SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended June 30, 2000 Commission File Number 001-13855
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ILX RESORTS INCORPORATED
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(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
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(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
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Former name, former address, and former fiscal year,
if changed since last report.
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 12 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 the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at June 30, 2000
- ------------------------------- ----------------------------
Common Stock, without par value 3,970,498 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1999 2000
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ASSETS (Unaudited)
Cash and cash equivalents $ 2,971,365 $ 2,807,570
Notes receivable, net 23,145,383 24,540,731
Resort property held for Vacation Ownership
Interest sales 21,742,875 20,684,633
Resort property under development 346,786 803,932
Land held for sale 1,596,759 1,602,597
Deferred assets 227,933 146,385
Property and equipment, net 4,212,470 4,307,126
Other assets 3,144,951 1,997,641
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TOTAL ASSETS $57,388,522 $56,890,615
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LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 923,016 $ 1,145,017
Accrued and other liabilities 2,679,107 2,692,447
Due to affiliates 26,282 --
Notes payable 27,020,947 25,164,422
Notes payable to affiliates 1,100,000 1,100,000
Income taxes payable 376,223 1,082,104
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Total liabilities 32,125,575 31,183,990
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MINORITY INTERESTS 23,778 --
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SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares
authorized; 305,978 and 293,635 shares issued and
outstanding; liquidation preference of $3,059,780
and $2,936,350 1,179,298 1,144,312
Common stock, no par value; 30,000,000 shares
authorized; 3,921,173 and 3,970,498 shares issued 18,069,840 18,148,852
Treasury stock, at cost, 0 and 305,600 shares,
respectively -- (614,894)
Additional paid in capital 279,450 225,742
Guaranteed ESOP Obligation (500,000) (250,000)
Retained earnings 6,210,581 7,052,613
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Total shareholders' equity 25,239,169 25,706,625
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $57,388,522 $56,890,615
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See notes to consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
-------------------------- -------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $ 6,168,570 $ 6,646,704 $11,320,079 $12,593,560
Resort operating revenue 3,357,742 3,558,870 6,220,745 6,683,080
Interest income 884,577 801,853 1,648,710 1,741,808
----------- ----------- ----------- -----------
Total timeshare revenues 10,410,889 11,007,427 19,189,534 21,018,448
----------- ----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 921,111 913,443 1,614,585 1,729,834
Cost of resort operations 3,045,256 3,183,597 5,858,297 6,179,178
Sales and marketing 3,730,893 3,561,039 7,139,859 7,141,524
General and administrative 1,101,582 1,150,576 2,032,142 2,232,208
Provision for doubtful accounts 176,453 293,275 327,299 516,756
Depreciation and amortization 112,874 142,606 225,576 279,141
----------- ----------- ----------- -----------
Total cost of sales and operating
expenses 9,088,169 9,244,536 17,197,758 18,078,641
----------- ----------- ----------- -----------
Timeshare operating income 1,322,720 1,762,891 1,991,776 2,939,807
Income from land and other, net 37,505 2,922 56,397 5,382
----------- ----------- ----------- -----------
Total operating income 1,360,225 1,765,813 2,048,173 2,945,189
Interest expense 698,094 699,360 1,370,375 1,388,363
----------- ----------- ----------- -----------
Income before income taxes and minority
interests 662,131 1,066,453 677,798 1,556,826
Income tax expense 264,000 426,746 268,000 596,746
----------- ----------- ----------- -----------
Income before minority interests 398,131 639,707 409,798 960,080
Minority interests 5,454 6,145 12,244 70,422
----------- ----------- ----------- -----------
NET INCOME $ 392,677 $ 633,562 $ 397,554 $ 889,658
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.10 $ 0.17 $ 0.09 $ 0.23
=========== =========== =========== ===========
Diluted $ 0.09 $ 0.16 $ 0.09 $ 0.22
=========== =========== =========== ===========
See notes to consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
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1999 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 397,554 $ 889,658
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Undistributed minority interest 12,244 (23,778)
Deferred income taxes 283,984 --
Provision for doubtful accounts 327,299 516,756
Depreciation and amortization 225,576 279,141
