e10vq
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2003

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period of                to

Commission File Number 1-14645

THOUSAND TRAILS, INC.

(Exact Name of Registrant as Specified in Its Charter)
     
Delaware   75-2138671
 
(State or Other Jurisdiction
of Incorporation or Organization)		   (IRS Employer Identification No.)
     
3801 Parkwood Blvd., Suite 100, Frisco, TX   75034
(Address of Principal Executive Office)   (Zip Code)
     
Registrant’s Telephone Number, Including Area Code:   (214) 618-7200
   

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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes  [   ]  No  [X]

The number of shares of Common Stock, par value $.01, issued and outstanding as of May 9, 2003, was 6,973,943.

 

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Operations
Consolidated Statement of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
Index to the Exhibits
EX-10.1 Second Amendment to Loan Agreement
EX-10.2 Letter Confirming Settlement-Stock Options
EX-11.1 Computation of Per Share Earnings
EX-99.1 Certification of Chief Executive Officer
EX-99.2 Certification of Chief Financial Officer

Table of Contents

Thousand Trails, Inc.

Index

           
        Page
PART I.  FINANCIAL INFORMATION      
Item 1.
   Financial Statements      
    Consolidated Balance Sheets as of March 31, 2003 and June 30, 2002   3  
    Consolidated Statements of Operations for the nine months ended March 31, 2003 and March 31, 2002   4  
    Consolidated Statements of Operations for the three months ended March 31, 2003 and March 31, 2002   5  
    Consolidated Statement of Shareholders’ Equity for the nine months ended March 31, 2003   6  
    Consolidated Statements of Cash Flows for the nine months ended March 31, 2003 and March 31, 2002   7  
    Notes to Consolidated Financial Statements   9  
Item 2.
   Management’s Discussion and Analysis of Financial Condition and Results of Operations   15  
Item 3.
   Quantitative and Qualitative Disclosures About Market Risk   27  
Item 4.
   Controls and Procedures   27  
PART II.  OTHER INFORMATION      
Item 6.
   Exhibits and Reports on Form 8-K   28  
Signatures
   29  
Certifications
   30  

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Thousand Trails, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)

                         
            March 31,   June 30,
    2003   2002
   
 
    (Unaudited)        
Assets                
Current Assets
                
 
Cash and cash equivalents
   $ 3,319     $ 4,180  
 
Marketable securities — available for sale
     17,536       5,343  
 
Current portion of receivables, net of allowances of $.8 million and $1.0 million respectively
     4,024       3,238  
 
Current portion of deferred membership origination costs
     6,032       5,013  
 
Deferred tax assets-current
     5,327       6,106  
 
Inventories
     1,123       1,158  
 
Other current assets
     1,222       2,889  
 
    
     
 
   
Total Current Assets
     38,583       27,927  
 
Restricted cash
     646       646  
 
Receivables, net of allowances of $1.3 million and $1.2 million, respectively
     6,685       6,400  
 
Campground land
     20,696       20,696  
 
Buildings and equipment, net of accumulated depreciation of $25.3 million and $24.5 million, respectively
     22,274       22,781  
 
Assets held for sale
     4,605       5,402  
 
Deferred membership origination costs, less current portion
     6,990       7,337  
 
Deferred tax assets-noncurrent
     806       296  
 
Other assets
     657       755  
 
    
     
 
Total Assets
   $ 101,942     $ 92,240  
 
    
     
 
Liabilities and Shareholders’ Equity
                
Current Liabilities
                
 
Accounts payable
   $ 1,475     $ 2,665  
 
Accrued liabilities
     7,030       8,108  
 
Current portion of deferred revenue
     39,856       34,212  
 
Other current liabilities
     145       364  
 
    
     
 
   
Total Current Liabilities
     48,506       45,349  
 
Deferred revenue, less current portion
     24,414       24,984  
 
Other liabilities
     1,323       1,244  
 
    
     
 
   
Total Liabilities
     74,243       71,577  
 
    
     
 
Commitments and Contingencies
                
Shareholders’ Equity
                
 
Preferred stock, $.01 par value, 1,500,000 shares authorized, none issued
 
Common stock, $.01 par value, 15,000,000 shares authorized, 8,474,395 and 8,395,528 shares issued, respectively
     85       84  
 
Additional paid-in capital
     22,640       22,596  
 
Retained earnings
     16,721       9,688  
 
Accumulated other comprehensive loss
     (248 )     (132 )
 
Treasury stock, 1,500,452 and 1,477,912 shares, respectively
     (11,499 )     (11,573 )
 
    
     
 
   
Total Shareholders’ Equity
     27,699       20,663  
 
    
     
 
Total Liabilities and Shareholders’ Equity
   $ 101,942     $ 92,240  
 
    
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Thousand Trails, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)

                       
          For the nine months ended March 31,
         
          2003   2002
         
 
Revenues
                
 
Membership contracts originated
   $ 19,102     $ 19,234  
 
Change in deferred revenue
     (2,808 )     (7,326 )
 
    
     
 
   
Membership sales revenue
     16,294       11,908  
 
Membership dues
     30,061       29,994  
 
Other campground revenue
     12,721       13,350  
 
Trails Management revenue
     3,287       3,417  
 
RPI membership fees
     2,500       2,689  
 
Interest income
     2,073       1,662  
 
Gain on asset sales
     186       144  
 
Other income
     1,855       1,815  
 
    
     
 
     
Total Revenues
     68,977       64,979  
 
    
     
 
Expenses
                
 
Campground operating expenses
     32,306       31,689  
 
Membership origination costs
     8,933       9,173  
 
Change in deferred origination costs
     (673 )     (2,397 )
 
Marketing expenses
     4,124       4,229  
 
Trails Management expenses
     2,987       3,132  
 
RPI membership expenses
     1,282       1,325  
 
Corporate member services
     986       1,028  
 
Interest expense
     13       27  
 
General and administrative expenses
     7,574       7,545  
 
    
     
 
     
Total Expenses
     57,532       55,751  
 
    
     
 
Income Before Income Taxes
     11,445       9,228  
Income Taxes —
                
 
Income tax provision – current
     (4,143 )     (2,168 )
 
Income tax provision – deferred
     (269 )     (1,031 )
 
    
     
 
 
     (4,412 )     (3,199 )
Net Income
   $ 7,033     $ 6,029  
 
    
     
 
Net Income per Share — Basic
   $ 1.01     $ .74  
 
    
     
 
Net Income per Share — Diluted
   $ .92     $ .70  
 
    
     
 
Shares Used to Calculate Net Income Per Share:
                
 
Basic
     6,946       8,129  
 
    
     
 
 
Diluted
     7,650       8,638  
 
    
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Thousand Trails, Inc. and Subsidiaries
Consolidated Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)

                       
          For the three months ended March 31,
         
          2003   2002
         
 
Revenues
                
 
Membership contracts originated
   $ 5,121     $ 6,297  
 
Change in deferred revenue
     565       (1,952 )
 
    
     
 
   
