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, 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
incorporation or organization) Identification Number)
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 June 30, 2001
----- ----------------------------
Common Stock, without par value 3,225,405 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2001
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,518,122 $ 2,058,120
Notes receivable, net 26,619,853 29,491,894
Resort property held for Vacation Ownership Interest sales 21,663,793 21,242,315
Resort property under development 5,263,737 5,504,538
Land held for sale 1,667,298 765,908
Deferred assets 170,440 151,697
Property and equipment, net 5,141,378 5,516,486
Other assets 2,500,155 2,409,011
------------ ------------
TOTAL ASSETS $ 65,544,776 $ 67,139,969
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 1,220,787 $ 1,068,227
Accrued and other liabilities 3,126,940 3,604,762
Notes payable 32,851,068 32,860,362
Notes payable to affiliates 1,000,000 1,000,000
Deferred income taxes 1,510,535 2,262,059
------------ ------------
Total liabilities 39,709,330 40,795,410
------------ ------------
Shareholders' Equity
Preferred stock, $10 par value; 10,000,000 shares authorized;
291,553 and 287,892 shares issued and outstanding; liquidation
preference of $2,915,530 and $2,878,920 1,138,566 1,128,302
Common stock, no par value; 30,000,000 shares authorized;
4,105,192 and 4,130,505 shares issued 18,333,333 18,389,491
Treasury stock, at cost, 657,500 and 905,100 shares, respectively (1,308,655) (1,943,107)
Additional paid in capital 225,742 225,857
Guaranteed ESOP Obligation (250,000) (250,000)
Retained earnings 7,696,460 8,794,016
------------ ------------
Total shareholders' equity 25,835,446 26,344,559
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 65,544,776 $ 67,139,969
============ ============
See notes to condensed consolidated financial statements
2
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended June 30, Six months ended June 30,
---------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------
Timeshare revenues:
Sales of Vacation Ownership Interests $ 6,646,704 $ 7,978,808 $ 12,593,560 $ 14,499,032
Resort operating revenue 3,558,870 4,627,334 6,683,080 8,674,558
Interest income 801,853 551,077 1,741,808 1,242,599
------------ ------------ ------------ ------------
Total timeshare revenues 11,007,427 13,157,219 21,018,448 24,416,189
------------ ------------ ------------ ------------
Cost of sales and operating expenses:
Cost of Vacation Ownership Interests sold 913,443 1,358,800 1,729,834 2,467,446
Cost of resort operations 3,183,597 3,846,927 6,179,178 7,095,357
Sales and marketing 3,561,039 4,369,893 7,141,524 8,451,761
General and administrative 1,150,576 1,174,123 2,232,208 2,221,762
Provision for doubtful accounts 293,275 349,947 516,756 636,142
Depreciation and amortization 142,606 202,407 279,141 300,461
------------ ------------ ------------ ------------
Total cost of sales and operating expenses 9,244,536 11,302,097 18,078,641 21,172,929
------------ ------------ ------------ ------------
Timeshare operating income 1,762,891 1,855,122 2,939,807 3,243,260
Income from land and other, net 2,922 38,764 5,382 35,497
------------ ------------ ------------ ------------
Total operating income 1,765,813 1,893,886 2,945,189 3,278,757
Interest expense (699,360) (638,745) (1,388,363) (1,382,229)
------------ ------------ ------------ ------------
Income before income taxes and minority interests 1,066,453 1,255,141 1,556,826 1,896,528
Income tax expense (426,746) (491,646) (596,746) (751,524)
------------ ------------ ------------ ------------
Income before minority interests 639,707 763,495 960,080 1,145,004
Minority interests (6,145) -- (70,422) --
------------ ------------ ------------ ------------
Net income $ 633,562 $ 763,495 $ 889,658 $ 1,145,004
============ ============ ============ ============
Net income per share
Basic $ 0.17 $ 0.23 $ 0.23 $ 0.34
============ ============ ============ ============
Diluted $ 0.16 $ 0.22 $ 0.22 $ 0.33
============ ============ ============ ============
See notes to condensed consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
-----------------------------
2000 2001
----------- -----------
Cash flows from operating activities:
Net income $ 889,658 $ 1,145,004
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss on sale of property and equipment -- 12,499
Undistributed minority interest (23,778) --
Deferred income taxes 705,881 751,524
Provision for doubtful accounts 516,756 636,142
