SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarter Ended March 31, 2000 Commission File Number 001-13855
ILX RESORTS INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
ARIZONA 86-0564171
- ------------------------------- ------------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
2111 East Highland Avenue, Suite 210, Phoenix, Arizona 85016
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(Address of principal executive offices)
Registrant's telephone number, including area code 602-957-2777
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Former name, former address, and former fiscal year,
if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
stock, as of the latest practicable date.
Class Outstanding at March 31, 2000
- ------------------------------- -----------------------------
Common Stock, without par value 3,783,573 shares
<PAGE>
PART I
ITEM 1. FINANCIAL STATEMENTS
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, March 31,
1999 2000
------------ ------------
(Unaudited)
ASSETS
Cash and cash equivalents $ 2,971,365 $ 2,845,105
Notes receivable, net 23,145,383 23,619,339
Resort property held for Vacation
Ownership Interest sales 21,742,875 21,310,275
Resort property under development 346,786 405,952
Land held for sale 1,596,759 1,602,597
Deferred assets 227,933 172,781
Property and equipment, net 4,212,470 4,348,289
Other assets 3,144,951 2,312,385
------------ ------------
TOTAL ASSETS $ 57,388,522 $ 56,616,723
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Accounts payable $ 923,016 $ 654,702
Accrued and other liabilities 2,679,107 2,908,711
Due to affiliates 26,282 --
Notes payable 27,020,947 25,929,838
Notes payable to affiliates 1,100,000 1,100,000
Income taxes payable 376,223 655,709
------------ ------------
Total liabilities 32,125,575 31,248,960
------------ ------------
MINORITY INTERESTS 23,778 88,055
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value; 10,000,000
shares authorized; and 305,978 shares
issued and outstanding; liquidation
preference of $3,059,780 1,179,298 1,179,298
Common stock, no par value; 30,000,000
shares authorized; 3,921,173 and
3,956,773 shares issued 18,069,840 18,099,515
Treasury stock, at cost, 0 and 173,200
shares, respectively -- (341,757)
Additional paid in capital 279,450 250,975
Guaranteed ESOP Obligation (500,000) (375,000)
Retained earnings 6,210,581 6,466,677
------------ ------------
Total shareholders' equity 25,239,169 25,279,708
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,388,522 $ 56,616,723
============ ============
See notes to consolidated financial statements
2
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
----------------------------
1999 2000
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Timeshare revenues:
Sales of Vacation Ownership Interests $ 5,151,509 $ 5,946,856
Resort operating revenue 2,863,003 3,124,210
Interest income 764,133 939,955
----------- ------------
Total timeshare revenues 8,778,645 10,011,021
----------- ------------
Cost of sales and operating expenses:
Cost of Vacation Ownership Interests sold 693,474 816,391
Cost of resort operations 2,813,041 2,995,581
Sales and marketing 3,408,966 3,580,485
General and administrative 930,560 1,081,632
Provision for doubtful accounts 150,846 223,481
Depreciation and amortization 112,702 136,535
----------- ------------
Total cost of sales and
operating expenses 8,109,589 8,834,105
----------- ------------
Timeshare operating income 669,056 1,176,916
Income from land and other, net 18,892 2,460
----------- ------------
Total operating income 687,948 1,179,376
Interest expense (672,281) (689,003)
----------- ------------
Income before income taxes and
minority interests 15,667 490,373
Income tax expense (4,000) (170,000)
----------- ------------
Income before minority interests 11,667 320,373
Minority interests (6,790) (64,277)
----------- ------------
Net income $ 4,877 $ 256,096
=========== ============
Net income per share
Basic $ 0.00 $ 0.06
=========== ============
Diluted $ 0.00 $ 0.06
=========== ============
See notes to consolidated financial statements
3
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
---------------------------
1999 2000
----------- -----------
Cash flows from operating activities:
Net income $ 4,877 $ 256,096
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Undistributed minority interest 6,790 64,277
Deferred income taxes 4,000 --
Provision for doubtful accounts 150,846 223,481
Depreciation and amortization 112,702 136,535
Amortization of guarantee fees 2,900 700
Change in assets and liabilities:
Decrease in resort property held for
Vacation Ownership Interest sales 712,547 432,600
Increase in resort property under
development (139,689) (59,166)
Increase in land held for sale (8,607) (5,838)
Decrease (increase) in other assets (517,823) 928,591
Decrease in accounts payable (248,709) (268,314)
Increase in accrued and other liabilities 235,406 259,279
Decrease in due to affiliates -- (26,282)
Increase in income taxes payable -- 279,486
