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GOOD SAM ENTERPRISES, LLC - 10-K - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Edgar Online, Inc.

The following tables set forth the components of the statements of operations for the years ended December 31, 2011, 2010, and 2009 as a percentage of total revenues, and the comparison of those components from period to period. The following discussion is based on our Consolidated Financial Statements included elsewhere herein. Our revenues are derived principally from membership services, including club membership dues and marketing fees paid to us for services provided by third parties, from publications, including subscriptions and advertising, and from retail sales.



                                        Percentage of            Percentage Increase/
                                       Total Revenues                 (Decrease)

                                                                Year 2011   Year 2010
                                   2011      2010      2009     over 2010   over 2009

REVENUES:
Membership services               30.7%     31.1%     30.1%          1.0%        2.9%
Media                             10.6%     11.4%     12.5%        (4.9%)       (8.8% )
Retail                            58.7%     57.5%     57.4%          4.4%           -
                                 100.0%    100.0%    100.0%          2.3%       (0.2% )

COSTS APPLICABLE TO REVENUES:
Membership services               16.9%     18.1%     18.0%        (4.3%)        0.5%
Media                              8.3%      8.6%      9.8%        (1.9%)      (11.9% )
Retail                            34.8%     33.5%     34.8%          6.3%       (4.2% )
                                  60.0%     60.2%     62.6%          1.9%       (4.1% )

GROSS PROFIT                      40.0%     39.8%     37.4%          2.9%        6.2%

OPERATING EXPENSES:
Selling, general and              27.2%     26.9%     27.3%          3.4%       (1.8% )
administrative
Goodwill impairment                   -         -      9.9%             -     (100.0% )
Financing expense (recovery)          -      3.1%      0.6%      (100.1%)      100.0%
Depreciation and amortization      3.4%      3.9%      4.5%       (10.9%)      (12.1% )
                                  30.6%     33.9%     42.3%        (7.6%)      (20.1% )

INCOME (LOSS) FROM OPERATIONS      9.4%      5.9%     (4.9% )     (62.9%)      220.4%

NON-OPERATING ITEMS:
Interest income                    0.1%      0.1%      0.1%         10.2%       (3.5% )
Interest expense                  (9.4% )   (8.3% )   (6.5% )       15.3%       27.1%
Gain (loss) on derivative          0.8%     (1.4%      0.2%      (158.4%)     (996.6% )
instrument                                        )
Gain (loss) on debt                   -     (0.6%      1.0%      (100.0%)     (157.2% )
restructure                                       )
Gain (loss) on sale of assets      0.2%         -     (0.2% )          nm     (100.2% )
Other non-operating (expense)
income, net                           -         -     (0.2% )          nm     (100.0% )
                                  (8.3% )  (10.2% )   (5.6% )     (16.5%)       83.6%
INCOME (LOSS) FROM OPERATIONS
BEFORE INCOME TAXES                1.1%     (4.3% )  (10.5% )      125.5%       58.9%

INCOME TAX (EXPENSE) BENEFIT      (0.3% )    0.3%      2.2%      (184.7%)      (85.6% )

NET INCOME (LOSS)                  0.8%     (4.0% )   (8.3% )      120.8%       51.8%




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Year Ended December 31, 2011 compared with Year Ended December 31, 2010

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Revenues


Revenues of $481.4 million for 2011 increased by $10.7 million, or 2.3%, from 2010.

Membership Services revenues for 2011 of $147.8 million increased $1.5 million, or 1.0%, from 2010. This revenue increase was largely attributable to a $4.3 million increase in extended vehicle warranty program revenue, due to an increase in the average price per contract, and a $2.8 million increase in license fees received from FreedomRoads. These increases were partially offset by a $3.4 million decrease in vehicle insurance program revenue primarily from the $2.5 million fee received in 2010 as a result of waiving our right of first refusal regarding the sale of the third party provider of vehicle insurance, a $1.0 million reduction in dealer program marketing revenue, a $0.8 million revenue reduction from the Coast to Coast Club and Golf Card Club primarily attributable to decreased membership, and a $0.4 million reduction in member events revenue.

Media revenues of $51.2 million for 2011 decreased $2.6 million, or 4.9%, from 2010. This decrease was primarily attributable to a $3.5 million revenue reduction related to the sale of five publication businesses in 2011 (RV Business magazine in March 2011, Powerboat magazine in May 2011, Trailer Boats magazine in May 2011, guest services campground guides in June 2011, and ATV Magazine in October 2011). In addition, two fewer issues of motorcycle magazines were published in 2011, resulting in reduced revenue of $0.4 million, and other conferences and internet revenue decreased by $0.4 million. These decreases were partially offset by a $1.2 million increase in corporate sponsorships in the consumer shows group, and a $0.5 million increase in annual directory revenue.

Retail revenues of $282.4 million for 2011 increased $11.8 million, or 4.4%, from 2010. Store merchandise sales decreased $0.7 million from 2010 due to a same store sales decrease of $2.1 million, or 1.1%, (compared to a 0.5% decrease in same store sales for 2010), and decreased revenue from discontinued stores of $1.4 million, partially offset by a $2.8 million revenue increase from the opening of six new stores over the past twenty-four months Two stores were closed in the last twenty-four months in order to reduce fixed operating costs and to consolidate operations within the respective trade areas. Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year. Also, mail order and internet sales increased $10.6 million, supplies and other sales increased $1.8 million, and installation and service fees increased $0.1 million.




