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 March 31, 2001
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ____________ to
______________
Commission file number 000-22979
Trendwest Resorts, inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oregon 93-1004403
----------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation)
9805 Willows Road
Redmond, Washington 98052
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(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (425) 498-2500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of shares of the registrant's no-par voting common stock outstanding
as of May 8, 2001: 25,274,955 shares.
PART I - FINANCIAL INFORMATION
Item I - Financial Statements
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(dollars in thousands)
(Unaudited)
March 31, December 31,
Assets 2001 2000
----------------- ----------------
Cash $ 447 404
Restricted cash 11,093 7,201
Notes Receivable, net of allowance for doubtful accounts, sales
returns and deferred gross profit 87,594 76,197
Accrued interest and other receivables 7,825 8,171
Residual interest in Notes Receivable sold 55,905 52,043
Inventories 123,041 104,218
MountainStar development 60,361 56,536
Property and equipment, net 32,849 29,948
Refundable income taxes -- 5,688
Other assets 7,121 6,599
----------------- ----------------
Total assets $ 386,236 347,005
================= ================
Liabilities and Shareholders' Equity
Liabilities:
Accounts payable and bank overdraft 4,293 9,706
Accrued liabilities 27,511 21,538
Accrued construction in progress 6,250 2,855
Due to Parent 1,243 419
Note payable to Parent 17,731 17,731
Borrowing under bank line of credit 62,228 48,441
Mortgage payable 11,686 11,696
Allowance for recourse liability and deferred gross profit on Notes
Receivable sold 30,771 26,846
Current income taxes payable 5,628 --
Deferred income taxes 136 330
----------------- ----------------
Total liabilities 167,477 139,562
Shareholders' equity:
Preferred stock, no par value. Authorized 10,000,000 shares;
no shares issued or outstanding -- --
Common stock, no par value. Authorized 90,000,000 shares;
issued and outstanding 25,258,755 and 25,196,997 shares at
March 31, 2001 and December 31, 2000, respectively. 55,017 54,119
Accumulated other comprehensive loss (1,885) (522)
Retained earnings 165,627 153,846
----------------- ----------------
Total shareholders' equity 218,759 207,443
Commitments and contingencies
----------------- ----------------
Total liabilities and shareholders' equity $ 386,236 347,005
================= ================
See accompanying notes to the condensed consolidated financial statements.
2
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(Unaudited)
Three months ended March 31,
2001 2000
----------------- ----------------
Revenues:
Vacation Credit and Fractional Interest sales, net $ 92,576 62,513
Finance income 3,424 4,228
Gains on sales of Notes Receivable 6,255 3,589
Resort management services 980 1,613
Other 1,742 1,251
----------------- ----------------
Total revenues 104,977 73,194
----------------- ----------------
Costs and operating expenses:
Vacation Credit and Fractional Interest cost of sales 26,048 14,591
Resort management services 404 422
Sales and marketing 43,231 30,580
General and administrative 9,294 7,250
Provision for doubtful accounts and recourse
liability 6,751 4,254
Interest 74 47
----------------- ----------------
Total costs and operating expenses 85,802 57,144
----------------- ----------------
Income before income taxes 19,175 16,050
Income tax expense 7,394 6,380
----------------- ----------------
Net income $ 11,781 9,670
================= ================
Basic net income per common share $ .47 .38
Diluted net income per common share $ .46 .38
Weighted average shares of common stock and dilutive potential common stock
outstanding:
Basic 25,215,096 25,454,405
Diluted 25,496,248 25,553,636
See accompanying notes to the condensed consolidated financial statements.