----------- -----------
Net cash provided by operating activities 315,240 2,221,445
----------- -----------
Cash flows from investing activities:
Notes receivable, net (1,436,622) (697,437)
Decrease (increase) in deferred assets (6,746) 54,452
Purchases of plant and equipment, net (497,453) (271,854)
Net cash used in investing activities (1,940,821) (914,839)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 7,352,450 2,563,387
Principal payments on notes payable (4,805,922) (3,654,496)
Acquisition of treasury stock and other (53,975) (341,757)
----------- -----------
Net cash (used in) provided by financing
activities 2,492,553 (1,432,866)
----------- -----------
(Decrease) Increase in cash and cash
equivalents 866,972 (126,260)
Cash and cash equivalents at beginning
of period 3,196,710 2,971,365
----------- -----------
Cash and cash equivalents at end of period $ 4,063,682 $ 2,845,105
=========== ===========
See notes to consolidated financial statements
4
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BUSINESS ACTIVITIES
The consolidated financial statements include the accounts of ILX Resorts
Incorporated, formerly ILX Incorporated, and its wholly owned and majority-owned
subsidiaries ("ILX" or the "Company"). All significant intercompany transactions
and balances have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and the instructions to Form 10-Q and Rule 10-01 of
Registration S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments and
reclassifications considered necessary for a fair and comparable presentation
have been included and are of a normal recurring nature. Operating results for
the three-month period ended March 31, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000. The
accompanying financial statements should be read in conjunction with the
Company's most recent audited financial statements.
The Company's significant business activities include developing,
operating, marketing and financing ownership interests ("Vacation Ownership
Interests") in resort properties located in Arizona, Colorado, 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.
REVENUE RECOGNITION
Revenue from sales of Vacation Ownership Interests is recognized in
accordance with Statement of Financial Accounting Standard No. 66, Accounting
for Sales of Real Estate ("SFAS 66"). No sales are recognized until such time as
a minimum of 10% of the purchase price has been received in cash, the statutory
rescission period has expired, the buyer is committed to continued payments of
the remaining purchase price and the Company has been released of all future
obligations for the Vacation Ownership Interest. Resort operating revenue
represents daily room rentals and revenues from food and other resort services.
Such revenues are recorded as the rooms are rented or the services are
performed.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash equivalents are liquid investments with an original maturity of three
months or less. The following summarizes interest paid, income taxes paid and
capitalized interest.
Three Months Ended March 31,
----------------------------
1999 2000
-------- --------
Interest paid $629,000 $706,000
Income taxes paid -- --
Capitalized interest -- --
ACCOUNTING MATTERS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which was
effective for financial statements for periods ending after December 15, 1997
and establishes standards for disclosing information about an entity's capital
structure. The Company adopted SFAS 129 in 1997. There were no significant
effects on the Company's disclosures about its capital structure, as that term
is defined in SFAS 129, in the three months ended March 31, 1999 or 2000.
5
<PAGE>
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which was effective for financial
statements for periods beginning after December 15, 1997 and establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general-purpose
financial statements. The Company adopted SFAS 130 in 1998. There were no items
of other comprehensive income, as that term is defined in SFAS 130, in the three
months ended March 31, 1999 or 2000.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("SFAS
131"), which is effective for fiscal years beginning after December 15, 1997 and
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers. The Company has a single segment in the timeshare resort industry.
Revenue from products and services are reflected on the income statement under
Sales of Vacation Ownership Interests and Resort Operating Revenue.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The standard also provides specific guidance for accounting for derivatives
designated as hedging instruments. In June 1999, the Financial Accounting
Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of Statement No. 133" ("SFAS
No. 137"), which delayed the effective date of SFAS No. 133 for the company
until 2001. The Company is currently evaluating what impact this standard will
have on its financial statements.
