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, 1999 Commission File Number 001-13855
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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
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(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
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----------------------------------------------------
Former name, former address, and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at June 30, 1999
- ------------------------------- ----------------------------
Common Stock, without par value 4,424,863 shares
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
1998 1999
----------- -----------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,196,710 $ 1,560,328
Notes receivable, net 19,559,396 21,889,751
Resort property held for Vacation
Ownership Interest sales 20,834,225 20,928,018
Resort property under development 485,933 625,622
Land held for sale 1,593,885 1,602,492
Deferred assets 262,877 289,249
Property and equipment, net 4,006,991 4,633,383
Deferred income taxes 268,771 --
Other assets 1,788,470 2,743,942
----------- -----------
TOTAL ASSETS $51,997,258 $54,272,785
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,186,088 $ 764,866
Accrued and other liabilities 2,048,599 2,496,685
Deferred income tax liability -- 15,213
Notes payable 22,107,444 24,118,899
Notes payable to affiliates 894,078 894,078
----------- -----------
Total liabilities 26,236,209 28,289,741
----------- -----------
MINORITY INTERESTS (3,271) 8,973
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SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000
shares authorized; 380,468 and 305,978 shares
issued and outstanding; liquidation preference
of $3,804,680 and $3,059,780, respectively 1,384,891 1,179,299
Common stock, no par value; 30,000,000 shares
authorized; 4,332,533 and 4,424,863 shares issued 19,818,183 20,097,623
Treasury stock, at cost, 339,640 and 446,140 shares (1,273,843) (1,487,618)
Additional paid in capital 279,450 279,450
Retained earnings 5,555,639 5,905,317
----------- -----------
Total shareholders' equity 25,764,320 25,974,071
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $51,997,258 $54,272,785
=========== ===========
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,
--------------------------- --------------------------
1998 1999 1998 1999
---------- ----------- ----------- -----------
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $5,686,991 $ 6,168,570 $11,247,814 $11,320,079
Resort operating revenue 3,068,945 3,357,742 5,587,278 6,220,745
Interest income 485,666 884,577 933,673 1,648,710
---------- ----------- ----------- -----------
Total timeshare revenues 9,241,602 10,410,889 17,768,765 19,189,534
---------- ----------- ----------- -----------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 816,875 921,111 1,608,317 1,614,585
Cost of resort operations 2,933,587 3,045,256 5,548,727 5,858,297
Sales and marketing 3,488,551 3,730,893 6,819,821 7,139,859
General and administrative 617,308 1,101,582 1,277,680 2,032,142
Provision for doubtful accounts 167,913 176,453 330,182 327,299
Depreciation and amortization 97,892 112,874 184,510 225,576
---------- ----------- ----------- -----------
Total cost of sales and operating
expenses 8,122,126 9,088,169 15,769,237 17,197,758
---------- ----------- ----------- -----------
Timeshare operating income 1,119,476 1,322,720 1,999,528 1,991,776
Income from land and other, net 3,252 37,505 17,540 56,397
---------- ----------- ----------- -----------
Total operating income 1,122,728 1,360,225 2,017,068 2,048,173
Interest expense 401,618 698,094 907,133 1,370,375
---------- ----------- ----------- -----------
Income before income taxes and
minority interests 721,110 662,131 1,109,935 677,798
Income tax expense 289,000 264,000 445,000 268,000
---------- ----------- ----------- -----------
Income before minority interests 432,110 398,131 664,935 409,798
Minority interests -- 5,454 -- 12,244
---------- ----------- ----------- -----------
NET INCOME $ 432,110 $ 392,677 $ 664,935 $ 397,554
========== =========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.10 $ 0.10 $ 0.19 $ 0.09
========== =========== =========== ===========
Diluted $ 0.10 $ 0.09 $ 0.19 $ 0.09
========== =========== =========== ===========
See notes to consolidated financial statements
3
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months ended June 30,
--------------------------
1998 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 664,935 $ 397,554
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Undistributed minority interest -- 12,244
Deferred income taxes 442,000 283,984
Provision for doubtful accounts 330,182 327,299
Depreciation and amortization 184,510 225,576
Amortization of guarantee fees 35,675 4,200
Change in assets and liabilities:
