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 September 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 (I.R.S. Employer
of incorporation) Identification No.)
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 November 8, 2000: 16,847,159 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>
September 30, December 31,
Assets 2000 1999
----------------- ----------------
<S> <C> <C>
Assets:
Cash $ 123 1,760
Restricted cash 6,117 2,987
Notes Receivable, net of allowance for doubtful accounts, sales returns
and deferred gross profit 70,978 84,802
Accrued interest and other receivables 12,212 8,506
Residual interest in Notes Receivable sold 42,788 36,265
Receivable from Parent -- 3,058
Inventories 92,329 45,601
MountainStar development 49,073 --
Property and equipment, net 28,231 24,327
Deferred income taxes 2,306 --
Other assets 6,670 2,657
----------------- ----------------
Total assets $ 310,827 209,963
================= ================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable $ 5,951 1,900
Accrued liabilities 19,702 12,405
Accrued construction in progress 7,602 790
Due to Parent 481 --
Note payable to Parent 17,731 --
Borrowing under bank line of credit and other 41,599 3,900
Allowance for recourse liability and deferred gross profit on Notes
Receivable sold 19,253 17,211
Deferred income taxes -- 42
----------------- ----------------
Total liabilities 112,319 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 16,886,359 and 17,041,078 shares at September
30, 2000, and December 31, 1999, respectively. 55,956 59,428
Accumulated other comprehensive loss (607) --
Retained earnings 143,159 114,287
----------------- ----------------
Total shareholders' equity 198,508 173,715
Commitments and contingencies
----------------- ----------------
Total liabilities and shareholders' equity $ 310,827 209,963
================= ================
</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 Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
2000 1999 2000 1999
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Vacation Credit and Fractional Interest sales, net $ 82,908 62,951 217,010 175,393
Finance income 4,725 3,649 13,001 10,938
Gains on sales of Notes Receivable 5,040 3,857 13,096 13,000
Resort management services 1,081 573 3,881 2,348
Other 1,223 964 3,730 3,514
---------------- ----------------- ---------------- ----------------
Total revenues 94,977 71,994 250,718 205,193
---------------- ----------------- ---------------- ----------------
Costs and operating expenses:
Vacation Credit and Fractional Interest cost of
sales 22,253 18,076 53,598 52,179
Resort management services 424 438 1,361 1,256
Sales and marketing 38,529 27,814 102,715 77,976
General and administrative 8,633 6,664 23,687 17,909
Provision for doubtful accounts and recourse
liability 6,160 4,414 16,091 12,234
Interest 128 16 225 125
---------------- ----------------- ---------------- ----------------
Total costs and operating expenses 76,127 57,422 197,677 161,679
---------------- ----------------- ---------------- ----------------
Income before income taxes 18,850 14,572 53,041 43,514
Income tax expense 7,300 5,708 20,869 16,996
---------------- ----------------- ---------------- ----------------
Net income $ 11,550 8,864 32,172 26,518
================ ================= ================ ================
Basic net income per common share $ .68 .52 1.90 1.55
Diluted net income per common share .68 .52 1.89 1.54
Weighted average shares of common stock and
dilutive potential common stock outstanding:
Basic 16,916,899 17,128,830 16,942,229 17,142,331
Diluted 16,957,653 17,192,251 16,993,446 17,189,894
</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>
Nine months ended September 30,
-------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,172 26,518
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 2,005 1,212
Gain on sale of property and equipment -- (870)
Amortization of residual interest in Notes Receivable sold 10,283 7,919
Provision for doubtful accounts, sales returns and recourse
liability 19,685 16,166
Recoveries of Notes Receivable charged off 215 176
Residual interest in Notes Receivables sold (15,395) (17,994)
Unrealized (gain) loss on residual interest in Notes Receivable
sold (573) 973
Contract servicing liability arising from sale of Notes Receivable -- 2,847
Amortization of servicer liability (536) (129)
Change in deferred gross profit 631 27
Deferred income tax (benefit) expense (2,348) 1,569
Issuance of Notes Receivable (189,663) (152,773)
Proceeds from sale of Notes Receivable 152,224 114,892
Proceeds from repayment of Notes Receivable 44,789 40,487
Purchase of Notes Receivable (13,002) (6,267)
Changes in certain assets and liabilities:
Restricted cash (3,130) (1,868)
MountainStar development (29,773) --
Inventories (48,382) 1,094
