10-Q 1 trw10q.txt 3RD QUARTER United States SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 30, 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 (I.R.S. Employer of incorporation) Identification No.) 9805 Willows Road Redmond, Washington 98052 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including area code) (425) 498-2500 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of the registrant's no-par voting common stock outstanding as of August 6, 2001: 25,290,298 shares. PART I - FINANCIAL INFORMATION Item I - Financial Statements TRENDWEST RESORTS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (dollars in thousands) (Unaudited)

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)

See accompanying notes to the condensed consolidated financial statements. 3 TRENDWEST RESORTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (dollars in thousands) (Unaudited)

See accompanying notes to the condensed consolidated financial statements. 4 TRENDWEST RESORTS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (continued) (dollars in thousands) (unaudited)

See accompanying notes to the condensed consolidated financial statements. 5 TRENDWEST RESORTS, INC. AND SUBSIDIARIES Notes to the Condensed Consolidated Financial Statements (dollars in thousands except per share amounts) (Unaudited) Note 1 - Background Trendwest Resorts, Inc., (Company) markets, sells and finances timeshare 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 and six months ended June 30, 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 three and six month periods ended June 30, 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 June 30, 2001, the Company had foreign exchange contracts with notional amounts of approximately $2,081 CDN at 6 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 was $110, net of tax benefit, and has been included in other comprehensive income for the six months ended June 30, 2001. 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 disclosure provisions required under SFAS 140 as of December 31, 2000, and the remaining provisions as of April 1, 2001. SFAS 140 is to be applied prospectively with certain exceptions. The adoption of SFAS 140 did not 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 period. 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 and six month periods ended June 30, 2001. Note 4 -- Comprehensive Income The following illustrates the reconciliation of net income to comprehensive income:

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 illustrates the reconciliation of weighted average shares used for basic and diluted net income per share:

Net income available to common shareholders for basic net income per share was $14,041 and $10,952 for the three months ended June 30, 2001 and 2000, and $25,822 and $20,622 for the six months ended June 30, 2001 and 2000, respectively. For the three months ended June 30, 2001 and 2000, there were options outstanding to purchase 0 and 437,200 shares of common stock, respectively, which were anti-dilutive and therefore not included in the computation of diluted net income per common share. For the six months ended June 30, 2001 and 2000, there were options outstanding to purchase 0 and 431,000 shares of common stock, respectively, which were anti-dilutive and therefore not included in the computation of diluted net income per common share. Note 8 - Inventories Inventories consist of Vacation Credits and construction in progress as follows:

8 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 June 30, 2001, and December 30, 2000:

The activity in the allowance for doubtful accounts, recourse liability and sales returns is as follows for the six months ended June 30, 2001 and the year ended December 31, 2000:

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 June 30, 2001, the Company had outstanding purchase commitments of $126,249 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 June 30, 2001, there were $5,640 in surety bonds outstanding. 9 (c) Litigation The Company is involved in various claims and lawsuits arising in 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 Interests. 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 in the Company's 2000 Form 10-K. The Company evaluates performance based on profits or losses from sales and marketing activities on a pre-tax basis. Intersegment revenues are recorded at market rates as if the transactions occurred with third parties. Assets are not reported by segment. The following tables summarize the segment activity of the Company:

The following table provides a reconciliation of segment revenues and profits to the consolidated amounts:

