SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended September 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
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(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.
The undersigned registrant hereby amends its Quarterly Report on Form 10-Q for
the three- and nine-month periods ended September 30, 1998, as follows:
Part I, Items I and 2 and the Financial Data Schedule
are hereby amended to read in their entirety, as follows:
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, September 30,
1997 1998
------------ -------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,226,038 $ 1,650,200
Notes receivable, net 15,861,621 18,910,291
Resort property held for Vacation
Ownership Interest sales 14,666,658 20,881,974
Resort property under development 2,943,936 147,631
Land held for sale 1,557,498 1,593,009
Deferred assets 289,009 264,048
Property and equipment, net 3,472,899 4,251,823
Deferred income taxes 304,430 --
Other assets 1,400,224 1,496,604
----------- -----------
TOTAL ASSETS $43,722,313 $49,195,580
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 2,830,375 $ 1,740,263
Accrued and other liabilities 2,220,566 1,690,413
Notes payable 19,884,479 17,508,694
Notes payable to affiliates 2,166,100 1,620,557
Income taxes payable -- 94,320
----------- -----------
Total liabilities 27,101,520 22,654,247
----------- -----------
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 19,819,477
Treasury stock, at cost, 103,060 and 234,940 shares (652,587) (1,040,456)
Additional paid in capital 79,450 279,450
Retained earnings 5,541,372 6,097,971
----------- -----------
Total shareholders' equity 16,620,793 26,541,333
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $43,722,313 $49,195,580
=========== ===========
See notes to consolidated financial statements
2
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
1997 1998 1997 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $6,812,548 $5,633,797 $17,750,423 $16,881,611
Resort operating revenue 2,770,829 3,342,697 8,000,593 8,929,975
Interest income 414,482 610,098 973,236 1,543,771
---------- ---------- ----------- -----------
Total timeshare revenues 9,997,859 9,586,592 26,724,252 27,355,357
---------- ---------- ----------- -----------
COST OF SALES AND OPERATING
EXPENSES:
Cost of vacation ownership
Interests sold 852,314 739,509 2,369,296 2,347,826
Cost of resort operations 2,672,365 3,157,149 7,938,745 8,705,876
Sales and marketing 4,095,069 4,169,458 10,237,066 10,989,279
General and administrative 703,731 842,848 2,003,106 2,120,528
Provision for doubtful accounts 208,759 168,586 526,352 498,768
Depreciation and amortization 137,494 99,706 345,145 284,216
---------- ---------- ----------- -----------
Total cost of sales and operating
expenses 8,669,732 9,177,256 23,419,710 24,946,493
---------- ---------- ----------- -----------
Timeshare operating income 1,328,127 409,336 3,304,542 2,408,864
---------- ---------- ----------- -----------
Income from land and other, net 7,001 4,435 16,585 21,975
---------- ---------- ----------- -----------
Total operating income 1,335,128 413,771 3,321,127 2,430,839
Interest expense 564,710 515,111 1,500,472 1,422,244
---------- ---------- ----------- -----------
Income before income taxes and
minority interests 770,418 (101,340) 1,820,655 1,008,595
Income tax expense (303,845) 41,000 (656,302) (404,000)
---------- ---------- ----------- -----------
Income before minority interests 466,573 (60,340) 1,164,353 604,595
---------- ---------- ----------- -----------
Minority interests (9,554) -- (178,307) --
---------- ---------- ----------- -----------
NET INCOME $ 457,019 $ (60,340) $ 986,046 $ 604,595
========== ========== =========== ===========
NET INCOME PER SHARE
Basic $ 0.16 $ (0.02) $ 0.35 $ 0.15
========== ========== =========== ===========
Diluted $ 0.16 $ (0.02) $ 0.35 $ 0.15
========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
--------------------------
1997 1998
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 986,046 $ 604,595
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Undistributed minority interest 178,032 --
Deferred income taxes 414,204 398,750
Provision for doubtful accounts 526,352 498,768
Depreciation and amortization 345,145 284,216
Amortization of guarantee fees 67,150 39,075
Change in assets and liabilities:
Decrease (increase) in resort property
held for Vacation Ownership Interest sales 1,016,760 (3,419,011)
(Decrease) in resort property under development (518,127) --
Increase in land held for sale (3,572) (35,511)
Increase in other assets (11,637) (114,830)
Decrease in accounts payable (390,843) (1,090,112)
Increase (decrease) in accrued and
other liabilities 357,065 (331,032)
----------- ------------
Net cash provided by (used in) operating activities 2,966,575 (3,165,092)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (4,429,967) (3,547,438)
