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 June 30, 2000
[ ] 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
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(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 August 9, 2000: 16,921,183 shares.
<PAGE>
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Assets June 30, December 31,
2000 1999
----------------- ----------------
<S> <C> <C>
Assets:
Cash $ 23 1,760
Restricted cash 5,457 2,987
Notes Receivable, net of allowance for doubtful accounts, sales returns
and deferred gross profit 72,413 84,802
Accrued interest and other receivables 11,339 8,506
Residual interest in Notes Receivable sold 39,914 36,265
Receivable from Parent -- 3,058
Inventories 66,478 45,601
MountainStar development 45,122 --
Property and equipment, net 27,080 24,327
Deferred income taxes 1,103 --
Other assets 4,543 2,657
----------------- ----------------
Total assets $ 273,472 209,963
================= ================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable 6,931 1,900
Accrued liabilities 16,918 12,405
Accrued construction in progress 2,865 790
Due to parent 514 --
Note payable to parent 17,731 --
Borrowing under bank line of credit 21,000 3,900
Allowance for recourse liability and deferred gross profit on Notes
Receivable sold 18,831 17,211
Deferred income taxes -- 42
----------------- ----------------
Total liabilities 84,790 36,248
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 16,950,483 and 17,041,078 shares at June 30,
2000 and December 31, 1999, respectively 57,165 59,428
Accumulated other comprehensive loss (92) --
Retained earnings 131,609 114,287
----------------- ----------------
Total shareholders' equity 188,682 173,715
Commitments and contingencies
Total liabilities and shareholders' equity $ 273,472 209,963
================= ================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
---------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Vacation Credit and Fractional Interest sales,
net $ 71,240 63,426 134,103 112,442
Finance income 4,049 3,338 8,276 7,289
Gains on sales of Notes Receivable 4,467 4,793 8,056 9,143
Resort management services 1,186 953 2,800 1,775
Other 1,256 785 2,507 2,550
---------------- ----------------- --------------- ----------------
Total revenues 82,198 73,295 155,742 133,199
---------------- ----------------- --------------- ----------------
Costs and operating expenses:
Vacation Credit and Fractional Interest cost of
sales 16,754 20,482 31,345 34,103
Resort management services 516 421 937 818
Sales and marketing 33,606 26,664 64,187 50,162
General and administrative 7,804 5,853 15,055 11,245
Provision for doubtful accounts and recourse
liability 5,327 4,377 9,930 7,820
Interest 50 53 97 109
---------------- ----------------- --------------- ----------------
Total costs and operating expenses 64,057 57,850 121,551 104,257
---------------- ----------------- --------------- ----------------
Income before income taxes 18,141 15,445 34,191 28,942
Income tax expense 7,189 5,935 13,569 11,288
---------------- ----------------- --------------- ----------------
Net income $ 10,952 9,510 20,622 17,654
================ ================= =============== ================
Basic net income per common share $ .65 .55 1.22 1.03
Diluted net income per common share $ .64 .55 1.21 1.03
Weighted average shares of common stock and dilutive
potential common stock outstanding:
Basic 16,940,458 17,140,051 16,955,026 17,149,358
Diluted 17,004,547 17,186,588 17,020,178 17,185,054
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
--------------------------------------------
2000 1999
------------------- --------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 20,622 17,654
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Depreciation and amortization 1,263 750
Gain on sale of property and equipment -- (886)
Amortization of residual interest in Notes Receivable sold 6,549 4,670
Provision for doubtful accounts, sales returns and recourse
liability 12,066 10,744
Recoveries of Notes Receivable charged off 112 134
Residual interest in Notes Receivables sold (9,892) (9,473)
Amortization of servicer liability (365) --
Unrealized loss on residual interest in Notes Receivable sold -- 874
Change in deferred gross profit 362 (10)
Deferred income tax (benefit) expense (1,145) 238
Issuance of Notes Receivable (114,203) (95,810)
Proceeds from sale of Notes Receivable 84,663 66,022
Proceeds from repayment of Notes Receivable 37,737 21,975
Purchase of Notes Receivable (7,032) (4,270)
Changes in certain assets and liabilities:
Restricted cash (2,470) (802)
MountainStar Development (25,822) --
Inventories (21,854) (1,748)
Accounts payable and accrued liabilities 8,724 2,594
Income taxes payable -- 318
Other (4,785) 244
------------------- --------------------
Net cash (used in) provided by operating activities (15,470) 13,218
------------------- --------------------
Cash flows from investing activities:
Purchase of property and equipment (2,957) (4,178)
Proceeds from sale of property and equipment -- 4,412
------------------- --------------------
Net cash (used in) provided by investing activities (2,957) 234
Cash flows from financing activities:
Net borrowing (repayment) under bank line of credit and other 20,360 (6,343)
Increase in receivable from Parent -- (891)
Decrease in Due to Parent (1,297) (5,688)
