<PAGE>
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, 1996
Commission File Number 0-19743
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
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
The number of shares of Common Stock, par value $.01, issued and outstanding as
of February 7, 1997 was 7,383,276.
<PAGE>
THOUSAND TRAILS, INC.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets at December 31,
1996 and June 30, 1996...................................... 3
Consolidated Statements of Operations for the
six months ended December 31, 1996 and December 31, 1995.... 4
Consolidated Statements of Operations for the
three months ended December 31, 1996 and December 31, 1995.. 5
Consolidated Statement of Stockholders' Deficit for the six
months ended December 31, 1996.............................. 6
Consolidated Statements of Cash Flows for the six months
ended December 31, 1996 and December 31, 1995............... 7
Notes to Consolidated Financial Statements................... 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities........................................ 26
Item 4. Submission of Matters to a Vote of Security-Holders.......... 27
Item 6. Exhibits and Reports on Form 8-K............................. 28
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ ----------
(Unaudited)
<S> <C> <C>
Assets
------
Current Assets
Cash and cash equivalents $ 2,403 $ 37,403
Current portion of receivables, net of allowances and discount
of $2.3 million and $2.7 million 3,459 4,270
Accounts and dues receivable, net 301 522
Inventory and other current assets 3,112 4,672
-------- --------
Total Current Assets 9,275 46,867
Restricted cash 1,841 2,912
Receivables, net of allowances and discount of $4.7 million and
$5.4 million 5,978 8,949
Campground real estate 13,452 13,468
Resort real estate 595 1,159
Buildings and equipment, net of accumulated depreciation of
$11.5 million and $10.4 million 25,442 27,130
Land held for sale 6,155 6,821
Other assets 4,847 2,448
-------- --------
Total Assets $ 67,585 $109,754
======== ========
Liabilities and Stockholders' Deficit
-------------------------------------
Current Liabilities
Accounts payable $ 1,726 $ 3,030
Accrued interest 2,388 5,617
Other accrued liabilities 7,879 9,329
Current portion of long term debt 1,807 28,530
Accrued construction costs 2,942 3,154
Deferred membership dues revenue 13,697 17,599
-------- --------
Total Current Liabilities 30,439 67,259
Long term debt 56,457 66,922
Other liabilities 3,725 3,564
-------- --------
Total Liabilities 90,621 137,745
-------- --------
Commitments and Contingencies
Stockholders' Deficit
Preferred stock, $.01 par value, 1,500,000 shares authorized,
none issued or outstanding
Common stock, $.01 par value, 15,000,000 shares authorized,
7,383,276 and 3,702,726 shares issued and outstanding 74 37
Additional paid-in capital 20,502 17,549
Accumulated deficit subsequent to December 31, 1991, date of
emergence from bankruptcy (total deficit eliminated $51,752) (43,475) (45,451)
Cumulative currency translation adjustment (137) (126)
-------- --------
Total Stockholders' Deficit (23,036) (27,991)
-------- --------
Total Liabilities and Stockholders' Deficit $ 67,585 $109,754
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 3
<PAGE>
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,
-------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Revenues
Membership dues $19,917 $ 20,043
Other campground/resort revenue 10,286 12,954
Membership and resort interest sales 2,411 1,921
RPI membership fees 1,943 2,234
Interest income 1,995 3,404
Gain on asset dispositions 1,215 918
Other income 1,887 2,207
------- -------
Total Revenues 39,654 43,681
------- -------
Expenses
Campground/resort operating expenses 22,268 27,165
Selling expenses 1,824 1,816
Marketing expenses 635 663
RPI membership expenses 937 1,173
Corporate member services 812 904
Interest expense and amortization 5,078 9,041
General and administrative expenses 4,711 4,961
Restructuring costs 1,101
------- -------
Total Expenses 37,366 45,723
------- -------
Income (Loss) Before Income Taxes 2,288 (2,042)
Income tax (provision) benefit (312) 157
------- -------
Net Income (Loss) $ 1,976 ($1,885)
======= =======
Primary and Fully Diluted Net Income (Loss)
Per Share $.27 ($.51)
======= =======
Weighted Average Number of Shares Outstanding 7,212 3,703
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 4
<PAGE>
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,
---------------------------------------
1996 1995
------------------ -----------------
<S> <C> <C>
Revenues
Membership dues $10,054 $ 9,917
Other campground/resort revenue 3,193 4,113
Membership and resort interest sales 1,373 560
RPI membership fees 934 1,034
Interest income 875 1,629
Gain on asset dispositions 662
Other income 802 905
------- -------
Total Revenues 17,231 18,820
------- -------
Expenses
Campground/resort operating expenses 9,261 10,563
Selling expenses 915 795
Marketing expenses 295 210
RPI membership expenses 496 621
Corporate member services 323 359
Interest expense and amortization 2,623 4,431
General and administrative expenses 2,557 2,529
Loss on asset dispositions 47
Restructuring costs 204
------- -------
Total Expenses 16,721 19,508
------- -------
Income (Loss) Before Income Taxes 510 (688)
Income tax provision (189) (16)
------- -------
Net Income (Loss) $ 321 ($704)
======= =======
Primary and Fully Diluted Net Income (Loss)
Per Share $.04 ($.19)
======= =======
Weighted Average Number of Shares Outstanding 7,693 3,703
======= =======
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 5
<PAGE>
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(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, 1996 $37 $17,549 ($45,451) ($126) ($27,991)
Issuance of common stock in
Restructuring 37 2,953 2,990
Foreign currency translation
adjustment (11) (11)
Net income for the six months
ended December 31, 1996 1,976 1,976
--- ------- -------- ----- --------
BALANCE, December 31, 1996 $74 $20,502 ($43,475) ($137) ($23,036)
=== ======= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 6
<PAGE>
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Collections of principal on receivables $ 4,246 $ 6,434
Interest received 1,796 3,028
Interest paid (7,360) (7,757)
General and administrative, corporate
member services and restructuring costs (7,842) (6,466)
Cash collected from operations, including
deferred revenue 30,420 34,843
Cash from sales of memberships and resort
interests at the point of sale 2,311 1,816
Expenditures for property operations (22,146) (27,338)
Expenditures for sales and marketing (2,514) (2,486)
Expenditures for insurance premiums (158) (2,926)
Refund (payment) of income taxes (311) 120
Reduction of (deposit made to secure)
standby letter of credit 1,182 (1,500)
Other, net (47) 394
-------- --------
Net cash used in operating activities (423) (1,838)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital and HUD-related expenditures (586) (637)
Proceeds from asset sales 2,536 827
-------- --------
Net cash provided by investing activities 1,950 190
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial borrowings under Credit Agreement 32,000
Net repayments under Credit Agreement (14,942)
Payment of debt issuance costs (3,132)
Retirement of Secured Notes (50,169)
Mandatory redemption of Secured Notes (18,599)
Repayment of notes and mortgages (284) (244)
-------- --------
Net cash used in financing activities (36,527) (18,843)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (35,000) (20,491)
CASH AND CASH EQUIVALENTS:
Beginning of period 37,403 50,596
-------- --------
End of period $ 2,403 $ 30,105
======== ========
</TABLE>
- continued -
Page 7
<PAGE>
THOUSAND TRAILS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
For the six months
ended December 31,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
Reconciliation of net income (loss) to net
cash used in operating activities:
Net income (loss) $ 1,976 ($1,885)
------------ ------------
Adjustments to reconcile net income (loss)
to net cash used in operating activities --
Depreciation 1,389 1,444
Provision for doubtful accounts 10 11
Cost of sales 29 97
Amortization of interest discount,
collection costs and valuation allowance (372) (578)
Amortization of debt issue costs and
deferred gain 947
Amortization of debt discount and
consent fees 2,252
Gain on asset dispositions (1,215) (918)
Decrease (increase) in restricted cash 1,071 (1,334)
Decrease in receivables 4,144 6,269
Decrease (increase) in other assets 1,158 (277)
Decrease in accounts payable (1,304) (1,588)
Decrease in accrued interest (3,229) (1,023)
Decrease in deferred membership dues
revenue (3,785) (3,115)
Decrease in other liabilities (1,231) (1,204)
Other, net (11) 11
------------ ------------
Total adjustments (2,399) 47
------------ ------------
Net cash used in operating activities ($423) ($1,838)
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
Page 8
<PAGE>
THOUSAND TRAILS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(Unaudited)
GENERAL
Thousand Trails, Inc., a Delaware corporation ("Thousand Trails"), is the
successor by merger to USTrails Inc., a Nevada corporation ("USTrails").