3
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flow
(dollars in thousands)
(Unaudited)
Three months ended March 31,
-------------------------------------
2001 2000
----------------- ----------------
Cash flows from operating activities:
Net income $ 11,781 9,670
Adjustments to reconcile net income to net cash (used in) provided by
operating activities:
Depreciation and amortization 881 594
Amortization of residual interest in Notes Receivable sold 3,638 3,125
Provision for doubtful accounts, sales returns and recourse liability 8,018 5,620
Recoveries of Notes Receivable charged off 44 52
Residual interest in Notes Receivables sold (7,741) (3,674)
Unrealized loss on residual interest in Notes Receivable sold 616 --
Contract servicing liability arising from sale of Notes Receivable 148 --
Amortization of contract servicing liability (413) (186)
Change in deferred gross profit 498 (30)
Deferred income tax expense (benefit) 56 (539)
Issuance of Notes Receivable (77,687) (54,338)
Proceeds from sale of Notes Receivable 54,200 42,332
Proceeds from repayment of Notes Receivable 12,137 16,596
Purchase of Notes Receivable (5,656) (4,950)
Changes in certain assets and liabilities:
Restricted cash (3,892) (4,120)
MountainStar development (3,825) --
Inventories (20,911) (6,405)
Accounts payable and accrued liabilities 4,426 713
Income taxes payable 5,628 6,319
Refundable income taxes 5,688 --
Other (226) (2,154)
----------------- ----------------
Net cash (used in) provided by operating activities (12,592) 8,625
----------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment (2,422) (1,178)
----------------- ----------------
Net cash provided by (used in) investing activities (2,422) (1,178)
----------------- ----------------
Cash flows from financing activities:
Net borrowing (repayment) under bank line of credit and other 13,401 (3,900)
Repayments of mortgage payable (10) --
Decrease in receivable from Parent -- (1,279)
Increase in due to Parent 824 --
Issuance of common stock 923 166
Repurchase of common stock (25) (2,597)
----------------- ----------------
Net cash provided by (used in) financing activities 15,113 (7,610)
----------------- ----------------
Net (decrease) increase in cash 99 (163)
Effect of foreign currency exchange rates on cash (56) 58
Cash at beginning of period 404 1,760
----------------- ----------------
Cash at end of period $ 447 1,655
================= ================
See accompanying notes to the condensed consolidated financial statements.
4
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Condensed Consolidated Cash Flow Information
(continued)
(dollars in thousands)
(unaudited)
Three months ended March 31,
-------------------------------------
2001 2000
----------------- ----------------
Supplemental disclosures of cash flow information - cash paid during the period
for:
Interest (excluding capitalized amounts of $1,840 and $102,
respectively) $ -- 47
Income taxes, net of refunds received (3,261) --
See accompanying notes to condensed consolidated financial statements.
5
TRENDWEST RESORTS, INC.
AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements
(dollars in thousands)
(Unaudited)
Note 1 - Background
Trendwest Resorts, Inc., (Company) markets, sells and finances timeshare
Vacation Ownership Interests in the form of Vacation Credits and Fractional
Interests. The Company also acquires, develops and manages timeshare resorts.
The Company's timeshare resorts (except Fractional Interests) are owned and
operated through WorldMark, the Club, (WorldMark) and WorldMark South Pacific
Club (WorldMark South Pacific) (collectively "The Clubs"). WorldMark is a
non-profit mutual benefit corporation organized by Trendwest in 1989 to provide
an innovative, flexible vacation ownership system. WorldMark South Pacific is a
registered managed investment scheme regulated by the Australian Securities and
Investments Commission ("ASIC"). The Company presently sells Vacation Ownership
interests in the United States, Fiji, and Australia, primarily through off-site
sales offices. Fractional Interests are sold on-site at the Depoe Bay resort in
Oregon.
These condensed consolidated financial statements do not include certain
information and footnotes required by accounting principles generally accepted
in the United States of America 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 ended March 31, 2001, are not necessarily
indicative of the results that may be expected for the fiscal year ending
December 31, 2001.
These statements should be read in conjunction with the audited financial
statements and footnotes included in the Company's 2000 Form 10-K filed with the
Securities and Exchange Commission (SEC). The accounting policies used in
preparing these financial statements are the same as those described in such
Form 10-K, unless otherwise noted herein.
Note 2 - New Accounting Pronouncements
Effective January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities," ("FAS 133") which requires that all derivative instruments be
recorded on the balance sheet at fair value. The adoption of FAS 133 did not
have a material effect as of the adoption date of January 1, 2001, nor for the
period ended March 31, 2001. On the date derivative contracts are entered into,
the Company designates the derivative as either (a) a hedge of the fair value of
a recognized asset or liability or of an unrecognized firm commitment (fair
value hedge), (b) a hedge of a forecasted transaction or of the variability of
cash flows to be received or paid related to a recognized asset or liability
(cash flow hedge), (c) a hedge of a net investment in a foreign operation (net
investment hedge), or (d) a non-accounting hedge. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether the derivative is designated as part of a hedge
transaction and, if it is, depending on the type of hedge transaction. For fair
value hedge transactions, changes in fair value of the derivative instrument are
generally offset in the income statement by changes in the fair value of the
item being hedged. For cash-flow hedge transactions, changes in the fair value
of the derivative instrument are reported in other comprehensive income to the
extent of effectiveness. For net investment hedge transactions, changes in the
fair value are recorded as a component of the foreign currency translation
account that is also included in other comprehensive income.
