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 September 30, 2000 Commission File Number 001-13855
------------------ ---------
ILX RESORTS INCORPORATED
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(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 September 30, 2000
------------------------------- ---------------------------------
Common Stock, without par value 3,598,180 shares
<PAGE>
PART I
ITEM I. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 2,971,365 $ 3,000,830
Notes receivable, net 23,145,383 25,683,827
Resort property held for Vacation Ownership Interest sales 21,742,875 19,793,228
Resort property under development 346,786 1,806,444
Land held for sale 1,596,759 1,596,650
Deferred assets 227,933 146,185
Property and equipment, net 4,212,470 4,331,877
Other assets 3,144,951 2,323,551
------------ ------------
TOTAL ASSETS $ 57,388,522 $ 58,682,592
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Accounts payable $ 923,016 $ 1,163,779
Accrued and other liabilities 2,679,107 3,074,380
Due to affiliates 26,282 --
Notes payable 27,020,947 26,131,959
Notes payable to affiliates 1,100,000 1,100,000
Deferred income taxes 376,223 1,338,723
------------ ------------
Total liabilities 32,125,575 32,808,841
------------ ------------
MINORITY INTERESTS 23,778 --
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000 shares authorized;
305,978 and 293,089 shares issued and outstanding; liquidation
preference of $3,059,780 and $2,930,890 1,179,298 1,142,805
Common stock, no par value; 30,000,000 shares authorized;
3,921,173 and 4,089,680 shares issued 18,069,840 18,314,015
Treasury stock, at cost, 0 and 491,500 shares -- (994,283)
Additional paid in capital 279,450 225,742
Guaranteed ESOP Obligation (500,000) (250,000)
Retained earnings 6,210,581 7,435,472
------------ ------------
Total shareholders' equity 25,239,169 25,873,751
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,388,522 $ 58,682,592
============ ============
</TABLE>
See notes to condensed consolidated financial statements
2
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $ 6,642,223 $ 6,652,826 $ 17,962,302 $ 19,246,386
Resort operating revenue 3,475,879 3,402,251 9,696,624 10,085,331
Interest income 886,967 764,072 2,535,677 2,505,880
------------ ------------ ------------ ------------
Total timeshare revenues 11,005,069 10,819,149 30,194,603 31,837,597
------------ ------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership Interests sold 923,577 963,072 2,538,162 2,692,906
Cost of resort operations 3,315,927 3,284,223 9,174,224 9,463,401
Sales and marketing 4,284,034 3,674,672 11,423,893 10,816,196
General and administrative 1,036,372 1,124,466 3,068,514 3,356,674
Provision for doubtful accounts 250,129 295,359 577,428 812,115
Depreciation and amortization 122,848 164,292 348,424 443,433
------------ ------------ ------------ ------------
Total cost of sales and operating expenses 9,932,887 9,506,084 27,130,645 27,584,725
------------ ------------ ------------ ------------
Timeshare operating income 1,072,182 1,313,065 3,063,958 4,252,872
Income from land and other, net 8,429 (2,232) 64,826 3,150
------------ ------------ ------------ ------------
Total operating income 1,080,611 1,310,833 3,128,784 4,256,022
Interest expense 697,407 671,366 2,067,782 2,059,729
------------ ------------ ------------ ------------
Income before income taxes and minority interests 383,204 639,467 1,061,002 2,196,293
Income tax expense 150,000 256,618 418,000 853,364
------------ ------------ ------------ ------------
Income before minority interests 233,204 382,849 643,002 1,342,929
Minority interests 8,928 -- 21,172 70,422
------------ ------------ ------------ ------------
NET INCOME $ 224,276 $ 382,849 $ 621,830 $ 1,272,507
============ ============ ============ ============
NET INCOME PER SHARE
Basic $ 0.05 $ 0.10 $ 0.15 $ 0.33
============ ============ ============ ============
Diluted $ 0.05 $ 0.10 $ 0.14 $ 0.32
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended September 30,
--------------------------------
1999 2000
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 621,830 $ 1,272,507
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed minority interest 21,172 (23,778)
Deferred income taxes 433,984 962,500
Provision for doubtful accounts 577,428 812,115
Depreciation and amortization 348,424 443,433
Amortization of guarantee fees 5,300 1,350
Contribution of common stock to ESOP Plan -- 146,094
Common stock issued to employees for services 94,926 48,988
Change in assets and liabilities:
Decrease (increase) in resort property held for Vacation
Ownership Interest sales (544,086) 1,949,647
