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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 333-26861
TRENDWEST RESORTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
OREGON 93-1004403
(STATE OR OTHER JURISDICTION OF ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NO.)
9805 WILLOWS ROAD 98052
REDMOND, WA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(425) 990-2300
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS)
Aggregate market price of shares held by non-affiliates at March 9, 1999
was $37,837,715.63, consisting of 2,346,525 shares.
The number of shares of common stock outstanding on March 9, 1999 was
17,158,766 shares.
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement for the 1999 Annual Meeting of
stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
Trendwest Resorts, Inc. (Company) markets, sells and finances timeshare
Vacation Ownership Interests and acquires, develops and manages timeshare
resorts. A Vacation Ownership Interest entitles an owner to use a fully
furnished vacation resort unit at any of the WorldMark resorts based on the
number of Vacation Credits purchased. The Company's timeshare resorts are owned
and operated through WorldMark, the Club, (WorldMark) a non-profit mutual
benefit corporation organized by Trendwest in 1989 to provide an innovative,
flexible vacation ownership system. The Company presently sells Vacation
Ownership interests in Washington, Oregon, California, Arizona and Utah
primarily through off-site sales offices.
Trendwest sells Vacation Ownership Interests in the form of Vacation
Credits which are created by the transfer to WorldMark of resort units purchased
or developed by the Company. Vacation credits can be used by Owners to reserve
units at any of the WorldMark resorts, at any time of the year and in increments
as short as one day. The use of Vacation Credits is not tied to any particular
resort unit or time period as is typical in the timeshare industry. The Company
believes that the combination of multiple WorldMark Resorts and the Company's
Vacation Credit system provides Owners with an attractive range of vacation
planning choices and values not generally available within the timeshare
industry. The Company's vacation credit system with multiple WorldMark Resorts
facilitates the sale of Vacation Credits at off-site sales offices located in
major metropolitan areas and reduces dependence on on-site sales centers located
at more remote resort locations.
The Company sells vacation credits at twenty sales offices, thirteen of
which are located off-site in metropolitan areas. The other sales offices are
located on-site at seven of the WorldMark Resorts.
In addition to the planned expansion of the network of WorldMark resorts
(see table), the Company currently has several other resorts in the permitting
stage and several more in the advanced planning stage. One potential development
is the MountainStar project which initially would involve a 7,400 acre parcel in
central Washington owned by JELD-WEN inc, (Parent or JELD-WEN). On behalf of
JELD-WEN, the Company is currently pursuing the necessary regulatory approvals
and has incurred costs related to the project. All costs incurred by the Company
have been reimbursed by JELD-WEN.
CORPORATE BACKGROUND AND CONSOLIDATION OF FINANCE SUBSIDIARIES
The Company commenced its timeshare business as a wholly-owned subsidiary
of JELD-WEN, in 1989 with three condominium units. JELD-WEN is currently the
Company's principal shareholder. JELD-WEN is a privately owned company that was
founded in 1960 and is a major manufacturer of doors, windows and millwork
products. Headquartered in Klamath Falls, Oregon, JELD-WEN has diversified
operations located throughout the United States and in numerous foreign
countries that include manufacturing, hospitality and recreation, retail,
financial services and real estate.
The Company raises capital for property acquisitions and working capital by
selling or securitizing Notes Receivable through three subsidiaries (the
"Finance Subsidiaries"). Prior to June 30, 1997, two of the Finance Subsidiaries
were owned by JELD-WEN. Effective June 30, 1997, the Company acquired the two
Finance Subsidiaries from JELD-WEN for 5,193,693 shares of the Company's Common
Stock (the "Consolidation Transactions"). On August 15, 1997, the Company
consummated a public offering of 3,176,250 shares of Common Stock at $18.00 per
share resulting in net proceeds of $51,772,000 after deducting the related
issuance costs.
The Company has transactions with other JELD-WEN subsidiaries and related
parties. See note 15 "Related Party Transactions" in the notes to the combined
and consolidated financial statements included herein.
The Company was incorporated in Oregon in 1989. The Company's principal
executive offices are located at 9805 Willows Road, Redmond, Washington 98052,
and its telephone number is (425) 498-2500.
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WORLDMARK
WorldMark is a California nonprofit mutual benefit corporation formed by
Trendwest in 1989. WorldMark's articles of incorporation provide that the
specific purpose for which it was formed is to own, operate and manage the real
property conveyed to it by the Company for the benefit of the WorldMark Owners.
There are approximately 67,982 Owners at December 31, 1998. Owners receive the
right to use all WorldMark Resort units and the right to vote to elect
WorldMark's board members and to vote with respect to certain major WorldMark
matters. The number of votes that each Owner has is based on the number of
Vacation Credits owned.
The Resorts are owned by WorldMark free and clear of all monetary
encumbrances. WorldMark maintains a replacement reserve for the WorldMark
Resorts which is funded from the annual assessments of the Owners. 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.
Compared to other timeshare arrangements, the WorldMark concept provides
Owners significant flexibility in planning vacations. Depending on how many
Vacation Credits an Owner has purchased, the Owner may use the Vacation Credits
for one or more vacations annually. The number of Vacation Credits that are
required to stay one day at WorldMark's units varies, depending upon the resort
location, the size of the unit, the vacation season and the day of the week. For
example, a Friday or Saturday night stay at a one-bedroom unit may require 825
Vacation Credits per night off-season and 1,450 Vacation Credits per night in
peak season. A midweek stay at the same one-bedroom unit would require less
Vacation Credits. The range of Vacation Credits that is required to stay one day
enables an Owner to receive a varying number of days at the WorldMark Resorts
depending on the vacation choices made by the Owner. Under this system, Owners
can select vacations according to their schedules, space needs and available
Vacation Credits. Vacation Credits are reissued on an anniversary date basis and
any unused Vacation Credits may be carried over for one year. An Owner may also
borrow Vacation Credits from the Owner's succeeding year's allotment.
An Owner may also purchase bonus time ("Bonus Time") from WorldMark for use
when space is available. Bonus Time can only be reserved within fourteen days of
use for drive-to locations and within thirty days of use for exotic locations
(Mexico and Hawaii). Bonus Time gives Owners the opportunity to use available
units on short notice at a reduced rate (generally from $20 to $50 per night for
a two bedroom unit, mid-week in the off-season) and to obtain usage beyond their
Vacation Credit allotment.
WorldMark collects maintenance dues from Owners based on the number of
Vacation Credits owned. Currently, the annual dues are $249 for the first 5,000
Vacation Credits owned, plus approximately $76 for each additional increment of
2,500 Vacation Credits owned. These dues are intended to cover WorldMark's
operating costs, including condominium association dues at the WorldMark
Resorts. The Company pays WorldMark the dues on all unsold Vacation Credits.
Such payments totaled $1,107,000, $793,000 and $275,000 in 1998, 1997 and 1996,
respectively.
WorldMark has a five member board of directors that manages its business
and affairs. Three of the directors and principal executive officers of
WorldMark are also officers of the Company. The Board must obtain the approval
of a majority of the voting power of the Owners represented (excluding
Trendwest) to take certain actions, including (i) incurrence of capital
expenditures exceeding 5% of WorldMark's budgeted gross expenses during any
fiscal year and (ii) selling property of WorldMark during any fiscal year with
an aggregate fair market value in excess of 5% of WorldMark's budgeted gross
expenses for such year.
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THE WORLDMARK RESORTS
The following table sets forth certain information as of December 31, 1998,
regarding each existing WorldMark Resort, planned expansion at existing
WorldMark Resorts through 2000, and planned new WorldMark Resorts through 2000:
DATE EXISTING
CONTRIBUTED UNITS IN PLANNED TOTAL UNITS
EXISTING RESORTS LOCATION TO WORLDMARK(A) SERVICE EXPANSION ANTICIPATED RCI RATING(B)
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BRITISH COLUMBIA
Sundance Whistler February 1992 25 -- 25 Gold Crown
CALIFORNIA
North Shore Estates Bass Lake October 1991 61 -- 61 Gold Crown
Beachcomber Pismo Beach April 1993 20 -- 20 R.I.D
Palm Springs Palm Springs July 1995 64 -- 64 Gold Crown
Big Bear Big Bear Lake April 1996 51 19(c) 70 Gold Crown
Clear Lake Nice July 1998 76 -- 76 Gold Crown
Angels Camp Angels Camp September 1998 76 36 112 (g)
HAWAII
Valley Isle Maui April 1990 14 -- 14 Gold Crown
Kapaa Shores Kauai July 1991 49 -- 49 Gold Crown
Kona Hawaii November 1997 64 -- 64 Gold Crown
MEXICO
Coral Baja San Jose del Cabo November 1994 136 -- 136 Gold Crown
NEVADA
Lake Tahoe Stateline January 1991 50 -- 50 Gold Crown
Las Vegas Las Vegas December 1996 42 -- 42 Gold Crown
OREGON
Eagle Crest Redmond September 1989 83 -- 83 Gold Crown
Gleneden Beach Lincoln City March 1996 80 -- 80 Gold Crown
Running Y Ranch Klamath Falls February 1997 81 -- 81 Gold Crown
Schooner Landing Newport September 1997 13(d) -- 13 R.I.D
UTAH
Wolf Creek Eden June 1998 9(e) 64 73 R.I.D
WASHINGTON
Lake Chelan Shores Chelan August 1990 13 -- 13 Gold Crown
Surfside Long Beach September 1991 25 -- 25 R.I.D.
Discovery Bay Sequim January 1992 32 -- 32 Gold Crown
Park Village Leavenworth July 1992 72 -- 72 Gold Crown
Mariner Village Ocean Shores June 1994 32 -- 32 Gold Crown
Birch Bay Blaine January 1995 104 -- 104 Gold Crown
PLANNED RESORTS EXPECTED COMPLETION
Depoe Bay Depoe Bay, OR April 1999 -- 55(f) 55
Marina Monterey Bay, CA June 1999 -- 33 33
Vistoso Tucson, AZ August 1999 -- 111 111
Pinetop Pinetop/Lakeside, AZ June 1999 -- 61 61
Harbor Village Bear Lake, UT March 1999 -- 56 56
Fiji Denarau Island, Fiji March 2000 -- 76 76
The Canadian Vancouver, BC March 2000 -- 42 42
Kihei Maui, HI April 2000 -- 200 200
Oceanside Oceanside, CA July 2000 -- 140 140
----- --- -----
Total 1,272 893 2,165
===== === =====
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(a) The dates in this column indicate, for each resort, the month and year in
which the first completed units at such resort were transferred to
WorldMark. At certain resorts, additional units were transferred to
WorldMark at later dates.
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(b) Gold Crown and Resort of International Distinction ("R.I.D.") are resort
ratings awarded annually by RCI. In 1998, approximately 19% of the resorts
reviewed by RCI received a Gold Crown rating, the highest rating awarded by
RCI, and approximately 13% of the resorts reviewed by RCI received an R.I.D.
rating, the second-highest rating awarded by RCI.
(c) Construction was completed on all units at December 31, 1997. These 19 units
will be transferred to WorldMark in early 1999.
(d) The Company purchased 659 weeks of time per year from Schooner's Landing and
deeded the rights to this time to WorldMark. This is equivalent to 13
condominium units.
(e) The Company purchased 490 weeks of time per year from Wolf Creek and deeded
the rights to this time to WorldMark. This is equivalent to 9 condominium
units.
(f) The Company has an option to purchase 84 units at this resort and expects to
exercise this option in April of 1999. 29 units of this resort will be sold
as fractional interests and not deeded to WorldMark.
(g) This resort has not yet been rated by RCI.
SALES AND MARKETING
The Company's sales of Vacation Credits primarily occur at thirteen
off-site sales offices located in metropolitan areas in four regions. The
remainder of the Company's sales of Vacation Credits occur at seven on-site
sales offices.
The Company believes the advantages of using off-site sales offices
compared to sales offices located at more remote resorts include (i) access to
larger numbers of potential customers, (ii) convenience for prospective
customers to attend a sales presentation, (iii) access to a wider group of
qualified sales personnel due to more convenient work locations, (iv) ability to
open new sales offices quickly and without significant capital expenditures and
(v) lower marketing costs to attract prospective customers to visit an off-site
sales office.
The Company's off-site sales offices are approximately 5,000 square feet
and include a theater, sales area and reception area. Each off-site sales center
is staffed by a sales manager, an office administrator, approximately 10 to 25
salespeople, two verification representatives, and additional staff for guest
registration and clerical assistance. The on-site sales offices are
approximately 2,500 square feet and generally include similar facilities and a
smaller number of staff compared to the off-site sales offices.
The Company uses a variety of marketing programs to attract prospective
Owners, including sponsored promotional contests offering vacation packages or
gifts, targeted mailings and telemarketing efforts, and various other
promotional programs. The Company also co-sponsors sweepstakes, giveaways and
other promotional programs with professional teams at major sporting events
(such as Portland Trail Blazers basketball games and Seattle Mariners baseball
games) and with supermarkets. The Company continually monitors and adjusts its
marketing programs to improve efficiency and recently established a website on
the Internet. Trendwest targets prospective Owners through an analysis of age,
income and travel interests. The Company delivers targeted prospective Owners a
notice related to the specific promotion, inviting the prospective Owner to call
the Company's toll-free voice mail system to leave a return phone number. Those
persons who call the Company and leave their phone number receive a call from
the Company to invite them to visit an off-site sales office and attend a sales
presentation. As an incentive to attend the presentation, the Company offers
gifts, such as an overnight trip or electronic equipment.
When prospective Owners visit a sales facility, they are greeted by a host
or hostess and are shown to the theater to view a 30-minute multi-media
presentation describing the benefits of timeshares in general, and WorldMark
specifically. After the presentation, all prospective owners are introduced to
WorldMark and the benefits of becoming an Owner by a representative of
Trendwest. The speaker introduces the guests to their salesperson, who provides
more specific information, answers questions and invites the guest to join
WorldMark. Audience size is limited to about 20 prospects per presentation. Each
sales office generally conducts three or four presentations per day, five days a
week.
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Printed information regarding Trendwest and its properties, as well as the
rights and obligations of Owners, is provided to each prospective member before
Vacation Ownership Interests are sold. Prior to finalizing a sale, each new
Owner meets with one of the Company's verification representatives to discuss
the new Owner's reasons for joining and to review the rights and obligations of
Owners. The purpose of this meeting is to allow prospective Owners to review
their proposed commitment in an environment separate from the sales process.
Under the laws of each state where the Company sells Vacation Ownership
Interests, each purchaser has a right to rescind the purchase of Vacation
Credits for a period ranging from three to seven calendar days following the
later of the date the contract was signed or the date the purchaser received the
last of the documents required to be provided by the Company, depending on the
state. The Company's current practice is to allow all purchasers a seven day
rescission period, even if state law allows a shorter period. During 1998 and
1997, the Company had a rescission rate of 16.7% and 16.5% respectively, which
is consistent with the Company's historical experience.
The Company's salespeople are trained to use a soft sales approach. The
salespeople emphasize the advantages of becoming an Owner, including
convenience, flexibility, ownership and affordability. The Company believes the
success of its sales approach is reflected not only by the amount of sales of
Vacation Credits to new Owners, but also by the amount of sales of Vacation
Credits to "non-Owner" referrals. Non-Owner referrals are persons who were
referred to the Company by those who attended a sales presentation but did not
purchase Vacation Credits themselves.
Trendwest offers existing Owners cash awards for referrals of new Owners.
The Company maintains a staff of marketing individuals who specialize in
promoting referrals by existing Owners. In addition, as part of the Company's
ongoing marketing efforts, it offers existing Owners the opportunity to purchase
additional Vacation Credits (Upgrade Sales) generally at a discount from the
current price. Owners may purchase additional Vacation Credits in increments of
1,000. Trendwest currently employs 24 sales representatives who specialize in
Upgrade Sales. Sales of Vacation Credits from the Company's owner referral
program and Upgrade Sales contributed in the aggregate approximately 26.5% and
25.3% of the Company's net sales in 1998 and 1997, respectively.
CUSTOMER FINANCING
Since an important component of the Company's sales strategy is the
affordability of Vacation Credits, the Company believes that a significant
portion of its sales of Vacation Credits will continue to be financed by the
Company. In 1998, the average new Owner purchased approximately 6,700 Vacation
Credits for a purchase price of approximately $8,477 and the Company financed
approximately 88% of the aggregate purchase price of Vacation Credits sold to
new Owners with an average new Note Receivable of approximately $7,694. During
1998, the aggregate amount of Notes Receivable generated in connection with the
sale of Vacation Credits to new Owners was approximately $131.5 million. The
Company requires a down payment of at least 10% of the purchase price and the
related Notes Receivable have terms of up to seven years and interest rates of
13.9% or 14.9% per annum.