Increase in resort property held for Vacation
Ownership Interest sales (2,999,715) (93,793)
Increase in resort property under development -- (139,689)
Increase in land held for sale (35,511) (8,607)
Increase in other assets (235,207) (956,472)
Decrease in accounts payable (1,237,263) (421,222)
(Decrease) increase in accrued and other
liabilities (608,073) 521,934
----------- -----------
Net cash (used in) provided by operating activities (3,458,467) 153,008
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (2,295,180) (2,657,654)
Increase in deferred assets (893) (30,572)
Purchases of plant and equipment, net (733,425) (850,968)
----------- -----------
Net cash used in investing activities (3,029,498) (3,539,194)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 7,040,435 10,963,477
Principal payments on notes payable (9,860,556) (8,952,022)
Principal payments on notes payable to affiliates (157,627) --
Net proceeds from issuance of common stock 9,537,150 --
Preferred stock dividend payments (47,996) (47,876)
Acquisition of treasury stock (75,701) (213,775)
----------- -----------
Net cash provided by financing activities 6,435,705 1,749,804
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (52,260) (1,636,382)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,226,038 3,196,710
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,173,778 $ 1,560,328
=========== ===========
See notes to consolidated financial statements
4
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the six-month period ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. 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
six months or less. The following summarizes interest paid, income taxes paid
and capitalized interest.
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1998 1999 1998 1999
---- ---- ---- ----
Interest paid $602,000 $703,000 $1,141,000 $1,332,000
Income taxes paid $ -- $ -- $ 3,000 $ --
Capitalized interest $178,000 $ -- $ 323,000 $ --
5
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. SFAS 130 was adopted by the Company in
1998. There were no items of other comprehensive income, as that term is defined
in SFAS 130, in the six months ended June 30, 1998 or June 30, 1999.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company has a single segment in the timeshare resort industry.
Revenue from products and services are reflected on the income statement under
Sales of Vacation Ownership Interests and Resort Operating Revenue.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which 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.
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,
--------------------------- -------------------------
1998 1999 1998 1999
---------- ---------- ---------- ----------
Net income $ 432,110 $ 392,677 $ 664,935 $ 397,554
Less: Series A preferred stock dividends (12,000) (11,969) (24,000) (23,938)
Series C convertible preferred
stock cumulation share dividends (8,568) -- (16,892) --
---------- ---------- ---------- ----------
Net income available to common
stockholders - basic $ 411,542 $ 380,708 $ 624,043 $ 373,616
========== ========== ========== ==========
Weighted average shares of common
stock outstanding - basic 4,047,463 3,991,089 3,331,751 4,009,652
========== ========== ========== ==========
Basic net income per share $ 0.10 $ 0.10 $ 0.19 $ 0.09
========== ========== ========== ==========
6
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
DILUTED NET INCOME PER SHARE
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
Net income $ 432,110 $ 392,677 $ 664,935 $ 397,554
Less: Series A preferred stock dividends (12,000) (11,969) (24,000) (23,938)
----------- ----------- ----------- -----------
Net income available to common
stockholders - diluted $ 420,110 $ 380,708 $ 640,935 $ 373,616
=========== =========== =========== ===========
Weighted average shares of common
stock outstanding 4,047,463 3,991,089 3,331,751 4,009,652
Add: Convertible preferred stock
(Series B and C) dilutive effect 110,541 110,268 110,541 110,404
----------- ----------- ----------- -----------
Weighted average shares of common stock
outstanding - dilutive 4,158,004 4,101,357 3,442,292 4,120,056
=========== =========== =========== ===========
Diluted net income per share $ 0.10 $ 0.09 $ 0.19 $ 0.09
=========== =========== =========== ===========
Stock options and warrants to purchase 163,200 shares of common stock
at prices ranging from $3.25 per share to $8.125 per share were outstanding at
June 30, 1999 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 expire at various dates
between 1999 and 2004.
Series C Convertible Preferred Stock dividends are not required, nor
were they declared, subsequent to November 1, 1998.
NOTE 3. SHAREHOLDERS' EQUITY
During the six months ended June 30, 1999, the Company issued 67,500
shares of restricted common stock, valued at $73,848, to employees in exchange
for services provided.