Costs Applicable to Revenues



Costs applicable to revenues totaled $288.8 million, an increase of $5.4 million, or 1.9%, from the comparable period in 2010.

Membership Services costs applicable to revenues of $81.5 million decreased $3.7 million, or 4.3%, from 2010. This decrease consisted of a $4.7 million decrease in emergency road service costs primarily due to lower average claim costs, a $0.9 million reduction in the dealer program marketing, a $0.7 million reduction in other ancillary product costs, a $0.4 million reduction in overhead costs, and a net $0.2 million reduction in wage-related costs ($0.7 million of wage savings partially offset by $0.5 million of severance expense), partially offset by a $2.2 million increase in extended vehicle warranty program costs relating to increased revenue from those programs, and incremental Good Sam Club sponsorship fees and member publication costs of $1.0 million.

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Media costs applicable to revenues of $39.8 million for 2011 decreased $0.8 million, or 1.9%, from 2010 due to a $1.7 million expense reduction from the sale of five publication businesses in 2011, and a net $0.5 million reduction in wage-related costs (consisting of $1.1 million in wage savings partially offset by $0.6 million of severance expense), partially offset by a $0.9 million increase in annual directory costs and $0.5 million of incremental promotional costs related to the book division.




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Retail costs applicable to revenues increased $9.9 million, or 6.3%, to $167.4 million. The retail gross profit margin of 40.7% for 2011 decreased from 41.8% for 2010 primarily due to an increase in merchandise markdowns in order to drive increased retail traffic to provide greater opportunity to sell Good Sam memberships and other membership services to customers at retail stores.



Operating Expenses


Selling, general and administrative expenses of $130.8 million for 2011 increased $4.3 million compared to 2010. This increase was due a $5.0 million increase in retail selling, general and administrative expenses, primarily related to increased advertising and other selling expenses, $2.0 million of incremental wage-related expense, consisting of $1.2 million of severance and $0.8 million of other wage-related expense, and a $1.0 million reimbursement of legal expenses in 2010 related to the collection of a prior favorable judgment. These increases were partially offset by a $3.1 million decrease in deferred executive compensation under the deferred compensation agreements, and a $0.6 million decrease in professional fees.

Financing expense of $14.4 million was incurred in 2010 primarily for closing fees, premiums, legal and consulting costs related to the 2010 Senior Credit Facility entered into on March 1, 2010 which were expensed in accordance with accounting guidance for debtors accounting for a modification or exchange of debt instruments. The Company did not incur similar financing expenses in 2011.

Depreciation and amortization expense of $16.5 million in 2011 decreased $2.0 million from the prior year primarily due to reduced capital expenditures in prior years, and completed amortization of membership software and amortization of finance costs associated with the 2010 Senior Credit Facility entered into on March 1, 2010.




Income from Operations



Income from operations for 2011 totaled $45.3 million compared to $27.8 million for 2010. This $17.5 million increase was primarily the result of decreased financing expense of $14.4 million, decreased deferred executive compensation expense of $3.1 million, and increased gross profit for Membership Services and Retail segments of $5.2 million and $1.9 million, respectively. These favorable changes were partially offset by increased other operating expenses of $5.3 million and reduced gross profit of $1.8 million for the Media Segment.

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Non-Operating Items


Non-operating expenses of $40.1 million for 2011 decreased $7.9 million compared to 2010 due to a $10.6 million positive change in the loss/gain on derivative instruments related to the interest rate swap agreements, a $2.7 million loss on extinguishment of the 2010 Senior Credit Facility and the GSE Senior Notes in 2010, and a $0.6 million gain on sale of assets in 2011, primarily media businesses, partially offset by a $6.0 million increase in interest expense relating to the higher incremental interest rate on the Company's debt in 2011.

Income (loss) before Income Tax

Income from operations before income tax for 2011 was $5.2 million, compared to a loss of $20.3 million for 2010. This $25.4 million favorable change was attributable to the $17.5 million increase in income from operations, and the decrease in non-operating items of $7.9 million discussed above.




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Income Tax (Expense) Benefit


The Company recorded an income tax expense of $1.3 million for 2011, compared to a benefit of $1.5 million for 2010. This change was primarily the result of the Company's recognition of current tax expense in 2011 for federal alternative minimum tax and state income taxes, the recognition of tax benefit in 2010 from previously unrecognized tax benefits, as well as reversal of accrued interest and penalties related to unrecognized tax benefits and a decrease in the valuation allowance against deferred tax assets in 2010.



Net Income (Loss)


Net income for 2011 was $3.9 million compared to a net loss of $18.8 million for 2010 mainly due to the reasons discussed above.



Segment Profit (Loss)


The Company's three principal lines of business are Membership Services, Media and Retail. The Membership Services segment operates the Good Sam Club, the Coast to Coast Club, the President's Club, the Camp Club USA and assorted membership products and services for RV owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts. The Media segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories, and RV and powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreation shows primarily focused on RV and powersports markets. The Retail segment sells specialty retail merchandise and services for RV owners primarily through retail supercenters and mail order catalogs. The Company evaluates performance based on profit or loss from operations before income taxes and unusual items.

The reportable segments are strategic business units that offer different products and services. They are managed separately because each business required different technology, management expertise and marketing strategies.