Depreciation and amortization 279,141 300,461
Amortization of guarantee fees 1,150 18,743
Contribution of common stock to ESOP Plan -- 41,904
Common stock issued to employees for services 31,425 4,210
Change in assets and liabilities:
Decrease in resort property held for Vacation
Ownership Interest sales 1,058,242 421,478
Increase in resort property under development (457,146) (240,801)
Increase in land held for sale (5,838) (11,578)
Decrease in other assets 697,446 11,748
Increase (decrease) in accounts payable 222,001 (152,560)
Increase in accrued and other liabilities 671,342 611,612
Decrease in due to affiliates (26,282) --
----------- -----------
Net cash provided by operating activities 4,559,998 3,550,386
----------- -----------
Cash flows from investing activities:
Increase in notes receivable, net (1,912,104) (2,837,794)
Decrease in deferred assets 80,398 --
Purchases of plant and equipment, net (372,797) (499,883)
----------- -----------
Net cash used in investing activities (2,204,503) (3,337,677)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 5,392,362 9,040,109
Principal payments on notes payable (7,248,887) (9,030,815)
Preferred stock dividends (47,626) (47,448)
Redemption of preferred stock (245) (105)
Acquisition of treasury stock and other (614,894) (634,452)
----------- -----------
Net cash used in financing activities (2,519,290) (672,711)
----------- -----------
Decrease in cash and cash equivalents (163,795) (460,002)
Cash and cash equivalents at beginning of period 2,971,365 2,518,122
----------- -----------
Cash and cash equivalents at end of period $ 2,807,570 $ 2,058,120
=========== ===========
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 six-month period ended June 30, 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, Nevada
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. No income taxes were paid and no interest was capitalized during
the six month periods ended June 30, 2000 and 2001. The following summarizes
interest paid.
Three Months Ended June 30, Six Months ended June 30,
-------------------- -------------------------
2000 2001 2000 2001
---- ---- ---- ----
Interest paid $ 687,411 $ 651,375 $1,393,411 $1,361,375
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 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 Vacation Ownership Interests in the property. The
resort is not at this time registered with the Arizona Department of Real Estate
nor has marketing of Vacation Ownership Interests in the property commenced. The
reclassification has been applied to the December 31, 2000 and June 30, 2001
financial statements.
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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,
-------------------------- --------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Net income $ 633,562 $ 763,495 $ 889,658 $ 1,145,004
Less: Series A preferred stock dividends (11,969) (11,969) (23,938) (23,938)
----------- ----------- ----------- -----------
Net income available to common
stockholders - basic $ 621,593 $ 751,526 $ 865,720 $ 1,121,066
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding - basic 3,726,730 3,280,072 3,809,234 3,337,501
=========== =========== =========== ===========
Basic net income per share $ 0.17 $ 0.23 $ 0.23 $ 0.34
=========== =========== =========== ===========
DILUTED NET INCOME PER SHARE
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- --------------------------
2000 2001 2000 2001
----------- ----------- ----------- -----------
Net income $ 633,562 $ 763,495 $ 889,658 $ 1,145,004
Less: Series A preferred stock dividends (11,969) (11,969) (23,938) (23,938)
----------- ----------- ----------- -----------
Net income available to common
stockholders - diluted $ 621,593 $ 751,526 $ 865,720 $ 1,121,066
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding 3,726,730 3,280,072 3,809,234 3,337,501
Add: Convertible preferred stock
(Series B and C) dilutive effect 85,711 80,141 83,730 80,420
----------- ----------- ----------- -----------
Weighted average shares of common stock
outstanding - dilutive 3,812,441 3,360,213 3,892,964 3,417,921
=========== =========== =========== ===========
Diluted net income per share $ 0.16 $ 0.22 $ 0.22 $ 0.33
=========== =========== =========== ===========
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 June 30, 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 six months ended June 30, 2001, the Company issued 4,100 shares
of restricted common stock, valued at $4,210, 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.
