<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
Commission File Number 1-14645
THOUSAND TRAILS, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2138671
- --------------------------------- ---------------------------------
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation or Organization)
2711 LBJ FREEWAY, SUITE 200, DALLAS, TEXAS 75234
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (972) 243-2228
-------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Common Stock, par value $.01, issued and outstanding as
of February 12, 1999 was 7,667,635.
<PAGE> 2
THOUSAND TRAILS, INC.
INDEX
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1998
and June 30, 1998...........................................................................3
Consolidated Statements of Operations for the six months ended
December 31, 1998 and December 31, 1997.....................................................4
Consolidated Statements of Operations for the three months ended
December 31, 1998 and December 31, 1997.....................................................5
Consolidated Statement of Stockholders' Equity for the six months
ended December 31, 1998.....................................................................6
Consolidated Statements of Cash Flows for the six months ended
December 31, 1998 and December 31, 1997.....................................................7
Notes to Consolidated Financial Statements....................................................9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............................................14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................26
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders..........................................27
Item 6. Exhibits and Reports on Form 8-K.............................................................28
</TABLE>
Page 2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS December 31, June 30,
1998 1998
------------ ------------
CURRENT ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 1,174 $ 13,631
Current portion of receivables, net of allowances and discount of
$1.2 million and $1.1 million 1,822 2,440
Current portion of deferred membership selling expenses 505 538
Current portion of net deferred tax assets 2,723 2,954
Other current assets 1,629 1,890
------------ ------------
Total Current Assets 7,853 21,453
Restricted cash 1,433 1,171
Receivables, net of allowances and discount of $1.1 million and $1.6
million 688 1,741
Campground and resort land 13,328 13,338
Buildings and equipment, net of accumulated depreciation of 21,274 21,879
$16.2 million and $15.0 million
Land held for sale 2,860 3,866
Deferred membership selling expenses 1,308 1,087
Net deferred tax assets 6,259 7,046
Other assets 2,390 2,681
------------ ------------
Total Assets $ 57,393 $ 74,262
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,005 $ 2,037
Accrued interest -- 1,805
Other accrued liabilities 5,421 6,410
Current portion of long term debt 2,616 --
Accrued construction costs 1,808 2,845
Current portion of deferred revenue 16,636 18,851
------------ ------------
Total Current Liabilities 27,486 31,948
Long term debt 16,372 32,973
Deferred revenue 5,234 4,588
Other liabilities 1,983 1,999
------------ ------------
Total Liabilities 51,075 71,508
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,500,000 shares authorized, none issued
or outstanding
Common stock, $.01 par value, 15,000,000 shares authorized, 7,514,208 and
7,437,083 shares issued and outstanding 75 74
Additional paid-in capital 20,604 20,551
Accumulated deficit subsequent to December 31, 1991, date of emergence
from bankruptcy (14,219) (17,734)
Cumulative foreign currency translation adjustment (142) (137)
------------ ------------
Total Stockholders' Equity 6,318 2,754
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 57,393 $ 74,262
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 3
<PAGE> 4
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended December 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Membership dues $ 18,542 $ 18,996
Campground/resort revenue 10,383 9,339
Membership and resort interest sales 1,909 2,057
RPI membership fees 1,690 1,702
Interest income 1,123 1,177
Gain on asset sales 1,106 3,749
Nonrecurring income -- 495
Other income 1,444 1,825
------------ ------------
Total Revenues 36,197 39,340
------------ ------------
EXPENSES
Campground/resort operating expenses 20,829 20,171
Selling expenses 1,780 1,542
Marketing expenses 1,044 626
RPI membership expenses 1,012 928
Corporate member services 687 702
Interest expense and amortization 2,037 2,502
General and administrative expenses 4,263 4,151
------------ ------------
Total Expenses 31,652 30,622
------------ ------------
INCOME BEFORE INCOME TAXES 4,545 8,718
INCOME TAXES --
Income tax provision - current (12) (232)
Income tax provision - deferred (1,018) --
------------ ------------
(1,030) (232)
NET INCOME $ 3,515 $ 8,486
============ ============
NET INCOME PER SHARE-- BASIC $ .47 $ 1.15
============ ============
NET INCOME PER SHARE-- DILUTED $ .42 $ 1.01
============ ============
SHARES USED TO CALCULATE NET INCOME PER SHARE:
Basic 7,485 7,390
============ ============
Diluted 8,429 8,410
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4
<PAGE> 5
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the three months ended December 31,
---------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
REVENUES
Membership dues $ 9,202 $ 9,299
Campground/resort revenue 2,816 2,899
Membership and resort interest sales 931 1,036
RPI membership fees 721 820
Interest income 500 530
Gain on asset sales 1,018 329
Nonrecurring income -- 495
Other income 548 670
------------ ------------
Total Revenues 15,736 16,078
------------ ------------
EXPENSES
Campground/resort operating expenses 8,275 8,440
Selling expenses 792 678
Marketing expenses 462 348
RPI membership expenses 480 496
Corporate member services 306 318
Interest expense and amortization 959 1,137
General and administrative expenses 2,125 2,103
------------ ------------
Total Expenses 13,399 13,520
------------ ------------
INCOME BEFORE INCOME TAXES 2,337 2,558
INCOME TAXES --
Income tax benefit (provision) - current 249 (58)
Income tax provision - deferred (533) --
------------ ------------
(284) (58)
NET INCOME $ 2,053 $ 2,500
============ ============
NET INCOME PER SHARE-- BASIC $ .27 $ .34
============ ============
NET INCOME PER SHARE-- DILUTED $ .24 $ .29
============ ============
SHARES USED TO CALCULATE NET INCOME PER SHARE:
Basic 7,512 7,393
============ ============
Diluted 8,425 8,490
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5
<PAGE> 6
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED DECEMBER 31, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Foreign
Additional Currency
Common Paid-In Accumulated Translation
Stock Capital Deficit Adjustment Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, June 30, 1998 $ 74 $ 20,551 ($ 17,734) ($ 137) $ 2,754
Issuance of common stock 1 53 54
Foreign currency translation
adjustment (5) (5)
Net income for the six months ended
December 31, 1998
3,515 3,515
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 $ 75 $ 20,604 ($ 14,219) ($ 142) $ 6,318
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6
<PAGE> 7
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended December 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Collections of principal on receivables $ 2,317 $ 3,002
Interest received 1,030 1,050
Interest paid (1,871) (669)
General and administrative and corporate member
services costs (5,279) (5,222)
Cash collected from operations, including deferred
dues revenue 30,260 28,851
Cash from sales of campground memberships and
lots at the point of sale 1,914 2,085
Expenditures for property operations (20,415) (20,702)
Expenditures for sales and marketing (3,532) (2,169)
Expenditures for insurance premiums (889) (591)
Payment of income taxes (303) (231)
Other, net (262) 50
------------ ------------
Net cash provided by operating activities 2,970 5,454
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and HUD-related expenditures (1,898) (580)
Proceeds from asset sales 2,221 6,115
Issuance of Common Stock 54 19
------------ ------------
Net cash provided by investing activities 377 5,554
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of PIK Notes (34,792) --
Borrowings under Credit Agreement 24,000 --
Net repayments under Credit Agreement (5,012) (10,408)
Repayment of notes and mortgages -- (245)
------------ ------------
Net cash used in financing activities (15,804) (10,653)
------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12,457) 355
CASH AND CASH EQUIVALENTS:
Beginning of period 13,631 1,343
------------ ------------
End of period $ 1,174 $ 1,698
============ ============
</TABLE>
-- continued --
Page 7
<PAGE> 8
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months ended December 31,
-------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
Net income $ 3,515 $ 8,486
------------ ------------
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES --
Depreciation 1,295 1,287
Amortization of interest discount, collection costs and
valuation allowance (191) (245)
Net deferral of sales revenue 568 446
Net deferral of selling expenses (188) (152)
Gain on asset sales (1,105) (3,749)
Deferred income tax provision 1,018 --
(Increase) decrease in restricted cash (262) 58
Decrease in receivables 1,802 2,540
Decrease in other assets 601 776
Decrease in accounts payable (1,032) (182)
Increase in accrued interest 164 1,803
Decrease in other liabilities (3,142) (5,846)
Other, net (73) 232
------------ ------------
Total adjustments (545) (3,032)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,970 $ 5,454
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 8
<PAGE> 9
THOUSAND TRAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(Unaudited)
GENERAL
Thousand Trails, Inc., a Delaware corporation, and its subsidiaries
(collectively, the "Company") own and operate a system of 53 membership-based
campgrounds located in 17 states and British Columbia, Canada. In addition, the
Company provides a reciprocal use program for members of approximately 325
recreational facilities and manages 130 public campgrounds for the US Forest
Service. The campground business represents the most significant portion of the
Company's business comprising 99% of the Company's operating revenues in fiscal
1998. Operating revenues consist primarily of membership dues received from
campground members, fee revenue from members of the reciprocal use program,
management fees from the campground management operations, and guest fees and
revenues received from the campground and other operations.
