UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Act
of 1934
For the fiscal year ended December 31, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Act of 1934
For the transition period from _______________ to _______________
Commission File Number 001-13855
ILX RESORTS INCORPORATED
ARIZONA 86-0564171
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2111 East Highland Avenue, Suite 210, Phoenix, AZ 85016
Registrant's telephone number, including area code (602) 957-2777
Securities registered pursuant to Section 12(b) of the Act:
Name of each Exchange
Title of Class on which registered
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Common Stock, without par value American Stock Exchange, Inc.
Securities registered pursuant to Section 12 (g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate the number of shares outstanding of each of the Registrant's classes of
stock, as of the latest practicable date.
Class Outstanding at February 29, 2000
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Common Stock, without par value 3,853,873 shares
At February 29, 2000, the aggregate market value of Registrant's common shares
held by non-affiliates, based upon the closing price at such date, was
approximately $4.8 million.
Portions of Registrant's definitive Proxy Statement relating to the 2000 Annual
Meeting of Shareholders have been incorporated by reference into Part III, Items
10, 11, 12 and 13.
<PAGE>
ILX RESORTS INCORPORATED
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I ..................................................................... 3
Items 1 and 2. Business and Properties ................................... 3
Item 3. Legal Proceedings ................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders .............. 15
PART II .................................................................... 15
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................. 15
Item 6. Selected Financial Data ......................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ....................................... 16
Item 8. Financial Statements and Supplementary Data ..................... 21
Item 9. Changes in and Disagreements With Accountants On Accounting
and Financial Disclosure ........................................ 21
PART III ................................................................... 22
Item 10. Directors and Executive Officers of the Registrant ............. 22
Item 11. Executive Compensation ......................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and
Management...................................................... 22
Item 13. Certain Relationships and Related Transactions ................. 22
PART IV .................................................................... 22
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K .................................................... 22
<PAGE>
PART I
This Form 10-K contains certain "forward-looking statements," including
statements regarding, among other items, the Company's growth strategy, industry
and demographic trends, the Company's ability to finance its operations and
anticipated trends in its business. Actual results could differ materially from
these forward-looking statements as a result of a number of factors, including,
but not limited to, the Company's need for additional financing, intense
competition in various aspects of its business, the risks of rapid growth, its
dependence on key personnel and other factors discussed in the Company's public
filings with the Securities and Exchange Commission.
ITEMS 1 AND 2. BUSINESS AND PROPERTIES
THE COMPANY
ILX Resorts Incorporated ("ILX" or the "Company") is one of the leading
developers, marketers and operators of timeshare resorts in the western United
States. The Company's principal operations consist of (i) acquiring, developing
and operating timeshare resorts, marketed by the Company as vacation ownership
resorts, (ii) marketing and selling vacation ownership interests in the
timeshare resorts, which typically have entitled the buyers thereof to ownership
of a fully-furnished unit for a one-week period on either an annual or an
alternate year (i.e., biennial) basis ("Vacation Ownership Interests"), and
(iii) providing purchase money financing to the buyers of Vacation Ownership
Interests at its resorts. In addition, the Company receives revenues from the
rental of its unused or unsold inventory of units at its vacation ownership
resorts, and from the sale of food, beverages and other services at such
resorts. The Company's current portfolio of resorts consists of five resorts in
Arizona, one in Indiana, and one in Colorado, (collectively, the "ILX Resorts").
At December 31, 1999, the ILX Resorts represented an aggregate of 392 units and
21,944 sold and unsold one-week Vacation Ownership Interests, including 1,500
one-week 25-year right-to-use Sea of Cortez Beach Club Vacation Ownership
Interests currently under construction in San Carlos, Mexico and 103 weeks in
the Roundhouse Resort in Pinetop/Lakeside, Arizona, which have been annexed to
ILX Premiere Vacation Club. The Company also markets additional interests, which
consisted, at December 31, 1999, of an aggregate of approximately 91 Vacation
Ownership Interests in destination resorts owned by others and located in
Florida, Mexico and elsewhere (collectively, the "Additional Interests").
The Company was founded in 1986 and commenced implementation of its current
operating and growth strategies in the fourth quarter of 1991. During the period
from December 31, 1991 through December 31, 1999, the Company increased the
number of ILX Resorts from two to seven, and increased its total inventory of
sold and unsold Vacation Ownership Interests from 9,915 weeks to 22,035 weeks
(including 1,500 under construction in San Carlos and the Additional Interests).
The Company's total revenues increased from $6.1 million in 1991 to $40.4
million in 1999. During this period, the Company's growth was fueled principally
by the acquisition, redevelopment and expansion of certain ILX Resorts and the
marketing and sale of Vacation Ownership Interests in these resorts.
The Company believes it was able to purchase the ILX Resorts and the
Additional Interests at relatively attractive prices because of its skill in
locating, identifying and acquiring distressed or underdeveloped resorts and
Vacation Ownership Interests. The Company successfully utilized this strategy in
connection with the acquisition of the Los Abrigados Resort & Spa in Sedona,
Arizona (175 units), the Kohl's Ranch Lodge in Payson, Arizona (52 units), the
development rights to build additional units adjacent to the existing Roundhouse
Resort in Pinetop/Lakeside, Arizona, and the 1,500 Vacation Ownership Interests
currently under construction in San Carlos, Mexico.
Utilizing management's development expertise, the Company developed and
implemented the Varsity Clubs concept. This concept entails ground-up
development of urban vacation ownership properties strategically situated in
tourist destinations that are accessible to major population centers near
prominent colleges and universities. The first Varsity Clubs, VCA-South Bend,
consisting of 62 units, was completed in August 1995 and is located
approximately three miles from the University of Notre Dame in South Bend,
Indiana. The second Varsity Clubs, VCA-Tucson, consisting of 60 units, was
completed in July 1998 and is located approximately three miles from the
University of Arizona in Tucson, Arizona. The scope of the Company's activities
since 1991 have enabled the Company's management team, which has significant
experience in the vacation ownership resort and real estate development
industries, to establish substantial in-house capabilities in areas critical to
the Company's operating and growth strategies, including property identification
and acquisition, property development and rehabilitation, and Vacation Ownership
Interest sales and marketing.
The Company is pursuing a two-pronged operating strategy which focuses on
marketing Vacation Ownership Interests in the Company's convenient access
resorts ("CARs") and in its Varsity Clubs. CARs are typically high-quality
vacation ownership resorts situated in settings of natural beauty and located
within convenient and inexpensive travelling distance from major population
centers (currently Phoenix, Tucson and Denver). The Company's CARs are intended
to facilitate more frequent "short-stay" getaways, which the Company believes is
an increasingly popular vacation trend. To the extent Varsity Clubs resorts are
located proximate to major population centers, such resorts may also be CARs. As
of December 31, 1999, the Company operated six resorts consisting of 392 units
and held 7,470 unsold Vacation Ownership Interests in those resorts. The
Roundhouse Resort and the San Carlos Plaza Resort are operated by third parties
not affiliated with the Company. The Company's inventory of CARs has been
marketed primarily by ILX employees at the Company's on-site sales offices
located at or near selected ILX Resorts and, commencing in the first quarter of
2000, an offsite sales office in Phoenix, Arizona.
Historically the Company had primarily marketed Vacation Ownership
Interests in individual ILX Resorts. Commencing in June 1998, the Company began
marketing some of its inventory of CARs through membership interests in its
proprietary branded ILX Premiere Vacation Club. ILX Premiere Vacation Club
3
<PAGE>
offers purchasers a deeded one-week membership interest which may be used at any
time between certain specified dates at any one of the ILX Resorts included in
ILX Premiere Vacation Club, or may be split into multiple stays of shorter
duration at any combination of such resorts. Vacation Ownership Interests in
individual ILX Resorts and in ILX Premiere Vacation Club may be exchanged for
stays at other resorts through the major national exchange networks in which ILX
owners may participate, such as Resort Condominiums International ("RCI") and
Interval International ("II"). The majority of the Company's inventory of
Vacation Ownership Interests, including those at its Varsity Clubs and those
included in ILX Premiere Vacation Club, qualify as "red time," the highest
demand classification for purposes of participation in such exchange networks.
The Company designed ILX Premiere Vacation Club to respond to customer
preferences for flexible use options (e.g., floating days, two-day uses and the
ability to split a purchased membership interest), locations within convenient
driving distances from major metropolitan areas and other features (e.g., high
quality amenities and food and beverage discounts at its participating ILX
Resorts).
In addition to marketing through ILX Premiere Vacation Club, the Company
intends to pursue the expansion of its proprietary branded Varsity Clubs
concept. The Company will focus on development of additional Varsity Clubs in
areas with a significant base of existing tourism and access to major population
centers, which are located near prominent colleges and universities in the
western United States. The Company completed construction and commenced
operations of its prototype Varsity Clubs property, VCA-South Bend, located near
the University of Notre Dame, in 1995 and its second Varsity Clubs, VCA-Tucson,
located near the University of Arizona in Tucson, Arizona, in July 1998. The
Company intends to develop its Varsity Clubs properties at attractive locations
for visiting tourists who may rent accommodations or purchase a Vacation
Ownership Interest from the Company. In connection with the purchase of a
Vacation Ownership Interest, Varsity Clubs offer area residents an urban "city
club" experience with unlimited day-use privileges, as well as the opportunity
to participate in the II Vacation Ownership Interest exchange network. The
Company believes that Varsity Clubs offer features common to a "city club",
including a fitness center, swimming pool, bar, restaurant/lounge, billiards and
large sitting/welcome room. In addition, the Varsity Clubs concept enables the
Company to enlarge the Company's target list of potential purchasers by
utilizing an identification with the local university to market Vacation
Ownership Interests to alumni, sports season ticket holders, parents of
university students and corporate sponsors of university events, among others,
who attend the sporting, academic and cultural events regularly hosted by
various universities, thereby enlarging the Company's target base of potential
purchasers. Varsity Clubs offer a flexible ownership structure which permits the
purchase of Vacation Ownership Interests consisting of a single day, a
collection of single days (such as selected days during an entire specified
sports season) or a traditional one-week period, in addition to unlimited use of
the common areas for "city club" use. The Company believes that direct marketing
to a large target base of potential purchasers with university affiliations will
enable the Company to achieve premium pricing with respect to those portions of
its inventory which coincide with high demand for accommodations at prominent
university-sponsored events. The Company also believes that its success in
gaining access to alumni and other targeted potential purchasers with
relationships to the University of Notre Dame or the University of Arizona may
facilitate similar arrangements with other universities in the areas in which
future Varsity Clubs are developed.
During 1999, the Company sold 2,387 annual and biennial Vacation Ownership
Interests at the ILX Resorts, compared to 2,303 and 2,512 during 1998 and 1997,
respectively. The average sales price for a Vacation Ownership Interest
(excluding sales of Upgrades) was $12,886 for an annual interest and $6,965 for
a biennial interest, resulting in a weighted average price of $13,453 (each
biennial interest is treated as one-half of an annual interest) during the year
ended December 31, 1999 and $12,123 for an annual interest and $6,867 for a
biennial interest, resulting in a weighted average price of $13,013 during the
year ended December 31, 1998. Upgrades are sales to existing owners of Vacation
Ownership Interests in the ILX Resorts and may consist of purchases of
additional Vacation Ownership Interests or the exchange of their Vacation
Ownership Interest for a higher demand season; a larger unit; a different ILX
Resort; or for ILX Premiere Vacation Club; for which the customer pays an
additional fee. At December 31, 1999, the Company had an existing inventory of
9,061 unsold Vacation Ownership Interests (including the Additional Interests
and the 1,500 Sea of Cortez Beach Club Vacation Ownership Interests) and a
master plan, subject to consumer demand, receipt of applicable permits and other
contingencies generally applicable to real estate development, to construct up
to 5,094 additional Vacation Ownership Interests through 2001 and thereafter at
the existing ILX Resorts.
4
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THE RESORTS
The table below sets forth certain information, as of December 31, 1999,
with respect to the ILX Resorts. The information set forth below does not
include the Company's planned expansion of the ILX Resorts or development of
additional Varsity Clubs and CARs. As described in Note 9 of the Notes to
Consolidated Financial Statements, all of the Company's resorts except the
Golden Eagle Resort at the Crag's Lodge are encumbered by one or more deeds of
trust.
<TABLE>
<CAPTION>
Size of
Units(3) Resort Amenities
------------- -------------------------------------------------------
Restaurant/ Whirlpool/ Swimming Fitness Local
Resorts(l)(2) Location S 1BR 2BR Lounge Spa Pool Center Amenities(4)
- ------------- -------- --- --- --- ----------- ---------- -------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONVENIENT ACCESS RESORTS
Los Abrigados Resort Sedona, AZ 158 17 4/1 Y Y-2 Y B,BB,BL,
& Spa D,F,FW,G,
H,MT,Sh,
T,TH,V
The Inn at Los Abrigados Sedona, AZ 9 1 4/1 Y Y-2 Y B,BB,BL,
D,F,FW,G,
H,MT,Sh,
T,TH,V
Kohl's Ranch Lodge Payson, AZ 42 4 6 1/2 Y Y Y B,BB,C,D,
F,FW,G,H,
Sh,TH,V
Golden Eagle Resort Estes Park, CO 9 21 3 1/1 Y Y N BL,D,F,FW,
at the Crag's Lodge G,H,MT,
--- --- --- Sh,TH
TOTAL CARS 60 183 27
VARSITY CLUBS OF AMERICA
VCA - South Bend South Bend, IN 3 54 5 1/1 Y Y Y B,BB,BL,
D,G,M,
MT,Sh,UC
VCA - Tucson Tucson, AZ 4 44 12 1/1 Y Y Y BL,D,G,M,
MT,Sh,T,TH
--- --- --- UC
TOTAL VARSITY CLUBS(5) 7 98 17
--- --- ---
Total 67 281 44
=== === ===
</TABLE>
- ----------
(1) Information regarding the 1,500 Sea of Cortez Beach Club Vacation Ownership
Interests in San Carlos, Mexico (of which approximately 27% are studio, 20%
one-bedroom and 53% two-bedroom units) has not been included in the
following chart because such Vacation Ownership Interests are currently
under construction. Until construction is complete, ILX Premiere Vacation
Club members may utilize the accommodations and amenities at the
full-service resort adjacent to the property. Following construction, ILX
Premiere Vacation Club members will continue to be able to utilize the
adjacent resort amenities, as well as the amenities of the new
construction, which include three full-service restaurants and a lounge,
two swimming pools, a whirlpool spa and the fitness center. The following
amenities are also available locally: (4) BO, D, F, G, H, Sh, T and W.
(2) Information regarding the Additional Interests has not been included in the
following chart, as the Company only owns a number of, or has rights to
market, Vacation Ownership Interests at such resorts and does not own any
of such resorts.
(3) "S" indicates studio unit; "1 BR" indicates one-bedroom unit; "2 BR"
indicates two-bedroom unit. Units with the same number of bedrooms may vary
in size and amenities.
(4) B - Basketball, BB - Bocce Ball, BL - Billiards, BO - Boating, C - Casino,
D - Dining, F - Fishing, FW - Four Wheel Tours, G - Golf, H - Horseback
Riding, M - Museums, MT - Movie Theater, Sh - Shopping, SS - Snow Skiing, T
- Tennis, TH - Trail Hiking, UC - University Campus, V - Volleyball, W -
Watersports.
(5) To the extent Varsity Clubs are proximate to major metropolitan areas, such
resorts can also be considered CARs, but have not been so designated in the
chart.
5
<PAGE>
DESCRIPTION OF ILX RESORTS
CONVENIENT ACCESS RESORTS
LOS ABRIGADOS RESORT & SPA. Los Abrigados Resort & Spa ("Los Abrigados") is
located in Sedona, Arizona, approximately 110 miles from Phoenix, Arizona. This
resort consists of 175 units situated on approximately 20 acres of lush
landscaping and Spanish-styled plazas, winding walkways and bridges. Los
Abrigados offers one- and two-bedroom units, each with a separate living area,
bedroom, mini-kitchen and balcony or patio. Twenty suites offer a fireplace and
whirlpool spa as well. Nine units feature full kitchenettes. Los Abrigados is
designed in southwestern decor and is surrounded by the dramatic red rocks of
Oak Creek Canyon. This resort has an onsite sales office.
Amenities at the resort include four restaurants and a sports bar,
billiards emporium, library, two pools, tennis courts, sports court, basketball
court, bocce ball courts, simulated golf, fitness center and health spa offering
a variety of personal care services, aerobic and yoga classes, whirlpools, steam
and sauna rooms, hydrotherapy and other personal care facilities. In addition,
golf, horseback riding, jeep, helicopter and hot air balloon rides, and other
outdoor activities are easily accessible. Los Abrigados is both an RCI Gold
Crown and II Five-Star resort.
As of December 31, 1999, Los Abrigados contained 9,100 Vacation Ownership
Interests, of which 780 remained available for sale (excluding 1,581 Vacation
Ownership Interests owned by ILX Premiere Vacation Club). The Company believes
there exist additional expansion opportunities at and contiguous to Los
Abrigados including 20 units on the present site (representing 1,040 Vacation
Ownership Interests). The Company is currently exploring this and other
expansion possibilities in conjunction with opportunities of an adjacent site;
however, no contracts, rights or commitments exist with respect to any of such
opportunities.
THE INN AT LOS ABRIGADOS. The Inn at Los Abrigados is located in Sedona,
Arizona, approximately 110 miles from Phoenix, Arizona. This resort consists of
ten units adjacent to Los Abrigados. The Inn at Los Abrigados includes the main
Morris House and nine bed and breakfast-style units in three buildings situated
amidst a former apple orchard. The Morris House is a multi-level luxury suite
sleeping six, and features a sunken living room, full kitchen with dining area,
a loft, two full bathrooms and a private backyard with patio and barbecue. The
bed and breakfast-style units each feature king beds, a sitting area, microwave,
refrigerator, coffee maker, full bath with shower and balcony or patio. Guests
of the Inn at Los Abrigados have charge privileges at and full use of all Los
Abrigados amenities. The Inn at Los Abrigados is an II Five-Star resort.
KOHL'S RANCH LODGE. Kohl's Ranch is a 10.5-acre property located 17 miles
northeast of Payson, Arizona and approximately 105 miles from Phoenix, Arizona.
It is bordered on the eastern side by Tonto Creek and is surrounded by the Tonto
National Forest, which is believed to be the largest stand of Ponderosa Pines in
the world. Kohl's Ranch consists of 52 units. Forty-one of the units are at the
main lodge, 8 units consist of one- and two-bedroom cabins along Tonto Creek,
and three units are part of a triplex cabin. This resort also has an on-site
sales office.
Kohl's Ranch offers a variety of common area amenities including an outdoor
heated pool, outdoor whirlpool spa, exercise room, putting green, bocce ball
court, children's playground, gazebos and sport court. Kohl's Ranch also
includes a freestanding building that contains food and beverage facilities, a
gift shop and space for additional retail and other operations. Each unit at the
resort offers a mini-kitchenette or full kitchen, and many have a fireplace. In
addition, Kohl's Ranch offers a unique pet resort. Kohl's Ranch is an RCI
resort.
As of December 31, 1999, Kohl's Ranch contained 2,704 Vacation Ownership
Interests, of which approximately 394 were available for sale (excluding 1,566
Vacation Ownership Interests owned by ILX Premiere Vacation Club). In addition,
the Company has expansion capabilities at Kohl's Ranch for twelve additional
two-bedroom creekside cabin units (624 one-week Vacation Ownership Interests),
which are expected to be complete in the third quarter of 2000.
ROUNDHOUSE RESORT. In December 1997, the Company acquired the development
rights to the Roundhouse Resort, a fully sold out 59-unit timeshare resort
located on 9.5 acres in the White Mountains of northeastern Arizona,
approximately 190 miles from Phoenix, Arizona. The resort is an RCI resort and
is proximate to golf courses, skiing, horseback riding and other outdoor
activities. At an elevation of 7,200 feet, the Roundhouse Resort is set in a
location that offers four seasons, a distinct contrast to Arizona's arid
lowlands.
During 1999, the Company entered into an agreement (which is expected to be
final in the first quarter of 2000) with the Roundhouse Homeowners' Association
("RHA") to deed the property containing the existing 59 units and certain common
area amenities to the RHA, for which the RHA will be solely responsible for the
ownership, operation and financing. The Company will have sole ownership of the
remaining property and accordingly, may develop such property without the
constraints that would exist without this separation.
The Company plans to construct up to 40 new units at the Roundhouse Resort
at such time as it determines that annexing all or a portion of such additional
inventory in ILX Premiere Vacation Club is beneficial. Construction may occur in
phases of ten to twenty units each, with only minimal common area amenities
necessary. The Company has not yet selected the exchange company with which it
will affiliate new units.
As of December 31, 1999, the Company, through ILX Premiere Vacation Club,
holds 103 Vacation Ownership Interests in the Roundhouse Resort, which were
acquired by the Company in 1998.
6
<PAGE>
GOLDEN EAGLE RESORT AT THE CRAG'S LODGE. The Golden Eagle Resort at the
Crag's Lodge ("Golden Eagle") is a four-acre property located in the town of
Estes Park, Colorado, within three miles of Rocky Mountain National Park and
approximately 70 miles from Denver, Colorado. This resort consists of 33 units
and is bounded generally by undeveloped forested mountainside land, which
provides excellent mountain views from the resort.
Golden Eagle is centered around the historic Crag's Lodge, a four-story
wood frame building constructed in the early 1900s, which is listed on the
National Registry of Historic Places by the United States Department of the
Interior, and serves as the resort's main lodge. Amenities offered at this
resort include a restaurant, bar and library, as well as two other freestanding
buildings containing six guest rooms and support facilities. Each unit at Golden
Eagle features a fully equipped kitchenette, living and dining areas, television
and video cassette player. Additional amenities at this resort include a heated
pool and spa as well as local outdoor attractions. Golden Eagle is an RCI
resort.
As of December 31, 1999, Golden Eagle contained 1,683 one-week Vacation
Ownership Interests, of which 319 were available for sale (excluding 565
Vacation Ownership Interests owned by ILX Premiere Vacation Club). In addition,
the Company owns one unit in a residential duplex adjacent to the property,
which is not currently available for sales of Vacation Ownership Interests. The
Company intends to construct a minimum of two additional units in the future,
which would yield an additional 102 Vacation Ownership Interests.
VARSITY CLUBS OF AMERICA
VCA-SOUTH BEND. The Company's first Varsity Clubs facility is an
approximately four acre property located three miles from the University of
Notre Dame and Notre Dame Stadium in South Bend, Indiana, which is 90 miles from
Chicago, Illinois. VCA-South Bend offers 62 units, consisting of studio, one-
and two-bedroom suites. This resort has a small onsite sales operation.
Each one- and two-bedroom suite at VCA-South Bend includes a king master
bedroom, living room with sofa sleeper, kitchenette and whirlpool spa as well as
color television with premium movie channels. Common areas at the resort include
the Stadium Sports Lounge, which offers a variety of food and beverages and
features a theater-wall television in a stadium-type setting, fitness center
with whirlpool spa, indoor/outdoor heated pool, bocce ball, children's
playground, billiards room, library, gift shop, business center and special
events facilities. The Company intends VCA-South Bend to serve as a prototype,
subject to modifications and improvements, for the expansion of the Company's
Varsity Clubs concept to other suitable locations, with additional modifications
made as appropriate to suit local tastes and preferences. VCA-South Bend is an
II Five-Star resort.
