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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
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, 2001
OR
[ ] 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
Redmond, WA 98052
(Address of principal executive offices) (Zip Code)
(425) 498-2500
(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)
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. [ ]
The number of shares of common stock outstanding on March 26, 2002, was
38,162,784 shares.
Aggregate market price of shares held by non-affiliates at March 26, 2002, was
$142,229,690, consisting of 5,850,666 shares.
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<Page>
PART I
Item 1. Business
We market, sell, and finance timeshare vacation ownership interests in the form
of vacation credits and fractional ownership interests. We also acquire and
develop resorts. Our resorts (except fractional interests) are owned and
operated through WorldMark, the Club, (WorldMark) and WorldMark South Pacific
Club (WorldMark South Pacific) (collectively "the Clubs"). WorldMark is a
non-profit mutual benefit corporation organized in 1989 to provide an
innovative, flexible vacation ownership system. WorldMark South Pacific is a
registered managed investment scheme regulated by the Australian Securities and
Investments Commission ("ASIC"). We presently sell vacation ownership interests
in 48 resorts located in the United States, British Columbia, Mexico, Fiji, and
Australia and operate a network of 45 sales offices in eight western states,
Alaska, Kansas, Missouri, Australia, and Fiji. At December 31, 2001, the Clubs
had over 149,000 vacation credit owners.
We sell two types of timeshare vacation ownership interests: vacation credits
and fractional ownership interests in vacation properties. Our vacation credit
system is a points-based system that allows owners to reserve units at any of
the Clubs' 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. We believe that the combination of multiple Club resorts and our
vacation credit system provide owners with an attractive range of vacation
planning choices and values. Our vacation credit system 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.
Fractional vacation ownership interests represent deeded fixed intervals in
timeshare condominiums and are not transferred to the Clubs. Our first
fractional interest program, the Depoe Bay resort on the Oregon Coast, began
pre-selling in October 1998. All 377 fractional interests were completely sold
by October 1999 generating total revenue of $13.3 million. Because of the
success of the fractional sales program at Depoe Bay, we constructed a second
phase of Depoe Bay, which has 364 fractional interests. Virtually all fractional
interests were sold by December 2001 generating revenues of $13.8 million. At
December 31, 2001, only one interest was remaining. We intend to continue to
develop fractional ownership programs at strategic locations with high demand as
a complement to our vacation credit product.
Corporate Background
We began our timeshare business as a wholly-owned subsidiary of JELD-WEN, inc.
("Parent" or "JELD-WEN") in 1989 with two condominium units. JELD-WEN is
currently our 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.
We raise capital for property acquisitions and working capital by selling or
securitizing notes receivable through six subsidiaries (the "Finance
Subsidiaries") and through a corporate revolving credit facility. We have
transactions with other JELD-WEN subsidiaries and related parties. See note 14
"Related Party Transactions" in the notes to the consolidated financial
statements included herein.
We were incorporated in Oregon in 1989. Our principal executive offices are
located at 9805 Willows Road, Redmond, Washington 98052, and our telephone
number is (425) 498-2500.
The Clubs
(i) WorldMark, the Club
We formed WorldMark, the Club as a California nonprofit mutual benefit
corporation in 1989 to own, operate, and manage the real property that we convey
to it. WorldMark is not a part of us, and its operations are not included in our
consolidated financial statements. Owners receive the right to use all WorldMark
resort units at any available time and interval selected by the owner on a
first-come, first-served basis, and the right to vote to elect WorldMark's board
members and with respect to certain major WorldMark matters. The number of votes
that each Owner has is based on the number of vacation credits owned. As of
December 31, 2001, there were nearly 144,000 WorldMark owners.
1
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. As of December 31, 2001,
WorldMark had a reserve for replacement costs of approximately $18.9 million for
all depreciable assets (e.g., furniture, appliances, carpeting, roofs, and
decks) of the resorts.
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 900 vacation credits per night
off-season and 1,750 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 vary the
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 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 (Hawaii,
Mexico, and Fiji). Bonus time gives owners the opportunity to use available
units on short notice at a reduced rate (generally from $20 to $50 per night,
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 $340 for the first 6,000 Vacation
Credits owned, plus approximately $79 for each additional increment of 2,000 -
3,000 vacation credits owned. These dues reflect an increase effective October
1, 2001. Previously dues were $325 for the first 6,000 vacation credits owned,
plus approximately $76 for each additional increment of 2,000 - 3,000 vacation
credits owned. Dues are intended to cover WorldMark's operating costs, including
condominium association dues at the WorldMark resorts. We pay WorldMark the dues
on the unsold vacation credits we own. These payments totaled $1.7 million, $1.0
million, and $1.4 million in 2001, 2000, and 1999, respectively.
WorldMark has a five-member board of directors that manages its business and
affairs. Three of the directors of WorldMark are also current or former officers
of Trendwest. 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.
We have a management agreement with WorldMark under which we act as the
exclusive manager and servicing agent of WorldMark and the vacation owner
program. Our responsibilities under the management agreement include general
management of WorldMark, overseeing the property management and service levels
of the resorts, and preparing financial forecasts and budgets for WorldMark. The
management agreement provides for automatic one-year renewals unless such
renewal is denied by a majority of the voting power of the owners (excluding
us). As compensation for our services, we receive the portion of total revenues
received by WorldMark remaining after WorldMark pays or reserves for its
expenses plus reserves for repair and replacement of resorts. This amount is
subject to a ceiling equal to 15% of the budgeted annual expenses and reserves
of WorldMark (exclusive of our fee). Our management revenues from WorldMark for
the years ended December 31, 2001, 2000, and 1999 were approximately $3.2
million, $3.9 million and $3.0 million, respectively.
WorldMark has programs whereby an owner can use his or her vacation credits
toward other vacation options such as package tours and cruises. WorldMark
provides the owner with the package in exchange for the owner's vacation credits
plus cash, if necessary. The vacation credits are deposited into a pool of
credits. The pool of credits is available to us for a fee of $0.07 per credit or
for one-time use to owners for a fee of $0.08 per credit. In 2001, we purchased
$2.5 million of these one-time use vacation credits from WorldMark for marketing
programs.
2
(ii) WorldMark South Pacific Club
On October 22, 1999, we formed a wholly-owned Australian subsidiary, Trendwest
South Pacific, Pty. Ltd., to conduct sales, marketing, and resort development
activities in Australia and the South Pacific. Trendwest South Pacific was the
first company licensed under the new timeshare regulations in Australia.
WorldMark South Pacific was formed by Trendwest South Pacific in 2000 as a unit
trust and a registered managed investment scheme to own, operate, and manage the
real property conveyed to it by Trendwest South Pacific. WorldMark South Pacific
is not part of us, and its operations are not included in our consolidated
financial statements. Owners receive the right to use all resort units and the
right to vote with respect to certain major matters. The number of votes that
each owner has is based on the number of vacation credits owned. Trendwest South
Pacific is the manager of WorldMark South Pacific. As of December 31, 2001,
there were nearly 6,000 owners in WorldMark South Pacific.
The resorts are owned by WorldMark South Pacific free and clear of all monetary
encumbrances. The title to the resort properties are held in trust for the
benefit of the owners by an independent custodian, Permanent Trustee Australia
Limited. WorldMark South Pacific maintains a replacement reserve for its
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. As of December 31, 2001, WorldMark South
Pacific had a reserve for replacement costs of approximately $0.2 million.
The operation of WorldMark South Pacific is similar to the US operations of
WorldMark. WorldMark South Pacific owners may also purchase bonus time.
WorldMark and WorldMark South Pacific have reciprocal exchange privileges for
their respective owners. The credit values in WorldMark South Pacific are
consistent with WorldMark.
WorldMark South Pacific collects maintenance dues from owners based on the
number of vacation credits owned. Currently, the annual dues are AUD $358 for
the first 6,000 Vacation Credits owned, plus approximately AUD $82 for each
additional increment of 2,000 - 3,000 vacation credits owned. These dues are
intended to cover operating costs, including condominium association dues at the
resorts. Trendwest South Pacific pays the dues on the unsold vacation credits
they own. Such payments totaled $0.2 million and $0.3 million for the years
ended December 31, 2001 and 2000, respectively.
WorldMark South Pacific is managed by Trendwest South Pacific. Certain matters
require the approval of a majority of the voting power of the owners represented
(excluding Trendwest South Pacific) to take certain actions, including (i)
incurrence of capital expenditures or special assessments exceeding 5% of
WorldMark South Pacific's budgeted gross expenses during any fiscal year and
(ii) special assessments selling property of WorldMark South Pacific during any
fiscal year with an aggregate fair market value in excess of 5% of WorldMark
South Pacific's budgeted gross expenses for such year.
Through our subsidiary, Trendwest South Pacific, we have a management agreement
with WorldMark South Pacific under which we act as the exclusive manager and
servicing agent of WorldMark South Pacific and the vacation owner program. Our
responsibilities under the management agreement include general management of
WorldMark South Pacific, overseeing the property management and service levels
of the resorts, and preparing financial forecasts and budgets for WorldMark
South Pacific. The management agreement provides for automatic five-year
renewals beginning in 2005 unless such renewal is denied by a majority of the
voting power of the owners (excluding us). As compensation for our services, we
receive a management fee of 15% of WorldMark South Pacific's expenditures
(exclusive of our fee). Our management revenues from WorldMark South Pacific for
the years ended December 31, 2001 and 2000 were approximately $0.2 million and
$0 million, respectively.
3
The Resorts
The following table sets forth certain information as of December 31, 2001,
regarding each existing resort, planned expansion at existing resorts through
2002, and planned new resorts through 2003:
<Table>
<Caption>
Existing
Units
Date in Planned Total Units
Existing Resorts Location Contributed(a) Service Expansion Anticipated II Rating (b) RCI Rating (c)
- ------------------- -------------- --------------- ---------- --------- ----------- ------------- --------------
Arizona
Pinetop Pinetop/Lakeside August 1999 60 -- 60 Five Star Gold Crown
Vistoso Tucson December 1999 110 -- 110 Five Star Gold Crown
Bison Ranch Bison Town May 2001 41 -- 41 Five Star Gold Crown
Australia
Gold Beach (d) Caloundra, QLD June 2000 19 -- 19 Five Star (e)
Calypso Plaza (d) Coolangatta, QLD April 2000 10 -- 10 (b) (e)
Trinity Links (d) Cairns, QLD August 2000 12 -- 12 Five Star (e)
Horizon (d) Port Stephens,
New South Wales March 2001 10 -- 10 Five Star (e)
Pacific Bay (d) Coffs Harbour,
New South Wales November 2001 15 -- 15 (i) (e)
British Columbia
Sundance Whistler February 1992 25 -- 25 Five Star Gold Crown
Cascade Lodge Whistler September 1999 42 -- 42 Five Star Gold Crown
The Canadian Vancouver April 2000 42 -- 42 Five Star Gold Crown
California
North Shore Estates Bass Lake October 1991 61 -- 61 Five Star Gold Crown
Beachcomber Pismo Beach April 1993 20 -- 20 (b) R.I.D.
Palm Springs Palm Springs July 1995 64 -- 64 (b) R.I.D.
Big Bear Big Bear Lake April 1996 58 57 115 Five Star Gold Crown
Clear Lake Nice July 1998 88 -- 88 Five Star Gold Crown
Angels Camp Angels Camp September 1998 100 11 111 Five Star Gold Crown
Marina Monterey Bay November 1999 33 -- 33 Five Star Gold Crown
Oceanside Oceanside September 2001 138 -- 138 Five Star Gold Crown
Colorado
Steamboat Springs Steamboat Springs December 2000 34 -- 34 Five Star Gold Crown
Fiji
Denarau Island (f) Denarau Island December 1999 87 -- 87 Five Star Gold Crown
Hawaii
Valley Isle Maui April 1990 14 -- 14 Five Star Gold Crown
Kapaa Shores Kauai July 1991 49 -- 49 (b) R.I.D.
Kona Hawaii November 1997 64 -- 64 Five Star Gold Crown
Kihei Maui December 2001 199 -- 199 Five Star Gold Crown
Idaho
Arrow Point Coeur D'Alene September 2000 40 -- 40 Five Star Gold Crown
McCall McCall September 2001 20 -- 20 Five Star Gold Crown
Mexico
Coral Baja San Jose del Cabo November 1994 136 -- 136 Five Star Gold Crown
La Paloma Rosarita Beach August 2000 37 -- 37 Five Star Gold Crown
Missouri
Lake of the Ozarks Ozarks December 2000 70 -- 70 Five Star Gold Crown
Branson Branson August 2001 80 -- 80 Five Star Gold Crown
Nevada
Lake Tahoe Stateline January 1991 50 -- 50 (b) R.I.D
Las Vegas Las Vegas December 1996 42 -- 42 Five Star Gold Crown
Reno Reno November 2000 63 -- 63 Five Star Gold Crown
4
Existing
Units
Date in Planned Total Units
Existing Resorts Location Contributed(a) Service Expansion Anticipated II Rating (b) RCI Rating (c)
- ------------------- -------------- --------------- ---------- --------- ----------- ------------- --------------
Oregon
Eagle Crest Redmond September 1989 111 -- 111 Five Star Gold Crown
Gleneden Beach Lincoln City March 1996 80 -- 80 Five Star Gold Crown
Running Y Ranch Klamath Falls February 1997 94 -- 94 Five Star Gold Crown
Schooner Landing Newport September 1997 13 (g) -- 13 Five Star Gold Crown
Depoe Bay Depoe Bay April 1999 110 -- 110 Five Star Gold Crown
Utah
Wolf Creek Eden June 1998 71 (h) -- 71 Five Star Gold Crown
Harbor Village Bear Lake January 1999 26 -- 26 Five Star Gold Crown
St. George St. George December 2000 59 -- 59 Five Star Gold Crown
Washington
Lake Chelan Shores Chelan August 1990 13 -- 13 Five Star Gold Crown
Surfside Long Beach September 1991 25 -- 25 (b) R.I.D.
Discovery Bay Sequim January 1992 47 -- 47 Five Star Gold Crown
Park Village Leavenworth July 1992 72 -- 72 Five Star Gold Crown
Mariner Village Ocean Shores June 1994 32 -- 32 Five Star Gold Crown
Birch Bay Blaine January 1995 103 -- 103 Five Star Gold Crown
</Table>
<Table>
<Caption>
Existing
Units
Expected In Planned Total Units
Planned Resorts Location Completion Service Expansion Anticipated
------------------ ---------------- ------------ -------- --------- -----------
Las Vegas Las Vegas, NV August 2002 -- 207 407
Kirra Beach Kirra Beach, October 2002 -- 104 104
Queensland,
Australia
South Lake Tahoe Lake Tahoe, NV January 2003 -- 51 51
Victoria Victoria, B.C. February 2003 -- 91 91
Seaside Seaside, Oregon June 2003 -- 171 171
Solvang Solvang, CA September 2003 -- 89 89
Sonoma Sonoma, CA September 2003 -- 150 228
---------- ------------ -------------
Total 2,789 931 3,998
========== ============ =============
</Table>
(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 or WorldMark South Pacific. At certain resorts, additional units
were transferred to WorldMark at later dates.
(b) Five Star is the only resort rating awarded by II. These resorts did not
attain a Five Star rating.
(c) Gold Crown and Resort of International Distinction ("R.I.D.") are resort
ratings awarded annually by RCI. As of December, 2001 approximately 19% of
all resorts reviewed by RCI received a Gold Crown rating, the highest
rating awarded by RCI, and approximately 13% of all resorts reviewed by RCI
received an R.I.D. rating, the second-highest rating awarded by RCI.
(d) These units are deeded to WorldMark South Pacific Club.
(e) The units in WorldMark South Pacific participate in the exchange network
with Interval International and are not rated by RCI.
(f) 66 units were deeded to WorldMark and 21 units deeded to WorldMark South
Pacific.
(g) We purchased 659 weeks of time per year from Schooner Landing and deeded
the rights to this time to WorldMark. This is equivalent to 13 condominium
units.
(h) We 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. We constructed the remaining 62 units.
(i) This resort has not yet been rated by II.
5
Sales and Marketing
We use 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. We
also co-sponsor 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. We
continually monitor and adjust our marketing programs to improve efficiency. We
target prospective owners through an analysis of age, income and travel
interests.
Our sales of vacation credits primarily occur at 29 off-site sales offices
located in metropolitan areas in six regions, including the South Pacific. The
remainder of our vacation credit sales occur at 16 on-site sales offices. Our
fractional interest sales activity occurs on-site at the Depoe Bay resort. In
2001, 85% of our vacation credit sales were generated by off-site sales offices.
We believe the advantages of using off-site sales offices compared to sales
offices located at more remote resorts include:
>> access to larger numbers of potential customers
>> convenience for prospective customers to attend a sales presentation
>> access to a wider group of qualified sales personnel due to more convenient
work locations
>> ability to open new sales offices easily, and
>> lower marketing costs to attract prospective customers to visit an off-site
sales office.
Our off-site sales offices 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 developer's
representatives, and additional staff for guest registration and clerical
assistance. Our salespeople spend approximately 90 minutes with each potential
owner viewing videos of our resorts, answering customers' questions, and
providing detailed information regarding our vacation ownership opportunities.
The on-site sales offices generally include similar facilities and a smaller
number of staff compared to the off-site sales offices.
Printed information regarding Trendwest and the resorts, 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 our developer 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 we sell vacation ownership interests, each
purchaser has a right to rescind the purchase for a period ranging from three to
fifteen calendar days, depending on the state, 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. Our current practice is to
allow all purchasers a minimum rescission period of seven days, even if state
law allows a shorter period. During 2001 and 2000, the Company had a rescission
rate of 16.2% for both years, which is consistent with our historical
experience.
We offer existing Owners cash awards for referrals of potential new owners. We
maintain a staff of marketing individuals who specialize in promoting referrals
by existing owners. In addition, as part of our ongoing marketing efforts, we
offer existing owners the opportunity to purchase additional vacation credits
generally at a discount from the current price. Owners may purchase additional
vacation credits in increments of 1,000 credits. We currently employ 61 sales
representatives who specialize in upgrade sales. Many customers purchase more
than one upgrade over time, generally at a discount from the purchase price.
These sales provide a higher gross margin than other vacation credit sales due
to substantially lower marketing costs and lower sales commissions. Sales of
vacation credits from our owner referral program and upgrade sales contributed,
in the aggregate, approximately 26.0% and 26.9% of our net vacation credit sales
in 2001 and 2000, respectively.
6
Customer Financing
Since an important component of our sales strategy is the affordability of
vacation credits, we believe that we will continue to finance a significant
portion of our sales. In 2001, the average new owner purchased approximately
6,528 vacation credits for a purchase price of approximately $9,172. We financed
approximately 87% of the aggregate purchase price of vacation credits sold to
new owners with an average new note receivable of approximately $8,256. During
2001, the aggregate amount of notes receivable generated in connection with the
sale of vacation credits to new owners was approximately $302.3 million. Both
vacation credit and fractional interest sales require a down payment of at least
10% of the purchase price. Notes receivable relating to vacation credit sales
have terms of up to seven years at interest rates of 11.9% to 14.9%. Notes
receivable relating to fractional interest sales have terms of up to ten years
at interest rates of up to 11.9%.
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 often cancelled, and a new seven-year note secured by an interest in all
vacation credits owned is issued.
At December 31, 2001, an aggregate of $665.9 million of notes receivable were
outstanding. Of this amount, $61.7 million is unencumbered and $604.2 million
has been transferred into special purpose finance entities in securitization
transactions which qualify as sales of notes receivable. We receive proceeds
from these securitization transactions upon transfer of the notes receivable to
the finance entities and, subsequently as we receive an interest rate
differential and cash collections on the overcollateralized component of the
transferred receivables. At December 31, 2001, the fair value of the interest
rate differential of notes receivable securitized was $74.2 million, and the
gross amount of the overcollateralized component was $74.9 million. Our loss
exposure for notes receivable securitized is limited to the residual interest in
notes receivable securitized. Although we are not required to do so, our
historical practice has been to repurchase defaulted securitized notes
receivable up to certain limits, generally 10% to 17% of the face amount of the
original balance of notes receivable securitized. We expect to continue to sell
a substantial amount of our notes receivable in the future.
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, 2001, approximately $16.1 million, or
2.42% of our total receivables portfolio serviced of $665.9 million, were past
due 60 days or more. Our practice is to accrue 100% of the interest on notes
receivable up to 60 days past due and 50% of the interest on notes receivable 60
to 90 days past due. Interest is not accrued on notes receivable more than 90
days past due. When we write off uncollectible notes receivable (generally when
the receivable becomes 180 days past due), we reverse any interest that had been
accrued, reclaim the related vacation credits that secure such notes receivable,
and return such vacation credits to inventory as available for resale. In the
event of default of a fractional interest, we foreclose or offer a deed in lieu
of foreclosure on the title and remarket the interest.
We maintain an allowance for doubtful accounts on all notes receivable. We
estimate our allowance for doubtful accounts by analysis of bad debts by each
sales site by year of note receivable origination. We use this historical
analysis in conjunction with other factors such as local economic conditions and
industry trends. We also utilize experience factors of more mature sales sites
in establishing the allowance for bad debts at new sales offices. The aggregate
amount of this allowance, excluding an allowance for sales reversals, at
December 31, 2001 and 2000 was $51.9 million and $38.9 million, respectively,
representing approximately 7.8% and 7.7%, respectively, of the total portfolio
of notes receivable outstanding at those dates. The increase in the provision as
a percentage of the total portfolio reflects sales growth in new sales offices
with expected default rates higher than our historical average. No assurance can
be given that this allowance will be adequate, and if the amount of the notes
receivable that is ultimately written off materially exceeds the related
allowance, our business, results of operations and financial condition could be
materially adversely affected.
Loan Servicing
We perform our note servicing function in-house. We have retained other third
parties to provide many functions including the lockbox function, custodial and
statement rendering services. As servicer, we are responsible for the
maintenance of the accounts receivable file, all billing and collection
activities, including daily disbursements of
7
collected funds to the Trustees of the various securitizations. In addition, we
handle all personal interaction with the owners, including the collection
process.
Property Ownership
(i) Vacation Credits
We transfer, or arrange for the seller of the property to transfer, title to the
property to the Clubs in return for vacation credits and the exclusive right to
sell vacation credits. The Clubs are contractually prohibited from revoking such
rights or transferring them to another party.
When we purchase resort property, we vest the title to the property in the
Clubs, free and clear of any debt encumbrance. For properties we develop, we may
initially obtain title in the undeveloped property and then deed the developed
resort property to the Clubs. At the time we vest title to the property in
WorldMark, the Club, a "Declaration of Vacation Owner Program" is recorded
against 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 encumbrance. This ownership structure is designed to protect the
timeshare usage rights of the owners and comply with statutory regulations.
Title to the properties in WorldMark South Pacific is held by a third party
custodian for the benefit of the owners. This preserves the title against future
encumbrance and protects the owners' usage rights.
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. At non-exotic resorts (exotic resorts are Hawaii, Mexico and Fiji),
only 48 weeks of time of each unit are available for sale to owners leaving 4
weeks for bonus time and maintenance and upkeep on the units. At exotic
locations, 51 weeks of time of each unit are available for sale to owners
leaving the remaining time for maintenance and upkeep. The aggregate vacation
credits assigned to each unit may not be increased 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.
(ii) Fractional Interests
Fractional interests represent deeded intervals in condominium units. The
purchaser of a fractional interest owns an equal share of the condominium and
pays maintenance dues to a homeowner's association made up of other fractional
owners.
Fractional owners have been deeded specific weeks of time spaced evenly
throughout the year. The current fractional project at Depoe Bay in Oregon is
sold in 13th share increments. Each share represents four one-week intervals
thirteen weeks apart. These intervals rotate forward one week each year allowing
a fractional owner to have access to every calendar week over a thirteen year
period.
