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 March 31, 2001 Commission File Number 001-13855
ILX RESORTS INCORPORATED
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
(Address of principal executive offices)
602-957-2777
(Registrant's telephone number, including area code)
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 March 31, 2001
- ------------------------------- -----------------------------
Common Stock, without par value 3,319,505 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, March 31,
2000 2001
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,518,122 $ 2,564,231
Notes receivable, net 26,619,853 27,907,470
Resort property held for Vacation Ownership Interest sales 21,663,793 21,042,492
Resort property under development 254,441 5,362,054
Land held for sale 1,667,298 1,667,298
Deferred assets 170,440 170,290
Property and equipment, net 10,150,674 5,422,034
Other assets 2,500,155 2,583,046
------------ ------------
TOTAL ASSETS $ 65,544,776 $ 66,718,915
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,220,787 $ 953,055
Accrued and other liabilities 3,126,940 4,121,155
Due to affiliates -- 23,500
Notes payable 32,851,068 32,904,842
Notes payable to affiliates 1,000,000 1,000,000
Deferred income taxes 1,510,535 1,770,413
------------ ------------
TOTAL LIABILITIES 39,709,330 40,772,965
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares
authorized; 291,553 and 290,014 shares issued
and outstanding; liquidation preference of
$2,915,530 and $2,900,140 1,138,566 1,134,318
Common stock, no par value; 30,000,000 shares
authorized; 4,105,192 and 4,119,705 shares issued 18,333,333 18,359,685
Treasury stock, at cost, 657,500 and 800,200 shares,
respectively (1,308,655) (1,601,764)
Additional paid in capital 225,742 225,742
Guaranteed ESOP Obligation (250,000) (250,000)
Retained earnings 7,696,460 8,077,969
------------ ------------
Total shareholders' equity 25,835,446 25,945,950
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,544,776 $ 66,718,915
============ ============
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
-------------------------------------
2000 2001
------------ ------------
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $ 5,946,856 $ 6,520,224
Resort operating revenue 3,124,210 4,047,224
Interest income 939,955 691,522
------------ ------------
Total timeshare revenues 10,011,021 11,258,970
------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 816,391 1,108,646
Cost of resort operations 2,995,581 3,248,430
Sales and marketing 3,580,485 4,081,868
General and administrative 1,081,632 1,047,639
Provision for doubtful accounts 223,481 286,195
Depreciation and amortization 136,535 98,054
------------ ------------
Total cost of sales and operating expenses 8,834,105 9,870,832
------------ ------------
Timeshare operating income 1,176,916 1,388,138
Income (expense) from land and other, net 2,460 (3,267)
------------ ------------
Total operating income 1,179,376 1,384,871
Interest expense (689,003) (743,484)
------------ ------------
Income before income taxes and minority interests 490,373 641,387
Income tax expense (170,000) (259,878)
------------ ------------
Income before minority interests 320,373 381,509
Minority interests (64,277) --
------------ ------------
NET INCOME $ 256,096 $ 381,509
============ ============
NET INCOME PER SHARE
Basic $ 0.06 $ 0.11
============ ============
Diluted $ 0.06 $ 0.11
============ ============
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
----------------------------------
2000 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 256,096 $ 381,509
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed minority interest 64,277 --
Deferred income taxes 279,486 259,878
Provision for doubtful accounts 223,481 286,195
Depreciation and amortization 136,535 98,054
Amortization of guarantee fees 700 150
Contribution of common stock to ESOP Plan -- 18,104
Common stock issued to employees for services 29,675 4,000
Change in assets and liabilities:
Decrease in resort property held for Vacation Ownership
Interest sales 432,600 621,301
Increase in resort property under development (59,166) (98,317)
Increase in land held for sale (5,838) --
(Increase) decrease in other assets 928,591 (121,597)
Decrease in accounts payable (297,989) (267,732)
Increase in accrued and other liabilities 259,279 994,215
Increase (decrease) in due to affiliates (26,282) 23,500
----------- -----------
Net cash provided by operating activities 2,221,445 2,199,260
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable, net (697,437) (1,573,812)
Decrease in deferred assets 54,452 --
Purchases of plant and equipment, net (271,854) (340,004)
----------- -----------
Net cash used in investing activities (914,839) (1,913,816)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 2,563,387 4,253,336
Principal payments on notes payable (3,654,496) (4,199,562)
Acquisition of treasury stock and other (341,757) (293,109)
----------- -----------
Net cash used in financing activities (1,432,866) (239,335)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (126,260) 46,109
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,971,365 2,518,122
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,845,105 $ 2,564,231
=========== ===========
See notes to condensed consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The condensed 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 condensed 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 three-month period ended March 31, 2001 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2001. 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.
