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, 1996
[ ] 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.)
12301 NE 10TH Place
Bellevue, WA 98005
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (425) 990-2300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common stock,
no par value
(Title of Class)
Aggregate market price of shares held by non-affiliates at March
24, 1998 was $76,384,013.75, consisting of 3,867,545 shares.
The number of shares of common stock outstanding on March 24,
1998 was 17,593,366 shares.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ( )
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Company's Proxy Statement for the 1998 Annual
Meeting of stockholders are incorporated by reference into Part III of this
Form 10-K.
PART I
Item 1. Business
Trendwest Resorts, Inc. (Company) markets, sells and finances timeshare
Vacation Ownership Interests and acquires, develops and manages timeshare
resorts. A Vacation Ownership Interest entitles an owner to use a fully
furnished vacation resort unit at any of the WorldMark resorts based on the
number of Vacation Credits purchased. The Company's timeshare resorts are owned
and operated through WorldMark, the Club, (WorldMark) a non-profit mutual
benefit corporation organized by Trendwest in 1989 to provide an innovative,
flexible vacation ownership system. The Company presently sells Vacation
Ownership interests in Washington, Oregon and California primarily through
off-site sales offices.
Trendwest sells Vacation Ownership Interests in the form of Vacation Credits
which are created by the transfer to WorldMark of resort units purchased or
developed by the Company. Vacation credits can be used by Owners to reserve
units at any of the WorldMark resorts, at any time of the year and in increments
as short as one day. The use of Vacation Credits is not tied to any particular
resort unit or time period as is typical in the timeshare industry. The Company
believes that the combination of multiple WorldMark Resorts and the Company's
Vacation Credit system provides Owners with an attractive range of vacation
planning choices and values not generally available within the timeshare
industry. The Company's vacation credit system with multiple WorldMark Resorts
facilitates the sale of Vacation Credits at off-site sales offices located in
major metropolitan areas and reduces dependence on on-site sales centers located
at more remote resort locations.
The Company sells vacation credits at fourteen sales offices, ten of which
are located off-site in metropolitan areas. The other sales offices are located
on-site at four of the WorldMark Resorts.
In addition to the planned addition of Angel's Camp to the network of
WorldMark resorts (see table), the Company currently has several other resorts
in the permitting stage and several more in the advanced planning stage. One
potential development is the MountainStar project which initially would involve
an 1,100 acre parcel in central Washington owned by JELD-WEN inc, (Parent or
JELD-WEN). On behalf of JELD-WEN, the Company is currently pursuing the
necessary regulatory approvals and has incurred approximately $4,400,000 in
costs related to the project as of December 31, 1997. All costs incurred will be
reimbursed by JELD-WEN and are included as a reduction to the due to Parent
amounts on the Company's balance sheet.
Corporate Background and Consolidation of Finance Subsidiaries
The Company commenced its timeshare business as a wholly-owned subsidiary of
JELD-WEN, in 1989 with three condominium units. JELD-WEN is currently the
Company's principal stockholder. 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 nine foreign countries
that include manufacturing, hospitality and recreation, retail, financial
services and real estate.
The Company raises capital for property acquisitions and working capital by
selling or securitizing Notes Receivable through two subsidiaries (the "Finance
Subsidiaries"). Prior to June 30, 1997, the Finance Subsidiaries were owned by
JELD-WEN. Effective June 30, 1997, the Company acquired the Finance Subsidiaries
from JELD-WEN for 5,193,693 shares of the Company's Common Stock (the
"Consolidation Transactions"). On August 15, 1997, the Company consummated a
public offering of 3,176,250 shares of Common Stock at $18.00 per share
resulting in net proceeds of $51,772,000 after deducting the related issuance
costs.
The Company has transactions with other JELD-WEN subsidiaries and related
parties. See note 15 "Related Party Transactions" in the notes to the financial
statements contained herein.
The Company was incorporated in Oregon in 1989. The Company's principal
executive offices are located at 12301 NE 10th Place, Bellevue, Washington
98005, and its telephone number is (425) 990-2300.
WorldMark
WorldMark is a California nonprofit mutual benefit corporation formed by
Trendwest in 1989. WorldMark's articles of incorporation provide that the
specific purpose for which it was formed is to own, operate and manage the real
property conveyed to it by the Company. Owners receive the right to use all
WorldMark Resort units 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.
The Resorts are owned by WorldMark free and clear of all monetary
encumbrances. WorldMark maintains a replacement reserve for the WorldMark
Resorts which is funded from the annual assessments of the Owners. The
replacement reserve is utilized to refurbish and replace the interiors and
furnishings of the condominium units and to maintain the exteriors and common
areas in WorldMark Resorts in which all units are owned by WorldMark.
Compared to other timeshare arrangements, the WorldMark concept provides
Owners significant flexibility in planning vacations. Depending on how many
Vacation Credits an Owner has purchased, the Owner may use the Vacation Credits
for one or more vacations annually. The number of Vacation Credits that are
required to stay one day at WorldMark's units varies, depending upon the resort
location, the size of the unit, the vacation season and the day of the week. For
example, a Friday or Saturday night stay at a one-bedroom unit may require 825
Vacation Credits per night off-season and 1,450 Vacation Credits per night in
peak season. A midweek stay at the same one-bedroom unit would require less
Vacation Credits. This range of Vacation Credits that is required to stay one
day enables an Owner to receive a varying number of days at the WorldMark
Resorts depending on the vacation choices made by the Owner. Under this system,
Owners can select vacations according to their schedules, space needs and
available Vacation Credits. Vacation Credits are reissued on an anniversary date
basis and any unused Vacation Credits may be carried over for one year. An Owner
may also borrow Vacation Credits from the Owner's succeeding year's allotment.
An Owner may also purchase bonus time ("Bonus Time") from WorldMark for use
when space is available. Bonus Time can only be reserved within two weeks of
use. Bonus Time gives Owners the opportunity to use available units on short
notice at a reduced rate (generally from $20 to $50 per night for a two bedroom
unit, mid-week in the off-season) and to obtain usage beyond their Vacation
Credit allotment.
WorldMark collects maintenance dues from Owners based on the number of
Vacation Credits owned. Currently, the annual dues are $237 for the first 5,000
Vacation Credits owned, plus $72 for each additional increment of 2,500 Vacation
Credits owned. These dues are intended to cover WorldMark's operating costs,
including condominium association dues at the WorldMark Resorts. The Company
pays WorldMark the dues on all unsold Vacation Credits. Such payments totaled
$512,000, $275,000 and $793,000 in 1995, 1996 and 1997, respectively.
WorldMark has a five member board of directors that manages its business and
affairs. Three of the directors and principal executive officers of WorldMark
are also officers of the Company. The Board must obtain the approval of a
majority of the voting power of the Owners represented (excluding Trendwest) to
take certain actions, including (i) incurrence of capital expenditures exceeding
5% of WorldMark's budgeted gross expenses during any fiscal year and (ii)
selling property of WorldMark during any fiscal year with an aggregate fair
market value in excess of 5% of WorldMark's budgeted gross expenses for such
year.
The WorldMark Resorts
The following table sets forth certain information as of December 31, 1997,
regarding each existing WorldMark Resort, planned expansion at existing
WorldMark Resorts through 1999, and planned new WorldMark Resorts through 1999.
Existing
Date Units
Contributed in Planned Total Units
Existing Resorts Location To WorldMark (a) Service Expansion Anticipated RCI Rating (b)
British Columbia
Sundance Whistler February 1992 25 --- 25 R.I.D.
California
North Shore Estates Bass Lake October 1991 61 --- 61 Gold Crown
Beachcomber Pismo Beach April 1993 20 --- 20 Gold Crown
Palm Springs Palm Springs July 1995 64 --- 64 Gold Crown
Big Bear Big Bear Lake April 1996 51 19 (c) 70 Gold Crown
Hawaii
Valley Isle Maui April 1990 14 --- 14 (d) Gold Crown
Kapaa Shores Kauai July 1991 49 --- 49 (d) Gold Crown
Kona Hawaii November 1997 32 32 (e) 64 Gold Crown
Nevada
Lake Tahoe Stateline January 1991 50 --- 50 Gold Crown/R.I.D.
Las Vegas Las Vegas December 1996 42 --- 42 Gold Crown
Oregon
Eagle Crest Redmond September 1989 67 --- (f) 67 Gold Crown
Gleneden Beach Lincoln City March 1996 80 --- 80 Gold Crown
Running Y Ranch Klamath Falls February 1997 54 40 (g) 94 Gold Crown
Schooner Landing Newport September 1997 13 (h) --- 13 Gold Crown
Washington
Lake Chelan Shores Chelan August 1990 13 --- 13 (d) Gold Crown
Surfside Long Beach September 1991 25 --- 25 R.I.D.
Discovery Bay Sequim January 1992 32 --- 32 Gold Crown
Park Village Leavenworth July 1992 72 --- 72 Gold Crown
Mariner Village Ocean Shores June 1994 32 --- 32 Gold Crown
Birch Bay Blaine January 1995 52 52 (i) 104 Gold Crown
Mexico
Coral Baja San Jose November 1994 80 56 (j) 136 Gold Crown
del Cablo
Planned Resorts
Clear Lake Nice, CA (k) 88 88
Angel's Camp Angel's Camp, WA(l) --- 112 112
--- --- ---
Total 928 399 1,327
=== === =====
(a) The dates in this column indicate, for each resort, the month and year in
which the first completed units at such resort were transferred to
WorldMark. At certain resorts, additional units were transferred to
WorldMark at later dates.
(b) Gold Crown and Resort of International Distinction ("R.I.D.") are resort
ratings awarded annually by RCI. In 1997, approximately 17% of the resorts
reviewed by RCI received a Gold Crown rating, the highest rating awarded by
RCI, and approximately 13% of the resorts reviewed by RCI received an R.I.D.
rating, the second-highest rating awarded by RCI.
(c) Construction on 45 units began in January 1997 with all units complete at
December 31, 1997. The remaining 19 units will be transferred to WorldMark
in early 1998.
(d) These units represent less than 1/2 the number of units at this resort.
(e) Construction of this resort was completed in November 1997 with 32 units
transferred to WorldMark. The remaining 32 units will be transferred in the
first quarter of 1998.
(f) The Company has an agreement with Eagle Crest, Inc. (Eagle Crest) whereby
the Company has assigned to Eagle Crest the right to sell Vacation Credits
in WorldMark at the Eagle Crest Resort and Trendwest will purchase the
financed portion of such sales, with full recourse, which will allow the
company to realize the stated rates of interest ranging from 13.9% to 15.4%.
Eagle Crest will repurchase defaulted contracts when they become 180 days
delinquent or are written off at their unpaid principal amount. In exchange
for such sales, Eagle Crest must transfer condominium units to WorldMark at
no cost to either the Company or WorldMark. Retention of the full interest
amounts from the contracts was negotiated in lieu of a fee from Eagle Crest
equal to 3% of net sales of vacation credits occurring at the Eagle Crest
resort and originally planned to commence in September 1997. The number of
additional units to be deeded to WorldMark will depend on the number of
vacation credits sold by Eagle Crest, an estimate of which is not provided
in this table.
(g) The Company is obligated to purchase 20 units in November 1998 and 20 units
in 1999. Units will be transferred to WorldMark as purchased The Company has
an agreement with Running Y, Inc. (Running Y) whereby the Company has
assigned to Running Y the right to sell Vacation Credits in WorldMark at the
Running Y Resort and Trendwest will purchase the financed portion of such
sales with full recourse, which will allow the company to realize the stated
rates of interest ranging from 13.9% to 15.4%. Running Y will repurchase
defaulted contracts when they become 180 days delinquent or are written off
at their unpaid principal amount. In exchange for such sales, Running Y must
transfer condominium units to WorldMark at no cost to either the Company or
WorldMark. Retention of the full interest amounts from the contracts was
negotiated in lieu of a fee from Running Y equal to 3% of net sales of
vacation credits occurring at the Running Y resort and originally planned to
commence in September 1997. The number of additional units to be deeded to
WorldMark will depend on the number of Vacation Credits sold by Running Y,
an estimate of which is not provided in this table.
(h) The Company purchased 659 weeks of time per year from Schooner's Landing and
deeded the rights to this time to WorldMark. This is equivalent to 13
condominium units.
(i) Construction began in April 1997 with units completed and transferred
to WorldMark in February and March of 1998.
(j) Construction was completed by the developer in December 1997 with 6 units
transferred to WorldMark in December. The remaining 56 units are expected to
be transferred to WorldMark in 1998.
(k) This project was substantially complete at December 31, 1997 with 50% of the
units available for use by WorldMark owners. Individual units cannot be
transferred to WorldMark until construction is 100% completed because the
individual units do not have separate legal descriptions. The Company has
experienced delays in obtaining final certificates of occupancy for the
entire project as County Building Inspectors have been dealing with several
emergency conditions throughout the County due to heavy rains associated
with El Nino.
Final certificates of occupancy are expected in early April 1998.
(l) Construction on this resort began in September, 1997. The first units
are expected to be completed in August, 1998.
Sales And Marketing
The Company's sales of Vacation Credits primarily occur at ten off-site
sales offices located in metropolitan areas in three regions. The remainder of
the Company's sales of Vacation Credits occur at four on-site sales offices.
The Company believes the advantages of using off-site sales offices compared
to sales offices located at more remote resorts include (i) access to larger
numbers of potential customers, (ii) convenience for prospective customers to
attend a sales presentation, (iii) access to a wider group of qualified sales
personnel due to more convenient work locations, (iv) ability to open new sales
offices quickly and without significant capital expenditures and (v) lower
marketing costs to attract prospective customers to visit a sales office.
The Company's off-site sales offices are approximately 5,000 square feet and
include a theater, sales area and reception area. Each off-site sales center is
staffed by a sales manager, an office administrator, approximately 10 to 25
salespeople, two verification representatives, and additional staff for guest
registration and clerical assistance. The on-site sales offices are
approximately 2,500 square feet and generally include similar facilities and a
smaller number of staff compared to the off-site sales offices.
The Company uses a variety of marketing programs to attract prospective
Owners, including sponsored promotional contests offering vacation packages or
gifts, targeted mailings and telemarketing efforts, and various other
promotional programs. The Company also co-sponsors sweepstakes, giveaways and
other promotional programs with professional teams at major sporting events
(such as Portland Trail Blazers basketball games and Seattle Mariners baseball
games) and with supermarkets. The Company continually monitors and adjusts its
marketing programs to improve efficiency and recently established a website on
the Internet. Trendwest targets prospective Owners through an analysis of age,
income and travel interests. The Company delivers targeted prospective Owners a
notice related to the specific promotion, inviting the prospective Owner to call
the Company's toll-free voice mail system to leave a return phone number. Those
persons who call the Company and leave their phone number receive a call from
the Company to invite them to visit an off-site sales office and attend a sales
presentation. As an incentive to attend the presentation, the Company offers
gifts, such as an overnight trip or electronic equipment.
