Filed On 4/1/02 · SEC File 0-22979 · Accession Number 907303-2-65
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
4/01/02 Trendwest Resorts Inc 10-K 12/31/01 14:583 Heller Ehrman..McAuliffe
Document/Exhibit Description Pages Size
1: 10-K 10-K 2001 80 480K
2: EX-10 10.8 21 77K
3: EX-10 10.9 5 24K
4: EX-10 10.24 44 173K
5: EX-10 10.25 34 157K
6: EX-10 10.26 100 416K
7: EX-10 10.27 141 455K
8: EX-10 10.28 82 219K
9: EX-10 10.29 40 133K
10: EX-10 10.30 18 76K
11: EX-10 10.31 9 51K
12: EX-10 10.36 7 36K
13: EX-21 10.21 1 6K
14: EX-23 23.1 1 8K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 333-26861
TRENDWEST RESORTS, INC.
(Exact name of registrant as specified in charter)
Oregon 93-1004403
(State or other jurisdiction of organization) (IRS Employer Identification No.)
9805 Willows Road
Redmond, WA 98052
(Address of principal executive offices) (Zip Code)
(425) 498-2500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The number of shares of common stock outstanding on March 26, 2002, was
38,162,784 shares.
Aggregate market price of shares held by non-affiliates at March 26, 2002, was
$142,229,690, consisting of 5,850,666 shares.
===============================================================================
PART I
Item 1. Business
We market, sell, and finance timeshare vacation ownership interests in the form
of vacation credits and fractional ownership interests. We also acquire and
develop resorts. Our resorts (except fractional interests) are owned and
operated through WorldMark, the Club, (WorldMark) and WorldMark South Pacific
Club (WorldMark South Pacific) (collectively "the Clubs"). WorldMark is a
non-profit mutual benefit corporation organized in 1989 to provide an
innovative, flexible vacation ownership system. WorldMark South Pacific is a
registered managed investment scheme regulated by the Australian Securities and
Investments Commission ("ASIC"). We presently sell vacation ownership interests
in 48 resorts located in the United States, British Columbia, Mexico, Fiji, and
Australia and operate a network of 45 sales offices in eight western states,
Alaska, Kansas, Missouri, Australia, and Fiji. At December 31, 2001, the Clubs
had over 149,000 vacation credit owners.
We sell two types of timeshare vacation ownership interests: vacation credits
and fractional ownership interests in vacation properties. Our vacation credit
system is a points-based system that allows owners to reserve units at any of
the Clubs' resorts, at any time of the year and in increments as short as one
day. The use of vacation credits is not tied to any particular resort unit or
time period. We believe that the combination of multiple Club resorts and our
vacation credit system provide owners with an attractive range of vacation
planning choices and values. Our vacation credit system facilitates the sale of
vacation credits at off-site sales offices located in major metropolitan areas
and reduces dependence on on-site sales centers located at more remote resort
locations.
Fractional vacation ownership interests represent deeded fixed intervals in
timeshare condominiums and are not transferred to the Clubs. Our first
fractional interest program, the Depoe Bay resort on the Oregon Coast, began
pre-selling in October 1998. All 377 fractional interests were completely sold
by October 1999 generating total revenue of $13.3 million. Because of the
success of the fractional sales program at Depoe Bay, we constructed a second
phase of Depoe Bay, which has 364 fractional interests. Virtually all fractional
interests were sold by December 2001 generating revenues of $13.8 million. At
December 31, 2001, only one interest was remaining. We intend to continue to
develop fractional ownership programs at strategic locations with high demand as
a complement to our vacation credit product.
Corporate Background
We began our timeshare business as a wholly-owned subsidiary of JELD-WEN, inc.
("Parent" or "JELD-WEN") in 1989 with two condominium units. JELD-WEN is
currently our principal shareholder. JELD-WEN is a privately owned company that
was founded in 1960 and is a major manufacturer of doors, windows, and millwork
products. Headquartered in Klamath Falls, Oregon, JELD-WEN has diversified
operations located throughout the United States and in numerous foreign
countries that include manufacturing, hospitality and recreation, retail,
financial services, and real estate.
We raise capital for property acquisitions and working capital by selling or
securitizing notes receivable through six subsidiaries (the "Finance
Subsidiaries") and through a corporate revolving credit facility. We have
transactions with other JELD-WEN subsidiaries and related parties. See note 14
"Related Party Transactions" in the notes to the consolidated financial
statements included herein.
We were incorporated in Oregon in 1989. Our principal executive offices are
located at 9805 Willows Road, Redmond, Washington 98052, and our telephone
number is (425) 498-2500.
The Clubs
(i) WorldMark, the Club
We formed WorldMark, the Club as a California nonprofit mutual benefit
corporation in 1989 to own, operate, and manage the real property that we convey
to it. WorldMark is not a part of us, and its operations are not included in our
consolidated financial statements. Owners receive the right to use all WorldMark
resort units at any available time and interval selected by the owner on a
first-come, first-served basis, and the right to vote to elect WorldMark's board
members and with respect to certain major WorldMark matters. The number of votes
that each Owner has is based on the number of vacation credits owned. As of
December 31, 2001, there were nearly 144,000 WorldMark owners.
1
The resorts are owned by WorldMark free and clear of all monetary encumbrances.
WorldMark maintains a replacement reserve for the WorldMark resorts, which is
funded from the annual assessments of the owners. The replacement reserve is
utilized to refurbish and replace the interiors and furnishings of the
condominium units and to maintain the exteriors and common areas in WorldMark
resorts in which all units are owned by WorldMark. As of December 31, 2001,
WorldMark had a reserve for replacement costs of approximately $18.9 million for
all depreciable assets (e.g., furniture, appliances, carpeting, roofs, and
decks) of the resorts.
The WorldMark concept provides owners significant flexibility in planning
vacations. Depending on how many vacation credits an owner has purchased, the
owner may use the vacation credits for one or more vacations annually. The
number of vacation credits that are required to stay one day at WorldMark's
units varies, depending upon the resort location, the size of the unit, the
vacation season, and the day of the week. For example, a Friday or Saturday
night stay at a one-bedroom unit may require 900 vacation credits per night
off-season and 1,750 vacation credits per night in peak season. A midweek stay
at the same one-bedroom unit would require less vacation credits. The range of
vacation credits that is required to stay one day enables an owner to vary the
number of days at the WorldMark resorts depending on the vacation choices made
by the owner. Under this system, owners can select vacations according to their
schedules, space needs, and available vacation credits. Vacation credits are
reissued on an anniversary date basis and any unused vacation credits may be
carried over for one year. An owner may also borrow vacation credits from the
owner's succeeding year's allotment.
An owner may also purchase bonus time from WorldMark for use when space is
available. Bonus time can only be reserved within fourteen days of use for
drive-to locations and within thirty days of use for exotic locations (Hawaii,
Mexico, and Fiji). Bonus time gives owners the opportunity to use available
units on short notice at a reduced rate (generally from $20 to $50 per night,
mid-week in the off-season) and to obtain usage beyond their vacation credit
allotment.
WorldMark collects maintenance dues from owners based on the number of vacation
credits owned. Currently, the annual dues are $340 for the first 6,000 Vacation
Credits owned, plus approximately $79 for each additional increment of 2,000 -
3,000 vacation credits owned. These dues reflect an increase effective October
1, 2001. Previously dues were $325 for the first 6,000 vacation credits owned,
plus approximately $76 for each additional increment of 2,000 - 3,000 vacation
credits owned. Dues are intended to cover WorldMark's operating costs, including
condominium association dues at the WorldMark resorts. We pay WorldMark the dues
on the unsold vacation credits we own. These payments totaled $1.7 million, $1.0
million, and $1.4 million in 2001, 2000, and 1999, respectively.