The accompanying consolidated financial statements include the accounts of
Thousand Trails, Inc. and the following wholly owned subsidiaries: Coast
Financial Services, Inc. ("Coast"), National American Corporation and its
subsidiaries ("NACO"), Resort Parks International, Inc. ("RPI"), Thousand Trails
(Canada), Inc. and UST Wilderness Management Corporation ("Wilderness Mgmt.").
The accompanying consolidated financial statements of the Company have not been
examined by independent accountants, but in the opinion of management, the
unaudited interim financial statements furnished herein reflect all adjustments,
which are necessary for a fair presentation of the results for the interim
periods. All such adjustments are of a normal recurring nature, except for the
items described in the footnotes to the consolidated financial statements.
This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended June 30, 1998, filed
with the Securities and Exchange Commission (the "SEC") on September 25, 1998,
as amended by a Form 10-K/A filed with the SEC on October 7, 1998.
NOTE 1 -- BASIS OF FINANCIAL STATEMENT PRESENTATION
BASIS OF FINANCIAL STATEMENT PRESENTATION
The Company emerged from proceedings under Chapter 11 of the Bankruptcy Code on
December 31, 1991, pursuant to a confirmed plan of reorganization. Due to the
Company's emergence from bankruptcy, the Company adopted fresh start reporting,
under which a new reporting entity was created and assets and liabilities were
restated to reflect their reorganization value which approximated fair value at
the date of reorganization.
All significant intercompany transactions and balances have been eliminated in
the accompanying consolidated financial statements as of and for the six and
three month periods ended December 31, 1998 and 1997, and in the consolidated
balance sheet as of June 30, 1998.
Page 9
<PAGE> 10
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
130, "Reporting Comprehensive Income," on July 1, 1998. SFAS No. 130 requires
the Company to classify items of other comprehensive income by their nature in
its financial statements and to display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of its consolidated balance sheet. Comprehensive
income includes all changes in equity during a period except those resulting
from investments by owners and distributions to owners, and includes certain
items that were historically reported directly through equity as well as net
income reported on the income statement. Currently, the Company's only item of
other comprehensive income is its foreign currency translation adjustment. The
following table provides statements of comprehensive income for the six and
three months ended December 31, 1998 and 1997, as if the statement had been
implemented in the six and three months ended December 31, 1997 (dollars in
thousands):
<TABLE>
<CAPTION>
For the six months ended For the three months ended
December 31, December 31,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Income $ 3,515 $ 8,486 $ 2,053 $ 2,500
Foreign Currency Translation
Adjustment (5) (7) (2) (3)
------------ ------------ ------------ ------------
Comprehensive Income $ 3,510 $ 8,479 $ 2,051 $ 2,497
============ ============ ============ ============
</TABLE>
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which establishes standards for the way
that public companies report information about operating segments and related
disclosures in annual and interim financial statements. In February 1998, the
FASB issued SFAS No. 132, "Employers' Disclosures About Pensions and Other
Postretirement Benefits," which revises employers' disclosures about pension and
other postretirement benefit plans. These statements are effective for the
Company commencing at the end of fiscal 1999. The Company does not anticipate a
material impact from the adoption of these statements.
Net Income Per Share
- --------------------
The Company adopted SFAS No. 128 during the second quarter of fiscal 1998. SFAS
No. 128 replaced the calculation of primary and fully diluted net income per
share with basic and diluted net income per share. Basic net income per share is
computed by dividing net income by the weighted average number of common shares
outstanding, as determined by the treasury stock method. Diluted net income per
share includes the dilutive effects of common stock equivalents and is computed
by dividing net income by the weighted average number of common and common
equivalent shares outstanding, as determined by the treasury stock method.
Page 10
<PAGE> 11
The tables below set forth the information necessary to compute basic and
diluted net income per share for the six and three months ended December 31,
1998 and 1997, including a summary of the components of the numerators and
denominators of the basic and diluted net income per share computations for the
periods presented (dollars and shares in thousands, except per share amounts):
<TABLE>
<CAPTION>
For the six months ended For the three months ended
December 31, December 31,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(Unaudited) Unaudited)
<S> <C> <C> <C> <C>
Net Income $ 3,515 $ 8,486 $ 2,053 $ 2,500
============ ============ ============ ============
Weighted Average Number of
Shares - Basic 7,485 7,390 7,512 7,393
Dilutive Options 938 986 907 1,033
Dilutive Warrants 6 34 6 64
------------ ------------ ------------ ------------
Weighted Average Number of
Shares - Diluted 8,429 8,410 8,425 8,490
============ ============ ============ ============
Net Income Per Share - Basic $ .47 $ 1.15 $ .27 $ .34
============ ============ ============ ============
Net Income Per Share - Diluted $ .42 $ 1.01 $ .24 $ .29
============ ============ ============ ============
</TABLE>
Since inception, the Company has not paid any dividends. The Credit Agreement
("Credit Agreement") between the Company and Foothill Capital Corporation
("Foothill") prohibits the payment of any cash dividends without the consent of
Foothill during the term of the Credit Agreement.
NOTE 2 -- LONG TERM DEBT
PIK NOTES
The Company issued $40.2 million principal amount of 12% Senior Subordinated
Pay-In-Kind Notes Due 2003 ("PIK Notes") in a restructuring of its debt in July
1996. On January 15, 1997, the Company issued an additional $2.4 million
principal amount of PIK Notes in lieu of cash interest. On June 25, 1997, the
Company repurchased $13.4 million principal amount of PIK Notes at a cost of
$12.6 million, including accrued interest. On July 15, 1997, January 15, 1998,
and July 15, 1998, the Company issued an additional $1.8 million, $1.9 million,
and $2.0 million principal amount of PIK Notes, respectively, in lieu of cash
interest.
On December 15, 1998, the Company completed the redemption of all $34.8 million
principal amount of PIK Notes outstanding, which included the payment of $1.7
million of accrued interest. The Company funded this redemption with $12.5
million of its existing cash and $24.0 million of new borrowings under its
Credit Agreement with Foothill (see below).
