UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
______________
Commission file number 000-22979
TRENDWEST RESORTS, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-1004403
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
12301 N.E. 10th Place
Bellevue, Washington 98005
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): (425) 990-2300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares of the registrant's no-par voting common stock
outstanding as of August 7, 1998: 17,252,766 shares.
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
December 31, June 30,
Assets 1997 1998
---------------- ----------------
(Unaudited)
Assets:
Cash $ 70 1,238
Restricted cash 1,219 1,558
Notes receivable, net of allowance for doubtful accounts, sales
returns and deferred gross profit 73,075 72,316
Accrued interest and other receivables 7,435 6,855
Residual interest in notes receivable sold 15,235 20,496
Receivable from Parent -- 123
Inventories 44,534 43,853
Property and equipment, net 7,057 10,467
Deferred income taxes 924 1,090
Other assets 2,201 2,513
---------------- ----------------
Total assets $ 151,750 160,509
================ ================
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable 944 1,310
Accrued liabilities 3,862 5,984
Accrued construction in progress 10,480 4,168
Borrowing under bank line of credit -- 4,000
Due to Parent 1,947 --
Allowance for recourse liability and deferred gross profit on notes
receivable sold 8,757 11,443
Income taxes payable to Parent 2,755 --
Income taxes payable 880 451
---------------- ----------------
Total liabilities 29,625 27,356
Stockholders' equity:
Preferred stock, no par value. Authorized 10,000,000 shares;
no shares issued or outstanding -- --
Common stock, no par value. Authorized 90,000,000 shares;
issued and outstanding 17,593,366 shares 66,742 66,742
Retained earnings 55,383 66,411
---------------- ----------------
Total stockholders' equity 122,125 133,153
Commitments and contingencies -- --
---------------- ----------------
Total liabilities and stockholders' equity $ 151,750 160,509
================ ================
See accompanying notes to the condensed combined and consolidated financial
statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Combined and Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
----------------------------------- ----------------------------------
1997 1998 1997 1998
----------------- ---------------- --------------- -----------------
Revenues:
Vacation Credit sales, net $ 32,875 41,988 60,820 76,873
Finance income 2,617 3,101 5,836 6,300
Gains on sales of notes receivable 3,164 1,537 3,164 5,135
Resort management services 517 367 1,278 995
Other 663 1,000 1,351 1,519
----------------- ---------------- --------------- -----------------
Total revenues 39,836 47,993 72,449 90,822
----------------- ---------------- --------------- -----------------
Costs and operating expenses:
Vacation Credit cost of sales 8,672 11,169 16,225 20,682
Resort management services 270 322 529 599
Sales and marketing 15,408 21,022 28,539 38,658
General and administrative 3,298 4,281 6,266 8,069
Provision for doubtful accounts and recourse
liability 2,344 2,919 4,160 5,315
Interest 811 2 1,445 38
----------------- ---------------- --------------- -----------------
Total costs and operating expenses 30,803 39,715 57,164 73,361
----------------- ---------------- --------------- -----------------
Income before income taxes 9,033 8,278 15,285 17,461
Income tax expense 3,252 3,114 5,505 6,433
----------------- ---------------- --------------- -----------------
Net income $ 5,781 5,164 9,780 11,028
================= ================ =============== =================
Basic and diluted net income per common share $ .40 .29 .68 .63
Basic and diluted weighted average shares of 14,417,116 17,593,366 14,417,116 17,593,366
common stock outstanding
See accompanying notes to the condensed combined and consolidated financial
statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Combined and Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
Six months ended June 30,
-----------------------------------------------
1997 1998
------------------- ----------------------
Cash flows from operating activities:
Net income $ 9,780 11,028
Adjustments to reconcile net income to net cash provided by (used
in) operating activities:
Depreciation and amortization 319 474
Amortization of residual interest in notes receivable sold 1,841 3,108