Amortization of guarantee fees 4,200 (1,150)
Change in assets and liabilities:
Decrease (increase) in resort property held
for Vacation Ownership Interest sales (93,793) 1,058,242
Increase in resort property under development (139,689) (457,146)
Increase in land held for sale (8,607) (5,838)
Decrease (increase) in other assets (956,472) 1,355,448
Increase (decrease) in accounts payable (421,222) 222,001
Increase in accrued and other liabilities 521,934 44,765
Decrease in due to affiliates -- (26,282)
Increase in income taxes payable -- 705,881
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Net cash provided by operating activities 153,008 4,557,698
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (2,657,654) (1,912,104)
Decrease (increase) in deferred assets (30,572) 82,698
Purchases of plant and equipment, net (850,968) (372,797)
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Net cash used in investing activities (3,539,194) (2,202,203)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 10,963,477 5,392,362
Principal payments on notes payable (8,952,022) (7,248,887)
Preferred stock dividend payments (47,876) (47,626)
Acquisition of treasury stock and other (213,775) (614,894)
Redemption of preferred stock -- (245)
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Net cash (used in) provided by financing
activities 1,749,804 (2,519,290)
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DECREASE IN CASH AND CASH EQUIVALENTS (1,636,382) (163,795)
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,196,710 2,971,365
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,560,328 $ 2,807,570
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See notes to consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the six-month period ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. The
accompanying financial statements should be read in conjunction with the
Company's most recent audited financial statements.
The Company's significant business activities include developing,
operating, marketing and financing ownership interests ("Vacation Ownership
Interests") in resort properties located in Arizona, Colorado, Indiana and
Mexico. Until December 31, 1999, the Company's operations also included
marketing of skin and hair care products through its then majority owned
subsidiary Sedona Worldwide Incorporated ("SWI"). This activity was not
considered significant to resort operations.
REVENUE RECOGNITION
Revenue from sales of Vacation Ownership Interests is recognized in
accordance with Statement of Financial Accounting Standard No. 66, Accounting
for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as
a minimum of 10% of the purchase price has been received in cash, the statutory
rescission period has expired, the buyer is committed to continued payments of
the remaining purchase price and the Company has been released of all future
obligations for the Vacation Ownership Interest. Resort operating revenue
represents daily room rentals and revenues from food and other resort services.
Such revenues are recorded as the rooms are rented or the services are
performed.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of
three months or less. The following summarizes interest paid, income taxes paid
and capitalized interest.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -------------------------
1999 2000 1999 2000
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Interest paid $703,000 $687,411 $1,332,000 $1,393,411
Income taxes paid $ -- $ -- $ -- $ --
Capitalized interest $ -- $ -- $ -- $ --
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which
was effective for financial statements for periods ending after December 15,
1997 and establishes standards for disclosing information about an entity's
capital structure. The Company adopted SFAS 129 in 1997. There were no
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
significant effects on the Company's disclosures about its capital structure, as
that term is defined in SFAS 129, in the six months ended June 30, 1999 or 2000.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which was effective for
financial statements for periods beginning after December 15, 1997 and
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. The Company adopted SFAS 130 in 1998.
There were no items of other comprehensive income, as that term is defined in
SFAS 130, in the six months ended June 30, 1999 or 2000.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company has a single segment in the timeshare resort industry.
Revenue from products and services are reflected on the income statement under
Sales of Vacation Ownership Interests and Resort Operating Revenue.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
The standard also provides specific guidance for accounting for derivatives
designated as hedging instruments. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of Statement No. 133" ("SFAS
No. 137"), which delayed the effective date of SFAS No. 133 for the company
until 2001. The Company is currently evaluating what impact this standard will
have on its financial statements.