Membership sales revenue
     5,686       4,345  
 
Membership dues
     9,920       9,921  
 
Other campground revenue
     3,083       3,264  
 
Trails Management revenue
     35       1  
 
RPI membership fees
     953       1,003  
 
Interest income
     805       632  
 
Gain (loss) on asset sales
     184       (11 )
 
Other income
     622       578  
 
    
     
 
     
Total Revenues
     21,288       19,733  
 
    
     
 
Expenses
                
 
Campground operating expenses
     9,438       9,252  
 
Membership origination costs
     2,591       3,028  
 
Change in deferred origination costs
     209       (692 )
 
Marketing expenses
     1,025       1,167  
 
Trails Management expenses
     95       149  
 
RPI membership expenses
     481       426  
 
Corporate member services
     304       294  
 
Interest expense
     7       4  
 
General and administrative expenses
     2,357       2,827  
 
    
     
 
     
Total Expenses
     16,507       16,455  
 
    
     
 
Income Before Income Taxes
     4,781       3,278  
Income Taxes —
                
 
Income tax provision – current
     (1,311 )     (623 )
 
Income tax provision – deferred
     (533 )     (490 )
 
    
     
 
 
     (1,844 )     (1,113 )
Net Income
   $ 2,937     $ 2,165  
 
    
     
 
Net Income per Share — Basic
   $ .42     $ .27  
 
    
     
 
Net Income per Share — Diluted
   $ .38     $ .25  
 
    
     
 
Shares Used to Calculate Net Income Per Share:
                
 
Basic
     6,972       8,062  
 
    
     
 
 
Diluted
     7,641       8,699  
 
    
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Thousand Trails, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended March 31, 2003
(Dollars in thousands)
(Unaudited)

                                                         
                                    Accumulated                
                    Additional           Other                
    Comprehensive           Paid-In   Retained   Comprehensive   Treasury        
    Income   Common Stock   Capital   Earnings   Loss   Stock   Total
   
 
 
 
 
 
 
Balance, July 1, 2002
     —     $ 84     $ 22,523     $ 9,688      ($ 132 )    ($ 11,500 )   $ 20,663  
Issuance of common stock
     —       1       117       —       —       57       175  
Purchase of treasury stock
     —       —       —       —       —       (56 )     (56 )
Net income for the nine months ended March 31, 2003
     7,033       —       —       7,033       —       —       7,033  
Other comprehensive loss
     (116 )     —       —       —       (116 )     —       (116 )
 
    
     
     
     
     
     
     
 
Balance, March 31, 2003
   $ 6,917     $ 85     $ 22,640     $ 16,721      ($ 248 )    ($ 11,499 )   $ 27,699  
 
    
     
     
     
     
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Thousand Trails, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)

                   
      For the nine months ended March 31,
     
      2003   2002
     
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                
 
Collections of principal on receivables
   $ 5,431     $ 4,098  
 
Interest received
     2,073       1,661  
 
Interest paid
     (13 )     (28 )
 
General and administrative and corporate member services costs
     (8,734 )     (9,128 )
 
Cash collected from operations, including deferred revenue
     53,351       54,630  
 
Cash from sales of memberships
     12,661       13,467  
 
Expenditures for property operations
     (33,490 )     (34,295 )
 
Expenditures for sales and marketing
     (12,937 )     (12,964 )
 
Expenditures for insurance premiums
     (1,754 )     (1,905 )
 
Payment of income taxes
     (4,362 )     (2,162 )
 
    
     
 
Net cash provided by operating activities
     12,226       13,374  
 
    
     
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
 
Purchase of marketable securities
     (12,193 )     (11,700 )
 
Capital expenditures
     (2,035 )     (4,711 )
 
Proceeds from asset sales
     1,070       404  
 
    
     
 
Net cash used in investing activities
     (13,158 )     (16,007 )
 
    
     
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
 
Purchase of treasury stock
     (56 )     (764 )
 
Payment of notes
     (48 )     (54 )
 
Issuance of common stock
     175       58  
 
    
         
Net cash used in financing activities
     71       (760 )
 
    
     
 
DECREASE IN CASH AND CASH EQUIVALENTS
     (861 )     (3,393 )
CASH AND CASH EQUIVALENTS
                
 
Beginning of period
     4,180       9,016  
 
    
     
 
 
End of period
   $ 3,319     $ 5,623  
 
    
     
 

— continued —

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Thousand Trails, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(Dollars in thousands)
(Unaudited)

                   
      For the nine months ended March 31,
     
      2003   2002
     
 
Reconciliation of net income to net cash provided by operating activities:
                
Net Income
   $ 7,033     $ 6,029  
Adjustments to reconcile net income to net cash provided by operating activities —
                
 
Depreciation
     2,455       2,188  
 
Bad debt provision
     446       633  
 
Increase in deferred sales revenue
     2,808       7,326  
 
Increase in deferred membership origination costs
     (673 )     (2,397 )
 
Gain on asset sales
     (186 )     (144 )
 
Increase in deferred income tax provision
     269       1,031  
 
Increase in receivables
     (1,517 )     (1,669 )
 
Decrease in other assets
     2,162       337  
 
Decrease in accounts payable
     (1,190 )     (1,342 )
 
Increase in deferred dues
     2,537       2,099  
 
Decrease in other liabilities
     (1,802 )     (716 )
 
Other, net
     (116 )     (1 )
 
    
     
 
Total adjustments
     5,193       7,345  
 
    
     
 
Net cash provided by operating activities
   $ 12,226     $ 13,374  
 
    
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Thousand Trails, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2003
(Unaudited)

NOTE 1 — NATURE OF OPERATIONS

Thousand Trails, Inc., a Delaware corporation, and its subsidiaries (collectively, the “Company”) own and operate 59 membership-based campgrounds located in 17 states and British Columbia, Canada. In addition, the Company provides a reciprocal use program for members of approximately 280 recreational facilities and manages 194 public campgrounds for the U.S. Forest Service and other entities. Operating revenues consist primarily of membership sales, membership dues received from campground members, revenues from the campground operations, fee revenue from members of the reciprocal use program, and management fees from the campground management operations.

The accompanying consolidated financial statements include the accounts of Thousand Trails, Inc. and the following wholly owned subsidiaries: Coast Financial Services, Inc., Leisure Time Resorts of America, Inc. (“Leisure Time”), National American Corporation and its subsidiaries (“NACO”), Resort Parks International, Inc. (“RPI”), Thousand Trails (Canada), Inc., and Thousand Trails Management Services, Inc. (“Trails Management”).

The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The interim financial information is unaudited, but in the opinion of management, it reflects all adjustments necessary to present fairly, in all material respects, the consolidated financial position and results of operations of the Company as of the dates and for the periods presented. All such adjustments are of a normal recurring nature.

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, 2002, filed with the Securities and Exchange Commission (the “SEC”) on September 30, 2002.

All significant intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements as of and for the nine and three month periods ended March 31, 2003 and 2002, and in the consolidated balance sheets as of June 30, 2002 and March 31, 2003.

Reclassification
Certain reclassifications have been made to prior period information to conform to the current period presentation.