For the six months ended June 30, 2001 and 2000, the Company recorded the
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
exchange of 3,639 and 12,216 Series C Convertible shares for 1,213 and 4,072
common shares, respectively. Also during the six months ended June 30, 2001, the
Company purchased 247,600 shares of its common stock for $634,452, and issued
20,000 shares of its restricted common stock to the Employee Stock Ownership
Plan and Trust, valued at $41,904.
NOTE 4. OTHER
In May 2001, the Company sold land held for sale with a book value of
$912,968 and received a note receivable in the amount of $1,139,400 as
consideration. This land, located in Bullhead City, Arizona, is subject to
unpaid property taxes of $469,011. The note receivable will accrue interest at
8% per annum beginning October 1, 2001, and is due in full on January 1, 2003.
Note payments will initially be applied to accrued property taxes of $469,011,
which have been netted against the receivable.
In June 2001, the Company acquired for $900,000 cash 600 Vacation Ownership
Interests in The Carriage House, an existing vacation ownership resort in Las
Vegas. These 600 Vacation Ownership Interests, along with 2,400 timeshare
intervals in the Company's existing resorts, were annexed into Premiere Vacation
Club in June 2001, bringing the total number of Vacation Ownership Interests in
Premiere Vacation Club to 11,000 at June 30, 2001. In July 2001, the Company
acquired for $95,500 cash an additional 62 Vacation Ownership Interests in The
Carriage House, which have not yet been annexed into Premiere Vacation Club.
In July 2001, the Company acquired a 50-year leasehold interest in a
44-acre parcel located proximate to the Las Vegas Airport, University of Nevada
- - Las Vegas ("UNLV") and the "Strip" in Las Vegas, Nevada. The Company intends
to develop the property, to be known as the Kaleidoscope at McCarran, into a
mixed use development, including a vacation ownership sales office, museums,
restaurants, golf, retail and other ancillary uses. The parcel presently
includes a 25,000 square foot building which will contain a vacation ownership
sales office to be operated by the Company, provide club facilities for the UNLV
golf team, and the remainder has been leased for a golf-related use. In addition
to the existing building, the Company intends to lease the remaining developable
space on the 44-acre site, to be built by tenants to specifications approved by
the Company. The $5 million purchase price for the leasehold interest consists
of a $100,000 earnest money deposit made in August, 2000 and a $4.9 million
promissory note. Interest begins accruing on the note on February 1, 2002, with
interest only payable monthly through September 1, 2006. The interest rate is 6%
from February 1, 2002 through August 31, 2003, 7% for the next twelve months, 8%
for the next 24 months and twelve percent thereafter until the August 1, 2011
maturity date. Commencing September 1, 2006, monthly principal and interest
payments of $53,953 are payable monthly through maturity.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 and Mexico. 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 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 are being marketed for sale as Vacation Ownership Interests, and one
of the two resorts is operated under a long-term lease arrangement. The Company
also owns 662 Vacation Ownership Interests in a resort in Las Vegas, Nevada, 600
of which have been annexed into Premiere Vacation Club.
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.
