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 September 30, 1997
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
______________
Commission file number 333-26861
TRENDWEST RESORTS, INC.
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(Exact name of registrant as specified in its charter)
Oregon 93-1004403
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
12301 N.E. 10th Place
Bellevue, Washington 98005
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (425) 990-2300
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 twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the registrant's no-par voting common stock outstanding
as of November 7, 1997: 17,593,366 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
TRENDWEST RESORTS, INC.
CONDENSED COMBINED AND CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------------- ----------------------
(Unaudited)
<S> <C> <C>
Assets:
Cash and cash equivalents $ 93 $ 1,514
Restricted cash 709 1,148
Notes receivable, net of allowance for doubtful accounts, sales
returns and deferred gross profit 45,448 70,873
Accrued interest and other receivables 4,606 5,268
Receivable from Parent --- 7,562
Residual interest in notes receivable sold 10,839 14,207
Inventories 16,247 23,620
Property and equipment, net 5,912 6,644
Deferred income taxes 2,360 1,848
Other assets 3,116 3,596
----------------------------------------------
Total assets $ 89,330 $ 136,280
==============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable $ 1,037 $ 1,679
Accrued liabilities 2,100 4,341
Accrued construction in progress 2,089 247
Due to Parent 21,316 ---
Allowance for recourse liability and deferred gross profit
on notes sold 10,080 8,970
Income taxes payable to Parent 1,909 2,503
Income taxes payable --- 1,671
Notes payable 1,055 ---
----------------------------------------------
Total liabilities 39,586 19,411
----------------------------------------------
Stockholders' equity:
Common Stock
90,000,000 shares authorized, 9,224,723 and 17,593,366
shares issued and outstanding at December 31, 1996 and
September 30, 1997, respectively 14,970 66,882
Retained earnings 34,774 49,987
----------------------------------------------
Total stockholders' equity 49,744 116,869
----------------------------------------------
Total liabilities and stockholders' equity $ 89,330 $ 136,280
==============================================
</TABLE>
See notes to condensed combined and consolidated financial statements.
<PAGE>
TRENDWEST RESORTS, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1997 1996 1997
---------------------------------- -----------------------------------
<S> <C> <C> <C> <C>
Revenues:
Vacation Credit sales, net $ 26,896 $ 35,575 $ 75,436 $ 96,395
Finance income 1,748 2,930 5,012 8,766
Gains on sales of notes receivable 1,308 1,277 4,158 4,441
Resort management services 404 217 979 1,495
Other 810 473 1,799 1,825
--------------- ---------------- --------------- -----------------
Total revenues 31,166 40,472 87,384 112,922
--------------- ---------------- --------------- -----------------
Costs and operating expenses:
Vacation Credit cost of sales 7,315 9,219 20,236 25,444
Resort management services 220 302 636 830
Sales and marketing 12,874 16,306 36,306 44,845
General and administrative 2,710 3,348 7,773 9,615
Provision for doubtful accounts
and recourse liability 2,012 2,494 5,646 6,654
Interest 678 294 1,787 1,739
--------------- ---------------- --------------- -----------------
Total costs and operating
expenses 25,809 31,963 72,384 89,127
--------------- ---------------- --------------- -----------------
Income before income taxes 5,357 8,509 15,000 23,795
Income tax expense 1,971 3,076 5,514 8,582
--------------- ---------------- --------------- -----------------
Net income $ 3,386 $ 5,433 $ 9,486 $ 15,213
=============== ================ =============== =================
Pro forma net income
per share of common stock $ 0.34 $ 1.02
Pro forma shares used in computing
net income per share of common stock 15,923,174 14,920,981
</TABLE>
See notes to condensed combined and consolidated financial statements.
