United States
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1999
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
______________
Commission file number 000-22979
Trendwest Resorts, inc.
(Exact name of registrant as specified in its charter)
Oregon 93-1004403
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
9805 Willows Road
Redmond, Washington 98052
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (425) 498-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the registrant's no-par voting common stock outstanding
as of August 5, 1999: 17,129,026 shares.
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
June 30, December 31,
Assets 1999 1998
----------------- ----------------
(Unaudited)
Assets:
Cash $ 9 9
Restricted cash 3,153 2,351
Notes Receivable, net of allowance for doubtful accounts, sales
returns and deferred gross profit 94,328 93,361
Accrued interest and other receivables 12,420 11,399
Residual interest in Notes Receivable sold 28,457 23,683
Receivable from Parent 891 --
Inventories 44,057 42,309
Property and equipment, net 20,311 20,343
Deferred income taxes 464 702
Other assets 3,010 4,341
----------------- ----------------
Total assets $ 207,100 198,498
================= ================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable 5,669 1,436
Accrued liabilities 9,108 6,645
Accrued construction in progress 619 1,064
Borrowing under bank line of credit 20,000 30,000
Due to Parent -- 5,688
Allowance for recourse liability and deferred gross profit on Notes
Receivable sold 11,847 11,250
Income taxes payable 1,471 1,153
----------------- ----------------
Total liabilities 48,714 57,236
Shareholders' equity:
Preferred stock, no par value. Authorized 10,000,000 shares;
no shares issued or outstanding -- --
Common stock, no par value. Authorized 90,000,000 shares;
issued and outstanding 17,129,026 and 17,158,766 shares at June 30,
1999 and December 31, 1998, respectively 61,318 61,848
Retained earnings 97,068 79,414
----------------- ----------------
Total shareholders' equity 158,386 141,262
Commitments and contingencies
Total liabilities and shareholders' equity $ 207,100 198,498
================= ================
See accompanying notes to the condensed consolidated financial statements.
TRENDWEST RESORTS, INC
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ----------------- --------------- ----------------
Revenues:
Vacation Credit and Fractional Interest sales,
net $ 63,426 41,988 112,442 76,873
Finance income 3,338 3,101 7,289 6,300
Gains on sales of Notes Receivable 4,793 1,537 9,143 5,135
Resort management services 953 367 1,775 995
Other 785 1,000 2,550 1,519
---------------- ----------------- --------------- ----------------
Total revenues 73,295 47,993 133,199 90,822
---------------- ----------------- --------------- ----------------
Costs and operating expenses:
Vacation Credit and Fractional Interest cost of
sales 20,482 11,169 34,103 20,682
Resort management services 421 322 818 599
Sales and marketing 26,664 21,022 50,162 38,658
General and administrative 5,853 4,281 11,245 8,069
Provision for doubtful accounts and recourse
liability 4,377 2,919 7,820 5,315
Interest 53 2 109 38
---------------- ----------------- --------------- ----------------
Total costs and operating expenses 57,850 39,715 104,257 73,361
---------------- ----------------- --------------- ----------------
Income before income taxes 15,445 8,278 28,942 17,461
Income tax expense 5,935 3,114 11,288 6,433
---------------- ----------------- --------------- ----------------
Net income $ 9,510 5,164 17,654 11,028
================ ================= =============== ================
Basic net income per common share $ .55 .29 1.03 .63
Diluted net income per common share $ .55 .29 1.03 .63
Weighted average shares of common stock and
dilutive potential common stock outstanding:
Basic 17,140,051 17,593,366 17,149,358 17,593,366
Diluted 17,186,588 17,593,366 17,185,054 17,593,366
See accompanying notes to the condensed consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six months ended June 30,
--------------------------------------------
1999 1998
------------------- --------------------
Cash flows from operating activities:
Net income $ 17,654 11,028
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 750 474
Gain on sale of property and equipment (886) --
Amortization of residual interest in Notes Receivable sold 4,670 3,108
Provision for doubtful accounts, sales returns and recourse
liability 10,744 7,061
Recoveries of Notes Receivable charged off 134 98
Residual interest in Notes Receivables sold (9,473) (6,160)
Unrealized loss (gain) on residual interest in Notes Receivable
sold 874 (399)
Change in deferred gross profit (10) (510)
Deferred income tax expense (benefit) 238 (166)
Issuance of Notes Receivable (95,810) (67,104)
Proceeds from sale of Notes Receivable 66,022 55,643
Proceeds from repayment of Notes Receivable 21,975 13,924
Purchase of Notes Receivable (4,270) (7,477)
Changes in certain assets and liabilities:
Restricted cash (802) (339)
Inventories (1,748) 681
Accounts payable and accrued liabilities 2,594 (3,824)
Income taxes payable to Parent -- (2,755)
Income taxes payable 318 (429)