Participation in Vacation Interval Exchange Networks
We believe that the sale of our vacation ownership products is made more
attractive by our participation in the vacation interval exchange networks
operated by Interval International (II) and Resort Condominiums, International
(RCI). U.S. vacation credit owners participate in II and RCI; fractional
interest owners and South Pacific Owners participate in II.
Competition
We are 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. See "Risk Factors - Competition".
Employees
As of December 31, 2001, we had approximately 4,000 full-time employees. We
believe that our employee relations are good. None of our employees are
represented by a labor union.
We prefer to fill promotional opportunities from within our existing staff. To
support this philosophy, a full array of training curriculums have been designed
and offered. These "in-house" training courses range from curriculums
8
including management training, product knowledge, recruiting and interviewing,
employee orientation, and job specific training such as Best Sales Practices and
Customer Service.
We maintain several employee benefits such as a 401(k) plan, an Employee Stock
Purchase Plan, and an incentive stock option plan for certain employees. Our
Employee Stock Purchase Plan allows employees to purchase company stock through
a payroll deduction, with certain provisions, at a discount.
RISK FACTORS
In addition to the other information contained in this Form 10-K, the following
risk factors should be carefully considered in evaluating our business and us.
We caution the reader that this list of risk factors may not be exhaustive. This
document contains forward-looking statements that involve risks and
uncertainties. Our 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
Because the units are conveyed directly to the Clubs free of any monetary
encumbrances, we must pay the full cost of a resort prior to selling any
vacation credits attributable to that resort. Likewise, we incur sales and
marketing expenses prior to realizing cash proceeds from the sale of vacation
credits. Since we generally finance a large percentage of the aggregate purchase
price of the vacation credits we sell, we do not generate sufficient cash from
sales to provide the necessary capital to pay the costs of developing additional
resorts and to replenish working capital. Our principal source of funding cash
requirements is borrowing against and selling the receivables from the sale of
vacation credits. It is possible that we may not be able to borrow against or to
sell these receivables in the future, particularly if we suffer any significant
decline in the credit quality of these receivables. If we are unable to obtain
sufficient debt or equity financing, our ability to acquire additional resort
units will be adversely affected and our profitability from sales of vacation
credits may be reduced or eliminated.
Risks Associated with Development and Construction Activities
Our future growth and financial success depend, to a significant degree, on the
availability of attractive resort locations and our ability to acquire and
develop additional resort units on favorable terms. The number of vacation
credits we can sell depends upon the number of resort units that we have
transferred to the Clubs. If we do not continually add resort units or if the
new units are not located in vacation areas desired by our prospective
customers, our sales of vacation credits will suffer. The acquisition and
development of resorts involve risks, including that construction costs may
exceed original estimates or construction or permitting may not be completed on
schedule, resulting in increased interest expense and delays in the availability
for sale of vacation credits. In addition, although our construction activities
are generally performed by third-party contractors, it is possible that
construction claims may be asserted against us for construction defects and such
claims may give rise to liabilities. If we are unable to acquire and develop
additional resorts, or face delays or excessive costs in doing so, our ability
to sell vacation credits will be impaired and our profits will be reduced. We
currently have purchase agreements, developments in progress or plans to obtain
additional resort units that will satisfy our anticipated sales volumes of
vacation credits through the end of 2003. It is possible that not all of these
units will be acquired or completed on a timely basis or at all, which would
adversely affect our ability to sell vacation credits.
Risks Associated with Developing MountainStar
We are currently developing 7,400 acres located 80 miles east of Seattle,
Washington. We plan to develop the property as two separate projects: the
MountainStar Master Planned Resort and the City of Cle Elum Urban Growth Area, a
Master Planned Community.
Plans for the 6,300 acre Master Planned Resort include at least two golf
courses, numerous recreational amenities and 3,785 dwelling units. Before we can
begin development of the Master Planned Resort, we must finalize sewer
availability with the City of Cle Elum and transfer our water rights for the
project. The Master Planned Resort land use plan has been approved by Kittitas
County, and all appeals have been settled. We are working on several strategies
to
9
transfer our water rights to develop the proposed projects. If we cannot
transfer our water rights, development of the property may not occur as planned.
The 1,100 acre Urban Growth Area project is planned as a mixed-use development
including a primary home community with single-family homes, condominiums, an
office park, a golf course and apartment units. The city of Cle Elum will
release the Final Environmental Impact Statement on March 18, 2002. The
entitlement process for the project is independent from the entitlement process
for the Master Planned Resort except for water rights transfer and sewer
availability. Without the necessary governmental approvals and water rights
transfers, development of the Urban Growth Area may not occur as planned.
In the event that we cannot develop either or both projects as planned due to
our inability to obtain final government approvals, our inability to secure the
necessary water rights transfers or for other reasons, we have developed an
alternative strategy for disposition by selling large lot parcels.
We have not previously developed projects of the scope and cost of the
MountainStar Master Planned Resort and the Urban Growth Area in the City of Cle
Elum. We have hired project managers with extensive experience in the
development of master planned resorts and communities. As development activities
increase, we will need to hire other experienced managers, contractors and
consultants in order to successfully complete the project. Even with experienced
development managers, we may encounter design, development or construction
problems and delays that are not anticipated and that may cause the total cost
and actual development time of the projects to exceed our current estimates.
The MountainStar Master Planned Resort and the Urban Growth Area project will
require substantial capital over the life of these projects. We anticipate that
we will borrow a substantial portion of the required capital. If the development
is delayed or if we do not generate the anticipated revenues from the projects,
the increased interest expense as a result of these borrowings will affect our
net income and the related indebtedness may affect our financial position.
Factors Affecting Sales Volume
As the number of potential customers in the geographic area of a sales office
who have attended a sales presentation rises, we may have increasing difficulty
in attracting additional potential customers to a sales presentation at that
office, and it may become increasingly difficult to maintain current sales
levels at our existing sales offices. We anticipate that a substantial portion
of our future sales growth will depend on the opening of additional sales
offices. Sales from existing or new sales offices may not meet our expectations.
In such event, fixed expenses and excess inventory will need to be promptly
reduced in order to avoid significant harm to our business. Our efforts in this
respect may not be successful. Further, since we presently depend on
telemarketing activity to contact prospects and invite guests to attend a sales
presentation, our sales volume could also be reduced if our ability to use this
marketing technique is disrupted by government regulation, decreased customer
acceptance or otherwise.
Geographic Concentrations
We intend to expand our resort locations and our sales offices into market areas
where we presently do not have operations. Due to our lack of familiarity with
these new markets, we could encounter problems in locating and acquiring resort
units or in marketing vacation credits that we did not foresee. These problems
could lead to decreased sales growth and increased operating costs, thereby
decreasing our net income.
General Economic Conditions; Concentration in Timeshare Industry
A prolonged economic slowdown or a lengthy or severe recession could hurt our
operations. The risks associated with our business are more acute during periods
of economic slowdown or recession because these periods may be accompanied by
decreased discretionary consumer spending, adversely affecting our sales of
vacation ownership interests. Any significant worsening in economic conditions
or price increases or adverse events related to the travel and tourism industry
could also reduce our sales. These same economic conditions may also limit the
future availability of attractive financing rates for us or our customers which
may also materially impact our business. We may also experience decreased
collectibility and saleability of our notes receivable used to finance our
operations. Since our target customers include those with moderate income
levels, these individuals may be affected more negatively by an economic
downturn than higher income individuals. We presently sell vacation credits
primarily through off-site sales
10
offices in the western United States. Accordingly, we are particularly
vulnerable to regional conditions, such as energy costs, in this area of the
country. Further, as our operations are conducted solely within the timeshare
industry, any adverse changes affecting the timeshare industry could have a
material adverse effect on our business, results of operations, and financial
condition.
Risks Associated with Customer Financing
We face certain credit risks related to our customer financing. Although we
obtain a security interest in the vacation credits and fractional interests
purchased by our customers, we do not verify a prospective owner's credit
history for vacation credit sales. Our loss exposure for notes receivable
securitized is limited to the residual interest in notes receivable securitized.
The value of our residual interest in securitizations, net may also be
diminished if actual prepayments exceed our estimates. As general interest rates
decrease and remain at historically low levels for extended periods, the
likelihood of early prepayments will probably increase. Trends in our portfolio
during January and February 2002 indicate increased prepayment rates over
historical amounts.
Our historical practice has been to voluntarily repurchase defaulted securitized
notes receivable. We then write off any notes receivable deemed uncollectible
and reclaim and return to inventory the related vacation credits or fractional
interests that secure such notes receivable. However, we are not able to recover
the associated marketing costs and sales commissions and these expenses must be
incurred again to resell the vacation credits or fractional interests.
We maintain an allowance for doubtful accounts on all notes receivable. However,
these allowances are estimates and if the amount of our interest in the notes
receivable that is ultimately uncollectible materially exceeds the related
allowances, our results of operations and financial condition could be harmed.
Interest Rate Risk
We generally provide financing for a significant portion of the aggregate
purchase price of vacation credits and fractional interests sold at a fixed
interest rate. We then sell the notes receivable in order to provide liquidity.
If interest rates were to increase significantly our net income from financing
would be reduced, since we would probably not increase the interest rate offered
to finance vacation credit and fractional interest purchases. Conversely, if
interest rates were to decrease and remain at historically low levels for
extended periods, the likelihood of early prepayments will probably increase,
and customers will seek alternative financing, reducing our net income from
financing.
Risk Associated with Rapid Growth
We have grown rapidly and plan to continue to grow in the future. Rapid
increases in the number of owners, the amount of notes receivable and the number
of resorts and sales offices will require the acquisition of additional
management, administrative and sales personnel and sophisticated technology and
control systems to service the increased number of Club owners and prospective
customers and to manage our business, which we may not be able to do. If we do
not properly manage the Clubs' operations or the servicing of the notes
receivable, we could experience increased dissatisfaction by the Clubs' owners,
which could lead to lower sales volumes and increased defaults on the notes
receivable or in extreme cases, efforts to replace us as manager of the Clubs.
Foreign Exchange Risk
We are subject to foreign currency exchange rate risk when developing resort
properties and incurring costs denominated in a foreign currency and on sales
operations in the South Pacific. While we intend to mitigate our foreign
exchange risk through swap agreements and borrowings denominated in foreign
currencies, no assurance can be given that these strategies will be successful
and changes in foreign currency exchange rates could therefore have a materially
adverse effect on our business, results of operations, and financial condition.
From time to time, we may be exposed to losses in the event of nonperformance by
the counterparties to our forward swap agreements used to hedge foreign exchange
risks. We do not obtain collateral to support financial instruments but monitor
the credit standing of the counterparties.
11
Risks Associated with International Development
We are subject to risks arising from developing resort properties and sales and
marketing activities in the South Pacific. We have registered our product under
Australian regulations and are currently engaged in sales operations there.
Unlike the United States, Australian law requires a vacation ownership interest
to be sold as a security. Many, if not all of the risks described herein, are
potential risk factors for development activities in the South Pacific.
Competition
We compete with other entities engaged in the business of resort development,
sales and operation, including vacation interval ownership, condominiums, hotels
and motels, for the sales of vacation ownership interests and for the
acquisition of resale units. We may not be able to successfully compete against
these entities. In addition, resales of vacation credits by owners may compete
with our sales of new vacation credits and may inhibit our ability to increase
the market price of our vacation credits.
Regulation of Marketing and Sales of Vacation Credits; Other Laws
Our marketing and sales of vacation credits and other operations are extensively
regulated by the federal government and by the states and foreign jurisdictions
in which the Clubs' resorts are located and in which vacation credits are
marketed and sold.
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. We have registered our resorts, our vacation program, and
the number of vacation credits available for sale within the following
jurisdictions: Alaska, Arizona, Arkansas, California, Colorado, Idaho, Illinois,
Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana,
Nevada, Oklahoma, Oregon, Tennessee, Utah, Washington, Wisconsin, Wyoming, and
British Columbia. We are required to deliver a detailed offering statement
describing Trendwest and all material aspects of the project and sale of
vacation credits to all new purchasers of vacation credits, together with
certain additional information concerning the terms of the purchase. State laws
grant the purchaser from three to fifteen calendar days following the later of
the date the contract was signed or the date the purchaser received the last of
the documents we are required to provide to rescind the contract. Most states
also have other laws which regulate our 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 vacation 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 we are 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.
Foreign Regulation. The sale of interval ownership programs in Australia is
regulated by the Australian Securities and Investment Commission. Trendwest
South Pacific is required to provide a prospectus to potential buyers. This
prospectus must be updated at least annually.
Although we believe that we are in material compliance with all federal, state,
local and foreign laws and regulations to which we are currently subject, we
cannot assure you that we are in fact, in compliance. Any failure to comply with
applicable laws or regulations could materially harm our business. In addition,
we 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
We may be subject to liability under various federal, state, local and foreign
environmental laws. These laws generally hold the owner or operator of real
property 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
12
damage. These 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. Further, 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, or 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 our properties. Although
we conduct an environmental assessment with respect to the properties we acquire
for the Clubs, we have not received a Phase I environmental report for every
resort. Further, it is possible that the environmental assessments we have
undertaken have not revealed all potential environmental liabilities, or that an
environmental condition otherwise exists.
Natural Disasters; Uninsured Loss
Although the Clubs maintain property and liability insurance for the units at
the resorts, this insurance coverage is subject to policy specifications,
insured limits and deductibles. In addition, certain types of losses, such as
losses arising from war or military action, nuclear hazard or pollution, are
generally excluded from the insurance coverage. Should an uninsured loss or loss
in excess of insured limits occur, the Clubs will be required 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 the Clubs
may impose a limited amount of special assessments to pay for capital
improvements or major repairs, the Clubs may not be able to obtain sufficient
funds to pay for all possible capital improvements and major repairs of the
units at the resorts through these assessments. In such event, we may need to
advance funds to the Clubs to maintain the quality of the resorts in order to
maintain owner satisfaction.
Effective Voting Control by Majority Shareholder
JELD-WEN, inc. owns approximately 81% of the outstanding shares of common stock.
This concentration of ownership gives JELD-WEN control of the election of
directors and the management and affairs of the company and sufficient voting
power to determine the outcome of all matters submitted to the shareholders for
approval, including mergers, consolidations and the sale of all, or
substantially all, of our assets.
Item 2. Properties
We own our corporate headquarters in Redmond, Washington, and lease office space
at various locations for sales offices, regional administration and marketing
purposes. We also own some condominiums at WorldMark properties that are used
for sales and marketing purposes. We believe that these facilities along with
additional leased office space will be sufficient to meet our needs for the
foreseeable future.
In the ordinary course of business, we purchase property for development and
deed said property to the Club(s) upon completion of the project. See "Business
- - WorldMark".
Item 3. Legal Proceedings
We are not aware of any material legal proceedings pending against us. We 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 our equity holders during the
fourth quarter of 2001.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our 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:
<Table>
<Caption>
High Low
--------------- ----------------
Year ended December 31, 2001
First quarter............................... $ 16.22 $ 10.19
Second quarter.............................. $ 19.23 $ 14.50
Third quarter............................... $ 17.94 $ 13.80
Fourth quarter.............................. $ 28.10 $ 16.67
Year ended December 31, 2000
First quarter............................... $ 11.33 $ 8.45
Second quarter.............................. $ 11.83 $ 7.09
Third quarter............................... $ 9.33 $ 7.11
Fourth quarter.............................. $ 12.67 $ 6.72
</Table>
On March 26, 2002, there were approximately 52 holders of record of our common
stock and approximately 2,022 beneficial shareholders.
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying cash dividends on our common stock. We currently intend to
retain future earnings to finance our operations and fund the growth of our
business. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend on, among other things, our earnings, financial
condition, contractual restrictions in respect of the payment of dividends, and
other factors the Board of Directors deems relevant.
On February 21, 2001, the Board of Directors declared a 3 for 2 stock split for
shareholders of record on March 15, 2001, payable on March 29, 2001. On November
8, 2001, the Board of Directors declared another 3 for 2 stock split for
shareholders of record on November 29, 2001, payable on December 14, 2001. In
accordance with accounting principles generally accepted in the United States of
America, all share data and earnings per share figures contained in this Form
10-K have been adjusted to reflect the stock splits as if they were effective
for all periods presented.
14
Item 6. Selected Financial Data
(dollars in thousands, except per share and operating data)
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" is 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 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 derived from unaudited data. Share data
and earnings per share figures for all periods presented have been adjusted to
reflect the 3 for 2 stock splits declared by the Board of Directors on February
21, 2001, and November 8, 2001.
<Table>
<Caption>
Year Ended December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ----------- ---------- ---------- ------------
Statement of Operations Data:
Revenues:
Vacation credit and fractional interest
sales, net.............................. $ 406,137 $ 293,130 $ 234,315 $ 170,817 $ 128,835
Finance income........................... 20,629 15,562 15,243 13,790 11,989
Gains on sales of notes receivable....... 30,268 18,903 16,265 10,959 6,582
Resort management services............... 4,607 4,763 3,710 2,328 2,032
Other.................................... 7,527 5,280 4,593 3,063 2,149
---------- ----------- ---------- ---------- ------------
Total revenues......................... 469,168 337,638 274,126 200,957 151,587
---------- ----------- ---------- ---------- ------------
Costs and operating expenses:
Vacation credit and fractional interest
cost of sales........................... 112,288 74,714 68,611 48,059 34,569
Resort management services............... 1,588 1,759 1,656 1,399 1,108
Sales and marketing...................... 193,531 137,752 104,952 83,347 59,448
General and administrative............... 43,481 31,686 25,234 17,180 13,449
Provision for doubtful accounts.......... 30,276 21,148 16,100 11,865 9,077
Interest................................. 591 479 442 353 1,739
---------- ----------- ---------- ---------- ------------
Total costs and operating expenses..... 381,755 267,538 216,995 162,203 119,390
---------- ----------- ---------- ---------- ------------
Income before income taxes................. 87,413 70,100 57,131 38,754 32,197
Income tax expense....................... 32,211 27,241 22,258 14,723 11,588
---------- ----------- ---------- ---------- ------------
Net income................................. $ 55,202 $ 42,859 $ 34,873 $ 24,031 $ 20,609
========== =========== ========== ========== ============
Net income per share of common stock:
Basic.................................... $ 1.46 $ 1.13 $ 0.90 $ 0.61 $ 0.59
Diluted.................................. $ 1.43 $ 1.12 $ 0.90 $ 0.61 $ 0.59
Shares used in computing net income per
share of common stock :
Basic.................................... 37,915,714 38,058,093 38,542,275 39,178,841 35,091,944
Diluted................................... 38,558,418 38,181,791 38,648,147 39,187,556 35,091,944
Operating Data:
Number of resorts (at end of period)....... 48 41 31 24 22
Number of units (at end of period)......... 2,789 2,093 1,635 1,272 928
Number of vacation credits sold (in
thousands)............................... 284,386 215,115 165,829 131,058 99,911
Average price per vacation credit sold..... $ 1.38 $ 1.36 $ 1.34 $ 1.28 $ 1.27
Average cost per vacation credit sold...... $ 0.37 $ 0.35 $ 0.37 $ 0.37 $ 0.35
Number of owners (at end of period)........ 149,648 112,384 87,432 67,982 51,778
Average purchase price for new owners...... $ 9,172 $ 9,193 $ 8,855 $ 8,477 $ 8,507
Balance Sheet Data:
Cash, including restricted cash............ $ 9,659 $ 7,605 $ 4,747 $ 2,360 $ 1,289
Total assets (1)........................... 427,029 320,159 192,752 187,248 142,993
Indebtedness to Parent and Affiliate ...... 24,951 18,150 -- 5,688 1,947
Other indebtedness......................... 85,934 60,137 3,900 30,000 --
Shareholders' equity....................... 265,511 207,443 173,715 141,262 122,125
</Table>
(1) Certain reclassifications have been made to conform to the 2001
presentation.
15
Selected Quarterly Financial Data (1)
<Table>
<Caption>
2001 quarters ended
March 31 June 30 September 30 December 31
------------- -------------- ------------- --------------
Total revenues................... $ 104,962 $ 124,894 $ 129,087 $ 110,225
Total costs and operating 85,788 102,161 103,528 90,278
expenses.........................
Net income....................... 11,780 14,041 15,799 13,582
Net income per common share:
Basic........................ $ 0.31 $ 0.37 $ 0.42 $ 0.36
Diluted...................... $ 0.31 $ 0.36 $ 0.41 $ 0.35
2000 quarters ended
March 31 June 30 September 30 December 31
------------- -------------- ------------- --------------
Total revenues................... $ 73,194 $ 82,048 $ 94,877 $ 87,519
Total costs and operating 57,144 63,907 76,027 70,460
expenses.........................
Net income....................... 9,670 10,952 11,550 10,687
Net income per common share:
Basic........................ $ 0.25 $ 0.29 $ 0.31 $ 0.28
Diluted...................... $ 0.25 $ 0.29 $ 0.30 $ 0.28
</Table>
(1) Certain reclassifications have been made to the selected quarterly
financial data above to conform to the annual presentation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements below and other statements herein contain forward looking
information which include future financing transactions, acquisition of
properties, and our future prospects and other forecasts and statements of
expectations. Actual results may differ materially from those expressed in any
forward-looking statements made by us, due to, among other things, our 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.
Overview
We market, sell, and finance timeshare ownership interests in the form of
vacation credits and fractional interests and acquire, develop, and manage
resorts. We derive revenue primarily from the sale of vacation credits and
fractional interests, from the financing of vacation credits and fractional
interests, and from management fees generated from our management agreements
with the Clubs.
Sales of vacation credits, fractional interests, and additional vacation credits
to current owners (upgrade sales) are recognized on the accrual basis after we
have received an executed sales contract and a minimum 10% cash down payment,
and the rescission period (generally three to fifteen days) has passed. In
instances where we finance an upgrade sale and the customer does not make an
additional cash down payment of at least 10% of the upgrade sale, we use the
installment method to recognize revenue. Under the installment method, gross
profit on such upgrade sale is deferred and thereafter recognized in proportion
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. In 2001, 77.5% of Upgrade Sales had the additional
10% cash down payment, as compared to 76.1% in 2000.
We acquire or develop additional resort units and contribute those units to the
Clubs, free of monetary encumbrances, thereby creating additional vacation
credits for sale. We also acquire or develop resort units for fractional
interest sales. Fractional interests represent deeded fixed intervals in
condominium units which we sell directly and are not contributed to the Clubs.
We assign each new resort unit a specific number of vacation credits based on
its vacation use value relative to existing resort units. Acquisition and
construction costs associated with the resort units are recorded as construction
in process inventory until their transfer to the Clubs, when they are recorded
as vacation credit inventory. Vacation credit and fractional interest cost of
sales are recorded as sales are recognized.
We provide financing at fixed interest rates from 11.9% to 14.9% per annum for
terms of up to seven years for vacation credits and up to ten years for
fractional interest sales. We routinely sell notes receivable to financial
institutions and other investors through securitization transactions to generate
liquidity to acquire or develop new resort units and for working capital. We
recognize 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 securitized) over the allocated carrying value of the
16
notes receivable securitized. Residual interest in securitizations, net
represents the overcollateralized component of notes receivable securitized
reduced by an allowance for doubtful accounts and deferred gross profit related
to the notes receivable securitized plus the fair value of the interest rate
differential of the notes receivable securitized. Changes in the fair value of
the interest rate differential are included in finance income.
We are currently working through the final entitlement process on the
MountainStar project and are capitalizing all direct costs and interest incurred
relating to the development. We do not anticipate generating revenue from the
project during 2002.
Critical Accounting Policies and Significant Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts and the residual interest in notes receivable securitized.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. The results form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Our critical accounting policies and the related significant estimates are as
follows:
Revenue Recognition
(i) Vacation Credits
Substantially all vacation credits we sell 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. Vacation credit sales are included in revenues when we have
received an executed sales contract, at least a 10% down payment requirement has
been met and any rescission period has expired. Upgrade sales are subject to the
same rescission period as vacation credit sales.