Increase in deferred assets (67,617) (14,114)
Purchases of property and equipment, net (492,988) (1,044,690)
Net cash paid for minority interest (820,000) --
----------- ------------
Net cash used in investing activities (5,810,572) (4,606,242)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 6,208,386 9,716,404
Principal payments on notes payable (4,374,662) (12,092,189)
Principal payments on notes payable to affiliates (202,181) (387,143)
Distributions to minority partners (140,000) --
Net proceeds from issuance of common stock 96,125 9,394,289
Acquisition of treasury stock (563) (387,869)
Preferred stock dividend payments (47,894) (47,996)
----------- ------------
Net cash (used in) provided by financing activities (1,539,211) 6,195,496
----------- ------------
DECREASE IN CASH AND CASH EQUIVALENTS (1,304,786) (1,575,838)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 3,523,047 3,226,038
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,218,261 $ 1,650,200
=========== ============
See notes to consolidated financial statements
4
<PAGE>
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 (collectively referred to as "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 nine months ended September 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 Nine Months Ended
September 30, September 30,
------------------- -----------------------
1997 1998 1997 1998
Interest paid $627,000 $356,000 $1,547,000 $1,498,000
Income taxes paid $ -- $ 2,000 $ -- $ 5,000
Capitalized interest $ 54,000 $ 34,000 $ 140,000 $ 357,000
5
<PAGE>
RESORT PROPERTY UNDER DEVELOPMENT
Resort property under development totaling $2,943,936 at December 31, 1997
was reclassified to resort property held for Vacation Ownership Interest sales
as of September 30, 1998 to reflect 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 nine months ended September 30, 1997 or September 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. The Company is currently evaluating what impact this statement will
have on its financial statements.
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.
In September 1998, the Company amended a borrowing agreement to increase
the amount that it may borrow against eligible receivables from $2,000,000 to
$3,500,000 through September 2001. The terms of the agreement provide for
borrowing at prime plus 3%, with a maturity date of September 2006.
In September 1998, the Company borrowed $300,000 for additional development
at Varsity Clubs of America South Bend Chapter, including enclosure of the
outdoor swimming pool. The note is secured by furniture and equipment, bears
interest at 9.5% and matures in 2001.
6
<PAGE>
NOTE 3. NOTE PAYABLE TO AFFILIATES
In September 1998, the Company entered into an agreement to purchase at a
$200,000 discount a promissory note from an affiliate with a current principal
balance before the discount of $998,349 and accrued interest of $13,130. The
Company made a $100,000 principal payment in September 1998 and paid the
remaining balance in October 1998. The $200,000 in debt forgiveness has been
treated as additional paid-in capital.
NOTE 4. 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 457,019 $ (60,340) $ 986,046 $ 604,595
Less: Series A preferred stock
dividends (12,000) (12,000) (35,947) (36,000)
Series C convertible preferred
stock cumulation share dividends $ (8,859) (4,938) (26,577) (21,775)
---------- ---------- ---------- ----------
Net income available to common
stockholders - basic $ 436,160 $ (77,278) $ 923,522 $ 546,820
========== ========== ========== ==========
Weighted average shares of common
stock outstanding - basic 2,654,633 4,165,440 2,623,502 3,612,701
========== ========== ========== ==========
Basic net income per share $ 0.16 $ (0.02) $ 0.35 $ 0.15
========== ========== ========== ==========
DILUTED NET INCOME PER SHARE
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
1997 1998 1997 1998
---- ---- ---- ----
Net income $ 457,019 $ (60,340) $ 986,046 $ 604,595
Less: Series A preferred stock
dividends (12,000) (12,000) (35,947) (36,000)
---------- ---------- ---------- ----------
Net income available to common
stockholders - diluted $ 445,019 $ (72,340) $ 950,099 $ 568,595
========== ========== ========== ==========
Weighted average shares of common
stock outstanding 2,654,633 4,165,440 2,623,502 3,612,701
Add: Convertible preferred stock
(Series B and C) dilutive effect 110,541 110,541 112,320 110,541
---------- ---------- ---------- ----------
Weighted average shares of common
stock outstanding - dilutive 2,765,174 4,275,981 2,735,822 3,723,242
========== ========== ========== ==========
Diluted net income per share $ 0.16 $ (0.02) $ 0.35 $ 0.15
========== ========== ========== ==========
</TABLE>
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
September 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 the underlying common shares. These options and
warrants expire at various dates between 1998 and 2004.