Other 244 202
------------------- --------------------
Net cash provided by operating activities 13,218 3,056
------------------- --------------------
Cash flows from investing activities:
Purchase of property and equipment (4,178) (3,818)
Proceeds from sale of property and equipment 4,412 --
------------------- --------------------
Net cash provided by (used in) investing activities 234 (3,818)
------------------- --------------------
Cash flows from financing activities:
Net (repayment) borrowings under bank line of credit and other (6,343) 4,000
Increase in Receivable from Parent (891) (123)
Decrease in Due to Parent (5,688) (1,947)
Repurchase of common stock (530) --
------------------- --------------------
Net cash (used in) provided by financing activities (13,452) 1,930
------------------- --------------------
Net increase (decrease) in cash -- 1,168
Cash at beginning of period 9 70
------------------- --------------------
Cash at end of period $ 9 1,238
=================== ====================
See accompanying notes to the condensed consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(continued)
(dollars in thousands)
(unaudited)
Six month ended June 30,
-----------------------------------------------
1999 1998
-------------------- ----------------------
Supplemental disclosures of cash flow information cash paid during the period
for:
Interest (excluding capitalized amounts of $715 and $238,
respectively) $ 146 27
Income taxes 10,732 9,783
See accompanying notes to the condensed consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(dollars in thousands except per share amounts)
(Unaudited)
Note 1 - Background
Trendwest Resorts, Inc. (Company) markets, sells and finances timeshare
ownership interests in the form of perpetual timeshare credits (Vacation
Credits) in WorldMark, the Club (WorldMark) and Fractional Interests in vacation
properties. Vacation Credits are created through the transfer to WorldMark of
resort units acquired or developed by the Company. The Company derives revenues
primarily from Vacation Credit and Fractional Interest sales and, to a lesser
extent, from the financing of Vacation Credit and Fractional Interest sales and
from its management agreement with WorldMark.
These condensed consolidated financial statements do not include certain
information and footnotes required by generally accepted accounting principles
for complete financial statements. However, in the opinion of management, all
adjustments considered necessary for a fair presentation have been included and
are of a normal recurring nature. Operating results for the three months and six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 1999.
These statements should be read in conjunction with the audited financial
statements and footnotes included in the Company's 1998 Form 10-K filed with the
Securities and Exchange Commission (SEC). The accounting policies used in
preparing these financial statements are the same as those described in such
Form 10-K.
Note 2 - New Accounting Pronouncements
In April, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
(SOP) 98-5, Reporting on the Costs of Start-Up Activities. This SOP was
effective on January 1, 1999, and has not impacted the Company's financial
position or results of operations.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 2000. The Company does
not anticipate a material impact on its financial position or results of
operations from the future adoption of this standard.
Note 3 - Financing Transactions
On April 15, 1999, the Company created a wholly-owned, special purpose finance
company, TW Holdings II, Inc. At the same time, the Company entered into a $75
million, 364-day Receivables Warehouse facility (Facility) with Prudential
Securities Credit Corporation. The Facility has an advance rate of 90% and has a
required yield of LIBOR plus 100 basis points.
On June 17, 1999, the Company chose not to renew the revolving portion of the
$98 million Receivable Transfer Agreement from the Bank Group. The Company
expects to be able to transfer the TW Holdings receivables to a new
special-purpose entity in conjunction with a private placement of Notes
Receivable in August of 1999 and retire the credit facility.
Note 4 - Basic and Diluted Net Income Per Common Share
The following illustrates the reconciliation of weighted average shares used for
basic and diluted net income per share:
Three months ended Six months ended
June 30, June 30,
---------------------------------- ------------------------------------
1999 1998 1999 1998
---------------- -------------- --------------- ---------------
Basic
Weighted average shares outstanding 17,140,051 17,593,366 17,149,358 17,593,366
Diluted
Effect of dilutive securities 46,537 -- 35,696 --
---------------- --------------- -------------- ---------------
Diluted weighted average shares outstanding 17,186,588 17,593,366 17,185,054 17,593,366
================ ============== =============== ===============
Net income available to common shareholders for basic net income per share was
$9,510 and $5,164 for the three months ended June 30, 1999 and 1998, and $17,654
and $11,028 for the six months ended June 30, 1999 and 1998, respectively.