Increase in resort property under development (139,689) (1,459,658)
Decrease (increase) in land held for sale (8,607) 109
Decrease (increase) in other assets (1,240,851) 803,257
Increase (decrease) in accounts payable (416,790) 240,763
Increase in accrued and other liabilities 951,012 604,411
Decrease in due to affiliates -- (26,282)
------------ ------------
Net cash provided by operating activities 704,053 5,775,456
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (3,688,988) (3,350,559)
Decrease (increase) in deferred assets (5,851) 80,398
Purchases of plant and equipment, net (1,093,767) (544,697)
------------ ------------
Net cash used in investing activities (4,788,606) (3,814,858)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 15,165,666 10,310,410
Principal payments on notes payable (11,204,199) (11,199,398)
Principal payments on notes payable to affiliates (194,078) --
Preferred stock dividend payments (48,048) (47,616)
Acquisition of treasury stock and other (213,775) (994,284)
Redemption of preferred stock -- (245)
Unearned ESOP contribution (400,000) --
------------ ------------
Net cash (used in) provided by financing activities 3,105,566 (1,931,133)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (978,987) 29,465
------------ ------------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 3,196,710 2,971,365
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,217,723 $ 3,000,830
============ ============
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The condensed consolidated financial statements include the accounts of ILX
Resorts Incorporated, formerly ILX Incorporated, and its wholly owned and
majority-owned subsidiaries ("ILX" or the "Company"). All significant
intercompany transactions and balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Rule 10-01
of Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the nine-month period ended September 30, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. The
accompanying financial statements should be read in conjunction with the
Company's most recent audited financial statements.
The Company's significant business activities include developing,
operating, marketing and financing ownership interests ("Vacation Ownership
Interests") in resort properties located in Arizona, Colorado, Indiana and
Mexico. Until December 31, 1999, the Company's operations also included
marketing of skin and hair care products through its then majority owned
subsidiary Sedona Worldwide Incorporated ("SWI"). This activity was not
considered significant to resort operations.
REVENUE RECOGNITION
Revenue from sales of Vacation Ownership Interests is recognized in
accordance with Statement of Financial Accounting Standard No. 66, Accounting
for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as
a minimum of 10% of the purchase price has been received in cash, the statutory
rescission period has expired, the buyer is committed to continued payments of
the remaining purchase price and the Company has been released of all future
obligations for the Vacation Ownership Interest. Resort operating revenue
represents daily room rentals and revenues from food and other resort services.
Such revenues are recorded as the rooms are rented or the services are
performed.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three
months or less. The following summarizes interest paid, income taxes paid and
capitalized interest.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1999 2000 1999 2000
-------- -------- ---------- ----------
Interest paid $651,000 $710,000 $1,983,000 $2,016,000
Income taxes paid $ -- $ -- $ -- $ --
Capitalized interest $ -- $ -- $ -- $ --
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which was
effective for financial statements for periods ending after December 15, 1997
and establishes standards for disclosing information about an entity's capital
structure. The Company adopted SFAS 129 in 1997. There were no significant
5
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
effects on the Company's disclosures about its capital structure, as that term
is defined in SFAS 129, in the nine months ended September 30, 1999 or 2000.
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 nine
months ended September 30, 1999 or 2000.
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 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. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of Statement No. 133" ("SFAS
No. 137"), which delayed the effective date of SFAS No. 133 for the Company
until 2001. The Company is currently evaluating what impact this standard will
have on its financial statements.
