ILX Resorts 10-K 2010
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. oYes xNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. oYes x No
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. xYes oNo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes o No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate the number of shares outstanding of each of the Registrant’s classes of stock, as of the latest practicable date.
As a result of the Company’s Chapter 11 filing and subsequent delisting, a value cannot be ascribed at June 30, 2009, to the Registrant’s common shares held by non-affiliates.
ILX RESORTS INCORPORATED
2009 Form 10-K Annual Report
Table of Contents
This Form 10-K contains certain “forward-looking statements,” including statements regarding, among other items, the Company’s growth strategy, industry and demographic trends, the Company’s ability to finance its operations and anticipated trends in its business. Actual results could differ materially from these forward-looking statements as a result of a number of factors, including, but not limited to, the Company’s need for additional financing, intense competition in various aspects of its business, its dependence on key personnel, general economic conditions, government and regulatory actions, the impact of our announcement of our voluntary filing under Chapter 11 of the United States Bankruptcy Code and of subsequent announcements related to the proceedings, the ability to continue as a going concern, the ability to obtain court approval of our motions in the Chapter 11 proceedings, the ability to develop, pursue, confirm and consummate one or more plans or joint plans of reorganization with respect to the Chapter 11 case, the ability to complete a sale of most of our assets to a third party, our ability to obtain and maintain normal terms with vendors and service providers and other factors discussed in this document and in the Company’s public filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on such forward-looking statements and no assurances can be given that such statements will be achieved. The Company undertakes no obligation to publicly update or revise any of the forward-looking statements contained herein.
Chapter 11 Bankruptcy Filings
On March 2, 2009 (the “Petition Date”), ILX Resorts Incorporated (“ILX” or the “Company”) and fifteen of its subsidiaries and limited liability companies (“the Debtors”) filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code (“the Bankruptcy Code”) in the United States Bankruptcy Court for the District of Arizona (“the Bankruptcy Court”). The cases are being jointly administered under Case Number 2:09-BK-03594-RTB. The Company cannot provide any assurance as to what values, if any, will be ascribed in the bankruptcy proceedings to various pre-petition liabilities, common stock and other securities. Accordingly, caution should be exercised with respect to existing and future investments in any of these liabilities or securities. Trading of the Company’s common stock on the NYSE AMEX exchange was suspended on March 2, 2009 and the stock was subsequently delisted on March 13, 2009.
As a result of its bankruptcy filing, the Company is periodically required to file various documents with and provide certain information to, the Bankruptcy Court, including statements of financial affairs, schedules of assets and liabilities and monthly operating reports in forms prescribed by federal bankruptcy law, as well as certain financial information on an unconsolidated basis. Such materials are prepared according to requirements of federal bankruptcy law. While they accurately provide then-current information required under federal bankruptcy law, they are nonetheless unconsolidated, unaudited and are prepared in a format different from that used in the Company’s consolidated financial statements filed under the securities laws. Accordingly, the Company believes that the substance and format do not allow meaningful comparison with its regular publicly disclosed consolidated financial statements. Moreover, the materials filed with the Bankruptcy Court are not prepared for the purpose of providing a basis for an investment decision relating to the Company’s securities, or for comparison with other financial information filed with the Securities and Exchange Commission.
Reasons for Bankruptcy
The Debtor’s Chapter 11 filings were due to prevailing economic conditions and unanticipated reductions in credit facilities caused by instability in the credit markets.
The Bankruptcy Court has approved various motions for relief designed to allow the Company to continue normal operations. The Bankruptcy Court’s orders authorize the Debtors, among other things, in their discretion to: a) pay certain pre-petition and post-petition employee wages, salaries and benefits and other employee obligations, b) pay vendors in the ordinary course for goods and services received from and after the Petition Date, c) continue maintenance of existing bank accounts and existing cash management systems, and d) use certain cash collateral.