NOTE 2. NET INCOME PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the following
presents the computation of basic and diluted net income per share:
BASIC NET INCOME PER SHARE
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
Net income $ 392,677 $ 633,562 $ 397,554 $ 889,658
Less: Series A preferred
stock dividends (11,969) (11,969) (23,938) (23,938)
Net income available to common
stockholders - basic $ 380,708 $ 621,593 $ 373,616 $ 865,720
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding - basic 3,991,089 3,726,730 4,009,652 3,809,234
=========== =========== =========== ===========
Basic net income per share $ 0.10 $ 0.17 $ 0.09 $ 0.23
=========== =========== =========== ===========
6
DILUTED NET INCOME PER SHARE
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
1999 2000 1999 2000
----------- ----------- ----------- -----------
Net income $ 392,677 $ 633,562 $ 397,554 $ 889,658
Less: Series A preferred stock
dividends (11,969) (11,969) (23,938) (23,938)
----------- ----------- ----------- -----------
Net income available to common
stockholders - diluted $ 380,708 $ 621,593 $ 373,616 $ 865,720
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding 3,991,089 3,726,730 4,009,652 3,809,324
Add: Convertible preferred stock
(Series B and C) dilutive effect 110,268 85,711 110,404 83,730
----------- ----------- ----------- -----------
Weighted average shares of common
stock outstanding - dilutive 4,101,357 3,812,441 4,120,056 3,892,964
=========== =========== =========== ===========
Diluted net income per share $ 0.09 $ 0.16 $ 0.09 $ 0.22
=========== =========== =========== ===========
Stock options to purchase 145,700 shares of common stock at prices
ranging from $3.25 per share to $8.125 per share were outstanding at June 30,
2000 but were not included in the computation of diluted net income per share
because the options' exercise prices were greater than the average market price
of common shares. These options expire at various dates between 2000 and 2004.
NOTE 3. SHAREHOLDERS' EQUITY
During the six months ended June 30, 2000, the Company issued 37,600
shares of restricted common stock, valued at $31,425, to employees in exchange
for services provided. These restricted shares of common stock issued to
employees are exempt from registration under Section 4(2) of the Securities Act
of 1933. Also during the six months ended June 30, 2000, the Company purchased
305,600 shares of its common stock for $614,894.
During the six months ended June 30, 2000, the Company contributed
$250,000 to its ESOP and such funds were used by the ESOP to repay debt incurred
in 1999 to acquire common stock (see "Uses of Cash"). In accordance with SOP
93-6, Employer's Accounting for Employee Stock Option Plan, the difference of
$40,862 between the fair market value of the leveraged shares at the time of the
debt repayment in 2000 and their actual cost when the shares were purchased in
1999, was charged to Paid in Capital.
7
ILX RESORTS INCORPORATED AND SUBSIDIARIES
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN
THIS FORM 10-Q, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATES" AND
SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO
THE COMPANY'S FUTURE PERFORMANCE. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL
UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
OVERVIEW
ILX Resorts Incorporated was formed in 1986 to enter the Vacation
Ownership Interest business. The Company generates revenue primarily from the
sale and financing of Vacation Ownership Interests. The Company also generates
revenue from the rental of its unused or unsold inventory of units at the ILX
Resorts and from the sale of food, beverages or other services at such resorts.
The Company currently owns five resorts in Arizona, one in Indiana and one in
Colorado.
The Company recognizes revenue from the sale of Vacation Ownership
Interests at such time as a minimum of 10% of the purchase price has been
received in cash, the statutory rescission period has expired, the buyer is
committed to continued payments of the remaining purchase price and the
Company's future obligations for the Vacation Ownership Interests have been
released. Resort operating revenues are recorded as the rooms are rented or the
services are performed.