Membership services segment profit of $58.4 million for 2011 increased $4.5 million, or 8.4%, from the comparable period in 2010. This increase was largely attributable to a $4.2 million increase in segment profit from emergency road services programs, $2.8 million of incremental license fees received from FreedomRoads, and a $2.1 million increase in segment profit from the extended vehicle warranty programs. These increases were partially offset by a $3.4 million reduction in vehicle insurance program profit primarily relating to the $2.5 million fee received in 2010 as a result of waiving our right of first refusal regarding the sale of the third party partner, a $0.6 million profit reduction in the Coast and Golf Card Clubs relating to reduced membership, and a $0.6 million reduction in member events segment profit.

Media segment profit of $4.8 million for 2011 decreased $0.2 million, or 4.2%, from 2010. This decrease was due to $0.6 million of reduced segment profit in the RV magazine group primarily related to severance costs, and $0.5 million of reduced segment profit in the annual directories, partially offset by increased segment profit from the consumer shows group of $0.9 million.

Retail segment profit of $2.2 million for 2011 decreased $0.7 million, or 25.7%, from 2010. This decrease was the result of a $4.9 million increase in selling, general and administrative expenses, partially offset by a $1.1 million reduction in depreciation and amortization expense, a $2.7 million increase in gross profit margin, and a $0.4 million reduction in financing expense from 2010.




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Year Ended December 31, 2010 compared with Year Ended December 31, 2009



Revenues


Revenues of $470.7 million for 2010 decreased by $1.1 million, or 0.2%, from 2009.

Membership Services revenues for 2010 of $146.3 million increased $4.1 million, or 2.9%, from 2009. This revenue increase was largely attributable to an incremental $1.5 million fee received in the first quarter of 2010 related to vehicle insurance products as a result of our waiving our right of first refusal regarding the sale of the vehicle insurance business by a third party provider, a $1.2 million increase in extended vehicle warranty program revenue resulting from continued policy growth, a $0.9 million license fee from FreedomRoads agreed upon in the Second Amended and Restated Cooperative Resources Agreement dated October 2010 which provides for, among other items, an annual license fee of $3.75 million paid in quarterly installments, an $0.8 million increase in marketing fee revenue from health and life insurance products, a $0.6 million increase in member events revenue, a $0.6 million increase in emergency road service revenue primarily due to a price increase, and a $0.4 million revenue increase in credit card royalties. These increases were partially offset by a $1.2 million revenue decrease related to reduced enrollment in the Coast to Coast Club and the Golf Card Club and a $0.7 million reduction in marketing fees from the vehicle insurance business.

Media revenues of $53.8 million for 2010 decreased $5.2 million, or 8.8%, from 2009. This decrease was primarily attributable to a $3.8 million reduction in revenue from our outdoor power sports magazines. Anticipated declining advertising revenues resulted in management reducing total power sports issues published by nineteen issues in 2010 versus 2009. Declining exhibitor revenue commitments resulted in management canceling ten consumer shows, resulting in a $1.3 million reduction in exhibitor revenue in 2010 compared to 2009. In addition, advertising and circulation revenue decreased $0.6 million for the RV magazine group, and annual directory revenue decreased $0.3 million. These decreases were partially offset by an $0.8 million increase in revenue from outdoor power sports conferences and online ad sales.

Retail revenues of $270.6 million for 2010 remained unchanged from 2009. Store merchandise sales decreased $3.8 million from 2009 due to a same store sales decrease of $1.0 million, or 0.5%, compared to a 4.5% decrease in same store sales for 2009, and decreased revenue from discontinued stores of $2.9 million, were partially offset by a $0.1 million revenue increase from the opening of four new stores over the past twenty-four months Three stores were closed in the last twenty-four months in order to reduce fixed operating costs and to consolidate operations within the respective trade areas. Same store sale calculations for a given period include only those stores that were open both at the end of that period and at the beginning of the preceding fiscal year. Also, installation and service fees increased $1.7 million, mail order and internet sales increased $1.1 million, and supplies and other sales increased $1.0 million.

Costs Applicable to Revenues

Costs applicable to revenues totaled $283.4 million, a decrease of $12.0 million, or 4.1%, from the comparable period in 2009.

Membership Services costs applicable to revenues of $85.2 million increased $0.4 million, or 0.5%, from 2009. This increase consisted of a $1.3 million increase in costs associated with the extended vehicle warranty program, a $0.5 million increase in vehicle insurance marketing costs and a $0.3 million increase in emergency road services costs, all related to increased revenue, partially offset by a $1.0 million reduction in marketing and program costs related to reduced membership in the Coast to Coast Club and the Golf Card Club, and a $0.7 million reduction in wage-related expenses due to a reduction in personnel.




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Media costs applicable to revenues of $40.6 million for 2010 decreased $5.5 million, or 11.9%, from 2009 primarily related to a $4.3 million reduction in magazine expenses resulting from reduced issues published and reduced magazine sizes, a $1.2 million reduction in costs related to reduced consumer shows revenue related to the reduced number of shows and $0.5 million reduction in annual directory costs. These reductions were taken as a cost saving strategy because expected revenues from these products were not anticipated to cover expected costs. These decreases were partially offset by a $0.5 million increase in costs associated with increased revenue from outdoor power sports conferences.

Retail costs applicable to revenues decreased $6.9 million, or 4.2%, to $157.6 million due to improved gross margin. The retail gross profit margin of 41.8% for 2010 increased from 39.2% for 2009 primarily due to price increases on select high volume products.