As of December 31, 1999, this resort contained 3,224 one-week Vacation
Ownership Interests, of which approximately 611 were available for sale
(excluding 695 Vacation Ownership Interests owned by ILX Premiere Vacation
Club). Expansion capability exists for an additional 24 units (1,248 one-week
Vacation Ownership Interests). Construction of such additional units is not
anticipated prior to 2001.
VCA-TUCSON. The second Varsity Clubs resort is a two-acre property located
in Tucson, Arizona, approximately three miles from the University of Arizona and
110 miles from Phoenix, Arizona. VCA-Tucson offers 60 units, consisting of
studio, one- and two-bedroom suites. This resort has an onsite sales office.
VCA-Tucson was designed in accordance with the VCA-South Bend prototype,
with certain modifications made to improve operating efficiencies and satisfy
local tastes. Each of the suites includes a king master bedroom, living room
with sofa sleeper, kitchenette, whirlpool spa, as well as color television with
premium movie channels. Amenities at this resort include a Sports Lounge
designed similar to that at VCA-South Bend, the Twenty-Four Hour Sports Ticker,
Joey Pizza (a restaurant theme originally introduced at Los Abrigados),
billiards room, library, gift shop, fitness center, outdoor heated pool,
whirlpool spa, steam room, children's playground, bocce ball court, business
center and special events facilities. VCA-Tucson is an II Five-Star resort.
At December 31, 1999, this resort contained 3,120 one-week Vacation
Ownership Interests, of which 1,047 were available for sale (excluding 1,725
Vacation Ownership Interests owned by ILX Premiere Vacation Club).
THE SEA OF CORTEZ BEACH CLUB
The Sea of Cortez Beach Club is an ocean front property currently under
construction adjacent to the San Carlos Plaza Resort on the Sea of Cortez in San
Carlos, Mexico. The Company, through ILX Premiere Vacation Club, has acquired
1,500 25-year right-to-use Vacation Ownership Interests in 30 studio, one- and
two- bedroom units in The Sea of Cortez Beach Club upon completion of
construction, which is expected to be in late 2000. The Company intends to
market such Vacation Ownership Interests exclusively through ILX Premiere
Vacation Club. Until construction is complete, ILX Premiere Vacation Club
members wishing to visit San Carlos may utilize units in the San Carlos Plaza
Resort as well as all the resort amenities. The resort amenities will continue
to be available to owners of Vacation Ownership Interests in The Sea of Cortez
Beach Club (including ILX Premiere Vacation Club owners as discussed more fully
below) following completion of construction. Such amenities include two outdoor
swimming pools, whirlpool spa, fitness center, three restaurants, several
lounges, gift shops and water sports equipment. Each unit in The Sea of Cortez
Beach Club will have a separate living area, bedroom(s), full kitchen and
balcony or patio. During 1999, the Company annexed the 1,500 San Carlos Vacation
Ownership Interests into ILX Premiere Vacation Club. The Sea of Cortez Beach
Club will be an RCI Resort and has been awarded Gold Crown status. Operation of
an onsite sales office is planned following completion of construction of the
units and will offer Vacation Ownership Interests in ILX Premiere Vacation Club.
7
<PAGE>
ILX PREMIERE VACATION CLUB
In January 1998, the Company recorded in Maricopa County, Arizona its
proprietary ILX Premiere Vacation Club Membership Plan and in May 1998 annexed a
total of 5,000 Vacation Ownership Interests into the Club and received
Department of Real Estate approval in the State of Arizona to commence selling
Vacation Ownership Interests in the ILX Premiere Vacation Club. During 1999, the
Company annexed additional units and as of December 31, 1999, ILX Premiere
Vacation Club included a total of 8,000 Vacation Ownership Interests. The 8,000
Vacation Ownership Interests annexed into the Club consist of 1,581 Vacation
Ownership Interests in Los Abrigados, 265 Vacation Ownership Interests in The
Inn at Los Abrigados, 1,566 Vacation Ownership Interests in Kohl's Ranch Lodge,
565 Vacation Ownership Interests in Golden Eagle, 1,500 Vacation Ownership
Interests in the Sea of Cortez Beach Club, 695 Vacation Ownership Interests in
VCA-South Bend, 1,725 Vacation Ownership Interests in VCA-Tucson and 103
Vacation Ownership Interests in the Roundhouse Resort.
At December 31, 1999, 5,655 of the 8,000 ILX Premiere Vacation Club
Vacation Ownership Interests were available for sale. ILX Premiere Vacation Club
is affiliated with II and is offered for sale at each of the Company's sales
offices.
ADDITIONAL INTERESTS
In addition to the ILX Resorts, ILX owns a designated number of Vacation
Ownership Interests at additional resorts owned by unaffiliated third parties.
At December 31, 1999, the Company owned ten Vacation Ownership Interests at the
Ventura Resort located in Boca Raton, Florida. Purchasers of Vacation Ownership
Interests at Ventura Resort acquire deed and title to a particular unit, which
entitles the purchaser to use of the unit and to use the resort's common area
during a fixed designated time period. As of December 31, 1999, the Company also
owned 31 Vacation Ownership Interests at the Costa Vida Vallarta Resort, located
on a private beach, just south of Puerto Vallarta, Mexico. Vacation Ownership
Interests in the Costa Vida Vallarta Resort consist solely of contractual use
rights which expire in 2009. The Company also owns, in addition to the 103
Vacation Ownership Interests in the Roundhouse Resort that have been annexed
into ILX Premiere Vacation Club as disclosed above, six deeded Vacation
Ownership Interests in a resort in Palm Springs, California and one to two
Vacation Ownership Interests in each of a number of additional resorts that it
holds for resale.
PHOENIX SALES OFFICE
In January 2000, the Company opened an approximately 2,833 square foot
offsite sales office in Phoenix, Arizona, in the same building in which its
corporate offices are located. This office offers interests in ILX Premiere
Vacation Club primarily to prospective customers who reside in the Phoenix
metropolitan area.
OPERATING STRATEGIES
The Company's operating strategy seeks to emphasize the following
characteristics, which management believes provide ILX with certain competitive
advantages within the vacation ownership industry.
FLEXIBLE VACATION OWNERSHIP INTEREST PURCHASE OPTIONS. The Company believes
the flexibility associated with its inventory of Vacation Ownership Interests
provides a uniquely appealing opportunity for ILX owners. Unlike many of the
Company's competitors, substantially all of the Company's inventory of Vacation
Ownership Interests at the ILX Resorts are intended to be used on dates
specified from time to time by the ILX owner within a broad range of available
dates and not fixed at the time of purchase. Purchasers of a Vacation Ownership
Interest in the Company's proprietary branded ILX Premiere Vacation Club are
entitled to use their Vacation Ownership Interest at any resort in the ILX
Premiere Vacation Club or may split up their Vacation Ownership Interest
according to the owner's needs and preferences and it may be used at any number
of participating resorts, as well as thousands of other resorts through the
domestic and international exchange programs in which ILX owners participate. In
addition, Vacation Ownership Interests at Varsity Clubs may be purchased for
highly desirable single-day uses, a collection of single days (such as
designated days during an entire football or other sports season) or other
packages suited to meet each ILX owner's preferences.
CUSTOMER SATISFACTION. The Company believes that its inventory of highly
desirable resorts with extensive amenities, combined with flexible purchase
options have resulted in a high level of customer satisfaction. Each of the ILX
Resorts is located in an area with unique tourist attractions and offers food,
beverage and other amenities comparable to full-service commercial lodging
facilities, at discounted prices to ILX owners. As a result, the Company
believes ILX owners generally have a high level of satisfaction, resulting in
additional purchases and increased goodwill. The Company intends to capitalize
upon this by directing a portion of its marketing efforts towards increasing
sales of Vacation Ownership Interests to ILX owners.
ENHANCED AMENITIES. Each of the ILX Resorts has at least one full-service
restaurant and other food and beverage facilities in addition to a range of
other amenities typically found at high-quality resorts, such as horseback
riding, golf, swimming pools and exercise facilities. The Company believes that
most resorts offering Vacation Ownership Interests have none or only limited
restaurant and other food and beverage facilities. As a result, management
believes ILX owners appreciate the ability to enjoy traditional full-service
commercial hotel amenities and also maintain the option to use more economical
in-room facilities. See "- The Resorts."
DEMONSTRATED ABILITY TO ACQUIRE AND DEVELOP PROPERTIES. The Company has
historically been successful at acquiring resorts in settings of natural beauty
at relatively low costs. The Company's acquisition strategy is to identify
underutilized or distressed properties in locations with high tourist appeal and
access to major metropolitan centers. Thereafter, the Company's redevelopment
efforts are primarily targeted at improving the amenities and appointments of
such properties. The Company has successfully developed its prototype Varsity
Clubs of America resort, VCA-South Bend, and a second Varsity Clubs facility,
VCA-Tucson. Future Varsity Clubs will be designed and constructed in accordance
with the VCA-South Bend prototype, with appropriate modifications and
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improvements. The Company believes that its acquisition and development
strategies have resulted in a portfolio of desirable properties with a
relatively low cost of sales margin.
CONVENIENT ACCESS RESORTS. The Company's CARs are typically located within
a two-hour drive of an ILX owner's principal residence, which accommodates a
demand for more frequent and convenient "short-stay" vacations without the costs
of airfare. This proximity also facilitates marketing of the Company's ILX
Premiere Vacation Club, which permits members to divide their Vacation Ownership
Interest into shorter stays at any of the Company's properties included in the
ILX Premiere Vacation Club (including the VCAs) or exchange their entire
interest during any year through an exchange network. In addition to the use of
their Vacation Ownership Interest, ILX owners are also entitled to unlimited
day-use of the offered amenities and discounted food, beverage and other
services at their individual ILX Resort or, in the case of ILX Premiere Vacation
Club members, at any ILX Resort included in ILX Premiere Vacation Club, thereby
facilitating use and enhancing the benefits of ownership by ILX owners.
STANDARD DESIGN, LOWER CONSTRUCTION AND OPERATING COSTS OF VARSITY CLUBS.
The Company's Varsity Clubs concept is based upon its VCA-South Bend prototype.
While each Varsity Club may have aspects uniquely tailored to its targeted
customer base, the Company believes that its standard architectural and interior
designs for Varsity Clubs will significantly reduce associated development and
construction costs. Standardization also allows the Company to rapidly develop
new Varsity Clubs and integrate new resorts in response to demand. The Company
anticipates that new Varsity Clubs can be constructed within one year from
acquisition of the underlying real property.
PREMIUM LOCATIONS. The Company believes that the variety and natural beauty
of the surroundings for its CARs enhance their attraction to customers.
Substantially all of the ILX Resorts are located in the western United States,
in part because of the numerous locations in that region which are attractive to
tourists and convenient to major metropolitan areas. The vast majority of the
Company's inventory of Vacation Ownership Interests qualify as "red time," the
highest demand classification for purposes of participation in exchange networks
such as RCI and II. The Company intends to develop additional Varsity Clubs and
ILX Premiere Vacation Club resorts in other western United States sites that
offer natural settings or other attractions to entice tourists to visit such
locations.
INTEGRATED IN-HOUSE OPERATIONS. Substantially all of the Company's
marketing, sales, development, property management, financing and collections
operations are conducted internally, except certain minimal marketing functions
and processing of customer payments and certain collection activities related to
promissory notes given by ILX owners as partial payment for a Vacation Ownership
Interest ("Customer Notes"). In addition, the Company operates all of the ILX
Resorts on a centralized basis, with operating and maintenance costs paid from
ILX owners' dues as well as hotel rental revenues. The Company believes that its
internal capabilities result in greater control and consistency of all phases of
its operations and result in lower overall costs than generally associated with
outsourcing such operations. Such integration also facilitates the Company's ILX
Premiere Vacation Club and the ILX Resorts' qualification in the RCI and II
exchange networks, among others.
DIRECTED MARKETING. The Company's marketing strategy with respect to its
ILX Premiere Vacation Club is to target potential customers who have a
demonstrated interest in the location of its ILX Resorts or a likelihood of
frequent travel. As opposed to traditional marketing strategies which often
emphasize telemarketing and direct mail activities focused on promotional
inducements unrelated to travel, the Company's marketing activities primarily
offer travel-related inducements (such as discounted or complimentary vacations
at nearby ILX Resorts or at non-affiliated hotels in popular destinations in the
western United States and Mexico). By offering travel-related inducements, the
Company believes it is better able to identify customers who like to travel,
which results in a higher percentage of sales per contact. In addition, the
Company developed its proprietary Varsity Clubs of America concept to capitalize
upon affinity marketing strategies. The Company believes that a high-quality
"city club" experience combined with the traditional benefits associated with
Vacation Ownership Interests, such as the opportunity to participate in exchange
networks, will appeal to consumers in the local markets of each Varsity Clubs.
Further, the Varsity Clubs concept is intended to take advantage of a marketing
base of alumni, sports enthusiasts, parents of students, corporate sponsors and
others affiliated with each university next to which a Varsity Clubs will be
developed. For example, alumni of the University of Arizona, to whom the Company
is marketing Vacation Ownership Interests at its VCA-Tucson, currently number
approximately 180,000. The Company believes that these marketing strategies
permit it to take advantage of existing affinities, resulting in a higher rate
of closings per customer contacts.
ILX PREMIERE VACATION CLUB
Sales of Vacation Ownership Interests in ILX Premiere Vacation Club
commenced in June 1998. Purchasers are offered deeded membership interests that
may be used each use year in their entirety at one time or may be divided into
shorter stays at one or a variety of the Company's resorts or may be exchanged
through a participating exchange network. The Company's ILX Premiere Vacation
Club emphasizes CARs (i) which facilitate short-stay vacations with relatively
low cost and time associated with travel to the ILX Resort, (ii) located near
settings of natural beauty, (iii) with high quality amenities and resort
services and (iv) which facilitate flexible use options. The Company believes
that its proprietary branded ILX Premiere Vacation Club will capitalize upon
affinity marketing strategies and increase the goodwill associated with the ILX
Resorts. In addition, membership interests in the ILX Premiere Vacation Club are
marketed at an average higher gross sales price than sales of Vacation Ownership
Interests in a single ILX Resort. The Company also markets membership interests
in its ILX Premiere Vacation Club to existing ILX owners, thereby expanding its
sales volume without increasing its sales and marketing costs in the same
proportion as generally associated with sales to first-time buyers.
Initially, the Company's ILX Premiere Vacation Club inventory consisted of
Vacation Ownership Interests in the ILX Resorts. New resorts are expected to be
added through the Company's pursuit of selected acquisition opportunities, as
occurred with the addition of the 1,500 25-year right-to-use Vacation Ownership
Interests in The Sea of Cortez Beach Club in San Carlos, Mexico. By marketing
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its inventory of Vacation Ownership Interests through ILX Premiere Vacation
Club, the Company believes it has greater flexibility with respect to potential
acquisition opportunities than generally associated with the sale of Vacation
Ownership Interests in a single vacation resort, to the extent that small or
remote resorts which may be inefficient to market as a single location resort
may enhance the consumer appeal of a membership interest in ILX Premiere
Vacation Club. With its existing and planned resorts in Arizona, the Company is
seeking to build a critical mass of CARs within driving distance of the Phoenix
and Tucson metropolitan markets to support the initial introduction of the ILX
Premiere Vacation Club concept. The Company believes that the geographic and
cultural diversity of Arizona make that state particularly appropriate for this
expansion. Thereafter, the Company intends to develop networks of CARs proximate
to other major metropolitan areas in the western United States. Further
capitalizing on the flexibility of ILX Premiere Vacation Club, beginning in
March 1999, the Company entered into an agreement with Coast Resorts whereby ILX
Premiere Vacation Club members may utilize their ILX Premiere time in Las Vegas,
Nevada, a convenient access destination very attractive to the Phoenix and
Tucson markets. Also in 1999, the Company entered into an agreement with a
Scottsdale, Arizona resort whereby ILX Premiere Vacation Club members may
utilize the resort facilities on a day use basis, further enhancing the benefits
of ownership in ILX Premiere Vacation Club.
VARSITY CLUBS OF AMERICA
The Company intends to pursue the expansion of its proprietary branded
Varsity Clubs concept. The Company will focus on development of additional
Varsity Clubs near prominent colleges and universities in the western United
States located in areas with a significant base of existing tourism and access
to major population centers. The Varsity Clubs of America concept is primarily
intended to offer residents in major population centers a "city club" experience
with day-use privileges regularly available, as well as the opportunity to
exchange their Vacation Ownership Interest through the exchange networks in
which ILX owners participate. The Varsity Clubs concept also seeks to maximize
the appeal of such urban timeshare resorts by strategically locating each of
them proximate to one or more prominent colleges and universities with
nationally recognized athletic, cultural and other events. Large universities
host a variety of sporting, recreational, academic and cultural events that
create a substantial and relatively constant influx of participants, attendees
and spectators. The Varsity Clubs concept is designed to address the specific
needs of these individuals and entities by creating specialty vacation ownership
resorts that have a flexible ownership structure, enabling the purchase of
anything from a single day, a collection of single days (such as an entire
football or other sports' season) or a traditional one-week period. Each Varsity
Clubs facility will operate as a hotel to the extent of unsold or unused
vacation ownership inventory.
The prototype VCA-South Bend facility is an all-suite, 62-unit lodging
facility that features amenities such as The Stadium (a sports-theme atrium
lounge serving a variety of food and beverages and featuring a theater-wall
television), a private Member's Lounge, exercise facilities, a swimming pool and
whirlpool spa, complete business services and other facilities popular with the
target market of likely purchasers. The prototype Varsity Clubs facility is
based on a four-acre configuration expandable to as many as 90 units, without
the need to acquire additional real property, and can be built in smaller
configurations if warranted by a particular market or if dictated by the
availability of land.
The first Varsity Clubs facility was completed in August 1995, and is
located three miles from the University of Notre Dame and Notre Dame Stadium in
South Bend, Indiana, and approximately 90 miles from Chicago, Illinois.
Customers purchase deed and title to a floating period's use of a unit and
unlimited day-use privileges at the common areas of the property. Purchasers may
also receive the right to use the facility on specified dates, such as dates of
home football games, for which they pay a premium. A total of 62 units, or 3,224
one-week intervals, have been constructed at VCA-South Bend and, at December 31,
1999, approximately 611 one-week intervals were available for sale (excluding
695 Vacation Ownership Interests owned by ILX Premiere Vacation Club) and
expansion capacity exists for up to an additional 24 units (1,248 one-week
Vacation Ownership Interests). To date, VCA-South Bend has been able to compete
favorably for commercial guests because of its superior facilities and amenities
relative to other lodging accommodations in the area.
The second Varsity Clubs facility is located in Tucson, Arizona, less than
three miles from the University of Arizona. This second Varsity Clubs was
completed in July 1998 and offers 60 suites, or 3,120 one-week intervals. At
December 31, 1999, approximately 1,047 one-week intervals were available for
sale (excluding 1,725 Vacation Ownership Interests owned by ILX Premiere
Vacation Club). VCA-Tucson was designed in accordance with the VCA-South Bend
prototype, with certain modifications made to improve efficiency and incorporate
local design themes. The Company chose Tucson as a site for its Varsity Clubs
concept because of its status as a year-round destination location, a large
residential population base of approximately 750,000 and the proximity to the
University of Arizona, which has a current alumni base in excess of 180,000
people. The Company believes that all of these factors increase the appeal of
VCA-Tucson to prospective buyers as well as provide increased trading power for
purchasers of Vacation Ownership Interests in the resort for purposes of
participation in exchange networks. The VCA-Tucson onsite sales office offers
customers both ILX Premiere Vacation Club and VCA-Tucson Vacation Ownership
Interests. ILX Premiere Vacation Club Interests provide the buyer with local
city club privileges, access to all resorts in ILX Premiere Vacation Club, as
well as a variety of additional benefits.
The Company is considering various other sites for development of
additional Varsity Clubs facilities in the next five to seven years. Management
believes there exist numerous sites in the western United States that are
attractive for the development of additional Varsity Clubs. The Company intends
to expand its Varsity Clubs concept to up to three of these areas in the next
five years, based upon the VCA-South Bend prototype, with certain modifications
and improvements. The Company also believes that Varsity Clubs will establish
their own brand name recognition as additional facilities are offered, each with
a consistent design and selection of amenities. Varsity Clubs expansion efforts
will initially be primarily focused on metropolitan areas in the western United
States, each located near one or more large universities, but the Company will
assess other potential opportunities as they arise. Ideally, the Company will
seek to place additional Varsity Clubs near universities that are located in or
convenient to popular tourist destination locations in or near large
metropolitan areas, such as Tempe, Arizona; Boulder, Colorado; Las Vegas,
Nevada; Palo Alto, California; Salt Lake City - Provo, Utah; and Seattle,
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Washington. The Company will also seek to broaden the affinity marketing base of
its future Varsity Clubs by situating them proximate to more than one prominent
college or university, where appropriate. The Varsity Clubs concept also seeks
to capitalize on affinity marketing strategies through the perceived affiliation
with a nationally recognized university and the "city club" experience which the
Company seeks to associate with the Varsity Clubs of America brand name. The
Company intends to provide purchasers of Vacation Ownership Interests in one
Varsity Clubs certain benefits at other Varsity Clubs in order to enhance their
appeal to consumers.
Marketing is the process by which the Company attracts potential customers
to visit and tour an ILX Resort or attend a sales presentation. Sales is the
process by which the Company seeks to sell a Vacation Ownership Interest to a
potential customer once he or she arrives for a tour at an ILX Resort or attends
a sales presentation. The Company believes it has the marketing and sales
infrastructure necessary to sell Vacation Ownership Interests on a competitive
basis. All of the Company's sales and the majority of the Company's marketing
functions are currently performed in-house and the Company invests significant
resources in attracting, training and seeking to retain its sales and marketing
employees. The Company believes this strategy provides it with greater control
over these critical functions, resulting in greater consistency of customer
relations and improved customer satisfaction. In addition, management believes
that its practice of hiring employees to staff its sales and marketing
functions, as opposed to using independent contractors as has been the industry
norm, results in a higher retention rate among its sales force and provides a
pool of experienced staff from which to draw upon as the Company's business
expands. The Company expends substantial resources identifying, attracting and
training its sales and marketing personnel and offers a full package of
employment benefits to its sales and marketing personnel. Management believes
that consistency and high quality in its sales and marketing operations is
crucial to its success. The Company believes that the package of benefits
offered to its sales and marketing employees is uncommon in the vacation
ownership industry and, as a result, attracts high quality personnel and
provides an incentive for their performance.