Accounts payable and accrued liabilities 14,428 3,657
Income taxes payable -- (1,100)
Other (7,832) (1,905)
------------------- -------------------
Net cash (used in) provided by operating activities (34,202) 34,631
------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (4,596) (4,709)
Proceeds from sale of property and equipment -- 4,412
------------------- -------------------
Net cash used in investing activities (4,596) (297)
------------------- -------------------
Cash flows from financing activities:
Net borrowing (repayment) under bank line of credit and other 42,056 (26,391)
Increase in Receivable from Parent -- (1,660)
Decrease in Due to Parent (1,330) (5,688)
Repurchase of common stock (3,948) (732)
Issuance of common stock 476 163
------------------- -------------------
Net cash provided by (used in) financing activities 37,254 (34,308)
------------------- -------------------
Effect of foreign currency exchange rates on cash (93) --
Net (decrease) increase in cash (1,637) 26
Cash at beginning of period 1,760 9
------------------- -------------------
Cash at end of period $ 123 35
=================== ===================
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(continued)
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------------
2000 1999
------------------- -------------------
<S> <C> <C>
Supplemental disclosures of cash flow information -
cash paid during the period for:
Interest (excluding capitalized amounts of $1,485 and $1,047,
respectively) $ -- 212
Income taxes 23,787 16,526
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
nine months ended September 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. This Statement, as amended, 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.
In September 2000, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities--a replacement of FASB
Statement No. 125. This Statement applies to transfers and servicing of
financial assets and extinguishments occurring after March 31, 2001, with
certain disclosure and collateral recognition provisions effective for fiscal
years ending after December 15, 2000. The Company does not presently expect the
adoption of this standard to result in any material change to the Company's
financial position or results of operations.
6
<PAGE>
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 and losses are recorded in the results of
operations and were insignificant for the three and nine month periods ended
September 30, 2000.
Note 4 -- Comprehensive Income
The following illustrates the reconciliation of net income to comprehensive
income:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 11,550 8,864 32,172 26,518
Other comprehensive loss:
Change in cumulative effect of foreign currency
translation (515) -- (607) --
---------------------------- ----------------------------
Comprehensive income $ 11,035 8,864 31,565 26,518
============================ ============================
</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 Nine months ended
September 30, September 30,
---------------------------------- ------------------------------------
2000 1999 2000 1999
---------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Basic
Weighted average shares outstanding 16,916,899 17,128,830 16,942,229 17,142,331
Diluted
Effect of dilutive securities 40,754 63,421 51,217 47,563
---------------- -------------- --------------- ---------------
Diluted weighted average shares outstanding 16,957,653 17,192,251 16,993,446 17,189,894
================ ============== =============== ===============
</TABLE>
Net income available to common shareholders for basic and diluted net income per
share was $11,550 and $8,864 for the three months ended September 30, 2000 and
1999, and $32,172 and $26,518 for the nine months ended September 30, 2000, and
1999, respectively.
For the three months ended September 30, 2000 and 1999, there were options
outstanding to purchase 609,500 and 434,100 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 nine months ended
September 30, 2000 and 1999, there were options outstanding to purchase 588,000
and 433,500 shares of common stock, respectively, which were anti-dilutive and
therefore not included in the computation of diluted net income per common
share.
7
<PAGE>
Note 6 - Inventories
Inventories consist of Vacation Credits, Fractional Interests and construction
in progress as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Vacation Credits $ 8,097 13,247
Construction in progress 84,232 32,354
----------------- ------------------
Total inventories $ 92,329 45,601
================= ==================
</TABLE>
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 was 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 at least
two 18-hole golf courses, hotel and conference facilities, a spa and fitness
center, vacation homes and vacation condominiums.