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.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three
months or less. The following summarizes interest paid. No income taxes were
paid and no interest was capitalized during the three months ended March 31,
2000 and 2001.
Three Months Ended March 31,
----------------------------
2000 2001
--------- ---------
Interest paid $ 706,000 $ 710,000
RECLASSIFICATIONS
The financial statements for prior periods have been reclassified to be
consistent with the current period financial statement presentation. These
reclassifications had no effect on previously reported net income.
In the first quarter of 2001, the carrying value of the Bell Rock Inn was
reclassified to Resort Property Under Development to reflect the Company's
intent to register and market the property as Vacation Ownership Interests
through ILX Premiere Vacation Club.
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:
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIC NET INCOME PER SHARE
Three Months Ended March 31,
----------------------------
2000 2001
----------- -----------
Net income $ 256,096 $ 381,509
Less: Series A preferred stock dividends (11,969) (11,969)
----------- -----------
Net income available to common stockholders - basic $ 244,127 $ 369,540
=========== ===========
Weighted average shares of common stock outstanding - basic 3,884,086 3,395,543
=========== ===========
Basic net income per share $ 0.06 $ 0.11
=========== ===========
DILUTED NET INCOME PER SHARE
Three Months Ended March 31,
----------------------------
2000 2001
----------- -----------
Net income $ 256,096 $ 381,509
Less: Series A preferred stock dividends (11,969) (11,969)
----------- -----------
Net income available to common stockholders - diluted $ 244,127 $ 369,540
=========== ===========
Weighted average shares of common stock outstanding 3,884,086 3,395,543
Add: Convertible preferred stock (Series B and C) dilutive effect 85,711 80,752
----------- -----------
Weighted average shares of common stock outstanding - diluted 3,969,797 3,476,295
=========== ===========
Diluted net income per share $ 0.06 $ 0.11
=========== ===========
Stock options to purchase 135,700 shares of common stock at prices ranging
from $3.25 per share to $8.125 per share were outstanding at March 31, 2001 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 2002 and 2004.
NOTE 3. SHAREHOLDERS' EQUITY
During the first quarter of 2001, the Company issued 4,000 shares of
restricted common stock, valued at $4,000, 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 first quarter of 2001, the Company purchased 142,700 shares of its common
stock for $293,109, and issued 10,000 shares of its restricted common stock to
the Employee Stock Ownership Plan and Trust, valued at $18,104.
NOTE 4. OTHER
In August 2000, the Company entered into a definitive agreement to acquire
a leasehold interest in a 44-acre parcel in Las Vegas, Nevada near the "Las
Vegas Strip" and the University of Nevada - Las Vegas. If acquired, the Company
intends to develop the property into a mixed use development, which could
include construction of a Varsity Clubs of America, operation of a vacation
ownership sales office, as well as subletting portions of the parcel for
traditional hotel, restaurant, golf and other ancillary uses. Earnest money in
the amount of $100,000 was deposited with an escrow agent at the signing of the
agreement. The Company had an original eight-month period, which has since been
extended through June 30, 2001, in which to secure financing, extend the lease
term, receive government approvals, complete its due diligence and make a
determination whether to proceed with the acquisition.
6
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 ("ILX" or the "Company") is one of the leading
developers, marketers and operators of timeshare resorts in the western United
States. The Company's principal operations consist of (i) acquiring, developing
and operating timeshare resorts, marketed by the Company as vacation ownership
resorts, (ii) marketing and selling vacation ownership interests in the
timeshare resorts, which typically have entitled the buyers thereof to ownership
of a fully-furnished unit for a one-week period on either an annual or an
alternate year (i.e., biennial) basis ("Vacation Ownership Interests"), and
(iii) providing purchase money financing to the buyers of Vacation Ownership
Interests at its resorts. In addition, the Company receives revenues from the
rental of its unused or unsold inventory of units at its vacation ownership
resorts, and from the sale of food, beverages and other services at such
resorts. The Company's current portfolio of resorts consists of six resorts in
Arizona, one in Indiana, one in Colorado, one currently under construction in
San Carlos, Mexico, and land adjacent to an existing resort for which the
Company holds development rights (the Roundhouse Resort) (collectively, the "ILX
Resorts"). Two of the resorts in Arizona are not at this time registered with
the Arizona Department of Real Estate nor being marketed for sale as Vacation
Ownership Interests, and one of the two resorts is operated under a long-term
lease arrangement.