Operating Expenses


Selling, general and administrative expenses of $126.6 million for 2010 decreased $2.3 million compared to 2009. This decrease was due a $3.1 million decrease in retail general and administrative expenses consisting primarily of decreases in labor and advertising expense, a $1.8 million reduction in professional fees and a $1.0 million reimbursement of legal expenses related to the collection of a prior year favorable judgment for such expenses that was lien on real estate owned by the obligor that was received in the third quarter. These decreases were partially offset by a $3.1 million increase in deferred executive compensation under the 2010 Phantom Stock agreements and $0.5 million annual general and administrative support fee paid to the Company's ultimate parent.

The Company recorded a non-cash goodwill impairment charge of $46.9 million in the third quarter of 2009 related to our RV and powersports publications, which is part of the Media segment. No impairment charges were recorded in 2010.

Financing expense of $14.4 million was incurred in 2010 primarily for closing fees, premiums, legal and consulting costs related to the 2010 Senior Credit Facility entered into on March 1, 2010 which were expensed in accordance with accounting guidance for debtors accounting for a modification or exchange of debt instruments. Financing expense of $2.6 million for 2009 related to legal and other costs incurred associated with the amendment dated June 5, 2009 to the then senior credit facility.

Depreciation and amortization expense of $18.5 million decreased $2.5 million from the prior year primarily due to completed amortization of intangible assets associated with prior acquisitions, and the reduced level of capital expenditures since 2008.




Income (Loss) from Operations



Income from operations for 2010 totaled $27.8 million compared to loss from operation of $23.1 million for 2009. This $50.9 million change was primarily the result the $46.9 million goodwill impairment charge in the third quarter of 2009. In addition, the following favorable changes were experienced in 2010 compared to 2009: increased gross profit for the Retail, Membership Services and Media segments of $6.9 million, $3.7 million, and $0.3 million, respectively; and reduced operating expenses of $8.0 million. These favorable changes were only partially offset by increased financing expense of $11.8 million, and a $3.1 million increase in deferred executive compensation in 2010.



Non-Operating Items


Non-operating expenses of approximately $48.1 million for 2010 increased $21.9 million compared to 2009 due to an $8.4 million increase in net interest expense relating to higher interest rates and increased debt, a $7.4 million negative change in the loss/gain on derivative instruments related to the interest rate swap agreements, a $7.4 million negative change in the loss/gain related to debt restructurings resulting from a $2.7 million loss on extinguishment of the 2010 Senior Credit Facility and the GSE Senior Notes in 2010, and the $4.7 million gain on purchase of the $14.6 million GSE Senior Notes in the second quarter of 2009. The Company replaced its variable debt with fixed debt in November 2010 and the amounts included in Other Comprehensive Income were reclassed to the income statement as the interest rate swaps no longer qualify as cash flow hedges as the underlying cash flows being hedged were no longer going to occur. These increases were partially offset by a $0.7 million decrease in other non-operating expenses and a $0.6 million loss on sale of retail assets in 2009.




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Loss before Income Tax


Loss before income tax for 2010 was $20.3 million, compared to a loss of $49.3 million for 2009. This $29.0 million favorable change was attributable to the $50.9 million increase in income from operations, partially offset by the increase in non-operating items mentioned above of approximately $21.9 million.



Income Tax Benefit


The Company recorded an income tax benefit of $1.5 million for 2010, compared to $10.4 million for 2009. This change was the result of a favorable change in loss before income tax discussed above as well as a reversal of unrecognized tax benefits, reversal of accrued interest and penalties related to unrecognized tax benefits and a decrease in the valuation allowance against deferred tax assets in 2010.




Net loss



Net loss for 2010 was $18.8 million compared to a loss of $38.9 million for 2009 mainly due to the reasons discussed above.



Segment Profit (Loss)


The Company's three principal lines of business are Membership Services, Media and Retail. The Membership Services segment operates the Good Sam Club, the Coast to Coast Club, the President's Club, the Camp Club USA and assorted membership products and services for RV owners, campers and outdoor vacationers, and the Golf Card Club for golf enthusiasts. The Media segment publishes a variety of publications for selected markets in the recreation and leisure industry, including general circulation periodicals, directories, and RV and powersports industry trade magazines. In addition, the Media segment operates consumer outdoor recreation shows primarily focused on RV and powersports markets. The Retail segment sells specialty retail merchandise and services for RV owners primarily through retail supercenters, mail order catalogs and the internet. The Company evaluates performance based on profit or loss from operations before income taxes and unusual items.

The reportable segments are strategic business units that offer different products and services. They are managed separately because each business required different technology, management expertise and marketing strategies.

Membership services segment profit of $53.9 million for 2010 increased $6.2 million, or 13.1%, from the comparable period in 2009. This increase was largely attributable to a $1.4 million increase in segment profit in the Good Sam Club related to reduced marketing and administrative expenses, a $1.3 million increase in profit related to reduced overhead, marketing and wage-related expenses, a $0.9 million increase in segment profit relating to licensing fees paid by FreedomRoads, a $0.9 million increase in segment profit from various other club and ancillary product segment profit, a $0.8 million increase in marketing fee revenue from credit cards and health and life insurance products, a $0.7 million increase in profit related to the member events, and a $0.2 million increase in marketing fees related to vehicle insurance primarily related to an incremental $1.5 million fee received as a result of waiving our right of first refusal regarding the sale of the third party partner combined with reduced marketing fee revenue partially offset by increased expenses.




