischargeduntil consummation of the sale of Camping World.  The balance of the intercompany obligation ofCamping World to the Company has been contributed by the Company to the capitalof Camping World.

 

The financial statements for Camping World are different from thesegment reporting in Footnote 3 because the Camping World President’s Club andother related ancillary products are included as part of the MembershipServices segment in the segment reporting. In addition, as discussed below, interest expense is limited to debtrequired to be repaid upon consummation of this transaction.

 

The following unaudited pro forma condensed consolidated balance sheetas of September 30, 2008 and December 31, 2007 and the statement ofoperations for the nine months ended September 30, 2008 and 2007 reflectthe reclassification adjustments associated with the proposed disposal/sale ofCamping World to an affiliate of the Company The pro forma adjustments relatedto the disposal are presented since the disposition did not meet thediscontinued operations reporting requirements pursuant to SFAS Statement No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144) asof September 30, 2008, but will meet such requirements when thetransaction is completed.  Since thetransaction is a sale to an entity under common ownership with AGI suchlong-lived assets are considered disposed of when they are exchanged ordistributed in accordance with SFAS 144. The pro forma adjustments reflect the reclassification of assets andliabilities associated with Camping World to current assets and liabilities tobe disposed of in accordance with SFAS 144 as if the reporting requirements hadbeen met at September 30, 2008.  Inaddition, the historical operating results have also been reclassified toreflect discontinued operations.

 

19

----

 

**(12) RECENTEVENTS (continued)**

 

Corporate Expenses - The allocation to Camping World of expenses forcertain Affinity Group, Inc. corporate functions historically provided toCamping World are done in accordance with Staff Accounting Bulletin No. 55,“Allocation of Expenses and Related Disclosures in Subsidiaries’ FinancialStatements”, (“SAB 55”).  Suchallocations were made on a specific identification basis to the extent possibleand otherwise based on relative percentages, as compared to the Company’s otherbusinesses, of headcount or other appropriate methods depending on the natureof each item of cost to be allocated.

 

Interest Expense - The interest expense included in discontinuedoperations below reflects the interest allocated to Camping World based upon debtrequired to be repaid upon consummation of this transaction using proceeds fromthe transaction.

 

20

----

 

**(12) RECENT EVENTS (continued)**

 

The unaudited proforma balance sheet of AGI excluding Camping World as of September 30,2008 is as follows (in thousands except shares and par value):

 
| ** **                                                                                   | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **         | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                                   | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                   | ** ** | ** **     | ** ** | ** **                   | ** ** | ** **         | ** ** |
| CURRENT ASSETS:                                                                              |       |           |       |                         |       |               |       |
| Cash and cash equivalents                                                                    |       | $              | 15,989     |                         | $          | (1,043             | )          | $ | 14,946 |   |
| Accounts receivable, less allowance for doubtbul  accounts                                   |       | 34,912         |       | (14,300                      | )          | 20,612             |       |
| Inventories                                                                                  |       | 63,319         |       | (62,486                      | )          | 833                |       |
| Prepaid expenses and other assets                                                            |       | 19,946         |       | (2,195                       | )          | 17,751             |       |
| Deferred tax assets, net                                                                     |       | 4,095          |       | (4,095                       | )          | —             |       |
| Assets of discontinued operations                                                            |       | —         |       | 106,090                      |       | 106,090            |       |
| Total current assets                                                                         |       | 138,261        |       | 21,971                       |       | 160,232            |       |
|                                                                                         |       |           |       |                         |       |               |       |
| PROPERTY AND EQUIPMENT, net                                                                  |       | 44,649         |       | (34,645                      | )          | 10,004             |       |
| INVESTMENT IN AFFILIATE                                                                      |       | —         |       | —                       |       | —             |       |
| NOTE FROM AFFILIATE                                                                          |       | 4,619          |       | 16,750                       |       | 21,369             |       |
| INTANGIBLE ASSETS, net                                                                       |       | 22,460         |       | (3,651                       | )          | 18,809             |       |
| GOODWILL                                                                                     |       | 96,828         |       | —                       |       | 96,828             |       |
| OTHER ASSETS                                                                                 |       | 1,803          |       | (425                         | )          | 1,378              |       |
| Total assets                                                                                 |       | $              | 308,620    |                         | $          | —             |       | $ | 308,620 |   |
|                                                                                         |       |           |       |                         |       |               |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                               |       |           |       |                         |       |               |       |
| CURRENT LIABILITIES:                                                                         |       |           |       |                         |       |               |       |
| Accounts payable                                                                             |       | $              | 29,177     |                         | $          | (27,485            | )          | $ | 1,692 |   |
| Accrued interest                                                                             |       | 3,526          |       | —                       |       | 3,526              |       |
| Accrued income taxes                                                                         |       | 1,292          |       | 216                          |       | 1,508              |       |
| Accrued liabilities                                                                          |       | 32,317         |       | (16,582                      | )          | 15,735             |       |
| Deferred revenues and gains                                                                  |       | 72,601         |       | (7,748                       | )          | 64,853             |       |
| Current portion of long-term debt                                                            |       | 139,170        |       | (50,250                      | )          | 88,920             |       |
| Liabilities of discontinued operations                                                       |       | —         |       | 127,066                      |       | 127,066            |       |
| Total current liabilities                                                                    |       | 278,083        |       | 25,217                       |       | 303,300            |       |
|                                                                                         |       |           |       |                         |       |               |       |
| DEFERRED REVENUES AND GAINS                                                                  |       | 36,852         |       | (8,794                       | )          | 28,058             |       |
| LONG-TERM DEBT, net of current portion                                                       |       | 153,899        |       | —                       |       | 153,899            |       |
| DEFERRED TAX LIABILITY                                                                       |       | 2,875          |       | (2,875                       | )          | —             |       |
| OTHER LONG-TERM LIABILITIES                                                                  |       | 24,781         |       | (13,548                      | )          | 11,233             |       |
|                                                                                         |       | 496,490        |       | —                       |       | 496,490            |       |
|                                                                                         |       |           |       |                         |       |               |       |
| COMMITMENTS AND CONTINGENCIES                                                                |       |           |       |                         |       |               |       |
|                                                                                         |       |           |       |                         |       |               |       |
| STOCKHOLDER’S DEFICIT:                                                                  |       |           |       |                         |       |               |       |
| Common stock, $.001 par value, 2,000 shares  authorized, 2,000 shares issued and outstanding |       | 1              |       | —                       |       | 1                  |       |
| Additional paid-in capital                                                                   |       | 81,005         |       | —                       |       | 81,005             |       |
| Accumulated deficit                                                                          |       | (264,229       | )          | —                       |       | (264,229           | )          |
| Accumulated other comprehensive income                                                       |       | (4,647         | )          |                         |       | (4,647             | )          |
| Total stockholder’s deficit                                                             |       | (187,870       | )          | —                       |       | (187,870           | )          |
| Total liabilities and stockholder’s deficit                                             |       | $              | 308,620    |                         | $          | —             |       | $ | 308,620 |   |

 

21

----

 

**(12) RECENT EVENTS (continued)**

 