NOTE 2. NET INCOME PER SHARE
In accordance with SFAS No. 128, "Earnings Per Share," the following
presents the computation of basic and diluted net income per share:
BASIC NET INCOME PER SHARE
Three Months Ended March 31,
------------------------------
1999 2000
---------- -----------
Net income $ 4,877 $ 256,096
Less: Series A preferred
stock dividends (11,969) (11,969)
Net income available to common
stockholders - basic $ (7,092) $ 244,127
=========== ===========
Weighted average shares of common
stock outstanding - basic 4,028,421 3,884,086
=========== ===========
Basic net income per share $ 0.00 $ 0.06
=========== ===========
6
<PAGE>
DILUTED NET INCOME PER SHARE
Three Months Ended March 31,
-----------------------------
1999 2000
----------- -----------
Net income $ 4,877 $ 256,096
Less: Series A preferred
stock dividends (11,969) (11,969)
----------- -----------
Net income available to
common stockholders - diluted $ (7,092) $ 244,127
=========== ===========
Weighted average shares of commo
stock outstanding 4,028,421 3,884,086
Add: Convertible preferred stock
(Series B and C) dilutive effect 110,541 85,711
----------- -----------
Weighted average shares of common
stock outstanding - diluted 4,138,962 3,969,797
=========== ===========
Diluted net income per share $ 0.00 $ 0.06
=========== ===========
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 March 31, 2000 but
were not included in the computation of diluted net income per share because the
options' exercise prices were greater than the average market price of common
shares. These options expire at various dates between 2000 and 2004.
NOTE 3. SHAREHOLDERS' EQUITY
During the first quarter of 2000, the Company issued 35,600 shares of
restricted common stock, valued at $29,675, to employees in exchange for
services provided. These restricted shares of common stock issued to employees
are exempt from registration under Section 4(2) of the Securities Act of 1933.
Also during the first quarter of 2000, the Company purchased 173,200 shares of
its common stock for $341,757.
ITEM II. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS
OF OPERATIONS INCLUDES CERTAIN FORWARD-LOOKING STATEMENTS. WHEN USED IN THIS
FORM 10-Q, THE WORDS "ESTIMATE," "PROJECTION," "INTEND," "ANTICIPATES" AND
SIMILAR TERMS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS THAT RELATE TO
THE COMPANY'S FUTURE PERFORMANCE. SUCH STATEMENTS ARE SUBJECT TO SUBSTANTIAL
UNCERTAINTY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS SET FORTH BELOW. THE COMPANY UNDERTAKES NO OBLIGATION
TO PUBLICLY UPDATE OR REVISE ANY OF THE FORWARD-LOOKING STATEMENTS CONTAINED
HEREIN.
OVERVIEW
ILX Resorts Incorporated was formed in 1986 to enter the Vacation Ownership
Interest business. The Company generates revenue primarily from the sale and
financing of Vacation Ownership Interests. The Company also generates revenue
from the rental of its unused or unsold inventory of units at the ILX Resorts
and from the sale of food, beverages or other services at such resorts. The
Company currently owns five resorts in Arizona, one in Indiana and one in
Colorado.
The Company recognizes revenue from the sale of Vacation Ownership
Interests at such time as a minimum of 10% of the purchase price has been
received in cash, the statutory rescission period has expired, the buyer is
committed to continued payments of the remaining purchase price and the
Company's future obligations for the Vacation Ownership Interests have been
released. Resort operating revenues are recorded as the rooms are rented or the
services are performed.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
Costs associated with the acquisition and development of Vacation Ownership
Interests, including carrying costs such as interest and taxes, are capitalized
and amortized to cost of sales as the respective revenue is recognized.
