SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 1999 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
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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 March 31, 1999
- ------------------------------- -----------------------------
Common Stock, without par value 4,005,893 shares
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1998 1999
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 3,196,710 $ 4,063,682
Notes receivable, net 19,559,396 20,845,172
Resort property held for Vacation
Ownership Interest sales 20,834,225 20,121,678
Resort property under development 485,933 625,622
Land held for sale 1,593,885 1,602,492
Deferred assets 262,877 266,723
Property and equipment, net 4,006,991 4,391,742
Deferred income taxes 268,771 264,771
Other assets 1,788,470 2,306,293
------------ ------------
TOTAL ASSETS $ 51,997,258 $ 54,488,175
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,186,088 $ 937,379
Accrued and other liabilities 2,048,599 2,234,907
Notes payable 22,107,444 24,653,972
Notes payable to affiliates 894,078 894,078
------------ ------------
Total liabilities 26,236,209 28,720,336
------------ ------------
MINORITY INTERESTS (3,271) 3,519
------------ ------------
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; 4,332,533 and
4,378,033 shares issued 19,818,183 19,867,281
Treasury stock, at cost, 339,640 and
372,140 shares (1,273,843) (1,327,818)
Additional paid in capital 279,450 279,450
Retained earnings 5,555,639 5,560,516
------------ ------------
Total shareholders' equity 25,764,320 25,764,320
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 51,997,258 $ 54,488,175
============ ============
See notes to consolidated financial statements
2
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
----------------------------
1998 1999
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Timeshare revenues:
Sales of Vacation Ownership Interests $5,560,823 $5,151,509
Resort operating revenue 2,518,333 2,863,003
Interest income 448,007 764,133
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Total timeshare revenues 8,527,163 8,778,645
---------- ----------
Cost of sales and operating expenses:
Cost of Vacation Ownership Interests sold 791,442 693,474
Cost of resort operations 2,615,140 2,813,041
Sales and marketing 3,331,270 3,408,966
General and administrative 660,372 930,560
Provision for doubtful accounts 162,269 150,846
Depreciation and amortization 86,618 112,702
---------- ----------
Total cost of sales and operating expenses 7,647,111 8,109,589
---------- ----------
Timeshare operating income 880,052 669,056
Income from land and other, net 14,288 18,892
---------- ----------
Total operating income 894,340 687,948
Interest expense 505,515 672,281
---------- ----------
Income before income taxes and minority interests 388,825 15,667
Income tax expense 156,000 4,000
---------- ----------
Income before minority interests 232,825 11,667
Minority interests -- 6,790
---------- ----------
Net income 232,825 4,877
========== ==========
Net income per share
Basic $ 0.08 $ 0.00
========== ==========
Diluted $ 0.08 $ 0.00
========== ==========
See notes to consolidated financial statements
3
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 232,825 $ 4,877
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Undistributed minority interest -- 6,790
Deferred income taxes 156,000 4,000
Provision for doubtful accounts 162,269 150,846
Depreciation and amortization 86,618 112,702
Amortization of guarantee fees 24,000 2,900
Change in assets and liabilities:
Decrease in resort property held for Vacation
Ownership Interest sales 396,959 712,547
Increase in resort property under development (1,443,791) (139,689)
(Increase) decrease in land held for sale 500 (8,607)
Increase in other assets (450,359) (517,823)
Decrease in accounts payable (1,060,344) (248,709)
Increase (decrease) in accrued and other liabilities (30,474) 235,406
----------- -----------
Net cash provided by (used in) operating activities (1,925,797) 315,240
----------- -----------
Cash flows from investing activities:
Notes receivable, net (546,560) (1,436,622)
Decrease (increase) in deferred assets 2,680 (6,746)
Purchases of plant and equipment, net (232,435) (497,453)
----------- -----------
Net cash used in investing activities (776,315) (1,940,821)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 3,053,079 7,352,450
Principal payments on notes payable (1,594,712) (4,805,922)
Principal payments on notes payable to affiliates (18,638) --
Acquisition of treasury stock -- (53,975)
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Net cash provided by financing activities 1,439,729 2,492,553
----------- -----------
Increase (decrease) in cash and cash equivalents (1,262,383) 866,972
Cash and cash equivalents at beginning of period 3,226,038 3,196,710
----------- -----------
Cash and cash equivalents at end of period $ 1,963,655 $ 4,063,682
=========== ===========
</TABLE>
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 ("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 three-month period ended March 31, 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
three months or less. The following summarizes interest paid, income taxes paid
and capitalized interest.