At June 30, 1999 and 1998, there were options to purchase 481,540 and 492,000
shares of common stock, outstanding, respectively, which were anti-dilutive and
therefore not included in the computation of diluted net income per common
share.
Note 5 - Inventories
Inventories consist of Vacation Credits, Fractional Interests and construction
in progress as follows:
June 30, December 31,
1999 1998
----------------- ------------------
Vacation Credits $ 3,467 11,342
Fractional Interests 2,998 --
Construction in progress 37,592 30,967
----------------- ------------------
Total inventories $ 44,057 42,309
================= ==================
Note 6 - Allowance For Doubtful Accounts, Recourse Liability and Sales Returns
The activity in the allowance for doubtful accounts, recourse liability and
sales returns is as follows for the six months ended June 30, 1999, and the year
ended December 31, 1998:
1999 1998
----------------- ------------------
Balances at beginning of period $ 20,935 15,240
Provision for doubtful accounts, sales returns and
recourse liability 10,744 15,435
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (6,795) (9,919)
Recoveries 134 179
----------------- ------------------
Balances at end of period $ 25,018 20,935
================= ==================
Allowance for doubtful accounts and sales returns $ 15,771 12,363
Recourse liability on notes receivable sold 9,247 8,572
----------------- ------------------
$ 25,018 20,935
================= ==================
Total notes receivable outstanding, including notes receivable sold,
amounted to $348,283 and $307,740 at June 30, 1999 and December 31, 1998,
respectively.
Note 7 - Commitments and Contingencies
(a) Purchase Commitments
The Company routinely enters into purchase agreements with various developers to
acquire and build resort properties. At June 30, 1999 the Company had
outstanding purchase commitments of $47.7 million related to properties under
development.
(b) Litigation
The Company is involved in various claims and lawsuits arising from the ordinary
course of business. Management believes that outcome of these matters will not
have a material adverse effect on the Company's financial position, results of
operations, or liquidity.
Note 8 - Segment Reporting
The Company has two reportable segments: sales and financing. The sales segment
markets and sells timeshare memberships and Fractional Interests. The finance
segment is primarily responsible for servicing and collecting Notes Receivable
originated in conjunction with the financing of sales of Vacation Credits and
Fractional Interests. The finance segment does not include TW Holdings, TW
Holdings II, Trendwest Funding I or Trendwest Funding II. Management evaluates
the business based on sales and marketing activities as these are the primary
drivers of the business.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profits or losses from sales and marketing activities on a pre-tax
basis. Intersegment revenues are recorded at market rates as if the transactions
occurred with third parties. Assets are not reported by segment.
The following tables summarize the segment activity of the Company:
Segment
Three months ended June 30, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 63,426 753 953 65,132
Interest revenue - net -- 991 -- 991
Interest revenue-intersegment -- 861 -- 861
Intersegment revenue -- 636 -- 636
----------- ----------- ----------- -------------
Segment revenue $ 63,426 3,241 953 67,620
Segment profit $ 10,793 2,078 532 13,403
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 6,022 -- -- 6,022
Segment
Three months ended June 30, 1998: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 41,998 994 367 43,359
Interest revenue - net -- 769 -- 769
Interest revenue-intersegment -- 739 -- 739
Intersegment revenue -- 65 -- 65
----------- ----------- ----------- -------------
Segment revenue $ 41,998 2,567 367 44,932
Segment profit $ 6,279 1,741 45 8,065
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 3,895 -- -- 3,895
Segment
Six months ended June 30, 1999: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 112,442 2,476 1,775 116,693
Interest revenue - net -- 2,190 -- 2,190
Interest revenue-intersegment -- 1,587 -- 1,587
Intersegment revenue -- 1,065 -- 1,065
----------- ----------- ----------- -------------
Segment revenue $ 112,442 7,318 1,775 121,535
Segment profit $ 18,276 5,180 957 24,413
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 10,744 -- -- 10,744
Gain on sale of property and equipment $ -- 886 -- 886
Segment
Six months ended June 30, 1998: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 76,873 1,478 995 79,346
Interest revenue - net -- 1,803 -- 1,803
Interest revenue-intersegment -- 1,298 -- 1,298
Intersegment revenue -- 539 -- 539
----------- ----------- ----------- -------------
Segment revenue $ 76,873 5,118 995 82,986
Segment profit $ 11,203 3,514 396 15,113
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability $ 7,061 -- -- 7,061
The following table provides a reconciliation of segment revenues and profits to
the consolidated amounts:
Three Months Six Months
Ended June 30, Ended June 30,
1999 1998 1999 1998
----------- ----------- ------------ -------------
Segment revenue $ 67,620 44,932 121,535 82,986
Interest expense reported net of interest
income 53 2 109 38
Elimination of intersegment revenue (1,497) (804) (2,652) (1,837)
Finance subsidiaries revenue 7,119 3,863 14,207 9,635
----------- ----------- ------------ -------------
Consolidated revenue $ 73,295 47,993 133,199 90,822
=========== =========== ============ =============
Segment profit $ 13,403 8,065 24,413 15,113
Corporate overhead not included in segment
reporting (3,558) (2,838) (6,989) (5,417)
Finance subsidiaries profit 5,600 3,051 11,518 7,765
----------- ----------- ------------ -------------
Consolidated pre-tax income $ 15,445 8,278 28,942 17,461
=========== =========== ============ =============
All of the Company's revenue from external customers is derived from sales
within the United States.