The unaudited proforma balance sheet of AGI excluding Camping World as of December 31, 2007is as follows (in thousands except shares and par value):

 
| ** **                                                                                   | ** ** | ** **     | ** ** | **Reclassification of** | ** ** | ** **         | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                                   | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
| **ASSETS**                                                                                   |       |           |       |                         |       |               |       |
| CURRENT ASSETS:                                                                              |       |           |       |                         |       |               |       |
| Cash and cash equivalents                                                                    |       | $              | 8,357      |                         | $          | (3,315             | )          | $ | 5,042 |   |
| Accounts receivable, net                                                                     |       | 33,330         |       | (7,150                       | )          | 26,180             |       |
| Inventories                                                                                  |       | 64,209         |       | (63,336                      | )          | 873                |       |
| Prepaid expenses and other assets                                                            |       | 14,430         |       | (2,741                       | )          | 11,689             |       |
| Deferred tax assets, net                                                                     |       | 3,922          |       | (3,922                       | )          | —             |       |
| Assets of discontinued operations                                                            |       | —         |       | 249,174                      |       | 249,174            |       |
| Total current assets                                                                         |       | 124,248        |       | 168,710                      |       | 292,958            |       |
|                                                                                         |       |           |       |                         |       |               |       |
| PROPERTY AND EQUIPMENT, net                                                                  |       | 44,307         |       | (35,232                      | )          | 9,075              |       |
| INVESTMENT IN AFFILIATE                                                                      |       | 81,005         |       | (81,005                      | )          | —             |       |
| NOTE FROM AFFILIATE                                                                          |       | 4,650          |       | —                       |       | 4,650              |       |
| INTANGIBLE ASSETS, net                                                                       |       | 23,695         |       | (4,484                       | )          | 19,211             |       |
| GOODWILL                                                                                     |       | 144,429        |       | (47,601                      | )          | 96,828             |       |
| OTHER ASSETS                                                                                 |       | 1,979          |       | (388                         | )          | 1,591              |       |
| Total assets                                                                                 |       | $              | 424,313    |                         | $          | —             |       | $ | 424,313 |   |
|                                                                                         |       |           |       |                         |       |               |       |
| **LIABILITIES AND STOCKHOLDER’S DEFICIT**                                               |       |           |       |                         |       |               |       |
| CURRENT LIABILITIES:                                                                         |       |           |       |                         |       |               |       |
| Accounts payable                                                                             |       | $              | 27,171     |                         | $          | (23,072            | )          | $ | 4,099 |   |
| Accrued interest                                                                             |       | 6,700          |       | —                       |       | 6,700              |       |
| Accrued income taxes                                                                         |       | 1,189          |       | 206                          |       | 1,395              |       |
| Accrued liabilities                                                                          |       | 36,069         |       | (14,866                      | )          | 21,203             |       |
| Deferred revenues and gains                                                                  |       | 65,855         |       | (7,677                       | )          | 58,178             |       |
| Current portion of long-term debt                                                            |       | 4,406          |       | —                       |       | 4,406              |       |
| Liabilities of discontinued operations                                                       |       | —         |       | 69,984                       |       | 69,984             |       |
| Total current liabilities                                                                    |       | 141,390        |       | 24,575                       |       | 165,965            |       |
|                                                                                         |       |           |       |                         |       |               |       |
| DEFERRED REVENUES AND GAINS                                                                  |       | 38,535         |       | (8,952                       | )          | 29,583             |       |
| LONG-TERM DEBT, net of current portion                                                       |       | 282,767        |       | —                       |       | 282,767            |       |
| DEFERRED TAX LIABILITY                                                                       |       | 2,702          |       | (2,702                       | )          | —             |       |
| OTHER LONG-TERM LIABILITIES                                                                  |       | 25,829         |       | (12,921                      | )          | 12,908             |       |
|                                                                                         |       | 491,223        |       | —                       |       | 491,223            |       |
|                                                                                         |       |           |       |                         |       |               |       |
| COMMITMENTS AND CONTINGENCIES                                                                |       |           |       |                         |       |               |       |
|                                                                                         |       |           |       |                         |       |               |       |
| STOCKHOLDER’S DEFICIT:                                                                  |       |           |       |                         |       |               |       |
| Common stock, $.001 par value, 2,000 shares authorized,  2,000 shares issued and outstanding |       | 1              |       | —                       |       | 1                  |       |
| Additional paid-in capital                                                                   |       | 81,005         |       | —                       |       | 81,005             |       |
| Accumulated deficit                                                                          |       | (143,211       | )          | —                       |       | (143,211           | )          |
| Accumulated other comprehensive income                                                       |       | (4,705         | )          |                         |       | (4,705             | )          |
| Total stockholder’s deficit                                                             |       | (66,910        | )          | —                       |       | (66,910            | )          |
| Total liabilities and stockholder’s deficit                                             |       | $              | 424,313    |                         | $          | —             |       | $ | 424,313 |   |

 

22

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**(12) RECENT EVENTS (continued)**

 

Unaudited pro forma information relating to the operations of AGIexcluding Camping World for the nine months ended September 30, 2008 is asfollows (in thousands):

 
| ** **                                                                                | ** ** | **2008**       | ** ** | **Reclassification of** | ** ** | **2008**           | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                                | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                                      |       |           |       |                         |       |               |       |
| REVENUES:                                                                                 |       |           |       |                         |       |               |       |
| Membership services                                                                       |       | $              | 115,452    |                         | $          | (15,031            | )          | $ | 100,421 |   |
| Media                                                                                     |       | 54,227         |       | —                       |       | 54,227             |       |
| Retail                                                                                    |       | 236,372        |       | (236,372                     | )          | —             |       |
|                                                                                      |       | 406,051        |       | (251,403                     | )          | 154,648            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| COSTS APPLICABLE TO REVENUES:                                                             |       |           |       |                         |       |               |       |
| Membership services                                                                       |       | 72,810         |       | (3,573                       | )          | 69,237             |       |
| Media                                                                                     |       | 39,208         |       | —                       |       | 39,208             |       |
| Retail                                                                                    |       | 139,077        |       | (139,077                     | )          | —             |       |
|                                                                                      |       | 251,095        |       | (142,650                     | )          | 108,445            |       |
|                                                                                      |       |           |       |                         |       |               |       |
| GROSS PROFIT                                                                              |       | 154,956        |       | (108,753                     | )          | 46,203             |       |
|                                                                                      |       |           |       |                         |       |               |       |
| OPERATING EXPENSES:                                                                       |       |           |       |                         |       |               |       |
| Selling, general and administrative                                                       |       | 112,559        |       | (97,922                      | )          | 14,637             |       |
| Impairment of goodwill                                                                    |       | 47,601         |       | (47,601                      | )          | —             |       |
| Impairment of long-lived assets                                                           |       | 81,005         |       | (81,005                      | )          | —             |       |
| Depreciation and amortization                                                             |       | 15,074         |       | (6,509                       | )          | 8,565              |       |
|                                                                                      |       | 256,239        |       | (233,037                     | )          | 23,202             |       |
|                                                                                      |       |           |       |                         |       |               |       |
| (LOSS) INCOME FROM OPERATIONS                                                             |       | (101,283       | )          | 124,284                      |       | 23,001             |       |
|                                                                                      |       |           |       |                         |       |               |       |
| NON-OPERATING ITEMS:                                                                      |       |           |       |                         |       |               |       |
| Interest income                                                                           |       | 444            |       | (25                          | )          | 419                |       |
| Interest expense                                                                          |       | (18,174        | )          | 2,754                        |       | (15,420            | )          |
| Other non-operating items                                                                 |       | (164           | )          | 246                          |       | 82                 |       |
|                                                                                      |       | (17,894        | )          | 2,975                        |       | (14,919            | )          |
|                                                                                      |       |           |       |                         |       |               |       |
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE  INCOME TAXES AND DISCONTINUED OPERATIONS |       | (119,177       | )          | 127,259                      |       | 8,082              |       |
|                                                                                      |       |           |       |                         |       |               |       |
| INCOME TAX EXPENSE                                                                        |       | (841           | )          | 615                          |       | (226               | )          |
|                                                                                      |       |           |       |                         |       |               |       |
| (LOSS) INCOME FROM CONTINUING OPERATIONS                                                  |       | (120,018       | )          | 127,874                      |       | 7,856              |       |
|                                                                                      |       |           |       |                         |       |               |       |
| DISCONTINUED OPERATIONS                                                                   |       |           |       |                         |       |               |       |
| Loss from operations of discontinued Camping World, Inc.                             |       | —         |       | (127,259                     | )          | (127,259           | )          |
| Income tax benefit                                                                        |       | —         |       | (615                         | )          | (615               | )          |
| Loss on discontinued operations                                                           |       | —         |       | (127,874                     | )          | (127,874           | )          |
|                                                                                      |       |           |       |                         |       |               |       |
| NET LOSS                                                                                  |       | $              | (120,018   | )                            | $          | —             |       | $ | (120,018 | ) |