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Media segment profit improved to $5.0 million for 2010 from a loss of $43.9 million for 2009. This $48.9 million improvement resulted primarily from the $46.9 million goodwill impairment charge in 2009 in the Media segment. In addition, the following favorable changes were experienced in 2010 from 2009: a $0.9 million increase in segment profit in the powersports magazine group, a $0.4 million increase in segment profit in the RV magazine group, a $0.3 million increase in profit for outdoor power sports conferences and online ad sales, a $0.2 million increase in segment profit from the consumer shows group, and a $0.2 million decrease in publishing overhead.

Retail segment profit was $2.9 million for 2010 compared to a loss of $11.4 million for 2009. This $14.3 million improvement was the result of a $5.5 million decrease in allocated interest expense due to lower borrowings, a $5.1 million increase in gross profit margin, a $3.1 million decrease in selling, general and administrative expenses, and a $0.6 million of loss on sale of assets in 2009.

Liquidity and Capital Resources

We had working capital of $5.6 million and $10.6 million, respectively, as of December 31, 2011 and December 31, 2010. The primary reason for the low levels of working capital is the deferred revenue and gains reported under current liabilities of $54.9 million and $56.6 million as of December 31, 2011 and 2010, respectively, which reduce working capital. Deferred revenue is primarily comprised of cash collected for club memberships in advance of services to be provided which is deferred and recognized as revenue over the life of the membership. We use net proceeds from this deferred membership revenue to lower our long-term borrowings and finance our working capital needs.

Contractual Obligations and Commercial Commitments




The following table summarizes our commitments to make long-term debt, lease,
deferred compensation and letter of credit payments at December 31, 2011.  This
table includes principal and future interest due under our debt agreements based
on interest rates as of December 31, 2011 and assumes debt obligations will be
held to maturity.

                                        Payments Due by Period (in thousands)
                     Total       2012       2013       2014       2015       2016       Thereafter

Debt and future
interest           $ 524,540   $ 54,866   $ 46,558   $ 55,808   $ 43,940   $ 323,368   $          -
Operating lease
obligations          224,591     23,139     22,652     21,691     20,442      17,351        119,316
Deferred
compensation           2,298      1,034      1,021        243          -           -              -
Other commercial
commitments
Letters of
credit                 7,091      5,081      2,010          -          -           -              -

Grand total        $ 758,520   $ 84,120   $ 72,241   $ 77,742   $ 64,382   $ 340,719   $    119,316



11.50% Senior Secured Notes due 2016

On November 30, 2010, the Company issued $333.0 million of 11.5% senior secured notes due 2016 (the "Senior Secured Notes") at an original issue discount of 2.1%. Interest on the Senior Secured Notes is due each December 1 and June 1 commencing June 1, 2011. The Senior Secured Notes mature on December 1, 2016. The Company used the net proceeds of $326.0 million from the issuance of the Senior Secured Notes: (i) to irrevocably redeem or otherwise retire all of our outstanding 9% senior subordinated notes due 2012 (the "GSE Senior Notes") in an approximate amount (including accrued interest through but not including November 30, 2010) of $142.5 million; (ii) to permanently repay all of the outstanding indebtedness under our then senior secured credit facility (the "2010 Senior Credit Facility") in an approximate amount (including call premium and accrued interest through but not including November 30, 2010) of $153.4 million; (iii) to make a $19.6 million distribution to our direct parent, Affinity Group Holding, LLC, ("Parent"), to enable Parent, together with other funds contributed to the Parent, to redeem, repurchase or otherwise acquire for value and satisfy and discharge all of its outstanding 10 7/8% senior notes due 2012 (the "AGHI Notes"); and (iv) to pay related fees and expenses in connection with the foregoing transactions and to provide for general corporate purposes. As of December 31, 2011, an aggregate of $333.0 million of Senior Secured Notes remain outstanding.




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The Senior Secured Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by each of our existing and future domestic restricted subsidiaries. All of the Company's subsidiaries other than CWFR Capital Corp. ("CWFR") are designated as restricted subsidiaries, and CWFR constitutes our only "unrestricted subsidiary". In the event of a bankruptcy, liquidation or reorganization of the unrestricted subsidiary, holders of the indebtedness of the unrestricted subsidiary and their trade creditors are generally entitled to payment of their claims from the assets of the unrestricted subsidiary before any assets are made available for distribution to us. As a result, with respect to assets of unrestricted subsidiaries, the Senior Secured Notes are structurally subordinated to the prior payment of all of the debts of such unrestricted subsidiaries.

The indenture governing the Senior Secured Notes (the "Senior Secured Notes Indenture") limits the Company's ability to, among other things, incur more debt, pay dividends or make other distributions to our Parent, redeem stock, make certain investments, create liens, enter into transactions with affiliates, merge or consolidate, transfer or sell assets and make capital expenditures.

Subject to certain conditions, we must make an offer to purchase some or all of the Senior Secured Notes with the excess cash flow offer amount (as defined in the indenture) determined for each applicable period, commencing with the annual period ending December 31, 2011, and each June 30 and December 31 thereafter, at 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the date of repurchase. On February 27, 2012, the Company completed an excess cash flow offer to purchase of $7.4 million in principal amount of the Senior Secured Notes. These Senior Secured Notes were purchased by the Company and retired on February 27, 2012.