Note 8 - Allowance For Doubtful Accounts, Recourse Liability and Sales Returns
The following table summarizes the Company's total Notes Receivable portfolio
at:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------------- ------------------
<S> <C> <C>
Total Notes Receivable $ 471,732 389,901
Less Notes Receivable sold (377,743) (288,950)
----------------- ------------------
Gross on balance sheet Notes Receivable 93,989 100,951
================= ==================
Unencumbered Notes Receivable 42,782 64,169
Retained interest in Notes Receivable sold 51,207 36,782
----------------- ------------------
Gross on balance sheet Notes Receivable 93,989 100,951
Less: Deferred gross profit (1,113) (970)
Allowance for doubtful accounts and sales returns (21,898) (15,179)
----------------- ------------------
Notes Receivable, net $ 70,978 84,802
================= ==================
</TABLE>
8
<PAGE>
The activity in the allowance for doubtful accounts, recourse liability and
sales returns is as follows for the nine months ended September 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 19,685 21,407
Notes Receivable charged-off and sales returns net of
Vacation Credits recovered (11,627) (13,515)
Recoveries 215 260
----------------- ------------------
Balances at end of period $ 37,360 29,087
================= ==================
Allowance for doubtful accounts and sales returns $ 21,898 15,179
Recourse liability on Notes Receivable sold 15,462 13,908
----------------- ------------------
$ 37,360 29,087
================= ==================
</TABLE>
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 September 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 parties to
acquire and build resort properties. At September 30, 2000, the Company had
outstanding purchase commitments of $81.1 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.
9
<PAGE>
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 September 30, 2000: Sales Finance Other Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
External revenue $ 82,908 867 1,081 84,856
Interest revenue - net -- 1,039 -- 1,039
Interest revenue-intersegment -- 1,778 -- 1,778
Intersegment revenue -- 700 -- 700
----------- ----------- ----------- -------------
Segment revenue $ 82,908 4,384 1,081 88,373
Segment profit $ 14,175 2,871 657 17,703
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 7,619 -- -- 7,619
Segment
Three months ended September 30, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 62,951 923 573 64,447
Interest revenue - net -- 1,514 -- 1,514
Interest revenue-intersegment -- 1,039 -- 1,039
Intersegment revenue -- 416 -- 416
----------- ----------- ----------- -------------
Segment revenue $ 62,951 3,892 573 67,416
Segment profit $ 11,500 2,723 135 14,358
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 5,422 -- -- 5,422
Segment
Nine months ended September 30, 2000: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 217,010 2,877 3,881 223,768
Interest revenue - net -- 3,590 -- 3,590
Interest revenue-intersegment -- 4,840 -- 4,840
Intersegment revenue -- 1,505 -- 1,505
----------- ----------- ----------- -------------
Segment revenue $ 217,010 12,812 3,881 233,703
Segment profit $ 39,818 8,531 2,520 50,875
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 19,685 -- -- 19,685
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Segment
Nine months ended September 30, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
External revenue $ 175,393 3,399 2,348 181,140
Interest revenue - net -- 3,706 -- 3,706
Interest revenue-intersegment -- 2,626 -- 2,626
Intersegment revenue -- 1,481 -- 1,481
----------- ----------- ----------- -------------
Segment revenue $ 175,393 11,212 2,348 188,953
Segment profit $ 29,776 7,903 1,092 38,771
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 16,166 -- -- 16,166
Gain on sale of property and equipment $ -- 870 -- 870
</TABLE>
The following table provides a reconciliation of segment revenues and profits to
the consolidated amounts:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
2000 1999 2000 1999
----------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
Segment revenue $ 88,373 67,416 233,703 188,953
Interest expense reported net of interest
income 128 16 225 125
Elimination of intersegment revenue (2,478) (1,455) (6,345) (4,107)
Finance subsidiaries revenue 8,954 6,017 23,135 20,222
----------- ----------- ------------ -------------
Consolidated revenue $ 94,977 71,994 250,718 205,193
=========== =========== ============ =============
Segment profit $ 17,703 14,358 50,875 38,771
Corporate overhead not included in segment
reporting (5,178) (3,683) (14,223) (10,672)
Finance subsidiaries profit 6,325 3,897 16,389 15,415
----------- ----------- ------------ -------------
Consolidated pre-tax income $ 18,850 14,572 53,041 43,514
=========== =========== ============ =============
</TABLE>
The Company's revenue from external customers derived from sales within the
United States totaled $81,089 for the three months ended September 30, 2000, and
$214,321 for the nine months ended September 30, 2000. Revenue from external
customers derived from sales in all foreign countries totaled $1,819 and $2,689
for the three and nine months ended September 30, 2000, respectively.