<PAGE>
TRENDWEST RESORTS, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1997
--------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,486 $ 15,213
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 359 487
Amortization of excess servicing asset 2,085 2,966
Provision for doubtful accounts, recourse liability and sales
reversals 7,659 8,491
Recoveries of notes receivable charged off 36 151
Excess servicing spread on notes receivables sold (4,219) (4,551)
Unrealized gain on residual interest in notes receivable sold --- (1,243)
Change in deferred gross profit 2,320 (1,013)
Deferred income tax (benefit) expense (698) 512
Issuance of notes receivable (68,376) (83,234)
Proceeds from sale of notes receivable 49,699 23,611
Proceeds from repayment of notes receivable 17,880 19,242
Purchase of notes receivable (8,958) (11,071)
Changes in certain assets and liabilities:
Restricted cash (403) (439)
Inventories (3,087) (7,373)
Accounts payable and accrued liabilities 1,637 1,041
Income taxes payable to Parent 966 594
Income taxes payable --- 1,671
Other assets (746) (1,296)
--------------------------------------
Net cash provided by (used in) operating activities 5,640 (36,241)
--------------------------------------
Cash flows used in investing activities-purchase of property and equipment (596) (1,120)
--------------------------------------
Cash flows from financing activities:
Proceeds from notes payable --- 16,803
Payments on notes payable (1,171) (1,055)
Decrease in due to Parent (3,903) (21,316)
Increase in receivable from Parent --- (7,562)
Issuance of common stock 1 51,912
Payments on notes receivable for stock 30 ---
--------------------------------------
Net cash provided by (used in) financing activities (5,043) 38,782
--------------------------------------
Net increase in cash and cash equivalents 1 1,421
Cash and cash equivalents at beginning of period 135 93
-------------------------------------
Cash and cash equivalents at end of period $ 136 $ 1,514
======================================
</TABLE>
See notes to condensed combined and consolidated financial statements.
TRENDWEST RESORTS, INC.
CONDENSED COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1996 1997
---------------------------------------
<S> <C> <C>
Supplemental discloses of cash flow information - cash paid
during the period for:
Interest $ 1,821 $ 1,975
Income taxes 4,842 5,622
Supplemental schedule of non-cash investing and
financing activities:
Reduction of notes payable through transfer of notes receivable --- $ 16,803
Issuance of note receivable in exchange for other assets sold --- $ 489
</TABLE>
See notes to condensed combined and consolidated financial statements.
<PAGE>
TRENDWEST RESORTS, INC.
NOTES TO THE CONDENSED COMBINED AND CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in thousands)
(Unaudited)
NOTE 1 - BACKGROUND
Trendwest Resorts, Inc. (Company) markets, sells and finances timeshare
ownership interests in the form of perpetual timeshare credits (Vacation
Credits) in WorldMark, the Club (WorldMark). Vacation Credits are created
through the transfer to WorldMark of resort units acquired or developed by the
Company. The Company derives revenues primarily from Vacation Credit sales and,
to a lesser extent, from the financing of Vacation Credit sales and from its
management agreement with WorldMark.
These condensed combined and consolidated financial statements do not
include certain information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, all adjustments considered necessary for a fair presentation have
been included and are of a normal recurring nature. Operating results for three
months and nine months ended September 30, 1997 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
1997.
These statements should be read in conjunction with the audited
combined and consolidated financial statements and footnotes included in
Amendment No. 3 of the Company's Registration Statement on Form S-1 (File No.
333-26861) filed with the Securities and Exchange Commission (SEC) on August 12,
1997. The accounting policies used in preparing these condensed combined and
consolidated financial statements are the same as those described in such
Registration Statement on Form S-1.
NOTE 2 - CAPITAL TRANSACTIONS AND PUBLIC OFFERING
During the three months ended September 30, 1997, the Company
consumated the offering of 3,176,250 shares of the Company's common stock at $18
per share resulting in net proceeds, after deducting the related issuance costs,
of approximately $51,912. In addition, the Company issued 5,193,693 shares of
common stock to the Parent to acquire two wholly owned subsidiaries, TW Holdings
and Trendwest Funding (Consolidation Transactions). Effective June 30, 1997, TW
Holdings and Trendwest Funding were wholly-owned subsidiaries of the Company.
NOTE 3 - PRO FORMA NET INCOME PER SHARE
Pro forma net income per share for 1997 has been computed based on the
weighted average number of shares of Trendwest common stock outstanding assuming
the 5,193,693 shares issued to the Parent in connection with the Consolidation
Transactions described in Note 2 had been outstanding for all periods presented.
