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, 1998 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)
Registrant's telephone number, including area code 602-957-2777
------------
---------------------------------------------
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, 1998
- -------------------------------------- ----------------------------
Common Stock, without par value 4,216,893 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1997 1998
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,226,038 $ 3,173,778
Notes receivable, net 15,861,621 17,826,619
Resort property held for Vacation Ownership Interest sales 14,666,658 20,610,309
Resort property under development 2,943,936 --
Land held for sale 1,557,498 1,593,009
Deferred assets 289,009 254,227
Property and equipment, net 3,472,899 4,034,114
Deferred income taxes 304,430 --
Other assets 1,400,224 1,698,131
------------ ------------
TOTAL ASSETS $ 43,722,313 $ 49,190,187
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 2,830,375 $ 1,593,112
Accrued and other liabilities 2,220,566 1,488,372
Notes payable 19,884,479 17,064,358
Notes payable to affiliates 2,166,100 2,050,073
Income taxes payable -- 137,570
------------ ------------
Total liabilities 27,101,520 22,333,485
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares authorized;
380,468 shares issued and outstanding; liquidation preference of
$ 3,804,680 1,384,891 1,384,891
Common stock, no par value; 30,000,000 shares authorized;
2,692,433 and 4,332,533 shares issued 10,267,667 19,962,338
Treasury stock, at cost, 103,060 and 115,640 shares (652,587) (728,288)
Additional paid in capital 79,450 79,450
Retained earnings 5,541,372 6,158,311
------------ ------------
Total shareholders' equity 16,620,793 26,856,702
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 43,722,313 $ 49,190,187
============ ============
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,
--------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
TIMESHARE REVENUES:
Sales of Vacation Ownership
Interests $ 5,846,579 $ 5,686,991 $10,937,875 $11,247,814
Resort operating revenue 2,801,978 3,068,945 5,229,764 5,587,278
Interest income 294,031 485,666 558,754 933,673
----------- ----------- ----------- -----------
Total timeshare revenues 8,942,588 9,241,602 16,726,393 17,768,765
----------- ----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership
Interests sold 851,327 816,875 1,516,981 1,608,317
Cost of resort operations 2,550,141 2,933,587 5,094,727 5,548,727
Sales and marketing 3,332,044 3,488,551 6,141,997 6,819,821
General and administrative 676,755 617,308 1,470,402 1,277,680
Provision for doubtful accounts 170,823 167,913 317,593 330,182
Depreciation and amortization 95,198 97,892 208,278 184,510
----------- ----------- ----------- -----------
Total cost of sales and operating
expenses 7,676,288 8,122,126 14,749,978 15,769,237
----------- ----------- ----------- -----------
Timeshare operating income 1,266,300 1,119,476 1,976,415 1,999,528
Income from land and other, net 5,052 3,252 9,584 17,540
----------- ----------- ----------- -----------
Total operating income 1,271,352 1,122,728 1,985,999 2,017,068
Interest expense 472,177 401,618 935,762 907,133
----------- ----------- ----------- -----------
Income before income taxes and
minority interests 799,175 721,110 1,050,237 1,109,935
Income tax expense 281,884 289,000 352,457 445,000
----------- ----------- ----------- -----------
Income before minority interests 517,291 432,110 697,780 664,935
Minority interests 94,468 -- 168,753 --
----------- ----------- ----------- -----------
NET INCOME $ 422,823 $ 432,110 $ 529,027 $ 664,935
=========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
Diluted $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
See notes to consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended June 30,
-------------------------
1997 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 529,027 $ 664,935
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Undistributed minority interest 168,478 --
Deferred income taxes 316,359 442,000
Provision for doubtful accounts 317,593 330,182
Depreciation and amortization 208,278 184,510
Amortization of guarantee fees 45,850 35,675
Gain on settlement of liability (98,705) --
Change in assets and liabilities:
Decrease (increase) in resort property held for Vacation
Ownership Interest sales 790,834 (2,999,715)
Increase in resort property under development (137,539) --
Increase in land held for sale (3,572) (35,511)
Increase in other assets (173,161) (235,207)
Decrease in accounts payable (531,466) (1,237,263)
Increase (decrease) in accrued and other liabilities 315,596 (608,073)
----------- -----------
Net cash provided by (used in) operating activities 1,747,572 (3,458,467)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (2,660,127) (2,295,180)
Increase in deferred assets (54,434) (893)
Purchases of property and equipment, net (2,570) (733,425)
----------- -----------
Net cash used in investing activities (2,717,131) (3,029,498)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 1,238,048 7,040,435
Principal payments on notes payable (2,016,166) (9,860,556)
Principal payments on notes payable to affiliates (137,433) (157,627)
Net proceeds from issuance of common stock 39,875 9,537,150
Redemption of common stock -- (75,701)
Preferred stock dividend payments (7) (47,996)
----------- -----------
Net cash (used in) provided by financing activities (875,683) 6,435,705
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (1,845,242) (52,260)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,523,047 3,226,038
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,677,805 $ 3,173,778
=========== ===========
See notes to consolidated financial statements
4
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
Regulation 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 and six months ended June 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998. 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, Florida, Indiana
and Mexico. The Company's operations also include marketing of skin and hair
care products, which are not considered significant to resort operations.