Page 11
<PAGE> 12
Pursuant to the terms of the Indenture for the PIK Notes, the holders of the PIK
Notes received from the Company on December 15, 1998 the sum of $1,000, plus
accrued interest from July 15, 1998 to December 15, 1998 of $50.00 for each
$1,000 principal amount of PIK Notes, for a total price of $1,050.00 for each
$1,000 principal amount of PIK Notes (the "Redemption Price"). On December 15,
1998, interest ceased to accrue and the holders have no other rights as holders
other than the right to receive the Redemption Price, without further interest,
upon surrender of their certificates representing the PIK Notes.
CREDIT AGREEMENT WITH FOOTHILL
As of June 30, 1998, there were no outstanding borrowings under the Credit
Agreement with Foothill. On October 21, 1998, the Company entered into an
amendment to the Credit Agreement that gave the Company the flexibility to
borrow up to $5.0 million for working capital purposes and up to an additional
$30.0 million to use to redeem the PIK Notes and for the possible acquisition of
members through the purchase of other membership campground operations. Under
the amended Credit Agreement, the first $15.0 million of borrowings bear
interest at prime plus .25% per annum, borrowings over $15.0 million and up to
$25.0 million bear interest at prime plus .50% per annum, and borrowings over
$25.0 million bear interest at prime plus 1.5% per annum.
On December 15, 1998, the Company borrowed $24.0 million under the amended
Credit Agreement to partially fund the redemption of the PIK Notes as discussed
above. As a result of subsequent repayments, on December 31, 1998, the Company
had $19.0 million of outstanding borrowings under the amended Credit Agreement,
and it had the ability to borrow an additional $5.0 million for working capital
purposes and an additional $10.5 million to use for the possible acquisition of
members through the purchase of other membership campground operations. All
borrowings under the amended Credit Agreement will mature on January 17, 2003.
Under the terms of the amended Credit Agreement, the Company must use all
collections of principal and interest on the contracts receivable and all
proceeds from asset sales to reduce borrowings under the Credit Agreement. In
addition, the Company must make specified principal reductions on these
borrowings over time based on a monthly calculation of eligible contracts
receivable and an amortization schedule set forth in the Credit Agreement. The
maximum amount of the available borrowing capacity declines as these principal
reductions are made.
NOTE 3 -- NONRECURRING INCOME AND CONTINGENCIES
NONRECURRING INCOME
In December 1997, the Company received a refund of $495,000 for deposits made in
previous years to cover workers' compensation claims in excess of those covered
by the standard premium paid by the Company. These deposits were expensed in the
years the deposits were made because the Company anticipated that the deposits
would be used to cover workers' compensation claims. This refund is presented as
nonrecurring income in the accompanying consolidated statements of operations
for the six and three month periods ended December 31, 1997.
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CONTINGENCIES
General Liability Insurance
- ---------------------------
Commencing July 1, 1998, the Company obtained insurance covering general
liability losses up to an annual limit of $27.0 million, with no self-insured
deductible. Prior to this date, the Company's insurance covered general
liability losses up to an annual limit of $26.8 million, but required the
Company to pay the first $250,000 per occurrence, with an annual aggregate
exposure of $2.0 million. The Company has provided a liability for estimated
known and unknown claims related to uninsured general liability risks based on
actuarial estimates. At December 31, 1998 and June 30, 1998, the Company's
recorded liability for estimated losses related to uninsured general liability
claims totaled $1.2 million, which is included in other liabilities in the
accompanying consolidated balance sheets.
Declining Membership Base
- -------------------------
The Company derives a significant portion of its ongoing operating revenue from
its campground members (92% in fiscal 1998). The Company's membership base has
declined significantly over the past five fiscal years, and net of new sales,
the membership base is presently declining at the rate of approximately 6% per
year. The Company attributes this continuing attrition principally to its aging
membership base, of whom approximately 50% are senior citizens. In addition, the
Company estimates that the memberships sold in recent fiscal years will have an
expected life that is significantly shorter than the expected life of the
memberships previously sold by the Company. To stop the continuing decline in
the Company's membership base, the Company must significantly increase its
campground membership sales over current levels or acquire members in another
manner, such as through the purchase of other membership campground operations.
There is no assurance that the Company will be successful in these efforts.
Environmental Issues
- --------------------
Certain environmental issues may exist at some of the Company's campgrounds
concerning underground storage tanks, sewage treatment plants and septic
systems, and waste disposal. Management has reviewed these issues and believes
that they will not have a material adverse impact on the Company's operations or
financial position.
Litigation
- ----------
The Company is involved in certain claims and litigation arising in the normal
course of business. Management believes that the eventual outcome of these
claims and litigation will not have a material adverse impact on the Company's
operations or financial position.
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of non-cash investing and financing activities required
by SFAS No. 95, "Statement of Cash Flows," are presented below for the six
months ended December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
Six months ended December 31,
-----------------------------------
1998 1997
--------------- ---------------
<S> <C> <C>
Non-cash payment of PIK Note interest (see Note 2)
PIK Notes issued in lieu of cash interest payment $ 1,969 $ 1,752
</TABLE>
Page 13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's Annual Report on Form 10-K for the year ended June 30,
1998, filed with the SEC on September 25, 1998, as amended by a Form 10-K/A
filed with the SEC on October 7, 1998.
All capitalized terms used herein have the same meaning as those defined in Item
1 -- Financial Statements.
In this Management's Discussion and Analysis of Financial Condition and Results
of Operations, and elsewhere in this report, the Company makes certain
statements as to its expected financial condition, results of operations, cash
flows, and business strategies, plans, and conditions for periods after December
31, 1998. All of these statements are forward-looking statements made pursuant
to the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended. These statements are not historical and involve risks and
uncertainties. The Company's actual financial condition, results of operations,
cash flows, and business strategies, plans, and conditions for future periods
may differ materially due to several factors, including but not limited to the
Company's ability to control costs, campground market conditions and other
factors affecting the Company's sales and marketing plan, the actual rate of
decline in the campground membership base, the actual use of the campgrounds by
members and guests, the effects on members and guests of the Company's efforts
to downsize its business, the Company's success in collecting its contracts
receivable and selling assets, and the other factors affecting the Company's
operations described in this report.
LIQUIDITY AND CAPITAL RESOURCES
CURRENT BUSINESS STRATEGY. The Company's current business strategy is to improve
its campground operations and stabilize its campground membership base through
increased sales and marketing efforts or the possible acquisition of members
through the purchase of other membership campground operations. The Company
believes there is a viable market for campground memberships and that it has a
significant opportunity to compete for campers interested in higher quality
facilities and a higher level of service than is typically available at public
campgrounds or competing private campgrounds. The Company also believes it may
be possible to acquire members through the purchase of other membership
campground operations, many of whom are experiencing financial difficulties.
The Company's membership base has been declining. In response to this decline,
the Company has downsized its business by closing and disposing of campgrounds
and decreasing campground operating costs and general and administrative
expenses. The Company intends to continue to keep the size of its campground
system in an appropriate relation to the size of its membership base. In this
regard, if the membership base continues to decline, the Company may close and
dispose of additional campgrounds and it will seek to decrease other expenses.
At the same time, the Company intends to expand its sales and marketing efforts
with a view to stopping the membership decline. The Company also intends to
explore the possible acquisition of members through the purchase of other
membership campground organizations. The Company believes that the ultimate size
of its campground system and the amounts realized
Page 14
<PAGE> 15
from future asset sales will depend principally upon the degree to which the
Company can successfully implement this strategy.
REDEMPTION OF PIK NOTES. On December 15, 1998, the Company completed the
redemption of all $34.8 million principal amount of PIK Notes outstanding, which
included the payment of $1.7 million of accrued interest. The Company funded
this redemption with $12.5 million of its existing cash and $24.0 million of new
borrowings under its Credit Agreement with Foothill.