Three Months Ended March 31,
----------------------------
1998 1999
---- ----
Interest paid $413,000 $629,000
Income taxes paid -- --
Capitalized interest 129,000 --
5
<PAGE>
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 three months ended March 31, 1998 or March 31, 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 March 31,
-------------------------------
1998 1999
----------- -----------
Net income $ 232,825 $ 4,877
Less: Series A preferred stock dividends (12,000) (11,969)
Series C convertible preferred stock
cumulation share dividends (8,323) --
----------- -----------
Net income available to common
stockholders - basic $ 212,502 $ (7,092)
=========== ===========
Weighted average shares of common stock
outstanding - basic 2,605,086 4,028,421
=========== ===========
Basic net income per share $ 0.08 $ 0.00
=========== ===========
6
<PAGE>
DILUTED NET INCOME PER SHARE
Three Months Ended March 31,
-------------------------------
1998 1999
----------- -----------
Net income $ 232,825 $ 4,877
Less: Series A preferred stock dividends (12,000) (11,969)
----------- -----------
Net income available to common
stockholders - diluted $ 220,825 $ (7,092)
=========== ===========
Weighted average shares of common
stock outstanding 2,608,086 4,028,421
Add: Convertible preferred stock
(Series B and C) dilutive effect 110,541 110,541
----------- -----------
Weighted average shares of common stock
outstanding - diluted 2,718,627 4,138,962
=========== ===========
Diluted net income per share $ 0.08 $ 0.00
=========== ===========
Stock options to purchase 163,200 shares of common stock at prices
ranging from $3.25 per share to $8.125 per share were outstanding at March 31,
1999 but were not included in the computation of diluted net income per share
because the options' exercise prices were greater than the average market price
of common shares. These options expire at various dates between 1999 and 2004.
NOTE 3. SHAREHOLDERS' EQUITY
During the first quarter of 1999, the Company issued 45,500 shares of
restricted common stock, valued at $49,098, to employees in exchange for
services provided. These restricted shares of common stock issued to employees
are exempt from registration under Section 4(2) of the Securities Act of 1933.
Also during the first quarter of 1999, the Company purchased 32,500 shares of
its common stock for $53,975.
7
<PAGE>
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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended March 31,
----------------------------
1998 1999
------- -------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 65.2% 58.7%
Resort operating revenue 29.5% 32.6%
Interest income 5.3% 8.7%
------- -------
Total timeshare revenues 100.0% 100.0%
======= =======
As a percentage of sales of Vacation Ownership
Interests:
Cost of Vacation Ownership Interests sold 14.2% 13.5%
Sales and marketing 59.9% 66.2%
Provision for doubtful accounts 2.9% 2.9%
Contribution margin percentage from sale of
Vacation Ownership Interests (1) 23.0% 17.4%
As a percentage of resort operating revenue:
Cost of resort operations 103.8% 98.3%
As a percentage of total timeshare revenues:
General and administrative 7.7% 10.6%
Depreciation and amortization 1.0% 1.3%
Timeshare operating income 10.3% 7.6%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 376 332
Average sales price per Vacation Ownership
Interest sold (excluding revenues from
Upgrades) (2) $12,874 $13,563
Average sales price per Vacation Ownership
Interest sold (including revenues from
Upgrades) (2) $14,789 $15,517
(1) Defined as: the sum of Vacation Ownership Interest sales less the cost of
Vacation Ownership Interests sold less sales and marketing expenses less a
provision for doubtful accounts, divided by sales of Vacation Ownership
Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Consists of an aggregate of 572 and 503 biennial and annual Vacation
Ownership Interests for the three months ended March 31, 1998 and 1999,
respectively.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1999
Sales of Vacation Ownership Interests decreased 7.4% or $409,314 in
1999 to $5,151,509 from $5,560,823 in 1998 primarily as a result of a lower tour
flow at the South Bend sales office and a lower closing rate (number of sales as
a percentage of number of tours) at the Sedona sales office. The average sales
price per Vacation Ownership Interest sold (excluding revenues from Upgrades)
increased 5.4% or $689 in 1999 to $13,563 from $12,874 in 1998 reflecting the
higher per unit sales prices achieved for sales of ILX Premiere Vacation Club
Vacation Ownership Interests, which were first introduced in June 1998.