Costs associated with the acquisition and development of Vacation
Ownership Interests, including carrying costs such as interest and taxes, are
capitalized and amortized to cost of sales as the respective revenue is
recognized.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1999 2000 1999 2000
------ ------ ------ ------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 59.3% 60.4% 59.0% 59.9%
Resort operating revenue 32.3% 32.3% 32.4% 31.8%
Interest income 8.4% 7.3% 8.6% 8.3%
------ ------ ------ ------
Total timeshare revenues 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
As a percentage of sales of Vacation
Ownership Interests:
Cost of Vacation Ownership Interests sold 14.9% 13.7% 14.3% 13.7%
Sales and marketing 60.5% 53.6% 63.1% 56.7%
Provision for doubtful accounts 2.9% 4.4% 2.9% 4.1%
Contribution margin percentage from sale
of Vacation Ownership Interests (1) 21.7% 28.3% 19.7% 25.5%
As a percentage of resort operating revenue:
Cost of resort operations 90.7% 89.5% 94.2% 92.5%
As a percentage of total timeshare revenues:
General and administrative 10.6% 10.5% 10.6% 10.6%
Depreciation and amortization 1.1% 1.3% 1.2% 1.3%
Timeshare operating income 12.7% 16.0% 10.4% 14.0%
8
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
1999 2000 1999 2000
------- ------- ------- -------
Selected operating data:
Vacation Ownership Interests sold (2) (3) 413 429 745 800
Average sales price per Vacation Ownership
Interest sold (excluding revenues from
Upgrades) (2) $13,513 $13,937 $13,536 $13,887
Average sales price per Vacation Ownership
Interest sold (including revenues from
Upgrades) (2) $14,647 $15,116 $15,035 $15,257
- ----------
(1) Defined as: the sum of Vacation Ownership Interest sales less the cost of
Vacation Ownership Interests sold less sales and marketing expenses less a
provision for doubtful accounts, divided by sales of Vacation Ownership
Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Vacation Ownership Interests consist of 192 annual and 441 biennial for the
three months ended June 30, 1999 and 183 annual and 492 biennial for the
three months ended June 30, 2000, and 353 annual and 783 biennial for the
six months ended June 30, 1999 and 336 annual and 928 biennial for the six
months ended June 30, 2000.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 2000
Sales of Vacation Ownership Interests increased 7.8% or $478,134 to
$6,646,704 for the three months ended June 30, 2000, from $6,168,570 for the
same period in 1999 and increased 11.2% or $1,273,481 to $12,593,560 for the six
months ended June 30, 2000 from $11,320,079 for the same period in 1999. The
increases largely reflect increased sales from the Sedona sales office and the
addition of the Phoenix sales office, net of decreases in sales from the
VCA-South Bend and VCA-Tucson sales offices. The increased sales from the Sedona
sales office are a result of both an increase in the number of tours and
improved closing rates (sales as a percentage of tours). The lower sales from
the VCA-South Bend sales office reflect the reduction from a full scale sales
office to a small sales staff that both generates its own tours and sells to
such prospects for a percentage of sales. The decrease in sales from the
VCA-Tucson sales office is due to a decrease in tour flow, in part as a result
of reducing the operation from seven days to five days a week to gain certain
operating efficiencies. The average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) increased 3.1% or $424 in 2000 to
$13,937 for the three months ended June 30, 2000 from $13,513 for the same
period in 1999 and increased 2.6% or $351 to $13,887 for the six months ended
June 30, 2000 from $13,536 for the same period in 1999, reflecting a greater
percentage of sales of biennial interests, which are sold for greater than one
half of the price of an annual interest.
The number of Vacation Ownership Interests sold increased 3.9% from 413
in the three months ended June 30, 1999 to 429 for the same period in 2000 due
to a higher closing rate at the Sedona sales office, and increased 7.4% from 745
in the six months ended June 30, 1999 to 800 for the same period in 2000 due to
both greater tour flow and a higher closing rate at the Sedona sales office, the
addition of the Phoenix sales office, net of reduced sales in the VCA--South
Bend and VCA--Tucson sales offices as described above. Sales of Vacation
Ownership Interests in the three and six months ended June 30, 2000 included 492
and 928 biennial Vacation Ownership Interests (counted as 246 and 464 annual
Vacation Ownership Interests) compared to 441 and 803 biennial Vacation
Ownership Interests (counted as 205.5 and 401.5 annual Vacation Ownership
Interests) in the same periods in 1999, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales,
decreased 26.7% to $505,634 for the three months ended June 30, 2000 from
$689,812 for the same period in 1999 and decreased 1.8% to $1,096,499 for the
six months ended June 30, 2000 from $1,116,305 for the same period in 1999.