WorldMark has a five-member board of directors that manages its business and
affairs. Three of the directors of WorldMark are also current or former officers
of Trendwest. The Board must obtain the approval of a majority of the voting
power of the owners represented (excluding Trendwest) to take certain actions,
including (i) incurrence of capital expenditures exceeding 5% of WorldMark's
budgeted gross expenses during any fiscal year and (ii) selling property of
WorldMark during any fiscal year with an aggregate fair market value in excess
of 5% of WorldMark's budgeted gross expenses for such year.
We have a management agreement with WorldMark under which we act as the
exclusive manager and servicing agent of WorldMark and the vacation owner
program. Our responsibilities under the management agreement include general
management of WorldMark, overseeing the property management and service levels
of the resorts, and preparing financial forecasts and budgets for WorldMark. The
management agreement provides for automatic one-year renewals unless such
renewal is denied by a majority of the voting power of the owners (excluding
us). As compensation for our services, we receive the portion of total revenues
received by WorldMark remaining after WorldMark pays or reserves for its
expenses plus reserves for repair and replacement of resorts. This amount is
subject to a ceiling equal to 15% of the budgeted annual expenses and reserves
of WorldMark (exclusive of our fee). Our management revenues from WorldMark for
the years ended December 31, 2001, 2000, and 1999 were approximately $3.2
million, $3.9 million and $3.0 million, respectively.
WorldMark has programs whereby an owner can use his or her vacation credits
toward other vacation options such as package tours and cruises. WorldMark
provides the owner with the package in exchange for the owner's vacation credits
plus cash, if necessary. The vacation credits are deposited into a pool of
credits. The pool of credits is available to us for a fee of $0.07 per credit or
for one-time use to owners for a fee of $0.08 per credit. In 2001, we purchased
$2.5 million of these one-time use vacation credits from WorldMark for marketing
programs.
2
(ii) WorldMark South Pacific Club
On October 22, 1999, we formed a wholly-owned Australian subsidiary, Trendwest
South Pacific, Pty. Ltd., to conduct sales, marketing, and resort development
activities in Australia and the South Pacific. Trendwest South Pacific was the
first company licensed under the new timeshare regulations in Australia.
WorldMark South Pacific was formed by Trendwest South Pacific in 2000 as a unit
trust and a registered managed investment scheme to own, operate, and manage the
real property conveyed to it by Trendwest South Pacific. WorldMark South Pacific
is not part of us, and its operations are not included in our consolidated
financial statements. Owners receive the right to use all resort units and the
right to vote with respect to certain major matters. The number of votes that
each owner has is based on the number of vacation credits owned. Trendwest South
Pacific is the manager of WorldMark South Pacific. As of December 31, 2001,
there were nearly 6,000 owners in WorldMark South Pacific.
The resorts are owned by WorldMark South Pacific free and clear of all monetary
encumbrances. The title to the resort properties are held in trust for the
benefit of the owners by an independent custodian, Permanent Trustee Australia
Limited. WorldMark South Pacific maintains a replacement reserve for its
resorts, which is funded from the annual assessments of the Owners. The
replacement reserve is utilized to refurbish and replace the interiors and
furnishings of the condominium units. As of December 31, 2001, WorldMark South
Pacific had a reserve for replacement costs of approximately $0.2 million.
The operation of WorldMark South Pacific is similar to the US operations of
WorldMark. WorldMark South Pacific owners may also purchase bonus time.
WorldMark and WorldMark South Pacific have reciprocal exchange privileges for
their respective owners. The credit values in WorldMark South Pacific are
consistent with WorldMark.
WorldMark South Pacific collects maintenance dues from owners based on the
number of vacation credits owned. Currently, the annual dues are AUD $358 for
the first 6,000 Vacation Credits owned, plus approximately AUD $82 for each
additional increment of 2,000 - 3,000 vacation credits owned. These dues are
intended to cover operating costs, including condominium association dues at the
resorts. Trendwest South Pacific pays the dues on the unsold vacation credits
they own. Such payments totaled $0.2 million and $0.3 million for the years
ended December 31, 2001 and 2000, respectively.
WorldMark South Pacific is managed by Trendwest South Pacific. Certain matters
require the approval of a majority of the voting power of the owners represented
(excluding Trendwest South Pacific) to take certain actions, including (i)
incurrence of capital expenditures or special assessments exceeding 5% of
WorldMark South Pacific's budgeted gross expenses during any fiscal year and
(ii) special assessments selling property of WorldMark South Pacific during any
fiscal year with an aggregate fair market value in excess of 5% of WorldMark
South Pacific's budgeted gross expenses for such year.
Through our subsidiary, Trendwest South Pacific, we have a management agreement
with WorldMark South Pacific under which we act as the exclusive manager and
servicing agent of WorldMark South Pacific and the vacation owner program. Our
responsibilities under the management agreement include general management of
WorldMark South Pacific, overseeing the property management and service levels
of the resorts, and preparing financial forecasts and budgets for WorldMark
South Pacific. The management agreement provides for automatic five-year
renewals beginning in 2005 unless such renewal is denied by a majority of the
voting power of the owners (excluding us). As compensation for our services, we
receive a management fee of 15% of WorldMark South Pacific's expenditures
(exclusive of our fee). Our management revenues from WorldMark South Pacific for
the years ended December 31, 2001 and 2000 were approximately $0.2 million and
$0 million, respectively.
3
The Resorts
The following table sets forth certain information as of December 31, 2001,
regarding each existing resort, planned expansion at existing resorts through
2002, and planned new resorts through 2003:
[Enlarge/Download Table]
Existing
Units
Date in Planned Total Units
Existing Resorts Location Contributed(a) Service Expansion Anticipated II Rating (b) RCI Rating (c)
------------------- -------------- --------------- ---------- --------- ----------- ------------- --------------
Arizona
Pinetop Pinetop/Lakeside August 1999 60 -- 60 Five Star Gold Crown
Vistoso Tucson December 1999 110 -- 110 Five Star Gold Crown
Bison Ranch Bison Town May 2001 41 -- 41 Five Star Gold Crown
Australia
Gold Beach (d) Caloundra, QLD June 2000 19 -- 19 Five Star (e)
Calypso Plaza (d) Coolangatta, QLD April 2000 10 -- 10 (b) (e)
Trinity Links (d) Cairns, QLD August 2000 12 -- 12 Five Star (e)
Horizon (d) Port Stephens,
New South Wales March 2001 10 -- 10 Five Star (e)
Pacific Bay (d) Coffs Harbour,
New South Wales November 2001 15 -- 15 (i) (e)
British Columbia
Sundance Whistler February 1992 25 -- 25 Five Star Gold Crown
Cascade Lodge Whistler September 1999 42 -- 42 Five Star Gold Crown
The Canadian Vancouver April 2000 42 -- 42 Five Star Gold Crown
California
North Shore Estates Bass Lake October 1991 61 -- 61 Five Star Gold Crown
Beachcomber Pismo Beach April 1993 20 -- 20 (b) R.I.D.
Palm Springs Palm Springs July 1995 64 -- 64 (b) R.I.D.
Big Bear Big Bear Lake April 1996 58 57 115 Five Star Gold Crown
Clear Lake Nice July 1998 88 -- 88 Five Star Gold Crown
Angels Camp Angels Camp September 1998 100 11 111 Five Star Gold Crown
Marina Monterey Bay November 1999 33 -- 33 Five Star Gold Crown
Oceanside Oceanside September 2001 138 -- 138 Five Star Gold Crown
Colorado
Steamboat Springs Steamboat Springs December 2000 34 -- 34 Five Star Gold Crown
Fiji
Denarau Island (f) Denarau Island December 1999 87 -- 87 Five Star Gold Crown
Hawaii
Valley Isle Maui April 1990 14 -- 14 Five Star Gold Crown
Kapaa Shores Kauai July 1991 49 -- 49 (b) R.I.D.