The number of Vacation Ownership Interests sold decreased 11.7% from
376 in 1998 to 332 in 1999 largely due to lower tour flow to the South Bend
sales office and a lower closing rate at the Sedona sales office. Sales of
Vacation Ownership Interests in 1999 included 342 biennial Vacation Ownership
Interests (counted as 171 annual Vacation Ownership Interests) compared to 392
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
biennial Vacation Ownership Interests (counted as 196 annual Vacation Ownership
Interests) in 1998.
Upgrade revenue, included in Vacation Ownership Interest sales,
decreased 9.9% from $720,013 in 1998 to $648,442 in 1999 because of a change in
trade-in mix. 1998 Upgrades include a greater number of trade-ins of Golden
Eagle Vacation Ownership Interests, which have a higher trade-in value than
Vacation Ownership Interests in 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 price per
Vacation Ownership Interest sold. The average sales price per Vacation Ownership
Interest sold (including Upgrades) increased from $14,789 in 1998 to $15,517 in
1999 due to the 1999 sales mix including the higher prices of ILX Premiere
Vacation Club Vacation Ownership Interests.
Resort operating revenues increased 13.7% or $344,670 in 1999 to
$2,863,003 from $2,518,333 in 1998, reflecting the opening of VCA - Tucson in
the third quarter of 1998. Cost of resort operations increased 7.6% or $197,901
in 1999 to $2,813,041 from $2,615,140 in 1998 due to greater operating costs as
a percentage of revenue of the start-up VCA - Tucson operation.
The 70.6% increase in interest income from $448,007 in 1998 to $764,133
in 1999 is a result of the increased Customer Notes retained by the Company and
an increase 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 decreased from 14.2% in 1998 to 13.5% in 1999 due to
the inclusion in 1999 of sales of ILX Premiere Vacation Club Vacation Ownership
Interests, which sell for higher prices than Vacation Ownership Interests in
individual resorts.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 66.2% in 1999 from 59.9% in 1998 due to high costs of
tour generation to the South Bend sales office and lower closing rates in the
Sedona sales office.
The provision for doubtful accounts as a percentage of Vacation
Ownership Interest sales is comparable between years.
General and administrative expenses increased 40.9% to $930,560 in 1999
from $660,372 in 1998. General and administrative expenses increased to 10.6% as
a percentage of total timeshare revenues in 1999 compared to 7.7% in 1998. The
change reflects that first quarter 1998 general and administrative expenses were
reduced by property tax reductions related to successful appeals of property tax
assessments and that 1999 general and administrative expenses include property
taxes, insurance and other expenses related to VCA - Tucson.
The 33.0% increase in interest expense from $505,515 in 1998 to
$672,281 in 1999 reflects an increase in borrowings against customer notes
receivable as the Company retains and borrows against more of its consumer
paper, 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 1998 and 1999, cash (used in) provided
by operations was $(1,925,797) and $315,240, respectively. The negative cash
flow in 1998 was due primarily to an increase of $1,443,791 in resort property
under development, which was financed 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
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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, 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 three-year period. Such changes may result
from new Common Stock issuances by the Company or changes occurring as a result
of filings with the Securities and Exchange Commission of Schedules 13D and 13G
by holders of more than 5% of the Common Stock, whether involving the
acquisition or disposition of Common Stock. If such a subsequent change occurs,
the limitations of Section 382 would apply and may limit or deny the future
utilization of the NOL by the Company, which could result in the Company paying
substantial additional federal and state taxes.