Issuance of common stock 334 --
Repurchase of common stock (2,597) (530)
------------------- --------------------
Net cash provided by (used in) financing activities 16,800 (13,452)
------------------- --------------------
Effect of foreign currency exchange rates on cash (110) --
Net decrease in cash (1,737) --
Cash at beginning of period 1,760 9
------------------- --------------------
Cash at end of period $ 23 9
=================== ====================
</TABLE>
(Continued next page)
4
<PAGE>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (continued)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six month ended June 30,
-----------------------------------------------
2000 1999
-------------------- ----------------------
<S> <C> <C>
Supplemental disclosures of cash flow information -
Cash paid during the period for:
Interest (excluding capitalized amounts of $450 and $715,
respectively) $ 396 146
Income taxes 14,171 10,732
Supplemental schedule of noncash investing and financing activities:
Issuance of note payable to parent in connection with the MountainStar
development acquisition 17,731 --
Reduction in retained earnings for the excess of the purchase price of
the MountainStar development over the Parent's historical cost 3,300 --
Extinguishment of receivable from Parent in connection with the
MountainStar development acquisition 4,869 --
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
5
<PAGE>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(dollars in thousands except per share amounts)
(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) and Fractional Interests in vacation
properties. 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 and Fractional Interest sales and, to a lesser
extent, from the financing of Vacation Credit and Fractional Interest sales and
from its management agreement with WorldMark.
In October of 1999, the Company formed Trendwest South Pacific, Pty. Ltd.
(Trendwest South Pacific) as a wholly-owned subsidiary. Trendwest South Pacific
is an Australian corporation formed for the purpose of conducting sales,
marketing and resort development activities in the South Pacific. Trendwest
South Pacific commenced sales operations in Fiji in March 2000 and in Australia
in June of 2000. The sales terms in the South Pacific are similar to the terms
in the United States.
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 and six
months ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2000.
These statements should be read in conjunction with the audited financial
statements and footnotes included in the Company's 1999 Form 10-K filed with the
Securities and Exchange Commission (SEC). The accounting policies used in
preparing these financial statements are the same as those described in such
Form 10-K.
Note 2 - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended. This Statement is effective as of the
beginning of the first quarter of the fiscal year beginning after June 15, 2000.
The Company does not anticipate a material impact on its financial position or
results of operations from the future adoption of this standard.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition", which must be adopted by the
Company no later than the fourth quarter of 2000. Compliance with SAB No. 101 is
not presently expected to result in any material change to the Company's revenue
recognition policies.
Note 3 -- Foreign Currency Translation
Assets and liabilities in foreign functional currencies are translated into U.S.
dollars based upon the prevailing currency exchange rates in effect at the
balance sheet date. Translation gains and losses are not included in the
determination of net income but are accumulated in a separate component of
shareholders' equity. These translation gains and losses are the only component
of accumulated other comprehensive income in the accompanying consolidated
balance sheets. Transaction gains or losses are recorded in the results of
operations and were insignificant for the three and six month periods ended June
30, 2000.
6
<PAGE>
Note 4 -- Comprehensive Income
The following illustrates the reconciliation of net income to comprehensive
income:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 10,952 9,510 20,622 17,654
Other comprehensive loss:
Change in cumulative effect of foreign currency
translation (106) -- (92) --
---------------------------- ----------------------------
Comprehensive income $ 10,846 9,510 20,530 17,654
============================ ============================
</TABLE>
Note 5 - Basic and Diluted Net Income Per Common Share
The following illustrates the reconciliation of weighted average shares used for
basic and diluted net income per share:
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic
Weighted average shares outstanding 16,940,458 17,140,051 16,955,026 17,149,358
Diluted
Effect of dilutive securities 64,089 46,537 65,152 35,696
---------------- -------------- --------------- ---------------
Diluted weighted average shares outstanding 17,004,547 17,186,588 17,020,178 17,185,054
================ ============== =============== ===============
</TABLE>
Net income available to common shareholders for basic net income per share was
$10,952 and $9,510 for the three months ended June 30, 2000 and 1999, and
$20,622 and $17,654 for the six months ended June 30, 2000 and 1999,
respectively.