Provision for doubtful accounts, sales returns and recourse liability 6,198 7,061
Recoveries of notes receivable charged off 127 98
Residual interest in notes receivables sold (3,249) (6,160)
Unrealized gain on residual interest in notes receivable sold (1,156) (399)
Change in deferred gross profit (755) (510)
Deferred income tax expense (benefit) 525 (166)
Issuance of notes receivable (53,851) (67,104)
Proceeds from sale of notes receivable 11,434 55,643
Proceeds from repayment of notes receivable 12,451 13,924
Purchase of notes receivable (4,459) (7,477)
Changes in certain assets and liabilities:
Restricted cash (453) (339)
Inventories 1,794 681
Accounts payable and accrued liabilities (1,052) (3,824)
Income taxes payable to Parent 2,105 (2,755)
Income taxes payable -- (429)
Other (1,788) 202
------------------- ----------------------
Net cash provided by (used in) operating activities (20,189) 3,056
------------------- ----------------------
Cash flows used in investing activities -Purchase of property and (876) (3,818)
equipment
------------------- ----------------------
Cash flows from financing activities:
Proceeds from notes payable 16,803 --
Payments on notes payable (658) --
Net borrowings under bank line of credit -- 4,000
Increase in Receivable from Parent -- (123)
Increase (decrease) in Due to Parent 4,862 (1,947)
------------------- ----------------------
Net cash provided by financing activities 21,007 1,930
------------------- ----------------------
Net increase (decrease) in cash (58) 1,168
Cash at beginning of period 93 70
------------------- ----------------------
Cash at end of period $ 35 1,238
=================== ======================
See accompanying notes to the condensed combined and consolidated financial
statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Combined and Consolidated Statements of Cash Flows
(continued)
(dollars in thousands)
(unaudited)
Six month ended June 30,
-----------------------------------------------
1997 1998
------------------- ----------------------
Supplemental disclosures of cash flow information
cash paid during the period for:
Interest $ 1,504 265
Income taxes 2,877 9,783
Supplemental schedule of noncash investing and financing activities:
Reduction of notes payable through transfer of notes receivable $ 16,803 --
See accompanying notes to combined and consolidated financial statements.
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to the Condensed Combined and Consolidated
Financial Statements
(dollars in thousands except per share amounts)
(Unaudited)
Note 1 - Background
Trendwest Resorts, Inc. (Company) markets, sells and finances timeshare
ownership interests in the form of perpetual timeshare credits (Vacation
Credits) in WorldMark, the Club (WorldMark). Vacation Credits are created
through the transfer to WorldMark of resort units acquired or developed by the
Company. The Company derives revenues primarily from Vacation Credit sales and,
to a lesser extent, from the financing of Vacation Credit sales and from its
management agreement with WorldMark.
These condensed combined and consolidated financial statements do not
include certain information and footnotes required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of management, all adjustments considered necessary for a fair presentation have
been included and are of a normal recurring nature. Operating results for the
three months and six months ended June 30, 1998 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31,
1998.
These statements should be read in conjunction with the audited combined
and consolidated financial statements and footnotes included in the Company's
1997 Form 10-K filed with the Securities and Exchange Commission (SEC). The
accounting policies used in preparing these condensed combined and consolidated
financial statements are the same as those described in such Form 10-K.
Note 2 - New Accounting Pronouncements
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities. This Statement is effective as of the beginning of the
first quarter of the fiscal year beginning after June 15, 1999.
In April, 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AICPA) issued Statement of
Position (SOP) 98-5, Reporting on the Costs of Start-Up Activities. This SOP is
effective for financial statements for fiscal years beginning after December 15,
1998.
The Company does not anticipate a material impact on its financial position
or results of operations from the future adoption of these two standards.