Kona Hawaii November 1997 64 -- 64 Five Star Gold Crown
Kihei Maui December 2001 199 -- 199 Five Star Gold Crown
Idaho
Arrow Point Coeur D'Alene September 2000 40 -- 40 Five Star Gold Crown
McCall McCall September 2001 20 -- 20 Five Star Gold Crown
Mexico
Coral Baja San Jose del Cabo November 1994 136 -- 136 Five Star Gold Crown
La Paloma Rosarita Beach August 2000 37 -- 37 Five Star Gold Crown
Missouri
Lake of the Ozarks Ozarks December 2000 70 -- 70 Five Star Gold Crown
Branson Branson August 2001 80 -- 80 Five Star Gold Crown
Nevada
Lake Tahoe Stateline January 1991 50 -- 50 (b) R.I.D
Las Vegas Las Vegas December 1996 42 -- 42 Five Star Gold Crown
Reno Reno November 2000 63 -- 63 Five Star Gold Crown
4
Existing
Units
Date in Planned Total Units
Existing Resorts Location Contributed(a) Service Expansion Anticipated II Rating (b) RCI Rating (c)
------------------- -------------- --------------- ---------- --------- ----------- ------------- --------------
Oregon
Eagle Crest Redmond September 1989 111 -- 111 Five Star Gold Crown
Gleneden Beach Lincoln City March 1996 80 -- 80 Five Star Gold Crown
Running Y Ranch Klamath Falls February 1997 94 -- 94 Five Star Gold Crown
Schooner Landing Newport September 1997 13 (g) -- 13 Five Star Gold Crown
Depoe Bay Depoe Bay April 1999 110 -- 110 Five Star Gold Crown
Utah
Wolf Creek Eden June 1998 71 (h) -- 71 Five Star Gold Crown
Harbor Village Bear Lake January 1999 26 -- 26 Five Star Gold Crown
St. George St. George December 2000 59 -- 59 Five Star Gold Crown
Washington
Lake Chelan Shores Chelan August 1990 13 -- 13 Five Star Gold Crown
Surfside Long Beach September 1991 25 -- 25 (b) R.I.D.
Discovery Bay Sequim January 1992 47 -- 47 Five Star Gold Crown
Park Village Leavenworth July 1992 72 -- 72 Five Star Gold Crown
Mariner Village Ocean Shores June 1994 32 -- 32 Five Star Gold Crown
Birch Bay Blaine January 1995 103 -- 103 Five Star Gold Crown
[Enlarge/Download Table]
Existing
Units
Expected In Planned Total Units
Planned Resorts Location Completion Service Expansion Anticipated
------------------ ---------------- ------------ -------- --------- -----------
Las Vegas Las Vegas, NV August 2002 -- 207 407
Kirra Beach Kirra Beach, October 2002 -- 104 104
Queensland,
Australia
South Lake Tahoe Lake Tahoe, NV January 2003 -- 51 51
Victoria Victoria, B.C. February 2003 -- 91 91
Seaside Seaside, Oregon June 2003 -- 171 171
Solvang Solvang, CA September 2003 -- 89 89
Sonoma Sonoma, CA September 2003 -- 150 228
---------- ------------ -------------
Total 2,789 931 3,998
========== ============ =============
(a) The dates in this column indicate, for each resort, the month and year in
which the first completed units at such resort were transferred to
WorldMark or WorldMark South Pacific. At certain resorts, additional units
were transferred to WorldMark at later dates.
(b) Five Star is the only resort rating awarded by II. These resorts did not
attain a Five Star rating.
(c) Gold Crown and Resort of International Distinction ("R.I.D.") are resort
ratings awarded annually by RCI. As of December, 2001 approximately 19% of
all resorts reviewed by RCI received a Gold Crown rating, the highest
rating awarded by RCI, and approximately 13% of all resorts reviewed by RCI
received an R.I.D. rating, the second-highest rating awarded by RCI.
(d) These units are deeded to WorldMark South Pacific Club.
(e) The units in WorldMark South Pacific participate in the exchange network
with Interval International and are not rated by RCI.
(f) 66 units were deeded to WorldMark and 21 units deeded to WorldMark South
Pacific.
(g) We purchased 659 weeks of time per year from Schooner Landing and deeded
the rights to this time to WorldMark. This is equivalent to 13 condominium
units.
(h) We purchased 490 weeks of time per year from Wolf Creek and deeded the
rights to this time to WorldMark. This is equivalent to 9 condominium
units. We constructed the remaining 62 units.
(i) This resort has not yet been rated by II.
5
Sales and Marketing
We use a variety of marketing programs to attract prospective owners, including
sponsored promotional contests offering vacation packages or gifts, targeted
mailings and telemarketing efforts, and various other promotional programs. We
also co-sponsor sweepstakes, giveaways and other promotional programs with
professional teams at major sporting events (such as Portland Trail Blazers
basketball games and Seattle Mariners baseball games) and with supermarkets. We
continually monitor and adjust our marketing programs to improve efficiency. We
target prospective owners through an analysis of age, income and travel
interests.
Our sales of vacation credits primarily occur at 29 off-site sales offices
located in metropolitan areas in six regions, including the South Pacific. The
remainder of our vacation credit sales occur at 16 on-site sales offices. Our
fractional interest sales activity occurs on-site at the Depoe Bay resort. In
2001, 85% of our vacation credit sales were generated by off-site sales offices.
We believe the advantages of using off-site sales offices compared to sales
offices located at more remote resorts include:
>> access to larger numbers of potential customers
>> convenience for prospective customers to attend a sales presentation
>> access to a wider group of qualified sales personnel due to more convenient
work locations
>> ability to open new sales offices easily, and
>> lower marketing costs to attract prospective customers to visit an off-site
sales office.
Our off-site sales offices include a theater, sales area, and reception area.
Each off-site sales center is staffed by a sales manager, an office
administrator, approximately 10 to 25 salespeople, two developer's
representatives, and additional staff for guest registration and clerical
assistance. Our salespeople spend approximately 90 minutes with each potential
owner viewing videos of our resorts, answering customers' questions, and
providing detailed information regarding our vacation ownership opportunities.
The on-site sales offices generally include similar facilities and a smaller
number of staff compared to the off-site sales offices.
Printed information regarding Trendwest and the resorts, as well as the rights
and obligations of owners, is provided to each prospective member before
vacation ownership interests are sold. Prior to finalizing a sale, each new
owner meets with one of our developer representatives to discuss the new owner's
reasons for joining and to review the rights and obligations of owners. The
purpose of this meeting is to allow prospective owners to review their proposed
commitment in an environment separate from the sales process.
Under the laws of each state where we sell vacation ownership interests, each
purchaser has a right to rescind the purchase for a period ranging from three to
fifteen calendar days, depending on the state, following the later of the date
the contract was signed or the date the purchaser received the last of the
documents required to be provided by the Company. Our current practice is to
allow all purchasers a minimum rescission period of seven days, even if state
law allows a shorter period. During 2001 and 2000, the Company had a rescission
rate of 16.2% for both years, which is consistent with our historical
experience.
We offer existing Owners cash awards for referrals of potential new owners. We
maintain a staff of marketing individuals who specialize in promoting referrals
by existing owners. In addition, as part of our ongoing marketing efforts, we
offer existing owners the opportunity to purchase additional vacation credits
generally at a discount from the current price. Owners may purchase additional
vacation credits in increments of 1,000 credits. We currently employ 61 sales
representatives who specialize in upgrade sales. Many customers purchase more
than one upgrade over time, generally at a discount from the purchase price.