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 1999 to the three months ended
June 30, 1998
The Company achieved total revenues of $73.3 million for the three months ended
June 30, 1999, compared to $48.0 million for the three months ended June 30,
1998, an increase of 52.7%. The principal reasons for the overall improvement
were a 33.8% increase in Vacation Credit sales to $56.2 million for the three
months ended June 30, 1999, from $42.0 million for the three months ended June
30, 1998, and sales of Fractional Interests of $7.2 million. The Fractional
Interest sales program commenced pre-selling of fractional interests at the
Depoe Bay resort on the Oregon Coast in October 1998. The Company exercised its
purchase option in April of 1999 and began recognizing revenue from the
pre-sales at that time. The increase in Vacation Credit sales was primarily the
result of a 31.6% increase in the number of Vacation Credits sold to 42.9
million during the three months ended June 30, 1999, from 32.6 million during
the three months ended June 30, 1998. This increase was the result of the
continued maturation of sales
offices opened in 1998 and increased Upgrade sales. Revenues from Upgrade sales
increased 21.9% to $7.8 million for the three months ended June 30, 1999, from
$6.4 million for the three months ended June 30, 1998, due primarily to an
increase of 26.1% in the number of Vacation Credits sold as Upgrades during the
three months ended June 30, 1999, compared to the three months ended June 30,
1998. The average price per Vacation Credit sold increased to $1.31 per credit
for the three months ended June 30, 1999, versus $1.26 per credit for the three
months ended June 30, 1998, and reflected an approximate 4% increase in the
selling price of Vacation Credits, effective June 29, 1998. The Company
instituted another increase the selling prices of Vacation Credits on June 28,
1999, of approximately 4%.
Finance income increased 6.5% to $3.3 million for the three months ended June
30, 1999, from $3.1 million for the three months ended June 30, 1998. The
increase in finance income is less than the percentage increase in carrying
balances of Notes Receivable for the two periods compared because of an
unfavorable mark-to-market adjustment on the residual interest in Notes
Receivable sold resulting from early payoffs and rising short-term LIBOR
interest rates occurring late in the second quarter of 1999. Gains on sales of
Notes Receivable increased 220.0% to $4.8 million for the three months ended
June 30, 1999, from $1.5 million for the three months ended June 30, 1998, due
to an increase in the principal balances of Notes Receivable sold of 129.9% to
$33.1 million from $14.4 million for the three months ended June 30, 1999 and
1998, respectively. In addition, the increase is due to a reduction in the
required yield to the Bank Group of 12.5 basis points, effective June 18, 1998,
and the new Receivables Warehouse Facility through Prudential Securities Credit
Corporation. The new facility has a required yield of 100 basis points over
LIBOR.
Vacation Credit and Fractional Interest cost of sales increased to $20.5 million
for the three months ended June 30, 1999, from $11.2 million for the three
months ended June 30, 1998, an increase of 83.0%, primarily reflecting the
increase in sales of Vacation Credits and Fractional Interests. Sales
recognition of Fractional Interests began in the second quarter of 1999, and
have a higher product cost than Vacation Credits which is offset by the lower
sales and marketing costs. As a percentage of Vacation Credit and Fractional
Interests sales, cost of sales increased to 32.3% from 26.7% of Vacation Credit
and Fractional Interest sales for each of the three months ended June 30, 1999
and 1998, respectively.