Thousand Trails and its subsidiaries (the "Company") own and operate a system of
58 membership-based campgrounds located in 19 states and British Columbia,
Canada. In addition, the Company provides a reciprocal use program for members
of approximately 310 recreational facilities. The Company also owns certain
real estate at eight full service resorts located in seven states and owns and
operates the resort amenities at one of these locations. Prior to November 21,
1996, the Company also managed the timeshare facilities at these resorts (see
Note 4). The campground business represents the most significant portion of the
Company's business comprising 88% of the Company's operating revenues in fiscal
1997 to date. The reciprocal use and resort businesses provided the remaining
12%. Operating revenues consist primarily of membership dues received from
campground members, fee revenue from members of the reciprocal use program, and
management fees, guest fees and other fees and revenues received from the
campground and resort operations.
Effective November 20, 1996, the Company, then known as USTrails, reincorporated
in the state of Delaware and changed its name to Thousand Trails, Inc. The
reincorporation was effected through a merger with a newly formed wholly owned
subsidiary of USTrails that was approved by USTrails' stockholders at their
annual meeting (see Note 3).
The accompanying consolidated financial statements include the accounts of
Thousand Trails, Inc. (successor by merger to USTrails) and the following wholly
owned subsidiaries: National American Corporation and its subsidiaries ("NACO"),
Resort Parks International, Inc. ("RPI"), UST Wilderness Management Corporation
("Wilderness Management"), and until July 16, 1996, Thousand Trails, Inc., a
Washington corporation, and its subsidiaries ("Trails"). On July 16, 1996,
Trails was merged into the Company.
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, 1996, filed
with the Securities and Exchange Commission on September 26, 1996.
NOTE 1 -- 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, fresh start reporting, as required by AICPA
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," was reflected as of December 31, 1991 in the
Company's consolidated financial statements. Under fresh start reporting, 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 three and
six month periods
Page 9
<PAGE>
ended December 31, 1996 and 1995, and in the consolidated balance sheet at June
30, 1996. Certain prior period amounts in the consolidated financial statements
have been reclassified to conform to the current period presentation.
Net income per common share 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, whereby proceeds, if any, from the assumed
exercise of common stock equivalents, would be used to purchase shares at
current market prices. Net loss per common share is computed based on weighted
average common shares outstanding only. Warrants outstanding as well as common
stock equivalents that would be assumed to be outstanding are excluded from the
net loss per common share computation as they would be anti-dilutive. As part
of the Restructuring discussed in Note 2, on July 17, 1996, the Company issued
an aggregate of 3,680,550 shares of common stock as partial consideration for
the retirement of the Secured Notes. These shares represent approximately 50%
of the shares of common stock currently outstanding.
Since inception, the Company has not paid any dividends. The Credit Agreement
between the Company and Foothill Capital Corporation ("Foothill") prohibits the
payment of any cash dividends without the consent of Foothill until the
borrowings under the Credit Agreement are repaid. In addition, the Indenture
for the 12% Senior Subordinated PIK Notes Due 2003 ("PIK Notes") prohibits the
payment of any cash dividends until the PIK Notes are repaid.
NOTE 2 -- SECURED NOTE RESTRUCTURING AND LONG TERM DEBT
SECURED NOTE RESTRUCTURING
At June 30, 1996, the Company had outstanding $101.5 million principal amount of
Secured Notes. At that time, there was a substantial risk that the resources
available to the Company would be insufficient to cover its continuing operating
needs and the mandatory sinking fund and interest payments due on the Secured
Notes on July 15, 1996. In addition, the Company faced default under the
financial covenants in the Indenture for the Secured Notes if waivers were not
obtained by September 30, 1996. On July 17, 1996, however, the Company
consummated a restructuring (the "Restructuring"), in which all of the Secured
Notes were retired. The Restructuring provided a new capital structure for the
Company. This new capital structure includes $40.2 million principal amount of
PIK Notes that do not require the cash payment of interest until fiscal 2001, do
not contain financial covenants, and mature on July 15, 2003 without earlier
scheduled principal payments. The new capital structure also includes the
Credit Agreement with Foothill that, in addition to financing $32.0 million of
the retirement of the Secured Notes and related costs, provides the Company with
a working capital facility which reduces in availability through final maturity
on July 16, 1999. Availability of such working capital is subject to continued
compliance by the Company with the financial covenants, amortization schedule,
and other requirements of the Credit Agreement, including certain covenants
respecting minimum earnings before interest, taxes, depreciation and
amortization, and minimum tangible net worth. As part of the Restructuring, the
Company also issued an aggregate of 3,680,550 shares of common stock as partial
consideration for the retirement of the Secured Notes. These shares represent
approximately 50% of the shares of common stock currently outstanding (see Note
3).
The Restructuring was accounted for as a Troubled Debt Restructuring whereby the
restructured debt was recorded at the carrying value of the old debt, and no
gain or loss was recorded on the transaction. As a result, the $40.2 million
principal amount of PIK Notes issued in the Restructuring was recorded with a
deferred gain of $303,000. This deferred gain is being amortized as a reduction
of interest expense using the effective interest method over the term of the
notes.
The Company incurred $1.1 million of legal expenses and other direct costs in
connection with the completion of the Restructuring which have been presented as
restructuring costs in the
Page 10
<PAGE>
accompanying consolidated statement of operations for the six months ended
December 31, 1996. In addition, the Company incurred debt issuance costs of $3.1
million, including $570,000 of prepaid interest, related to obtaining the Credit
Agreement with Foothill. These costs, which include legal costs, financial
advisory fees and other direct costs of obtaining the loans, have been
capitalized and are reflected in other assets in the accompanying consolidated
balance sheet at December 31, 1996, and are being amortized over the term of the
Credit Agreement.
BALANCE SHEET PRESENTATION OF LONG TERM DEBT
Balance sheet presentation of the current and long term components of the
Company's outstanding debt is reflected below, as of December 31, 1996 and June
30, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
December 31, June 30,
1996 1996
------------ ------------
<S> <C> <C>
Current portion of long term debt :
Borrowings under Credit Agreement $ 1,674
Secured Notes, net of discount of $7.1 million $28,264
Notes and mortgages payable 133 266
------- -------
$ 1,807 $28,530
======= =======
Long term debt:
Borrowings under Credit Agreement $15,384
PIK Notes, including deferred gain of $.3 million 40,502
Secured Notes $66,086
Notes and mortgages payable 571 836
------- -------
$56,457 $66,922
======= =======
Total long term debt $58,264 $95,452
======= =======
</TABLE>
NOTE 3 -- REINCORPORATION MERGER
On November 19, 1996, the stockholders of USTrails approved the merger (the
"Merger") of USTrails into the Company, a newly formed, wholly-owned Delaware
subsidiary, pursuant to the Agreement and Plan of Merger dated as of October 1,
1996, between USTrails and the Company (the "Merger Agreement"). The Merger was
consummated on November 20, 1996. Pursuant to the terms of the Merger Agreement,
the Company is the surviving corporation. Each share of USTrails common stock,
par value $.01 per share ("USTrails Common Stock"), outstanding prior to the
Merger was converted into the right to receive one share of the Company's common
stock, par value $.01 per share ("Company Common Stock"), and each outstanding
stock option, warrant or other right to purchase or receive USTrails Common
Stock was converted into a similar stock option, warrant or other right to
acquire Company Common Stock. The principal purposes of the Merger were to
implement the transfer restrictions described below and to change USTrails'
state of incorporation to Delaware.