Note 3 - Sale and Securitization of Notes Receivable
In March 1998, the Company sold $37.4 million of Notes Receivable to a
wholly-owned special purpose company, Trendwest Funding II, Inc. In addition,
the Bank Group sold $93.0 million of Notes Receivable purchased from TW
Holdings, Inc. to Trendwest Funding II, Inc. The special purpose company sold
the receivable to TRI Funding II, Inc. (TRI), a special purpose entity
wholly-owned by Trendwest Funding II, Inc., and TRI issued $130.4 million in two
classes of senior and subordinated notes to institutional investors. The 1998-1,
Class A notes were issued for $125.0 million at a fixed rate of 6.88%. The
1998-1, Class B notes were issued for $5.4 million at a fixed rate of 7.98%. The
Class A notes and Class B notes were rated `A" and `BBB' by Fitch IBCA, Inc.,
respectively, and are secured by the Notes Receivable owned by TRI. The ratings
reflect credit enhancements of a 4% over-collaterilization and a 2% minimum
reserve account. The notes have a stated maturity of April 15, 2009.
Note 4 - Basic and Diluted Net Income Per Common Share
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,
after deducting the related issuance costs, of approximately $51,772. In
addition, the Company issued 5,193,693 shares of common stock to the Parent to
acquire two wholly owned subsidiaries, TW Holdings and Trendwest Funding
(Consolidation Transactions). Effective June 30, 1997, TW Holdings and Trendwest
Funding were wholly-owned subsidiaries of the Company.
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 1997 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:
Three months ended Six months ended
June 30, June 30,
----------------------------------- ----------------------------------
1997 1998 1997 1998
--------------- --------------- ---------------- ---------------
Basic
Weighted average shares - Trendwest 9,223,423 17,593,366 9,223,423 17,593,366
Effect of consolidation transactions 5,193,693 -- 5,193,693 --
--------------- --------------- ---------------- ---------------
Basic and diluted weighted average
shares outstanding 14,417,116 17,593,366 14,417,116 17,593,366
=============== =============== ================ ===============
Net income available to common shareholders for basic net income per share
was $5,781 and $5,164 for the three months ended June 30, 1997 and 1998, and
$9,780 and 11,028 for the six months ended June 30, 1997 and 1998, respectively.
There were no dilutive securities outstanding for the periods presented
resulting in basic and diluted net income per share being equal.
At June 30, 1998, there were options to purchase 499,000 shares of common
stock outstanding which were antidilutive in 1998 and therefore not included in
the computation of diluted net income per share.
Note 5 - Inventories
Inventories consist of Vacation Credits and construction in progress as
follows:
December 31, June 30,
1997 1998
----------------- ------------------
Vacation Credits $ 1,722 2,649
Construction in progress 42,812 41,204
----------------- ------------------
Total inventories $ 44,534 43,853
================= ==================
Note 6 - Allowance For Doubtful Accounts, Recourse Liability and Sales Returns
The activity in the allowance for doubtful accounts, recourse liability and
sales returns is as follows for the year ended December 31, 1997 and the six
months ended June 30, 1998:
1997 1998
----------------- ------------------
Balances at beginning of period $ 11,241 15,240
Provision for doubtful accounts, sales returns and 7,061
recourse liability 11,755
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (7,888) (4,483)
Recoveries 132 98
----------------- ------------------
Balances at end of period $ 15,240 17,916
================= ==================
Allowance for doubtful accounts and sales returns $ 9,935 9,996
Recourse liability on notes receivable sold 5,305 7,920
----------------- ------------------
$ 15,240 17,916
================= ==================
Total notes receivable outstanding, including notes receivable sold,
amounted to $242,286 and $271,781 at December 31, 1997 and June 30, 1998,
respectively.
Note 7 - Commitments and Contingencies
(a) Purchase Commitments
The Company routinely enters into purchase agreements with various
developers to acquire and build resort properties. At June 30, 1998 the Company
had outstanding purchase commitments of $18,812 related to properties under
development and $9.1 million related to the purchase of land and construction of
a new Corporate headquarters building.
(b) Litigation
The Company is involved in various claims and lawsuits arising from the
ordinary course of business. Management believes that outcome of these matters
will not have a material adverse effect on the Company's financial position,
results of operations, or liquidity.