RESULTS OF OPERATIONS
The following table sets forth certain operating information for the
Company:
Three Months Ended March 31,
----------------------------
1999 2000
--------- ---------
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests 58.7% 59.4%
Resort operating revenue 32.6% 31.2%
Interest income 8.7% 9.4%
--------- ---------
Total timeshare revenues 100.0% 100.0%
========= =========
As a percentage of sales of Vacation
Ownership Interests:
Cost of Vacation Ownership Interests sold 13.5% 13.7%
Sales and marketing 66.2% 60.2%
Provision for doubtful accounts 2.9% 3.8%
Contribution margin percentage from sale
of Vacation Ownership Interests (1) 17.4% 22.3%
As a percentage of resort operating revenue:
Cost of resort operations 98.3% 95.9%
As a percentage of total timeshare revenues:
General and administrative 10.6% 10.8%
Depreciation and amortization 1.3% 1.4%
Timeshare operating income 7.6% 11.8%
Selected operating data:
Vacation Ownership Interests sold (2) (3) 332 371
Average sales price per Vacation Ownership
Interest sold (excluding revenues from
Upgrades) (2) $ 13,563 $ 13,828
Average sales price per Vacation Ownership
Interest sold (including revenues from
Upgrades) (2) $ 15,517 $ 15,421
- ----------
(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 503 and 589 biennial and annual Vacation
Ownership Interests for the three months ended March 31, 1999 and 2000,
respectively.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 TO THE THREE MONTHS ENDED
MARCH 31, 2000
Sales of Vacation Ownership Interests increased 15.4% or $795,347 in 2000
to $5,946,856 from $5,151,509 in 1999 reflecting an increase in sales from the
Sedona sales office, net of decreases in sales from the VCA-South Bend and
VCA-Tucson sales offices. 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. The decrease in sales from the VCA-Tucson sales office is
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
due to a decrease in tour flow in part as a result of reducing the operation
from seven days to five days a week to gain certain operating efficiencies. The
average sales price per Vacation Ownership Interest sold (excluding revenues
from Upgrades) increased 2.0% or $265 in 2000 to $13,828 from $13,563 in 1999,
reflecting the higher per unit sales prices achieved for sales of ILX Premiere
Vacation Club Vacation Ownership Interests.
The number of Vacation Ownership Interests sold increased 11.7% from 332 in
1999 to 371 in 2000 largely due to greater tour flow and a higher closing rate
at the Sedona sales office. Sales of Vacation Ownership Interests in 2000
included 436 biennial Vacation Ownership Interests (counted as 218 annual
Vacation Ownership Interests) compared to 342 biennial Vacation Ownership
Interests (counted as 171 annual Vacation Ownership Interests) in 1999.
Upgrade revenue, included in Vacation Ownership Interest sales, decreased
8.9% from $648,442 in 1999 to $590,865 in 2000. Upgrades generally do not
involve the sale of additional Vacation Ownership Interests (merely their
exchange) and, therefore, such Upgrades increase the average sales price per
Vacation Ownership Interest sold. The average sales price per Vacation Ownership
Interest sold (including Upgrades) decreased from $15,517 in 1999 to $15,421 in
2000 as a result of the reduced Upgrade revenue, offset in part by increased
sales of ILX Premiere Vacation Club Ownership Interests, which sell for higher
prices than Vacation Ownership Interests in individual ILX resorts.
Resort operating revenues increased 9.1% or $261,207 in 2000 to $3,124,210
from $2,863,003 in 1999, reflecting net increased occupancy and average
receipts, including the growth of business at VCA-Tucson, which opened in the
third quarter of 1998. Cost of resort operations improved from 98.3% in 1999 to
95.9% in 2000 as a result of net increases in operating efficiencies, including
VCA-Tucson.
The 23.0% increase in interest income from $764,133 in 1999 to $939,955 in
2000 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,
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 increased slightly from 13.5% in 1999 to 13.7% in 2000
due to product mix in ILX Premiere Vacation Club.
Sales and marketing as a percentage of sales of Vacation Ownership
Interests decreased to 60.2% in 2000 from 66.2% in 1999 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 3.8% of sales of Vacation Ownership Interests in
2000, compared to 2.9% in 1999, reflecting the Company's decision to increase
the provision on new sales effective in the third quarter of 1999.