During the six months ended June 30, 1999, the Company purchased
106,500 shares of its common stock for $213,775.
For the six months ended June 30, 1999, the Company recorded the
exchange of 74,540 shares of Series C Convertible shares for 24,847 common
shares.
NOTE 4. EMPLOYEE STOCK OWNERSHIP PLAN
On April 9, 1999 (effective January 1, 1999), the Company formed the
ILX Resorts Incorporated Employee Stock Ownership Plan and Trust ("ESOP"). The
intent of the ESOP is to provide a retirement program for employees which aligns
their interests with those of the Company. During the second quarter of 1999 the
Company declared a $200,000 contribution to the ESOP and funded that
contribution in cash. The ESOP used the contribution to purchase 93,400 shares
of the Company's common stock in the open market in April and May 1999. In July
1999, the Company declared and contributed an additional $50,000 to the ESOP and
the ESOP purchased 20,500 shares of ILX common stock in the open market.
7
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN
THIS FORM 10-Q, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATES" AND
SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO
THE COMPANY'S FUTURE PERFORMANCE. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL
UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
OVERVIEW
ILX Resorts Incorporated was formed in 1986 to enter the Vacation
Ownership Interest business. The Company generates revenue primarily from the
sale and financing of Vacation Ownership Interests. The Company also generates
revenue from the rental of its unused or unsold inventory of units at the ILX
Resorts and from the sale of food, beverages or other services at such resorts.
The Company currently owns five resorts in Arizona, one in Indiana and one in
Colorado.
The Company recognizes revenue from the sale of Vacation Ownership
Interests at such time as a minimum of 10% of the purchase price has been
received in cash, the statutory rescission period has expired, the buyer is
committed to continued payments of the remaining purchase price and the
Company's future obligations for the Vacation Ownership Interests have been
released. Resort operating revenues are recorded as the rooms are rented or the
services are performed.
Costs associated with the acquisition and development of Vacation
Ownership Interests, including carrying costs such as interest and taxes, are
capitalized and amortized to cost of sales as the respective revenue is
recognized.
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,
--------------------------- -------------------------
1998 1999 1998 1999
------- ------- ------- -------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 61.5% 59.3% 63.3% 59.0%
Resort operating revenue 33.2% 32.3% 31.4% 32.4%
Interest income 5.3% 8.4% 5.3% 8.6%
------- ------- ------- -------
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 14.4% 14.9% 14.3% 14.3%
Sales and marketing 61.3% 60.5% 60.6% 63.1%
Provision for doubtful accounts 3.0% 2.9% 2.9% 2.9%
Contribution margin percentage from sale of
Vacation Ownership Interests (1) 21.3% 21.7% 22.1% 19.7%
As a percentage of resort operating revenue:
Cost of resort operations 95.6% 90.7% 99.3% 94.2%
As a percentage of total timeshare revenues:
General and administrative 6.7% 10.6% 7.2% 10.6%
Depreciation and amortization 1.1% 1.1% 1.0% 1.2%
Timeshare operating income 12.1% 12.7% 11.3% 10.4%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 386 413 762 745
Average sales price per Vacation Ownership
Interest sold (excluding revenues from
Upgrades) (2) $12,963 $13,513 $12,919 $13,536
Average sales price per Vacation Ownership
Interest sold (including revenues from
Upgrades) (2) $14,752 $14,647 $14,771 $15,035
- ----------
(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 180 annual and 411 biennial for the
three months ended June 30, 1998 and 192 annual and 441 biennial for the
three months ended June 30, 1999, and 360 annual and 803 biennial for the
six months ended June 30, 1998 and 353 annual and 783 biennial for the six
months ended June 30, 1999.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999
Sales of Vacation Ownership Interests increased 8.5% or $481,579 to
$6,168,570 for the three months ended June 30, 1999, from $5,686,991 for the
same period in 1998 and increased 0.6% or $72,265 to $11,320,079 for the six
months ended June 30, 1999 from $11,247,814 for the same period in 1998. The
increase in the second quarter largely reflects the improved closing rate (sales
as a percentage of tours) at the Sedona sales office. The average sales price
per Vacation Ownership Interest sold (excluding revenues from Upgrades)
increased 4.2% or $550 to $13,513 for the three months ended June 30, 1999, from
$12,963 for the same period in 1998 and increased 4.8% or $617 to $13,536 for
the six months ended June 30, 1999 from $12,919 for the same period in 1998
reflecting higher per unit sales prices for sales of ILX Premiere Vacation Club
Vacation Ownership Interests than for single resort Vacation Ownership
Interests. ILX Premiere Vacation Club was first introduced in June 1998.