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.
We also finance sales of upgrades which often result in the cancellation of an
existing note receivable and the issuance of a new note for a term of up to
seven years and secured by an interest in all vacation credits owned. No
additional down payment is required 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 payments on the existing note receivable. Because the resulting
note receivable is secured by an interest in all vacation credits owned, when we
finance an upgrade sale and the customer does not make an additional down
payment of at least 10% of the upgrade sale amount, we use 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 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) Fractional Interests
Fractional interest sales are included in revenues when we have received an
executed sales contract, at least a 10% down payment requirement has been met,
and any rescission period has expired.
17
Fractional interest marketing and overhead costs are expensed as incurred.
Fractional interest cost of sales and direct selling expenses related to a
fractional interest sale are recorded at the time the sale is recognized.
Fractional interest costs include the cost of land, improvements to the
property, including costs of amenities constructed and other direct acquisition
costs. Direct selling expenses are recorded as sales and marketing expenses.
(iii) Sales of Notes Receivable
Periodically, we sell our notes receivable through securitization transactions
which we account for according to the provisions of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
When we sell notes receivable through securitization transactions, we use
special purpose finance companies and retain interest rate differentials, a
subordinated principal tranche, servicing rights (and obligations), and in some
cases a cash reserve account, all of which are residual interests in the
securitized receivables. Gain or loss on sale of the receivables depends in part
on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the residual interests based on
their relative fair values at the date of transfer. To obtain fair values,
quoted market prices are used if available. However, quotes are generally not
available for retained interests, so we estimate fair value based on the present
value of future expected cash flows estimated using management's best estimates
of the key assumptions--credit losses, prepayment speeds and discount rates
commensurate with the risks involved.
While we believe that our estimates reflect our best judgements for these key
assumptions, small changes in these estimates can significantly effect the
initial measurement of these transactions and the subsequent measurement of the
asset carrying values. We base our judgements on numerous factors, including our
own historical experience, recent trends, and available market information. Note
4 to our consolidated financial statements presents the sensitivity of our
determination of the fair value of the future cash flows resulting from the
interest rate differential to small changes in our key assumptions. For example,
a 10% adverse change in any of our three key assumptions would reduce the fair
value by $1.1 to $1.7 million. A 20% adverse change would reduce the fair value
by $2.2 to $3.4 million.
We provide for estimated credit losses related to uncollectible notes receivable
securitized through our allowance for doubtful accounts. Our loss exposure for
notes receivable securitized is limited to the residual interests in notes
receivable securitized. Although we are not required to do so, our historical
practice has been to repurchase defaulted securitized notes receivable up to
certain limits, generally 10% to 17% of the face amount of the original balance
of notes receivable securitized.
Gains on sales of notes receivable primarily represent, net of transaction
costs, the present value of the estimated cash flow differential between
contractual interest rates charged to borrowers on notes receivable securitized
and the interest rates to be received by the purchasers of such notes
receivable, after considering the effects of estimated prepayments and the fair
value of servicing costs. We recognize such gains on sales of notes receivable
on the settlement date. Gains on the sale of notes receivable are determined
based on the relative fair market value of the components of notes receivable
portions sold and retained.
Income from the interest rate differential retained is subsequently recorded in
finance income using the interest method. In addition, finance income includes
interest income on notes receivable and the overcollateralized component of
notes receivable securitized. The residual interest in notes receivable
securitized arising from the interest rate differential 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 with
changes in the market value recognized as finance income.
The interest rate differential component of our residual interest in securitized
notes receivable is subject to significant prepayment risk. To the extent that
notes receivable pay off prior to their contractual maturity at a rate more
rapid than we have estimated, the fair market value of our residual interests
will be reduced. While our experience through December 31, 2001 with historical
prepayment speeds has been slightly higher than in prior years, there is a
reasonable possibility that such rates may increase in the near term if the U.S.
economy is perceived by our customers to be improving at the same time as
interest rates remain at historically low levels and our customers refinance
their indebtedness to us with funds from third party lenders. Conversely, if the
U.S. economy is perceived as not improving, our customers may be unwilling or
less able to refinance their obligations to us in order to reduce their interest
costs, resulting in slower prepayment rates than we have estimated. Recent
economic forecasts suggest a greater likelihood of
18
increased prepayment rates than those evidenced at December 31, 2001. Further,
trends in our portfolio during January and February 2002 indicate increased
prepayment rates over historical amounts.
Allowance for Doubtful Accounts
Our allowance for doubtful accounts is one of our most significant estimates. We
estimate our allowance for doubtful accounts by analysis of bad debts by each
sales site by year of notes receivable origination and our estimate is net of
anticipated cost recoveries of the underlying vacation credits and fractional
interests. We use this historical analysis in conjunction with other factors
such as local economic conditions and industry trends. We also utilize
experience factors of more mature sales sites in establishing the allowance for
bad debts at new sales offices. Management believes that all such allowances are
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 amounts
recorded.
We charge 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.
Fractional interests recovered are recorded at historical cost at the time of
the recovery. All collection costs are expensed as incurred.
Results of Operations
Comparison of the year ended December 31, 2001, to the year ended December 31,
2000
We achieved total revenues of $469.2 million for the year ended December 31,
2001, compared to $337.6 million for the year ended December 31, 2000, an
increase of 39.0%. The principal reason for the overall improvement was a 38.6%
increase in vacation credit and fractional interest sales to $406.1 million for
the year ended December 31, 2001, from $293.1 million for the year ended
December 31, 2000. Of the $406.1 million in sales, $13.8 million is related to
fractional interest sales recognized during 2001. No fractional interest sales
were recognized in 2000. The increase in vacation credit sales was primarily the
result of a 20.5% increase in vacation credits sold in the United States to
252.3 million for the year ended December 31, 2001, from 209.4 million for the
year ended December 31, 2000. In addition, vacation credits sold in the South
Pacific increased 463.2% to 32.1 million for the year ended December 31, 2001,
from 5.7 million for the year ended December 31, 2000. These increases were
largely attributable to continued improvement in existing sales offices,
improved performance in the new offices opened during 2001, and increased
upgrade sales. We opened the following sales offices during 2001:
Location Opened On/off site
---------------- --------------- -----------
Roslyn, WA January, 2001 Off-site
Steamboat, CO January, 2001 Off-site
Englewood, CO March, 2001 Off-site
Overland Park March, 2001 Off-site
Branson, MO March, 2001 On-site
Sydney 1, NSW* March, 2001 Off-site
Issaquah, WA April, 2001 Off-site
Bison Ranch, AZ May, 2001 On-site
Couer D'Alene, ID June, 2001 Off-site
Sydney 2, NSW* June, 2001 Off-site
Broomfield, CO August, 2001 Off-site
Seaside, OR September, 2001 Off-site
*Trendwest South Pacific sales offices
Revenues from upgrade sales increased 34.3% to $57.6 million for the year ended
December 31, 2001, from $42.9 million for the year ended December 31, 2000. The
increase in upgrade sales reflects the Club owners' continuing satisfaction and
the ongoing growth in the owner base.
In the United States, the average price per vacation credit sold increased to
$1.44 per credit for the year ended December 31, 2001, up from $1.36 per credit
for the year ended December 31, 2000, reflecting the increase in the selling
price of vacation credits for new sales effective May 1, 2001. The average price
per vacation credit sold in the South Pacific increased to AUD $1.83 per credit
for the year ended December 31, 2001, up from AUD $1.65 per credit for the year
ended December 31, 2000 reflecting two increases in the selling price of
vacation credits for new sales effective April 1, 2001 and September 1, 2001.
19
For the year ended December 31, 2001, financing activities (finance income and
gains on sale of notes receivable) generated $50.9 million in revenues, compared
to $34.5 million for the year ended December 31, 2000, a 47.5% increase. This
growth is largely attributable to increased gains on sales of notes receivable
due to greater sales of notes receivable. In addition, interest rates fell
during the year, increasing the net interest spread and thus increasing finance
income and gains recognized.
For the year ended December 31, 2001, resort management services contributed
$4.6 million to total revenues, down from the same period last year of $4.8
million as higher utility costs at western resorts and higher labor costs
negatively affected the Clubs' profits on which the management fee is based.
For the year ended December 31, 2001, other income increased 41.5% to $7.5
million compared to $5.3 million for the year ended December 31, 2000. This
increase is due to additional servicing fee income from securitized notes
receivable resulting from the securitizations that occurred during 2001 and at
the end of 2000.
Vacation credit and fractional interest cost of sales, as a percentage of
vacation credit and fractional interest sales, was 27.6% for the year ended
December 31, 2001, compared to 25.5% for the year ended December 31, 2000. This
increase is a result of the higher cost of sales percentage for fractional
interests sold during 2001, as well as the lower cost of the units at Fiji and
at Rancho Vistoso in Arizona contributed to the Clubs during the first quarter
of 2000, both of which had product costs lower than our historical average.
Sales and marketing costs as a percentage of vacation credit and fractional
interest sales were 47.6% for the year ended December 31, 2001, as compared to
47.0% for the year ended December 31, 2000. This increase is was due to higher
tour costs and lower closing percentages.
General and administrative expenses increased 37.2% to $43.5 million for the
year ended December 31, 2001, from $31.7 million for the year ended December 31,
2000. As a percentage of total revenues, general and administrative expenses
were 9.3% for the year ended December 31, 2001, comparable to 9.4% for the year
ended December 31, 2000. Provision for doubtful accounts, as a percentage of
vacation credit and fractional interest sales, was 7.5% for the year ended
December 31, 2001 versus 7.2% for the comparable period last year. This increase
was the result of a higher mix of sales in newer sales offices with expected
default rates higher than our average historical experience.
We maintain an allowance for doubtful accounts on all notes receivable. The
aggregate amount of these allowances, excluding sales reversals, at December 31,
2001 and 2000, were $51.9 million and $38.9 million, respectively, representing
approximately 7.8% and 7.7%, respectively, of the total portfolio of notes
receivable outstanding at those dates. No assurance can be given that these
allowances will be adequate, and if the amount of the notes receivable that are
ultimately written off materially exceed the related allowances, our business,
results of operations and financial condition could be materially adversely
affected.
We estimate our allowance for doubtful accounts by analysis of bad debts by each
sales site by year of note receivable origination. We use this historical
analysis, in conjunction with other factors such as local economic conditions
and industry trends in estimating the allowance for doubtful accounts. We also
utilize experience factors of more mature sales sites in establishing the
allowance for bad debts at new sales offices. We generally charge off all
receivables when they become 180 days past due and return the credits associated
with such charge-offs to inventory. At December 31, 2001 and 2000, 2.42% and
2.29% of the total receivables portfolio outstanding of $665.9 million and
$502.8 million, respectively, were more than 60 days past due.
Our effective tax rate decreased from 38.9% to 36.8% due to Australia reducing
its statutory tax rate from 34% to 30% and Trendwest South Pacific's taxable
income making up a greater percentage of consolidated taxable income in 2001. In
addition, we implemented state tax planning to reduce our effective state tax
rate.
Comparison of the year ended December 31, 2000, to the year ended December 31,
1999
For the year ended December 31, 2000, we achieved total revenues of $337.6
million compared to $274.1 million for the year ended December 31, 1999, an
increase of 23.2%. The principal reasons for the overall improvement was
vacation credit and fractional interest sales increasing 25.1% to $293.1 million
for the year ended December 31, 2000, from $234.3 million for the year ended
December 31, 1999, and additional gains on sales of notes receivable. Total
revenue in 2000 and 1999 included fractional interest sales of $0 and $13.3
million, respectively. The increase in
20
vacation credit sales was primarily the result of an increase in vacation
credits sold to 215.1 million for the year ended December 31, 2000, from 165.8
million for the year ended December 31, 1999, a 29.7% increase. The increase in
vacation credits sold was largely attributable to the maturation of four sales
offices opened in 1999, the opening of eleven new sales offices during 2000,
continued strong improvement at more mature sales offices, and considerably
increased Upgrade sales.
The following table summarizes the sales offices opened during 2000:
Location Opened On/off site
Oceanside, CA January, 2000 Off-site
Pinetop, AZ February, 2000 On-site
Fiji* March, 2000 On-site
Novato, CA May, 2000 Off-site
Las Vegas, NV May, 2000 Off-site
St. Louis, MO May, 2000 Off-site
St. George, UT June, 2000 On-site
Brisbane 1, QLD* June, 2000 Off-site
Brisbane 2, QLD* October, 2000 Off-site
Reno, NV November, 2000 On-site
Fairbanks, AK December, 2000 Off-site
*Trendwest South Pacific sales offices
Revenues from upgrade sales increased 41.6% to $42.9 million for the year ended
December 31, 2000, from $30.3 million for the year ended December 31, 1999. We
believe this increase was due to the continued growth of resorts, the owners'
continued satisfaction with the WorldMark product, and effective sales efforts.
The average price per vacation credit sold increased to $1.36 for the year ended
December 31, 2000, from $1.34 for the year ended December 31, 1999, reflecting
the increase in the selling price of vacation credits for new sales effective
July 1, 2000, and in the selling price of upgrade vacation credits effective
September 1, 2000.
For the year ended December 31, 2000, financing activities (finance income and
gains on sale of notes receivable) generated $34.5 million in revenues, compared
to $31.5 million for the year ended December 31, 2000, a 9.5% increase. This is
primarily due to increased gains on sales of notes receivable as a result of
increased sales of notes receivable.
Vacation credit and fractional interest cost of sales increased to $74.7 million
for the year ended December 31, 2000, from $68.6 million for the year ended
December 31, 1999, an increase of 8.9%. As a percentage of Vacation Credit and
Fractional Interest sales, Vacation Credit and Fractional Interest cost of sales
decreased to 25.5% for the year ended December 31, 2000, from 29.3% for the year
ended December 31, 1999. This decrease is due to the higher product cost of the
Fractional interest sales recognized in 1999, as well as below-average product
cost for the Fiji and Vistoso projects completed in 2000.
Sales and marketing costs increased 31.2% to $137.8 million for the year ended
December 31, 2000, from $105.0 million for the year ended December 31, 1999. As
a percentage of Vacation Credit and Fractional Interest sales, sales and
marketing costs increased to 47.0% for the year ended December 31, 2000 from
44.8% for the year ended December 31, 1999. This increase is attributable to two
factors. First, the Fractional Interest sales in 1999 had lower sales and
marketing costs which are offset by higher product cost. Second, the start-up
costs for the eleven sales offices opened in 2000 were all absorbed during the
year, and these sales offices have a lower closing rate during their start-up
phase than our seasoned offices, which increases marketing costs as a percentage
of sales.
General and administrative expenses increased 25.8% to $31.7 million for the
year ended December 31, 2000, from $25.2 million for the year ended December 31,
1999. As a percentage of total revenues, general and administrative expenses
increased to 9.4% for the year ended December 31, 2000, from 9.2% for the year
ended December 31, 1999. This increase is the result of increases in the
infrastructure, both at the Corporate and Regional levels, to support the
continued growth of the company and fully expensing start-up costs for the new
regions and sales offices opened during the year.
Provision for doubtful accounts increased 31.1% to $21.1 million for the year
ended December 31, 2000, from $16.1 million for the year ended December 31,
1999. As a percentage of vacation credit and fractional interest sales, the
21
provision increased to 7.2% versus 6.9% in 1999. This increase was the result of
a higher mix of sales in newer sales offices with expected default rates higher
than our historical experience.
LIQUIDITY AND CAPITAL RESOURCES
We generate cash principally from down payments on sales of vacation ownership
interests which are financed, cash sales of vacation ownership interests,
principal and interest payments on notes receivable including notes receivable
securitized, and proceeds from sales of notes receivable and other borrowings.
During the year ended December 31, 2001, net cash used in operating activities
was $11.6 million. Cash flows from operating activities resulted primarily from
the sale and repayment of notes receivable of $328.2 million and net income of
$55.2 million. Cash used in operating activities was principally due to issuance
of notes receivable of $345.7 million to finance the purchase of vacation
credits and fractional interests, purchases of notes receivable of $47.3
million, the continuing development of the MountainStar development of $13.8
million, and an increase in inventory of $30.0 million due to additional
construction in progress to meet increasing sales demand.
During the year ended December 31, 2001, net cash used in investing activities
was $17.9 million. Cash used in investing activities was for purchases of
furniture, fixtures and data equipment to support our expansion and growth.
During the year ended December 31, 2001, net cash provided by financing
activities was $29.9 million. Cash provided by financing activities was
principally the result of increased borrowings under our bank line of credit and
other of $25.2 million, a $6.6 million increase in due to Parent and Affiliate,
and issuance of common stock of $5.0 million. Cash used in financing activities
was principally for repayments of note payable to Parent of $4.4 million and
$2.4 million to repurchase common stock.
We are developing a resort in central Washington state known as MountainStar.
Prior to June 2000, our Parent, JELD-WEN, inc. owned the land and we were acting
as the developer. In June of 2000, we acquired the MountainStar development from
our Parent. The purchase price was $47.6 million, consisting of $25.0 million in
cash, a $17.7 million unsecured note payable to Parent and the settlement of a
$4.9 million intercompany receivable from Parent. The excess of the purchase
price over Parent's historical cost was treated as a non-cash reduction to
retained earnings due to the accounting requirement to use historical cost on
such a transfer from a controlling shareholder. We recorded the asset at
Parent's historical cost of $44.3 million; the excess $3.3 million of the
purchase price over this amount reduced retained earnings. The cash payment was
funded primarily through our existing credit facilities. We do not anticipate
generating revenue from the project during 2002.
On September 28, 2001, we entered into an agreement with Eagle Crest, Inc.
(Eagle Crest) and Running Y Resort, Inc. (Running Y) (collectively Affiliate),
wholly-owned subsidiaries of Parent, to acquire $12.1 million of notes
receivable at Affiliate's historical cost of face value plus accrued interest in
exchange for a cash payment of $8.6 million and a $3.5 million promissory note.
The promissory note is non-interest bearing, payable in equal monthly
installments, and is due in full on the earlier of September 28, 2002 or the
closing date of our next securitization transaction following the acquisition
date. Under the agreement, any remaining principal balance on notes receivable
acquired from Affiliate which default, reduce the outstanding amount owed under
the promissory note. In addition, we acquired land from Affiliate for future
development in McCall, Idaho, in exchange for a non-interest bearing promissory
note of $1.3 million. This note matures on the earlier of September 28, 2003, or
commencement of construction on the property. At December 31, 2001, the total
amount due to Affiliate was $4.5 million
Based on our current sales projections for 2002, we anticipate spending $158
million for inventory during 2002. We plan to fund these expenditures with cash
generated from operations, borrowings on the bank line of credit and further
sales and securitizations of notes receivable. The amount of capital
expenditures with respect to the MountainStar development will depend on the
timing of approval of our water rights transfers and final resolution of
litigation regarding our entitlements. We anticipate that we will fund the
MountainStar development through a traditional bank loan. The acquisition of new
resort sites and properties is an ongoing process and availability of certain
properties in desired locations could result in increased expenditures for such
activities. We believe that, with respect to our current operations, cash
generated from operations, future borrowings and sales of notes receivable, will
be sufficient to meet our working capital and capital expenditure needs through
the end of 2002. If these are not sufficient, we have the ability to adjust our
spending on inventory.
22
Our plan for meeting our liquidity needs may be affected by, but not limited to,
the following: demand for our product, our ability to securitize our notes
receivable, our ability to secure borrowings under our current borrowing
arrangements and capacities, an increase in prepayment speeds and default rates
on our notes receivable, and limitations on our ability to conduct telemarketing
activities.
Our principal method of funding our cash requirements is borrowing against and
selling the notes receivable originating from the sale of vacation credits.
Historically, we have been able to securitize our notes receivable at terms
favorable to us and anticipate that in the future we will be able to continue to
do so. Our most recent securitization was completed in August 2001, with
favorable terms. If we are unable to borrow against or to sell our notes
receivable in the future, particularly if we suffer any significant decline in
the credit quality of our notes receivable or if the market for our notes
receivable declines, our ability to acquire additional resort units will be
adversely affected and our profitability from sales of vacation credits may be
reduced or eliminated. Similarly, if we are unable to secure borrowings under
our current borrowing arrangements and capacities, or if we are unable to obtain
sufficient alternative financing, such as debt or equity financing, our ability
to meet our cash flow needs would be negatively impacted.
Recent economic forecasts suggest a greater likelihood of increased prepayment
rates than those evidenced at December 31, 2001. Further, trends in our
portfolio during January and February 2002 indicate increased prepayment rates
over historical amounts. To the extent that notes receivable pay off prior to
their contractual maturity at a rate more rapid than we have estimated, the fair
value of our residual interests will be reduced and cash flows would be
negatively impacted.
At December 31, 2001, there were 101.7 million vacation credits available for
sale. With the completion of current projects in progress, the acquisition of
new resorts, and the expansion of existing resorts, we believe we will have an
adequate supply of credits available to meet our planned growth through the
early part of the year 2003.
Since completed units at various resort properties are acquired or developed in
advance and we finance a significant portion of the purchase price of vacation
credits, we continually need funds to acquire and develop property, to carry
notes receivable contracts, and to provide working capital. We have historically
secured additional funds through the sale of notes receivable, borrowings on a
revolving line of credit, and loans from our parent, JELD-WEN, inc.
Corporate Finance
Overview
Since we generally finance a large percentage of the aggregate purchase price of
the vacation credits we sell, we do not generate sufficient cash from sales to
provide the necessary capital to pay the costs of developing additional resorts
and to replenish working capital. We finance our business principally from the
sale of notes receivable and borrowings under our bank line of credit. Notes
receivable are sold to our short-term warehouse facility monthly. These sales
occur at variable interest rates. The warehouse facility is used to accumulate
an efficient size of contracts (generally $125 million to $175 million) for a
private placement. Once an adequate size is reached, a private placement of the
notes receivable previously sold is undertaken through the use of qualifying
special purpose finance companies. The proceeds from the private placements are
used to pay down the warehouse facility and fix interest rates at the time of
the placement so that the Company is match funded on that portion of the notes
receivable portfolio. We use our revolving line of credit to fill in cash needs
between sales of notes receivable to the warehouse facility.
Notes Receivable Securitizations
We account for the sale of our notes receivable to our warehouse facility and
through private placements ("securitization transactions") in accordance with
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, as the transfer of our notes receivable
represents, amongst other things, a surrender of control over those receivables,
which includes meeting the definition of a "true sale" under the Bankruptcy
Code, II U.S.C.
We use special purpose finance companies for our securitization transactions.
The cash proceeds received in the securitizations are less than the full face
amount of the notes receivable transferred to the special purpose finance
companies as a result of deal specific over collateralization requirements. The
difference continues to be recorded as an asset on our balance sheet included in
residual interest in securitizations. The residual interest in securitizations
23
primarily represents the excess of the principal balances of notes receivable
sold to the finance subsidiaries over the principal balances of the notes issued
to institutional investors (over collateralization) and the "strip" which is the
interest differential of discounted cash flows resulting from interest receipts
on notes receivable sold and interest payments on notes issued to institutional
investors and servicing payments, net of allowances for credit losses. Our
residual interests in securitizations are subordinated to the payment
requirements of the holders of the securitized interests under certain
conditions. In calculating the gain on sale of receivables sold, the components
comprising the total pool of receivables are measured at fair value in order to
allocate the carrying value of the receivables sold against the proceeds from
the sale.
Gains on sales of notes receivable primarily represent the present value of the
estimated cash flow differential between contractual interest rates charged to
borrowers on notes receivable securitized and the interest rates to be received
by the purchasers of such notes receivable, after considering the effects of
estimated prepayments and the fair value servicing costs, net of transaction
costs. We recognize such gains on sales of notes receivable on the settlement
date. Gains on the sale of Notes Receivable are determined based on the relative
fair market value of the components of notes receivable portions sold and
retained.