These sales provide a higher gross margin than other vacation credit sales due
to substantially lower marketing costs and lower sales commissions. Sales of
vacation credits from our owner referral program and upgrade sales contributed,
in the aggregate, approximately 26.0% and 26.9% of our net vacation credit sales
in 2001 and 2000, respectively.
6
Customer Financing
Since an important component of our sales strategy is the affordability of
vacation credits, we believe that we will continue to finance a significant
portion of our sales. In 2001, the average new owner purchased approximately
6,528 vacation credits for a purchase price of approximately $9,172. We financed
approximately 87% of the aggregate purchase price of vacation credits sold to
new owners with an average new note receivable of approximately $8,256. During
2001, the aggregate amount of notes receivable generated in connection with the
sale of vacation credits to new owners was approximately $302.3 million. Both
vacation credit and fractional interest sales require a down payment of at least
10% of the purchase price. Notes receivable relating to vacation credit sales
have terms of up to seven years at interest rates of 11.9% to 14.9%. Notes
receivable relating to fractional interest sales have terms of up to ten years
at interest rates of up to 11.9%.
Existing owners purchasing additional vacation credits must either make a down
payment of 10% of the price of the upgrade sale or have sufficient equity in
their existing vacation credits to provide at least 10% of the value of all
vacation credits, including the upgrade. The amount of the existing receivable
is often cancelled, and a new seven-year note secured by an interest in all
vacation credits owned is issued.
At December 31, 2001, an aggregate of $665.9 million of notes receivable were
outstanding. Of this amount, $61.7 million is unencumbered and $604.2 million
has been transferred into special purpose finance entities in securitization
transactions which qualify as sales of notes receivable. We receive proceeds
from these securitization transactions upon transfer of the notes receivable to
the finance entities and, subsequently as we receive an interest rate
differential and cash collections on the overcollateralized component of the
transferred receivables. At December 31, 2001, the fair value of the interest
rate differential of notes receivable securitized was $74.2 million, and the
gross amount of the overcollateralized component was $74.9 million. Our loss
exposure for notes receivable securitized is limited to the residual interest in
notes receivable securitized. Although we are not required to do so, our
historical practice has been to repurchase defaulted securitized notes
receivable up to certain limits, generally 10% to 17% of the face amount of the
original balance of notes receivable securitized. We expect to continue to sell
a substantial amount of our notes receivable in the future.
Notes receivable become delinquent when a scheduled payment is 30 days or more
past due and reservation privileges are suspended when a scheduled payment is 60
days or more past due. At December 31, 2001, approximately $16.1 million, or
2.42% of our total receivables portfolio serviced of $665.9 million, were past
due 60 days or more. Our practice is to accrue 100% of the interest on notes
receivable up to 60 days past due and 50% of the interest on notes receivable 60
to 90 days past due. Interest is not accrued on notes receivable more than 90
days past due. When we write off uncollectible notes receivable (generally when
the receivable becomes 180 days past due), we reverse any interest that had been
accrued, reclaim the related vacation credits that secure such notes receivable,
and return such vacation credits to inventory as available for resale. In the
event of default of a fractional interest, we foreclose or offer a deed in lieu
of foreclosure on the title and remarket the interest.
We maintain an allowance for doubtful accounts on all notes receivable. We
estimate our allowance for doubtful accounts by analysis of bad debts by each
sales site by year of note receivable origination. We use this historical
analysis in conjunction with other factors such as local economic conditions and
industry trends. We also utilize experience factors of more mature sales sites
in establishing the allowance for bad debts at new sales offices. The aggregate
amount of this allowance, excluding an allowance for sales reversals, at
December 31, 2001 and 2000 was $51.9 million and $38.9 million, respectively,
representing approximately 7.8% and 7.7%, respectively, of the total portfolio
of notes receivable outstanding at those dates. The increase in the provision as
a percentage of the total portfolio reflects sales growth in new sales offices
with expected default rates higher than our historical average. No assurance can
be given that this allowance will be adequate, and if the amount of the notes
receivable that is ultimately written off materially exceeds the related
allowance, our business, results of operations and financial condition could be
materially adversely affected.
Loan Servicing
We perform our note servicing function in-house. We have retained other third
parties to provide many functions including the lockbox function, custodial and
statement rendering services. As servicer, we are responsible for the
maintenance of the accounts receivable file, all billing and collection
activities, including daily disbursements of
7
collected funds to the Trustees of the various securitizations. In addition, we
handle all personal interaction with the owners, including the collection
process.
Property Ownership
(i) Vacation Credits
We transfer, or arrange for the seller of the property to transfer, title to the
property to the Clubs in return for vacation credits and the exclusive right to
sell vacation credits. The Clubs are contractually prohibited from revoking such
rights or transferring them to another party.
When we purchase resort property, we vest the title to the property in the
Clubs, free and clear of any debt encumbrance. For properties we develop, we may
initially obtain title in the undeveloped property and then deed the developed
resort property to the Clubs. At the time we vest title to the property in
WorldMark, the Club, a "Declaration of Vacation Owner Program" is recorded
against the property. This declaration establishes the usage rights of owners as
a covenant on title, thus protecting those rights against the effect of any
future encumbrance. This ownership structure is designed to protect the
timeshare usage rights of the owners and comply with statutory regulations.
Title to the properties in WorldMark South Pacific is held by a third party
custodian for the benefit of the owners. This preserves the title against future
encumbrance and protects the owners' usage rights.
Vacation credits are allocated to each unit based on its vacation use value
relative to existing properties. Vacation credits are assigned for weeks of
peak, shoulder and off-peak use, reserving time for bonus time, repairs and
maintenance. At non-exotic resorts (exotic resorts are Hawaii, Mexico and Fiji),
only 48 weeks of time of each unit are available for sale to owners leaving 4
weeks for bonus time and maintenance and upkeep on the units. At exotic
locations, 51 weeks of time of each unit are available for sale to owners
leaving the remaining time for maintenance and upkeep. The aggregate vacation
credits assigned to each unit may not be increased in the future, and the actual
number of credits assigned are contained in the recorded declaration. This
system of irrevocable allocation and registration with the state protects the
owners by preventing dilution in the usage value of the owner's vacation
credits.
(ii) Fractional Interests
Fractional interests represent deeded intervals in condominium units. The
purchaser of a fractional interest owns an equal share of the condominium and
pays maintenance dues to a homeowner's association made up of other fractional
owners.
Fractional owners have been deeded specific weeks of time spaced evenly
throughout the year. The current fractional project at Depoe Bay in Oregon is
sold in 13th share increments. Each share represents four one-week intervals
thirteen weeks apart. These intervals rotate forward one week each year allowing
a fractional owner to have access to every calendar week over a thirteen year
period.
Participation in Vacation Interval Exchange Networks
We believe that the sale of our vacation ownership products is made more
attractive by our participation in the vacation interval exchange networks
operated by Interval International (II) and Resort Condominiums, International
(RCI). U.S. vacation credit owners participate in II and RCI; fractional
interest owners and South Pacific Owners participate in II.
Competition
We are subject to significant competition from other entities engaged in the
business of resort development, sales and operation, including vacation interval
ownership, condominiums, hotels and motels. See "Risk Factors - Competition".
Employees
As of December 31, 2001, we had approximately 4,000 full-time employees. We
believe that our employee relations are good. None of our employees are
represented by a labor union.
We prefer to fill promotional opportunities from within our existing staff. To
support this philosophy, a full array of training curriculums have been designed
and offered. These "in-house" training courses range from curriculums
8
including management training, product knowledge, recruiting and interviewing,
employee orientation, and job specific training such as Best Sales Practices and
Customer Service.