General and administrative expenses increased 16.2% to $1,081,632 in 2000
from $930,560 in 1999. General and administrative expenses increased slightly to
10.8% as a percentage of total timeshare revenues in 2000 compared to 10.6% in
1999. The increase reflects recognition in 2000 of ESOP contributions and
increased property tax recognition on VCA-South Bend and VCA-Tucson. The ESOP
Plan was adopted in the second quarter of 1999.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The 2.5% increase in interest expense from $672,281 in 1999 to $689,003 in
2000 reflects an increase in borrowings against customer notes receivable as the
Company retains and borrows against more of its consumer paper and an increase
in interest rates, net of fluctuations in the balances of borrowings
outstanding.
LIQUIDITY AND CAPITAL RESOURCES
SOURCES OF CASH
The Company generates cash primarily from the sale of Vacation Ownership
Interests (including Upgrades), the financing of customer notes from such sales
and resort operations. During the three months ended March 31, 1999 and 2000,
cash provided by operations was $315,240 and $2,221,445, respectively. The
increase is due to increased income and resultant income taxes payable as well
as decreased other assets. The decrease in other assets is related to advances
made to Sedona Vacation Club Homeowners' Association for renovations as of
December 31, 1999, which were reimbursed in the first quarter of 2000 and to
timing of collections of homeowners' dues. Because the Company uses significant
amounts of cash in the development and marketing of Vacation Ownership
Interests, but collects the cash on the customer notes receivable over a long
period of time, borrowing against and/or selling receivables is a necessary part
of its normal operations.
For regular federal income tax purposes, the Company reports substantially
all of its non-factored financed Vacation Ownership Interest sales under the
installment method. Under the installment method, the Company recognizes income
on sales of Vacation Ownership Interests only when cash is received by the
Company in the form of a down payment, as installment payments or from proceeds
from the sale of the customer note. The deferral of income tax liability
conserves cash resources on a current basis. Interest may be imposed, however,
on the amount of tax attributable to the installment payments for the period
beginning on the date of sale and ending on the date the related tax is paid. If
the Company is otherwise not subject to tax in a particular year, no interest is
imposed since the interest is based on the amount of tax paid in that year. The
consolidated financial statements do not contain an accrual for any interest
expense that would be paid on the deferred taxes related to the installment
method, as the interest expense is not estimable.
At December 31, 1999, the Company, excluding its Genesis subsidiary, had
NOL carryforwards of approximately $9.8 million, which expire in 2001 through
2012. 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 Internal Revenue Code imposes additional
limitations on the utilization of NOLs by a corporation following various types
of ownership changes, which result in more than a 50% change in ownership of a
corporation within a three-year period. Such changes may result from new Common
Stock issuances by the Company or changes occurring as a result of filings with
the Securities and Exchange Commission of Schedules 13D and 13G by holders of
more than 5% of the Common Stock, whether involving the acquisition or
disposition of Common Stock. If such a subsequent change occurs, the limitations
of Section 382 would apply and may limit or deny the future utilization of the
NOL by the Company, which could result in the Company paying substantial
additional federal and state taxes.
USES OF CASH
Investing activities typically reflect a net use of cash because of capital
additions and loans to customers in connection with the Company's Vacation
Ownership Interest sales. Net cash used in investing activities in the three
months ended March 31, 1999 and 2000 was $1,940,821 and $914,839, respectively.
The decrease is due to a reduction in the increase of notes receivable from
prior year end to the end of the respective first quarters. The Company began
hypothecating rather than selling a greater portion of notes receivable in first
quarter 1999. The Company continued this strategy in 2000; therefore, there was
a larger increase in the notes receivable balance from December 31, 1998 to
March 31, 1999, as compared to the increase from December 31, 1999 to March 31,
2000.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
The Company requires funds to finance the acquisitions of property for
future resort development and to further develop the existing resorts, as well
as to make capital improvements and support current operations. During 2000, the
Company advanced funds toward the cost of construction of the San Carlos
Vacation Ownership Interests. The Company funded such advances with proceeds
from a financing commitment established for this purpose. In 2000, the Company
is building twelve additional cabins at Kohl's Ranch, for which a financing
commitment equal to the construction cost is in place.