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NOTE 2 — COMPREHENSIVE INCOME

Comprehensive income includes all changes in equity during a period except those resulting from investments by owners and distributions to owners, as well as net income reported on the income statement. The Company lists items of other comprehensive income by their nature in its financial statements and presents the accumulated balance of such items separately from retained earnings and additional paid-in capital in the equity section of its consolidated balance sheet.

Currently, the Company’s items of other comprehensive income consist of its foreign currency translation and unrealized gains on marketable securities held as available for sale. The Company translates the balance sheet of its Canadian subsidiary into U.S. dollars at exchange rates in effect at that time. Unrealized gains on marketable securities are calculated as the difference between the carrying amount and the fair market value of the Company’s marketable securities.

The following table provides statements of comprehensive income for the nine and three months ended March 31, 2003 and 2002 (dollars in thousands):

                                 
    For the nine months ended   For the three months ended
    March 31,   March 31,
   
 
    2003   2002   2003   2002
   
 
 
 
    (Unaudited)   (Unaudited)
Net income
   $ 7,033     $ 6,029     $ 2,937     $ 2,165  
Other comprehensive income:
                                
Unrealized loss on marketable securities
     (118 )     —       (65 )     —  
Foreign currency translation adjustment
     2       (1 )     2       —  
 
    
     
     
     
 
Comprehensive income
   $ 6,917     $ 6,028     $ 2,884     $ 2,165  
 
    
     
     
     
 

NOTE 3 — SEGMENT REPORTING

The Company has three reportable segments: campgrounds, RPI, and Trails Management. The campground segment generates a majority of the Company’s operating revenues. Each segment is differentiated by the products or services it offers.

The campgrounds segment consists of 59 membership-based campgrounds in 17 states and British Columbia, Canada. Operations within the campground segment include (i) the sale of memberships entitling the member to use campground facilities, (ii) the sale of undivided interests in campground facilities, and (iii) net revenues earned from operations at the campgrounds.

RPI sells memberships that allow members to use any of the approximately 280 recreational facilities participating in RPI’s reciprocal use system, subject to certain limitations. Operating revenue consists of annual membership fees paid by members.

Trails Management manages 194 public campgrounds for the U.S. Forest Service and other entities. Operating revenue consists of the campsite usage fees paid by customers staying at the public campgrounds.

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The Company evaluates performance based upon the income before income taxes for each business segment.

                                         
    Nine months ended March 31, 2003
   
                    Trails   Corporate        
    Campgrounds   RPI   Management   and Other   Consolidated
   
 
 
 
 
Operating revenues
   $ 42,782     $ 2,500     $ 3,287     $ 17     $ 48,586  
Membership sales revenue
     16,294       —       —       —       16,294  
Income (loss) before income taxes
     14,386       1,218       300       (4,459 )     11,445  
                                         
    Nine months ended March 31, 2002
   
                    Trails   Corporate        
    Campgrounds   RPI   Management   and Other   Consolidated
   
 
 
 
 
Operating revenues
   $ 43,344     $ 2,689     $ 3,417     $ 62     $ 49,512  
Membership sales revenue
     11,908       —       —       —       11,908  
Income (loss) before income taxes
     12,558       1,364       285       (4,979 )     9,228  
                                         
    Three months ended March 31, 2003
   
                    Trails   Corporate        
    Campgrounds   RPI   Management   and Other   Consolidated
   
 
 
 
 
Operating revenues
   $ 13,003     $ 953     $ 35       ($2 )   $ 13,989  
Membership sales revenue
     5,686       —       —       —       5,686  
Income (loss) before income taxes
     5,426       472       (60 )     (1,057 )     4,781  
                                         
    Three months ended March 31, 2002
   
                    Trails   Corporate        
    Campgrounds   RPI   Management   and Other   Consolidated
   
 
 
 
 
Operating revenues
   $ 13,185     $ 1,003     $ 1     $ 18     $ 14,207  
Membership sales revenue
     4,345       —       —       —       4,345  
Income (loss) before income taxes
     4,775       577       (148 )     (1,926 )     3,278  

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NOTE 4 — STOCK BASED COMPENSATION

The Company follows the accounting treatment prescribed by APB Opinion No. 25 in accounting for stock options issued to its employees and directors. Accordingly, no compensation expense was recognized in connection with the grant of options during the periods presented, as all options granted had an exercise price equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net earnings and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 (dollars and shares in thousands, except per share amounts):

                                 
    For the nine months ended   For the three months ended
    March 31,   March 31,
   
 
    2003   2002   2003   2002
   
 
 
 
    (Unaudited)   (Unaudited)
           
Net income as reported
   $ 7,033     $ 6,029     $ 2,937     $ 2,165  
Deduct: Total stock-based employee compensation under fair value based method, net of related tax effect
     189       192       63       67  
 
    
     
     
     
 
Pro forma
   $ 6,844     $ 5,837     $ 2,874     $ 2,098  
 
    
     
     
     
 
Net income per share – basic
                                
As reported
   $ 1.01     $ .74     $ .42     $ .27  
Pro forma
   $ .99     $ .72     $ .41     $ .26  
Net income per share – diluted
  
As reported
   $ .92     $ .70     $ .38     $ .25  
Pro forma
   $ .90     $ .68     $ .37     $ .24  

NOTE 5 — NET INCOME PER SHARE

The table below sets forth the information necessary to compute basic and diluted net income per share for the nine and three months ended March 31, 2003 and 2002, 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):

                                   
      For the nine months ended   For the three months ended
      March 31,   March 31,
     
 
      2003   2002   2003   2002
     
 
 
 
      (Unaudited)   (Unaudited)
           
Net Income
   $ 7,033     $ 6,029     $ 2,937     $ 2,165  
 
    
     
     
     
 
Weighted Average Number of Shares – Basic
     6,946       8,129       6,972       8,062  
 
Dilutive Options
     704       509       669       637  
 
    
     
     
     
 
Weighted Average Number of Shares – Diluted
     7,650       8,638       7,641       8,699  
 
    
     
     
     
 
Net Income Per Share – Basic
   $ 1.01     $ .74     $ .42     $ .27  
 
    
     
     
     
 
Net Income Per Share – Diluted
   $ .92     $ .70     $ .38     $ .25  
 
    
     
     
     
 

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NOTE 6 — LONG TERM DEBT

Line of Credit with Union Bank

The Company has a $15.0 million revolving, secured line of credit (“Line of Credit”) with Union Bank of California, N.A. (“Union Bank”). Borrowings under the Line of Credit carry an interest rate of prime minus 0.75%. The Company may borrow, repay and reborrow under the Line of Credit from time to time, provided, however, that for at least one day during each twelve-month period, the principal amount outstanding under the Line of Credit must be not more than $5.0 million. The Company anticipates using the Line of Credit for general working capital purposes, although it is permitted under the terms of the Line of Credit to use up to $5.0 million for acquisitions from time to time. On April 29, 2003, the Company and Union Bank amended the Line of Credit (a) to modify the financial covenants respecting minimum tangible net worth and minimum adjusted EBITDA (as defined) and (b) to extend the maturity date from July 1, 2003 to December 31, 2004.

