<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1999
[ ] 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 000-22979
Trendwest Resorts, inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-1004403
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
9805 Willows Road
Redmond, Washington 98052
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (425) 498-2500
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 May 4, 1999: 17,147,966 shares.
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
<S> <C> <C>
Assets:
Cash $ 1,678 9
Restricted cash 3,254 2,351
Notes Receivable, net of allowance for doubtful accounts, sales
returns and deferred gross profit 91,423 93,361
Accrued interest and other receivables 10,976 11,399
Residual interest in Notes Receivable sold 26,332 23,683
Receivable from Parent 320 --
Inventories 38,409 42,309
Property and equipment, net 18,031 20,343
Deferred income taxes 134 702
Other assets 4,591 4,341
------------ ------------
Total assets $ 195,148 198,498
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable 1,873 1,436
Accrued liabilities 7,509 6,645
Accrued construction in progress -- 1,064
Borrowing under bank line of credit 19,000 30,000
Due to Parent -- 5,688
Allowance for recourse liability and deferred gross profit on Notes
Receivable sold 12,147 11,250
Income taxes payable 5,213 1,153
------------ ------------
Total liabilities 45,742 57,236
Shareholders' equity:
Preferred stock, no par value. Authorized 10,000,000 shares;
no shares issued or outstanding -- --
Common stock, no par value. Authorized 90,000,000 shares;
issued and outstanding 17,158,766 61,848 61,848
Retained earnings 87,558 79,414
------------ ------------
Total shareholders' equity 149,406 141,262
Commitments and contingencies
------------ ------------
Total liabilities and shareholders' equity $ 195,148 198,498
============ ============
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE> 3
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenues:
Vacation Credit sales, net $ 49,016 34,885
Finance income 3,951 3,198
Gains on sales of Notes Receivable 4,350 3,597
Resort management services 823 629
Other 1,765 519
----------- -----------
Total revenues 59,905 42,828
----------- -----------
Costs and operating expenses:
Vacation Credit cost of sales 13,621 9,513
Resort management services 397 276
Sales and marketing 23,498 17,635
General and administrative 5,394 3,789
Provision for doubtful accounts and recourse
liability 3,443 2,396
Interest 55 36
----------- -----------
Total costs and operating expenses 46,408 33,645
----------- -----------
Income before income taxes 13,497 9,183
Income tax expense 5,353 3,319
----------- -----------
Net income $ 8,144 5,864
=========== ===========
Basic net income per common share $ .47 .33
Diluted net income per common share $ .47 .33
Weighted average shares of common stock and dilutive potential common stock
outstanding:
Basic 17,158,766 17,593,366
Diluted 17,179,327 17,593,366
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE> 4
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,144 5,864
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization 406 197
Gain on sale of property and equipment (896) --
Amortization of residual interest in notes receivable sold 2,247 1,402
Provision for doubtful accounts, sales returns and recourse liability 4,722 3,166
Recoveries of notes receivable charged off 53 31
Residual interest in notes receivables sold (4,350) (4,582)
Unrealized loss on residual interest in notes receivable sold -- 44
Change in deferred gross profit (171) (226)
Deferred income tax expense 568 363
Issuance of notes receivable (42,060) (31,078)
Proceeds from sale of notes receivable 32,244 38,488
Proceeds from repayment of notes receivable 8,096 5,401
Purchase of notes receivable (595) (2,104)
Changes in certain assets and liabilities:
Restricted cash (903) (174)
Inventories 3,900 (2,935)
Accounts payable and accrued liabilities 237 (2,911)
Income taxes payable to Parent -- (2,755)
Income taxes payable 4,060 1,181
Other 140 (556)
---------- ----------
Net cash provided by operating activities 15,842 8,816
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,577) (1,068)
Proceeds from sale of property and equipment 4,412 --
---------- ----------
Net cash provided by (used in) investing activities 2,835 (1,068)
---------- ----------
Cash flows from financing activities:
Net change in bank line of credit (11,000) --
Increase in receivable from Parent (320) (1,311)
Decrease in due to Parent (5,688) (1,947)
---------- ----------
Net cash used in financing activities (17,008) (3,258)
---------- ----------
Net increase in cash 1,669 4,490
Cash at beginning of period 9 70
---------- ----------
Cash at end of period $ 1,678 4,560
========== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE> 5
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(continued)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
---------- ----------
<S> <C> <C>
Supplemental disclosures of cash flow information -
cash paid during the period for:
Interest (excluding capitalized amounts of $388 and $153,
respectively) $ 480 178
Income taxes 725 4,530
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to the Condensed 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 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 the three months ended
March 31, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending December 31, 1999.