Transfer of Company Common Stock is subject to restrictions designed to avoid an
"ownership change" within the meaning of section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"). Such restrictions are set forth in
Article IX of the Company's Restated Certificate of Incorporation. Article IX
generally restricts, until June 30, 2011 (or earlier in certain events), direct
or indirect transfer of Company Common Stock that would without the approval of
the board of directors of the Company (i) increase to more than 4.75% the
percentage ownership of Company Common Stock of any person who at any time
during the preceding three-year period did not own more than 4.75% of the
Company Common Stock, (ii) increase the percentage of
Page 11
<PAGE>
Company Common Stock owned by any person that during the preceding three-year
period owned more than 4.75% of the Company Common Stock, or by any group of
persons treated as a "5 Percent Shareholder" (as defined in the Code but
substituting "4.75%" for "5 Percent"), or (iii) cause an "ownership change" of
the Company. Article IX provides that any direct or indirect transfer of Company
Common Stock in violation of Article IX is void ab initio as to the purported
transferee, and the purported transferee will not be recognized as the owner of
shares owned in violation of Article IX for any purpose, including for purposes
of voting and receiving dividends or other distributions in respect of Company
Common Stock. Any shares purportedly acquired in violation of Article IX will be
transferred to a trustee who will be required to sell them. See the Company's
Proxy Statement/Prospectus, dated October 3, 1996 (the "Proxy
Statement/Prospectus"), in which the terms of such restrictions were previously
reported.
NOTE 4 -- SALE OF TIMESHARE OPERATIONS
On November 21, 1996, the Company sold its timeshare management operations and
timeshare inventory to a newly formed corporation owned by two former employees
(the "Buyer"). The sales price was $850,000, of which $50,000 was paid in cash
at closing and the balance is represented by a promissory note in the principal
amount of $800,000. The principal of the note is payable $300,000 on or before
May 15, 1997, and $500,000 on or before May 15, 1998. Interest accrues on the
note at the rate of 14 1/2% per annum and is payable at the time of the
principal installments. The Buyer may extend payment of $150,000 of the second
principal installment for up to one year, with interest accruing at 20% per
annum. The note is secured by liens on substantially all assets of the Buyer, a
pledge of the Buyer's outstanding stock, and the personal guarantees of the two
shareholders of the Buyer.
A deferred gain of $397,000 was recorded in connection with this sale which will
be recognized on the installment method of accounting as payments on the note
are received. The deferred gain was netted against the principal amount of the
note, and the net balance is included in other current and long term assets in
the accompanying consolidated balance sheet at December 31, 1996.
NOTE 5 -- CONTINGENCIES
Self Insurance
- --------------
The Company is self-insured for general liability losses up to $250,000 per
occurrence, with an annual per occurrence aggregate exposure to the Company of
$2.0 million. The Company's liability insurance program provides coverage in
excess of the $250,000 retention up to an annual limit of $26.8 million per
occurrence and in the aggregate. The Company has provided a liability for
estimated known and unknown claims related to uninsured general liability risks
of $1.8 million at December 31, 1996, which is included in other liabilities in
the accompanying consolidated balance sheet. This liability is determined based
on actuarial estimates.
CEO Bonus Accrual
- -----------------
The employment agreement between the Company and its Chief Executive Officer
("CEO") provided that the CEO would receive a one-time bonus equal to between 4%
and 6% of the amount by which the enterprise value of the Company (including the
value of its debt and equity) exceeded $75.0 million at the time the CEO elected
to receive the bonus. The bonus would have been adversely affected by the
consummation of the Restructuring. As a result, on June 29, 1996, the CEO
exercised his right to receive the bonus. The CEO is entitled to $1,270,589, of
which $952,927 was paid on July 9, 1996. The additional $317,662 is payable on
May 11, 1997, provided that the CEO is employed by the Company on that date. The
Company accrued the entire amount of the bonus at June 30, 1996. The Company
obtained an irrevocable standby letter of credit on which the CEO may draw
payment if the Company fails to pay any portion of the bonus after receiving a
request from the CEO. A $1.5 million cash deposit securing this letter of
credit was reduced to $317,662 after payment of the initial bonus amount.
Page 12
<PAGE>
Declining Membership Base
- -------------------------
The Company derives a significant portion of its ongoing operating revenue from
its campground members (88% in fiscal 1997 to date). The Company's membership
base has declined significantly during the past several years and is presently
declining at the rate of approximately 8% per year. The Company attributes this
continuing attrition principally to its aging membership base, of whom
approximately 50% are senior citizens. The Company must significantly increase
its campground membership sales over current levels in order to stop the decline
in the Company's membership base. As a result, the success of the Company's
business strategy over the long term is dependent upon the Company's ability to
market new memberships in sufficient numbers on a cost-effective basis.
Environmental Issues
- --------------------
Certain environmental issues may exist at some of the Company's campgrounds and
resorts 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
- ----------
Johnnie Lacy v. Thousands Trails, Inc., Civil Action No C-96 004411, filed
- -------------------------------------
February 1, 1996, in the United States District Court for the Northern District
of California. In this action, which purports to be a class action, the
plaintiff alleges that the Company has failed to comply with the Americans with
Disabilities Act and related California statutes with respect to certain of its
campgrounds. The plaintiff alleges that the Company has failed to remove
barriers to access by persons with disabilities where such barrier removal is
readily achievable. The plaintiff seeks unspecified damages and injunctive
relief. Although this case is still in the early stages of development,
management does not believe that it will have a material adverse impact on the
Company's operations or financial position.
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.
Page 13
<PAGE>
NOTE 6 -- SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental disclosures of non-cash investing and financing activities required
by Statement of Financial Accounting Standards No. 95 "Statement of Cash Flows"
are presented below for the six months ended December 31, 1996 and 1995 (dollars
in thousands):
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
DECEMBER 31,
1996
------------
<S> <C>
Non-cash transactions related to the Restructuring
- --------------------------------------------------
(see Note 2)
- -------------
Retirement of Secured Notes ($44,181)
Issuance of PIK Notes 40,521
Issuance of Common Stock 2,990
Write-off of unamortized portion of consent fees 670
Non-cash transactions related to the timeshare sale
- ---------------------------------------------------
(see Note 4)
- -------------
Note receivable from buyers $800
Deferred gain (397)
Book value of timeshare inventory sold (18)
Book value of fixed assets sold (193)
Net receivables written off (242)
SIX MONTHS
ENDED
DECEMBER 31,
1995
------------
Abandonment of two operating campgrounds and elimination of $2,518
related nonrecourse obligations
</TABLE>
Page 14
<PAGE>
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,
1996, filed with the SEC on September 26, 1996.
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, the Company makes certain statements as to its expected financial
condition, results of operations, and cash flows for periods after December 31,
1996. All of these statements are forward-looking statements made pursuant to
the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements are not historical and involve risks and uncertainties.
The Company's actual financial condition, results of operations, and cash flows
for future periods may differ materially due to several factors, including but
not limited to the Company's ability to control costs and implement its 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 stated 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,
and in the Company's Annual Report on Form 10-K for the year ended June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES
STABILIZED OPERATIONS. Since reorganizing under Chapter 11 on December 31,
1991, the Company's annualized operating revenues have decreased by $21.3
million (23%). Over the same period, the Company has decreased its annualized
operating expenses by $43.7 million (38%), and implemented a program under which
certain campground members voluntarily increased their annual dues by an
aggregate of $2.1 million. During this period, the Company has concentrated on
increasing continuing revenues and decreasing continuing expenses. The Company
has closed eleven campgrounds and has changed other campgrounds to seasonal
operations, reduced staff, consolidated its administrative functions, deferred
maintenance, and reduced service levels. The Company has also disposed of
certain campgrounds and other non-core assets. However, the Company's
membership base has declined significantly during this period, and the
membership base is presently declining at the rate of approximately 8% per year.