When prospective Owners visit a sales facility, they are greeted by a host
or hostess and are shown to the theater to view a 30-minute multi-media
presentation describing the benefits of timeshares in general, and WorldMark
specifically. After the presentation, all prospective owners are introduced to
WorldMark and the benefits of becoming an Owner by a representative of
Trendwest. The speaker introduces the guests to their salesperson, who provides
more specific information, answers questions and invites the guest to join
WorldMark. Audience size is limited to about 20 prospects per presentation. Each
sales office generally conducts three or four presentations per day, five days a
week.
Printed information regarding Trendwest and its properties, as well as the
rights and obligations of Owners, is provided to each prospective member before
Vacation Ownership Interests are sold. Prior to finalizing a sale, each new
Owner meets with one of the Company's verification representatives to discuss
the new Owner's reasons for joining and to review the rights and obligations of
Owners. The purpose of this meeting is to allow prospective Owners to review
their proposed commitment in an environment separate from the sales process.
Under the laws of each state where the Company sells Vacation Ownership
Interests, each purchaser has a right to rescind the purchase of Vacation
Credits for a period ranging from three to seven calendar days following the
later of the date the contract was signed or the date the purchaser received the
last of the documents required to be provided by the Company, depending on the
state. The Company's current practice is to allow all purchasers a seven day
rescission period, even if state law allows a shorter period. During 1996 and
1997, the Company had a rescission rate of 17.7% and 16.5% respectively, which
is consistent with the Company's historical experience.
The Company's salespeople are trained to use a soft sales approach. The
salespeople emphasize the advantages of becoming an Owner, including
convenience, flexibility, ownership and affordability. The Company believes the
success of its sales approach is reflected not only by the amount of sales of
Vacation Credits to new Owners, but also by the amount of sales of Vacation
Credits to "non-Owner" referrals.
Trendwest offers existing Owners cash awards for referrals of new Owners.
The Company maintains a staff of marketing individuals who specialize in
promoting referrals by existing Owners. In addition, as part of the Company's
ongoing marketing efforts, it offers existing Owners the opportunity to purchase
additional Vacation Credits generally at a discount from the current price.
Owners may purchase additional Vacation Credits in increments of 1,000.
Trendwest currently employs 20 sales representatives who specialize in Upgrade
Sales. Sales of Vacation Credits from the Company's owner referral program and
Upgrade Sales contributed in the aggregate approximately 29.0% and 25.3% of the
Company's net sales in 1996 and 1997, respectively.
Customer Financing
Since an important component of the Company's sales strategy is the
affordability of Vacation Credits, the Company believes that a significant
portion of its sales of Vacation Credits will continue to be financed by the
Company. In 1997, the average new Owner purchased approximately 6,600 Vacation
Credits for a purchase price of approximately $8,507 and the Company financed
approximately 88% of the aggregate purchase price of Vacation Credits sold to
new Owners with an average new Note Receivable of approximately $7,653. During
1997, the aggregate amount of Notes Receivable generated in connection with the
sale of Vacation Credits to new Owners was approximately $98.3 million. The
Company requires a down payment of at least 10% of the purchase price and
provides a term of up to seven years and an interest rate of 13.9% or 14.9% per
annum, depending on the method of payment selected.
Existing Owners purchasing additional Vacation Credits must either make a
down payment of 10% of the price of the Upgrade Sales or have sufficient equity
in their existing Vacation Credits to provide at least 10% of the value of all
Vacation Credits, including the Upgrade. The amount of the existing receivable
is cancelled and a new seven-year note secured by an interest in all Vacation
Credits owned is issued.
At December 31, 1997, an aggregate of $242.3 million of Notes Receivable
were outstanding, of which approximately $84.7 million with a weighted average
interest rate of 14.1% per annum had been retained by the Company. The balance
of approximately $157.6 million of Notes Receivable had been sold by the Company
prior to that date, although the Company retained limited recourse liability
with respect to these Notes Receivable. The Company may continue to sell a
substantial amount of its Notes Receivable. See "Liquidity and Capital Resources
- -- Finance Subsidiaries" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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, 1997, approximately $4.5 million of
Notes Receivable, including Notes Receivable previously sold by the Company,
were past due 60 days or more. The Notes Receivable are secured by a security
interest in the related Vacation Credits. The Company's practice has been to
continue to accrue interest on Notes Receivable until such accounts are deemed
uncollectible, at which time the Company writes off such Notes Receivable and
records as an expense any interest that had been accrued, reclaims the related
Vacation Credits that secure such Notes Receivable and returns such Vacation
Credits to inventory as available for resale.
The Company maintains a reserve for doubtful accounts in respect of the
Notes Receivable owned by the Company and a reserve for recourse liability in
respect of the Notes Receivable that have been sold by the Company. The
aggregate amount of these reserves at December 31, 1996 and 1997 were $11.2
million, and $15.2 million, respectively, representing approximately 6.2%, and
6.3% respectively, of the total portfolio of Notes Receivable at those dates,
including the Notes Receivable that had been sold by the Company. No assurance
can be given that these reserves will be adequate, and if the amount of the
Notes Receivable that is ultimately written off materially exceeds the related
reserves, the Company's business, results of operations and financial condition
could be materially adversely affected.
The Company estimates its reserve 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 December 31, 1997, 1.9% of the
Company's total receivables portfolio of $242.3 million were more than 60 days
past due.
Sage Systems, Inc. ("Sage"), a licensed escrow company, services the
Company's entire portfolio of Notes Receivable under an Escrow Agreement with
the Company. Under the Escrow Agreement, contracts for the sale of Vacation
Credits by the Company, and the funds received from such sales, are placed in
escrow with Sage. The escrowed funds and documents are released to the Company
when the Company certifies that it has sufficient Vacation Credits available for
sale, the applicable state-mandated cancellation period (under which a purchaser
may rescind his purchase) has expired, and Sage receives notice from the Company
that a rescission notice has not been received from the purchaser. The Company
handles billing inquiries and all other personal interaction with the Owners,
including collections on its Notes Receivable.
Property Ownership
Unlike many "right-to-use" timeshare operations in which a developer sells
timeshare interests in properties it owns, the Company does not own the
properties designated for timeshare use. Rather, when the Company purchases
resort property, it vests in WorldMark title to the property free and clear of
any debt encumbrance. With respect to property developed by the Company, the
Company may initially obtain title in the undeveloped property and then deed the
developed resort property to WorldMark. At the time the Company vests title to
the property in WorldMark, a "Declaration of Vacation Owner Program" is recorded
on the property. This declaration establishes the usage rights of Owners as a
covenant on title, thus protecting those rights against the effect of any future
blanket encumbrance. This ownership structure is designed to protect the
timeshare usage rights of the Owners and comply with statutory regulations.
The Company's only consideration for paying for the properties and for
arranging for the seller of the property to transfer title of the property
directly to WorldMark is the exclusive right to sell Vacation Credits and to add
new properties and additional units at the Company's discretion. The Company's
rights to sell Vacation Credits against the deeded properties are protected by a
security interest in the unsold inventory of Vacation Credits. This lien
prevents WorldMark from revoking such rights or transferring them to another
party.
Vacation Credits are allocated to each unit based on its vacation use value
relative to existing properties. Vacation Credits are assigned for weeks of
peak, shoulder and off-peak use, reserving time for Bonus Time, repairs and
maintenance. The aggregate Vacation Credits assigned to each unit may not be
changed in the future, and the actual number of Credits assigned are contained
in the recorded declaration. This system of irrevocable allocation and
registration with the state protects the Owners by preventing dilution in the
usage value of the Owner's Vacation Credits.
As of December 31, 1997, WorldMark had a reserve for replacement costs of
approximately $5.3 million for all depreciable assets (e.g., furniture,
appliances, carpeting, roofs and decks) of the WorldMark Resorts. In those
WorldMark Resorts where WorldMark owns only a small percentage of the units in a
complex and belongs to an independent homeowners' association, the dues paid to
such association by WorldMark are partially used to provide adequate reserves
for replacement costs relating to such properties.
Participation in Vacation Interval Exchange Network
The Company believes that sale of Vacation Credits is made more attractive
by the Company's participation in the vacation interval exchange network
operated by Resort Condominiums International, LLC (RCI). In a 1995 study
sponsored by the Alliance for Timeshare Excellence and ARDA, the exchange
opportunity was cited by purchasers of vacation intervals as the most
significant factor in determining whether to purchase a vacation interval. For
an annual membership fee (currently $78), Owners may participate in RCI, which
allows Owners to exchange Vacation Credits for an occupancy right at a
participating resort in RCI based upon availability and the payment of an
additional exchange fee (currently $110 for exchanges in North America and $145
for International exchanges). The Company pays the RCI annual membership fee for
the Owner's first year. An Owner may exchange Vacation Credits for an occupancy
right in a resort participating in the RCI network by requesting occupancy and
specifying the desired unit size and time period. RCI provides an Owner hotline
with direct phone access to representatives who are knowledgeable about
WorldMark and are responsible for assisting Owners with an exchange. RCI assigns
a weekly exchange value for Vacation Credits. This exchange value is based upon
a number of factors. If RCI is unable to meet the Owner's initial request, it
suggests alternative resorts based on availability.
Founded in 1974, RCI, which was recently acquired by HFS Incorporated, has
grown to be the world's largest vacation interval exchange organization. As of
March 11, 1998, RCI had approximately 3,200 participating resort facilities and
over 2.4 million members worldwide. During 1997, RCI processed approximately 1.8
million vacation interval exchanges.
Competition
The Company is subject to significant competition from other entities
engaged in the business of resort development, sales and operation, including
vacation interval ownership, condominiums, hotels and motels. Some of the
world's most recognized lodging, hospitality and entertainment companies have
begun to develop and sell vacation intervals in resort properties. Major
companies that now operate or are developing or planning to develop vacation
interval resorts include Marriott, Disney, Hilton, Hyatt, Four Seasons,
Inter-Continental, Westin and Promus. In addition, other publicly-traded
companies in the timeshare industry, such as Signature, Fairfield and Vistana,
currently compete, or may in the future compete, with the Company. Many of these
entities possess significantly greater financial, marketing and other resources
than those of the Company. Management believes that industry competition will be
increased by recent and potential future consolidation in the timeshare
industry. See "Risk Factors - Competition".
Employees
As of December 31, 1997, Trendwest had 837 full-time employees. The Company
believes that its employee relations are good. None of the Company's employees
are represented by a labor union.
The Company enforces a stringent drug policy with all employees. All
prospective employees are tested for the presence of impairing substances before
being hired by the Company. Employees of the Company are tested periodically for
the presence of impairing substances and, in addition, any Company employee may
be tested for such substances for cause. Any employee who is found to be under
the influence of an impairing substance is subject to appropriate disciplinary
action, including termination.
RISK FACTORS
In addition to the other information contained in this Form 10-K, the
following risk factors should be carefully considered in evaluating the Company
and its business. The Company cautions the reader that this list of risk factors
may not be exhaustive. This document contains forward-looking statements which
involve risks and uncertainties. The Company's actual results and the timing of
certain events could differ materially from those anticipated by such
forward-looking statements as a result of certain factors, including the factors
set forth below and in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business," as well as those discussed
elsewhere in the Form 10-K.
Dependence on Acquisitions of Additional Resort Units for Growth; Need for
Additional Capital
The Company purchases or develops resort units for WorldMark in exchange for
the exclusive right to sell the Vacation Credits assigned to these units. When
the Company purchases or develops a new resort or additional units at an
existing WorldMark Resort, the Company causes the units to be conveyed directly
to WorldMark free of any monetary encumbrances, and therefore must purchase its
properties without any financing secured by the properties. The Company can only
sell additional Vacation Credits to the extent that it acquires or develops
additional resort units for WorldMark. The Company's future growth and financial
success therefore will depend to a significant degree on the availability of
attractive resort locations and the Company's ability to acquire and develop
additional resort units on favorable terms and to obtain additional debt and
equity capital to fund such acquisitions and development. There can be no
assurance that the Company will be successful in this regard. As of December 31,
1997, the Company had purchase agreements and developments in progress to obtain
399 additional resort units by the end of 1999. No assurance can be given that
all of such units will be acquired or completed on a timely basis or at all.
There are numerous potential buyers of resort real estate competing to acquire
resort properties which the Company may consider attractive resort acquisition
opportunities, and many of these potential buyers are better capitalized than
the Company. There can be no assurance that the Company will be able to compete
against such other buyers successfully.
Since the Company generally finances approximately 88% of the aggregate
purchase price of Vacation Credits sold to new Owners, it does not generate
sufficient cash from sales to provide the necessary capital to purchase
additional resort units. No assurance can be given that the Company will be able
to obtain debt or equity capital through the sale or securitization of its Notes
Receivable, or otherwise, in order to continue to acquire additional properties
or that such future financing can be obtained on terms favorable to the Company.
See "Liquidity and Capital Resources - Finance Subsidiaries".
Risks Associated with Development and Construction Activities
The Company intends to expand its acquisition, development, construction and
expansion of timeshare resorts. There can be no assurance that the Company will
complete current or future development or expansion projects. Risks associated
with these activities include the risk that (i) acquisition or development
opportunities may be abandoned; (ii) construction costs may exceed original
estimates, possibly making the development or expansion uneconomical or
unprofitable; (iii) financing may not be available on favorable terms or at all;
and (iv) construction may not be completed on schedule, resulting in increased
interest expense and delays in the availability for sale of Vacation Credits.
Development activities are also subject to risks relating to inability to
obtain, or delays in obtaining, all necessary zoning, land-use, building,
occupancy and other required governmental permits and authorizations, the
ability of the Company to coordinate construction activities with the process of
obtaining such permits and authorizations, and the ability of the Company to
obtain the financing necessary to complete the necessary acquisition,
construction and conversion work. In addition, the Company's construction
activities are generally performed by third-party contractors. These third-party
contractors generally control the timing, quality and completion of the
construction activities. Nevertheless, construction claims may be asserted
against the Company for construction defects and such claims may give rise to
liabilities. New development activities, regardless of whether or not they are
ultimately successful, typically require a substantial portion of management's
time and attention. The ability of the Company to expand its business to include
new resorts will in part depend upon the availability of suitable properties at
reasonable prices and the availability of financing for the acquisition and
development of such properties. In the future, the Company may undertake the
development of larger resort complexes. No assurance can be given that any such
larger resort complexes will be developed in a profitable manner, if at all.
Factors Affecting Sales Volume
As the number of potential customers in the geographic area of a sales
office who have attended a sales presentation increases, the Company may have
increasing difficulty in attracting additional potential customers to a sales
presentation at that office and it may become increasingly difficult for the
Company to maintain current sales levels at its existing sales offices.
Accordingly, the Company anticipates that a substantial portion of its future
sales growth will depend on the opening of additional off-site sales offices. No
assurance can be given, however, that sales from existing or new off-site sales
offices will meet management's expectations. If the Company does not open
additional sales offices or if existing or new sales offices do not perform as
expected, the Company's business, results of operations and financial condition
could be materially adversely affected.
Geographic Concentration on West Coast
The Company presently sells Vacation Credits in Washington, Oregon and
California, primarily to residents of those states and of British Columbia. The
Company intends to continue to sell Vacation Credits in these three states and
to increase the number of its off-site sales offices in California. Since all of
the Company's sales offices are in the western United States, any economic
downturn in this area of the country could have a material adverse effect on the
Company's business, results of operations and financial condition. In addition,
the appeal of becoming an Owner may decrease if residents of Washington, Oregon,
California and British Columbia do not continue to view the locations of
WorldMark's Resorts (which are primarily located in these areas) as attractive
vacation destinations.