The Company's revenue from external customers derived from sales within the United States totaled $103,251 and $70,271 for the three months ended June 30, 2001 and 2000, respectively. The Company's revenue from external customers derived from sales within the United States totaled $191,251 and $132,732 for the six months ended June 30, 2001 and 2000, respectively. Revenue from external customers derived from sales in all foreign countries totaled $7,168 and $819 for the three months ended June 30, 2001 and 2000, respectively, and totaled $11,744 and $871 for the six months ended June 30, 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 $6,953 at June 30, 2001. 11 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Comparison of the three months ended June 30, 2001, to the three months ended June 30, 2000 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 to, among other things, 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 $124.9 million for the three months ended June 30, 2001, compared to $82.0 million for the three months ended June 30, 2000, an increase of 52.3%. The principal reason for the overall improvement was a 47.4% increase in total Vacation Credit sales to $104.8 million for the three months ended June 30, 2001, from $71.1 million for the three months ended June 30, 2000, including a $6.3 million increase in Vacation Credit sales in the South Pacific, from $0.8 million to $7.1 million. In addition, $5.6 million in Fractional Interest sales from the second phase of the Depoe Bay, Oregon, resort were recognized during the second quarter of 2001. The increase in Vacation Credit sales was primarily the result of a 46.1% increase in the number of Vacation Credits sold to 77.3 million during the three months ended June 30, 2001, from 52.9 million during the three months ended June 30, 2000. The increase in Vacation Credits sold was largely attributable to improved performance in the eleven new offices opened during 2000, an increase in Vacation Credits sold in the South Pacific to 7.9 million for the quarter versus 0.9 million for the same period in 2000, and continued increases in Upgrade Sales. Revenues from Upgrade sales increased 39.1% to $15.3 million for the three months ended June 30, 2001, from $11.0 million for the three months ended June 30, 2000. We opened the following sales offices during the second quarter of 2001, which had no material effect on revenues during the quarter: Location Opened On/Off-Site --------------------------------- ------------- --------------- Issaquah, WA..................... April, 2001 Off-site Bison Ranch, AZ.................. May, 2001 On-site Coeur d'Alene, ID................ June, 2001 Off-site Sydney 2, QLD*................... June, 2001 Off-site *Trendwest South Pacific sales office In the United States, the average price per Vacation Credit sold increased to $1.41 per credit for the three months ended June 30, 2001, versus $1.36 per credit for the three months ended June 30, 2000, primarily as a result of a $0.05 increase in the selling price of new Vacation Credits effective July 1, 2000, and in Upgrade Vacation Credits effective September 1, 2000. The Company again raised the selling price of Vacation Credits $0.05 on May 1, 2001. In the South Pacific, the average price per Vacation Credit sold decreased from $0.92 per credit to $0.90 per credit due largely to fluctuations in the US dollar to Australian dollar exchange rate, partially offset by an increase in the selling price in the South Pacific that took effect in the second quarter. For the quarter ended June 30, 2001, financing activities generated $11.8 million in revenues, compared to $8.5 million in the same quarter last year, a 38.8% increase. This increase consists of a 46.7% increase in gains on sales of Notes Receivable and a 30.0% increase in finance income. Gains increased due to falling interest rates during the quarter and a $9.3 million increase in Notes sold over the comparable period. Finance income also benefited from falling interest rates, which increased the net interest spread on variable-rate residual interests in Notes Receivable sold, as well as increased average carrying balances of Notes Receivable. 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 June 30, 2001, versus 23.6% for the three months ended June 30, 2000. This increase resulted from comparatively low construction costs associated with last year's addition of Fiji and Rancho Vistoso, Arizona properties, higher costs 12 associated with the sale of Fractional Interests during 2001 at the second phase of the Depoe Bay resort, and more capitalized interest in cost of sales during the three months ended June 30, 2001, than in the same period last year. Sales and marketing costs increased 53.3% to $51.5 million for the three months ended June 30, 2001, from $33.6 million for the three months ended June 30, 2000. As a percentage of Vacation Credit and Fractional Interest sales, sales and marketing costs decreased to 46.6% for the three months ended June 30, 2001, from 47.3% for the three months ended June 30, 2000. This decrease was largely a result of the relatively lower sales and marketing costs of Fractional Interest sales during 2001, which are offset by higher product cost. General and administrative expenses increased 43.6% to $11.2 million for the three months ended June 30, 2001, from $7.8 million for the three months ended June 30, 2000. As a percentage of total