These statements should be read in conjunction with the audited financial
statements and footnotes included in the Company's 1998 Form 10-K filed with the
Securities and Exchange Commission (SEC). The accounting policies used in
preparing these condensed consolidated financial statements are the same as
those described in such Form 10-K.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENTS
In April, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-5, Reporting on the Costs of Start-Up Activities. This SOP was
effective on January 1, 1999, and has not impacted the Company's financial
position or results of operations.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 1999. The Company does
not anticipate a material impact on its financial position or results of
operations from the future adoption of this standard.
NOTE 3 - BASIC AND DILUTED NET INCOME PER COMMON SHARE
The following presents the reconciliation of weighted average shares used for
basic and diluted net income per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1999 1998
---------- ----------
<S> <C> <C>
BASIC
Basic weighted average shares 17,158,766 17,593,366
---------- ----------
DILUTED
Effect of dilutive securities 20,561 --
---------- ----------
Diluted weighted average shares outstanding 17,179,327 17,593,366
========== ==========
</TABLE>
6
<PAGE> 7
Net income available to common shareholders for basic net income per share was
$8,144 and $5,864 for the three months ended March 31, 1999 and 1998,
respectively.
At March 31, 1999 and 1998, there were options to purchase 492,500 and 488,000
shares of common stock outstanding, respectively, which were antidilutive and
therefore not included in the computation of diluted net income per share.
NOTE 4 - INVENTORIES
Inventories consist of Vacation Credits and construction in progress as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Vacation Credits $ 6,128 11,342
Construction in progress 32,281 30,967
------------ ------------
Total inventories $ 38,409 42,309
============ ============
</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 three months ended March 31, 1999 and the
year ended December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Balances at beginning of period $ 20,935 15,240
Provision for doubtful accounts, sales returns and
recourse liability 4,722 15,435
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (3,156) (9,919)
Recoveries 53 179
---------- ----------
Balances at end of period $ 22,554 20,935
========== ==========
Allowance for doubtful accounts and sales returns $ 12,934 12,363
Recourse Liability on notes receivable sold 9,620 8,572
---------- ----------
$ 22,554 20,935
========== ==========
</TABLE>
Total notes receivable outstanding, including notes receivable sold, amounted to
$324,856 and $307,740 at March 31, 1999 and December 31, 1998, respectively.
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 March 31, 1999 the Company had
outstanding purchase commitments of $47,441 related to properties under
development.
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(b) LITIGATION
The Company is involved in various claims and lawsuits arising from the ordinary
course of business. Management believes that outcome of these matters will not
have a material adverse effect on the Company's financial position, results of
operations, or liquidity.
NOTE 7 - SEGMENT REPORTING
The Company has two reportable segments; sales and financing. The sales segment
markets and sells timeshare memberships. The finance segment is primarily
responsible for servicing and collecting Notes Receivable originated in
conjunction with the financing of sales of Vacation Credits. The finance segment
does not include TW Holdings, Trendwest Funding I or Trendwest Funding II.
Management evaluates the business based on sales and marketing activities as
these are the primary drivers of the business.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profits or losses from sales and marketing activities on a pre-tax
basis. Intersegment revenues are recorded at market rates as if the transactions
occurred with third parties. Assets are not reported by segment.