Note 8 - Subsequent Event
On July 7, 1998, the Board of Directors authorized the Company to
repurchase up to 436,000 shares of its common stock on the open market or in
privately negotiated transactions.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 1998 to the
three months ended June 30, 1997
The Company achieved total revenues of $48.0 million for the three months
ended June 30, 1998 compared to $39.9 million for the three months ended June
30, 1997, an increase of 20.3%. The principal reason for the overall improvement
was a 27.7% increase in Vacation Credit sales from $32.9 million for the three
months ended June 30, 1997 to $42.0 million for the three months ended June 30,
1998. The increase in Vacation Credit sales was primarily the result of a 28.3%
increase in the number of Vacation Credits sold from 25.4 million during the
three months ended June 30, 1997 to 32.6 million during the three months ended
June 30, 1998. The increase in Vacation Credits sold was largely attributable to
maturation of off-site sales offices in Costa Mesa, California opened in
February 1997; Woodland Hills, California, opened in October of 1997; new
off-site sales office in Burlingame, California, opened in March, 1998;
relocated the Vallejo, California office to Walnut Creek, California and
increased Upgrade sales. Revenues from Upgrade Sales increased 33.3% from $4.8
million for the three months ended June 30, 1997 to $6.4 million for the three
months ended June 30, 1998 due primarily to an increase of 36.5% in the number
of Vacation Credits sold as Upgrades during the three months ended June 30, 1997
compared to the three months ended June 30, 1998. The average price per Vacation
Credit sold decreased slightly from $1.27 per credit for the three months ended
June 30, 1997 versus $1.26 per credit for the three months ended June 30, 1998
reflecting a greater percentage of vacation credits sold as Upgrades which are
sold at a lower selling price. Effective June 29, 1998, the Company increased
the selling price of vacation credits, including upgrades, by approximately
4.0%.
Finance income increased 19.2% from $2.6 million for the three months ended
June 30, 1997 to $3.1 million for the three months ended June 30, 1998. The
increase in finance income reflects the increase in carrying balances of Notes
Receivable for the two periods compared. Gains on sales of Notes Receivable
decreased 53.1% from $3.2 million for the three months ended June 30, 1997 to
$1.5 million for the three months ended June 30, 1998 due primarily to a
decrease in the principal balances of Notes Receivable sold of 46.0% from $27.0
million to $14.4 million for the two periods compared. Notes Receivable
transferred to the bank group in the first quarter of 1997 did not meet the
requirements of Statement of Financial Accounting Standards Number 125 (SFAS
125) and were treated as secured borrowings but were qualified as sales in the
second quarter of 1997.
Vacation Credit cost of sales increased from $8.7 million for the three
months ended June 30, 1997 to $11.2 million for the three months ended June 30,
1998, an increase of 28.7%, primarily reflecting the increase in sales of
Vacation Credits. As a percentage of Vacation Credit sales, Vacation Credit cost
of sales remained comparable at 26.4% and 26.7% of Vacation Credit sales for
each of the three months ended June 30, 1997 and 1998, respectively. Management
expects product cost as a percentage of vacation credit sales to be
approximately 29.0% for the remainder of the year. This is primarily the result
of the Clear Lake and Angels Camp resorts in California which are coming on line
in the third quarter. Clear Lake experienced construction delays and cost
overruns due to inclement weather and the Angels Camp resort has a product cost
higher than the historical average.
