Item 3. Legal Proceedings
Although the Company may be subject to litigation from time to time in the ordinary course of its business, it is not a party to any pending or threatened legal proceedings that it believes will have a material impact on its business.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5.
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 quoted on the Nasdaq SmallCap Market. Since February 11, 1998, the Common Stock has been listed on the American Stock Exchange. As of December 31, 1997, the Common Stock was held by approximately 1,158 holders of record. No dividends on Common Stock have been declared by the Company since inception and none are anticipated in the foreseeable future.
Common Stock --------------------- High Low ---- --- Year Ended December 31, 1996 First Quarter $ 6.90 $ 5.00 Second Quarter 9.70 5.65 Third Quarter 8.15 5.95 Fourth Quarter 7.50 4.85 Year Ended December 31, 1997 First Quarter $ 6.88 $ 5.00 Second Quarter 6.88 3.13 Third Quarter 8.44 3.91 Fourth Quarter 8.75 5.15
Item 6.
Item 6. Selected Consolidated Financial Information
The selected consolidated historical financial information set forth below for the five years ended December 31, 1997 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."
Item 7.
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 four resorts in Arizona, one in Indiana, one in Colorado and the Company is constructing a seventh resort in Tucson, Arizona.
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.
Results Of Operations
The following table sets forth certain operating information for the Company.
- --------------------
(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 2,195, 2,320 and 2,512 biennial and annual Vacation Ownership Interests for the years ended December 31, 1995, 1996 and 1997, respectively.
Comparison of Year Ended December 31, 1996 to December 31, 1997
Sales of Vacation Ownership Interests increased 22.4% or $4.4 million in 1997 to $24.0 million from $19.6 in 1996. The increase reflects both an increase in sales prices and an expanded marketing program whereby existing ILX Owners were offered an opportunity to purchase an Upgrade. Upgrade revenue, included in sales of Vacation Ownership Interests, increased 200% from $1.0 million in 1996 to $3.0 million in 1997. The average sales price per Vacation Ownership Interest sold (including Upgrades) increased 14.9% from $12,573 in 1996 to $14,446 in 1997 as a result of increased sales prices and the additional Upgrade sales. 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 number of Vacation Ownership Interests sold increased 6.3% from 1,562 in 1996 to 1,660 in 1997. The average sales price per Vacation Ownership Interest sold (excluding Upgrades) increased 5.8% from $11,963 in 1996 to $12,656 in 1997. Sales of Vacation Ownership Interests in 1997 included 1,705 biennial Vacation Ownership Interests (counted as 853 annual Vacation Ownership Interests) compared to 1,517 biennial Vacation Ownership Interest sales (counted as 759 annual Vacation Ownership Interests) in 1996. The increase in average price per Vacation Ownership Interest sold (excluding Upgrades) in 1997 resulted both from increased prices and from the Company's increased sales of biennial Vacation Ownership Interests (the sales price of which is more than one-half of an annual Vacation Ownership Interest sales price).
Resort operating revenues and cost of resort operations are comparable between the two periods.
The 51.4% increase in interest income from $997,500 in 1996 to $1,510,208 in 1997 is a result of the increased Customer Notes retained by the Company and an increase in interest rates charged by the Company on its Customer Notes, effective July 1997.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales decreased from 15.8% in 1996 to 13.4% in 1997 due to the increased sales of biennial Vacation Ownership Interests (which have a lower cost of sales percentage than an annual Vacation Ownership Interest) and a larger amount of Upgrade sales in 1997.
Sales and marketing as a percentage of sales of Vacation Ownership Interests increased to 57.9% in 1997 compared to 53.4% in 1996 due to (i) increased costs of generating tours to ILX Resorts in 1997, (ii) increased costs from the opening of a new sales office in Tempe in 1997, (iii) increased costs from the opening of a Tucson sales office in 1997 (which is anticipated to achieve operating efficiency consistent with the Company's standards following opening of VCA-Tucson), and (iv) recognition in 1996 of benefits from premiums issued to potential customers in prior periods which expired without redemption. Increases in costs of generating tours in 1997 is due in part to the trial of several new marketing strategies which were determined ineffective and were therefore terminated in July and August 1997. Additionally, the Tempe sales office was not retained beyond the trial period (April-July 1997) due to high marketing costs and low closing rates.