Sales and marketing costs increased 27.1% to $26.7 million for the three months
ended June 30, 1999, from $21.0 million for the three months ended June 30,
1998. As a percentage of Vacation Credit and Fractional Interest sales, sales
and marketing costs decreased to 42.1% for the three months ended June 30, 1999,
from 50.0% for the three months ended June 30, 1998. This decrease reflects the
sales generated from the new Fractional Interest sales program which has
significantly lower sales and marketing costs than Vacation Credit sales. In
addition, the new sales offices opened during 1998 have improved closing
percentages over last year's start-up phase which further reduces sales and
marketing costs. The improvement in sales and marketing costs is also
attributable to the price increase effective June 29, 1998, and the changes to
the commissions program effective June 30, 1998.
General and administrative expenses increased 37.2% to $5.9 million for the
three months ended June 30, 1999, from $4.3 million for the three months ended
June 30, 1998. As a percentage of total revenue, general and administrative
costs decreased to 8.0% for the three months ended June 30, 1999, from 9.0% for
the three months ended June 30, 1998. Absent the increase in gains on sales of
Notes Receivable and Fractional Interest sales, general and administrative
expenses, as a percentage of total revenue, would have been comparable to the
prior period.
Provision for doubtful accounts and recourse liability increased 51.7% to $4.4
million for the three months ended June 30, 1999, from $2.9 million for the
three months ended June 30, 1998. As a percentage of Vacation Credit and
Fractional sales, the provision remained comparable at 6.9% for the two periods
compared.
Comparison of the six months ended June 30, 1999 to the six months ended
June 30, 1998
The Company achieved total revenues of $133.2 million for the six months ended
June 30, 1999, compared to $90.8 million for the six months ended June 30, 1998,
an increase of 46.7%. The principal reasons for the overall improvement were a
36.8% increase in Vacation Credit sales to $105.2 million for the six months
ended June 30, 1999, from $76.9 million for the six months ended June 30, 1998,
and sales of Fractional Interests of $7.2 million. The Fractional Interest sales
program commenced pre-selling of fractional interests at the Depoe Bay resort on
the Oregon Coast in October 1998. The Company exercised its purchase option in
April of 1999 and began recognizing revenue
from the pre-sales at that time. This increase was primarily the result of a
34.0% increase in the number of Vacation Credits sold to 80.0 million during the
six months ended June 30, 1999, from 59.7 million during the six months ended
June 30, 1998. This increase was the result of the continued maturation of sales
offices opened in 1998 and increased Upgrade sales. Revenues from Upgrade sales
increased 19.0% to $15.0 million for the six months ended June 30, 1999 from
$12.6 million for the six months ended June 30, 1998, due primarily to an
increase of 19.8% in the number of Vacation Credits sold as Upgrades during the
six months ended June 30, 1999, compared to the six months ended June 30, 1998.
The average price per Vacation Credit sold increased to $1.31 per credit for the
six months ended June 30, 1999, versus $1.26 per credit for the six months ended
June 30, 1998, and reflected an approximate 4% increase in the selling price of
Vacation Credits, effective June 29, 1998. The Company instituted another
increase the selling prices of Vacation Credits on June 28, 1999, of
approximately 4%.
Finance income increased 15.9% to $7.3 million for the six months ended June 30,
1999, compared to $6.3 million for the six months ended June 30, 1998. The
increase in finance income reflects the increase in carrying balances of Notes
Receivable for the two periods compared and the 1999 impact of an unfavorable
mark-to-market adjustment on the residual interest in Notes Receivable sold
resulting from early payoffs and rising interest rates. Gains on sales of Notes
Receivable increased 78.4% to $9.1 million for the six months ended June 30,
1999, from $5.1 million for the six months ended June 30, 1998. This increase is
due to a reduction in the required yield to the Bank Group of 12.5 basis points,
effective June 18, 1998, and the new Receivables Warehouse Facility through
Prudential Securities Credit Corporation. The new facility has a required yield
of 100 basis points over LIBOR.
Other income increased $1.1 million to $2.6 million for the six months ended
June 30, 1999, compared to $1.5 million for the six months ended June 30, 1998,
due primarily to a gain recorded on the sale of the Bellevue Corporate building
of $.9 million in March of 1999.