RECLASSIFICATIONS
The financial statements for December 31, 1999 have been reclassified to be
consistent with the current period financial statement presentation.
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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 224,276 $ 382,849 $ 621,830 $1,272,507
Less: Series A preferred stock dividends (11,969) (11,969) (35,907) (35,907)
---------- ---------- ---------- ----------
Net income available to common
stockholders - basic $ 212,307 $ 370,880 $ 585,923 $1,236,600
========== ========== ========== ==========
Weighted average shares of common stock
outstanding - basic 3,991,846 3,632,076 4,003,651 3,749,751
========== ========== ========== ==========
Basic net income per share $ 0.05 $ 0.10 $ 0.15 $ 0.33
========== ========== ========== ==========
</TABLE>
6
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
DILUTED NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 2000 1999 2000
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 224,276 $ 382,849 $ 621,830 $1,272,507
Less: Series A preferred stock dividends (11,969) (11,969) (35,907) (35,907)
---------- ---------- ---------- ----------
Net income available to common
stockholders - diluted $ 212,307 $ 370,880 $ 585,923 $1,236,600
========== ========== ========== ==========
Weighted average shares of common
stock outstanding 3,991,846 3,632,076 4,003,651 3,749,751
Add: Convertible preferred stock
(Series B and C) dilutive effect 85,711 81,578 102,083 83,008
---------- ---------- ---------- ----------
Weighted average shares of common stock
outstanding - dilutive 4,077,557 3,713,654 4,105,734 3,832,759
========== ========== ========== ==========
Diluted net income per share $ 0.05 $ 0.10 $ 0.14 $ 0.32
========== ========== ========== ==========
</TABLE>
Stock options to purchase 135,700 shares of common stock at prices ranging
from $3.25 per share to $8.125 per share were outstanding at September 30, 2000
but were not included in the computation of diluted net income per share because
the options' exercise prices were greater than the average market price of
common shares. These options expire at various dates between 2002 and 2004.
NOTE 3. SHAREHOLDERS' EQUITY
During the nine months ended September 30, 2000, the Company issued 56,600
shares of restricted common stock, valued at $48,988, 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 nine months ended September 30, 2000, the Company
purchased 491,500 shares of its common stock for $994,283.
During the nine months ended September 30, 2000, the Company contributed
$250,000 to its ESOP and such funds were used by the ESOP to repay debt incurred
in 1999 to acquire common stock (see "Uses of Cash"). In accordance with SOP
93-6, Employer's Accounting for Employee Stock Option Plan, the difference of
$40,862 between the fair market value of the leveraged shares at the time of the
debt repayment in 2000 and their actual cost when the shares were purchased in
1999, was charged to Paid in Capital. During the quarter ending September 30,
2000 the Company issued to the ESOP 100,000 shares of restricted common stock
valued at $146,093.
NOTE 4. OTHER
In August 2000, the Company entered into a definitive agreement to acquire
a leasehold interest in a 44-acre parcel in Las Vegas, Nevada near the "Las
Vegas Strip" and the University of Nevada - Las Vegas. If acquired, the Company
intends to develop the property into a mixed use development including
construction of a Varsity Clubs of America, operation of a vacation ownership
sales office, as well as subletting portions of the parcel for traditional
hotel, restaurant, golf and other ancillary uses. Earnest money in the amount of
$100,000 was deposited with an escrow agent at the signing of the agreement. The
Company has a six-month period in which to secure financing, extend the lease
term, receive government approvals, complete its due diligence and make a
determination whether to proceed with the acquisition.