The gains and losses on cash flow hedge transactions that are reported in other
comprehensive income are reclassified to earnings in the periods in which
earnings are affected by the variability of the cash flows of the hedged item.
The ineffective portions of all hedges are recognized in current period
earnings. From time to time, the Company acquires resorts outside of the United
States, where payment for the resort is denominated in a foreign currency. It is
the Company's policy to assess such transactions and ensure that any foreign
exchange risks associated with the transaction are appropriately managed. As a
result of this, the Company periodically enters into economic hedges by
purchasing foreign exchange contracts as a hedge against foreign denominated
commitments to purchase resort properties. As of March 31, 2001, the Company had
foreign exchange contracts with notional amounts of
6
approximately $2,081 CDN at a rate of $1.4955 CDN/US and $16,919 CDN at a rate
of $1.4905 CDN/US for fixed purchase commitments. The impact of recording the
fair values of the forward contracts were $408, net of tax benefit, and have
been included in other comprehensive income for the quarter.
In September 2000, the FASB issued SFAS No. 140, which replaces SFAS No. 125,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities and rescinds SFAS No. 127, Deferral of the Effective Date of
Certain Provisions of FASB Statement No. 125. SFAS 140 revises SFAS 125's
standards for accounting for securitizations and other transfers of financial
assets and collateral and requires certain disclosures, but it carries over most
of SFAS 125's provisions without reconsideration. SFAS 140 is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001 and for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. The Company adopted
the new disclosures required under SFAS 140 as of December 31, 2000. SFAS 140 is
to be applied prospectively with certain exceptions. SFAS 140 is not expected to
have a material impact on the Company's consolidated results of operations or
financial position.
Note 3 - Foreign Currency Translation
Assets and liabilities in foreign functional currencies are translated into U.S.
dollars based upon the prevailing currency exchange rates in effect at the
balance sheet date, while revenues and expenses are translated at average rates
prevailing during the year. Translation gains and losses are not included in the
determination of net income but are accumulated in a separate component of
shareholders' equity. Transaction gains or losses are recorded in the results of
operations and were insignificant for the three month period ended March 31,
2001.
Note 4 -- Comprehensive Income
Comprehensive income is comprised of the following:
Three months ended
March 31,
----------------------------
2001 2000
------------ ------------
Net income $ 11,781 9,670
Other comprehensive loss:
Change in cumulative effect of foreign currency
translation (955) 14
Unrealized derivative losses, net of tax effect (408) --
------------ ------------
Comprehensive income $ 10,418 9,684
============ ============
Note 5 - Stock Split
On February 21, 2001, the Board of Directors declared a 3 for 2 stock split for
shareholders of record on March 15, 2001, payable on March 29, 2001. Shares
outstanding and earnings per share figures contained in this Form 10-Q and in
the condensed consolidated financial statements contained herein have been
adjusted to reflect the stock split as if it were effective for all periods
presented.
Note 6 - Reclassifications
Certain reclassifications have been made to prior year amounts to conform to the
current presentation.
7
Note 7 - Basic and Diluted Net Income Per Common Share
The following presents the reconciliation of weighted average shares used for
basic and diluted net income per share:
Three months ended March 31,
----------------------------------------
2001 2000
----------------- ------------------
Basic
Basic weighted average shares 25,215,096 25,454,404
Diluted
Effect of dilutive securities 281,152 99,232
----------------- ------------------
Diluted weighted average shares outstanding 25,496,248 25,553,636
================= ==================
Net income available to common shareholders for basic net income per share was
$11,781 and $9,670 for the three months ended March 31, 2001 and 2000,
respectively.
At March 31, 2001 and 2000, there were options to purchase 0 and 669,000 shares
of common stock outstanding, respectively, which were antidilutive and therefore
not included in the computation of diluted net income per share.