Pursuant to the terms of the Indenture for the PIK Notes, the holders of the PIK
Notes received from the Company on December 15, 1998 the sum of $1,000, plus
accrued interest from July 15, 1998 to December 15, 1998 of $50.00 for each
$1,000 principal amount of PIK Notes, for a total price of $1,050.00 for each
$1,000 principal amount of PIK Notes (the "Redemption Price"). On December 15,
1998, interest ceased to accrue and the holders have no other rights as holders
other than the right to receive the Redemption Price, without further interest,
upon surrender of their certificates representing the PIK Notes.
CASH. On December 31, 1998, the Company had $1.2 million of cash and cash
equivalents, a decrease of $12.5 million from June 30, 1998. During the six
months ended December 31, 1998, the Company's operating activities produced $3.0
million of cash, its investing activities produced $377,000 of cash, and its
financing activities used $15.8 million of cash, which included the $12.5
million of cash used to partially fund the redemption of the PIK Notes. The
Company's investing activities consisted principally of $2.2 million from the
sale of assets less $1.9 million of capital and HUD-related expenditures.
With respect to the Company's operating activities, for the six months ended
December 31, 1998, the principal sources of cash were $30.3 million in dues
collections and other campground and resort revenues, $3.3 million in principal
and interest collections on contracts receivable and invested cash, and $1.9
million in cash collected from sales of campground memberships and lots at the
point of sale. Principal uses of operating cash for the six months ended
December 31, 1998, were $20.4 million in operating expenses, $5.3 million in
administrative expenses (including general and administrative expenses and
corporate member services costs), and $3.5 million in sales and marketing
expenditures.
As of June 30, 1998, there were no outstanding borrowings under the Credit
Agreement with Foothill. On October 21, 1998, the Company entered into an
amendment to the Credit Agreement that gave the Company the flexibility to
borrow up to $5.0 million for working capital purposes and up to an additional
$30.0 million to use to redeem the PIK Notes and for the possible acquisition of
members through the purchase of other membership campground operations. Under
the amended Credit Agreement, the first $15.0 million of borrowings bear
interest at prime plus .25% per annum, borrowings over $15.0 million and up to
$25.0 million bear interest at prime plus .50% per annum, and borrowings over
$25.0 million bear interest at prime plus 1.5% per annum.
On December 15, 1998, the Company borrowed $24.0 million under the amended
Credit Agreement to partially fund the redemption of the PIK Notes as discussed
above. The Company repaid $5.0 million of such borrowings by December 31, 1998.
All borrowings under the amended Credit Agreement will mature on January 17,
2003.
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<PAGE> 16
Under the terms of the amended Credit Agreement, the Company must use all
collections of principal and interest on the contracts receivable and all
proceeds from asset sales to reduce borrowings under the Credit Agreement. In
addition, the Company must make specified principal reductions on these
borrowings over time based on a monthly calculation of eligible contracts
receivable and an amortization schedule set forth in the Credit Agreement. The
maximum amount of the revolving loan declines as these principal reductions are
made.
As of the date of this report, the Company had $14.8 million of outstanding
borrowings under the amended Credit Agreement, and it had the ability to borrow
an additional $5.0 million for working capital purposes and an additional $14.3
million to use for the possible acquisition of members through the purchase of
other membership campground operations. Based upon its current business plan,
the Company believes that future cash flows provided from operations, asset
sales, and borrowings available under the amended Credit Agreement will be
adequate for the Company's operating and other cash requirements during the
remaining term of the amended Credit Agreement. While any borrowings are
outstanding under the amended Credit Agreement, all cash held by the Company and
its wholly owned subsidiaries will generally be deposited in accounts that are
controlled by and pledged to Foothill.
MATERIAL CHANGES IN FINANCIAL CONDITION
Total assets decreased by $16.9 million during the six months ended December 31,
1998. Cash decreased by $12.5 million as discussed above. Contracts receivable
decreased by $1.7 million due primarily to $2.3 million in cash collections
partially offset by new financed sales and amortization of the allowances for
interest discount, collection costs, and valuation discount. Other current
assets decreased by $261,000 due primarily to lower dues receivable and
inventory due to the seasonal nature of the business. Buildings and equipment
decreased by $605,000 due primarily to depreciation, partially offset by capital
improvements made at certain campgrounds. Land held for sale decreased by $1.0
million due to the sale of acreage not related to the campground operations.
Other assets decreased by $291,000 due primarily to the release of certain prior
year workers' compensation insurance deposits that were applied to current year
insurance payments.
Total liabilities decreased by $20.4 million during the six months ended
December 31, 1998. Accounts payable decreased by $1.0 million due to the timing
of payments and the seasonality of the business. Accrued interest decreased by
$1.8 million due to the payment of all accrued interest on the PIK Notes on
December 15, 1998 in connection with the redemption of such notes. Accrued
construction costs decreased by $1.0 million as a result of HUD-related
improvements made at one resort during the period. Deferred revenue decreased by
$1.6 million due primarily to the recognition of $2.0 million of dues revenue in
excess of dues collected during the period, partially offset by a $568,000 net
increase in deferred sales revenue. In addition, the Company's outstanding debt
decreased by $14.0 million during the period. This decrease was due to the
redemption of the PIK Notes and the subsequent repayment of $5.0 million of the
new borrowings the Company made under the Credit Agreement to partially fund the
redemption of the PIK Notes.
MARKET RISK AND INTEREST RATE SENSITIVITY. As noted above, on December 15, 1998,
the Company completed the redemption of all $34.8 million principal amount of
PIK Notes outstanding. The Company funded this redemption with $12.5 million of
its existing cash and $24.0 million of new borrowings under the amended Credit
Agreement with Foothill. The
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<PAGE> 17
Company used substantially all of its invested cash to fund the redemption,
which eliminated any interest rate market risk with respect to cash balances.
However, the borrowings under the amended Credit Agreement accrue interest at
rates that fluctuate with changes in the prime rate and, thus, are subject to
interest rate market risk. In management's opinion, a hypothetical ten percent
change in market interest rates over the next year would not have a material
effect on the fair value of the Company's contracts receivable, long term debt,
or cash balances.
RESULTS OF OPERATIONS
The following discussion and analysis are based on the historical results of
operations of the Company for the six and three months ended December 31, 1998
and 1997. The financial information set forth below should be read in
conjunction with the Company's consolidated financial statements included in
Item 1.
SIX MONTHS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. The Company reported net income of $3.5 million or $.42 per diluted
share on revenues of $36.2 million for the six months ended December 31, 1998.
This compares with net income of $8.5 million or $1.01 per diluted share on
revenues of $39.3 million for the same period last year. Excluding gains on
asset sales and nonrecurring income, the Company's revenues remained
approximately the same between periods. Gains on asset sales were $1.1 million
in the current period, compared with $3.7 million in the same period last year.
In addition, the prior period had $495,000 of nonrecurring income. The Company
also incurred higher expenses in the current period, which resulted in the
decline in net income between periods.
The table on the following page shows separately the results of the campground
operations, Wilderness Mgmt., Resort Parks International, and resort operations,
without any allocation of corporate expenses, as well as corporate expenses and
other revenues and expenses in the aggregate, for the six months ended December
31, 1998 and 1997.