9
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Upgrades generally do not involve the sale of additional Vacation Ownership
Interests (merely their exchange) and, therefore, such Upgrades increase the
average sales price per Vacation Ownership Interest sold. The average sales
price per Vacation Ownership Interest sold (including Upgrades) increased 3.2%
or $469 to $15,116 for the three months ended June 30, 2000 from $14,647 in 1999
and increased 1.5% or $222 to $15,257 for the six months ended June 30, 2000
from $15,035 for the same period in 1999, as a result of the greater percentage
of biennial sales, which sell for more than one half the price of an annual
interest, net of lower Upgrades.
Resort operating revenues increased 6.0% and 7.4% or $201,128 and
$462,335 to $3,558,870 and $6,683,080 for the three and six months ended
June 30, 2000, respectively, reflecting net increased occupancy and average
receipts, including the growth of business at VCA-Tucson, which opened in the
third quarter of 1998. Cost of resort operations improved to 89.5% from 90.7%
and to 92.5% from 94.2% for the second quarter and six months of 2000,
respectively, as a result of net increases in operating efficiencies, including
VCA-Tucson.
Interest income decreased 9.4% to $801,853 for the three months ended
June 30, 2000 from $884,577 for the same period in 1999 and increased 5.6% to
$1,741,808 for the six months ended June 30, 2000 from $1,648,710 for the same
period in 1999. The decrease in the quarter is caused by an increased number of
early payoffs of Customer Notes. The year-to-date increase is a result of the
increased Customer Notes retained by the Company and increases in interest rates
charged by the Company on its Customer Notes, consistent with its strategy to
retain and borrow against, rather than sell, a greater portion of its Customer
Notes. The Company has sought to increase the percentage of Customer Notes it
retains (hypothecates) and borrows against, rather than sells, and earns the
interest spread between the customer rate and the lower Company borrowing rate.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 14.9% for the three months ended
June 30, 1999 to 13.7% for the same period in 2000 and from 14.3% for the six
months ended June 30, 1999 to 13.7% for the same period in 2000, reflecting the
increase in average sales price in 2000.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests decreased to 53.6% for the three months ended June 30, 2000 from 60.5%
for the same period in 1999 and to 56.7% for the six months ended June 30, 2000
from 63.1% for the same period in 1999. The improvements reflect changes in
sales and marketing approaches that commenced in the first quarter of 1999, and
are continuing, including generation of a greater number of tours and increased
closing rates at the Sedona sales office, reduction of less efficient tour
generation methods to the VCA--South Bend sales office in the third quarter of
1999 and to the Kohl's Ranch sales office in the first quarter of 2000.
The provision for doubtful accounts as a percentage of Vacation
Ownership Interest sales increased to 4.4% and 4.1% of sales of Vacation
Ownership Interests in the three and six month periods ended June 30, 2000,
respectively, from 2.9% for the same periods in 1999, reflecting the Company's
decision to increase the provision on new sales effective both in the third
quarter of 1999 and the second quarter of 2000.
General and administrative expenses increased 4.4% to $1,150,576 in the
three months ended June 30, 2000 from $1,101,582 for the same period in 1999 and
9.8% to $2,232,208 in the six months ended June 30, 2000 from $2,032,142 for the
same period in 1999. General and administrative expenses remained consistent at
10.5% and 10.6% as a percentage of total timeshare revenues in the three and six
months ended June 30, 2000, respectively, compared to 10.6% for the same periods
in 1999.
The 0.2% and 1.3% increases in interest expense to $699,360 and
$1,388,363 for the three and six months ended June 30, 2000 from $698,094 and
$1,370,375 for the same periods in 1999, respectively, reflect an increase in
borrowings against customer notes receivable as the Company retains and borrows
against more of its consumer paper and an increase in interest rates, net of
fluctuations in the balances of borrowings outstanding.