 

23

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**(12) RECENT EVENTS (continued)**

 

Unaudited proforma information relating the operations of AGI excluding Camping World forthe nine months ended September 30, 2007 is as follows (in thousands):

 
| ** **                                                                         | ** ** | **2007**       | ** ** | **Reclassification of** | ** ** | **2007**           | ** ** |
|------------------------------------------------------------------------------------|------------|----------------|------------|------------------------------|------------|--------------------|------------|
| ** **                                                                         | ** ** | **Historical** | ** ** | **Camping World**       | ** ** | **Pro Forma** | ** ** |
|                                                                               |       |           |       |                         |       |               |       |
| REVENUES:                                                                          |       |           |       |                         |       |               |       |
| Membership services                                                                |       | $              | 111,528    |                         | $          | (13,684            | )          | $ | 97,844 |   |
| Media                                                                              |       | 57,082         |       | —                       |       | 57,082             |       |
| Retail                                                                             |       | 259,489        |       | (259,489                     | )          | —             |       |
|                                                                               |       | 428,099        |       | (273,173                     | )          | 154,926            |       |
|                                                                               |       |           |       |                         |       |               |       |
| COSTS APPLICABLE TO REVENUES:                                                      |       |           |       |                         |       |               |       |
| Membership services                                                                |       | 72,205         |       | (3,152                       | )          | 69,053             |       |
| Media                                                                              |       | 38,907         |       | —                       |       | 38,907             |       |
| Retail                                                                             |       | 157,721        |       | (157,721                     | )          | —             |       |
|                                                                               |       | 268,833        |       | (160,873                     | )          | 107,960            |       |
|                                                                               |       |           |       |                         |       |               |       |
| GROSS PROFIT                                                                       |       | 159,266        |       | (112,300                     | )          | 46,966             |       |
|                                                                               |       |           |       |                         |       |               |       |
| OPERATING EXPENSES:                                                                |       |           |       |                         |       |               |       |
| Selling, general and administrative                                                |       | 112,088        |       | (95,202                      | )          | 16,886             |       |
| Depreciation and amortization                                                      |       | 14,185         |       | (5,770                       | )          | 8,415              |       |
|                                                                               |       | 126,273        |       | (100,972                     | )          | 25,301             |       |
|                                                                               |       |           |       |                         |       |               |       |
| INCOME (LOSS) FROM OPERATIONS                                                      |       | 32,993         |       | (11,328                      | )          | 21,665             |       |
|                                                                               |       |           |       |                         |       |               |       |
| NON-OPERATING ITEMS:                                                               |       |           |       |                         |       |               |       |
| Interest income                                                                    |       | 518            |       | (77                          | )          | 441                |       |
| Interest expense                                                                   |       | (18,763        | )          | 3,000                        |       | (15,763            | )          |
| Debt extinguishment expense                                                        |       | (775           | )          | —                       |       | (775               | )          |
| Other non-operating items                                                          |       | 42             |       | 78                           |       | 120                |       |
|                                                                               |       | (18,978        | )          | 3,001                        |       | (15,977            | )          |
|                                                                               |       |           |       |                         |       |               |       |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME  TAXES AND DISCONTINUED OPERATIONS |       | 14,015         |       | (8,327                       | )          | 5,688              |       |
|                                                                               |       |           |       |                         |       |               |       |
| INCOME TAX EXPENSE                                                                 |       | (4,581         | )          | (4,315                       | )          | (8,896             | )          |
|                                                                               |       |           |       |                         |       |               |       |
| INCOME (LOSS) FROM CONTINUING OPERATIONS                                           |       | 9,434          |       | (12,642                      | )          | (3,208             | )          |
|                                                                               |       |           |       |                         |       |               |       |
| DISCONTINUED OPERATIONS                                                            |       |           |       |                         |       |               |       |
| Income from operations of discontinued Camping World, Inc.                    |       | —         |       | 8,327                        |       | 8,327              |       |
| Income tax expense                                                                 |       | —         |       | 4,315                        |       | 4,315              |       |
| Income on discontinued operations                                                  |       | —         |       | 12,642                       |       | 12,642             |       |
|                                                                               |       |           |       |                         |       |               |       |
| NET INCOME                                                                         |       | $              | 9,434      |                         | $          | —             |       | $ | 9,434 |   |

 

24

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**ITEM2:**

 

AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                                        | ** ** | **THREE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                    | ** ** | **9/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                              |       |                             |       |   |   |   |   |
| REVENUES:                                         |       |                             |       |   |   |   |   |
| Membership services                               |       | 27.5                             | %          | 26.9 | % | (7.0 | )% |
| Media                                             |       | 9.4                              | %          | 10.2 | % | (15.6 | )% |
| Retail                                            |       | 63.1                             | %          | 62.9 | % | (8.7 | )% |
|                                              |       | 100.0                            | %          | 100.0 | % | (8.9 | )% |
|                                              |       |                             |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                             |       |   |   |   |   |
| Membership services                               |       | 17.4                             | %          | 17.9 | % | (11.8 | )% |
| Media                                             |       | 8.0                              | %          | 7.4 | % | (2.4 | )% |
| Retail                                            |       | 37.3                             | %          | 38.2 | % | (10.6 | )% |
|                                              |       | 62.7                             | %          | 63.5 | % | (10.0 | )% |
|                                              |       |                             |       |   |   |   |   |
| GROSS PROFIT                                      |       | 37.3                             | %          | 36.5 | % | (7.1 | )% |
|                                              |       |                             |       |   |   |   |   |
| OPERATING EXPENSES:                               |       |                             |       |   |   |   |   |
| Selling, general and administrative               |       | 26.8                             | %          | 26.4 | % | (7.1 | )% |
| Goodwill impairment                               |       | 35.7                             | %          | — |   | n/a |   |
| Impairment of investment in affiliate             |       | 60.8                             | %          | — |   | n/a |   |
| Depreciation and amortization                     |       | 3.8                              | %          | 3.2 | % | 7.2 | % |
|                                              |       | 127.1                            | %          | 29.6 | % | 291.4 | % |
|                                              |       |                             |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (89.8                            | )%         | 6.9 | % | n/a |   |
|                                              |       |                             |       |   |   |   |   |
| NON-OPERATING ITEMS:                              |       |                             |       |   |   |   |   |
| Interest income                                   |       | 0.1                              | %          | 0.1 | % | 0.6 | % |
| Interest expense                                  |       | (4.6                             | )%         | (4.2 | )% | (2.5 | )% |
| Other non-operating items, net                    |       | (0.1                             | )%         | — |   | 176.5 | % |
|                                              |       | (4.6                             | )%         | (4.1 | )% | (1.1 | )% |
|                                              |       |                             |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (94.4                            | )%         | 2.8 | % | n/a |   |
|                                              |       |                             |       |   |   |   |   |
| INCOME TAX EXPENSE                                |       | (0.2                             | )%         | (3.3 | )% | (94.3 | )% |
|                                              |       |                             |       |   |   |   |   |
| NET LOSS                                          |       | (94.6                            | )%         | (0.5 | )% | n/a |   |

 

25

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AFFINITY GROUP, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

 