The following tables summarize the segment activity of the Company:
<TABLE>
<CAPTION>
SEGMENT
THREE MONTHS ENDED MARCH 31, 1999: SALES FINANCE OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
External revenue $ 49,016 1,722 823 51,561
Interest revenue - net -- 1,199 -- 1,199
Interest revenue-intersegment -- 726 -- 726
Intersegment revenue -- 429 -- 429
---------- ---------- ---------- ----------
Segment revenue $ 49,016 4,076 823 53,915
Segment profit $ 7,483 3,106 421 11,010
SIGNIFICANT NON-CASH ITEMS:
Provision for doubtful accounts, sales 3,443 -- -- 3,443
returns and recourse liability
Gain on sale of property and equipment -- 896 -- 896
</TABLE>
<TABLE>
<CAPTION>
SEGMENT
THREE MONTHS ENDED MARCH 31, 1998: SALES FINANCE OTHER TOTAL
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
External revenue $ 34,885 480 629 35,994
Interest revenue - net -- 1,034 -- 1,034
Interest revenue-intersegment -- 559 -- 559
Intersegment revenue -- 474 -- 474
---------- ---------- ---------- ----------
Segment revenue $ 34,885 2,547 629 38,061
Segment profit $ 4,924 1,778 346 7,048
SIGNIFICANT NON-CASH ITEMS:
Provision for doubtful accounts, sales 2,396 -- -- 2,396
returns and recourse liability
</TABLE>
8
<PAGE> 9
The following table provides a reconciliation of segment revenues and profits to
the consolidated amounts:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Segment revenue $ 53,915 38,061
Interest expense reported net of interest
income 55 36
Elimination of intersegment revenue (1,155) (1,033)
Finance subsidiaries revenue 7,090 5,764
---------- ----------
CONSOLIDATED REVENUE $ 59,905 42,828
========== ==========
Segment profit $ 11,010 7,048
Corporate overhead not included in segment
reporting (3,431) (2,579)
Finance subsidiaries profit 5,918 4,714
---------- ----------
CONSOLIDATED PRE-TAX INCOME $ 13,497 9,183
========== ==========
</TABLE>
All of the Company's revenue from external customers is derived from sales
within the United States. The Company has no long-lived assets other than
financial instruments.
NOTE 8 - SUBSEQUENT EVENT
On April 15, 1999, the Company created a wholly-owned, special purpose finance
company, TW Holdings II, Inc. At the same time, the Company entered into a $75
million, 364-day Receivables Warehouse facility (Facility) with Prudential
Securities Credit Corporation. The Facility has an advance rate of 90% and has a
required yield of LIBOR plus 100 basis points.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The Company achieved total revenues of $59.9 million for the three months ended
March 31, 1999, compared to $42.8 million for the three months ended March 31,
1998, an increase of 40.0%. The principal reason for the overall improvement was
a 40.4% increase in Vacation Credit sales to $49.0 million for the three months
ended March 31, 1999 from $34.9 million for the three months ended March 31,
1998. The increase in Vacation Credit sales was primarily the result of a 36.5%
increase in the number of Vacation Credits sold to 37.0 million for the three
months ended March 31, 1999, from 27.1 million for the three months ended March
31, 1998. The increase in Vacation Credits sold was largely attributable to
three new off- and four on-site sales offices opened between March, 1998 and
September, 1998, and increased Upgrade Sales. Revenues from Upgrade Sales
increased 16.4% to $7.1 million for the three months ended March 31, 1999, from
$6.1 million for the three months ended March 31, 1998 due primarily to an
increase of 12.5% in the number of Vacation Credits sold as Upgrades during the
three months ended March 31, 1998 compared to the three months ended March 31,
1999. The average price per Vacation Credit sold increased to $1.32 per credit
for the three months ended March 31, 1999 versus $1.26 per credit for the three
months ended March 31, 1998 primarily as a result of an approximate 4% increase
in the selling price of Vacation Credits effective June 29, 1998.
Finance income for the three months ended March 31, 1999 increased 25.0% to $4.0
million from $3.2 million for the three months ended March 31, 1998 due to
increased carrying balances of notes receivable for the two periods compared.