Reverse Stock Split
On January 9, 1998, the Company's shareholders approved an amendment to
the Company's Articles of Incorporation to effect a one-for-five reverse stock
split of the Company's issued and outstanding shares of common stock. The
reverse stock split has been retroactively reflected in the accompanying
financial statements.
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 June 30, Six Months Ended June 30,
--------------------------- --------------------------
1997 1998 1997 1998
---------- ---------- ---------- ----------
Interest paid $ 403,000 $ 602,000 $ 939,000 $1,141,000
Income taxes paid $ -- $ -- $ -- $ 3,000
Capitalized interest $ 40,000 $ 178,000 $ 86,000 $ 323,000
5
Notes to Consolidated Financial Statements
(Unaudited)
(continued)
Resort Property Under Development
Resort property under development totaling $2,943,936 at December 31,
1997 was reclassified as resort property held for Vacation Ownership Interest
Sales as of June 30, 1998 in conjunction with the substantial completion of
construction. The resort opened to revenue paying guests in July 1998.
Accounting Matters
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 three and six months ended June 30, 1997 or June 30, 1998.
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.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133"),
which is effective for the Company in 2000. SFAS No. 133 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. The
Company is currently evaluating what impact this standard will have on its
financial statements.
Reclassifications
The financial statements for 1997 have been reclassified to be
consistent with the 1998 presentation.
Note 2. Notes Payable
In June 1998, the Company entered into a borrowing agreement under
which it may borrow up to $40 million against eligible receivables through June
2002. The terms of the agreement provide for borrowing at prime plus 1.5% to
prime plus 1.75%, with a maturity date of June 11, 2007. A commitment fee of 1%
is payable as amounts are advanced under the line.
In June 1998, the Company acquired residential real estate in Sedona,
Arizona for $308,000 for which it paid $58,000 in cash and borrowed $250,000
secured by a deed of trust. The note bears interest at 8.5%, and matures in
2003.
Note 3. 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,
--------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
Net income $ 422,823 $ 432,110 $ 529,027 $ 664,935
Less: Series A preferred stock dividends (11,974) (12,000) (23,947) (24,000)
Series C convertible preferred stock cumulation
share dividends (8,859) (8,568) (17,719) (16,892)
----------- ----------- ----------- -----------
Net income available to common stockholders -
basic $ 401,990 $ 411,542 $ 487,361 $ 624,043
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding - basic 2,614,396 4,047,463 2,609,737 3,331,751
=========== =========== =========== ===========
Basic net income per share $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
6
Notes to Consolidated Financial Statements
(Unaudited)
(continued)
Diluted Net Income Per Share
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1997 1998 1997 1998
----------- ----------- ----------- -----------
Net income $ 422,823 $ 432,110 $ 529,027 $ 664,935
Less: Series A preferred stock dividends (11,974) (12,000) (23,947) (24,000)
----------- ----------- ----------- -----------
Net income available to common stockholders -
diluted $ 410,849 $ 420,110 $ 505,080 $ 640,935
=========== =========== =========== ===========
Weighted average shares of common stock
outstanding 2,614,396 4,047,463 2,609,737 3,331,751
Add: Convertible preferred stock (Series B and C)
dilutive effect 112,100 110,541 113,210 110,541
----------- ----------- ----------- -----------
Weighted average shares of common stock
outstanding - dilutive 2,726,496 4,158,004 2,722,947 3,442,292
=========== =========== =========== ===========
Diluted net income per share $ 0.15 $ 0.10 $ 0.19 $ 0.19
=========== =========== =========== ===========
Stock options and warrants to purchase 157,200 shares of common stock
at prices ranging from $6.75 per share to $8.125 per share were outstanding at
June 30, 1998 but were not included in the computation of diluted net income per
share because the options' and warrants' exercise prices were greater than the
average market price of common shares. These options and warrants expire at
various dates between 1998 and 2004.