General Economic Conditions; Concentration in Timeshare Industry
Any downturn in economic conditions or significant price increases or
adverse events related to the travel and tourism industry, such as the cost and
availability of fuel, could depress discretionary consumer spending and have
material adverse effect on the Company's business, results of operations and
financial condition. Any such economic conditions, including recession, may also
adversely affect the future availability of attractive financing rates for the
Company or its customers and may material adversely affect the Company's
business. Furthermore, adverse changes in general economic conditions may
adversely affect the collectibility of the Notes Receivable. Because the
Company's operations are conducted solely within the timeshare industry, any
adverse changes affecting the timeshare industry could have a material adverse
effect on the Company's business, results of operations and financial condition.
Risks Associated with Customer Financing
The Company obtains a security interest in the purchased Vacation Credits
and it does not verify a prospective Owner's credit history. At December 31,
1997, an aggregate of $242.3 million of Notes Receivable were outstanding, of
which approximately $84.7 million had been retained by the Company. The
remaining balance of approximately $157.6 million of Notes Receivable had been
sold by the Company prior to that date, although the Company retained limited
recourse liability with respect to these Notes Receivable.
Notes Receivable become delinquent when a 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, 1997, approximately $4.5 million of Notes
Receivable previously sold by the Company were past 60 days due or more. The
Notes Receivable are secured by a security interest in the related Vacation
Credits. The Company's practice has been to continue to accrue interest on Notes
Receivable until such accounts are deemed uncollectible, at which time the
Company writes off such Notes Receivable and records an expense for any interest
that had been accrued, reclaims the related Vacation Credits that secure such
Notes Receivable and returns such Vacation Credits to inventory available for
resale. However, the associated marketing costs and sales commissions are not
recovered by the Company and these expenses must be incurred again to resell the
Vacation Credits.
The Company maintains a reserve for doubtful accounts in respect of the
Notes Receivable owned by the Company and a reserve for recourse liability in
respect of the Notes Receivable that have been sold by the Company. These
reserves are estimates and if the amount of the Notes Receivable that is
ultimately uncollectible materially exceeds the related reserves, the Company's
business, results of operations and financial condition could be materially
adversely affected. See "Business - Customer Financing." Interest Rate Risk
The Company generally provides financing for a significant portion of the
aggregate purchase price of Vacation Credits sold at a fixed interest rate. In
order to provide liquidity, the Company through the Finance Subsidiaries, sells
or securitizes its Notes Receivable. Although a significant portion of the
existing financing of the Notes Receivable through the Finance Subsidiaries is
at a fixed rate or at a variable rate with a cap on the maximum rate, if
interest rates were to increase significantly, the Company's future cost of
funds would also likely increase significantly. The Company has the ability to
respond to rising interest rates by increasing the interest rate offered to
finance Vacation Credit purchases. However, such an increase could have a
material adverse effect on sales of Vacation Credits or on the percentage of
Owners who finance their Vacation Credit purchases through the Company, which
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business - Customer Financing" and
"Liquidity and Capital Resources - Finance Subsidiaries."
The Company is exposed to credit losses in the event of nonperrformance by
the counterparties to its interest rate caps and forward swap agreements used to
hedge interest rate risk in securitization transactions. The Company does not
obtain collateral to support financial instruments but monitors the credit
standing of the counterparties.
Competition
The Company is subject to significant competition from other entities
engaged in the business of resort development, sales and operation, including
vacation interval ownership, condominiums, hotels and motels. Some of the
world's most recognized lodging, hospitality and entertainment companies have
begun to develop and sell vacation intervals in resort properties. Major
companies that now operate or are developing or planning to develop vacation
interval resorts include Marriott International, Inc., The Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels and & Resorts,
Inc., Inter-Continental Hotels and Resorts, Inc., Westin Hotels & Resorts and
Promus Hotels, Inc. In addition, other publicly-traded companies in the
timeshare industry, such as Signature Resorts, Inc., Fairfield Communities,
Inc., and Vistana, Inc., currently compete or may in the future compete with the
Company. Many of these entities possess significantly greater financial,
marketing and other resources than those of the Company. Management believes
that industry competition will be increased by recent and potential future
consolidation in the timeshare industry.
Resales of Vacation Credits by Owners may compete with sales of Vacation
Credits by the Company and may inhibit the Company's ability to increase the
market price of Vacation Credits it sells.
Dependence on Key Personnel
The Company's success depends to a large extent upon the experience and
abilities of William F. Peare, the Company's President and Chief Executive
Officer, Jeffery P. Sites, the Company's Executive Vice President and Chief
Operating Officer, and Gary A. Florence, the Company's Vice President, Chief
Financial Officer and Treasurer. The loss of the services of any one of these
individuals could have a material adverse effect on the Company's business,
results of operations and financial condition. The Company's success is also
dependent upon its ability to attract and retain qualified development,
acquisition, marketing, management, administrative and sales personnel for which
there is keen competition. In addition, the cost of retaining such key personnel
could escalate over time. There can be no assurance that the Company will be
successful in attracting and retaining such personnel.
Regulation of Marketing and Sales of Vacation Credits; Other Laws
The Company's marketing and sales of Vacation Credits and certain of its
other operations are subject to extensive regulation by the states and foreign
jurisdictions in which the WorldMark Resorts are located and in which Vacation
Credits are marketed and sold and also by the federal government.
State and Provincial Regulations. Most U.S. states and Canadian provinces
have adopted specific laws and regulations regarding the sale of vacation
interval ownership programs. Washington, Oregon, California, Hawaii and British
Columbia require the company to register WorldMark Resorts, the Company's
vacation program and the number of Vacation Credits available for sale in such
state or province with a designated state or provincial authority. The Company
must amend its registration if it desires to increase the number of Vacation
Credits registered for sale in that state or province. Either the Company or the
state or provincial authority assembles a detailed offering statement describing
the Company and all material aspects of the project and sale of Vacation
Credits. The company is required to deliver the offering statement to all new
purchasers of Vacation Credits, together with certain additional information
concerning the terms of the purchase. Hawaii imposes particularly stringent and
broad regulation requirements for the sale of interests in interval ownership
programs that have resort units located in Hawaii. The Company has incurred
substantial expenditures over an extended period of time in the registration
process in Hawaii and still has not completed this process. Hawaii has allowed
the use of WorldMark units in Hawaii, provided that the company continues in
good faith to pursue registration in Hawaii. Laws in each state where the
Company sells Vacation Credits grant the purchaser from three to seven calendar
days following the later of the date the contract was signed or the date the
purchaser received the last of the documents required to be provided by the
Company. Most states have other laws which regulate the Company's activities,
such as real estate licensure laws, laws relating to the use of public
accommodations, and facilities by disabled persons, sellers of travel licensure
laws, anti-fraud laws, advertising laws and labor laws.
Federal Regulations. The Federal Trade Commission has taken an active
regulatory role in the interval ownership industry through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which the Company is or may be
subject includes the Truth-In-Lending Act and Regulation Z, the Equal
Opportunity Credit Act and Regulation B, the Interstate Land Sales Full
Disclosure Act, the Real Estate Standards Practices Act, the Telephone Consumer
Protection Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act,
the Civil Rights Act of 1964 and 1968, the Fair Housing Act and the Americans
with Disabilities Act.
Although the Company believes that it is in material compliance with all
federal, state, local and foreign laws and regulations to which it is currently
subject, there can be no assurance that it is in fact, in compliance. Any
failure by the Company to comply with applicable laws or regulations could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, the Company will continue to incur significant
costs to remain in compliance with applicable laws and regulations, and such
costs could increase substantially in the future.
Possible Environmental Liabilities
Under various federal, state, local and foreign laws, ordinances and
regulations, the owner or operator of real property generally is liable for the
costs of removal or remediation of certain hazardous or toxic substances located
on or in, or emanating from, such property, as well as related costs of
investigation and property damage. Such laws often impose such liability without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Other federal and state laws
require the removal or encapsulation of asbestos-containing material when such
material is in poor condition or in the event of construction, demolition,
remodeling or renovation. Other statutes may require the removal of underground
storage tanks. Noncompliance with these and other environmental, health or
safety requirements may result in the need to cease or alter operations at the
property. Although the Company conducts an environmental assessment with respect
to the properties it acquires for WorldMark, the company has not received a
Phase I environmental report for any WorldMark Resort. There can be no assurance
that any environmental assessments undertaken by the Company with respect to the
WorldMark Resorts have revealed all potential environmental liabilities, or that
an environmental condition does not otherwise exist as to any one or more of the
WorldMark Resorts that could have a material adverse effect on the Company's
business, results of operations and financial condition.
Natural Disasters; Uninsured Loss
WorldMark maintains property insurance and liability insurance for the units
at the WorldMark Resorts, with certain policy specifications, insured limits and
deductibles. Certain types of losses, such as losses arising from earthquakes,
floods or acts of war, are generally excluded from WorldMark's insurance
coverage. Should an uninsured loss or loss in excess of insured limits occur,
WorldMark has the option to either (i) remove such units from the Vacation
Credit system, which would result in a proportional dilution of vacation time
available for the Vacation Credits which have been sold, or (ii) pay the related
costs of replacement. Although WorldMark's board of directors may impose a
limited amount of special assessments to pay for capital improvements or major
repairs, there can be no assurance that WorldMark would be able to increase
assessments to provide sufficient funds to pay for all possible capital
improvements and major repairs of the units at the WorldMark Resorts. In such
event, the Company may need to advance funds to WorldMark in order to maintain
the quality of the WorldMark Resorts or WorldMark may be required to defer
certain improvements or repairs. In addition, the Company may advance funds to
WorldMark if WorldMark does not have sufficient funds to pay its obligations in
a timely manner. See "Business - Insurance; Legal Proceedings."
Item 2. Properties
The Company owns its headquarters building in Bellevue, Washington. In the
ordinary course of business, the Company purchases property for development and
deeds said property to WorldMark upon completion of the project.
See "Business - WorldMark".
Item 3. Legal Proceedings
The Company is not aware of any material legal proceedings pending against
it. The Company may be subject to claims and legal proceedings from time to time
in the ordinary course of business.
Item 4. Submission of Matters to a Vote of Securities Holders
There were no matters submitted to a vote of the Company's equity holders
during the fourth quarter of 1997.
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
The Company's initial public offering of Common Stock was consummated on
August 15, 1997 at an initial price of $18.00 per share. The Company's common
stock is quoted on the Nasdaq National Market under the symbol "TWRI". The
following table sets forth for the periods indicated, the high and low sales
price for Common Stock, as quoted on the Nasdaq National Market:
High Low
------- -----------
Year ended December 31, 1997:
Third quarter (commencing August 15, $20 7/8 $17 7/8
1997)
Fourth quarter $29 1/2 $18 1/2
January 1, 1998 to March 24, 1998 $22 3/4 $18 13/16
On March 24, 1998, there were approximately 37 holders of record of the
Company's common stock and approximately 1,362 beneficial stockholders.
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying cash dividends on its Common Stock. The
Company currently intends to retain future earnings to finance its operations
and fund the growth of the business. Any payment of future dividends will be at
the discretion of the Board of Directors of the Company and will depend on,
among other things, the Company's earnings, financial condition, contractual
restrictions in respect of the payment of dividends and other factors the Board
of Directors deems relevant.
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" are derived from the audited financial
statements of Trendwest Resorts, Inc. and certain affiliates. The information
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the combined and
consolidated financial information for the Company and the notes thereto which
are contained elsewhere herein. The information presented below under the
caption "Operating Data" is unaudited.
Year Ended December 31,
-------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ---------- ------------ --------
Statement of Operations Data:
Revenues:
Vacation Credit sales, net............... $38,743 $54,904 $77,783 $ 100,040 $ 128,835
Finance income........................... 3,813 3,736 5,368 7,143 11,989
Gains on sales of notes receivable....... 1,558 1,635 3,222 5,673 6,582
Resort management services............... 1,102 2,805 1,579 1,501 2,032
Other.................................... 344 763 1,226 2,552 2,149
------- ------- ------- ----------- -----------
Total revenues..................... 45,560 63,843 89,178 116,909 151,587
Costs and operating expenses:
Vacation Credit cost of sales............ 8,743 15,070 20,484 27,400 34,569
Resort management services............... 959 2,613 1,283 859 1,108
Sales and marketing...................... 19,523 25,615 36,374 47,810 59,448
General and administrative............... 4,056 6,588 8,391 10,904 13,449
Provision for doubtful accounts and
recourse 2,805 4,537 6,522 7,467 9,077
liability..............................
Interest................................. 1,929 881 2,380 2,445 1,739
------- ------- ------- ----------- -----------
Total costs and operating expenses. 38,015 55,304 75,434 96,885 119,390
------- ------- ------- ----------- ------------
Income before income taxes................. 7,545 8,539 13,744 20,024 32,197
Income tax expense....................... 2,909 3,214 4,979 7,348 11,588
------- ------- ------- ----------- ------------
Net income................................. $ 4,636 $ 5,325 $ 8,765 $ 12,676 $ 20,609
======= ======= ======= =========== ============
Basic and diluted net income per share of
Common Stock............................... $ 0.37 $ 0.42 $ 0.61 $ 0.88 $ 1.32
Shares used in computing basic and diluted
net income per share of Common Stock (1).. 12,378,643 12,758,616 14,387,169 14,417,116 15,596,419
Operating Data:
Number of WorldMark Resorts (at end of
period).................................. 12 14 16 19 22
Number of units (at end of period)......... 239 325 499 746 928
Number of Vacation Credits sold (in
thousands)............................... 34,296 47,025 65,308 82,270 99,911
Average price per Vacation Credit sold..... $ 1.14 $ 1.18 $ 1.21 $ 1.24 $ 1.27
Average cost per Vacation Credit sold...... $ 0.25 $ 0.32 $ 0.31 $ 0.33 $ 0.35
Number of Owners (at end of period)........ 12,732 18,740 27,965 38,997 51,778
Average purchase price for new Owners...... $ 7,879 $ 8,141 $ 8,325 $ 8,432 $ 8,507
Balance Sheet Data:
Cash, including restricted cash............ $ 528 $ 375 $ 516 $ 802 $ 1,289
Total assets............................... 36,007 51,143 71,289 89,330 151,750
Indebtedness(2)............................ 4,809 10,378 24,826 22,371 1,947
Stockholders' equity....................... 22,308 27,456 36,753 49,744 122,125
- ----------
(1) Includes 5,193,693 shares issued to JELD-WEN in connection with the Consolidation Transactions.
(2) Indebtedness is comprised of notes payable to JELD-WEN and others.