8
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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 2001 2000 2001
--------- --------- --------- ---------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 60.4% 60.6% 59.9% 59.4%
Resort operating revenue 32.3% 35.2% 31.8% 35.5%
Interest income 7.3% 4.2% 8.3% 5.1%
--------- --------- --------- ---------
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 13.7% 17.0% 13.7% 17.0%
Sales and marketing 53.6% 54.8% 56.7% 58.3%
Provision for doubtful accounts 4.4% 4.4% 4.1% 4.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 28.3% 23.8% 25.5% 20.3%
As a percentage of resort operating revenue:
Cost of resort operations 89.5% 83.1% 92.5% 81.8%
As a percentage of total timeshare revenues:
General and administrative 10.5% 8.9% 10.6% 9.1%
Depreciation and amortization 1.3% 1.5% 1.3% 1.2%
Timeshare operating income 16.0% 14.1% 14.0% 13.3%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 429 502 800 912
Average sales price per Vacation Ownership Interest sold
(excluding revenues from Upgrades) (2) $ 13,937 $ 14,263 $ 13,887 $ 14,202
Average sales price per Vacation Ownership Interest sold
(including revenues from Upgrades) (2) $ 15,116 $ 15,607 $ 15,257 $ 15,611
- ----------
(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 675 and 766 biennial and annual Vacation
Ownership Interests for the three months ended June 30, 2000 and 2001,
respectively, and 1,264 and 1,411 biennial and annual vacation ownership
interests for the six months ended June 30, 2000 and June 30, 2001,
respectively.
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 2001
Sales of Vacation Ownership Interests increased 20.0% or $1,332,104 to
$7,978,808 for the three months ended June 30, 2001, from $6,646,704 for the
same period in 2000 and increased 15.1% or $1,905,472 to $14,499,032 for the six
months ended June 30, 2001 from $12,593,560 for the same period in 2000. The
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
increases reflect primarily higher 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. The reduced tour
flow reflects unfavorable weather conditions in the first quarter of 2001 and a
reduction in the number of non-owner guests at the resort for private functions,
due to the construction of new cabins in space previously utilized for this
purpose. Non-owner visitors to the resort are offered the opportunity to attend
a sales presentation either during their visit, or at a later date. The decrease
in sales from the VCA-Tucson sales office is a result primarily of lower tour
flow and to a lesser degree, a lower closing rate (sales as a percentage of
tours). The reduction in tour flow is consistent with the Company's expectations
as its tenure in the Tucson market lengthens and, accordingly, an increasing
portion of the qualified population in Tucson has previously toured and/or
purchased. In January 2000, the Company opened an off-site sales office in
Phoenix. While off-site sales operations typically operate at lower closing
rates than on-site sales offices at which the touring guest takes part in the
resort experience, an off-site sales office located proximate to a customer base
can provide more convenient access and therefore a broader audience as well as a
lower per tour cost. The cost and the effectiveness of tour generation to the
Phoenix office did not justify the lower efficiencies of this off-site sales
office and the Company closed the office on May 31, 2001. This office generated
37 annualized sales (11 annual and 52 biennial) during the first five months of
2001.
The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) increased 2.3% or $326 in 2001 to $14,263 for the three
months ended June 30, 2001 from $13,937 for the same period in 2000 and
increased 2.3% or $315 to $14,202 for the six months ended June 30, 2001 from
$13,887 for the same period in 2000. The number of Vacation Ownership Interests
sold increased 17.0% from 429 in the three months ended June 30, 2000 to 502 for
the same period in 2001 and increased 14.0% from 800 in the six months ended
June 30, 2000 to 912 for the same period in 2001 due to greater tour flow at the
Sedona sales office, net of reduced sales in the Kohl's Ranch and VCA--Tucson
sales offices as described above. The three and six months ended June 30, 2001
included 528 and 998 biennial Vacation Ownership Interests (counted as 264 and
499 annual Vacation Ownership Interests) compared to 492 and 928 biennial
Vacation Ownership Interests (counted as 246 and 464 annual Vacation Ownership
Interests) in the same periods in 2000, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
33.5% to $674,921 for the three months ended June 30, 2001 from $505,634 for the
same period in 2000 and increased 17.2% to $1,285,115 for the six months ended
June 30, 2001 from $1,096,499 for the same period in 2000. 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 $491 to $15,607 for the
three months ended June 30, 2001 from $15,116 in 2000 and increased 2.3% or $354
to $15,611 for the six months ended June 30, 2001 from $15,257 for the same
period in 2000. The percentage changes in average sales price per Vacation
Ownership Interest sold (including Upgrades) between periods reflect the
combination of increased average sales price (excluding Upgrades), the increase
in Upgrade revenue, spread over increased sales revenue in the current year.