The Company attributes this continuing attrition principally to its aging
membership base, approximately 50% of whom are senior citizens.
During fiscal 1996, the Company stabilized its operations, which it had been
seeking to accomplish since emerging from Chapter 11 proceedings in 1991, and
achieved a positive contribution from operations of $4.8 million. For the six
months ended December 31, 1996, the Company had a positive contribution from
operations of $5.3 million, compared with $2.7 million for the same period last
year. For this purpose, the contribution from operations is defined as
operating income before interest income and expense, gain (loss) on asset
dispositions, restructuring costs, and taxes. See the tables on pages 18-19 and
23-24 for the elements of the contribution from operations and the Company's
operating income (loss) before taxes for the periods presented.
CURRENT BUSINESS STRATEGY. The Company's current strategy is to improve its
campground operations, stabilize its campground membership base through
increased sales and marketing efforts, and determine the appropriate level for
its ongoing campground operations. The Company has conducted an extensive
marketing study, redesigned its membership products, and developed a sales and
marketing operation. Consistent with this strategy, the Company intends to
downsize its business by implementing additional cost reduction measures while
its
Page 15
<PAGE>
membership base declines. These cost reduction measures will likely include
the closure and disposition of additional campgrounds and decreases in general
and administrative expenditures. The disposition of campgrounds will require
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 disposition opportunities or the ability of the Company to realize
recoveries from asset dispositions. Moreover, the possibility of additional
campground dispositions may adversely affect the collection of dues and
contracts receivable from members.
CASH. On December 31, 1996, the Company had $2.4 million of cash and cash
equivalents, a decrease of $35.0 million during the six month period. The
Company's cash declined primarily because $28.6 million was used to retire the
Secured Notes and pay legal and other costs related to the Restructuring
(including accrued interest), and $14.9 million was used to repay borrowings
under the Credit Agreement with Foothill. These expenditures were partially
offset by $2.5 million of proceeds from asset sales.
In the Restructuring, $50.2 million of cash was paid to the holders of the
Secured Notes as full or partial consideration for the retirement of the Secured
Notes, and $6.2 million of cash was paid to the holders of the Secured Notes for
the semi-annual interest due July 15, 1996, and additional interest through the
date of the Restructuring. In addition, $1.1 million of cash was used to pay
for expenses related to the Restructuring, and $3.1 million of cash was used to
pay the costs of obtaining the Credit Agreement with Foothill. The Company
funded these cash payments with $28.6 million of its cash and $32.0 million of
new borrowings under the Credit Agreement with Foothill.
The Company's principal sources of operating cash for the six months ended
December 31, 1996, were $6.0 million in principal and interest collections on
contracts receivable and $30.4 million in dues collections and other campground
and resort revenues. Principal uses of operating cash for the six months ended
December 31, 1996, were $22.1 million in operating expenses, $7.8 million in
general and administrative expenses (including corporate member services and
restructuring costs), $2.3 million in sales and marketing expenditures, and
$7.4 million in interest payments, $6.2 million of which was related to the
Secured Notes that were retired in the Restructuring.
Under the Credit Agreement with Foothill, as of December 31, 1996, the Company
had outstanding term loans totaling $8.3 million, and a revolving loan in the
maximum amount of $22.5 million, of which $8.8 million was outstanding and $13.7
million was available for borrowing. Under the 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. The Credit Agreement must be paid in full on July 16, 1999. During the
balance of fiscal 1997, the Company is required to make mandatory principal
reductions under the term loans in the aggregate amount of $1.7 million, funded
from collections of principal and interest on the contracts receivable. Based
upon its current business plan, the Company believes that future cash flows
provided from operations, asset sales, and borrowings available under the
revolving loan will be adequate for the Company's operating and other cash
requirements during the remaining term of the Credit Agreement. All cash held
by the Company and its wholly owned subsidiaries is generally deposited in
accounts that are controlled by and pledged to Foothill.
The Company's cash flows are highly seasonal. The Company receives the majority
of the dues revenue from its members during the winter and incurs a higher level
of operating expenses during the summer. As a result of dues receipts, as of
February 7, 1997, the outstanding term loans under the Credit Agreement had been
reduced to $7.1 million and the outstanding revolving loan had been reduced to
$2.4 million. As of February 7, 1997, $19.7 million was available for borrowing
under the revolving loan.
Page 16
<PAGE>
MATERIAL CHANGES IN FINANCIAL CONDITION
Total assets decreased by $42.2 million during the six months ended December 31,
1996. Cash decreased by $35.0 million as discussed above. Contracts receivable
decreased by $3.8 million due primarily to $4.2 million in cash collections
offset by $372,000 related to the amortization of the allowances for interest
discount and collection costs and valuation allowance. Inventory and other
current assets decreased by $1.6 million due primarily to the amortization of
insurance premiums for fiscal 1997 that were paid in June 1996. Campground and
resort properties decreased by a total of $2.9 million due primarily to the sale
of four campgrounds, the timeshare operations at the resorts, certain other real
estate at the campgrounds and resorts, and depreciation during the period. In
addition, restricted cash decreased by $1.1 million resulting primarily from the
payment of a one-time bonus to the Company's Chief Executive Officer under the
terms of his employment agreement with the Company. These decreases were offset
by a $2.4 million increase in other assets, due primarily to $3.1 million of
debt issuance costs incurred in connection with obtaining the Credit Agreement
with Foothill, reduced by amortization during the period.
Total liabilities decreased by $47.1 million during the six months ended
December 31, 1996. The Company's total outstanding debt decreased by $37.2
million due primarily to the retirement of $101.5 million principal amount of
Secured Notes in the Restructuring, partially offset by the issuance of $40.2
million principal amount of PIK Notes and net borrowings under the Credit
Agreement. Accrued interest declined by $3.2 million due to the $6.2 million of
interest paid on the Secured Notes in July 1996, partially offset by $2.2
million of non-cash interest accruing on the PIK Notes, which amount was paid on
January 15, 1997, by issuing additional PIK Notes. In addition, deferred
membership dues revenue declined by $3.9 million due to revenue recognized in
excess of cash collections during the period.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Three Months Ended December 31, 1996 and 1995
NET INCOME (LOSS). The Company reported net income of $321,000 or $.04 per
share on revenues of $17.2 million for the three months ended December 31, 1996.
This compares with a net loss of $704,000 or $.19 per share on revenues of $18.8
million for the same period last year. Although overall revenues declined, the
results for the current period improved significantly from the previous year,
due primarily to higher sales revenue and lower campground operating costs and
interest expense.