Gains on sales of Notes Receivable increased 22.2% in 1999 over the comparable
period last year because of increased net interest spreads resulting from
reduced interest rates over the same period last year and a reduction in the
required yield to the Bank Group of 12.5 basis points.
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<PAGE> 10
Other income increased 260% to $1.8 million for the three months ended March 31,
1999 from $.5 million for the same period last year as the result of a gain on
the sale of the Bellevue Corporate building of $.9 million in March of 1999.
Vacation Credit cost of sales increased to $13.6 million for the three months
ended March 31, 1999 from $9.5 million for the three months ended March 31,
1998, an increase of 43.2%, primarily reflecting the increase in sales of
Vacation Credits. As a percentage of Vacation Credit sales, Vacation Credit cost
of sales increased slightly to 27.8% versus 27.2% for the three months ended
March 31, 1998 reflecting the increased costs of developing resorts in
California, namely Angels Camp which came on line in the third and fourth
quarters of 1998 and the first quarter of 1999.
Sales and marketing costs increased 33.5% to $23.5 million for the three months
ended March 31, 1999 from $17.6 million for the three months ended March 31,
1998. As a percentage of Vacation Credit sales, sales and marketing costs
decreased to 48.0% for the three months ended March 31, 1999 from 50.4% for the
three months ended March 31, 1998. This is the result of changes made effective
July 6, 1998, to the sales commission program for New and Upgrade sales as well
as raised performance targets for additional sales bonuses which has resulted in
an overall decrease in commission costs.
General and administrative expenses increased 42.1% to $5.4 million for the
three months ended March 31, 1999 from $3.8 million for the three months ended
March 31, 1998. Absent the increase in gains on sales of Notes Receivable and
the gain on the sale the Bellevue Corporate building, general and administrative
expenses would have been higher as a percentage of total revenue for the 1999
period as compared to the 1998 period due to increased sales growth;
inflationary pressure on wages and relocation expenses associated with the move
of the corporate office to a larger facility due to the continued growth of the
Company.
Provision for doubtful accounts and recourse liability increased 41.7% to $3.4
million for the three months ended March 31, 1999 from $2.4 million for the
three months ended March 31, 1998. As a percentage of Vacation Credit sales, the
provision remained comparable at 6.9% for the two periods compared.
The effective tax rate increased to 40.0% for the three months ended March 31,
1999 versus 35.9% for the same period last year as a result of an increased
presence in states with higher income tax rates.
The Company maintains an allowance for doubtful accounts in respect of the Notes
Receivable owned by the Company and an allowance for recourse liability in
respect of the Notes Receivable that have been sold by the Company. The
aggregate amount of these allowances at March 31, 1999 and December 31, were
$22.6 million, and $20.9 million, respectively, representing approximately 7.0%
and 6.8%, respectively, of the total portfolio of Notes Receivable at those
dates, including the Notes Receivable that had been sold by the Company. No
assurance can be given that these allowances will be adequate, and if the amount
of the Notes Receivable that are ultimately written off materially exceed the
related allowances, the Company's business, results of operations and financial
condition could be materially adversely affected.
The Company estimates its allowance for doubtful accounts and recourse liability
by analysis of bad debts by each sales site by year of Note Receivable
origination. The Company uses this historical analysis, in conjunction with
other factors such as local economic conditions and industry trends. The Company
also utilizes experience factors of more mature sales sites in establishing the
reserve for bad debts at new sales offices. The Company generally charges off
all receivables when they become 180 days past due and returns the credits
associated with such charge-offs to inventory. At March 31, 1999 and December
31, 1998, 2.0% and 1.97% of the Company's total receivables portfolio of $324.9
and $307.7 million, respectively, were more than 60 days past due.