10
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
The Company generates cash primarily from the sale of Vacation
Ownership Interests (including Upgrades), the financing of customer notes from
such sales and resort operations. During the six months ended June 30, 1999 and
2000, cash provided by operations was $153,008 and $4,557,698, respectively. The
increase is due to increased income and resultant income taxes payable as well
as decreased other assets and resort property held for Vacation Ownership
Interest sales. The decrease in other assets is related to advances made to the
Sedona Vacation Club Homeowners' Association for renovations as of December 31,
1999, which were reimbursed in the first quarter of 2000, and to timing of
collections of homeowners' dues. The decrease in resort property held for
Vacation Ownership Interest sales reflects the increase in sales of Vacation
Ownership Interests in 2000 and the annexation of weeks from the Sea of Cortez
Beach Club to ILX Premiere Vacation Club in the first half of 1999. Because the
Company uses significant amounts of cash in the development and marketing of
Vacation Ownership Interests, but collects the cash on the customer notes
receivable over a long period of time, borrowing against and/or selling
receivables is a necessary part of its normal operations.
For regular federal income tax purposes, the Company reports
substantially all of its non-factored financed Vacation Ownership Interest sales
under the installment method. Under the installment method, the Company
recognizes income on sales of Vacation Ownership Interests only when cash is
received by the Company in the form of a down payment, as installment payments
or from proceeds from the sale of the customer note. The deferral of income tax
liability conserves cash resources on a current basis. Interest may be imposed,
however, on the amount of tax attributable to the installment payments for the
period beginning on the date of sale and ending on the date the related tax is
paid. If the Company is otherwise not subject to tax in a particular year, no
interest is imposed since the interest is based on the amount of tax paid in
that year. The consolidated financial statements do not contain an accrual for
any interest expense that would be paid on the deferred taxes related to the
installment method, as the interest expense is not estimable.
At December 31, 1999, the Company, excluding its Genesis subsidiary,
had NOL carryforwards of approximately $9.8 million, which expire in 2001
through 2012. At December 31, 1999, Genesis had federal NOL carryforwards of
approximately $1.4 million, which are limited as to usage because they arise
from built in losses of an acquired company. In addition, such losses can only
be utilized through the earnings of Genesis and are limited to a maximum of
$189,000 per year. To the extent the entire $189,000 is not utilized in a given
year, the difference may be carried forward to future years. Any unused Genesis
NOLs will expire in 2008.
In addition, Section 382 of the Internal Revenue Code imposes
additional limitations on the utilization of NOLs by a corporation following
various types of ownership changes, which result in more than a 50% change in
ownership of a corporation within a three-year period. Such changes may result
from new common stock issuances by the Company or changes occurring as a result
of filings with the Securities and Exchange Commission of Schedules 13D and 13G
by holders of more than 5% of the common stock, whether involving the
acquisition or disposition of common stock. If such a subsequent change occurs,
the limitations of Section 382 would apply and may limit or deny the future
utilization of the NOL by the Company, which could result in the Company paying
substantial additional federal and state taxes.
USES OF CASH
Investing activities typically reflect a net use of cash because of
capital additions and loans to customers in connection with the Company's
Vacation Ownership Interest sales. Net cash used in investing activities in the
six months ended June 30, 1999 and 2000 was $3,539,194 and $2,202,203,
respectively. The decrease is due mainly to a reduction in the increase of notes
receivable from prior year end to the end of the respective first quarters. The
Company began hypothecating rather than selling a greater portion of notes
receivable in the first quarter of 1999. The Company continued this strategy in
2000; therefore, there was a larger increase in the notes receivable balance
from December 31, 1998 to June 30, 1999, as compared to the increase from
11
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
December 31, 1999 to June 30, 2000. Also contributing to the decrease is a
reduction in the purchase of equipment.
The Company requires funds to finance the acquisitions of property for
future resort development and to further develop the existing resorts, as well
as to make capital improvements and support current operations. During 2000, the
Company advanced funds toward the cost of construction of the San Carlos
Vacation Ownership Interests. The Company funded such advances with proceeds
from a financing commitment established for this purpose. In 2000, the Company
is building twelve additional cabins at Kohl's Ranch, for which a financing
commitment equal to the construction cost is in place.
Customer defaults have a significant impact on cash available to the
Company from financing customer notes receivables in that notes which are more
than 60 to 90 days past due are not eligible as collateral. As a result, the
Company in effect must repay borrowings against such notes or buy back such
notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the
ILX Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP").