Note 8 - Inventories
Inventories consist of Vacation Credits and construction in progress as follows:
March 31, December 31,
2001 2000
----------------- ----------------
Vacation Credits $ 18,246 16,829
Construction in progress 104,795 87,389
----------------- ----------------
Total inventories $ 123,041 104,218
================= ================
Note 9 - Notes Receivable, Allowance For Doubtful Accounts, Recourse Liability
and Sales Returns
The following table summarizes the Company's total Notes Receivable portfolio
at:
March 31, December 31,
2001 2000
----------------- ------------------
Total Notes Receivable $ 538,091 502,762
Less Notes Receivable sold (432,027) (407,215)
----------------- ------------------
Gross on balance sheet Notes Receivable 106,064 95,547
================= ==================
Unencumbered Notes Receivable 51,206 37,873
Retained interest in Notes Receivable sold 54,858 57,674
----------------- ------------------
Gross on balance sheet Notes Receivable 106,064 95,547
Less: Deferred gross profit (1,381) (1,340)
Allowance for doubtful accounts and sales returns (17,089) (18,010)
----------------- ------------------
Notes Receivable, net $ 87,594 76,197
================= ==================
8
The activity in the allowance for doubtful accounts, recourse liability and
sales returns is as follows for the three months ended March 31, 2001 and the
year ended December 31, 2000:
2001 2000
----------------- ------------------
Balances at beginning of period $ 40,292 29,087
Provision for doubtful accounts, sales returns and
recourse liability 8,018 27,015
Notes receivable charged-off and sales returns net of
Vacation Credits recovered (5,515) (16,061)
Recoveries 44 251
----------------- ------------------
Balances at end of period $ 42,839 40,292
================= ==================
Allowance for doubtful accounts and sales returns $ 17,089 18,010
Recourse Liability on notes receivable sold 25,750 22,282
----------------- ------------------
$ 42,839 40,292
================= ==================
Note 10 - Commitments and Contingencies
(a) Purchase Commitments
The Company routinely enters into purchase agreements with various parties to
acquire and build resort properties. At March 31, 2001, the Company had
outstanding purchase commitments of $51,124 related to properties under
development.
(b) Surety and Performance Bonds
The Company utilizes surety and performance bonds as part of developing resort
properties. As of March 31, 2001, there were $5,587 in surety bonds outstanding.
(c) 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 11 - Segment Reporting
The Company has two reportable segments; sales and financing. The sales segment
markets and sells Vacation Credits and Fractional Interests. The finance segment
is primarily responsible for servicing and collecting Notes Receivable
originated in conjunction with the financing of sales of Vacation Credits and
Fractional interest Sales. The finance segment does not include the activities
of the Company's finance subsidiaries. Management evaluates the business based
on sales and marketing activities as these are the primary drivers of the
business.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates performance
based on profits or losses from sales and marketing activities on a pre-tax
basis. Intersegment revenues are recorded at market rates as if the transactions
occurred with third parties. Assets are not reported by segment.
9
The following tables summarize the segment activity of the Company:
Segment
Three months ended March 31, 2001: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 92,576 1,258 980 94,814
Interest revenue - net -- 1,082 -- 1,082
Interest revenue-intersegment -- 1,991 -- 1,991
Intersegment revenue -- 305 -- 305
----------- ----------- ----------- -------------
Segment revenue $ 92,576 4,636 980 98,192
Segment profit $ 14,301 2,895 576 17,772
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability 8,018 -- -- 8,018
Segment
Three months ended March 31, 2000: Sales Finance Other Total
----------- ----------- ----------- -------------
External revenue $ 62,513 1,036 1,613 65,162
Interest revenue - net -- 1,311 -- 1,311
Interest revenue-intersegment -- 1,531 -- 1,531
Intersegment revenue -- 296 -- 296
----------- ----------- ----------- -------------
Segment revenue $ 62,513 4,174 1,613 68,300
Segment profit $ 11,889 2,868 1,191 15,948
Significant non-cash items:
Provision for doubtful accounts, sales
returns and recourse liability 5,614 -- -- 5,614
The following table provides a reconciliation of segment revenues and profits to
the consolidated amounts:
Three months ended March 31,
---------------------------------------
2001 2000
---------------- ---------------
Segment revenue $ 98,192 68,300
\Interest expense reported net of interest
income 74 47
Elimination of intersegment revenue (2,296) (1,827)
Other subsidiaries revenue 9,007 6,674
---------------- ---------------
Consolidated revenue $ 104,977 73,194
================ ===============
Segment profit $ 17,772 15,948
Corporate overhead not included in segment
reporting (5,742) (4,212)
Other subsidiaries profit 7,145 4,314
---------------- ---------------
Consolidated pre-tax income $ 19,175 16,050
================ ===============
The Company's revenue from external customers derived from sales within the
United States totaled $88,000 and $62,513 for the three months ended March 31,
2001 and 2000, respectively. Revenue from external customers derived from sales
in all foreign countries totaled $4,576 and $0 for the three months ended March
31, 2001 and 2000, respectively. Revenue from external customers is attributed
to countries based on the location where the sale was made. Substantially all of
the Company's long-lived assets are located within the United States. The net
assets of foreign operations totaled $6,822 at March 31, 2001.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
The statements below 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 the
Company's Form 10-K.