For the three months ended June 30, 2000 and 1999, there were options
outstanding to purchase 437,200 and 468,300 shares of common stock,
respectively, which were anti-dilutive and therefore not included in the
computation of diluted net income per common share. For the six months ended
June 30, 2000 and 1999, there were options outstanding to purchase 431,000 and
481,540 shares of common stock, respectively, which were anti-dilutive and
therefore not included in the computation of diluted net income per common
share.
Note 6 - Inventories
Inventories consist of Vacation Credits and construction in progress as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- -----------------
<S> <C> <C>
Vacation Credits $ 10,342 13,247
Construction in progress 56,136 32,354
----------------- -----------------
Total inventories $ 66,478 45,601
================= =================
</TABLE>
7
<PAGE>
Note 7 - MountainStar Development
In June of 2000, the Company acquired the MountainStar development from its
majority shareholder JELD-WEN, inc. (Parent). The purchase price was $47,600
consisting of $25,000 in cash, a $17,731 note payable to Parent and the
settlement by the Company of a $4,869 intercompany receivable from Parent. The
excess of the purchase price over Parent's historical cost is treated as a
non-cash reduction to retained earnings due to the accounting requirement to use
historical cost on such a transfer from a controlling shareholder. The Company
recorded the asset at Parent's historical cost of $44,300; the excess $3,300 of
the purchase price over this amount reduced retained earnings. The cash payment
was funded primarily through the Company's existing credit facilities.
The conceptual master plan for the MountainStar development includes two 18-hole
golf courses, hotel and conference facilities, a spa and fitness center,
vacation homes and vacation condominiums. The property is currently in the final
phase of the entitlement process.
Note 8 - Notes Receivable, Allowance For Doubtful Accounts, Recourse Liability
and Sales Returns
The following table summarizes the Company's total Notes Receivable portfolio
at:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Total Notes Receivable $ 438,363 389,901
Less Notes Receivable sold (346,286) (288,950)
----------------- ------------------
Gross on balance sheet Notes Receivable 92,077 100,951
================= ==================
Unencumbered Notes Receivable 48,508 64,169
Retained interest in Notes Receivable sold 43,569 36,782
----------------- ------------------
Gross on balance sheet Notes Receivable 92,077 100,951
Less: Deferred gross profit (1,052) (970)
Allowance for doubtful accounts and sales returns (18,612) (15,179)
----------------- ------------------
Notes Receivable, net $ 72,413 84,802
================= ==================
</TABLE>
The activity in the allowance for doubtful accounts, recourse liability and
sales returns is as follows for the six months ended June 30, 2000, and the year
ended December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
----------------- ------------------
<S> <C> <C>
Balances at beginning of period $ 29,087 20,935
Provision for doubtful accounts, sales returns and
recourse liability 12,066 21,407
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (7,405) (13,515)
Recoveries 112 260
----------------- ------------------
Balances at end of period $ 33,860 29,087
================= ==================
Allowance for doubtful accounts and sales returns $ 18,612 15,179
Recourse liability on notes receivable sold 15,248 13,908
----------------- ------------------
$ 33,860 29,087
================= ==================
</TABLE>
8
<PAGE>
Note 9 - Note Payable to Parent
In connection with the acquisition of the MountainStar development, the Company
issued a promissory note payable to Parent in the amount of $17,731. The note
bears an interest rate of 9.0%, with quarterly interest payments due starting on
September 1, 2000. Eight quarterly principal payments of $2,216 are due starting
on September 1, 2001. The note matures on June 1, 2003.
Maturities of the Note Payable to Parent at June 30, 2000, are as follows:
2001 $4,433
2002 8,865
2003 4,433
-------
Total $17,731
=======
Note 10 - Commitments and Contingencies
(a) Purchase Commitments
The Company routinely enters into purchase agreements with various developers to
acquire and build resort properties. At June 30, 2000, the Company had
outstanding purchase commitments of $85.4 million related to properties under
development.