The intent of the ESOP is to provide a retirement program for employees that
aligns their interests with those of the Company. During 1999, the Company
declared, and funded in cash, contributions of $250,000 to the ESOP. In August
1999, the ESOP entered into an agreement with Litchfield Financial Corporation
for a $500,000 line of credit, which is secured by the Company's stock purchased
with the funds and guaranteed by the Company. The Company paid a total of
$43,047 in fees in 1999 on behalf of the ESOP related to the line of credit,
consisting of $10,000 in loan fees, $16,231 in legal fees and interest of
$16,816. As of December 31, 1999, the ESOP had borrowed the full $500,000 on the
line. In both January and April 2000, the Company contributed $125,000 to the
ESOP, which the ESOP used to repay principal on the line, reducing the borrowing
to $250,000 at June 30, 2000.
During 1999, the ESOP purchased a total of 375,300 shares of the
Company's common stock in the open market, including 257,400 with borrowed funds
and, at June 30, 2000, held the 375,300 shares and $2,646 in cash. The shares
purchased with borrowed funds had not been allocated to participant accounts as
of June 30, 2000 and are collateral for the borrowing. The fair market value of
the unallocated shares at June 30, 2000 was approximately $609,435.
The leveraged and unallocated shares will be released at the end of the
current Plan year (December 31, 2000) based on the amount of principal and
interest payments made during the year. During the six months ended June 30,
2000, the Company paid and recognized as an expense contributions of $18,906 for
interest and $250,000 for principal.
The ESOP may purchase additional shares for future year contributions
through loans made directly to the ESOP and guaranteed by the Company. Such
borrowings are not expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
The Company has an agreement with a financial institution for a $40
million financing commitment under which the Company may sell certain of its
Customer Notes. The agreement provides for sales on a recourse basis with a
percentage of the amount sold held back by the financial institution as
additional collateral. Customer Notes may be sold at discounts or premiums to
the principal amount in order to yield the consumer market rate, as defined by
the financial institution. At June 30, 2000, $27.9 million of the $40 million
commitment was available to the Company.
The Company also has financing commitments aggregating $43.5 million
whereby the Company may borrow against notes receivable pledged as collateral.
These borrowings bear interest at a rate of prime plus 1.5% ($40 million) to
prime plus 3% ($3.5 million). The $3.5 million and $40 million commitments
12
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
expire in 2001 and 2002, respectively. At June 30, 2000, approximately $25.6
million is available under these commitments.
At June 30, 1999 and 2000, the Company had approximately $16.7 million
and $18.6 million, respectively, in outstanding notes receivable sold on a
recourse basis. Portions of the notes receivable are secured by deeds of trust
on Los Abrigados Resort & Spa, VCA-South Bend and VCA-Tucson.
In December 1999, the Company completed the spin-off of its 80%
ownership interest in SWI to the shareholders of ILX. In conjunction with the
spin-off, the Company agreed to provide up to $200,000 of working capital
financing to SWI through November 30, 2000. All amounts borrowed by SWI will
bear interest at the prime rate plus 3%, with interest payable monthly. The
entire unpaid principal will be due on December 31, 2000. At June 30, 2000,
there had been no funds advanced under this agreement.
In February 2000, the Company borrowed $600,000 for the purpose of
using the funds to purchase treasury stock. The note is collateralized by cash
or stock, bears interest at 12% and is due through 2002. As of June 30, 2000,
the Company purchased 247,000 shares of stock at a cost of $513,137 with funds
provided by this note. The remaining $86,049 is classified as restricted cash
and is included in "Other Assets" on the balance sheet.
In the future, the Company may negotiate additional credit facilities,
issue corporate debt, issue equity securities, or any combination of the above.
Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. There is no assurance that the Company will
be able to secure additional corporate debt or equity at or beyond current
levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash
generated from operations, will be sufficient to meet the Company's liquidity,
operating and capital requirements for at least the next 12 months.
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX
Owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased or
additional seasonality dynamics which may cause the Company's operating results
to fluctuate.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years or the six months ended June 30, 2000. However,
to the extent inflationary trends affect short-term interest rates, a portion of
the Company's debt service costs may be affected as well as the rates the
Company charges on its customer notes.