USES OF CASH
Investing activities typically reflect a net use of cash because of
capital additions and loans to customers in connection with the Company's
Vacation Ownership Interest sales. Net cash used in investing activities in the
three months ended March 31, 1998 and 1999 was $776,315 and $1,940,821
respectively. In 1999, the Company retained and borrowed against, rather than
sold, a greater portion of its customer notes.
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 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.
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 March 31, 1999, $39.5 million of the $40 million
in commitment was available to the Company.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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% and
expire at various dates from 2001 through 2002. At March 31, 1999, approximately
$34.4 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
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 $60,000 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.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 August 31, 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
three most recent fiscal years or the three months ended March 31, 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.
13
<PAGE>
PART II
ITEM I. LEGAL PROCEEDINGS
A dispute has arisen between the general contractor, Summit Builders,
and the Company's wholly owned subsidiary, VCA Tucson Incorporated with respect
to amounts owing under the guaranteed maximum price contract relating to the
construction of VCA-Tucson. Jeffrey C. Stone dba Summit Builders has filed a
demand for arbitration with the American Arbitration Association, claiming
damages of $1,763,085. The Company is contesting the claim vigorously and has
filed a counterclaim in the original amount of $2,372,427. The Company has
obtained a payment bond in the amount of $2,645,227 in accordance with the
provisions of Arizona law. In February 1999, the parties entered into a
stipulation agreement under which Summit Builders reduced certain of its claims
totaling $197,239, the Company agreed to claims totaling $226,854, of which
$116,714 represents undisputed change orders previously approved by the Company,
and both parties dismissed fraud claims previously sought. In the event that the
arbitration results in any liability to the Company greater than amounts accrued
for the guaranteed maximum price plus approved change orders, such additional
liability will increase the amount recorded as resort property held for sale for
VCA-Tucson and will be amortized to cost of sales prospectively as Vacation
Ownership Interests are sold.
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.
Other litigation has arisen in the normal course of the Company's
business, none of which is deemed to be material.
ITEM II. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM III. DEFAULTS UPON SENIOR SECURITIES
None
ITEM IV. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
As reported on the Company's Form 8-K filed with the Securities and
Exchange Commission on February 16, 1999, on February 8, 1999, the Company
engaged Hansen, Barnett & Maxwell, a professional corporation ("HB&M"), as its
14
<PAGE>
principal accountant to audit the Company's financial statements for the year
ended December 31, 1998. Prior to its engagement, the Company had not consulted
HB&M with respect to the application of accounting principles to a specified
transaction or any matter that was the subject of a disagreement or a reportable
event (as described in Item 301(a)(1)(v) of Regulation S-K). The Company has
authorized the predecessor auditor to respond fully to inquiries of the
successor accountant.
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
Date: As of May 14, 1999
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FIRST QUARTER 1999 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 4,063,682
<SECURITIES> 0
<RECEIVABLES> 24,442,288
<ALLOWANCES> 3,597,116
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,333,187
<DEPRECIATION> 1,941,445
<TOTAL-ASSETS> 54,488,175
<CURRENT-LIABILITIES> 0
<BONDS> 25,548,050
0
1,384,891
<COMMON> 19,867,281
<OTHER-SE> 4,512,148
<TOTAL-LIABILITY-AND-EQUITY> 54,488,175
<SALES> 5,151,509
<TOTAL-REVENUES> 8,778,645
<CGS> 693,474
<TOTAL-COSTS> 8,109,589
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 150,846
<INTEREST-EXPENSE> 672,281
<INCOME-PRETAX> 15,667
<INCOME-TAX> 4,000
<INCOME-CONTINUING> 4,877
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,877
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