The Company achieved total revenues of $105.0 million for the three months ended
March 31, 2001, compared to $73.2 million for the three months ended March 31,
2000, an increase of 43.4%. The principal reason for the overall improvement was
a 39.8% increase in Vacation Credit sales to $87.4 million for the three months
ended March 31, 2001, from $62.5 million for the three months ended March 31,
2000. In addition, $5.2 million in Fractional Interest sales from the Depoe Bay,
Oregon, resort were recognized during the first three months of 2001. No
Fractional Interest sales were recognized in 2000. The increase in Vacation
Credit sales was primarily the result of a 28.6% increase in the number of
Vacation Credits sold in the United States, to 58.9 million for the three months
ended March 31, 2001, from 45.8 million for the three months ended March 31,
2000. The increase in Vacation Credits sold was largely attributable to
continued improvement in existing sales offices, improved performance in the
eleven new offices opened during 2000, and increased Upgrade Sales. Revenues
from Upgrade Sales increased 34.0% to $13.4 million for the three months ended
March 31, 2001, from $10.0 million for the three months ended March 31, 2000.
The increase in Upgrade sales is the result of continuing satisfaction on the
part of WorldMark Owners and the ongoing growth in the owner base.
In the United States, the average price per Vacation Credit sold increased to
$1.41 per credit for the three months ended March 31, 2001, versus $1.37 per
credit for the three months ended March 31, 2000, primarily as a result of a
$0.05 increase in the selling price of Vacation Credits effective July 1, 2000,
and an $0.05 increase in the price of Upgrade Vacation Credits effective
September 1, 2000.
For the quarter ended March 31, 2001, financing activities generated $9.7
million in revenues, compared to $7.8 million in the same quarter last year, a
24% increase. This increase is largely due to increased gains on sales of Notes
Receivable. Gains increased due to increased sales of Notes Receivable. In
addition, interest rates fell during the quarter, increasing the net interest
spread and thus increasing the gains recognized.
Vacation Credit and Fractional Interest cost of sales, as a percentage of
Vacation Credit and Fractional Interest sales, was 28.1% for the three months
ended March 31, 2001, versus 23.4% for the three months ended March 31, 2000.
This increase is a result of the higher cost of sales of Fractional Interest
sold during 2001, as well as the lower cost of the units at Fiji and at Rancho
Vistoso in Arizona contributed to WorldMark during the first quarter of 2000,
both of which had product costs lower than the Company's historical average.
Over the remainder of 2001, the Company expects product cost, as a percentage of
Vacation Credit sales, to remain at a similar level to first quarter results.
The Company expects to recognize the remaining incremental revenue from the
Fractional Sales program at the second phase of Depoe Bay, with its higher
product cost as a percentage of sales, by the end of the third quarter, with
most of this revenue being recognized in the second quarter.
Sales and marketing costs, as a percentage of Vacation Credit and Fractional
Interest sales, were 46.7% for the three months ended March 31, 2001, as
compared to 49.0% for the three months ended March 31, 2000. This decrease was a
result of the Company experiencing strong sales system wide. In addition,
Fractional Interest sales have lower relative sales and marketing costs, offset
by higher product cost.