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

 
| ** **                                        | ** ** | **NINE MONTHS ENDED** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|
| ** **                                        | ** ** | **9/30/2008**                   | ** ** | **9/30/2007** | ** ** | **Inc/(Dec)** | ** ** |
|                                              |       |                            |       |   |   |   |   |
| REVENUES:                                         |       |                            |       |   |   |   |   |
| Membership services                               |       | 28.3                            | %          | 26.1 | % | 2.9 | % |
| Media                                             |       | 13.4                            | %          | 13.3 | % | (5.0 | )% |
| Retail                                            |       | 58.3                            | %          | 60.6 | % | (8.6 | )% |
|                                              |       | 100.0                           | %          | 100.0 | % | (5.2 | )% |
|                                              |       |                            |       |   |   |   |   |
| COSTS APPLICABLE TO REVENUES:                     |       |                            |       |   |   |   |   |
| Membership services                               |       | 17.9                            | %          | 16.9 | % | 0.8 | % |
| Media                                             |       | 9.7                             | %          | 9.1 | % | 0.8 | % |
| Retail                                            |       | 34.2                            | %          | 36.8 | % | (11.8 | )% |
|                                              |       | 61.8                            | %          | 62.8 | % | (6.6 | )% |
|                                              |       |                            |       |   |   |   |   |
| GROSS PROFIT                                      |       | 38.2                            | %          | 37.2 | % | (2.7 | )% |
|                                              |       |                            |       |   |   |   |   |
| OPERATING EXPENSES:                               |       |                            |       |   |   |   |   |
| Selling, general and administrative               |       | 27.6                            | %          | 26.2 | % | 0.4 | % |
| Goodwill impairment                               |       | 11.8                            | %          | — |   | n/a |   |
| Impairment of investment in affiliate             |       | 20.0                            | %          | — |   | n/a |   |
| Depreciation and amortization                     |       | 3.7                             | %          | 3.3 | % | 6.3 | % |
|                                              |       | 63.1                            | %          | 29.5 | % | 102.9 | % |
|                                              |       |                            |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS                     |       | (24.9                           | )%         | 7.7 | % | (407.0 | )% |
|                                              |       |                            |       |   |   |   |   |
| NON-OPERATING ITEMS:                              |       |                            |       |   |   |   |   |
| Interest income                                   |       | 0.1                             | %          | 0.1 | % | (14.3 | )% |
| Interest expense                                  |       | (4.6                            | )%         | (4.3 | )% | (3.1 | )% |
| Debt extinguishment expense                       |       | —                          |       | (0.2 | )% | (100.0 | )% |
| Other non-operating items, net                    |       | —                          |       | — |   | (490.5 | )% |
|                                              |       | (4.5                            | )%         | (4.4 | )% | (5.7 | )% |
|                                              |       |                            |       |   |   |   |   |
| (LOSS) INCOME FROM OPERATIONS BEFORE INCOME TAXES |       | (29.4                           | )%         | 3.3 | % | (950.4 | )% |
|                                              |       |                            |       |   |   |   |   |
| INCOME TAX EXPENSE                                |       | (0.2                            | )%         | (1.1 | )% | (81.6 | )% |
|                                              |       |                            |       |   |   |   |   |
| NET (LOSS) INCOME                                 |       | (29.6                           | )%         | 2.2 | % | n/a |   |

 

26

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**RESULTS OF OPERATIONS**

 

**ThreeMonths Ended September 30, 2008**

**ComparedWith Three Months Ended September 30, 2007**

 

*Revenues*

 

Revenuesof $133.3 million for the third quarter of 2008 decreased by $13.1 million, or8.9%, from the comparable period in 2007.

 

Membershipservices revenues of $36.6 million for the third quarter of 2008 decreased $2.8million, or 7.0%, from the comparable period in 2007.  This revenue decrease was largelyattributable to a decrease in member events revenue of $2.5 million due totiming of the Good Sam Club annual rally, which occurred in the second quarterof 2008 versus the third quarter of 2007, a $1.3 million reduction in revenuefor the Good Sam Club, Coast Club and Golf Club resulting from reducedmembership file size, and reduced advertising revenue in member publications,and a $0.5 million decrease in marketing fee income for vehicle insuranceproducts.  These decreases were partiallyoffset by increased extended vehicle warranty program revenue resulting from$0.8 million of income from underwriting profit sharing, and $0.7 million fromthe continued growth of contracts in force.

 

Mediarevenues of $12.5 million for the third quarter of 2008 decreased $2.3 million,or 15.6%, from the comparable period in 2007. This decrease was primarily attributable to $0.9 million of reducedadvertising revenue in the RV-related magazine group, $0.7 million of reducedadvertising revenue in the outdoor power sports magazine group, $0.5 million ofreduced revenue from the campground guides and annual directories, and $0.2million of reduced consumer show revenue.

 

Retail revenues ofapproximately $84.2 million decreased by approximately $8.0 million, or 8.7%,from the comparable period in 2007. Store merchandise sales decreased $7.0 million from the third quarter of2007 due to a same store sales decrease of $8.5 million, or 14.3%, compared toa 6.1% decrease in same store sales for the third quarter of 2007, partiallyoffset by a $1.5 million revenue increase from the opening of 23 new storesover the past twenty-one months.  Samestore sale calculations for a given period include only those stores that wereopen both at the end of that period and at the beginning of the precedingfiscal year.  Further, mail order salesdecreased $2.2 million, and supplies and other sales increased $1.2 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $83.6 million for the third quarter of 2008, adecrease of $9.3 million, or 9.5%, from the comparable period in 2007.

 

Membershipservices costs and expenses of approximately $23.1 million decreased $3.1million, or 11.8%, from the comparable period in 2007.  This decrease consisted of $2.3 million ofreduced expense associated with timing of the Good Sam Club annual rally, $0.9million of reduced marketing costs related to the Good Sam Club, Coast to Coast

 

27

----

 

Cluband Golf Card Club, and a $0.2 million reduction in marketing costs related tovehicle insurance products.  Thesedecreases in membership services costs were partially offset by $0.3 million ofincremental costs associated with increased extended vehicle warranty programrevenue.

 

Mediacosts and expenses of $10.6 million for the third quarter of 2008 decreased$0.3 million, or 2.4%, from the comparable period in 2007 primarily related todecreased circulation and production costs of RV-related magazines and outdoorpowersports magazines.

 

Retailcosts applicable to revenues decreased $5.9 million, or 10.6%, to $49.9 millionprimarily as a result of the decrease in retail revenue.  The retail gross profit margin of 40.2% forthe third quarter of 2008 increased from 39.5% for the comparable period in2007 primarily due to general price increases.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $35.9 million for thethird quarter of 2008 decreased $2.8 million compared to the third quarter of2007.  This decrease was due to a $1.6million decrease in retail general and administrative expenses consisting ofdecreases in labor, selling and other general and administrative expensespartially offset by increased facilities rent due to new store openings.  In addition, professional fees were reduced$0.5 million, deferred executive compensation was reduced $0.5 million, andother general and administrative expenses were reduced $0.2 million.

 

The $47.6 millionnon-cash goodwill impairment charge was based on the Valuation Report preparedin anticipation of the potential sale of Camping World that determined that thecarrying value of the goodwill associated with Camping World exceeded itsestimated fair value.  The $81.0 millionnon-cash long-lived asset impairment charge was also based on the ValuationReport prepared in anticipation of the potential sale of Camping World thatdetermined the carrying value of the preferred interest in FreedomRoads HoldingCompany, LLC, held by an indirect subsidiary of Camping World, exceeded itsestimated fair value.

 

Depreciationand amortization expense of $5.0 million increased $0.3 million from the prioryear primarily due to increased depreciation from the retail store openings andincreased amortization of intangible assets associated with the 2008 purchaseof consumer events.

 

*(Loss)Income from Operations*

 

Lossfrom operations for the third quarter of 2008 totaling $119.8 million increased$130.0 million compared to the third quarter of 2007.  This decrease in income from operations wasprimarily due to the valuation impairments to goodwill and our investment inaffiliate totaling $128.6 million, reduced gross profit for retail and mediaoperations of $2.1 million and $2.0 million, respectively, partially offset byreduced operating expenses

 

28

----

 

of$2.4 million and increased gross profit for the membership services operationsof $0.3 million.