(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 11 - Segment Reporting
The Company has two reportable segments: sales and financing. The sales segment
markets and sells timeshare memberships and Fractional Interests. The finance
segment is primarily responsible for servicing and collecting Notes Receivable
originated in conjunction with the financing of sales of Vacation Credits and
Fractional Interests. The finance segment does not include TW Holdings II, TW
Holdings III, Trendwest Funding I, Trendwest Funding II, or Trendwest Funding
III.
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 June 30, 2000: Sales Finance Other Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
External revenue $ 71,240 975 1,186 73,401
Interest revenue - net -- 1,240 -- 1,240
Interest revenue-intersegment -- 1,531 -- 1,531
Intersegment revenue -- 509 -- 509
----------- ----------- ----------- -------------
Segment revenue $ 71,240 4,255 1,186 76,681
Segment profit $ 13,754 2,800 670 17,224
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 6,452 -- -- 6,452
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Segment
Three months ended June 30, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
External revenue $ 63,426 753 953 65,132
Interest revenue - net -- 991 -- 991
Interest revenue-intersegment -- 861 -- 861
Intersegment revenue -- 636 -- 636
----------- ----------- ----------- -------------
Segment revenue $ 63,426 3,241 953 67,620
Segment profit $ 10,793 2,078 532 13,403
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 6,022 -- -- 6,022
Segment
Six months ended June 30, 2000: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 134,103 2,010 2,800 138,913
Interest revenue - net -- 2,551 -- 2,551
Interest revenue-intersegment -- 3,062 -- 3,062
Intersegment revenue -- 805 -- 805
----------- ----------- ----------- -------------
Segment revenue $ 134,103 8,428 2,800 145,331
Segment profit $ 25,643 5,666 1,863 33,172
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 12,066 -- -- 12,066
Segment
Six months ended June 30, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 112,442 2,476 1,775 116,693
Interest revenue - net -- 2,190 -- 2,190
Interest revenue-intersegment -- 1,587 -- 1,587
Intersegment revenue -- 1,065 -- 1,065
----------- ----------- ----------- -------------
Segment revenue $ 112,442 7,318 1,775 121,535
Segment profit $ 18,276 5,180 957 24,413
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 10,744 -- -- 10,744
Gain on sale of property and equipment $ -- 886 -- 886
</TABLE>
10
<PAGE>
The following table provides a reconciliation of segment revenues and profits to
the consolidated amounts:
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
2000 1999 2000 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Segment revenue $ 76,681 67,620 145,331 121,535
Interest expense reported net of interest
income 50 53 97 109
Elimination of intersegment revenue (2,040) (1,497) (3,867) (2,652)
Finance subsidiaries revenue 7,507 7,119 14,181 14,207
----------- ----------- ------------ -------------
Consolidated revenue $ 82,198 73,295 155,742 133,199
=========== =========== ============ =============
Segment profit $ 17,224 13,403 33,172 24,413
Corporate overhead not included in segment
reporting (3,229) (3,558) (9,045) (6,989)
Finance subsidiaries profit 4,146 5,600 10,064 11,518
----------- ----------- ------------ -------------
Consolidated income before income
taxes $ 18,141 15,445 34,191 28,942
=========== =========== ============ =============
</TABLE>
The Company's revenue from external customers derived from sales within the
United States totaled $70,421 for the three months ended June 30, 2000, and
$133,232 for the six months ended June 30, 2000. Revenue from external customers
derived from sales in all foreign countries totaled $819 and $871 for the three
and six months ended June 30, 2000, respectively. Substantially all of the
Company's long-lived assets are located within the United States.
Note 12 - Subsequent Events
On August 9, 2000, the Company increased its Receivables Warehouse Facility with
Banc One to $150 million from $75 million.
On August 14, 2000, the Company completed a three-year, $60 million unsecured
revolving credit agreement (Agreement) with a group of banks agented by KeyBank
National Association (KeyBank). The Agreement also allows for borrowings in
Australian dollars up to a maximum of $15 million US dollar equivalent.
The Agreement provides for borrowings at either a reference rate as announced by
KeyBank or at LIBOR rates plus the applicable margin for the level of borrowings
outstanding. Available borrowings under the Agreement are subject to a borrowing
base which is a percentage of Notes Receivable and inventory, including property
under development. The Credit Agreement will replace the previous $30 million
revolving credit agreement.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2000 to the three months ended
June 30, 1999
The statements below 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 to, among
other things, 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 Form 10-K.