Management reviews on a quarterly basis the underlying assumptions used to
determine the fair value of the residual interest and adjusts the carrying value
based on actual experience and trends in the industry. To determine the fair
value of the interest rate differential component of our residual interests, we
estimate the fair value based on the present value of future expected cash flows
using the following assumptions at the dates of the securitizations:
<Table>
<Caption>
2001 2000
------------------ -----------------
Weighted-average annual prepayment speed and expected
annual gross defaults 10.00% 9.00%
Weighted-average life (in years) 2.24 2.35
Residual cash flows discounted at 13.50% 12.25%
Weighted-average interest rate on warehouse facility 6.16% 7.95%
</Table>
During the third quarter of 2001, after performing a normal, timely review of
our key assumptions, we increased the weighted annual prepayment speed and
default estimate to 10.6%, up from 9%, resulting in lower residual interest
valuations. The increase in the weighted annual prepayment speed and default
assumption did not significantly impact our results of operations.
In each transaction, we retain servicing responsibilities, interest rate
differentials and subordinated interests. We receive annual servicing fees of
between 1.0% and 1.75% of the outstanding balance of the notes receivable
securitized and rights to future cash flows arising after the investors in the
securitization trusts have received the return for which they contracted. The
investors and the securitization trusts have no recourse to our other assets for
failure of debtors to pay when due. Our retained interests are subordinate to
investors' interests.
We provide for estimated credit losses related to uncollectible notes receivable
securitized through our allowance for doubtful accounts. Our loss exposure for
notes receivable securitized is limited to the residual interests in notes
receivable securitized. Although we are not required to do so, our historical
practice has been to repurchase defaulted securitized notes receivable up to
certain limits, generally 10% to 17% of the face amount of the original balance
of notes receivable securitized.
The following table sets forth the cash flows relating to our securitizations
for the periods indicated:
<Table>
<Caption>
2001 2000
------------ -------------
Proceeds to us from:
New securitizations $ 215,045 $ 174,500
Reinvested collections $ 40,094 $ 37,267
Purchases of defaulted notes receivable $ (21,058) $ (17,420)
Cash received from residual interests $ 57,207 $ 52,212
Servicing fees received $ 6,230 $ 3,505
</Table>
24
The Financial Accounting Standards Board (FASB) and other accounting regulatory
bodies are currently discussing potential new accounting standards for
off-balance sheet arrangements. Although it is considered likely that these new
standards will affect us, management is unable to determine the potential impact
on our financial position and results of operations given the preliminary nature
of the discussions.
(i) Warehouse Facility
TW Holdings III, Inc. (TW III), a wholly-owned special purpose finance Company,
was formed in January 2000. We have a 364-day, $175 million receivables
warehouse facility funded by a commercial paper conduit. At December 31, 2001,
the amount of receivables outstanding and transferred through TW III were $83.6
million. TW III's credit agreement is subject to annual renewals with the
present commitment expiring on September 26, 2002. In the event of non-renewal
of the commitment, we would not be able to sell additional notes receivable to
TW III.
(ii) Private Placements
In 1996, we 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
(primarily representing the excess of notes receivable interest collections over
contractual servicing payments and interest disbursements to institutional
investors) of the LLC. The LLC issued $70.0 million of senior notes, series
1996-1 to private institutional investors. The notes were rated `A' by Fitch
IBCA, Inc., and were issued at a fixed rate of 7.42%.
In March 1998, we formed a wholly-owned special purpose company, Trendwest
Funding II, Inc. (TRI Funding II). At the same time, we sold certain notes
receivable to TRI Funding II for cash, a subordinated note payable from TRI
Funding II, and a residual interest in the excess cash flows (primarily
representing the excess of notes receivable interest collections over
contractual servicing payments and interest disbursements to institutional
investors) of TRI Funding II. TRI Funding II 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 and the 1998-1, Class B notes were
issued for $5.4 million. The Class A notes and Class B notes were rated `A" and
`BBB' by Fitch IBCA, Inc., and were issued at fixed rates of 6.88% and 7.98%,
respectively.
In August 1999, we formed TRI Funding III, Inc. (TRI Funding III), a special
purpose finance company. At the same time, we sold certain notes receivable to
TRI Funding III, for cash, a subordinated note payable from TRI Funding III and
a residual interest in the excess cash flows (primarily representing the excess
of notes receivable interest collections over contractual servicing payments and
interest disbursements to institutional investors) of TRI Funding III. TRI
Funding III issued six classes of fixed-rate notes for a ten-year term purchased
by institutional investors. Duff & Phelps Credit Rating Agency and Fitch IBCA,
Inc. rated the Class A, B, and C Notes, with Fitch IBCA rating the Class D
Notes. The notes consisted of three time-tranched Class A Notes, $104.4 million
rated "AAA", Class B Notes, $18.2 million rated "AA", Class C Notes, $19.9
million rated "A", and Class D Notes, $17.4 million rated "BBB". The notes were
issued at a weighted average interest rate of 7.49%.
In November 2000, we formed TRI Funding IV, Inc. (TRI Funding IV), a special
purpose finance company. At the same time, we sold certain notes receivable to
TRI Funding IV for cash, a subordinated note payable from TRI Funding IV, and a
residual interest in the excess cash flows (primarily representing the excess of
notes receivable interest collections over contractual servicing payments and
interest disbursements to institutional investors) of TRI Funding IV. TRI
Funding IV issued four classes of fixed-rate notes for a ten-year term purchased
by institutional investors. Moody's Investor Service, Inc. and Fitch, Inc. rated
the Class A, B, and C Notes. The notes consisted of two time-tranched Class A
Notes, $98.5 million rated "Aaa" by Moody's and "AAA" by Fitch, Class B Notes,
$39.4 million rated "A2" by Moody's and "AA-" by Fitch, and Class C Notes, $25.1
million rated "Baa3" by Moody's and "BBB+" by Fitch. The notes were issued at a
weighted average interest rate of 7.76%.
In August 2001, we formed TRI Funding V, Inc. (TRI Funding V), a special purpose
finance company. At the same time, we sold certain notes receivable to TRI
Funding V for cash, a subordinated note payable from TRI Funding V, and a
residual interest in the excess cash flows (primarily representing the excess of
notes receivable interest collections over contractual servicing payments and
interest disbursements to institutional investors) of TRI Funding V. TRI Funding
V issued four classes of fixed-rate notes for a ten-year term purchased by
institutional investors. Moody's Investor Service, Inc. and Fitch, Inc. rated
the Class A, B, and C Notes. The notes consisted of two time-tranched Class A
Notes, $102.6 million rated "Aaa" by Moody's and "AAA" by Fitch, Class B Notes,
$37.8 million rated "A2" by
25
Moody's and "AA-" by Fitch, and Class C Notes, $23.4 million rated "Baa3" by
Moody's and "BBB+" by Fitch. The notes were issued at a weighted average
interest rate of 5.69%.
(iii) Revolving Credit Facilities and Other
We are party to a three-year $85 million revolving credit agreement (Agreement)
with a group of banks that allows for borrowings in Australian dollars up to a
maximum of $25 million US dollar equivalent. The Agreement provides for
borrowings at either a reference rate or at LIBOR rates plus the applicable
margin for the level of borrowings outstanding. The Agreement also requires a
quarterly commitment fee of 0.30% to 0.50% based on the usage level of the total
commitment. Available borrowings under the Agreement are subject to a borrowing
base which is a percentage of notes receivable and inventory, including property
under development, and are secured by a first mortgage on the MountainStar
property. The Agreement expires on August 14, 2003. Borrowings outstanding under
the agreement at December 31, 2001 and 2000, were $74.3 million at a weighted
average interest rate of 4.43% and $48.4 million at a weighted average interest
rate of 8.48%, respectively.
We have a $10 million open line of credit with our parent corporation, JELD-WEN,
inc., which bears interest at prime plus 1% (5.75% at December 31, 2001) per
annum and is payable on demand. As of December 31, 2001 and 2000, outstanding
borrowings under this agreement were $7.1 million and $0.4 million,
respectively. We periodically lend excess funds to the Parent at the prime rate
minus 2% (2.75% at December 31, 2001). There were no outstanding lendings under
this agreement at December 31, 2001 and 2000.
We have a ten-year mortgage payable secured by our corporate headquarters
building. The mortgage carries an interest rate of 8.29%, with monthly interest
and principal payments due. The outstanding balance at December 31, 2001 and
2000, was $11.6 million and $11.7 million, respectively.
In the future, we may negotiate additional credit facilities or issue corporate
debt or equity securities. Any debt incurred or issued may be secured or
unsecured, at a fixed or variable interest rate, and may be subject to such
additional terms as management deems appropriate.
Future payments due under debt and lease obligations as of December 31, 2001 (in
thousands):
<Table>
<Caption>
Payment Due by Period
------------------------------------------------------------------------------
Contractual Obligations Total 1 year 2 - 3 years 4 - 5 years After 5 years
------------- -------------- -------------- -------------- ----------------
Note payable to Parent.......... $ 13,298 $ 8,865 $ 4,433 $ -- $ --
Due to Parent and Affiliate..... $ 11,653 $ 10,360 $ 1,293 $ -- $ --
Mortgage payable................ $ 11,616 $ 80 $ 191 $ 228 $ 11,117
Noncancelable operating leases.. $ 30,507 $ 8,210 $ 14,018 $ 7,662 $ 617
</Table>
<Table>
<Caption>
Payment Due by Period
---------------------------------------------------------------------------------
Other Commitments Total 1 year 2 - 3 years 4 - 5 years After 5 years
------------- -------------- -------------- -------------- ----------------
Credit facility.................. $ 74,318 $ 74,318 $ -- $ -- $ --
Cancelable purchase commitments.. $ 136,305 $ 66,190 $ 70,115 $ -- $ --
</Table>
(iv) Derivatives
We utilize derivative financial instruments, which have historically included
foreign exchange contracts, forward interest rate swaps, and interest rate cap
agreements, to manage well-defined interest and foreign currency rate risks.
Derivative financial instruments are not used for trading or speculative
purposes. Counterparties to our derivative financial instruments are generally
major financial institutions. We manage the risk of counterparty default on our
derivative financial instruments through the use of credit standards,
counterparty diversification and monitoring of counterparty financial
conditions. We have not experienced any losses due to counterparty default.
During January 2001, we entered into two foreign exchange contracts to manage
our exposure to foreign exchange rate risk associated with the development of a
resort property in Canada. The foreign exchange purchase contracts had
26
notional amounts of $2.1 million CDN at a rate of $1.4955 CDN/US which was
settled on July 3, 2001 and $16.9 million CDN at a rate of $1.4905 CDN/US to be
settled on September 30, 2002 corresponding to the anticipated dates of payments
on the resort development. The foreign exchange contracts have been designated
as cash flow hedges and accordingly in 2001 we recognized $0.4 million of
unrealized losses, net of $0.3 million tax effect, in other comprehensive income
representing the change in the fair value of the effective portion of the hedge.
The related liability for the losses of $0.7 million is included in accrued
liabilities. Changes in the fair value of the ineffective portion of the hedge
were immaterial in 2001. The unrealized gains or losses resulting from the
foreign exchange contracts will be reclassified into earnings once the vacation
credits associated with the resort property under development are sold and the
related costs are recognized in earnings.
No derivative financial instruments were outstanding at December 31, 2000.
Recent Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations be accounted for
under a single method, the purchase method. Use of the pooling-of-interests
method is no longer permitted. SFAS No. 141 requires that the purchase method be
used for business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The amortization of goodwill ceases upon adoption of
SFAS No. 142, which will be adopted by the Company on January 1, 2002. The
adoption of these statements are not expected to have a material impact on our
financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is applicable for fiscal years beginning after June 15, 2002.
SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of a tangible long-lived asset. Since
the requirement is to recognize the obligation when incurred, approaches that
have been used in the past to accrue the asset retirement obligation over the
life of the asset are no longer acceptable. Statement No. 143 also requires the
enterprise to record the contra to the initial obligation as an increase to the
carrying amount of the related long-lived asset (i.e., the associated asset
retirement costs) and to depreciate that cost over the remaining useful life of
the asset. The liability is changed at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. The provisions of SFAS
No. 143 are not expected to have a material impact on our financial position or
operating results.
In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is applicable for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and portions of APB Opinion 30, Reporting the Results of Operations. SFAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of SFAS No. 144 generally are required to be
applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential effect that the
adoption of SFAS No. 144 will have on the Company's financial statements.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to interest rate changes primarily as a result of its financing
of timeshare purchases, the sale and securitization of notes receivable, and
borrowings under revolving lines of credit. Our 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 our objectives, we
borrow funds or sell 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 our interest rate risk on a related
financial instrument.
The functional currency of our Australian operations is the Australian dollar.
The Australian operations are funded through the $85 million credit facility,
which has an Australian dollar sub-limit of up to $25 million U.S. dollar
27
equivalent. We are also subject to foreign currency exchange rate risk when
developing resort properties with costs denominated in a foreign currency. As we
continue expanding our operations worldwide, there will be additional exposure
to foreign currency exchange rate risk.
The tables below provide information as of December 31, 2001 and 2000, about our
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.
<Table>
By Expected Maturity
2001: Year ended December 31,
---------------------------------------------------
After Fair
2002 2003 2004 2005 2006 2006 Total Value
--------- --------- -------- ------- -------- -------- ------- --------
Cash:
Amounts maturing..................... $ 821 -- -- -- -- -- 821 821
Weighted average interest rate....... -- -- -- -- -- -- -- --
Restricted cash:
Amounts maturing..................... $ 8,838 -- -- -- -- -- 8,838 8,838
Weighted average interest rate....... -- -- -- -- -- -- -- --
Notes receivable (1):
Amounts maturing..................... $ 6,125 6,639 7,117 7,750 8,565 18,129 54,325 54,325
Weighted average interest rate....... 13.56% 13.56% 13.56% 13.56% 13.56% 13.56% 13.56% 13.56%
Residual interest in securitizations,
net:
Fair value of interest rate
differential:
Fixed rate (2):
Amounts maturing................ $ 19,544 15,011 11,325 8,165 5,628 1,372 61,045 61,045
Weighted average interest rate.. 6.95% 6.95% 6.95% 6.95% 6.95% 6.95% 6.95% 6.95%
Variable rate (3):
Amounts maturing................ $ 3,567 3,010 2,487 1,941 1,363 823 13,191 13,191
Weighted average interest rate.. 5.95% 5.95% 5.95% 5.95% 5.95% 5.95% 5.95% 5.95%
Overcollateralized notes receivable
(1):
Amounts maturing.................. $ 4,124 4,473 4,736 4,869 4,636 5,681 28,519 28,519
Weighted average interest rate.... 14.08% 14.08% 14.08% 14.08% 14.08% 14.08% 14.08% 14.08%
Due to Parent and Affiliate:
Amounts maturing..................... $ 10,360 1,293 -- -- -- -- 11,653 11,653
Weighted average interest rate....... 3.52% 3.52% -- -- -- -- 3.52% 3.52%
Note payable to Parent
Amounts maturing..................... $ 8,865 4,433 -- -- -- -- 13,298 13,298
Weighted average interest rate....... 9.0% 9.0% -- -- -- -- 9.0% 9.0%
Mortgage payable
Amounts maturing..................... $ 80 93 98 109 119 11,117 11,616 11,616
Weighted average interest rate....... 8.29% 8.29% 8.29% 8.29% 8.29% 8.29% 8.29% 8.29%
Borrowings under bank line of credit:
Amount maturing...................... $ 74,318 -- -- -- -- -- 74,318 74,318
Weighted average interest rate....... 4.43% -- -- -- -- -- 4.43% 4.43%
__________________________________________________________________________________________________
</Table>
(1) Net of allowance for doubtful accounts, but prior to consideration of
deferred gross profit.
(2) Fixed interest rates represent the differential between the contract
interest rate on notes receivable securitized 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 securitized and the required yield.
28
<Table>
<Caption>
By Expected Maturity
2000: Year ended December 31,
---------------------------------------------------
After Fair
2002 2003 2004 2005 2006 2006 Total Value
--------- --------- -------- ------- -------- -------- ------- --------
Cash:
Amounts maturing..................... $ 404 -- -- -- -- -- 404 404
Weighted average interest rate....... -- -- -- -- -- -- -- --
Restricted cash:
Amounts maturing..................... $ 7,201 -- -- -- -- -- 7,201 7,201
Weighted average interest rate....... -- -- -- -- -- -- -- --
Notes receivable (1):
Amounts maturing..................... $ 3,644 4,148 4,477 4,740 5,029 10,943 32,981 32,981
Weighted average interest rate....... 14.01% 14.01% 14.01% 14.01% 14.01% 14.01% 14.01% 14.01%
Residual interest in securitizations, net:
Fair value of interest rate
differential:
Fixed rate (2):
Amounts maturing................ $ 12,603 11,670 8,942 6,269 3,634 2,140 45,258 45,258
Weighted average interest rate.. 6.54% 6.54% 6.54% 6.54% 6.54% 6.54% 6.54% 6.54%
Variable rate (3):
Amounts maturing................ $ 1,619 1,532 1,283 1,097 678 576 6,785 6,785
Weighted average interest rate.. 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%
Overcollateralized notes receivable (1):
Amounts maturing.................. $ 3,224 3,535 3,737 3,796 3,625 4,357 22,274 22,274
Weighted average interest rate.... 14.06% 14.06% 14.06% 14.06% 14.06% 14.06% 14.06% 14.06%
Due to Parent:
Amounts maturing..................... $ 419 -- -- -- -- -- 419 419
Weighted average interest rate....... 10.50% -- -- -- -- -- 10.50% 10.50%
Note payable to Parent
Amounts maturing..................... $ 4,433 8,865 4,433 -- -- -- 17,731 17,731
Weighted average interest rate....... 9.00% 9.00% 9.00% -- -- -- 9.00% 9.00%
Mortgage payable
Amounts maturing..................... $ 78 85 93 98 109 11,233 11,696 11,696
Weighted average interest rate....... 8.29% 8.29% 8.29% 8.29% 8.29% 8.29% 8.29% 8.29%
Borrowings under bank line of credit:
Amount maturing...................... $ 48,441 -- -- -- -- -- 48,441 48,441
Weighted average interest rate....... 8.48% -- -- -- -- -- 8.48% 8.48%
__________________________________________________________________________________________________
</Table>
(1) Net of allowance for doubtful accounts, but prior to consideration of
deferred gross profit.
(2) Fixed interest rates represent the differential between the contract
interest rate on notes receivable securitized 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 securitized and the required yield.
29
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
None
PART III
Item 10. Directors and Executive Officers of the Registrant
The following is a brief description of our directors and officers:
Directors
William F. Peare, age 64, has served as President, Chief Executive Officer, and
a director since 1989. Prior to founding Trendwest in 1989, Peare served as a
management consultant for Eagle Crest Resort in Redmond, Oregon ("Eagle Crest")
and for Elkhorn Resort in Sun Valley, Idaho. From 1985 to 1987, Peare was a
Senior Vice President at Horizon Airlines.
Jeffery P. Sites, age 45, has served as Executive Vice President, Chief
Operating Officer, Secretary and a director since 1989. Sites oversees
day-to-day operations of the Company. Sites served as Treasurer from 1989 to
1997. Prior to 1998, Sites served as director and Treasurer of WorldMark.
Jerol E. Andres, age 58, has served as a director of the Company since 1989.
Andres is Chief Executive Officer of Eagle Crest, Inc., having served as
President and CEO from 1988 through 2001. He also serves as director of Cascade
Bancorp, a publicly-traded bank company headquartered in Bend, Oregon.
Douglas P. Kintzinger, age 41, has served as a director of the Company since
1994 and currently is a member of the compensation committee. Kintzinger is
Senior Vice President, CFO, Director and Secretary of JELD-WEN, inc., where he
is responsible for all administrative functions, including accounting, finance,
information systems, benefits, legal, and risk management. Kintzinger is also an
officer/director of various JELD-WEN affiliates and subsidiaries, including
JELD-WEN HOLDINGS, inc., AmeriTitle, Inc. and Eagle Crest, Inc. Since 1990,
Kintzinger has also served as a director of South Valley State Bank and as a
Regent of Luther College.
Roderick C. Wendt, age 47, has served as a director of the Company since 1989.
Wendt is also President, CEO, and Corporate Director of JELD-WEN, inc. with
responsibility for the overall day-to-day operating activities of JELD-WEN. In
addition, Wendt also serves as an officer and/or director of various JELD-WEN
affiliates and subsidiaries, including Eagle Crest, Inc. Wendt sits on the Board
of South Valley State Bank, having served in this capacity since 1996 and from
1983 to 1995.
Harry L. Demorest, age 60, has served as a director of the Company since 1997
and currently is a member of the audit committee. Demorest is Chief Executive
Officer of Columbia Forest Products, Inc. having served in this capacity since
March 1996. Previously, he served as President from March 1994 to March 1996,
and as Executive Vice President from April 1992 to February 1994. Prior to his
employment by Columbia Forest Products, Inc., Demorest was a partner with Arthur
Andersen & Co., serving as Office Managing Partner for the Portland, Oregon
office from 1981 to 1991 and as Partner-in-Charge of the tax division of the
Portland office from 1979 to 1985.
Michael P. Hollern, age 63, has served as a director of the Company since 1997
and currently is a member of both the audit and compensation committees. Hollern
is Chairman and CEO of Brooks Resources Corporation, having served in this
capacity since 1999 and previously as President since 1983. Hollern also serves
on the boards of several corporate, civic and charitable organizations.
Linda M. Tubbs, age 54, has served as a director of the Company since 1997 and
currently is a member of both the compensation and audit committees, serving as
chairperson of the latter. Ms. Tubbs retired from Wells Fargo Bank as Executive
Vice President, having served as Division Manager for the Northwest Commercial
Banking Group in Oregon, Washington, Idaho and Utah since 1996. Prior to their
merger with Wells Fargo Bank, Ms. Tubbs was Senior Vice
30
President and Manager of First Interstate's Portland, Oregon, Commercial Banking
Administration. Ms. Tubbs also serves on the boards of several civic and
charitable organizations.
Executive Officers
Gene F. Hensley, age 49, is Executive Vice President, having served in this
capacity since 1998. Previously, Hensley served as Vice President of Operations
from 1995. Hensley's current responsibilities include oversight of domestic
sales, marketing, and WorldMark operations. Since 1996, Hensley has served as
President of WorldMark the Club. He also serves as a director of various
Trendwest subsidiaries.
Alan B. Schriber, age 50, is Executive Vice President, having served in this
capacity since January 1999. Previously Schriber served as Vice President -
Administration and Finance from 1994 to 1997. Schriber is responsible for
accounts receivable, data processing, contract processing, corporate
communications, and human resources functions for Trendwest.
Timothy P. O'Neil, age 39, is Executive Vice President, having served in this
capacity since January 2002 and Chief Financial Officer and Treasurer since
April 2000. Previously O'Neil served as Vice President - Finance from February
1999 to April 2000. Prior to joining Trendwest, O'Neil was Vice President - Loan
Sales & Syndications at Bank One Capital Markets.
Item 11. Executive Compensation
SUMMARY COMPENSATION TABLE
The following table and related notes set forth all compensation received for
the three fiscal years ended December 31, 2001 by the Company's Chief Executive
Officer ("CEO") and the four most highly paid executive officers (other than the
CEO) who were serving as executive officers at the end of 2001 (collectively,
together with the CEO, the "Named Executive Officers").