 

*Non-OperatingItems*

 

Non-operatingitems of $6.0 million for the third quarter of 2008 decreased $0.1 millioncompared to the third quarter of 2007 due to a $0.2 million decrease in netinterest expense resulting from reduced interest rates, partially offset by a$0.1 million loss on sale of retail assets.

 

*(Loss)Income before Income Taxes*

 

Lossbefore income taxes for the third quarter of 2008 was $125.8 million, or $129.9million lower than the third quarter of 2007. This decrease was attributable to the $130.0 million decrease in incomefrom operations and $0.1 million of reduced non-operating items mentionedabove.

 

*IncomeTax Expense*

 

TheCompany recorded income tax expense of approximately $0.3 million for the thirdquarter of 2008, compared to $4.8 million for the third quarter of 2007.

 

# *Net Loss*

# * *

Netloss in the third quarter of 2008 was $126.1 million compared to net loss of$0.7 million for the same period in 2007 mainly due to the reasons discussedabove.

 

*SegmentProfit (Loss)*

 

Segment loss of$119.8 million for the third quarter of 2008 (before unallocated depreciationand amortization, general and administrative, interest, and income tax expense)increased $133.2 million from the comparable period in 2007.

 

Membershipservices segment profit of $10.9 million for the third quarter of 2008decreased $1.1 million, or 9.3%, from the comparable period in 2007.  This decrease was largely attributable to a$1.5 million decrease in profit from emergency road service products primarilydue to reduced intercompany interest income resulting from a lower averageinterest rate, a $0.5 million increase in marketing and online servicesexpenses, a $0.4 million decrease in profit recognized on vehicle insuranceproducts, and a $0.3 million decrease in profit due to the timing of the GoodSam Club annual rally.  These decreaseswere partially offset by a $1.3 million increase in profit from the extendedvehicle warranty programs, and a $0.3 million increase in segment profit fromCoast Club and Golf Club, associated with reduced marketing expenses.

 

Media segment lossof approximately $1.2 million for the third quarter of 2008 increased $2.4million, or 184.7%, from the comparable period in 2007.  This increased loss was largely attributed toa $0.8 million decrease in profit in the RV-related publications related toreduced advertising revenue, a $0.6 million decrease in segment profit from our

 

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consumer showsgroup primarily related to amortization from the consumer shows acquired in2008, a $0.5 million decrease in segment profit related to our outdoorpowersports magazine group, primarily driven by reduced advertising revenue, a$0.4 million decrease in profit for the campground guides and annualdirectories, and $0.1 million of increased marketing expense for new products*.*

 

Retail segmentloss increased $129.7 million from the third quarter of 2007 to a loss of$129.5 million for the third quarter of 2008. This increase insegment loss resulted primarily from the Camping World goodwill impairment andthe FreedomRoads Preferred Interest impairment totaling $128.6 million, a $2.3million decrease in gross profit margin, a $0.2 million increase indepreciation expense, a $0.1 million increase in loss on sale of equipment, anda $0.1 million increase in interest expense, partially offset by a $1.6 million decrease in selling, general andadministrative expenses.

 

**NineMonths Ended September 30, 2008**

**ComparedWith Nine Months Ended September 30, 2007**

 

*Revenues*

 

Revenuesof $406.1 million for the first nine months of 2008 decreased by $22.0 million,or 5.2%, from the comparable period in 2007.

 

Membershipservices revenues of $114.7 million for the first nine months of 2008 increasedby approximately $3.2 million, or 2.9%, from the comparable period in2007.  This revenue increase was largelyattributable to a $3.9 million increase in extended vehicle warranty programrevenue due to the continued growth of contracts in force and underwritingprofit sharing, a $1.5 million increase in marketing fee revenue from healthand life insurance products, a $0.7 million revenue increase in emergency roadservice programs due to increased average enrollment.  These increases were partially offset by amembership services revenue reduction of $1.2 million due to enrollmentdecreases in the Coast to Coast Club and the Golf Card Club, a $1.0 milliondecrease in fee income recognized on vehicle insurance products, and a $0.7million reduction in fee income from other products and services.

 

Mediarevenues of $54.2 million for the first nine months of 2008 decreasedapproximately $2.8 million, or 5.0%, from the comparable period in 2007primarily attributable to a $2.2 million revenue reduction from the outdoorpower sports magazine group primarily associated with reduced advertisingrevenue, a $1.8 million reduction from the RV magazine group primarilyassociated with reduced advertising revenue, a $0.6 million revenue reductionassociated with the annual directories, and a $0.3 million revenue reductionassociated with reduced book sales. These decreases were partially offset by $2.1 million of incrementalrevenue primarily associated with nine RV and boat shows purchased from MACEvents, LLC in January 2008 and three RV and boat shows purchased from MidAmerica Expositions, Inc. in February 2008.

 

Retail revenues ofapproximately $237.1 million decreased $22.4 million, or 8.6%, from thecomparable period in 2007.  Storemerchandise sales decreased approximately $19.7

 

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million over thefirst nine months of 2007 due to a same store sales decrease of $26.1 million,or 15.0%, compared to a 4.2% decrease in same store sales for the first ninemonths of 2007, partially offset by a $6.4 million revenue increase from theopening of 23 new stores over the past twenty-one months.  Same store sale calculations for a givenperiod include only those stores that were open both at the end of that periodand at the beginning of the preceding fiscal year.  Supplies and other sales increased $4.1million, and mail order sales decreased $6.8 million.

 

*CostsApplicable to Revenues*

 

Costsapplicable to revenues totaled $251.1 million for the first nine months of2008, a decrease of approximately $17.7 million, or 6.6%, from the comparableperiod in 2007.

 

Membershipservices costs and expenses of $72.8 million increased $0.6 million, or 0.8%,from the comparable period in 2007.  Thisincrease consisted of $1.7 million of additional costs associated withincreased extended vehicle warranty program revenue and emergency road servicerevenue and a $0.7 million increase in program costs associated with increasedmarketing fee revenue from health and life insurance products.  In addition, membership services costsdecreased approximately $1.5 million primarily due to a net reduction in clubmarketing and program costs, and a $0.3 million reduction in costs related toreduced vehicle insurance revenue.

 

Mediacosts and expenses of approximately $39.2 million for the first nine months of2008 increased $0.3 million, or 0.8%, from the comparable period in 2007.  This increase was attributable to $1.3million of additional costs related primarily to the consumer shows purchasedin 2008, partially offset by $1.0 million of reduced costs for the outdoorpower sports publications and the RV-related publications primarily associatedwith reduced book sizes and lower circulation.

 

Retailcosts applicable to revenues decreased $18.6 million, or 11.8%, to $139.1million primarily as a result of the decrease in retail revenue.  The retail gross profit margin of 41.3% forthe first nine months of 2008 increased from 39.2% for the comparable period in2007 primarily due to general price increases.

 

*OperatingExpenses*

 

Selling,general and administrative expenses of approximately $112.6 million for thefirst nine months of 2008 increased $0.5 million compared to the first ninemonths of 2007.  This increase was due toan increase in retail selling and general and administrative expenses ofapproximately $2.7 million primarily associated with increased facility rentrelating to new store openings, and a $0.5 million increase related to theconsumer show acquisitions.  Theseincreases were partially offset by a $0.9 million reduction in arbitrationexpense recorded in 2007 in connection with our asserted claim to a right offirst refusal in connection with the sale of General Motors AcceptanceCorporation, the insurance provider for the RV vehicle insurance offered by ourMembership Services segment, which claim was rejected by the arbitration panel,a $1.0 million reduction in executive compensation, and a $0.8 millionreduction in professional fees.