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<PAGE> 18
THOUSAND TRAILS, INC. AND SUBSIDIARIES
SUMMARY OF OPERATING RESULTS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CAMPGROUND OPERATIONS
Membership dues $ 18,542 $ 18,996
Campground revenues 8,666 8,064
Cost of campground revenues (3,901) (3,391)
Operating expenses (15,404) (15,598)
------------ ------------
Contribution from campground operations 7,903 8,071
------------ ------------
SALES
Sales revenues 1,851 1,479
Selling expenses (1,738) (1,259)
Marketing expenses (1,044) (626)
------------ ------------
Loss on sales (931) (406)
------------ ------------
WILDERNESS MGMT
Revenues 1,694 895
Expenses (1,439) (713)
------------ ------------
Contribution from Wilderness Mgmt 255 182
------------ ------------
RESORT PARKS INTERNATIONAL
Revenues 1,690 1,702
Expenses (1,012) (928)
------------ ------------
Contribution from RPI 678 774
------------ ------------
RESORT OPERATIONS
Revenues 81 958
Expenses (127) (752)
------------ ------------
Contribution (loss) from resort operations (46) 206
------------ ------------
7,859 8,827
------------ ------------
Other income 1,444 1,825
Corporate member services (687) (702)
General and administrative expenses (4,263) (4,151)
------------ ------------
OPERATING INCOME BEFORE INTEREST INCOME AND
EXPENSE, GAIN ON ASSET SALES, NONRECURRING
INCOME, AND TAXES 4,353 5,799
------------ ------------
Interest income 1,123 1,177
Interest expense (2,037) (2,502)
Gain on asset sales 1,106 3,749
Nonrecurring income -- 495
------------ ------------
OPERATING INCOME BEFORE TAXES $ 4,545 $ 8,718
============ ============
</TABLE>
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<PAGE> 19
OPERATING INCOME. During the six months ended December 31, 1998, the Company's
contribution from operations was $4.4 million, a decrease of $1.4 million from
the $5.8 million achieved in the same period last year. The decrease was due
primarily to a higher loss from sales operations, a lower contribution from the
Company's reciprocal use and resort businesses, and a decrease in other income.
For this purpose, the contribution from operations is defined as operating
income before interest income and expense, gain on asset sales, nonrecurring
income and taxes. See the table on the previous page for the elements of the
contribution from operations and the Company's operating income before taxes for
the historical periods presented.
CAMPGROUND OPERATIONS. The Company's operations are highly seasonal. The Company
receives the majority of the dues revenue from its members during the winter,
which are recognized as income ratably during the year. However, the Company
incurs a higher level of operating expenses during the summer. In addition, a
majority of the Company's sales and marketing efforts occur during the summer.
Campground membership dues revenue was $18.5 million for the six months ended
December 31, 1998, compared with $19.0 million for the same period last year.
The decline in dues revenue was due primarily to the net loss of campground
members during the year, partially offset by the effect of the annual dues
increase.
Campground revenues were $8.7 million for the six months ended December 31,
1998, compared with $8.1 million for the same period last year. The related
expenses were $3.9 million for the six months ended December 31, 1998, compared
with $3.4 million for the same period last year. The increase in campground
revenues and related expenses in the current period was due primarily to a
greater emphasis on the ancillary revenue programs at the campgrounds.
Campground operating expenses were $15.4 million for the six months ended
December 31, 1998, compared with $15.6 million for the same period last year.
The decrease in expenses in the current period reflects the effects of the
closure and sale of two campgrounds in the second quarter of fiscal 1998, as
well as the Company's continuing efforts to reduce operating expenses.
The Company intends to continue to keep the size of its campground system in an
appropriate relation to the size of its membership base. In this regard, if the
membership base continues to decline, the Company may close and dispose of
additional campgrounds and it will seek to decrease other expenses. Although the
Company believes that this strategy should result in lower future operating
expenses, no assurance can be given that this strategy will not reduce revenues
by an amount in excess of the expense reductions.
The Company recognizes revenue from the sale of campground memberships that do
not convey a deeded interest in real estate on a straight-line basis over the
expected life of the memberships sold. For the six months ended December 31,
1998 and 1997, the Company recognized campground membership sales revenues of
$1.9 million and $1.5 million, respectively. These amounts include revenues of
$1.4 million and $1.2 million, respectively, that were deferred in prior
periods. Moreover, during these same periods, the Company deferred revenues of
$2.0 million and $1.6 million, respectively, which are recognized in subsequent
periods. Sales revenues increased in the current period due to the sale of a
greater number of memberships at
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<PAGE> 20
slightly higher average sales prices, partially offset by a higher net deferral
of sales revenues in the current period.
Selling expenses directly related to the sale of campground memberships are
deferred and recognized as expenses on a straight-line basis over the expected
life of the memberships sold. All other selling and marketing costs are
recognized as expenses in the period incurred. For the six months ended December
31, 1998 and 1997, the Company recognized selling expenses of $1.7 million and
$1.3 million, respectively. These amounts include expenses of $340,000 and
$265,000, respectively, that were deferred in prior periods. Moreover, for these
same periods, the Company deferred expenses of $529,000 and $417,000,
respectively, which are recognized in subsequent periods.
Selling and marketing expenses exceeded sales revenues by $931,000 and $406,000
for the six months ended December 31, 1998 and 1997, respectively. These
expenses exceeded sales revenues because of increased marketing activity and the
low volume of sales, which did not cover fixed costs. In addition, the Company
deferred more sales revenues than selling expenses during the periods presented.
The Company's selling and marketing efforts require significant expenditures,
the majority of which must be expensed in the current period, while the related
sales revenues are generally deferred and recognized on a straight-line basis
over the expected life of the memberships sold. As a consequence, the Company
expects that its selling and marketing expenses will continue to exceed its
campground membership sales revenue. This disparity will increase if the Company
is successful in growing its membership sales.
The Company's selling and marketing efforts have not produced the level of sales
needed to stop the continuing decline in the Company's membership base. If the
Company is not able to significantly increase its campground membership sales
over current levels, the membership base will continue to decline, which will
further decrease the Company's revenues. Further decreases in revenues that are
not offset by sufficient expense reductions could have a material adverse impact
on the Company's business and results of operations.
CAMPGROUND MANAGEMENT. Wilderness Mgmt. manages 130 public campgrounds for the
US Forest Service. For the six months ended December 31, 1998, these operations
produced a net contribution of $255,000 on revenues of $1.7 million, compared
with a net contribution of $182,000 on revenues of $895,000 for the same period
last year. The increases in net contribution and revenues between periods was
due primarily to new contracts entered into in the spring of 1998, which
significantly increased the number of campgrounds managed. The revenues and
expenses related to the campground management operations are included in other
campground/resort revenue and campground/resort operating expenses in the
consolidated statement of operations.
RESORT PARKS INTERNATIONAL. RPI charges its members a fee for a membership that
entitles them to use any of the approximately 325 campgrounds participating in
RPI's reciprocal use system, subject to certain limitations. For the six months
ended December 31, 1998, RPI's operations produced a net contribution of
$678,000 on revenues of $1.7 million, compared with a contribution of $774,000
on revenues of $1.7 million for the same period last year. The decrease in the
net contribution between periods was due primarily to higher costs associated
with directories provided to new members in the first quarter of fiscal 1999.
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<PAGE> 21
RESORT OPERATIONS. The Company's resort operations presently consist solely of
the sale of residential lots and other miscellaneous real estate at three
resorts. For the six months ended December 31, 1998, the resort operations
produced a loss of $46,000 on revenues of $81,000, compared with a net
contribution of $206,000 on revenues of $958,000 for the same period last year.
The prior year results include a bulk sale of lots that did not require the
payment of commissions, and revenues and expenses related to selling property
and managing the amenities at one resort. The amenities previously managed by
the Company were transferred to the resort's property owners' association during
fiscal 1998. The Company does not expect a positive contribution from the resort
operations in the future as its continues its efforts to sell the remaining
assets it owns at the resorts.