MARKETING. The Company's marketing activities are devoted primarily towards
(i) hotel guests at the ILX Resorts, (ii) RCI and II exchange program
participants staying at the ILX Resorts, (iii) off-premise contacts with
visitors to the local surroundings of the ILX Resorts and in the metropolitan
areas within driving distances of the ILX Resorts and (iv) direct mail and
telemarketing to residents of metropolitan areas within driving distance of the
ILX Resorts. The Company's marketing strategy seeks to target prospective buyers
who respond favorably to travel-related inducements because the Company believes
such consumers are more likely to travel and therefore have a greater likelihood
of purchasing a Vacation Ownership Interest. The Company identifies potential
purchasers through internally developed marketing techniques, and sells Vacation
Ownership Interests through its four sales offices located at ILX Resorts and,
commencing in the first quarter of 2000, from an offsite sales office in
Phoenix, Arizona. For its onsite sales offices, the Company primarily targets
customers who live within driving distance of the ILX Resort or who are
vacationing at or near the ILX Resort. This practice allows the Company to
invite potential purchasers to experience the ILX Resorts and avoid the more
expensive marketing costs of subsidized airfare and lodging which are typically
associated with the vacation ownership industry. In addition, the Company
believes that its marketing strategy results in a higher percentage of sales per
prospective customer contacts as compared to many of its competitors because its
targeted customer base has a demonstrated interest in the locale of an ILX
Resort and/or a greater likelihood to take vacations. The Company targets local
residents to its Phoenix offsite sales office by offering these prospective
customers travel incentives in exchange for their attendance at the sales
presentation. The Company believes that prospective customers who respond to
such travel offers have strong sales potential because of the attractiveness of
the convenient access of the ILX Resorts to their homes, and because of their
interest in travel.
Similar to branding techniques utilized by some of its competitors, the
Company also seeks to capitalize upon affinity marketing concepts in attracting
prospective buyers to its Varsity Clubs concept by seeking to develop a branded
"city club" experience for flexible use by local residents. In addition,
marketing of Varsity Clubs seeks to focus on alumni, parents of university
students and other persons or entities who have a preexisting affiliation with
or other attraction to the local university. All of the Company's marketing
activities emphasize the convenience of the ILX Resorts, coupled with the
opportunity to participate in exchange networks, as well as the quality and
breadth of amenities available at each of the ILX Resorts.
SALES. The Company actively sells its inventory of Vacation Ownership
Interests primarily through a sales staff of approximately 175 employees at
December 31 1999, including approximately 130 sales agents at four sales offices
located at selected ILX Resorts. Commencing in 2000, the Company also opened and
began sales from an offsite sales office in Phoenix, Arizona. Prospective
first-time purchasers participate in a tour of the facilities as well as its
related amenities, guided by a salesperson. In the Phoenix offsite sales office,
the "tour" of the facilities consists of a photo tour of the ILX Resorts and
viewing of a video on vacation ownership. At the conclusion of the tour, the
terms of making a purchase, including financing alternatives, are explained to
the customer. Approximately 20% to 25% of the Company's sales have historically
been made on a cash basis. However, for those customers seeking financing, the
Company conducts substantial credit pre-approval research. The Company's
point-of-sale credit pre-approval process typically includes a review of the
customer's credit history. After final approval of a purchase, which includes
verification of employment, the Company waits until expiration of the applicable
statutory waiting period, generally from three to seven days, prior to
recognizing a sale as complete.
In addition to generating sales to first-time buyers, the Company's sales
force seeks to generate sales of additional Vacation Ownership Interests or
Upgrades to ILX owners. Sales to ILX owners generally have lower marketing costs
associated with them as these buyers tend to be more familiar with the nature of
purchasing a Vacation Ownership Interest and the amenities offered by the ILX
Resorts. Sales to ILX owners accounted for 9.2% of Vacation Ownership Interest
sales by the Company during 1999. During 1998 and 1997, sales to ILX owners
accounted for 13.7% and 12.5% of the Company's total sales, respectively. The
Company intends to increase its sales efforts with respect to ILX owners.
Prior to June 1998, the Company's inventory of Vacation Ownership Interests
had historically consisted of a one-week interval which could be used on an
annual or an alternate-year basis in a specified ILX Resort during a specified
range of dates. ILX owners could also participate in exchange networks such as
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RCI and II. Commencing in June 1998, the Company began offering deeded
membership interests in its ILX Premiere Vacation Club, which permit a member to
stay at one or more of the participating ILX Resorts for up to one week on an
annual or alternate-year basis. ILX Premiere Vacation Club members may divide
their stays into shorter vacations at any time between a specified period of
time, enjoy unlimited day use and discounted goods and services at any ILX
Resort, as well as a variety of other benefits. The Company believes that the
variety and flexibility of use options associated with its inventory of Vacation
Ownership Interests are uniquely attractive to customers.
CUSTOMER FINANCING
The Company currently provides financing for approximately 75% to 80% of
its Vacation Ownership Interest sales. On financed sales, the Company receives
at least 10% of the aggregate sales price of Vacation Ownership Interests as a
down payment. Financing for the remainder is typically made available by the
Company to the buyer for a term of seven years at a fixed rate of interest,
which is currently approximately 15.9% to 16.9% per annum. At December 31, 1999,
the Company had a portfolio of retained Customer Notes with an aggregate
principal amount of $23.1 million, of which $17.7 million were serviced by an
outside vendor and had a weighted average yield of 14.95% per annum, which
compares favorably to the Company's weighted average cost of borrowings for such
Customer Notes of 10.1% per annum.
The Company believes that providing available financing is essential to the
successful sales and marketing of its Vacation Ownership Interest inventory.
However, the Company seeks to minimize the risks associated with its financing
activities by emphasizing the credit pre-approval process. In addition, the
Company expends significant resources negotiating alternative repayment programs
for past due accounts, so as to minimize its actual losses. Collection
activities with respect to Customer Notes which the Company has hypothecated are
managed internally and serviced by a third-party on behalf of the lenders and
the Company. In addition, the Company may utilize third party collection
agencies for difficult accounts.
Prior to 1995, the Company sold the majority of its Customer Notes and
retained the small remaining portion, most of which were hypothecated. Since
1995, the Company has increased the amount of Customer Notes that it retains,
most of which it hypothecates, and, as a result, at December 31, 1999, the
Company retained Customer Notes in an aggregate principal amount of $23.1
million as compared to $7.9 million at December 31, 1995.
Although the terms of each Customer Note vary, typically such notes are
deemed past due when a scheduled payment is 30 days or more past due. In
addition, a delinquency occurs when an account becomes more than 90 days past
due. The Company seeks to avoid defaults by working closely with the lender and
its collection agent with respect to ILX owners who become delinquent. The first
collection contact typically occurs within 16 to 30 days of a payment's due
date.
At December 31, 1999, the Company has an agreement with a financial
institution for a commitment of $40 million 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 December 31, 1999, $33.4 million of the
$40 million commitment was available to the Company. The Company also has
financing commitments in the aggregate amount of $43.5 million, pursuant to
which the Company may hypothecate Customer Notes which are pledged to the lender
as collateral. These borrowings bear interest at prime plus 1.5% ($40 million)
to prime plus 3% ($3.5 million), have draw periods which expire in 2001 and
2002, and maturity dates of 2006 and 2007, respectively. At December 31, 1999,
$27.8 million was available to the Company under these commitments. The Company
currently reserves approximately 4% of gross sales (including cash sales) as an
allowance for doubtful accounts. At December 31, 1997, 1998 and 1999, the
aggregate amount of these reserves was $3.0 million, $3.5 million and $3.3
million, respectively. During 1997 and 1998, the Company's provision for
doubtful accounts exceeded actual write-offs by $0.4 million and $0.5 million,
respectively. During 1999, actual write-offs exceeded the Company's provision
for doubtful accounts by $0.2 million. The Company generally writes off
receivables only at such time as it accepts back a deed to the underlying
property and determines the remainder uncollectible. The timing of such
write-offs is neither indicative of the date delinquency commenced nor of the
date the likelihood of noncollectibility was determined. To the extent that the
Company's losses as a result of bad debt exceed its corresponding reserves, its
financial condition and results of operations may be materially adversely
affected.
OTHER OPERATIONS
RESORT OPERATIONS. The Company also receives revenues from (i) the rental
of its unsold or unused inventory of units at the ILX Resorts, (ii) the sale of
food, beverages and other amenities at such resorts and (iii) the management and
operation of the ILX Resorts. During 1999, the Company received $13.4 million in
net revenues from these operations, consisting of $7.2 million in room rental
revenue, $4.4 million in food and beverage revenue and $1.8 million in other
revenue. Of these amounts, Los Abrigados contributed $8.7 million, or 65% of the
Company's total resort operations revenues in 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Historically, the Company's resort operation activities have not generated
a material portion of the Company's net profits on a consolidated business.
Revenues from resort operations typically vary significantly from one ILX Resort
to another. In addition, changes in revenue received from these operations have
not typically correlated with fluctuations in the Company's revenues from sales
of Vacation Ownership Interests. Management expects this trend to continue in
the future in part because of the emphasis of the Company's growth strategy on
its Varsity Clubs, which have typically generated a lower percentage of revenues
from resort operations than that generated by the Company's CARs. However, the
Company believes that its resort management activities directly complement the
Company's efforts with respect to the marketing and sales of Vacation Ownership
Interests.
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SEDONA SPA. Prior to December 31, 1999, the Company's operations included
the sale of personal care products through its majority-owned subsidiary Sedona
Worldwide Incorporated ("SWI"). Effective December 31, 1999, the Company spun
off its entire ownership interest in SWI to the shareholders of ILX Resorts
common stock through a prorata distribution of the 3,360,000 common shares of
SWI held by the Company (representing 80% of the then total common shares of
SWI). The Company believes the spin-off will allow the management of each
company to concentrate its attention and financial resources on the core
business of its respective company without regard to the corporate objectives,
policies and investment standards of the other.
The SWI personal care products had historically been marketed under its
proprietary Red Rock Collection brand name through the ILX Resorts. Commencing
in the second quarter of 1998, these products were marketed under the brand name
"Sedona Spa" and, in connection with such change, certain modifications to the
product line were implemented. Sedona Spa products have, and continue to be,
utilized at the ILX Resorts as in-room amenities and are also offered for retail
sale in the resort gift shops and at the Sedona Spa at Los Abrigados. Sedona Spa
products are also used by the Company as promotion incentives to potential
purchasers who attend the Company's sales tours and presentations. SWI uses
direct mail to market Sedona Spa products to resort customers and tour
participants who have previously used the products. Sales of Sedona Spa products
are included in "Income from land and other, net" on the Company's financial
statements and have not resulted in a material amount of net revenues or profits
to the Company. The Company anticipates continuing to utilize Sedona Spa
products for in-room amenities, promotional incentives and in its retail outlets
through 2000. In addition, the Company has agreed to provide SWI, if necessary,
up to $200,000 in financing to fund working capital shortfalls through November
30, 2000. Any such advances are interest bearing and mature on December 31,
2000. To the extent SWI uses services of ILX employees for accounting,
administrative or other purposes post spin-off, SWI will pay the Company for
such services.
LAND SALES. Since l993, the Company has also received revenues from the
sale of primarily unimproved real property. These operations originated as a
result of the Company's acquisition of its wholly owned subsidiary, Genesis
Investment Group, Inc. ("Genesis"), in November 1993. The sale of real property
is not a core business function for the Company and, as such, the Company has
not historically and does not intend in the future to devote a material portion
of its resources to these operations. Typically, the Company has sold these
assets as subdivided lots or large unimproved parcels. The Company intends to
sell substantially all of the remaining assets during the next twelve to
twenty-four months, although there can be no assurance that it will be able to
sell these assets at attractive prices, if at all, during this time. Following
the sale of these assets, management does not expect to engage in the sale of
real property.
RESALE OPERATIONS. In June 1998, the Company acquired a 51% interest in
Timeshare Resale Brokers, Inc. ("TRBI"), an Arizona company engaged in the
resale of Vacation Ownership Interests on behalf of consumers and others, for
which it earns a commission upon sale. The operation is based in Sedona,
Arizona, and while the Company anticipates the possibility of expanding these
operations to additional vacation destinations, to date the operations of TRBI
have not been material to the Company.
PARTICIPATION IN EXCHANGE NETWORKS
The Company believes that consumers are more likely to purchase from its
inventory of Vacation Ownership Interests as a result of the Company's
participation in the Vacation Ownership Interest exchange networks operated by
RCI and II, the leading exchange network operators. In a 1995 study sponsored by
the Alliance for Timeshare Excellence and the American Resort Development
Association, exchange opportunity was cited by purchasers of interval interests
as one of the most significant factors in their decision to purchase an
interest. Membership in RCI or II allows ILX owners to exchange in a particular
year their occupancy right in the unit in which they own a Vacation Ownership
Interest for an occupancy right at the same time or a different time in another
participating resort, based upon availability and the payment of a variable
exchange fee. A participating ILX owner may exchange his or her Vacation
Ownership Interest for an occupancy right in another participating resort by
listing the Vacation Ownership Interest as available with the exchange network
operator and by requesting occupancy at another participating resort, indicating
the particular resort or geographic area to which the owner desires to travel,
the size of the unit desired and the period during which occupancy is desired.
The exchange network assigns a rating to each listed Vacation Ownership
Interest, based upon a number of factors, including the location and size of the
unit, the quality of the resort and the period of the year during which the
Vacation Ownership Interest is available, and attempts to satisfy the exchange
request by providing an occupancy right in another Vacation Ownership Interest
with a similar rating. Approximately 85% of the Vacation Ownership Interests at
the ILX Resorts qualify as "red time," the highest demand classification,
thereby increasing the exchange opportunities available to ILX owners. If RCI or
II is unable to meet the member's initial request, the network operator may
suggest alternative resorts, based on availability. In addition, ILX's
Centralized Owner Services Department has established arrangements with
additional resorts and smaller exchange networks through which it offers
exchange opportunities and discounted vacation getaways to ILX owners. The
Company believes that its direct participation in the exchange process, coupled
with these additional services, provides ILX with a competitive advantage and
tends to increase customer satisfaction.
COMPETITION
ILX's Vacation Ownership Interest plans compete both with other Vacation
Ownership Interest plans as well as hotels, motels, condominium developments and
second homes. ILX considers the direct competitors of individual resorts to also
include alternative accommodations, including hotels, motels, bed-and-breakfasts
and small vacation ownership operators located within the immediate geographic
vicinity of such resort. This is particularly true with respect to its CARs that
tend to attract purchasers whose decision to buy a Vacation Ownership Interest
is likely to be influenced by the convenience of the resort to their principal
residence.
The Vacation Ownership Interest industry historically has been highly
fragmented and dominated by a very large number of local and regional resort
developers and operators, each with limited portfolios. More recently, many of
the world's most widely-recognized lodging, hospitality and entertainment
13
<PAGE>
companies have begun to develop and sell vacation ownership interests under
their brand names, including Marriott Ownership Resorts, Walt Disney Company,
Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts,
Starwood Hotels & Resorts Worldwide Inc. and Promus Hotel Corporation. In
addition, other publicly traded companies such as Sunterra Resorts, Fairfield
Communities, Inc., Silverleaf Resorts, Inc., Trendwest Resorts, Inc., and
Bluegreen Corporation currently compete or may compete in the future with the
Company. Furthermore, significant competition exists in other markets in which
the Company currently operates or is developing vacation ownership resorts. Many
entities with which the Company competes have significantly greater access to
financial, sales and marketing and other resources than those of the Company and
may be able to grow at a more rapid rate or more profitably as a result.
Management anticipates competition to increase in the future as a result of
consolidation in the vacation ownership industry. There can be no assurance that
the Company will be able to successfully compete with such companies.
GOVERNMENTAL REGULATION
GENERAL. The Company's marketing and sales activities and other resort
operations are subject to extensive regulation by the federal government and the
states in which the Company's resorts are located and in which its Vacation
Ownership Interests are marketed and sold. Federal legislation to which the
Company is or may be subject includes the Federal Trade Commission Act, the Fair
Housing Act, the Truth-in-Lending Act, the Real Estate Settlement Procedures
Act, the Equal Credit Opportunity Act, the Interstate Land Sales Full Disclosure
Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Civil
Rights Acts of 1964, 1968 and 1991. Many states have adopted legislation as well
as specific laws and regulations regarding the sale of Vacation Ownership
Interests. The laws of most states, including Arizona, require a designated
state authority to approve a detailed offering statement describing the Company
and all material aspects of the resort and sale of Vacation Ownership Interests
at such resort. In addition, the laws of most states in which the Company sells
vacation ownership interests grant the purchaser of a Vacation Ownership
Interest the right to rescind a contract of purchase at any time within a
statutory rescission period. Furthermore, most states have other laws which
regulate the Company's activities, such as real estate licensure laws, travel
sales licensure laws, anti-fraud laws, telemarketing laws, prize, gift and
sweepstakes laws, and labor laws. The Company believes that it is in material
compliance with all applicable federal, state, local and foreign laws and
regulations to which it is currently subject.
ENVIRONMENTAL MATTERS. Under applicable federal, state and local
environmental laws and regulations, a current or previous owner or operator of
real estate may be required to investigate, remediate and remove hazardous or
toxic substances at such property, and may be held liable for property damage
and for investigation, remediation and removal costs incurred by such parties in
connection with the contamination. Such laws typically impose such liability
without regard to whether the owner or operator knew of or caused the presence
of the contaminants, and the liability under such laws has been interpreted to
be joint and several unless the harm is divisible and there is a reasonable
basis for allocation of responsibility. The costs associated with compliance
with such regulations may be substantial, and the presence of such substances,
or the failure to properly remediate the contamination on such property, may
adversely affect the owner's or operator's ability to sell or rent such property
or to borrow against such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances at a disposal or
treatment facility also may be liable for the costs of removal or remediation of
a release of hazardous or toxic substances at such disposal or treatment
facility, whether or not such facility is owned or operated by such person. In
addition, some environmental laws create a lien on the contaminated site in
favor of the government for damages and costs it incurs in connection with the
contamination. Finally, the owner or operator of a site may be subject to common
law claims by third parties based on damages and costs resulting from
environmental contamination emanating from a site. In connection with its
ownership and operation of its properties, the Company may be potentially liable
for such costs.
The Company does not always conduct Phase I environmental assessments at
the ILX Resorts, properties under development and properties subject to
acquisition. Because many of the Company's resorts are typically found in remote
locations, it does not consider the risks of environmental liabilities
significant enough to warrant the performance of Phase I assessments at such
locations. Failure to obtain such reports may result in the Company acquiring or
developing unusable property or assuming certain liabilities which could have
been avoided if the Company had the information typically discovered in a Phase
I report. However, when appropriate, the Company has in the past and will in the
future obtain Phase I reports. To date, the Company has obtained environmental
reports with respect to three of the ILX Resorts. In addition, the Company does
conduct significant in-house due diligence prior to the acquisition of any real
property interests. To date, the Company's investigation of its properties have
not revealed any environmental liability that the Company believes would have a
material adverse effect on the Company, its business, assets, financial
condition or results of operations, nor is the Company aware of any such
material environmental liability.
The Company believes that its properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances. The Company has not been notified by
any governmental authority or any third party, and is not otherwise aware, of
any material noncompliance, liability or claim relating to hazardous or toxic
substances or petroleum products in connection with any of its present
properties.
OTHER REGULATIONS. Under various state and federal laws governing housing
and places of public accommodation, the Company is required to meet certain
requirements related to access and use by disabled persons. Although management
believes that the Company's resorts are substantially in compliance with present
requirements of such laws, the Company may incur additional costs of compliance
in connection with the development of new resorts, or conversion or renovation
of ILX Resorts. Future legislation may impose additional requirements on owners
with respect to access by disabled persons. The aggregate costs associated with
compliance with such regulations are not currently known, and, while such costs
are not expected to have a material effect on the Company, such costs could be
substantial. Limitations or restrictions on the completion of certain
renovations may limit application of the Company's growth strategy in certain
instances or reduce profit margins on the Company's operations.
14
<PAGE>
EMPLOYEES
As of December 31, 1999, the Company had approximately 815 employees, of
which approximately 620 were employed on a full-time basis (including
approximately 85 employed on a full-time equivalent basis of 20 hours per week).
The Company believes relations with its employees are good and none of its
employees are represented by labor unions.
INSURANCE
The Company carries comprehensive liability, business interruption, title,
fire and storm insurance with respect to the ILX Resorts, with policy
specifications, insured limits and deductibles customarily carried for similar
properties, which the Company believes are adequate. There are, however, certain
types of losses (such as losses caused by floods or acts of war) that are not
generally insured because they are either uninsurable or not economically
insurable. Should an uninsured loss or a loss in excess of insured limits occur,
the Company could lose its capital invested in a resort, as well as the
anticipated future revenues from such resort and would continue to be obligated
on any mortgage indebtedness or other obligations related to the property. Any
such loss could have a material adverse effect on the Company.
CORPORATE HEADQUARTERS
The Company leases 5,444 square feet for its corporate offices in Phoenix,
Arizona, under a lease which expires on January 31, 2002. During 1999, the
Company leased an additional 2,833 square feet through December 31, 2004 in the
same building which houses its corporate offices, to be used for an offsite
sales office.
ITEM 3. 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.
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 December 31, 1999, 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.
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.
Other litigation has arisen in the normal course of the Company's business,
none of which is deemed to be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table sets forth, for the periods indicated, the range of
high and low sales prices for the Common Stock, after giving retroactive effect
to the one-for-five reverse stock split (the "Reverse Stock Split"), declared
effective by the Company on January 12, 1998. The information is as reported by
the Nasdaq SmallCap Market or the American Stock Exchange. Since February 11,
1998, the Common Stock has been listed on the American Stock Exchange. Prior to
February 11, 1998, it had been traded on the Nasdaq SmallCap Market. As of
December 31, 1999, the Common Stock was held by approximately 1,123 holders of
record. No dividends on the Common Stock have been declared by the Company since
inception and none are anticipated in the foreseeable future. Dividends on
Common Stock are subordinate to dividends payable on the Company's Series A and
Series C Preferred Stock.
15
<PAGE>
Common Stock
----------------
High Low
----- -----
YEAR ENDED DECEMBER 31, 1998
First Quarter $7.25 $4.38
Second Quarter 7.25 5.69
Third Quarter 5.88 1.88
Fourth Quarter 2.94 1.75
YEAR ENDED DECEMBER 31, 1999
First Quarter $2.44 $1.25
Second Quarter 2.50 1.50
Third Quarter 2.25 1.75
Fourth Quarter 2.00 1.37
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated historical financial information set forth below
for the five years ended December 31, 1999 has been derived from the
consolidated financial statements of the Company which have been restated to
give effect to the Reverse Stock Split.