 

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The $47.6 millionnon-cash goodwill impairment charge was based on the Valuation Report preparedin anticipation of the potential sale of Camping World that determined that thecarrying value of the goodwill associated with Camping World exceeded itsestimated fair value.  The $81.0 millionnon-cash long-lived asset impairment charge was also based on the ValuationReport prepared in anticipation of the potential sale of Camping World thatdetermined the carrying value of the preferred interest in FreedomRoads HoldingCompany, LLC, held by an indirect subsidiary of Camping World, exceeded itsestimated fair value.

 

Depreciationand amortization expense of $15.1 million increased $0.9 million from the prioryear primarily due to increased depreciation from the retail store openings andincreased amortization of intangible assets associated with the 2008 purchaseof consumer events, partially offset by completed amortization for Coastmembership and customer lists in December, 2007.

 

*(Loss)Income from Operations*

 

Lossfrom operations for the first nine months of 2008 totaling $101.3 milliondecreased $134.3 million compared to the first nine months of 2007.  This decrease was primarily due to thevaluation impairments to goodwill and our investment in affiliate totaling$128.6 million, reduced gross profit for retail and media operations of $3.8million and $3.1 million, respectively, and increased operating expenses of$1.4 million, partially offset by increased gross profit for the membershipservices operations of $2.6 million.

 

*Non-OperatingItems*

 

Non-operatingitems of approximately $17.9 million for the first nine months of 2008decreased $1.1 million compared to the first nine months of 2007 due to $0.8million of debt extinguishment expense associated with the retirement of SeniorSubordinated Notes in 2007, and a $0.5 million decrease in net interest expense,partially offset by a $0.2 million loss on sale of retail assets.

 

*(Loss)Income before Income Taxes*

 

Lossbefore income taxes for the first nine months of 2008 was $119.2 million, or$133.2 million lower than the first nine months of 2007.  This decrease was attributable to the $134.3million decrease in income from operations and $1.1 million of decreasednon-operating items mentioned above.

 

*IncomeTax Expense*

 

TheCompany recorded a $0.8 million income tax expense for the first nine months of2008, compared to $4.6 million for the first nine months of 2007.

 

# *Net (Loss) Income*

# * *

Netloss in the first nine months of 2008 was $120.0 million compared to net incomeof $9.4 million for the same period in 2007 mainly due to the reasons discussedabove.

 

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*SegmentProfit (Loss)*

 

Segment loss of$98.7 million for the first nine months of 2008 (before unallocateddepreciation and amortization, general and administrative, interest, and incometax expense) increased $143.0 million, or 323.3%, from the comparable period in2007.

 

Membershipservices segment profit of $34.1 million for the first nine months of 2008decreased $1.8 million, or 5.1%, from the comparable period in 2007.  This decrease was largely attributable to a$3.8 million decrease in profit from emergency road service products primarilydue to reduced intercompany interest income resulting from a lower averageinterest rate, a $1.1 million increase in marketing expenses and new clubdevelopment, a $0.9 million decrease in profit from vehicle insurance products,and a $0.4 million increase in miscellaneous online development expenses.  These changes reducing membership segmentprofit were partially offset by a $2.7 million increase in profit from theextended vehicle warranty programs, a $1.3 increase in segment profit for CoastClub and Golf Club due to decreased marketing, depreciation and amortizationexpense, and a $1.1 million increase in profit from health and life insuranceproducts.

 

Media segmentprofit of $5.6 million for the first nine months of 2008 decreased $4.5million, or 44.5%, from the comparable period in 2007.  This decrease was largely attributed to a$1.5 million decrease in segment profit related to our outdoor powersportsmagazine group, primarily relating to reduced advertising revenue, a $1.4million decrease in profit in the RV-related publications due to reducedadvertising revenue, a $0.5 million increase in product development andoverhead expense, a $0.5 million decrease in segment profit from annualdirectories, a $0.5 million decrease in segment profit from increasedamortization from our consumer shows group primarily related to the consumershows acquired in 2008, and a $0.1 million increase in depreciation expense.

 

Retail segmentloss increased approximately $136.6 million from the first nine months of 2007to a loss of approximately $138.4 million for the first nine months of2008.  This increase in segment loss resultedprimarily from the Camping World goodwill impairment and the FreedomRoadsPreferred Interest impairment totaling $128.6 million, a $3.6 million decreasein gross profit margin, a $2.7million increase in selling, general and administrative expenses primarilyrelated to the increase in new stores, a $0.8 million increase in depreciationexpense, a $0.7 million increase in interest expense, and a $0.2 million losson sale of equipment.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

TheCompany has historically operated with a working capital deficit.  The working capital deficit as of September 30,2008 and December 31, 2007 was $139.8 million and $17.1 million,respectively.  The primary reason for theincrease in working capital deficit for 2008 is the classification of thedebt associated with the Amended and Restated Credit Agreement totaling $136.9million as a current liability, since the credit facility matures June 24,2009.  Deferred revenue and gains reported undercurrent liabilities was $72.6

 

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millionand $65.9 million as of September 30, 2008 and December 31, 2007,respectively.  Deferred revenue isprimarily comprised of cash collected for club memberships in advance, which isamortized over the life of the membership. The Company uses net proceeds from this deferred membership revenue tolower its long-term borrowings.  TheCompany anticipates that it will be able to refinance or replace the existingcredit facility before its maturity on June 24, 2009 and, assuming suchrefinancing, will have sufficient funds from its operations together withavailable borrowing under the replacement credit facility to meet all of theCompany’s debt service, capital requirements and working capital needs over thenext twelve months.

 

Although, on September 26, 2008, the Companysigned a non-binding outline of terms with an institutional lender for a creditfacility that would refinance indebtedness outstanding under the Company’ssenior secured credit facility, execution of a definitive agreement with suchinstitutional lender is uncertain.  If adefinitive agreement were to be reached, the Company expects the new seniorcredit facility (i) will permit borrowings significantly below the maximumamount of senior indebtedness permitted under the AGI Indenture for the SeniorSubordinated Notes and the indenture under which the AGHI Notes were issued and(ii) the interest rate payable will be substantially higher than the ratepayable under the existing senior secured credit facility.  If a definitive agreement is reached, fundingwould be subject to several conditions, including the sale by the Company ofits Camping World subsidiary at its fair market value, which is currentlyestimated to be approximately $67.0 million based upon the valuation reportreferred to in Footnotes 5 and 6, completion of a due diligence investigationand completion of loan documentation. The purchaser of Camping World is expected to be an affiliate of theCompany and the sale would be subject to various conditions, including thepurchaser’s ability to obtain financing for the transaction.  In anticipation of such refinancing and sale,the Company declared a dividend in the amount of $26.5 million to AffinityGroup Holding, Inc., the sole shareholder of the Company, and AffinityGroup Holding, Inc. declared a dividend in the amount of $24.4 million toAGI Intermediate Holdco, LLC, the sole shareholder of Affinity Group Holding,Inc, each such dividend being payable by assignment and delivery of a portionof the intercompany obligation of Camping World to the Company.  Though declared, such dividends have not beenpaid and the assigned intercompany obligation is not expected to be dischargeduntil consummation of the sale of Camping World.  The balance of the intercompany obligation ofCamping World to the Company has been contributed by the Company to the capitalof Camping World.