The provision for doubtful accounts as a percentage of Vacation Ownership Interest sales remained comparable between years.
General and administrative expenses increased 30.4% to $3.0 million in 1997 from $2.3 million in 1996. General and administrative expenses increased to 8.2% as a percentage of total timeshare revenues in 1997 from 7.3% in 1996 due to an increase in payroll expense, professional fees and rent expense.
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 1996 to 1997 reflects (i) the buyout by the Company of the LAP minority interest in August 1997 and (ii) reduced LAP resort income.
Comparison of Year Ended December 31, 1995 to the Year Ended December 31, 1996
Sales of Vacation Ownership Interests decreased by 8.4% or $1.8 million to $19.6 million in 1996 from $21.4 million in 1995. Part of this decline reflects operation through April 1995 of a Phoenix sales office (which generated approximately $771,000 in sales in 1995 prior to closure) and the recognition of approximately $513,000 in sales of Vacation Ownership Interests in VCA-South Bend written in 1994 but for which revenue recognition was deferred until completion of construction in 1995. Upgrade revenue, included in Vacation Ownership Interest sales, decreased 28.6% from $1.4 million in 1995 to $1.0 million in 1996. The average sales price per Vacation Ownership Interest sold (including Upgrades) increased 10.5% from $11,377 in 1995 to $12,573 in
1996 as a result of increased sales of biennial Vacation Ownership Interests which was partially offset by the decline in Upgrade sales.
The number of Vacation Ownership Interests sold decreased 16.8% from 1,877 in 1995 to 1,562 in 1996. The average sales price of Vacation Ownership Interests sold (excluding Upgrades) increased 12.6% from $10,624 in 1995 to $11,963 in 1996 due primarily to an increase in the number of biennial Vacation Ownership Interests sold. Sales of Vacation Ownership Interests in 1996 included 1,517 biennial interests (counted as 759 annual Vacation Ownership Interests) compared to 636 (counted as 318 annual Vacation Ownership Interests) in 1995. The increase in 1996 biennial sales was the result of the Company's increased sales and marketing efforts in this market segment and its ability to charge a sales price that was significantly greater than one-half of the sales price of an annual Vacation Ownership Interest. The increased emphasis upon sales of biennial Vacation Ownership Interests at higher prices and the closure of the Phoenix sales office resulted in a reduction in sales of annual Vacation Ownership Interests from 1,559 in 1995 to 803 in 1996.
Resort operating revenue increased 22.5% from $8.9 million in 1995 to $10.9 million in 1996. The increase reflects a full year of operations in 1996 of both VCA-South Bend, which opened in mid-August 1995, and Kohl's Ranch, which was acquired on June 1, 1995.
The 59.1% increase in interest income from $627,081 in 1995 to $997,500 in 1996 is a result of the increased amount of Customer Notes retained by the Company as well as increased balances of invested cash.
Cost of Vacation Ownership Interests sold as a percentage of Vacation Ownership Interest sales decreased from 16.5% in 1995 to 15.8% in 1996 due to an increase in the number of biennial sales.
Sales and marketing costs as a percentage of Vacation Ownership Interests sales increased from 51.4% in 1995 to 53.4% in 1996 due to a promotional program in 1996 which offered certain purchasers of Vacation Ownership Interests a vacation experience (including accommodations, airfare and car rental). While the cost of the vacation experience was added to the purchase price, it had the effect of increasing sales and marketing costs as a percentage of sales of Vacation Ownership Interests. Additionally, 1995 included the recognition of $513,400 of revenue recognized on the percentage of completion method but for which marketing costs were recognized in 1994 when incurred.