INTEREST INCOME AND EXPENSE. Interest income was $1.1 million for the six months
ended December 31, 1998, compared with $1.2 for the same period last year.
During these periods, interest income included amortization of the allowances
for interest and valuation discounts related to the contracts receivable of
$109,000 and $134,000, respectively. There was only a slight decline in interest
income between periods because, in the current period, the decrease in interest
income from the Company's diminishing portfolio of contracts receivable was
substantially offset by an increase in interest income from invested cash. The
interest earned on the Company's portfolio of contracts receivable will continue
to decrease in the future as the portfolio declines. In addition, the interest
earned on invested cash will be significantly lower in future periods as the
Company used substantially all of its existing cash in the current quarter to
partially fund the redemption of the PIK Notes.
Interest expense was $2.0 million for the six months ended December 31, 1998,
compared with $2.5 million for the same period last year. The $465,000 decrease
in interest expense between periods was due primarily to repayments of
outstanding debt during the periods. In the third quarter of fiscal 1998, the
Company repaid all then outstanding borrowings under the Credit Agreement and
all remaining mortgage notes. In addition, on December 15, 1998, the Company
completed the redemption of all $34.8 million principal amount of PIK Notes
outstanding. The Company funded this redemption with $12.5 million of its
existing cash and $24.0 million of new borrowings under the amended Credit
Agreement. The redemption of the PIK Notes lowered the Company's outstanding
debt and is expected to lower its interest expense in future periods. However,
in contrast to the interest on the PIK Notes that could be paid in the form of
additional PIK Notes, the interest on the borrowings under the amended Credit
Agreement must be paid in cash on a monthly basis.
GAIN ON ASSET SALES. The Company recognized a gain on the sale of assets of $1.1
million for the six months ended December 31, 1998, compared with $3.7 million
for the same period last year. The decrease in the current period was due to the
timing of asset sales. The gain in the current period resulted primarily from
the sale of acreage not related to the campground operations. Over the next
several years, the Company intends to dispose of the remaining land that it
holds for sale and any campgrounds that are closed as the Company downsizes. The
sale of campgrounds requires addressing the rights of members associated with
such campgrounds. The impact of these rights is uncertain and could adversely
affect the availability or timing of sale opportunities or the ability of the
Company to realize recoveries from asset sales. In addition, although the
Company has successfully sold assets during the past several years, no assurance
exists that the Company will be able to locate a buyer for any of the remaining
assets or that sales on acceptable terms can be made.
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<PAGE> 22
OTHER INCOME. Other income generally consists of transfer fees received when
existing memberships are transferred in the secondary market without assistance
from the Company, settlements received on defaulted contracts and delinquent
dues, and subscription fees received from members who subscribe to the Company's
member magazine. Other income was $1.4 million for the six months ended December
31, 1998, compared with $1.8 million for the same period last year. The decrease
between periods was due, in part, to lower settlements received on defaulted
contracts and delinquent dues in the current period. The Company also had
$495,000 of nonrecurring income in the prior period resulting from a refund of
deposits made in previous years to cover workers' compensation claims in excess
of those covered by the standard premium paid by the Company. These deposits
were expensed in the years the deposits were made because the Company
anticipated that the deposits would be used to cover workers' compensation
claims.
ADMINISTRATIVE EXPENSES. Administrative expenses, including corporate member
service costs and general and administrative expenses, were approximately $4.9
million for the six months ended December 31, 1998 and 1997.
INCOME TAXES. The Company's current provision for income taxes was $12,000 for
the six months ended December 31, 1998, compared with $232,000 for the same
period last year. The current provisions for these periods include amounts for
federal alternative minimum taxes and state income taxes payable in the various
states where the Company conducts its operations. With the exception of federal
alternative minimum taxes, the Company does not have federal income taxes
payable on a consolidated basis due to its net operating tax loss carryforwards,
which were estimated to total $26.9 million at June 30, 1998.
The Company recorded a deferred tax provision of $1.0 million for the six months
ended December 31, 1998. At June 30, 1998, the Company reduced the valuation
allowance related to its net deferred tax assets by $10.0 million because
management determined it was more likely than not that the Company would realize
the benefits of a significant portion of the net deferred tax assets. The net
deferred tax assets had previously been fully reserved. The Company will
continue to record a deferred tax provision in future periods as the related
deferred tax assets are realized. The deferred tax provision will not affect
current or future income tax payments, but will result in higher tax provisions
in the future in the periods the related deferred tax assets are realized.
THREE MONTHS ENDED DECEMBER 31, 1998 AND 1997
NET INCOME. The Company reported net income of $2.1 million or $.24 per diluted
share on revenues of $15.7 million for the three months ended December 31, 1998.
This compares with net income of $2.5 million or $.29 per diluted share on
revenues of $16.1 million for the same period last year. Although the Company
reduced operating expenses in the current period, its revenues declined by a
greater amount, which resulted in the decline in net income between periods.
The table on the following page shows separately the results of the campground
operations, Wilderness Mgmt., Resort Parks International, and resort operations,
without any allocation of corporate expenses, as well as corporate expenses and
other revenues and expenses in the aggregate, for the three months ended
December 31, 1998 and 1997.
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THOUSAND TRAILS, INC. AND SUBSIDIARIES
SUMMARY OF OPERATING RESULTS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
CAMPGROUND OPERATIONS
Membership dues $ 9,202 9,299
Campground revenues 2,770 2,674
Cost of campground revenues (1,502) (1,233)
Operating expenses (6,510) (6,926)
------------ ------------
Contribution from campground operations 3,960 3,814
------------ ------------
SALES
Sales revenues 911 788
Selling expenses (779) (588)
Marketing expenses (462) (348)
------------ ------------
Loss on sales (330) (148)
------------ ------------
WILDERNESS MGMT
Revenues 41 47
Expenses (221) (69)
------------ ------------
Loss from Wilderness Mgmt (180) (22)
------------ ------------
RESORT PARKS INTERNATIONAL
Revenues 721 820
Expenses (480) (496)
------------ ------------
Contribution from RPI 241 324
------------ ------------
RESORT OPERATIONS
Revenues 25 426
Expenses (55) (302)
------------ ------------
Contribution (loss) from resort operations (30) 124
------------ ------------
3,661 4,092
------------ ------------
Other income 548 670
Corporate member services (306) (318)
General and administrative expenses (2,125) (2,103)
------------ ------------
OPERATING INCOME BEFORE INTEREST INCOME AND
EXPENSE, GAIN ON ASSET SALES, NONRECURRING
INCOME AND TAXES 1,778 2,341
------------ ------------
Interest income 500 530
Interest expense (959) (1,137)
Gain on asset sales 1,018 329
Nonrecurring income -- 495
------------ ------------
OPERATING INCOME BEFORE TAXES $ 2,337 $ 2,558
============ ============
</TABLE>
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<PAGE> 24
OPERATING INCOME. During the three months ended December 31, 1998, the Company's
contribution from operations was $1.8 million, a decrease of $563,000 from the
$2.3 million achieved in the same period last year. The decrease was due
primarily to a higher loss from sales operations, a lower contribution from the
Company's reciprocal use and resort businesses, and a decrease in other income.
For this purpose, the contribution from operations is defined as operating
income before interest income and expense, gain on asset sales, nonrecurring
income and taxes. See the table on the previous page for the elements of the
contribution from operations and the Company's operating income before taxes for
the historical periods presented.
CAMPGROUND OPERATIONS. Campground membership dues revenue was $9.2 million for
the three months ended December 31, 1998, compared with $9.3 million for the
same period last year. The slight decline in dues revenue was due primarily to
the net loss of campground members during the year, partially offset by the
effect of the annual dues increase.