The Company achieved total revenues of $82.2 million for the three months ended
June 30, 2000, compared to $73.3 million for the three months ended June 30,
1999, an increase of 12.1%. Excluding $7.2 million in revenue from sales of
11
<PAGE>
Fractional Interests in the second quarter of 1999, total revenues increased
24.4% over 1999. The principal reason for the overall improvement was a 26.7%
increase in Vacation Credit sales to $71.2 million for the three months ended
June 30, 2000, from $56.2 million for the three months ended June 30, 1999. The
increase in Vacation Credit sales was primarily the result of a 23.3% increase
in the number of Vacation Credits sold to 52.9 million during the three months
ended June 30, 2000, from 42.9 million during the three months ended June 30,
1999. This increase was the result of the maturation of sales offices opened in
1999, strong sales in existing markets, and increased Upgrade sales. Revenues
from Upgrade sales increased 41.0% to $11.0 million for the three months ended
June 30, 2000, from $7.8 million for the three months ended June 30, 1999. The
increase in Upgrade sales is the result of continuing satisfaction on the part
of WorldMark Owners and the ongoing growth in the owner base. The average price
per Vacation Credit sold increased to $1.35 per credit for the three months
ended June 30, 2000, versus $1.31 per credit for the three months ended June 30,
1999, primarily as a result of an approximate 4% increase in the selling price
of Vacation Credits effective June 28, 1999. The Company again increased the
selling price of Vacation Credits by $.05 per credit for new sales effective
July 1, 2000, and a $.05 per credit increase for Upgrade sales is scheduled to
be effective September 1, 2000.
Finance income increased 21.2% to $4.0 million for the three months ended June
30, 2000, from $3.3 million for the three months ended June 30, 1999. The
increase in finance income is the result of an increase in average carrying
balances of Notes Receivable for the comparable periods and an unfavorable
mark-to-market adjustment on the residual interest in Notes Receivable sold in
the second quarter of 1999. The second quarter of 2000 had no mark-to-market
adjustment. The assumptions used in measuring the fair value of residual
interest in Notes Receivable sold are consistent with those used at December 31,
1999. Gains on sales of Notes Receivable decreased 6.3% to $4.5 million for the
three months ended June 30, 2000, from $4.8 million for the three months ended
June 30, 1999, due to an increase in interest rates over 1999, reducing the net
interest spread.
Vacation Credit cost of sales, as a percentage of Vacation Credit and Fractional
Interest sales, was 23.6% for the three months ended June 30, 2000, versus 32.3%
for the three months ended June 30, 1999. This decrease is a result of the
higher product cost of the 1999 Fractional Sales program and below average
product cost for the Fiji and Vistoso projects. Fractional Interests have a
higher product cost than Vacation Credits which is offset by lower sales and
marketing costs. The Company expects product cost, as a percentage of sales, to
increase back to historical levels in the third quarter.
Sales and marketing costs increased 25.8% to $33.6 million for the three months
ended June 30, 2000, from $26.7 million for the three months ended June 30,
1999. As a percentage of Vacation Credit sales, sales and marketing costs
increased to 47.2% for the three months ended June 30, 2000, from 42.1% for the
three months ended June 30, 1999. The difference is primarily attributable to
the lower sales and marketing cost of the Fractional Sales program included in
1999, as well as a lower close rate at new sales offices.
General and administrative expenses increased 32.2% to $7.8 million for the
three months ended June 30, 2000, from $5.9 million for the three months ended
June 30, 1999. As a percentage of total revenue, general and administrative
costs increased to 9.5% for the three months ended June 30, 2000, from 8.0% for
the three months ended June 30, 1999. The increase resulted from fully expensing
start-up costs for the new Midwest and South Pacific regions and the new sales
offices opened in the second quarter of 2000.
Provision for doubtful accounts and recourse liability increased 20.5% to $5.3
million for the three months ended June 30, 2000, from $4.4 million for the
three months ended June 30, 1999. As a percentage of Vacation Credit sales, the
provision for doubtful accounts and recourse liability was 7.4% for the second
quarter of 2000 versus 6.9% for the comparable period last year. This increase
was the result of a higher mix of sales in newer regions with expected default
rates higher than the Company's historical experience.