The decrease in the provision for doubtful accounts as a percentage of sales of Vacation Ownership Interests from 5.8% in 1995 to 3.0% in 1996 reflects the expected performance of the portfolio of consumer paper based on the Company's collection experience in the prior years, both sold and unsold.
The decrease in cost of resort operations as a percentage of resort operating revenue to 95.1% in 1996 from 101.3% in 1995 reflects lower costs of operations at Los Abrigados as a percentage of revenue due to increased occupancy, increased ILX Owner rates and reductions in operating costs, net of the costs of operations for VCA-South Bend and Kohl's Ranch, which began operations in 1995 and accordingly had lower occupancy than mature resorts.
General and administrative expenses decreased 39.5% from $3.8 million in 1995 to $2.3 million in 1996 due in part to operating efficiencies in 1996 and unusual expenses in 1995. General and administrative expense decreased to 7.3% as a percentage of total timeshare revenues in 1996 from 12.3% in 1995. In 1995, approximately $400,000 of expenses were recognized relating to a $10.0 million convertible bond offering which was abandoned due to the underwriter's inability to place the bonds. Proceeds from the failed offering were intended for Varsity Clubs expansion; however, as a result of abandoning the bond offering, the Company canceled its options on certain Varsity Clubs sites, and $320,000 of related costs were written-off because the Company no longer expected to build at these sites within the option periods.
The increase in interest expense from $1.3 million in 1995 to $2.0 million in 1996 reflects an increase in notes payable, including the note payable for the construction of VCA-South Bend, which interest had been capitalized through completion in August 1995, the acquisition notes for Kohl's Ranch, Lomacasi Cottages and the Inn at Los Abrigados, and increased borrowings against consumer notes receivable.
Income tax expense increased from a benefit in 1995 to a provision in 1996 because 1995 included a reduction in the valuation allowance, reflecting management's estimate of the future benefit to be derived from the utilization of Genesis NOL carryovers, and also a result of increased net income in 1996.
Minority interests are comparable between years. However, 1996 reflects an increase in Los Abrigados net income between years due to increased hotel operating income, increased Vacation Ownership Interest sales prices and reduced costs of Vacation Ownership Interests sold, depreciation and bad debt provision. For 1995, the minority interests include the minority interest ownership of the Genesis land parcels sold in 1995.
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 1995, 1996 and 1997, cash provided by (used in) operations was $(0.7) million, $4.0 million, and $2.8 million, respectively. The negative cash flow in 1995 was due primarily to an increase in resort property held for timeshare sales of $4.4 million resulting from the completion of construction and opening of VCA-South Bend, which was financed primarily through borrowings of $4.2 million in 1995. 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, 1997, the Company, excluding Genesis, had NOL carryforwards of $4.8 million, which expire in 2001 through 2012. At December 31, 1997, Genesis had federal NOL carryforwards of $1.9 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 NOL's 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.
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 1995, 1996 and 1997 was $3.2 million, $3.5 million and $6.5 million, respectively. Cash used in investing activities increased $3.0 million in 1997 compared to 1996, due to the Company's purchase of the minority interest in LAP (see Note 11 of Notes to Consolidated Financial Statements) which included a cash payment of approximately $820,000 and due to the Company's strategy of hypothecating its Customer Notes rather than selling them.
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 is currently constructing VCA -- Tucson, Arizona at an aggregate estimated cost of $7.5 million. Construction of the facility commenced in 1997 and is expected to be completed in April 1998. The Company has a commitment for construction financing in the amount of $6.55 million, which is expected to be sufficient to build and furnish the property. At December 31, 1997, $3.1 million had been drawn against this commitment.
Customer defaults have a significant impact on cash available to the Company from financing Customer Notes receivables in that notes which are more than 60 to 90 days past due are not eligible as collateral. As a result, the Company in effect must repay borrowings against such notes or buy back such notes if they were sold with recourse.