We maintain several employee benefits such as a 401(k) plan, an Employee Stock
Purchase Plan, and an incentive stock option plan for certain employees. Our
Employee Stock Purchase Plan allows employees to purchase company stock through
a payroll deduction, with certain provisions, at a discount.
RISK FACTORS
In addition to the other information contained in this Form 10-K, the following
risk factors should be carefully considered in evaluating our business and us.
We caution the reader that this list of risk factors may not be exhaustive. This
document contains forward-looking statements that involve risks and
uncertainties. Our actual results and the timing of certain events could differ
materially from those anticipated by such forward-looking statements as a result
of certain factors, including the factors set forth below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as those discussed elsewhere in the Form 10-K.
Dependence on Acquisitions of Additional Resort Units for Growth; Need for
Additional Capital
Because the units are conveyed directly to the Clubs free of any monetary
encumbrances, we must pay the full cost of a resort prior to selling any
vacation credits attributable to that resort. Likewise, we incur sales and
marketing expenses prior to realizing cash proceeds from the sale of vacation
credits. Since we generally finance a large percentage of the aggregate purchase
price of the vacation credits we sell, we do not generate sufficient cash from
sales to provide the necessary capital to pay the costs of developing additional
resorts and to replenish working capital. Our principal source of funding cash
requirements is borrowing against and selling the receivables from the sale of
vacation credits. It is possible that we may not be able to borrow against or to
sell these receivables in the future, particularly if we suffer any significant
decline in the credit quality of these receivables. If we are unable to obtain
sufficient debt or equity financing, our ability to acquire additional resort
units will be adversely affected and our profitability from sales of vacation
credits may be reduced or eliminated.
Risks Associated with Development and Construction Activities
Our future growth and financial success depend, to a significant degree, on the
availability of attractive resort locations and our ability to acquire and
develop additional resort units on favorable terms. The number of vacation
credits we can sell depends upon the number of resort units that we have
transferred to the Clubs. If we do not continually add resort units or if the
new units are not located in vacation areas desired by our prospective
customers, our sales of vacation credits will suffer. The acquisition and
development of resorts involve risks, including that construction costs may
exceed original estimates or construction or permitting may not be completed on
schedule, resulting in increased interest expense and delays in the availability
for sale of vacation credits. In addition, although our construction activities
are generally performed by third-party contractors, it is possible that
construction claims may be asserted against us for construction defects and such
claims may give rise to liabilities. If we are unable to acquire and develop
additional resorts, or face delays or excessive costs in doing so, our ability
to sell vacation credits will be impaired and our profits will be reduced. We
currently have purchase agreements, developments in progress or plans to obtain
additional resort units that will satisfy our anticipated sales volumes of
vacation credits through the end of 2003. It is possible that not all of these
units will be acquired or completed on a timely basis or at all, which would
adversely affect our ability to sell vacation credits.
Risks Associated with Developing MountainStar
We are currently developing 7,400 acres located 80 miles east of Seattle,
Washington. We plan to develop the property as two separate projects: the
MountainStar Master Planned Resort and the City of Cle Elum Urban Growth Area, a
Master Planned Community.
Plans for the 6,300 acre Master Planned Resort include at least two golf
courses, numerous recreational amenities and 3,785 dwelling units. Before we can
begin development of the Master Planned Resort, we must finalize sewer
availability with the City of Cle Elum and transfer our water rights for the
project. The Master Planned Resort land use plan has been approved by Kittitas
County, and all appeals have been settled. We are working on several strategies
to
9
transfer our water rights to develop the proposed projects. If we cannot
transfer our water rights, development of the property may not occur as planned.
The 1,100 acre Urban Growth Area project is planned as a mixed-use development
including a primary home community with single-family homes, condominiums, an
office park, a golf course and apartment units. The city of Cle Elum will
release the Final Environmental Impact Statement on March 18, 2002. The
entitlement process for the project is independent from the entitlement process
for the Master Planned Resort except for water rights transfer and sewer
availability. Without the necessary governmental approvals and water rights
transfers, development of the Urban Growth Area may not occur as planned.
In the event that we cannot develop either or both projects as planned due to
our inability to obtain final government approvals, our inability to secure the
necessary water rights transfers or for other reasons, we have developed an
alternative strategy for disposition by selling large lot parcels.
We have not previously developed projects of the scope and cost of the
MountainStar Master Planned Resort and the Urban Growth Area in the City of Cle
Elum. We have hired project managers with extensive experience in the
development of master planned resorts and communities. As development activities
increase, we will need to hire other experienced managers, contractors and
consultants in order to successfully complete the project. Even with experienced
development managers, we may encounter design, development or construction
problems and delays that are not anticipated and that may cause the total cost
and actual development time of the projects to exceed our current estimates.
The MountainStar Master Planned Resort and the Urban Growth Area project will
require substantial capital over the life of these projects. We anticipate that
we will borrow a substantial portion of the required capital. If the development
is delayed or if we do not generate the anticipated revenues from the projects,
the increased interest expense as a result of these borrowings will affect our
net income and the related indebtedness may affect our financial position.
Factors Affecting Sales Volume
As the number of potential customers in the geographic area of a sales office
who have attended a sales presentation rises, we may have increasing difficulty
in attracting additional potential customers to a sales presentation at that
office, and it may become increasingly difficult to maintain current sales
levels at our existing sales offices. We anticipate that a substantial portion
of our future sales growth will depend on the opening of additional sales
offices. Sales from existing or new sales offices may not meet our expectations.
In such event, fixed expenses and excess inventory will need to be promptly
reduced in order to avoid significant harm to our business. Our efforts in this
respect may not be successful. Further, since we presently depend on
telemarketing activity to contact prospects and invite guests to attend a sales
presentation, our sales volume could also be reduced if our ability to use this
marketing technique is disrupted by government regulation, decreased customer
acceptance or otherwise.
Geographic Concentrations
We intend to expand our resort locations and our sales offices into market areas
where we presently do not have operations. Due to our lack of familiarity with
these new markets, we could encounter problems in locating and acquiring resort
units or in marketing vacation credits that we did not foresee. These problems
could lead to decreased sales growth and increased operating costs, thereby
decreasing our net income.
General Economic Conditions; Concentration in Timeshare Industry
A prolonged economic slowdown or a lengthy or severe recession could hurt our
operations. The risks associated with our business are more acute during periods
of economic slowdown or recession because these periods may be accompanied by
decreased discretionary consumer spending, adversely affecting our sales of
vacation ownership interests. Any significant worsening in economic conditions
or price increases or adverse events related to the travel and tourism industry
could also reduce our sales. These same economic conditions may also limit the
future availability of attractive financing rates for us or our customers which
may also materially impact our business. We may also experience decreased
collectibility and saleability of our notes receivable used to finance our
operations. Since our target customers include those with moderate income
levels, these individuals may be affected more negatively by an economic
downturn than higher income individuals. We presently sell vacation credits
primarily through off-site sales
10
offices in the western United States. Accordingly, we are particularly
vulnerable to regional conditions, such as energy costs, in this area of the
country. Further, as our operations are conducted solely within the timeshare
industry, any adverse changes affecting the timeshare industry could have a
material adverse effect on our business, results of operations, and financial
condition.
Risks Associated with Customer Financing
We face certain credit risks related to our customer financing. Although we
obtain a security interest in the vacation credits and fractional interests
purchased by our customers, we do not verify a prospective owner's credit
history for vacation credit sales. Our loss exposure for notes receivable
securitized is limited to the residual interest in notes receivable securitized.
The value of our residual interest in securitizations, net may also be
diminished if actual prepayments exceed our estimates. As general interest rates
decrease and remain at historically low levels for extended periods, the
likelihood of early prepayments will probably increase. Trends in our portfolio
during January and February 2002 indicate increased prepayment rates over
historical amounts.