Comparison of the six months ended June 30, 2000 to the six months ended June
30, 1999:
The Company achieved total revenues of $155.7 million for the six months ended
June 30, 2000, compared to $133.2 million for the six months ended June 30,
1999, an increase of 16.9%. Excluding $7.2 million in revenue from sales of
Fractional Interests in the first six months of 1999, total revenues for the
period increased 23.6% over 1999. The principal reasons for the overall
12
<PAGE>
improvement were a 27.5% increase in Vacation Credit sales to $134.1 million for
the six months ended June 30, 2000, compared to $105.2 million for the six
months ended June 30, 1999. This increase was primarily the result of a 23.5%
increase in the number of Vacation Credits sold to 98.8 million during the six
months ended June 30, 2000, from 80.0 million during the six months ended June
30, 1999. This increase was the result of the continued maturation of sales
offices opened in 1999, strong sales in existing markets, and increased Upgrade
sales. Revenues from Upgrade sales increased 40.0% to $21.0 million for the six
months ended June 30, 2000, from $15.0 million for the six months ended June 30,
1999. The average price per Vacation Credit sold increased to $1.36 per credit
for the six months ended June 30, 2000, versus $1.31 per credit for the six
months ended June 30, 1999, and reflected an approximate 4% increase in the
selling price of Vacation Credits effective June 28, 1999. The Company again
increased the selling price of Vacation Credits by $.05 per credit for new sales
effective July 1, 2000, and a $.05 per credit increase for Upgrade sales is
scheduled to be effective September 1, 2000.
The Company has broken ground on Phase II at Depoe Bay on the Oregon Coast.
Phase II will also include sales of Fractional Interests. Construction is
expected to be completed in the first quarter of 2001. To date, reservation
deposits have been taken on over half of the Phase II Fractional Interests.
Finance income increased 13.7% to $8.3 million for the six months ended June 30,
2000, compared to $7.3 million for the six months ended June 30, 1999. The
increase in finance income reflects the increase in carrying balances of Notes
Receivable for the two periods compared and the 1999 impact of an unfavorable
mark-to-market adjustment on the residual interest in Notes Receivable sold
resulting from early payoffs and rising interest rates. The first six months of
2000 had no such mark-to-market adjustment. The assumptions used in measuring
the fair value of residual interest in Notes Receivable sold are consistent with
those used at December 31, 1999. Gains on sales of Notes Receivable decreased
11.0% to $8.1 million for the six months ended June 30, 2000, from $9.1 million
for the six months ended June 30, 1999. This decrease is due to the increase in
interest rates over 1999, reducing the net interest spread.
Vacation Credit cost of sales, as a percentage of Vacation Credit and Fractional
Interest sales, was 23.3% for the six months ended June 30, 2000 versus 30.3%
for the six months ended June 30, 1999. This decrease is a result of the higher
product cost of the 1999 Fractional Sales program and below average product cost
for the Fiji and Vistoso projects. Fractional Interests have a higher product
cost than Vacation Credits which is offset by lower sales and marketing costs.
The Company expects product cost, as a percentage of sales, to increase back to
historical levels in the third quarter.
Sales and marketing costs increased 27.9% to $64.2 million for the six months
ended June 30, 2000, from $50.2 million for the six months ended June 30, 1999.
As a percentage of Vacation Credit and Fractional Interest sales, sales and
marketing costs increased to 47.9% for the six months ended June 30, 2000, from
44.7% for the six months ended June 30, 1999. The difference is primarily
attributable to the lower sales and marketing cost of the Fractional Sales
program included in 1999, as well as a lower close rate at new sales offices.
General and administrative expenses increased 34.8% to $15.1 million for the six
months ended June 30, 2000, from $11.2 million for the six months ended June 30,
1999. As a percentage of total revenue, general and administrative costs
increased to 9.7% of total revenue for the six months ended June 30, 2000, from
8.4% of total revenue for the six months ended June 30, 1999. The increase
resulted from fully expensing start-up costs for the new Midwest and South
Pacific regions and the new sales offices opened during the first six months of
2000.
Provision for doubtful accounts and recourse liability increased 26.9% to $9.9
million for the six months ended June 30, 2000, from $7.8 million for the six
months ended June 30, 1999. As a percentage of Vacation Credit and Fractional
Interest sales, the provision was 7.4% of Vacation Credit sales for the first
six months of 2000 versus 6.9% for the comparable period last year. This
increase was the result of a higher mix of sales in newer regions with expected
default rates higher than the Company's historical experience.