Page 17
<PAGE>
The following table summarizes the operating results of the Company's
campgrounds (including Wilderness Management), full service resorts, and RPI,
excluding allocations of corporate overhead and other revenues and expenses, for
the three months ended December 31, 1996:
<TABLE>
<CAPTION>
Three Months Ended December 31, 1996
------------------------------------
Campgrounds Resorts Total
----------- ------- -----
<S> <C> <C> <C>
CAMPGROUND/RESORT OPERATIONS
Membership dues $10,054 $10,054
Other campground/resort revenues 2,502 $ 691 3,193
Campground ancillary expenses (1,317) (1,317)
Other operating expenses (7,118) (826) (7,944)
------- ----- -------
Profit (loss) on campground/resort
operations 4,121 (135) 3,986
------- ----- -------
SALES
Memberships 1,205 1,205
Resort interests 168 168
------- ----- -------
Total sales 1,205 168 1,373
------- ----- -------
Selling costs (821) (94) (915)
Marketing expenses (295) (295)
------- ----- -------
Total expenses (1,116) (94) (1,210)
------- ----- -------
Profit on sales 89 74 163
------- ----- -------
RESORT PARKS INTERNATIONAL
Fee income 934 934
Cost of operations (496) (496)
------- ----- -------
RPI net contribution 438 438
------- ----- -------
$ 4,648 ($61) 4,587
======= ===== =======
Other income 802
Corporate member services (323)
General and administrative expenses (2,557)
-------
OPERATING INCOME BEFORE INTEREST INCOME
AND EXPENSE, GAIN ON ASSET DISPOSITION
RESTRUCTURING COSTS, AND TAXES 2,509
-------
Interest income 875
Interest expense and amortization of
debt issuance costs and deferred gain (2,623)
Loss on asset dispositions (47)
Restructuring costs (204)
-------
OPERATING INCOME BEFORE TAXES $ 510
=======
</TABLE>
Page 18
<PAGE>
The following table summarizes the operating results of the Company's
campgrounds (including Wilderness Management), full service resorts, and RPI,
excluding allocations of corporate overhead and other revenues and expenses, for
the three months ended December 31, 1995:
<TABLE>
<CAPTION>
Three Months Ended December 31, 1995
------------------------------------
Campgrounds Resorts Total
----------- ------- ----------
<S> <C> <C> <C>
CAMPGROUND/RESORT OPERATIONS
Membership dues $ 9,917 $ 9,917
Other campground/resort revenues 2,552 $ 1,561 4,113
Campground ancillary expenses (1,436) (1,436)
Operating expenses (7,308) (1,819) (9,127)
------- ------- -------
Profit (loss) on campground/resort
operations 3,725 (258) 3,467
------- ------- -------
SALES
Memberships 347 347
Resort interests 213 213
------- ------- -------
Total sales 347 213 560
------- ------- -------
Selling costs (616) (179) (795)
Marketing expenses (210) (210)
------- ------- -------
Total expenses (826) (179) (1,005)
------- ------- -------
Profit (loss) on sales (479) 34 (445)
------- ------- -------
RESORT PARKS INTERNATIONAL
Fee income 1,034 1,034
Cost of operations (621) (621)
------- ------- -------
RPI net contribution 413 413
------- ------- -------
$ 3,659 ($224) 3,435
======= ======= -------
Other income 905
Corporate member services (359)
General and administrative
expenses (2,529)
-------
OPERATING INCOME BEFORE INTEREST INCOME
AND EXPENSE, GAIN ON ASSET DISPOSITIONS,
AND TAXES 1,452
-------
Interest income 1,629
Interest expense and amortization of debt
discount and consent fees (4,431)
Gain on asset dispositions 662
-------
OPERATING LOSS BEFORE TAXES ($688)
=======
</TABLE>
Page 19
<PAGE>
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 $10.1 million for the three months ended
December 31, 1996, compared with $9.9 million for the same period last year.
The slight increase in dues revenue was due primarily to the effect of annual
dues increases which were only partially offset by the net loss of campground
members.
Other campground revenues were $2.5 million for the three months ended December
31, 1996, compared with $2.6 million for the same period last year. The related
campground ancillary expenses were $1.3 million for the three months ended
December 31, 1996, compared with $1.4 million for the same period last year.
The decreases in campground revenues and the related campground ancillary
expenses were due primarily to the closure of four campgrounds during fiscal
1996 and reductions in service levels at certain other campgrounds.
Other campground operating expenses were $7.1 million for the three months ended
December 31, 1996, compared with $7.3 million for the same period last year.
The decrease in expenses resulted primarily from the operational changes made at
the campgrounds in fiscal 1996, which included reducing campground management
and personnel, closing and disposing of four campgrounds, and changing to
seasonal operations at additional campgrounds with low usage during off-season
periods.
During the balance of fiscal 1997, the Company intends to continue to evaluate
its campground operations to determine the appropriate level for such
operations, and it expects to implement additional cost reduction measures while
its membership base continues to decline. These cost reduction measures will
likely include the closure and disposition of additional campgrounds.
Campground membership sales revenue was $1.2 million for the three months ended
December 31, 1996, compared with $347,000 for the same period last year,
reflecting a significantly higher volume of sales in the current period, but at
lower average prices. Sales of new campground memberships increased from 364
during the three months ended December 31, 1995, to 1,013 during the three
months ended December 31, 1996, while sales of upgrade memberships increased
from 53 during the three months ended December 31, 1995, to 1,113 during the
three months ended December 31, 1996. The increase in sales was due primarily
to special promotional programs implemented in fiscal 1997. The increase in
sales revenue reflects the Company's focus on campground membership sales, which
must continue to increase significantly over current levels in order to stop the
continuing decline in the Company's membership base.
Although the Company's sales results are improving, its selling and marketing
expenses as a percentage of sales were 93% and 238% for the three months ended
December 31, 1996 and 1995, respectively. The Company's marketing efforts
require significant expense, and in the short term, the Company expects that its
selling and marketing expenses will exceed its campground membership sales
revenue on an annual basis. The Company must significantly increase its
campground membership sales over current levels in order to stop the continuing
decline in the Company's membership base. The Company is working to increase
the number of prospects that attend its sales presentations, which has not met
the Company's expectations in fiscal 1997. Because the Company intends to keep
its selling and marketing expenses within a close relation to sales revenue, it
is relying principally upon member and RV dealer referrals to increase the
number of sales prospects in the future. The success of the Company's business
strategy over the long term is dependent upon the Company's ability to market
new memberships in sufficient numbers on a cost-effective basis.
Page 20
<PAGE>
The Company reported previously that it was testing a new "cottage membership"
offering use of upscale park model trailers at four of its campgrounds in
California, Oregon, and Washington. The cottage membership was designed to
broaden the market for the Company's product by appealing to families who do not
generally consider themselves campers but who enjoy outdoor activities. To
date, the results from this program have been significantly below expectations
and the program may be discontinued.
CAMPGROUND MANAGEMENT. Wilderness Management, a wholly owned subsidiary of the
Company, manages public campgrounds for the US Forest Service. For the three
months ended December 31, 1996, these operations produced revenues of $46,000
with related expenses (excluding certain shared administrative costs) of
$103,000. This compares with revenues for the same period last year of $41,000
and related expenses (excluding certain shared administrative costs) of $81,000.
The campground management operations generally incur a loss during the second
fiscal quarter due to certain fixed expenses and the seasonal closure of the
campgrounds.
RESORT PARKS INTERNATIONAL. RPI charges its members a fee for a membership that
entitles them to use any of the participating facilities, subject to certain
limitations. For the three months ended December 31, 1996, RPI's operations
produced a net contribution of $438,000, compared with $413,000 for the same
period last year. Although revenues decreased between periods, the decrease was
offset by expense reductions. RPI's revenues have declined as a result of
declining sales in the membership camping industry generally. To maintain its
net contribution in the future, RPI is working to introduce new products to
increase its revenues; however, there is no assurance that it will be
successful.
RESORT OPERATIONS. During the periods presented, the Company's resort
operations consisted primarily of timeshare management and timeshare and lot
sales. On November 21, 1996, the Company sold its timeshare management
operations and timeshare inventory to a newly formed corporation owned by two
former employees. See Note 4 to the consolidated financial statements included
in Item 1 of Part I of this report.
For the three months ended December 31, 1996 and 1995, the resort operations
produced a net negative contribution of $61,000 and $224,000, respectively. For
these same periods, the negative contribution from the resort operations was
offset, in part, by a net positive contribution from the timeshare operations of
$37,000 and $45,000, respectively. The sale of the timeshare operations will
significantly reduce both the revenues and expenses from the resort operations
in future periods.
The Company's present interest in the resorts consists primarily of
approximately 600 residential lots and other miscellaneous real estate at the
resorts. The Company presently plans to dispose of the remaining assets that it
owns at the resorts over the next several years. However, there is no assurance
that the Company will be able to locate a buyer for any of the remaining resort
assets or that sales on acceptable terms can be effected.