Sales and marketing costs increased 36.4% from $15.4 million for the three
months ended June 30, 1997 to $21.0 million for the three months ending June 30,
1998. As a percentage of Vacation Credit sales, sales and marketing costs
increased from 46.8% for the three months ended June 30, 1997 to 50.0% for the
three months ended June 30, 1998. This increase reflects start-up costs and
delays associated with opening the Scottsdale, Arizona; Wolf Creek, Utah and San
Diego, California sales offices in May and June of 1998, without the benefit of
a full quarter of sales from these locations. In addition, training costs
associated with new salespeople and office personnel in the Southwest and
Mountain Region also contributed to higher sales and marketing costs for the
quarter. Effective January 1, 1998, the Company increased commissions on new
sales and raised performance targets for additional bonuses. During the three
months ended June 30, 1998, the sales force met these new performance targets
resulting in net increased commission costs. Management continues to evaluate
the commission program and has made changes to these performance targets as well
as other aspects of the overall commission program. Management expects sales and
marketing costs as a percentage of Vacation Credit sales to decrease and come
more in line with historical results for the remainder of the year as a result
of the aforementioned changes to commissions and the effect of increased sales
at new sales offices and the increase in the selling price of vacation credits.
General and administrative expenses increased 30.3% from $3.3 million for
the three months ended June 30, 1997 to $4.3 million for the three months ended
June 30, 1998. As a percentage of total revenue, general and administrative
costs increased from 8.3% for the three months ended June 30, 1997 to 9.0% for
the three months ended June 30, 1998. The increase in general and administrative
expenses is due to increased sales growth, inflationary pressure on wages,
increased administration costs resulting from being a publicly traded company
and regionalization.
Provision for doubtful accounts and recourse liability increased 26.1% from
$2.3 million for the three months ended June 30, 1997 to $2.9 million for the
three months ended June 30, 1998. As a percentage of Vacation Credit sales, the
provision remained comparable at 7.0% for the three months ended June 30, 1997
and 6.9% for the three months ended June 30, 1998.
Comparison of the six months ended June 30, 1998
to the six months ended June 30, 1997
The Company achieved total revenues of $90.8 million for the six months
ended June 30, 1998 compared to $72.4 million for the six months ended June 30,
1997, an increase of 25.4%. The principal reason for the overall improvement was
a 26.5% increase in Vacation Credit sales from $60.8 million for the six months
ended June 30, 1997 to $76.9 million for the six months ended June 30, 1998. The
increase in Vacation Credit sales was primarily the result of a 27.6% increase
in the number of Vacation Credits sold from 46.8 million during the six months
ended June 30, 1997 to 59.7 million during the six months ended June 30, 1998.
The increase in Vacation Credits sold was largely attributable to the maturation
of off-site sales offices in Costa Mesa, California opened in February 1997,
Woodland Hills, California, opened in October of 1997; a new off-site sales
office opened in Burlingame, California, opened in March 1998; and relocated the
Vallejo, California office to Walnut Creek, California and increased Upgrade
sales. Revenues from Upgrade Sales increased 38.5% from $9.1 million for the six
months ended June 30, 1997 to $12.6 million for the six months ended June 30,
1998 due primarily to an increase of 45.2% in the number of Vacation Credits
sold as Upgrades during the six months ended June 30, 1997 compared to the six
months ended June 30, 1998. The average price per Vacation Credit sold decreased
slightly from $1.27 per credit for the six months ended June 30, 1997 versus
$1.26 per credit for the six months ended June 30, 1998 reflecting a greater
percentage of vacation credits sold as Upgrades which are sold at a lower
selling price. Effective June 29, 1998, the Company increased the selling price
of vacation credits, including upgrades, by approximately 4.0%.
Finance income increased 8.6% from $5.8 million for the six months ended
June 30, 1997 compared to $6.3 million for the six months ended June 30, 1998.
The 1997 period benefitted from an $.8 million recognition of the unrealized
gain on residual interest in Notes Receivable sold, resulting primarily from the
adoption of Statement of Financial Accounting Standards Number 125 (SFAS 125).
Absent this benefit, the increase in finance income reflects the increase in
carrying balances of Notes Receivable for the two periods compared. Gains on
sales of Notes Receivable increased 59.4% from $3.2 million for the six months
ended June 30, 1997 to $5.1 million for the six months ended June 30, 1998 due
to notes receivable sold, which qualified for sales recognition, increasing from
$27.0 million to $51.8 million, an increase of 91.9% for the two periods
compared. The asset backed securitization consummated during the first quarter
of 1998 resulted in recording gains on $33.6 million of Notes Receivable sold
and reduced the Company's interest rate risk in the future, if interest rates
were to increase, on $130.4 million of notes receivable sold.