The Company maintains an allowance for doubtful accounts in respect to the Notes
Receivable owned by the Company and an allowance for recourse liability in
respect to the Notes Receivable that have been sold by the Company. The
aggregate amount of these allowances at June 30, 2000, and December 31, 1999,
were $33.9 million and $29.1 million, respectively, representing approximately
7.7% and 7.5%, respectively, of the total portfolio of Notes Receivable at those
dates, including the Notes Receivable that had been sold by the Company. The
growth in the allowance as a percentage of the total portfolio is attributable
to the mix of sales in newer regions with expected default rates higher than the
Company's historical experience. No assurance can be given that these allowances
will be adequate, and if the amount of the Notes Receivable that are ultimately
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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 in
estimating the allowance for doubtful accounts and recourse liability. The
Company also utilizes experience factors of more mature sales sites in
establishing the allowance 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 June 30,
2000, and December 31, 1999, 1.69% and 1.91% of the Company's total receivables
portfolio of $438.4 million and $389.9 million, respectively, were more than 60
days past due.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations from down payments on sales of
Vacation Credits and Fractional Interests which are financed, cash sales of
Vacation Credits and Fractional Interests, 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 six months ended June 30, 2000 and 1999, cash (used in) provided by
operating activities was $(15.5) million and $13.2 million, respectively. Cash
used in operating activities increased principally due to the increased issuance
of Notes Receivable, increased expenditures for inventory, and the cash payment
to Parent for the MountainStar development. For the first six months of 2000,
cash used in operating activities was principally for the issuance and purchase
of Notes Receivable of $121.2 million to finance the purchase of Vacation
Credits by Owners, an increase in inventory of $21.9 million due to additional
construction in progress to meet increasing sales demand, and the acquisition of
the MountainStar development of $25.0 million. Cash provided by operating
activities resulted primarily from sales and repayments of Notes Receivable of
$122.4 million and net income of $20.6 million. For the six months ended June
30, 1999, cash used in operating activities was principally for the issuance and
purchase of Notes Receivable of $100.1 million to finance the purchase of
Vacation Credits and Fractional Interests by Owners. Cash provided by operating
activities resulted primarily from the sale and repayment of Notes Receivable of
$88.0 million and net income of $17.7 million.
Net cash (used in) provided by investing activities for the six months ended
June 30, 2000 and 1999, was $(3.0) million and $.2 million, respectively. Cash
used in investing activities for the six months ended June 30, 2000, of $3.0
million was the result of purchases of furniture and equipment to support the
Company's growth. Cash provided by investing activities for the first six months
of 1999 was the result of $4.4 million in proceeds from the sale of the Bellevue
Corporate building. Cash used for the same period in 1999 of $4.2 million was
the result of final retention payments on the new Corporate headquarters and
furniture and equipment related to the new building.
Net cash provided by (used in) financing activities for the six months ended
June 30, 2000 and 1999, was $16.8 million and ($13.5) million, respectively. For
the six months ended June 30, 2000, cash provided by financing activities was
principally the result of increased borrowings under the Company's Bank line of
credit and other of $20.4 million. For the same period, cash used in financing
activity was principally the result of a decrease in Due to the Parent and the
repurchase of common stock of the company. For the six months ended June 30,
1999, cash used in financing activities was principally the result of payments
on the Bank line of credit and other of $6.3 million and a decrease in Due to
the Parent of $5.7 million.
The Company has a $30.0 million unsecured revolving credit agreement (Credit
Agreement) with a group of banks. The credit agreement provides for borrowings
at the reference rate as announced by Bank of America, NT&SA or at LIBOR plus
100 basis points and a commitment fee to the banks of 30 basis points per annum
on the total unused amount of the commitment. Availability under the line of
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<PAGE>
credit is subject to a borrowing base which is a percentage of unencumbered
Notes Receivable and inventory, including property under development. Under the
terms of the Credit Agreement, the Company is required to maintain certain
interest coverage ratios and capitalization ratios and also imposes limitations
on certain liens and carrying amounts of inventory. Borrowings outstanding at
June 30, 2000 and December 31, 1999 were $21,000 and $3,900 respectively, at
weighted average interest rates of 8.12% and 8.50%, respectively. The borrowings
at June 30, 2000, were comprised mainly of LIBOR-rate borrowings.