Due to the significant impact of the Consolidation Transactions on the number of
outstanding shares of Trendwest common stock, historical net income per share is
not meaningful and is therefore not presented.
Statements of Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share" specifies new computation, presentation and disclosure
requirements. The statement will be effective for both interim and annual
periods ending after December 15, 1997 and will require retroactive application.
Management believes that the adoption of this statement will not have a material
impact on the previously reported pro forma net income per share presented.
NOTE 4 - INVENTORIES
Inventories consist of Vacation Credits and construction in progress as
follows:
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
<S> <C> <C>
Vacation Credits $ 7,784 $ 205
Construction in progress 8,463 23,415
--------------------------------
Total Inventories $ 16,247 $23,620
================================
</TABLE>
NOTE 5 - ALLOWANCE FOR DOUBTFUL ACCOUNTS, RECOURSE LIABILITY
AND SALES RETURNS
The activity in the allowance for doubtful accounts, recourse liability
and sales returns is as follows for the year ended December 31, 1996 and the
nine months ended September 30, 1997:
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
------------------------------------------
<S> <C> <C>
Balances at beginning of period $ 7,964 $ 11,241
Provision for doubtful accounts, recourse liability and
sales returns 10,078 8,491
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (6,873) (5,559)
Recoveries 72 151
==========================================
Balances at end of period $ 11,241 $ 14,324
==========================================
Allowance for doubtful accounts and sales returns 5,832 9,240
Allowance for recourse liability on notes receivable
sold 5,409 5,084
==========================================
$ 11,241 $ 14,324
==========================================
</TABLE>
Total notes receivable outstanding, including notes receivable sold,
amounted to $180,323 and $ 224,632 at December 31, 1996 and September 30, 1997,
respectively.
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
(a) Purchase Commitments
The Company routinely enters into purchase agreements with various
developers to acquire and build resort properties. At September 30, 1997 the
Company had outstanding purchase commitments of $41,962 related to properties
under development.
(b) Tax Contingency
The Internal Revenue Service (IRS) is currently auditing the 1991, 1992
and 1993 tax returns of Trendwest, Inc., the former parent of the Company. The
Company is a party to this matter. The IRS has issued a letter to Trendwest,
Inc. setting forth the adjustments proposed by the examining agent. The letter
recommends a finding for tax and interest totaling approximately $9,300. The
finding relates primarily to the disallowance of all resort property costs.
Trendwest, Inc. has appealed the letter and the Company believes that this
matter is close to resolution and that the amount of any actual deficiency will
not be material to the Company's financial position, results of operations or
liquidity.
NOTE 7 - SUBSEQUENT EVENT
On October 23, 1997 the Company granted certain executive officers and
other employees options to purchase an aggregate of 492,000 shares of common
stock at an exercise price of $26.875 per share. The options became exercisable
at the rate of 20% per year beginning on October 23, 1998 and expire on October
23, 2005.
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparison of the three months ended September 30, 1996 to the three months
ended September 30, 1997
For the three months ended September 30, 1997, the Company achieved
total revenues of $40.5 million compared to $31.2 million for the three months
ended September 30, 1996, an increase of 29.8%. The principal reason for the
overall improvement was a 32.3% increase in Vacation Credit sales from $26.9
million for the three months ended September 30, 1996 to $35.6 million for the
three months ended September 30, 1997. The increase in Vacation Credit sales was
primarily the result of a 23.4% increase in the number of Vacation Credits sold
from 22.2 million in the three months ended September 30, 1996 to 27.4 million
in the three months ended September 30, 1997. The increase in Vacation Credits
sold was largely attributable to a new off-site sales office in Costa Mesa,
California opened in February 1997 and the maturation of two offices opened in
February and April of 1996 and increased Upgrade sales. Revenues from Upgrade
Sales increased 37.8% from $3.7 million for the three months ended September 30,
1996 to $5.1 million for the three months ended September 30, 1997 due primarily
to the increase in number of Owners who made the necessary 10% cash down payment
to allow full revenue recognition at the time of the sale. The number of
Vacation Credits sold as Upgrades increased by approximately 1.7% in the three
months ended September 30, 1997 compared to the three months ended September 30,
1996. The average price per Vacation Credit sold increased from $1.24 for the
three months ended September 30, 1996 to $1.27 for the three months ended
September 30, 1997, an increase of 2.4%, which was due primarily to a 4.5%
increase in the sales price of Upgrade credits.