Resort operating revenue increased 30.0% and 29.8% or $1,068,464 and
$1,991,478 to $4,627,334 and $8,674,558 for the three and six months ended June
30, 2001, respectively, reflecting an increase in both revenue from vacation
interval owners and hotel room rentals. Hotel room rentals increased due to the
acquisition of the Bell Rock Inn and Los Abrigados Lodge in the fourth quarter
of 2000 as well as the addition of twelve new cabins at Kohl's Ranch Lodge. Cost
of resort operations as a percentage of resort operating revenue decreased from
89.5% to 83.1% and from 92.5% to 81.8% for the second quarter and six months
ended June 30, 2001, respectively, as a result of the increases in revenue,
which includes both an increase in rates from vacation interval owners in 2001
and timing differences in recognizing revenue, increased occupancy and improved
operating efficiencies at Kohl's Ranch Lodge, and lower overhead and the ability
to offer more limited services and amenities at the newly acquired Sedona
resorts made possible in part by cross utilizing the Los Abrigados Resort and
Spa amenities.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
Interest income decreased 31.3% to $551,077 for the three months ended June
30, 2001 from $801,853 for the same period in 2000 and decreased 28.7% to
$1,242,599 for the six months ended June 30, 2001 from $1,741,808 for the same
period 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% for the three and six months ended
June 30, 2000 to 17.0% for the three and six months ended June 30, 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 54.8% for the three months ended June 30, 2001 from 53.6%
for the same period in 2000 and to 58.3% for the six months ended June 30, 2001
from 56.7% for the same period in 2000, largely reflecting reduced efficiency at
the Sedona sales office. The relocation to a new sales center in January with
significantly greater capacity and the start-up costs of several new offsite
marketing locations in Sedona impacted efficiency, particularly in the first
quarter of 2001.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales was consistent at 4.4% of sales of Vacation Ownership Interests
in the three month periods ended June 30, 2000 and 2001, respectively. The
provision for doubtful accounts increased from 4.1% for the six months ended
June 30, 2000 to 4.4% for the same period in 2001, reflecting the Company's
decision to increase the provision on new sales effective in the second quarter
of 2000.
General and administrative expenses decreased to 8.9% and 9.1% of total
timeshare revenue for the second quarter and six months ended June 30, 2001,
from 10.5% and 10.6% for the same periods in 2000, reflecting the Company's
continued focus on cost control and efficiency.
The 8.7% and 0.4% decreases in interest expense to $638,745 and $1,382,229
for the three and six months ended June 30, 2001 from $699,360 and $1,388,363
for the same periods in 2000, respectively, reflect an increase in borrowings
against Customer Notes receivable, net of interest rate reductions on the
Company's variable rate notes. During the first half of 2001, the Company
retained and borrowed against, rather than sold, a greater portion of its
Customer Notes. The Company's borrowings against Customer Notes are at rates
which vary with prime, and therefore the Company benefited by interest rate
reductions between years on Customer Notes hypothecated in prior periods. 2001
interest expense includes interest on the assumption of the existing mortgage
($4,473,000) to acquire Bell Rock Inn in December 2000 and the $808,000
borrowing in March 2001 to finance the 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), from the financing of Customer Notes from such
sales and from resort operations. During the six months ended June 30, 2000 and
2001, cash provided by operations was $4,559,998 and $3,550,386, respectively.
The decrease in cash provided by operations reflects an increase in resort
property held for sale for the June 2001 acquisition of 600 Vacation Ownership
Interests in the Carriage House in Las Vegas and a decrease in other assets in
2000 as a result of advances made to the Sedona Vacation Club Homeowners'
Association for renovations in 1999 which were reimbursed in the first quarter
of 2000. 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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
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 six
months ended June 30, 2000 and 2001 was $2,204,503 and $3,337,677, 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.