On March 31, 2003, the Company had no outstanding borrowings under the Line of Credit. The Company’s availability under the Line of Credit has been reduced by $1.1 million as a result of the issuance of a letter of credit to secure obligations that may arise in the future under the Company’s insurance program.

The Company’s ability to borrow under the Line of Credit for working capital purposes is subject to continued compliance by the Company with the financial covenants and other requirements of the Line of Credit, including certain covenants respecting minimum tangible net worth, minimum adjusted EBITDA (as defined) and minimum total debt to adjusted EBITDA. The Line of Credit prohibits the Company from borrowing from other sources.

The Company has granted liens on substantially all of its assets, other than its real estate, to secure its obligations under the Line of Credit. In addition, the Company’s principal subsidiaries have guaranteed the Company’s obligations under the Line of Credit and have granted liens on substantially all of their assets, other than their real estate, to secure their guarantees.

NOTE 7 — CONTINGENCIES

General Liability Insurance

The Company’s general liability insurance requires 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. As of March 31, 2003 and June 30, 2002, the Company’s recorded liability for estimated losses related to uninsured general liability claims totaled approximately $692,000 and $567,000, respectively, which is included in other liabilities in the accompanying consolidated balance sheets. In the quarter ended March 31, 2003, the Company reduced its liability for uninsured general liability and workers’ compensation claims by a total of $225,000 based on an analysis of claims incurred this year.

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.

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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 8 — SUBSEQUENT EVENT

On April 30, 2003, the Company announced that it has entered into a definitive merger agreement providing for the acquisition of the Company by affiliates of the private equity firm Kohlberg & Company, LLC (“Kohlberg”). The merger agreement calls for each holder of the Company’s common stock to receive $14.50 per share in cash, subject to adjustment as described below.

Completion of the transaction is subject to funding of required financing, a minimum working capital condition and other customary closing conditions including approval of the Company’s stockholders. The merger agreement also provides for an adjustment to the merger consideration if the Company’s working capital significantly decreases below anticipated levels prior to closing. William J. Shaw and Carl Marks Strategic Investments, L.P., who hold approximately 62% of the outstanding shares of common stock, have agreed to vote in favor of the merger as long as the merger agreement is in effect. The Company will file proxy materials with the Securities and Exchange Commission (“SEC”) for a special meeting of stockholders to vote on the proposed merger. It is anticipated that the special meeting will be held in late July or early August 2003, with the exact timing dependent on the completion of necessary filings. Affiliates of Kohlberg have committed equity financing and Kohlberg has received debt financing commitments in connection with the transaction, subject the execution of definitive loan agreements and the satisfaction of the conditions specified in the commitment letters.

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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, 2002, filed with the SEC on September 30, 2002.

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 March 31, 2003. 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 membership base, the actual use of the campgrounds by members and guests, the Company’s success in collecting its contracts receivable and selling assets, the Company’s success in acquiring members through the purchase of other membership campground operations and the other factors affecting the Company’s operations described in this report and other reports filed by the Company with the SEC.

LIQUIDITY AND CAPITAL RESOURCES

Merger Agreement with affiliates of Kohlberg & Company. On April 30, 2003, the Company announced that it has entered into a definitive merger agreement providing for the acquisition of the Company by affiliates of the private equity firm Kohlberg & Company, LLC (“Kohlberg”). The merger agreement calls for each holder of the Company’s common stock to receive $14.50 per share in cash. Completion of the transaction is subject to funding of required financing, a minimum working capital condition and other customary closing conditions including approval of the Company’s stockholders. The merger agreement provides for an adjustment to the merger consideration if the Company’s working capital (as defined) significantly decreases below anticipated levels prior to closing and allows Kohlberg or the Company to terminate the agreement if such working capital is less than a minimum amount. If Kohlberg or the Company terminates the agreement for this reason, the Company would be required to reimburse Kohlberg’s expenses related to the transaction. The merger agreement also provides the Company with other termination rights should it receive an acquisition proposal that the Board of Directors determines is a superior proposal; however, exercise of such rights could require the Company to pay a $4 million fee, as well as reimburse Kohlberg’s expenses.

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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 and the 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.

Over the past decade, the Company’s membership base has been declining, although the Company has been successful in slowing the rate of this decline. In response to this attrition, 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, or other opportunities arise consistent with the needs of the members, the Company may close and dispose of additional campgrounds and it will seek to decrease other expenses. At the same time, the Company has expanded its sales and marketing efforts with a view to stopping the membership decline. The Company has also acquired members through the purchase of Leisure Time, and it intends to explore the possible acquisition of additional members through the purchase of other membership campground organizations. However, at this time, the Company has not identified any realistic acquisition candidates. The Company believes that the ultimate size of its campground system and the amounts realized from future asset sales will depend principally upon the degree to which the Company can successfully implement this strategy.

Cash. On March 31, 2003, the Company had $3.9 million of cash and cash equivalents, a decrease of $861,000 from June 30, 2002. The Company has elected to invest its cash in marketable securities to increase the amount of interest earned on the invested funds.

During the nine months ended March 31, 2003, the Company’s operating activities provided $12.2 million of cash, its investing activities used $13.2 million of cash, and its financing activities provided $71,000 of cash. The Company’s investing activities consisted of purchases of $12.2 million in marketable securities and $2.0 in capital expenditures, partially offset by $1.1 million in proceeds from asset sales. The Company’s financing activities consisted of $175,000 of proceeds from the exercise of employee stock options and sales of shares through the Company’s employee stock purchase plan, partially offset by $48,000 in payments on notes payable.

With respect to the Company’s operating activities, for the nine months ended March 31, 2003, the principal sources of operating cash were $53.4 million from operations, $7.5 million in principal and interest collections on contracts receivable, and $12.7 million from sales of campground memberships. Principal uses of operating cash for the nine months ended March 31, 2003, were $33.5 million in operating expenses, $12.9 million in membership origination costs and marketing expenses, $8.7 million in administrative expenses (including general and administrative expenses and corporate member services costs), $1.8 million in insurance premiums, and $4.4 million in income taxes.

During the nine months ended March 31, 2002, the Company’s operating activities provided $13.4 million of cash, its investing activities used $16.0 million of cash, and its financing activities used $760,000 of cash. The Company’s investing activities consisted of purchases of

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$11.7 million in marketable securities and capital expenditures of $4.7 million, partially offset by $404,000 in proceeds from the sales of assets. The Company’s financing activities consisted of $58,000 of proceeds from the exercise of employee stock options, payments of $764,000 for the purchase of 125,800 shares of the Company’s common stock, and $54,000 in payments on notes payable.

During the nine months ended March 31, 2003 and through the date of this report, the Company has had no outstanding borrowings under its Line of Credit with Union Bank. On April 29, 2003, the Company and Union Bank amended the Line of Credit (a) to modify the financial covenants respecting minimum tangible net worth and minimum adjusted EBITDA (as defined) and (b) to extend the maturity date from July 1, 2003 to December 31, 2004. Based upon its current business plan, the Company believes that future cash flows provided from operations, asset sales, and borrowings available under the Line of Credit will be adequate for the Company’s operating and other cash requirements.