Note 4. Shareholders' Equity
During the first quarter of 1998, the Company issued 28,100 shares of
restricted common stock, valued at $82,521, to employees in exchange for
services provided. In February 1998, the Company issued 12,000 shares, valued at
$75,000, to EVEREN Securities, Inc., for investment banking and underwriting
services (see Note 5).
Note 5. Common Stock Offering
In April 1998, the Company sold, through a public offering, 1,400,000
shares of its common stock at a price of $6.75; EVEREN Securities, Inc., the
underwriter of the offering, also exercised its overallotment option and
purchased an additional 200,000 shares at a price of $6.75, for total proceeds
of $10,800,000. Proceeds of the offering, net of the costs of the underwriting
(including a 7% underwriting discount, professional fees, printing and
promotional costs totaling $1,262,850), were recorded as common stock.
Note 6. Other
In June 1998, the Company entered into an agreement to acquire 1,500
one-week, 25-year right-to-use Vacation Ownership Interests to be constructed on
land adjacent to a full service resort in San Carlos, Mexico. Such interests
will be contributed to Premiere Vacation Club in exchange for participation in
the profits of Premiere Vacation Club as provided in the agreement.
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.
7
Management's Discussion and Analysis of Financial Condition and Results of
Operations
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 June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
As a percentage of total timeshare
revenues:
Sales of Vacation Ownership Interests 65.4% 61.5% 65.4% 63.3%
Resort operating revenue 31.3% 33.2% 31.3% 31.4%
Interest income 3.3% 5.3% 3.3% 5.3%
------ ------ ------ ------
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 14.6% 14.4% 13.9% 14.3%
Sales and marketing 57.0% 61.3% 56.2% 60.6%
Provision for doubtful accounts 2.9% 3.0% 2.9% 2.9%
Contribution margin percentage from
sale of Vacation Ownership
Interests (1) 25.5% 21.3% 27.1% 22.1%
As a percentage of resort operating
revenue:
Cost of resort operations 91.0% 95.6% 97.4% 99.3%
As a percentage of total timeshare
revenues:
General and administrative 7.6% 6.7% 8.8% 7.2%
Depreciation and amortization 1.1% 1.1% 1.2% 1.0%
Timeshare operating income 14.2% 12.1% 11.8% 11.3%
8
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
Selected operating data:
Vacation Ownership Interests sold (2)
(3) 382 386 709 762
Average sales price per Vacation
Ownership Interest sold (excluding
revenues from Upgrades) (2) $13,181 $12,963 $13,021 $12,919
Average sales price per Vacation
Ownership Interest sold (including
revenues from Upgrades) (2) $15,305 $14,752 $15,427 $14,771
- -------------------------
(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 178 annual and 408 biennial for
the three months ended June 30, 1997 and 180 annual and 411 biennial for
the three months ended June 30, 1998, and 341 annual and 736 biennial for
the six months ended June 30, 1997 and 360 annual and 803 biennial for
the six months ended June 30, 1998.
Comparison of the Three and Six Months Ended June 30, 1997 to the Three and Six
Months Ended June 30, 1998
Sales of Vacation Ownership Interests decreased 3% or $159,588 to
$5,686,991 for the three months ended June 30, 1998, from $5,846,579 for the
same period in 1997 and increased 3% or $309,939 to $11,247,814 for the six
months ended June 30, 1998 from $10,937,875 for the same period in 1997. The
variations in sales reflect a decline in sales from the South Bend and Sedona
sales offices as a result of fewer tours generated to those offices, net of
sales from the Tucson sales office, which opened in August 1997. The average
sales price per Vacation Ownership Interest sold (excluding revenues from
Upgrades) was comparable between periods.
The number of Vacation Ownership Interests sold were comparable between
years for the three months ended June 30 and increased 8% to 762 for the six
months ended June 30, 1998 from 709 for the same period in 1997. Sales of
Vacation Ownership Interests in the three and six months ended June 30, 1998,
included 411 and 803 biennial Vacation Ownership Interests (counted as 205.5 and
401.5 annual Vacation Ownership Interests) compared to 408 and 736 biennial
Vacation Ownership Interests (counted as 204 and 368 annual Vacation Ownership
Interests) for the same periods in 1997, respectively.
The decrease in tour flow to the South Bend sales office in the first
half of 1998 was due to the termination of the marketing company which had
provided the majority of tours to the sales office, in favor of internal
generation of tours. Fewer tours have been generated during the transition and
start-up periods of these new programs. Tour flow to the Sedona sales office has
decreased due to increasing competition for tours in the Phoenix market. In
response to this trend, the Company has sought approval in California to
generate tours to its Sedona sales office, and such approval was received in
July 1998. The Company intends to begin marketing into California late in the
third quarter.