 

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*Contractual Obligations andCommercial Commitments*

 

The following table reflects our contractual obligations and commercialcommitments at September 30, 2008. This table includes principal and future interest due under our debtagreements based on interest rates as of September 30, 2008 and assumesdebt obligations will be held to maturity.

 
| ** **                         | ** ** | **Payments Due by Period** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| **(in thousands)**            | ** ** | **Total**                                 | ** ** | **Balance of  2008** | ** ** | **2009 and  2010** | ** ** | **2011 and  2012** | ** ** | **Thereafter** | ** ** |
|                               |       |                                      |       |   |   |   |   |   |   |   |   |
| Long-term debt and future interest |       | $                                         | 352,098    |   | $ | 6,796 |   | $ | 172,244 |   | $ | 173,058 |   | $ | — |   |
| Operating lease obligations        |       | 212,513                                   |       | 5,417 |   | 41,128 |   | 35,815 |   | 130,153 |   |
| Deferred compensation              |       | 1,400                                     |       | 6 |   | 1,394 |   | — |   | — |   |
| Standby letters of credit          |       | 5,217                                     |       | 2,537 |   | 2,680 |   | — |   | — |   |
| Grand total                        |       | $                                         | 571,228    |   | $ | 14,756 |   | $ | 217,446 |   | $ | 208,873 |   | $ | 130,153 |   |

 

On June 24,2003, the Company entered into an Amended and Restated Credit Agreement and aSenior Secured Floating Rate Note Purchase Agreement (as amended, the “SeniorCredit Facility”).  The Senior CreditFacility provides for a revolving credit facility of $35.0 million and termloans in the aggregate of $140.0 million. As of September 30, 2008, $8.5 million was outstanding under therevolving credit facility and $127.4 million was outstanding under the termloans.  Reborrowings under the term loansare not permitted.  The interest on borrowingsunder the Senior Credit Facility was at variable rates based on the ratio oftotal cash flow to outstanding indebtedness (as defined).  Interest rates float with prime and theLondon Interbank Offered Rates, or LIBOR, plus an applicable margin rangingfrom 1.50% to 2.50% over the stated rates. As of September 30, 2008, the average interest rates on the termloans and the revolving credit facility were 7.27% and 6.18%, respectively, andpermitted borrowings under the revolving facility were $29.8 million.  The Company also pays a commitment fee of0.5% per annum on the unused amount of the revolving credit facility.  The aggregate quarterly scheduled payments onthe term loans are $0.4 million.  Boththe revolving credit facility and the term loans mature on June 24,2009.  The funds available under theSenior Credit Facility may be utilized for borrowings or letters of credit;however, a maximum of $7.5 million may be allocated to such letters ofcredit.  As of September 30, 2008,the Company had letters of credit in the aggregate amount of $5.2 millionoutstanding.  The Senior Credit Facilityis secured by virtually all of the Company’s assets and a pledge of the Company’sstock and the stock of the Company’s subsidiaries.

 

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

 

On March 3,2006, AGI amended its Senior Credit Facility to revise the definition ofConsolidated Fixed Charges Ratio and Permitted Tax Distributions.  This amendment allows the Company todistribute taxes to its ultimate parent based on its stand-alone tax obligationrather than the tax obligation of its parent, AGHI, until such time that AGHIpays interest on its 10 7/8% Senior Notes in cash instead of by the issuance ofadditional

 

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notes and AGImakes a distribution to AGHI for purposes of paying that cash interest.  For the nine months ended September 30,2008 and 2007, the Company distributed $1.0 million and $3.7 million,respectively, in the form of dividends to AGHI to fund the Company’s taxobligations.  Further, the Companyamended the Senior Credit Facility’s covenant restrictions with affiliates topermit a joint venture arrangement between Camping World and FreedomRoadsHolding Company, LLC (“FreedomRoads”), an affiliate of the Company.

 

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

 

On March 8,2007, the Company purchased $17.7 million of the Senior SubordinatedNotes.  The Company funded the purchasethrough the issuance of the $25.0 million in additional incremental term loansas permitted under the February 27, 2007 amendment to the Senior CreditFacility.  The balance of the $25.0million issued was used to pay down the Company’s revolving credit facility by$6.5 million and to pay associated loan fees and transaction expenses.  The terms on the additional incremental loansare consistent with the remaining term loan outstanding under the Senior CreditFacility.  As of September 30, 2008,$152.4 million of Senior Subordinated Notes remain outstanding.

 

The AGI Indenturepursuant to which the AGI Senior Subordinated Notes were issued and the SeniorCredit Facility contain certain restrictive covenants relating to, but notlimited to, mergers, changes in the nature of the business, acquisitions,additional indebtedness, sale of assets, investments, and the payment ofdividends subject to certain limitations and minimum operating covenants.  The Company was in compliance with all debtcovenants at September 30, 2008.

 

On March 24,2005 in a private placement, AGHI, the Company’s parent, issued $88.2 millionprincipal amount of the 10-7/8% senior notes due February 15, 2012 (the “AGHINotes”).  Interest on the AGHI notes ispayable semi-annually on February 15 and August 15.  For interest payments on and prior to February 15,2008, AGHI had the election to pay interest on the AGHI Notes in cash or by theissuance of additional notes of the same tenor as the AGHI Notes, except thematurity date is March 15, 2010. AGI has not paid any dividends to AGHI to fund payment of interest onthe AGHI Notes and AGHI made the interest payments due on August 15, 2005,February 15, 2006, August 15, 2006, February 15, 2007, and February 15,2008 through the issuance of additional notes. AGHI paid the interest on the AGHI Notes due August 15, 2007 and2008 from proceeds of capital contributions made by AGHI’s parent, AGHC in theamount of $5.9 million and $6.2 million, respectively.  As of September 30, 2008, $111.6 millionof AGHI Notes remain outstanding.

 

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In January 2007,AGI Productions, Inc. acquired a consumer show from MAC Events, Inc.for $0.5 million.  As part of thepurchase, the Company assumed $0.3 million of liabilities.  In February 2007, AGI Productions, Inc.acquired consumer shows from Industrial Exposition Inc. for $1.9 million.  As part of the purchase, the Company issued$1.5 million of debt and assumed $0.6 million of liabilities.

 

On October 15,2007, the Company entered into a five-year interest rate swap agreement with anotional amount of $100.0 million from which it will receive periodic paymentsat the 3 month LIBOR-based variable rate (2.80% at September 30, 2008based upon the July 31, 2008 reset date) and make periodic payments at afixed rate of 5.135%, with settlement and rate reset dates every January 31,April 30, July 31, and October 31.  On March 19, 2008, the Company enteredinto an interest rate swap agreement with a notional amount of $35.0 millionfrom which it will receive periodic payments at the 3 month LIBOR-basedvariable rate (2.80% at September 30, 2008 based upon the July 31,2008 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 fair value ofthe swap contracts were zero at inception. The interest rate swap was effective beginning April 30, 2008 andexpires on October 31, 2012.  TheCompany entered into the interest rate swap contracts to limit the effect ofincreases on our floating rate debt.  Theinterest rate swap contracts are designated as a cash flow hedge of thevariable rate interest payments due on $135.0 million of the term loans and therevolving credit facility issued June 24, 2003, and accordingly, gains andlosses on the fair value of the interest rate swap agreements are reported inaccumulated other comprehensive loss and reclassified to earnings in the sameperiod in which the hedged interest payment affects earnings.  The interest rate swap agreements expire on October 31,2012.  The fair value of the swapcontracts are included in other accrued liabilities and totaled $4.6 millionand $4.7 million as of September 30, 2008 and December 31, 2007,respectively.

 

Due to thepotential sale of Camping World, a highly effective hedge on the $35.0 millionoutstanding debt by the $35.0 million notional amount interest rate swapagreement is deemed to be no longer probable and is now deemed to be reasonablypossible.  As a result, changes in thevalue of the $35.0 million interest rate swap agreement will be included inearnings prospectively beginning October 1, 2008.  Changes in value from September 26, 2008to September 30, 2008 were immaterial. A highly-effective hedge on the $100.0 million outstanding debt by the$100.0 notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31, 2012.

 

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

 

For the ninemonths ended September 30, 2008, the Company incurred $0.1 million ofdeferred executive compensation benefit under the phantom stock agreements, and

 

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made payments of$1.8 million under the terms of the vested phantom stock agreements.  The earned incentives under these agreementsare scheduled to be paid at various times over the next four years.  Phantom stock payments totaling $6,000 arescheduled to**be made for the remainder of 2008.