13
ILX RESORTS INCORPORATED AND SUBSIDIARIES
PART II
ITEM 1. LEGAL PROCEEDINGS
A dispute had arisen between the general contractor, Summit Builders,
and the Company's wholly owned subsidiary, VCA Tucson Incorporated, with respect
to amounts owed for the construction of VCA-Tucson. In May 1999, the dispute was
settled for an amount of $1.3 million. Such cost is included in resort property
held for sale at December 31, 1999 and June 30, 2000.
A dispute had arisen between Bowne of Phoenix, Inc. ("Bowne"), and the
Company regarding amounts owing for printing related to the Company's 1998
follow-on public offering. Bowne and the Company reached agreement on a payment
of $110,000 for such services, which Bowne subsequently sought to change. Bowne
filed suit in the Superior Court of Arizona seeking total payment of $154,720
plus interest and attorneys' fees. At June 30, 2000, approximately $46,000 of
the $110,000 has been paid to Bowne on account and the remaining amount was
fully accrued on the books of the Company. On September 15, 1999, the Superior
Court granted the Company's motion for summary judgment on the issue of whether
the parties had entered into a binding settlement agreement. In February 2000,
the Superior Court also granted the Company's request for $32,904 in attorneys'
fees plus taxable costs. Bowne has filed an appeal with the Arizona Court of
Appeals.
In June 1999, the Company brought suit in The Superior Court of the
State of Arizona against Deloitte & Touche LLP seeking compensatory and punitive
damages for breach of contract, breach of fiduciary duty and negligence. This
litigation is in the discovery stage.
In June 2000, the Company brought suit in The Superior Court of the
State of Arizona against Ronald R. Rostan, a former employee, seeking
compensation and punitive damages for breach of contract, negligence, breach of
fiduciary duties, embezzlement, conversion, fraud, deceit, concealment and
non-disclosure. This litigation is in the discovery stage.
In June 2000, the Company entered into a settlement agreement and
mutual release of certain claims with Dean Phelan ("Phelan"), a former employee,
and minority interest shareholder in the Company's subsidiary Timeshare Resale
Brokers, Inc. ("TRBI"). The agreement dismisses litigation that had arisen
between the parties, grants the Company a judgment for $190,000 against Phelan
that the Company will not exercise unless Phelan breaches the agreement and
awards to the Company Phelan's minority interest in TRBI.
Other litigation has arisen in the normal course of the Company's
business, none of which is deemed to be material.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
14
ILX RESORTS INCORPORATED AND SUBSIDIARIES
PART II
(CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 21, 2000, the Company held its Annual Meeting of Shareholders.
At this Annual Meeting the shareholders were asked to vote on the following
proposal:
To elect seven (7) directors to serve until the next annual meeting of
shareholders of the Company, or until their successors are duly
elected and qualified.
The voting results were as follows:
Nominees recommended in the Proxy Statement:
Votes Against
Votes For or Withheld Non-votes
--------- ----------- ---------
Steven R. Chanen 3,310,198 0 141,635
Joseph P. Martori 3,364,330 0 87,503
Joseph P. Martori, II 3,363,970 0 87,863
Patrick J. McGroder III 3,362,961 0 88,872
James W. Myers 3,310,210 0 141,623
Nancy J. Stone 3,366,210 0 85,623
Edward S. Zielinski 3,365,170 0 86,663
As a result of the vote, the following seven directors will serve until
the next annual meeting or until his or her successor is elected and qualified:
Steven R. Chanen Joseph P. Martori Joseph P. Martori, II
James W. Myers Patrick J. McGroder III Nancy J. Stone
Edward S. Zielinski
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
None
15
ILX RESORTS INCORPORATED AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused its quarterly report on Form 10-Q to be
signed on its behalf by the undersigned thereunto duly authorized.
ILX RESORTS INCORPORATED
(Registrant)
/s/ Joseph P. Martori
---------------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
---------------------------
Nancy J. Stone
President
/s/ Margaret M. Eardley
---------------------------
Margaret M. Eardley
Executive Vice President
Chief Financial Officer
Date: As of August 7, 2000
16