Finance income increased 70.6% from $1.7 million for the three months
ended September 30, 1996 to $2.9 million for the three months ended September
30, 1997 due primarily to increased carrying balances of Notes Receivable. Gains
on sales of Notes Receivable were basically unchanged for the three month
periods compared due to higher net interest spreads as the principal amount of
Notes Receivables sold declined 17.0% from $14.7 million to $12.2 million.
Vacation Credit cost of sales increased from $7.3 million for the three
months ended September 30, 1996 to $9.2 million for the three months ended
September 30, 1997, an increase of 26.0%, primarily reflecting the increase in
sales of Vacation Credits. As a percentage of Vacation Credit sales, Vacation
Credit cost of sales decreased from 27.2% for the three months ended September
30, 1996 to 25.9% for the three months ended September 30, 1997. The Company
believes that the change in Vacation Credit cost of sales as a percentage of
Vacation Credit sales would have been only slightly lower for the three months
ended September 30, 1997 as compared with the three months ended September 30,
1996 absent the increase in the percentage of Owners who made a 10% cash down
payment on Upgrade Sales.
Sales and marketing costs increased 26.4% from $12.9 million for the
three months ended September 30, 1996 to $16.3 million in the three months of
1997. As a percentage of Vacation Credit sales, sales and marketing costs
decreased from 47.9% for the three months ended September 30, 1996 to 45.8% for
the three months ended September 30, 1997 primarily due to the substantially
higher percentage of Upgrade Sales for the three months ended September 30, 1997
that were entitled to full revenue recognition at the time of sale. The Company
believes that sales and marketing costs as a percentage of Vacation Credit sales
would have decreased slightly for the three months ended September 30, 1997 as
compared with the three months ended September 30, 1996 absent the increase in
the percentage of Owners who made a 10% cash down payment on Upgrade Sales.
General and administrative expenses increased 22.2% from $2.7 million
for the three months ended September 30, 1996 to $3.3 million for the three
months ended September 30, 1997 primarily reflecting the increased sales growth
and increased administration costs due to regionalization. As a percentage of
total revenues, general and administrative expenses decreased from 8.7% for the
three months ended September 30, 1996 to 8.3% for the three months ended
September 30, 1997, due primarily to the substantially higher percentage of
Upgrade Sales for the three months ended September 30, 1997 that were entitled
to full revenue recognition at the time of sale. The Company believes that
general and administrative expenses as a percentage of total revenues would have
remained relatively constant for the three months ended September 30, 1997 and
1996 absent the increase in the percentage of Owners who made a 10% cash down
payment on Upgrade Sales.
Provision for doubtful accounts and recourse liability increased 25.0 %
from $2.0 million for the three months ended September 30, 1996 to $2.5 million
for the three months ended September 30, 1997. As a percentage of Vacation
Credit sales, the provision declined from 7.5% for the three months ended
September 30, 1996 to 7.0% for the three months ended September 30, 1997 due to
continued growth in the amount of Notes Receivable from Upgrade Sales as Upgrade
Sales have a historically lower default rate than new sales.
Comparison of the nine months ended September 30, 1996 to the nine months ended
September 30, 1997
For the nine months ended September 30, 1997, the Company achieved
total revenues of $112.9 million compared to $87.4 million for the nine months
ended September 30, 1996, an increase of 29.2%. The principal reason for the
overall improvement was a 27.9% increase in Vacation Credit sales from $75.4
million for the nine months ended September 30, 1996 to $96.4 million for the
nine months ended September 30, 1997. The increase in Vacation Credit sales was
primarily the result of an 18.9% increase in the number of Vacation Credits sold
from 62.4 million for the nine months ended September 30, 1996 to 74.2 million
for the nine months ended September 30, 1997. The increase in Vacation Credits
sold was largely attributable to a new off-site sales office in Costa Mesa,
California opened in February 1997 and the maturation of two offices opened in
February and April of 1996 and increased Upgrade sales. Revenues from Upgrade
Sales increased 54.3% from $9.2 million for the nine months ended September 30,
1996 to $14.2 million for the nine months ended September 30, 1997 due primarily
to the increase in number of Owners who made the necessary 10% cash down payment
to allow full revenue recognition at the time of the sale. The number of
Vacation Credits sold as Upgrades increased by approximately 6.9% for the nine
months ended September 30, 1997 compared to the nine months ended September 30,
1996. The average price per Vacation Credit sold increased from $1.24 for the
nine months ended September 30, 1996 to $1.27 for the nine months ended
September 30, 1997, an increase of 2.4%, which was due primarily to a 4.5%
increase in the sales price of Upgrade credits.