Selected quarterly financial data
1996 quarters ended
March 31 June 30 September 30 December 31
------------- ------------ --------------- --------------
Total revenue $25,202 $31,016 $31,166 $29,525
Total costs and operating 21,936 24,639 25,809 24,501
expenses
Net income 2,057 4,043 3,386 3,190
Basic and diluted net income
per common share $ 0.14 $ 0.28 $ 0.23 $ 0.22
1997 quarters ended
March 31 June 30 September 30 December 31
------------- ------------ --------------- --------------
Total revenue $ 32,613 $ 39,837 $ 40,472 $ 38,665
Total costs and operating 26,361 30,803 31,963 30,263
expenses
Net income 3,999 5,781 5,433 5,396
Basic and diluted net income
per common share $ 0.28 $ 0.40 $ 0.34 $ 0.31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Trendwest markets, sells and finances timeshare ownership interests in the
form of Vacation Credits and acquires, develops and manages the WorldMark
Resorts. The Company derives revenue primarily from the sale of Vacation Credits
and, to a lesser extent, from financing of Vacation Credits and from management
fees generated from its management agreement with WorldMark.
Vacation Credit sales and Upgrade Sales are recognized on the accrual basis
after the Company has received an executed sales contract and a minimum 10% down
payment, and the rescission period (generally three to seven days) has passed.
In instances where the Company finances an Upgrade Sale and the customer does
not make an additional cash down payment of at least 10% of the Upgrade Sale the
Company uses the installment method to recognize revenue. Under the installment
method, gross profit on such Upgrade Sale is deferred and thereafter recognized
in relation to each principal payment received. Revenue is fully recognized on
the Upgrade Sale when the cash collected related to the Upgrade Sale totals 10%
of the amount of the Upgrade sale. Commencing in the first quarter of 1997, the
Company modified its Upgrade Sales marketing practices so as to encourage an
additional cash down payment of at least 10% of the Upgrade Sale amount. In
1996, 13% of Upgrade Sales had the additional 10% cash down payment, as compared
to 55% in 1997.
The Company acquires or develops additional resort units for WorldMark and
contributes those units to WorldMark free of monetary encumbrances, thereby
creating additional Vacation Credits for sale by the Company. The Company
assigns each WorldMark Resort unit a specific number of Vacation Credits based
on its vacation use value relative to existing WorldMark Resort units.
Acquisition and construction costs associated with the WorldMark Resort units
are recorded as inventory. Vacation Credit cost of sales are allocated as
Vacation Credit sales are recognized.
Financing of Vacation Credits is provided to Owners by Trendwest at an
interest rate of 13.9% or 14.9% per annum for a term of up to seven years. The
Company routinely sells Notes Receivable to financial institutions and other
investors to generate liquidity to acquire or develop new resort units and for
working capital. The Company recognizes a gain on the sale of Notes Receivable
at the time of sale equal to the present value of the estimated net future cash
flow of the payment streams. This gain is recorded as a residual interest in
Notes Receivable sold on the Company's balance sheet and is amortized over the
term of the Notes Receivable using the interest method.
Results of Operations
The following discussion of the results of operations relates to entities
comprising the Company on a combined historical basis.
Year Ended December 31,
------------------------------
As a Percentage of Total Revenues: 1995 1996 1997
---- ---- ----
Vacation Credit sales, net 87.2% 85.5% 85.0%
Finance income 6.0 6.1 7.9
Gains on sales of notes receivable 3.6 4.9 4.3
Resort management services 1.8 1.3 1.3
Other 1.4 2.2 1.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
As a Percentage of Vacation Credit Sales, Net:
Vacation Credit cost of sales 26.3% 27.4% 26.8%
Sales and marketing 46.8 47.8 46.1
Provision for doubtful accounts and recourse liability 8.4 7.5 7.0
As a Percent of Resort Management Revenues:
Cost of resort management services 81.3% 57.2% 54.5%
As a Percentage of Total Revenues:
General and administrative 9.4% 9.3% 8.9%
Total costs and operating expenses 84.6 82.9 78.8
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
For the year ended December 31, 1997 the Company achieved total revenues of
$151.6 million compared to $116.9 million for the year ended December 31, 1996,
an increase of 29.7%. The principal reason for the overall improvement was a
28.8% increase in Vacation Credit sales from $100.0 million for the year ended
December 31, 1996 to $128.8 million for the year ended December 31, 1997. The
increase in Vacation Credit sales was primarily the result of a 21.4% increase
in the number of Vacation Credits sold from 82.3 million for the year ended
December 31, 1996 to 99.9 million for the year ended December 31, 1997. The
increase in Vacation Credits sold was largely attributable to two new off-site
sales offices in the Southern California region, Costa Mesa and Woodland Hills,
opened in February and October 1997; the maturation of two offices opened in
February and April of 1996; and increased Upgrade sales. Revenues from Upgrade
Sales increased 60.5% from $12.4 million for the year ended December 31, 1996 to
$19.9 million for the year ended December 31, 1997 due largely to the increase
in number of Owners who made the necessary 10% cash down payment to allow full
revenue recognition at the time of the sale. The number of Vacation Credits sold
as Upgrades increased by approximately 11.4% in the year ended December 31, 1997
compared to the year ended December 31, 1996 due to the continued growth of
resorts and effective sales efforts. The average price per Vacation Credit sold
increased from $1.24 for the year ended December 31, 1996 to $1.27 for the year
ended December 31, 1997, an increase of 2.4%, which was due primarily to a 4.5%
increase in the sales price of Upgrade credits.
Finance income increased 69.0% from $7.1 million for the year ended December
31, 1996 to $12.0 million for the year ended December 31, 1997, due to the
increased carrying balances of Notes Receivable and the recognition of
unrealized gain on residual interest in Notes Receivable sold of $1.0 million.
Gains on sales of Notes Receivable increased 15.8% from $5.7 million for the
year ended December 31, 1996 to $6.6 million for the year ended December 31,
1997 due to higher net interest spreads on the principal amount of Notes
Receivable sold.
Vacation Credit cost of sales increased from $27.4 million for the year
ended December 31, 1996 to $34.6 million for the year ended December 31, 1997,
an increase of 26.3% and primarily reflects the increase in sales of Vacation
Credits. As a percentage of Vacation Credit sales, Vacation Credit cost of sales
decreased from 27.4% for the year ended December 31, 1996 to 26.8% for the year
ended December 31, 1997. The Company believes that the change in Vacation Credit
cost of sales as a percentage of Vacation Credit sales would have been slightly
higher for the year ended December 31, 1997 as compared with the year ended
December 31, 1996 absent the increase in the percentage of Owners who made a 10%
cash down payment on Upgrade Sales.
Sales and marketing costs increased 24.3% from $47.8 million for the year
ended December 31, 1996 to $59.4 million in the year ended December 31, 1997. As
a percentage of Vacation Credit sales, sales and marketing costs decreased from
47.8% for the year ended December 31, 1996 to 46.1% for the year ended December
31, 1997 primarily due to a substantially higher percentage of Upgrade Sales for
the year ended December 31, 1997 that were entitled to full revenue recognition
at the time of sale. The Company believes that sales and marketing costs as a
percentage of Vacation Credit sales would have remained relatively constant for
the two years compared absent the increase in the percentage of Owners who made
a 10% cash down payment on Upgrade Sales.
General and administrative expenses increased 22.9% from $10.9 million for
the year ended December 31, 1996 to $13.4 million for the year ended December
31, 1997 primarily reflecting the increased sales growth and increased
administration costs due to regionalization. As a percentage of total revenues,
general and administrative expenses decreased from 9.3% for the year ended
December 31, 1996 to 8.9% for the year ended December 31, 1997, due primarily to
the substantially higher percentage of Upgrade Sales that were entitled to full
revenue recognition at the time of sale. The Company believes that general and
administrative expenses as a percentage of total revenues would have remained
relatively constant for the years ended December 31, 1996 and 1997 absent the
increase in the percentage of Owners who made a 10% cash down payment on Upgrade
Sales in 1997.
Interest expense decreased from $2.4 million for 1996 to $1.7 million for
1997, a decrease of 29.2% due primarily to the repayment of borrowings from the
Parent from net proceeds of the Offering in August 1997.
Provision for doubtful accounts and recourse liability increased 21.3% from
$7.5 million for the year ended December 31, 1996 to $9.1 million for the year
ended December 31, 1997. As a percentage of Vacation Credit sales, the provision
declined from 7.5% for the year ended December 31, 1996 to 7.0% for the year
ended December 31, 1997 due to the substantially higher percentage of Upgrade
Sales for 1997 that were entitled to full revenue recognition at the time of
sale and continued growth in the amount of Notes Receivable from Upgrade Sales
which have a historically lower default rate than new sales.
Comparison of the year ended December 31, 1996 to the year ended
December 31, 1995
For 1996, the Company achieved total revenue of $116.9 million compared to
$89.2 million for 1995, an increase of 31.1%. This increase was primarily due to
a 28.5% increase in Vacation Credit sales, from $77.8 million to $100.0 million,
and a 31.5% increase in finance income, from $5.4 million to $7.1 million. The
increase in Vacation Credit sales was primarily the result of a 26.0% increase
in the number of Vacation Credits sold from 65.3 million in 1995 to 82.3 million
in 1996 due to the opening of two new off-site sales offices (one in May 1995
and one in April 1996) and three new on-site sales offices (one in April 1995,
one in June 1995 and one in February 1996). Revenues from Upgrade Sales,
increased from $6.6 million for 1995 to $12.4 million for 1996, due to the
increased number of Owners and more effective sales programs. The average price
per Vacation Credit sold increased slightly from $1.21 for 1995 to $1.24 for
1996, an increase of 2.5%. The increase in finance income was primarily due to
increased carrying balances of Notes Receivable related to higher Vacation
Credit sales in 1996 compared to 1995. Gains on sales of Notes Receivable
increased 78.1% from $3.2 million for 1995 to $5.7 million for 1996. This
increase was due to a greater amount of Notes Receivable sold, which increased
from $38.6 million for 1995 to $72.2 million for 1996.
Vacation Credit cost of sales increased from $20.5 million for 1995 to $27.4
million for 1996, an increase of 33.7%, primarily reflecting the increase in
sales of Vacation Credits. As a percentage of Vacation Credit sales, Vacation
Credit cost of sales increased to 27.4% in 1996 from 26.3% in 1995. This
increase was due to the relatively higher cost of developing and constructing
Gleneden Beach resort in Oregon compared to other WorldMark Resorts and the
reduction of revenue resulting from an increase in net deferred gross profit on
Upgrade Sales.
Cost of resort management services decreased 30.8% from $1.3 million in 1995
to $0.9 million in 1996, primarily as a result of the shift in the management
responsibility for WorldMark's resort level operations from Trendwest to
WorldMark which occurred in the second quarter of 1995.
For 1996, sales and marketing costs increased 31.3% from $36.4 million in
1995 to $47.8 million in 1996. As a percentage of Vacation Credit sales, sales
and marketing costs increased slightly from 46.8% in 1995 to 47.8% in 1996. The
growth in sales and marketing costs reflects the increase in Vacation Credit
sales and the opening of two new sales offices.
General and administrative expenses increased 29.8% from $8.4 million in
1995 to $10.9 million in 1996, primarily reflecting the growth in the overall
business of Trendwest. General and administrative expenses decreased as a
percentage of total revenues from 9.4% in 1995 to 9.3% in 1996, primarily
reflecting the realization of certain economies of scale causing administrative
expenses to increase at a lower rate than total revenues.
Interest expense remained consistent at $2.4 million, as lower average
interest rates offset the effect of somewhat higher average loan balances.
Provisions for doubtful accounts and recourse liability increased 15.4% from
$6.5 million in 1995 to $7.5 million in 1996. As a percentage of Vacation Credit
sales, the provision declined from 8.4% in 1995 to 7.5% in 1996. Reserve
strengthening contributed to the higher percentage in 1995 and a higher
percentage of the Company's Notes Receivable being held by Upgrade Owners at the
end of 1996 contributed to the lower percentage in 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations from down payments on sales of
Vacation Credits which are financed, cash sales of Vacation Credits, management
fees, principal and interest on Notes Receivable, and proceeds from sales and
borrowings collateralized by Notes Receivable. The Company also generates cash
on the interest differential between the interest charged on the Notes
Receivable and the interest paid on loans collateralized by Notes Receivable.
During the year ended December 31 1997, cash used in operating activities
was $46.5 million. While net income was higher for the year ended December 31,
1997, cash generated from operating activities was reduced principally due to
the increased issuance of Notes Receivable to finance the purchase of Vacation
Credits, reduced proceeds from sales of Notes Receivable and higher expenditures
to increase inventory levels of Vacation Credits. Cash flows from operating
activities resulted primarily from the sale and repayment of Notes Receivable of
$71.1 million and net income of $20.6 million. Cash flow used in operating
activities was principally due to an increase in Notes Receivable of $112.2
million to finance the purchase of Vacation Credits by Owners and an increase in
inventory of $28.3 million due to the increasing sales of Vacation Credits. The
decrease in proceeds from the sales of Notes Receivable was due in part to
treating the transfer of such receivables to the Bank Group after January 1,
1997, and prior to June 30 1997 as secured borrowing as TW Holdings did not meet
the sales recognition criteria of Statement of Financial Accounting Standards
Number 125 (SFAS 125).
Net cash used in investing activities for the year ended December 31, 1997,
was $1.7 million and primarily consisted of acquisitions of furniture and
fixtures and data processing equipment required to meet the growth of the
Company.
Net cash provided by financing activities for the year ended December 31
1997 was $48.2 million. The Company received net proceeds of $51.8 million from
the offering of 3,176,250 shares of the Company's stock. Net proceeds from the
offering were used to repay $41.9 million of borrowings from JELD-WEN, resulting
in a net change due to Parent of $19.4 million. The balance of the proceeds were
used to finance the acquisition of additional resort properties, to carry Notes
Receivable contracts, and for working capital and other general corporate
purposes. After January 1, 1997, and prior to June 30, 1997, the Company
borrowed $16.8 million from a group of banks through TW Holdings, Inc., secured
by Notes Receivable to meet working capital needs.
The Company continually needs to acquire and develop additional resort units
for WorldMark in order to provide additional vacation credits for sale by the
Company and to provide a greater variety of resort location for Owners. The
continued growth of the Company and increase in the owner base allows for the
development of larger resorts which provides certain economies of scale to the
Company and to WorldMark from an operating cost standpoint. The permitting
process for larger resorts can be lengthy at times, particularly in California
and necessitates the need to acquire land as much 12 to 18 months before a
resort is completed. This is reflected in the Company's investment in inventory
which increased $28.3 million in 1997 to $44.5 million at December 31, 1997.
At December 31, 1997, there were 5.2 million credits available for sale.
Included in construction in progress at December 31, 1997 were 55.2 million of
credits associated with Kona, Big Bear and Coral Baja which will be transferred
to the Company by developers in 1998 in accordance with the transfer schedules.
In addition, Clear Lake was substantially complete at December 31, 1997 with
some use by Owners. Due to the impact of El Nino, final approvals from local
authorities allowing for transfer of title to WorldMark could not be obtained
until late March of 1998. This project will provide approximately 37.1 million
of credits for sale by the Company. With the above units coming on line in 1998,
completion of 112 units at Angel's Camp, the expansion of existing resorts and
completion of the permitting process for Maui, the Company believes it will have
an adequate supply of credits available to meet its planned growth through the
early part of the year 2000. Since all vacation credits have the same use rights
and sell for the same price, the Company does not experience a buildup of
inventory of less desirable resort units or interval dates which are difficult
to sell.