Our historical practice has been to voluntarily repurchase defaulted securitized
notes receivable. We then write off any notes receivable deemed uncollectible
and reclaim and return to inventory the related vacation credits or fractional
interests that secure such notes receivable. However, we are not able to recover
the associated marketing costs and sales commissions and these expenses must be
incurred again to resell the vacation credits or fractional interests.
We maintain an allowance for doubtful accounts on all notes receivable. However,
these allowances are estimates and if the amount of our interest in the notes
receivable that is ultimately uncollectible materially exceeds the related
allowances, our results of operations and financial condition could be harmed.
Interest Rate Risk
We generally provide financing for a significant portion of the aggregate
purchase price of vacation credits and fractional interests sold at a fixed
interest rate. We then sell the notes receivable in order to provide liquidity.
If interest rates were to increase significantly our net income from financing
would be reduced, since we would probably not increase the interest rate offered
to finance vacation credit and fractional interest purchases. Conversely, if
interest rates were to decrease and remain at historically low levels for
extended periods, the likelihood of early prepayments will probably increase,
and customers will seek alternative financing, reducing our net income from
financing.
Risk Associated with Rapid Growth
We have grown rapidly and plan to continue to grow in the future. Rapid
increases in the number of owners, the amount of notes receivable and the number
of resorts and sales offices will require the acquisition of additional
management, administrative and sales personnel and sophisticated technology and
control systems to service the increased number of Club owners and prospective
customers and to manage our business, which we may not be able to do. If we do
not properly manage the Clubs' operations or the servicing of the notes
receivable, we could experience increased dissatisfaction by the Clubs' owners,
which could lead to lower sales volumes and increased defaults on the notes
receivable or in extreme cases, efforts to replace us as manager of the Clubs.
Foreign Exchange Risk
We are subject to foreign currency exchange rate risk when developing resort
properties and incurring costs denominated in a foreign currency and on sales
operations in the South Pacific. While we intend to mitigate our foreign
exchange risk through swap agreements and borrowings denominated in foreign
currencies, no assurance can be given that these strategies will be successful
and changes in foreign currency exchange rates could therefore have a materially
adverse effect on our business, results of operations, and financial condition.
From time to time, we may be exposed to losses in the event of nonperformance by
the counterparties to our forward swap agreements used to hedge foreign exchange
risks. We do not obtain collateral to support financial instruments but monitor
the credit standing of the counterparties.
11
Risks Associated with International Development
We are subject to risks arising from developing resort properties and sales and
marketing activities in the South Pacific. We have registered our product under
Australian regulations and are currently engaged in sales operations there.
Unlike the United States, Australian law requires a vacation ownership interest
to be sold as a security. Many, if not all of the risks described herein, are
potential risk factors for development activities in the South Pacific.
Competition
We compete with other entities engaged in the business of resort development,
sales and operation, including vacation interval ownership, condominiums, hotels
and motels, for the sales of vacation ownership interests and for the
acquisition of resale units. We may not be able to successfully compete against
these entities. In addition, resales of vacation credits by owners may compete
with our sales of new vacation credits and may inhibit our ability to increase
the market price of our vacation credits.
Regulation of Marketing and Sales of Vacation Credits; Other Laws
Our marketing and sales of vacation credits and other operations are extensively
regulated by the federal government and by the states and foreign jurisdictions
in which the Clubs' resorts are located and in which vacation credits are
marketed and sold.
State and Provincial Regulations. Most U.S. states and Canadian provinces have
adopted specific laws and regulations regarding the sale of vacation interval
ownership programs. We have registered our resorts, our vacation program, and
the number of vacation credits available for sale within the following
jurisdictions: Alaska, Arizona, Arkansas, California, Colorado, Idaho, Illinois,
Iowa, Kansas, Kentucky, Louisiana, Minnesota, Mississippi, Missouri, Montana,
Nevada, Oklahoma, Oregon, Tennessee, Utah, Washington, Wisconsin, Wyoming, and
British Columbia. We are required to deliver a detailed offering statement
describing Trendwest and all material aspects of the project and sale of
vacation credits to all new purchasers of vacation credits, together with
certain additional information concerning the terms of the purchase. State laws
grant the purchaser from three to fifteen calendar days following the later of
the date the contract was signed or the date the purchaser received the last of
the documents we are required to provide to rescind the contract. Most states
also have other laws which regulate our activities, such as real estate
licensure laws, laws relating to the use of public accommodations and facilities
by disabled persons, sellers of travel licensure laws, anti-fraud laws,
advertising laws and labor laws.
Federal Regulations. The Federal Trade Commission has taken an active regulatory
role in the vacation interval ownership industry through the Federal Trade
Commission Act, which prohibits unfair or deceptive acts or competition in
interstate commerce. Other federal legislation to which we are or may be subject
includes the Truth-In-Lending Act and Regulation Z, the Equal Opportunity Credit
Act and Regulation B, the Interstate Land Sales Full Disclosure Act, the Real
Estate Standards Practices Act, the Telephone Consumer Protection Act, the
Telemarketing and Consumer Fraud and Abuse Prevention Act, the Civil Rights Act
of 1964 and 1968, the Fair Housing Act and the Americans with Disabilities Act.
Foreign Regulation. The sale of interval ownership programs in Australia is
regulated by the Australian Securities and Investment Commission. Trendwest
South Pacific is required to provide a prospectus to potential buyers. This
prospectus must be updated at least annually.
Although we believe that we are in material compliance with all federal, state,
local and foreign laws and regulations to which we are currently subject, we
cannot assure you that we are in fact, in compliance. Any failure to comply with
applicable laws or regulations could materially harm our business. In addition,
we will continue to incur significant costs to remain in compliance with
applicable laws and regulations, and such costs could increase substantially in
the future.
Possible Environmental Liabilities
We may be subject to liability under various federal, state, local and foreign
environmental laws. These laws generally hold the owner or operator of real
property liable for the costs of removal or remediation of certain hazardous or
toxic substances located on or in, or emanating from, such property, as well as
related costs of investigation and property
12
damage. These laws often impose such liability without regard to whether the
owner or operator knew of, or was responsible for, the presence of such
hazardous or toxic substances. Further, other federal and state laws require the
removal or encapsulation of asbestos containing material when such material is
in poor condition or in the event of construction, demolition, remodeling or
renovation, or may require the removal of underground storage tanks.
Noncompliance with these and other environmental, health or safety requirements
may result in the need to cease or alter operations at our properties. Although
we conduct an environmental assessment with respect to the properties we acquire
for the Clubs, we have not received a Phase I environmental report for every
resort. Further, it is possible that the environmental assessments we have
undertaken have not revealed all potential environmental liabilities, or that an
environmental condition otherwise exists.
Natural Disasters; Uninsured Loss
Although the Clubs maintain property and liability insurance for the units at
the resorts, this insurance coverage is subject to policy specifications,
insured limits and deductibles. In addition, certain types of losses, such as
losses arising from war or military action, nuclear hazard or pollution, are
generally excluded from the insurance coverage. Should an uninsured loss or loss
in excess of insured limits occur, the Clubs will be required to either (i)
remove such units from the vacation credit system, which would result in a
proportional dilution of vacation time available for the vacation credits which
have been sold, or (ii) pay the related costs of replacement. Although the Clubs
may impose a limited amount of special assessments to pay for capital
improvements or major repairs, the Clubs may not be able to obtain sufficient
funds to pay for all possible capital improvements and major repairs of the
units at the resorts through these assessments. In such event, we may need to
advance funds to the Clubs to maintain the quality of the resorts in order to
maintain owner satisfaction.
Effective Voting Control by Majority Shareholder
JELD-WEN, inc. owns approximately 81% of the outstanding shares of common stock.
