ILX RESORTS
INC (ILX) Three Months Ended June 30,
Six Months Ended June 30,
1998
1999
1998
1999
61.5%
59.3%
63.3%
59.0%
33.2%
32.3%
31.4%
32.4%
5.3%
8.4%
5.3%
8.6%
100.0%
100.0%
100.0%
100.0%
14.4%
14.9%
14.3%
14.3%
61.3%
60.5%
60.6%
63.1%
3.0%
2.9%
2.9%
2.9%
21.3%
21.7%
22.1%
19.7%
95.6%
90.7%
99.3%
94.2%
6.7%
10.6%
7.2%
10.6%
1.1%
1.1%
1.0%
1.2%
12.1%
12.7%
11.3%
10.4%
386
413
762
745
$12,963
$13,513
$12,919
$13,536
$14,752
$14,647
$14,771
$15,035
Quarterly Report (SEC form 10-Q)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
RESULTS OF OPERATIONS
August 13, 1999
The following table sets forth certain operating information for the Company:
As a percentage of total timeshare revenues:
Sales of Vacation Ownership Interests
Resort operating revenue
Interest income
Total timeshare revenues
As a percentage of sales of Vacation
Ownership Interests:
Cost of Vacation Ownership Interests sold
Sales and marketing
Provision for doubtful accounts
Contribution margin percentage from sale of
Vacation Ownership Interests (1)
As a percentage of resort operating revenue:
Cost of resort operations
As a percentage of total timeshare revenues:
General and administrative
Depreciation and amortization
Timeshare operating income
Selected operating data:
Vacation Ownership Interests sold (2)(3)
Average sales price per Vacation Ownership
Interest sold (excluding revenues from
Upgrades) (2)
Average sales price per Vacation Ownership
Interest sold (including revenues from
Upgrades) (2)
(1) Defined as: the sum of Vacation Ownership Interest sales less the cost of Vacation Ownership Interests sold
less sales and marketing expenses less a provision for doubtful accounts, divided by sales of Vacation Ownership
Interests.
(2) Reflects all Vacation Ownership Interests on an annual basis.
(3) Vacation Ownership Interests consist of 180 annual and 411 biennial for the three months ended June 30, 1998
and 192 annual and 441 biennial for the three months ended June 30, 1999, and 360 annual and 803 biennial for the
six months ended June 30, 1998 and 353 annual and 783 biennial for the six months ended June 30, 1999.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 1999
Sales of Vacation Ownership Interests increased 8.5% or $481,579 to $6,168,570 for the three months ended June
30, 1999, from $5,686,991 for the same period in 1998 and increased 0.6% or $72,265 to $11,320,079 for the six
months ended June 30, 1999 from $11,247,814 for the same period in 1998. The increase in the second quarter largely
reflects the improved closing rate (sales as a percentage of tours) at the Sedona sales office. The average sales
price per Vacation Ownership Interest sold (excluding revenues from Upgrades) increased 4.2% or $550 to $13,513
for the three months ended June 30, 1999, from $12,963 for the same period in 1998 and increased 4.8% or $617 to
$13,536 for the six months ended June 30, 1999 from $12,919 for the same period in 1998 reflecting 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.
The number of Vacation Ownership Interests sold increased 7.0% from 386 in the three months ended June 30, 1998
to 413 for the same period in 1999 due to the improved closing rate at the Sedona sales office, and decreased 2.2%
from 762 in the six months ended June 30, 1998 to 745 for the same period in 1999 largely due to lower tour flow
to the South Bend sales office. Sales of Vacation Ownership Interests in the three and six months ended June 30,
1999 included 441 and 783 biennial Vacation Ownership Interests (counted as 220.5 and 391.5 annual Vacation Ownership
Interests) compared to 411 and 803 biennial Vacation Ownership Interests (counted as 205.5 and 401.5 annual Vacation
Ownership Interests) in the same periods in 1998, respectively.
Upgrade revenue, included in Vacation Ownership Interest sales, decreased 32.2% to $467,863 for the three months
ended June 30, 1999 from $689,812 for the same period in 1998 and decreased 20.8% to $1,116,305 for the six months
ended June 30, 1999 from $1,409,825 for the same period in 1998, because second quarter 1998 sales included the
initial introduction of ILX Premiere Vacation Club. The Company made special offers to introduce the program to
its existing owners, which generated significant upgrade activity in the second quarter of 1998. The second quarter
average sales price per Vacation Ownership Interest sold (including Upgrades) was comparable between periods and
increased to $15,035 for the six months ended June 30, 1999 from $14,771 for the same period in 1998 because of
the inclusion in the 1999 sales mix of sales to new customers of the higher priced ILX Premiere Vacation Club Vacation
Ownership Interests, net of reduced Upgrade Sales.