7
<PAGE>
NOTE 5. 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.
NOTE 6. 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 $1,405,711), were recorded as common stock.
NOTE 7. 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 the Company's Premiere Vacation Club in exchange for
participation in the profits of Premiere Vacation Club as provided in the
agreement.
8
<PAGE>
ITEM 2. 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 and other services at such resorts. The
Company currently owns five resorts in Arizona, one in Indiana and one in
Colorado. In addition, the Company has the right to market Vacation Ownership
Interests in resorts located in Florida and Mexico.
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.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1998 1997 1998
As a percentage of total timeshare
revenues:
Sales of Vacation Ownership Interests 68.2% 58.8% 66.5% 61.7%
Resort operating revenue 27.7% 34.8% 29.9% 32.7%
Interest income 4.1% 6.4% 3.6% 5.6%
------- ------- ------- -------
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 12.5% 13.1% 13.3% 13.9%
Sales and marketing 60.1% 74.0% 57.7% 65.1%
Provision for doubtful accounts 3.1% 3.0% 3.0% 3.0%
Contribution margin percentage
from sale of Vacation
Ownership Interests (1) 24.3% 9.9% 26.0% 18.0%
As a percentage of resort operating
revenue:
Cost of resort operations 96.4% 94.4% 99.2% 97.5%
As a percentage of total timeshare
revenues:
General and administrative 7.0% 8.8% 7.5% 7.8%
Depreciation and amortization 1.4% 1.0% 1.3% 1.0%
Timeshare operating income 13.3% 4.3% 12.4% 8.8%
Selected operating data:
Vacation Ownership Interests sold (2)(3) 522 352 1,231 1,114
Average sales price per Vacation
Ownership Interest sold (excluding
revenues from Upgrades) (2) $12,023 $13,387 $12,598 $13,018
Average sales price per Vacation
Ownership Interest sold (including
revenues from Upgrades) (2) $13,051 $16,005 $14,420 $15,161
- ----------
(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 241 annual and 562 biennial for the
three months ended September 30, 1997 and 143 annual and 418 biennial for
the three months ended September 30, 1998, and 582 annual and 1,298
biennial for the nine months ended September 30, 1997 and 503 annual and
1,221 biennial for the nine months ended September 30, 1998.
10
<PAGE>
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 1998
Sales of Vacation Ownership Interests decreased 17% or $1,178,751 to
$5,633,797 for the three months ended September 30, 1998, from $6,812,548 for
the same period in 1997 and decreased 5% or $868,812 to $16,881,611 for the nine
months ended September 30, 1998 from $17,750,423 for the same period in 1997.
The reductions 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 and a
lower closing rate in the Sedona office, net of increased upgrade sales to
existing owners and sales from the Tucson sales office, which opened in August
1997. The average sales price per Vacation Ownership Interest sold (excluding
revenues from Upgrades) increased 11% and 3% for the three and nine month
periods ended September 30, 1998, reflecting higher prices charged for Premiere
Vacation Club interests in comparison to interests in individual properties. The
Company began selling Premiere Vacation Club late in the second quarter of 1998.