Since completed units at various resort properties are acquired or developed
in advance and a significant portion of the purchase price of Vacation Credits
is financed by the Company, the Company continually needs funds to acquire and
develop property, to carry Notes Receivable contracts and to provide working
capital. The Company has historically secured additional funds through loans
from the Parent and the sale of Notes Receivable through the Finance
Subsidiaries. See "Risk Factors - Dependence on Acquisitions of Additional
Resort Units for Growth; Need for Additional Capital."
Finance Subsidiaries
TW Holdings, Inc. ("TW") was organized in 1993 to purchase Notes Receivable
at face value plus accrued interest. TW transfers these Notes Receivable to a
group of banks led by Bank of America NT&SA (the "Bank Group") pursuant to a
receivables transfer agreement. Through TW, the Company transferred eligible
Notes Receivable of $38.6 million in 1995, $42.1 million in 1996 and $57.1
million in 1997 to the Bank Group. The transfers are subject to recourse for
defaults and the Company maintains a reserve for recourse liability.
Financing of Notes Receivable has been accomplished by use of a $98.0
million purchase commitment from the Bank Group. As of December 31, 1997, Notes
Receivable totaling $98.0 million had been transferred to the Bank Group. The
Company's transfer of receivables to the Bank Group in the first quarter of 1997
did not meet the sale recognition criteria of SFAS No. 125 and were treated as
secured borrowings. The Notes Receivable transferred to the Bank Group are
collateralized by a pool of Notes Receivable equal to 25% of the amount
transferred to the Bank Group. Interest rates under the line of credit with the
Bank Group are at 30 day, 60 day, 90 day or 180 day LIBOR plus 125 basis points.
The Company has purchased a three year, 30-day LIBOR interest rate cap at
10.125% per annum on $31.8 million. The interest rate cap expires on April 10,
1998. In conjunction with the renewal of the purchase commitment in June of
1997, the Company modified its transfer arrangements so that Notes Receivable
transferred to the Bank Group qualify for sales recognition under SFAS 125. In
December of 1997 the purchase commitment was amended to increase the size of the
facility from $93.0 million to $98.0 million. TW's agreement with the Bank Group
is subject to annual renewals on June 30 of each year, with the present
commitment expiring on June 30, 1998. In the event of nonrenewal of the
commitment, the Company would not be able to transfer additional Notes
Receivable to the Bank Group
In April 1996, the Company sold $30.1 million of Notes Receivable to a
special purpose company, Trendwest Funding I, Inc. ("TFI"). In addition, the
Bank Group sold $47.1 million of Notes Receivable purchased from TW to another
special purpose company. The special purpose companies sold the receivables to
TRI Funding Company I, L.L.C. ("TFL"), a special purpose limited liability
company, and TFL issued $70.0 million of 7.42% fixed rate senior notes, series
1996-1 to private institutional investors. The notes were rated 'A' by Fitch
Investors and are secured by the Notes Receivable owned by TFL. The rating
reflects credit enhancements of a 10% overcollateralization and a 2% minimum
reserve account. The notes have a stated maturity of May 15, 2004.
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate risks. They are not used
for trading purposes.
The Company has a $10 million open line of credit with the Parent which
bears interest at prime plus 1% (currently 9.5%) per annum and is payable on
demand. As of December 31, 1997 the outstanding indebtedness to the Parent was
$1.9 million and income taxes payable to the Parent were $2.8 million.
In October 1997, the Company entered into two $50 million notional amount
forward interest rate swap agreements to effectively hedge the treasury
component of a future financing transaction expected to be completed in the
first quarter of 1998. These transactions meet the requirement for hedge
accounting, including designation to a specific transaction, and high
correlation. Gains and losses on the forward swap agreements are deferred and
recognized upon completion of the transaction. The fair value of these swaps was
($472,000) at December 31, 1997, which reflects the estimated amount the Company
would have to pay at that date to cancel the contracts or transfer them to other
parties.
The remaining balance of the Company's $5.0 million line of credit with
FINOVA Capital Corporation was paid in August 1997, and the line of credit was
terminated by the Company due to the relatively high interest rate of 10.5%. The
Company pursued and consummated a $30 million revolving line of credit with its
Bank Group agented by Bank of America NT&SA in February 1998, at more favorable
interest rates, (see discussion under "Recent Developments.").
Through the end of 1999, the Company anticipates spending approximately
$98.0 million for acquisitions and development of new resort properties and for
expansion and development activities at the existing WorldMark Resorts. The
Company plans to fund these expenditures from net proceeds of a securitization
of notes receivable completed in March 1998, further sales or securitizations of
Notes Receivable and a $30 million revolving credit facility, which was
consummated in the first quarter of 1998, (see discussion under "Recent
Developments"). The above credit facilities, together with cash generated from
financing transactions and the $10 million line of credit with Parent should be
sufficient to meet the Company's working capital and capital expenditure needs
for the near future.
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 rate interest, and
may be subject to such additional terms as management deems appropriate.
Recent Developments
In February 1998, the Company entered into a Credit Agreement with a group
of banks to provide the Company with a three-year unsecured revolving credit
facility for $30 million. The credit agreement provides for borrowings at the
reference rate as announced by Bank of America, NT&SA or at LIBOR plus 100 basis
points. The Credit Agreement provides for a commitment fee to the banks of 30
basis points per annum on the total unused amount of the commitment.
Availability under the line of credit is subject to a borrowing base which is a
percentage of unencumbered Notes Receivable and inventory, including property
under development. Under the terms of the Credit Agreement, the Company is
required to maintain certain interest coverage ratios and capitalization ratios
and also imposes limitations on certain liens and carrying amounts of inventory.
The Credit Agreement matures on February 12, 2001. The Company plans to use this
facility to meet short term working capital needs.
In March 1998, the Company sold $37.9 million of Notes Receivable to a
special purpose company, Trendwest Funding II, Inc. In addition, the Bank Group
sold $98.0 million of Notes Receivable purchased from TW Holdings, Inc. to
Trendwest Funding II, Inc. The special purpose company sold the receivable to
TRI Funding II, Inc. (TRI), a special purpose entity , and TRI issued $130.4
million in two classes of senior and subordinated notes to institutional
investors. The 1998-1, Class A notes were issued for $125.0 million at a fixed
rate of 6.88%. The 1998-1, Class B notes were issued for $5.4 million at a fixed
rate of 7.98%. The Class A notes and Class B notes were rated `A" and `BBB' by
Fitch IBCA, Inc., respectively, and are secured by the Notes Receivable owned by
TRI. The ratings reflect credit enhancements of a 4% overcollaterilization and a
2% minimum reserve account. The notes have a stated maturity of April 15, 2009.
Upon completion of this financing, the Company had $93.0 million of availability
under the TW Holdings facility and $30.0 million under the revolving credit
agreement.
On March 17, 1998 the Company opened its Burlingame, California off-site
sales office bringing the total number of off-site sales offices to fourteen,
ten of which are located off-site in metropolitan areas. This newest Northern
California sales office will compliment other off-site Northern California sales
offices in Sacramento, Santa Clara and Walnut Creek. In the second quarter of
1998 the Company expects to open two additional off-site sales offices, one in
the San Diego area and one in the Phoenix area. The latter which will provide an
entrance into the Southwest Region market area which the Company believes will
provide additional sales opportunities to sustain near-term growth of the
Company.
The Company is presently negotiating the purchase of land and construction
of a new Corporate headquarters building to be available for occupancy on or
about December 1, 1998. The facility will be larger and enable the Company to
consolidate most of the existing Corporate operations at one location. Estimated
cost of the new facility is expected to be approximately $11.0 million and will
provide space to meet growth of the Company for the near future. The existing
Corporate facility will be sold with proceeds estimated at approximately $3.8
million. The new building is a expected to be financed under a conventional
commercial real estate mortgage.
Year 2000
The Year 2000 issue is a flaw in many electronic data processing systems
which prevents them from processing year-date data accurately beyond the year
1999. This is the result of using a two-digit representation for the year, for
example "99" for "1999". This approach assumed that the first two digits of the
abbreviated date is "19". However, when the computer reaches 2000 it may
interpret "00" as the year 1900 possibly causing inaccurate data processing or
processing to stop altogether. The Company has reviewed its exposure to the Year
2000 issue with respect to its data processing systems and determined the cost
of Year 2000 compliance will be immaterial to its financial condition and
results of operations. Additionally, the Company has reviewed its exposure to
Year 2000 issue with respect to material vendors such as Sage and is monitoring
Sage's Year 2000 compliance program to ensure timely completion.
The above statement and other statements herein contain forward looking
information which include future financing transactions, acquisition of
properties, and the Company's future prospects and other forecasts and
statements of expectations. Actual results may differ materially from those
expressed in any forward-looking statement made by the Company, due among other
things, to the Company's ability to develop or acquire additional resort
properties, find acceptable debt or equity capital to fund such development, as
well as other risk factors as outlined in the "Risk Factors" section of this
Form 10-K.
Item 8. Financial Statements and Supplementary Data
See the information set forth on Index to Financial Statements appearing on
page F-1 of this report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
In August 1996, the Company engaged Coopers & Lybrand LLP ("C&L") as the
Company's independent accountants to report on the Company's balance sheet as of
December 31, 1995 and 1994, and the related statements of income, stockholders'
equity and cash flow for each of the years in the three year period ended
December 31, 1995. C&L did not render any report on the Company's financial
statements and was dismissed as the Company's independent accountants on
February 10, 1997. The decision to retain and subsequently to dismiss C&L was
approved by the Company's Board of Directors.
During the period of C&L's engagement, disagreements arose over the
accounting treatment of the sales of additional Vacation Credits to existing
Owners ("Upgrade Sales"). The Company contended that Upgrade Sales could be
fully recognized as income under Financial Accounting Standards Board Statement
No. 66 ("SFAS 66") without an additional 10% cash down payment, provided that
the Owner had sufficient equity in previously purchased Vacation Credits
(including prior principal payments on the Note Receivable from the previous
purchases) and additional cash down payments, if any, at the time of the Upgrade
Sale, to satisfy the 10% down payment requirement for full accrual profit
recognition under SFAS 66. C&L's position was that SFAS 66 and Emerging Issues
Task Force Issue No. 88-12 required each Upgrade Sale to have a separate 10%
cash down payment (without consideration of equity from previously purchased
Vacation Credits) before the full accrual of revenue could be recognized on such
sale. Prior to C&L's dismissal, the Company agreed to modify its revenue
recognition policies in accordance with C&L's position.
Upon an Upgrade Sale, any existing Note Receivable is cancelled and a new
Note Receivable with a seven year term is executed for the balance of the
existing Note Receivable and the financed amount of the Upgrade Sale. The
Company and C&L discussed the allocation of payments on the new Note Receivable
for the purpose of profit recognition on the Upgrade Sale. The Company's view,
as reflected in the financial statements included herein, is that the payment
due on the new Note Receivable could be bifurcated between the amount
attributable to the Upgrade Sale and the amount attributable to the extended
balance of the previous Note Receivable, and that the excess of the payment due
under the new Note Receivable over the part of the bifurcated payment
attributable to the extended balance of the previous Note Receivable could be
allocated to the financed portion of the Upgrade Sale without affecting the
accounting for the previous sale. Profit on the Upgrade Sale would be recognized
on the installment method until allocated principal payments equal to 10% of the
Upgrade Sale are received. Profit would then be recognized on the accrual
method. C&L recommended that the concurrence of the Securities and Exchange
Commission ("Commission") staff with this methodology be obtained prior to
filing the Registration Statement in connection with the Company's IPO. C&L was
prepared to accept the Company's view, provided that the Commission staff
concurred. Accordingly, at the time of C&L's dismissal, with the exception of
the issue of profit recognition on the new Note Receivable and the effect of the
allocation of principal payments on the new Note Receivable on the recognition
of profit on the previous sale, the Company does not believe that there were any
unresolved disagreements with C&L on any matter of accounting principles or
practices, financial disclosure, or auditing scope or procedure, which, if not
resolved to C&L's satisfaction, would have caused it to make reference to the
subject matter of the disagreements in connection with its reports. C&L
discussed each of these issues with members of the Board of Directors of the
Company and of the board of directors of the Company's parent, JELD-WEN. The
Company has authorized C&L to respond fully to the inquiries of KPMG concerning
each of the disagreements.
In addition, C&L advised the Company of two matters that, if further
considered in connection with its audit of the financial statements, could
materially impact the fairness of the financial statements. The matters relate
to the adequacy of the Company's allowance for doubtful accounts for receivables
from the sale of Vacation Credits and the method of calculating gains on the
sale of such receivables. Due to their dismissal, C&L did not complete the audit
procedures and inquiries necessary to conclude on these matters.
As previously discussed, C&L was prepared to accept the Company's view
regarding revenue recognition for Upgrade Sales, provided that the Commission
staff concurred. The Commission staff did not object to the Company's revenue
recognition policy for upgrade sales at the time of the Company's IPO. In
addition, due to their dismissal, C&L did not complete the audit procedures and
inquiries necessary to conclude on certain other matters. The Company believes
that, if C&L had been allowed to complete their engagement the resolution of the
aforementioned issues and matters would have been treated no differently than as
presently treated.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item will be set forth under "Directors and
Executive Officers" and "Proxy Statement - Compliance with Section 16(a) Under
the Securities Exchange Act of 1934" in the Company's Proxy Statement and
reference is expressly made thereto for specific information incorporated herein
by reference.
Item 11. Executive Compensation
The information required by this Item will be set forth under Executive
Compensation" in the Company's Proxy Statement and reference is expressly made
thereto for the specific information incorporated herein by the aforesaid
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item will be set forth under "Proxy
Statement - Share Ownership of Directors and Executive Officers," and "Other
information - Certain Shareholders" in the Company's Proxy Statement and
reference is expressly made thereto for the specific information incorporated
herein by the aforesaid reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item will be set forth under "Proxy
Statement - Certain Relationships and Related Transactions" in the Company's
Proxy Statement and reference is expressly made thereto for the specific
information incorporated herein by the aforesaid reference.