General and administrative expenses increased 27.4% to $9.3 million for the
three months ended March 31, 2001, from $7.3 million for the three months ended
March 31, 2000. As a percentage of total revenue, general and administrative
costs decreased to 8.9% for the three months ended March 31, 2001, versus 10.0%
for the three months ended March 31, 2000. In the first quarter of 2000, the
Company fully expensed start-up costs for the new Midwest and South Pacific
regions without the corresponding benefit of sales.
11
Resort management services contributed $1.0 million to total revenues, down from
last year's $1.6 million as higher utility costs at Western resorts and higher
labor costs negatively impacted the management fee received from WorldMark. The
Company is currently evaluating various profit improvement initiatives to bring
management fees more in line with prior periods.
Provision for doubtful accounts and recourse liability, as a percentage of
Vacation Credit and Fractional Interest sales, was 7.3% for the first quarter of
2001 versus 6.9% for the comparable period last year. This increase was the
result of a higher mix of sales in newer sales offices with expected default
rates higher than the Company's average historical experience.
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 March 31, 2001 and December 31, 2000,
were $41.4 million, and $38.9 million, respectively, both representing
approximately 7.7% 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 in
estimating the allowance for doubtful accounts and recourse liability. The
Company also utilizes experience factors of more mature sales sites in
establishing the allowance for bad debts at new sales offices. The Company
generally charges off all receivables when they become 180 days past due and
returns the credits associated with such charge-offs to inventory. At March 31,
2001 and December 31, 2000, 2.2% and 2.3% of the Company's total receivables
portfolio of $538.1 million and $502.8 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 payments 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 three months ended March 31, 2001 and 2000, cash (used in) provided
by operating activities was ($12.6) million and $8.6 million, respectively. Cash
used in operating activities increased principally due to the increased issuance
of Notes Receivable and increased expenditures for inventory. For the three
months ended March 31, 2001, cash provided by operating activities resulted
primarily from sales and repayments of Notes Receivable of $66.3 million, a
decrease in accounts payable and accrued liabilities of $4.4 million, an
increase in taxes payable of $5.6 million, and net income of $11.8 million. For
the three months ended March 31, 2001, cash used in operating activities was
principally for the issuance and purchase of Notes Receivable of $83.3 million,
and an increase in inventory of $20.9 million. For the three months ended March
31, 2000, cash provided by operating activities resulted primarily from sales
and repayments of Notes Receivable of $58.9 million, an increase in taxes
payable of $6.3 million, and net income of $9.7 million. For the three months
ended March 31, 2000, cash used in operating activities was principally for the
issuance and purchase of Notes Receivable of $59.3 million to finance the
purchase of Vacation Credits by Owners, and an increase in inventory of $6.4
million.
Net cash used in investing activities for the three months ended March 31, 2001
and 2000, was $2.4 million and $1.2 million, respectively. Cash used in
investing activities for the three months ended March 31, 2001, was the result
of leasehold, furniture, and equipment purchases to support the new sales
offices opened to support expansion of both US and South Pacific operations.
Cash used in investing activities for the three months ended March 31, 2000, was
the result of furniture and equipment purchases to support the Company's ongoing
growth.
12
Net cash provided by (used in) financing activities for the three months ended
March 31, 2001 and 2000, was $15.1 million and ($7.6) million, respectively. For
the three months ended March 31, 2001, cash provided by financing activities was
principally the result of an increase in net borrowings under the bank line of
credit and other of $13.4 million, issuance of common stock of $0.9 million, and
an increase in due to Parent of $0.8 million. For the three months ended March
31, 2000, cash used in financing activities was principally the result of a
decrease in net borrowings under the bank line of credit of $3.9 million,
repurchase of common stock of $2.6 million, and decrease in receivable from
Parent of $1.3 million.
The Company has a three-year, $85.0 million unsecured revolving credit agreement
(Credit Agreement) with a group of banks. The Agreement allows for borrowings in
Australian dollars up to a maximum of $25 million US dollar equivalent. The
Agreement provides for borrowings at either a reference rate or at LIBOR rates
plus the applicable margin for the level of borrowings outstanding. In addition,
the Agreement requires a quarterly commitment fee of 0.30% to 0.50% based on the
usage level of the total commitment. Available borrowings under the Agreement
are subject to a borrowing base which is a percentage of Notes Receivable and
inventory, including property under development. 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 Agreement was amended during the first
quarter. The amendment increased the total commitment from $60 million to $85
million, raised the Australian dollar limit to $25 million US dollar equivalent,
increased the quarterly commitment fee, and provided a first mortgage on the
MountainStar property. Borrowings outstanding at March 31, 2001 and December 31,
2000, were $62.2 million and $48.4 million, respectively, at weighted average
interest rates of 7.60% and 8.48%.