Existing Owners purchasing additional Vacation Credits must either make a
down payment of 10% of the price of the Upgrade Sale or have sufficient equity
in their existing Vacation Credits to provide at least 10% of the value of all
Vacation Credits, including the Upgrade. The amount of the existing receivable
is cancelled and a new seven-year note secured by an interest in all Vacation
Credits owned is issued.
At December 31, 1998, an aggregate of $307.7 million of Notes Receivable
were outstanding, of which approximately $106.9 million with a weighted average
interest rate of 14.1% per annum had been retained by the Company. The balance
of approximately $200.8 million of Notes Receivable had been sold by the Company
prior to that date, although the Company retains limited recourse liability with
respect to these Notes Receivable. The Company may continue to sell a
substantial amount of its Notes Receivable. See "Liquidity and Capital
Resources -- Finance Subsidiaries" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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Notes Receivable become delinquent when a scheduled payment is 30 days or
more past due and reservation privileges are suspended when a scheduled payment
is 60 days or more past due. At December 31, 1998, approximately $6.1 million of
Notes Receivable, including Notes Receivable previously sold by the Company,
were past due 60 days or more. The Notes Receivable are secured by a security
interest in the related Vacation Credits. The Company's practice has been to
continue to accrue interest on Notes Receivable until such accounts are deemed
uncollectible, at which time the Company writes off such Notes Receivable and
records as an expense any interest that had been accrued, reclaims the related
Vacation Credits that secure such Notes Receivable and returns such Vacation
Credits to inventory as available for resale.
The Company maintains an allowance for doubtful accounts in respect of the
Notes Receivable owned by the Company and an allowance for recourse liability in
respect of the Notes Receivable that have been sold by the Company. The
aggregate amount of these reserves at December 31, 1998 and 1997 were $20.9
million, and $15.2 million, respectively, representing approximately 6.8%, and
6.3% respectively, of the total portfolio of Notes Receivable at those dates,
including the Notes Receivable that had been sold by the Company. The increase
in the provision as a percentage of the total portfolio reflects sales growth in
new regions with default rates higher than the Company's historical average. No
assurance can be given that these allowances will be adequate, and if the amount
of the Notes Receivable that is ultimately written off materially exceeds the
related allowances, the Company's business, results of operations and financial
condition could be materially adversely affected.
The Company estimates its allowance for doubtful accounts and recourse
liability by analysis of bad debts by each sales site by year of Note Receivable
origination. The Company uses this historical analysis, in conjunction with
other factors such as local economic conditions and industry trends. The Company
also utilizes experience factors of more mature sales sites in establishing the
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 reclaimed
credits associated with such charge-offs to inventory. At December 31, 1998 and
1997, 1.97% and 1.88%, respectively, of the Company's total receivables
portfolio of $307.7 million were more than 60 days past due (with reservation
privileges suspended).
Sage Systems, Inc. ("Sage"), a licensed escrow company, services the
Company's entire portfolio of Notes Receivable under an Escrow Agreement with
the Company. Under the Escrow Agreement, contracts for the sale of Vacation
Credits by the Company, and the funds received from such sales, are placed in
escrow with Sage. The escrowed funds and documents are released to the Company
when the Company certifies that it has sufficient Vacation Credits available for
sale, the applicable state-mandated cancellation period (under which a purchaser
may rescind his purchase) has expired, and Sage receives notice from the Company
that a rescission notice has not been received from the purchaser. The Company
handles billing inquiries and all other personal interaction with the Owners,
including collections on its Notes Receivable.
PROPERTY OWNERSHIP
Unlike many "right-to-use" timeshare operations in which a developer sells
timeshare interests in properties it owns, the Company does not own the
properties designated for timeshare use. Rather, when the Company purchases
resort property, it vests in WorldMark title to the property free and clear of
any debt encumbrance. With respect to property developed by the Company, the
Company may initially obtain title in the undeveloped property and then deed the
developed resort property to WorldMark. At the time the Company vests title to
the property in WorldMark, a "Declaration of Vacation Owner Program" is recorded
on the property. This declaration establishes the usage rights of Owners as a
covenant on title, thus protecting those rights against the effect of any future
blanket encumbrance. This ownership structure is designed to protect the
timeshare usage rights of the Owners and comply with statutory regulations.
The Company's only consideration for paying for the properties and for
arranging for the seller of the property to transfer title of the property
directly to WorldMark is the exclusive right to sell Vacation Credits and to add
new properties and additional units at the Company's discretion. The Company's
rights to sell Vacation Credits against the deeded properties are protected by a
security interest in the unsold inventory of
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Vacation Credits. This lien prevents WorldMark from revoking such rights or
transferring them to another party.
Vacation Credits are allocated to each unit based on its vacation use value
relative to existing properties. Vacation Credits are assigned for weeks of
peak, shoulder and off-peak use, reserving time for Bonus Time, repairs and
maintenance. The aggregate Vacation Credits assigned to each unit may not be
changed in the future, and the actual number of Credits assigned are contained
in the recorded declaration. This system of irrevocable allocation and
registration with the state protects the Owners by preventing dilution in the
usage value of the Owner's Vacation Credits.
As of December 31, 1998, WorldMark had a reserve for replacement costs of
approximately $8.3 million for all depreciable assets (e.g., furniture,
appliances, carpeting, roofs and decks) of the WorldMark Resorts. In those
WorldMark Resorts where WorldMark owns only a small percentage of the units in a
complex and belongs to an independent homeowners' association, the dues paid to
such association by WorldMark are partially used to provide adequate reserves
for replacement costs relating to such properties.
PARTICIPATION IN VACATION INTERVAL EXCHANGE NETWORK
The Company believes that the sale of Vacation Credits is made more
attractive by the Company's participation in the vacation interval exchange
network operated by Resort Condominiums International, LLC (RCI). In a 1995
study sponsored by the Alliance for Timeshare Excellence and ARDA, the exchange
opportunity was cited by purchasers of vacation intervals as the most
significant factor in determining whether to purchase a vacation interval. For
an annual membership fee (currently $84), Owners may participate in RCI, which
allows Owners to exchange Vacation Credits for an occupancy right at a
participating resort in RCI based upon availability and the payment of an
additional exchange fee (currently $118 for exchanges in North America and $155
for International exchanges). The Company pays the RCI annual membership fee for
the Owner's first year. An Owner may exchange Vacation Credits for an occupancy
right in a resort participating in the RCI network by requesting occupancy and
specifying the desired unit size and time period. RCI provides an Owner hotline
with direct phone access to representatives who are knowledgeable about
WorldMark and are responsible for assisting Owners with an exchange. RCI assigns
a weekly exchange value for Vacation Credits. This exchange value is based upon
a number of factors. If RCI is unable to meet the Owner's initial request, it
suggests alternative resorts based on availability.
COMPETITION
The Company is subject to significant competition from other entities
engaged in the business of resort development, sales and operation, including
vacation interval ownership, condominiums, hotels and motels. Some of the
world's most recognized lodging, hospitality and entertainment companies have
begun to develop and sell vacation intervals in resort properties. Major
companies that now operate or are developing or planning to develop vacation
interval resorts include Marriott, Disney, Hilton, Hyatt, Four Seasons, Inter-
Continental, Westin and Promus. In addition, other publicly-traded companies in
the timeshare industry, such as Sunterra, Fairfield, Silverleaf and Vistana,
currently compete, or may in the future compete, with the Company. Many of these
entities possess significantly greater financial, marketing and other resources
than those of the Company. Management believes that industry competition will be
increased by recent and potential future consolidation in the timeshare
industry. See "Risk Factors -- Competition".
EMPLOYEES
As of December 31, 1998, Trendwest had 1,064 full-time employees. The
Company believes that its employee relations are good. None of the Company's
employees are represented by a labor union.
The Company enforces a stringent drug policy with all employees. All
prospective employees are tested for the presence of impairing substances before
being hired by the Company. Employees of the Company are tested periodically for
the presence of impairing substances and, in addition, any Company employee may
be tested for such substances for cause. Any employee who is found to be under
the influence of an impairing substance is subject to appropriate disciplinary
action, including termination.
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RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be carefully considered in evaluating the Company
and its business. The Company cautions the reader that this list of risk factors
may not be exhaustive. This document contains forward-looking statements which
involve risks and uncertainties. The Company's actual results and the timing of
certain events could differ materially from those anticipated by such
forward-looking statements as a result of certain factors, including the factors
set forth below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in the Form 10-K.
DEPENDENCE ON ACQUISITIONS OF ADDITIONAL RESORT UNITS FOR GROWTH; NEED FOR
ADDITIONAL CAPITAL
The Company purchases or develops resort units for WorldMark in exchange
for the exclusive right to sell the Vacation Credits assigned to these units.
When the Company purchases or develops a new resort or additional units at an
existing WorldMark Resort, the Company causes the units to be conveyed directly
to WorldMark free of any monetary encumbrances, and therefore must purchase its
properties without any financing secured by the properties. The Company can only
sell additional Vacation Credits to the extent that it acquires or develops
additional resort units for WorldMark. The Company's future growth and financial
success therefore will depend to a significant degree on the availability of
attractive resort locations and the Company's ability to acquire and develop
additional resort units on favorable terms and to obtain additional debt and
equity capital to fund such acquisitions and development. There can be no
assurance that the Company will be successful in this regard. As of December 31,
1998, the Company had purchase agreements and developments in progress to obtain
913 additional resort units by the end of 2000. No assurance can be given that
all of such units will be acquired or completed on a timely basis or at all.
There are numerous potential buyers of resort real estate competing to acquire
resort properties which the Company may consider attractive resort acquisition
opportunities, and many of these potential buyers are better capitalized than
the Company. There can be no assurance that the Company will be able to compete
against such other buyers successfully.
Since the Company generally finances approximately 88% of the aggregate
purchase price of Vacation Credits sold to new Owners, it does not generate
sufficient cash from sales to provide the necessary capital to purchase
additional resort units. No assurance can be given that the Company will be able
to obtain debt or equity capital through the sale or securitization of its Notes
Receivable, or otherwise, in order to continue to acquire additional properties
or that such future financing can be obtained on terms favorable to the Company.
See "Liquidity and Capital Resources -- Finance Subsidiaries".
RISKS ASSOCIATED WITH DEVELOPMENT AND CONSTRUCTION ACTIVITIES
The Company intends to expand its acquisition, development, construction
and expansion of timeshare resorts. There can be no assurance that the Company
will complete current or future development or expansion projects. Risks
associated with these activities include the risk that (i) acquisition or
development opportunities may be abandoned; (ii) construction costs may exceed
original estimates, possibly making the development or expansion uneconomical or
unprofitable; (iii) financing may not be available on favorable terms or at all;
and (iv) construction may not be completed on schedule, resulting in increased
interest expense and delays in the availability for sale of Vacation Credits.
Development activities are also subject to risks relating to inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and authorizations, the
ability of the Company to coordinate construction activities with the process of
obtaining such permits and authorizations, and the ability of the Company to
obtain the financing necessary to complete the necessary acquisition,
construction and conversion work. In addition, the Company's construction
activities are generally performed by third-party contractors. These third-party
contractors generally control the timing, quality and completion of the
construction activities. Nevertheless, construction claims may be asserted
against the Company for construction defects and such claims may give rise to
liabilities. New development activities, regardless of whether or not they are
ultimately successful, typically require a substantial portion of management's
time and attention. The ability of the Company to expand its business to include
new resorts will in part depend upon the availability of
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suitable properties at reasonable prices and the availability of financing for
the acquisition and development of such properties. In the future, the Company
may undertake the development of larger resort complexes. No assurance can be
given that any such larger resort complexes will be developed in a profitable
manner, if at all.
FACTORS AFFECTING SALES VOLUME
As the number of potential customers in the geographic area of a sales
office who have attended a sales presentation increases, the Company may have
increasing difficulty in attracting additional potential customers to a sales
presentation at that office and it may become increasingly difficult for the
Company to maintain current sales levels at its existing sales offices.
Accordingly, the Company anticipates that a substantial portion of its future
sales growth will depend on the opening of additional sales offices. No
assurance can be given, however, that sales from existing or new sales offices
will meet management's expectations. If the Company does not open additional
sales offices or if existing or new sales offices do not perform as expected,
the Company's business, results of operations and financial condition could be
materially adversely affected.
GEOGRAPHIC CONCENTRATION IN THE WESTERN UNITED STATES
The Company presently sells Vacation Credits in Washington, Oregon,
California, Arizona and Utah, primarily to residents of those states and of
British Columbia. The Company intends to continue to sell Vacation Credits in
these five states and to increase the number of its sales offices. Since all of
the Company's sales offices are in the western United States, any economic
downturn in this area of the country could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
the appeal of becoming an Owner may decrease if residents of the western United
States and British Columbia do not continue to view the locations of WorldMark's
Resorts (which are primarily located in these areas) as attractive vacation
destinations.
GENERAL ECONOMIC CONDITIONS; CONCENTRATION IN TIMESHARE INDUSTRY
Any downturn in economic conditions or significant price increases or
adverse events related to the travel and tourism industry, such as the cost and
availability of fuel, could depress discretionary consumer spending and have a
material adverse effect on the Company's business, results of operations and
financial condition. Any such economic conditions, including recession, may also
adversely affect the future availability of attractive financing rates for the
Company or its customers and may materially impact the Company's business.
Furthermore, adverse changes in general economic conditions may adversely affect
the collectibility of the Notes Receivable. Because the Company's operations are
conducted solely within the timeshare industry, any adverse changes affecting
the timeshare industry could have a material adverse effect on the Company's
business, results of operations and financial condition.
RISKS ASSOCIATED WITH CUSTOMER FINANCING
The Company obtains a security interest in the purchased Vacation Credits
and it does not verify a prospective Owner's credit history. At December 31,
1998, an aggregate of $307.7 million of Notes Receivable were outstanding, of
which approximately $106.9 million had been retained by the Company. The
remaining balance of approximately $200.8 million of Notes Receivable had been
sold by the Company prior to that date, although the Company retained limited
recourse liability with respect to these Notes Receivable.
Notes Receivable become delinquent when a scheduled payment is 30 days or
more past due and reservation privileges are suspended when a scheduled payment
is 60 days or more past due. At December 31, 1998, approximately $6.1 million of
Notes Receivable previously sold by the Company were 60 days past due or more.
The Notes Receivable are secured by a security interest in the related Vacation
Credits. The Company's practice has been to continue to accrue interest on Notes
Receivable until such accounts are deemed uncollectible, at which time the
Company writes off such Notes Receivable and records an expense for any interest
that had been accrued, reclaims the related Vacation Credits that secure such
Notes Receivable and returns such Vacation Credits to inventory available for
resale. However, the associated
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marketing costs and sales commissions are not recovered by the Company and these
expenses must be incurred again to resell the Vacation Credits.
The Company maintains an allowance for doubtful accounts in respect of the
Notes Receivable owned by the Company and an allowance for recourse liability in
respect of the Notes Receivable that have been sold by the Company. These
allowances are estimates and if the amount of the Notes Receivable that is
ultimately uncollectible materially exceeds the related allowances, the
Company's business, results of operations and financial condition could be
materially adversely affected. See "Business -- Customer Financing."
INTEREST RATE RISK
The Company generally provides financing for a significant portion of the
aggregate purchase price of Vacation Credits sold at a fixed interest rate. In
order to provide liquidity, the Company through the Finance Subsidiaries, sells
or securitizes its Notes Receivable. Although a significant portion of the
existing financing of the Notes Receivable through the Finance Subsidiaries is
at a fixed rate or at a variable rate with a cap on the maximum rate, if
interest rates were to increase significantly, the Company's future cost of
funds would also likely increase significantly. The Company has the ability to
respond to rising interest rates by increasing the interest rate offered to
finance Vacation Credit purchases. However, such an increase could have a
material adverse effect on sales of Vacation Credits or on the percentage of
Owners who finance their Vacation Credit purchases through the Company, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Customer Financing" and
"Liquidity and Capital Resources -- Finance Subsidiaries."
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate caps and forward swap agreements used to
hedge interest rate risk in securitization transactions. The Company does not
obtain collateral to support financial instruments but monitors the credit
standing of the counterparties.