INTEREST INCOME AND EXPENSE. Interest income was $875,000 for the three months
ended December 31, 1996, compared with $1.6 million for the same period last
year. In these periods, interest income included amortization of the allowance
for interest discount and valuation allowance related to the contracts
receivable of $95,000 and $144,000, respectively. The $754,000 decrease in
interest income from period to period was due primarily to a decrease in
interest earned on the Company's diminishing portfolio of contracts receivable
and a $27.7 million decrease in cash between years.
Interest expense was $2.6 million for the three months ended December 31, 1996,
compared with $4.4 million for the same period last year. In the current
period, interest expense included amortization of $704,000 related to the debt
issuance costs incurred in connection with obtaining the Credit Agreement with
Foothill. The $1.8 million decrease in interest expense from period to
Page 21
<PAGE>
period was due primarily to the repurchase of $7.4 million principal amount of
Secured Notes in January 1996, a net $36.8 million reduction in the Company's
outstanding debt resulting from the Restructuring and subsequent payments under
the Credit Agreement, a $2.5 million reduction in mortgage notes due to the
abandonment of two operating campgrounds in the Fall of 1995, and scheduled
repayments of notes payable.
As a result of the Restructuring, interest expense is expected to decrease
significantly for fiscal 1997 compared with fiscal 1996 due to the reduction in
the total amount of debt outstanding. Moreover, since the Company is prohibited
from paying cash interest on the PIK Notes until the borrowings under the Credit
Agreement with Foothill are repaid, during the repayment period, a substantial
portion of the Company's interest expense will represent non-cash interest on
the PIK Notes. The payment-in-kind feature of the PIK Notes will decrease the
Company's cash interest costs over this period. However, the payment-in-kind
feature of the PIK Notes will also increase the principal amount of PIK Notes
outstanding at the rate of 12% per year, compounded semi-annually, which will
increase interest expense in the future and also decrease the rate at which the
Company is able to retire its total debt outstanding.
GAIN (LOSS) ON ASSET DISPOSITIONS. The Company recognized a loss on the
disposition of assets of $47,000 for the three months ended December 31, 1996,
compared with a gain of $662,000 for the same period last year. The decrease in
the current period resulted primarily from the timing of asset sales. Over the
next several years, the Company intends to dispose of the remaining assets that
it owns at the resorts, any campgrounds that are closed as the Company
downsizes, and other undeveloped land and excess acreage associated with the
campgrounds. However, no assurance exists that the Company will be able to
locate a buyer for these assets or that sales on acceptable terms can be
effected.
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, subscription fees
received from members who subscribe to the Company's member magazine, and fees
received from members who make more than five operator-assisted reservations in
a given year, rather than use the Company's automated reservation system. For
the three months ended December 31, 1996, other income was $802,000, compared
with $905,000 for the same period last year. The decrease in the current period
was due primarily to a decrease in income from recoveries on canceled contracts
and dues through the use of outside collection agencies.
RESTRUCTURING COSTS. The Company incurred $204,000 of restructuring costs
during the three months ended December 31, 1996, related to the Restructuring.
In addition, the Company's consolidated balance sheet as of December 31, 1996,
includes in "other assets" the unamortized debt issuance costs related to
obtaining the Credit Agreement with Foothill. See Note 2 to the consolidated
financial statements included in Item 1 of Part I of this report.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Six Months Ended December 31, 1996 and 1995
NET INCOME (LOSS). The Company reported net income of $2.0 million or $.27 per
share on revenues of $39.7 million for the six months ended December 31, 1996.
This compares with a net loss of $1.9 million or $.51 per share on revenues of
$43.7 million for the same period last year. Although revenues declined during
the current period, there were greater decreases in expenses, principally
campground operating costs, general and administrative expenses, and interest,
which were primarily responsible for the improvement in results.
Page 22
<PAGE>
The following table summarizes the operating results of the Company's
campgrounds (including Wilderness Management), full service resorts, and RPI,
excluding allocations of corporate overhead and other revenues and expenses, for
the six months ended December 31, 1996:
<TABLE>
<CAPTION>
Six Months Ended December 31, 1996
------------------------------------
Campgrounds Resorts Total
----------- ------- ----------
<S> <C> <C> <C>
CAMPGROUND/RESORT OPERATIONS
Membership dues $ 19,917 $ 19,917
Other campground/resort revenues 8,428 $ 1,858 10,286
Campground ancillary expenses (3,990) (3,990)
Other operating expenses (16,259) (2,019) (18,278)
-------- ------- --------
Profit (loss) on campground/resort
operations 8,096 (161) 7,935
-------- ------- --------
SALES
Memberships 2,063 2,063
Resort interests 348 348
-------- ------- --------
Total sales 2,063 348 2,411
-------- ------- --------
Selling costs (1,591) (233) (1,824)
Marketing expenses (635) (635)
-------- ------- --------
Total expenses (2,226) (233) (2,459)
-------- ------- --------
Profit (loss) on sales (163) 115 (48)
-------- ------- --------
RESORT PARKS INTERNATIONAL
Fee income 1,943 1,943
Cost of operations (937) (937)
-------- ------- --------
RPI net contribution 1,006 1,006
-------- ------- --------
$ 8,939 ($46) 8,893
======== ======= --------
Other income 1,887
Corporate member services (812)
General and administrative expenses (4,711)
--------
OPERATING INCOME BEFORE INTEREST INCOME
AND EXPENSE, GAIN ON ASSET DISPOSITIONS,
RESTRUCTURING COSTS, AND TAXES 5,257
--------
Interest income 1,995
Interest expense and amortization of debt
issuance costs and deferred gain (5,078)
Gain on asset dispositions 1,215
Restructuring costs (1,101)
--------
OPERATING INCOME BEFORE TAXES $ 2,288
========
</TABLE>
Page 23
<PAGE>
The following table summarizes the operating results of the Company's
campgrounds (including Wilderness Management), full service resorts, and RPI,
excluding allocations of corporate overhead and other revenues and expenses, for
the six months ended December 31, 1995:
<TABLE>
<CAPTION>
Six Months Ended December 31, 1995
------------------------------------
Campgrounds Resorts Total
----------- ------- ----------
<S> <C> <C> <C>
CAMPGROUND/RESORT OPERATIONS
Membership dues $ 20,043 $ 20,043
Other campground/resort revenues 9,059 $ 3,895 12,954
Campground ancillary expenses (4,618) (4,618)
Operating expenses (18,356) (4,191) (22,547)
-------- ------- --------
Profit (loss) on campground/resort
operations 6,128 (296) 5,832
-------- ------- --------
SALES
Memberships 1,221 1,221
Resort interests 700 700
-------- ------- --------
Total sales 1,221 700 1,921
-------- ------- --------
Selling costs (1,323) (493) (1,816)
Marketing expenses (663) (663)
-------- ------- --------
Total expenses (1,986) (493) (2,479)
-------- ------- --------
Profit (loss) on sales (765) 207 (558)
-------- ------- --------
RESORT PARKS INTERNATIONAL
Fee income 2,234 2,234
Cost of operations (1,173) (1,173)
-------- ------- --------
RPI net contribution 1,061 1,061
-------- ------- --------
$ 6,424 ($89) 6,335
======== ======= --------
Other income 2,207
Corporate member services (904)
General and administrative expenses (4,961)
--------
OPERATING INCOME BEFORE INTEREST
INCOME AND EXPENSE, GAIN ON ASSET
DISPOSITIONS, AND TAXES 2,677
--------
Interest income 3,404
Interest expense and amortization
of debt discount and consent fees (9,041)
Gain on asset dispositions 918
--------
OPERATING LOSS BEFORE TAXES ($2,042)
========
</TABLE>
Page 24
<PAGE>
CAMPGROUND OPERATIONS. Campground membership dues revenue was $19.9 million for
the six months ended December 31, 1996, compared with $20.0 million for the same
period last year. The slight decline in dues revenue was due primarily to the
net loss of campground members, substantially offset by the effect of the annual
dues increase.