PART IV
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
Exhibit
Number Description
3.1 Amended and Restated Articles of Incorporation of the Registrant, dated July 2, 1997. (1)
3.2 Amended and Restated Bylaws of the Registrant. (1)
10.1 Management Agreement (Fourth Amended) between the Registrant and WorldMark, the Club
("WorldMark"), dated September 30, 1994. (1)
10.2 Software Support and Maintenance Agreement between the Registrant and Sage Systems, Inc.
("Sage"), dated , 1994. (1)
10.3 Service Agreement between the Registrant and Sage, dated January 1, 1996. (1)
10.4 Software Transfer Agreement between the Registrant, Sage and James McBride, Sr., dated
August, 1994. (1)
10.5 Escrow Agreement between the Registrant, Club Esprit (predecessor to WorldMark) and Sage,
dated as of October 25, 1990. (1)
10.6 Form of WorldMark Retail Installment Contract Vacation Owner Agreement. (1)
10.7 Indenture among the Registrant, TRI Funding Company I, L.L.C. and LaSalle National Bank, dated
as of March 1, 1996. (1)
10.8 Servicing Agreement among the Registrant, TRI Funding Company I, L.L.C., Sage and LaSalle
National Bank, dated as of March 1, 1996. (1)
10.9 Purchase and Sale Agreement among the Registrant, Trendwest Funding I, Inc., TWH Funding I,
Inc. and TRI Funding Company I, L.L.C., dated March 1, 1996. (1)
10.10 Receivables Purchase Agreement among the Registrant, TW Holdings, Inc. and Trendwest Funding
I, Inc., dated March 1, 1996. (1)
10.12 Receivables Purchase Agreement between Registrant and TW Holdings, Inc., dated December 1,
1993. (1)
10.13 Second Amended and Restated Eagle Crest Receivables Purchase Agreement dated as of June 1,
1997, by and between Eagle Crest, Inc. and TW Holdings
10.14 Second Amended and Restated Receivables Transfer Agreement dated as of June 1, 1997, by and
between TW Holdings, Inc. as Seller, Bank of America National Trust and Savings Association,
doing business as Seafirst Bank, and Other Purchasers Named Therein as Purchasers, Seafirst
Bank as Agent, and Trendwest Resorts, Inc. as Master Servicer
10.14.1 First Amendment to Receivables Transfer Agreement
10.15 Nonexclusive Limited Assignment among the Registrant, Eagle Crest Partners, Ltd. and
WorldMark, dated September 20, 1996. (1)
10.16 Nonexclusive Limited Assignment among the Registrant, Running Y, Inc. and WorldMark dated
September 20, 1996. (1)
10.17 Purchase Agreement among the Registrant, Eagle Crest Partnership, Ltd., Roderick C. Wendt and
Richard L. Wendt, dated December 30, 1992. (1)
10.18 Purchase Agreement among the Registrant, Roderick C. Wendt and Richard L. Wendt, dated April
1, 1993. (1)
10.19 Purchase Agreement between the Registrant and Jeld-Wen Foundation, dated March 13, 1992. (1)
10.20 Purchase Agreement between the Registrant and Jeld-Wen, dated March 15, 1993. (1)
10.21 Purchase Agreement between the Registrant and Jeld-Wen, dated September 30, 1993. (1)
10.22 Purchase Agreement between the Registrant and Jewel W. Kintzinger, dated October 12, 1993. (1)
10.23 Servicing Escrow Agreement between Jewel Kintzinger, the Registrant and Sage, dated October
12, 1993. (1)
10.24 Articles of Incorporation of WorldMark, the Club, dated December 10, 1992. (1)
10.25 Bylaws of WorldMark, dated December 2, 1994. (1)
10.26 Form of Employment Agreement between William F. Peare and the Registrant. (1)
10.27 Form of Employment Agreement between Jeffery P. Sites and the Registrant. (1)
10.28 Trendwest Resorts, Inc. 1997 Employee Stock Option Plan. (1)
10.29 Stock Purchase Agreement between Trendwest Resorts, Inc. and JELD-WEN, inc. (1)
10.30 Stock Purchase Agreement between Trendwest Resorts, Inc. and I&I Holdings, Ltd. (1)
11.1 Statement re Computation of Earnings per Share
13.1 Annual Report to Shareholders (2)
21.1 List of all Subsidiaries of the Registrant. (1)
24.1 Power of Attorney from officers and directors (contained on signature page).
27.1 Financial Data Schedule (one year)
(1) Incorporated by reference to the Company's Registration Statement on Form S-1 (File No. 333-26861).
(2) Incorporated by reference to the Company's Annual Report to Shareholders.
- ----------
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three month
period ending December 31, 1997.
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 Bellevue,
State of Washington, on March 30, 1998.
TRENDWEST RESORTS, INC.
By: /s/ JEFFERY P. SITES
Jeffery P. Sites
Executive Vice President
/s/ WILLIAM F. PEARE President, March 30, 1998
- ---------------------------------- Chief Executive Officer
William F. Peare and Director
(Principal Executive Officer)
/s/ JEFFERY P. SITES Executive Vice President, March 30, 1998
- ----------------------------------
Jeffery P. Sites Chief Operating Officer and
Director
/s/ GARY A. FLORENCE Vice President, Treasurer March 30, 1998
- ----------------------------------
Gary A. Florence and Chief Financial Officer
(Principal Financial Officer)
/s/ JEROL E. ANDRES Director March 30, 1998
- ----------------------------------
Jerol E. Andres
Director March __, 1998
- ----------------------------------
Harry L. Demorest
/s/ MICHAEL P. HOLLERN Director March 30, 1998
- ----------------------------------
Michael P. Hollern
/s/ DOUGLAS P. KINTZINGER Director March 30, 1998
- ----------------------------------
Douglas P. Kintzinger
Director March __, 1998
- ----------------------------------
Linda M. Tubbs
/s/ RODERICK C. WENDT Director March 30, 1998
- ----------------------------------
Roderick C. Wendt
INDEX TO FINANCIAL STATEMENTS
TRENDWEST RESORTS, INC. AND SUBSIDIARIES
Page
Independent Auditors' Report.................................. F-2
Combined and Consolidated Balance Sheets...................... F-3
Combined and Consolidated Statements of Income................ F-4
Combined and Consolidated Statements of Stockholders' Equity.. F-5
Combined and Consolidated Statements of Cash Flows............ F-6
Notes to Combined and Consolidated Financial Statements....... F-7
INDEPENDENT AUDITORS' REPORT
The Stockholders
Trendwest Resorts, Inc.:
We have audited the accompanying combined and consolidated balance sheets of
Trendwest Resorts, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the related combined and consolidated statements of income, stockholders' equity
and cash flows for each of the years in the three-year period ended December 31,
1997. These combined and consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined and consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined and consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Trendwest Resorts, Inc. and subsidiaries as of December 31, 1996 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
February 13, 1998
F-2
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Combined and Consolidated Balance Sheets
(dollars in thousands)
December 31,
--------------------------------------
Assets 1996 1997
----------------- -----------------
Assets:
Cash $ 93 70
Restricted cash 709 1,219
Notes receivable, net of allowance for doubtful accounts, sales
returns and deferred gross profit 45,448 73,075
Accrued interest and other receivables 4,606 7,435
Residual interest in notes receivable sold 10,839 15,235
Inventories 16,247 44,534
Property and equipment, net 5,912 7,057
Deferred income taxes 2,360 924
Other assets 3,116 2,201
----------------- -----------------
Total assets $ 89,330 151,750
----------------- -----------------
----------------- -----------------
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable 1,037 944
Accrued liabilities 2,100 3,862
Accrued construction in progress 2,089 10,480
Due to Parent 21,316 1,947
Allowance for recourse liability and deferred gross profit on notes
receivable sold 10,080 8,757
Income taxes payable to Parent 1,909 2,755
Income taxes payable -- 880
Notes payable 1,055 --
----------------- -----------------
Total liabilities 39,586 29,625
----------------- -----------------
Stockholders' equity:
Preferred stock, no par value. Authorized 10,000,000 shares;
no shares shares issued or outstanding -- --
Common stock, no par value. Authorized 90,000,000 shares;
issued and outstanding 17,593,366 shares at December 31, 1997 14,970 66,742
Retained earnings 34,774 55,383
----------------- -----------------
Total stockholders' equity 49,744 122,125
Commitments and contingencies
----------------- -----------------
Total liabilities and stockholders' equity $ 89,330 151,750
----------------- -----------------
----------------- -----------------
See accompanying notes to combined and consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Combined and Consolidated Statements of Income
(dollars in thousands, except per share data)
Year ended December 31,
1995 1996 1997
------------------ ------------------ ------------------
Revenues:
Vacation Credit sales, net $ 77,783 100,040 128,835
Finance income 5,368 7,143 11,989
Gains on sales of notes receivable 3,222 5,673 6,582
Resort management services 1,579 1,501 2,032
Other 1,226 2,552 2,149
------------------ ------------------ ------------------
Total revenues 89,178 116,909 151,587
------------------ ------------------ ------------------
Costs and operating expenses:
Vacation Credit cost of sales 20,484 27,400 34,569
Resort management services 1,283 859 1,108
Sales and marketing 36,374 47,810 59,448
General and administrative 8,391 10,904 13,449
Provision for doubtful accounts and recourse
liability 6,522 7,467 9,077
Interest 2,380 2,445 1,739
------------------ ------------------ ------------------
Total costs and operating expenses 75,434 96,885 119,390
------------------ ------------------ ------------------
Income before income taxes 13,744 20,024 32,197
Income tax expense 4,979 7,348 11,588
------------------ ------------------ ------------------
Net income $ 8,765 12,676 20,609
------------------ ------------------ ------------------
------------------ ------------------ ------------------
Basic and diluted net income per common share $ .61 .88 1.32
Basic and diluted weighted average shares of
common stock outstanding 14,387,169 14,417,116 15,596,419
See accompanying notes to combined and consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Combined and Consolidated Statements of Stockholders' Equity
(dollars in thousands)
Employee
Class A Class B notes
common stock common stock receivable Total
------------------------ ---------------------- for common Retained stockholders'
Shares Amount Shares Amount stock earnings equity
----------- --------- ---------- -------- --------- ---------- ------------
Balance at December 31, 1994 8,981,388 $ 6,413 100 $ 8,500 (910) 13,453 27,456
Exchanges for parent company
stock -- -- -- -- 607 -- 607
Issuance of Trendwest common
stock
to employees for notes 242,235 56 -- -- (41) -- 15
Note payments -- -- -- -- 30 -- 30
Dividends declared and paid by
TW Holdings -- -- -- -- -- (120) (120)
Net income -- -- -- -- -- 8,765 8,765
----------- ---------- --------------- -------- ---------- ------------ ---------
Balance at December 31, 1995 9,223,623 6,469 100 8,500 (314) 22,098 36,753
Issuance of Trendwest Funding
common stock 1,000 1 -- -- -- -- 1
Note payments -- -- -- -- 314 -- 314
Net income -- -- -- -- -- 12,676 12,676
----------- ---------- --------------- -------- ---------- ------------ ---------
Balance at December 31, 1996 9,224,623 6,470 100 8,500 -- 34,774 49,744
Consolidation transactions
(5,193,693 shares of Trendwest
common stock issued in
exchange for all of the out-
standing shares of TW Holdings
and Trendwest Funding) 5,192,493 8,500 (100) (8,500) -- -- --
Issuance of common stock, net
of issuance costs of $5,401 3,176,250 51,772 -- -- -- -- 51,772
Net income -- -- -- -- -- 20,609 20,609
----------- ---------- --------------- -------- ---------- ------------ ---------
Balance at December 31, 1997 17,593,366 $ 66,742 -- $ -- -- 55,383 122,125
----------- ---------- --------------- -------- ---------- ------------ ---------
----------- ---------- --------------- -------- ---------- ------------ ---------
December 31, 1996
----------------------------
Issued and
Authorized outstanding
-------------- -----------
Trendwest:
Common stock, voting no par value 10,264,215 9,223,423
Preferred stock, no par value -- --
TW Holdings:
Class A, voting, no par value 200 200
Class B, nonvoting, no par value 200 100
Trendwest Funding common stock,
voting, no par value 1,000 1,000
See accompanying notes to combined and consolidated financial statements.
TRENDWEST RESORTS, INC.
AND CERTAIN AFFILIATES
Combined and Consolidated Statements of Cash Flows
(amounts in thousands)
Year ended December 31,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
Cash flows from operating activities:
Net income $ 8,765 12,676 20,609
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 330 502 681
Amortization of residual interest in notes receivable sold 1,481 2,735 4,089
Provision for doubtful accounts, sales returns and recourse
liability 7,655 10,078 11,755
Recoveries of notes receivable charged off 113 72 132
Residual interest in notes receivables sold (3,258) (5,674) (6,729)
Unrealized gain on residual interest in notes receivable sold -- -- (1,044)
Change in deferred gross profit 1,480 2,737 (684)
Deferred income tax expense (benefit) (364) (422) 1,436
Issuance of notes receivable (71,052) (91,593) (112,170)
Proceeds from sale of notes receivable 46,665 67,257 42,292
Proceeds from repayment of notes receivable 11,084 21,388 28,781
Purchase of notes receivable (11,305) (11,150) (16,571)
Changes in certain assets and liabilities:
Increase in restricted cash (110) (328) (510)
Inventories 1,493 (5,653) (28,287)
Accounts payable and accrued liabilities (3,279) 1,729 10,060
Income taxes payable to Parent (2,207) 713 846
Income taxes payable -- -- 880
Other (1,740) (1,540) (2,044)
-------------- -------------- --------------
Net cash provided by (used in) operating activities (14,249) 3,527 (46,478)
-------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment (4,312) (1,429) (1,696)
Proceeds from sale of marketable equity securities 4,219 -- --
-------------- -------------- --------------
Net cash used in investing activities (93) (1,429) (1,696)
-------------- -------------- --------------
Cash flows from financing activities:
Proceeds from notes payable 100 -- 16,803
Payments on notes payable (1,529) (1,487) (1,055)
Net change in due to Parent 15,877 (968) (19,369)
Dividends paid (120) -- --
Proceeds from issuance of common stock 15 1 51,772
Payments on notes receivable for stock 30 314 --
-------------- -------------- --------------
Net cash provided by (used in) financing activities 14,373 (2,140) 48,151
-------------- -------------- --------------
Net increase (decrease) in cash 31 (42) (23)
Cash at beginning of period 104 135 93
-------------- -------------- --------------
Cash at end of period $ 135 93 70
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental disclosures of cash flow information
cash paid during the period for:
Interest $ 2,091 2,579 1,951
Income taxes 7,547 7,056 8,010
-------------- -------------- --------------
-------------- -------------- --------------
Supplemental schedule of noncash investing and financing activities:
Issuance of common stock for notes receivable $ 41 -- --
Reduction of notes payable through transfer of notes receivable -- -- 16,803
Issuance of note receivable in exchange for other assets sold -- -- 489
-------------- -------------- --------------
-------------- -------------- --------------
See accompanying notes to combined and consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to Combined and Consolidated Financial Statements, Continued
December 31, 1995, 1996 and 1997
(dollar amounts in thousands)
(1) Description of Business and Basis of Presentation
Description of Business
Trendwest Resorts, Inc. (Trendwest), TW Holdings, Inc. (TW Holdings) and
Trendwest Funding I Inc. (Trendwest Funding I) (Company) generate
revenues from the sale and financing of Vacation Credits in WorldMark,
The Club (WorldMark), which entitle the owner to use a fully furnished
vacation resort unit based on the number of Vacation Credits purchased.
Vacation Credits are created through the transfer to WorldMark of resort
units developed or purchased by the Company. The Company also manages
resort properties under a management agreement with WorldMark. WorldMark
is a separate entity which owns the transferred properties for the
benefit of Vacation Credit owners (Members or Owners).
The Company sells Vacation Credits to individuals principally in the
Western United States. Sales to new owners are financed by the Company
after requiring a minimum 10% down payment. Sales to existing owners
(Upgrades) are financed by the Company and require down payments to the
extent that the owner's equity interest in Vacation Credits owned,
including the Upgrade, is less than 10%. The resulting note balances are
secured by the Vacation Credits sold.