COMPETITION
The Company is subject to significant competition from other entities
engaged in the business of resort development, sales and operation, including
vacation interval ownership, condominiums, hotels and motels. Some of the
world's most recognized lodging, hospitality and entertainment companies have
begun to develop and sell vacation intervals in resort properties. Major
companies that now operate or are developing or planning to develop vacation
interval resorts include Marriott International, Inc., The Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels and & Resorts,
Inc., Inter-Continental Hotels and Resorts, Inc., Westin Hotels & Resorts and
Promus Hotels, Inc. In addition, other publicly-traded companies in the
timeshare industry, such as Sunterra Corp., Fairfield Communities, Inc.,
Silverleaf Resorts, Inc., and Vistana, Inc., currently compete or may in the
future compete with the Company. Many of these entities possess significantly
greater financial, marketing and other resources than those of the Company.
Management believes that industry competition will be increased by recent and
potential future consolidation in the timeshare industry.
Resales of Vacation Credits by Owners may compete with sales of Vacation
Credits by the Company and may inhibit the Company's ability to increase the
market price of Vacation Credits it sells.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a large extent upon the experience and
abilities of William F. Peare, the Company's President and Chief Executive
Officer, Jeffery P. Sites, the Company's Executive Vice President and Chief
Operating Officer, and Gary A. Florence, the Company's Vice President, Chief
Financial Officer and Treasurer. The loss of the services of any one of these
individuals could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's success is also
dependent upon its ability to attract and retain qualified development,
acquisition, marketing, management, administrative and sales personnel for which
there is keen competition. In addition, the cost of retaining such
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key personnel could escalate over time. There can be no assurance that the
Company will be successful in attracting and retaining such personnel.
REGULATION OF MARKETING AND SALES OF VACATION CREDITS; OTHER LAWS
The Company's marketing and sales of Vacation Credits and certain of its
other operations are subject to extensive regulation by the states and foreign
jurisdictions in which the WorldMark Resorts are located and in which Vacation
Credits are marketed and sold and also by the federal government.
State and Provincial Regulations. Most U.S. states and Canadian provinces
have adopted specific laws and regulations regarding the sale of vacation
interval ownership programs. Washington, Oregon, California, Arizona, Utah,
Hawaii and British Columbia require the company to register WorldMark Resorts,
the Company's vacation program and the number of Vacation Credits available for
sale in such state or province with a designated state or provincial authority.
The Company must amend its registration if it desires to increase the number of
Vacation Credits registered for sale in that state or province. Either the
Company or the state or provincial authority assembles a detailed offering
statement describing the Company and all material aspects of the project and
sale of Vacation Credits. The company is required to deliver the offering
statement to all new purchasers of Vacation Credits, together with certain
additional information concerning the terms of the purchase. Hawaii imposes
particularly stringent and broad regulation requirements for the sale of
interests in interval ownership programs that have resort units located in
Hawaii. The Company has incurred substantial expenditures over an extended
period of time in the registration process in Hawaii and still has not completed
this process. Hawaii has allowed the use of WorldMark units in Hawaii, provided
that the company continues in good faith to pursue registration in Hawaii. Laws
in each state where the Company sells Vacation Credits grant the purchaser from
three to seven calendar days following the later of the date the contract was
signed or the date the purchaser received the last of the documents required to
be provided by the Company. Most states have other laws which regulate the
Company's activities, such as real estate licensure laws, laws relating to the
use of public accommodations, and facilities by disabled persons, sellers of
travel licensure laws, anti-fraud laws, advertising laws and labor laws.
Federal Regulations. The Federal Trade Commission has taken an active
regulatory role in the interval ownership industry through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject includes the Truth-In-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Real Estate Standards Practices Act, the Telephone Consumer
Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act,
the Civil Rights Act of 1964 and 1968, the Fair Housing Act and the Americans
with Disabilities Act.
Although the Company believes that it is in material compliance with all
federal, state, local and foreign laws and regulations to which it is currently
subject, there can be no assurance that it is in fact, in compliance. Any
failure by the Company to comply with applicable laws or regulations could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company will continue to incur significant
costs to remain in compliance with applicable laws and regulations, and such
costs could increase substantially in the future.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state, local and foreign laws, ordinances and
regulations, the owner or operator of real property generally is liable for the
costs of removal or remediation of certain hazardous or toxic substances located
on or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Other federal and state laws
require the removal or encapsulation of asbestos-containing material when such
material is in poor condition or in the event of construction, demolition,
remodeling or renovation. Other statutes may require the removal of underground
storage tanks. Noncompliance with these and other environmental, health or
safety requirements may result in the need to cease or alter operations at the
property. Although the Company conducts an
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environmental assessment with respect to the properties it acquires for
WorldMark, the company has not received a Phase I environmental report for any
WorldMark Resort. There can be no assurance that any environmental assessments
undertaken by the Company with respect to the WorldMark Resorts have revealed
all potential environmental liabilities, or that an environmental condition does
not otherwise exist as to any one or more of the WorldMark Resorts that could
have a material adverse effect on the Company's business, results of operations
and financial condition.
NATURAL DISASTERS; UNINSURED LOSS
WorldMark maintains property insurance and liability insurance for the
units at the WorldMark Resorts, with certain policy specifications, insured
limits and deductibles. Certain types of losses, such as losses arising from
earthquakes, floods or acts of war, are generally excluded from WorldMark's
insurance coverage. Should an uninsured loss or loss in excess of insured limits
occur, WorldMark has the option to either (i) remove such units from the
Vacation Credit system, which would result in a proportional dilution of
vacation time available for the Vacation Credits which have been sold, or (ii)
pay the related costs of replacement. Although WorldMark's board of directors
may impose a limited amount of special assessments to pay for capital
improvements or major repairs, there can be no assurance that WorldMark would be
able to increase assessments to provide sufficient funds to pay for all possible
capital improvements and major repairs of the units at the WorldMark Resorts. In
such event, the Company may need to advance funds to WorldMark in order to
maintain the quality of the WorldMark Resorts or WorldMark may be required to
defer certain improvements or repairs. In addition, the Company may advance
funds to WorldMark if WorldMark does not have sufficient funds to pay its
obligations in a timely manner. See "Business -- Insurance; Legal Proceedings."
ITEM 2. PROPERTIES
The Company owns its former headquarters building in Bellevue, Washington
and its new corporate headquarters in Redmond, Washington. The Company intends
to sell the Bellevue building in the first half of 1999. In the ordinary course
of business, the Company purchases property for development and deeds said
property to WorldMark upon completion of the project. See
"Business -- WorldMark".
ITEM 3. LEGAL PROCEEDINGS
The Company is not aware of any material legal proceedings pending against
it. The Company may be subject to claims and legal proceedings from time to time
in the ordinary course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
There were no matters submitted to a vote of the Company's equity holders
during the fourth quarter of 1998.
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's initial public offering of Common Stock was consummated on
August 15, 1997 at an initial price of $18.00 per share. The Company's common
stock is quoted on the Nasdaq National Market under the symbol "TWRI". The
following table sets forth for the periods indicated, the high and low sales
price for Common Stock, as quoted on the Nasdaq National Market:
HIGH LOW
---- ---
YEAR ENDED DECEMBER 31, 1997:
Third quarter (commencing August 15, 1997).................. $20 7/8 $17 7/8
Fourth quarter.............................................. 29 1/2 18 1/2
YEAR ENDED DECEMBER 31, 1998:
First quarter............................................... 23 3/8 18
Second quarter.............................................. 19 3/4 12 1/8
Third quarter............................................... 14 7 3/4
Fourth quarter.............................................. 15 3/8 4 7/8
On February 23, 1999, there were approximately 48 holders of record of the
Company's common stock and approximately 1,330 beneficial shareholders.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock. The
Company currently intends to retain future earnings to finance its operations
and fund the growth of the business. Any payment of future dividends will be at
the discretion of the Board of Directors of the Company and will depend on,
among other things, the Company's earnings, financial condition, contractual
restrictions in respect of the payment of dividends and other factors the Board
of Directors deems relevant.
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ITEM 6. SELECTED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" are derived from the audited financial
statements of Trendwest Resorts, Inc. and subsidiaries. The information set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the combined and
consolidated financial statements for the Company and the notes thereto which
are contained elsewhere herein. The information presented below under the
captions "Operating Data" and "Selected Quarterly Financial Data" is unaudited.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
Vacation Credit sales, net.............. $ 170,817 $ 128,835 $ 100,040 $ 77,783 $ 54,904
Finance income.......................... 13,790 11,989 7,143 5,368 3,736
Gains on sales of notes receivable...... 10,959 6,582 5,673 3,222 1,635
Resort management services.............. 2,328 2,032 1,501 1,579 2,805
Other................................... 3,063 2,149 2,552 1,226 763
----------- ----------- ----------- ----------- -----------
Total revenues................... 200,957 151,587 116,909 89,178 63,843
Costs and operating expenses:
Vacation Credit cost of sales........... 48,059 34,569 27,400 20,484 15,070
Resort management services.............. 1,399 1,108 859 1,283 2,613
Sales and marketing..................... 83,347 59,448 47,810 36,374 25,615
General and administrative.............. 17,180 13,449 10,904 8,391 6,588
Provision for doubtful accounts and
recourse liability.................... 11,865 9,077 7,467 6,522 4,537
Interest.................................. 353 1,739 2,445 2,380 881
----------- ----------- ----------- ----------- -----------
Total costs and operating
expenses....................... 162,203 119,390 96,885 75,434 55,304
----------- ----------- ----------- ----------- -----------
Income before income taxes................ 38,754 32,197 20,024 13,744 8,539
Income tax expense...................... 14,723 11,588 7,348 4,979 3,214
----------- ----------- ----------- ----------- -----------
Net income................................ $ 24,031 $ 20,609 $ 12,676 $ 8,765 $ 5,325
=========== =========== =========== =========== ===========
Net income per share of common stock:
Basic................................... $ 1.38 $ 1.32 $ 0.88 $ 0.61 $ 0.42
Diluted................................. $ 1.38 $ 1.32 $ 0.88 $ 0.61 $ 0.42
Shares used in computing net income per
share of common stock(1):
Basic................................... 17,412,818 15,596,419 14,417,116 14,387,169 12,758,616
Diluted................................. 17,416,691 15,596,419 14,417,116 14,387,169 12,758,616
OPERATING DATA:
Number of WorldMark Resorts (at end of
period)................................. 24 22 19 16 14
Number of units (at end of period)........ 1,272 928 746 499 325
Number of Vacation Credits sold (in
thousands).............................. 131,058 99,911 82,270 65,308 47,025
Average price per Vacation Credit sold.... $ 1.28 $ 1.27 $ 1.24 $ 1.21 $ 1.18
Average cost per Vacation Credit sold..... $ 0.37 $ 0.35 $ 0.33 $ 0.31 $ 0.32
Number of Owners (at end of period)....... 67,982 51,778 38,997 27,965 18,740
Average purchase price for new Owners..... $ 8,477 $ 8,507 $ 8,432 $ 8,325 $ 8,141
BALANCE SHEET DATA:
Cash, including restricted cash........... $ 2,360 $ 1,289 $ 802 $ 516 $ 375
Total assets.............................. 198,498 151,750 89,330 71,289 51,143
Indebtedness(2)........................... 35,688 1,947 22,371 24,826 10,378
Shareholders' equity...................... 141,262 122,125 49,744 36,753 27,456
- ---------------
(1) Includes the 5,193,693 shares issued to JELD-WEN in connection with the
Consolidation Transactions for all periods presented.
(2) Indebtedness is comprised of notes payable to JELD-WEN and others.
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SELECTED QUARTERLY FINANCIAL DATA
1998 QUARTERS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Total revenue....................................... $42,828 $47,993 $53,193 $56,944
Total costs and operating expenses.................. 33,645 39,715 43,801 45,043
Net income.......................................... 5,864 5,164 5,884 7,119
Basic and diluted net income per common share....... $ .33 $ .29 $ .34 $ .41
1997 QUARTERS ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
Total revenue....................................... $32,613 $39,837 $40,472 $38,665
Total costs and operating expenses.................. 26,361 30,803 31,963 30,263
Net income.......................................... 3,999 5,781 5,433 5,396
Basic and diluted net income per common share....... $ .28 $ .40 $ .34 $ .31
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Trendwest markets, sells and finances timeshare ownership interests in the
form of Vacation Credits and acquires, develops and manages the WorldMark
Resorts. The Company derives revenue primarily from the sale of Vacation Credits
and, to a lesser extent, from financing of Vacation Credits and from management
fees generated from its management agreement with WorldMark.
Vacation Credit sales and Upgrade Sales are recognized on the accrual basis
after the Company has received an executed sales contract and a minimum 10% down
payment, and the rescission period (generally three to seven days) has passed.
In instances where the Company finances an Upgrade Sale and the customer does
not make an additional cash down payment of at least 10% of the Upgrade Sale,
the Company uses the installment method to recognize revenue. Under the
installment method, gross profit on such Upgrade Sale is deferred and thereafter
recognized in relation to each principal payment received. Revenue is fully
recognized on the Upgrade Sale when the principal collected related to the
Upgrade Sale totals 10% of the amount of the Upgrade sale. Commencing in the
first quarter of 1997, the Company modified its Upgrade Sales marketing
practices so as to encourage an additional cash down payment of at least 10% of
the Upgrade Sale amount. In 1998, 62% of Upgrade Sales had the additional 10%
cash down payment, as compared to 55% in 1997.
The Company acquires or develops additional resort units for WorldMark and
contributes those units to WorldMark free of monetary encumbrances, thereby
creating additional Vacation Credits for sale by the Company. The Company
assigns each WorldMark Resort unit a specific number of Vacation Credits based
on its vacation use value relative to existing WorldMark Resort units.
Acquisition and construction costs associated with the WorldMark Resort units
are recorded as inventory. Vacation Credit cost of sales are allocated as
Vacation Credit sales are recognized.
Financing of Vacation Credits is provided to Owners by Trendwest at an
interest rate of 13.9% or 14.9% per annum for a term of up to seven years. The
Company routinely sells Notes Receivable to financial institutions and other
investors to generate liquidity to acquire or develop new resort units and for
working capital. The Company recognizes a gain on the sale of Notes Receivable
at the time of sale equal to the excess of the proceeds received (cash plus
residual interest in notes receivable sold) over the allocated carrying value of
the Notes Receivable sold. Residual interest in Notes Receivable sold represents
the present value of the estimated net future cash flows of the payment streams,
resulting from the sale of Notes Receivable, and is carried at fair value with
the changes in fair value included in finance income.
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RESULTS OF OPERATIONS
The following discussion of the results of operations relates to entities
comprising the Company on a combined historical basis.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996
----- ----- -----
AS A PERCENTAGE OF TOTAL REVENUES:
Vacation Credit sales, net................................ 85.0% 85.0% 85.5%
Finance income............................................ 6.9 7.9 6.1
Gains on sales of notes receivable........................ 5.5 4.3 4.9
Resort management services................................ 1.1 1.3 1.3
Other..................................................... 1.5 1.5 2.2
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
AS A PERCENTAGE OF VACATION CREDIT SALES, NET:
Vacation Credit cost of sales............................. 28.2% 26.8% 27.4%
Sales and marketing....................................... 48.8 46.1 47.8
Provision for doubtful accounts and recourse liability.... 7.0 7.0 7.5
AS A PERCENT OF RESORT MANAGEMENT REVENUES:
Cost of resort management services........................ 60.9% 54.5% 57.2%
AS A PERCENTAGE OF TOTAL REVENUES:
General and administrative................................ 8.6% 8.9% 9.3%
Total costs and operating expenses........................ 80.7 78.8 82.9
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997
For the year ended December 31, 1998 the Company achieved total revenues of
$201.0 million compared to $151.6 million for the year ended December 31, 1997,
an increase of 32.6%. The principal reason for the overall improvement was
Vacation Credit sales increasing to $170.8 million for the year ended December
31, 1998 from $128.8 million for the year ended December 31, 1997, a 32.6%
increase. The increase in Vacation Credit sales was primarily the result of an
increase in Vacation credits sold to 131.1 million for the year ended December
31, 1998 from 99.9 million for the year ended December 31, 1997, a 31.2%
increase. The increase in Vacation Credits sold was largely attributable to
opening seven new sales offices during 1998. The following table summarizes the
sales offices opened during the year:
ON/OFF
LOCATION OPENED SITE
-------- ------ -----------
Burlingame, CA March, 1998 off-site
Scottsdale, AZ May, 1998 off-site
Wolf Creek, UT June, 1998 on-site
San Diego, CA June, 1998 off-site
Angels Camp, CA September, 1998 on-site
Salt Lake City, UT September, 1998 off-site
Big Bear, CA September, 1998 on site
Additionally, the maturation of the Costa Mesa and Woodland Hills sales
offices, opened in February and October 1997, and increased Upgrade sales also
contributed to the increase in Vacation Credit sales. Revenues from Upgrade
Sales increased 24.1% to $24.7 million for the year ended December 31, 1998 from
$19.9 million for the year ended December 31, 1997. The number of Vacation
Credits sold as Upgrades increased by approximately 28.9% in the year ended
December 31, 1998 compared to the year ended December 31, 1997 due to the
continued growth of resorts and effective sales efforts. The average price per
Vacation Credit sold increased to $1.28 for the year ended December 31, 1998
from $1.27 for the year ended December 31, 1997, reflecting the increase in the
selling price of vacation credits effective June 29, 1998. The
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percentage increase in the average selling price of Vacation Credits was less
than the percentage increase in the selling price of Vacation Credits because of
the recognition of sales made prior to the price increase.