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.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended March 31,
----------------------------
2000 2001
--------- ---------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 59.4% 57.9%
Resort operating revenue 31.2% 35.9%
Interest income 9.4% 6.2%
--------- ---------
Total timeshare revenues 100.0% 100.0%
========= =========
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 13.7% 17.0%
Sales and marketing 60.2% 62.6%
Provision for doubtful accounts 3.8% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 22.3% 16.0%
As a percentage of resort operating revenue:
Cost of resort operations 95.9% 80.3%
As a percentage of total timeshare revenues:
General and administrative 10.8% 9.3%
Depreciation and amortization 1.4% 0.9%
Timeshare operating income 11.8% 12.3%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 371 410
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $ 13,828 $ 14,128
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $ 15,421 $ 15,616
- ----------
(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) Consists of an aggregate of 589 and 645 biennial and annual Vacation
Ownership Interests for the three months ended March 31, 2000 and 2001,
respectively.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO THE THREE MONTHS ENDED
MARCH 31, 2001
Sales of Vacation Ownership Interests increased 9.6% or $573,368 in 2001 to
$6,520,224 from $5,946,856 in 2000, reflecting primarily an increase in sales
from the Sedona sales office, net of decreases in sales from the Kohl's Ranch
and VCA-Tucson sales offices. The increase in sales from the Sedona sales office
is due to greater tour flow from the marketing venues in Sedona, including the
new locations added in the first quarter of 2001. The decrease in sales from the
Kohl's Ranch sales office reflects a reduction in the number of tours to this
office, in large part due to unfavorable weather. The decrease in sales from the
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
VCA-Tucson sales office is a result of a lower closing rate (sales as a
percentage of tours). The average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) increased 2.2% or by $300 in 2001 to
$14,128 from $13,828 in 2000, reflecting a greater percentage of sales from the
Sedona sales office, which generally achieves higher average prices than the
Company's other sales offices.
The number of Vacation Ownership Interests sold increased 10.5% from 371 in
2000 to 410 in 2001 largely due to the greater tour flow to the Sedona sales
office. Sales of Vacation Ownership Interests in 2001 included 470 biennial
Vacation Ownership Interests (counted as 235 annual Vacation Ownership
Interests) compared to 436 biennial Vacation Ownership Interests (counted as 218
annual Vacation Ownership Interests) in 2000.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
3.3% from $590,865 in 2000 to $610,194 in 2001. 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. While Upgrade revenue increased by 3.3%, and
average sales price excluding Upgrades by $300 per Vacation Ownership Interest
sold, the average sales price per Vacation Ownership Interest sold (including
Upgrades) increased by only $195, from $15,421 in 2000 to $15,616 in 2001
because of the greater increase in total sales of Vacation Ownership Interests
than in Upgrade revenue.
Resort operating revenue increased 29.5% or $923,014 in 2001 to $4,047,224
from $3,124,210 in 2000, reflecting an increase in both revenue from vacation
interval owners and hotel room rentals. Hotel room rentals increased due to the
addition of the Bell Rock Inn and Los Abrigados Lodge in the fourth quarter of
2000. Cost of resort operations as a percentage of resort operating revenue
decreased from 95.9% in 2000 to 80.3% in 2001 as a result of the increases in
revenue, which includes both timing differences in recognizing revenue and an
increase in rates from vacation interval owners in 2001, improved operating
efficiencies at Kohl's Ranch Lodge, and lower overhead and temporarily more
limited services and amenities at the newly acquired Sedona resorts.
Interest income decreased by 26.4% to $691,522 in 2001 from $939,955 in
2000, reflecting an increase in the percentage of Customer Notes retained by the
Company, on which the Company will collect revenue over the term of the note,
and a decrease in the percentage of Customer Notes sold, for which the Company
recognizes the interest premium upon sale of the note.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales increased from 13.7% in 2000 to 17.0% in 2001,
reflecting variations in product mix, an increase in cost of sales recognized on
Upgrades, and improvements made to resort properties.