revenue, general and administrative costs decreased to 9.0% for the three months ended June 30, 2001, from 9.5% for the three months ended June 30, 2000. This is a result of the strong growth in total revenue over the prior period. Resort management services contributed $1.0 million to total revenue during the second quarter of 2001, down from $1.2 million for the second quarter of 2000. Higher utility costs at Western resorts continued to be a factor during the second quarter of 2001, negatively impacting the Clubs profits on which the management fee is based. Utility costs are expected to remain high through the remainder of 2001. The provision for doubtful accounts and recourse liability, as a percentage of Vacation Credit and Fractional Interest sales, was 7.2% for the second quarter of 2001 versus 7.3% for the comparable period last year. This decrease is due to a mix of sales in sales offices with average default rates lower than the Company's historical average. Comparison of the six months ended June 30, 2001, to the six months ended June 30, 2000 The Company achieved total revenues of $229.9 million for the six months ended June 30, 2001, compared to $155.2 million for the six months ended June 30, 2000, an increase of 48.1%. The principal reasons for the overall improvement were a 43.9% increase in total Vacation Credit sales to $192.2 million for the six months ended June 30, 2001, compared to $133.6 million for the six months ended June 30, 2000, including a $10.8 million increase in Vacation Credit sales in the South Pacific, from $0.9 million to $11.7 million. In addition, $10.8 million in Fractional Interest sales from the second phase of the Depoe Bay, Oregon, resort were recognized during the first half of 2001. No Fractional Interest sales were recognized in 2000. All revenue from the sale of Fractional Interests at the second phase of Depoe Bay is expected to be recognized by the end of 2001. The increase in Vacation Credit sales was primarily the result of a 43.1% increase in the number of Vacation Credits sold, to 141.4 million during the six months ended June 30, 2001, from 98.8 million during the six months ended June 30, 2000. The increase in Vacation Credits sold was largely attributable to improved performance in the eleven new offices opened during 2000, a 12.2 million increase in Vacation Credits sold in the South Pacific, to 13.2 million in 2001 from 1.0 million in 2000, and continued increases in Upgrade Sales. Revenues from Upgrade sales increased 36.2% to $28.6 million for the six months ended June 30, 2001, from $21.0 million for the six months ended June 30, 2000. We opened the following sales offices during the first half of 2001, which did not have a significant impact on revenues for the period: 13 Location Opened On/Off-Site --------------------------------- --------------- ---------------- Steamboat, CO.................... January, 2001 On-site Roslyn, WA....................... January, 2001 Off-site Englewood, CO.................... March, 2001 Off-site Overland Park, KS................ March, 2001 Off-site Branson, MO...................... March, 2001 On-site Sydney 1, QLD*................... March, 2001 Off-site Issaquah, WA..................... April, 2001 Off-site Bison Ranch, AZ.................. May, 2001 On-site Coeur d'Alene, ID................ June, 2001 Off-site Sydney 2, QLD*................... June, 2001 Off-site *Trendwest South Pacific sales office In the United States, the average price per Vacation Credit sold increased to $1.41 per credit for the six months ended June 30, 2001, versus $1.36 per credit for the six months ended June 30, 2000, primarily as a result of a $0.05 increase in the selling price of new Vacation Credits effective July 1, 2000, and of Upgrade Vacation Credits effective September 1, 2000. The price of Vacation Credits on new sales again increased $0.05 on May 1, 2001. In the South Pacific, the average price per Vacation Credit sold decreased from $0.91 per credit to $0.89 per credit, due largely to fluctuations in the US dollar to Australian dollar exchange rate, partially offset by an increase in the selling price per Vacation Credit in the South Pacific that became effective in 2001. For the six months ended June 30, 2001, financing activities generated $21.5 million in revenues, compared to $16.3 million in the same period last year, a 31.9% increase. This increase is largely attributable to a 58.0% increase in gains on sales of Notes Receivable. Notes Receivable sold for gains increased $18.8 million for the first six months of 2001 as compared to 2000. In addition, interest rates fell substantially during the first half of 2001, increasing the net interest spread on the sales and thus 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 six months ended June 30, 2001, versus 23.4% for the six months ended June 30, 2000. This increase resulted from comparatively low construction costs associated with the addition of Fiji and Rancho Vistoso, Arizona properties during the first six months of 2000, higher costs associated with the sale of Fractional Interests during 2001, and more capitalized interest in cost of sales during the six months ended June 30, 2001, than in the same period last year. Over the remainder of 2001, the Company expects product cost, as a percentage of Vacation Credit and Fractional Interest sales, to remain at a similar level to the results for the first half of the year. 