Vacation Credit and Fractional Interest cost of sales increased to $34.1 million
for the six months ended June 30, 1999, from $20.7 million for the six months
ended June 30, 1998, an increase of 64.7%, primarily reflecting the increase in
sales of Vacation Credits and Fractional Interest sales. As a percentage of
Vacation Credit and Fractional Interest sales, cost of sales were 30.3% for the
six months ended June 30, 1999, from 26.9% of Vacation Credit sales for the six
months ended June 30, 1998. This increase is the result of the Fractional
Interests having a higher product cost than Vacation Credits which is offset by
lower sales and marketing costs.
Sales and marketing costs increased 29.7% to $50.2 million for the six months
ended June 30, 1999, from $38.7 million for the six months ended June 30, 1998.
As a percentage of Vacation Credit and Fractional Interest sales, sales and
marketing costs decreased to 44.6% for the six months ended June 30, 1999, from
50.3% for the six months ended June 30, 1998. This decrease reflects the sales
generated from the new Fractional Interest sales program which has significantly
lower sales and marketing costs than Vacation Credit sales. In addition, the new
sales offices opened during 1998 have improved closing percentages over last
year's start-up phase which further reduces sales and marketing costs. The
improvement in sales and marketing costs is also attributable to the price
increase effective June 29, 1998, and the changes to the commissions program
effective June 30, 1998.
General and administrative expenses increased 38.3% to $11.2 million for the six
months ended June 30, 1999, from $8.1 million for the six months ended June 30,
1998. As a percentage of total revenue, general and administrative costs
decreased to 8.4% of total revenue for the six months ended June 30, 1999 from
8.9% of total revenue for the six months ended June 30, 1998. Absent the
increase in gains on sales of Notes Receivable and Fractional Interest sales,
general and administrative expenses, as a percentage of total revenue, would
have been slightly higher for the six month ended June 30, 1999, when compared
to the same period last year.
Provision for doubtful accounts and recourse liability increased 47.2% to $7.8
million for the six months ended June 30, 1999, from $5.3 million for the six
months ended June 30, 1998. As a percentage of Vacation Credit sales, the
provision remained comparable at 6.9% for each of the six months ended June 30.
The Company maintains an allowance for doubtful accounts in respect of the Notes
Receivable owned by the Company and an allowance for recourse liability in
respect of the Notes Receivable that have been sold by the Company. The
aggregate amount of these allowances at June 30, 1999, and December 31, 1998,
were $25.0 million, and $20.9
million, respectively, representing approximately 7.2% and 6.8%, respectively,
of the total portfolio of Notes Receivable at those dates, including the Notes
Receivable that had been sold by the Company. No assurance can be given that
these allowances will be adequate, and if the amount of the Notes Receivable
that are ultimately written off materially exceed the related allowances, the
Company's business, results of operations and financial condition could be
materially adversely affected.
The Company estimates its allowance for doubtful accounts and recourse liability
by analysis of bad debts by each sales site by year of Note Receivable
origination. The Company uses this historical analysis, in conjunction with
other factors such as local economic conditions and industry trends. The Company
also utilizes experience factors of more mature sales sites in establishing the
reserve for bad debts at new sales offices. The Company generally charges off
all receivables when they become 180 days past due and returns the credits
associated with such charge-offs to inventory. At June 30, 1999, and December
31, 1998, 1.84% and 1.97% of the Company's total receivables portfolio of $348.3
million and $307.7 million, respectively, were more than 60 days past due.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations from down payments on sales of
Vacation Credits and Fractional Interests which are financed, cash sales of
Vacation Credits and Fractional Interests, principal and interest on Notes
Receivable, and proceeds from sales and borrowings collateralized by Notes
Receivable. The Company also generates cash on the interest differential between
the interest charged on the Notes Receivable and the interest paid on loans
collateralized by Notes Receivable.
During the six months ended June 30, 1999 and 1998, cash provided by operating
activities was $13.2 million and $3.1 million, respectively. Cash generated from
operating activities increased principally due to the increased sales of Notes
Receivable. For the first six months of 1999, cash used in operating activities
was principally for the issuance and purchase of Notes Receivable of $100.1
million to finance the purchase of Vacation Credits by Owners and Fractional
Interests and an increase in inventory of $1.7 million due to additional
construction in progress to meet increasing sales demand. Cash provided by
operating activities resulted primarily from sales and repayments of Notes
Receivable of $88.0 million and net income of $17.7 million. For the six months
ended June 30, 1998, cash used in operating activities was principally for the
issuance and purchase of Notes Receivable of $74.6 million to finance the
purchase of Vacation Credits by Owners. Cash provided by operating activities
resulted primarily from the sale and repayment of Notes Receivable of $69.5
million and net income of $11.0 million.