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 six months ended June 30,
2001, the Company issued 20,000 shares of its restricted common stock to the
ESOP, valued at $41,904. In July 2001, the Company made a total of $250,000 in
cash contributions to the ESOP for the repayment in full by the ESOP of the
outstanding principal balance on its line of credit, which the Company
guaranteed. The ESOP line of credit had been used to purchase shares, which were
collateral for the line. At June 30, 2001, the value of the collateral was
approximately $543,000 and the line of credit balance was $250,000. During the
six months ended June 30, 2001, the Company paid, and recognized as an expense
contribution, $13,404 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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
CREDIT FACILITIES AND CAPITAL
At June 30, 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 June 30, 2001, $22.6 million of the $40 million
commitment was available to the Company. The Company has been informed that this
financial institution is ceasing the portion of its business activities that
includes the financing of Customer Notes. The Company has not yet fully assessed
how it will be affected by this change.
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 June 30, 2001, approximately $26.7
million is available under these commitments.
At June 30, 2000 and 2001, the Company had approximately $18.6 million and
$14.1 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 six months of 2001, the Company purchased 247,600 treasury
shares for a cost of $634,452.
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 June 2001, the Company acquired 600 Vacation Ownership Interests in the
Carriage House in Las Vegas, Nevada for $900,000 in cash.
In July 2001, the Company acquired an additional 62 Vacation Ownership
Interests in The Carriage House for $95,500.
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 August 2001, the terms of the note were
further modified to include the addition of $1,000,000 in borrowings and to
increase the minimum monthly principal payment to $134,000. The additional
$1,000,000 was advanced in August 2001.
In July 2001, the Company acquired a 50-year leasehold interest in a
44-acre parcel located proximate to the Las Vegas Airport, University of Nevada
- - Las Vegas ("UNLV") and the "Strip" in Las Vegas, Nevada. The Company intends
to develop the property, to be known as the Kaleidoscope at McCarran, into a
mixed use development, including a vacation ownership sales office, museums,
restaurants, golf, retail and other ancillary uses. The parcel presently
includes a 25,000 square foot building which will contain a vacation ownership
sales office to be operated by the Company, provide club facilities for the UNLV
golf team, and the remainder has been leased for a golf-related use. In addition
to the existing building, the Company intends to lease the remaining developable
space on the 44-acre site, to be built by tenants to specifications approved by
the Company. The $5 million purchase price for the leasehold interest consists
of a $100,000 earnest money deposit made in August, 2000 and a $4.9 million
promissory note. Interest begins accruing on the note on February 1, 2002, with
interest only payable monthly through September 1, 2006. The interest rate is 6%
from February 1, 2002 through August 31, 2003, 7% for the next twelve months, 8%
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(CONTINUED)
for the next 24 months and twelve percent thereafter until the August 1, 2011
maturity date. Commencing September 1, 2006, monthly principal and interest
payments of $53,953 are payable monthly through maturity.
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. While the Company believes it maintains
excellent relationships with its lenders and will seek renewal or replacement of
existing lines upon their maturity, 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 has been negotiating with additional lenders to supplement its
existing credit facilities.
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 six months ended June 30, 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.
14
PART II
ITEM I. LEGAL PROCEEDINGS
The action filed on June 11, 1999 between the Company and Deloitte & Touche
LLP was resolved by agreement and dismissed.
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
On Wednesday, June 20, 2001, the Company held its Annual Meeting of
Shareholders. At this 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 For Votes Against Votes Withheld
--------- ------------- --------------
Steven R. Chanen 3,138,073 0 73,131
Joseph P. Martori 3,147,797 0 63,407
Joseph P. Martori, II 3,123,973 0 87,230
Patrick J. McGroder III 3,161,563 0 49,641
James W. Myers 3,161,563 0 49,641
Nancy J. Stone 3,147,797 0 63,407
Edward S. Zielinski 3,147,929 0 63,275
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, and Edward S. Zielinski.
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
None
15
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/ Chris J. Scoggin
------------------------------------
Chris J. Scoggin
Executive Vice President & Chief Financial Officer
/s/ Taryn L. Chmielewski
------------------------------------
Taryn L. Chmielewski
Vice President
Corporate Controller
Date: As of August 9, 2001
16