Upgrade revenue, included in Vacation Ownership Interest sales,
decreased 15% to $689,812 for the three months ended June 30, 1998 from $811,525
for the same period in 1997 and decreased 17% to $1,409,825 for the six months
ended June 30, 1998 from $1,705,951 for the same period in 1997, as a result of
limiting other programs in anticipation of introduction of the Premiere Vacation
Club, which was delayed beyond its expected start date due to delays in
regulatory approval. Approval was received late in the second quarter and
marketing of this new product to existing owners began in the last few weeks of
the quarter. Also, in 1997 a greater proportion of Upgrades were by owners of
Golden Eagle Vacation Ownership Interests which have a higher trade-in value
than the Company's other properties. Upgrades generally do not involve the sale
of additional Vacation Ownership Interests (merely their exchange) and,
therefore, such Upgrades increase the average sales
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
price per Vacation Ownership Interest sold. The reduced upgrade revenue due to
the delayed Premiere Vacation Club promotion and the change in upgrade mix to
include fewer Golden Eagle owners resulted in lower average sales prices per
Vacation Ownership Interest sold (including Upgrades) of $14,752 for the three
months ended June 30, 1998 from $15,305 for the same period in 1997 and $14,771
for the six months ended June 30, 1998 from $15,427 for the same period in 1997.
Resort operating revenues increased 10% and 7% or $266,967 and $357,514
to $3,068,945 and $5,587,278 for the three and six month periods ending June 30,
1998, respectively, reflecting increases in sales of food and beverage and other
amenities at Kohl's Ranch Lodge and increases in occupancy at Varsity Clubs of
America - South Bend Chapter.
The increases in cost of resort operations as a percentage of resort
operating revenue for both the three and six month periods ended June 30, 1998
are a result of initial operating costs of Varsity Clubs of America - Tucson
Chapter, which opened to revenue paying guests in July 1998.
Interest income increased 65% to $485,666 for the three months ended
June 30, 1998 from $294,031 for the same period in 1997 and increased 67% to
$933,673 for the six months ended June 30, 1998 from $558,754 for the same
period in 1997 as a result of the increase in customer notes retained by the
Company and increases in interest rates charged by the Company on its customer
notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales are comparable between periods.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 61% for the three and six months ended June 30, 1998 from
57% and 56% for the same periods in 1997, respectively, due to reduced tours to
the South Bend sales office as a result of transition from the utilization of a
major outside vendor of tours to internal generation of tours as discussed
above, and the increased costs of generating tours to the Sedona sales office
due in part to the inclement weather (during the first quarter of 1998) and in
part to increasing costs of generating tours from the Phoenix market. In July
1998 the Company received regulatory authority to market in California to its
Sedona sales office and intends to begin marketing for the first time in that
state late in the third quarter.
The provision for doubtful accounts as a percentage of Vacation
Ownership Interest sales remained comparable between years.
General and administrative expenses decreased 9% to $617,308 for the
three months ended June 30, 1998 from $676,755 for the same period in 1997 and
decreased 13% to $1,277,680 for the six months ended June 30, 1998 from
$1,470,402 for the same period in 1997. General and administrative expenses
decreased as a percentage of total timeshare revenues to 7% for the three and
six months ended June 30, 1998 compared to 8% and 9% for the same periods in
1997, respectively. These decreases were primarily due to the recognition of a
gain on the write off of an accrued liability in the second quarter of 1998 and
a reduction in property tax expense related to successful appeals of property
tax assessments in the first quarter of 1998.
Interest expense decreased 15% to $401,618 for the three months ended
June 30, 1998 from $472,177 for the same period in 1997 and decreased 3% to
$907,133 for the six months ended June 30, 1998 from $935,762 for the same
period in 1997, reflecting reductions in borrowings in the second quarter of
1998 from the use of proceeds of the follow-on offering of the Company's common
stock, net of an increase in borrowings against notes receivable as the Company
retains and borrows against, rather than sells, a greater portion of its
customer notes receivable.
Income tax expense as a percentage of pre-tax income net of minority
interests is comparable between years.
The elimination of minority interests in 1998 is due to the buyout by
the Company of the LAP minority interest in August 1997.
10
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, 1997 and
1998, cash provided by (used in) operations was $1,747,572 and $(3,458,467),
respectively. The negative cash flow for the six months ended June 30, 1998 was
due primarily to the construction of Varsity Clubs of America - Tucson Chapter,
which was financed in large part through a construction loan and lease
financing. 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, 1997, the Company, excluding Genesis, had NOL
carryforwards of $4.8 million, which expire in 2001 through 2012. At December
31, 1997, Genesis had federal NOL carryforwards of $1.9 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 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 for the
six months ended June 30, 1997 and 1998 was $2,717,131 and $3,029,498,
respectively.