Vacation Credit cost of sales increased from $16.2 million for the six
months ended June 30, 1997 to $20.7 million for the six months ended June 30,
1998, an increase of 27.8%, primarily reflecting the increase in sales of
Vacation Credits. As a percentage of Vacation Credit sales, Vacation Credit cost
of sales were comparable at 26.6% and 26.9% of Vacation Credit sales for the six
months ended June 30, 1997 and 1998, respectively. Management expects product
cost as a percentage of vacation credit sales to be approximately 29.0% for the
remainder of the year. This is primarily the result of the Clear Lake and Angels
Camp resorts in California which are coming on line in the third quarter. Clear
lake experienced construction delays and cost overruns due to inclement weather
and the Angels Camp resort has a product cost higher than the historical
average.
Sales and marketing costs increased 35.8% from $28.5 million for the six
months ended June 30, 1997 to $38.7 million in the six months of 1998. As a
percentage of Vacation Credit sales, sales and marketing costs increased from
46.9% for the six months ended June 30, 1997 to 50.3% for the six months ended
June 30, 1998. This increase reflects start-up costs and delays associated with
opening the Scottsdale, Arizona; Wolf Creek, Utah and San Diego, California
sales offices in May and June of 1998, without the benefit of a full quarter of
sales from these locations. In addition, training costs associated with new
salespeople and office personnel in the Southwest and Mountain Region also
contributed to higher sales and marketing costs for the six months ended June
30, 1998. Effective January 1, 1998, the Company increased commissions on new
sales and raised performance targets for additional bonuses. During the three
months ended June 30, 1998, the sales force met these new performance targets
resulting in net increased commission costs. Management continues to evaluate
the commission program and has made changes to these performance targets as well
as other aspects of the overall commission program. Management expects sales and
marketing costs as a percentage of Vacation Credit sales to decrease and come
more in line with historical results for the remainder of the year as a result
of the aforementioned changes to commissions and the effect of increased sales
at new sales offices and the increase in the selling price of Vacation Credits.
General and administrative expenses increased 28.6% from $6.3 million for
the six months ended June 30, 1997 to $8.1 million for the six months ended June
30, 1998. As a percentage of total revenue, general and administrative costs
increased from 8.7% of total revenue for the six months ended June 30, 1997 to
8.9% of total revenue for the six months ended June 30, 1998. The increase in
general and administrative expenses is due to increased sales growth,
inflationary pressure on wages, increased administration costs resulting from
being a publicly traded company and regionalization.
Provision for doubtful accounts and recourse liability increased 26.2% from
$4.2 million for the six months ended June 30, 1997 to $5.3 million for the six
months ended June 30, 1998. As a percentage of Vacation Credit sales, the
provision remained comparable at 6.9% for each of the six months ended June 30.
The Company maintains an allowance for doubtful accounts in respect of the
Notes Receivable owned by the Company and an allowance for recourse liability in
respect of the Notes Receivable that have been sold by the Company. The
aggregate amount of these allowances at December 31, 1997 and June 30, 1998 were
$15.2 million, and $17.9 million, respectively, representing approximately 6.3%
and 6.6%, respectively, of the total portfolio of Notes Receivable at those
dates, including the Notes Receivable that had been sold by the Company. No
assurance can be given that these allowances will be adequate, and if the amount
of the Notes Receivable that are ultimately written off materially exceed the
related allowances, the Company's business, results of operations and financial
condition could be materially adversely affected.