Resort operating revenues increased 9.4% and 11.3% or $288,797 and $633,467 to $3,357,742 and $6,220,745 for the
three and six month periods ending June 30, 1999, respectively, reflecting the opening of Varsity Clubs of America
- Tucson Chapter in the third quarter of 1998. Cost of resort operations as a percentage of resort operating revenue
improved to 90.7% from 95.6% and to 94.2% from 99.3% for the first quarter and first six months of 1999, respectively,
due to increased operating efficiency at Los Abrigados Resort & Spa and because 1998 expenses included the
initial operating costs of Varsity Clubs of America - Tucson Chapter, which did not open to revenue paying guests
until July 1998.
Interest income increased 82.1% to $884,577 for the three months ended June 30, 1999 from $485,666 for the same
period in 1998 and increased 76.6% to $1,648,710 for the six months ended June 30, 1999 from $933,673 for the same
period in 1998 as a result of the increase in customer notes retained by the Company consistent with its strategy
to retain and borrow against, rather than sell, the majority of its customer notes.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales increased from 14.4%
for the three months ended June 30, 1998 to 14.9% for the same period in 1999 and were comparable at 14.3% for
the six months ended June 30, 1998 and 1999. The second quarter 1999 increase reflects the greater upgrade revenue
in 1998, for which there is no associated product cost, and variances in product mix between periods.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Sales and marketing as a percentage of sales of Vacation Ownership Interests were comparable at 61% for the three-month
periods ended June 30, 1999 and 1998, and increased to 63% for the six-month period ended June 30, 1999 from 61%
for the same period in 1998, reflecting greater costs of tour generation to the South Bend sales office in 1999,
lower closing rates in the Sedona sales office in the first quarter of 1999, and greater upgrade sales in the second
quarter of 1998. Marketing and sales costs are generally a smaller percentage of revenue on upgrade sales than
on sales to new customers.
The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales is comparable between
years.
General and administrative expenses increased to 10.6% of total timeshare revenues in both the three and six month
periods ended June 30, 1999 compared to 6.7% and 7.2% for the same periods in 1998, to $1,101,582 for the three
months ended June 30, 1999 from $617,308 for the same period in 1998 and to $2,032,142 for the six months ended
June 30, 1999 from $1,277,680 for the same period in 1998. The increases in 1999 reflect development and implementation
of centralized reservations, owner services and reporting systems to support ILX Premiere Vacation Club and to
provide operating efficiencies for expected future growth. In addition, first quarter 1998 general and administrative
expenses were reduced by property tax reductions related to successful appeals of property tax assessments and
1999 general and administrative expenses include property taxes, insurance and other expenses related to Varsity
Clubs of America - Tucson Chapter.
The 73.8% increase in interest expense from $401,618 for the three months ended June 30, 1998 to $698,094 for the
same period in 1999 and 51.1% increase in interest expense from $907,133 for the six months ended June 30, 1998
to $1,370,375 for the same period in 1999, reflect 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.
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 six months ended June 30, 1998 and 1999, cash
(used in)/provided by operations was $(3,458,467) and $153,008, respectively. The negative cash flow in 1998 was
due primarily to an increase of $2,999,715 in resort property under development, which includes the development
of Varsity Clubs of America - Tucson Chapter, which was financed in large part through a construction loan and
lease financing. Because the Company uses significant amounts of cash in the development and marketing of Vacation
Ownership Interests, but collects the cash on the customer notes receivable over a long period of time, borrowing
against and/or selling receivables is a necessary part of its normal operations.
Cash provided by financing activities of $1,749,804 for the first six months in 1999 was lower than the $6,435,705
of 1998 because 1999 reflects 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), and because 1998 reflects the proceeds, net of offering costs, of the follow-on offering
of 1.6 million shares of common stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
For regular federal income tax purposes, the Company reports substantially all of its non-factored financed Vacation
Ownership Interest sales under the installment method. Under the installment method, the Company recognizes income
on sales of Vacation Ownership Interests only when cash is received by the Company in the form of a down payment,
as installment payments or from proceeds from the sale of the customer note. The deferral of income tax liability
conserves cash resources on a current basis. Interest may be imposed, however, on the amount of tax attributable
to the installment payments for the period beginning on the date of sale and ending on the date the related tax
is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the
interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain
an accrual for any interest expense that would be paid on the deferred taxes related to the installment method,
as the interest expense is not estimable.
At December 31, 1998, the Company, excluding its Genesis subsidiary, had NOL carryforwards of approximately $4.3
million, which expire in 2001 through 2012. At December 31, 1998, Genesis had federal NOL carryforwards of approximately
$1.7 million, which are limited as to usage because they arise from built in losses of an acquired company. In
addition, such losses can only be utilized through the earnings of Genesis and are limited to a maximum of $189,000
per year. To the extent the entire $189,000 is not utilized in a given year, the difference may be carried forward
to future years. Any unused Genesis NOLs will expire in 2008.
In addition, Section 382 of the Internal Revenue Code imposes additional limitations on the utilization of NOLs
by a corporation following various types of ownership changes, which result in more than a 50% change in ownership
of a corporation within a six-year period. Such changes may result from new Common Stock issuances by the Company
or changes occurring as a result of filings with the Securities and Exchange Commission of Schedules 13D and 13G
by holders of more than 5% of the Common Stock, whether involving the acquisition or disposition of Common Stock.