Finance income increased 15.0% to $13.8 million for the year ended December
31, 1998 from $12.0 million for the year ended December 31, 1997, due to
increased carrying balances of Notes Receivable. Gains on sales of Notes
Receivable increased 66.7% to $11.0 million for the year ended December 31, 1998
from $6.6 million for the year ended December 31, 1997. This is due to increased
sales of Notes Receivable in the fourth quarter of 1998 to generate cash and the
asset backed securitization consummated during the first quarter of 1998. The
securitization in the first quarter of 1998 resulted in recording gains of $3.1
million for Notes Receivable sold and reduced the Company's interest rate risk
in the future, if interest rates were to increase, on $130.4 million of sold
notes receivable.
Vacation Credit cost of sales increased to $48.1 million for the year ended
December 31, 1998 from $34.6 million for the year ended December 31, 1997, an
increase of 39.0%. As a percentage of Vacation Credit sales, Vacation Credit
cost of sales increased to 28.2% for the year ended December 31, 1998 from 26.8%
for the year ended December 31, 1997. This increase is the result of the Clear
Lake and Angels Camp resorts in California which came on line in the third
quarter. Clear Lake experienced construction delays and cost overruns due to
inclement weather and the Angels Camp resort had a product cost higher than the
historical average. In addition, higher carrying balances of inventory resulted
in increased developer dues expense paid to WorldMark, the Club.
Sales and marketing costs increased 40.2% to $83.3 million for the year
ended December 31, 1998 from $59.4 million in the year ended December 31, 1997.
As a percentage of Vacation Credit sales, sales and marketing costs increased to
48.8% for the year ended December 31, 1998 from 46.1% for the year ended
December 31, 1997. Sales and marketing costs for the year ended December 31,
1998, as compared to the same period last year, were impacted by four new off
site and three on site sales offices opened during the year as compared to two
off site and one on site sales office last year. The Scottsdale, San Diego, Wolf
Creek and Salt Lake sales offices experienced lower closing percentages, which
initially occur in a new sales office less than one year old, resulting in
higher marketing costs as a percentage of Vacation Credit sales. The payment of
minimum compensation amounts to sales representatives during this initial period
resulted in higher commission costs as a percentage of Vacation Credit sales.
Effective July 6, 1998 management initiated changes to the sales commission
program for New and Upgrade Sales and raised performance targets for additional
bonuses which has resulted in an overall decrease in sales and marketing costs,
for the second half of the year, when expressed as a percentage of Vacation
Credit sales.
General and administrative expenses increased 28.4% to $17.2 million for
the year ended December 31, 1998 from $13.4 million for the year ended December
31, 1997 primarily reflecting the increased sales growth. As a percentage of
total revenues, general and administrative expenses decreased slightly to 8.6%
for the year ended December 31, 1997 from 8.9% for the year ended December 31,
1997, due primarily to the higher gains on sales of notes receivable. The
Company believes that general and administrative expenses as a percentage of
total revenues would have increased slightly for the year ended December 31,
1998 absent the increase in gains on sales of notes receivable during the year.
Interest expense decreased to $.3 million for 1998 from $1.7 million for
1997, a decrease of 82.4% due primarily to the reduction in the average
borrowings from the Parent and proceeds from the sale of Notes Receivable in
1998. In addition, the Company capitalized interest of $704,000 and $637,000 for
the year ended December 31, 1998 and 1997 respectively.
Provision for doubtful accounts and recourse liability increased 30.8% to
$11.9 million for the year ended December 31, 1998 from $9.1 million for the
year ended December 31, 1997. As a percentage of Vacation Credit sales, the
provision remained comparable at 7.0% for the two periods compared.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
For the year ended December 31, 1997 the Company achieved total revenues of
$151.6 million compared to $116.9 million for the year ended December 31, 1996,
an increase of 29.7%. The principal reason for the
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overall improvement was a 28.8% increase in Vacation Credit sales to $128.8
million for the year ended December 31, 1997 from $100.0 million for the year
ended December 31, 1996. The increase in Vacation Credit sales was primarily the
result of a 21.4% increase in the number of Vacation Credits sold for the year
ended December 31, 1997 of 99.9 million from 82.3 million for the year ended
December 31, 1996. The increase in Vacation Credits sold was largely
attributable to two new off-site sales offices in the Southern California
region, Costa Mesa and Woodland Hills, opened in February and October 1997; the
maturation of two offices opened in February and April of 1996; and increased
Upgrade sales. Revenues from Upgrade Sales increased 60.5% to $19.9 million for
the year ended December 31, 1997 from $12.4 million for the year ended December
31, 1996 due largely to the increase in number of Owners who made the necessary
10% cash down payment to allow full revenue recognition at the time of the sale.
The number of Vacation Credits sold as Upgrades increased by approximately 11.4%
in the year ended December 31, 1997 compared to the year ended December 31, 1996
due to the continued growth of resorts and effective sales efforts. The average
price per Vacation Credit sold increased to $1.27 for the year ended December
31, 1997 from $1.24 for the year ended December 31, 1996, an increase of 2.4%,
which was due primarily to a 4.5% increase in the sales price of Upgrade
credits.
Finance income increased 69.0% to $12.0 million for the year ended December
31, 1997 from $7.1 million for the year ended December 31, 1996, due to the
increased carrying balances of Notes Receivable and the recognition of
unrealized gain on residual interest in Notes Receivable sold of $1.0 million.
Gains on sales of Notes Receivable increased 15.8% to $6.6 million for the year
ended December 31, 1997 from $5.7 million for the year ended December 31, 1996
due to higher net interest spreads on the principal amount of Notes Receivable
sold.
Vacation Credit cost of sales increased to $34.6 million for the year ended
December 31, 1997 from $27.4 million for the year ended December 31, 1996, an
increase of 26.3% and primarily reflects the increase in sales of Vacation
Credits. As a percentage of Vacation Credit sales, Vacation Credit cost of sales
decreased to 26.8% for the year ended December 31, 1997 from 27.4% for the year
ended December 31, 1996. The Company believes that the change in Vacation Credit
cost of sales as a percentage of Vacation Credit sales would have been slightly
higher for the year ended December 31, 1997 as compared with the year ended
December 31, 1996 absent the increase in the percentage of Owners who made a 10%
cash down payment on Upgrade Sales.
Sales and marketing costs increased 24.3% to $59.4 million for the year
ended December 31, 1997 from $47.8 million in the year ended December 31, 1996.
As a percentage of Vacation Credit sales, sales and marketing costs decreased to
46.1% for the year ended December 31, 1997 from 47.8% for the year ended
December 31, 1996 primarily due to a substantially higher percentage of Upgrade
Sales for the year ended December 31, 1997 that were entitled to full revenue
recognition at the time of sale. The Company believes that sales and marketing
costs as a percentage of Vacation Credit sales would have remained relatively
constant for the two years compared absent the increase in the percentage of
Owners who made a 10% cash down payment on Upgrade Sales.
General and administrative expenses increased 22.9% to $13.4 million for
the year ended December 31, 1997 from $10.9 million for the year ended December
31, 1996 primarily reflecting the increased sales growth and increased
administration costs due to regionalization. As a percentage of total revenues,
general and administrative expenses decreased to 8.9% for the year ended
December 31, 1997 from 9.3% for the year ended December 31, 1996, due primarily
to the substantially higher percentage of Upgrade Sales that were entitled to
full revenue recognition at the time of sale. The Company believes that general
and administrative expenses as a percentage of total revenues would have
remained relatively constant for the years ended December 31, 1997 and 1996
absent the increase in the percentage of Owners who made a 10% cash down payment
on Upgrade Sales in 1997.
Interest expense decreased to $1.7 million in 1997 from $2.4 million for
1996, a decrease of 29.2% due primarily to the repayment of borrowings from the
Parent from net proceeds of the Offering in August 1997.
Provision for doubtful accounts and recourse liability increased 21.3% to
$9.1 million for the year ended December 31, 1997 from $7.5 million for the year
ended December 31, 1996. As a percentage of Vacation
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Credit sales, the provision declined to 7.0% for the year ended December 31,
1997 from 7.5% for the year ended December 31, 1996 due to the substantially
higher percentage of Upgrade Sales for 1997 that were entitled to full revenue
recognition at the time of sale and continued growth in the amount of Notes
Receivable from Upgrade Sales which have a historically lower default rate than
new sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations from down payments on sales of
Vacation Credits which are financed, cash sales of Vacation Credits, management
fees, 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 securitized by Notes Receivable.
During the year ended December 31 1998, cash used in operating activities
was $14.7 million. While net income was higher for the year ended December 31,
1998 as compared to the year ended December 31, 1997, cash continued to be used
in operating activities due principally to the increased issuance of Notes
Receivable to finance the purchase of Vacation Credits, repurchase of notes
receivable sold and a decrease in accounts payable and accrued liabilities. Cash
flows from operating activities resulted primarily from the sale and repayment
of Notes Receivable of $138.4 million and net income of $24.0 million. Cash flow
used in operating activities was principally due to an increase in Notes
Receivable of $148.7 million to finance the purchase of Vacation Credits by
Owners, purchases of Notes Receivable of $24.4 million, and a decrease in
accounts payable and accrued liabilities and income taxes payable to parent of
$8.9 million. The 1998 increase in proceeds from the sales of Notes Receivable,
as compared to 1997, was due in part to treating the transfer of such
receivables to the Bank Group after January 1, 1997, through June 30, 1997, as
secured borrowing as TW Holdings did not meet the sales recognition criteria of
Statement of Financial Accounting Standards No. 125 (SFAS 125).
Net cash used in investing activities for the year ended December 31, 1998,
was $14.2 million and primarily consisted of the construction of a new corporate
headquarters of $11.1 million. The remaining expenditures consisted of
furniture, fixtures and data processing equipment required to open seven sales
locations to support the growth of the Company.
Net cash provided by financing activities for the year ended December 31
1998 was $28.8 million. This consisted primarily of proceeds from net borrowings
under the bank line of credit of $30.0 million. Cash used in financing
activities was principally the result of repurchasing Company common stock on
the open market of $4.9 million.
The Company continually needs to acquire and develop additional resort
units for WorldMark in order to provide additional vacation credits for sale by
the Company and to provide a greater variety of resort location for Owners. The
continued growth of the Company and increase in the owner base allows for the
development of larger resorts which provides certain economies of scale to the
Company and to WorldMark from an operating cost standpoint. The permitting
process for larger resorts can be lengthy at times, particularly in California
and necessitates the need to acquire land as much 12 to 18 months before a
resort is completed. This is reflected in the Company's investment in inventory
which remained comparable at $42.3 and $44.5 million for the years ended
December 31, 1998 and 1997, respectively.
At December 31, 1998, there were 33.5 million credits available for sale.
With the completion of current projects in progress, the expansion of existing
resorts and completion of the permitting process for Maui, the Company believes
it will have an adequate supply of credits available to meet its planned growth
through the early part of the year 2000. Since all vacation credits have the
same use rights and the same listed selling price, the Company does not
experience a buildup of inventory of less desirable resort units or interval
dates which are difficult to sell.
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
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Company has historically secured additional funds through loans from the Parent
and the sale of Notes Receivable through the Finance Subsidiaries. See "Risk
Factors -- Dependence on Acquisitions of Additional Resort Units for Growth;
Need for Additional Capital."
FINANCE SUBSIDIARIES
TW Holdings, Inc. ("TW") was organized in 1993 to purchase Notes Receivable
at face value plus accrued interest. TW transfers these Notes Receivable to a
group of banks led by Bank of America NT&SA (the "Bank Group") pursuant to a
receivables transfer agreement. Through TW, the Company sold eligible Notes
Receivable of $64.9 million in 1998 and $57.1 million in 1997 to the Bank Group
at an advance rate of 80%. The transfers are subject to recourse for defaults up
to a maximum of 20% and the Company maintains an allowance for recourse
liability.
Financing of Notes Receivable has been accomplished by use of a $98.0
million purchase commitment from the Bank Group. As of December 31, 1998, total
Notes Receivable of $61.0 million were outstanding and transferred to the Bank
Group. The Bank Group is paid interest for the total outstanding balance of the
purchase commitment at 30 day, 60 day, 90 day or 180 day LIBOR plus 112.5 basis
points. TW's agreement with the Bank Group is subject to annual renewals on June
17 of each year, with the present commitment expiring on June 17, 1999. In the
event of nonrenewal of the commitment, the Company would not be able to transfer
additional Notes Receivable to the Bank Group.
In April 1996, the Company sold $30.1 million of Notes receivable to a
special purpose company, Trendwest Funding I, Inc. ("TFI"). In addition, the
Bank Group sold $47.1 million of Notes Receivable purchased from TW to another
special purpose company. The special purpose company sold the receivables to TRI
Funding Company I, L.L.C. ("TFL"), a special purpose limited liability company,
and TFL issued $70.0 million of 7.42% fixed senior notes, series 1996-1 to
private institutional investors. The notes were rated "A" by Fitch Investors and
are secured by the Notes Receivable owned by TFL. The rating reflects the credit
enhancements of a 90% advance rate and a 2% minimum cash reserve account. The
notes have a stated maturity of May 15, 2004.
In March 1998, the Company sold $37.4 million of Notes Receivable to a
wholly-owned special purpose company, Trendwest Funding II, Inc. In addition,
the Bank Group sold $93.0 million of Notes Receivable purchased from TW
Holdings, Inc. to Trendwest Funding II, Inc. The special purpose company sold
the receivables to TRI Funding II, Inc. (TRI), a special purpose entity
wholly-owned by Trendwest Funding II, Inc., and TRI issued $130.4 million in two
classes of senior and subordinated notes to institutional investors. The 1998-1,
Class A notes were issued for $125.0 million at a fixed rate of 6.88%. The
1998-1, Class B notes were issued for $5.4 million at a fixed rate of 7.98%. The
Class A notes and Class B notes were rated "A" and "BBB" by Fitch IBCA, Inc.,
respectively, and are secured by the Notes Receivable owned by TRI. The ratings
reflect credit enhancements of a 96% advance rate and a 2% minimum cash reserve
account. The notes have a stated maturity of April 15, 2009.
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate risks. They are not used
for trading purposes.
The Company has a $10 million open line of credit with the Parent which
bears interest at prime plus 1% (8.75% at December 31, 1998) per annum and is
payable on demand. As of December 31, 1998 the outstanding indebtedness to the
Parent was $5.7 million.
Through the end of 2000, the Company anticipates spending approximately
$120 million for acquisitions and development of new resort properties and for
expansion and development activities at the existing WorldMark Resorts. The
Company plans to fund these expenditures from net proceeds of a securitization
of notes receivable expected to be consummated in the second quarter of 1999,
further sales or securitizations of Notes Receivable and a $30 million revolving
credit facility. The Company believes that the above credit facilities, together
with cash generated from financing transactions and the $10 million line of
credit with Parent should be sufficient to meet the Company's working capital
and capital expenditure needs for the near
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future. At December 31, 1998, the Company has outstanding purchase commitments
of $50.1 million related to properties under development.
In the future, the Company may negotiate additional credit facilities,
financing for the new Corporate headquarters, 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.
RECENT DEVELOPMENTS
The Company occupied a new Corporate headquarters building in February,
1999. The facility is larger than the Company's previous facility and enables
the Company to consolidate most of the existing Corporate operations at one
location and will provide space to meet growth of the Company for the near
future. The Company is in negotiations to sell its previous Corporate facility.