Under the Bankruptcy Code, the Company may assume or reject certain unexpired leases subject to the Bankruptcy Court’s approval and certain other conditions. As of the filing date of this report, the Debtors have filed motions to reject seven operating leases; all of which have been granted. Various other filings have been made with respect to utilities, third party servicing firms, professional firm engagements and contract approvals.
Shortly after the Petition Date, the Debtors began notifying all known current or potential creditors of the Chapter 11 filing. The Debtors’ Chapter 11 filing automatically enjoined, or stayed, the continuation of any judicial or administrative proceeding or other actions against the Debtors or their property to recover on, collect or secure a claim arising prior to the Petition Date. Vendors are being paid for goods and services provided after the Petition Date in the ordinary course of business. The deadline for the filing of proofs of claims against the Debtors was September 15, 2009.
Proofs of Claim
As permitted under the bankruptcy process, certain of the Debtors’ creditors filed proofs of claim with the Bankruptcy Court. The total amount of the claims that were filed far exceed the Company’s estimate of ultimate liability. The Debtors believe some of these claims are invalid because they are duplicative, have been amended or superseded by later filed claims, are based on contingencies that have not occurred, or are inaccurate or not valid. Differences in amounts between claims filed by creditors and liabilities shown in our records are being investigated and will be resolved in connection with our claims resolution process. There can be no assurances at this time that the Company will not continue to record adjustments related to the ultimate amount of claims allowed.
Executory Contracts and Determination of Allowed Claims
Under the Bankruptcy Code, the Debtors may assume or reject certain executory contracts and unexpired leases. Claims may arise as a result of rejecting any executory contract or unexpired lease. As mentioned above, the Debtors have rejected seven operating leases. The consolidated financial statements do not include the effects of any claims from the rejection of these as the Company cannot estimate the amount that will be allowed by the Bankruptcy Court.
Plan of Reorganization
The Debtors had the exclusive right for 120 days after the Petition Date to file a plan of reorganization and an additional 60 days to obtain necessary acceptances of the plan. Due to ongoing discussions with the Company’s primary lender, a motion to extend exclusivity for an additional 45 days was filed and approved in June 2009. A second motion to extend exclusivity was granted, the Debtors filed a plan of reorganization and disclosure statement on August 28, 2009 and in September the Court extended the Debtors exclusive right to obtain necessary acceptances of the plan to December 1, 2009. The Debtor filed an Amended Joint Plan of Reorganization (“the Plan”) and First Amended Joint Disclosure Statement (“the Disclosure Statement”) on October 2, 2009. Also on October 2, 2009, the Bankruptcy Court entered its order approving the Disclosure Statement and establishing the solicitation and voting procedures for the Debtors’ Plan. The creditors and equity holders’ votes for or against, and any objections to the Debtors’ Plan were required to be filed on or before November 2, 2009. The confirmation hearing on the Debtors’ Plan was scheduled for November 10 and 12, 2009. The Company’s primary lender filed a Motion for Relief From Automatic Stay Regarding Debtors’ Real and Personal Property on August 15, 2009. The hearing on this motion was scheduled to be held in conjunction with the Plan confirmation hearing on November 10 and 12, 2009. The Debtors and their primary lender asked for an extension on November 12, 2009 until January 7, 2010 in order to work together on a mutually acceptable plan of reorganization. In January 2010, the Debtors and their primary lender reached an agreement, stipulated to the terms of the agreement in the bankruptcy court, and are now working together on a Joint Plan of Reorganization (“Joint Plan”) in which most of the Debtors assets will be sold to a third party.
A plan of reorganization will be deemed accepted by holders of claims against and equity interests in the Debtors if (1) at least one-half in number and two-thirds in dollar amount of claims actually voting in each impaired class of claims have voted to accept the plan and (2) at least two-thirds in amount of equity interests actually voting in each impaired class of equity interests has voted to accept the plan.