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 year. Sales and marketing costs, as a percentage of Vacation Credit and Fractional Interest sales, decreased to 46.7% for the six months ended June 30, 2001, from 48.1% for the six months ended June 30, 2000. The difference is attributable to both the lower sales and marketing cost of the Fractional Interest sales program included in 2001 results and the improved efficiency in sales offices Company-wide. General and administrative expenses increased 35.8% to $20.5 million for the six months ended June 30, 2001, from $15.1 million for the six months ended June 30, 2000. As a percentage of total revenue, general and administrative costs decreased to 8.9% of total revenue for the six months ended June 30, 2001, from 9.7% of total revenue for the six months ended June 30, 2000. This decrease is largely driven by the increase in total revenue, as well as the Company's having fully-expensed all start-up costs for new South Pacific and Midwest regions opened during the first half of 2000 without the corresponding benefit of sales. The provision for doubtful accounts and recourse liability, as a percentage of Vacation Credit and Fractional Interest sales, was 7.2% and 7.0% for the six months ended June 30, 2001 and 2000, respectively. This increase is largely due to the mix of sales for the period at newer sales offices with higher expected default rates than the Company's average historical experience. 14 The Company maintains an allowance for doubtful accounts in respect of the Notes Receivable owned by the Company and an allowance for recourse liability in respect of the Notes Receivable that have been sold by the Company. The aggregate amount of these allowances at June 30, 2001 and December 31, 2000, were $45.6 million and $38.9 million, respectively, representing approximately 7.8% and 7.7% of the total portfolio of Notes Receivable serviced at those dates. 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 exceeds 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 June 30, 2001, and December 31, 2000, 2.0% and 2.3% of the Company's total receivables portfolio of $584.4 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 and Fractional Interests which are financed, cash sales of Vacation Credits and Fractional Interests, collection of principal and interest on Notes Receivable, proceeds from sales of Notes Receivable, and other borrowings. The Company also generates cash on the interest differential between the interest charged on the Notes Receivable and the interest paid on loans collateralized by Notes Receivable. During the six months ended June 30, 2001 and 2000, cash used in operating activities was $19.5 million and $15.5 million, respectively. Cash used in operating activities increased principally due to the increased issuance of Notes Receivable. For the first six months of 2001, cash used in operating activities was principally for the issuance and purchase of Notes Receivable of $189.1 million to finance the purchase of Vacation Credits by Owners, an increase in inventory of $19.4 million due to additional construction in progress to meet increasing sales demand, and spending on the MountainStar resort of $7.2 million, which was primarily related to the on-going entitlement process. Cash provided by operating activities during the first six months of 2001 resulted primarily from sales and repayments of Notes Receivable of $150.4 million, an increase in accounts payable and accrued liabilities of $6.4 million, and net income of $25.8 million. For the six months ended June 30, 2000, cash used in operating activities was principally for the issuance and purchase of Notes Receivable of $121.2 million to finance the purchase of Vacation Credits by Owners, an increase in inventory of $21.9 million due to additional construction in progress to meet increasing sales demand, and the acquisition of the MountainStar development of $25.0 million. Cash provided by operating activities during the first six months of 2000 resulted primarily from sales and repayments of Notes Receivable of $122.4 million and net income of $20.6 million. Net cash used in investing activities for the six months ended June 30, 2001 and 2000, was $5.3 million and $3.0 million, respectively. Cash used in investing activities for the six months ended June 30, 2001, was primarily the result of leasehold, furniture, and equipment purchases related to the ten new sales offices opened, both in the United States and in Australia. Cash used in investing activities for the six months ended June 30, 2000, was the result of purchases of furniture and equipment to support the Company's new regions and sales offices opened during the period. Net cash provided by financing activities for the six months ended June 30, 2001 and 2000, was $25.4 million and $16.8 million, respectively. For the six months ended June 30, 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 $22.9 million, issuance of common stock of $1.4 million, and an increase in due to Parent of $1.0 million. For the six months ended June 30, 2000, cash provided by financing activities was principally the result of increased borrowings under the Company's bank line of credit and other of $20.4 million, offset by a decrease in due to the Parent of $1.3 million and the repurchase of common stock of the Company of $2.6 million. 15 The Company has a three-year, $85.0 million revolving credit agreement with a group of banks, which is secured by a first mortgage on the MountainStar property. 