The Company estimates its allowance for doubtful accounts and recourse
liability by analysis of bad debts by each sales site by year of Note Receivable
origination. The Company uses this historical analysis, in conjunction with
other factors such as local economic conditions and industry trends. The Company
also utilizes experience factors of more mature sales sites in establishing the
reserve for bad debts at new sales offices. The Company generally charges off
all receivables when they become 180 days past due and returns the credits
associated with such charge-offs to inventory. At June 30, 1998 and December 31,
1997, 1.9% of the Company's total receivables portfolio of $271.8 million and
$242.3 million, respectively, were more than 60 days past due.
LIQUIDITY AND CAPITAL RESOURCES
The Company generates cash from operations from down payments on sales of
Vacation Credits which are financed, cash sales of Vacation Credits, principal
and interest on Notes Receivable, and proceeds from sales and borrowings
collateralized by Notes Receivable. The Company also generates cash on the
interest differential between the interest charged on the Notes Receivable and
the interest paid on loans collateralized by Notes Receivable.
During the six months ended June 30, 1997 and 1998, cash (used in) provided
by operating activities was ($20.2) million and $3.1 million, respectively. Cash
generated from operating activities increased principally due to the increased
sales of Notes Receivable. For the first six months of 1997, cash used in
operating activities was principally for the issuance and purchase of Notes
Receivable of $58.4 million to finance the purchase of Vacation Credits by
Owners and an increase in inventory of $1.8 million due to additional
construction in progress to meet increasing sales demand. Cash provided by
operating activities resulted primarily from sales and repayments of Notes
Receivable of $23.9 million and net income of $9.8 million. For the six months
ended June 30, 1998, cash used in operating activities was principally for the
issuance and purchase of Notes Receivable of $74.6 million to finance the
purchase of Vacation Credits by Owners. Cash provided by operating activities
resulted primarily from the sale and repayment of Notes Receivable of $69.5
million and net income of $11.0 million.
Net cash used in investing activities for the six months ended June 30,
1997 and 1998 was $.9 and $3.8 million, respectively. Cash used in the
acquisition of property and equipment was primarily used to acquire furniture
and fixtures, data processing equipment, and construction of a new corporate
office building required to meet the growth of the Company.
Net cash provided by financing activities for the six months ended June 30,
1997 and 1998, was $21.0 million and $1.9 million, respectively. For the six
months ended June 30, 1997, cash provided by financing activities resulted
primarily from the issuance of notes payable of $16.8 million in conjunction
with the sale of Notes Receivable from TW Holdings which was treated as a
secured borrowing as the transaction did not meet the sales recognition criteria
of SFAS 125. The note payable was extinguished in a non-cash transaction by
transferring notes receivable to the note holder. For the six months ended June
30, 1998, cash used in financing activities was principally the result of
payments to the Parent on the revolving line of credit of $1.9 million. Cash
provided was principally the result of outstanding borrowings of $4.0 million on
the Bank $30 million revolving credit facility.
Financing of Notes Receivable has been accomplished by use of a $98.0
million Receivable Transfer Agreement from the Bank Group through TW Holdings.
As of June 30, 1998, Notes Receivable totaling $18.3 million had been
transferred to the Bank Group. The agreement with the Bank Group is subject to
annual renewal on June 30 of each year and was renewed on June 18, 1998 at a
required yield to the bank group of LIBOR plus 112.5 basis points. In the
future, the Company may hypothecate its Notes Receivable.
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. The line of credit
is payable on demand. As of June 30, 1998, there was not any outstanding
indebtedness to the Parent. The Company may advance excess funds to the Parent
at prime rate minus 2% (currently 6.5%) per annum. At June 30, 1998 there was a
$.1 million Receivable from Parent.
The Company has 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. The Credit Agreement also
imposes limitations on certain liens and carrying amounts of inventory and
matures on February 12, 2001. The Company plans to use this facility to meet
short-term working capital needs. Outstanding borrowings under this credit
facility at June 30, 1998 were $4.0 million.