Finance income increased 76.0% from $5.0 million for the nine months
ended September 30, 1996 to $8.8 million for the nine months ended September 30,
1997 due to increased carrying balances of Notes Receivable and the recognition
of the unrealized gain on residual interest in the Notes Receivable sold of $1.2
million. Gains on sales of Notes Receivable increased 4.8% from $4.2 million for
the nine months ended September 30, 1996 to $4.4 million for the nine months
ended September 30, 1997 due to higher net interest spreads which more than
offset the effect of a 18.7% reduction in the principal amount of Notes
Receivable sold. For the nine month periods ended September 30, 1996 and 1997
Notes Receivable sold amounted to $49.7 million and $40.4 million respectively.
Net interest spreads, however, were higher for the nine months ended September
30, 1997 as compared to the prior period and largely offset the effect of the
reduction in principal amount of Notes Receivable sold.
Vacation Credit cost of sales increased from $20.2 million for the nine
months ended September 30, 1996 to $25.4 million for the nine months ended
September 30, 1997, an increase of 25.7%, primarily reflecting the increase in
sales of Vacation Credits. As a percentage of Vacation Credit sales, Vacation
Credit cost of sales decreased slightly from 26.8% for the nine months ended
September 30, 1996 to 26.4% for the nine months ended September 30, 1997. The
Company believes that the change in Vacation Credit cost of sales as a
percentage of Vacation Credit sales would have been slightly greater in the
first nine months of 1997 as compared with the first nine months of 1996 absent
the increase in the percentage of Owners who made a 10% cash down payment on
Upgrade Sales.
Sales and marketing costs increased 23.4% from $36.3 million for the
nine months ended September 30, 1996 to $44.8 million for the nine months ended
September 30, 1997. As a percentage of Vacation Credit sales, sales and
marketing costs decreased from 48.1% for the nine months ended September 30,
1996 to 46.5% for the nine months ended September 30, 1997 primarily due to the
substantially higher percentage of Upgrade Sales in the first nine months of
1997 that were entitled to full revenue recognition at the time of sale. The
Company believes that sales and marketing costs as a percentage of Vacation
Credit sales would have increased slightly for the nine months September 30,
1997 as compared with the nine months ended September 30, 1996 absent the
increase in the percentage of Owners who made a 10% cash down payment on Upgrade
Sales.
General and administrative expenses increased 23.1% from $7.8 million
for the nine months ended September 30, 1996 to $9.6 million for the nine months
ended September 30, 1997, primarily reflecting the increased sales growth and
increased administration costs due to regionalization. As a percentage of total
revenues, general and administrative expenses decreased from 8.9% for the nine
months ended September 30, 1996 to 8.5% for the nine months ended September 30,
1997, due primarily to the substantially higher percentage of Upgrade Sales in
the first nine months of 1997 that were entitled to full revenue recognition at
the time of sale. The Company believes that general and administrative expenses
as a percentage of total revenues would have remained relatively constant for
the nine months ended September 30, 1997 as compared with the nine months ended
September 30, 1996 absent the increase in the percentage of Owners who made a
10% cash down payment on Upgrade Sales.