The number of Vacation Ownership Interests sold increased 7.0% from 386
in the three months ended June 30, 1998 to 413 for the same period in 1999 due
to the improved closing rate at the Sedona sales office, and decreased 2.2% from
762 in the six months ended June 30, 1998 to 745 for the same period in 1999
largely due to lower tour flow to the South Bend sales office. Sales of Vacation
Ownership Interests in the three and six months ended June 30, 1999 included 441
and 783 biennial Vacation Ownership Interests (counted as 220.5 and 391.5 annual
Vacation Ownership Interests) compared to 411 and 803 biennial Vacation
Ownership Interests (counted as 205.5 and 401.5 annual Vacation Ownership
Interests) in the same periods in 1998, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales,
decreased 32.2% to $467,863 for the three months ended June 30, 1999 from
$689,812 for the same period in 1998 and decreased 20.8% to $1,116,305 for the
six months ended June 30, 1999 from $1,409,825 for the same period in 1998,
because second quarter 1998 sales included the initial introduction of ILX
Premiere Vacation Club. The Company made special offers to introduce the program
to its existing owners, which generated significant upgrade activity in the
second quarter of 1998. The second quarter average sales price per Vacation
Ownership Interest sold (including Upgrades) was comparable between periods and
increased to $15,035 for the six months ended June 30, 1999 from $14,771 for the
same period in 1998 because of the inclusion in the 1999 sales mix of sales to
new customers of the higher priced ILX Premiere Vacation Club Vacation Ownership
Interests, net of reduced Upgrade Sales.
Resort operating revenues increased 9.4% and 11.3% or $288,797 and
$633,467 to $3,357,742 and $6,220,745 for the three and six month periods ending
June 30, 1999, respectively, reflecting the opening of Varsity Clubs of America
- - Tucson Chapter in the third quarter of 1998. Cost of resort operations as a
percentage of resort operating revenue improved to 90.7% from 95.6% and to 94.2%
from 99.3% for the first quarter and first six months of 1999, respectively, due
to increased operating efficiency at Los Abrigados Resort & Spa and because 1998
expenses included the initial operating costs of Varsity Clubs of America -
Tucson Chapter, which did not open to revenue paying guests until July 1998.
Interest income increased 82.1% to $884,577 for the three months ended
June 30, 1999 from $485,666 for the same period in 1998 and increased 76.6% to
$1,648,710 for the six months ended June 30, 1999 from $933,673 for the same
period in 1998 as a result of the increase in customer notes retained by the
Company consistent with its strategy to retain and borrow against, rather than
sell, the majority of its customer notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales increased from 14.4% for the three months ended June
30, 1998 to 14.9% for the same period in 1999 and were comparable at 14.3% for
the six months ended June 30, 1998 and 1999. The second quarter 1999 increase
reflects the greater upgrade revenue in 1998, for which there is no associated
product cost, and variances in product mix between periods.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Sales and marketing as a percentage of sales of Vacation Ownership
Interests were comparable at 61% for the three-month periods ended June 30, 1999
and 1998, and increased to 63% for the six-month period ended June 30, 1999 from
61% for the same period in 1998, reflecting greater costs of tour generation to
the South Bend sales office in 1999, lower closing rates in the Sedona sales
office in the first quarter of 1999, and greater upgrade sales in the second
quarter of 1998. Marketing and sales costs are generally a smaller percentage of
revenue on upgrade sales than on sales to new customers.
The provision for doubtful accounts as a percentage of Vacation
Ownership Interest sales is comparable between years.