If such a subsequent change occurs, the limitations of Section 382 would apply and may limit or deny the future
utilization of the NOL by the Company, which could result in the Company paying substantial additional federal
and state taxes.
USES OF CASH
Investing activities typically reflect a net use of cash because of capital additions and loans to customers in
connection with the Company's Vacation Ownership Interest sales. Net cash used in investing activities for the
six months ended June 30, 1998 and 1999 was $3,029,498 and $3,539,194, respectively.
The Company requires funds to finance the acquisitions of property for future resort development and to further
develop the existing resorts, as well as to make capital improvements and support current operations. The Company
intends to build twelve additional cabins at Kohl's Ranch commencing in 1999, for which a financing commitment
equal to the construction cost is in place.
Customer defaults have a significant impact on cash available to the Company from financing customer notes receivables
in that notes which are more than 60 to 90 days past due are not eligible as collateral. As a result, the Company
in effect must repay borrowings against such notes or buy back such notes if they were sold with recourse.
On April 9, 1999 (effective January 1, 1999), the Company formed the ILX Resorts Incorporated Employee Stock Ownership
Plan and Trust ("ESOP"). The intent of the ESOP is to provide a retirement program for employees which
aligns their interests with those of the Company. During the second quarter of 1999 the Company declared a $200,000
contribution to the ESOP and funded that contribution in cash. The ESOP used the contribution to purchase 93,400
shares of the Company's common stock in the open market in April and May 1999. In July 1999, the Company declared
and contributed an additional $50,000 to the ESOP and
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
the ESOP purchased 20,500 shares of ILX common stock in the open market. No additional contributions are expected
for the 1999 Plan year. The Plan, however, 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 June 30, 1999, approximately $37 million of the $40 million in 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) and
prime plus 3% ($3.5 million). The $3.5 million and $40 million commitments expire in 2001 and 2002, respectively.
At June 30, 1999, approximately $31.7 million is available under these commitments.
In the future, the Company may negotiate additional credit facilities, issue corporate debt, issue equity securities,
or any combination of the above. Any debt incurred or issued by the Company may be secured or unsecured, may bear
interest at fixed or variable rates of interest, and may be subject to such terms as management deems prudent.
There is no assurance that the Company will be able to secure additional corporate debt or equity at or beyond
current levels or that the Company will be able to maintain its current level of debt.
The Company believes available borrowing capacity, together with cash generated from operations, will be sufficient
to meet the Company's liquidity, operating and capital requirements for at least the next 12 months.
SEASONALITY
The Company's revenues are moderately seasonal with the volume of ILX owners, hotel guests and Vacation Ownership
Interest exchange participants typically greatest in the second and third fiscal quarters. As the Company expands
into new markets and geographic locations it may experience increased or additional seasonality dynamics which
may cause the Company's operating results to fluctuate.
YEAR 2000 ISSUES
The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process
data fields containing a 2-digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000
approaches, such systems may be unable to accurately process certain date-based information.
The Company believes it has identified all significant applications that will require modifications to ensure Year
2000 Compliance. Internal and external resources are currently being used to test Year 2000 Compliance and make
any additional modifications where required. The identification of needed modifications and upgrades of all significant
internal applications was complete at December 31, 1998.
In addition, the Company is communicating with others with whom it does significant business to determine their
Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Compliance issues. However, there can be no guarantee that the systems of other companies on which the Company's
systems rely will be timely converted, or that a failure to convert by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance activities has not been and is not anticipated to be
material to its financial position or results of operations in any given year. Since the Company commenced its
assessment of its Year 2000 Compliance during early 1998, it has expended approximately $70,000 and estimates additional
future costs of approximately $30,000, consisting primarily of software purchases and associated training and consulting
services. In addition, certain employees of the Company have devoted their time to assessing and implementing the
Company's Year 2000 Compliance, the costs of which have not been separately allocated by the Company. These costs
and the date on which the Company plans to complete the Year 2000 modification and testing processes are based
on management's best estimates, which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ from those plans.
The Company is in the process of developing a contingency plan in the event that any of its systems or the systems
of any third party with which it has a material relationship are not Year 2000 Compliant, and expects to have the
plan complete by September 30, 1999. In the event that the Company is vulnerable to any such Year 2000 Compliance
issue, the worst case scenario could include any or all of the following:
1. Inability to timely collect payments on customer notes; 2. Inability to timely or properly bill customers for
resort charges; 3. Reduction in effectiveness of generating tours to sales offices; 4. Inability to purchase goods
(including food, beverages and operating supplies) from existing sources, thereby forcing the Company to use alternative
vendors at potentially less favorable pricing; 5. Inability to process payroll and/or perform other accounting
functions on an efficient basis; and 6. Suspension of some or all operations.
INFLATION
Inflation and changing prices have not had a material impact on the Company's revenues, operating income and net
income during any of the Company's six most recent fiscal years or the six months ended June 30, 1999. However,
to the extent inflationary trends affect short-term interest rates, a portion of the Company's debt service costs
may be affected as well as the rates the Company charges on its customer notes.