Campground revenues were $2.8 million for the three months ended December 31,
1998, compared with $2.7 million for the same period last year. The related
expenses were $1.5 million for the three months ended December 31, 1998,
compared with $1.2 million for the same period last year. The increase in
campground revenues and related expenses in the current period was due primarily
to a greater emphasis on the ancillary revenue programs at the campgrounds.
Campground operating expenses were $6.5 million for the three months ended
December 31, 1998, compared with $6.9 million for the same period last year. The
decrease in expenses in the current period reflects the effects of the closure
and sale of two campgrounds in the second quarter of fiscal 1998, as well as the
Company's continuing efforts to reduce operating expenses.
For the three months ended December 31, 1998 and 1997, the Company recognized
campground membership sales revenues of $911,000 and $788,000, respectively.
These amounts include revenues of $748,000 and $610,000, respectively, that were
deferred in prior periods. Moreover, during these same periods, the Company
deferred revenues of $664,000 and $808,000, respectively, which are recognized
in subsequent periods. Sales revenues increased in the current period due
primarily to the effect of the deferral accounting. Sales revenue included in
the current period that had been deferred in earlier periods exceeded the sales
revenue that was deferred in the current period. In contrast, the sales revenue
that was deferred in the prior period exceeded the sales revenue included in
such period that had been deferred in earlier periods. Excluding the effect of
the deferral accounting, sale revenues declined slightly in the current period
due primarily to the sale of fewer membership upgrades.
For the three months ended December 31, 1998 and 1997, the Company recognized
selling expenses of $779,000 and $588,000, respectively. These amounts include
expenses of $164,000 and $139,000, respectively, that were deferred in prior
periods. Moreover, for these same periods, the Company deferred expenses of
$343,000 and $207,000, respectively, which are recognized in subsequent periods.
Selling and marketing expenses exceeded sales revenues by $330,000 and $148,000
for the three months ended December 31, 1998 and 1997, respectively. These
expenses exceeded sales
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<PAGE> 25
revenues because of increased marketing activity and the low volume of sales,
which did not cover fixed costs.
CAMPGROUND MANAGEMENT. For the three months ended December 31, 1998, the
operations of Wilderness Mgmt. produced a loss of $180,000 on revenues of
$41,000, compared with a loss of $22,000 on revenues of $47,000 for the same
period last year. The loss increased in the current period because of higher
expenses resulting from the management of a greater number of campgrounds in the
current period and a requirement to keep such campgrounds open for a specific
period of time regardless of usage. The campground management operations
generally incur a loss during the second fiscal quarter due to fixed expenses
and the seasonal closure of the campgrounds. The revenues and expenses related
to these operations are included in other campground/resort revenue and
campground/resort operating expenses in the consolidated statement of
operations.
RESORT PARKS INTERNATIONAL. For the three months ended December 31, 1998, RPI's
operations produced a net contribution of $241,000 on revenues of $721,000,
compared with a net contribution of $324,000 on revenues of $820,000 for the
same period last year. Although RPI reduced its operating expenses slightly in
the current period, its revenues declined by a greater amount, which resulted in
the decline in the net contribution between periods.
RESORT OPERATIONS. For the three months ended December 31, 1998, the resort
operations produced a loss of $30,000 on revenues of $25,000, compared with a
net contribution of $124,000 on revenues of $426,000 for the same period last
year. The prior year results include a bulk sale of lots that did not require
the payment of commissions, and revenues and expenses related to selling
property and managing the amenities at one resort. The amenities previously
managed by the Company were transferred to the resort's property owners'
association during fiscal 1998.
INTEREST INCOME AND EXPENSE. Interest income was $500,000 for the three months
ended December 31, 1998, compared with $530,000 for the same period last year.
During these periods, interest income included amortization of the allowances
for interest and valuation discounts related to the contracts receivable of
$49,000 and $68,000, respectively. There was only a slight decline in interest
income between periods because, in the current period, the decrease in interest
income from the Company's diminishing portfolio of contracts receivable was
substantially offset by an increase in interest income from invested cash.
Interest expense was $959,000 for the three months ended December 31, 1998,
compared with $1.1 million for the same period last year. The $178,000 decrease
in interest expense between periods was due primarily to repayments of
outstanding debt during the periods.
GAIN ON ASSET SALES. The Company recognized a gain on the sale of assets of $1.0
million for the three months ended December 31, 1998, compared with $329,000 for
the same period last year. The increase in the current period was due to the
timing of asset sales.
OTHER INCOME. Other income was $548,000 for the three months ended December 31,
1998, compared with $670,000 for the same period last year. The decrease between
periods was due, in part, to lower settlements received on defaulted contracts
and delinquent dues in the current period. The Company also had $495,000 of
nonrecurring income in the prior period resulting from a refund of deposits made
in previous years to cover workers' compensation claims in
Page 25
<PAGE> 26
excess of those covered by the standard premium paid by the Company. These
deposits were expensed in the years the deposits were made because the Company
anticipated that the deposits would be used to cover workers' compensation
claims.
ADMINISTRATIVE EXPENSES. Administrative expenses, including corporate member
service costs and general and administrative expenses, were approximately $2.4
million for the three months ended December 31, 1998 and 1997.
INCOME TAXES. The Company had a current income tax benefit of $249,000 for the
three months ended December 31, 1998, compared with a current income tax
provision of $58,000 for the same period last year. The income tax benefit in
the current period arose primarily from the reversal of income taxes accrued
during the first quarter. This reversal resulted from the redemption of the PIK
Notes in December 1998 which allowed the Company to deduct the interest
previously paid on the PIK Notes in the form of additional PIK Notes. This
deduction reduced the Company's anticipated income tax liability for the year.
The Company recorded a deferred tax provision of $533,000 for the three months
ended December 31, 1998.
INFLATION. During the past several fiscal years, the Company's results have not
been affected materially by inflation. However, should the rate of inflation
increase in the future, the Company's expenses are likely to increase at a
greater rate than it can increase the annual dues paid by the campground members
because the Company cannot increase the dues on existing contracts of senior
citizens and disabled members who notify the Company of their age or disability
and request that their dues be frozen. At the present time, approximately 35% of
the members have requested that their dues be frozen because of their age or
disability.
IMPACT OF YEAR 2000. Based on recent assessments, the Company has determined
that it must modify certain software and replace certain hardware so that its
computer systems will function properly with respect to dates in the year 2000
and thereafter. The Company has begun making the internal software modifications
and anticipates completing the year 2000 project by June 30, 1999. These
modifications, if timely completed, will avoid any material impact on its
operating systems. The Company spent approximately $75,000 during the six months
ended December 31, 1998 on year 2000 modifications, and currently estimates that
it will spend an additional $200,000 during the remainder of the fiscal year to
make the necessary enhancements to its hardware and software. These expenditures
will not significantly impact the Company's financial position, operations, or
cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company currently does not have any derivative financial instruments.
However, the Company does have other financial instruments that contain market
risk. Management believes that the market risk associated with the Company's
financial instruments as of December 31, 1998 is not significant. The
information required by Item 305 of S-K is contained in Item 2 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" under
the heading "Market Risk and Interest Rate Sensitivity," which is incorporated
herein by reference.
Page 26
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On December 10, 1998, the Company held its annual meeting of stockholders. As of
the record date for the meeting, the Company had 7,511,708 shares of common
stock outstanding, of which 6,940,320 shares were represented at the meeting in
person or by proxy. The stockholders took the following actions at the meeting.