This concentration of ownership gives JELD-WEN control of the election of
directors and the management and affairs of the company and sufficient voting
power to determine the outcome of all matters submitted to the shareholders for
approval, including mergers, consolidations and the sale of all, or
substantially all, of our assets.
Item 2. Properties
We own our corporate headquarters in Redmond, Washington, and lease office space
at various locations for sales offices, regional administration and marketing
purposes. We also own some condominiums at WorldMark properties that are used
for sales and marketing purposes. We believe that these facilities along with
additional leased office space will be sufficient to meet our needs for the
foreseeable future.
In the ordinary course of business, we purchase property for development and
deed said property to the Club(s) upon completion of the project. See "Business
- WorldMark".
Item 3. Legal Proceedings
We are not aware of any material legal proceedings pending against us. We may be
subject to claims and legal proceedings from time to time in the ordinary course
of business.
Item 4. Submission of Matters to a Vote of Securities Holders
There were no matters submitted to a vote of our equity holders during the
fourth quarter of 2001.
13
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Our common stock is quoted on the Nasdaq National Market under the symbol
"TWRI". The following table sets forth for the periods indicated, the high and
low sales price for Common Stock, as quoted on the Nasdaq National Market:
[Download Table]
High Low
--------------- ----------------
Year ended December 31, 2001
First quarter............................... $ 16.22 $ 10.19
Second quarter.............................. $ 19.23 $ 14.50
Third quarter............................... $ 17.94 $ 13.80
Fourth quarter.............................. $ 28.10 $ 16.67
Year ended December 31, 2000
First quarter............................... $ 11.33 $ 8.45
Second quarter.............................. $ 11.83 $ 7.09
Third quarter............................... $ 9.33 $ 7.11
Fourth quarter.............................. $ 12.67 $ 6.72
On March 26, 2002, there were approximately 52 holders of record of our common
stock and approximately 2,022 beneficial shareholders.
We have never declared or paid any cash dividends on our capital stock and do
not anticipate paying cash dividends on our common stock. We currently intend to
retain future earnings to finance our operations and fund the growth of our
business. Any payment of future dividends will be at the discretion of the Board
of Directors and will depend on, among other things, our earnings, financial
condition, contractual restrictions in respect of the payment of dividends, and
other factors the Board of Directors deems relevant.
On February 21, 2001, the Board of Directors declared a 3 for 2 stock split for
shareholders of record on March 15, 2001, payable on March 29, 2001. On November
8, 2001, the Board of Directors declared another 3 for 2 stock split for
shareholders of record on November 29, 2001, payable on December 14, 2001. In
accordance with accounting principles generally accepted in the United States of
America, all share data and earnings per share figures contained in this Form
10-K have been adjusted to reflect the stock splits as if they were effective
for all periods presented.
14
Item 6. Selected Financial Data
(dollars in thousands, except per share and operating data)
The selected data presented below under the captions "Statement of Operations
Data" and "Balance Sheet Data" is derived from the audited financial statements
of Trendwest Resorts, Inc. and subsidiaries. The information set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements for the Company and the notes thereto which are contained elsewhere
herein. The information presented below under the captions "Operating Data" and
"Selected Quarterly Financial Data" is derived from unaudited data. Share data
and earnings per share figures for all periods presented have been adjusted to
reflect the 3 for 2 stock splits declared by the Board of Directors on February
21, 2001, and November 8, 2001.
[Enlarge/Download Table]
Year Ended December 31,
--------------------------------------------------------------
2001 2000 1999 1998 1997
---------- ----------- ---------- ---------- ------------
Statement of Operations Data:
Revenues:
Vacation credit and fractional interest
sales, net.............................. $ 406,137 $ 293,130 $ 234,315 $ 170,817 $ 128,835
Finance income........................... 20,629 15,562 15,243 13,790 11,989
Gains on sales of notes receivable....... 30,268 18,903 16,265 10,959 6,582
Resort management services............... 4,607 4,763 3,710 2,328 2,032
Other.................................... 7,527 5,280 4,593 3,063 2,149
---------- ----------- ---------- ---------- ------------
Total revenues......................... 469,168 337,638 274,126 200,957 151,587
---------- ----------- ---------- ---------- ------------
Costs and operating expenses:
Vacation credit and fractional interest
cost of sales........................... 112,288 74,714 68,611 48,059 34,569
Resort management services............... 1,588 1,759 1,656 1,399 1,108
Sales and marketing...................... 193,531 137,752 104,952 83,347 59,448
General and administrative............... 43,481 31,686 25,234 17,180 13,449
Provision for doubtful accounts.......... 30,276 21,148 16,100 11,865 9,077
Interest................................. 591 479 442 353 1,739
---------- ----------- ---------- ---------- ------------
Total costs and operating expenses..... 381,755 267,538 216,995 162,203 119,390
---------- ----------- ---------- ---------- ------------
Income before income taxes................. 87,413 70,100 57,131 38,754 32,197
Income tax expense....................... 32,211 27,241 22,258 14,723 11,588
---------- ----------- ---------- ---------- ------------
Net income................................. $ 55,202 $ 42,859 $ 34,873 $ 24,031 $ 20,609
========== =========== ========== ========== ============
Net income per share of common stock:
Basic.................................... $ 1.46 $ 1.13 $ 0.90 $ 0.61 $ 0.59
Diluted.................................. $ 1.43 $ 1.12 $ 0.90 $ 0.61 $ 0.59
Shares used in computing net income per
share of common stock :
Basic.................................... 37,915,714 38,058,093 38,542,275 39,178,841 35,091,944
Diluted................................... 38,558,418 38,181,791 38,648,147 39,187,556 35,091,944
Operating Data:
Number of resorts (at end of period)....... 48 41 31 24 22
Number of units (at end of period)......... 2,789 2,093 1,635 1,272 928
Number of vacation credits sold (in
thousands)............................... 284,386 215,115 165,829 131,058 99,911
Average price per vacation credit sold..... $ 1.38 $ 1.36 $ 1.34 $ 1.28 $ 1.27
Average cost per vacation credit sold...... $ 0.37 $ 0.35 $ 0.37 $ 0.37 $ 0.35
Number of owners (at end of period)........ 149,648 112,384 87,432 67,982 51,778
Average purchase price for new owners...... $ 9,172 $ 9,193 $ 8,855 $ 8,477 $ 8,507
Balance Sheet Data:
Cash, including restricted cash............ $ 9,659 $ 7,605 $ 4,747 $ 2,360 $ 1,289
Total assets (1)........................... 427,029 320,159 192,752 187,248 142,993
Indebtedness to Parent and Affiliate ...... 24,951 18,150 -- 5,688 1,947
Other indebtedness......................... 85,934 60,137 3,900 30,000 --
Shareholders' equity....................... 265,511 207,443 173,715 141,262 122,125
(1) Certain reclassifications have been made to conform to the 2001
presentation.
15
Selected Quarterly Financial Data (1)
[Enlarge/Download Table]
2001 quarters ended
March 31 June 30 September 30 December 31
------------- -------------- ------------- --------------
Total revenues................... $ 104,962 $ 124,894 $ 129,087 $ 110,225
Total costs and operating 85,788 102,161 103,528 90,278
expenses.........................
Net income....................... 11,780 14,041 15,799 13,582
Net income per common share:
Basic........................ $ 0.31 $ 0.37 $ 0.42 $ 0.36
Diluted...................... $ 0.31 $ 0.36 $ 0.41 $ 0.35
2000 quarters ended
March 31 June 30 September 30 December 31
------------- -------------- ------------- --------------
Total revenues................... $ 73,194 $ 82,048 $ 94,877 $ 87,519
Total costs and operating 57,144 63,907 76,027 70,460
expenses.........................