Other campground revenues were $8.4 million for the six months ended December
31, 1996, compared with $9.1 million for the same period last year. The related
campground ancillary expenses were $4.0 million for the six months ended
December 31, 1996, compared with $4.6 million for the same period last year.
The decreases in other campground revenues and the related ancillary expenses
were due primarily to the closure of four campgrounds during fiscal 1996 and
reductions in service levels at certain other campgrounds.
Other campground operating expenses decreased by $2.1 million to $16.3 million
for the six months ended December 31, 1996, from $18.4 million for the same
period last year. This decrease resulted primarily from the operational changes
made at the campgrounds in fiscal 1996, which included reducing campground
management and personnel, closing and disposing of four campgrounds, and
changing to seasonal operations at additional campgrounds with low usage during
off-season periods.
Campground membership sales revenue was $2.1 million for the six months ended
December 31, 1996, compared with $1.2 million for the same period last year,
reflecting a significantly higher volume of sales in the current period, but at
lower average prices. Sales of new campground memberships increased from 1,399
during the six months ended December 31, 1995, to 2,162 during the six months
ended December 31, 1996, while sales of upgrade memberships increased from 123
during the six months ended December 31, 1995, to 1,332 during the six months
ended December 31, 1996. The increase in sales revenue reflects the Company's
focus on increasing campground membership sales.
Selling and marketing expenses exceeded the related sales revenue by $163,000
and $765,000, respectively, in the two periods. These expenses exceeded sales
revenue because of the increased marketing activity, and the low volume of sales
in both periods which did not cover fixed costs.
CAMPGROUND MANAGEMENT. For the six months ended December 31, 1996, the
Company's campground management operations produced revenues of $779,000 with
related expenses (excluding certain shared administrative costs) of $683,000.
This compares with revenues for the same period last year of $582,000 and
related expenses (excluding certain shared administrative costs) of $511,000.
RESORT PARKS INTERNATIONAL. RPI's operations produced a net contribution of
approximately $1.0 million for the six months ended December 31, 1996 and 1995.
Although revenues decreased between periods, the decrease was offset by expense
reductions.
RESORT OPERATIONS. The resort operations produced a net negative contribution
of $46,000 for the six months ended December 31, 1996, compared with a net
negative contribution of $89,000 for the same period last year. For these same
periods, the negative contribution from the resort operations was offset, in
part, by a net positive contribution from the timeshare operations of $93,000
and $167,000, respectively. As previously discussed, the sale of the timeshare
operations will significantly reduce both the revenues and expenses from the
resort operations in future periods.
INTEREST INCOME AND EXPENSE. Interest income was $2.0 million for the six
months ended December 31, 1996, compared with $3.4 million for the same period
last year. In these periods, interest income included amortization of the
allowance for interest discount and valuation allowance related to the contracts
receivable of $203,000 and $305,000, respectively. The $1.4 million decrease
in interest income from period to period was due primarily to a decrease in
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<PAGE>
interest earned on the Company's diminishing portfolio of contracts receivable
and significantly lower cash balances between years.
Interest expense was $5.1 million for the six months ended December 31, 1996,
compared with $9.0 million for the same period last year. In the current
period, interest expense included amortization of $966,000 related to the debt
issuance costs incurred in connection with obtaining the Credit Agreement with
Foothill. The $4.0 million decrease in interest expense from period to period
was due primarily to the repurchase of $7.4 million principal amount of Secured
Notes in January 1996, a net $36.8 million reduction in the Company's
outstanding debt resulting from the Restructuring and subsequent repayments
under the Credit Agreement, a $2.5 million reduction in mortgage notes due to
the abandonment of two operating campgrounds in the Fall of 1995, and scheduled
repayments of notes payable.
GAIN ON ASSET DISPOSITIONS. The Company recognized a gain on the disposition of
assets of $1.2 million for the six months ended December 31, 1996, compared with
$918,000 for the same period last year. The gain in the current period resulted
primarily from the sale of three campgrounds and certain other real estate at
the campgrounds and resorts.
OTHER INCOME. Other income was $1.9 million for the six months ended December
31, 1996, compared with $2.2 million for the same period last year. The decrease
in the current period was due primarily to a decrease in income from recoveries
on canceled contracts and dues through the use of outside collection agencies.
OTHER EXPENSES. General and administrative expenses were $4.7 million for the
six months ended December 31, 1996, compared with $5.0 million for the same
period last year, reflecting the Company's continuing efforts to lower its
administrative costs.
Corporate member services costs were $812,000 for the six months ended December
31, 1996, compared with $904,000 for the same period last year. The decrease in
the current period was due primarily to staff reductions and other cost-cutting
measures implemented during fiscal 1996, including implementation of an
automated reservation system.
The Company incurred $1.1 million of restructuring costs during the six months
ended December 31, 1996, related to the Restructuring.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
On November 19, 1996, the stockholders of USTrails approved the merger (the
"Merger") of USTrails into the Company, a newly formed, wholly-owned Delaware
subsidiary, pursuant to the Agreement and Plan of Merger dated as of October 1,
1996, between USTrails and the Company (the "Merger Agreement"). The Merger was
consummated on November 20, 1996. Pursuant to the terms of the Merger Agreement,
the Company is the surviving corporation. Each share of USTrails common stock,
par value $.01 per share ("USTrails Common Stock"), outstanding prior to the
Merger was converted into the right to receive one share of the Company's common
stock, par value $.01 per share ("Company Common Stock"), and each outstanding
stock option, warrant or other right to purchase or receive USTrails Common
Stock was converted into a similar stock option, warrant or other right to
acquire Company Common Stock. The principal purposes of the Merger were to
implement the transfer restrictions described below and to change USTrails'
state of incorporation to Delaware.
Transfer of Company Common Stock is subject to restrictions designed to
avoid an "ownership change" within the meaning of section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). Such restrictions are set forth
in Article IX of the Company's Restated Certificate of Incorporation. Article
IX generally restricts, until June 30, 2011 (or earlier in certain events),
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<PAGE>
direct or indirect transfer of Company Common Stock that would without the
approval of the board of directors of the Company (i) increase to more than
4.75% the percentage ownership of Company Common Stock of any person who at any
time during the preceding three-year period did not own more than 4.75% of the
Company Common Stock, (ii) increase the percentage of Company Common Stock owned
by any person that during the preceding three-year period owned more than 4.75%
of the Company Common Stock, or by any group of persons treated as a "5 Percent
Shareholder" (as defined in the Code but substituting "4.75%" for "5 Percent"),
or (iii) cause an "ownership change" of the Company. Article IX provides that
any direct or indirect transfer of Company Common Stock in violation of Article
IX is void ab initio as to the purported transferee, and the purported
transferee will not be recognized as the owner of shares owned in violation of
Article IX for any purpose, including for purposes of voting and receiving
dividends or other distributions in respect of Company Common Stock. Any shares
purportedly acquired in violation of Article IX will be transferred to a trustee
who will be required to sell them. See the Company's Proxy
Statement/Prospectus, dated October 3, 1996 (the "Proxy Statement/Prospectus"),
in which the terms of such restrictions were previously reported.
On November 19, 1996, the stockholders of USTrails also approved the grant
to William J. Shaw, the President, Chief Executive Officer, and a director of
the Company, of an option to purchase 664,495 shares of USTrails Common Stock at
an exercise price of $0.69 per share. Upon effectiveness of the Merger, such
option became exercisable for an equal number of shares of Company Common Stock.