Credit Facilities
The Company has agreements with financial institutions for total commitments aggregating $20.0 million under which the Company may sell certain of its Customer Notes. These agreements provide for sales on a recourse basis with a percentage of the amount sold held back by the financial institution as additional collateral. Notes may be sold at discounts or premiums to yield the consumer market rate as defined by the financial institution. At December 31, 1997, approximately $6.0 million was available under these commitments.
The Company also has financing commitments aggregating $19.2 million whereby the Company may borrow against notes receivable pledged as collateral. These borrowings bear interest at a rate of prime plus 3.25% to prime plus 5.0% and expire at various dates from 1998 through 2000. At December 31, 1997, approximately $13.0 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
As with other organizations, some of the Company's computer programs were originally designed to recognize calendar years by their last two digits. Calculations performed using these truncated fields would not work properly with dates from the year 2000 and beyond. The Company has initiated efforts to remedy this situation and expects all programs to be corrected and tested prior to the year 2000. The incremental costs of this project are not expected to have a material effect of the Company's consolidated financial statements or results of operations.
Inflation
Inflation and changing prices have not had a material impact on the Company's revenues, operating income and net income during any of the Company's three most recent fiscal years. 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.
Item 8. Financial Statements and Supplementary Data
See the information set forth on Index to Consolidated Financial Statements appearing on page of this Report on Form 10-K.
Item 9.
Item 9. Changes in Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information in response to this Item is incorporated herein by reference from the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the most recent fiscal year covered by this Form 10-K.
Item 11.
Item 11. Executive Compensation
Information in response to this Item is incorporated herein by reference from the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the most recent fiscal year covered by this Form 10-K.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information in response to this Item is incorporated herein by reference from the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the most recent fiscal year covered by this Form 10-K.
Item 13.
Item 13. Certain Relationships and Related Transactions
Information in response to this Item is incorporated herein by reference from the Company's Definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the most recent fiscal year covered by this Form 10-K.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Consolidated Financial Statements Page or Method of Filing --------------------------------- ------------------------
(i) Consolidated Financial Statements and Pages through Notes to Consolidated Statements of the Registrant, including Consolidated Balance Sheets as of December 31, 1997 and 1996 and Consolidated Statements of Operations, Shareholders' Equity and Cash Flows for each of the three years ended December 31, 1997, 1996 and 1995.
(ii) Report of Deloitte & Touche LLP Page
(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
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 30th day of March, 1998.
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.
INDEPENDENT AUDITORS' REPORT
Shareholders of ILX Resorts Incorporated Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of ILX Resorts Incorporated (formerly ILX Incorporated) and Subsidiaries (the "Company") as of December 31, 1996 and 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 audit 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, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1996 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/ DELOITTE & TOUCHE LLP
March 6, 1998 Phoenix, Arizona
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
See notes to consolidated financial statements
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company's operations also include marketing of skin and hair care products which are not considered significant to resort operations.
Reverse Stock Split
On January 9, 1998, the Company's shareholders approved an amendment to the Company's Articles of Incorporation to effect a one-for-five reverse stock split of the Company's issued and outstanding shares of common stock. The reverse stock split has been retroactively reflected in the accompanying financial statements.
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 market. 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, ------------------------------------ 1995 1996 1997 ---------- ---------- ---------- Interest paid $1,271,000 $1,746,000 $2,222,000 Income taxes paid 221,000 723,000 78,000 Capitalized interest 228,000 95,000 213,000
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Matters
In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which was effective for the Company beginning January 1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply APB Opinion No. 25, which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company did not grant any stock options to employees in 1996 or 1997. The Company intends to continue to apply APB Option No. 25 to any future stock options that may be granted to employees.
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS 125"), which is effective for fiscal years beginning after December 31, 1996. During 1997, SFAS 125 was adopted and had no significant impact on the Company's financial position, results of operations or cash flows.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 129, "Disclosure of Information about Capital Structure" ("SFAS 129"), which is effective for financial statements for periods ending after December 15, 1997 and establishes standards for disclosing information about an entity's capital structure. During 1997, SFAS 129 was adopted and had no significant effect on the Company's disclosures about its capital structure.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which is 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 does not believe the adoption of SFAS 130 will have a material impact on its financial statement presentation or related disclosures.