Net income....................... 9,670 10,952 11,550 10,687
Net income per common share:
Basic........................ $ 0.25 $ 0.29 $ 0.31 $ 0.28
Diluted...................... $ 0.25 $ 0.29 $ 0.30 $ 0.28
(1) Certain reclassifications have been made to the selected quarterly
financial data above to conform to the annual presentation.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The statements below and other statements herein contain forward looking
information which include future financing transactions, acquisition of
properties, and our future prospects and other forecasts and statements of
expectations. Actual results may differ materially from those expressed in any
forward-looking statements made by us, due to, among other things, our ability
to develop or acquire additional resort properties, find acceptable debt or
equity capital to fund such development, as well as other risk factors as
outlined in the "Risk Factors" section of this Form 10-K.
Overview
We market, sell, and finance timeshare ownership interests in the form of
vacation credits and fractional interests and acquire, develop, and manage
resorts. We derive revenue primarily from the sale of vacation credits and
fractional interests, from the financing of vacation credits and fractional
interests, and from management fees generated from our management agreements
with the Clubs.
Sales of vacation credits, fractional interests, and additional vacation credits
to current owners (upgrade sales) are recognized on the accrual basis after we
have received an executed sales contract and a minimum 10% cash down payment,
and the rescission period (generally three to fifteen days) has passed. In
instances where we finance an upgrade sale and the customer does not make an
additional cash down payment of at least 10% of the upgrade sale, we use the
installment method to recognize revenue. Under the installment method, gross
profit on such upgrade sale is deferred and thereafter recognized in proportion
to each principal payment received. Revenue is fully recognized on the upgrade
sale when the principal collected related to the upgrade sale totals 10% of the
amount of the upgrade sale. In 2001, 77.5% of Upgrade Sales had the additional
10% cash down payment, as compared to 76.1% in 2000.
We acquire or develop additional resort units and contribute those units to the
Clubs, free of monetary encumbrances, thereby creating additional vacation
credits for sale. We also acquire or develop resort units for fractional
interest sales. Fractional interests represent deeded fixed intervals in
condominium units which we sell directly and are not contributed to the Clubs.
We assign each new resort unit a specific number of vacation credits based on
its vacation use value relative to existing resort units. Acquisition and
construction costs associated with the resort units are recorded as construction
in process inventory until their transfer to the Clubs, when they are recorded
as vacation credit inventory. Vacation credit and fractional interest cost of
sales are recorded as sales are recognized.
We provide financing at fixed interest rates from 11.9% to 14.9% per annum for
terms of up to seven years for vacation credits and up to ten years for
fractional interest sales. We routinely sell notes receivable to financial
institutions and other investors through securitization transactions to generate
liquidity to acquire or develop new resort units and for working capital. We
recognize a gain on the sale of notes receivable at the time of sale equal to
the excess of the proceeds received (cash plus residual interest in notes
receivable securitized) over the allocated carrying value of the
16
notes receivable securitized. Residual interest in securitizations, net
represents the overcollateralized component of notes receivable securitized
reduced by an allowance for doubtful accounts and deferred gross profit related
to the notes receivable securitized plus the fair value of the interest rate
differential of the notes receivable securitized. Changes in the fair value of
the interest rate differential are included in finance income.
We are currently working through the final entitlement process on the
MountainStar project and are capitalizing all direct costs and interest incurred
relating to the development. We do not anticipate generating revenue from the
project during 2002.
Critical Accounting Policies and Significant Estimates
The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to bad debts and the residual interest in notes receivable securitized.
We base our estimates on historical experience and on various other assumptions
that we believe are reasonable under the circumstances. The results form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
Our critical accounting policies and the related significant estimates are as
follows:
Revenue Recognition
(i) Vacation Credits
Substantially all vacation credits we sell generate installment notes receivable
secured by an interest in the related vacation credits. These notes receivable
are payable in monthly installments, including interest, with maturities up to
seven years. Vacation credit sales are included in revenues when we have
received an executed sales contract, at least a 10% down payment requirement has
been met and any rescission period has expired. Upgrade sales are subject to the
same rescission period as vacation credit sales.
Vacation credit cost of sales and direct selling expenses related to a vacation
credit sale are recorded at the time the sale is recognized. Vacation credit
costs include the cost of land, improvements to the property, including costs of
amenities constructed for the use and benefit of the vacation credit owners, and
other direct acquisition costs. Direct selling expenses are recorded as sales
and marketing expenses.
We also finance sales of upgrades which often result in the cancellation of an
existing note receivable and the issuance of a new note for a term of up to
seven years and secured by an interest in all vacation credits owned. No
additional down payment is required as long as the owner's equity interest in
the original vacation credits is equal to 10% of the value of all vacation
credits, including those from the upgrade sale, and the customer is not
delinquent in payments on the existing note receivable. Because the resulting
note receivable is secured by an interest in all vacation credits owned, when we
finance an upgrade sale and the customer does not make an additional down
payment of at least 10% of the upgrade sale amount, we use the installment
method to recognize revenue whereby profit is recognized as a portion of each
principal payment is received on the upgrade. Revenue is fully recognized on the
upgrade sale when the cash collected relating to the upgrade sale totals 10% of
the upgrade sale. Cash collected relating to a financed upgrade sale is measured
as the sum of any additional down payment received at the time of the upgrade
sale and the principal repayment of the new note receivable which is allocable
to the upgrade sale. Principal repayments are allocated to the upgrade sale
component of the new note receivable and the pre-upgrade sale component of the
new note receivable based on the ratio of such components at the time of the
upgrade sale.
(ii) Fractional Interests
Fractional interest sales are included in revenues when we have received an
executed sales contract, at least a 10% down payment requirement has been met,
and any rescission period has expired.
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Fractional interest marketing and overhead costs are expensed as incurred.
Fractional interest cost of sales and direct selling expenses related to a
fractional interest sale are recorded at the time the sale is recognized.
Fractional interest costs include the cost of land, improvements to the
property, including costs of amenities constructed and other direct acquisition
costs. Direct selling expenses are recorded as sales and marketing expenses.
(iii) Sales of Notes Receivable
Periodically, we sell our notes receivable through securitization transactions
which we account for according to the provisions of SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities.
When we sell notes receivable through securitization transactions, we use
special purpose finance companies and retain interest rate differentials, a
subordinated principal tranche, servicing rights (and obligations), and in some
cases a cash reserve account, all of which are residual interests in the
securitized receivables. Gain or loss on sale of the receivables depends in part
on the previous carrying amount of the financial assets involved in the
transfer, allocated between the assets sold and the residual interests based on
their relative fair values at the date of transfer. To obtain fair values,
quoted market prices are used if available. However, quotes are generally not
available for retained interests, so we estimate fair value based on the present
value of future expected cash flows estimated using management's best estimates
of the key assumptions--credit losses, prepayment speeds and discount rates
commensurate with the risks involved.
While we believe that our estimates reflect our best judgements for these key
assumptions, small changes in these estimates can significantly effect the
initial measurement of these transactions and the subsequent measurement of the
asset carrying values. We base our judgements on numerous factors, including our
own historical experience, recent trends, and available market information. Note
4 to our consolidated financial statements presents the sensitivity of our
determination of the fair value of the future cash flows resulting from the
interest rate differential to small changes in our key assumptions. For example,
a 10% adverse change in any of our three key assumptions would reduce the fair
value by $1.1 to $1.7 million. A 20% adverse change would reduce the fair value
by $2.2 to $3.4 million.
We provide for estimated credit losses related to uncollectible notes receivable
securitized through our allowance for doubtful accounts. Our loss exposure for
notes receivable securitized is limited to the residual interests in notes
receivable securitized. Although we are not required to do so, our historical
practice has been to repurchase defaulted securitized notes receivable up to
certain limits, generally 10% to 17% of the face amount of the original balance
of notes receivable securitized. 