The Company recently completed a three-year, $60 million unsecured revolving
credit agreement (Agreement) with a group of banks agented by KeyBank National
Association (KeyBank). The Agreement also allows for borrowings in Australian
dollars up to a maximum of $15 million US dollar equivalent.
The Agreement provides for borrowings at either a reference rate as announced by
KeyBank or at LIBOR rates plus the applicable margin for the level of borrowings
outstanding. Available borrowings under the Agreement are subject to a borrowing
base which is a percentage of Notes Receivable and inventory, including property
under development. The Credit Agreement will replace the $30 million revolving
credit agreement agented by Bank of America. The borrowings under this agreement
will be used to fund the MountainStar development, resort development
activities, and general corporate purposes.
The Company has a $10 million open line of credit with the Parent which bears
interest at prime plus 1% (currently 10.5%) per annum. The line of credit is
payable on demand. As of June 30, 2000, there was $.5 million outstanding
indebtedness to the Parent. The Company may advance excess funds to the Parent
at prime minus 2% (currently 7.5%) per annum. At June 30, 2000, there was no
Receivable from Parent. As part of the consideration for the acquisition of
MountainStar development, the Company extinguished a $4.9 million Receivable
from Parent.
In addition, in June 2000 the Company issued a note payable to the Parent in the
amount of $17.7 million for the purchase of the MountainStar development (see
Note 8 to the condensed consolidated financial statements). The note carries a
9% interest rate, with quarterly interest payments due starting September 1,
2000. The first of eight quarterly principal payments of $2.2 million is due
September 1, 2001. The MountainStar development includes the 6,200 acre site for
the proposed MountainStar Resort and land designated as an urban growth area for
the City of Cle Elum, Washington. The property is in the final phase of the
entitlement process. The conceptual master plan for the MountainStar Resort
includes two 18-hole golf courses, hotel and conference facilities, a spa and
fitness center, vacation homes and vacation condominiums. The Company does not
expect a significant earnings impact from MountainStar until 2001, as all
development costs are anticipated to be capitalized for the foreseeable future.
For the remainder of 2000, the Company anticipates spending approximately $94.1
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 borrowings under the new $60 million
revolving credit agreement. 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 operations, cash generated from operations and
future borrowings available under existing agreements, will be sufficient to
meet the Company's working capital and capital expenditure needs through the end
of 2000.
WorldMark maintains a replacement reserve for the WorldMark Resorts which is
funded from the annual assessments of the Owners. At June 30, 2000, the amount
of such reserve was approximately $14.1 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 its
revolving credit facility, 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 1999 Form 10-K.
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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.
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 is also
subject to foreign currency exchange rate risk when developing resort properties
denominated in a foreign currency. As the Company expands its operations
worldwide, there will be additional exposure to foreign currency exchange risk.
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 commodity price risk. Other than commencing operations in
the South Pacific, there have been no material changes to the Company's exposure
to market risk since December 31, 1999.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 10 of "Notes to Condensed Consoli-
dated 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
Trendwest Resorts, Inc. (Company) held its Annual Meeting of
Shareholders on June 8, 2000. The matters voted upon at the meeting and
the votes cast with respect thereto were as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
Nominee: Number of shares Number of shares Number of shares
voted FOR voted AGAINST Withheld
--------------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C>
William F. Peare 16,665,975 5,250 --
Harry L. Demorest 16,665,975 5,250 --
</TABLE>
2. Proposal to Ratify the selection of KPMG LLP as independent auditors of
the Company for the 2000 fiscal year:
Number of shares Number of shares Number of shares
voted FOR voted AGAINST Withheld
--------------------- -------------------- ------------------
--------------------- -------------------- ------------------
16,668,065 1,310 1,850
Item 5 - Other Information
None.
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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 5
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).
(b) Reports on Form 8-K
FORM 8-K dated June 12, 2000 on Item 2: Acquisition or Disposition of
Assets, relating to agreement with majority shareholder JELD-WEN to
acquire the JELD-WEN property located in Upper Kittitas County in
Washington State (site of future MountainStar Resort).
17
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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: August 14, 2000 /s/ WILLIAM F. PEARE
------------------- --------------------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 14, 2000 /s/ TIMOTHY P. O'NEIL
------------------- --------------------------------------
Timothy P. O'Neil
Vice President, Chief Financial Officer
And Treasurer
(Principal Financial Officer)
18