10
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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 payments 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 three months ended March 31, 1999 and 1998, cash provided by
operating activities was $15.8 million and $8.8 million, respectively. For the
three months ended March 31, 1999, cash provided by operating activities
resulted primarily from sales and repayments of Notes Receivable of $40.3
million a decrease in inventory of $3.9 million, an increase in taxes payable of
$4.1 million and net income of $8.1 million. For the three months ended March
31, 1999, cash used in operating activities was principally for the issuance and
purchase of Notes Receivable of $42.7 million to finance the purchase of
Vacation Credits by Owners. For the three months ended March 31, 1998 cash
provided by operating activities resulted primarily from the sale and repayment
of Notes Receivable of $43.9 million and net income of $5.9 million. Cash used
in operating activities was primarily for the issuance and purchase of Notes
Receivable of $33.2 million, an increase in inventory of $2.9 million and a
reduction in liabilities of $4.6 million.
Net cash provided by (used in) investing activities for the three months ended
March 31, 1999 and 1998 was $2.8 and ($1.1) million, respectively. Cash provided
by investing activities was the result of $4.4 million in proceeds from the sale
of the Bellevue Corporate building. Cash used in investing activities for the
three months ended March 31, 1999, of ($1.6) million was the result of final
retention payments on the new Corporate headquarters and other furniture and
equipment related to the new building. Cash used for the same period in 1998 of
($1.1) million was the acquisition of furniture and fixtures and data processing
equipment required to meet the growth of the Company.
Net cash used in financing activities for the three months ended March 31, 1999
and 1998, was $17.0 million and $3.3 million, respectively. For the three months
ended March 31, 1999, cash used in financing activities was principally the
result of a decreased in net borrowings under the bank line of credit of $11.0
million and payments to the Parent on the revolving line of credit of $5.7
million. For the three months ended March 31, 1998, cash used in financing
activities was principally the result of payments to the Parent on the revolving
line of credit of $1.9 million and advancing excess funds to the Parent of $1.3
million.
Financing of Notes Receivable has been accomplished by use of a $98.0 million
purchase commitment from the Bank Group through TW Holdings. As of March 31,
1999, Notes Receivable totaling $88 million had been transferred to the Bank
Group. The agreement with the Bank Group is subject to annual renewal on June 17
of each year. The interest rate on borrowings under the agreement with the Bank
Group is currently LIBOR plus 112.5 basis points.
The Company has a $10 million open line of credit with the Parent which bears
interest at prime plus 1% (currently 8.75%) per annum. The line of credit is
payable on demand. As of March 31, 1999, there was not any outstanding
indebtedness to the Parent. The Company may advance excess funds to the Parent
at the prime rate minus 2% (currently 5.75%) per annum. At March 31, 1999, there
was a $.3 million Receivable from Parent.
For the remainder of 1999, the Company anticipates spending approximately $49.0
million for acquisitions and development of new resort properties and for
expansion and development activities. The Company plans to fund these
expenditures with cash generated from operations, including further sales and
securitizations of Notes Receivable and a mortgage on the Company's corporate
headquarters building in Redmond, WA. Acquisition of new resort sites and
properties is an ongoing process and availability of certain properties in
desired locations could result in increased expenditures for such activities.
The Company believes that, with respect to its current
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<PAGE> 12
operations, 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 1999.
WorldMark maintains a replacement reserve for the WorldMark Resorts which is
funded from the annual assessments of the Owners. At March 31, 1999, the amount
of such reserve was approximately $9.1 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.
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 1998 Form
10-K.
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 interest rate, and may be
subject to such additional terms as management deems appropriate.
YEAR 2000
The Year 2000 issue is a flaw in many electronic data processing systems
which prevents them from processing year-date data accurately beyond the year
1999. This is the result of using a two-digit representation for the year, for
example "99" for "1999". This approach assumed that the first two digits of the
abbreviated date is "19". However, when the computer reaches 2000 it may
interpret "00" as the year 1900 possibly causing inaccurate data processing or
processing to stop altogether.
The Company is addressing the Year 2000 issue with a corporate wide
initiative led by the Director of Information Systems and involving the Vice
President of Administration and the Chief Operating Officer. The initiative
includes the identification of affected software, the development of a plan for
correcting the software in the most effective manner, the implementation of that
plan and the monitoring of that implementation. The program also includes
communications with the Company's significant suppliers to determine the extent
to which the Company's systems are vulnerable to any failures by them to address
the Year 2000 issue. In most instances, the Company will renovate existing code
applications, replace older software with new programs and systems, which will
significantly upgrade the existing software as well as appropriately interpret
the calendar Year 2000 and beyond. Although the timing of these replacements is
influenced by the Year 2000 issue, in most instances they will involve capital
expenditures that would have occurred in the normal course of business.