Material Changes in Financial Condition

Total assets increased by $9.7 million during the nine months ended March 31, 2003. Marketable securities available for sale increased $12.1 million, contracts receivable increased by $1.1 million as $6.5 million of new receivables from financed sales exceeded the $5.4 million of cash collections on the existing portfolio, and deferred membership origination costs increased $672,000. Cash decreased by $861,000 as discussed above. Other current assets decreased by $1.7 million due primarily to the collection of a receivable arising from a sale of assets. Assets held for sale decreased by $797,000 due to the sale of excess acreage at one of the Company’s campgrounds. Deferred tax assets decreased by $269,000 as a result of deferred tax expense recognized in the current period.

Total liabilities increased by $2.7 million during the nine months ended March 31, 2003, primarily as a result of increases in deferred sales revenue and deferred dues, partially offset by decreases in accounts payable and other accrued liabilities. Deferred sales revenue increased by $2.8 million due to new membership sales contracts originated, and deferred dues increased by $2.5 million because dues collected during the period exceeded dues revenue recognized. Accounts payable decreased by $1.2 million due to the timing of payments, and other accrued liabilities decreased by $1.1 million due primarily to payments of accrued wages and benefits.

Market Risk and Interest Rate Sensitivity. The Company is exposed to changes in interest rates primarily as a result of its investment in marketable securities, financing of membership sales, and borrowings under its Line of Credit with Union Bank. The Company’s objective is to limit the impact of interest rate changes on earnings and cash flows and to reduce overall borrowing costs. However, the Company does not engage in interest rate market risk management activities.

The Company has an investment in marketable securities, which consists of shares in a mutual fund that invests a majority of its assets in adjustable rate mortgage securities issued or guaranteed by the U.S. government, with the remaining assets invested in U.S. government obligations. Changes in interest rates may affect the fair value of the mutual fund shares as well as the amount of interest received. However, the risks associated with this investment are mitigated because the fund seeks to minimize portfolio volatility by limiting the duration of its investments to that of a six-month to one-year U.S. Treasury security. At March 31, 2003, the

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Company’s investment in this mutual fund totaled $17.5 million, and it recorded an unrealized loss of $118,000 on this investment during the nine months then ended. The Company invests the balance of its available cash in money market funds that provide relatively low rates of return and, thus, have little exposure to changes in interest rates.

The Company finances a portion of its membership sales creating contracts receivable. At March 31, 2003, the Company had $12.8 million of contracts receivable which had a weighted average interest rate of 14% and an average remaining term of 28 months. The Company is not exposed to changes in interest rates related to the collection of its contracts receivable because the interest rates on the contracts receivable are fixed. Changes in interest rates could affect the value of the Company’s contracts receivable; however, the Company generally holds such contracts receivable to maturity.

The Company currently has no outstanding borrowings under its revolving Line of Credit with Union Bank. Under the Line of Credit, the Company could borrow $13.9 million for working capital purposes, which would accrue interest at a rate that fluctuates with changes in the prime rate. Changes in interest rates on borrowings under the Line of Credit would increase or decrease the Company’s interest expense on these borrowings.

The Company receives revenues from its Canadian subsidiary and exchanges them into U.S. Dollars at exchange rates that fluctuate with market conditions; however, such revenues are not material to the Company’s operations.

The Company does not use financial instruments for trading purposes.

The Company believes that a hypothetical ten percent change in market interest rates over the next year would not materially impact the Company’s earnings or cash flow. In addition, the Company believes that a hypothetical ten percent change in market interest rates would not have a material effect on the fair value of the Company’s marketable securities, contracts receivable or short-term cash investments.

RESULTS OF OPERATIONS

The following discussion and analysis are based on the historical results of operations of the Company for the nine months ended March 31, 2003 and 2002. The financial information set forth below should be read in conjunction with the Company’s consolidated financial statements included in Item 1.

Nine Months Ended March 31, 2003 and 2002

Net Income. The Company reported net income of $7.0 million or $.92 per diluted share on revenues of $69.0 million for the nine months ended March 31, 2003. This compares with net income of $6.0 million or $.70 per diluted share on revenues of $65.0 million for the same period last year.

The Company’s revenues grew in the current period due primarily to increased membership sales revenue. In the current period, membership sales revenue was higher because the net change in deferred revenue was a negative $2.8 million, compared with a negative $7.3 million in the same

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period last year. Expenses were also higher in the current period due to increased sales and marketing efforts and higher campground operating expenses.

The table set forth below shows separately the results of the campground operations, membership sales, Trails Management, and RPI, without any allocation of corporate expenses, as well as corporate expenses and other revenues and expenses in the aggregate, for the nine months ended March 31, 2003 and 2002.

Thousand Trails, Inc. and Subsidiaries
Summary of Operating Results
(Dollars in thousands)
(Unaudited)

                     
        Nine Months Ended
        March 31,
       
        2003   2002
       
 
Campground Operations
                
 
Membership dues
   $ 30,061     $ 29,994  
 
Campground revenues
     12,721       13,350  
 
Cost of campground revenues
     (5,500 )     (5,753 )
 
Operating expenses
     (26,806 )     (25,936 )
 
    
     
 
Contribution from campground operations
     10,476       11,655  
 
    
     
 
Membership Sales
                
 
Membership contracts originated
     19,102       19,234  
 
Change in deferred revenue
     (2,808 )     (7,326 )
 
    
     
 
   
Membership sales revenue
     16,294       11,908  
 
Membership origination costs
     (8,933 )     (9,173 )
 
Change in deferred origination costs
     673       2,397  
 
Marketing expenses
     (4,124 )     (4,229 )
 
    
     
 
Contribution from sales
     3,910       903  
 
    
     
 
Trails Management
                
 
Revenues
     3,287       3,417  
 
Expenses
     (2,987 )     (3,132 )
 
    
     
 
Contribution from Trails Management
     300       285  
 
    
     
 
Resort Parks International
                
 
Revenues
     2,500       2,689  
 
Expenses
     (1,282 )     (1,325 )
 
    
     
 
Contribution from RPI
     1,218       1,364  
 
    
     
 
 
Other income
     1,838       1,753  
 
Corporate member services
     (986 )     (1,028 )
 
General and administrative expense
     (7,574 )     (7,545 )
 
Other
     17       62  
 
Interest income
     2,073       1,662  
 
Interest expense
     (13 )     (27 )
 
Gain on asset sales
     186       144  
 
    
     
 
Income before taxes
   $ 11,445     $ 9,228  
 
    
     
 

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Income before taxes. For the nine months ended March 31, 2003, income before taxes was $11.5 million, compared with $9.2 million for the same period last year. Income before taxes increased in the current period due primarily to a $3.0 million improvement in the contribution from sales. In addition, interest income increased $411,000 during the current period. These increases were partially offset by a $1.2 million decrease in the contribution from campground operations. See the table on the previous page for the elements of income before taxes for the 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 is 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 $30.0 million for both the nine months ended March 31, 2003 and 2002. Dues revenue remained constant because the effect of the annual dues increase offset the net loss of campground members during the year.