Under the priority classification established by the Bankruptcy Code, unless creditors agree otherwise, pre and post petition liabilities must be satisfied in full before stockholders are entitled to receive any distribution under a plan of reorganization. While the Joint Plan anticipates some payment to all creditors and payment by the primary lender to holders of outstanding common stock of ILX Resort Incorporated, the ultimate treatment of creditors and stockholders will not be determined until confirmation of a plan of reorganization. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 cases to each of these groups or what types or amounts of distributions, if any, they would receive. A plan of reorganization could result in holders of the Debtors’ liabilities and/or securities, including common stock, receiving no distribution on account of their interests and cancellation of their holdings.
There can be no assurance at this time that the Company will be able to sell most of its assets to a third party or that it can restructure as a going concern, that the Joint Plan or Plan will be confirmed by the Bankruptcy Court, or that any plan will be implemented successfully.
The Debtors have incurred and will continue to incur significant costs associated with their reorganization. The amount of these costs, which are being expensed as incurred, have affected and are expected to continue to significantly affect the Debtors’ liquidity and results of operations. See Note 3 “Reorganization Items” for additional information.
Risks and Uncertainties
The Debtors’ proposed Joint Plan contemplates a sale of most assets to a third party and does not contemplate that the Company will continue as a going concern. If the proposed sale does not occur, the ability of the Company, both during and after the Chapter 11 case, to continue as a going concern is dependent upon, among other things, a) the ability of the Company to successfully achieve required cost savings to complete its restructuring; b) the ability of the Company to maintain adequate liquidity; c) the ability of the Company to generate cash from operations; d) the ability of the Company to collect customer note balances; e) the ability of the Company to confirm a plan of reorganization under the Bankruptcy Code and f) the Company’s ability to achieve and maintain profitability. Uncertainty as to the outcome of these factors raises substantial doubt about the Company’s ability to continue as a going concern. A confirmed plan could materially change the amounts currently disclosed in the consolidated financial statements.
Item 1. Business
ILX is one of the leading developers, marketers and operators of timeshare resorts in the western United States. The Company’s principal operations consist of (i) acquiring, developing and operating timeshare resorts, marketed by the Company as vacation ownership resorts, (ii) marketing and selling vacation ownership interests in the timeshare resorts, which typically have entitled the buyers thereof to ownership of a fully-furnished unit for a one-week period on either an annual or an alternate year (i.e., biennial) basis (“Vacation Ownership Interests”), and (iii) providing purchase money financing to the buyers of Vacation Ownership Interests at its resorts. In addition, the Company receives revenues from the rental of the unused or unsold inventory of units at its vacation ownership resorts, from the operating portion of homeowner dues from owners of Vacation Ownership Interests and from the sale of food, beverages and other services at such resorts. The Company’s current portfolio of resorts consists of seven resorts in Arizona, one in Indiana, one in Colorado, one in San Carlos, Mexico, and land in Puerto Peñasco (“Rocky Point”), Mexico and Sedona, Arizona (collectively, the “ILX resorts”). The Company also has interests in 2,241 weeks at the Carriage House in Las Vegas, Nevada, 176 weeks at the Scottsdale Camelback Resort in Scottsdale, Arizona and 194 weeks in the Roundhouse Resort in Pinetop, Arizona.
At December 31, 2009, the ILX resorts represented an aggregate of 591 units and 33,273 sold and unsold one-week Vacation Ownership Interests, including the following which have been annexed into Premiere Vacation Club: 1,500 one-week 25-year right-to-use Sea of Cortez Premiere Vacation Club Vacation Ownership Interests in San Carlos, Mexico, 194 weeks in the Roundhouse Resort in Pinetop/Lakeside, Arizona, 2,233 weeks in the Carriage House in Las Vegas, Nevada, and 174 weeks at the Scottsdale Camelback Resort in Scottsdale, Arizona. The Company also holds additional interests, which consisted, at December 31, 2009, of an aggregate of approximately 10 Vacation Ownership Interests in destination resorts owned by others and located in Arizona and Nevada (collectively, the “Additional Interests”), including 8 in the Carriage House and 2 in Scottsdale Camelback Resort which have not yet been annexed to Premiere Vacation Club.