Net cash provided by (used in) investing activities for the six months ended
June 30, 1999 and 1998, was $.2 million and ($3.8) million, respectively. Cash
provided by investing activities was the result of $4.4 million in proceeds from
the sale of the Bellevue Corporate building. Cash used in investing activities
for the six months ended June 30, 1999, of $4.2 million was the result of final
retention payments on the new Corporate headquarters and furniture and equipment
related to the new building. Cash used for the same period in 1998 of $3.8
million was for the acquisition of furniture and fixtures and data processing
equipment required to meet the growth of the Company.
Net cash (used in) provided by financing activities for the six months ended
June 30, 1999 and 1998, was ($13.5) million and $1.9 million, respectively. For
the six months ended June 30, 1999, cash used in financing activities was
principally the result of payments on the Bank line of credit and other of $6.3
million and a decrease in Due to the Parent on the revolving line of credit of
$5.7 million. Cash provided by financing activities for the six months ended
June 30, 1998, was principally the result of borrowings on the Bank line of
credit of $4.0 million. Cash used in financing activities for the same period
was the result of a decrease in Due to Parent of $1.9 million.
Financing of Notes Receivable has been accomplished by use of a $98.0 million
Receivable Transfer Agreement from the Bank Group through TW Holdings and a new
$75.0 million Receivables Warehouse facility with Prudential Securities Credit
Corporation through TW Holdings II. On June 17, 1999, the Company chose not to
renew the revolving portion of the $98 million Receivable Transfer Agreement
from the Bank Group. The Company expects to be able to transfer the TW Holdings
receivables to a new special-purpose entity in conjunction with a private
placement of Notes Receivable in August of 1999 and retire the credit facility.
The Company has a $10 million open line of credit with the Parent which bears
interest at prime plus 1% (currently 8.75%) per annum. The line of credit is
payable on demand. As of June 30, 1999, there was no outstanding indebtedness to
the Parent. The Company may advance excess funds to the Parent at prime minus 2%
(currently 5.75%) per annum. At June 30, 1999, there was a $0.9 million
Receivable from Parent. The Company also has a $30.0 million unsecured revolving
line of credit. Outstanding borrowings on the line of credit were $20.0 million
at June 30, 1999.
For the remainder of 1999, the Company anticipates spending approximately $28.9
million for acquisitions and development of new resort properties and for
expansion and development activities. The Company plans to fund these
expenditures with cash generated from operations, including further sales and
securitizations of Notes Receivable and borrowings under the revolving credit
agreement. Acquisition of new resort sites and properties is an ongoing process
and availability of certain properties in desired locations could result in
increased expenditures for such activities. The Company believes that, with
respect to its current operations, cash generated from operations and future
borrowings available under existing agreements, will be sufficient to meet the
Company's working capital and capital expenditure needs through the end of 1999.
WorldMark maintains a replacement reserve for the WorldMark Resorts which is
funded from the annual assessments of the Owners. At June 30, 1999, the amount
of such reserve was approximately $10.0 million. The replacement reserve is
utilized to refurbish and replace the interiors and furnishings of the
condominium units and to maintain the exteriors and common areas in WorldMark
Resorts in which all units are owned by WorldMark. The Company may advance funds
to WorldMark from time to time.
Since completed units at various resort properties are acquired or developed in
advance and a significant portion of the purchase price of Vacation Credits is
financed by the Company, the Company continually needs funds to acquire and
develop property, to carry Notes Receivable contracts and to provide working
capital. The Company has historically secured additional funds through its
revolving credit facility, loans from the Parent and the sale of Notes
Receivable through the Finance Subsidiaries. See "Risk Factors - Dependence on
Acquisitions of Additional Resort Units for Growth; Need for Additional Capital"
of the Company's 1998 Form 10-K.
In the future, the Company may negotiate additional credit facilities, or issue
corporate debt or equity securities. Any debt incurred or issued by the Company
may be secured or unsecured, at a fixed or variable interest rate, and may be
subject to such additional terms as management deems appropriate.
Year 2000
The Year 2000 issue relates to a flaw in many electronic data processing systems
which prevents them from processing year-date data accurately beyond the year
1999. This is the result of using a two-digit representation for the year, for
example "99" for "1999". This approach assumed that the first two digits of the
abbreviated date are "19". However, when the computer reaches 2000 it may
interpret "00" as the year 1900 possibly causing inaccurate data processing or
processing to stop altogether.