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. The agreement requires the Company to maintain certain interest coverage ratios and capitalization ratios and also imposes limitations on certain liens and carrying amounts of inventory. Borrowings outstanding at June 30, 2001 and December 31, 2000, were $72.6 million and $48.4 million, respectively, at weighted average interest rates of 6.55% and 8.48%. The Company has a $10 million open line of credit with its principal shareholder, JELD-WEN, inc. (Parent) which bears interest at prime plus 1.25% (currently 8.00%) per annum. The line of credit is payable on demand. As of June 30, 2001, there was $1.5 million in indebtedness to the Parent. The Company may advance excess funds to the Parent at the prime rate minus 1.75% (currently 5.00%) per annum. At June 30, 2001, there was no receivable from Parent. The Company anticipates spending approximately $72.3 million for acquisitions and development of new resort properties and for expansion and development activities during the second half of 2001, including $5.7 million for the continued development of the MountainStar property. The Company plans to fund these expenditures with cash generated from operations, including further sales and securitizations of Notes Receivable and borrowings under the $85.0 million revolving credit agreement. In addition, during the third quarter of 2001, the Company anticipates completing an private placement of Notes Receivable previously sold through the Notes Receivable warehouse facility. Acquisition of new resort sites and properties is an ongoing process and availability of certain properties in desired locations could result in increased expenditures for such activities. The Company believes that, with respect to its current operations, cash generated from operations and future borrowings available under existing agreements will be sufficient to meet the Company's working capital and capital expenditure needs through the end of 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. The Company filed a registration statement with the SEC for the sale by it and certain shareholders of $75 million of common stock. It is anticipated that the Company will sell 45% of the shares. The Company may also negotiate additional credit facilities, or issue corporate debt or additional equity securities in the future. 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 and WorldMark South Pacific maintain replacement reserves for the resorts, which are funded from the annual assessments of the Owners. At June 30, 2001, the amount of The Clubs' reserves was approximately $17.5 million. The replacement reserves are 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. RECENT ACCOUNTING PRONOUNCEMENTS On July 20, 2001, the FASB issued Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires that all business combinations be accounted for under a single method, the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Statement 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which will be adopted by the company on January 1, 2002. The adoption of this statement is not expected to have a material impact on our financial statements. 16 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. On July 3, 2001, the July 2001 contract was rolled over into a new contract to receive $2,081 CDN at a rate of $1.4958 CDN/US on August 2, 2001. On August 2, 2001, this contract was again rolled over into a new contract to receive $2,081 CDN at a rate of $1.4958 CDN/US on September 4, 2001. 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. 17 PART II - OTHER INFORMATION Item 1 - Legal Proceedings The Company is not aware of any material legal proceeding pending against it. The Company may be subject to claims and legal proceedings from time to time in the ordinary course of business. See Note 10 of "Notes to Condensed Consolidated Financial Statements." Item 2 - Changes in Securities and Use of Proceeds None Item 3 - Defaults Upon Senior Securities None Item 4 - Submission of Matter to a Vote of Security Holders Trendwest Resorts, Inc. (Company) held its Annual Meeting of Shareholders on June 27, 2000. The matters voted upon at the meeting and the votes cast with respect thereto were as follows: 1. Election of Directors:

2. Proposal to approve an increase in authorized shares under the 1997 Stock Option Plan: Number of shares Number of shares Number of shares voted FOR voted AGAINST Withheld --------------------- -------------------- ----------------- 24,296,202 189,010 56,866 3. Proposal to Ratify the selection of KPMG LLP as independent auditors of the Company for the 2001 fiscal year: Number of shares Number of shares Number of shares voted FOR voted AGAINST Withheld --------------------- -------------------- ----------------- 24,539,663 1,719 696 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 None. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TRENDWEST RESORTS, INC. Date: August 14, 2001 /s/ WILLIAM F. PEARE -------------------- ------------------------------------- William F. Peare President, Chief Executive Officer and Director (Principal Executive Officer) Date: August 14, 2001 /s/ TIMOTHY P. O'NEIL -------------------- ------------------------------------- Timothy P. O'Neil Vice President, Chief Financial Officer And Treasurer (Principal Financial Officer) 19

TRENDWEST RESORTS INC 10-Q