The Company was founded in 1986 and commenced implementation of its current operating and growth strategies in the fourth quarter of 1991. During the period from December 31, 1991 through December 31, 2009, the Company increased the number of ILX resorts from two to ten (excluding the Roundhouse Resort, the Carriage House and Scottsdale Camelback Resort), and increased its total inventory of sold and unsold Vacation Ownership Interests from 9,915 weeks to 33,283 weeks (including the Sea of Cortez Premiere Vacation Club, the Roundhouse Resort, the Carriage House and the Scottsdale Camelback Resort Vacation Ownership Interests). The Company’s total revenues, excluding estimated uncollectible revenue, increased from $6.1 million in 1991 to $33.6 million in 2009. During this period, the Company’s growth was fueled principally by the acquisition, redevelopment and expansion of certain ILX resorts and the marketing, sale and financing of Vacation Ownership Interests in these resorts. The Company believes it was able to purchase the ILX resorts and the Additional Interests at relatively attractive prices and/or terms because of its skill in locating, identifying and acquiring distressed or underdeveloped resorts and undervalued Vacation Ownership Interests. The Company successfully utilized this strategy in connection with the acquisition of the Los Abrigados Resort & Spa in Sedona, Arizona (186 units including the adjacent Celebrity House and the Winner’s Circle suites), the Kohl’s Ranch Lodge in Payson, Arizona (66 units), the Premiere Vacation Club at Bell Rock in the Village of Oak Creek near Sedona, Arizona (85 units), Rancho Mañana Resort in Cave Creek, Arizona (14 units), Premiere Vacation Club at the Roundhouse Resort in Pinetop/Lakeside, Arizona (21 units), the 1,500 Vacation Ownership Interests in San Carlos, Mexico, the 2,241 Vacation Ownership Interests at the Carriage House in Las Vegas, Nevada, the 194 Vacation Ownership Interests at the Roundhouse Resort in Pinetop/Lakeside, Arizona and the 176 weeks at the Scottsdale Camelback Resort in Scottsdale, Arizona.
Utilizing management’s development expertise, the Company developed and implemented the Varsity Clubs concept. This concept entails ground-up development of urban vacation ownership properties strategically situated in destinations that are accessible to major population centers near prominent colleges and universities. The first Varsity Clubs, VCA–South Bend, consisting of 86 units, is located approximately three miles from the University of Notre Dame in South Bend, Indiana. The second Varsity Clubs, VCA–Tucson, consisting of 60 units, is located approximately three miles from the University of Arizona in Tucson, Arizona. The scope of the Company’s activities since 1991 have enabled the Company’s management team, which has significant experience in the vacation ownership resort and real estate development industries, to establish substantial in-house capabilities in areas critical to the Company’s operating and growth strategies, including property identification and acquisition, property development and rehabilitation, operation of resort properties and Vacation Ownership Interest sales and marketing.
The Company’s primary operating strategy focuses on marketing Vacation Ownership Interests in the Company’s convenient access resorts (“CARs”) and, in addition, affinity marketing of its Varsity Clubs. CARs are typically high-quality vacation ownership resorts situated in settings of natural beauty or other special locations and within convenient and inexpensive traveling distance from major population centers (currently Phoenix, Tucson, Las Vegas and Denver). In a 2008 study developed for Interval International (“II”), from data collected for the Ypartnership/Yankelovich, Inc. 2008 National Leisure Travel MONITOR, prospective timeshare buyers preferred their personal or rental automobile with 84% using their personal or rental automobile on vacation in the past year. The Company’s CARs are intended to facilitate more frequent “short-stay” getaways, which the Company believes is an increasingly popular vacation trend. This belief is confirmed in the previously noted II study that indicates 72% of prospective timeshare buyers took a weekend trip in the last 12 months. To the extent Varsity Clubs resorts are located proximate to major population centers, such resorts may also be CARs. As of December 31, 2009, the Company operated ten resorts consisting of 577 units and held 8,135.5 unsold Vacation Ownership Interests in those resorts, inclusive of unsold interests in Premiere Vacation Club and exclusive of certain interests recovered through the write off of certain notes receivable. Third parties operate the Rancho Mañana Resort, the Roundhouse Resort, the Carriage House and Scottsdale Camelback Resort. The Company’s inventory of CARs has been marketed primarily by ILX employees at the Company’s on-site sales offices located at selected ILX resorts.