 

Capitalexpenditures for the first nine months of 2008 totaling $9.4 million decreased$5.2 million from the first nine months of 2007 primarily due to a slow down ofnew retail store openings.  Additionalcapital expenditures of $2.6 million are anticipated for the balance of 2008primarily for information technology, a retail warehouse management system,computer hardware, and membership system and online upgrades.

 

**CRITICALACCOUNTING POLICIES**

 

*General*

 

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

 

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

 

*Revenue Recognition*

 

Merchandise revenue is recognized when products are sold in the retailstores, shipped for mail and Internet orders, or when services are provided tocustomers. Publication advertising and newsstand sales, net of estimatedprovision for returns, are recorded at time of delivery.  Subscription sales of publications aredeferred and recognized over the lives of the subscriptions.  Revenues from the emergency road serviceprogram (“ERS”) are deferred and recognized over the life of themembership.  ERS claim expenses are recognizedwhen incurred.  Advances on third partycredit card fee revenues are deferred and recognized based primarily on apercentage of credit card receivables held by third parties.  Membership revenue is generated from annual,multi-year and lifetime memberships.  Therevenue and expenses associated with these memberships are deferred andamortized over the membership period. For lifetime memberships, an 

 

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18-year period is used, which is the actuarially determined estimatedfulfillment period.  Promotionalexpenses, consisting primarily of direct mail advertising, are deferred andexpensed over the period of expected future benefit.  Renewal expenses are expensed at the timerelated materials are mailed.  Recognizedrevenues and profit are subject to revisions as the membership progresses tocompletion.  Revisions to membershipperiod estimates would change the amount of income and expense amortized infuture accounting periods.  Revenue andrelated expenses for consumer shows are recognized when the show occurs.

 

*Accounts Receivable*

 

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

 

*Inventory*

 

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

 

*Long-LivedAssets*

 

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

 

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

 

In 2005, AGHI issued $88.2 million principal amount of its 10-7/8%Senior Notes due 2012 (the “AGHI Notes”) and contributed the net proceeds,approximately $81.0 million, to the Company and in turn, the Company made anequity contribution to Camping World.

 

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Camping World then made an equity capital contribution in the same amountto its wholly-owned subsidiary, CWI, Inc. that created a new wholly-ownedsubsidiary named CWFR Capital Corp. (“CWFR”) which is an “unrestrictedsubsidiary” under the AGHI Notes, and the AGI Indenture, and made an equitycapital contribution to CWFR in an equal amount to the capital contributionthat it received from Camping World. Since CWFR is an unrestricted subsidiary, its operations are notrestricted by either the AGI Indenture or the AGHI Notes.  CWFR used the proceeds from the equitycapital contribution to acquire the FreedomRoads Preferred Interest.  FreedomRoads is owned 90% by The StephenAdams Living Trust, which also indirectly owns 99.1% of the outstanding capitalstock of AGHC and indirectly AGI.

 

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

 

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

 

*Indefinite-LivedIntangible Assets*

 

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

 

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

 

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

 

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

 

The results of athird party valuation report (“Valuation Report”) prepared in the third quarterby a nationally recognized firm in anticipation of the potential sale ofCamping World (see Footnote 12- Recent Events) indicated that the estimatedfair value of the Camping World reporting unit was less than book value.  The excess of the carrying value over theestimated fair value of the Camping World reporting unit was primarily due tothe decline in the recreational vehicle and camping retail markets leading tolower expected future cash flows for the business and lower market comparables.In determining the fair value, the Company used a weighted average of theincome valuation approach and market valuation approaches.

 

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

 

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

 

The Company hasevaluated the remaining useful lives of its property and equipment andfinite-lived purchased intangible assets to determine if any adjustments to theuseful lives were necessary.  The Companydetermined that no adjustments to the useful lives of its property andequipment or finite-lived purchased intangible assets were necessary. Futuregoodwill impairment tests could result in a charge to earnings.  The Company will

 

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continue toevaluate goodwill on an annual basis and whenever events and changes in circumstancesindicate that there may be a potential impairment.

 

*AccumulatedOther Comprehensive Loss*

 

Accumulatedother comprehensive loss consists of unrealized losses on cash flowhedges.  At September 30, 2008,accumulated other comprehensive loss was $4.6 million.

 

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

 

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

 

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

 

Due to thepotential sale of Camping World, a highly effective hedge on the $35.0 millionoutstanding debt by the $35.0 million notional amount interest rate swapagreement is deemed to be no longer probable and is now deemed to be reasonablypossible.  As a result, changes in thevalue of the $35.0 million interest rate swap agreement will be included inearnings prospectively beginning October 1, 2008.  Changes in value from September 26, 2008to September 30, 2008 were immaterial. A highly-effective hedge on the $100.0 million outstanding debt by the$100.0 notional amount of interest rate swap agreement is still deemed to beprobable as the Company will maintain its LIBOR-based debt at a minimum of$100.0 million until the interest swap expire date of October 31, 2012.

 

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*FairValue Measurements*

 

As discussed in Note 2 to the unauditedcondensed consolidated financial statements, the Company adopted the provisionsof Statement 157 effective January 1, 2008.  The Company has determined that it utilizesobservable (Level 2) inputs in determining the fair value of its interest rateswap contracts which totaled $4.6 million at September 30, 2008.

 

*IncomeTaxes*

 

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

 

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

 

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

 

The followinginformation discusses the sensitivity to our earnings.  The range of changes chosen for this analysisreflects our view of changes which are reasonably possible over a one-yearperiod.  These forward-looking disclosuresare selective in nature and only address the potential impacts from financialinstruments.  They do not include otherpotential effects which could impact our business as a result of these interestrate fluctuations.

 

*InterestRate Sensitivity Analysis*

 

At September 30,2008, we had debt totaling $293.1 million, comprised of $0.9 million ofvariable rate debt and $292.2 million of fixed rate debt, comprised of $135.0million of debt fixed through the interest rate swap agreements, $152.4 millionof Senior Notes and $4.8 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 less than $0.1 million.  Thenew interest rate swap agreement dated March 19, 2008 to fix an additional$35.0 million of debt was effective in April 30, 2008.

 

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*CreditRisk*

 

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

 

**ITEM 4: CONTROLS AND PROCEDURES**

 

Within 90 days prior to the filing of this Quarterly Report on Form 10-Q,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the President and ChiefExecutive Officer and the Senior Vice President and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Regulation 13a-15e under the SecuritiesExchange Act of 1934, as amended.  Basedupon that evaluation, the President and Chief Executive Officer along with theSenior Vice President and Chief Financial Officer concluded that the disclosurecontrols and procedures are effective in timely alerting them to materialinformation relating to the Company (including its consolidated subsidiaries)required to be included in the periodic SEC filings.  Management determined that, as of September 30,2008, there have been no significant changes in the Company’s internal controlover financial reporting or in other factors that could significantly affectthese controls subsequent to the date the Company carried out its evaluation.

 

**PART II: OTHER INFORMATION.**

 

**ITEM 1A: RISK FACTORS**

 

The Senior CreditFacility matures on June 24, 2009. Although AGI is currently seeking to refinance or replace this creditfacility and has received a number of proposals from prospective lenders, therecan be no assurance that the Senior Credit Facility will be refinanced orreplaced prior to its maturity.  It isalso expected that the interest rate payable on a new credit facility will behigher than the interest rates under the current Senior Credit Facility.

 

**ITEM 5: OTHER INFORMATION**

 

None.

 

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**SIGNATURES:**

 

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

 

 
|                                | **AFFINITY GROUP, INC.**  |
|-------------------------------------|---------------------------|
|                                |                      |
|                                |                      |
|                                | /s/ Thomas F. Wolfe       |
| Date:  November 14,  2008 | Thomas F. Wolfe           |
|                                | Senior Vice President and |
|                                | Chief Financial Officer   |

 

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