The Selected Consolidated Financial Information should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included herein, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
December 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(In Thousands, Except Per Share Data)
Revenues $30,849 $31,581 $36,411 $36,858 $40,439
Net income 625 1,051 1,668 62 703
Net income per share - basic .24 .38 .60 .00 .16
Net income per share - diluted .24 .37 .59 .00 .16
Total assets 37,753 41,275 43,722 51,997 57,389
Notes payable 13,528 16,434 22,051 23,002 28,121
Shareholders' equity 13,775 15,175 16,621 25,764 25,239
ITEM 7. 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-K, 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 revenues 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.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 65.9% 61.3% 58.6%
Resort operating revenue 30.0% 33.1% 33.0%
Interest income 4.1% 5.6% 8.4%
------- ------- -------
Total timeshare revenues 100.0% 100.0% 100.0%
======= ======= =======
As a percentage of sales of Vacation Ownership Interests:
Cost of Vacation Ownership Interests sold 13.4% 13.8% 13.3%
Sales and marketing 57.9% 67.7% 65.1%
Provision for doubtful accounts 2.9% 2.9% 3.4%
Contribution margin percentage from sale of Vacation
Ownership Interests (1) 25.7% 15.6% 18.3%
As a percentage of resort operating revenue:
Cost of resort operations 95.9% 97.3% 93.7%
As a percentage of total timeshare revenues:
General and administrative 8.2% 9.2% 10.8%
Depreciation and amortization 1.3% 1.0% 1.3%
Timeshare operating income 12.9% 5.9% 9.0%
Selected operating data:
Vacation Ownership Interests sold (2)(3) 1,660 1,485 1,545
Average sales price per Vacation Ownership Interest
sold (excluding revenues from Upgrades) (2) $12,656 $13,013 $13,453
Average sales price per Vacation Ownership Interest
sold (including revenues from Upgrades) (2) $14,446 $15,137 $15,183
</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) Consists of an aggregate of 2,512, 2,303 and 2,387 biennial and annual
Vacation Ownership Interests for the years ended December 31, 1997, 1998
and 1999, respectively.
COMPARISON OF YEAR ENDED DECEMBER 31, 1998 TO DECEMBER 31, 1999
Sales of Vacation Ownership Interests increased 4.9% or $1.1 million in
1999 to $23.7 million from $22.6 million in 1998, reflecting an increase in
sales from the Sedona sales office, net of a decrease in sales from the VCA -
South Bend sales office and reduced Upgrades. The increase in sales from the
Sedona sales office is a result of both an increase in the number of tours and
an improved closing rate (sales as a percentage of tours). The decrease in sales
from the VCA - South Bend sales office reflects 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. Upgrade revenue decreased 29.0%
from $3.1 million in 1998 to $2.2 million in 1999 because 1998 sales reflected
the introduction of ILX Premiere Vacation Club late in the second quarter of
1998. The Company made special offers to introduce the program to its existing
owners, which generated significant upgrade activity in 1998. The average sales
price per Vacation Ownership Interest sold (excluding Upgrades) increased 3.4%
to $13,453 in 1999 from $13,013 in 1998 as a result of increased sales prices.
The increase in average sales price per Vacation Ownership Interest sold
including Upgrades increased 0.3% reflecting the increased prices on new sales,
net of fewer Upgrades.
The number of Vacation Ownership Interests sold increased 4.0% to 1,545 in
1999 from 1,485 in 1998. Sales of Vacation Ownership Interests in 1999 included
1,685 biennial Vacation Ownership Interests (counted as 843 annual Vacation
Ownership Interests) and 702 annual Vacation Ownership Interests compared to
1,637 biennial Vacation Ownership Interests (counted as 819 annual Vacation
Ownership Interests) and 666 annual Vacation Ownership Interests in 1998. The
increase in average price per Vacation Ownership Interest sold (excluding
Upgrades) in 1999 reflects higher per unit sales prices for sales of ILX
Premiere Vacation Club Vacation Ownership Interests than for single resort
Vacation Ownership Interests. ILX Premiere Vacation Club was first introduced in
June 1998. ILX Premiere Vacation Club members may use their time at any of the
participating ILX Resorts, and enjoy day use and food, beverage and other
discounts at the ILX Resorts. The Company charges higher prices for the greater
flexibility and benefits ILX Premiere Vacation Club offers.
17
<PAGE>
Resort operating revenues increased 9.8% or $1.2 million from $12.2 million
in 1998 to $13.4 million in 1999 as a result of a full year of operations of
VCA-Tucson, which opened in the third quarter of 1998. The cost of resort
operations increased 5.0% or $0.6 million from $11.9 million in 1998 to $12.5
million in 1999, again reflecting the full year of activity of VCA-Tucson. Cost
of resort operations as a percentage of resort operating revenue improved from
97.3% in 1998 to 93.7% in 1999 as a result of the non-recurrence of the 1998
opening and start-up costs and the increased occupancy at VCA - Tucson.
The 61.9% increase in interest income from $2.1 million in 1998 to $3.4
million in 1999 is a result of the increase in Customer Notes retained by the
Company, consistent with its strategy to retain and borrow against, rather than
sell, a greater portion of its Customer Notes. The Company has sought to
increase the percentage of Customer Notes it retains (hypothecates) and borrows
against, rather than sells, thereby benefiting from the interest spread between
the customer rate and the lower Company borrowing rate.
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales decreased from 13.8% in 1998 to 13.3% in 1999,
reflecting the higher prices charged for Vacation Ownership Interests in ILX
Premiere Vacation Club than for Vacation Ownership Interests in a single resort.
ILX Premiere Vacation Club was introduced in mid-1998, and in 1999 the majority
of sales of Vacation Ownership Interests were of this more flexible product, for
which the Company charges a premium over single resort Vacation Ownership
Interests.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests decreased to 65.1% in 1999 compared to 67.7% in 1998, reflecting the
impact of sales and marketing changes made in the first quarter of 1999, which
resulted in a greater number of tours and increased closing rates at the Sedona
sales office, net of high costs of marketing to the VCA - South Bend sales
office in the first half of 1999. Those marketing efforts that were not cost
effective in generating tours to the South Bend sales office were eliminated
beginning in the third quarter of 1999, and the sales operation correspondingly
reduced.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales increased to 3.4% of sales of Vacation Ownership Interests in
1999, compared to 2.9% in 1998, reflecting the Company's decision to increase
the provision on new sales effective in the third quarter of 1999.
General and administrative expenses increased 29.4% to $4.4 million in 1999
from $3.4 million in 1998, and to 10.8% as a percentage of total timeshare
revenues in 1999 from 9.2% in 1998. The increases in 1999 reflect recognition of
ESOP contributions, increased professional fees, including fees to reissue the
audit reports of previous years, and costs related to development and
implementation of centralized reservations, owner services and reporting systems
to support ILX Premiere Vacation Club and to provide for expected future growth.
In addition, 1998 general and administrative expense was reduced by successful
appeals of property tax assessments and the reduction of unused legal reserves.
The 33.3% increase in interest expense from $2.1 million in 1998 to $2.8
million in 1999 reflects increased borrowings against Customer Notes receivable
as the Company retains and borrows against more of such Notes, net of decreases
in interest rates and fluctuations in the balances of borrowings outstanding.
COMPARISON OF YEAR ENDED DECEMBER 31, 1997 TO DECEMBER 31, 1998
Sales of Vacation Ownership Interests decreased 5.8% or $1.4 million in
1998 to $22.6 million, from $24.0 million in 1997. The decrease reflects both a
decrease in tour flow to the Sedona and South Bend sales offices and a lower
closing rate in the Sedona sales office. Upgrade revenue, included in sales of
Vacation Ownership Interests, increased 3% from $3.0 million in 1997 to $3.1
million in 1998. The average sales price per Vacation Ownership Interest sold
(including Upgrades) increased 4.8% from $14,446 in 1997 to $15,137 in 1998 as a
result of increased sales prices.
The number of Vacation Ownership Interests sold decreased 10.5% from 1,660
in 1997 to 1,485 in 1998. The average sales price per Vacation Ownership
Interest sold (excluding Upgrades) increased 2.8% from $12,656 in 1997 to
$13,013 in 1998. Sales of Vacation Ownership Interests in 1998 included 1,637
biennial Vacation Ownership Interests (counted as 819 annual Vacation Ownership
Interests) and 666 annual Vacation Ownership Interests compared to 1,705
biennial Vacation Ownership Interest sales (counted as 853 annual Vacation
Ownership Interests) and 807 annual Vacation Ownership Interests in 1997. The
increase in average price per Vacation Ownership Interest sold (excluding
Upgrades) in 1998 resulted from increased prices related to the June 1998
introduction of ILX Premiere Vacation Club. ILX Premiere Vacation Club members
may use their time at any of the participating ILX Resorts, and enjoy day use
and food, beverage and other discounts at the ILX Resorts. The Company charges
higher prices for the greater flexibility and benefits ILX Premiere Vacation
Club offers.
Resort operating revenues increased 11.9% or $1.3 million from $10.9
million in 1997 to $12.2 million in 1998 as a result of increased occupancy and
the opening of VCA-Tucson in July 1998. The cost of resort operations increased
13.3% or $1.4 million from $10.5 million in 1997 to $11.9 million in 1998 as a
result of costs related to increased occupancy at other resort properties and
the cost of both operation of and opening of VCA-Tucson. The increase in cost of
resort operations as a percentage of resort operating revenue from 95.9% in 1997
to 97.3% in 1998 reflects the start-up costs of VCA-Tucson as well as initial
lower occupancy of this new property.
The 40.0% increase in interest income from $1.5 million in 1997 to $2.1
million in 1998 is a result of the increased Customer Notes retained by the
Company and increases in interest rates charged by the Company on its Customer
Notes. The Company has sought to increase the percentage of Customer Notes it
retains (hypothecates) and borrows against, rather than sells, thereby
benefiting from the interest spread between the customer rate and the lower
Company borrowing rate.
18
<PAGE>
Cost of Vacation Ownership Interests sold as a percentage of Vacation
Ownership Interest sales increased from 13.4% in 1997 to 13.8% in 1998 due to an
increase in the sales mix of purpose-built VCA facilities, which have a higher
cost basis than acquired resorts. Sales of Vacation Ownership Interests in
VCA-Tucson commenced in mid-1997, with the first full year of sales in 1998.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests increased to 67.7% in 1998 compared to 57.9% in 1997 due primarily to
reduced closing rates at the Sedona sales office, and to low tour flow to the
South Bend sales office, coupled with high marketing costs, as the Company
pursued start-up of alternative marketing approaches to generate tours to the
South Bend sales office. Tours to this office had previously been produced by an
outside vendor who was terminated due to unethical business practices.
The provision for doubtful accounts as a percentage of Vacation Ownership
Interest sales was comparable between years.
General and administrative expenses increased 13.3% to $3.4 million in 1998
from $3.0 million in 1997. General and administrative expenses increased to 9.2%
as a percentage of total timeshare revenues in 1998 from 8.2% in 1997 due to an
increase in payroll expense, professional fees and automation, in part due to
the infrastructure necessary for the introduction and support of ILX Premiere
Vacation Club.
Interest expense is comparable between years in spite of greater
hypothecation borrowings because of principal reductions in other notes payable
made from the proceeds of the Company's follow-on offering in the second quarter
of 1998.
In December 1997, the Company sold its general partnership interest in
Lomacasi Cottages, resulting in a non-recurring gain of $356,000.
The decrease in minority interests from 1997 to 1998 reflects the buyout by
the Company of the Los Abrigados Partners Limited Partnership ("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. 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 necessary to provide sufficient cash
to fund its normal operations.
The fluctuations in cash provided by financing activities to $3.7 million
in 1999, from $9.8 million in 1998 and $3.4 million in 1997, reflect the 1999
greater borrowings against retained Customer Notes receivable (as the Company
follows its post follow-on offering strategy of retaining and borrowing against,
rather than selling, a greater portion of its customer notes), the 1998
borrowings for construction of VCA - Tucson and the 1998 proceeds, net of
offering costs, of the follow-on offering of 1.6 million shares of common stock,
net of repayment of indebtedness with a portion of the proceeds of the offering.
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 either in the form of a down payment, as an installment payment 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, 1999, the Company, excluding its Genesis subsidiary, had
net operating loss ("NOL") carryforwards of approximately $9.8 million, which
expire in 2001 through 2013. At December 31, 1999, Genesis had federal NOL
carryforwards of approximately $1.4 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. See Note 8 of Notes to Consolidated Financial Statements.
19
<PAGE>
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 1997, 1998
and 1999 was $6.5 million, $5.3 million and $5.2 million, respectively. The
decrease in cash used in investing activities between 1997 and 1998 reflects the
1997 $820,000 cash payment portion of the purchase of the minority interest in
the partnership that owns Los Abrigados. Cash used in investing activities in
1999 was comparable to 1998.
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. Cash provided by
operating activities was $1.3 million in 1999, as compared to cash used in
operating activities of $4.6 million in 1998, reflecting the cost of
construction of VCA - Tucson in 1998. During 1998 and 1999, 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 intends to build
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 which 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.
During 1999, the ESOP purchased a total of 375,300 shares of the Company's
common stock in the open market and, at December 31, 1999, held these 375,300
shares and $2,661 in cash. The 257,400 of these shares purchased with borrowed
funds have neither been allocated to nor committed to be released to participant
accounts as of December 31, 1999 and are collateral for the $500,000 borrowing.
At December 31, 1999, the unallocated shares are reflected at cost as a contra
equity account, Guaranteed ESOP Obligation. The fair market value of the
unallocated shares at December 31, 1999 was approximately $386,100.
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
At December 31, 1999, the Company has an agreement with a financial
institution for a commitment of $40 million 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 December 31, 1999, $33.4 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 December 31, 1999, approximately $27.8
million is available under these commitments.
In July 1999, the Company entered into an agreement with an affiliate to
purchase sixty vacation ownership interests for the price of $500,000. The
vacation ownership interests consist of four ILX Premiere Vacation Club Platinum
memberships, fifty ILX Premiere Vacation Club Gold memberships and six VCA-South
Bend Alumni House extended football weekend memberships. The Company issued a
promissory note for the purchase price, which bears interest at 8%. The note is
recorded as a Note payable to affiliates. The agreement also modified the terms
of a previously existing Note payable to a related affiliate.
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 December 31, 1999, there had been no funds
advanced under this agreement.
In December 1999, the Company guaranteed a $1,000,000 operating line of
credit for the Sedona Vacation Club, the owners' association of the members who
own Vacation Ownership Interests in Los Abrigados. Sedona Vacation Club will use
the proceeds for renovations at Los Abrigados and will repay the principal and
interest from collections it receives from a special assessment of its owners
for this purpose and from current and future year owner reserve payments. The
line of credit bears interest at prime plus 2.5% and is due through 2002.
In February 2000, the Company borrowed $600,000 for the purpose of using
the funds to purchase treasury stock. The note payable bears interest at 12% and
is due through 2002.
20
<PAGE>
In the future, the Company may negotiate additional credit facilities,
including leases, 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. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the information set forth on Index to Consolidated Financial Statements
appearing on page F-1 of this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 20, 1998, Deloitte & Touche LLP ("D&T") resigned as the
principal independent accountants for the Company. D&T delivered its resignation
at a meeting held with the Audit Committee of the Company's Board of Directors.
Prior to such meeting, the Audit Committee had determined to terminate D&T as a
result of issues relating to the Company's evaluation of the quality of service
provided by D&T.
D&T advised the Audit Committee that it was resigning due to a disagreement
over the proper treatment of the extinguishment by the Company of certain debt.
In September 1998, the Company prepaid a promissory note to an affiliated party
in exchange for the forgiveness of $200,000 of the principal amount of such
note. This transaction was reflected as approximately $200,000 of income in the
Company's income statement for the fiscal quarter ended September 30, 1998. The
nature of this transaction was also disclosed in Note 3 to the Company's
financial statements for such period. D&T indicated that its view was that,
because this transaction was with a related party, it should have been treated
as a capital transaction under APB 26. Although the Company believes that its
treatment of this extinguishment of debt is consistent with Paragraph 20 of APB
26, on December 31, 1998, the Company amended its report on Form 10-Q for the
period ended September 30, 1998 to reflect the treatment of this transaction as
a capital transaction.
Neither of D&T's reports on the Company's financial statements for the last
two years contained an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principles.
In addition, during such periods and the period from December 31, 1997 until the
date of D&T's resignation, except for the disagreement discussed in the
preceding paragraph, there were no disagreements or "reportable events", as
contemplated by Item 304(a)(1) (iv) and (v), respectively, under Regulation S-K.
On December 11, 1998, the Company filed an Amendment No. 1 to its Report on
Form 8-K dated November 20, 1998, for the purpose of filing a letter from D&T in
which D&T indicated that it disagreed with certain portions of the foregoing
description of the events related to its resignation. Copies of the Form 8-K and
the Amendment thereto are publicly available.
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
principal accountants to audit the Company's financial statements for the year
ended December 31, 1998. On December 22, 1999, the Company engaged HB&M to audit
its financial statements for the year ended December 31, 1999. 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 D&T to respond fully
to inquiries of the successor accountant concerning the subject matter of the
disagreement discussed above.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information in response to this Item is set forth in the Company's
Definitive Proxy Statement relating to the 2000 Annual Meeting of Shareholders
and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) CONSOLIDATED FINANCIAL STATEMENTS PAGE OR METHOD OF FILING
------------------------
(i) Report of Hansen, Barnett & Maxwell,
a professional corporation Page F-2
(ii) Consolidated Financial Statements Pages F-3 through F-21
and Notes to Consolidated Statements
of the Registrant, including
Consolidated Balance Sheets as of
December 31, 1999 and 1998 and
Consolidated Statements of
Operations, Shareholders' Equity and
Cash Flows for each of the three
years ended December 31, 1999, 1998
and 1997.
(a)(2) CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
Schedules other than those mentioned above are omitted
because the conditions requiring their filing do not
exist or because the required information is given in the
financial statements, including the notes thereto.
(a)(3) EXHIBITS
The Exhibit Index attached to this report is hereby
incorporated by reference.
(b) REPORTS ON FORM 8-K
None
22
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day
of March, 2000.
ILX Resorts Incorporated,
an Arizona corporation
(Registrant)
By: /s/ Joseph P. Martori
------------------------------------
Joseph P. Martori
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Joseph P. Martori Chairman of the Board and March 27, 2000
- ----------------------------- Chief Executive Officer
Joseph P. Martori (principal executive officer)
/s/ Nancy J. Stone President, Chief Operating March 27, 2000
- ----------------------------- Officer and Director
Nancy J. Stone
/s/ Margaret M. Eardley Executive Vice President and March 27, 2000
- ----------------------------- Chief Financial Officer
Margaret M. Eardley (principal financial and
accounting officer)
/s/ Edward S. Zielinski Executive Vice President and March 27, 2000
- ----------------------------- Director
Edward S. Zielinski
/s/ Joseph P. Martori, II Vice President and Director March 27, 2000
- -----------------------------
Joseph P. Martori, II
/s/ Steven R. Chanen Director March 27, 2000
- -----------------------------
Steven R. Chanen
/s/ James W. Myers Director March 27, 2000
- -----------------------------
James W. Myers
/s/ Patrick J. McGroder III Director March 27, 2000
- -----------------------------
Patrick J. McGroder III
23
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets at December 31, 1998 and 1999 F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999 F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1997, 1998 and 1999 F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 F-6
Notes to Consolidated Financial Statements F-7
F-1
<PAGE>
[HANSEN, BARNETT & MAXWELL LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
Shareholders of ILX Resorts Incorporated
We have audited the accompanying consolidated balance sheets of ILX Resorts
Incorporated and Subsidiaries (the "Company") as of December 31, 1999 and 1998
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company at
December 31, 1999 and 1998 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1999 in conformity
with generally accepted accounting principles.