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.
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.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Notes Receivable, Net
Notes receivable consist of the following:
December 31, ---------------------------- 1996 1997 ------------ ------------ Vacation Ownership Interest notes receivable $ 10,559,309 $ 14,522,191 Holdbacks by financial institutions 3,481,061 4,091,294 Other receivables 275,347 199,164 Allowance for possible credit losses (2,569,997) (2,951,028) ------------ ------------ $ 11,745,720 $ 15,861,621 ============ ============
Notes generated from the sale of Vacation Ownership Interests generally bear interest at annual rates ranging from 11% to 16% and have terms of five to ten years. The notes are collateralized by deeds of trust on the Vacation Ownership Interests sold.
The Company has agreements with financial institutions for total commitments aggregating $20 million under which the Company may sell certain of its notes receivable. These agreements provide for sales on a recourse basis with a percentage of the amount sold held back by the financial institution as additional collateral. Notes may be sold at discounts to yield the consumer market rate as defined by the financial institution. At December 31, 1997, approximately $6.0 million is available under these commitments.
The Company also has financing commitments aggregating $19.2 million whereby the Company may borrow against notes receivable pledged as collateral. These borrowings bear interest at prime plus 3.25% to prime plus 5% and expire at various dates from 1998 through 2000. At December 31, 1997, approximately $13.0 million is available under these commitments.
At December 31, 1996 and 1997, the Company had approximately $22 million and $24 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"), Golden Eagle Resort and Varsity Clubs of America-South Bend ("VCA-South Bend").
At December 31, 1996 and 1997, the Company had approximately $188,000 and $173,000, respectively, in additional outstanding notes sold on a recourse basis to related parties.
At December 31, 1997, notes receivable in the amount of approximately $302,000 have been contributed to the Company's Series A Preferred Stock sinking fund and therefore their use is restricted (Note 13).
The following summarizes activity in the allowance for possible credit losses:
Year Ended December 31, ----------------------------------------- 1995 1996 1997 ----------- ----------- ----------- Beginning balance $ 1,262,483 $ 2,410,900 $ 2,569,997 Provision for doubtful accounts 1,235,417 590,653 702,417 Amounts written off (87,000) (431,556) (321,386) ----------- ----------- ----------- Ending balance $ 2,410,900 $ 2,569,997 $ 2,951,028 =========== =========== ===========
The Company considers all notes receivable past due in excess of 90 days to be delinquent. At December 31, 1997, $3.2 million in principal, or 8.2%, of the retained notes and notes previously sold, which are recourse to the Company, were more than 90 days past due.
At December 31, 1996 and 1997, the above allowance includes $440,000 and $480,000 respectively, for notes sold with recourse.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Resort Property Held For Vacation Ownership Interest Sales
Resort property held for Vacation Ownership Interest sales consists of the following:
December 31, ---------------------------- 1996 1997 ---------------------------- VCA-- South Bend $ 5,692,165 $ 4,421,308 Los Abrigados 4,325,052 3,826,206 Golden Eagle Resort 2,242,947 2,433,410 Kohl's Ranch Lodge 2,110,012 2,054,609 The Inn at Los Abrigados 773,911 1,168,320 Roundhouse Resort -- 715,305 Ventura Resort 63,000 39,000 Costa Vida Resort 40,500 8,500 ----------- ----------- $15,247,587 $14,666,658 =========== ===========
In September 1994, the Company acquired, for $15,000, an option from an affiliate to purchase 667 Vacation Ownership Interests in Los Abrigados that were sold in 1992. The terms of the option agreement provide that the seller may sell to the Company or the Company may acquire from the seller up to 25 Vacation Ownership Interests per month and, in addition, up to one half of the remainder of the 667 Vacation Ownership Interests per year, for $2,100 per Vacation Ownership Interest. The seller must provide the Company with written notice of its intent to sell 30 days in advance of a monthly sale and 180 days in advance of an annual sale. The Company had purchased 560 Vacation Ownership Interests under this option as of December 31, 1997.