Sales and marketing as a percentage of Sales of Vacation Ownership
Interests increased to 62.6% in 2001 from 60.2% in 2000, reflecting reduced
efficiency at the Sedona sales office as a result of the relocation to a new
sales center in the first quarter and also reflecting the start-up costs of
several new offsite marketing locations in Sedona. The new Sedona sales center
has a greater capacity and the new marketing locations will help contribute to
the increased tour flow to capitalize on that capacity.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales increased to 4.4% of sales of Vacation Ownership Interests in
2001, compared to 3.8% in 2000, reflecting the Company's decision to increase
the provision on new sales effective in the second quarter of 2000.
General and administrative expenses decreased 3.1% to $1,047,639 in 2001
from $1,081,632 in 2000, and to 9.3% as a percentage of total timeshare revenues
in 2001 compared to 10.8% in 2000, reflecting a small decrease in expenses in
spite of the growth in revenue between years.
The 7.9% increase in interest expense from $689,003 in 2000 to $743,484 in
2001 reflects the combined net effect of fluctuations in borrowings between
periods and lower borrowing rates on its variable rate loans. During the quarter
ended March 31, 2001, the Company retained and borrowed against, rather than
sold, a greater portion of its Customer Notes. In addition, the Company assumed
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
an existing mortgage to acquire the Bell Rock Inn in December 2000 and borrowed
$808,000 in March 2001 to finance the fourth quarter 2000 purchase of the Sedona
Station, the site of the new Sedona sales center.
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 three months ended March 31, 2000 and 2001,
cash provided by operations was $2,221,445 and $2,199,260, respectively. The
increase in other assets in 2001 is related to an increase in prepaid loan fees
from the refinancing of the VCA-Tucson construction loan. The increase in
accrued and other liabilities reflects timing differences between years in
drawing funds from the homeowner associations for operating activities. 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 an installment payment, 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 condensed 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, 2000, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $4.6 million, which expire in 2001 through
2013. At December 31, 2000, 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 three
months ended March 31, 2000 and 2001 was $914,839 and $1,913,816, respectively.
The increase reflects a larger portion of Customer Notes being retained and
borrowed against, rather than sold.
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.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Customer defaults have a significant impact on cash available to the
Company from financing Customer Notes receivable 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 the quarter ended March 31,
2001, the Company issued 10,000 shares of its restricted common stock to the
ESOP valued at $18,104, and in May 2001, an additional 10,000 shares valued at
$23,800. The Company intends to make a $250,000 cash contribution to the ESOP in
2001 for the repayment by the ESOP of its line of credit, which the Company
guarantees. The ESOP line of credit was used to purchase shares, which are
collateral for the line. At March 31, 2001, the value of the collateral was
approximately $345,000 and the line of credit balance was $250,000. During the
quarter ended March 31, 2001, the Company paid and recognized as an expense
contribution $6,992 for interest on the line.
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
At March 31, 2001, the Company has an agreement with a financial
institution for a commitment of $40 million, 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. If a customer pays off a note prior to
maturity of the note, the financial institution may recover from the Company the
unearned interest premium, if any. At March 31, 2001, $22.8 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
expire in 2001 and 2002, respectively. At March 31, 2001, approximately $27.9
million is available under these commitments.
At March 31, 2000 and 2001, the Company had approximately $18.8 million and
$16.9 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 the first quarter of 2001, the Company purchased 142,700 treasury shares
for a cost of $293,109.
In December 2000, the Company acquired for $1,010,000 cash the Sedona
Station adjacent to Los Abrigados to be the site of its new Sedona sales center.
In March 2001, the Company borrowed $808,000, which is secured by the property
and bears interest at a fixed rate of 8.625%. The debt is payable in equal
monthly payments of principal and interest over a ten-year term, ending April
2011.
In January 2001, the Company refinanced the construction note payable on
VCA-Tucson. The new terms include extension of the maturity date to April 2004,
modification of the interest rate to prime plus 1% from a 12% fixed rate, and a
change in the principal payments and release provisions to include a $100,000
minimum monthly principal payment.
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
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
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 twelve 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 three months ended March 31, 2001.
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.
12
PART II
ITEM I. LEGAL PROCEEDINGS
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.
Other litigation has arisen in the normal course of the Company's business,
none of which is deemed to be material.
ITEM II. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM III. DEFAULTS UPON SENIOR SECURITIES
None
ITEM IV. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
None
13
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/ Taryn L. Chmielewski
----------------------------------------
Taryn L. Chmielewski
Vice President
Corporate Controller
Date: As of May 8, 2001
14