The Company has analyzed each line of code within critical applications and
has determined how any Year 2000 issues will be addressed. The Reservation
system was the first system for remediation as reservations are accepted 13
months in advance. Code revisions have been completed, tested and released to
the live Reservations application on September 10, 1998, one month ahead of
schedule. Subsequent use of the revised Reservation system indicates it is
accepting reservations in the Year 2000 as designed. Remediation of other
critical applications such as Dues, Contracts Collections and Sales was
completed on April 30, 1999. These applications will be put into the live
environment by June 30, 1999. The Marketing system is another critical
application which is currently being re-written and upgraded to improve its
features and for Year 2000 compliance. The Marketing system is scheduled for
implementation on June 30, 1999. As a contingency plan in the event the
re-written code is not ready on June, 30, 1999, the Company is remediating the
old Marketing system code at the same time. Non-critical applications are
scheduled for completion by October 1, 1999. The Company is currently on track
with its implementation schedule and is in the process of developing a
contingency plan in case the remediation is not completed.
12
<PAGE> 13
The Company is also monitoring the Year 2000 compliance program of Sage
Systems, Inc. (Sage), the Servicer of the Company's Notes Receivable portfolio.
Sage has represented that its Year 2000 remediation is complete. The Company
currently is reviewing each line of Sage's code to verify their Year 2000
compliance.
The Company has incurred approximately $.6 million to date to modify or
replace software in order to remediate the Year 2000 issue and anticipates
future expenditures of approximately $.4 million. In the worst case, if the
remediation is not completed in time, management will employ additional
personnel and use PC based applications to maintain critical functions.
Based on its current assessments and remediation plans, the Company does
not expect that it will suffer any material disruption of its business as a
result of the Year 2000 issue. If the Company's remediations were to fail, it
would implement its contingency plan. In such an event, it is likely that there
would be temporary disruption of customer service and customer inconvenience and
additional costs from the implementation of the contingency plan. It is not
possible to quantify those costs at the present time. Although the Company
believes its contingency plan, when completed, will satisfactorily address these
issues, there can be no assurance that the Company's contingency plan will
function as anticipated or that the results of operations of the Company will
not be adversely affected.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily as a result of
its financing of timeshare purchases, the sale and securitization of notes
receivable and borrowing under revolving lines of credit. The Company's interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to reduce overall borrowing costs. To achieve its
objectives, the Company borrows funds, sells or securitizes Notes Receivable
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument. The Company does not
maintain a trading account for any class of financial instrument, it does not
purchase high risk derivative instruments and it is not directly subject to
foreign currency exchange rate risk nor commodity price risk. There have been no
material changes to the Company's exposure to market risk since December 31,
1998.
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 this
Form 10-K.
13
<PAGE> 14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 6 of "Notes to Condensed
Consolidated Financial Statements."
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matter to a Vote of Security Holders
None
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Restated Articles of Incorporation (1)
2.2 Restated Bylaws (1)
11 Statement re: Computation of Earnings per share - See note 3
of "Notes to Condensed Consolidated Financial Statements."
27 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
14
<PAGE> 15
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: May 13, 1999 /s/ WILLIAM F. PEARE
--------------------- -----------------------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: May 13, 1999 /s/ GARY A. FLORENCE
--------------------- -----------------------------------------
Gary A. Florence
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF TRENDWEST RESORTS, INC. AND SUBSIDIARIES
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 104,357
<ALLOWANCES> 12,934
<INVENTORY> 38,409
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<TOTAL-ASSETS> 195,148
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0
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<COMMON> 61,848
<OTHER-SE> 87,558
<TOTAL-LIABILITY-AND-EQUITY> 195,148
<SALES> 49,016
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<CGS> 13,621
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