See the Proxy Statement/Prospectus in which the terms of such option, including
the Stock Option Agreement, dated as of August 1, 1996, related thereto, were
previously reported. The shares of Company Common Stock issuable upon the
exercise of such option will be registered on Form S-8 pursuant to the
Securities Act of 1933, as amended, as contemplated by the Proxy
Statement/Prospectus.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On November 19, 1996, the Company held its annual meeting of stockholders. As
of the record date for the meeting, the Company had 7,383,276 shares of common
stock outstanding, of which 5,993,401 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:
Name Votes For Votes Withheld
---- --------- --------------
Andrew M. Boas 5,991,045 2,356
William P. Kovacs 5,991,045 2,356
Donald R. Leopold 5,991,045 2,356
H. Sean Mathis 5,991,045 2,356
Douglas K. Nelson 5,991,045 2,356
William J. Shaw 5,991,045 2,356
2. The stockholders approved the Merger Agreement as described in Item 2 of Part
II of this Report. The votes cast for, votes cast against, and abstentions
and broker non-votes were as follows:
Abstentions and
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
5,159,523 139,478 694,400
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<PAGE>
3. The stockholders voted to eliminate certain charter restrictions on the
issuance and repurchase of the Company's capital stock imposed in connection
with the issuance of the Secured Notes that were retired in July 1996. The
votes cast for, votes cast against, and abstentions and broker non-votes were
as follows:
Abstentions and
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
5,156,931 142,270 694,200
4. The stockholders approved the Stock Option Agreement, dated as of August 1,
1996, granting the Company's CEO the option to purchase 664,495 shares of the
Company's common stock. The votes cast for, votes cast against, and
abstentions and broker non-votes were as follows:
Abstentions and
Votes For Votes Against Broker Non-Votes
--------- ------------- ----------------
5,288,509 9,777 695,115
5. 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, 1997. The votes cast for, votes cast against, and abstentions
were as follows:
Votes For Votes Against Abstentions
--------- ------------- ----------------
5,990,350 3,044 7
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
The following documents are filed as exhibits to this report.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
2.1 Agreement and Plan of Merger, dated as of October 1, 1996, between
the Company and USTrails (predecessor in interest to the Company)
(incorporated by reference to the proxy statement/prospectus filed
with the Securities and Exchange Commission (the "SEC") on October 3,
1996 as part of the Registration Statement on Form S-4, Registration
Statement No. 333-13339 (the "S-4 Registration Statement")).
3.1 Restated Certificate of Incorporation of the Company (incorporated by
reference to the proxy statement/prospectus filed with the SEC on
October 3, 1996 as part of the S-4 Registration Statement).
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Form 8-B filed by the Company with
the SEC on November 27, 1996).
10.1 Stock Option Agreement, dated as of August 1, 1996, between USTrails
and William J. Shaw (incorporated by reference to Exhibit 10.26 to
the Form 8-B filed by the Company with the SEC on November 27, 1996).
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<PAGE>
10.2 Assumption of Obligations, dated as of November 20, 1996, by the
Company assuming the obligations of USTrails under the USTrails Inc.
1991 Employee Stock Incentive Plan, as amended; the USTrails Inc.
1993 Stock Option and Restricted Stock Purchase Plan, as amended; the
USTrails Inc. 1993 Director Stock Option Plan, as amended; Warrant
Certificates originally issued on December 31, 1991, June 12, 1992,
and March 2, 1994 to May 16, 1995; and the Stock Option Agreement,
dated as of August 1, 1996, between USTrails and William J. Shaw
(incorporated by reference to Exhibit 10.27 to the Form 8-B filed by
the Company with the SEC on November 27, 1996).
10.3 Indemnification Agreement, dated as of November 20, 1996, between the
Company and William J. Shaw and Schedule of substantially identical
Indemnification Agreements (incorporated by reference to Exhibit
10.39 to the Company's Registration Statement no. 333-19357 on Form
S-1, originally filed with the Sec on January 7, 1997).
10.4 Supplement No. 2 to Grantor Trust Agreement, dated as of November 20,
1996, by the Company in favor of Union Bank of California, N.A.
(formerly known as The Bank of California, N.A., and referred to
herein as "Union Bank") supplementing the Grantor Trust Agreement,
dated as of September 30, 1991, between Union Bank and Thousand
Trails, Inc. (incorporated by reference to Exhibit 10.44 to the
Company's Registration Statement NO. 333-19357 on Form S-1,
originally filed with the SEC on January 7, 1997).
10.5 Supplement to Grantor Trust Agreement, dated as of November 20, 1996,
by the Company in favor of Union Bank supplementing the Grantor Trust
Agreement, dated as of May 8, 1991, as supplemented, between USTrails
Inc. and Texas Commerce Bank, N.A. (incorporated by reference to
Exhibit 10.43 to the Form 8-B filed by the Company with the SEC on
November 27, 1996).
11.1 Statement re: Computation of Per Share Earnings.
27.1 Financial Data Schedule.
REPORTS ON FORM 8-K
On November 27, 1996, the Company filed a current report on Form 8-K relating to
the consummation of the Merger. See Item 2 of Part II of this report.
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<PAGE>
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, 1997 By: /s/ Harry J. White, Jr.
----------------------------------
Harry J. White, Jr.
Vice President, Chief Financial
Officer, and Chief Accounting
Officer
Page 30
<PAGE>
Exhibit 11.1
------------
THOUSAND TRAILS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(DOLLARS AND COMMON SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
PRIMARY:
Weighted average number of common shares outstanding 7,041 3,703
Weighted average common stock equivalents (vested
options) 171
------ -------
Weighted average number of common shares outstanding 7,212 3,703
====== =======
Net income (loss) allocable to common shareholders $1,976 ($1,885)
====== =======
Primary net income (loss) per common share $ 0.27 ($0.51)
====== =======
FULLY DILUTED:
Weighted average number of common shares outstanding 7,041 3,703
Weighted average common stock equivalents (vested
options) 220
------ -------
Weighted average number of common shares outstanding 7,261 3,703
====== =======
Net income (loss) allocable to common shareholders $1,976 ($1,885)
====== =======
Fully diluted net income (loss) per common share $ 0.27 ($0.51)
====== =======
</TABLE>
Page 1
<PAGE>
Exhibit 11.1
------------
THOUSAND TRAILS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(DOLLARS AND COMMON SHARES IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, December 31,
1996 1995
------------ ------------
<S> <C> <C>
PRIMARY:
Weighted average number of common shares outstanding 7,383 3,703
Weighted average common stock equivalents (vested
options) 310
------ ------
Weighted average number of common shares outstanding 7,693 3,703
====== ======
Net income (loss) allocable to common shareholders $ 321 ($704)
====== ======
Primary net income (loss) per common share $ 0.04 ($0.19)
====== ======
FULLY DILUTED:
Weighted average number of common shares outstanding 7,383 3,703
Weighted average common stock equivalents (vested
options) 369
------ ------
Weighted average number of common shares outstanding 7,752 3,703
====== ======
Net income (loss) allocable to common shareholders $ 321 ($704)
====== ======
Fully diluted net income (loss) per common share $ 0.04 ($0.19)
====== ======
</TABLE>
Page 2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> JUN-30-1997 JUN-30-1996
<PERIOD-START> JUL-01-1996 JUL-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<CASH> 2,403 0
<SECURITIES> 0 0
<RECEIVABLES> 9,437 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 9,275 0
<PP&E> 25,442 0
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 67,585 0
<CURRENT-LIABILITIES> 30,439 0
<BONDS> 56,264 0
0 0
0 0
<COMMON> 74 0
<OTHER-SE> (22,973) 0
<TOTAL-LIABILITY-AND-EQUITY> 67,585 0
<SALES> 2,411 1,921
<TOTAL-REVENUES> 39,654 43,681
<CGS> 29 97
<TOTAL-COSTS> 37,366 45,723
<OTHER-EXPENSES> 32,249 36,574
<LOSS-PROVISION> 10 11
<INTEREST-EXPENSE> 5,078 9,041
<INCOME-PRETAX> 2,288 (2,042)
<INCOME-TAX> (312) 157
<INCOME-CONTINUING> 1,976 (1,885)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,976 (1,885)
<EPS-PRIMARY> .27 (.51)
<EPS-DILUTED> .27 (.51)
</TABLE>