Historically the Company had primarily marketed Vacation Ownership Interests in individual ILX resorts. Commencing in June 1998, the Company began marketing much of its inventory of CARs through membership interests in its proprietary branded Premiere Vacation Club. Premiere Vacation Club offers purchasers a deeded one-week membership interest that may be used at any time between certain specified dates at any one of the destinations included in Premiere Vacation Club, or may be split into multiple stays of shorter duration at any combination of such resorts. Vacation Ownership Interests in individual ILX resorts and in Premiere Vacation Club may be exchanged for stays at other resorts through the major national exchange networks in which ILX owners may participate, such as II and Resort Condominiums International (“RCI”). Due to the resort amenities and attractive seasons, the Company’s inventory of Vacation Ownership Interests trade well in such exchange networks. The Company designed Premiere Vacation Club to respond to customer preferences for flexible use options (e.g., floating days, two-day uses and the ability to split a purchased membership interest), locations within convenient driving distances from major metropolitan areas and other features (e.g., high quality amenities, natural beauty and food and beverage discounts at participating ILX resorts).
In addition to marketing through Premiere Vacation Club, the Company holds the right to expand its proprietary branded Varsity Clubs concept. Such expansion would focus on development of additional Varsity Clubs in areas with a significant base of existing tourism and access to major population centers, which are located near prominent colleges and universities in the western United States. The Company presently has two Varsity Clubs, its prototype Varsity Clubs property, VCA–South Bend, located near the University of Notre Dame and its second Varsity Clubs, VCA–Tucson, located near the University of Arizona in Tucson, Arizona. Future Varsity Clubs would be developed at attractive locations for visiting tourists who may rent accommodations or purchase a Vacation Ownership Interest from the Company. In connection with the purchase of a Vacation Ownership Interest, Varsity Clubs offer area residents an urban “city club” experience with unlimited day-use privileges, as well as the opportunity to participate in the II Vacation Ownership Interest exchange network. The Company believes that Varsity Clubs offer features common to a “city club,” including a fitness center, swimming pool, bar, restaurant/lounge, billiards and large sitting/welcome room. In addition, the Varsity Clubs concept enables the Company to enlarge the Company’s target list of potential purchasers by utilizing an identification with the local university to market Vacation Ownership Interests to alumni, sports season ticket holders, parents of university students and corporate sponsors of university events, among others, who attend the sporting, academic and cultural events regularly hosted by various universities. The Company believes that direct marketing to a large target base of potential purchasers with university affiliations may enable the Company to achieve premium pricing with respect to those portions of its inventory which coincide with high demand for accommodations at prominent university-sponsored events. The Company also believes that its success in gaining access to alumni and other targeted potential purchasers with relationships to the University of Notre Dame or the University of Arizona may facilitate similar arrangements with other universities in the areas in which future Varsity Clubs could be developed.
During 2009, the Company sold 1,003 annual and biennial Vacation Ownership Interests at the ILX resorts, compared to 1,342 during 2008. The average sales price for a Vacation Ownership Interest (excluding sales of Upgrades) was $12,541 for an annual interest and $8,567 for a biennial interest, resulting in a weighted average price of $14,459 (each biennial interest is treated as one-half of an annual interest) during the year ended December 31, 2009 and $15,606 for an annual interest and $8,935 for a biennial interest, resulting in a weighted average price of $16,895 during the year ended December 31, 2008. Upgrades are sales to existing owners of Vacation Ownership Interests in the ILX resorts and may consist of the exchange of their Vacation Ownership Interest for a higher demand season; a larger unit; or for Premiere Vacation Club; for which the customer pays an additional fee. At December 31, 2009, the Company had an existing inventory of 8,135.5 unsold Vacation Ownership Interests (including Additional Interests and the unsold interests in Premiere Vacation Club but excluding certain interests recovered through the write off of certain notes receivable).