The Company is also negotiating financing for the new building which is
currently funded by the $30.0 million operating line of credit.
RECENT 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 establishes comprehensive accounting and
financial reporting standards for derivative instruments and hedging activities.
This Statement is effective as of the beginning of the first quarter of the
fiscal year beginning after June 15, 1999.
The Company does not anticipate a material impact on its financial position
or results of operations from the future adoption of this standard.
YEAR 2000
The Year 2000 issue is a flaw in many electronic data processing systems
which prevents them from processing year-date data accurately beyond the year
1999. This is the result of using a two-digit representation for the year, for
example "99" for "1999". This approach assumed that the first two digits of the
abbreviated date is "19". However, when the computer reaches 2000 it may
interpret "00" as the year 1900 possibly causing inaccurate data processing or
processing to stop altogether.
The Company is addressing the Year 2000 issue with a corporate wide
initiative led by the Director of Information Systems and involving the Vice
President of Administration and the Chief Operating Officer. The initiative
includes the identification of affected software, the development of a plan for
correcting the software in the most effective manner, the implementation of that
plan and the monitoring of that implementation. The program also includes
communications with the Company's significant suppliers to determine the extent
to which the Company's systems are vulnerable to any failures by them to address
the Year 2000 issue. In most instances, the Company will renovate existing code
applications, replace older software with new programs and systems, which will
significantly upgrade the existing software as well as appropriately interpret
the calendar Year 2000 and beyond. Although the timing of these replacements is
influenced by the Year 2000 issue, in most instances they will involve capital
expenditures that would have occurred in the normal course of business.
The Company has analyzed each line of code within critical applications and
has determined how any Year 2000 issues will be addressed. The Reservation
system was the first system for remediation as reservations are accepted 13
months in advance. Code revisions have been completed, tested and released to
the live Reservations application on September 10, 1998, one month ahead of
schedule. Subsequent use of the revised Reservation system indicates it is
accepting reservations in the Year 2000 as designed. Other critical applications
such as Dues, Contracts, Collections and Sales are currently scheduled for
completion of remediation by April 1, 1999. These applications will be put into
the live environment by June 30, 1999. The Marketing system is another critical
application which is currently being re-written and upgraded to improve its
features and for Year 2000 compliance. The Marketing system is scheduled for
implementation on June 30,
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1999. As a contingency plan in the event the re-written code is not ready on
June 30, 1999, the Company is remediating the old Marketing system code at the
same time. Non-critical applications are scheduled for completion by October 1,
1999. The Company is currently on track with its implementation schedule and is
in the process of developing a contingency plan in case the remediation is not
completed.
The Company is also monitoring the Year 2000 compliance program of Sage
Systems, Inc. (Sage), the Servicer of the Company's Notes Receivable portfolio.
Sage has represented that its Year 2000 remediation is complete. The Company
currently is reviewing each line of Sage's code to verify their Year 2000
compliance.
The Company has incurred approximately $.5 million to date to modify or
replace software in order to remediate the Year 2000 issue and anticipates
future expenditures of approximately $.5 million. In the worst case, if the
remediation is not completed in time, management will employ additional
personnel and use PC based applications to maintain critical functions.
Based on its current assessments and remediation plans, the Company does
not expect that it will suffer any material disruption of its business as a
result of the Year 2000 issue. If the Company's remediations were to fail, it
would implement its contingency plan. In such an event, it is likely that there
would be temporary disruption of customer service and customer inconvenience and
additional costs from the implementation of the contingency plan. It is not
possible to quantify those costs at the present time. Although the Company
believes its contingency plan, when completed, will satisfactorily address these
issues, there can be no assurance that the Company's contingency plan will
function as anticipated or that the results of operations of the Company will
not be adversely affected.
The above statement and other statements herein contain forward looking
information which include future financing transactions, acquisition of
properties, and the Company's future prospects and other forecasts and
statements of expectations. Actual results may differ materially from those
expressed in any forward-looking statement made by the Company, due among other
things, to the Company's ability to develop or acquire additional resort
properties, find acceptable debt or equity capital to fund such development, as
well as other risk factors as outlined in the "Risk Factors" section of this
Form 10-K.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate changes primarily as a result of
its financing of timeshare purchases, the sale and securitization of notes
receivable and borrowing under revolving lines of credit. The Company's interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to reduce overall borrowing costs. To achieve its
objectives, the Company borrows funds, sells or securitizes Notes Receivable
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument. The Company does not
maintain a trading account for any class of financial instrument, it does not
purchase high risk derivative instruments and it is not directly subject to
foreign currency exchange rate risk nor commodity price risk.
The table below provides information as of December 31, 1998 about the
Company's financial instruments that are sensitive to changes in interest rates.
The table presents estimated principal cash flows and related weighted average
interest rates by expected maturity dates. The actual cash flows may differ from
these amounts due to prepayments, sales and defaults of notes receivable.
BY EXPECTED MATURITY YEAR ENDED DECEMBER 31,
----------------------------------------------- AFTER FAIR
1999 2000 2001 2002 2003 2003 TOTAL VALUE
------- ------- ------- ------- ------- ------ ------ ------
Cash:
Amounts Maturing................. 9 -- -- -- -- -- 9 9
Weighted Average interest rate... -- -- -- -- -- --
Restricted cash:
Amounts Maturing................. 2,351 -- -- -- -- -- 2,351 2,351
Weighted Average interest rate... -- -- -- -- -- --
Notes receivable (1):
Amounts Maturing................. 11,137 12,474 13,821 14,978 15,523 26,604 94,538 94,538
Weighted Average interest rate... 14.1% 14.1% 14.1% 14.1% 14.1% 14.1%
Residual interest in notes
receivable sold:
Fixed rate (2):
Amounts Maturing................. 5,307 4,175 2,819 1,802 776 -- 14,879 14,879
Weighted Average interest rate... 7.07% 7.07% 7.07% 7.07% 7.07% 7.07%
Variable rate (3):
Amounts Maturing................. 2,491 2,129 1,737 1,308 1,139 -- 8,804 8,804
Weighted Average interest rate... 7.91% 7.91% 7.91% 7.91% 7.91% 7.91%
Due to Parent:
Amounts Maturing................. 5,688 -- -- -- -- -- 5,688 5,688
Weighted Average interest rate... 8.75% -- -- -- -- --
Recourse liability on notes sold:
Amounts Maturing................. 2,823 2,282 1,649 1,126 693 -- 8,572 8,572
Weighted Average interest rate... -- -- -- -- -- --
Borrowings under bank line of
credit:
Amount Maturing.................. 30,000 -- -- -- -- -- 30,000 30,000
Weighted Average interest rate... 6.64% -- -- -- -- --
- ---------------
(1) Excludes deferred gross profit.
(2) Fixed interest rates represent the differential between the contract
interest rate on Notes Receivable sold and the interest rate paid to
purchasers of the Notes Receivable.
(3) Variable interest rates represent the differential between the contract
interest rate on Notes Receivable sold and the required yield to the Bank
Group (currently LIBOR plus 112.5 basis points).
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Financial Statements appearing on
page F-1 of this report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In August 1996, the Company engaged Coopers & Lybrand LLP ("C&L") as the
Company's independent accountants to report on the Company's balance sheet as of
December 31, 1995 and 1994, and the related statements of income, shareholders'
equity and cash flow for each of the years in the three year period ended
December 31, 1995. C&L did not render any report on the Company's financial
statements and was dismissed as the Company's independent accountants on
February 10, 1997. The decision to retain and subsequently to dismiss C&L was
approved by the Company's Board of Directors.
During the period of C&L's engagement, disagreements arose over the
accounting treatment of the sales of additional Vacation Credits to existing
Owners ("Upgrade Sales"). The Company contended that Upgrade Sales could be
fully recognized as income under Financial Accounting Standards Board Statement
No. 66 ("SFAS 66") without an additional 10% cash down payment, provided that
the Owner had sufficient equity in previously purchased Vacation Credits
(including prior principal payments on the Note Receivable from the previous
purchases) and additional cash down payments, if any, at the time of the Upgrade
Sale, to satisfy the 10% down payment requirement for full accrual profit
recognition under SFAS 66. C&L's position was that SFAS 66 and Emerging Issues
Task Force Issue No. 88-12 required each Upgrade Sale to have a separate 10%
cash down payment (without consideration of equity from previously purchased
Vacation Credits) before the full accrual of revenue could be recognized on such
sale. Prior to C&L's dismissal, the Company agreed to modify its revenue
recognition policies in accordance with C&L's position.
Upon an Upgrade Sale, any existing Note Receivable is cancelled and a new
Note Receivable with a seven year term is executed for the balance of the
existing Note Receivable and the financed amount of the Upgrade Sale. The
Company and C&L discussed the allocation of payments on the new Note Receivable
for the purpose of profit recognition on the Upgrade Sale. The Company's view,
as reflected in the financial statements included herein, is that the payment
due on the new Note Receivable could be bifurcated between the amount
attributable to the Upgrade Sale and the amount attributable to the extended
balance of the previous Note Receivable, and that the excess of the payment due
under the new Note Receivable over the part of the bifurcated payment
attributable to the extended balance of the previous Note Receivable could be
allocated to the financed portion of the Upgrade Sale without affecting the
accounting for the previous sale. Profit on the Upgrade Sale would be recognized
on the installment method until allocated principal payments equal to 10% of the
Upgrade Sale are received. Profit would then be recognized on the accrual
method. C&L recommended that the concurrence of the Securities and Exchange
Commission ("Commission") staff with this methodology be obtained prior to
filing the Registration Statement in connection with the Company's IPO. C&L was
prepared to accept the Company's view, provided that the Commission staff
concurred. Accordingly, at the time of C&L's dismissal, with the exception of
the issue of profit recognition on the new Note Receivable and the effect of the
allocation of principal payments on the new Note Receivable on the recognition
of profit on the previous sale, the Company does not believe that there were any
unresolved disagreements with C&L on any matter of accounting principles or
practices, financial disclosure, or auditing scope or procedure, which, if not
resolved to C&L's satisfaction, would have caused it to make reference to the
subject matter of the disagreements in connection with its reports. C&L
discussed each of these issues with members of the Board of Directors of the
Company and of the board of directors of the Company's parent, JELD-WEN. The
Company has authorized C&L to respond fully to the inquiries of KPMG LLP (KPMG)
concerning each of the disagreements.
In addition, C&L advised the Company of two matters that, if further
considered in connection with its audit of the financial statements, could
materially impact the fairness of the financial statements. The matters relate
to the adequacy of the Company's allowance for doubtful accounts for receivables
from the sale of Vacation Credits and the method of calculating gains on the
sale of such receivables. Due to their dismissal, C&L did not complete the audit
procedures and inquiries necessary to conclude on these matters.
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As previously discussed, C&L was prepared to accept the Company's view
regarding revenue recognition for Upgrade Sales, provided that the Commission
staff concurred. The Commission staff did not object to the Company's revenue
recognition policy for Upgrade Sales at the time of the Company's IPO. In
addition, due to their dismissal, C&L did not complete the audit procedures and
inquiries necessary to conclude on certain other matters. The Company believes
that, if C&L had been allowed to complete their engagement the resolution of the
aforementioned issues and matters would have been treated no differently than as
presently treated.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item will be set forth under "Directors
and Executive Officers" and "Proxy Statement -- Compliance with Section 16(a)
Under the Securities Exchange Act of 1934" in the Company's Proxy Statement and
reference is expressly made thereto for specific information incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth under "Executive
Compensation" in the Company's Proxy Statement and reference is expressly made
thereto for the specific information incorporated herein by the aforesaid
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item will be set forth under "Proxy
Statement -- Share Ownership of Directors and Executive Officers," and "Other
information -- Certain Shareholders" in the Company's Proxy Statement and
reference is expressly made thereto for the specific information incorporated
herein by the aforesaid reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth under "Proxy
Statement -- Certain Relationships and Related Transactions" in the Company's
Proxy Statement and reference is expressly made thereto for the specific
information incorporated herein by the aforesaid reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Registrant, dated July 2, 1997.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
10.1 Management Agreement (Fourth Amended) between the Registrant
and WorldMark, the Club ("WorldMark"), dated September 30,
1994.(1)
10.2 Software Support and Maintenance Agreement between the
Registrant and Sage Systems, Inc. ("Sage"), dated
, 1994.(1)
10.3 Service Agreement between the Registrant and Sage, dated
January 1, 1996.(1)
10.4 Software Transfer Agreement between the Registrant, Sage and
James McBride, Sr., dated August, 1994.(1)
10.5 Escrow Agreement between the Registrant, Club Esprit
(predecessor to WorldMark) and Sage, dated as of October 25,
1990.(1)
10.6 Form of WorldMark Retail Installment Contract Vacation Owner
Agreement.(1)
10.7 Indenture among the Registrant, TRI Funding Company I,
L.L.C. and LaSalle National Bank, dated as of March 1,
1996.(1)
10.8 Servicing Agreement among the Registrant, TRI Funding
Company I, L.L.C., Sage and LaSalle National Bank, dated as
of March 1, 1996.(1)
10.9 Purchase and Sale Agreement among the Registrant, Trendwest
Funding I, Inc., TWH Funding I, Inc. and TRI Funding Company
I, L.L.C., dated March 1, 1996.(1)
10.10 Receivables Purchase Agreement among the Registrant, TW
Holdings, Inc. and Trendwest Funding I, Inc., dated March 1,
1996.(1)
10.12 Receivables Purchase Agreement between Registrant and TW
Holdings, Inc., dated December 1, 1993.(1)
10.13 Second Amended and Restated Eagle Crest Receivables Purchase
Agreement dated as of June 1, 1997, by and between Eagle
Crest, Inc. and TW Holdings(1)
10.14 Second Amended and Restated Receivables Transfer Agreement
dated as of June 1, 1997, by and between TW Holdings, Inc.
as Seller, Bank of America National Trust and Savings
Association, doing business as Seafirst Bank, and Other
Purchasers Named Therein as Purchasers, Seafirst Bank as
Agent, and Trendwest Resorts, Inc. as Master Servicer(1)
10.15 Nonexclusive Limited Assignment among the Registrant, Eagle
Crest Partners, Ltd. and WorldMark, dated September 20,
1996.(1)
10.16 Nonexclusive Limited Assignment among the Registrant,
Running Y, Inc. and WorldMark dated September 20, 1996.(1)
10.17 Purchase Agreement among the Registrant, Eagle Crest
Partnership, Ltd., Roderick C. Wendt and Richard L. Wendt,
dated December 30, 1992.(1)
10.18 Purchase Agreement among the Registrant, Roderick C. Wendt
and Richard L. Wendt, dated April 1, 1993.(1)
10.19 Purchase Agreement between the Registrant and Jeld-Wen
Foundation, dated March 13, 1992.(1)
10.20 Purchase Agreement between the Registrant and Jeld-Wen,
dated March 15, 1993.(1)
10.21 Purchase Agreement between the Registrant and Jeld-Wen,
dated September 30, 1993.(1)
10.22 Purchase Agreement between the Registrant and Jewel W.
Kintzinger, dated October 12, 1993.(1)
27
28
EXHIBIT
NUMBER DESCRIPTION
------- -----------
10.23 Servicing Escrow Agreement between Jewel Kintzinger, the
Registrant and Sage, dated October 12, 1993.(1)
10.24 Articles of Incorporation of WorldMark, the Club, dated
December 10, 1992.(1)
10.25 Bylaws of WorldMark, dated December 2, 1994.(1)
10.26 Form of Employment Agreement between William F. Peare and
the Registrant.(1)
10.27 Form of Employment Agreement between Jeffery P. Sites and
the Registrant.(1)
10.28 Trendwest Resorts, Inc. 1997 Employee Stock Option Plan.(1)
10.29 Stock Purchase Agreement between Trendwest Resorts, Inc. and
JELD-WEN, inc.(1)
10.30 Stock Purchase Agreement between Trendwest Resorts, Inc. and
I&I Holdings, Ltd.(1)
10.31 Indenture among the Registrant, TRI Funding II, Inc. and
LaSalle National Bank, dated as of March 1, 1998.(3)
10.32 Series 1998-1 Supplement Dated as of March 1, 1998 to
Indenture Dated as of March 1, 1998 among the Registrant,
Trendwest Funding II, Inc. and LaSalle National Bank.(3)
10.33 Servicing Agreement among the Registrant, TRI Funding II,
Inc., Sage Systems, Inc. and LaSalle National Bank, dated as
of March 1,1998.(3)
10.34 Purchase and Sale Agreement between the Registrant,
Trendwest Funding II, Inc. and TRI Funding II, Inc.(3)
10.35 Receivables purchase agreement among the Registrant, TRI
Funding Company I, L.L.C., TW Holdings Inc. and Trendwest
Funding II, Inc., Dated as of March 1, 1998.(3)
10.36 Credit Agreement among the Registrant, Bank of America
National Trust and Savings Association as Agent, and Other
Financial Institutions Party Hereto, Dated as of February
12, 1998.(3)
10.37 Amendment Number Two Dated June 18, 1998 to the Second
Amended and Restated Receivables Transfer Agreement between
the Registrant, Seafirst Bank and other purchasers, TW
Holdings, and Bank of America Dated June 18, 1998.(3)
10.38 Purchase Agreement among Registrant, Roderick C. Wendt, and
Richard L. Wendt, dated September 22, 1998.(3)
10.39 Purchase Agreement among Registrant, Roderick C. Wendt, and
Richard L. Wendt, dated October 13, 1998.