HANSEN BARNETT & MAXWELL
Salt Lake City, Utah
February 25, 2000
F-2
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
----------------------------
1998 1999
------------ ------------
Cash and cash equivalents $ 3,196,710 $ 2,971,365
Notes receivable, net (Notes 2, 6 and 9 ) 19,559,396 23,145,383
Resort property held for Vacation Ownership
Interest sales (Notes 2, 3, 9 and 17) 20,834,225 21,742,875
Resort property under development 485,933 346,786
Land held for sale 1,593,885 1,596,759
Deferred assets (Note 6) 262,877 227,933
Property and equipment, net (Notes 7, 9 and 18) 4,006,991 4,212,470
Deferred income taxes (Note 8) 268,771 --
Other assets 1,788,470 3,144,951
------------ ------------
TOTAL ASSETS $ 51,997,258 $ 57,388,522
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 1,186,088 $ 923,016
Accrued and other liabilities 2,012,186 2,679,107
Due to affiliates (Note 10) 36,413 26,282
Notes payable (Note 9) 22,107,444 27,020,947
Notes payable to affiliates (Notes 10 and 17) 894,078 1,100,000
Income taxes payable -- 376,223
------------ ------------
Total liabilities 26,236,209 32,125,575
------------ ------------
MINORITY INTERESTS (Note 11) (3,271) 23,778
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 19)
SHAREHOLDERS' EQUITY (Notes 13, 14, 15 and 16):
Preferred stock, $10 par value; 10,000,000 shares
authorized; 380,468 and 305,978 shares issued
and outstanding; liquidation preference of
$3,804,680 and $3,059,780 1,384,891 1,179,298
Common stock, no par value; 30,000,000 shares
authorized; 4,332,533 and 3,921,173 shares
issued (Note 1) 19,818,183 18,069,840
Treasury stock, at cost, 339,640
and 0 shares, respectively (1,273,843) --
Additional paid in capital 279,450 279,450
Guaranteed ESOP Obligation (Note 15) -- (500,000)
Retained earnings 5,555,639 6,210,581
------------ ------------
Total shareholders' equity 25,764,320 25,239,169
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 51,997,258 $ 57,388,522
============ ============
See notes to consolidated financial statements
F-3
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
TIMESHARE REVENUES:
Sales of Vacation Ownership Interests $ 23,980,707 $ 22,582,605 $ 23,708,616
Resort operating revenue 10,919,831 12,215,791 13,350,658
Interest income 1,510,208 2,059,187 3,379,626
------------ ------------ ------------
Total timeshare revenues 36,410,746 36,857,583 40,438,900
------------ ------------ ------------
COST OF SALES AND OPERATING EXPENSES:
Cost of Vacation Ownership
Interests sold 3,218,850 3,112,550 3,148,840
Cost of resort operations 10,473,093 11,884,115 12,512,259
Sales and marketing 13,894,731 15,285,515 15,431,476
General and administrative 2,974,835 3,377,937 4,381,522
Provision for doubtful accounts 702,417 663,666 796,548
Depreciation and amortization 455,185 369,155 532,114
------------ ------------ ------------
Total cost of sales and
operating expenses 31,719,111 34,692,938 36,802,759
------------ ------------ ------------
Timeshare operating income 4,691,635 2,164,645 3,636,141
Income from land and other net 28,514 13,987 403,676
------------ ------------ ------------
Total operating income 4,720,149 2,178,632 4,039,817
Gain on sale of property (Note 7) 356,000 -- --
Interest expense (Notes 9 and 10) (2,084,969) (2,074,139) (2,836,049)
------------ ------------ ------------
Income before income taxes and
minority interests 2,991,180 104,493 1,203,768
Income tax expense (Note 8) (1,145,000) (45,500) (473,570)
------------ ------------ ------------
Income before minority interests 1,846,180 58,993 730,198
Minority interests (Note 11) (178,307) 3,271 (27,049)
------------ ------------ ------------
NET INCOME $ 1,667,873 $ 62,264 $ 703,149
============ ============ ============
NET INCOME PER SHARE (Notes 1 and 4):
Basic $ 0.60 $ 0.00 $ 0.16
============ ============ ============
Diluted $ 0.59 $ 0.00 $ 0.16
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Preferred Stock Common Stock Treasury Stock
---------------------- ----------------------- -----------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, DECEMBER 31, 1996 392,109 $1,419,243 2,604,858 $ 9,788,738 (6,000) $ (36,536)
Net income
Issuance of common stock 83,000 443,681
Exchange of preferred stock
for common stock (11,334) (31,282) 3,778 31,282
Issuance of cumulative shares
for dividend arrearage 797 3,966
Exchange of preferred stock
for lodging certificates (307) (3,070)
Payment of dividends
Acquisition of treasury shares,
net of reissuances (97,060) (616,051)
-------- ---------- ---------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1997 380,468 1,384,891 2,692,433 10,267,667 (103,060) (652,587)
Net income
Issuance of common stock 1,640,100 9,550,516
Payment of dividends
Acquisition of treasury shares,
net of reissuances (236,580) (621,256)
Gain on extinguishment of note
payable to affiliate
-------- ---------- ---------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1998 380,468 1,384,891 4,332,533 19,818,183 (339,640) (1,273,843)
Net income
Issuance of common stock 89,850 94,926
Exchange of preferred stock
for common stock (74,490) (205,592) 24,830 205,592
Payment of dividends
Acquisition of treasury shares (186,400) (368,383)
Retirement of outstanding
treasury shares (526,040) (1,642,226) 526,040 1,642,226
Distribution of Sedona
Worldwide Incorporated (406,635)
Guaranteed ESOP Obligation
-------- ---------- ---------- ----------- ---------- -----------
BALANCES, DECEMBER 31, 1999 305,978 $1,179,298 3,921,173 $18,069,840 -- --
======= ========== ========== =========== ========== ===========
Additional Guaranteed
Paid In ESOP Retained
Capital Obligation Earnings Total
-------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1996 $ 78,300 $ 0 $3,925,375 $15,175,120
Net income 1,667,873 1,667,873
Issuance of common stock 443,681
Exchange of preferred stock
for common stock
Issuance of cumulative shares
for dividend arrearage (3,982) (16)
Exchange of preferred stock
for lodging certificates 1,150 (1,920)
Payment of dividends (47,894) (47,894)
Acquisition of treasury shares,
net of reissuances (616,051)
-------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1997 79,450 5,541,372 16,620,793
Net income 62,264 62,264
Issuance of common stock 9,550,516
Payment of dividends (47,997) (47,997)
Acquisition of treasury shares,
net of reissuances (621,256)
Gain on extinguishment of note
payable to affiliate 200,000 200,000
-------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1998 279,450 5,555,639 25,764,320
Net income 703,149 703,149
Issuance of common stock 94,926
Exchange of preferred stock
for common stock
Payment of dividends (48,207) (48,207)
Acquisition of treasury shares (368,383)
Retirement of outstanding
treasury shares
Distribution of Sedona
Worldwide Incorporated (406,635)
Guaranteed ESOP Obligation (500,000) (500,000)
-------- --------- ---------- -----------
BALANCES, DECEMBER 31, 1999 $279,450 $(500,000) $6,210,581 $25,239,169
======== ========= ========== ===========
</TABLE>
See notes to consolidated financial statements
F-5
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,667,873 $ 62,264 $ 703,149
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Gain on sale of property (356,000) -- --
Undistributed minority interest 178,307 (3,271) 27,049
Deferred income taxes 874,223 35,659 644,994
Provision for doubtful accounts 702,417 663,666 796,548
Depreciation and amortization 455,185 369,155 532,114
Amortization of guarantee fees 92,250 40,915 6,700
Change in assets and liabilities:
(Increase) decrease in resort property held
for Vacation Ownership Interest sales 580,929 (6,167,567) (408,650)
Decrease (increase) in resort property
under development (1,734,230) 2,458,003 139,147
Increase in land held for sale (10,005) (36,387) (2,874)
(Increase) decrease in other assets 235,356 (406,005) (1,624,447)
(Decrease) increase in accounts payable 519,775 (1,644,287) (263,072)
Increase (decrease) in accrued and other
liabilities (315,105) 47,119 788,290
Decrease in due to affiliates (82,043) (21,259) (10,131)
------------ ------------ ------------
Net cash provided by (used in) operating activities 2,808,932 (4,601,995) 1,328,817
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Notes receivable, net (4,534,235) (4,361,441) (4,382,535)
Increase in deferred assets (67,913) (14,783) (94,792)
Purchases of property and equipment, net (1,057,852) (885,488) (759,977)
Net cash paid for minority interest (820,000) -- --
------------ ------------ ------------
Net cash used in investing activities (6,480,000) (5,261,712) (5,237,304)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 9,794,082 15,019,952 17,544,988
Principal payments on notes payable (6,058,556) (12,796,987) (13,131,485)
Principal payments on notes payable to affiliates (271,187) (1,113,622) (294,078)
Distributions to minority partners (140,000) -- --
Net proceeds from issuance of common stock 98,193 9,394,289 --
Acquisition of treasury stock and other (579) (621,256) (368,383)
Preferred stock dividend payments (47,894) (47,997) (48,207)
------------ ------------ ------------
Net cash provided by financing activities 3,374,059 9,834,379 3,702,835
------------ ------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (297,009) (29,328) (225,345)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,523,047 3,226,038 3,196,710
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,226,038 $ 3,196,710 $ 2,971,365
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Notes payable issued to extinguish accrued liabilities $ 2,400,000 $ -- $ --
Notes payable assumed by buyer of property and equipment (2,143,000) -- --
Notes payable issued or assumed to purchase assets or
minority interest 1,975,000 -- 500,000
Treasury stock received for sale of property and equipment (625,000) -- --
Common stock issued to acquire assets or in exchange
for indebtedness 355,000 -- --
Note payable to acquire shares for ESOP -- -- 500,000
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
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 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. 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 (Note 13).
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.
RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales is recorded at
the lower of historical cost less amounts charged to cost of Vacation Ownership
Interests sold or marketed. As Vacation Ownership Interests are sold, the
Company amortizes to cost of sales the average carrying value of the property
plus estimated future additional costs related to remodeling and construction.
Land held for sale is recorded at the lower of cost or fair value less cost
to sell, consistent with the Company's intention to liquidate these properties.
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.
PROPERTY AND EQUIPMENT, NET
Property and equipment are stated at cost and are depreciated on the
straight-line method over their respective estimated useful lives ranging from 3
to 30 years. Property and equipment under capitalized leases are stated at the
lesser of fair value or the present value of future minimum lease payments as of
the date placed in service, and amortized on the straight-line method over the
term of the lease.
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 to resort property under development:
Year Ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
Interest paid $2,222,000 $2,121,000 $2,830,000
Income taxes paid 78,000 12,000 --
Capitalized interest 213,000 357,000 --
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. SFAS 129 was adopted by the Company in 1997. There were no
significant effects on the Company's disclosures about its capital structure, as
that term is defined in SFAS 129, in the years ended December 31, 1997, 1998 or
1999.
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 years
ended December 31, 1997, 1998 or 1999.
F-7
<PAGE>
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
The financial statements for prior periods have been reclassified to be
consistent with the current period financial statement presentation.
NOTE 2. NOTES RECEIVABLE, NET
Notes receivable consist of the following:
December 31,
---------------------------
1998 1999
------------ ------------
Vacation Ownership Interest notes receivable $ 19,683,949 $ 23,149,278
Holdbacks by financial institutions 3,150,601 3,206,705
Other receivables 199,164 121,950
Allowance for possible credit losses (3,474,318) (3,332,550)
------------ ------------
$ 19,559,396 $ 23,145,383
============ ============
Notes generated from the sale of Vacation Ownership Interests generally
bear interest at annual rates ranging from 13% to 17% and have terms of five to
ten years. The notes are collateralized by deeds of trust on the Vacation
Ownership Interests sold.
At December 31, 1999, the Company has an agreement with a financial
institution for a commitment of $40 million 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 December 31, 1999, $33.4 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 prime plus 1.5% ($40 million) and prime plus
3% ($3.5 million). The $3.5 million and $40 million commitments expire in 2001
and 2002, respectively. At December 31, 1999, approximately $27.8 million is
available under these commitments.
At December 31, 1998 and 1999, the Company had approximately $21 million
and $19 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 ("Los Abrigados"), Varsity Clubs of America-South
Bend ("VCA-South Bend") and Varsity Clubs of America - Tucson ("VCA-Tucson").
For the twelve months ended December 31, 1997, 1998 and 1999, the Company
sold with recourse approximately $14 million, $6 million and $8 million of notes
receivable generated from sales of Vacation Ownership Interests in the
respective years. The decrease in the amount of notes sold with recourse between
years reflects the Company's strategy to retain and borrow against, rather than
sell, a greater portion of its Customer Notes.
At December 31, 1999, notes receivable in the amount of approximately
$332,000 have been contributed to the Company's Series A Preferred Stock sinking
fund and therefore their use is restricted (Note 13).
F-8
<PAGE>
The following summarizes activity in the allowance for possible credit
losses:
Year Ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
Beginning balance $2,569,997 $2,951,028 $3,474,318
Provision for doubtful accounts 702,417 663,666 796,548
Amounts written off (321,386) (140,376) (938,316)
---------- ---------- ----------
Ending balance $2,951,028 $3,474,318 $3,332,550
========== ========== ==========
The Company considers all notes receivable past due in excess of 90 days to
be delinquent. Typically, uncollectible accounts are not written off until the
underlying inventory is recovered via acceptance of a deed back or foreclosure,
the timing of which is determined by the Company. During 1999, the Company
deeded back in a bulk transaction Vacation Ownership Interests in Sedona
Vacation Club of 146 delinquent owners. These accounts had become delinquent
over a several year period. The Company subsequently annexed those recovered
weeks to ILX Premiere Vacation Club. At December 31, 1999, $5.6 million in
principal or $4.3 million net of the historical costs of the underlying property
which would be recovered in the event of noncollectibility, or 12.3% and 9.6%,
respectively, of the retained notes and notes previously sold, which are
recourse to the Company, were more than 90 days past due.
At December 31, 1998 and 1999, the above allowance includes $420,000 and
$375,000 respectively, for notes sold with recourse.
NOTE 3. RESORT PROPERTY HELD FOR VACATION OWNERSHIP INTEREST SALES
Resort property held for Vacation Ownership Interest sales consists of the
following:
December 31,
-----------------------------
1998 1999
----------- -----------
ILX Premiere Vacation Club $ 8,837,747 $11,515,520
VCA-Tucson 3,922,161 3,574,644
VCA-South Bend 2,773,344 2,383,190
Golden Eagle Resort 1,380,103 1,433,740
Los Abrigados 1,884,384 1,134,201
Roundhouse Resort 748,755 748,755
Kohl's Ranch Lodge 758,213 518,458
The Inn at Los Abrigados 489,618 394,467
Other 39,900 39,900
----------- -----------
$20,834,225 $21,742,875
=========== ===========
Varsity Clubs of America Incorporated ("Varsity Clubs"), a wholly-owned
subsidiary of ILX, intends to develop lodging accommodations in areas located
near major university campuses, and to market those lodging accommodations,
including interval ownership interests, to alumni and other sport enthusiasts.
Construction of the second Varsity Clubs facility, located near the University
of Arizona, in Tucson, commenced in 1997 and was completed in July 1998.
The Company acquired approximately one-half acre of improved property now
known as the Inn at Los Abrigados, adjacent to Los Abrigados, in September 1996
for a purchase price of $750,000, consisting of a $185,862 cash down payment and
a $564,138 first deed of trust. The Company made improvements to the property
through late November 1997 when it commenced resort operations. Vacation
Ownership Interest sales began in February 1998.
In December 1997, the Company acquired the development rights at the
Roundhouse Resort, an existing 59-unit Vacation Ownership Interest resort with
approximately five acres of developable land located in Pinetop/Lakeside,
Arizona. The purchase price of $700,000 was financed by the issuance of a note
payable, which was subsequently paid in full. The Company intends to construct
additional Vacation Ownership Interests on the land adjacent to the existing
resort. The initial planning and development for such expansion began in 1998.
In January 1998, the Company recorded in Maricopa County, Arizona its
proprietary ILX Premiere Vacation Club Membership Plan and in May 1998 annexed a
total of 5,000 Vacation Ownership Interests into the Club and received
Department of Real Estate approval in the State of Arizona to commence selling
Vacation Ownership Interests in the ILX Premiere Vacation Club. During 1999, the
Company annexed additional units and as of December 31, 1999, ILX Premiere
Vacation Club included a total of 8,000 Vacation Ownership Interests. The 8,000
Vacation Ownership Interests annexed into the Club consisted of 1,581 Vacation
Ownership Interests in Los Abrigados, 265 Vacation Ownership Interests in The
Inn at Los Abrigados, 1,566 Vacation Ownership Interests in Kohl's Ranch Lodge,
565 Vacation Ownership Interests in the Golden Eagle Resort, 1,500 Vacation
Ownership Interests in The Sea of Cortez Beach Club (the Company acquired these
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),
695 Vacation Ownership Interests in VCA-South Bend, 1,725 Vacation Ownership
Interests in VCA-Tucson and 103 Vacation Ownership Interests in the Roundhouse
Resort.
F-9
<PAGE>
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>
Year Ended December 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 1,667,873 $ 62,264 $ 703,149
Less: Series A preferred stock dividends (47,894) (47,997) (47,876)
Series C convertible preferred stock
cumulation share Dividends (29,052) (20,828) --
----------- ----------- -----------
Net income available to common stockholders - basic $ 1,590,927 $ (6,561) $ 655,273
Weighted average shares of common stock outstanding - basic 2,635,418 3,717,835 3,996,206
=========== =========== ===========
Basic net income per share $ 0.60 $ 0.00 $ 0.16
=========== =========== ===========
DILUTED NET INCOME PER SHARE
Year Ended December 31,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
Net income $ 1,667,873 $ 62,264 $ 703,149
Less: Series A preferred stock dividends (47,894) (47,997) (47,876)
----------- ----------- -----------
Net income available to common stockholders-- diluted $ 1,619,979 $ 14,267 $ 655,273
=========== =========== ===========
Weighted average shares of common stock outstanding 2,635,418 3,717,835 3,996,206
Add: Convertible preferred stock (Series B and Series C)
dilutive effect 111,875 110,541 97,956
----------- ----------- -----------
Weighted average shares of common stock outstanding - Diluted 2,747,293 3,828,376 4,094,162
=========== =========== ===========
Diluted net income per share $ 0.59 $ 0.00 $ 0.16
=========== =========== ===========
</TABLE>
Stock options to purchase 145,700 shares of common stock at prices ranging
from $3.25 per share to $8.125 per share were outstanding at December 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 2000 and 2004 .
Series C Convertible Preferred Stock dividends are not required, nor were
they declared, subsequent to November 1, 1998.
NOTE 5. 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
in 1998 upon completion of construction of VCA - Tucson. The resort opened to
revenue paying guests in July 1998.
NOTE 6. DEFERRED ASSETS
As part of the acquisition of Los Abrigados, certain affiliates of the
Company guaranteed the underlying mortgage on the resort. As partial
consideration for their guarantee, the affiliates earned a $780,000 fee, which
is amortized to expense at the rate of $100 per Los Abrigados Vacation Ownership
Interest sold. At December 31, 1998 and 1999, deferred assets included $154,235
and $147,535, respectively, of guarantee fees, net of accumulated amortization.
NOTE 7. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
December 31,
--------------------------
1998 1999
----------- -----------
Land $ 379,704 $ 379,704
Buildings and improvements 4,061,056 4,345,020
Leasehold improvements 10,261 11,923
Furniture and fixtures 500,558 637,426
Office equipment 330,808 353,383
Computer equipment 486,092 508,190
Vehicles 56,279 103,091
----------- -----------
5,824,758 6,338,737
Accumulated depreciation (1,817,767) (2,126,267)
----------- -----------
$ 4,006,991 $ 4,212,470
=========== ===========
In March 1996, the Company, through a subsidiary, became the general
partner of the limited partnership that owns Lomacasi Cottages in Sedona,
Arizona, a 5.27-acre property approximately one mile from Los Abrigados. In
December 1997, the Company sold its general partner interest in Lomacasi
F-10
<PAGE>
Cottages to a non-affiliated buyer. In connection with the sale, the buyer
assumed notes payable and the Company received as consideration 100,000 shares
of its common stock valued at $625,000, resulting in a gain on the sale of
$356,000.
NOTE 8. INCOME TAXES
Deferred income tax assets (liabilities) included in the consolidated
balance sheets consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Nondeductible accruals for uncollectible receivables $ 1,319,000 $ 1,265,000
Tax basis in excess of book on resort property held
for Vacation Ownership Interest sales 215,000 183,000
Deferred startup expenses for tax purposes 60,500 --
Intangible assets capitalized for tax purposes 24,000 23,000
Alternative minimum tax credit 369,000 88,000
Net operating loss carryforwards 2,185,000 3,967,000
Valuation allowance -- (1,190,000)
Other 231,500 13,000
----------- -----------
Total deferred tax assets 4,404,000 4,349,000
----------- -----------
Deferred Tax Liabilities:
Installment receivable gross profit deferred for tax purposes (4,076,000) (4,682,000)
Tax amortization of loan fees in excess of book (59,000) (43,000)
----------- -----------
Total deferred tax liabilities (4,135,000) (4,725,000)
----------- -----------
Net deferred tax asset (liability) $ 269,000 $ (376,000)
=========== ===========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Current $ -- $ -- $ --
Deferred 1,145,000 45,500 473,570
----------- ----------- -----------
Total $ 1,145,000 $ 45,500 $ 473,570
=========== =========== ===========
</TABLE>
A reconciliation of the income tax expense (benefit) and the amount that
would be computed using statutory federal income tax rates is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Federal, computed on income before minority
interest and income taxes $ 1,017,000 $ 35,528 $ 409,281
Minority interest (60,000) -- (9,197)
State, computed on income after minority interest
and before income taxes 169,000 6,500 39,724
Benefits of NOL carryforward -- -- (1,156,485)
Change in valuation allowance -- -- 1,190,247
Other 19,000 3,472 --
----------- ----------- -----------
Income tax expense $ 1,145,000 $ 45,500 $ 473,570
=========== =========== ===========
</TABLE>
The Company reports substantially all Vacation Ownership Interest sales
that it finances on the installment method for Federal income tax purposes.
Under the installment method, the Company does not recognize income on the
financed portion of sales of Vacation Ownership Interests, until the installment
payments on customer receivables are received by the Company or the customer
receivables are sold by the Company. Interest will 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. The amount of interest expense is not estimable as of December 31, 1999.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of
the deferred income that results from the installment sales treatment of
vacation ownership interest sales for regular tax purposes. The AMT liability
creates a deferred tax asset that can be used to offset any future tax liability
from regular Federal income tax. This deferred tax asset has an unlimited
carryover period.
During 1999, the Company determined to provide a valuation allowance
against the benefit of the net operating loss carryforwards in an amount
approximately equal to 30% of this deferred asset. This determination was made
due to the continuing tax loss that the Company has incurred.
At December 31, 1999, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $9,756,440, which expire in 2001 through
2013. At December 31, 1999, Genesis had federal NOL carryforwards of
approximately $1,350,000 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.
F-11
<PAGE>
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 occur as a result of
new common stock issuances by the Company or changes occurring as a result of
filings with the Securities and Exchange Commissions on Schedule 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 net operating loss by the Company, which could result in the
Company paying substantial additional federal and state taxes.
NOTE 9. NOTES PAYABLE
Notes payable consist of the following:
December 31,
---------------------------
1998 1999
----------- -----------
Note payable, collateralized by consumer notes
receivable, interest at prime plus 1.5% (10%
at December 31, 1999) due through 2007 $ 3,870,383 $11,392,412
Construction note payable, collateralized by
deed of trust on VCA-Tucson, interest at 12%
plus $100 per annual VCA-Tucson Vacation
Ownership Interest sold, due through 2001 5,843,506 5,104,422
Note payable, collateralized by deed of trust on
Los Abrigados, the Inn at Los Abrigados and ILX
Premiere Vacation Club, interest at prime plus
2.5% (11% at December 31, 1999), due through 2005 333,889 1,937,067
Note payable, collateralized by deed of trust,
interest at 10%, due through 2003 1,500,000 1,378,087
Obligations under capital leases with interest
at 8.5% to 17.1% (Note 18) 1,514,146 1,319,313
Note payable, collateralized by deed of trust
on Los Abrigados, interest at prime plus 2.5%
(11% at December 31, 1999), due through 2003 991,483 962,245
Construction note payable, collateralized by
deed of trust on Kohl's Ranch Lodge, interest
at prime plus 2.5% (11% at December 31, 1999),
due through 2003 -- 900,390
Lines of credit aggregating $2,000,000, interest
at prime plus 1.5% to prime plus 2.0% (10% to
10.5% at December 31, 1999), collateralized by
10% partnership interest in Los Abrigados
Partners Limited Partnership ("LAP"), due
through 2000 1,200,000 700,000
Note payable, collateralized by consumer notes
receivable, interest at prime plus 3% (11.5%
at December 31, 1999), due through 2001 1,038,296 595,857
Note payable, collateralized by LAP partnership
interest, interest at 8%, due through 2002 621,011 579,320
Note payable by Employee Stock Ownership Plan
and guaranteed by the Company, collateralized
by Company stock purchased by the Plan, interest
at prime plus 2.5% (11% at December 31, 1999),
due through 2001 -- 500,000
Note payable, collateralized by consumer notes
receivable and an assignment of the Company's
general partnership interest in LAP, interest
at 10%, due through 2003 500,000 400,000
Note payable, collateralized by deed of trust,
interest at 8.5%, due through 2002 420,318 396,511
Note payable, collateralized by LAP partnership
interest, interest at prime plus 1.5% (10%
at December 31, 1999), due through 2002 400,080 300,000
Note payable, collateralized by deed of trust,
interest at 8.5%, due through 2003 246,301 231,913
Note payable, collateralized by furniture,
fixtures and equipment at VCA - South Bend,
interest at 9.5%, due through 2001 270,973 184,956
Other 143,928 138,454
Notes payable repaid or extinguished in 1999 3,213,130 --
----------- -----------
$22,107,444 $27,020,947
=========== ===========
At December 31, 1999, approximately $22.3 million of the Company's notes
payable have scheduled payment terms that may be accelerated based on
established release prices related to future Vacation Ownership Interest sales
or are dependent on the amount of mortgage notes receivable pledged as
collateral. The maturities of these notes are included below based on their
scheduled repayment terms and maturities. Future contractual maturities of notes
payable and capitalized leases at December 31, 1999 are as follows:
F-12
<PAGE>
2000 4,296,128
2001 7,033,967
2002 2,614,467
2003 4,145,964
2004 2,280,605
Thereafter 6,649,816
-----------
$27,020,947
===========
In February 2000, the Company borrowed $600,000 with the intent to use such
funds to purchase treasury stock. The note payable bears interest at 12% and is
due through 2002.
NOTE 10. NOTES PAYABLE TO AFFILIATES
Notes payable to affiliates consist of the following:
December 31,
------------------------
1998 1999
---------- ----------
Note payable, collateralized by LAP partnership
interest, interest at 10%, due through 2003 $ 894,078 $ 700,000
Notes payable, collateralized by LAP partnership
interest, interest at 8%, due through 2002 -- 400,000
---------- ----------
$ 894,078 $1,100,000
========== ==========
Future maturities of notes payable to affiliates at December 31, 1999 are as
follows:
2000 $ 100,000
2001 100,000
2002 200,000
2003 700,000
----------
$1,100,000
==========
Total interest expense on notes payable to affiliates for the years ended
December 31, 1997, 1998 and 1999 was approximately $147,000, $132,000 and
$89,000, respectively. Interest payable to affiliates at December 31, 1998 and
1999 was approximately $36,000 and $26,000, respectively.