<Table>
<Caption>
Long-Term
Compensation
---------------------
Other Annual Securities
Compensation ($) Underlying
Name and Principal Position Year Salary ($) Bonus ($) (1) Options(#)
---------------------------------------- --------- ------------- ------------ ------------------- ---------------------
William F. Peare 2001 $150,000 $299,999 $22,088 12,000
President and CEO 2000 130,000 260,202 13,450 6,000
1999 115,000 195,522 12,276 6,000
Jeffery P. Sites 2001 127,000 245,519 19,600 12,000
Chief Operating Officer 2000 105,000 210,002 19,450 6,000
1999 90,000 159,359 18,560 6,000
Gene F. Hensley 2001 100,000 200,001 21,724 12,000
Executive Vice President 2000 90,000 180,000 20,950 6,000
1999 80,000 136,183 19,597 6,000
Alan B. Schriber 2001 100,000 200,001 20,193 12,000
Executive Vice President 2000 90,000 180,000 18,668 6,000
1999 80,000 136,183 17,545 6,000
Timothy P. O'Neil 2001 85,000 180,190 20,177 12,000
Executive Vice President, Chief 2000 77,000 143,197 16,934 13,500
Financial Officer and Treasurer 1999 64,167 99,313 35,252 10,500
</Table>
(1) Other annual compensation is comprised of various items such as 401(k)
contributions and auto allowance.
31
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information on stock option grants during fiscal
2001 to the Named Executive Officers. The options set forth in the table below
were granted in 2001, as part of recipient's 2001 compensation:
<Table>
<Caption>
Potential Realized Value
at Assumed Annual Rates
Number of Percent of Total of Stock Appreciation for
Securities Options Granted Exercise Option Term (2)
Underlying to ---------------------------
Name Options Employees in Price Expiration
Granted (1) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- -------------------------------- --------------- ------------------ -------------- -------------- ------------- -------------
William F. Peare 12,000 3.42% $25.20 12/18/09 $190,178 $481,948
Jeffery P. Sites 12,000 3.42% 25.20 12/18/09 190,178 481,948
Gene F. Hensley 12,000 3.42% 25.20 12/18/09 190,178 481,948
Alan B. Schriber 12,000 3.42% 25.20 12/18/09 190,178 481,948
Timothy P. O'Neil 12,000 3.42% 25.20 12/18/09 190,178 481,948
</Table>
(1) Each of the options reflected in these tables was granted to the respective
Named Executive Officer pursuant to our 1997 Employee Stock Option Plan.
The exercise price of each option is equal to the fair market value of the
common stock on the date of grant. The options vest ratably in annual
installments over five years beginning on the first anniversary of the date
of grant.
(2) These assumed rates of appreciation are provided in order to comply with
the requirements of the Securities and Exchange Commission (the "SEC") and
do not represent our expectation or projection as to the actual rate of
appreciation of the common stock. These gains are based on assumed rates of
annual compound stock price appreciation of 5% and 10% from the date the
options were granted over the full option term. The actual value of the
options will depend on the performance of the common stock and may be
greater or less than the amounts shown.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
The following table sets forth information on the exercise of stock options
during fiscal year 2001 by each of the Named Executive Officers and the value of
unexercised options at December 31, 2001.
<Table>
<Caption>
Value of Unexercised
Number of Unexercised Options In-the-Money Options at Fiscal
at Fiscal Year-End (#) Year-End ($)
Shares --------------------------------- --------------------------------
Acquired on Value Realized
Name Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
- -------------------------- ---------------- ---------------- -------------- ------------------ -------------- -----------------
William F. Peare -- -- 46,800 37,200 $673,200 $382,590
Jeffery P. Sites -- -- 46,800 37,200 673,200 382,590
Gene F. Hensley -- -- 46,800 37,200 673,200 382,590
Alan B. Schriber -- -- 46,800 37,200 673,200 382,590
Timothy P. O'Neil -- -- 14,400 33,600 174,123 412,542
</Table>
32
Compensation of Directors
Directors who are not employees of our Parent or us received $25,000 each in
fees for fiscal year 2001. All non-employee directors are reimbursed for out of
pocket expenses for each Board meeting attended.
Employment, Termination and Change of Control Agreements
Messrs. William Peare and Jeffery Sites have entered into employment agreements
with us. For 2002 under the employment agreements, Mr. Peare will receive a base
annual salary of $180,000 and Mr. Sites will receive a base annual salary of
$150,000. In addition, each will have the opportunity to receive performance
bonuses. The agreements contain a covenant not to compete for a period of two
years in the event of termination of employment for any reason. If employment is
terminated by us without cause, the employee will receive his base salary for a
period of one year following the date of termination plus the amount of bonus
earned during the preceding twelve months.
33
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors is responsible for
establishing policies and programs which govern compensation for executive
officers and for administering these programs to determine bonus amounts and
option awards.
COMPENSATION POLICY
Our executive compensation policy is designed to attract, reward and retain
management who will achieve our business objectives. Our compensation policy
seeks to align executive compensation with corporate performance, both on a
short-term and long-term basis. In this regard, the base salaries of executives
are established at levels which are considered lower than might otherwise be
warranted in light of the duties and scope of responsibilities of each officer's
position. Executive officers are afforded the opportunity to substantially
increase their income through a bonus system that is based primarily on our
annual sales. A smaller portion of the bonus of executive officers is based on
our net income exceeding a 20% annual return on equity.
The Compensation Committee also awarded stock options to various executive
officers following our initial public offering. The purpose of these awards was
to provide key officers with an equity incentive to reinforce management's
commitment to enhancement of profitability and Shareholder value. These options
granted were based primarily on the executive officer's level of responsibility
and the length of time such officer had been employed.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
Mr. William Peare, our Chief Executive Officer, is a party to an employment
agreement with us and his compensation for 2001 was determined in accordance
with the employment agreement. Mr. Peare's base compensation was set at $150,000
and he was eligible to receive a performance bonus, based primarily on our
annual sales, up to approximately two times his base salary. For 2001, Mr.
Peare's bonus was $299,999. The Compensation Committee also awarded Mr. Peare a
grant of options to acquire 12,000 shares of common stock. As with the other
grants to executive officers, Mr. Peare's grant was based on his position as
chief executive officer and his length of service with us.
COMPENSATION COMMITTEE
Michael P. Hollern
Douglas P. Kintzinger
Linda M. Tubbs
34
PERFORMANCE GRAPH
The following graph compares the cumulative total Shareholder return (stock
price appreciation plus dividends) on the common stock with the cumulative total
return of the S&P 500 Index and the group of peer companies set forth below
(based on weighted market capitalization) selected by the Company.
COMPARED CUMULATIVE TOTAL RETURN AMONG
TRENDWEST RESORTS, INC., S&P 500 INDEX AND PEER GROUP INDEX
[PERFORMANCE GRAPH]
<Table>
<Caption>
Aug 1997 1997 1998 1999 2000 2001
-------- ---- ---- ---- ---- ----
Trendwest Resorts Cum $ $100.00 $127.08 $69.44 $125.00 $150.00 $316.49
S & P 500 Cum $ $100.00 $102.43 $131.70 $159.42 $144.90 $127.68
Peer Group Cum $ $100.00 $95.85 $71.07 $67.84 $85.87 $73.29
</Table>
PEER GROUP DETAIL
American Skiing Candlewood Hotels
Choice Hotels Co. Four Season Hotels
Host Marriott Corp. Intrawest Corp.
Lodgian, Inc. Sholodge Inc.
Suburban Lodges
Three companies that were included in the 2000 Peer Group results are not
included in the 2001 Peer Group results, as the companies are no longer in
existence. The following table lists the companies and the reason for their
omission:
Fairfield Communities Acquired
Silverleaf Resorts Filed for bankruptcy; stock delisted
Sunburst Hospitality Corp. Acquired
35
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding ownership of common stock
by each person known to us to own more than 5% of the outstanding shares of the
common stock on March 26, 2002.
<Table>
<Caption>
Shares of Common
Stock Beneficially Percent of
Name and Address of Beneficial Owner Owned Class
--------------------------------------------- --------------------- ----------------
JELD-WEN, inc. 30,883,097 80.9%
3250 Lakeport Blvd.
Klamath Falls, Oregon 97601
Richard L. Wendt 2,218,686 5.8%
3250 Lakeport Blvd.
Klamath Falls, Oregon 97601
</Table>
The following table sets forth information regarding the beneficial ownership of
common stock on March 26, 2002, by (i) each director, (ii) our Chief Executive
Officer and the other executive officers named in the executive compensation
table set forth herein and (iii) all directors and executive officers as a
group. The following is based on information furnished by such owners. Each of
the persons named below has sole voting and investment power with respect to the
shares shown, except as noted below.
<Table>
<Caption>
Shares of Common
Stock Beneficially Right to Percent of
Name of Beneficial Owner Owned Acquire (1) Class
--------------------------------------------- --------------------- --------------- --------------
William F. Peare 600,494 46,800 1.7%
Jeffery P. Sites 104,718 46,800 *
Gene F. Hensley 450 46,800 *
Alan B. Schriber 4,163 46,800 *
Timothy P. O'Neil 4,725 14,400 *
Jerol E. Andres 4,500 *
Douglas P. Kintzinger (6) 15,264 (2) *
Roderick C. Wendt (6) 672,775 (3) 1.8%
Michael Hollern 4,500 (4) *
Harry Demorest 22,250 (5) *
Linda M. Tubbs 4,500 *
All directors and executive officers as a
group (11 persons) 1,438,339 201,600 4.3%
</Table>
* Less than 1%
(1) Shares that can be acquired through stock option exercises through May 26,
2002.
(2) Includes 2,700 shares held by spouse.
(3) Includes 9,263 shares held by Mr. Wendt's minor children.
(4) Shares held by Hollybrook & Co., a nominee partnership holding shares in a
trust of which Mr. Hollern is a beneficiary.
(5) Shares held by spouse.
(6) Messrs. Kintzinger and Wendt are executive officers and directors of
JELD-WEN, inc. and disclaim any beneficial ownership in the shares of the
Company owned by JELD-WEN, inc.
Section 16(a) Beneficial Ownership Reporting Compliance
Under SEC rules, our directors, executive officers and beneficial owners of more
than 10% of any Trendwest equity security are required to file periodic reports
of their ownership, and changes in that ownership, with the SEC. Based solely on
our review of copies of these reports and representations of such reporting
persons, we believe during fiscal 2001, such SEC filing requirements were
satisfied, except Roderick C. Wendt, Director, filed a late Form 4 detailing a
stock disposition transaction for March 2001.
36
Item 13. Certain Relationships and Related Transactions
Relationship with JELD-WEN, inc.
Background. JELD-WEN, inc. ("Parent" or "JELD-WEN") owns approximately 81% of
the outstanding shares of our common stock as of March 26, 2002. Roderick Wendt
and Douglas Kintzinger are directors and Richard Wendt was a director until
March 1997. Richard Wendt, Roderick Wendt and Douglas Kintzinger are all
directors of JELD-WEN. In addition, Richard Wendt, Roderick Wendt and Douglas
Kintzinger own 34.8%, 1.1% and 0.5%, respectively, of the outstanding shares of
JELD-WEN as of December 31, 2001.
Administrative Services. JELD-WEN provides a self-insured health, life and
disability benefits plan to its employees, in which we participate. We paid
JELD-WEN approximately $6.2 million in 2001 to include our employees within the
JELD-WEN plan. JELD-WEN also self-insures its worker's compensation liability,
and we also participate in that plan. We paid JELD-WEN approximately $1.2
million in 2001 to include our employees within the JELD-WEN plan.
Credit Facility. We maintain an unsecured, open, revolving credit line with
JELD-WEN of $10 million which is payable on demand. We pay JELD-WEN interest at
prime plus one percent. As of December 31, 2001, borrowings under this agreement
were $7.1 million. To the extent we have excess funds available to loan
JELD-WEN, such loans earn interest at prime minus two percent. There were no
lendings to JELD-WEN during 2001. The terms of the line of credit are the same
as JELD-WEN provides to its other subsidiaries and divisions. We believe that
the terms of the line of credit as a whole are no less favorable than could be
obtained from an unaffiliated third party.
MountainStar Development. We are developing a resort in central Washington state
known as MountainStar. Prior to June 2000, JELD-WEN owned the land and we were
acting as the developer. In June of 2000, we acquired the MountainStar
development from JELD-WEN. The purchase price was $47.6 million, consisting of
$25 million in cash, a $17.7 million unsecured note payable to Parent and the
settlement of a $4.9 million intercompany receivable from JELD-WEN. The excess
of the purchase price over JELD-WEN's historical cost was treated as a non-cash
reduction to retained earnings due to the accounting requirement to use
historical cost on such a transfer from a controlling shareholder. We recorded
the asset at JELD-WEN's historical cost of $44.3 million; the excess $3.3
million of the purchase price over this amount reduced retained earnings. The
cash payment was funded primarily through our existing credit facilities.
Relationship with Affiliate (collectively, Eagle Crest, Inc. and Running Y
Resort, Inc.)
Receivables Purchase. On September 28, 2001, we entered into an agreement with
Eagle Crest, Inc. (Eagle Crest) and Running Y Resort, Inc. (Running Y)
(collectively Affiliate), wholly-owned subsidiaries of JELD-WEN, to acquire
$12.1 million of notes receivable at Affiliate's historical cost of face value
plus accrued interest in exchange for a cash payment of $8.6 million and a $3.5
million promissory note. The promissory note is non-interest bearing, payable in
equal monthly installments, and is due in full on the earlier of September 28,
2002 or the closing date of our next securitization transaction following the
acquisition date. Under the agreement, any remaining principal balance on notes
receivable acquired from Affiliate which default reduce the outstanding amount
owed by us under the promissory note.
Land Acquisition. In addition, we acquired land from Affiliate for future
development in McCall, Idaho, in exchange for a non-interest bearing promissory
note of $1.3 million. This note matures on the earlier of September 28, 2003, or
commencement of construction on the property by us.
At December 31, 2001, the total amount due to Affiliate was $4.5 million.
Marketing Agreement. In conjunction with the above transactions, Affiliate
entered into an agreement with us and WorldMark to transfer all of its developed
unsold resort properties to WorldMark in exchange for the right to sell
WorldMark vacation credits equal to the credit value of the properties. We
agreed to purchase notes receivable resulting from the subsequent sale of
vacation credits by Affiliate at face value. Affiliate will refund to us any
remaining principal balance on notes receivable purchased from Affiliate that
default. Additionally, we receive a fee from Affiliate for each vacation credit
sale made by Affiliate and must pay a commission fee to Affiliate for any
upgrades of vacation credit sales originated by Affiliate. During 2001 we
purchased $5.7 million of receivables and received $.2 million of fees from
Affiliate and paid $.2 million of commission fees to Affiliate. Through 1999, we
acquired certain notes receivable from Affiliate under a similar agreement which
expired in 1999.
37
Relationship with Creative Media Development
Servicing Agreement. We purchase merchandise, including incentives and/or
promotional products, from Creative Media Development, Inc. (CMD), a subsidiary
of JELD-WEN, pursuant to the Servicing Agreement dated August 21, 2001. Except
for work in process, this agreement is terminable at will by either party at no
cost. During 2001, we purchased merchandise totaling approximately $.1 million
from CMD.
Employment Relationships
Frederick C. Peare, the brother of Mr. William Peare, is employed by us as a
manager of one of our sales offices. During 2001, Frederick C. Peare received
salary (based on commissions), bonus, and 401(k) contributions of $251,436.
Gregory Farnum, the son-in-law of Mr. William Peare, is employed by us in a
sales capacity. During 2001, Mr. Farnum received salary (based on commissions),
bonus, and 401(k) contributions of $101,036. Deborah Hamilton, the sister of Mr.
William Peare, is employed by us in an administrative role. During 2001, Ms.
Hamilton received salary, bonus, and 401(k) contributions of $79,564. Rebecca
Benavides, the sister of Mr. William Peare, is employed by us in an
administrative capacity. During 2001, Ms. Benavides received salary, bonus, and
401(k) contributions of $73,772. Vicente Benavides, the nephew of Mr. William
Peare, is employed by us in a sales capacity. During 2001, Mr. Benavides
received salary (based on commissions), bonus, and 401(k) contributions of
$65,838. Michael Holz, the brother-in-law of Mr. William Peare, is employed by
us in an administrative capacity. During 2001, Mr. Holz received salary, bonus,
and 401(k) contributions of $68,337.
Thomas F. Sites, the brother of Mr. Jeffery Sites, is employed by us as the Vice
President of a business unit. During 2001, Thomas Sites received a salary, bonus
and 401(k) contributions of $290,885. Scott Sites, the brother of Mr. Jeffery
Sites, is employed by us in a marketing capacity. During 2001, Scott Sites
received a salary, bonus and 401(k) contributions of $198,419.
38
Index to Financial Statements
Trendwest Resorts, Inc. and Subsidiaries
<Table>
<Caption>
Page
Independent Auditors' Report....................................................................................... F-2
Consolidated Balance Sheets........................................................................................ F-3
Consolidated Statements of Income.................................................................................. F-4
Consolidated Statements of Shareholders' Equity and Comprehensive Income........................................... F-5
Consolidated Statements of Cash Flows.............................................................................. F-6
Notes to Consolidated Financial Statements......................................................................... F-8
</Table>
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, 2001 and 2000, and the related
consolidated statements of income, shareholders' equity and comprehensive
income, and cash flows for each of the years in the three-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Seattle, Washington
January 30, 2002
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands)
<Table>
<Caption>
December 31,
--------------------------------------
Assets 2001 2000
----------------- -----------------
Cash.................................................................... $ 821 $ 404
Restricted cash......................................................... 8,838 7,201
Notes Receivable, net................................................... 53,802 32,570
Accrued interest and other receivables.................................. 8,499 8,171
Residual interest in securitizations, net............................... 95,733 68,824
Inventories............................................................. 134,745 104,218
MountainStar development................................................ 70,382 56,536
Property and equipment, net............................................. 43,798 29,948
Refundable income taxes................................................. -- 5,688
Other assets............................................................ 10,411 6,599
----------------- -----------------
Total assets............................................ $ 427,029 $ 320,159
================= =================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and bank overdraft..................................... $ 5,582 $ 9,706
Accrued liabilities..................................................... 34,265 21,538
Accrued construction in progress........................................ 7,153 2,855
Due to Parent and Affiliate............................................. 11,653 419
Note payable to Parent.................................................. 13,298 17,731
Borrowings under bank line of credit.................................... 74,318 48,441
Current income taxes payable............................................ 1,383 --
Mortgage payable........................................................ 11,616 11,696
Deferred income taxes................................................... 2,250 330
----------------- -----------------
Total liabilities....................................... 161,518 112,716
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 38,094,589 and 37,795,496 shares at December 31, 2001 and
2000, respectively................................................... 57,917 54,119
Accumulated other comprehensive loss.................................... (1,454) (522)
Retained earnings....................................................... 209,048 153,846
----------------- -----------------
Total shareholders' equity.............................. 265,511 207,443
----------------- -----------------
Commitments and contingencies
Total liabilities and shareholders' equity.............. $ 427,029 $ 320,159
================= =================
</Table>
See accompanying notes to the consolidated financial statements.
F-3
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except per share data)
<Table>
<Caption>
Year ended December 31,
2001 2000 1999
------------------ ------------------ ------------------
Revenues:
Vacation Credit and Fractional Interest sales, net...... $ 406,137 $ 293,130 $ 234,315
Finance income.......................................... 20,629 15,562 15,243
Gains on sales of Notes Receivable...................... 30,268 18,903 16,265
Resort management services.............................. 4,607 4,763 3,710
Other................................................... 7,527 5,280 4,593
------------------ ------------------ ------------------
Total revenues.................................. 469,168 337,638 274,126
------------------ ------------------ ------------------
Costs and operating expenses:
Vacation Credit and Fractional Interest cost of sales 112,288 74,714 68,611
Resort management services.............................. 1,588 1,759 1,656
Sales and marketing..................................... 193,531 137,752 104,952
General and administrative.............................. 43,481 31,686 25,234
Provision for doubtful accounts......................... 30,276 21,148 16,100
Interest................................................ 591 479 442
------------------ ------------------ ------------------
Total costs and operating expenses.............. 381,755 267,538 216,995
------------------ ------------------ ------------------
Income before income taxes ..................... 87,413 70,100 57,131
Income tax expense........................................... 32,211 27,241 22,258
------------------ ------------------ ------------------
Net income...................................... $ 55,202 $ 42,859 $ 34,873
================== ================== ==================
Basic net income per common share............................ $ 1.46 $ 1.13 $ 0.90
Diluted net income per common share.......................... $ 1.43 $ 1.12 $ 0.90
Weighted average shares of common stock and dilutive
potential common stock outstanding:
Basic........................................................ 37,915,714 38,058,093 38,542,275
Diluted ..................................................... 38,558,418 38,181,791 38,648,147
</Table>
See accompanying notes to the consolidated financial statements.
F-4
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(dollars in thousands)
<Table>
<Caption>
Common
Stock Accumulated Other Total
------------------------------- Comprehensive Retained shareholders
Shares Amount Loss Earnings Equity
---------------- ------------ ------------------- -------------- --------------
Balance at December 31, 1998 38,607,224 $ 61,848 $ -- $ 79,414 $ 141,262
Repurchase of common stock........ (303,912) (2,780) -- -- (2,780)
Issuance of common stock under the
Employee Stock Purchase Plan... 39,114 360 -- -- 360
Net income........................ -- -- -- 34,873 34,873
---------------- ------------ ------------------- -------------- --------------
Balance at December 31, 1999 38,342,426 59,428 -- 114,287 173,715
Repurchase of common stock........ (628,200) (5,926) -- -- (5,926)
Issuance of common stock under the
Employee Stock Purchase Plan... 76,320 588 -- -- 588
Issuance of common stock from
exercise of employee stock options 4,950 29 -- -- 29
Reduction in retained earnings for
the excess of the purchase price
of the MountainStar development
over the Parent's historical cost -- -- -- (3,300) (3,300)
Comprehensive Income:
Net income..................... -- -- -- 42,859 42,859
Other comprehensive loss:
Change in cumulative effect of
foreign currency translation -- -- (522) (522)
--------------
Total comprehensive income 42,337
---------------- ------------ ------------------- -------------- --------------
Balance at December 31, 2000 37,795,496 $ 54,119 $ (522) $ 153,846 $ 207,443
Repurchase of common stock........... (149,615) (2,379) -- -- (2,379)
Issuance of common stock under the
Employee Stock Purchase Plan...... 39,808 257 -- -- 257
Issuance of common stock from
exercise of employee stock options 408,900 4,726 -- -- 4,726
Tax benefit from employee stock
option exercises.................. 1,077 1,077
Stock compensation................... 117 117
Comprehensive Income:
Net income..................... -- -- -- 55,202 55,202
Other comprehensive loss:
Change in cumulative effect of
foreign currency translation. -- -- (488) (488)
Unrealized derivative losses,
net of $267 tax effect...... (444) (444)
---------------
Total comprehensive income 54,270
---------------- ------------ ------------------- -------------- --------------
Balance at December 31, 2001 38,094,589 $ 57,917 $ (1,454) $ 209,048 $ 265,511
================ ============ =================== ============== ===============
</Table>
See accompanying notes to the consolidated financial statements.