Substantially all of the Company's long-lived assets are located within the
United States.
Note 12 - Subsequent Events
In October of 2000, the Kittitas County Commissioners approved the MountainStar
development's land use application. The development of the master planned resort
is still subject to the transfer of water rights and plat approval. Effective
with the approval vote, the Company began taking refundable reservation deposits
on single-family vacation lots for the first phase of the planned development.
11
<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, 2000, to the three months
ended September 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 $95.0 million for the three months ended
September 30, 2000, compared to $72.0 million for the three months ended
September 30, 1999, an increase of 31.9%. Excluding $4.3 million in revenue from
sales of Fractional Interests in the third quarter of 1999, total revenues
increased 40.3% over 1999. The principal reasons for the overall improvement
were a 41.2% increase in Vacation Credit sales to $82.9 million for the three
months ended September 30, 2000, from $58.7 million for the three months ended
September 30, 1999. The increase in Vacation Credit sales was primarily the
result of a 39.6% increase in the number of Vacation Credits sold to 60.3
million during the three months ended September 30, 2000, from 43.2 million
during the three months ended September 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
57.1% to $12.1 million for the three months ended September 30, 2000, from $7.7
million for the three months ended September 30, 1999, due primarily to an
increase of 57.4% in the number of Vacation Credits sold as Upgrades during the
three months ended September 30, 2000, compared to the three months ended
September 30, 1999. The increase in Upgrade sales results from WorldMark's
owners continued satisfaction with its products and service. The average price
per Vacation Credit sold increased to $1.37 per credit for the three months
ended September 30, 2000, versus $1.36 per credit for the three months ended
September 30, 1999, reflecting the effect of an increase in the selling price of
Vacation Credits for new sales of $0.05 per credit effective July 1, 2000, and
an increase in the price of Upgrade vacation credits of $0.05 per credit
effective September 1, 2000.
Finance income increased 30.6% to $4.7 million for the three months ended
September 30, 2000, from $3.6 million for the three months ended September 30,
1999. The increase in finance income is the result of an increase in the average
carrying balances of Notes Receivable for the comparable periods and a favorable
mark-to-market adjustment on the residual interest in Notes Receivable sold in
the third quarter of 2000, resulting from lower interest rates on Notes
Receivable sold into variable rate structures. The third quarter of 1999 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 increased 28.2% to $5.0
million for the three months ended September 30, 2000 from $3.9 million for the
three months ended September 30, 1999.
Vacation Credit and Fractional Interest cost of sales increased to $22.3 million
for the three months ended September 30, 2000, from $18.1 million for the three
months ended September 30, 1999, an increase of 23.2%, primarily reflecting the
increase in sales of Vacation Credits. As a percentage of Vacation Credit and
Fractional Interests sales, cost of sales decreased to 26.9% from 28.7% of
Vacation Credit and Fractional Interest sales for the two periods compared. This
decrease is attributable to the higher cost of sales of the Fractional Interests
sales which are included in 1999 results. Fractional Interests have a higher
product cost than Vacation Credits, which is offset by lower sales and marketing
costs.
Sales and marketing costs increased 38.5% to $38.5 million for the three months
ended September 30, 2000, from $27.8 million for the three months ended
September 30, 1999. As a percentage of Vacation Credit and Fractional Interest
sales, sales and marketing costs increased to 46.4% for the three months ended
September 30, 2000, from 44.1% for the three months ended September 30, 1999.
This increase is a reflection of the sales generated from the Fractional
Interest sales program included in 1999 results, which had significantly lower
sales and marketing costs than Vacation Credit sales.
12
<PAGE>
General and administrative expenses increased 28.4% to $8.6 million for the
three months ended September 30, 2000, from $6.7 million for the three months
ended September 30, 1999. As a percentage of total revenue, general and
administrative costs remained comparable at 9.1% for the three months ended
September 30, 2000, and 9.3% for the three months ended September 30, 1999.
The provision for doubtful accounts and recourse liability increased 40.9% to
$6.2 million for the three months ended September 30, 2000, from $4.4 million
for the three months ended September 30, 1999. As a percentage of Vacation
Credit and Fractional Interest sales, the provision increased to 7.5% for the
three months ended September 30, 2000, from 7.0% for the three months ended
September 30, 1999. This increase was the result of a higher mix of sales in
newer sales offices with expected default rates higher than the Company's
experience with more mature locations.