Other campground revenues were $12.7 million for the nine months ended March 31, 2003, compared with $13.3 million for the same period last year. The related expenses were $5.5 million for the nine months ended March 31, 2003, compared with $5.8 million for the same period last year. Campground revenues decreased due primarily to decreases in revenues from cabin and trailer rentals, guest fees, food services programs and sales of merchandise. These decreases were partially offset by an increase in utility usage fees implemented to help control utility costs at the campgrounds. These revenues declined in part because of a decrease in usage of the campgrounds during the current period. The decline in the related expenses was due primarily to decreases in the cost of operating the Company’s rental trailers and the cost of goods sold, partially offset by an increase in utilities and maintenance expense.

Campground operating expenses were $26.8 million for the nine months ended March 31, 2003, compared with $25.9 million for the same period last year. The increase in the current period was due primarily to a $359,000 increase in employee benefit costs resulting from rising healthcare costs. In addition, the Company incurred higher utility, communication, depreciation, maintenance, and property and liability insurance costs, which were partially offset by a decrease in administrative expenses associated with operating the campgrounds.

The Company intends 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, or other opportunities arise consistent with the needs of the members, the Company may close and dispose of additional campgrounds and it will seek to decrease other expenses. Although the Company believes that such changes would result in lower future operating expenses, no assurance can be given that such changes will not reduce revenues by an amount in excess of the expense reductions.

For the nine months ended March 31, 2003, the Company originated membership contracts of $19.1 million, compared with $19.2 million for the same period last year. In the current period, the Company originated a greater number of new membership contracts at a higher average price, but fewer upgrade contacts, compared with the prior period. The number of upgrade contract originations declined because the Company discontinued a test it conducted in fiscal

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2002 that involved selling upgrades in the Eastern United States in addition to its current sales efforts in the Western United States. For the nine months ended March 31, 2003, the Company originated approximately 2,700 new membership contracts at an average sales price of $3,536, compared with approximately 2,600 new membership contracts at an average sales price of $3,136 in the prior period, resulting in a $1.4 million increase in new membership contracts originated. However, in the current period, the Company originated approximately 3,000 contracts in the upgrade program, compared with 3,200 in the same period last year, resulting in an $850,000 decrease in upgrade contracts originated. In addition, during the nine months ended March 31, 2002, the Company offered existing members access to its other campground systems for a fee, which contributed $457,000 to contracts originated in the prior period. This program was discontinued in fiscal 2002. During the nine months ended March 31, 2003, the Company also originated approximately 790 contracts through sales agreements with other companies, compared with approximately 820 contracts during the same period last year.

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 nine months ended March 31, 2003 and 2002, the Company recognized campground membership sales revenues of $16.3 million and $11.9 million, respectively. Membership sales revenue includes revenues of $14.5 million and $9.5 million, respectively, which were deferred in prior periods. Moreover, during these same periods, the Company deferred revenues of $17.3 million and $16.8 million, respectively, which will be recognized in future periods.

The net change in deferred sales revenue was $2.8 million for the nine months ended March 31, 2003, compared with $7.3 million for the same period last year. In fiscal 2001, the Company experienced a large increase in membership contracts originated, due primarily to the success of its upgrade programs. In fiscal 2002, contracts originations increased over fiscal 2001, but to a lesser degree. In fiscal 2003, contracts originations declined slightly from fiscal 2002. As a result, revenue recognized from prior periods is beginning to decrease the impact of the deferral of revenue in the current period. As long as the rate of growth of membership contract originations is slower in the current period than in prior periods, or declines, the impact of the deferral on the Company’s sales revenue will be lower in the current period as the recognition of revenues deferred in prior periods begins to outweigh revenue deferred in the current period.

Selling expenses directly related to the sale of campground memberships, substantially all of which are sales commissions, 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 nine months ended March 31, 2003 and 2002, the Company recognized selling expenses of $8.3 million and $6.7 million, respectively. These amounts include expenses of $4.4 million and $2.9 million, respectively, which were deferred in prior periods. Moreover, for these same periods, the Company deferred expenses of $5.1 million and $5.3 million, respectively, which will be recognized in future periods.

For the nine months ended March 31, 2003, the Company’s contribution from sales was $3.9 million, compared with $903,000 for the same period last year. The Company incurs significant selling and marketing expenses to originate new membership contracts, and the majority of these expenses 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 result, the Company generally incurs a loss from the sale of new membership contracts. In

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contrast, the Company incurs substantially less selling and marketing expenses to originate upgrade contracts, and these expenses (substantially all of which are sales commissions) are generally deferred and recognized on a straight-line basis over the expected life of the memberships sold, as are the related sales revenue. As a result, the Company generally has a positive contribution from the sale of upgrade contracts, which offsets the loss from the sale of new membership contracts.

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, although the Company has been successful in slowing the rate of this decline. If the Company is not able to increase its campground membership sales over the current levels or acquire members through the purchase of other membership campground operations, the membership base may continue to decline, which could decrease the Company’s revenues, if not offset by dues increases or expense reductions.

Trails Management. Trails Management, a wholly owned subsidiary of the Company, currently manages 194 public campgrounds for the U.S. Forest Service and other entities. For the nine months ended March 31, 2003, these operations produced a net contribution of $300,000 on revenues of $3.3 million, compared with a net contribution of $285,000 on revenues of $3.4 million for the same period last year. While Trails Management receives most of its revenues and incurs most of its expenses during the first fiscal quarter, it continues to incur certain fixed costs during the remainder of the fiscal year, which will reduce its contribution for the full fiscal year.

Resort Parks International. RPI charges its members a fee for a membership that entitles them to use any of the campgrounds participating in RPI’s reciprocal use system, subject to certain limitations. For the nine months ended March 31, 2003, RPI’s operations produced a net contribution of $1.2 million on revenues of $2.5 million, compared with a net contribution of $1.4 million on revenues of $2.7 million for the same period last year. The decrease in contribution in the current period was due primarily to a decrease in revenues from new memberships, which was only partially offset by a decrease in expenses.

Interest Income and Expense. Interest income increased to $2.1 million for the nine months ended March 31, 2003, from $1.7 million for the same period last year. The increase in interest income in the current period was due primarily to an increase in interest earned on the Company’s growing portfolio of contracts receivable. The Company’s portfolio of contracts receivable increased over the past year as a result of an increase in financed sales. Approximately 37% of membership sales were financed in the current period. The Company expects the interest earned on its portfolio of contracts receivable and invested cash to increase during the balance of fiscal 2003, compared with historical levels, as the portfolio continues to grow and the Company accumulates cash.

Interest expense decreased to $13,000 for the nine months ended March 31, 2003, from $27,000 for the same period last year.

Gain on Asset Sales. The Company recognized a gain of $186,000 on asset sales for the nine months ended March 31, 2003, compared with $144,000 for the same period last year. The decrease in the current period was due to the timing of asset sales. Over the next several years, the Company intends to dispose of the remaining assets it holds for sale.