F-5
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands)
<Table>
<Caption>
Year ended December 31,
--------------------------------------------
2001 2000 1999
------------ ------------ ------------
Cash flows from operating activities:
Net income................................................................ $ 55,202 $ 42,859 $ 34,873
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization.......................................... 4,447 2,743 1,758
Gain on sale of property and equipment................................. -- -- (869)
Amortization of residual interest in Notes Receivable sold............. 20,208 14,801 10,931
Provision for doubtful accounts and sales returns...................... 38,886 27,015 21,407
Recoveries of Notes Receivable charged off............................. 447 251 260
Residual interest in Notes Receivable securitized...................... (43,665) (30,762) (23,727)
Unrealized loss (gain) on residual interest in securitizations......... 1,990 337 1,139
Contract servicing liability arising from sale of Notes Receivable..... 4,129 3,554 2,847
Amortization of contract servicing liability........................... (1,943) (869) (321)
Change in deferred gross profit........................................ 1,641 1,631 419
Deferred income tax expense............................................ 2,174 290 744
Stock compensation..................................................... 117 -- --
Issuance of Notes Receivable........................................... (345,678) (258,452) (201,766)
Proceeds from sale of Notes Receivable................................. 255,139 211,767 156,303
Proceeds from repayment of Notes Receivable and overcollateralized
component of Notes Receivable securitized............................ 73,095 57,974 51,198
Purchase of Notes Receivable from related parties...................... (14,272) -- (650)
Purchase of Notes Receivable........................................... (33,040) (22,201) (13,576)
Changes in certain assets and liabilities:
Restricted cash................................................... (1,637) (4,214) (636)
MountainStar development.......................................... (13,846) (37,236) --
Inventories....................................................... (29,951) (60,396) (5,159)
Accounts payable and accrued liabilities.......................... 11,098 12,534 3,424
Income taxes payable.............................................. 2,490 -- (1,153)
Refundable income taxes........................................... 5,688 (5,088) (600)
Other ............................................................ (4,344) (4,403) 2,733
------------ ------------ ------------
Net cash (used in) provided by operating activities.................. (11,625) (47,865) 39,579
------------ ------------ ------------
Cash flows used in investing activities:
Purchase of property and equipment........................................ (17,879) (6,621) (4,974)
Proceeds from sale of property and equipment.............................. -- -- 4,412
------------ ------------ ------------
Net cash used in investing activities (17,879) (6,621) (562)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings (repayments) under bank line of credit and other........... 25,154 48,394 (26,100)
Issuance of mortgage payable.............................................. -- 11,700 --
Repayments of mortgage payable............................................ (80) (4) --
Repayments of note payable to Parent...................................... (4,432) -- --
Increase (decrease) in Due to Parent and Affiliate........................ 6,620 (1,392) (5,688)
Increase in Receivable from Parent........................................ -- -- (3,058)
Proceeds from issuance of common stock.................................... 4,983 617 360
Repurchase of common stock................................................ (2,379) (5,926) (2,780)
------------ ------------ ------------
Net cash provided by (used in) financing activities.................. 29,866 53,389 (37,266)
------------ ------------ ------------
Net increase (decrease) in cash 362 (1,097) 1,751
Effect of foreign currency exchange rates on cash 55 (259) --
Cash at beginning of year...................................................... 404 1,760 9
------------ ------------ ------------
Cash at end of year............................................................ $ 821 $ 404 $ 1,760
============ ============ ============
</Table>
See accompanying notes to the consolidated financial statements.
F-6
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(continued)
(dollars in thousands)
<Table>
<Caption>
Year ended December 31,
2001 2000 1999
------------ ------------ ------------
Supplemental disclosures of cash flow information - Cash paid during the period
for:
Interest (excluding capitalized amounts of $7,146, $2,951 and $1,188,
respectively).......................................................... $ 240 $ 378 $ 179
Income taxes.............................................................. 22,789 32,201 22,542
Supplemental schedule of noncash investing and financing activities:
Issuance of note payable to Parent in connection with the MountainStar
development acquisition................................................... -- 17,731 --
Reduction in retained earnings for the excess of the purchase price of the
MountainStar development over the Parent's historical cost................ -- 3,300 --
Extinguishment of receivable from Parent in connection with the
MountainStar development acquisition...................................... -- 4,869 --
Issuance of note payable to Affiliate in connection with the acquisition
of certain notes receivable and inventory................................. 4,806 -- --
</Table>
See accompanying notes to the consolidated financial statements.
F-7
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
(1) Description of Business and Basis of Presentation
Description of Business
Trendwest Resorts, Inc. (Trendwest) and subsidiaries (Company) generate revenues
from the sale and financing of Vacation Credits in WorldMark, The Club
(WorldMark), and WorldMark South Pacific Club (WorldMark South Pacific)
(collectively The Clubs) and Fractional Interests in resort condominium units.
Vacation Credits entitle the owner to use a fully furnished vacation resort unit
in The Clubs based on the number of Vacation Credits purchased. Vacation Credits
are created through the transfer to The Clubs of resort units developed or
purchased by the Company. The Company also manages resort properties under a
management agreement with The Clubs. The Clubs are separate entities which own
the transferred properties for the benefit of Vacation Credit owners (Members or
Owners). Fractional Interest sales are deeded intervals in condominium units and
are not transferred to The Clubs.
Sales to new owners are typically financed by the Company after requiring a
minimum 10% down payment. Sales to existing Vacation Credit 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%. All note balances are secured by the Vacation Credits
or Fractional Interests sold.
Basis of Presentation
Trendwest is a majority owned subsidiary of JELD-WEN, inc. (Parent). The
consolidated financial statements include the accounts of Trendwest and its
wholly-owned subsidiaries, including Trendwest South Pacific, Pty. Ltd, an
Australian corporation formed in October 1999. All intercompany balances and
transactions have been eliminated in consolidation.
Stock Split
All share and earnings per share information contained in these consolidated
financial statements have been adjusted to reflect 3 for 2 stock splits declared
on both February 21, 2001 and November 8, 2001, as if they were effective for
all periods presented.
Capital Transactions
In March 1999 and July 1998, the Board of Directors authorized the Company to
repurchase up to 1,125,000, and 981,000 shares, respectively, of its common
stock on the open market or in privately negotiated transactions based on market
conditions. During the years ended December 31, 2001, 2000, and 1999, the
Company repurchased 149,615, 628,200, and 303,912 shares, respectively. The
Board of Directors may at its discretion authorize additional repurchases in the
future.
F-8
<Page>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
Basic and Diluted Net Income Per Common Share
The following presents the reconciliation of weighted average shares used for
basic and diluted net income per share:
<Table>
<Caption>
Year ended December 31,
-----------------------------------------------------
2001 2000 1999
--------------- --------------- ---------------
Basic
Basic weighted average shares outstanding.................. 37,915,714 38,058,093 38,542,275
Diluted
Effect of dilutive securities.............................. 642,704 123,698 105,872
--------------- --------------- ---------------
Diluted weighted average shares outstanding................ 38,558,418 38,181,791 38,648,147
=============== =============== ===============
</Table>
Net income available to common shareholders for basic and diluted net income per
share was $55,202, $42,859, and $34,873 for the years ended December 31, 2001,
2000, and 1999, respectively.
At December 31, 2001, 2000, and 1999, there were options to purchase 346,500,
1,749,375 and 1,345,500 shares of common stock outstanding, respectively, which
were anti-dilutive and therefore not included in the computation of diluted net
income per share.
(2) Summary of Significant Accounting Policies
Restricted Cash
Restricted cash consists primarily of deposits received on sales of Vacation
Credits and Fractional Interests, that are held in trust or escrow until the
applicable statutory rescission period of three to fifteen calendar days has
expired and the related customer Note Receivable has been recorded. It also
consists of amounts received prior to attainment of the 10% down payment
required to recognize a sale and refundable reservation deposits on MountainStar
vacation home sites.
Allowance for Doubtful Accounts
The Company estimates its allowance for doubtful accounts by analysis of bad
debts by each sales site by year of Notes Receivable origination and is net of
anticipated cost recoveries of the underlying Vacation Credits and Fractional
Interests. 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. Management believes that all such
allowances are 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 amounts recorded.
F-9
<Page>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
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. Fractional Interests recovered are recorded at historical cost at the
time of the recovery. All collection costs are expensed as incurred.
Inventories
Inventories consist of Vacation Credits and construction in progress as follows:
<Table>
<Caption>
December 31,
-----------------------------------
2001 2000
---------------- ----------------
Vacation Credits.................................. $ 35,098 $ 16,829
Construction in progress.......................... 99,647 87,389
---------------- ----------------
Total inventories........................ $ 134,745 $ 104,218
================ ================
</Table>
Vacation Credits represent the costs of unsold ownership interests in the Clubs.
These costs represent the actual costs to develop the resort properties
including the cost of the 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. Resort properties are completed, and the Company
transfers ownership to the Clubs in return for the right to sell a discrete
number of Vacation Credits. Actual costs of the completed resort properties are
transferred from construction in progress to Vacation Credits inventory at the
time such properties are transferred to the Clubs. The discrete number of
Vacation Credits that result from each transfer of resort property 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 on resort properties during
the years ended December 31, 2001, 2000, and 1999 amounted to $3,319, $610, and
$1,188, respectively.
MountainStar Development
The MountainStar development is valued at the lower of the carrying amount or
fair value less costs to sell. The Company capitalizes all direct costs and
interest incurred relating to the development. During 2001 and 2000, the Company
capitalized $3,827 and $2,341, respectively, in interest cost on MountainStar.
All selling expenses relating to refundable reservation deposits associated with
MountainStar are capitalized and included in other assets.
F-10
<Page>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
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. Vacation Credit sales are included in revenues
when the Company has received an executed sales contract, at least a 10% down
payment requirement has been met and any rescission period has expired. Upgrade
sales are subject to the same rescission period as Vacation Credit sales.
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 an existing note receivable and the issuance of a new note for a
term of up to seven years and 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 payments on the existing note receivable. Because
the resulting note receivable is secured by an interest in all Vacation Credits
owned, 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 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) Fractional Interests
Fractional Interest sales are included in revenues when the Company has received
an executed sales contract, at least a 10% down payment requirement has been met
and any rescission period has expired.
Fractional Interest marketing and overhead costs are expensed as incurred.
Fractional Interest cost of sales and direct selling expenses related to a
Fractional Interest sale are recorded at the time the sale is recognized.
Fractional Interest costs include the cost of land, improvements to the
property, including costs of amenities constructed and other direct acquisition
costs. Direct selling expenses are recorded as sales and marketing expenses.
F-11
<Page>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
(iii) Sales of Notes Receivable
Periodically, the Company sells its Notes Receivable through securitzation
transactions which the Company accounts for according to the provisions of SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities. The Company adopted SFAS No. 140 effective March
31, 2001. SFAS No. 140 supercedes SFAS No. 125 and rescinds SFAS No. 127. The
disclosure-only provisions of SFAS No. 140 were adopted by the Company as of
December 31, 2000. The adoption of SFAS No. 140 did not have a material impact
on the Company's accounting for its securitization transactions.
In the accompanying consolidated financial statements and related notes, Notes
Receivable sold by the Company in securitization transactions are termed Notes
Receivable securitized and Notes Receivable held by the Company which have not
been securitized are termed Notes Receivable.
When the Company sells Notes Receivable through securitization transactions, it
uses special purpose finance companies and retains interest rate differentials,
a subordinated principal tranche, servicing rights (and obligations), and in
some cases a cash reserve account, all of which are residual interests in the
securitized Notes Receivable. Gain or loss on sale of Notes Receivable
securitized depends in part on the previous carrying amount of the financial
assets involved in the transfer, allocated between the assets sold and the
residual interests based on their relative fair values at the date of transfer.
To obtain fair values, quoted market prices are used if available. However,
quotes are generally not available for retained interests, so the Company
estimates fair value based on the present value of future expected cash flows
estimated using management's best estimates of the key assumptions--credit
losses, prepayment speeds and discount rates commensurate with the risks
involved. The Company estimates prepayment speeds based on its historical
experience.
The Company provides for estimated credit losses related to uncollectible Notes
Receivable securitized through its allowance for doubtful accounts. The
Company's loss exposure for Notes Receivable securitized is limited to the
residual interests in Notes Receivable securitized. Although it is not required
to do so, the Company's historical practice has been to repurchase defaulted
securitized Notes Receivable up to certain limits, generally 10% to 17% of the
face amount of the original balance of Notes Receivable securitized.
Gains on sales of Notes Receivable primarily represent the present value of the
estimated cash flow differential between contractual interest rates charged to
borrowers on Notes Receivable securitized 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 fair value servicing costs, net of
transaction costs. The Company recognizes such gains on sales of Notes
Receivable on the settlement date. Gains on the sale of Notes Receivable are
determined based on the relative fair market value of the components of Note
Receivable portions sold and retained.
Income from the interest rate differential retained is subsequently recorded in
finance income using the interest method. In addition, finance income includes
interest income on Notes Receivable and the overcollateralized component of
Notes Receivable securitized. The residual interest in Notes Receivable
F-12
<Page>
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
securitized arising from the interest rate differential 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 with
changes in the market value recognized as finance income.
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......................Lesser of estimated
useful life or the
remaining lease term
Direct internal and external costs of computer software developed for internal
use are capitalized subsequent to the preliminary stage of the project.
Capitalized costs are amortized over the estimated useful life on a
straight-line basis beginning when each module is complete and ready for its
intended use.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the assets to the future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
the cost to sell.
Advertising
Advertising costs, included in sales and marketing expenses in the accompanying
statements of income, are expensed as incurred and amounted to $10,840, $9,956,
and $7,337 for the years ended December 31, 2001, 2000, and 1999, respectively.
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 intends to reinvest unremitted earnings of its non-U.S. subsidiary
in the foreign jurisdiction and thereby postpone their remittance indefinitely.
Accordingly, no provision for additional U.S. or foreign income taxes has been
recorded.
F-13
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
Stock-Based Compensation
The Company accounts for stock option plans for employees in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. As such, compensation
expense related to employee stock options is recorded if, on the date of grant,
the fair value of the underlying stock exceeds the exercise price. The Company
applies the disclosure-only requirements of SFAS No. 123, Accounting for
Stock-Based Compensation, which allows entities to continue to apply the
provisions of APB Opinion No. 25 for transactions with employees, and to provide
pro forma results of operations disclosures for employee stock option grants as
if the fair-value-based method of accounting in SFAS No. 123 had been applied to
those transactions.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local
currency of the country in which the subsidiary is located. Assets and
liabilities in foreign operations are translated into U.S. dollars using rates
of exchange in effect at the end of the reporting period. Income and expense
accounts are translated into U.S. dollars using average rates of exchange for
the period. The net gain or loss resulting from translation is shown as a
translation adjustment and included in other comprehensive income in
shareholders' equity. Gains and losses from foreign currency transactions are
included in the consolidated statements of operations and were not significant
in any of the periods presented.
Derivative Financial Instruments
The Company utilizes derivative financial instruments, which have historically
included foreign exchange contracts, forward interest rate swaps, and interest
rate cap agreements, to manage well-defined interest and foreign currency rate
risks. Derivative financial instruments are not used for trading or speculative
purposes. Counterparties to the Company's derivative financial instruments are
generally major financial institutions. The Company manages the risk of
counterparty default on its derivative financial instruments through the use of
credit standards, counterparty diversification and monitoring of counterparty
financial conditions. The Company has not experienced any losses due to
counterparty default.
Effective January 1, 2001, the Company adopted the provisions of SFAS No. 133,
Accounting for Derivative Financial Instruments and Hedging Activities, as
amended. SFAS No. 133 requires all derivative instruments to be recognized as
assets or liabilities at fair value. Accordingly, on the date derivative
contracts are entered into, the Company designates the derivatives as either (i)
a hedge of the fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (ii) a hedge of a forecasted
transaction or of the variability of future cash flows to be received or paid
related to a recognized asset or liability (cash flow hedge), (iii) a hedge of a
net investment in a foreign operation (net investment hedge), or (iv) a
derivative not designated as a hedging instrument. The effective portion of
changes in the fair value of derivatives designated as hedges are recorded in
other comprehensive income, net of tax, until the hedged item is recognized in
earnings. The ineffective portion of the changes in fair value are recognized
currently in earnings. Changes in the fair value of derivatives which are not
designated as hedges are recognized currently in earnings. The adoption of SFAS
No. 133 did not have a material impact on the consolidated financial statements.
F-14
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
New Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that all business combinations be accounted for
under a single method, the purchase method. Use of the pooling-of-interests
method is no longer permitted. SFAS No. 141 requires that the purchase method be
used for business combinations initiated after June 30, 2001. SFAS No. 142
requires that goodwill no longer be amortized to earnings, but instead be
reviewed for impairment. The amortization of goodwill ceases upon adoption of
SFAS No. 142, which will be adopted by the Company on January 1, 2002. The
adoption of these statements are not expected to have a material impact on the
Company's financial statements.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations, which is applicable for fiscal years beginning after June 15, 2002.
SFAS No. 143 requires an enterprise to record the fair value of an asset
retirement obligation as a liability in the period in which it incurs a legal
obligation associated with the retirement of a tangible long-lived asset.
Statement No. 143 also requires the enterprise to record the contra to the
initial obligation as an increase to the carrying amount of the related
long-lived asset (i.e., the associated asset retirement costs) and to depreciate
that cost over the remaining useful life of the asset. The liability is changed
at the end of each period to reflect the passage of time (i.e., accretion
expense) and changes in the estimated future cash flows underlying the initial
fair value measurement. The provisions of SFAS No. 143 are not expected to have
a material impact on the Company's financial position or operating results.
In September 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets, which is applicable for fiscal years beginning
after December 15, 2001. SFAS No. 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and portions of APB Opinion 30, Reporting the Results of Operations. SFAS No.
144 provides a single accounting model for long-lived assets to be disposed of
and significantly changes the criteria that would have to be met to classify an
asset as held-for-sale. Classification as held-for-sale is an important
distinction since such assets are not depreciated and are stated at the lower of
fair value and carrying amount. SFAS No. 144 also requires expected future
operating losses from discontinued operations to be displayed in the period(s)
in which the losses are incurred, rather than as of the measurement date as
presently required. The provisions of SFAS No. 144 generally are required to be
applied prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential effect that the
adoption of SFAS No. 144 will have on the Company's financial statements.
Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current presentation.
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
F-15
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these financial statements in conformity with
accounting principles generally accepted in the United States of America. Actual
results could differ from those estimates and assumptions.
(3) Notes Receivable
The Company provides financing to the purchasers of Vacation Credits and
Fractional Interests. The notes resulting from sales of Vacation Credits bear
interest at 11.9% to 14.9%, depending on the method of payment, and are written
with initial terms of up to 84 months. Notes resulting from the sale of
Fractional Interests bear interest rates of up to 11.9% for a term of up to 120
months. Once a 10% down payment has been received and any recission period has
expired, 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, 2001, are as follows:
2002.......................... $ 6,953
2003.......................... 7,536
2004.......................... 8,079
2005.......................... 8,798
2006.......................... 9,723
Thereafter.................... 20,580
---------------
$ 61,669
===============
F-16
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
The following table summarizes the Company's total Notes Receivable
portfolio at December 31:
<Table>
<Caption>
2001 2000
--------------- ---------------
Total Notes Receivable portfolio............................ $ 665,871 $ 502,762
Less: Notes Receivable securitized......................... (604,202) (464,889)
--------------- ---------------
Total Notes Receivable...................................... 61,669 37,873
--------------- ---------------
Less: Deferred gross profit related to Notes Receivable.... (523) (411)
Less: Allowance for doubtful accounts and sales returns on
Notes Receivable........................................ (7,344) (4,892)
-------------- ---------------
Notes Receivable, net $ 53,802 $ 32,570
=============== ===============
</Table>
Customers over 60 days past due on monthly payments are considered delinquent.
Delinquent Notes Receivable represent 2.42% and 2.29% of the total Notes
Receivable portfolio at December 31, 2001 and 2000, respectively.
The activity in the allowance for doubtful accounts and sales returns is as
follows for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
-------------- ---------------- ---------------
Balances at beginning of period......................... $ 40,292 $ 29,087 $ 20,935
Provision for doubtful accounts and sales returns....... 38,886 27,015 21,407
Notes Receivable charged-off and sales returns net of
Vacation Credits recovered.......................... (25,840) (16,061) (13,515)
Recoveries.............................................. 447 251 260
Effect of foreign currency translation.................. (41) -- --
-------------- ---------------- ---------------
Balances at end of period............................... $ 53,744 $ 40,292 $ 29,087
============== ================ ===============
Allowance for doubtful accounts and sales returns on
Notes Receivable.................................... $ 7,344 $ 4,892 $ 5,487
Allowance for doubtful accounts on residual interest in
Notes Receivable securitized........................ 46,400 35,400 23,600
-------------- ---------------- ---------------
$ 53,744 $ 40,292 $ 29,087
============== ================ ===============
</Table>
F-17
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
(4) Sales of Notes Receivable and Residual Interest in Securitizations
During 2001, 2000, and 1999, the Company sold Notes Receivable through
securitization transactions. In each transaction, the Company retained servicing
responsibilities, interest rate differentials and subordinated interests. The
Company receives annual servicing fees of between 1.0% and 1.75% of the
outstanding balance of the Notes Receivable securitized and rights to future
cash flows arising after the investors in the securitization trusts have
received the return for which they contracted. The investors and the
securitization trusts have no recourse to the Company's other assets for failure
of debtors to pay when due. The Company's retained interests are subordinate to
investors' interests.
On September 28, 2001, the Company increased its Receivables Warehouse Facility
with Banc One to $175 million from $150 million. In conjunction with this
amendment, Fleet Bank entered the agreement as a co-purchaser with Banc One,
purchasing $75 million of the $175 million limit. At December 31, 2001, the
amount of Notes Receivable outstanding under the facility was $83.6 million.
When the Company enters into a securitization transaction which provides for
other than fair compensation for the related servicing of the Notes Receivable
securitized, the Company records a servicing asset or liability. In connection
with the Company's securitizations, the Company has recorded servicing
liabilities which are measured by discounting the difference between the cash
flows relating to the contractual servicing fee stipulated in the servicing
agreement and the cash flows from the estimated fair value of the servicing
activities, over the servicing period. For all periods presented, the Company
has estimated the fair value compensation for its servicing activities to be
1.75% of the outstanding balance of the Notes Receivable securitized. The fair
value was determined based on the Company's experience with servicing rates it
has paid to other servicers from time to time and the nature of the servicing
activities provided. The resulting servicing liability reduces the gain on sale
of notes receivable. The future cash flow assumptions used to measure the
servicing liability are the same as those used to measure the interest rate
differential as disclosed below. The cash flow differentials are discounted at
8%. The carrying value, which approximates fair value, of the servicing
liability at December 31, 2001 and 2000, was $7,397 and $5,211, respectively,
which is included in accrued liabilities and is being amortized into income as
services are performed.
In 2001 and 2000, the Company recognized pre-tax gains of $30,268 and $18,903,
respectively, on the securitization of its Notes Receivable.
F-18
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
The composition of residual interest in securitizations, net is as follows at
December 31:
<Table>
<Caption>
2001 2000
-------------- --------------
Gross Notes Receivable securitized............................ $ 604,202 $ 464,889
Less: Outstanding securitized borrowings..................... (529,283) (407,215)
-------------- --------------
Overcollateralization of Notes Receivable securitized........ 74,919 57,674
Less: Allowance for doubtful accounts on Notes Receivable
securitized............................................... (46,400) (35,400)
Less: Deferred gross profit related to Notes Receivable
securitized............................................... (7,022) (5,493)
Add: Fair value of interest rate differential................ 74,236 52,043
-------------- --------------
Residual interest in securitizations, net..................... $ 95,733 $ 68,824
============== ==============
</Table>
The following are the key assumptions used in 2001 and 2000 in measuring the
fair value of the interest rate differential at the dates of the
securitizations. During the third quarter of 2001, after performing a normal,
timely review of its key assumptions, the Company adjusted its prepayment speed
and default rate assumption used in calculating gains on sales of Notes
Receivable and residual interest. The Company increased its weighted annual
prepayment speed and default estimate to 10.6%, up from 9%, resulting in lower
residual interest valuations. The increase in the weighted annual prepayment
speed and default assumption did not significantly impact the Company's results
of operations. The Receivables Warehouse Facility is the only securitization
that has a variable interest rate.