Comparison of the nine months ended September 30, 2000, to the nine months ended
September 30, 1999
The Company achieved total revenues of $250.7 million for the nine months ended
September 30, 2000, compared to $205.2 million for the nine months ended
September 30, 1999, an increase of 22.2%. Excluding $11.6 million in revenue
from sales of Fractional Interests during the nine months ended September 30,
1999, total revenues increased 29.5% over 1999. The principal reasons for the
overall improvement were a 32.5% increase in Vacation Credit sales to $217.0
million for the nine months ended September 30, 2000, from $163.8 million for
the nine months ended September 30, 1999. The increase in Vacation Credit sales
was primarily the result of a 29.1% increase in the number of Vacation Credits
sold to 159.1 million during the nine months ended September 30, 2000, from
123.2 million during the nine months ended September 30, 1999, and resulted from
the continued maturation of sales offices opened in 1999, strong sales in
existing markets, and increased Upgrade sales. Revenues from Upgrade sales
increased 46.1% to $33.3 million for the nine months ended September 30, 2000
from $22.8 million for the nine months ended September 30, 1999, due primarily
to an increase of 42.1% in the number of Vacation Credits sold as Upgrades
during the nine months ended September 30, 2000, compared to the nine months
ended September 30, 1999. The increase in Upgrade sales results from WorldMark's
owners continued satisfaction with its products and service. The average price
per Vacation Credit sold increased to $1.36 per credit for the nine months ended
September 30, 2000, versus $1.33 per credit for the nine months ended September
30, 1999, reflecting the effect of an increase the selling price of Vacation
Credits for new sales of $0.05 per credit effective July 1, 2000, and an
increase in the price of Upgrade Vacation Credits of $0.05 per credit effective
September 1, 2000.
Finance income increased 19.3% to $13.0 million for the nine months ended
September 30, 2000, compared to $10.9 million for the nine months ended
September 30, 1999. The increase in finance income reflects the increase in
average carrying balances of Notes Receivable for the two periods compared and a
favorable mark-to-market adjustment on the residual interest in Notes Receivable
sold in 2000, resulting from lower interest rates on Notes Receivable sold into
variable rate structures. 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 remained comparable at
$13.1 million for the nine months ended September 30, 2000, and $13.0 million
for the nine months ended September 30, 1999. In 2000, increased principal
balances of Notes Receivable were sold at higher interest rates than in 1999,
reducing the gains.
Vacation Credit and Fractional Interest cost of sales increased 2.7% to $53.6
million for the nine months ended September 30, 2000, from $52.2 million for the
nine months ended September 30, 1999. As a percentage of Vacation Credit and
Fractional Interests sales, cost of sales decreased to 24.7% for the nine months
ended September 30, 2000, compared to 29.8% for the nine months ended September
30, 1999. This decrease is a result of the higher product cost of the 1999
Fractional Interest sales and below average product cost for the Fiji and
Vistoso projects completed in 2000. Fractional Interests have a higher product
cost than Vacation Credits which is offset by lower sales and marketing costs.
Sales and marketing costs increased 31.7% to $102.7 million for the nine months
ended September 30, 2000, from $78.0 million for the nine months ended September
30, 1999. As a percentage of Vacation Credit and Fractional Interest sales,
sales and marketing costs increased to 47.3% for the nine months ended September
30, 2000, from 44.5% for the nine months ended September 30, 1999. The
difference is primarily attributable to the lower sales and marketing cost of
the Fractional Interest sales program which are included in 1999.
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General and administrative expenses increased 32.4% to $23.7 million for the
nine months ended September 30, 2000, from $17.9 million for the nine months
ended September 30, 1999. As a percentage of total revenue, general and
administrative costs increased to 9.5% for the nine months ended September 30,
2000, from 8.7% of total revenue for the nine months ended September 30, 1999.
The increase resulted from start-up costs for the new Midwest and South Pacific
regions which were expensed as incurred, and the new sales offices opened during
the first half of 2000.