NOTE 11. MINORITY INTERESTS
Minority interests consisted primarily of the Company's interests in LAP,
the Arizona limited partnership that owns and operates Los Abrigados. Through
August 1997, the Company held a 78.5% interest in LAP and the 21.5% minority
interest was held by Class B limited partners. In August 1997, the Company
acquired the Class B Limited Partnership Interest in LAP for a purchase price of
$2,920,000 consisting of $820,000 cash, the issuance of 20,000 shares of the
Company's common stock valued at $6.25 per share, and the issuance of promissory
notes in the amounts of $1,300,000 and $675,000.
In June 1998, the Company acquired a 51% interest in Timeshare Resale
Brokers, Inc. ("TRBI"), an Arizona company engaged in the resale of Vacation
Ownership Interests on behalf of consumers and others, for which it earns a
commission upon sale. The operation is based in Sedona, Arizona, and while the
Company anticipates the possibility of expanding these operations to additional
vacation destinations, to date the operations of TRBI have not been material to
the Company.
NOTE 12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Operating leases are used to lease office space, equipment and vehicles.
Future minimum lease payments on noncancelable operating leases at December 31,
1999 are as follows:
2000 $ 446,000
2001 342,000
2002 147,000
2003 95,000
2004 79,000
----------
$1,109,000
==========
Total rent expense for the years ended December 31, 1997, 1998 and 1999 was
approximately $532,000, $499,000, and $498,000 respectively.
F-13
<PAGE>
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.
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 December 31, 1999, 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.
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.
Other litigation has arisen in the normal course of the Company's business,
none of which is deemed to be material.
OTHER
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 and any unpaid principal
balance due on December 31, 2000. At December 31, 1999, there had been no funds
advanced under this agreement.
In December 1999, the Company guaranteed a $1,000,000 operating line of
credit for Sedona Vacation Club, the proceeds of which will be used for
renovations at Los Abrigados. Sedona Vacation Club intends to repay the interest
and principal on the loan from proceeds it receives from a special assessment of
its owners and from their reserve payments for the year 2000 and future years.
The line of credit bears interest at prime plus 2.5% and is due through 2002.
NOTE 13. SHAREHOLDERS' EQUITY
PREFERRED STOCK
At December 31, 1998 and 1999, preferred stock includes 59,845 shares of
the Company's Series A Preferred Stock carried at $598,450. The Series A
Preferred Stock has a par value and liquidation preference of $10 per share and,
commencing July 1, 1996, is entitled to annual dividend payments of $.80 per
share. Dividends were paid of $47,894, $47,998 and $48,207 in 1997, 1998 and
1999, respectively. Commencing January 1, 1993, on a quarterly basis, the
Company must contribute $100 per Vacation Ownership Interest sold in Los
Abrigados to a mandatory dividend sinking fund. At December 31, 1999, notes
receivable in the amount of approximately $332,000 have been designated for the
sinking fund. Dividends on the Company's common stock are subordinated to the
Series A dividends and to the contributions required by the sinking fund.
At December 31, 1998 and 1999, preferred stock also includes 55,000 shares
of the Company's Series B Convertible Preferred Stock carried at $55,000. The
Series B Convertible Preferred Stock has a $10 par value and a liquidation
preference of $10 per share, which is subordinate to the Series A liquidation
preference. The Series B Convertible Preferred Stock is not entitled to
dividends. Commencing July 1, 1996, the Series B Convertible Preferred Stock may
be converted into common stock on the basis of two shares of common for five
shares of preferred stock.
Both the Series A and Series B preferred stock may, at the holder's
election, be exchanged for Los Abrigados Vacation Ownership Interests at the
rate of 1,000 shares of stock plus $2,100 cash per Vacation Ownership Interest.
Through September 1996, these shares could also have been exchanged for lodging
certificates under certain conditions.
At December 31, 1998 and 1999, preferred stock also includes 265,623 and
191,133 shares of the Company's Series C Convertible Preferred Stock carried at
$731,441 and $525,848. The Series C Convertible Preferred Stock has a $10 par
value and is entitled to dividends at the rate of $.60 per share per annum when
declared by the Board of Directors. If dividends were not declared in any year
prior to the fifth anniversary of the Genesis merger date (November 1, 1993),
such undeclared dividends ("Dividend Arrearage") could have been converted to
"Cumulation Shares" at the rate of $6 of Dividend Arrearage per Cumulation
Share. The Series C Preferred Stock and the Cumulation Shares have a liquidation
preference of $10 per share and $6 per share, respectively, and are subordinate
to the liquidation preferences of the Series A and Series B stock. Commencing
November 1, 1994 through October 31, 2004, the Series C Preferred Stock may be
converted to ILX common stock on the basis of one share of common stock for
three shares of Series C Preferred Stock and one share of ILX common stock for
each $30 in Dividend Arrearages. For the years ended December 31, 1997, 1998 and
1999, the Company recorded the exchange of 11,334, 0 and 74,490 Series C
Convertible shares for 3,778, 0 and 24,830 common shares, respectively. For the
year ended December 31, 1997, 797 common shares were issued to exchanging
shareholders for their 1997 dividend arrearage. ILX may redeem the Series C
Preferred Stock commencing November 1, 1996, at $10 per share plus payment of
all declared but unpaid dividends.
F-14
<PAGE>
COMMON STOCK
In June 1997, the Company entered into an agreement with EVEREN Securities,
Inc. ("ESI") for ESI to act as ILX's exclusive financial advisor, investment
bankers and agent with respect to evaluation of alternatives to position ILX for
long-term growth and to enhance shareholder value. In exchange for the services,
ILX issued 12,000 shares of ILX common stock in August 1997 and issued an
additional 12,000 shares in February 1998. The shares issued have been valued at
$56,250 and $75,000, respectively. In accordance with the terms of the
agreement, ILX has registered with the Securities and Exchange Commission all
shares issued.
For the years ended December 31, 1997, 1998 and 1999, the Company issued
17,240, 28,100 and 89,850 shares of restricted common stock, or treasury stock,
valued at $49,387, $81,227 and $94,926, respectively, to employees in exchange
for services provided.
During 1998 and 1999, the Company purchased 237,000 and 186,400 shares of
its Common Stock for $622,700 and $368,383. During 1998, 420 of these shares
were re-issued to employees and a consultant and valued at $1,444.
In December 1999, the Company retired 526,040 shares of treasury stock
valued at $1,642,226.
In December 1999, the Company spun off its 80% ownership interest in SWI
through a prorata distribution to the common shareholders of ILX of the
3,360,000 common shares of SWI held by the Company. The spin-off was recorded as
a reduction in common stock of $406,635. 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 December 31, 1999, there had been no funds
advanced under this agreement.
NOTE 14. 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 15. EMPLOYEE STOCK OWNERSHIP PLAN
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX
Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The
intent of the ESOP is to provide a retirement program for all eligible employees
which aligns their interests with those of the Company. Generally, all employees
who have completed one year of service, have attained the age of 21 and complete
1000 hours of service during the plan year are eligible to participate in the
ESOP. During the twelve months ended December 31, 1999, the Company declared,
and funded in cash, contributions of $250,000 to the ESOP and recorded this
amount as compensation expense.
In August 1999, the ESOP entered into an agreement with Litchfield
Financial Corporation for a $500,000 line of credit, which is secured by 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 $500,000 on the line.
The debt is included in notes payable (Note 9).
During the year ended December 31, 1999, the ESOP purchased a total of
375,300 shares of the Company's common stock in the open market and, at December
31, 1999, held these 375,300 shares and $2,661 in cash. The 257,400 of these
shares purchased with borrowed funds have neither been allocated to nor
committed to be released to participant accounts as of December 31, 1999 and are
collateral for the $500,000 borrowing. At December 31, 1999, the unallocated
shares are reflected at cost as a contra equity account, Guaranteed ESOP
Obligation. The fair market value of the unallocated shares at December 31, 1999
was approximately $386,100.
NOTE 16. EMPLOYEE STOCK OPTION PLANS
The Company has Stock Option Plans pursuant to which options (which term as
used herein includes both incentive stock options and non-statutory stock
options) may be granted to key employees, including officers, whether or not
they are directors, and non-employee directors and consultants, who are
determined by the Board of Directors to have contributed in the past, or who may
be expected to contribute materially in the future, to the success of the
Company. The exercise price of the options granted pursuant to the Plans shall
be not less than the fair market value of the shares on the date of grant. All
outstanding stock options require the holder to have been a director or employee
of the Company for at least one year before exercising the option. Options are
exercisable over a five-year period from date of grant if the optionee was a
ten-percent or more shareholder immediately prior to the granting of the option
and over a ten-year period if the optionee was not a ten-percent shareholder.
The aggregate number of shares that may be issued under the Plans shall not
exceed 200,000 shares. The number of shares available for grant under the Plans
at December 31, 1998 and December 31, 1999 were 46,800 and 54,300, respectively.
F-15
<PAGE>
Stock option transactions are summarized as follows:
Outstanding at December 31, 1996 66,000
Options canceled (5,600)
-----------
Outstanding at December 31, 1997 60,400
Options granted 100,000
Options canceled (7,200)
-----------
Outstanding at December 31, 1998 153,200
Options granted 10,000
Options canceled (17,500)
-----------
Outstanding at December 31, 1999 145,700
===========
The exercise price for options granted in 1998 and 1999 were $6.75 and
$3.25 per share, respectively. The exercise price for options outstanding at
December 31, 1999 ranged from $3.25 to $8.125 per share. There were no changes
in the exercise price of outstanding options during 1999. Options outstanding at
December 31, 1999 have expiration dates as follows:
Year Ending Options for
December 31, Shares
------------ ------
2000 10,000
2001 --
2002 100,000
2003 --
2004 35,700
---------
145,700
=========
The Company applies APB Opinion 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations in accounting for its Plan. Accordingly,
no compensation cost has been recognized for stock options granted under the
Plan. Had compensation cost for the Plan been determined based on the fair value
at the grant dates for awards under the Plan consistent with the alternative
method of SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, the Company's
net loss and loss per share would have increased to the proforma amounts
indicated below. The weighted average assumptions used to estimate the fair
value of each option grant, using the Black-Scholes option-pricing model, are
also presented:
December 31,
-----------------------
1998 1999
--------- ---------
Net Income (Loss)
As reported $ 62,264 $ 703,149
Proforma (237,036) 702,783
Primary and Diluted Loss per share
As reported $ 0.00 $ 0.16
Proforma (0.06) 0.16
Weighted-Average Assumptions:
Dividend yield $ 0.00 $ 0.00
Expected volatility 62.9% 64.5%
Risk-free interest rate 5.6% 5.0%
Expected life of options, in years 4 5
NOTE 17. PROFIT SHARING PLAN
The Company has a defined contribution profit sharing plan in which
substantially all employees are eligible to participate. The Company contributes
a discretionary amount to the plan as determined by the Board of Directors. The
Company declared contributions of $100,000, $100,000 and $50,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
NOTE 18. RELATED PARTY TRANSACTIONS
In addition to the related party transactions described elsewhere in the
financial statements, the Company had the following related party transactions:
In December 1995, in exchange for modification of the terms of note
payables to affiliates, the Company provided the affiliates with the option to
convert, at maturity, the $580,000 note balances into shares of ILX common stock
at the price of $10 per share. In July 1997, the Company issued 36,800 shares of
its common stock in exchange for $230,000 of the balance on this note. In
conjunction with the exchange, 100 Vacation Ownership Interests in Los
Abrigados, which collateralized the note, were released.
In December 1995, the Company sold the building that houses its Phoenix
telemarketing operations, the Sedona Spa warehouse and administrative offices
and certain other ILX administrative offices, to an affiliate for $500,000. The
purchase price consisted of a reduction in the principal balance of the
Company's note payable to the affiliate of $320,000 in December 1995, and, in
January 1996, payment by the affiliate of the $180,000 note collateralized by a
deed of trust on the building. The Company leased the building through SWI for
an initial one-year term, with four one-year options to renew through December
2000. Rent of $48,000 per year was paid in each of 1997, 1998 and 1999.
Effective January 1, 2000, the Company entered into a new agreement between ILX
and the affiliate to lease the building for a two-year term with three one-year
options to renew at the rate of $48,000 per year.
In September 1998, the Company entered into an agreement with an affiliate
to pay off at a $200,000 discount a promissory note with a principal balance
before the discount of $998,349. The $200,000 discount has been recorded as a
capital transaction.
F-16
<PAGE>
In July 1999, the Company entered into an agreement with an affiliate to
purchase sixty vacation ownership interests for the price of $500,000, which is
approximately equal to the affiliate's historical cost. The vacation ownership
interests consist of four ILX Premiere Vacation Club Platinum memberships, fifty
ILX Premiere Vacation Club Gold memberships and six VCA-South Bend Alumni House
extended football weekend memberships. The Company issued a promissory note for
the purchase price, which bears interest at 8%. The note is recorded as a note
payable to affiliates (Note 10). The agreement also modified the terms of a
previously existing note payable to a related affiliate.
NOTE 19. CAPITAL LEASES
Leased assets included in resort property held for Vacation Ownership
Interest sales and property and equipment totaled $2,451,075 and $2,768,636 (net
of accumulated amortization of $936,929 and $1,449,323) at December 31, 1998 and
1999, respectively. The leases expire through 2002. Future minimum lease
payments at December 31, 1999 are as follows:
2000 $ 854,406
2001 475,254
2002 131,486
2003 24,754
2004 13,572
----------
Total 1,499,472
Less: Amounts representing interest (180,159)
----------
Net minimum lease payments $1,319,313
==========
NOTE 20. CONCENTRATIONS OF RISK
CREDIT RISK
The Company is exposed to on-balance sheet credit risk related to its notes
receivable. The Company is exposed to off-balance sheet credit risk related to
loans sold under recourse provisions.
The Company offers financing to the buyers of Vacation Ownership Interests
at the Company's resorts. These buyers make a down payment of at least 10% of
the purchase price and deliver a promissory note to the Company for the balance;
the promissory notes generally bear interest at a fixed rate, are payable over a
seven-year period and are collateralized by a first mortgage on the Vacation
Ownership Interest. The Company bears the risk of defaults on these promissory
notes. The Company performs credit evaluations prior to Vacation Ownership
Interest sales and the Vacation Ownership Interest deed of trust serves as
collateral on the note receivable. If a buyer of a Vacation Ownership Interest
defaults, the Company generally recovers the Vacation Ownership Interest by
receiving a deed back from the owner or through foreclosure. The Company may
resell the Vacation Ownership Interest; however, marketing, selling and
administrative costs from the original sale are not recovered; and such costs
must be incurred again to resell the Vacation Ownership Interest.
INTEREST RATE RISK
Because the Company's indebtedness bears interest at variable rates and the
Company's customer receivables bear interest at fixed rates, increases in
interest rates could cause the rate on the Company's borrowings to exceed the
rate at which the Company provides financing to its customers. The Company does
not engage in interest rate hedging transactions. Therefore, any increase in
interest rates, particularly if sustained, could have a material adverse effect
on the Company's results of operations, cash flows and financial position.
AVAILABILITY OF FUNDING SOURCES
The Company funds substantially all of the notes receivable, resort
property held for Vacation Ownership Interest sales and land inventory which it
originates or purchases with sales of consumer notes, borrowings through its
financing facilities and internally generated funds. Borrowings are in turn
repaid with the proceeds received by the Company from sales of notes receivable
or from repayments by consumers of such notes receivable. To the extent that the
Company is not successful in maintaining or replacing existing financings, it
would have to curtail its operations or sell assets, thereby having a material
adverse effect on the Company's results of operations, cash flows and financial
condition.
GEOGRAPHIC CONCENTRATION
The Company's notes receivable are primarily originated in Arizona and, to
a lesser extent, Indiana. The risk inherent in such concentrations is dependent
upon regional and general economic stability that affects property values and
the financial stability of the borrowers. The Company's resort property held for
Vacation Ownership Interest sales is also concentrated in these states. The risk
inherent in such concentrations is in the continued popularity of the resort
destinations, which affects the marketability of the Company's products and the
collection of notes receivable.
NOTE 21. DISCLOSURES ABOUT FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS 107, Disclosures about Fair Value of Financial Instruments, requires
that the Company disclose estimated fair values for its financial instruments.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
F-17
<PAGE>
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates their fair value because of the short maturity of these
instruments.
NOTES RECEIVABLE
The carrying amount reported in the balance sheet for notes receivable
approximates its fair value because the interest rates on the portfolio of notes
receivable approximate current interest rates to be received on similar current
notes receivable.
NOTES PAYABLE
The carrying amount reported in the balance sheet for notes payable
approximates its fair value because the interest rates on these instruments
approximate current interest rates charged on similar current borrowings.
NOTES PAYABLE TO AFFILIATES
The fair value of the notes payable to affiliates is not determinable since
these financial instruments are not readily marketable and are payable to
affiliates.
NOTE 22. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary.
<TABLE>
<CAPTION>
1997
Three Months Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 7,783,805 $ 8,942,588 $ 9,997,859 $ 9,686,494
Operating income 714,647 1,271,352 1,335,128 1,399,022
Net income 106,204 422,823 457,019 681,827
Net income (loss) per share - basic .03 .15 .16 .25
Net income (loss) per share - diluted .03 .15 .16 .24
1998
Three Months Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
Revenues $ 8,527,163 $ 9,241,602 $ 9,629,431 $ 9,459,387
Operating income 894,340 1,122,728 413,771 (252,207)
Net income 232,825 432,110 (60,340) (542,331)
Net income (loss) per share - basic .08 .10 (.02) (.14)
Net income (loss) per share - diluted .08 .10 (.02) (.13)
1999
Three Months Ended
------------------------------------------------------
March 31 June 30 September 30 December 31
----------- ----------- ----------- -----------
Revenues $ 8,778,645 10,410,889 $11,005,069 10,244,297
Operating income 687,948 1,360,225 1,080,611 911,033
Net income 4,877 392,677 224,276 81,319
Net income per share - basic .00 .10 .05 .02
Net income per share - diluted .00 .09 .05 .02
</TABLE>
The 1997, 1998 and 1999 net income (loss) per share does not equal the
summation of the quarters due to rounding and the weighting of average shares.
NOTE 23. SIGNIFICANT FOURTH QUARTER ADJUSTMENT
There were no material fourth quarter adjustments or accounting changes.
F-18
<PAGE>
EXHIBITS TO
1999 FORM 10-K
ILX RESORTS INCORPORATED
<PAGE>
ILX RESORTS INCORPORATED
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page Numbers or
Numbers Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
1 Form of Underwriting Agreement Incorporated by reference to
Registration Statement on Form
S-1 No. 333-45403
3(i).1 Articles of Incorporation of International Leisure Incorporated by reference to
Enterprises Incorporated (filed October 8, 1986) Registration Statement on Form
S-1 No. 33-16122
3(i).2 Articles of Amendment to the Articles of Incorporated by reference to
Incorporation of International Leisure Enterprises 1990 10-K
Incorporated (filed August 31, 1987)
3(i).3 Articles of Amendment to the Articles of Incorporated by reference to
Incorporation of International Leisure Enterprises 1994 10-K/A-3
Incorporated (filed October 19, 1987)
3(i).4 Articles of Amendment to the Articles of Incorporated by reference to
Incorporation of International Leisure Enterprises 1994 10-K/A-3
Incorporated (filed May 3, 1990)
3(i).5 Articles of Amendment to the Articles of Incorporated by reference to
Incorporation of International Leisure Enterprises 1993 10-K
Incorporated (Name changed by this Amendment to
ILX Incorporated), (filed June 28, 1993)
3(i).6 Certificate of Amendment to Articles of Incorporated by reference to
Incorporation, filed January 12, 1998 Registration Statement on Form
S-1 No. 333-45403
3(i).7 Articles of Correction, filed January 12, 1998, to Incorporated by reference to
correct Certificate of Amendment to Articles of Registration Statement on Form
Incorporation, dated January 12, 1998 S-1 No. 333-45403
3(i).8 Certificate of Designation, Preferences, Rights, Incorporated by reference to
and Limitations of Series A Preferred Stock, 1991 10-K
$10.00 par value of International Leisure
Enterprises Incorporated, filed September 5, 1991
3(i).9 Certificate of Designation, Preferences, Rights, Incorporated by reference to
and Limitations of Series B Preferred Stock, 1991 10-K
$10.00 par value of International Leisure
Enterprises Incorporated, filed September 5, 1991
3(ii).10 Certificate of Designation of Series C Preferred Incorporated by reference to
Stock, filed April 30, 1993 1993 10-K
3.(ii) Amended and Restated Bylaws of International Incorporated by reference to
Leisure Enterprises Incorporated, dated October 1990 10-K
26, 1987
4 Form of Common Stock Certificate Incorporated by reference to
Form 8-A, filed February 4, 1998
10.1 1992 Stock Option Plan Incorporated by reference to
1992 10-K
10.2 1995 Stock Option Plan Incorporated by reference to
1995 10-K
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page Numbers or
Numbers Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.3 Agreement and Plan of Merger among ILE Acquistion Incorporated by reference to
Corporation, International Leisure Enterprises 1992 10-K
Incorporated and Genesis Investment Group, Inc.,
dated March 15, 1993
10.4 First Amendment to Agreement and Plan of Merger Incorporated by reference to
between ILE Acquisition Corporation, International 1993 10-K
Leisure Enterprises Incorporated and Genesis
Investment Group, Inc., dated April 22, 1993
10.5 Agreement among ILX Incorporated, Martori Incorporated by reference to
Enterprises Incorporated, Los Abrigados Partners 1995 10-K
Limited Partnership, Red Rock Collection
Incorporated, Edward John Martori and Joseph P.