10.40 Amendment to Non Exclusive Limited Assignment agreement
among Registrant and Eagle Crest, Inc. dated September 20,
1998.
11.1 Statement re Computation of Earnings per Share -- See note
1 of "Notes to Combined and Consolidated financial
Statements."
13.1 Annual Report to Shareholders(2)
21.1 List of all Subsidiaries of the Registrant.(1)
24.1 Power of Attorney from officers and directors (contained on
signature page).
27.1 Financial Data Schedule (one year)
- ---------------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-26861).
(2) Incorporated by reference to the Company's Annual Report to Shareholders.
(3) Incorporated by reference to the Company's 1998 quarterly filings on Form
10-Q (File No. 333-26861).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the year ending
December 31, 1998.
28
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, Trendwest Resorts, Inc. has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Redmond,
State of Washington, on March 19, 1999.
TRENDWEST RESORTS, INC.
By: /s/ JEFFERY P. SITES
------------------------------------
Jeffery P. Sites
Executive Vice President
/s/ WILLIAM F. PEARE President, Chief Executive Officer
- ----------------------------------------------------- and Director
William F. Peare (Principal Executive Officer)
/s/ JEFFERY P. SITES Executive Vice President,
- ----------------------------------------------------- Chief Operating Officer and
Jeffery P. Sites Director
/s/ GARY A. FLORENCE Vice President, Treasurer
- ----------------------------------------------------- and Chief Financial Officer
Gary A. Florence (Principal Financial Officer)
/s/ JEROL E. ANDRES Director
- -----------------------------------------------------
Jerol E. Andres
/s/ HARRY L. DEMOREST Director
- -----------------------------------------------------
Harry L. Demorest
/s/ MICHAEL P. HOLLERN Director
- -----------------------------------------------------
Michael P. Hollern
/s/ DOUGLAS P. KINTZINGER Director
- -----------------------------------------------------
Douglas P. Kintzinger
/s/ LINDA M. TUBBS Director
- -----------------------------------------------------
Linda M. Tubbs
/s/ RODERICK C. WENDT Director
- -----------------------------------------------------
Roderick C. Wendt
29
30
INDEX TO FINANCIAL STATEMENTS
TRENDWEST RESORTS, INC. AND SUBSIDIARIES
PAGE
----
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets................................. F-3
Combined and Consolidated Statements of Income.............. F-4
Combined and Consolidated Statements of Shareholders'
Equity.................................................... F-5
Combined and Consolidated Statements of Cash Flows.......... F-6
Notes to Combined and Consolidated Financial Statements..... F-7
F-1
31
INDEPENDENT AUDITORS' REPORT
The Shareholders
Trendwest Resorts, Inc.:
We have audited the accompanying consolidated balance sheets of Trendwest
Resorts, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
combined and consolidated statements of income, shareholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1998.
These combined and consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined and consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined and consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Trendwest Resorts, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
Seattle, Washington
February 9, 1999
F-2
32
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31,
----------------------
1998 1997
--------- ---------
(DOLLARS IN THOUSANDS)
Assets:
Cash...................................................... $ 9 $ 70
Restricted cash........................................... 2,351 1,219
Notes receivable, net of allowance for doubtful accounts,
sales returns and deferred gross profit................ 93,361 73,075
Accrued interest and other receivables.................... 11,399 7,435
Residual interest in notes receivable sold................ 23,683 15,235
Inventories............................................... 42,309 44,534
Property and equipment, net............................... 20,343 7,057
Deferred income taxes..................................... 702 924
Other assets.............................................. 4,341 2,201
-------- --------
Total assets...................................... $198,498 $151,750
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable.......................................... $ 1,436 $ 944
Accrued liabilities....................................... 6,645 3,862
Accrued construction in progress.......................... 1,064 10,480
Borrowing under bank line of credit....................... 30,000 --
Due to Parent............................................. 5,688 1,947
Allowance for recourse liability and deferred gross profit
on notes receivable sold............................... 11,250 8,757
Income taxes payable to Parent............................ -- 2,755
Income taxes payable...................................... 1,153 880
-------- --------
Total liabilities................................. 57,236 29,625
Shareholders' equity:
Preferred stock, no par value. Authorized 10,000,000
shares; no shares issued or outstanding................ -- --
Common stock, no par value. Authorized 90,000,000 shares;
issued and outstanding 17,158,766 and 17,593,366 shares
at December 31, 1998 and 1997, respectively............ 61,848 66,742
Retained earnings......................................... 79,414 55,383
-------- --------
Total shareholders' equity........................ 141,262 122,125
Commitments and contingencies...............................
-------- --------
Total liabilities and shareholders' equity........ $198,498 $151,750
======== ========
See accompanying notes to the combined and consolidated financial statements.
F-3
33
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
------------- ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Vacation Credit sales, net........................... $170,817 $128,835 $100,040
Finance income....................................... 13,790 11,989 7,143
Gains on sales of notes receivable................... 10,959 6,582 5,673
Resort management services........................... 2,328 2,032 1,501
Other................................................ 3,063 2,149 2,552
----------- ----------- -----------
Total revenues............................... 200,957 151,587 116,909
----------- ----------- -----------
Costs and operating expenses:
Vacation Credit cost of sales........................ 48,059 34,569 27,400
Resort management services........................... 1,399 1,108 859
Sales and marketing.................................. 83,347 59,448 47,810
General and administrative........................... 17,180 13,449 10,904
Provision for doubtful accounts and recourse
liability......................................... 11,865 9,077 7,467
Interest............................................. 353 1,739 2,445
----------- ----------- -----------
Total costs and operating expenses........... 162,203 119,390 96,885
----------- ----------- -----------
Income before income taxes................... 38,754 32,197 20,024
Income tax expense..................................... 14,723 11,588 7,348
----------- ----------- -----------
Net income................................... $ 24,031 $ 20,609 $ 12,676
----------- ----------- -----------
----------- ----------- -----------
Basic net income per common share...................... $ 1.38 $ 1.32 $ .88
Diluted net income per common share.................... $ 1.38 $ 1.32 $ .88
Weighted average shares of common stock and dilutive
potential common stock outstanding:
Basic................................................ 17,412,818 15,596,419 14,417,116
Diluted.............................................. 17,416,691 15,596,419 14,417,116
See accompanying notes to the combined and consolidated financial statements.
F-4
34
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
EMPLOYEE
CLASS A CLASS B NOTES
COMMON STOCK COMMON STOCK RECEIVABLE TOTAL
-------------------- ---------------- FOR RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK EARNINGS EQUITY
---------- ------- ------ ------- ---------- -------- -------------
BALANCE AT DECEMBER 31, 1995..... 9,223,623 $ 6,469 100 $ 8,500 $(314) $22,098 $ 36,753
Issuance of Trendwest Funding
common stock................... 1,000 1 -- -- -- -- 1
Note payments.................... -- -- -- -- 314 -- 314
Net income....................... -- -- -- -- -- 12,676 12,676
---------- ------- ---- ------- ----- ------- --------
BALANCE AT DECEMBER 31, 1996..... 9,224,623 6,470 100 8,500 -- 34,774 49,744
Consolidation transactions
(5,193,693 shares of common
stock issued in exchange for
all of the outstanding shares
of TW Holdings and Trendwest
Funding)....................... 5,192,493 8,500 (100) (8,500) -- -- --
Issuance of common stock, net of
issuance costs of $5,401....... 3,176,250 51,772 -- -- -- -- 51,772
Net income....................... -- -- -- -- -- 20,609 20,609
---------- ------- ---- ------- ----- ------- --------
BALANCE AT DECEMBER 31, 1997..... 17,593,366 66,742 -- -- -- 55,383 122,125
Repurchase of common stock....... (434,600) (4,894) -- -- -- -- (4,894)
Net income....................... -- -- -- -- -- 24,031 24,031
---------- ------- ---- ------- ----- ------- --------
BALANCE AT DECEMBER 31, 1998..... 17,158,766 $61,848 -- $ -- $ -- $79,414 $141,262
========== ======= ==== ======= ===== ======= ========
See accompanying notes the combined and consolidated financial statements.
F-5
35
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
COMBINED AND CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(DOLLARS IN THOUSANDS)
Cash flows from operating activities:
Net income................................................ $ 24,031 $ 20,609 $ 12,676
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization........................... 1,079 681 502
Amortization of residual interest in notes receivable
sold................................................... 6,877 4,089 2,735
Provision for doubtful accounts, sales returns and
recourse liability..................................... 15,435 11,755 10,078
Recoveries of notes receivable charged off.............. 179 132 72
Residual interest in notes receivable sold.............. (11,949) (6,729) (5,674)
Unrealized gain on residual interest in notes receivable
sold................................................... (779) (1,044) --
Change in deferred gross profit......................... (1,301) (684) 2,737
Deferred income tax expense (benefit)................... 222 1,436 (422)
Issuance of notes receivable............................ (148,720) (112,170) (91,593)
Proceeds from sale of notes receivable.................. 104,573 42,292 67,257
Proceeds from repayment of notes receivable............. 33,831 28,781 21,388
Purchase of notes receivable from related parties....... (17,397) (12,888) (11,150)
Purchase of notes receivable............................ (6,990) (3,683) --
Changes in certain assets and liabilities:
Restricted cash....................................... (1,132) (510) (328)
Inventories........................................... 2,225 (28,287) (5,653)
Accounts payable and accrued liabilities.............. (6,141) 10,060 1,729
Income taxes payable to Parent........................ (2,755) 846 713
Income taxes payable.................................. 273 880 --
Other................................................. (6,236) (2,044) (1,540)
--------- --------- --------
Net cash provided by (used in) operating activities..... (14,675) (46,478) 3,527
--------- --------- --------
Cash flows used in investing activities -- Purchase of
property and equipment.................................... (14,233) (1,696) (1,429)
--------- --------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... -- 16,803 --
Payments on notes payable................................. -- (1,055) (1,487)
Net borrowings under bank line of credit.................. 30,000 -- --
Increase (decrease) in due to Parent...................... 3,741 (19,369) (968)
Proceeds from issuance of common stock.................... -- 51,772 1
Repurchase of common stock................................ (4,894) -- --
Payments on notes receivable for stock.................... -- -- 314
--------- --------- --------
Net cash provided by (used in) financing activities..... 28,847 48,151 (2,140)
--------- --------- --------
Net decrease in cash.................................... (61) (23) (42)
Cash at beginning of period................................. 70 93 135
--------- --------- --------
Cash at end of period....................................... $ 9 $ 70 $ 93
========= ========= ========
Supplemental disclosures of cash flow information -- cash paid during the period for:
Interest............................................................... $ 864 $ 1,951 $ 2,579
Income taxes........................................................... 16,983 8,010 7,056
Supplemental schedule of noncash investing and financing activities:
Reduction of notes payable through transfer of notes receivable........ -- 16,803 --
Issuance of Notes Receivable in exchange for other assets sold......... -- 489 --
See accompanying notes to combined and consolidated financial statements.
F-6
36
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(1) DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Trendwest Resorts, Inc. (Trendwest), TW Holdings, Inc. (TW Holdings),
Trendwest Funding I Inc. (Trendwest Funding I), and Trendwest Funding II Inc.
(Trendwest Funding II) (Company) generate revenues from the sale and financing
of Vacation Credits in WorldMark, The Club (WorldMark), which entitle the owner
to use a fully furnished vacation resort unit based on the number of Vacation
Credits purchased. Vacation Credits are created through the transfer to
WorldMark of resort units developed or purchased by the Company. The Company
also manages resort properties under a management agreement with WorldMark.
WorldMark is a separate entity which owns the transferred properties for the
benefit of Vacation Credit owners (Members or Owners).
The Company sells Vacation Credits to individuals principally in the
Western United States. Sales to new owners are typically financed by the Company
after requiring a minimum 10% down payment. Sales to existing owners (Upgrades)
are typically financed by the Company and require down payments to the extent
that the owner's equity interest in Vacation Credits owned, including the
Upgrade, is less than 10%. The resulting note balances are secured by the
Vacation Credits sold.
Basis of Presentation
For periods prior to June 30, 1997, the financial statements are presented
on a combined basis and include the accounts of Trendwest, TW Holdings and
Trendwest Funding I. Trendwest Funding I is included in the financial statements
from April 19, 1996 (inception). The financial statements of these three
entities have been combined as they are entities under the common control of
JELD-WEN, inc. (Parent).
Trendwest is a majority owned subsidiary of the Parent and prior to June
30, 1997, TW Holdings and Trendwest Funding I were wholly-owned subsidiaries of
the Parent. Effective June 30, 1997, the Parent transferred to Trendwest all of
the outstanding common stock of TW Holdings and Trendwest Funding I in exchange
for 5,193,693 shares of Trendwest common stock (Consolidation Transactions)
resulting in TW Holdings and Trendwest Funding I becoming wholly-owned
subsidiaries of Trendwest. The financial statements for periods beginning June
30, 1997 are presented on a consolidated basis and include the accounts of
Trendwest, TW Holdings and Trendwest Funding I. Trendwest Funding II, a wholly
owned subsidiary, is included in the financial statements from March 12, 1998
(inception).
The Consolidation Transactions are considered a reorganization of entities
under common control and have been accounted for in a manner similar to a
pooling of interests. The assets and liabilities of the combining entities
continue to be recorded at their historical cost basis and the results of
operations continue to include the same components in consolidation as were
included in combination.
All intercompany balances and transactions have been eliminated in
combination and consolidation.
Capital Transactions and Public Offering
In contemplation of the Company's initial public offering, the Company's
articles of incorporation were amended effective July 2, 1997 to increase the
number of authorized shares of common stock to 90,000,000 and to establish
preferred stock with 10,000,000 shares authorized.
As authorized, the pricing committee of the Board declared a 513.211 for 1
stock split effective July 2, 1997. The accompanying combined financial
statements have been retroactively restated to give effect to this stock split.
F-7
37
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
On August 15, 1997, the Company consummated the offering of 3,176,250
shares of the Company's common stock at $18 per share resulting in net proceeds
of $51,772, after deducting the related issuance costs.
On July 7, 1998, the Board of Directors authorized the Company to
repurchase up to 436,000 shares of its common stock on the open market or in
privately negotiated transactions. During the year ended December 31, 1998, the
Company repurchased 434,600 shares.
Basic and Diluted Net Income Per Common Share
Basic and diluted net income per common share has been computed based on
the number of shares of Trendwest common stock outstanding and assumes the
5,193,693 shares issued to the Parent in connection with the Consolidation
Transactions have been outstanding for all periods presented.
The following presents the reconciliation of weighted average shares used
for basic and diluted net income per share:
YEAR ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
BASIC
Weighted average shares -- Trendwest........... 17,412,818 10,402,726 9,223,423
Effect of consolidation transactions........... -- 5,193,693 5,193,693
---------- ---------- ----------
Basic weighted average shares outstanding...... 17,412,818 15,596,419 14,417,116
DILUTED
Effect of dilutive securities.................. 3,873 -- --
---------- ---------- ----------
Diluted weighted average shares outstanding.... 17,416,691 15,596,419 14,417,116
========== ========== ==========
Net income available to common shareholders for basic and diluted net
income per share was $24,031, $20,609 and $12,676 for the years ended December
31, 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997 there were options to purchase 491,500 and
490,000 shares of common stock outstanding, respectively, which were
antidilutive and therefore not included in the computation of diluted net income
per share. There were no dilutive securities outstanding for the year ended
December 31, 1996 resulting in basic and diluted net income per share being
equal.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Restricted Cash
Restricted cash consists primarily of deposits received on sales of
Vacation Credits that are held in escrow until the applicable statutory
rescission period has expired and the related customer note receivable has been
recorded and amounts received prior to the attainment of the required 10% down
payment.