The Senior Secured Notes and the related guarantees are our and the guarantors' senior secured obligations. The Senior Secured Notes (i) rank senior in right of payment to all of our and the guarantors' existing and future subordinated indebtedness, (ii) rank equal in right of payment with all of our and the guarantors' existing and future senior indebtedness other than the obligations of Camping World and its subsidiaries under the credit agreement dated March 1, 2010 ("CW Credit Facility") and future replacements of that facility, (iii) are structurally subordinated to all future indebtedness of our subsidiaries that are not guarantors of the Senior Secured Notes and (iv) are effectively subordinated to the CW Credit Facility and any future credit facilities in replacement thereof to the extent of the value of the collateral securing indebtedness under such facilities.



The CW Credit Facility


On March 1, 2010, our wholly-owned subsidiary, Camping World, Inc. ("Camping World") entered into the CW Credit Facility providing for an asset based lending facility of up to $22.0 million, of which $10.0 million is available for letters of credit and $12.0 million is available for revolving loans. The CW Credit Facility initially matured on the earlier of March 1, 2013, 60 days prior to the date of maturity of the 2010 Senior Credit Facility, or 120 days prior to the earlier date of maturity of the GSE Senior Notes and the AGHI Notes. Interest under the revolving loans under the CW Credit Facility floated at either 3.25% over the base rate (defined as the greater of the prime rate, federal funds rate plus 50 basis points or 1 month LIBOR) for borrowings whose interest is based on the prime rate or 3.25% over the LIBOR rate (defined as the greater of LIBOR rate applicable to the period of the respective LIBOR borrowings) for borrowings whose interest is based on LIBOR. On December 30, 2010, the CW Credit Facility was amended to extend the maturity to September 1, 2014, to decrease the interest rate margin to 2.75%, to remove the 1% LIBOR floor, to increase the revolving loan commitment amount from $12.0 million to $20.0 million, with a $5.0 million sublimit for letters of credit, and to decrease the letters of credit commitment from $10.0 million to $5.0 million. As of December 31, 2011, the average interest rate on the CW Credit Facility was 3.02%. Borrowings under the CW Credit Facility are based on the borrowing base of eligible inventory and accounts receivable of Camping World and its subsidiaries. As of December 31, 2011, $10.5 million of CW Credit Facility remains outstanding and $7.1 million of letters of credit were issued.




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The CW Credit Facility contains affirmative covenants, including financial covenants, and negative covenants. Borrowings under the Camping World Credit Agreement are guaranteed by the direct and indirect subsidiaries of Camping World and are secured by a pledge on the stock of Camping World and its direct and indirect subsidiaries and liens on the assets of Camping World and its direct and indirect subsidiaries. The administrative agent under the CW Credit Facility, the collateral agent under the Senior Secured Notes Indenture, the Company, and certain guarantor subsidiaries of the Company have entered into the intercreditor agreement that governs their rights to the collateral pledged to secure the respective indebtedness of the Company and the guarantors pursuant to the CW Credit Facility and the Senior Secured Notes Indenture.

The Senior Secured Notes Indenture and the CW Credit Facility contain certain restrictive covenants relating to, but not limited to, mergers, changes in the nature of the business, acquisitions, additional indebtedness, sale of assets, investments, and the payment of dividends subject to certain limitations and minimum operating covenants. We were in compliance with all debt covenants at December 31, 2011.

Interest Rate Swap Agreements

On October 15, 2007, the Company entered into a five-year interest rate swap agreement with a notional amount of $100.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.428% at December 31, 2011 based upon the October 31, 2011 reset date) and make periodic payments at a fixed rate of 5.135%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31. The fair value of the swap was zero at inception. The Company entered into the interest rate swap to limit the effect of increases on our floating rate debt. The interest rate swap was initially designated as a cash flow hedge of the variable rate interest payments due on $100.0 million of the term loans issued June 24, 2003 under the 2003 Senior Credit Facility, and accordingly, gains and losses on the fair value of the interest rate swap agreement were previously reported in accumulated other comprehensive loss and reclassified to earnings in the same period in which the hedged interest payment affects earnings. The interest rate swap agreement expires on October 31, 2012. On March 19, 2008, the Company entered into a 4.5 year interest rate swap agreement effective April 30, 2008, with a notional amount of $35.0 million from which it will receive periodic payments at the 3 month LIBOR-based variable rate (0.428% at December 31, 2011 based upon the October 31, 2011 reset date) and make periodic payments at a fixed rate of 3.43%, with settlement and rate reset dates every January 31, April 30, July 31, and October 31. The interest rate swap was effective beginning April 30, 2008 and expires on October 31, 2012. As of December 31, 2011, the fair value of the swap contracts is included in Accrued Liabilities totaled $3.9 million. As of December 31, 2010, the fair value of the swap contracts included in Accrued Liabilities and Other Long-Term Liabilities was $4.2 million and $3.5 million, respectively.

Due to the potential sale of Camping World in September 2008, a highly effective hedge on the $35.0 million outstanding debt by the $35.0 million notional amount interest rate swap agreement was deemed to be no longer probable and was deemed to be reasonably possible. As a result, changes in the value of the $35.0 million interest rate swap agreement are included in earnings beginning on October 1, 2008. Change in value from October 1, 2008 to December 31, 2008 was $2.4 million. On June 11, 2009, the Company partially terminated the $35.0 million interest rate swap, subject to a partial termination fee of $0.6 million which was expensed. The notional amount was reduced to $20.0 million. All other terms of the interest rate swap agreement remained unchanged. As a result, the amount included in other comprehensive income related to the $35.0 million interest rate swap was reduced prorata and included in earnings as a gain (loss) on derivative instrument.