The number of Vacation Ownership Interests sold decreased 32.6% to 352 for
the three months ended September 30, 1998 from 522 for the same period in 1997
and decreased 9% to 1,114 for the nine months ended September 30, 1998 from
1,231 for the same period in 1997. Sales of Vacation Ownership Interests in the
three and nine months ended September 30, 1998, included 418 and 1,221 biennial
Vacation Ownership Interests (counted as 209 and 610.5 annual Vacation Ownership
Interests) compared to 562 and 1,298 biennial Vacation Ownership Interests
(counted as 281 and 649 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 nine
months 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. Improvement in tour flow as a result of
the investment in these programs is expected to be realized beginning in the
latter half of the fourth quarter in 1998. 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 sought approval in California to generate
tours to its Sedona sales office, and such approval was received in July 1998.
The Company began test marketing into California late in the third quarter.
Significant tour flow from this market is not expected until late in the fourth
quarter of 1998 or early 1999, following completion of test marketing. During
July and August 1998 the Sedona sales office experienced an 11% closing rate,
substantially lower than the office's historical performance. The Company
attributes the decline to management of the office and, accordingly, made a
change in management on September 1, 1998. Following the change, the September
closing rate for the office increased to 18%, consistent with historical results
from this office.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
72% to $921,722 for the three months ended September 30, 1998 from $536,645 for
the same period in 1997 and increased 6% to $2,385,830 for the nine months ended
September 30, 1998 from $2,242,596 for the same period in 1997. The increases in
Upgrade revenue in the third quarter and year-to-date reflect the introduction
of Premiere Vacation Club late in the second quarter of 1998. Premiere Vacation
Club, which offers buyers the opportunity to utilize their time at any of the
participating individual ILX Resorts, to receive day use privileges and food and
beverage discounts at all ILX Resorts and a variety of other benefits, is
currently being marketed as an Upgrade to owners of Vacation Ownership Interests
in the individual ILX Resorts (as well as to new customers). Interests in
Premiere Vacation Club are sold for higher prices than interests of a similar
size and season in the Company's individual resorts due to the greater
flexibility Premiere provides. The increase in Upgrade revenue from Premiere
Vacation Club sales in 1998 is offset in part by the greater trade-in value
recognized in 1997 on Upgrades by owners of Golden Eagle ownership interests.
Golden Eagle ownership interests have a higher trade-in value than the Company's
other properties and, in 1997, a disproportionate number of Golden Eagle owners
upgraded their ownership interests. 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 introduction of the higher priced Premiere Vacation Club interests to
both new customers and existing owners is reflected in the increased average
sales price per Vacation Ownership Interest sold. The average sale price per
Vacation Ownership Interest sold excluding revenue from Upgrades increased from
$12,023 to $13,387 and from $12,598 to $13,018 for the three and nine month
periods in 1997 to the same periods in 1998 and the average sales price
11
<PAGE>
including Upgrades increased from $13,051 to $16,005 and from $14,420 to $15,161
for the same periods.
Resort operating revenues increased 21% and 12% or $571,868 and $929,382 to
$3,342,697 and $8,929,975 for the three and nine month periods ending September
30, 1998, respectively, reflecting increases at the Company's Sedona properties
and at Kohl's Ranch Lodge, and the opening of Varsity Clubs of America - Tucson
Chapter in July 1998.
The decreases in cost of resort operations as a percentage of resort
operating revenue for both the three and nine month periods ended September 30,
1998 reflect increased revenue at the Company's Sedona property and Kohl's Ranch
Lodge, net of the effects of recognition of start-up and initial operating costs
of Varsity Clubs of America - Tucson Chapter.