7
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(UNAUDITED)
In September 2000, the Company entered into an agreement to lease an
existing motel in Sedona, Arizona, commencing October 1, 2000 and terminating on
December 31, 2010. The lease contains a provision in which the lease term may be
automatically extended for consecutive one-year periods after December 31, 2010
up to December 31, 2038 if the lease has not been terminated prior to
December 31, 2010. The lessor is required to remodel and refurbish the existing
project, previously known as the Canyon Portal Motel, as well as construct
additional units at the complex. The Company has renamed the property "The Los
Abrigados Lodge." The property will be used for hotel accommodations, including
accommodations for customers invited to attend a vacation ownership presentation
at the Sedona sales office. In conjunction with the lease, the Company loaned
$100,000 to the lessor for improvements to be made to the property. The loan is
recorded as a note receivable on the balance sheet and bears interest at 1.5%
over the prime rate.
8
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
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 four resorts in Arizona, one in Indiana and one in
Colorado, and has material interests in resorts in Pinetop, Arizona and San
Carlos, 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.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------- ---------------
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 60.4% 61.5% 59.5% 60.5%
Resort operating revenue 31.6% 31.4% 32.1% 31.7%
Interest income 8.0% 7.1% 8.4% 7.8%
----- ----- ----- -----
Total timeshare revenues 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 13.9% 14.5% 14.1% 14.0%
Sales and marketing 64.5% 55.2% 63.6% 56.2%
Provision for doubtful accounts 3.8% 4.4% 3.2% 4.2%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 17.8% 25.9% 19.1% 25.6%
As a percentage of resort operating revenue:
Cost of resort operations 95.4% 96.5% 94.6% 93.8%
</TABLE>
9
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1999 2000 1999 2000
------- ------- ------- -------
<S> <C> <C> <C> <C>
As a percentage of total timeshare revenues:
General and administrative 9.4% 10.4% 10.2% 10.5%
Depreciation and amortization 1.1% 1.5% 1.2% 1.4%
Timeshare operating income 9.7% 12.1% 10.1% 13.4%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 437 423 1,182 1,223
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $13,960 $13,993 $13,693 $13,924
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $15,050 $15,748 $15,040 $15,427
</TABLE>
----------
(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 184 annual and 506 biennial for the
three months ended September 30, 1999 and 190 annual and 466 biennial for
the three months ended September 30, 2000, and 537 annual and 1,289
biennial for the nine months ended September 30, 1999 and 526 annual and
1,394 biennial for the nine months ended September 30, 2000.
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Sales of Vacation Ownership Interests of $6,652,826 for the three months
ended September 30, 2000 were comparable to sales of $6,642,223 for the same
period in 1999 and increased 7.1% or $1,284,084 to $19,246,386 for the nine
months ended September 30, 2000 from $17,962,302 for the same period in 1999.
The year-to-date increases largely reflect greater sales from the Sedona sales
office and the addition of the Phoenix sales office, net of decreases in sales
from the VCA-South Bend and VCA-Tucson sales offices. The increased sales from
the Sedona sales office are a result of both an increase in the number of tours
and the office's average sales price. The lower sales from the VCA-South Bend
sales office reflect the reduction from a full scale sales office to a small
sales staff that both generates its own tours and sells to such prospects for a
percentage of sales. The decrease in sales from the VCA-Tucson sales office is
due to a decrease in tour flow, in part as a result of reducing the operation
from seven days to five days a week to gain certain operating efficiencies. The
average sales price per Vacation Ownership Interest sold (excluding revenues
from Upgrades) of $13,993 for the three months ended September 30, 2000 was
comparable to $13,960 for the same period in 1999 and increased 1.7% or $231 to
$13,924 for the nine months ended September 30, 2000 from $13,693 for the same
period in 1999, reflecting in part a greater percentage of sales of biennial
interests, which are sold for greater than one half of the price of an annual
interest.