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Due to the issuance of an option to the shareholder of the ultimate parent of the Company to purchase Camping World, in the second quarter of 2009, which option was subsequently terminated, a portion of the highly effective hedge on the $100.0 million outstanding debt by the $100.0 million notional amount interest rate swap agreement was deemed to be no longer probable and was deemed to be reasonably possible. As a result, changes in the value of the last $20.0 million of the $100.0 million interest rate swap agreement are included in earnings beginning on June 5, 2009.

Due to the issuance of the Senior Secured Notes representing fixed rate debt to replace the existing variable rate debt on November 30, 2010, the interest rate swaps no longer qualify as cash flow hedges as the underlying cash flows being hedged were no longer going to occur. As a result, the net loss on the fair value of the interest rate swap agreements included in other comprehensive loss of $6.5 million related to previously effective cash flow hedges as of November 30, 2010, was reclassified to earnings as gain (loss) on derivative instrument and all future changes in the fair value of the interest rate swaps will be included in earnings as gain (loss) on derivative instrument.

Other Contractual Obligations and Commercial Commitments

During 2011, deferred executive compensation under our deferred compensation agreements was earned and the Company made payments of $0.8 million on mature deferred compensation plans. The Company expects to pay $1.0 million on the mature deferred compensation plans in 2012.

Capital expenditures for 2011 totaled $5.1 million, compared to capital expenditures of $4.5 million in 2010. For 2011, $3.6 million of capital expenditures were funded through operations, $970,000 through a capital contribution, $277,000 through proceeds of asset sales, and $230,000 paid by lessor. Capital expenditures are anticipated to be approximately $5.0 million for 2012, primarily for new retail stores, a Point Of Sale system, existing retail store upgrades, leasehold improvements, software enhancements, and information technology upgrades.

Factors Affecting Future Performance

Our financial operations have been affected by the recent economic downturn. Other factors that could adversely affect our operations include increases in operating costs, fuel shortages and substantial increases in propane and gasoline prices. Such events could cause declines in advertisements, club enrollment and retail spending. We are unable to predict at what point fluctuating fuel prices may begin to adversely impact revenues or cash flow. We believe we will be able to partially offset any cost increases with price increases to our members along with certain cost reducing measures.



Seasonality


Our cash flow is highest in the summer months due to the seasonal nature of the retail segment, membership renewals and advertising prepayments for the annual directories.




Critical Accounting Policies



General


Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to membership programs and incentives, bad debts, inventories, intangible assets, employee health insurance benefits, income taxes, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.




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Revenue Recognition


Merchandise revenue is recognized when products are sold in the retail stores, shipped for mail and Internet orders, or when services are provided to customers. Emergency Road Service ("ERS") revenues are deferred and recognized over the life of the membership. ERS claim expenses are recognized when incurred. Royalty revenue is earned under the terms of an arrangement with a third party credit card provider based on a percentage of the Company's outstanding credit card balances with such third party credit card provider. Membership revenue is generated from annual, multi-year and lifetime memberships. The revenue and expenses associated with these memberships are deferred and amortized over the membership period. For lifetime memberships, an 18-year period is used, which is the actuarially determined estimated fulfillment period. Promotional expenses, consisting primarily of direct mail advertising, are deferred and expensed over the period of expected future benefit, typically three months based on historical actual response rates. Renewal expenses are expensed at the time related materials are mailed. Recognized revenues and profit are subject to revisions as the membership progresses to completion. Revisions to membership period estimates would change the amount of income and expense amortized in future accounting periods.

Newsstand sales of publications and related expenses are recorded at the time of delivery, net of estimated provision for returns. Subscription sales of publications are reflected in income over the lives of the subscriptions. The related selling expenses are expensed as incurred. Advertising revenues and related expenses are recorded at the time of delivery. Subscription and newsstand revenues and expenses related to annual publications are deferred until the publications are distributed. Revenues and related expenses for consumer shows are recognized when the show occurs.



Accounts Receivable


We estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables including the current credit-worthiness of each customer. Changes in required reserves have been recorded in recent periods and may occur in the future due to the market conditions and the economic environment.



Inventory


We state inventories at the lower of cost or market. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements and compare that with the current or committed inventory levels. We have recorded changes in required reserves in recent periods due to changes in strategic direction, such as discontinuances of product lines as well as changes in market conditions due to changes in demand requirements. It is possible that changes in required inventory reserves may continue to occur in the future due to the market conditions.



Long-Lived Assets


Purchased intangible assets with finite lives are amortized using the straight-line method over the estimated economic lives of the assets, ranging from one to fifteen years.

Long-lived assets, such as property, plant and equipment and purchased intangible assets with finite lives are evaluated for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable in accordance with accounting guidance on accounting for the impairment or disposal of long-lived assets. We assess the fair value of the assets based on the future cash flow the assets are expected to generate and recognize an impairment loss when estimated undiscounted future cash flow expected to result from the use of the asset plus net proceeds expected from disposition of the asset (if any) are less than the carrying value of the asset. When an impairment is identified, we reduce the carrying amount of the asset to its estimated fair value based on a discounted cash flow approach or, when available and appropriate, comparable market values.