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Other Income. Other income generally consists of transfer fees received when existing memberships are transferred in the secondary market without assistance from the Company, collections of written-off contracts and delinquent dues, subscription fees received from members who subscribe to the Company’s member magazine, and fees received from third parties for billing and collection services. Other income was $1.8 million for both the nine months ended March 31, 2003 and 2002.

Other Expenses. Administrative expenses, including corporate member service costs and general and administrative expenses, were $8.6 million for both the nine months ended March 31, 2003 and 2002. During the nine months ended March 31, 2003, the Company experienced increases in maintenance costs and depreciation on the Company’s new computer and communication systems, and recorded compensation expense of $224,000 on the purchase of 29,200 shares of its common stock from a director of the Company. These expenses were offset by the elimination of a $180,000 reserve relating to contracts receivable no longer outstanding, a reduction in accrued bonuses, and a decrease in rent expense and third party legal fees.

Income Taxes. The Company’s current provision for income taxes was $4.1 million for the nine months ended March 31, 2003, compared with $2.2 million for the same period last year. The current provision for the nine months ended March 31, 2003, includes amounts for regular federal corporation income tax as well as state income taxes in the various states where the Company conducts its business. For the nine months ended March 31, 2002, the Company did not have federal income taxes payable on a consolidated basis, with the exception of federal alternative minimum taxes, due to its net operating tax loss carryforwards. The Company fully utilized its tax loss carryforwards in fiscal 2002. As a result, the Company anticipates that its current provision for income taxes will be higher for the balance of fiscal 2003 than it was in prior periods.

The Company recorded a deferred tax provision of $269,000 for the nine months ended March 31, 2003, compared with $1.0 million for the same period last year. The Company will continue to adjust its deferred taxes in future periods, and believes that the realization of its net deferred tax benefit is more likely than not. The deferred tax provision will not affect current or future income tax payments.

Three Months Ended March 31, 2003 and 2002

Net Income. The Company reported net income of $2.9 million or $.38 per diluted share on revenues of $21.3 million for the three months ended March 31, 2003. This compares with net income of $2.2 million or $.25 per diluted share on revenues of $19.7 million for the same period last year.

The Company’s revenues grew in the current quarter due primarily to increased membership sales revenue. In the current quarter, membership sales revenue was higher because the net change in deferred revenue was a positive $565,000, compared with a negative $1.9 million in the same quarter last year. Expenses were also higher in the current quarter due primarily to increased costs to operate the campgrounds, primarily as a result of higher costs for utilities and insurance. General and administrative costs were lower in the quarter due primarily to reductions in rent, employee benefit costs and legal expenses.

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The table set forth below shows separately the results of the campground operations, membership sales, Trails Management, and RPI, without any allocation of corporate expenses, as well as corporate expenses and other revenues and expenses in the aggregate, for the three months ended March 31, 2003 and 2002.

Thousand Trails, Inc. and Subsidiaries
Summary of Operating Results
(Dollars in thousands)
(Unaudited)

                     
        Three Months Ended
        March 31,
       
        2003   2002
       
 
Campground Operations
                
 
Membership dues
   $ 9,920     $ 9,921  
 
Campground revenues
     3,083       3,264  
 
Cost of campground revenues
     (1,359 )     (1,455 )
 
Operating expenses
     (8,079 )     (7,797 )
 
    
     
 
Contribution from campground operations
     3,565       3,933  
 
    
     
 
Membership Sales
                
 
Membership contracts originated
     5,121       6,297  
 
Change in deferred revenue
     565       (1,952 )
 
    
     
 
   
Membership sales revenue
     5,686       4,345  
 
Membership origination costs
     (2,591 )     (3,028 )
 
Change in deferred origination costs
     (209 )     692  
 
Marketing expenses
     (1,025 )     (1,167 )
 
    
     
 
Contribution from sales
     1,861       842  
 
    
     
 
Trails Management
                
 
Revenues
     35       1  
 
Expenses
     (95 )     (149 )
 
    
     
 
Loss from Trails Management
     (60 )     (148 )
 
    
     
 
Resort Parks International
                
 
Revenues
     953       1,003  
 
Expenses
     (481 )     (426 )
 
    
     
 
Contribution from RPI
     472       577  
 
    
     
 
 
Other income
     624       560  
 
Corporate member services
     (304 )     (294 )
 
General and administrative expense
     (2,357 )     (2,827 )
 
Other
     (2 )     18  
 
Interest income
     805       632  
 
Interest expense
     (7 )     (4 )
 
Gain (loss) on asset sales
     184       (11 )
 
    
     
 
Income before taxes
   $ 4,781     $ 3,278  
 
    
     
 

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Income before taxes. For the three months ended March 31, 2003, income before taxes was $4.8 million, compared with $3.3 million for the same period last year. Income before taxes increased in the current period due primarily to a $1.0 million improvement in the contribution from sales and a $470,000 decrease in general and administrative expenses, partially offset by decreases in the contributions from campground operations, Trails Management, and RPI. In addition, interest income and asset sales increased by $173,000 and $195,000, respectively. See the table on the previous page for the elements of income before taxes for the periods presented.

Campground Operations. Campground membership dues revenue was $9.9 million for both the three months ended March 31, 2003 and 2002. Dues revenue remained constant because the effect of the annual dues increase offset the loss of campground members during the year.

Other campground revenues were $3.1 million for the three months ended March 31, 2003, compared with $3.3 million for the same period last year. The related expenses were $1.4 million for the three months ended March 31, 2003, compared with $1.5 million for the same period last year. Other campground revenues decreased primarily due to decreases in revenues from cabin and trailer rentals and sales of merchandise, partially offset by an increase in utility usage fees. These revenues may have declined in part because of a decrease in usage of the campgrounds during the current period. The decline in the related expenses was due primarily to decreases in the cost of operating the Company’s rental trailers and the cost of goods sold, partially offset by an increase in utilities and maintenance expense.

Campground operating expenses were $8.1 million for the three months ended March 31, 2003, compared with $7.8 million for the same period last year. The increase in campground operating expenses in the current period was due primarily to increases in property and liability insurance costs, utilities, and employee benefit costs resulting from rising healthcare costs.

For the three months ended March 31, 2003, the Company originated membership contracts of $5.1 million, compared with $6.3 million in the same period last year. In the current period, the Company originated a greater number of new membership contracts at a higher average price, but fewer upgrade contacts, compared with the prior period. The number of upgrade contract originations declined because the Company discontinued a test it conducted in fiscal 2002 that involved selling upgrades in the Eastern United States in addition to its current sales efforts in the Western United States. For the three months ended March 31, 2003, the Company originated approximately 680 new membership contracts at an average sales price of $3,134, compared with approximately 600 new membership contracts at an average sales price of $2,834, resulting in a $430,000 increase in new membership contracts originated. However, in the current period, the Company originated approximately 840 upgrade contracts, compared with approximately 1,280 upgrade contracts in the same period last year, resulting in a $1.3 million decrease in upgrade contracts originated. During the three months ended March 31, 2003, the Company also originated approximately 270 contracts through sales agreements with other companies, compared with approximately 350 contracts during the same period last year.