The Company has a $10 million open line of credit with the Parent which bears
interest at prime plus 1.25% (currently 9.25%) per annum. The line of credit is
payable on demand. As of March 31, 2001, there was $1.2 million in indebtedness
to the Parent. The Company may advance excess funds to the Parent at the prime
rate minus 1.75% (currently 6.25%) per annum. At March 31, 2001, there was no
Receivable from Parent.
For the remainder of 2001, the Company anticipates spending approximately $85.5
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, borrowings on the bank line of
credit and further sales and securitizations of Notes Receivable. The
acquisition of new resort sites and properties is an ongoing process and
availability of certain properties in desired locations could result in
increased expenditures for such activities. 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 2001.
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 the sale
of Notes Receivable through the Finance Subsidiaries, borrowings under the $85.0
million revolving line of credit and loans from the Parent. See "Risk Factors -
Dependence on Acquisitions of Additional Resort Units for Growth; Need for
Additional Capital" of the Company's 2000 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.
Both WorldMark The Club and WorldMark South Pacific maintain replacement
reserves for the Resorts, which are funded from the annual assessments of the
Owners. At March 31, 2001, the amount of The Clubs' reserve was approximately
$17.1 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 The Clubs' Resorts in which all units are owned by The
Clubs. The Company may advance funds to either Club from time to time.
13
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to interest rate changes primarily as a result of its
financing of timeshare purchases, the sale and securitization of notes
receivable and borrowing under revolving lines of credit. The Company's interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows and to reduce overall borrowing costs. To achieve its
objectives, the Company borrows funds, sells or securitizes Notes Receivable
primarily at fixed rates and may enter into derivative financial instruments
such as interest rate swaps, caps and treasury locks in order to mitigate its
interest rate risk on a related financial instrument.
The functional currency of the Company's Australian operations is the Australian
dollar. The Australian operations are funded through the $85 million credit
facility, which has an Australian dollar sub-limit of up to $25 million US
dollar equivalent. The Company is also subject to foreign currency exchange rate
risk when developing resort properties denominated in a foreign currency. As the
Company continues expanding its operations worldwide, there will be additional
exposure to foreign currency exchange rate risk. The Company occasionally enters
into foreign exchange contracts to reduce exposure to exchange rate risk. In
January 2001, the Company entered into a forward exchange contract, to receive
$2,081 CDN at a rate of $1.4955 CDN/US on July 3, 2001, and $16,919 CDN at a
rate of $1.4905 CDN/US on September 30, 2002. The Company is also exposed to
credit losses in the event of nonperformance by the counterparties to its
foreign exchange contracts. The Company does not obtain collateral to support
financial instruments but monitors the credit standing of the counterparties.
The Company does not maintain a trading account for any class of financial
instrument, it does not purchase high risk derivative instruments and it is not
directly subject to commodity price risk.
There have been no material changes to the Company's exposure to market risk
since December 31, 2000.
14
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Incorporated by reference. See Note 11 of "Notes to Condensed
Consolidated Financial Statements."
Item 2 - Changes in Securities and Use of Proceeds
None
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matter to a Vote of Security Holders
None
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 - See note 4
of "Notes to Condensed Consolidated Financial Statements."
(1) Incorporated by reference to the Company's Registration Statement on Form
S-1 (File No. 333-26861).
(a) Reports on Form 8-K
FORM 8-K dated February 27, 2001, on Item 5. Other Events -
Stock Split., relating to the 3 for 2 stock split declared by
the Board of Directors on February 21, 2001, effective for
stockholders of record on March 15, 2001.
15
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: May 15, 2001 /s/ WILLIAM F. PEARE
---------------- -----------------------------------------
William F. Peare
President, Chief Executive Officer and
Director (Principal Executive Officer)
Date: May 15, 2001 /s/ TIMOTHY P. O'NEIL
---------------- -----------------------------------------
Timothy P. O'Neil
Vice President, Chief Financial Officer
(Principal Financial Officer)
16