In March 1998, the Company sold $37.4 million of Notes Receivable to a
wholly-owned special purpose company, Trendwest Funding II, Inc. In addition,
the Bank Group sold $93.0 million of Notes Receivable purchased from TW
Holdings, Inc. to Trendwest Funding II, Inc. The special purpose company sold
the receivable to TRI Funding II, Inc. (TRI), a special purpose entity
wholly-owned by Trendwest Funding II, Inc., and TRI issued $130.4 million in two
classes of senior and subordinated notes to institutional investors. The 1998-1,
Class A notes were issued for $125.0 million at a fixed rate of 6.88%. The
1998-1, Class B notes were issued for $5.4 million at a fixed rate of 7.98%. The
Class A notes and Class B notes were rated `A' and `BBB' by Fitch IBCA, Inc.,
respectively, and are secured by the Notes Receivable owned by TRI. The ratings
reflect credit enhancements of a 4% over-collaterilization and a 2% minimum
reserve account. The notes have a stated maturity of April 15, 2009.
Through the end of 1998, the Company anticipates spending approximately $24
million for acquisitions and development of new resort properties and for
expansion and development activities. The Company plans to fund these
expenditures with cash generated from operations, including further sales and
securitizations of Notes Receivable. The Company believes that, with respect to
its current operations, cash generated from operations and future borrowings,
will be sufficient to meet the Company's working capital and capital expenditure
needs through the end of 1998.
WorldMark maintains a replacement reserve for the WorldMark Resorts which
is funded from the annual assessments of the Owners. At June 30, 1998, the
amount of such reserve was approximately $6.8 million. The replacement reserve
is utilized to refurbish and replace the interiors and furnishings of the
condominium units and to maintain the exteriors and common areas in WorldMark
Resorts in which all units are owned by WorldMark. The Company may advance funds
to WorldMark from time to time.
Since completed units at various resort properties are acquired or
developed in advance and a significant portion of the purchase price of Vacation
Credits is financed by the Company, the Company continually needs funds to
acquire and develop property, to carry Notes Receivable contracts and to provide
working capital. The Company has historically secured additional funds through
loans from the Parent and the sale of Notes Receivable through the Finance
Subsidiaries. See "Risk Factors - Dependence on Acquisitions of Additional
Resort Units for Growth; Need for Additional Capital" of the Company's 1997 Form
10-K.
In the future, the Company may negotiate additional credit facilities, or
issue corporate debt or equity securities. Any debt incurred or issued by the
Company may be secured or unsecured, at a fixed or variable interest rate, and
may be subject to such additional terms as management deems appropriate.
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 6 of "Notes to Condensed Combined and
Consolidated Financial Statements."
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matter to a Vote of Security Holders
Trendwest Resorts, Inc. (Company) held its Annual Meeting of Stockholders
on May 28, 1998. The matters voted upon at the meeting and the votes cast with
respect thereto were as follows:
1. Election of Directors:
Nominee: Number of shares Number of shares
voted FOR Withheld
------------------------------------------------------------------
Jerol E. Andres 17,017,909 2,040
Roderick C. Wendt 17,017,909 2,040
Linda M. Tubbs 17,017,909 2,040
2. Proposal to Ratify the selection of KPMG Peat Marwick LLP
as independent auditors of the Company for the 1998 fiscal
year:
Number of shares Number of shares Number of shares
voted FOR voted AGAINST Withheld
---------------------------------------------------------
17,019,149 300 500
Item 5 - Other Information
None
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Restated Articles of Incorporation (1)
2.2 Restated Bylaws (1)
11 Statement re: Computation of Earnings per share
10.37 Amendment Number Two Dated June 18, 1998 to the
Second Amended and Restated Receivables Transfer
Agreement between the Registrant, Seafirst Bank
and other purchasers, TW Holdings, and Bank of America
Dated June 18, 1998
27 Financial Data Schedule
(1) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 333-26861).
(a) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRENDWEST RESORTS, INC.
Date: August 14, 1998 /s/ WILLIAM F. PEARE
--------------- ---------------------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: August 14, 1998 /s/ GARY A. FLORENCE
--------------- ---------------------------------------
Gary A. Florence
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial Officer)