<Table>
<Caption>
2001 2000
-------------------- ----------------
Weighted-average annual prepayment speed and expected
annual gross defaults 10.00% 9.00%
Weighted-average life (in years) 2.24 2.35
Residual cash flows discounted at 13.50% 12.25%
Weighted-average interest rate on Receivables Warehouse
Facility 6.16% 7.95%
</Table>
F-19
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
During 2001 and 2000, the following cash flows relating to the Company's
securitizations occurred:
<Table>
<Caption>
2001 2000
---------------- ---------------
Proceeds to the Company from:
New securitizations $ 215,045 $ 174,500
Reinvested collections $ 40,094 $ 37,267
Purchases of defaulted Notes Receivable $ (21,058) $ (17,420)
Cash received from residual interests $ 57,207 $ 52,212
Servicing fees received $ 6,230 $ 3,505
</Table>
At December 31, 2001, the key economic assumptions and the sensitivity of the
current fair value of residual cash flows to immediate 10% and 20% adverse
changes in those assumptions are as follows:
<Table>
<Caption>
2001
-----------------
Carrying amount/fair value of interest rate differential $ 74,236
Weighted average life (in years) 2.06
Weighted prepayment speed and expected gross defaults 10.5%
(annual rate)
Impact on fair value of 10% adverse change $ (1,241)
Impact on fair value of 20% adverse change $ (2,436)
Residual cash flows discount rate (annual) 13.5%
Impact on fair value of 10% adverse change $ (1,657)
Impact on fair value of 20% adverse change $ (3,254)
Annual interest rate on Receivables Warehouse Facility 5.95%
Impact on fair value of 10% adverse change $ (1,133)
Impact on fair value of 20% adverse change $ (2,247)
</Table>
Amounts expressed as annual rates represent the monthly rates multiplied by
twelve. These sensitivities are hypothetical and should be used with caution. As
the figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in
this table the effect of a variation in a particular assumption on the fair
value of the residual interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
Actual and projected gross defaults for Notes Receivable securitized during 2001
were approximately 9.8% as of December 31, 2001. Actual and projected gross
defaults for Notes Receivable securitized during 2000 were approximately 9.8%
and 9.0% as of December 31, 2001 and 2000, respectively.
F-20
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
Information regarding delinquency and defaults for the year ended December 31,
2001 are as follows:
<Table>
<Caption>
Principal Principal amount
balance of of notes 60 or
Notes more days past Notes Receivable
Receivable due charged-off, net
--------------- ---------------- -------------------
Total Notes Receivable portfolio $ 665,871 $ 16,088 $ 17,177
===================
Less: Notes Receivable securitized 604,202 14,641
--------------- ----------------
Total Notes Receivable $ 61,669 $ 1,447
=============== ================
</Table>
Information regarding delinquency and defaults for the year ended December 31,
2000 are as follows:
<Table>
<Caption>
Principal Principal amount
balance of of notes 60 or
Notes more days past Notes Receivable
Receivable due charged-off, net
--------------- ---------------- -------------------
Total Notes Receivable portfolio $ 502,762 $ 11,528 $ 11,147
===================
Less: Notes Receivable securitized 464,889 6,393
--------------- ----------------
Total Notes Receivable $ 37,873 $ 5,135
=============== ================
</Table>
(5) Property and Equipment
Property and equipment, net, consists of the following at December 31:
<Table>
<Caption>
2001 2000
--------------- ----------------
Land....................................................... $ 2,895 $ 2,467
Building and improvements.................................. 25,159 16,745
Equipment, furniture and fixtures.......................... 17,135 10,263
Leasehold improvements..................................... 6,672 3,726
Construction in Progress................................... 2,201 2,574
--------------- ----------------
54,062 35,775
Less accumulated depreciation and amortization............. 10,264 5,827
--------------- ----------------
$ 43,798 $ 29,948
=============== ================
</Table>
F-21
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(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:
<Table>
<Caption>
2001 2000 1999
--------------- --------------- ---------------
Gross sales value............................... $ 12,572 $ 9,388 $ 7,227
=============== =============== ===============
Gross profit deferred........................... $ 6,739 $ 5,094 $ 3,597
Gross profit recognized......................... 5,098 3,463 3,178
--------------- --------------- ---------------
Net gross profit deferred (recognized) during
period...................................... $ 1,641 $ 1,631 $ 419
=============== =============== ===============
</Table>
Notes Receivable is presented net of deferred gross profit in the accompanying
balance sheets. Such deferred amounts aggregated $523 and $411 at December 31,
2001 and 2000, respectively. Deferred gross profit associated with Notes
Receivable securitized is netted against residual interest in the accompanying
balance sheets and aggregated $7,022 and $5,493 at December 31, 2001 and 2000,
respectively.
(7) Debt
(i) Credit Facility
The Company has an $85,000 revolving credit agreement (Agreement) with a group
of banks which allows for borrowings in Australian dollars up to a maximum of
$25 million U.S. dollar equivalent. The Agreement provides for borrowings at
either a reference rate or at LIBOR rates plus the applicable margin for the
level of borrowings outstanding. The Agreement also requires a quarterly
commitment fee of 0.30% to 0.50% based on the usage level of the total
commitment. Available borrowings under the Agreement are subject to a borrowing
base which is a percentage of Notes Receivable and inventory, including property
under development, and are secured by a first mortgage on the MountainStar
property. The Agreement expires on August 14, 2003. Borrowings outstanding under
the Agreement at December 31, 2001 and 2000, were $74,318 and $48,441,
respectively at weighted average interest rates of 4.43% and 8.48% at December
31, 2001 and 2000, respectively.
F-22
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
(ii) Note Payable to Parent
In connection with the acquisition of the MountainStar development, the Company
issued an unsecured promissory note payable to Parent in the amount of $17,731.
The note bears an interest rate of 9.0%, with quarterly interest payments due
starting on September 1, 2000. Eight quarterly principal payments of $2,216 are
due starting on September 1, 2001. The note matures on June 1, 2003.
Maturities of the Note Payable to Parent at December 31, 2001, are as follows:
2002 $ 8,865
2003 4,433
------------
Total $ 13,298
============
(iii) Mortgage Payable
On November 21, 2000, the Company closed a ten-year mortgage payable secured by
its corporate headquarters building. The mortgage carries an interest rate of
8.29%, with monthly interest and principal payments due starting January 1,
2001. Maturities of the Mortgage Payable at December 31, 2001, are as follows:
2002 $ 80
2003 93
2004 98
2005 109
2006 119
Thereafter 11,117
------------
Total $ 11,616
============
(8) Income Taxes
The provision for income taxes consist of the following for the years ended
December 31:
<Table>
<Caption>
2001 2000 1999
--------------- --------------- ---------------
Current
Federal......................... $ 24,449 $ 22,630 $ 18,988
State........................... 2,100 3,930 2,526
Tax effect of employee stock
option exercises.............. 1,077 -- --
Foreign......................... 2,411 391 --
--------------- --------------- ---------------
Total current....................... 30,037 26,951 21,514
--------------- --------------- ---------------
Deferred
Federal......................... 2,538 326 299
State........................... 140 171 445
Foreign......................... (504) (207) --
--------------- --------------- ---------------
Total deferred..................... 2,174 290 744
--------------- --------------- ---------------
Total.................... $ 32,211 $ 27,241 $ 22,258
=============== =============== ===============
</Table>
F-23
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
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:
<Table>
<Caption>
2001 2000
---------------- ----------------
Deferred tax assets:
Allowance for doubtful accounts on Notes Receivable $ 966 $ 1,212
Contract servicing liability arising from Notes
Receivable securitized.......................... 2,782 2,025
Other............................................. 1,114 955
---------------- ----------------
Total deferred tax assets.................. 4,862 4,192
---------------- ----------------
Deferred tax liabilities:
Residual interest in securitizations, net......... 3,053 2,229
Property and equipment............................ 1,603 1,186
Other assets...................................... 1,316 --
Other............................................. 1,140 1,107
---------------- ----------------
Total deferred tax liabilities............. 7,112 4,522
---------------- ----------------
Net deferred tax liabilities............... $ (2,250) $ (330)
================ ================
</Table>
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-24
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(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:
<Table>
<Caption>
2001 2000 1999
--------------- ---------------- ----------------
Income tax at Federal statutory rate................ 35.0% 35.0% 35.0%
State tax, net of Federal benefit................... 2.3 3.8 3.4
Other............................................... (0.5) 0.1 0.6
--------------- ---------------- ----------------
36.8% 38.9% 39.0%
=============== ================ ================
</Table>
The Company had $6,185, $(895), and $0 of pre-tax income (losses) from foreign
operations for the years ended December 31, 2001, 2000, and 1999, respectively.
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) Plan
The Company sponsors a 401(k) plan covering all Trendwest employees. Company
contributions totaled $4,995, $3,792, and $2,708 for the years ended December
31, 2001, 2000, and 1999, respectively.
(10) Employee Stock Purchase Plan
In July, 1999, the Shareholders of the Company approved the 1999 Employee Stock
Purchase Plan (Plan). The Plan allows employees to purchase up to two thousand
five hundred dollars worth of the Company's common stock at a 15% discount from
the market price on the last business day of a quarter. There is no lookback
provision for determining market value. Under the Plan, the Company issued
39,808, 76,320 and 39,114 shares of common stock during the years ended December
31, 2001, 2000, and 1999 respectively. The 15% discount from the market price is
considered compensation expense for SFAS No. 123 disclosure purposes only and is
included in the SFAS No. 123 disclosures in note 12.
F-25
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
(11) Derivative Financial Instruments
During January 2001, the Company entered into two foreign exchange contracts to
manage the Company's exposure to foreign exchange rate risk associated with the
development of a resort property in Canada. The foreign exchange purchase
contracts had notional amounts of $2,081 CDN at a rate of $1.4955 CDN/US which
was settled on July 3, 2001 and $16,919 CDN at a rate of $1.4905 CDN/US to be
settled on September 30, 2002 corresponding to the anticipated dates of payments
on the resort development. The foreign exchange contracts have been designated
as cash flow hedges and accordingly in 2001 the Company has recognized $444 of
unrealized losses, net of $267 tax effect, in other comprehensive income
representing the change in the fair value of the effective portion of the hedge.
The related liability for the losses of $711 is included in accrued liabilities.
Changes in the fair value of the ineffective portion of the hedge were
immaterial in 2001. The unrealized gains or losses resulting from the foreign
exchange contracts will be reclassified into earnings once the Vacation Credits
associated with the resort property under development are sold and the related
costs are recognized in earnings.
No derivative financial instruments were outstanding at December 31, 2000.
(12) 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 the underlying common stock. The plan provides for grants up to
10% of the Company's outstanding shares (3,809,459 at December 31, 2001). Stock
options vest ratably over five years and expire three years after becoming fully
vested.
The following table summarizes stock option activity:
<Table>
<Caption>
Weighted
Number of average
Shares exercise price
------------------ -----------------
Balance at December 31, 1998................. 1,361,250 $ 10.61
Granted...................................... 348,750 9.45
Expired or canceled.......................... (97,875) 10.52
------------------ -----------------
Balance at December 31, 1999................. 1,612,125 $ 10.37
Granted...................................... 454,500 10.91
Exercised.................................... (4,950) 5.87
Expired or canceled.......................... (51,975) 10.67
------------------ -----------------
Balance at December 31, 2000................. 2,009,700 $ 10.49
Granted...................................... 350,325 25.08
Exercised.................................... (408,900) 11.56
Expired or canceled.......................... (28,350) 10.39
------------------ -----------------
Balance at December 31, 2001................. 1,922,775 $ 12.92
================== =================
</Table>
F-26
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
The following table summarizes information about stock options outstanding under
the Company's stock option plan at December 31, 2001:
<Table>
<Caption>
Options outstanding Options exercisable
-------------------------------------------------------------- ----------------------------------
Weighted-average
remaining Weighted-average Weighted-average
Range of exercise Number contractual life exercise price Number exercise price
prices outstanding (in years) per share exercisable per share
------------------------ --------------- ---------------------- ------------------- -------------- ------------------
$5.05 - $10.10 526,875 5.49 $8.05 193,200 $7.53
$10.31 - $11.05 371,925 6.94 $11.04 72,225 $11.05
$11.95 - $11.95 672,975 3.81 $11.95 486,450 $11.95
$16.00 - $25.20 351,000 7.96 $25.08 -- --
------------------------ --------------- ---------------------- ------------------- -------------- ------------------
$5.05 - $25.20 1,922,775 5.63 $12.92 751,875 $10.73
</Table>
At December 31, 2001, 2000, and 1999, exercisable options of 751,875, 750,375
and 454,275, respectively, were outstanding at weighted average exercise prices
of $10.73, $10.88, and $11.21 per share, respectively.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized in the accompanying
financial statements as all options were granted with exercise prices equal to
the fair market value of the underlying common stock on the grant date. Had the
Company determined compensation cost based on the fair value of the options on
the grant date under SFAS No. 123, the Company's net income would have been
reduced to the pro forma amounts indicated below. For disclosure purposes, the
Company recognizes compensation expense related to employee stock options on a
straight-line basis.
<Table>
<Caption>
Year ended December 31,
---------------------------------------------------
2001 2000 1999
--------------- ---------------- --------------
Net income, as reported............................... $ 55,202 $ 42,859 $ 34,873
Net income, pro forma................................. 52,952 41,047 33,511
Basic EPS, as reported................................ 1.46 1.13 0.90
Diluted EPS, as reported.............................. 1.43 1.12 0.90
Basic EPS, pro forma.................................. 1.40 1.08 0.87
Diluted EPS, pro forma................................ 1.37 1.08 0.87
</Table>
F-27
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
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:
<Table>
<Caption>
Year ended December 31,
-----------------------------------------------
2001 2000 1999
--------------- --------------- ------------
Annual dividend yield..................................... 0.0% 0.0% 0.0%
Volatility................................................ 58.0% 50.9% 54.3%
Risk free interest rate................................... 4.9% 5.2% 5.8%
Expected life ............................................ 6.5 years 6 years 6 years
</Table>
The weighted average grant date fair value per share of options granted during
the years ended December 31, 2001, 2000, and 1999 were $15.29, $5.97, and $5.47,
respectively.
(13) 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 balance sheet. 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:
<Table>
<Caption>
2001 2000
--------------------------------- ------------------------------
Carrying Estimated fair Carrying Estimated
value value value fair value
-------------- ---------------- ------------- ---------------
Financial assets:
Cash................................... (a) $ 821 $ 821 $ 404 $ 404
Restricted cash........................ (a) 8,838 8,838 7,201 7,201
Notes Receivable, net.................. (a) 54,325 54,325 32,981 32,981
Residual interest in securitizations, net (b) 102,755 102,755 74,317 74,317
Financial liabilities:
Due to Parent and Affiliate............ (c) 11,653 11,653 419 419
Borrowings under bank line of credit... (c) 74,318 74,318 48,441 48,441
Mortgage payable....................... (d) 11,616 11,616 11,696 11,696
Note payable to Parent................. (d) 13,298 13,298 17,731 17,731
Foreign exchange contract.............. 711 711 -- --
</Table>
F-28
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
(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) The fair value of the overcollaterization component is determined to
approximate the carrying value after the allowance for doubtful accounts on
Notes Receivable securitized and before deferred gross profit. The fair
value of the interest rate differential component is determined using
estimated discounted future cash flows taking into consideration
anticipated prepayment and default rates as follows:
<Table>
<Caption>
2001 2000
--------------- ---------------
Discount rate............................... 13.5% 13.5%
Weighted annual prepayment speed and
expected default rate................... 10.5% 9.0%
</Table>
(c) The carrying value of the due to Parent approximates fair value due to the
variable interest rates charged on the borrowings. The carrying value of
the due to Affiliate approximates fair value due to its short-term nature.
(d) The carrying value reported approximates the fair value because the
interest rates charged on these obligations approximates the market rate of
interest for similar types of borrowings.
Because no market exists for a portion of the financial instruments, fair value
estimates may be based on judgments regarding future cash flows 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.
(14) Related Party Transactions
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
owners. Under the terms of the management agreement, the Company receives a
management fee equal to the lesser of 15% of WorldMark's budgeted 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 reimburses WorldMark for
delinquent dues on canceled memberships in order to reacquire Vacation Credits
securing defaulted Notes Receivable. The managed operations of WorldMark are not
consolidated in the accompanying financial statements as the Company does not
exercise voting control over WorldMark and the terms of the management agreement
do not result in the Company having a controlling financial interest in
WorldMark.
WorldMark has programs whereby an Owner can use his or her Vacation Credits
toward other vacation options such as package tours and cruises. Trendwest
purchases the vacation packages on behalf of
F-29
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
WorldMark and is subsequently reimbursed. WorldMark provides the owner with the
package in exchange for the owner's Vacation Credits plus cash, if necessary.
The Vacation Credits are deposited into a pool of credits. The pool of credits
is available to the Company for a fee of $0.07 per credit or for one-time use to
owners for a fee of $0.08 per credit paid to WorldMark. Trendwest utilizes these
Vacation Credits in certain marketing programs. The Company also pays various
salaries and other costs on behalf of WorldMark and is subsequently reimbursed.
The Company does not recognize any revenues related to these reimbursement
transactions with WorldMark. A summary of these transactions for the years ended
December 31 follows:
<Table>
<Caption>
2001 2000 1999
------------- ------------- -------------
Management fee income recognized by Trendwest.............. $ 3,170 $ 3,877 $ 2,972
Dues expense incurred by Trendwest......................... 1,735 1,008 1,376
Delinquent dues expense incurred by Trendwest.............. 1,497 940 727
Salaries and benefits reimbursed by WorldMark.............. (a) 1,848 6,208 10,417
Travel packages reimbursed by WorldMark.................... 1,130 430 --
One-time use credits purchased by Trendwest................ 2,464 1,282 --
Other expenses reimbursed by WorldMark..................... (b) 2,560 933 763
</Table>
(a) WorldMark began funding its own payroll and taxes during 2001.
(b) Other reimbursed expenses increased during 2001 due to leasing of office
space from the Company and payment of dues statement preparation and
related costs.
(ii) Financial Information (Unaudited)
A summary of financial information for WorldMark as of and for the years ended
December 31, 2001 and 2000 is as follows:
<Table>
<Caption>
2001 2000
---------------- ----------------
Cash and investment securities........................................ $ 20,058 $ 16,772
Member dues receivable................................................ 33,065 24,378
Other assets.......................................................... 6,402 5,302
---------------- ----------------
Total assets................................................. 59,525 46,452
---------------- ----------------
Deferred revenue...................................................... 35,911 27,432
Other liabilities..................................................... 4,677 2,992
---------------- ----------------
Total liabilities............................................ 40,588 30,424
---------------- ----------------
Net assets................................................... $ 18,937 $ 16,028
================ ================
Annual member assessments............................................. $ 48,041 $ 36,560
================ ================
Condominiums owned, at Developers' unamortized historical cost........ $ 416,957 $ 301,436
================ ================
</Table>
F-30
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
WorldMark maintains a reserve for replacement costs of depreciable assets. Such
reserves at December 31, 2001 and 2000, were $18,937 and $16,028, respectively.
WorldMark South Pacific
The Company manages the resort properties transferred to WorldMark South Pacific
through its subsidiary Trendwest South Pacific under the terms of a management
agreement that is subject to renewal every five years starting in 2005. Under
the terms of the management agreement, the Company receives a management fee
equal to 15% of WorldMark South Pacific's expenditures (excluding the management
fee). In addition, the Company is responsible for paying annual dues on Vacation
Credits that it owns prior to their sale to customers and reimburses WorldMark
South Pacific for delinquent dues on canceled memberships in order to reacquire
Vacation Credits securing defaulted Notes Receivable. The managed operations of
WorldMark South Pacific are not consolidated in the accompanying financial
statements as the Company does not exercise voting control over WorldMark South
Pacific and the terms of the management agreement do not result in the Company
having a controlling financial interest in WorldMark South Pacific. A summary of
these transactions for the years ended December 31 follows:
<Table>
<Caption>
2001 2000
------------- --------------
Management fee income recognized by Trendwest............ $ 185 $ 47
Dues expense incurred by Trendwest....................... 243 279
</Table>
WorldMark South Pacific maintains a reserve for replacement costs of depreciable
assets. Such reserves at December 31, 2001 and 2000 were $191 and $49,
respectively.
Parent
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 (5.75% and 10.50%
at December 31, 2001 and 2000, respectively). Outstanding borrowings under this
credit agreement were $7,129 and $419 at December 31, 2001 and 2000,
respectively. The Company periodically lends excess funds to the Parent at the
prime rate minus 2% (2.75% and 7.50% at December 31, 2001 and 2000,
respectively). There were no outstanding lendings under this agreement at
December 31, 2001 and 2000.
The Company also reimburses the Parent its share of insurance expenses. A
summary of these transactions follows for the years ended December 31:
<Table>
<Caption>
2001 2000 1999
---------------- ---------------- ----------------
Interest expense incurred by Trendwest. $ 284 $ 44 $ 31
Interest income recognized by Trendwest -- 114 129
Insurance expense incurred by Trendwest 7,424 5,224 3,927
</Table>
F-31
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
Affiliate
On September 28, 2001, the Company entered into an agreement with Eagle Crest,
Inc. (Eagle Crest) and Running Y Resort, Inc. (Running Y) (collectively
Affiliate), wholly-owned subsidiaries of Parent, to acquire $12,138 of Notes
Receivable at Affiliate's historical cost of face value plus accrued interest in
exchange for a cash payment of $8,625 and a $3,513 promissory note. The
promissory note is non-interest bearing, payable in equal monthly installments,
and is due in full on the earlier of September 28, 2002 or the closing date of
the Company's next securitization transaction following the acquisition date.
Under the agreement, any remaining principal balance on Notes Receivable
acquired from Affiliate which default reduce the outstanding amount owed by the
Company under the promissory note.
In addition, the Company acquired land from Affiliate for future development in
McCall, Idaho, in exchange for a non-interest bearing promissory note of $1,293.
This note matures on the earlier of September 28, 2003, or commencement of
construction on the property by the Company.
At December 31, 2001, the total amount due to Affiliate was $4,524.
In conjunction with the above transactions, Affiliate entered into an agreement
with the Company and WorldMark to transfer all of its developed unsold resort
properties to WorldMark in exchange for the right to sell WorldMark Vacation
Credits equal to the credit value of the properties. The Company agreed to
purchase Notes Receivable resulting from the subsequent sale of Vacation Credits
by Affiliate at face value. Affiliate will refund to the Company any remaining
principal balance on Notes Receivable purchased from Affiliate that default.
Additionally, the Company receives a fee from Affiliate for each Vacation Credit
sale made by Affiliate and must pay a commission fee to Affiliate for any
Upgrades of Vacation Credit sales originated by Affiliate. Through 1999, the
Company acquired certain Notes Receivable from Affiliate under a similar
agreement which expired in 1999.
The following is a summary of the transactions with Affiliate for the years
ended December 31:
<Table>
<Caption>
2001 2000 1999
---------------- ---------------- ----------------
Notes Receivable purchased from
Affiliate............................ $ 17,785 $ -- $ 650
Transaction fees received from Affiliate 222 -- --
Upgrade commissions paid to Affiliate.. 186 -- --
</Table>
(15) MountainStar Development
The Company is developing a resort in central Washington state known as
MountainStar. Prior to June 2000, the Parent owned the land and the Company was
acting as the developer. In June of 2000, the
F-32
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
Company acquired the MountainStar development from its Parent. The purchase
price was $47,600, consisting of $25,000 in cash, a $17,731 unsecured note
payable to Parent and the settlement by the Company of a $4,869 intercompany
receivable from Parent. The excess of the purchase price over Parent's
historical cost was treated as a non-cash reduction to retained earnings due to
the accounting requirement to use historical cost on such a transfer from a
controlling shareholder. The Company recorded the asset at Parent's historical
cost of $44,300; the excess $3,300 of the purchase price over this amount
reduced retained earnings. The cash payment was funded primarily through the
Company's existing credit facilities.
The property is located approximately 80 miles east of Seattle, Washington. The
Company plans to develop the property as two separate projects: the MountainStar
Master Planned Resort (MPR) and the City of Cle Elum Urban Growth Area (UGA).