The number of Vacation Ownership Interests sold decreased 3.2% from 437 in
the three months ended September 30, 1999 to 423 for the same period in 2000 due
to reduced sales operations at VCA-South Bend and VCA-Tucson, and increased
3.5% from 1,182 in the nine months ended September 30, 1999 to 1,223 for the
same period in 2000, due to both greater tour flow to the Sedona sales office
and the addition of the Phoenix sales office, net of reduced sales in the
10
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
VCA-South Bend and VCA-Tucson sales offices as described above. Sales of
Vacation Ownership Interests in the three and nine months ended September 30,
2000 included 466 and 1,394 biennial Vacation Ownership Interests (counted as
233 and 697 annual Vacation Ownership Interests) compared to 506 and 1,289
biennial Vacation Ownership Interests (counted as 253 and 644.5 annual Vacation
Ownership Interests) in the same periods in 1999, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, increased
55.9% to $742,048 for the three months ended September 30, 2000 from $476,124
for the same period in 1999 and increased 15.5% to $1,838,546 for the nine
months ended September 30, 2000 from $1,592,429 for the same period in 1999.
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 4.6%
or $698 to $15,748 for the three months ended September 30, 2000 from $15,050 in
1999 as a result of the substantial increase in Upgrade revenue for the period
and increased 2.6% or $387 to $15,427 for the nine months ended September 30,
2000 from $15,040 for the same period in 1999, as a result of both the increase
in Upgrade revenue and the greater percentage of biennial sales, which sell for
more than one half the price of an annual interest.
Resort operating revenues decreased 2.1% or $73,628 to $3,402,251 for the
three months ended September 30, 2000 and increased 4.0% or $388,707 to
$10,085,331 for the nine months ended September 30, 2000. The changes reflect
net increased occupancy and average receipts, including the growth of business
at VCA-Tucson, which opened in the third quarter of 1998, offset by increased
occupancy by vacation ownership members whose nightly rate is less than hotel
guest rates. Cost of resort operations as a percentage of resort operating
revenues was comparable between years at 96.5% and 93.8% in the three and nine
months ended September 30, 2000, respectively, compared to 95.4% and 94.6% for
the same periods in 1999, respectively.
Interest income decreased 13.9% to $764,072 for the three months ended
September 30, 2000 from $886,967 for the same period in 1999 and decreased 1.2%
to $2,505,880 for the nine months ended September 30, 2000 from $2,535,677 for
the same period in 1999, reflecting greater early payoffs of Customer Notes in
2000.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales increased from 13.9% for the three months ended
September 30, 1999 to 14.5% for the same period in 2000, reflecting fluctuations
in product mix for the quarters, and were comparable between the nine month
periods ended September 30, 1999 and 2000 at 14.1% and 14.0%, respectively.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests decreased to 55.2% for the three months ended September 30, 2000 from
64.5% for the same period in 1999 and to 56.2% for the nine months ended
September 30, 2000 from 63.6% for the same period in 1999. The improvements
reflect changes in sales and marketing approaches that commenced in the first
quarter of 1999, and are continuing, including generation of a greater number of
tours and increased closing rates at the Sedona sales office, reduction of less
efficient tour generation methods to the VCA-South Bend sales office in the
third quarter of 1999 and to the Kohl's Ranch sales office in the first quarter
of 2000.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales increased to 4.4% and 4.2% of sales of Vacation Ownership
Interests in the three and nine month periods ended September 30, 2000 from 3.8%
and 3.2% for the same periods in 1999, respectively, reflecting the Company's
decision to increase the provision on new sales effective both in the third
quarter of 1999 and the second quarter of 2000.
11
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
General and administrative expenses increased 8.5% to $1,124,466 in the
three months ended September 30, 2000 from $1,036,372 for the same period in
1999 and 9.4% to $3,356,674 in the nine months ended September 30, 2000 from
$3,068,514 for the same period in 1999. General and administrative expenses
increased to 10.4% as a percentage of total timeshare revenues in the three
months ended September 30, 2000 from 9.4% for the same period in 1999 due to
increased legal fees related to the Las Vegas and Sedona purchases and from
increases in property taxes. General and administrative expenses are comparable
between periods as a percentage of total timeshare revenues at 10.5% for the
nine months ended September 30, 2000, and 10.2% for the same period in 1999.