Martori as Trustee for Cynthia J. Polich
Irrevocable Trust dated December 29, 1995
10.6 Lease Agreement between Edward John Martori and Incorporated by reference to
Red Rock Collection Incorporated, dated December 1995 10-K
29, 1995
10.7 First Amended Certificate of Limited Partnership Incorporated by reference to
and Amended Agreement of Los Abrigados Partners 1991 10-K
Limited Partnership, dated September 9, 1991
10.8 Certificate of Amendment of Limited Partnership Incorporated by reference to
for Los Abrigados Partners Limited Partnership, 1994 10-K/A-3
dated November 11, 1993
10.9 First Amendment to Amended Agreement of Los Incorporated by reference to
Abrigados Partners Limited Partnership, dated 1995 10-K
February 9, 1996
10.10 Consulting Agreement between Investor Resource Incorporated by reference to
Services, Inc. and ILX Incorporated, dated January 1/7/97 8-K
1, 1997
10.11 Consulting Agreement between Universal Solutions, Incorporated by reference to
Inc. and ILX Incorporated 1/7/97 8-K
10.12 Installment Promissory Note ($1,300,000) by ILX Incorporated by reference to
Incorporated to Martori Enterprises Inc., dated Form 8-K, filed August 22,
August 8, 1997 1997
10.13 Security Agreement between ILX Incorporated and Incorporated by reference to
Martori Enterprises Inc., dated August 8, 1997 Form 8-K, filed August 22,
1997
10.14 Amended and Restated Promissory Note ($909,078) by Incorporated by reference to
ILX Incorporated to Edward J. Martori, dated Registration Statement on Form
January 1, 1996 S-1 No. 333-45403
10.15 Agreement to Modify Amended and Restated Incorporated by reference to
Promissory Note ($909,078) by ILX Resorts 9/30/99 10-Q
Incorporated to Edward J. Martori dated January 1,
1996 and the sale by Martori Enterprises
Incorporated to ILX Resorts Incorporated and/or
its nominee of certain vacation ownership
interests in ILX Premiere Vacation Club and VCA
South Bend Incorporated
10.16 Agreement for Transfer of Limited Partnership Incorporated by reference to
Interest by ILX Incorporated and Alan R. Mishkin, Form 8-K, filed August 22,
dated August 29, 1997 1997
10.17 Installment Promissory Note ($675,000) by ILX Incorporated by reference to
Incorporated to Alan R. Mishkin dated September Form 8-K, filed August 22,
24, 1997 1997
10.18 Security (Pledge) Agreement between ILX Incorporated by reference to
Incorporated and Alan R. Mishkin, dated September Form 8-K, filed August 22,
24, 1997 Incorporated by reference to 1992 10-K 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page Numbers or
Numbers Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.19 Form of Employment Agreement among ILX Resorts Incorporated by reference to
Incorporated and each of Joseph Martori, Nancy Registration Statement on Form
Stone and Edward Zielinski S-1 No. 333-45403
10.20 Letter Agreement between Texas Capital Securities Incorporated by reference to
and ILX Incorporated, dated January 7, 1997 Registration Statement on Form
S-1 No. 333-45403
10.21 Assumption Agreement among Investor Resource Incorporated by reference to
Services, Inc., ILX Incorporated, and Martori Form 8-K, filed May 20, 1997
Enterprises Incorporated, dated January 1, 1997
10.22 Assumption Agreement among Texas Capital Incorporated by reference to
Securities, ILX Incorporated and Martori Form 8-K, filed May 20, 1997
Enterprises, Inc., dated January 7, 1997
10.23 Stock Purchase Agreement between Genesis Incorporated by reference to
Investment Group, Inc. and Goodyear 93, L.L.C., Registration Statement on Form
dated December 5, 1997 S-1 No. 333-45403
10.24 Option Agreement between Texas Capital Securities Incorporated by reference to
and ILX Incorporated, dated January 7, 1997 Form 8-K, filed January 7,
1997
10.25 Secured Line of Credit Lending Agreement between Incorporated by reference to
Litchfield Financial Corporation and ILX Resorts 6/30/98 10-Q
Incorporated, Los Abrigados Partners Limited
Partnership and Premiere Development Incorporated
dated as of June 12, 1998
10.26 Secured Line of Credit Promissory Note between Incorporated by reference to
Litchfield Financial Corporation and ILX Resorts 6/30/98 10-Q
Incorporated, Los Abrigados Partners Limited
Partnership and Premiere Development Incorporated
dated as of June 12, 1998
10.27 Business Agreement among ILX Resorts Incorporated, Incorporated by reference to
Premiere Vacation Club and Premiere Development 6/30/98 10-Q
Incorporated and Treasures of the Sea of Cortez,
Promotura de Inversion Turistica, Immobiliaria y
Hotelera Los Algodones and Immobiliaria Cerro
Pelon dated as of June 8, 1998
10.28 Amended and Restated Secured Line of Credit Incorporated by reference to
Lending Agreement between ILX Resorts 9/30/98 10-Q
Incorporated, Los Abrigados Partners Limited
Partnership, ILE Sedona Incorporated, VCA Tucson
Incorporated, VCA South Bend Incorporated,
Premiere Development Incorporated and Litchfield
Financial Corporation dated as of September 17,
1998
10.29 Agreement for Sale and Transfer of Promissory Note Incorporated by reference to
between ILX Resorts Incorporated and Martori 9/30/98 10-Q
Enterprises Incorporated dated as of September 29,
1998
10.30 Contract of Sale of Timeshare Receivables with Incorporated by reference to
Recourse between Resort Funding, Inc. and Premiere 1998 10-K
Development Incorporated dated as of March 19,
1999
10.31 Guaranty Agreement between ILX Resorts Incorporated by reference to
Incorporated and Resort Funding, Inc. dated as of 1998 10-K
March 19, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page Numbers or
Numbers Description Method of Filing
- ------- ----------- ----------------
<S> <C> <C>
10.32 Rider to Contract between Resort Funding, Inc. and Incorporated by reference to
Premiere Development Incorporated dated March 24, 1998 10-K
1999 to supplement the Contract of Sale of
Timeshare Receivables with Recourse dated as of
March 19, 1999
10.33 Credit Agreement between Patrick J. McGroder, III, Incorporated by reference to
Nancy J. Stone, and James W. Myers, Trustees for 9/30/99 10-Q
the ILX Resorts Incorporated Employee Stock
Ownership Plan and Trust and Litchfield Financial
Corporation dated as of August 12, 1999
10.34 Sedona Worldwide Incorporated Form 10-SB Incorporated by reference to
SWI's Form 10-SB on Form
10SB12G No. 000-25025, filed
November 4, 1998
10.35 Sedona Worldwide Incorporated Amendment No. 1 to Incorporated by reference to
Form 10-SB SWI's Amendment No. 1 to Form
10-SB on Form 10-12G/A No.
000-25025, filed July 2, 1999
10.36 Sedona Worldwide Incorporated Amendment No. 2 to Incorporated by reference to
Form 10-SB SWI's Amendment No. 2 to Form
10-SB on Form 10SB12G/A No.
000-25025, filed November 12,
1999
10.37 Sedona Worldwide Incorporated Amendment No. 3 to Incorporated by reference to
Form 10-SB SWI's Amendment No. 3 to Form
10-SB on Form 1012G/A No.
000-25025, filed December 8,
1999
10.38 Letter Agreement, dated as of October 28, 1999, Filed herewith
among ILX Resorts Incorporated and Sedona
Worldwide Incorporated
10.39 Schedule 14C Definitive Information Statement Incorporated by reference to
pursuant to Section 14(c) of the Securities Schedule 14C on Form No. DEF
Exchange Act of 1934 for Sedona Worldwide 14C No. 001-13855, filed
Incorporated January 3, 2000
10.40 Promissory Note ($600,000) by ILX Resorts Filed herewith
Incorporated to The Steele Foundation, Inc. dated
February 23, 2000
10.41 Lease Agreement between Edward John Martori and Filed herewith
ILX Resorts Incorporated dated January 1, 2000
10.42 Installment Promissory Note ($500,000) by ILX Filed herewith
Resorts Incorporated to Martori Enterprises
Incorporated dated August 1, 1999 Filed herewith
21 List of Subsidiaries of ILX Resorts Incorporated Filed herewith
27.1 Financial Data Schedule - Year Ended December 31, Filed herewith
1999
</TABLE>
October 28, 1999
VIA FACSIMILE AND HAND DELIVERY
Sedona Worldwide Incorporated
3840 North 16th Street
Phoenix, Arizona 85016
RE: LINE OF CREDIT
Dear Board of Directors:
ILX Resorts Incorporated ("ILX") is pleased to grant to Sedona Worldwide
Incorporated ("SWW/Borrower") an operating line of credit ("Line") for general
working capital purposes and other related uses. The amount, terms and
conditions of the Line are set forth below.
A. DETAILS OF LINE OF CREDIT
1. BORROWER. Sedona Worldwide Incorporated.
2. COMMITMENT AMOUNT. The Commitment Amount will be $200,000.
3. BORROWING PERIOD. The Borrowing Period shall extend from the "Closing Date"
until November 30, 2000.
4. MATURITY DATE. December 31, 2000.
5. PAYMENT SCHEDULE. Interest on the line shall be paid monthly in arrears.
Principal shall be payable on December 31, 2000.
6. INTEREST RATE. Interest on the Line will be based on the outstanding
principal balance, at a variable rate per annum equal to the prime rate, as
published in the Wall Street Journal, PLUS three percent (3.0%), provided,
however, that at no time shall the Interest Rate fall below eleven percent
(11.0%).
<PAGE>
Sedona Worldwide Incorporated
October 28, 1999
Page 2
B. CONDITIONS
ILX's obligation to fund the Line will be contingent upon the following:
1. Borrower will be required to execute and deliver to ILX such instruments,
documents, certificates, opinions and assurances as ILX might request in
connection with funding the Line on the basis outlined above. The
documentation for the Line shall be evidenced by a Promissory Note and such
other legal documents as ILX may reasonably request.
2. Borrower will provide ILX with a request for an advance on the Line a
minimum of three (3) business days prior to the date of each requested
funding.
3. Borrower will not be permitted to obtain any additional loans or financing
without ILX's prior written approval.
4. ILX will have the right to make periodic audits of Borrower's books and
records at Borrower's expense with appropriate notice.
5. There can be no material adverse change in Borrower's financial or other
conditions subsequent to the "Closing Date".
C. CLOSING DATE
The initial funding on the Line shall be an advance of no less than $20,000 and
shall take place on such date as will be satisfactory to Borrower and to ILX
("Closing Date") but in no event more than thirty (30) days following the date
of this commitment.
Sincerely, Agreed to and Accepted by:
ILX RESORTS INCORPORATED SEDONA WORLDWIDE INCORPORATED
/s/ Nancy J. Stone By: /s/ Mia A. Martori
- ------------------------------------ -------------------------------
Nancy J. Stone, President
Title: President
-----------------------------
Date: October 28, 1999
-----------------------------
PROMISSORY NOTE
$600,000.00 February 23, 2000
The undersigned, ILX RESORTS INCORPORATED, AN ARIZONA CORPORATION
("Borrower"), jointly and severally in the case of more than one Borrower)
promises to pay to THE STEELE FOUNDATION, INC., AN ARIZONA NON-PROFIT
CORPORATION ("Lender"), or order, the principal sum of SIX HUNDRED THOUSAND
DOLLARS ($600,000.00) with interest from the date hereof on the unpaid principal
balance (the "Loan"). This Promissory Note (the "Note") is secured in part by a
Pledge Agreement granting Lender a security interest in all assets, including
stock, held in the Wedbush Morgan Securities, account no. 43983106 (the "Stock"
) and by the collateral assignment of Borrower's / Consenting Parties' right in
each of the Resort Funding Inc. contracts ("Contracts"). Borrower promises to
pay the principal and interest evidenced hereby in accordance with the terms and
conditions herein contained and set forth.
1. PROMISE TO PAY PRINCIPAL AND INTEREST. Borrower promises to and shall pay
Lender in monthly installments of principal and interest in an amount of
$23,248.87 beginning on April 1, 2000, and continuing through September 1, 2002
("maturity" or the "Maturity Date"). Pursuant to the terms of the Loan
Commitment Letter dated February 23, 2000 (the "Commitment"), interest is
charged at the rate of TWELVE PERCENT (12%) PER ANNUM (the "Contract Rate"). On
or before September 1, 2002, Borrower shall have repaid all principal due
hereunder, totaling an amount of SIX HUNDRED THOUSAND AND NO/100 DOLLARS
($600,000.00) plus all interest due thereon. In the event the Stock or Contracts
are liquidated or otherwise transferred or encumbered as prohibited under the
Commitment and Pledge Agreement, Borrower promises to and shall immediately pay
Lender the principal sum and all accrued interest then outstanding. In the event
Borrower breaches any term or condition of the Loan Commitment Letter dated
February 23, 2000 between Borrower and Lender, Lender may, at the Lender's
option, declare all sums due hereunder immediately due and payable. The entire
unpaid balance of the principal and interest, if not sooner paid, shall be and
become due and payable at maturity.
2. PLACE OF PAYMENT. All payments shall be made by Borrower to Lender at
Lender's home office, which is located at 702 East Osborn Road, Suite #200,
Phoenix, Arizona 85014, or at such other place or places as Lender may designate
in writing from time to time. All payments made under this Note, including any
permitted prepayments or release payments, shall be applied first to interest
and then to principal.
3. LAWFUL MONEY. All payments shall be in lawful money of the United States of
America or in such other form which is acceptable to Lender. Lender's acceptance
of payment in any form other than lawful money of the United States of America
for any partial payment required or permitted under t he provisions of this Note
shall not be a waiver of the requirement that any future payments be made in
lawful money of the United States of America.
4. PREPAYMENT PENALTY. Borrower shall have the privilege to prepay the Loan in
full or in part, at any time without penalty or premium, subject to the terms of
the Note. In the event Borrower elects such prepayment privilege, Lender shall
be provided with sixty (60) days prior written notice of such intent to prepay.
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<PAGE>
5. ACCELERATION UPON DEFAULT. If Borrower shall default:
a. in the payment when due of any payment or payments as herein provided;
b. in the payment when due of any other sum or sums payable to Lender by
Borrower pursuant to terms hereof or under the Pledge Agreement and
any other loan document; or,
c. in the performance of any of the other terms, agreements, covenants or
conditions in any of the Loan Documents, as defined below; then,
subject to the notice and cure provision of paragraph 19 hereof, the
entire unpaid principal and interest of this Note, irrespective of the
Maturity Date specified herein, together with all the then accrued,
but unpaid, interest thereon and all other sums owed hereunder or
under the other Loan Documents, shall, at the election of the Lender,
and subject to paragraph 19, hereof, without further notice of such
election, become immediately due and payable and Lender may exercise
any remedy set forth herein, under any of the other Loan Documents, or
otherwise available at law or in equity. "Loan Documents" as used
herein shall be those documents listed in paragraph 15 of the
Commitment.
6. LATE CHARGE. Should any payment not be paid within ten (10) days after the
same becomes due and payable (other than at maturity or by acceleration), it is
recognized by Borrower that Lender will incur extra expenses for the handling of
delinquent payments, the exact amount of such extra expense being impossible to
ascertain, but that a charge of five percent (5%) of the delinquent payment
would be a fair approximation of the expense so incurred by Lender. Therefore,
in such event, upon written notice of the same from Lender to Borrower, and
without prejudice to the right of Lender to collect any other amounts provided
to be paid herein or to declare a default hereunder, and as Lender's monetary
recovery to cover such expense incurred in handling delinquent payments, a late
charge in that amount shall either be deducted from the amount of such
delinquent payment when made or shall be paid by Borrower to Lender in addition
to such delinquent payment.
7. DEFAULT RATE OF INTEREST. If any payment provided for herein is not paid when
due, each and every such delinquent payment, including the entire principal
balance and accrued interest in the event of an acceleration or maturity of the
principal amount due hereunder, and including any late charges assessed as
provided herein, may, in Lender's sole discretion, bear interest to the extent
permitted by law at the rate (the "Default Rate") of eighteen percent (18%) per
annum commencing with the latter to occur of the expiration of the cure period
described in paragraph 19 or the date of Lender's written notice to Borrower as
provided below, which rate shall be in lieu of the Contract Rate, and which
outstanding interest shall be added to principal and compounded monthly until
paid in full. Should Lender elect to initiate the Default Rate as permitted by
this paragraph, written notice to that effect shall be given Borrower at any
time.
8. REMEDIES CUMULATIVE. The rights or remedies of Lender as provided in this
Note and the other Loan Documents shall be cumulative and concurrent, and may be
pursued singularly, successively, or together against Borrower, any guarantor
hereof, and any other funds, property or security held by Lender for the payment
hereof or otherwise at the sole, absolute and uncontrolled discretion of Lender.
The failure to exercise any such right or remedy shall in no event be construed
as a waiver or release of said rights or remedies or of the rights to exercise
them at any later time.
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<PAGE>
9. CONSENT AND WAIVER OF DEFENSES. Except as otherwise required by law, Borrower
(including the Consenting Parties as defined in the Pledge Agreement) and all
indemnitors, endorsers, guarantors, sureties, accommodation parties, assuming
parties hereof, and all persons liable or to become liable on this Note waive
presentment, protest and demand, notice of protest, demand and dishonor and
nonpayment of this Note; all applicable appraisement, valuation exemption
rights, notices of whatsoever kind or nature, including, but not limited to,
notice of intention to accelerate, notice of acceleration, notice of dishonor or
other notice which Lender might otherwise be obligated to provide Borrower
following an Event of Default, specifically excepting such notice requirements
as are expressly set forth in this Note or in the Loan Documents; and they also
jointly and severally hereby consent to any and all renewals, extensions or
modifications of the terms hereof, including time of payment, or of the terms of
the Loan Documents or any other document, agreed upon by Borrower, and further
agree that any such renewal, extension or modification of the terms hereof or of
the terms of the Loan Documents or any other document, or the release or
substitution of any security for the indebtedness evidenced hereby or any other
indulgences, as agreed upon by Borrower, shall not affect the liability of any
of said parties for the indebtedness evidenced by this Note. Any such renewals,
extensions or modifications which have been agreed upon by Borrower may be made
without notice to any of said parties.
10. FEES AND EXPENSES. Borrower, indemnitors, endorsers, guarantors, sureties,
accommodation parties, assuming parties hereof and all other persons liable or
to become liable on this Note, agree, jointly and severally, to pay all
reasonable and customary costs of collection, including trustee's fees, title
fees, reasonable attorneys' fees and all reasonable costs of suit, in case the
unpaid principal sum of this Note, or any payment of interest or principal and
interest thereon or premium, is not paid when due, or in case it becomes
necessary to protect the security for the indebtedness evidenced hereby, or for
the foreclosure or other enforcement by Lender or lender of any of the Loan
Documents, in which Lender shall be successful, or in the event Lender is made
party to any litigation because of the existence of the indebtedness evidenced
by this Note, or because of the existence of the other Loan Documents, whether
suit be brought or not, and whether through courts of original jurisdiction, as
well as courts of appellate jurisdiction, or through a bankruptcy court or other
legal proceedings.
11. AMENDMENT. This Note and the other Loan Documents may not be amended,
modified or changed, nor shall any waiver of any provision hereof be effective,
except only by an instrument in writing and signed by the party against whom
enforcement of any waiver, amendment, change, modification or discharge is
sought; provided, however, that this paragraph shall in no way be a limitation
on the provisions of the consents and waivers set forth in paragraph 9, except
that the terms of this Note and the other Loan Documents may not be amended
without Borrower's execution thereof.
12. NOTE SECURED BY PLEDGE AGREEMENT. This Note is secured by the Pledge
Agreement and other Loan Documents which contain additional provisions for the
acceleration of the maturity of the obligation to pay under the provisions of
this Note.
13. INTEREST NOT TO EXCEED LEGAL MAXIMUM. Notwithstanding any provision herein
or in any instrument now or hereafter securing this Note, the total liability
for payments in the nature of interest shall not exceed the limits imposed by
the usury laws of the State of Arizona. If Lender receives as interest an amount
which would exceed such limits, such amount which would be excessive interest
shall be applied to the reduction of the unpaid principal balance and not to the
payment of interest; and if a surplus remains after full payment of principal
and lawful interest, the surplus shall be remitted to Borrower by Lender, and
Borrower hereby agrees to accept such remittance. If this paragraph becomes
operative, the total Loan shall at the option of Lender become immediately due
and payable and shall bear interest at the maximum rate then permitted by the
usury laws of the State of Arizona until all the then obligations of this Note,
as modified by this paragraph, are paid and performed in full. The acceleration
provided for in this paragraph may be avoided by Borrower and all parties liable
to Lender on the Note by then waiving any and all usury claims and defenses they
then have, if permitted by law, and by paying all interest then and thereafter
due and payable at the lesser of the Contract Rate or highest rate then
permitted by law.
-3-
<PAGE>
14. ADDITIONAL SUMS. All fees, charges, goods, things in action or any other
sums or things of value (collectively, the "Additional Sums") paid by Borrower
to Lender, whether pursuant to this Note or otherwise howsoever with respect to
the Loan or indebtedness evidenced hereby, or with respect to the other Loan
Documents, which, under the law of the State of Arizona may be deemed to be
interest with respect to such loan or indebtedness, shall, for the purpose of
any laws of the State of Arizona which may limit the maximum rate of interest to
be charged with respect to such loan or indebtedness, be payable by Borrower as,
and shall be deemed to be, additional interest, and for such purposes only, the
agreed upon and contracted rate of interest described above shall be deemed to
be increased by the Additional Sums.
15. SUCCESSORS AND ASSIGNS. Whenever used herein, the words "Borrower" and
"Lender" shall be deemed to include their respective heirs, personal
representatives, successors and assigns. This paragraph shall not be a consent
by Lender for Borrower to assign or transfer any property securing payment
hereof or any rights, powers, obligations or duties of Borrower.
16. CHOICE OF LAW. Except where preempted by the laws of the United States, or
regulations promulgated thereunder, this Note shall be governed by the laws of
the State of Arizona.
17. NOTICE. All notices or other communications required or permitted to be
given or delivered under this Note shall be in writing and may be hand
delivered, deposited in the United States Mail, postage prepaid, or forwarded by
facsimile transmission with the original to follow by United States Mail
addressed to said party or parties at the addresses shown below, or to such
other address as Borrower or Lender may designate by giving notice in the
foregoing manner, which notices shall be deemed effective pursuant to paragraph
4.03 of the Deed of Trust. Any notice hand-delivered or sent by facsimile shall
be deemed effective when received and any notice sent United States Mail shall
be deemed effective two (2) days following the date of mailing.
If intended for Borrower:
Joseph P. Martori
ILX Resorts Incorporated
2111 E. Highland Ave., Suite #210
Phoenix, AZ 85016
Facsimile telephone number: 602-957-2780
-4-
<PAGE>
If intended for Lender and mailed:
Daniel Cracchiolo, President
The Steele Foundation, Inc.
702 East Osborn Road, Suite #200
Phoenix, AZ 85014
Facsimile telephone number: 602-234-0341
With a copy, to:
Andrew Abraham, Esq. Burch & Cracchiolo, P.A.
702 East Osborn Road, Suite #200
Phoenix, AZ 85014
Facsimile telephone number: 602-234-0341
18. INTEGRATED CONTRACT. This Note and the other documents and instruments
described and referred to in the Commitment and executed in connection with the
Loan (the Note and such other documents may be referred to as the "Loan
Documents") shall be and become an integrated contract, and all terms,
conditions and provisions hereof and thereof shall survive the closing of the
Loan and the recording of the Loan Documents. In the event of any conflict
between this Note and the other Loan Documents, then this Note shall control.
19. EXERCISE OF REMEDIES. Lender will not exercise any of the rights or remedies
authorized or permitted herein or in the other Loan Documents which are
exercisable upon the occurrence of a default by Borrower unless and until Lender
has given notice to Borrower pursuant to paragraph 17 hereof and Borrower shall
have failed to cure the default specified within said notice within a period of
(a) ten (10) days after receipt of such notice, as to any default occurring as a
result of the nonpayment of any sum of principal or interest which shall be or
become payable by Borrower to Lender, or (b) thirty (30) days after receipt of
such notice as to any other default occurring under the terms of the Note or the
other Loan Documents, unless such default cannot be cured within thirty (30)
days. If the default specified is not a result of the nonpayment of principal
and interest and cannot be cured within thirty (30) days and Borrower shall have
initiated action to cure the same within said period and shall proceed with due
diligence, Lender shall not exercise any right or remedy which is exercisable as
a result of such default until the expiration of a reasonable time, which in no
event shall exceed sixty (60) days without written consent of the Lender.