Provision for doubtful accounts and recourse liability increased 19.6 %
from $5.6 million for the nine months ended September 30, 1996 to $6.7 million
for the nine months ended September 30, 1997. As a percentage of Vacation Credit
sales, the provision declined from 7.5% for the nine months ended September 30,
1996 to 6.9% for the nine months ended September 30, 1997 due to the
substantially higher percentage of Upgrade Sales in the first nine months of
1997 that were entitled to full revenue recognition at the time of sale and
continued growth in the amount of Notes Receivable from Upgrade Sales as Upgrade
Sales have a historically lower default rate than new sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations from down payments on sales
of Vacation Credits which are financed, cash sales of Vacation Credits,
principal and interest on Notes Receivable, and proceeds from sales and
borrowings collateralized by Notes Receivable. The Company also generates cash
on the interest differential between the interest charged on the Notes
Receivable and the interest paid on loans collateralized by Notes Receivable.
During the nine months ended September 30, 1996 and 1997, cash flow
provided by (used in) operating activities were $5.6 million and ($36.2)
million, respectively. While net income was higher for the nine months ended
September 30, 1997 compared to the same period in the prior year, cash generated
from operating activities decreased principally due to the increased issuance of
Notes Receivable to finance the purchase of Vacation Credits and reduced
proceeds from sales of Notes Receivable. For the first nine months of 1997, cash
flows from operating activities resulted primarily from sales and repayments of
Notes Receivable of $42.9 million and net income of $15.2 million, and cash flow
used in operating activities was principally for the issuance and purchase of
Notes Receivable of $94.3 million to finance the purchase of Vacation Credits by
Owners and an increase in inventory of $7.4 million due to additional
construction in progress to meet increasing sales demand. For the nine months
ended September 30, 1996, cash flows from operating activities resulted
primarily from the sale and repayment of Notes Receivable of $67.6 million and
net income of $9.5 million. Cash flow used in operating activities in the first
nine months of 1996 was principally for the issuance and purchase of Notes
Receivable of $77.3 million to finance the purchase of Vacation Credits by
Owners and an increase in inventory of $3.1 million due to additional
construction in progress to meet increasing sales demand. The decrease in
proceeds from sales of Notes Receivable in the first nine months of 1997 as
compared with the prior year same period was due in part to treating the
transfer of such receivables to the bank group after January 1, 1997 and prior
to June 30, 1997 as secured borrowing as TW Holdings did not meet the sales
recognition criteria of Statement of Financial Accounting Standards Number 125
(SFAS 125).
Net cash used in investing activities for the nine months ended
September 30, 1996 and 1997 was $0.6 and $1.1 million, respectively. Cash used
in the acquisition of property, plant and equipment was primarily used to
acquire furniture and fixtures and data processing equipment required to meet
the growth of the Company.
Net cash provided by (used in) financing activities for the nine months
ended September 30, 1996 and 1997, was ($5.0) million and $38.8 million,
respectively. For the nine months ended September 30, 1997, the Company received
net proceeds of $51.9 from the offering of 3,176,250 shares of the Company's
common stock. Net proceeds from the offering were used to repay $41.9 million of
borrowings from Jeld-Wen, Inc. (the Parent) resulting in a net change in due to
Parent of $21.3 million. The balance of the proceeds were used for working
capital purposes and to loan funds to the Parent resulting in an increase in
receivable from Parent of $7.6 million which bears interest at prime minus 1%
(currently 7.5%) per annum, and are due on demand from the Company.
Since completed units at various resort properties are acquired or
developed in advance and a significant portion of the purchase price of Vacation
Credits is financed by the Company, the Company continually needs funds to
acquire and develop property, to carry Notes Receivable contracts and to provide
working capital. The Company has historically secured additional funds through
loans from the Parent and the sale of Notes Receivable through the Finance
Subsidiaries. See "Risk Factors - Dependence on Acquisitions of Additional
Resort Units for Growth; Need for Additional Capital" of the Company's
Registration Statement Form S-1.
The Company has a $10 million open line of credit with the Parent which
bears interest at prime plus 1% (currently 9.5 %) per annum. The line of credit
is payable on demand. As of September 30, 1997, there was not any outstanding
indebtedness to the Parent except for the balance of 1997 estimated income taxes
payable to the Parent of $2,5 million.