Interest expense was comparable between the three and nine month periods
ended September 30, 2000 and 1999 at $671,366 and $2,059,729 in 2000, and at
$697,407 and $2,067,782 in 1999, respectively.
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, 1999 and 2000,
cash provided by operations was $704,053 and $5,775,456, respectively. The
increase is due to increased income and resultant deferred income taxes as well
as decreased other assets and resort property held for Vacation Ownership
Interest sales. The decrease in other assets is related to advances made to the
Sedona Vacation Club Homeowners' Association for renovations as of December 31,
1999, which were reimbursed in the first quarter of 2000, and to timing of
collections of homeowners' dues. The decrease in resort property held for
Vacation Ownership Interest sales reflects primarily the annexation of weeks
from the Sea of Cortez Beach Club to ILX Premiere Vacation Club in the first
half of 1999. 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 because the interest is based on the amount of tax paid in that year.
The condensed consolidated financial statements do not contain an accrual for
any interest expense that would be paid on the deferred taxes related to the
installment method, as the interest expense is not estimable.
At December 31, 1999, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $8.0 million, which expire in 2001 through
2012. At December 31, 1999, Genesis had federal NOL carryforwards of
approximately $2.1 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.
12
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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 nine
months ended September 30, 1999 and 2000 was $4,788,606 and $3,814,858,
respectively. The decrease is due to greater purchases of plant and equipment in
1999, including investments related to the centralization of reservations and
owner services operations, and due to a reduction in the increase of notes
receivable from prior year end to the end of the respective quarters. The
Company began hypothecating rather than selling a greater portion of notes
receivable in the first quarter of 1999. The Company continued this strategy in
2000; therefore, there was a larger increase in the notes receivable balance
from December 31, 1998 to September 30, 1999, as compared to the increase from
December 31, 1999 to September 30, 2000.
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 2000, the
Company advanced funds toward the cost of construction of the San Carlos
Vacation Ownership Interests. The Company funded such advances with proceeds
from a financing commitment established for this purpose. In 2000, the Company
is building twelve additional cabins at Kohl's Ranch, 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 (the "ESOP"). The
intent of the ESOP is to provide a retirement program for employees that aligns
their interests with those of the Company. During 1999, the Company declared,
and funded in cash, contributions of $250,000 to the ESOP. In August 1999, the
ESOP entered into an agreement with Litchfield Financial Corporation for a
$500,000 line of credit, which is secured by the Company's stock purchased with
the funds and guaranteed by the Company. The Company paid a total of $43,047 in
fees in 1999 on behalf of the ESOP related to the line of credit, consisting of
$10,000 in loan fees, $16,231 in legal fees and interest of $16,816. As of
December 31, 1999, the ESOP had borrowed the full $500,000 on the line. In both
January and April 2000, the Company contributed $125,000 to the ESOP, which the
ESOP used to repay principal on the line, reducing the borrowing to $250,000 at
September 30, 2000.
13
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
During 1999, the ESOP purchased a total of 375,300 shares of the Company's
common stock in the open market, including 257,400 with borrowed funds and, at
September 30, 2000, held the 375,300 shares and $2,682 in cash. The shares
purchased with borrowed funds had not been allocated to participant accounts as
of September 30, 2000 and are collateral for the borrowing. The fair market
value of the unallocated shares at September 30, 2000 was approximately
$418,275. During the quarter ending September 30, 2000 the Company contributed
100,000 of new shares to the ESOP valued at $146,093.
The leveraged and unallocated shares will be released at the end of the
current Plan year (December 31, 2000) based on the amount of principal and
interest payments made during the year. During the nine months ended
September 30, 2000, the Company paid and recognized as an expense contributions
of $26,467 for interest and $250,000 for principal.
The ESOP may purchase additional shares for future year contributions
through loans made directly to the ESOP and guaranteed by the Company. Such
borrowings are not expected to exceed $1,000,000.
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 September 30, 2000, $25.7 million of the $40 million 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) to
prime plus 3% ($3.5 million). The $3.5 million and $40 million commitments
expire in 2001 and 2002, respectively. At September 30, 2000, approximately
$23.1 million is available under these commitments.