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 the six
months ended June 30, 1998 the Company was constructing Varsity Clubs of America
- - Tucson Chapter, which was complete in July 1998. During that period, the
Company borrowed $3,438,076 on its construction financing commitment and
$800,200 on its lease commitment for this property.
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
11
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
result, the Company in effect must repay borrowings against such notes or buy
back such notes if they were sold with recourse.
Credit Facilities and Capital
The Company has agreements with financial institutions for total
commitments aggregating $25.0 million under which the Company may sell certain
of its customer notes. These agreements provide for sales on a recourse basis
with a percentage of the amount sold held back by the financial institution as
additional collateral. Notes may be sold at discounts or premiums to yield the
consumer market rate as defined by the financial institution. At June 30, 1998,
approximately $12.7 million was available under these commitments.
The Company also has financing commitments aggregating $42.0 million
whereby the Company may borrow against notes receivable pledged as collateral.
These borrowings bear interest at a rate of prime plus 1.5% to prime plus 5.0%
and expire at various dates from 2002 through 2003. At June 30, 1998,
approximately $39.5 million is available under these commitments. The Company
has a written commitment for an additional $10.0 million of notes receivable
financing that is subject to final documentation.
In April 1998, the Company sold, through a public offering, 1,400,000
shares of its common stock at a price of $6.75; EVEREN Securities, Inc., the
underwriter of the offering, also exercised its overallotment option and
purchased an additional 200,000 shares at a price of $6.75, for total proceeds
of $10,800,000. Proceeds of the offering, net of the costs of the underwriting
(including a 7% underwriting discount, professional fees, printing and
promotional costs totaling $1,262,850), were recorded as common stock.
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.
Other
In June 1998, the Company entered into an agreement to acquire 1,500
one-week, 25-year right-to-use Vacation Ownership Interests to be constructed on
land adjacent to a full service resort in San Carlos, Mexico. Such interests
will be contributed to Premiere Vacation Club in exchange for participation in
the profits of Premiere Vacation Club as provided in the agreement.
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.
Year 2000 Issues
As with other organizations, some of the Company's computer programs
were originally designed to recognize calendar years by their last two digits.
Calculations performed using these truncated fields would not work properly with
dates from the year 2000 and beyond. The Company has initiated efforts to remedy
this situation and expects all programs to be corrected and tested prior to the
year 2000. The incremental costs of this project are not expected to have a
material effect on the Company's consolidated financial statements or results of
operations.
12
Management's Discussion and Analysis of Financial Condition and Results of
Operations
(continued)
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 or six months ended June 30, 1998.
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
Part II
Item I. Legal Proceedings
None
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
(i) Exhibits
Exhibit No. Description
----------- -----------
10-1 Secured Line of Credit Lending Agreement
between Litchfield Financial Corporation
and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and
Premiere Development Incorporated dated as
of June 12, 1998 (filed herewith)
10-2 Secured Line of Credit Promissory Note
between Litchfield Financial Corporation
and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and
Premiere Development Incorporated dated as
of June 12, 1998 (filed herewith)
10-3 Business Agreement among ILX Resorts
Incorporated, Premiere Vacation Club and
Premiere Development Incorporated and
Treasures of the Sea of Cortez, Promotora
de Inversion Turistica, Immobiliaria y
Hotelera Los Algodones and Immobiliaria
Cerro Pelon dated as of June 8, 1998
(filed herewith)
27-1 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
None
14
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/ Stephen W. Morgan
--------------------------------
Stephen W. Morgan
Chief Financial Officer
and Senior Vice President
Date: As of August 10, 1998
15
EXHIBIT INDEX
No. Description
- --- -----------
10-1 Secured Line of Credit Lending Agreement between Litchfield
Financial Corporation and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and Premiere
Development Incorporated dated as of June 12, 1998 (filed
herewith)
10-2 Secured Line of Credit Promissory Note between Litchfield
Financial Corporation and ILX Resorts Incorporated, Los
Abrigados Partners Limited Partnership and Premiere
Development Incorporated dated as of June 12, 1998 (filed
herewith)
10-3 Business Agreement among ILX Resorts Incorporated, Premiere
Vacation Club and Premiere Development Incorporated and
Treasures of the Sea of Cortez, Promotora de Inversion
Turistica, Immobiliaria y Hotelera Los Algodones and
Immobiliaria Cerro Pelon dated as of June 8, 1998 (filed
herewith)
27-1 Financial Data Schedule (filed herewith)
16