Financing of Notes Receivable has been accomplished by use of a $93.0
million purchase commitment from the Bank Group. As of September 30, 1997, Notes
Receivable totaling $85.0 million had been transferred to the Bank Group. The
agreement with the Bank Group is subject to annual renewal on June 30 of each
year. The interest rate on borrowings under the agreement with the Bank Group is
currently LIBOR plus 125 basis points. In the future, the Company may
hypothecate its Notes Receivable. The Company, through a finance subsidiary, is
presently pursuing an asset backed securitization of $100 million to retire the
existing off-balance sheet financing with the Bank Group and provide the
potential for an additional $93 million in future financings of notes receivable
to the Bank Group. This is targeted to take place late in the first quarter of
1998.
The remaining balance of the Company's $5.0 million line of credit with
FINOVA Capital Corporation was paid in August 1997 and the line of credit was
terminated by the Company due to the relatively high interest rate of 10.5%. The
Company believes it can obtain more favorable interest rates from a $30 million
line of credit which is presently being pursued with its Bank Group agented by
Bank of America NT&SA.
Through the end of 1998, the Company anticipates spending approximately
$64 million for acquisitions and development of new resort properties and for
expansion and development activities. The Company plans to fund these
expenditures with the net proceeds of the Offering (after reduction of debt) and
cash generated from operations, including further sales and securitizations of
Notes Receivable. The Company believes that, with respect to its current
operations, the net proceeds to the Company from the Offering, together with
cash generated from operations and future borrowings, will be sufficient to meet
the Company's working capital and capital expenditure needs through the end of
1998.
WorldMark maintains a replacement reserve for the WorldMark Resorts
which is funded from the annual assessments of the Owners. At September 30,
1997, the amount of such reserve was approximately $4.7 million. The replacement
reserve is utilized to refurbish and replace the interiors and furnishings of
the condominium units and to maintain the exteriors and common areas in
WorldMark Resorts in which all units are owned by WorldMark. The Company may
advance funds to WorldMark from time to time.
In the future, the Company may negotiate additional credit facilities,
or issue corporate debt or equity securities. Any debt incurred or issued by the
Company may be secured or unsecured, at a fixed or variable rate interest, and
may be subject to such additional terms as management deems appropriate.
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 6 of "Notes to
Condensed Combined and Consolidated Financial Statements."
Item 2 - Changes in Securities and Use of Proceeds
On August 12, 1997, the Securities and Exchange Commission
declared effective the Company's Registration Statement on
Form S-1 (File No. 333-26861). On August 14, 1997, the Company
consummated the offering of 3,176,250 shares of the Company's
voting no par value common stock. The Managing Underwriter of
the offering was Montgomery Securities.
Activity relating to the Company and the Selling Shareholder
is summarized below:
<TABLE>
<CAPTION>
Selling
Company Shareholder
--------------------- -------------------
<S> <C> <C>
Shares registered (1) 3,176,250 130,000
Aggregate price of the offering
amount registered (1) $ 57,172,500 $2,340,000
Amount sold to date (1) $ 57,172,500 $2,340,000
Underwriting discount 4,002,000
Other expenses 1,258,500
---------------------
Total expenses (2) 5,260,500
Net proceeds to Company $ 51,912,000
=====================
(1) Includes a 30-day option granted to and exercised by the
underwriters to purchase up to 431,250 additional shares
of Common Stock solely to cover over-allotments.
(2) All such expenses were direct or indirect payments to
others.
</TABLE>
Proceeds from the offering as of September 30, 1997 were used
to retire $41.9 million of debt to the Parent Company. The
remaining proceeds were used to fund working capital which
includes a loan to the Parent of $7.6 million and to purchase
real property for development in the amount of $1.3 million.
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matter to a Vote of Security Holders
None
<PAGE>
Item 5 - Other Information
On July 18, 1997 the Company purchased 20.55 acres of
land at Angel's Camp, California on which it plans to
construct a total of 200 condominium units. Phase I is
expected to include 112 condominium units, two swimming pools,
a sports court, check-in facility and fitness room. It is
anticipated that Phase I will be taken down as each building
is completed beginning in May or June 1998. This project will
provide drive-to inventory for WorldMark owners in northern
California.
The Company purchased 13 units at Schooner Landing,
an existing resort property on the Oregon Coast on September
17, 1997 at a cost of $1,319,000. The units, which were
transferred to WorldMark in September, provided approximately
5.2 million credits in inventory which will provide additional
capacity on the Oregon Coast. The WorldMark resort at Gleneden
Beach, on the Oregon Coast, is presently running at
approximately 96% occupancy year round. This brings the number
of WorldMark resorts in the system to twenty.