Basis of Presentation
For periods prior to June 30, 1997, the financial statements are
presented on a combined basis and include the accounts of Trendwest, TW
Holdings and Trendwest Funding I. Trendwest Funding I is included in the
financial statements from April 19, 1996 (inception). The financial
statements of these three entities have been combined as they are
entities under the common control of JELD-WEN, inc. (Parent).
Trendwest is a majority owned subsidiary of the Parent and prior to June
30, 1997, TW Holdings and Trendwest Funding I were wholly-owned
subsidiaries of the Parent. Effective June 30, 1997, the Parent
transferred to Trendwest all of the outstanding common stock of TW
Holdings and Trendwest Funding I in exchange for 5,193,693 shares of
Trendwest common stock (Consolidation Transactions) resulting in TW
Holdings and Trendwest Funding I becoming wholly-owned subsidiaries of
Trendwest. The financial statements for periods beginning June 30, 1997
are presented on a consolidated basis and include the accounts of
Trendwest, TW Holdings and Trendwest Funding I.
The Consolidation Transactions are considered a reorganization of
entities under common control and have been accounted for in a manner
similar to a pooling of interests. The assets and liabilities of the
combining entities continue to be recorded at their historical cost basis
and the results of operations continue to include the same components in
consolidation as were included in combination.
All intercompany balances and transactions have been eliminated in
combination and consolidation.
Capital Transactions and Public Offering
In contemplation of the Company's initial public offering, the Company's
articles of incorporation were amended effective July 2, 1997 to increase
the number of authorized shares of common stock to 90,000,000 and to
establish preferred stock with 10,000,000 shares authorized.
As authorized, the pricing committee of the Board declared a 513.211 for
1 stock split effective July 2, 1997. The accompanying combined financial
statements have been retroactively restated to give effect to this stock
split.
On August 15, 1997, the Company consummated the offering of 3,176,250
shares of the Company's common stock at $18 per share resulting in net
proceeds of $51,772, after deducting the related issuance costs.
Basic and Diluted Net Income Per Common Share
Basic and diluted net income per common share has been computed based on
the number of shares of Trendwest common stock outstanding and assumes
the 5,193,693 shares issued to the Parent in connection with the
Consolidation Transactions have been outstanding for all periods
presented.
The following illustrates the reconciliation of weighted average shares
used for basic net income per share:
Year ended December 31,
-----------------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
Basic
Weighted average shares - Trendwest 9,193,476 9,223,423 10,402,726
Effect of consolidation transactions 5,193,693 5,193,693 5,193,693
--------------- --------------- ---------------
Basic weighted average shares outstanding 14,387,169 14,417,116 15,596,419
=============== =============== ===============
Net income available to common shareholders for basic net income per share
was $8,765, $12,676 and $20,609 for the years ended December 31, 1995, 1996 and
1997, respectively.
There were no dilutive securities outstanding for the periods presented
resulting in basic and diluted net income per share being equal.
At December 31, 1997, there were options to purchase 490,000 shares of
common stock outstanding which were antidilutive in 1997 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 that are held in escrow until the applicable statutory
rescission period has expired and the related customer note receivable
has been recorded and amounts received prior to the attainment of the
required 10% down payment.
Allowance for Doubtful Accounts and Recourse Liability
The Company provides for estimated future losses to be incurred related
to uncollectible notes receivable and notes receivable sold with
recourse. The provision for credit losses is charged to income in amounts
sufficient to maintain the allowance and the recourse liability at levels
considered adequate to cover anticipated losses resulting from
liquidation of notes receivable and notes receivable sold with recourse.
The allowance for doubtful accounts and recourse liability are based on
the collection history of the receivables and are net of anticipated cost
recoveries of the underlying Vacation Credits. Management believes that
all such allowances and estimated liabilities are adequate; however, such
amounts are based on estimates and there is no assurance that the actual
amounts incurred will not be more or less than the amount recorded.
The Company charges off notes receivable when deemed to be uncollectible.
Interest income previously accrued and unpaid is reversed. Vacation
Credits recovered are recorded at the weighted average cost of credits at
the time of recovery.
Inventories
Inventories consist of Vacation Credits and construction in progress as
follows:
December 31,
-----------------------------------
1996 1997
---------------- ----------------
Vacation Credits $ 7,784 1,722
Construction in progress 8,463 42,812
---------------- ----------------
Total inventories $ 16,247 44,534
================ ================
Vacation Credits represent the costs of unsold ownership interests in
WorldMark. Resort properties are completed and ownership is transferred
by the Company to WorldMark in return for the right to sell Vacation
Credits in these properties based on the number of credits available for
the properties. Credits available are determined using a formula based on
the number of user days available as well as the relative value of each
property. Vacation Credits are carried at the lower of cost, based on the
moving weighted average of property cost per Vacation Credit established,
or net realizable value.
Construction in progress is valued at the lower of cost or net realizable
value. Interest, taxes and other carrying costs incurred during the
construction period are capitalized. The amount of interest capitalized
during the years ended December 31, 1995, 1996 and 1997 amounted to $0,
$343 and $637, respectively.
Revenue Recognition
(i) Vacation Credits
Substantially all Vacation Credits sold by the Company generate
installment notes receivable secured by an interest in the related
Vacation Credits. These notes receivable are payable in monthly
installments, including interest, with maturities up to seven years.
Sales are included in revenues when at least a 10% down payment
requirement has been met and any recission period has expired.
Vacation Credit cost of sales and direct selling expenses related to a
Vacation Credit sale are recorded at the time the sale is recognized.
Vacation Credit costs include the cost of land, improvements to the
property, including costs of amenities constructed for the use and
benefit of the Vacation Credit owners, and other direct acquisition
costs. Direct selling expenses are recorded as sales and marketing
expenses.
The Company also finances sales of Upgrades which result in the
cancellation of any existing note receivable and the issuance of a new
seven-year note secured by an interest in all Vacation Credits owned. No
additional down payment is required by the Company as long as the owner's
equity interest in the original Vacation Credits is equal to 10% of the
value of all Vacation Credits, including those from the Upgrade sale, and
the customer is not delinquent in his payments on his existing note
receivable. When the Company finances an Upgrade sale and the customer
does not make an additional down payment of at least 10% of the Upgrade
sale amount, the Company uses the installment method to recognize revenue
whereby profit is recognized as a portion of each principal payment is
received on the Upgrade. Revenue is fully recognized on the Upgrade sale
when the cash collected relating to the Upgrade sale totals 10% of the
Upgrade sale. Cash collected relating to a financed Upgrade sale is
measured as the sum of any additional down payment received at the time
of the Upgrade sale and the principal repayment of the new note
receivable which is allocable to the Upgrade sale. Principal repayments
are allocated to the Upgrade sale component of the new note receivable
and the pre-Upgrade sale component of the new note receivable based on
the ratio of such components at the time of the Upgrade sale.
(ii) Sales of Notes Receivable
Gains on sales of notes receivable represent the present value of the
differential between contractual interest rates charged to borrowers on
notes receivable sold by the Company and the interest rates to be
received by the purchasers of such notes receivable, after considering
the effects of estimated prepayments and the costs of servicing, net of
transaction costs. The Company recognizes such gains on sales of notes
receivable on the settlement date. Gains on the sale of a portion of
notes receivable are based on the relative fair market value of the note
receivable portions sold and retained.
The Company discounts cash flows on its notes receivable sold at a rate
which it believes a purchaser would require as a rate of return. The
Company has developed its assumptions based on experience with its own
portfolio, available market data and ongoing consultation with its
investment bankers.
Income from the differential retained is recorded in finance income using
the interest method. In addition, finance income includes interest income
on notes receivable retained by the Company. Prior to January 1, 1997,
the residual interest in notes receivable sold was classified as an
excess servicing asset and carried at the lower of amortized cost or net
realizable value. Beginning January 1, 1997, the residual interest in
notes receivable sold is classified as a trading security in accordance
with SFAS No. 115, Accounting for Certain Investments in Debt or Equity
Securities, and is carried at market value. Also, beginning January 1,
1997, changes in the fair market value (see note 14) of the residual
interest in notes receivable sold are recognized as finance income.
Prior to January 1, 1997, the carrying value of the excess servicing
asset was analyzed quarterly by the Company on a disaggregated basis to
determine whether prepayment experience had an impact on carrying value.
Expected cash flows of the underlying notes receivable sold were reviewed
based upon current economic conditions and the type of notes receivable
originated and revised as necessary using the original discount rate used
in calculating the gain on sale. Losses arising from adverse prepayment
experience were recognized as a charge to earnings while favorable
experience was not recognized until realized.
Property and Equipment
Property and equipment are recorded at cost and depreciated or amortized
using the straight-line method over the following assets' estimated
useful lives:
Building and improvements 20 to 45 years
Equipment, furniture and fixtures 3 to 12 years
Leasehold improvements 2 to 5 years
Advertising
Advertising costs, included in sales and marketing expenses in the
accompanying combined statements of income, are expensed as incurred and
amounted to $2,012, $4,036 and $4,204 for the years ended December 31,
1995, 1996 and 1997, 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 was included in the Federal consolidated tax return of the
Parent prior to August 15, 1997. The Parent allocated the combined
current and deferred tax expense to the Company as if the Company had
filed on a stand-alone basis.
Subsequent to August 15, 1997, the Company files its Federal consolidated
tax return on a stand-alone basis.
Stock-Based Compensation
During 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, effective for years beginning after
December 15, 1995. The statement requires expanded disclosures of
stock-based compensation arrangements and encourages (but does not
require) application of the fair value recognition provision in the
statement. Under the fair value recognition method, compensation cost is
measured at the grant date of the option, based on the value of the award
and is recognized over the vesting period. Under existing rules
("intrinsic value based method"), compensation cost is the excess, if
any, of the market value of the stock at grant date over the amount an
employee must pay to acquire the stock. None of the Company's stock
options have any intrinsic value at grant date and, under Accounting
Principles Board (APB) Opinion No. 25, no compensation cost has been
recognized for them. SFAS No. 123 does not alter the existing accounting
rules for employee stock-based programs. Companies may continue to follow
rules outlined in APB Opinion No. 25, but are required to disclose the
pro forma amounts of net income and earnings per share that would have
been reported had they elected to follow the fair value recognition
provision of SFAS No. 123. Effective January 1, 1996, the Company adopted
the disclosure requirements of SFAS No. 123, but has determined that it
will continue to measure its employee stock-based compensation
arrangements under the provisions of APB Opinion No. 25. Accordingly, no
compensation cost has been recognized for its stock option plan.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates and assumptions.
Derivative Financial Instruments
The Company has limited involvement with derivative financial instruments
and uses them only to manage well-defined interest rate risks. They are
not used for trading purposes.
The Company enters into forward interest rate swap agreements and
interest rate cap agreements to hedge the effects of fluctuations in
interest rates related to anticipated sales of notes receivables. These
transactions meet the requirements for hedge accounting, including
designation to a specific transaction and high correlation. Gains and
losses on these agreements are deferred and recognized upon completion of
the sale of notes receivable.
Effect of New Accounting Pronouncements
In June 1996, the FASB issued SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities. SFAS
No. 125 provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial-components
approach that focuses on control. Under that approach, after a transfer
of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. SFAS No. 125 is effective for transfers
and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, and is to be applied prospectively.
The adoption of SFAS No. 125 on January 1, 1997 resulted in an increase
in the carrying value of the Company's residual interest in notes
receivable sold at December 31, 1996 of $755 and $111 related to the
sales of notes receivable to Investors and to the limited liability
company (LLC), respectively, (see note 5).
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share. SFAS
No. 128 establishes standards for computing and presenting earnings per
share and applies to entities with publicly held common stock or
potential common stock. This statement is effective for financial
statements issued for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. The Company
adopted SFAS No. 128 in the fourth quarter of 1997 and has restated all
prior periods to conform to the new standard. There was no material
impact on earnings per share from the adoption of this standard.
(3) Marketable Securities
In 1995, the Company sold marketable equity securities to the Parent. No
gain or loss was realized on this transaction.
(4) Notes Receivable
The Company provides financing to the purchasers of Vacation Credits. The
notes resulting from sales of Vacation Credits in 1996 and 1997 bear
interest at 13.9% or 14.9%, depending on the method of payment, and are
written with initial terms of up to 84 months. Once a 10% down payment
has been received, the Company has no obligation under the notes to
refund monies or provide further services to the Owners in the event
membership is terminated for nonpayment of the notes.
Maturities of notes receivable at December 31, 1997 are as follows during
the next five years and thereafter:
1998 $ 10,435
1999 11,585
2000 12,627
2001 13,544
2002 13,986
Thereafter 22,537
---------------
$ 84,714
===============
Customers over 60 days past due on monthly payments are considered
delinquent. Delinquent notes receivable represent 1.80% and 1.88% of
notes receivable at December 31, 1996 and 1997, respectively.
The activity in the allowance for doubtful accounts, recourse liability
and sales returns is as follows for the years ended December 31:
1995 1996 1997
--------------- --------------- ---------------
Balances at beginning of period $ 5,284 7,964 11,241
Provision for doubtful accounts, sales returns and
recourse liability 7,655 10,078 11,755
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (5,088) (6,873) (7,888)
Recoveries 113 72 132
--------------- --------------- ---------------
Balances at end of period $ 7,964 11,241 15,240
=============== =============== ===============
1995 1996 1997
--------------- --------------- ---------------
Allowance for doubtful accounts and sales returns $ 5,429 5,832 9,935
Recourse liability on notes receivable sold 2,535 5,409 5,305
--------------- --------------- ---------------
$ 7,964 11,241 15,240
=============== =============== ===============
Total notes receivable outstanding, including notes receivable sold (see
note 5), amounted to $180,323 and $242,286 at December 31, 1996 and 1997,
respectively.
(5) Sales of Notes Receivable
TW Holdings
The Company sells through TW Holdings, an 80% interest in certain notes
receivable to outside investors primarily through an agreement, as
amended on December 30, 1997, expiring June 30, 1998 (Agreement) with
Seattle-First National Bank and other purchasers (Investors). Under the
terms of the Agreement, up to $98,000 of receivables can be sold to the
Investors and proceeds from the collection of sold notes receivable can
be used to purchase additional notes receivable. The notes receivable
have stated rates of 13.9%-14.9% and are sold at par to yield LIBOR plus
1.25% per annum to the Investors. The 20% retained interest is recorded
as notes receivable whereas the residual interest in the excess cash
flows of notes receivable sold is classified as residual interest in
notes receivable sold, and beginning January 1, 1997 is measured at fair
value under SFAS No. 125.
Total notes receivable sold and outstanding under this Agreement amounted
to $55,000 and $98,000 at December 31, 1996 and 1997, respectively.
The Investors have recourse to the Company's retained interest in notes
receivable sold under certain default provisions related primarily to the
delinquency status of the notes receivable sold. The Company's retained
interest included in notes receivable in the accompanying balance sheets
amounted to $13,750 and $24,500 at December 31, 1996 and 1997,
respectively.
Subsequent to January 1, 1997 and prior to the Consolidation
Transactions, the Company's transfer of notes receivable under the
Agreement did not qualify for sales treatment under SFAS No. 125 and were
treated as secured borrowings.