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. The first Varsity Clubs facility, located near the University of Notre Dame, was completed in August 1995. Revenues of $513,400, net of related selling costs of $148,205, were deferred at December 31, 1994 and were recognized in 1995 when construction was complete. The Company is currently constructing a second Varsity Club in Tucson, Arizona (Note 5).
The Company acquired approximately one-half acre of improved property, to be 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 are expected to begin in 1998.
In December 1997, the Company acquired 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. The Company intends to construct additional Vacation Ownership Interests on the property commencing in 1998.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
Stock options to purchase 60,400 shares of common stock at prices ranging from $7.50 per share to $8.125 per share were outstanding at December 31, 1997 but were not included in the computation of diluted net income per share because the options' exercise prices were greater than the average market price of common shares. These options expire at various dates between 1999 and 2004.
Note 5. Resort Property under Development
In July 1995, the Company acquired for $1,002,000 a two-acre parcel in Tucson, Arizona, near the University of Arizona, to be the site of a second Varsity Clubs. The Company made a down payment of $300,600 with the remaining balance of $701,400 financed by a note payable to the seller. Construction of the facility commenced in 1997 and is expected to be completed in 1998. The Company has a commitment for construction financing in the amount of $6.55 million (Note 9), which is expected to be sufficient to build and furnish the property.
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. The fee is amortized to expense and was payable to the affiliates at the rate of $100 per Los Abrigados Vacation Ownership Interest sold. At December 31, 1996 and 1997, deferred assets included $287,400 and $195,150, respectively, of guarantee fees, net of accumulated amortization.
As additional consideration for the guarantee, the affiliates were entitled to receive a percentage of certain amounts held back on the sale of notes receivable by a financial institution as collateral. The amount was paid as the amounts held back were collected from the financial institution.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Property and Equipment, Net
Property and equipment consists of the following:
December 31, ------------------------------- 1996 1997 ----------- ----------- Land $ 1,658,500 $ 379,704 Buildings and improvements 3,290,834 3,428,956 Leasehold improvements 498,198 5,719 Furniture and fixtures 415,714 498,645 Office equipment 269,129 318,020 Computer equipment 156,611 228,812 Vehicles 26,829 56,279 ----------- ----------- 6,315,815 4,916,135 Accumulated depreciation (1,438,348) (1,443,236) ----------- ----------- $ 4,877,467 $ 3,472,899 =========== ===========
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. At December 31, 1996, property and equipment, net of accumulated depreciation, included $2,162,280 related to Lomacasi Cottages, which served as collateral for two notes payable aggregating $2,156,842 at December 31, 1996 (Note 9). In December 1997, the Company sold its general partner interest in Lomacasi Cottages to a non-affiliated buyer. In connection with the sale, the buyer assumed the 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:
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the income tax expense (benefit) and the amount that would be computed using statutory federal income tax rates is as follows:
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, 1997.
The Company is subject to Alternative Minimum Tax ("AMT") as a result of the deferred income that results from the installment sales treatment of timeshare 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.
In 1994, due to the profitability of Los Abrigados, the improvement in the Arizona real estate market and the development of tax strategies, which include the acquisition by Genesis of Vacation Ownership Interests in resort properties that have historically been sold on a profitable basis, it was concluded that more likely than not a portion of the Genesis net operating loss ("NOL") carryforwards and the remainder of Los Abrigados tax benefits would be utilized. Accordingly, the valuation allowance was reduced in 1994. In 1995, due to the continued expansion and profitability of Vacation Ownership Interests activity it was determined that the balance of the Genesis NOL's would be utilized and the remaining valuation allowance was eliminated.
At December 31, 1997, the Company, excluding Genesis, had NOL carryforwards of approximately $4,756,000, which expire in 2001 through 2012. At December 31, 1997, Genesis had federal NOL carryforwards of approximately $1,892,000 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.