For the three months ended March 31, 2003 and 2002, the Company recognized campground membership sales revenues of $5.7 million and $4.3 million, respectively. Membership sales revenue includes revenues of $5.2 million and $3.5 million, respectively, that were deferred in prior periods. Moreover, during these same periods, the Company deferred revenues of $4.6 million and $5.5 million, respectively, which will be recognized in future periods.

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For the three months ended March 31, 2003 and 2002, the Company recognized selling expenses of $2.8 million and $2.3 million, respectively. These amounts include expenses of $1.6 million and $1.1 million, respectively, that were deferred in prior periods. Moreover, for these same periods, the Company deferred expenses of $1.4 million and $1.8 million, respectively, which will be recognized in future periods.

For the three months ended March 31, 2003, the Company’s contribution from sales was $1.9 million, compared with $842,000 for the same period last year. The contribution from sales increased because the net change in deferred revenue was a positive $565,000 in the current period, compared with a negative $1.9 million in the same period last year, reflecting the decline in membership contract originations this year compared with prior years.

Trails Management. For the three months ended March 31, 2003, the operations of Trails Management produced a loss of $60,000, compared with a loss of $148,000 for the same period last year. The campground management operations generally incur a loss during the third fiscal quarter due to fixed expenses and the seasonal closure of the campgrounds.

Resort Parks International. For the three months ended March 31, 2003, RPI’s operations produced a net contribution of $472,000 on revenues of $953,000, compared with a net contribution of $577,000 on revenues of $1.0 million for the same period last year. The decrease in contribution during the current period was due primarily to a decrease in revenues from new membership sales and an increase in expenses.

Interest Income and Expense. Interest income increased to $805,000 for the three months ended March 31, 2003, from $632,000 for the same period last year. The increase in the current period was due primarily to an increase in the interest earned on the Company’s growing portfolio of contracts receivable.

Interest expense was $7,000 for the three months ended March 31, 2003, compared with $4,000 for the same period last year.

Gain on Asset Sales. For the three months ended March 31, 2003, the Company recognized a gain of $184,000 on the asset sales, compared with a loss of $11,000 during the same period last year. The increase in the current period was due to the timing of asset sales.

Other Income. Other income was $624,000 for the three months ended March 31, 2003, compared with $560,000 for the same period last year. The increase in the current period was due primarily to an increase in transfer fees and other miscellaneous income, partially offset by decreases in the collection of written-off contracts and delinquent dues.

Other Expenses. Administrative expenses, including corporate member service costs and general and administrative expenses, were $2.7 million for the three months ended March 31, 2003, compared with $3.1 million for the same period last year. The decrease in the current period was due primarily to reductions in rent, employee benefit costs and legal expenses, partially offset by increases in maintenance expense and depreciation on the Company’s computer and communication systems.

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Income Taxes. The Company’s current provision for income taxes was $1.3 million for the three months ended March 31, 2003, compared with $623,000 for the same period last year. The Company recorded a deferred tax provision of $533,000 for the three months ended March 31, 2003, compared with $490,000 for the same period last year.

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 March 31, 2003 is not significant. The information required by Item 305 of Regulation 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.”

Item 4. Controls and Procedures

Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. The Company has not made any significant changes in its disclosure controls and procedures or in other factors that could significantly affect its disclosure controls and procedures subsequent to the date of the evaluation described above.

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Part II. OTHER INFORMATION

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 April 29, 2003, among Thousand Trails, Inc., KTTI Holding Company, Inc., and KTTI Acquisition Company, Inc. (schedules and exhibits omitted) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed by the Company with the SEC on May 1, 2003, File No. 1-14645).
     
10.1   Second Amendment dated April 29, 2003, to the Loan Agreement between the Company and Union Bank of California, N.A.
     
10.2   Letter from William J. Shaw to the Company confirming the settlement of outstanding stock options for cash in connection with a cash merger (and schedule of substantially identical letters).
     
11.1   Statement re: Computation of Per Share Earnings.
     
99.1   Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Company’s Chief Executive Officer.(1)
     
99.2   Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Company’s Chief Financial Officer.(1)

(1)  These certifications pursuant to 18 U.S.C. Section 1350 by the Company’s Chief Executive Officer, furnished as Exhibit 99.1, and by the Company’s Chief Financial Officer, furnished as Exhibit 99.2, to this Quarterly Report on Form 10-Q, will not be deemed to be filed with the SEC or incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such certifications by reference.

Reports on Form 8-K

The Company did not file any Current Reports on Form 8-K during the quarter ended March 31, 2003.

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SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned thereunto duly authorized.

         
    Thousand Trails, Inc.
         
Date: May 14, 2003   By:   /s/ William J. Shaw
       
        William J. Shaw
President and Chief Executive Officer
         
Date: May 14, 2003   By:   /s/ Bryan D. Reed
       
        Bryan D. Reed
Chief Financial and Accounting Officer

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CERTIFICATIONS

          I, William J. Shaw, certify that:

 
          1.      I have reviewed this quarterly report on Form 10-Q of Thousand Trails, Inc.
 
          2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.
 
          3.      Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
 
          4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:
 
          a)      Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
          b)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
          c)      Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
 
          5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
          a)      All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
          b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
          6.      The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

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significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
         
Date: May 14, 2003   By:     /s/ William J. Shaw
       
          William J. Shaw
  Chief Executive Officer

          I, Bryan D. Reed, certify that:

 
          1.      I have reviewed this quarterly report on Form 10-Q of Thousand Trails, Inc.
 
          2.      Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report.
 
          3.      Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.
 
          4.      The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
          a)      Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
          b)      Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
          c)      Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date.
 
          5.      The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):
 
          a)      All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
          b)      Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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          6.      The registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
         
Date: May 14, 2003   By:   /s/ Bryan D. Reed
       
        Bryan D. Reed
Chief Financial and Accounting Officer

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Index to the Exhibits

     
Exhibit    
Number   Description
 
2.1   Agreement and Plan of Merger, dated as of April 29, 2003, among Thousand Trails, Inc., KTTI Holding Company, Inc., and KTTI Acquisition Company, Inc. (schedules and exhibits omitted) (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed by the Company with the SEC on May 1, 2003, File No. 1-14645).
     
10.1   Second Amendment dated April 29, 2003, to the Loan Agreement between the Company and Union Bank of California, N.A.
     
10.2   Letter from William J. Shaw to the Company confirming the settlement of outstanding stock options for cash in connection with a cash merger (and schedule of substantially identical letters).
     
11.1   Statement re: Computation of Per Share Earnings.
     
99.1   Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Company’s Chief Executive Officer.(1)
     
99.2   Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by the Company’s Chief Financial Officer.(1)

(1)  These certifications pursuant to 18 U.S.C. Section 1350 by the Company’s Chief Executive Officer, furnished as Exhibit 99.1, and by the Company’s Chief Financial Officer, furnished as Exhibit 99.2, to this Quarterly Report on Form 10-Q, will not be deemed to be filed with the SEC or incorporated by reference into any filing by the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates such certifications by reference.

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