At September 30, 1999 and 2000, the Company had approximately $18.8 million
and $18.6 million, respectively, in outstanding notes receivable sold on a
recourse basis. Portions of the notes receivable are secured by deeds of trust
on Los Abrigados Resort & Spa, VCA-South Bend and VCA-Tucson.
In December 1999, the Company completed the spin-off of its 80% ownership
interest in SWI to the shareholders of ILX. In conjunction with the spin-off,
the Company agreed to provide up to $200,000 of working capital financing to SWI
through November 30, 2000. All amounts borrowed by SWI will bear interest at the
prime rate plus 3%, with interest payable monthly. The entire unpaid principal
will be due on December 31, 2000. At September 30, 2000, $35,000 had been
advanced under this agreement.
In February 2000, the Company borrowed $600,000 for the purpose of using
the funds to purchase Company treasury stock. The note is collateralized by cash
or stock, bears interest at 12% and is due through 2002. As of September 30,
2000, the Company had purchased 288,000 shares of stock at a cost of $593,800
with funds provided by this note. The remaining $6,200 are fees associated with
the loan. In the first nine months of 2000 the Company had purchased a total of
491,500 treasury shares, inclusive of the 288,000 shares. The Company may
purchase additional treasury shares from time to time in open market
transactions depending on price, availability, market conditions, cash flow and
other factors. At September 30, 2000, Board approval exists to repurchase
approximately 300,000 more shares if conditions so warrant.
14
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
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.
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 nine months ended September 30, 2000.
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>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
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 VCA-Tucson. 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 December 31, 1999 and September 30, 2000.
A dispute had 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
filed suit in the Superior Court of Arizona seeking total payment of $154,720
plus interest and attorneys' fees. At September 30, 2000, approximately $46,000
of the $110,000 has been paid to Bowne on account and the remaining amount was
fully accrued on the books of the Company. On September 15, 1999, the Superior
Court granted the Company's motion for summary judgment on the issue of whether
the parties had entered into a binding settlement agreement. In February 2000,
the Superior Court also granted the Company's request for $32,904 in attorneys'
fees plus taxable costs. Bowne has filed an appeal with the Arizona Court of
Appeals.
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 the discovery stage.
In June 2000, the Company brought suit in The Superior Court of the State
of Arizona against a former employee seeking compensation and punitive damages
for breach of contract, negligence, breach of fiduciary duties, embezzlement,
conversion, fraud, deceit, concealment and non-disclosure. In October 2000, the
Company agreed to the defendant's offer of settlement.
In June 2000, the Company entered into a settlement agreement and mutual
release of certain claims with Dean Phelan ("Phelan"), a former employee, and
minority interest shareholder in the Company's subsidiary Timeshare Resale
Brokers, Inc. ("TRBI"). The agreement dismisses litigation that had arisen
between the parties, grants the Company a judgment for $190,000 against Phelan
that the Company will not exercise unless Phelan breaches the agreement and
awards to the Company Phelan's minority interest in TRBI.
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
16
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
PART II
(CONTINUED)
ITEM IV. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
10.1 PURCHASE AND SALE AGREEMENT between ILX Resorts
Incorporated and Las Vegas Golf Center, LLC, dated
August 16, 2000
10.2 LEASE OF CANYON PORTAL, L.L.C. between Canyon Portal,
L.L.C. and ILX Resorts Incorporated, commencing
October 1, 2000 and dated September 26, 2000
10.3 PROMISSORY NOTE ($100,000) by Canyon Portal, L.L.C. to
ILX Resorts Incorporated, dated September 26, 2000
27 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
None
17
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
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/ Michael E. Miller
---------------------
Michael E. Miller
Executive Vice President
Chief Financial Officer
/s/ Taryn L. Chmielewski
------------------------
Taryn L. Chmielewski
Corporate Controller
Date: As of November 6, 2000
18