During the fourth quarter of 1997 the Company
anticipates the completion of construction of two new resorts,
Clear Lake at Nice, California and Kona on the island of
Hawaii. These two projects will provide 88 and 64 condominium
units, respectively. The Clear Lake resort will provide
drive-to inventory for WorldMark's growing owner base in
northern California while Kona will add needed exotic
inventory to the system. The completion of these two resorts
will bring the number of resorts in the WorldMark system to
twenty-two.
The above statement and other statements herein
contain forward looking information which include future
financing transactions, acquisition of properties, and the
Company's future prospects and other forecasts and statements
of expectations. Actual results may differ materially from
those expressed in any forward-looking statement made by the
Company, due among other things, to the Company's ability to
develop or acquire additional resort properties, find
acceptable debt or equity capital to fund such development, as
well as other risk factors as outlined in the "Risk Factors"
section of the Company's Registration Statement on Form S-1
filed with the SEC (File No: 333-26861).
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Restated Articles of Incorporation (1)
2.2 Restated Bylaws (1)
Statement re: Computation of Earnings per share
Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-26861).
(a) Reports on Form 8-K: None
SIGNATURES
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.
TRENDWEST RESORTS, INC.
Date: November 12, 1997 /s/ WILLIAM F. PEARE
------------------------- ---------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: November 12, 1997 /s/ GARY A. FLORENCE
------------------------ -----------------------------
Gary A. Florence
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
AND CONSOLIDATED FINANCIAL STATEMENTS OF TRENDWEST RESORTS, INC. AND CERTAIN
AFFILIATES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> SEP-30-1997 SEP-30-1997
<CASH> 2,662 2,662
<SECURITIES> 0 0
<RECEIVABLES> 80,113 80,113
<ALLOWANCES> 9,240 9,240
<INVENTORY> 23,620 23,620
<CURRENT-ASSETS> 0 0
<PP&E> 8,423 8,423
<DEPRECIATION> 1,779 1,779
<TOTAL-ASSETS> 136,280 136,280
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 66,882 66,882
<OTHER-SE> 49,987 49,987
<TOTAL-LIABILITY-AND-EQUITY> 136,280 136,280
<SALES> 35,575 96,395
<TOTAL-REVENUES> 40,472 112,922
<CGS> 9,219 25,444
<TOTAL-COSTS> 9,521 26,274
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 2,494 6,654
<INTEREST-EXPENSE> 294 1,739
<INCOME-PRETAX> 8,509 89,127
<INCOME-TAX> 3,076 8,582
<INCOME-CONTINUING> 5,433 15,213
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 5,433 15,213
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
Exhibit 11 Statement re Computation of Pro Form Net Income per Share
Pro forma net income per share is calculated as follows:
<TABLE>
<CAPTION>
Nine months ended September 30, 1997: Number of Weighted
Date shares Average
---------------------------------------------
<S> <C> <C> <C>
Shares outstanding 1/1/97 (1) 1/1/97 14,417,116 14,417,116
Shares issued 8/15/97 2,745,000 464,228
Over-allotment shares issued 9/5/97 431,250 39,637
---------------------------------------------
Weighted average shares outstanding for the period 14,920,981
Net income for the period (thousands) $ 15,213
=================
Pro forma net income per share (2) $
1.02
=================
Three months ended September 30, 1997: Number of Weighted
Date shares Average
-------------------------------------------
Shares outstanding 7/1/97 (1) 7/1/97 14,417,116 14,417,116
Shares issued 8/15/97 2,745,000 1,387,583
Over-allotment shares issued 9/5/97 431,250 118,475
-------------------------------------------
Weighted average shares outstanding for the period 15,923,174
Net income for the period (thousands) $ 5,433
==================
Pro forma net income per share (2) $ 0.34
==================
(1) Assuming 5,193,693 shares issued in conjunction with the consolidation
transaction described in Note 2 to the combined and consolidated
financial statements had been outstanding for all periods presented.
(2) There are no dilutive securities for the periods presented.
</TABLE>