General and administrative expenses increased to 10.6% of total
timeshare revenues in both the three and six month periods ended June 30, 1999
compared to 6.7% and 7.2% for the same periods in 1998, to $1,101,582 for the
three months ended June 30, 1999 from $617,308 for the same period in 1998 and
to $2,032,142 for the six months ended June 30, 1999 from $1,277,680 for the
same period in 1998. The increases in 1999 reflect development and
implementation of centralized reservations, owner services and reporting systems
to support ILX Premiere Vacation Club and to provide operating efficiencies for
expected future growth. In addition, first quarter 1998 general and
administrative expenses were reduced by property tax reductions related to
successful appeals of property tax assessments and 1999 general and
administrative expenses include property taxes, insurance and other expenses
related to Varsity Clubs of America - Tucson Chapter.
The 73.8% increase in interest expense from $401,618 for the three
months ended June 30, 1998 to $698,094 for the same period in 1999 and 51.1%
increase in interest expense from $907,133 for the six months ended June 30,
1998 to $1,370,375 for the same period in 1999, reflect increased borrowings
against customer notes receivable as the Company retains and borrows against
more of such notes, net of decreases in interest rates and fluctuations in the
balances of borrowings outstanding.
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, 1998 and
1999, cash (used in)/provided by operations was $(3,458,467) and $153,008,
respectively. The negative cash flow in 1998 was due primarily to an increase of
$2,999,715 in resort property under development, which includes the development
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.
Cash provided by financing activities of $1,749,804 for the first six
months in 1999 was lower than the $6,435,705 of 1998 because 1999 reflects
greater borrowings against retained customer notes receivable (as the Company
follows its post follow-on offering strategy of retaining and borrowing against,
rather than selling, a greater portion of its customer notes), and because 1998
reflects the proceeds, net of offering costs, of the follow-on offering of 1.6
million shares of common stock.
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 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, 1998, the Company, excluding its Genesis subsidiary,
had NOL carryforwards of approximately $4.3 million, which expire in 2001
through 2012. At December 31, 1998, Genesis had federal NOL carryforwards of
approximately $1.7 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 six-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, 1998 and 1999 was $3,029,498 and $3,539,194,
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. The Company
intends to build twelve additional cabins at Kohl's Ranch commencing in 1999,
for which a financing commitment equal to the construction cost is in place.
Customer defaults have a significant impact on cash available to the
Company from financing customer notes receivables in that notes which are more
than 60 to 90 days past due are not eligible as collateral. As a result, the
Company in effect must repay borrowings against such notes or buy back such
notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the
ILX Resorts Incorporated Employee Stock Ownership Plan and Trust ("ESOP"). The
intent of the ESOP is to provide a retirement program for employees which aligns
their interests with those of the Company. During the second quarter of 1999 the
Company declared a $200,000 contribution to the ESOP and funded that
contribution in cash. The ESOP used the contribution to purchase 93,400 shares
of the Company's common stock in the open market in April and May 1999. In July
1999, the Company declared and contributed an additional $50,000 to the ESOP and
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the ESOP purchased 20,500 shares of ILX common stock in the open market. No
additional contributions are expected for the 1999 Plan year. The Plan, however,
may purchase additional shares for future year contributions through loans made
directly to the ESOP and guaranteed by the Company. Such borrowings are not
expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
The Company has an agreement with a financial institution for a $40
million financing commitment under which the Company may sell certain of its
customer notes. The agreement provides for sales on a recourse basis with a
percentage of the amount sold held back by the financial institution as
additional collateral. Customer notes may be sold at discounts or premiums to
the principal amount in order to yield the consumer market rate, as defined by
the financial institution. At June 30, 1999, approximately $37 million of the
$40 million in 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) and
prime plus 3% ($3.5 million). The $3.5 million and $40 million commitments
expire in 2001 and 2002, respectively. At June 30, 1999, approximately $31.7
million is available under these commitments.
In the future, the Company may negotiate additional credit facilities,
issue corporate debt, issue equity securities, or any combination of the above.
Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. There is no assurance that the Company will
be able to secure additional corporate debt or equity at or beyond current
levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash
generated from operations, will be sufficient to meet the Company's liquidity,
operating and capital requirements for at least the next 12 months.
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX
owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased or
additional seasonality dynamics which may cause the Company's operating results
to fluctuate.