20. ATTORNEYS' FEES. Notwithstanding any provision hereof to the contrary, if
any dispute arising under the terms of this Note or the other Loan Documents
shall result in litigation, the successful party shall, in addition to any other
relief granted or awarded by the court, be entitled to an award of reasonable
attorneys' fees.
21. HEADINGS. The paragraph headings used herein are for convenience only and
are not to be used to interpret or construe this Note.
22. TIME IS OF THE ESSENCE. Time is of the essence of this Note and each and
every provision hereof. Any extension of time granted for the performance of any
duty under this Note shall not be considered an extension of time for the
performance of any other duty under this Note.
-5-
<PAGE>
23. SEVERABILITY. In case any one or more of the provisions contained in this
Note shall for any reason be held to be invalid, illegal or unenforceable in any
respect, such invalidity, illegality or unenforceability shall not affect any
other provision hereof and this Note shall be construed as if such invalid,
illegal or unenforceable provision had never been contained herein.
Borrower has executed this Note on the day first hereinbefore written.
BORROWER:
ILX RESORTS INCORPORATED, AN ARIZONA CORPORATION
By: /s/ Joseph P. Martori
--------------------------------------------
Joseph P. Martori
Its: Chairman
-------------------------------------------
-6-
LEASE AGREEMENT
Edward John Martori, hereafter "Landlord", agrees to lease to ILX Resorts
Incorporated, an Arizona corporation, hereafter "Tenant", and Tenant agrees to
lease from Landlord, the real property situated in Maricopa County, Arizona,
more particularly described in Exhibit "A" attached hereto located at 3840 N.
16th Street, Phoenix, Arizona, hereafter "the premises", upon the following
terms and conditions:
1. TERM: The term of this Lease shall commence on the 1st day of January, 2000
and shall terminate on the 31st day of December 2001. Tenant shall have
three options to extend the term, each for a successive additional one
calendar year period, by giving written notice thereof to Landlord at least
thirty (30) days in advance of the commencement of such extended term.
2. POSSESSION: Tenant shall take possession of the premises on January 1,
2000. Tenant shall be bound by all provisions of this Lease, including the
payment of rent, at all times Tenant is in possession of the premises.
3. RENT: Tenant agrees to pay Landlord as base rent FOUR THOUSAND DOLLARS
($4,000) per month for each month of the Lease. Rent is due on or before
the last day of each month and is payable at Landlord's offices or at such
other place as Landlord may designate in writing. Rent shall be prorated on
the basis of a thirty (30) day month for each partial month during the term
of this Lease or during which Tenant is in possession of the premises. All
other monetary obligations of Tenant under this Lease shall constitute
additional rent and shall be due as specified in each instance.
4. TAXES AND ASSESSMENTS: Tenant agrees to pay directly as additional rent
during each lease year or partial lease year of the term of this Lease, all
real estate taxes and assessments levied and assessed for any such year
upon the premises and the underlying realty. For any partial lease year of
the term hereof such amount shall be pro rated on a daily basis.
Tenant shall pay to Landlord, in addition to and along with the rental
otherwise payable hereunder, any excise, transaction, sales or privilege
tax now or hereafter imposed by any government or agency upon Landlord and
attributed to or measured by rent or prorations payable by Tenant.
5. OPERATING EXPENSES: The operating expenses of the premises shall be paid by
Tenant. The operating expenses of the Project include without limitation:
property taxes, special assessments, utilities, maintenance, supplies,
management fees, janitorial services, trash removal, fire and liability
insurance premiums, repairs and all other costs which can properly be
considered expenses of operating and maintaining the building and
surrounding property of which the premises are a part, including necessary
capital expenditures. Without limiting the generality of the foregoing,
Tenant shall at its own expense and at all times maintain the premises in
good and safe condition, including plate glass, heating and air
conditioning units, roof, exterior walls, electrical wiring, plumbing and
any other systems or equipment upon the premises. Tenant will promptly pay
when due all electric, water, gas and other similar charges directly
attributable to the premises.
6. USE OF PREMISES: Tenant shall use the premises for the purpose of
office/warehouse use and shall not use or allow the premises to be used for
any illegal or objectionable purpose. Tenant shall at its own cost and
expense obtain all licenses and permits necessary for such use. Tenant
shall use its best efforts to comply with all governmental laws, ordinances
-1-
<PAGE>
and regulations applicable to the use of the demised premises, and shall
use its best efforts to promptly comply with all governmental orders and
directives for the correction, prevention and abatement of nuisances in or
upon, or connected with, the use of the demised premises all at Tenant's
sole expense. Tenant shall not operate its business in such manner so as to
constitute an annoyance to other tenants and shall endeavor to control its
customers so as to maintain an orderly premises. Tenant shall not do or
permit anything to be done which would increase the cost of any fire,
extended coverage or any other insurance covering the premises.
7. REPAIR: Tenant shall at its own expense keep the premises in good condition
and repair.
8. ASSIGNMENT: Tenant shall not assign or hypothecate this Lease, or enter
into a sublease relating to all or any portion of the premises, without
Landlord's prior written consent, which consent shall not be unreasonably
withheld. It is understood by Landlord that Sedona Worldwide Incorporated,
a former subsidiary of Tenant, will occupy a portion of the premises. Any
other assignment or subletting without consent shall be void. Landlord's
approval of any such assignment or sublease shall not release Tenant from
its obligations under this Lease or constitute assent to any subsequent
assignment or sublease.
9. RETURN OF PREMISES: Upon the termination of this Lease, Tenant shall return
the premises to Landlord in its original condition, ordinary wear and tear
and alterations or improvements not designated to be removed excepted.
10. INSURANCE: Tenant, during the term hereof, at its own expense, will provide
and keep in force for the benefit of Landlord and Tenant, as their
respective interests may appear, fire, comprehensive, plate glass and
general and public liability insurance protection with respect to the
premises and for claims for personal injury or death or property damage in
and about the premises with limits not less than $1,000,000 in the event of
bodily injury or death of any number of persons in any one accident and
limits of not less than $1,000,000 for damage to property, and shall
provide Landlord with a copy of the policy upon Landlord's written request.
Tenant shall name Landlord as an additional insured under the policy and
provide Landlord a certificate of insurance. The insurance shall be primary
insurance and shall provide that any right of subrogation against Landlord
is waived. The policy shall further provide that no act or omission by
Tenant shall impair the rights of the insured to receive the proceeds of
the policy and that the policy shall not be canceled except upon thirty
(30) days prior written notice to each named insured.
11. INDEMNIFICATION: Tenant shall indemnify, defend and hold Landlord harmless
from all actions, claims, demands, penalties or liabilities arising out of
events occurring in or about the premises or caused in whole or in part by
Tenant or Tenant's agents, servants, employees or invitees, except for
matters attributable to Landlord's willful misconduct or gross negligence.
This indemnification shall include all costs and expenses and reasonable
attorney's fees which Landlord may expend in connection with any of the
foregoing.
12. LIMITATION OF LIABILITY: Landlord shall not be liable to Tenant for damages
nor shall Tenant be entitled to a reduction in rent by reason of any of the
following: (i) Landlord's failure to provide utilities or services when
such failure is caused by accident, repairs, strikes, disturbances or any
other cause beyond the reasonable control of Landlord; (ii) disruption to
Tenant's business caused by Landlord's repairs or improvements to the
-2-
<PAGE>
project; (iii) damages to the premises or Tenant's property unless caused
by Landlord's gross negligence or willful misconduct.
13. NOTICE: All notices or demands under this Lease or required to be given by
law are to be made in writing by registered or certified mail, return
receipt requested, and are deemed given when deposited in the United States
mail postage prepaid and addressed to Landlord or Tenant at the addresses
set forth on the signature page of this Lease. Each party shall have the
right, from time to time, to designate a different address to which notices
and demands are to be sent by giving notice in the manner provided for
above except that Landlord may in any event use the premises as Tenant's
address for notice purposes.
14. ENTRY BY LANDLORD: Landlord shall have the right to enter the premises at
all reasonable times for the purposes of inspecting, repairing or
maintaining the premises, determining whether the terms of the Lease are
being complied with, posting such notices as Landlord deems advisable for
its protection, and showing the premises to prospective tenants, purchasers
or lenders. Landlord may at any time within ninety (90) days prior to the
expiration of this Lease place upon the premises any customary "For Lease"
signs, and reasonably permit persons desiring to lease the same to inspect
the premises.
15. DEFAULT & REMEDIES:
(a) The occurrence of one or more of the following events shall constitute
a default of this Lease by Tenant:
(1) The abandonment of the premises by Tenant or absence of Tenant
from premises for thirty (30) days or longer while failing to
comply with any provision of this Lease.
(2) The failure by Tenant to make any payment of rent or other
payment required to be made by Tenant under this Lease when due.
(3) The failure by Tenant to observe or perform any provision of this
Lease other than the payment of money where such failure
continues for a period of thirty (30) days after written notice
thereof from Landlord to Tenant. This notice shall be in lieu of,
and not in addition to, any notice required under Arizona law.
(4) (i) The making by Tenant of any general assignment for the
benefit of creditors; (ii) the filing by or against Tenant of a
petition under the United States Bankruptcy Code unless dismissed
within thirty (30) days; (iii) the appointment of a receiver or
trustee to take possession of substantially all of Tenant's
assets located at the premises or of this Lease where possession
is not restored to Tenant within thirty (30) days; (iv) the
attachment, execution or other judicial seizure of substantially
all of Tenant's assets located on the premises where such seizure
is not discharged within thirty (30) days.
(b) In the event of any default by Tenant as defined above, Landlord may
exercise one or more of the following remedies in addition to any
remedy provided for at law or equity:
(1) With or without notice or process of law and using such force as
Landlord may deem reasonably necessary under the circumstances,
and without terminating this Lease or relieving Tenant of any
-3-
<PAGE>
obligation hereunder, Landlord may re-enter and take possession
of the premises and of all property located therein. Under no
circumstances shall Landlord be liable in damages or otherwise by
reason of the exercise by Landlord of any such re-entry or
eviction, or by reason of the exercise by Landlord of any other
remedy provided in this subparagraph (b).
(2) In the event that Landlord recovers possession of the premises
without termination of this Lease, Tenant shall pay to Landlord
all sums due under this Lease on the dates due as if Tenant
remained in possession-of the premises.
(3) Landlord may recover from Tenant, and Tenant shall pay upon
demand, all expenses incurred in recovering possession of the
premises, repairing and altering the premises for reletting, and
attempting to relet the premises, including commissions and
attorney fees.
(c) The remedies described in subparagraph (b) are cumulative and in
addition to any remedy at law or in equity. The filing of an action by
Landlord against Tenant requesting under one or more remedies shall
not be deemed an election of that remedy or remedies to the exclusion
of all others.
(d) Landlord shall be under no obligation to observe or perform any duty
imposed by this Lease which accrues after the date of any default by
Tenant.
(e) The failure or delay of Landlord in exercising any right or remedy
shall not be construed as a waiver of any such right or remedy or of
any default by Tenant.
16. ATTORNEY'S FEES: In the event any action or proceeding is brought by either
party against the other under this Lease, the prevailing party shall be
entitled to recover from the other party its reasonable costs, expenses and
attorneys' fees.
17. WAIVER: The waiver by Landlord of Tenant's breach by any provision of this
Lease shall not constitute a continuing waiver of any subsequent breach by
Tenant of the same or other provision.
18. DEFAULT BY LANDLORD: Landlord shall not be in default unless Landlord fails
to perform its obligations under this Lease within thirty (30) days after
written notice by Tenant to Landlord specifying the obligations which the
Landlord has failed to perform. If an obligation is such that it cannot
reasonably be completed within such thirty (30) day period, Landlord shall
not be in default if Landlord commences performance within thirty (30) days
and thereafter diligently prosecutes the same to completion.
19. SURRENDER OF PREMISES: The surrender of this Lease by Tenant to Landlord
shall not work a merger and shall, at the option of Landlord, operate as an
assignment to it of any subleases affecting the premises.
20. ESTOPPEL CERTIFICATE:
(a) Tenant shall upon not less than five (5) days prior written notice
from Landlord execute, acknowledge and deliver to Landlord a statement
in writing (i) certifying that this Lease is unmodified and in full
force and effect and if modified, stating the nature of such
modification and certifying that this Lease as modified is in full
-4-
<PAGE>
force and effect; (ii) specifying the dates to which rental and other
charges are paid in advance; and (iii) acknowledging that there are no
uncured defaults on the part of Landlord or specifying such defaults
if any are claimed. Any such statement may be relied upon by any
prospective purchaser or encumbrancer of the real property of which
the premises are a part.
(b) Tenant's failure to deliver such a statement within the time specified
above shall be conclusive upon Tenant (i) that this Lease is in full
force and effect and without modification except as may be represented
by Landlord; and (ii) that there are no uncured defaults by Landlord.
21. CONDITION OF PREMISES: Tenant acknowledges that neither the Landlord nor
any of the Landlord's agents has made any representation or warranty with
respect to the premises or building or with respect to the suitability of
either for the conduct of Tenant's business. Taking possession of the
premises by Tenant shall conclusively establish that the premises and
building were in good, sanitary order, condition and repair at such time.
22. DESTRUCTION OF PREMISES: In the event that the premises or the building of
which the premises are a part are destroyed in whole or in part by fire or
other casualty, Landlord may terminate this Lease at its option. If
Landlord does not terminate this Lease and elects to repair the damage,
this Lease shall remain in full force and effect.
23. CONDEMNATION: If all or a portion of the leased premises are appropriated
by a public or quasi-public authority under the power of eminent domain or
are transferred by Landlord in lieu thereof, Landlord may terminate this
Lease without liability to Tenant for any unexpired term of this Lease. If
this Lease is not terminated as a result of such appropriation or transfer,
base rent shall be equitably reduced. In either event, Landlord shall be
entitled to the entire condemnation award or settlement except that Tenant
shall be entitled to any award made by such authority specifically to
Tenant for moving expenses or damages for disruption to Tenant's business.
24. LATE CHARGES: All sums due under this Lease not paid by Tenant within ten
(10) days from the date such payment is due shall be subject to a late
charge of the greater of Twenty Dollars ($20.00) or Five Percent (5%) of
the amount due and shall bear interest at a rate of Eighteen Percent (18%)
per annum until paid.
25. SALE BY LANDLORD: In the event of a sale or conveyance by Landlord of the
premises, the same shall operate to release Landlord from any future
liability upon any of the covenants or conditions, express or implied,
herein contained in favor of Tenant (so long as the purchaser expressly
assumes such liability), and in such event Tenant agrees to look solely to
the responsibility of the successor in interest of Landlord in and to this
Lease. This Lease shall not be affected by any such sale, and Tenant agrees
to attorn to the purchaser or assignee.
26. LANDLORD'S CONSENT: Except as otherwise provided herein, where Landlord's
consent is required under this Lease, such consent shall not be
unreasonably withheld.
27. APPLICABLE LAW: This Lease shall be governed by the laws of the State of
Arizona.
-5-
<PAGE>
28. TIME OF ESSENCE: Time is of the essence with respect to the performance of
every provision of this Lease in which time of performance is a factor.
INTENDING TO BE LEGALLY BOUND, the parties have executed this Lease agreement
effective as of the 1st day of January, 2000.
LANDLORD: TENANT:
ILX Resorts Incorporated
/s/ Edward John Martori
- ----------------------------------- By: /s/ Joseph P. Martori
Edward John Martori ---------------------------------
Its: Chairman
4740 East Sunrise Drive, #394
Tucson, Arizona 85718 2111 East Highland Avenue, Suite 210
Phoenix, Arizona 85016
-6-
<PAGE>
EXHIBIT "A"
LEGAL DESCRIPTION OF PREMISES
The North 106 feet of Lots 4 and 5, of DUNDEE SUBDIVISION, according to the plat
of record in the office of the County Recorder of Maricopa County, Arizona,
recorded in Book 10 of Maps, Page 5.
EXCEPT the East 7 feet of the North 106 feet of Lot 5.
-7-
INSTALLMENT PROMISSORY NOTE
$500,000.00 August 1, 1999
Phoenix, Arizona
FOR VALUE RECEIVED, the undersigned, ILX Resorts Incorporated, an Arizona
corporation (the "undersigned"), promises to pay to the order of Martori
Enterprises Incorporated, an Arizona corporation ("Payee"), at Phoenix, Arizona,
or at such other place as the holder hereof may from time to time designate, the
principal sum of Five Hundred Thousand Dollars ($500,000.00), together with
interest thereon as computed below, as follows:
Principal payments of $100,000.00 on or before August 15, 1999 and
$100,000.00 on or before December 15, 2000 and December 15, 2001.
Installments of interest only shall be payable quarterly on the first day
of January, April, July and October of each year commencing October 1,
1999. The entire unpaid principal balance, together with all accrued and
unpaid interest thereon and other costs payable hereunder, shall be paid in
full on December 15, 2002.
Interest shall be charged on the unpaid principal balance of this Note to
the date of maturity on a daily basis for the actual number of days any portion
of the principal is outstanding, computed on the basis of a 360-day year, at a
per annum rate (the "Note Rate") equal to eight percent (8%).
The undersigned acknowledges that the undersigned has agreed to the rate of
interest represented by the Note Rate, and any additional charges, costs and
fees arising out of or related to the transaction of which this Note is a part,
to the extent deemed to be interest under applicable law.
Each and every payment due under this Note shall be made in lawful money of
the United States of America and in immediately available funds, and when made
shall be first applied to accrued costs, expenses and fees, if any, then to
accrued interest that has not yet been added to principal, and then to the
reduction of the principal amount of this Note. This Note may be prepaid, in
whole or in part, without penalty or premium, provided that each such payments
shall be applied as set forth above.
At the option of the holder hereof, any of the following shall constitute a
"default" hereunder, and, upon the occurrence of any of the following, all
obligations hereunder shall, at the option of the holder hereof, become
immediately due and payable, without presentment for payment, diligence, grace,
exhibition of this Note, protest, further demand or notice of any kind, all of
which are hereby expressly waived: (i) any sum owing hereunder or under other
indebtedness of the undersigned to Payee is not paid as agreed; (ii) any
petition or application for any form of relief under any provision of Title 11,
United States Code, as amended from time to time (the "Bankruptcy Code") or any
other law pertaining to reorganization, insolvency or readjustment of debts is
filed by or against the undersigned, its assets or affairs; (iii) the
undersigned makes an assignment for the benefit of creditors, is not paying
debts as they become due, or is granted an order for relief under any chapter of
the Bankruptcy Code; (iv) a custodian, as defined by the Bankruptcy Code, takes
charge of any property of the undersigned; (v) garnishment, attachment, levy or
execution is issued against any of the property or effects of the undersigned;
(vi) there is a termination, failure to exist or dissolution of the undersigned;
or (vii) there is any default or breach of any representation, warranty or
covenant, or there is any false statement or material omission, by the
undersigned under any document forming part of the transaction in respect of
which this Note is made or forming part of any other transaction under which the
undersigned is indebted to Payee.
1
<PAGE>
The undersigned hereby agrees: (i) to any and all extensions (including
extensions beyond the original term hereof) and renewals hereof, from time to
time, without notice, and that no such extension or renewal shall constitute or
be deemed a release of any obligation of the undersigned to the holder hereof;
(ii) that any written modification, extension or renewal hereof executed by the
undersigned shall constitute a representation and warranty of the undersigned
that the unpaid balance of principal, interest and other sums owing hereunder at
the time of such modification, renewal or extension are owed without adjustment
for offset, counterclaim or other defense of any kind by the undersigned against
Payee; (iii) that the acceptance by the holder hereof of any performance which
does not comply strictly with the terms hereof shall not be deemed to be a
waiver or bar of any right of said holder, nor a release of any obligation of
the undersigned to the holder hereof; (iv) to offsets of any sums or property
owed to the undersigned by the holder hereof at any time; (v) that this Note
shall be governed by the laws of the State of Arizona applicable to promissory
notes made and to be paid in the State of Arizona; and (vi) to pay the holder
hereof upon demand any and all costs, expenses and fees (including reasonable
attorneys' fees) incurred in enforcing or attempting to recover payment of the
amounts due under this Note, including negotiating, documenting and otherwise
pursuing or consummating modifications, extensions, compositions, renewals or
other similar transactions pertaining to this Note, irrespective of the
existence of an event of default, and including costs, expenses and fees
incurred before, after or irrespective of whether suit is commenced, and in the
event suit is brought to enforce payment hereof, such costs, expenses and fees
and all other issues in such suite shall be determined by a court sitting
without a jury.
This Note is secured by a Security Agreement dated July 1, 1994.
This Note is executed to be effective as of the date set forth above.
ILX RESORTS INCORPORATED,
an Arizona corporation
By: /s/ Nancy J. Stone
------------------------------------
Its: President
-----------------------------------
ATTEST:
By: /s/ Dorinne Dobson
------------------------------
Its: Assistant Secretary
-----------------------------
2
ILX RESORTS INCORPORATED
LIST OF SUBSIDIARIES
All-Star Resorts, Inc., an Arizona corporation
Genesis Investment Group, Inc., an Arizona corporation
Golden Eagle Realty, Inc., a Colorado corporation
Golden Eagle Resort, Inc., an Arizona corporation
ILE Florida, Inc., an Arizona corporation
ILE Sedona Incorporated, an Arizona corporation
ILX Tourist Station Incorporated, an Arizona corporation
Kohl's Ranch Water Company, an Arizona corporation
Premiere Development Incorporated, an Arizona corporation
SHI Health Institute Incorporated, an Arizona corporation
Southern Vacations, Inc., a Florida corporation
SW Resorts Incorporated, an Arizona corporation
Syracuse Project Incorporated, an Arizona corporation
Timeshare Resale Brokers, Inc., an Arizona corporation
Varsity Clubs of America Incorporated, an Arizona corporation
VCA Iowa Incorporated, an Arizona corporation
VCA Management Incorporated
VCA South Bend Incorporated, an Arizona corporation
VCA Tucson Incorporated, an Arizona corporation
Los Abrigados Partners Limited Partnership, an Arizona limited partnership
Orangemen Club Limited Partnership, a New York limited partnership
VCASB Partners General Partnership, an Arizona general partnership
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS DECEMBER 31, 1999 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,971,365
<SECURITIES> 0
<RECEIVABLES> 26,477,933
<ALLOWANCES> 3,332,550
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,338,737
<DEPRECIATION> 2,126,267
<TOTAL-ASSETS> 57,388,522
<CURRENT-LIABILITIES> 0
<BONDS> 28,120,947
0
1,179,298
<COMMON> 18,069,840
<OTHER-SE> 5,990,031
<TOTAL-LIABILITY-AND-EQUITY> 57,388,522
<SALES> 23,708,616
<TOTAL-REVENUES> 40,438,900
<CGS> 3,148,840
<TOTAL-COSTS> 15,431,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 796,548
<INTEREST-EXPENSE> 2,836,049
<INCOME-PRETAX> 1,203,768
<INCOME-TAX> 473,570
<INCOME-CONTINUING> 703,149
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 703,149
<EPS-BASIC> 0.16
<EPS-DILUTED> 0.16
</TABLE>