Customer defaults have a significant impact on cash available to the
Company from financing customer notes receivables in that notes which are more
than 60 to 90 days past due are not eligible as collateral. As a result, the
Company in effect must repay borrowings against such notes or buy back such
notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX
Resorts Incorporated Employee Stock Ownership Plan and Trust (the "ESOP"). The
intent of the ESOP is to provide a retirement program for employees that aligns
their interests with those of the Company. During 1999, the Company declared,
and funded in cash, contributions of $250,000 to the ESOP. In August 1999, the
ESOP entered into an agreement with Litchfield Financial Corporation for a
$500,000 line of credit, which is secured by the Company's stock purchased with
the funds and guaranteed by the Company. The Company paid a total of $43,047 in
fees in 1999 on behalf of the ESOP related to the line of credit, consisting of
$10,000 in loan fees, $16,231 in legal fees and interest of $16,816. As of
December 31, 1999, the ESOP had borrowed the full $500,000 on the line. In
January 2000, the Company contributed $125,000 to the ESOP, which the ESOP used
to repay principal on the line, reducing the borrowing to $375,000 at March 31,
2000.
During 1999, the ESOP purchased a total of 375,300 shares of the Company's
common stock in the open market, including 257,400 with borrowed funds and, at
March 31, 2000, held the 375,300 shares and $2,610 in cash. The shares purchased
with borrowed funds had not been allocated to participant accounts as of March
31, 2000 and are collateral for the borrowing. The fair market value of the
unallocated shares at March 31, 2000 was approximately $482,625.
The leveraged and unallocated shares will be released at the end of the
current Plan year (December 31, 2000) based on the amount of principal and
interest payments made during the year. During the quarter ended March 31, 2000,
the Company paid and recognized as an expense contributions of $10,213 for
interest and $125,000 for principal.
The ESOP may purchase additional shares for future year contributions
through loans made directly to the ESOP and guaranteed by the Company. Such
borrowings are not expected to exceed $1,000,000.
CREDIT FACILITIES AND CAPITAL
The Company has an agreement with a financial institution for a $40 million
financing commitment under which the Company may sell certain of its Customer
Notes. The agreement provides for sales on a recourse basis with a percentage of
the amount sold held back by the financial institution as additional collateral.
Customer Notes may be sold at discounts or premiums to the principal amount in
order to yield the consumer market rate, as defined by the financial
institution. At March 31, 2000, $30.7 million of the $40 million commitment was
available to the Company.
The Company also has financing commitments aggregating $43.5 million
whereby the Company may borrow against notes receivable pledged as collateral.
These borrowings bear interest at a rate of prime plus 1.5% ($40 million) to
prime plus 3% ($3.5 million). The $3.5 million and $40 million commitments
expire in 2001 and 2002, respectively. At March 31, 2000, approximately $27.6
million is available under these commitments.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(CONTINUED)
At March 31, 1999 and 2000, the Company had approximately $19.1 million and
$18.8 million, respectively, in outstanding notes receivable sold on a recourse
basis. Portions of the notes receivable are secured by deeds of trust on Los
Abrigados Resort & Spa, VCA-South Bend and VCA-Tucson.
In December 1999, the Company completed the spin-off of its 80% ownership
interest in SWI to the shareholders of ILX. In conjunction with the spin-off,
the Company agreed to provide up to $200,000 of working capital financing to SWI
through November 30, 2000. All amounts borrowed by SWI will bear interest at the
prime rate plus 3%, with interest payable monthly. The entire unpaid principal
will be due on December 31, 2000. At March 31, 2000, there had been no funds
advanced under this agreement.
In February 2000, the Company borrowed $600,000 for the purpose of using
the funds to purchase treasury stock. The note is collateralized by cash or
stock, bears interest at 12% and is due through 2002. As of March 31, 2000, the
Company purchased 114,600 shares of stock at a cost of $240,000 with funds
provided by this note. The remaining $360,000 is classified as restricted cash
and is included in "Other Assets" on the balance sheet.