YEAR 2000 ISSUES
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company believes it has identified all significant applications
that will require modifications to ensure Year 2000 Compliance. Internal and
external resources are currently being used to test Year 2000 Compliance and
make any additional modifications where required. The identification of needed
modifications and upgrades of all significant internal applications was complete
at December 31, 1998.
In addition, the Company is communicating with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Compliance issues. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted, or that
a failure to convert by another company, or a conversion that is incompatible
with the Company's systems, would not have a material adverse effect on the
Company.
The total cost to the Company of these Year 2000 Compliance activities
has not been and is not anticipated to be material to its financial position or
results of operations in any given year. Since the Company commenced its
assessment of its Year 2000 Compliance during early 1998, it has expended
approximately $70,000 and estimates additional future costs of approximately
$30,000, consisting primarily of software purchases and associated training and
consulting services. In addition, certain employees of the Company have devoted
their time to assessing and implementing the Company's Year 2000 Compliance, the
costs of which have not been separately allocated by the Company. These costs
and the date on which the Company plans to complete the Year 2000 modification
and testing processes are based on management's best estimates, which were
derived utilizing numerous assumptions of future events including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans.
The Company is in the process of developing a contingency plan in the
event that any of its systems or the systems of any third party with which it
has a material relationship are not Year 2000 Compliant, and expects to have the
plan complete by September 30, 1999. In the event that the Company is vulnerable
to any such Year 2000 Compliance issue, the worst case scenario could include
any or all of the following:
1. Inability to timely collect payments on customer notes;
2. Inability to timely or properly bill customers for resort charges;
3. Reduction in effectiveness of generating tours to sales offices;
4. Inability to purchase goods (including food, beverages and operating
supplies) from existing sources, thereby forcing the Company to use
alternative vendors at potentially less favorable pricing;
5. Inability to process payroll and/or perform other accounting functions
on an efficient basis; and
6. Suspension of some or all operations.
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
six most recent fiscal years or the six months ended June 30, 1999. 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
A dispute had arisen between the general contractor, Summit Builders,
and the Company's wholly owned subsidiary, VCA Tucson Incorporated, with respect
to amounts owed for the construction of Varsity Clubs of America - Tucson
Chapter. In May 1999, the dispute was settled for an amount of $1.3 million.
Such cost is included in resort property held for sale at June 30, 1999.
A dispute has arisen between Bowne of Phoenix, Inc. ("Bowne"), and the
Company regarding amounts owing for printing related to the Company's 1998
follow-on public offering. Bowne and the Company reached agreement on a payment
of $110,000 for such services, which Bowne subsequently sought to change. Bowne
has filed suit in the Superior Court of Arizona seeking total payment of
$154,720 plus interest and attorneys' fees. The Company is vigorously contesting
the claim and believes the matter will be resolved for less than the settlement
previously agreed to by Bowne prior to its institution of litigation and that
the Company will recover its attorneys' fees and other costs of litigation.
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 its preliminary stage. The defendant has not yet filed an
answer to the complaint nor has discovery commenced.
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 July 26, 1999, the Company held its Annual Meeting of Shareholders.
At this Annual Meeting the shareholders were asked to vote on the following
proposal:
To elect seven (7) directors to serve until the next annual meeting of
shareholders of the Company, or until their successors are duly elected
and qualified.
The voting results were as follows:
Nominees recommended in the Proxy Statement:
Votes Against
Votes For or Withheld Non-votes
--------- ----------- ---------
Steven R. Chanen 2,776,599 74,097 322,030
Joseph A. Leonetti 2,576,147 74,097 322,030
Joseph P. Martori 4,576,613 74,097 322,030
Patrick J. McGroder III 2,776,613 74,097 322,030
James W. Myers 2,776,613 74,097 322,030
Nancy J. Stone 3,029,061 74,097 322,030
Edward S. Zielinski 2,776,520 74,097 322,030
15
Shareholder nominee proposed at the Annual Meeting:
Joseph P. Martori, II 4,000,000
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
Patrick J. McGroder III James W. Myers Nancy J. Stone
Edward S. Zielinski
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
None
16
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
------------------------
Chief Financial Officer
Date: As of August 10, 1999
17