In conjunction with the Consolidation Transactions, the bylaws and
articles of incorporation of TW Holdings were amended such that the
transfer of notes receivable from Trendwest to TW Holdings met the sales
recognition criteria of SFAS No. 125 resulting in the transferred notes
receivable no longer being assets of Trendwest. At June 30, 1997, notes
receivable previously transferred and treated as secured borrowings
aggregating $16.8 million were accounted for as sales of notes
receivable.
Trendwest Funding I
In 1996, the Company sold through Trendwest Funding I, certain notes
receivable to the LLC in exchange for cash, a subordinated note payable
from the LLC and a residual interest in the excess cash flows of the LLC.
The subordinated note payable from the LLC represents the Company's
retained interest in notes receivable which provide collateral to holders
of notes issued by the LLC (the LLC noteholders) and is classified as
notes receivable in the accompanying balance sheet. The residual interest
in the excess cash flows of the LLC is classified as residual interest in
notes receivable sold and beginning January 1, 1997 is measured at fair
value under SFAS No. 125.
The LLC noteholders and the LLC outside investor have recourse to the
Company's retained interest in notes receivable sold under certain
default provisions related primarily to the delinquency status of the
notes receivable sold. The Company's retained interest is included in
notes receivable in the accompanying combined balance sheets, and
amounted to approximately $12,600 and $14,580 at December 31, 1996 and
1997, respectively.
The LLC is controlled and 99% owned by an independent third party who has
made a substantial capital investment and has substantial risks and
rewards of the assets of the LLC.
(6) Property and Equipment
Property and equipment, net, consists primarily of the Company's
corporate headquarters and leased sales offices as follows at December
31:
1996 1997
--------------- ----------------
Land $ 877 877
Building and improvements 3,586 3,612
Equipment, furniture and fixtures 2,504 3,697
Leasehold improvements 336 814
--------------- ----------------
7,303 9,000
Less accumulated depreciation and amortization 1,391 1,943
--------------- ----------------
$ 5,912 7,057
=============== ================
(7) 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:
1995 1996 1997
--------------- --------------- ---------------
Gross sales value $ 8,266 15,618 9,023
=============== =============== ===============
Gross profit deferred 3,826 7,328 4,277
Gross profit recognized 2,346 4,591 4,961
--------------- --------------- ---------------
Net gross profit deferred (recognized)
during period $ 1,480 2,737 (684)
=============== =============== ===============
Notes receivable is presented net of deferred gross profit in the
accompanying balance sheets. Such deferred amounts aggregated $1,168 and
$1,704 at December 31, 1996 and 1997, respectively.
Deferred gross profit related to notes receivable sold is combined with
allowance for recourse liability on notes receivable sold in the
accompanying balance sheets. Such deferred amounts aggregated $4,671 and
$3,451 at December 31, 1996 and 1997, respectively.
(8) Notes Payable
The Company had a line of credit of $5,000 with FINOVA Capital
Corporation which was terminated in August 1997. The outstanding balance
at December 31, 1996 and 1997 was $1,054 and $0, respectively.
(9) Income Taxes
The provision for income taxes consist of the following for the years
ended December 31:
1995 1996 1997
--------------- --------------- ---------------
Federal:
Current $ 5,218 7,426 9,173
Deferred (308) (450) 1,749
--------------- --------------- ---------------
4,910 6,976 10,922
--------------- --------------- ---------------
State:
Current 125 344 980
Deferred (56) 28 (314)
--------------- --------------- ---------------
69 372 666
--------------- --------------- ---------------
Total $ 4,979 7,348 11,588
=============== =============== ===============
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:
1996 1997
---------------- ----------------
Deferred tax assets:
Allowance for credit losses $ 4,206 3,940
Deferred gross profit 2,185 1,964
Other 571 690
---------------- ----------------
Total deferred tax assets 6,962 6,594
---------------- ----------------
Deferred tax liability:
Excess servicing asset 3,375 4,664
Other assets 196 150
Property and equipment 120 251
Other 911 605
---------------- ----------------
Total deferred tax liability 4,602 5,670
---------------- ----------------
Total deferred asset, net $ 2,360 924
================ ================
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, 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.
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:
1995 1996 1997
--------------- ---------------- ----------------
Income tax at Federal statutory rate 35.0% 35.0% 35.0%
State tax, net of Federal benefit .3 1.2 1.3
Other .9 .5 (.3)
--------------- ---------------- ----------------
36.2% 36.7% 36.0%
=============== ================ ================
(10) Employee Notes for Common Stock
Notes accepted upon the purchase of Company common stock are secured by
the stock, bear interest at 9% per annum and are included as a reduction
to stockholders' equity. In 1995, certain individuals exchanged their
Company common stock for common stock of the Parent and the notes were
repaid.
(11) 401(k) Plans
Prior to August 15, 1997, the Company participated in the Parent 401(k)
plan. Company contributions, which are invested in Parent common stock,
were at the discretion of the Board of Directors of the Parent and
totaled $1,283, $1,686 and $1,124 for the years ended December 31, 1995
and 1996 and the period from January 1, 1997 to August 15, 1997,
respectively.
On August 15, 1997, the Company ceased participation in the Parent 401(k)
plan and sponsored a new plan (Trendwest plan) covering all Trendwest
employees. Company contributions totaled $765 for the period from August
15, 1997 to December 31, 1997.
(12) Derivative Financial Instruments
Interest Rate Cap Agreement
In March 1995, the Company entered into an interest rate cap agreement at
a cost of $92 to reduce the impact of changes in interest rates on its
notes receivable sold. The interest rate cap agreement has a 30-day
notional principal amount of $31,800 on which the Company receives
interest payments to the extent that LIBOR exceeds an annualized rate of
10.25%.
The interest rate cap agreement expires in April 1998.
Forward Swap Agreement
In October 1997, the Company entered into two $50,000 notional amount
forward interest rate swap agreements. These contracts are designed to
hedge the interest rate risk of an anticipated securitization of notes
receivable expected to close in the first quarter of 1998.
The Company is exposed to credit losses in the event of nonperformance by
the counterparties to its interest rate caps and its forward swap
agreements. The Company anticipates, however, that counterparties will be
able to fully satisfy their obligations under the contracts. The Company
does not obtain collateral to support financial instruments but monitors
the credit standing of the counterparties.
(13) Stock Option Plan
In 1997, the Board of Directors approved the adoption of an incentive
stock option plan providing for the award of incentive stock options to
employees of the Company at the discretion of the Board of Directors.
Under the plan, on the date of grant, the exercise price of the option
must be at least equal to the market value of common stock for shares
issued. The plan provides for grants up to 5% of the Company's
outstanding shares (879,668 at December 31, 1997).
Stock options vest ratably over five years and expire three years after
becoming fully vested.
The following table summarizes stock option activity for the year ended
December 31, 1997:
Weighted
average
Shares option price
---------------- ----------------
Options granted 492,000 $ 26.875
Expired or canceled 2,000 --
---------------- ----------------
Balance at end of year 490,000 $ 26.875
================ ================
There are no options exercisable at December 31, 1997.
The Company applies APB Opinion No. 25 in accounting for its plan and,
accordingly, no compensation cost has been recognized for its stock
options in the accompanying financial statements. Had the Company
determined compensation cost based on the fair value at the grant date,
the Company's net income would have been reduced to the pro forma amounts
indicated below:
Year ended
December 31, 1997
--------------------
Net income, as reported $ 20,609
Net income, pro forma 20,377
Basic and diluted EPS, as reported 1.32
Basic and diluted EPS, pro forma 1.31
The fair value of the options granted is estimated on the date of grant
using the Black-Scholes method with the following weighted average
assumptions used in 1997; annual dividend yield of 0%; volatility of 45%;
risk free interest rate of 6.4%; and expected lives of 6 years. The
weighted average grant date fair value per share of options granted
during the year ended December 31, 1997 was $12.94.
(14) Fair Values of Financial Instruments
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition. Fair values 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:
1996 1997
---------------------------------- ----------------------------------
Carrying value Estimated Carrying value Estimated
fair value fair value
--------------- --------------- --------------- ---------------
Financial assets:
Cash (a) $ 93 93 70 70
Restricted cash (a) 709 709 1,219 1,219
Notes receivable (a) 46,616 46,616 74,779 74,779
Residual interest in notes
receivable sold (b) 10,839 11,705 15,235 15,235
Financial liabilities:
Due to Parent (c) 21,316 21,316 1,937 1,947
Recourse liability on notes (a) 5,409 5,409 5,305 5,305
sold
Notes payable (c) 1,055 1,055 -- --
(a) The carrying value, prior to consideration of deferred gross
profit in the case of notes receivable, is considered to be a
reasonable estimate of fair value.
(b) Fair value is determined using estimated discounted future cash
flows taking into consideration anticipated prepayment rates. The
Company utilizes the following assumptions in determining the fair
value of its residual interest in notes receivable sold at
December 31:
1996 1997
--------------- ---------------
Discount rate 12.25% 12.25%
Annual prepayment rate 6% 6%
(c) The carrying value reported approximates fair value due to the
variable interest rates charged on the borrowings.
Because no market exists for a portion of the financial instruments, fair
value estimates may be based on judgments regarding future instruments
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
The fair market value of the interest rate cap agreement is based on
current interest rates and is estimated to be $0 at December 31, 1996 and
1997. The fair value of the Company's forward swap agreement was $(472)
at December 31, 1997. This negative fair value represents the estimated
amount the Company would have to pay at each date to cancel the contracts
or transfer them to other parties.
(15) Related Party Transactions
Notes Receivable
The Company, on an ongoing basis, acquires from and sells notes
receivable to related parties. A summary of these transactions follows
for the years ended December 31:
1996 1996 1997
-------------- --------------- --------------
Sale of notes receivable:
Members of the Board of Directors of the Parent (at
face value, no recourse) $ 3,905 3,350 917
I&I Holdings, a subsidiary of the Parent (at face value,
full recourse) 1,321 232 55
Parent Foundation (at face value, full recourse) 191 211 --
Purchases of notes receivable:
Eagle Crest Partners, Ltd., a subsidiary of the Parent
(at face value, full recourse) 11,305 8,993 7,134
Running Y Resorts, Ltd., a subsidiary of the Parent (at
face value, full recourse) -- 2,157 3,218
Parent foundation (at face value, full recourse) -- -- 2,536
With respect to notes receivable sold to members of the Board of
Directors of the Parent and I&I Holdings of the Parent, the Company
services such receivables without compensation.
The outstanding balance of notes receivable sold with full recourse to
related parties amounted to $18,512 and $13,564 at December 31, 1996 and
1997, respectively.
WorldMark
(i) Management Contract
The Company manages the resort properties transferred to WorldMark under
the terms of a management agreement which is subject to annual approval
by the Members. Under the terms of the management agreement, the Company
receives a management fee equal to the lesser of 15% of WorldMark's
expenditures or 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. A
summary of these transactions for the years ended December 31 follows:
1995 1996 1997
---------------- ---------------- ----------------
WorldMark:
Management fee income $ 747 1,103 1,488
Dues expense incurred by Trendwest 512 275 793
Reimbursed salaries 1,533 3,103 5,448
Resort operations, maid and key service
income 332 -- --
Other reimbursed expenses 297 323 612
(ii) Financial Information (Unaudited)
A summary of financial information for WorldMark as of and for the years
ended December 31, 1996 and 1997 is as follows:
1996 1997
---------------- ----------------
Cash and investment securities $ 4,166 6,364
Member dues receivable 6,694 8,860
Other 908 2,170
---------------- ----------------
Total assets 11,768 17,394
---------------- ----------------
Deferred revenue 7,441 10,080
Other 1,015 2,008
---------------- ----------------
Total liabilities 8,456 12,088
---------------- ----------------
Net assets $ 3,312 5,306
================ ================
Annual member assessments $ 10,733 15,426
================ ================
Excess of revenues over expenses $ 1,351 1,994
================ ================
Condominiums owned, at developers unamortized historical cost $ 98,826 128,411
================ ================
Parent and Other Related Party
The Company has an open revolving credit line with its Parent to meet
operating needs and invest excess funds. The credit line is $10 million
and is payable on demand. It bears interest at the prime rate plus 1% per
annum (9.5% at December 31, 1997).
The Company also reimburses the Parent for administrative services
received and its share of insurance expenses. Also, through June 30, 1997
the Parent was named as the master servicer under the terms of certain
sales of notes receivable and received a servicing fee of 1.75% per annum
of the sold receivables to service the receivable. The Parent
subcontracted the servicing to Trendwest for a servicing fee of 1.25% per
annum of the sold receivable balance. Trendwest also received a servicing
fee from TRI Funding Company I, LLC of 1.75% per annum of the sold
receivables' balance and subsequent to June 30, 1997 is the named master
servicer under the terms of certain sales of notes receivable. Trendwest,
in turn, subcontracts components of the servicing to a third-party
servicer, SAGE. A summary of these transactions follows for the years
ended December 31:
1995 1996 1997
---------------- ---------------- ----------------
Parent:
Interest income $ -- 451 159
Interest expense 1,993 2,564 1,945
Insurance expense 879 1,304 1,865
Administrative service expense 723 913 --
Servicing fee expense, net 1,163 1,008 240
TRI Funding Company I, LLC - servicing fee
income -- 925 1,157
The Company is developing a resort in central Washington known as
MountainStar in conjunction with its Parent. The Parent owns the land and
the Company is acting as the developer. On behalf of its Parent, the
Company has incurred approximately $4,400 in costs related to the project
as of December 31, 1997. All costs incurred will be reimbursed by the
Parent and are included as a reduction to the due to Parent amounts on
the Company's balance sheet.
(16) Commitments and Contingencies
Purchase Commitments
The Company routinely enters into purchase agreements with various
developers to acquire and build resort properties. At December 31, 1997,
the Company has outstanding purchase commitments $28,353 related to
properties under development. The Company has also committed to
purchasing 20 condominium units in each of 1998, 1999 and 2000,
respectively, from Running Y Resorts, Ltd. The cost of the units is fixed
at 26% of the selling price of Vacation Credits at the time the units are
purchased.
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:
1998 $ 1,582
1999 1,483
2000 1,229
2001 729
2002 133
Rental expense amounted to $1,126, $1,426 and $2,018 for the years ended
December 31, 1995, 1996 and 1997, respectively.
(17) Subsequent Events
Credit Facility
In February 1998, the Company entered into a credit agreement with a
group of banks to provide the Company with a three-year unsecured
revolving credit facility for $30 million.
Trendwest Funding II, Inc.
In March 1998, the Company sold $37.9 million of notes receivable to a
special purpose company, Trendwest Funding II, Inc. In addition, the Bank
Group sold $98.0 million of notes receivable purchased from TW Holdings
to Trendwest Funding II, Inc. The special purpose company sold the
receivable to TRI Funding II, Inc. (TRI), a special purpose entity, and
TRI issued $130.4 million in two classes of senior and subordinated notes
to institutional investors.
Purchase Commitment
The Company has an agreement in principle to purchase land and construct
a new office building in Redmond, Washington. The estimated construction
and land costs are $11 million and the building is expected to be
completed on or before December 1, 1998.