Allowance for Doubtful Accounts and Recourse Liability
The Company provides for estimated losses related to uncollectible notes
receivable and notes receivable sold with recourse. The provision for credit
losses is charged to income in amounts sufficient to maintain the allowance and
the recourse liability at levels considered adequate to cover losses resulting
from liquidation of notes receivable and notes receivable sold with recourse.
The allowance for doubtful accounts and recourse liability are based on the
collection history of the receivables and are net of anticipated cost recoveries
of the underlying Vacation Credits. Management believes that all such allowances
and estimated liabilities are
F-8
38
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
adequate; however, such amounts are based on estimates and there is no assurance
that the actual amounts incurred will not be more or less than the amount
recorded.
The Company charges off notes receivable when deemed to be uncollectible.
Interest income previously accrued and unpaid is reversed. Vacation Credits
recovered are recorded at the weighted average cost of credits at the time of
recovery.
Inventories
Inventories consist of Vacation Credits and construction in progress as
follows:
DECEMBER 31,
------------------
1998 1997
------- -------
Vacation Credits......................................... $11,342 $ 1,722
Construction in progress................................. 30,967 42,812
------- -------
Total inventories.............................. $42,309 $44,534
======= =======
Vacation Credits represent the costs of unsold ownership interests in
WorldMark. Resort properties are completed and ownership is transferred by the
Company to WorldMark in return for the right to sell Vacation Credits based on
the number of credits available for the properties. Credits available are
determined using a formula based on the number of user days available as well as
the relative value of each property. Vacation Credits are carried at the lower
of cost, based on the moving weighted average of property cost per Vacation
Credit established, or net realizable value.
Construction in progress is valued at the lower of cost or net realizable
value. Interest, taxes and other carrying costs incurred during the construction
period are capitalized. The amount of interest capitalized during the years
ended December 31, 1998, 1997 and 1996 amounted to $552, $637 and $343,
respectively.
Revenue Recognition
(i) Vacation Credits
Substantially all Vacation Credits sold by the Company generate installment
notes receivable secured by an interest in the related Vacation Credits. These
notes receivable are payable in monthly installments, including interest, with
maturities up to seven years. Sales are included in revenues when at least a 10%
down payment requirement has been met and any rescission period has expired.
Vacation Credit cost of sales and direct selling expenses related to a
Vacation Credit sale are recorded at the time the sale is recognized. Vacation
Credit costs include the cost of land, improvements to the property, including
costs of amenities constructed for the use and benefit of the Vacation Credit
owners, and other direct acquisition costs. Direct selling expenses are recorded
as sales and marketing expenses.
The Company also finances sales of Upgrades which often result in the
cancellation of any existing note receivable and the issuance of a new
seven-year note secured by an interest in all Vacation Credits owned. No
additional down payment is required by the Company as long as the owner's equity
interest in the original Vacation Credits is equal to 10% of the value of all
Vacation Credits, including those from the Upgrade sale, and the customer is not
delinquent in his payments on his existing note receivable. When the Company
finances an Upgrade sale and the customer does not make an additional down
payment of at least 10% of the Upgrade sale amount, the Company uses the
installment method to recognize revenue whereby profit is recognized as a
portion of each principal payment is received on the Upgrade. Revenue is fully
recognized on
F-9
39
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
the Upgrade sale when the cash collected relating to the Upgrade sale totals 10%
of the Upgrade sale. Cash collected relating to a financed Upgrade sale is
measured as the sum of any additional down payment received at the time of the
Upgrade sale and the principal repayment of the new note receivable which is
allocable to the Upgrade sale. Principal repayments are allocated to the Upgrade
sale component of the new note receivable and the pre-Upgrade sale component of
the new note receivable based on the ratio of such components at the time of the
Upgrade sale.
(ii) Sales of Notes Receivable
Gains on sales of notes receivable represent the present value of the
differential between contractual interest rates charged to borrowers on notes
receivable sold by the Company and the interest rates to be received by the
purchasers of such notes receivable, after considering the effects of estimated
prepayments and the costs of servicing, net of transaction costs. The Company
recognizes such gains on sales of notes receivable on the settlement date. Gains
on the sale of a portion of notes receivable are based on the relative fair
market value of the note receivable portions sold and retained.
The Company discounts cash flows on its notes receivable sold at a rate
which it believes a purchaser would require as a rate of return. The Company
develops its assumptions based on experience with its own portfolio, available
market data and ongoing consultation with its investment bankers (see note 12).
Income from the differential retained is recorded in finance income using
the interest method. In addition, finance income includes interest income on
notes receivable retained by the Company. Prior to January 1, 1997, the residual
interest in notes receivable sold was classified as an excess servicing asset
and carried at the lower of amortized cost or net realizable value. Beginning
January 1, 1997, the residual interest in notes receivable sold is classified as
a trading security in accordance with SFAS No. 115, Accounting for Certain
Investments in Debt or Equity Securities, and is carried at market value. Also,
beginning January 1, 1997, changes in the fair market value (see note 12) of the
residual interest in notes receivable sold are recognized as finance income.
Prior to January 1, 1997, the carrying value of the excess servicing asset
was analyzed quarterly by the Company on a disaggregated basis to determine
whether prepayment experience had an impact on carrying value. Expected cash
flows of the underlying notes receivable sold were reviewed based upon current
economic conditions and the type of notes receivable originated and revised as
necessary using the original discount rate used in calculating the gain on sale.
Losses arising from adverse prepayment experience were recognized as a charge to
earnings while favorable experience was not recognized until realized.
Property and Equipment
Property and equipment are recorded at cost and depreciated or amortized
using the straight-line method over the following assets' estimated useful
lives:
Building and improvements............................. 20 to 45 years
Equipment, furniture and fixtures..................... 3 to 12 years
Leasehold improvements................................ 2 to 5 years
Advertising
Advertising costs, included in sales and marketing expenses in the
accompanying combined statements of income, are expensed as incurred and
amounted to $5,655, $4,204 and $4,036 for the years ended December 31, 1998,
1997 and 1996, respectively.
F-10
40
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
Income Taxes
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company was included in the Federal consolidated tax return of the
Parent prior to August 15, 1997. The Parent allocated the combined current and
deferred tax expense to the Company as if the Company had filed on a stand-alone
basis.
Subsequent to August 15, 1997, the Company files its Federal and State
consolidated tax returns on a stand-alone basis.
Stock-Based Compensation
The Company measures its employee stock-based compensation arrangements
under the provisions of Accounting Principles Board (APB) Opinion No. 25. Under
APB No. 25, compensation cost is the excess, if any, of the market value of the
stock at grant date over the amount an employee must pay to acquire the stock
("intrinsic value based method"). None of the Company's stock options have any
intrinsic value at grant date and, accordingly, no compensation cost has been
recognized for them.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those estimates and
assumptions.
Derivative Financial Instruments
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate risks. They are not used
for trading purposes.
The Company enters into forward interest rate swap agreements and interest
rate cap agreements to hedge the effects of fluctuations in interest rates
related to anticipated sales of notes receivables. These transactions meet the
requirements for hedge accounting, including designation to a specific
transaction and high correlation. Gains and losses on these agreements are
deferred and recognized upon completion of the sale of notes receivable.
Effect of New Accounting Pronouncements
The Company adopted SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, on January 1, 1997. SFAS
No. 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities.
F-11
41
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
The adoption of SFAS No. 125 resulted in an increase in the carrying value
of the Company's residual interest in notes receivable sold at December 31, 1996
of $755 and $111 related to the sales of notes receivable to Investors and to
the limited liability company (LLC), respectively, (see note 4).
The Company adopted SFAS No. 128, Earnings Per Share, which establishes
standards for computing and presenting earnings per share in the fourth quarter
of 1997 and has restated all prior periods to conform to the new standard. There
was no material impact on earnings per share from the adoption of this standard.
In April, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 1999.
The Company does not anticipate a material impact on its financial position
or results of operations from the future adoption of these two standards.
(3) NOTES RECEIVABLE
The Company provides financing to the purchasers of Vacation Credits. The
notes resulting from sales of Vacation Credits bear interest at 13.9% or 14.9%,
depending on the method of payment, and are written with initial terms of up to
84 months. Once a 10% down payment has been received, the Company has no
obligation under the notes to refund monies or provide further services to the
Owners in the event membership is terminated for nonpayment of the notes.
Maturities of notes receivable at December 31, 1998 are as follows during
the next five years and thereafter:
1999.............................................. $ 12,593
2000.............................................. 14,106
2001.............................................. 15,628
2002.............................................. 16,936
2003.............................................. 17,553
Thereafter........................................ 30,084
--------
$106,900
========
Customers over 60 days past due on monthly payments are considered
delinquent. Delinquent notes receivable represent 1.97% and 1.88% of notes
receivable at December 31, 1998 and 1997, respectively.
F-12
42
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
The activity in the allowance for doubtful accounts, recourse liability and
sales returns is as follows for the years ended December 31:
1998 1997 1996
------- ------- -------
Balances at beginning of period........................... $15,240 $11,241 $ 7,964
Provision for doubtful accounts, sales returns and
recourse liability...................................... 15,435 11,755 10,078
Notes receivable charged-off and sales returns net of
Vacation Credits recovered.............................. (9,919) (7,888) (6,873)
Recoveries................................................ 179 132 72
------- ------- -------
Balances at end of period................................. $20,935 $15,240 $11,241
======= ======= =======
Allowance for doubtful accounts and sales returns......... $12,363 $ 9,935 $ 5,832
Recourse liability on notes receivable sold............... 8,572 5,305 5,409
------- ------- -------
$20,935 $15,240 $11,241
======= ======= =======
Total notes receivable outstanding, including notes receivable sold (see
note 4), amounted to $307,740 and $242,286 at December 31, 1998 and 1997,
respectively.
(4) SALES OF NOTES RECEIVABLE
TW Holdings
The Company sells through TW Holdings, an 80% interest in certain notes
receivable to outside investors primarily through an agreement, as amended on
June 18, 1998, expiring June 17, 1999 (Agreement) with Bank of America and other
purchasers (Investors). Under the terms of the Agreement, up to $98,000 of
receivables can be sold to the Investors and proceeds from the collection of
sold notes receivable can be used to purchase additional notes receivable. The
notes receivable have stated rates of 13.9%-14.9% and are sold at par to yield
LIBOR plus 1.125% per annum to the Investors. The 20% retained interest is
recorded as notes receivable whereas the residual interest in the excess cash
flows of notes receivable sold is classified as residual interest in notes
receivable sold and is measured at fair value.
Total notes receivable sold and outstanding under this Agreement amounted
to $61,000 and $98,000 at December 31, 1998 and 1997, respectively.
The Investors have recourse to the Company's retained interest in notes
receivable sold under certain default provisions related primarily to the
delinquency status of the notes receivable sold. The Company's retained interest
included in notes receivable in the accompanying balance sheets amounted to
$15,250 and $24,500 at December 31, 1998 and 1997, respectively.
Subsequent to January 1, 1997 and prior to the Consolidation Transactions,
the Company's transfer of notes receivable under the Agreement did not qualify
for sales treatment under SFAS No. 125 and were treated as secured borrowings.
In conjunction with the Consolidation Transactions, the bylaws and articles
of incorporation of TW Holdings were amended such that the transfer of notes
receivable from Trendwest to TW Holdings met the sales recognition criteria of
SFAS No. 125 resulting in the transferred notes receivable no longer being
assets of Trendwest. At June 30, 1997, notes receivable previously transferred
and treated as secured borrowings aggregating $16.8 million were accounted for
as sales of notes receivable.
F-13
43
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
Trendwest Funding I
In 1996, the Company sold through Trendwest Funding I, certain notes
receivable to a limited liability corporation (LLC) in exchange for cash, a
subordinated note payable from the LLC and a residual interest in the excess
cash flows of the LLC. The subordinated note payable from the LLC represents the
Company's retained interest in notes receivable which provide collateral to
holders of notes issued by the LLC (the LLC noteholders) and is classified as
notes receivable in the accompanying balance sheet. The residual interest in the
excess cash flows of the LLC is classified as residual interest in notes
receivable sold and is measured at fair value.
The LLC noteholders and the LLC outside investor have recourse to the
Company's retained interest in notes receivable sold under certain default
provisions related primarily to the delinquency status of the notes receivable
sold. The Company's retained interest is included in notes receivable in the
accompanying balance sheets, and amounted to approximately $8,146 and $14,580 at
December 31, 1998 and 1997, respectively.
The LLC is controlled and 99% owned by an independent third party who has
made a substantial capital investment and has substantial risks and rewards of
the assets of the LLC.
Trendwest Funding II
In 1998, the Company sold through Trendwest Funding II certain Notes
Receivable to a special purpose entity (Entity) wholly-owned by Trendwest
Funding II (TFI II) for cash, subordinated notes payable from the Entity and a
residual interest in the excess cash flows of the Entity. TFI II issued two
classes of senior and subordinated notes to institutional investors. The
subordinated notes payable from the Entity represent the Company's retained
interest in notes receivable which provides collateral to the holders of the
notes issued by the Entity and is classified as notes receivable in the
accompanying balance sheets. The residual interest in the excess cash flows of
the Entity is classified as residual interest in notes receivable sold and is
measured at fair value.
The Company's retained interest is included in notes receivable in the
accompanying balance sheets, and amounted to approximately $13,667 and $0 at
December 31, 1998 and 1997, respectively.
(5) PROPERTY AND EQUIPMENT
Property and equipment, net, consists primarily of the Company's corporate
headquarters and leased sales offices as follows at December 31:
1998 1997
------- ------
Land...................................................... $ 877 $ 877
Building and improvements................................. 3,612 3,612
Equipment, furniture and fixtures......................... 5,628 3,697
Leasehold improvements.................................... 1,986 814
Construction in Progress.................................. 11,120 --
------- ------
23,223 9,000
Less accumulated depreciation and amortization............ 2,880 1,943
------- ------
$20,343 $7,057
======= ======
Construction in progress at December 31, 1998 includes capitalized interest
of $152.
F-14
44
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(6) DEFERRED GROSS PROFIT
The Company accounts for certain Upgrade sales on the installment method
prior to satisfaction of minimum down payment requirements. Information for
those transactions follows for the years ended December 31:
1998 1997 1996
------- ------ -------
Gross sales value...................................... $ 6,496 $9,023 $15,618
======= ====== =======
Gross profit deferred.................................. $ 3,043 $4,277 $ 7,328
Gross profit recognized................................ 4,344 4,961 4,591
------- ------ -------
Net gross profit deferred (recognized) during period... $(1,301) $ (684) $ 2,737
======= ====== =======
Notes receivable is presented net of deferred gross profit in the
accompanying balance sheets. Such deferred amounts aggregated $1,176 and $1,704
at December 31, 1998 and 1997, respectively.
Deferred gross profit related to notes receivable sold is combined with
allowance for recourse liability on notes receivable sold in the accompanying
balance sheets. Such deferred amounts aggregated $2,678 and $3,451 at December
31, 1998 and 1997, respectively.
(7) DEBT
Note Payable
The Company had a line of credit of $5,000 with FINOVA Capital Corporation
which was terminated in August 1997.
Credit Facility
The Company has a $30,000 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
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. The Credit Agreement matures
on February 12, 2001. Borrowings at December 31, 1998 were $30,000 at a weighted
average interest rate of 6.64%.
F-15
45
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(8) INCOME TAXES
The provision for income taxes consist of the following for the years ended
December 31:
1998 1997 1996
------- ------- ------
Federal:
Current...................................... $12,731 $ 9,173 $7,426
Deferred..................................... 247 1,749 (450)
------- ------- ------
12,978 10,922 6,976
------- ------- ------
State:
Current...................................... 1,770 980 344
Deferred..................................... (25) (314) 28
------- ------- ------
1,745 666 372
------- ------- ------
Total................................ $14,723 $11,588 $7,348
======= ======= ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below at December 31:
1998 1997
------- ------
Deferred tax assets:
Allowance for credit losses............................. $ 6,492 $3,940
Deferred gross profit................................... 1,478 1,964
Retained interest in Notes Receivable sold.............. 1,844 386
Other................................................... 296 304
------- ------
Total deferred tax assets....................... 10,110 6,594
------- ------
Deferred tax liability:
Residual interest in Notes Receivable sold.............. 8,289 4,664
Other assets............................................ 112 150
Property and equipment.................................. 418 251
Other................................................... 589 605
------- ------
Total deferred tax liability.................... 9,408 5,670
------- ------
Total deferred asset, net....................... $ 702 $ 924
======= ======
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, tax previously paid, projected
future taxable income, and tax planning strategies in making this assessment.