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.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Notes Payable
Notes payable consist of the following:
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1997, approximately $15.8 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, 1997 are as follows:
1998 $ 6,053,856 1999 1,357,384 2000 2,054,078 2001 3,248,636 2002 4,195,373 Thereafter 2,975,152 ------------ $ 19,884,479 ============ Note 10. Notes Payable to Affiliates
Notes payable to affiliates consist of the following:
Future maturities of notes payable to affiliates at December 31, 1997 are as follows:
1998 $ 257,022 1999 1,109,078 2000 200,000 2001 200,000 2002 400,000 ------------ $ 2,166,100 ============
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Total interest expense on notes payable to affiliates for the years ended December 31, 1995, 1996 and 1997 was approximately $222,000, $158,000 and $147,000, 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 (Notes 9 and 10).
Note 12. Commitments and Contingencies
Operating Leases
Future minimum lease payments on noncancelable operating leases at December 31, 1997 are as follows:
1998 $ 263,000 1999 206,000 2000 171,000 2001 107,000 2002 9,000 ------------ $ 756,000 ============
Total rent expense for the years ended December 31, 1995, 1996 and 1997 was approximately $490,000, $443,000 and $532,000, respectively.
Legal Proceedings
Although the Company may be subject to litigation from time to time in the ordinary course of its business, it is not a party to any pending or threatened legal proceedings that it believes will have a material impact on its business.
Note 13. Shareholders' Equity
Preferred Stock
At December 31, 1996 and 1997, preferred stock includes 60,152 and 59,845 shares of the Company's Series A Preferred Stock carried at $601,520 and $598,450, respectively. 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 $47,969 in 1996 and $47,894 in 1997. 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, 1997, notes receivable in the amount of approximately $302,000 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. The Company redeemed 5,035 shares of Series A Preferred Stock for $12,000 in 1996.
At December 31, 1996 and 1997, 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.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1996 and 1997, preferred stock also includes 276,957 and 265,623 shares of the Company's Series C Convertible Preferred Stock carried at $762,723 and $731,441, respectively. 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 are not declared in any year prior to the fifth anniversary of the Genesis merger date (November 1, 1993), such undeclared dividends ("Dividend Arrearage") may be 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, 1995, 1996 and 1997, 7,524, 13,515 and 11,334 Series C Convertible shares were exchanged for 2,508, 4,505 and 3,778 common shares, respectively. For the years ended December 31, 1995, 1996, and 1997, 372, 702 and 797 common shares were issued to exchanging shareholders for their 1995, 1996 and 1997 dividend arrearage, respectively. ILX may redeem the Series C Preferred Stock commencing November 1, 1996, at $10 per share plus payment of all declared but unpaid dividends.
Common Stock
In March 1994, the Company issued warrants for 20,000 shares of ILX restricted common stock exercisable at a price of $8.125 per share, the approximate market value at date of issuance. The warrants were issued in conjunction with the early collection in March 1994, of a note receivable with a due date of December 31, 1997, in the amount of $900,000. The warrants expired without being exercised on June 30, 1997.
During 1995, 4,923 shares of restricted common stock valued at $29,232 were issued in exchange for services provided to the Company. The stock was valued at the approximate market price on the date of the agreement.
Effective June 1995, the Company entered into a one-year consulting agreement for investor relations, broker relations and public relations services. In exchange for the services to be provided, the Company issued 10,000 shares of restricted common stock in 1995 and 10,000 shares in 1996. The shares were valued at $5.9375 per share and the cost was recognized over a one-year period. In addition, during 1995, the Company granted options for 80,000 shares of common stock at $6.25 per share and 20,000 shares of common stock at $8.125 per share. During 1996, options for 50,000 shares were exercised at $6.25.
In June 1995, the Company issued 24,000 shares of restricted Common Stock as partial consideration for the acquisition of Kohl's Ranch Lodge.