Interest income increased 47% to $610,098 for the three months ended
September 30, 1998 from $414,482 for the same period in 1997 and increased 59%
to $1,543,771 for the nine months ended September 30, 1998 from $973,236 for the
same period in 1997, primarily 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. The Company is retaining and borrowing against
(hypothecating) rather than selling a greater portion of its consumer notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales increased slightly (approximately 0.6%) for both the
three and nine month periods ended September 30, 1998, reflecting variations in
product mix. 1998 sales include a lower proportion of sales of interests in Los
Abrigados Resort & Spa, and greater sales of interests in Varsity Clubs. The
purpose built Varsity Clubs typically have a greater cost of sales than
interests in Los Abrigados. Partially offsetting this change in mix are the
greater 1998 prices as described above.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 74% and 65% for the three and nine months ended September
30, 1998 from 60% and 58% for the same periods in 1997, respectively, due to
reduced tours to the South Bend sales office as a result of the transition from
the utilization of a major outside vendor of tours to internal generation of
tours, increased costs of generating tours to the Sedona sales office and
reduced closing rates in the Sedona office in July and August, all as discussed
above. Sales and marketing expenses in the third quarter of 1998 also reflect
start-up costs associated with developing sales operations at the Roundhouse
Resort in Pinetop, Arizona, and two offsite sales offices in Mexico, which are
not expected to produce significant revenue until at least the first quarter of
1999. Sales and marketing expenses also include costs of developing an exit
program for non-purchasers which allows such customers to take advantage of the
benefits of ownership on a trial basis. Introduction of the exit program is
planned for the fourth quarter of 1998, with significant revenue not expected
until 1999.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales remained comparable between years.
General and administrative expenses increased 20% to $842,848 for the three
months ended September 30, 1998 from $703,731 for the same period in 1997 and
increased 6% to $2,120,528 for the nine months ended September 30, 1998 from
$2,003,106 for the same period in 1997. General and administrative expenses
increased as a percentage of total timeshare revenues increased to 8.8% for the
three and 7.8% for the nine months ended September 30, 1998 compared to 7.0% and
7.5% for the same periods in 1997, respectively. The increases reflect greater
staffing (including information systems, contract and loan processing and
accounting and financial personnel) to support recent and planned expansion of
sales offices, properties and marketing programs, including the Varsity Clubs of
America - Tucson Chapter hotel and sales office, offsite sales offices in Mexico
and the Premiere Vacation Club program.
Interest expense decreased 9% to $515,111 for the three months ended
September 30, 1998 from $564,710 for the same period in 1997 and decreased 5% to
$1,422,244 for the nine months ended September 30, 1998 from $1,500,472 for the
same period in 1997, reflecting reductions in borrowings in the second and third
quarters 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
12
<PAGE>
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.
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 nine months ended September 30, 1997 and 1998,
cash provided by (used in) operations was $2,966,575 and $(3,165,092),
respectively. The negative cash flow for the nine months ended September 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 nine
months ended September 30, 1997 and 1998 was $5,810,572 and $4,606,242,
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 nine
13
<PAGE>
months ended September 30, 1998, the Company was constructing Varsity Clubs of
America - Tucson Chapter, which was completed 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 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 September 30,
1998, approximately $9.1 million was available under these commitments.
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% to prime plus 3.0%
and expire at various dates from 2002 through 2003. At September 30, 1998,
approximately $39.7 million is available under these commitments. In addition,
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 $1,405,711), 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
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.
14
<PAGE>
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 make the required modifications and test
Year 2000 Compliance. The modification and upgrade of all significant internal
applications is currently in process. The Company plans on completing the
modification and upgrade process of all significant applications by December 31,
1998.
In addition, the Company has communicated 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
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 $28,000 and estimates additional future costs of approximately
$40,000, 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.
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 nine months ended September 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.
15
<PAGE>
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 December 30, 1998
16
<PAGE>
EXHIBIT INDEX
No. Description
- --- -----------
27-1 Financial Data Schedule (filed herewith)
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS THIRD QUARTER 1998 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 1,650,200
<SECURITIES> 0
<RECEIVABLES> 22,278,258
<ALLOWANCES> 3,367,967
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 5,973,125
<DEPRECIATION> 1,721,302
<TOTAL-ASSETS> 49,195,580
<CURRENT-LIABILITIES> 0
<BONDS> 19,129,251
0
1,384,891
<COMMON> 19,819,477
<OTHER-SE> 5,336,965
<TOTAL-LIABILITY-AND-EQUITY> 49,195,580
<SALES> 16,881,611
<TOTAL-REVENUES> 27,355,357
<CGS> 2,347,826
<TOTAL-COSTS> 24,946,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 498,768
<INTEREST-EXPENSE> 1,422,244
<INCOME-PRETAX> 1,008,595
<INCOME-TAX> 404,000
<INCOME-CONTINUING> 604,595
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 604,595
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