The Company has completed a review of each line of code for its Reservations,
Contract Processing, and Collections applications. These applications have been
analyzed and tested and the Company has determined that all these applications
are Year 2000 compliant. These critical applications are currently operating in
the live environment.
The Marketing system is another critical application which is currently being
rewritten, upgraded and analyzed for Year 2000 compliance. The upgrades and Year
2000 compliance on the Marketing system is expected to be completed and tested
by the end of the third quarter.
The Company is also monitoring the Year 2000 compliance program of Sage Systems,
Inc. (Sage), the servicer of the Company's Notes Receivable portfolio. Sage has
represented that 28 programs are being remediated for Year 2000 compliance. The
Company will play an active role in reviewing the remediated lines of code and
will also participate in the testing of Sage applications.
The Company has incurred approximately $.7 million to date to modify or replace
software in order to remediate the Year 2000 issue and anticipates future
expenditures of approximately $.3 million. In the worst case, if the remediation
is not completed in time, management will employ additional personnel and use PC
based applications to maintain critical functions.
Based on its current assessments and remediation plans, the Company does not
expect that it will suffer any material disruption of its business as a result
of the Year 2000 issue. Nevertheless, the Company is developing a contingency
plan to address the possibility of Sage being unable to adequately address Year
2000 issues.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily as a result of its
financing of timeshare purchases, the sale and securitization of notes
receivable and borrowing under revolving lines of credit. The Company's interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to reduce overall borrowing costs. To achieve its
objectives, the Company borrows funds, sells or securitizes Notes Receivable
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument. The Company does not
maintain a trading account for any class of financial instrument, it does not
purchase high risk derivative instruments and it is not directly subject to
foreign currency exchange rate risk nor commodity price risk. There have been no
material changes to the Company's exposure to market risk since December 31,
1998.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 7 of "Notes to Condensed
Consolidated Financial Statements."
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matter to a Vote of Security Holders
Trendwest Resorts, Inc. (Company) held its Annual Meeting of
Shareholders on June 3, 1999. The matters voted upon at the meeting and
the votes cast with respect thereto were as follows:
1. Election of Directors:
Nominee: Number of shares Number of shares
voted FOR Withheld
---------------------------------- -------------------- -------------------
---------------------------------- -------------------- -------------------
Jerol E. Andres 17,017,909 2,040
Roderick C. Wendt 17,017,909 2,040
Linda M. Tubbs 17,017,909 2,040
2. Proposal to approve the 1999 Trendwest Employee Stock Purchase Plan:
Number of shares Number of shares Number of shares
voted FOR voted AGAINST Withheld
--------------------- -------------------- --------------------
--------------------- -------------------- --------------------
17,019,149 300 500
3. Proposal to Ratify the selection of KPMG LLP as independent auditors
of the Company for the 1999 fiscal year:
Number of shares Number of shares Number of shares
voted FOR voted AGAINST Withheld
--------------------- -------------------- --------------------
--------------------- -------------------- --------------------
17,019,149 300 500
Item 5 - Other Information
On June 18, 1999, the Company and JELD-WEN, inc., its largest
shareholder, announced that JELD-WEN has retained Banc of
America Securities LLC as financial advisor to explore
strategic and financial alternatives relating to JELD-WEN's
ownership interest in Trendwest Resorts, Inc.. JELD-WEN
currently holds approximately 13.7 million shares, or 80% of
the Company's outstanding common stock.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Restated Articles of Incorporation (1)
2.2 Restated Bylaws (1)
11 Statement re: Computation of Earnings per share - See note 4
of "Notes to Condensed Consolidated Financial Statements".
10.41 Receivable Sale Agreement between Registrant and TW Holdings II
Dated as of April 15, 1999.
10.42 Credit Agreement between Registrant, TW Holdings II as
Borrower and Prudential Securities
Credit Corporation as lender dated as of April 15, 1999.
10.43 Trust Indenture between Registrant, TW Holdings II, Sages
Systems, Inc., and LaSalle National Bank Dated as of April 15,
1999.
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration
Statement on Form S-1 (File No. 333-26861).
(a) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRENDWEST RESORTS, INC.
Date: August 10, 1999 /s/ WILLIAM F. PEARE
------------------ ------------------------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 10, 1999 /s/ GARY A. FLORENCE
------------------ ------------------------------------------
Gary A. Florence
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)