1. The stockholders elected the six members of the Board of Directors of the
Company who will serve until the next annual meeting of stockholders and
until their successors are elected and qualified. The six directors and the
votes cast for and withheld for each of them were as follows:
<TABLE>
<CAPTION>
Name Votes For Votes Withheld
---- --------- --------------
<S> <C> <C>
Andrew M. Boas 6,666,483 4,980
William P. Kovacs 6,666,483 4,980
Donald R. Leopold 6,666,483 4,980
H. Sean Mathis 6,666,483 4,980
Douglas K. Nelson 6,666,483 4,980
William J. Shaw 6,666,483 4,980
</TABLE>
2. The stockholders ratified the appointment of Arthur Andersen LLP as the
independent certified public accountants for the Company for the fiscal
year ending June 30, 1999. The votes cast for, votes cast against, and
abstentions were as follows:
<TABLE>
<CAPTION>
Votes For Votes Against Abstentions
--------- ------------- -----------
<S> <C> <C>
6,668,483 2,780 200
</TABLE>
Page 27
<PAGE> 28
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following documents are filed as exhibits to this report.
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Amendment dated as of December 10, 1998 to the Employment
Agreement between the Company and William J. Shaw.
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule for the six and three months ended
December 31, 1998.
</TABLE>
REPORTS ON FORM 8-K
On December 22, 1998, the Company filed with the SEC a Current Report on Form
8-K reporting under Item 5 the redemption of the PIK Notes.
Page 28
<PAGE> 29
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THOUSAND TRAILS, INC.
Date: February 12, 1999 By: /s/William J. Shaw
-------------------------------
William J. Shaw
President, Chief Executive Officer
and acting Chief Financial Officer
Date: February 12, 1999 By: /s/Bryan D. Reed
-------------------------------
Bryan D. Reed
Chief Accounting Officer
Page 29
<PAGE> 30
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.1 Amendment dated as of December 10, 1998 to the Employment
Agreement between the Company and William J. Shaw.
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule for the six and three months ended
December 31, 1998.
</TABLE>
Page 30
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment to Employment Agreement, dated as of the 10th day of
December, 1998, is between Thousand Trails, Inc., a Delaware Corporation (the
"Corporation"), and William J. Shaw, a resident of Frisco, Texas (the
"Executive").
RECITALS
The Corporation and the Executive entered into an Employment Agreement,
dated as of May 5, 1995 (the "Employment Agreement"). The Executive has
requested, and the Board of Directors of the Corporation has approved, an
amendment to the Employment Agreement as set forth herein.
AGREEMENTS
In consideration of the mutual covenants and promises set forth herein
and other good and valuable consideration, the Corporation and the Executive
agree as follows:
1. AMENDMENT OF SECTION 3B. Section 3B of the Employment Agreement is
hereby amended in its entirety to read as follows:
"SECTION 3B. CHANGE IN CONTROL BONUS. In addition to all other
compensation payable to the Executive under this Employment Agreement, if
during the Term of Employment a Change in Control (as hereinafter defined)
occurs, the Corporation shall pay to the Executive a cash bonus in an
amount equal to the Executive's then current Base Salary multiplied by two
(the "Change in Control Bonus"). The Corporation shall pay, or cause NACO
to pay, the Change in Control Bonus to the Executive promptly after the
Corporation becomes aware of the occurrence of a Change in Control.
(a) A "Change in Control" shall mean an Unaffiliated Person's (as
hereinafter defined) purchase from the Major Shareholder (as
hereinafter defined) of 42% or more of the outstanding shares of
Common Stock after the date of this Employment Agreement.
(b) An "Unaffiliated Person" shall mean a person or group of persons
acting together other than: (i) the Executive, an affiliate of the
Executive, or any member of his immediate family, (ii) the
Corporation, any subsidiary of the Corporation, or any employee
benefit plan of the Corporation or any of its subsidiaries, or (iii)
the Major Shareholder, any person who is part of the Major
Shareholder, any affiliate of the Major Shareholder or any such
person or any member of the immediate family of any such affiliate or
person.
- 1 -
<PAGE> 2
EXHIBIT 10.1
(c) The "Major Shareholder" shall mean Carl Marks Management Co., L.P.
and the persons whose shares of Common Stock it is described as
beneficially owning in the Corporation's most recent annual meeting
proxy statement prior to the date of this Employment Agreement.
(d) For purposes of this Section 3B, a Change of Control can occur only
once.
(e) Notwithstanding anything to the contrary in this Section 3B, however,
if the Change in Control Bonus, along with any other payments to the
Executive, would be subject to any excise tax, including the excise
tax on excess parachute payments set forth in Section 4999 of the
Internal Revenue Code of 1986, as amended, then the amount of the
Change in Control Bonus shall be decreased to the extent that such
decrease would cause the Executive to receive a greater net amount
with respect to the Change in Control Bonus after consideration of
applicable excise and income taxes."
2. RATIFICATION. Except as modified by the terms of this Amendment, the
terms of the Employment Agreement are hereby ratified and shall continue in full
force and effect.
Executed as of the day and year first above written.
THOUSAND TRAILS, INC.
/s/ Walter B. Jaccard
---------------------------------
Walter B. Jaccard, Vice President
THE EXECUTIVE
/s/ William J. Shaw
---------------------------------
William J. Shaw
- 2 -
<PAGE> 1
Exhibit 11.1
THOUSAND TRAILS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(DOLLARS AND COMMON SHARES IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
BASIC:
Weighted average number of common shares outstanding 7,485 7,390
============ ============
Net income allocable to common shareholders $ 3,515 $ 8,486
============ ============
Net income per common share -- basic $ 0.47 $ 1.15
============ ============
DILUTED:
Weighted average number of common shares outstanding 7,485 7,390
Weighted average common stock equivalents -
Dilutive options 938 986
Dilutive warrants 6 34
------------ ------------
Weighted average number of common shares outstanding 8,429 8,410
============ ============
Net income allocable to common shareholders $ 3,515 $ 8,486
============ ============
Net income per common share -- diluted $ 0.42 $ 1.01
============ ============
</TABLE>
Page 1 of 2
<PAGE> 2
THOUSAND TRAILS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(DOLLARS AND COMMON SHARES IN THOUSANDS)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
BASIC:
Weighted average number of common shares outstanding 7,512 7,393
============ ============
Net income allocable to common shareholders $ 2,053 $ 2,500
============ ============
Net income per common share -- basic $ 0.27 $ 0.34
============ ============
DILUTED:
Weighted average number of common shares outstanding 7,512 7,393
Weighted average common stock equivalents -
Dilutive options 907 1,033
Dilutive warrants 6 64
------------ ------------
Weighted average number of common shares outstanding 8,425 8,490
============ ============
Net income allocable to common shareholders $ 2,053 $ 2,500
============ ============
Net income per common share -- diluted $ 0.24 $ 0.29
============ ============
</TABLE>
Page 2 of 2
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 1174
<SECURITIES> 0
<RECEIVABLES> 2510
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,853
<PP&E> 21,274
<DEPRECIATION> 0
<TOTAL-ASSETS> 57,393
<CURRENT-LIABILITIES> 27,486
<BONDS> 18,988
0
0
<COMMON> 75
<OTHER-SE> 6,385
<TOTAL-LIABILITY-AND-EQUITY> 57,393
<SALES> 1,909
<TOTAL-REVENUES> 36,197
<CGS> 0
<TOTAL-COSTS> 31,652
<OTHER-EXPENSES> 29,615
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,037
<INCOME-PRETAX> 4,545
<INCOME-TAX> (1,030)
<INCOME-CONTINUING> 3,515
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,515
<EPS-PRIMARY> .47
<EPS-DILUTED> .42
</TABLE>