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 on August 1, 1997 and will issue an additional 12,000 shares in March 1998. The shares issued and to be issued have been valued at $112,500. In accordance with the terms of the agreement, ILX has registered with the Securities and Exchange Commission the shares issued in August and will likewise cause the shares to be issued in February to be so registered. The parties intend for the agreement to remain in effect for a minimum of one year.
For the years ended December 31, 1995, 1996 and 1997, the Company issued 7,220, 14,500 and 17,240 shares of restricted common stock, or Treasury stock, valued at $26,837, $52,000 and $49,387, respectively, to employees in exchange for services provided.
Note 14. 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
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 268,275 shares.
Stock option transactions are summarized as follows: Outstanding at December 31, 1994 65,600 Options granted 110,000 Options canceled (1,000) ------- Outstanding at December 31, 1995 174,600 Options exercised (50,000) Options canceled (58,600) ------- Outstanding at December 31, 1996 66,000 Options canceled (5,600) ------- Outstanding at December 31, 1997 60,400 =======
The exercise price for options granted in 1995 ranged from $6.25 to $8.125 per share and includes options for 10,000 shares granted to directors. The exercise price for options exercised in 1996 was $6.25 per share for 50,000 shares. The exercise price for options outstanding at December 31, 1997 ranged from $7.50 to $8.125 per share. Options outstanding at December 31, 1997 have expiration dates as follows:
Year Ending Options for December 31, Shares ------------ ------
1999 12,500 2000 10,000 2004 37,900 ------ 60,400 ======
Note 15. Related Party Transactions
In addition to the related party transactions described elsewhere in the financial statements, the Company had the following related party transactions:
The Company leased from affiliates through October 1, 1996, 41 Vacation Ownership Interests in the Stonehouse at Los Abrigados at the rate of $1,000 per Vacation Ownership Interest per year. The Company paid $41,000 and $30,750 per year in lease payments to affiliates for the years ended December 31, 1995 and 1996. The affiliates paid maintenance fees to the Company on an annual basis for their ownership intervals of $650 per interval in 1995 and $714 per interval in 1996.
In June 1995, an affiliate of the Company purchased twenty-four (24) one-night intervals in VCA-South Bend for $90,000.
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 its Red Rock Collection building 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
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
back the building for a one-year term, with four one-year options to renew through December 2000. Rent of $44,000 was paid in 1996 and $48,000 in 1997.
In January 1996, an affiliate of the Company agreed to accept a discounted payment of $60,000 cash and $100,000 in a promissory note as full satisfaction of a remaining obligation of the Company to such affiliate of $173,225 in guarantee fees and $44,073 in holdbacks. The note was paid in full in January 1997.
In September 1996, the Company purchased from an affiliate twenty Vacation Ownership Interests in the Stonehouse at Los Abrigados for $260,000. Subsequently, the affiliate purchased 52 Vacation Ownership Interests in Kohl's Ranch for $260,000.
Note 16. Capital Leases
Leased assets included in resort property held for Vacation Ownership Interest sales and property and equipment totaled $1,097,720 and $1,132,033 (net of accumulated amortization of $369,880 and $456,032) at December 31, 1996 and 1997, respectively. The leases expire through 2000. Future minimum lease payments at December 31, 1997 are as follows:
1998 $ 366,848 1999 306,057 2000 113,246 ----------- Total 786,151 Less: Amounts representing interest (99,391) ----------- Net minimum lease payments $ 686,760 ===========
Note 17. 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. The Vacation Ownership Interests deed of trust serves as collateral on the note receivable. If a buyer of a Vacation Ownership Interest defaults, the Company generally must foreclose on the interest and attempt to resell it; the associated 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 sale 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
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Interests 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.
Notes 18. 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:
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 19. Subsequent Events
On February 2, 1998, the Company filed with the Securities and Exchange Commission a Registration Statement related to the proposed public offering by the Company of shares of its common stock.
ILX RESORTS INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20. Quarterly Financial Data (Unaudited)
Quarterly financial information is presented in the following summary.
Exhibits
to
1997 Form 10-K
ILX RESORTS INCORPORATED