In the future, the Company may negotiate additional credit facilities,
issue corporate debt, issue equity securities, or any combination of the above.
Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such
terms as management deems prudent. There is no assurance that the Company will
be able to secure additional corporate debt or equity at or beyond current
levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash
generated from operations, will be sufficient to meet the Company's liquidity,
operating and capital requirements for at least the next 12 months.
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX
Owners, hotel guests and Vacation Ownership Interest exchange participants
typically greatest in the second and third fiscal quarters. As the Company
expands into new markets and geographic locations it may experience increased or
additional seasonality dynamics which may cause the Company's operating results
to fluctuate.
INFLATION
Inflation and changing prices have not had a material impact on the
Company's revenues, operating income and net income during any of the Company's
three most recent fiscal years or the three months ended March 31, 2000.
However, to the extent inflationary trends affect short-term interest rates, a
portion of the Company's debt service costs may be affected as well as the rates
the Company charges on its customer notes.
12
<PAGE>
PART II
ITEM I. LEGAL PROCEEDINGS
A dispute had arisen between the general contractor, Summit Builders, and
the Company's wholly owned subsidiary, VCA Tucson Incorporated, with respect to
amounts owed for the construction of VCA-Tucson. In May 1999, the dispute was
settled for an amount of $1.3 million. Such cost is included in resort property
held for sale at December 31, 1999 and March 31, 2000.
A dispute had arisen between Bowne of Phoenix, Inc. ("Bowne"), and the
Company regarding amounts owing for printing related to the Company's 1998
follow-on public offering. Bowne and the Company reached agreement on a payment
of $110,000 for such services, which Bowne subsequently sought to change. Bowne
filed suit in the Superior Court of Arizona seeking total payment of $154,720
plus interest and attorneys' fees. At March 31, 2000, approximately $46,000 of
the $110,000 has been paid to Bowne on account and the remaining amount was
fully accrued on the books of the Company. On September 15, 1999, the Superior
Court granted the Company's motion for summary judgment on the issue of whether
the parties had entered into a binding settlement agreement. In February 2000,
the Superior Court also granted the Company's request for $32,904 in attorneys'
fees plus taxable costs.
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 II. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM III. DEFAULTS UPON SENIOR SECURITIES
None
ITEM IV. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM V. OTHER INFORMATION
None
ITEM VI. EXHIBITS AND REPORTS ON FORM 8-K
(i) Exhibits
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed herewith)
(ii) Reports on Form 8-K
None
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused its quarterly report on Form 10-Q to be
signed on its behalf by the undersigned thereunto duly authorized.
ILX RESORTS INCORPORATED (Registrant)
/s/ Joseph P. Martori
-------------------------------------
Joseph P. Martori
Chief Executive Officer
/s/ Nancy J. Stone
-------------------------------------
Nancy J. Stone
President
/s/ Margaret M. Eardley
-------------------------------------
Margaret M. Eardley
Executive Vice President
Chief Financial Officer
/s/ Stephen W. Morgan
-------------------------------------
Senior Vice President
Corporate Controller
Date: As of May 11, 2000
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANTS FIRST QUARTER 2000 CONSOLIDATED BALANCE SHEET AND CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,845,105
<SECURITIES> 0
<RECEIVABLES> 27,149,561
<ALLOWANCES> 3,530,222
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,610,591
<DEPRECIATION> 2,262,302
<TOTAL-ASSETS> 56,616,723
<CURRENT-LIABILITIES> 0
<BONDS> 27,029,838
0
1,179,298
<COMMON> 18,099,515
<OTHER-SE> 6,000,895
<TOTAL-LIABILITY-AND-EQUITY> 56,616,723
<SALES> 5,946,856
<TOTAL-REVENUES> 10,011,021
<CGS> 816,391
<TOTAL-COSTS> 3,580,485
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 223,481
<INTEREST-EXPENSE> 689,003
<INCOME-PRETAX> 490,373
<INCOME-TAX> 170,000
<INCOME-CONTINUING> 256,096
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 256,096
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