Plans for the 6,300-acre MPR include at least two golf courses, numerous
recreational amenities and 3,785 dwelling units including two lodges,
condominiums, cabins and vacation homes. The MPR land use plan has been approved
by Kittitas County and all appeals have been settled. The Company is also
working on several strategies to provide adequate water to develop the proposed
projects. There can be no assurance that these strategies will be successful. If
the Company is unable to achieve its objectives with regards to water rights,
the actual development of the MPR could be materially different than outlined
above.
The 1,100-acre UGA is planned as a mixed-use development including a primary
home community with single family homes, condominiums, an office park, a golf
course, and apartment units. The City of Cle Elum is scheduled to release the
Final Environmental Impact Statement in Spring 2002. The City of Cle Elum is the
lead agency for land use decisions in the UGA. If the Company is not successful
in obtaining the desired entitlements for the UGA, the final development of the
property could be materially different than outlined above.
The Company does not anticipate generating revenue from either project during
2002.
(16) Commitments and Contingencies
Purchase Commitments
The Company routinely enters into cancelable purchase agreements with various
parties to acquire and build resort properties. At December 31, 2001, the
Company has outstanding purchase commitments of $136,305 related to properties
under development. Anticipated future payments under the purchase agreements are
as follows for the years ending December 31:
2002 $ 66,190
2003 70,115
------------
Total $ 136,305
============
F-33
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
Surety and Performance Bonds
The Company utilizes surety and performance bonds in developing resort
properties. As of December 31, 2001, there were $4,625 in surety bonds
outstanding.
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:
2002.......................... $ 8,210
2003.......................... 7,247
2004.......................... 6,771
2005.......................... 5,034
2006.......................... 2,628
Thereafter.................... 617
Rental expense amounted to $8,526, $5,925, and $4,225 for the years ended
December 31, 2001, 2000, and 1999, respectively.
(17) Segment Reporting
The Company has two reportable segments; sales and financing. The sales segment
markets and sells Vacation Credits and Fractional Interests. The finance segment
is primarily responsible for servicing and collecting Notes Receivable
originated in conjunction with the financing of sales of Vacation Credits and
Fractional Interest sales. The finance segment does not include the activities
of the Company's finance subsidiaries. Management evaluates the business based
on sales and marketing activities as these are the primary drivers of the
business.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profits or losses from sales and marketing activities on a pre-tax
basis. Intersegment revenues are recorded at market rates as if the transactions
occurred with third parties. Assets are not reported by segment.
F-34
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
The following tables summarize the segment activity of the Company:
<Table>
<Caption>
Segment
Year ended December 31, 2001: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue........................... $ 406,137 $ 5,282 $ 4,607 $ 416,026
Interest revenue - net..................... -- 6,238 -- 6,238
Interest revenue-intersegment.............. -- 7,243 -- 7,243
Intersegment revenue....................... -- 1,446 -- 1,446
----------- ----------- ----------- -------------
Segment revenue................... $ 406,137 $ 20,209 $ 4,607 $ 430,953
Segment profit............................. $ 62,927 $ 13,154 $ 3,019 $ 79,100
Significant non-cash items:
Provision for doubtful accounts and sales
returns.................................. $ 38,886 $ -- $ -- $ 38,886
</Table>
<Table>
<Caption>
Segment
Year ended December 31, 2000: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue........................... $ 293,130 $ 3,943 $ 4,763 $ 301,836
Interest revenue - net..................... -- 4,373 -- 4,373
Interest revenue-intersegment.............. -- 6,712 -- 6,712
Intersegment revenue....................... -- 1,933 -- 1,933
----------- ----------- ----------- -------------
Segment revenue................... $ 293,130 $ 16,961 $ 4,763 $ 314,854
Segment profit............................. $ 53,026 $ 11,036 $ 3,004 $ 67,066
Significant non-cash items:
Provision for doubtful accounts and sales
returns.................................. $ 27,015 $ -- $ -- $ 27,015
</Table>
<Table>
<Caption>
Segment
Year ended December 31, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue........................... $ 234,315 $ 4,463 $ 3,710 $ 242,488
Interest revenue - net..................... -- 5,552 -- 5,552
Interest revenue-intersegment.............. -- 3,839 -- 3,839
Intersegment revenue....................... -- 1,605 -- 1,605
----------- ----------- ----------- -------------
Segment revenue................... $ 234,315 $ 15,459 $ 3,710 $ 253,484
Segment profit............................. $ 40,035 $ 10,890 $ 2,054 $ 52,979
Significant non-cash items:
Provision for doubtful accounts and sales
returns.................................. $ 21,407 $ -- $ -- $ 21,407
Gain on sale of property and equipment..... $ -- $ 869 $ -- $ 869
</Table>
F-35
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2001, 2000, and 1999
(dollar amounts in thousands)
The following table provides a reconciliation of segment revenues and profits to
the consolidated amounts:
<Table>
<Caption>
Year ended December 31,
2001 2000 1999
------------- ------------ ---------------
------------- ------------ ---------------
Segment revenue.............................. $ 430,953 $ 314,854 $ 253,484
Interest expense reported net of capitalized
interest................................. 591 479 442
Elimination of intersegment revenue ......... (8,689) (8,645) (5,444)
Finance subsidiaries revenue ................ 46,313 30,950 25,644
------------- ------------ ---------------
Consolidated revenue.................. $ 469,168 $ 337,638 $ 274,126
============= ============ ===============
Segment profit............................... $ 79,100 $ 67,066 $ 52,979
Corporate overhead not included in segment
reporting................................ (29,712) (18,983) (15,091)
Finance subsidiaries profit ................. 38,025 22,017 19,243
------------- ------------ ---------------
Consolidated pre-tax income........... $ 87,413 $ 70,100 $ 57,131
============= ============ ===============
</Table>
The Company's revenue from external customers derived from sales within the
United States totaled $376,642, $287,795, and $234,665 for the years ended
December 31, 2001, 2000, and 1999, respectively. Revenue from external customers
derived from sales in all foreign countries, primarily Australia, totaled
$29,495, $5,335, and $0 for the years ended December 31, 2001, 2000, and 1999,
respectively. Revenue from external customers is attributed to countries based
on the location where the sale was made. Substantially all of the Company's
long-lived assets are located within the United States. The net assets of
foreign operations totaled $9,964 and $6,140 at December 31, 2001 and 2000,
respectively.
F-36
<Page>
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
The following documents are filed as part of this report:
<Table>
<Caption>
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of Trendwest Resorts, Inc. (12)
3.2 Amended and Restated Bylaws of Trendwest Resorts, Inc. (12)
10.1 Receivables Purchase Agreement among Trendwest Resorts, Inc. and TW Holdings II, Inc. and TW Holdings
III, Inc. and TRI Funding IV, Inc. dated as of November 1, 2000. (1)
10.2 Receivables Purchase Agreement among Trendwest Resorts, Inc., TW Holdings III, Inc., Sage Systems,
Inc. International Securitization Corporation and Bank One, NA dated as of January 7, 2000. (3)
10.3 Receivables Sale Agreement between Trendwest Resorts, Inc. and TW Holdings III, Inc. dated as of
January 7, 2000. (3)
10.4 Receivables Purchase Agreement among Trendwest Resorts, Inc., TRI Funding II, Inc., TRI Funding
Company I, LLC, TW Holdings, Inc., TW Holdings II, Inc., and TRI Funding III, Inc. dated as of August
1, 1999. (6)
10.5 Receivable Sale Agreement between Trendwest Resorts, Inc. and TW Holdings II dated as of April 15,
1999. (7)
10.6 Receivables Purchase Agreement among Trendwest Resorts, Inc., TRI Funding Company I, L.L.C., TW
Holdings Inc. and Trendwest Funding II, Inc., dated as of March 1, 1998. (10)
10.7 Receivables Purchase Agreement among Trendwest Resorts, Inc., TW Holdings, Inc. and Trendwest Funding
I, Inc., dated as of March 1, 1996. (12)
*10.8 Second Amendment dated March 7, 2001 to Credit Agreement between Trendwest Resorts, Inc., and
Trendwest South Pacific PTY. Ltd., as the Borrowers, the lenders named therein, KeyBank National
Association, as lead arranger and administrative agent and as the letter of credit issuing lender,
Bank One, NA, as syndication agent and Australian lender dated as of August 14, 2000.
*10.9 First Amendment dated January 19, 2001 to Credit Agreement between Trendwest Resorts, Inc., and
Trendwest South Pacific PTY. Ltd., as the Borrowers, the lenders named therein, KeyBank National
Association, as lead arranger and administrative agent and as the letter of credit issuing lender,
Bank One, NA, as syndication agent and Australian lender dated as of August 14, 2000.
10.10 Credit Agreement between Trendwest Resorts, Inc., and Trendwest South Pacific PTY. Ltd., as the
Borrowers, the lenders named therein, KeyBank National Association, as lead arranger and
administrative agent and as the letter of credit issuing lender, Bank One, NA, as syndication agent
and Australian lender dated as of August 14, 2000. (2)
10.11 Servicing Agreement among TRI Funding IV, Inc., Trendwest Resorts, Inc. and Wells Fargo Bank
Minnesota, National Association dated as of November 1, 2000. (1)
10.12 Indenture Among TRI Funding IV, Inc., Trendwest Resorts, Inc. and Wells Fargo Bank Minnesota, National
Association dated as of November 1, 2000. (1)
10.13 Indenture among Trendwest Resorts, Inc., TRI Funding III, Inc. and Norwest Bank Minnesota, National
Association dated as of August 1, 1999. (6)
10.14 Trust Indenture between Trendwest Resorts, Inc., TW Holdings II, Sages Systems, Inc., and LaSalle
National Bank dated as of April 15, 1999. (7)
10.15 Series 1998-1 Supplement dated as of March 1, 1998 to Indenture among Trendwest Resorts, Inc.,
Trendwest Funding II, Inc. and LaSalle National Bank dated as of March 1, 1998. (10)
10.16 Indenture among Trendwest Resorts, Inc., TRI Funding II, Inc. and LaSalle National Bank, dated as of
March 1, 1998. (10)
10.17 Indenture among Trendwest Resorts, Inc., TRI Funding Company I, L.L.C. and LaSalle National Bank,
dated as of March 1, 1996. (12)
10.18 Purchase Agreement between TRI Funding III, Inc., and Prudential Securities Incorporated dated August
18, 1999. (6)
10.19 Purchase and Sale Agreement between Trendwest Resorts, Inc., Trendwest Funding II, Inc. and TRI
Funding II, Inc. (10)
10.20 Purchase and Sale Agreement among Trendwest Resorts, Inc., Trendwest Funding I, Inc., TWH Funding I,
Inc. and TRI Funding Company I, L.L.C., dated March 1, 1996. (12)
10.21 Management Agreement (Fourth Amended) between Trendwest Resorts, Inc. and WorldMark, the Club, dated
September 30, 1994. (12)
10.22 Stock Purchase Agreement among JELD-WEN, inc., Trendwest Resorts, Inc., and Trendwest Investments,
Inc. dated as of June 12, 2000. (4)
10.23 Form of Promissory Note relating to Stock Purchase Agreement among JELD-WEN, inc., Trendwest Resorts,
Inc., and Trendwest Investments, Inc. dated as of June 12, 2000. (4)
*10.24 Receivables Purchase Agreement Among Trendwest Resorts, Inc. and TW Holdings III, Inc. and TRI Funding
V, Inc. Dated as of August 1, 2001
*10.25 Servicing Agreement Among TRI Funding V, Inc. and Trendwest Resorts, Inc. and Wells Fargo Bank
Minnesota, National Association Dated as of August 1, 2001
39
*10.26 Indenture Among TRI Funding V, Inc. And Trendwest Resorts, Inc. and Wells Fargo Bank Minnesota,
National Association Dated as of August 1, 2001
*10.27 Receivables Purchase Agreement Among Trendwest Resorts, Inc., TW Holdings III, Inc., Wells Fargo Bank
Minnesota, Jupiter Securitization Corporation, Blue Keel Funding, LLC, Fleet Securities, Inc., Bank
One, NA, and Bank One Trust Company Dated as of September 28, 2001
*10.28 Receivables Sales Agreement Among Trendwest Resorts, Inc. and TW Holdings III, Inc. Dated as of
September 28, 2001
*10.29 Receivables Transfer Agreement Among Trendwest Resorts, Inc., Eagle Crest, Inc., and Running Y Resort,
Inc. Dated as of September 28, 2001
*10.30 Acquisition Agreement dated as of May 4, 2001 by and among EAGLE CREST, INC., an Oregon corporation,
RUNNING Y RESORT, INC., an Oregon corporation and EAGLE CREST VACATION CLUB, a nonprofit Oregon
corporation and TRENDWEST RESORTS, INC., an Oregon corporation and WORLDMARK, THE CLUB, a California
nonprofit mutual benefit corporation.
*10.31 WORLDMARK MARKETING AGREEMENT dated as of May 4, 2001, by and among TRENDWEST RESORTS, INC., an Oregon
corporation, EAGLE CREST, INC., an Oregon corporation, and RUNNING Y RESORT, INC., an Oregon
corporation
10.32 Trendwest Resorts, Inc. 1999 Employee Stock Purchase Plan. (8)
10.33 Trendwest Resorts, Inc. 1997 Employee Stock Option Plan (12)
10.34 Form of Employment Agreement between William F. Peare and Trendwest Resorts, Inc. (12)
10.35 Form of Employment Agreement between Jeffery P. Sites and Trendwest Resorts, Inc. (12)
*10.36 Form of Indemnity Agreement between Registrant and its directors
11 Statement re Computation of Per Share Earnings ( see Note 1 to the financial statements included in
this Form 10-K)
*21 List of Subsidiaries of the Registrant
*23.1 Consent of KPMG LLP
</Table>
* Filed herewith.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, filed March 30, 2001.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000, filed on November 13, 2000.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2000, filed on May 12, 2000.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 22, 2000.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, filed March 30, 2000.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999, filed on November 12, 1999.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1999, filed on August 10, 1999.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on July 1, 1999.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed August 14, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, filed May 15, 1998.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed March 31, 1998.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-26861).
____________________________________________________________________________
(b) Reports on Form 8-K
FORM 8-K dated September 26, 2001 on Item 7: Financial Statements, Pro Forma
Financial Information and Exhibits, relating to agreement with RIDGE, a local
citizens group, settling the dispute over a Master Planned Resort in Upper
Kittitas County in Washington State (site of future MountainStar resort).
FORM 8-K dated December 19, 2001 on Item 9: Regulation FD Disclosure. The
Company announced its projected fourth quarter 2001 financial results and its
2002 projections.
40
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 29, 2002.
TRENDWEST RESORTS, INC.
By: /s/ JEFFERY P. SITES
-------------------------------------
Jeffery P. Sites
Executive Vice President
<Table>
<Caption>
/s/ WILLIAM F. PEARE President, Chief Executive Officer March 29, 2002
- ---------------------------------------------------------------
William F. Peare and Director
(Principal Executive Officer)
/s/ JEFFERY P. SITES Executive Vice President, March 29, 2002
- ---------------------------------------------------------------
Jeffery P. Sites Chief Operating Officer and
Director
/s/ TIMOTHY P. O'NEIL Vice President, Treasurer March 29, 2002
- ---------------------------------------------------------------
Timothy P. O'Neil and Chief Financial Officer
(Principal Financial Officer)
(Principal Accounting Officer)
/s/ JEROL E. ANDRES Director March 29, 2002
- ---------------------------------------------------------------
Jerol E. Andres
/s/ HARRY L. DEMOREST Director March 29, 2002
- ---------------------------------------------------------------
Harry L. Demorest
/s/ MIICHAEL P. HOLLERN Director March 29, 2002
- ---------------------------------------------------------------
Michael P. Hollern
/s/ DOUGLAS P. KINTZINGER Director March 29, 2002
- ---------------------------------------------------------------
Douglas P. Kintzinger
/s/ LINDA M. TUBBS Director March 29, 2002
- ---------------------------------------------------------------
Linda M. Tubbs
/s/ RODERICK C. WENDT Director March 29, 2002
- ---------------------------------------------------------------
Roderick C. Wendt
</Table>
41
EXHIBIT INDEX
<Table>
<Caption>
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of Trendwest Resorts, Inc. (12)
3.2 Amended and Restated Bylaws of Trendwest Resorts, Inc. (12)
10.1 Receivables Purchase Agreement among Trendwest Resorts, Inc. and TW Holdings II, Inc. and TW Holdings
III, Inc. and TRI Funding IV, Inc. dated as of November 1, 2000. (1)
10.2 Receivables Purchase Agreement among Trendwest Resorts, Inc., TW Holdings III, Inc., Sage Systems,
Inc. International Securitization Corporation and Bank One, NA dated as of January 7, 2000. (3)
10.3 Receivables Sale Agreement between Trendwest Resorts, Inc. and TW Holdings III, Inc. dated as of
January 7, 2000. (3)
10.4 Receivables Purchase Agreement among Trendwest Resorts, Inc., TRI Funding II, Inc., TRI Funding
Company I, LLC, TW Holdings, Inc., TW Holdings II, Inc., and TRI Funding III, Inc. dated as of August
1, 1999. (6)
10.5 Receivable Sale Agreement between Trendwest Resorts, Inc. and TW Holdings II dated as of April 15,
1999. (7)
10.6 Receivables Purchase Agreement among Trendwest Resorts, Inc., TRI Funding Company I, L.L.C., TW
Holdings Inc. and Trendwest Funding II, Inc., dated as of March 1, 1998. (10)
10.7 Receivables Purchase Agreement among Trendwest Resorts, Inc., TW Holdings, Inc. and Trendwest Funding
I, Inc., dated as of March 1, 1996. (12)
*10.8 Second Amendment dated March 7, 2001 to Credit Agreement between Trendwest Resorts, Inc., and
Trendwest South Pacific PTY. Ltd., as the Borrowers, the lenders named therein, KeyBank National
Association, as lead arranger and administrative agent and as the letter of credit issuing lender,
Bank One, NA, as syndication agent and Australian lender dated as of August 14, 2000.
*10.9 First Amendment dated January 19, 2001 to Credit Agreement between Trendwest Resorts, Inc., and
Trendwest South Pacific PTY. Ltd., as the Borrowers, the lenders named therein, KeyBank National
Association, as lead arranger and administrative agent and as the letter of credit issuing lender,
Bank One, NA, as syndication agent and Australian lender dated as of August 14, 2000.
10.10 Credit Agreement between Trendwest Resorts, Inc., and Trendwest South Pacific PTY. Ltd., as the
Borrowers, the lenders named therein, KeyBank National Association, as lead arranger and
administrative agent and as the letter of credit issuing lender, Bank One, NA, as syndication agent
and Australian lender dated as of August 14, 2000. (2)
10.11 Servicing Agreement among TRI Funding IV, Inc., Trendwest Resorts, Inc. and Wells Fargo Bank
Minnesota, National Association dated as of November 1, 2000. (1)
10.12 Indenture Among TRI Funding IV, Inc., Trendwest Resorts, Inc. and Wells Fargo Bank Minnesota, National
Association dated as of November 1, 2000. (1)
10.13 Indenture among Trendwest Resorts, Inc., TRI Funding III, Inc. and Norwest Bank Minnesota, National
Association dated as of August 1, 1999. (6)
10.14 Trust Indenture between Trendwest Resorts, Inc., TW Holdings II, Sages Systems, Inc., and LaSalle
National Bank dated as of April 15, 1999. (7)
10.15 Series 1998-1 Supplement dated as of March 1, 1998 to Indenture among Trendwest Resorts, Inc.,
Trendwest Funding II, Inc. and LaSalle National Bank dated as of March 1, 1998. (10)
10.16 Indenture among Trendwest Resorts, Inc., TRI Funding II, Inc. and LaSalle National Bank, dated as of
March 1, 1998. (10)
10.17 Indenture among Trendwest Resorts, Inc., TRI Funding Company I, L.L.C. and LaSalle National Bank,
dated as of March 1, 1996. (12)
10.18 Purchase Agreement between TRI Funding III, Inc., and Prudential Securities Incorporated dated August
18, 1999. (6)
10.19 Purchase and Sale Agreement between Trendwest Resorts, Inc., Trendwest Funding II, Inc. and TRI
Funding II, Inc. (10)
10.20 Purchase and Sale Agreement among Trendwest Resorts, Inc., Trendwest Funding I, Inc., TWH Funding I,
Inc. and TRI Funding Company I, L.L.C., dated March 1, 1996. (12)
10.21 Management Agreement (Fourth Amended) between Trendwest Resorts, Inc. and WorldMark, the Club, dated
September 30, 1994. (12)
10.22 Stock Purchase Agreement among JELD-WEN, inc., Trendwest Resorts, Inc., and Trendwest Investments,
Inc. dated as of June 12, 2000. (4)
10.23 Form of Promissory Note relating to Stock Purchase Agreement among JELD-WEN, inc., Trendwest Resorts,
Inc., and Trendwest Investments, Inc. dated as of June 12, 2000. (4)
*10.24 Receivables Purchase Agreement Among Trendwest Resorts, Inc. and TW Holdings III, Inc. and TRI Funding
V, Inc. Dated as of August 1, 2001
*10.25 Servicing Agreement Among TRI Funding V, Inc. and Trendwest Resorts, Inc. and Wells Fargo Bank
Minnesota, National Association Dated as of August 1, 2001
*10.26 Indenture Among TRI Funding V, Inc. And Trendwest Resorts, Inc. and Wells Fargo Bank Minnesota,
National Association Dated as of August 1, 2001
42
*10.27 Receivables Purchase Agreement Among Trendwest Resorts, Inc., TW Holdings III, Inc., Wells Fargo Bank
Minnesota, Jupiter Securitization Corporation, Blue Keel Funding, LLC, Fleet Securities, Inc., Bank
One, NA, and Bank One Trust Company Dated as of September 28, 2001
*10.28 Receivables Sales Agreement Among Trendwest Resorts, Inc. and TW Holdings III, Inc. Dated as of
September 28, 2001
*10.29 Receivables Transfer Agreement Among Trendwest Resorts, Inc., Eagle Crest, Inc., and Running Y Resort,
Inc. Dated as of September 28, 2001
*10.30 Acquisition Agreement dated as of May 4, 2001 by and among EAGLE CREST, INC., an Oregon corporation,
RUNNING Y RESORT, INC., an Oregon corporation and EAGLE CREST VACATION CLUB, a nonprofit Oregon
corporation and TRENDWEST RESORTS, INC., an Oregon corporation and WORLDMARK, THE CLUB, a California
nonprofit mutual benefit corporation.
*10.31 WORLDMARK MARKETING AGREEMENT dated as of May 4, 2001, by and among TRENDWEST RESORTS, INC., an Oregon
corporation, EAGLE CREST, INC., an Oregon corporation, and RUNNING Y RESORT, INC., an Oregon
corporation
10.32 Trendwest Resorts, Inc. 1999 Employee Stock Purchase Plan. (8)
10.33 Trendwest Resorts, Inc. 1997 Employee Stock Option Plan (12)
10.34 Form of Employment Agreement between William F. Peare and Trendwest Resorts, Inc. (12)
10.35 Form of Employment Agreement between Jeffery P. Sites and Trendwest Resorts, Inc. (12)
*10.36 Form of Indemnity Agreement between Registrant and its directors
11 Statement re Computation of Per Share Earnings ( see Note 1 to the financial statements included in
this Form 10-K)
*21 List of Subsidiaries of the Registrant
*23.1 Consent of KPMG LLP
</Table>
* Filed herewith.
(1) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 2000, filed March 30, 2001.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 2000, filed on November 13, 2000.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 2000, filed on May 12, 2000.
(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 22, 2000.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, filed March 30, 2000.
(6) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999, filed on November 12, 1999.
(7) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1999, filed on August 10, 1999.
(8) Incorporated by reference to the Company's Registration Statement on Form
S-8, filed on July 1, 1999.
(9) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1998, filed August 14, 1998.
(10) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the period ended March 31, 1998, filed May 15, 1998.
(11) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997, filed March 31, 1998.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-26861).
____________________________________________________________________________
43