The provision for doubtful accounts and recourse liability increased 32.0% to
$16.1 million for the nine months ended September 30, 2000, from $12.2 million
for the nine months ended September 30, 1999. As a percentage of Vacation Credit
and Fractional Interest sales, the provision increased to 7.4% from 7.0% for the
nine months ended September 30, 2000 and 1999, respectively. This increase was
the result of a higher mix of sales in newer sales offices with expected default
rates higher than the Company's experience with more mature locations.
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 September 30, 2000, and December 31,
1999, were $37.4 million and $29.1 million, respectively, representing
approximately 7.9% 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 sales offices with expected default
rates higher than the Company's experience with more mature locations. 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 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 September
30, 2000, and December 31, 1999, 1.81% and 1.91% of the Company's total
receivables portfolio of $471.7 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 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 nine months ended September 30, 2000 and 1999, cash (used in)
provided by operating activities was ($34.2) million and $34.6 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
nine months of 2000, cash used in operating activities was principally for the
issuance and purchase of Notes Receivable of $202.7 million to finance the
purchase of Vacation Credits by Owners, an increase in inventory of $48.4
million due to additional construction in progress to meet increasing sales
demand, and the acquisition and continuing development of the MountainStar
development of $29.8 million. Cash provided by operating activities resulted
primarily from sales and repayments of Notes Receivable of $197.0 million and
net income of $32.2 million. For the first nine months of 1999, cash used in
operating activities was principally for the issuance and purchase of Notes
Receivable of $159.1 million to finance the purchase of Vacation Credits by
Owners. Cash provided by operating activities resulted primarily from sales and
repayments of Notes Receivable of $155.4 million and net income of $26.5
million.
14
<PAGE>
Net cash used in investing activities for the nine months ended September 30,
2000 and 1999, was $4.6 million and $0.3 million, respectively. Cash used in
investing activities for the nine months ended September 30, 2000, of $4.6
million was the result of purchases of furniture and equipment to support the
Company's expansion. For the nine months ended September 30, 1999, 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 of $4.7
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 nine months ended
September 30, 2000 and 1999, was $37.3 million and ($34.3) million,
respectively. For the nine months ended September 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 $42.1 million. Cash used in
financing activities was the result of a $1.3 million decrease in due to Parent
and $3.9 million repurchase of common stock. For the nine months ended September
30, 1999, cash used in financing activities was the result of $26.4 million
reduction in net borrowings under bank line of credit and other, a $5.7 million
decrease in due to Parent, a $1.7 million increase in receivable from Parent and
$.7 million repurchase of common stock.
On August 14, 2000, the Company entered into 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 replaced the $30 million revolving
credit agreement agented by Bank of America. Borrowings outstanding under the
new agreement at September 30, 2000, were $41,599 at a weighted average interest
rate of 8.38%. Borrowings outstanding at December 31, 1999, under the previous
agreement were $3,900 at a weighted average interest rate of 8.50%.
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 September 30, 2000, there was $0.5 million indebtedness
to the Parent. The Company may advance excess funds to the Parent at prime rate
minus 2% (currently 7.5%) per annum. At September 30, 2000, no amounts were
receivable from Parent.
In addition, the Company has a note payable outstanding to Parent in the amount
of $17.7 million. This note was issued in connection with the purchase of the
MountainStar development. 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. In October of 2000, Kittitas County Commissioners approved the
property's land use application. Water rights and plat approval are still in
process for the first phase of the planned development.
For the remainder of 2000, the Company anticipates spending approximately $44.1
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 $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.
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.
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.
15
<PAGE>
WorldMark maintains a replacement reserve for the WorldMark Resorts which is
funded from the annual assessments of the Owners. At September 30, 2000, the
amount of such reserve was approximately $15.1 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.
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 borrowings 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. As the
Company expands its operations and resort development activities worldwide, the
Company will also be exposed 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.
16
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PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 7 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)
10.1 Credit Agreement between Trendwest Resort, Inc., Trendwest
South Pacific Pty. Ltd. and KeyBank National Association.
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
-------------------
None.
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: November 10, 2000 /s/ WILLIAM F. PEARE
--------------------- -----------------------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: November 10, 2000 /s/ TIMOTHY P. O'NEIL
--------------------- -----------------------------------------
Timothy P. O'Neil
Vice President, Chief Financial Officer
And Treasurer
(Principal Financial Officer)
18