Based upon the level of historical taxable income and projections for
future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not that the Company will
realize the benefits of these deferred tax assets.
F-16
46
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
Income tax expense differed from the amounts computed by applying the U.S.
Federal income tax rate of 35% to pretax income as a result of the following for
the years ended December 31:
1998 1997 1996
----- ----- -----
Income tax at Federal statutory rate............... 35.0% 35.0% 35.0%
State tax, net of Federal benefit.................. 2.9 1.3 1.2
Other.............................................. .1 (.3) .5
----- ----- -----
38.0% 36.0% 36.7%
===== ===== =====
As the Company continues to expand sales operations and development
activities into new tax jurisdictions, both domestic and international, it
becomes subject to new tax rules and tax authorities. Often tax law and taxation
criteria require interpretation with regards to the Company's timeshare
business, and while it is management's intent to investigate and comply with all
applicable tax laws, no assurance can be provided that taxing authorities in
such jurisdictions will agree with the Company's assessment of the appropriate
filing requirements and liability determinations.
(9) 401(K) PLANS
Prior to August 15, 1997, the Company participated in the Parent 401(k)
plan. Company contributions, which are invested in Parent common stock, were at
the discretion of the Board of Directors of the Parent and totaled $1,124 and
$1,686 for the period from January 1, 1997 to August 15, 1997, and the year
ended December 31, 1996, respectively.
On August 15, 1997, the Company ceased participation in the Parent 401(k)
plan and sponsored a new plan (Trendwest plan) covering all Trendwest employees.
Company contributions totaled $2,402 and $765 for the year ended December 31,
1998, and the period from August 15, 1997 to December 31, 1997, respectively.
(10) DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Cap Agreement
In March 1995, the Company entered into an interest rate cap agreement at a
cost of $92 to reduce the impact of changes in interest rates on its notes
receivable sold. The interest rate cap agreement has a 30-day notional principal
amount of $31,800 on which the Company receives interest payments to the extent
that LIBOR exceeds an annualized rate of 10.25%.
The interest rate cap agreement expired in April 1998.
Forward Swap Agreement
In October 1997, while the Company entered into two $50,000 notional amount
forward interest rate swap agreements, no such agreements were in place at
December 31, 1998.
While the Company is exposed to credit losses in the event of
nonperformance by the counterparties to its interest rate caps and its forward
swap agreements, no such agreements were in place at December 31, 1998. The
Company does not obtain collateral to support financial instruments but monitors
the credit standing of the counterparties.
F-17
47
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(11) STOCK OPTION PLAN
In 1997, the Board of Directors approved the adoption of an incentive stock
option plan providing for the award of incentive stock options to employees of
the Company at the discretion of the Board of Directors.
Under the plan, on the date of grant, the exercise price of the option must
be at least equal to the market value of common stock for shares issued. The
plan provides for grants up to 5% of the Company's outstanding shares (857,938
at December 31, 1998).
Stock options vest ratably over five years and expire three years after
becoming fully vested.
The following table summarizes stock option activity:
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES OPTION PRICE REMAINING LIFE
------- ---------------- ----------------
Options granted................................ 492,000 $26.875
Expired or canceled............................ 2,000 26.875
------- ------- -------
BALANCE AT DECEMBER 31, 1997................... 490,000 $26.875 8 years
Options granted................................ 122,500 12.024
Expired or canceled............................ 7,500 26.875
------- ------- -------
BALANCE AT DECEMBER 31, 1998................... 605,000 $23.867 7 years
======= ======= =======
There are 96,500 options exercisable at a weighted average exercise price
of $26.875 at December 31, 1998.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock options in
the accompanying financial statements as the options had no intrinsic value at
the grant date. Had the Company determined compensation cost based on the fair
value of the options at the grant date, the Company's net income would have been
reduced to the pro forma amounts indicated below:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
--------- ---------
Net income, as reported................................ $24,031 $20,609
Net income, pro forma.................................. 22,748 20,377
Basic and diluted EPS, as reported..................... 1.38 1.32
Basic and diluted EPS, pro forma....................... 1.31 1.31
The fair value of the options granted is estimated on the date of grant
using the Black-Scholes method with the following weighted average assumptions
used:
YEAR ENDED DECEMBER 31,
------------------------
1998 1997
--------- ---------
Annual dividend yield.................................. 0.0% 0.0%
Volatility............................................. 58.2% 45.0%
Risk free interest rate................................ 4.5% 6.4%
Expected life.......................................... 6 years 6 years
The weighted average grant date fair value per share of options granted
during the years ended December 31, 1998 and 1997 were $6.15 and $12.94,
respectively.
F-18
48
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(12) FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition. The fair
values of financial instruments are based on estimates using present value or
other valuation techniques in cases where quoted market prices are not
available. Those techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In that regard,
the derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Company.
Estimated fair values, carrying values and various methods and assumptions
used in valuing the Company's financial instruments are set forth below at
December 31:
1998 1997
---------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------- ---------- -------- ----------
Financial assets:
Cash...................................... (a) $ 9 $ 9 $ 70 $ 70
Restricted cash........................... (a) 2,351 2,351 1,219 1,219
Notes receivable.......................... (a) 94,537 94,537 74,779 74,779
Residual interest in notes receivable
sold................................... (b) 23,683 23,683 15,235 15,235
Financial liabilities:
Due to Parent............................. (c) 5,688 5,688 1,947 1,947
Borrowing under bank line of credit....... (c) 30,000 30,000 -- --
Recourse liability on notes sold.......... (a) 8,572 8,572 5,305 5,305
- ---------------
(a) The carrying value, prior to consideration of deferred gross profit in the
case of notes receivable, is considered to be a reasonable estimate of fair
value.
(b) Fair value is determined using estimated discounted future cash flows taking
into consideration anticipated prepayment rates. The Company utilizes the
following assumptions in determining the fair value of its residual interest
in notes receivable sold at December 31:
1998 1997
------------ -----
Discount rate................................. 12.25% 12.25%
Annual prepayment rate........................ 6.0% to 7.2% 6.0%
(c) The carrying value reported approximates fair value due to the variable
interest rates charged on the borrowings.
Because no market exists for a portion of the financial instruments, fair
value estimates may be based on judgments regarding future instruments and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
F-19
49
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
The fair value of the Company's forward swap agreement was $(472) at
December 31, 1997. This negative fair value represents the estimated amount the
Company would have to pay at that date to cancel the contracts or transfer them
to other parties.
(13) RELATED PARTY TRANSACTIONS
Notes Receivable
The Company, on an ongoing basis, acquires from and sells notes receivable
to related parties. A summary of these transactions follows for the years ended
December 31:
1998 1997 1996
------- ------ ------
Sale of notes receivable:
Members of the Board of Directors of the Parent (at
face value, full recourse)......................... $ 928 $ 917 $3,350
I&I Holdings, a subsidiary of the Parent (at face
value, full recourse).............................. 7 55 232
Parent Foundation (at face value, full recourse)...... -- -- 211
Purchases of notes receivable:
Eagle Crest Partners, Ltd., a subsidiary of the Parent
(at face value, full recourse)..................... 2,709 7,134 8,993
Running Y Resorts, Ltd., a subsidiary of the Parent
(at face value, full recourse)..................... 2,537 3,218 2,157
Parent foundation (at face value, full recourse)...... -- 2,536 --
I&I Holdings, a subsidiary of the Parent (at face
value, full recourse).............................. 843 -- --
Members of the Board of Directors of the Parent (at
face value, full recourse)......................... 11,308 -- --
With respect to notes receivable sold to members of the Board of Directors
of the Parent and I&I Holdings, the Company services such receivables without
compensation.
The outstanding balance of notes receivable sold with full recourse to
related parties amounted to $0 and $13,564 at December 31, 1998 and 1997,
respectively.
WorldMark
(i) Management Contract
The Company manages the resort properties transferred to WorldMark under
the terms of a management agreement which is subject to annual approval by the
Members. Under the terms of the management agreement, the Company receives a
management fee equal to the lesser of 15% of WorldMark's expenditures or the
full net profit of WorldMark and is reimbursed for certain expenses. In
addition, the Company is responsible for paying annual dues on Vacation Credits
which it owns prior to their sale to customers and
F-20
50
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
reimburses WorldMark for delinquent dues on canceled memberships. A summary of
these transactions for the years ended December 31 follows:
1998 1997 1996
------ ------ ------
WorldMark:
Management fee income.......................... $1,707 $1,488 $1,103
Dues expense incurred by Trendwest............. 1,107 793 275
Delinquent dues expense incurred by
Trendwest................................... 500 389 313
Reimbursed salaries............................ 7,145 5,448 3,103
Other reimbursed expenses...................... 779 612 323
(ii) Financial Information (Unaudited)
A summary of financial information for WorldMark as of and for the years
ended December 31, 1998 and 1997 is as follows:
1998 1997
-------- --------
Cash and investment securities........................... $ 10,154 $ 6,364
Member dues receivable................................... 12,607 8,860
Other assets............................................. 2,336 2,170
-------- --------
Total assets................................... 25,097 17,394
-------- --------
Deferred revenue......................................... 13,647 10,080
Other liabilities........................................ 3,187 2,008
Total liabilities.............................. 16,834 12,088
-------- --------
Net assets..................................... $ 8,263 $ 5,306
======== ========
Annual member assessments................................ $ 20,978 $ 15,426
======== ========
Excess of revenues over expenses......................... $ 2,957 $ 1,994
======== ========
Condominiums owned, at developers unamortized historical
cost................................................... $181,196 $128,411
======== ========
WorldMark maintains a reserve for replacement costs of depreciable assets.
Such reserves at December 31, 1998 and 1997, were $8.3 million and $5.3 million,
respectively.
Parent and Other Related Party
The Company has an open revolving credit line with its Parent to meet
operating needs and invest excess funds. The credit line is $10 million and is
payable on demand. It bears interest at the prime rate plus 1% per annum (8.75%
and 9.5% at December 31, 1998 and 1997, respectively). Outstanding borrowings
under this credit agreement were $5,688 and $4,702 at December 31, 1998 and
1997, respectively.
The Company also reimburses the Parent for administrative services received
and its share of insurance expenses. Also, through June 30, 1997 the Parent was
named as the master servicer under the terms of certain sales of notes
receivable and received a servicing fee of 1.75% per annum of the sold
receivables to service the receivable. The Parent subcontracted the servicing to
Trendwest for a servicing fee of 1.25% per annum of the sold receivable balance.
Trendwest also received a servicing fee from TRI Funding Company I, LLC of 1.75%
per annum of the sold receivables' balance and subsequent to June 30, 1997 is
the named master servicer under the terms of certain sales of notes receivable.
Trendwest, in turn, subcontracts components of the
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51
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
servicing to a third-party servicer, Sage. A summary of these transactions
follows for the years ended December 31:
1998 1997 1996
------ ------ ------
Parent:
Interest income................................ $ 141 $ 159 $ 451
Interest expense............................... 26 1,945 2,564
Insurance expense.............................. 2,624 1,865 1,304
Administrative service expense................. -- -- 913
Servicing fee expense, net..................... -- 240 1,008
TRI Funding Company I, LLC:
Servicing fee income........................... -- 1,157 925
The Company is developing a resort in central Washington known as
MountainStar in conjunction with its Parent. The Parent owns the land and the
Company is acting as the developer. On behalf of its Parent, the Company has
incurred costs of approximately $5,869 and $4,400 in 1998 and 1997,
respectively, related to the project. All costs incurred have been reimbursed by
the Parent.
In 1998, the Company purchased 25 condominium units at a cost of $3,462
from Running Y Resorts.
(14) COMMITMENTS AND CONTINGENCIES
Purchase Commitments
The Company routinely enters into purchase agreements with various
developers to acquire and build resort properties. At December 31, 1998, the
Company has outstanding purchase commitments of $50,139 related to properties
under development.
Litigation
The Company is involved in various claims and lawsuits arising in the
ordinary course of business. Management believes the outcome of these matters
will not have a material adverse effect on the Company's financial position,
results of operations or liquidity.
Lease Commitments
The Company has various operating lease agreements, primarily for sales
offices. These obligations generally have remaining noncancelable terms of five
years or less. Future minimum lease payments are as follows for the years ending
December 31:
1999........................................................ 3,562
2000........................................................ 3,335
2001........................................................ 2,711
2002........................................................ 1,543
2003........................................................ 439
Thereafter.................................................. 279
Rental expense amounted to $3,262, $2,018 and $1,426 for the years ended
December 31, 1998, 1997 and 1996, respectively.
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52
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
(15) SEGMENT REPORTING
The Company has two reportable segments; sales and financing. The sales
segment markets and sells timeshare memberships. The finance segment is
primarily responsible for servicing and collecting Notes Receivable originated
in conjunction with the financing of sales of Vacation Credits. The finance
segment does not include TW Holdings, Trendwest Funding I or Trendwest Funding
II. Management has chosen to evaluate the business based on sales and marketing
activities as these are the primary drivers of the business.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. The Company evaluates
performance based on profits or losses from sales and marketing activities on a
pre-tax basis. Intersegment revenues are recorded at market rates as if the
transactions occurred with third parties. Assets are not reported by segment.
F-23
53
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
The following tables summarize the segment activity of the Company:
SEGMENT
SALES FINANCE OTHER TOTAL
-------- ------- ------ --------
YEAR ENDED DECEMBER 31, 1998:
External revenue......................................... $170,817 $ 2,985 $2,329 $176,131
Interest revenue -- net.................................. -- 4,132 -- 4,132
Interest revenue-intersegment............................ -- 2,870 -- 2,870
Intersegment revenue..................................... -- 976 -- 976
-------- ------- ------ --------
Segment revenue........................................ $170,817 $10,963 $2,329 $184,109
Segment profit........................................... $ 25,205 $ 7,651 $ 929 $ 33,785
SIGNIFICANT NON-CASH ITEMS:
Provision for doubtful accounts, sales returns and
recourse liability..................................... 15,435 -- -- 15,435
YEAR ENDED DECEMBER 31, 1997:
External revenue......................................... $128,835 $ 1,769 $2,032 $132,636
Interest revenue -- net.................................. -- 3,563 -- 3,563
Interest revenue-intersegment............................ -- 681 -- 681
Intersegment revenue..................................... -- 960 -- 960
-------- ------- ------ --------
Segment revenue........................................ $128,835 $ 6,973 $2,032 $137,840
Segment profit........................................... $ 23,779 $ 4,412 $ 924 $ 29,115
SIGNIFICANT NON-CASH ITEMS:
Provision for doubtful accounts, sales returns and
recourse liability..................................... 11,755 -- -- 11,755
YEAR ENDED DECEMBER 31, 1996:
External revenue......................................... $100,040 $ 1,855 $1,501 $103,396
Interest revenue -- net.................................. -- 2,141 -- 2,141
-------- ------- ------ --------
Segment revenue........................................ $100,040 $ 3,996 $1,501 $105,537
Segment profit........................................... $ 16,332 $ 1,947 $ 642 $ 18,921
SIGNIFICANT NON-CASH ITEMS:
Provision for doubtful accounts, sales returns and
recourse liability..................................... 10,078 -- -- 10,078
F-24
54
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
NOTES TO COMBINED AND CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
(DOLLAR AMOUNTS IN THOUSANDS)
The following table provides a reconciliation of segment revenues, profits
and assets to the consolidated amounts:
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
Segment revenue............................................. $184,109 $137,840 $105,537
Interest expense reported net of interest income............ 353 1,739 2,445
Elimination of intersegment revenue......................... (3,846) (1,641) --
Finance subsidiaries revenue................................ 20,341 13,649 8,927
-------- -------- --------
Consolidated revenue................................... $200,957 $151,587 $116,909
======== ======== ========
Segment profit.............................................. $ 33,785 $ 29,115 $ 18,921
Corporate overhead not included in segment reporting........ (11,463) (8,699) (7,511)
Finance subsidiaries profit................................. 16,432 11,780 8,614
-------- -------- --------
Consolidated pre-tax income............................ $ 38,754 $ 32,196 $ 20,024
======== ======== ========
All of the Company's revenue from external customers is derived from sales
within the United States. The Company has no long-lived assets other than
financial instruments.
F-25