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We have evaluated the remaining useful lives of our finite-lived purchased intangible assets to determine if any adjustments to the useful lives were necessary or if any of these assets had indefinite lives and were therefore not subject to amortization. We determined that no adjustments to the useful lives of our finite-lived purchased intangible assets were necessary. The finite-lived purchased intangible assets consist of membership customer lists, non-compete and deferred consulting agreements and deferred financing costs which have weighted average useful lives of approximately 6 years, 15 years and 6 years, respectively.

Indefinite-Lived Intangible Assets

We evaluate indefinite-lived intangible assets for impairment at least annually or when events indicate that an impairment exists. The impairment tests for goodwill and other indefinite-lived intangible assets are assessed for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with the net book value (or carrying amount), including goodwill. If the fair value of the reporting unit exceeds the carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary. If the carrying amount of the reporting unit exceeds the fair value, or if another indicator of impairment exists, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of the reporting unit's goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit's goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, accordingly the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

Determining the fair value of a reporting unit under the first step of the goodwill impairment test and determining the fair value of individual assets and liabilities of a reporting unit under the second step of the goodwill impairment test is judgmental in nature and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant impact on whether or not an impairment charge is recognized and also the extent of such charge. Our estimates of fair value utilized in goodwill and other indefinite-lived intangible asset tests may be based upon a number of factors, including assumptions about the projected future cash flows, discount rate, growth rate, determination of market comparables, technological change, economic conditions or changes to our business operations. Such changes may result in impairment charges recorded in future periods.

The fair value of our reporting units is annually determined using a combination of the income approach and the market approach. Under the income approach, the fair value of a reporting unit is calculated based on the present value of estimated future cash flows. Future cash flows are estimated by us under the market approach, fair value is estimated based on market multiples of revenue or earnings for comparable companies.




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We performed an annual goodwill impairment test as required and there were no goodwill impairment indicators for our other reporting units. Based on the results of the annual impairment tests, we determined that no indicators of goodwill impairment existed for the other reporting units as of December 31, 2011. However, future goodwill impairments tests could result in a charge to earnings. We will continue to evaluate goodwill on an annual basis and whenever events and changes in circumstances indicate that there may be a potential impairment.




Self-insurance Program



Self-insurance accruals for workers compensation and general liability programs are calculated by outside actuaries and are based on claims filed and include estimates for claims incurred but not yet reported. Projections of future loss are inherently uncertain because of the random nature of insurance claims occurrences and could be substantially affected if future occurrences and claims differ significantly from these assumptions and historical trends.

Derivative Financial Instruments

The Company accounts for derivative instruments and hedging activities in accordance with accounting guidance for accounting for derivative instruments and hedging activities. All derivatives are recognized on the balance sheet at their fair value. On the date that the Company enters into a derivative contract, management formally documents all relationships between hedging instruments and hedged items, as well as risk management objectives and strategies for undertaking various hedge transactions.

Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge (a "swap"), to the extent that the hedge is effective, are recorded in accumulated other comprehensive loss, until earnings are affected by the variability of cash flows of the hedged transaction. The Company measures effectiveness of the swap at each quarter end using the Hypothetical Derivative Method. Under this method, hedge effectiveness is measured based on a comparison of the change in fair value of the actual swap designated as the hedging instrument and the change in fair value of the hypothetical swap which would have the terms that identically match the critical terms of the hedged cash flows from the anticipated debt issuance. The amount of ineffectiveness, if any, recorded in earnings would be equal to the excess of the cumulative change in the fair value of the swap over the cumulative change in the fair value of the plain vanilla swap lock, as defined in the accounting literature. Once a swap is settled, the effective portion is amortized over the estimated life of the hedge item.

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

Due to the issuance of fixed rate date to replace the existing variable rate debt in November 2010, the interest rate swaps no longer qualify as cash flow hedges. As a result, the net loss included in other comprehensive loss of $6.5 million as of November 30, 2010 was reclassed to earnings and all future changes in the fair value of the interest rate swaps will be included in earnings.



Income Taxes


Significant judgment is required in determining the Company's tax provision 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 the Company's positions may not be fully sustained. The tax contingency accruals are adjusted in light of changing facts and circumstances, such as the progress of tax audits, case law and emerging legislation. The Company's tax provision includes the impact of tax contingency accruals and changes to the accruals, including related interest and penalties, as considered appropriate by management.




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New Accounting Standards


In January 2011, the Company was required to adopt a newly issued accounting standard which requires additional disclosure requiring an entity to present disaggregated information about activity in Level 3 fair value measurements on a gross basis, rather than a single amount. As this newly issued accounting standard only requires enhanced disclosure, the adoption of this standard did not impact our financial position, results of operations or cash flows.

In January 2011, the Company was required to adopt a newly issued accounting standard which requires the Company to perform step 2 of the goodwill impairment test if a reporting unit has a carrying amount equal to or less than zero and there are qualitative factors that indicate it is more likely than not that a goodwill impairment exists. The adoption of the newly issued accounting standard did not impact our financial position, results of operations or cash flows.

In June 2011, a new accounting standard was issued that amends the disclosure requirements for the presentation of other comprehensive income ("OCI") in the financial statements, including elimination of the option to present OCI in the statement of stockholder's or member's deficit. As a result of this new standard, OCI and its components will be required to be presented for both interim and annual periods in a single continuous financial statement, the statement of comprehensive income, or in two separate but consecutive financial statements, consisting of a statement of income followed by a separate statement of OCI. In addition, items that are reclassified from OCI to net income must be presented on the face of the financial statement. This new standard is required to be applied retrospectively beginning in 2012.

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