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
The table below sets forth certain information, as of December 31, 2009, with respect to the ILX resorts. The information set forth below does not include expansion of the ILX resorts or development of additional Varsity Clubs and CARs. As described in Note 12 of the Notes to Consolidated Financial Statements, all of the Company’s owned resorts are encumbered by one or more deeds of trust. If the Joint Plan is confirmed, the Company would sell any interests it holds in the ILX resorts.
Description of ILX Resorts
Los Abrigados Resort & Spa. Los Abrigados Resort & Spa (“Los Abrigados”) is located in Sedona, Arizona, approximately 110 miles from Phoenix, Arizona. This resort consists of 186 units situated on approximately 20 acres of lush landscaping and Spanish-styled plazas, winding walkways and bridges. Los Abrigados offers one- and two-bedroom units each with a separate living area, bedroom, mini-kitchen or full kitchen and balcony or patio. Thirty suites offer a fireplace and either a private outdoor whirlpool spa or indoor jetted tub as well. The Celebrity House is a luxury stand-alone unit adjacent to the property and includes its own pool, spa, fireplace and full size kitchen. Los Abrigados is designed in southwestern décor and is surrounded by the dramatic red rocks of Oak Creek Canyon. This resort has an on-site sales office.
Amenities at the resort include two restaurants and off-track betting, billiards emporium, library, two pools, outdoor whirlpool spa, tennis courts, basketball court, bocce ball court, miniature golf, bird sanctuary, labyrinth, fitness center and health spa offering a variety of personal care services, aerobic and yoga classes, indoor whirlpools, steam and sauna rooms, hydrotherapy and other personal care facilities. In addition, golf, horseback riding, jeep, helicopter and hot air balloon rides, and other outdoor activities are easily accessible. Los Abrigados is an II resort.
As of December 31, 2009, Los Abrigados contained 9,672 Vacation Ownership Interests, of which approximately 145 remained available for sale (excluding 4,884.5 Vacation Ownership Interests annexed into Premiere Vacation Club). The Company believes there exist additional expansion opportunities at and contiguous to Los Abrigados. The Company, through its ownership in ILX–Bruno LLC (“ILX–Bruno”), purchased approximately 22 acres of land adjacent to Los Abrigados in 2005. The Company anticipates surrendering this land as part of the Joint Plan and Plan.
The Inn at Los Abrigados. The Inn at Los Abrigados is located in Sedona, Arizona, approximately 110 miles from Phoenix, Arizona. This resort consists of ten units adjacent to Los Abrigados. The Inn at Los Abrigados includes the main Morris House and nine bed and breakfast-style units in three buildings situated amidst a former apple orchard. The Morris House is a multi-level luxury suite sleeping six, and features a sunken living room, full kitchen with dining area, a loft, two full bathrooms and a private backyard with patio and barbecue. The bed and breakfast-style units each feature king beds, a sitting area, microwave, refrigerator, coffee maker, full bath with shower and balcony or patio. Guests of the Inn at Los Abrigados have charge privileges at and full use of all Los Abrigados amenities. The Inn at Los Abrigados is an II resort.
As of December 31, 2009, the Inn at Los Abrigados contained 510 Vacation Ownership Interests, of which approximately 107.5 remained available for sale (excluding 340.5 Vacation Ownership Interests annexed into Premiere Vacation Club).
Kohl’s Ranch Lodge. Kohl’s Ranch is a 10.5-acre property located 17 miles northeast of Payson, Arizona and approximately 105 miles from Phoenix, Arizona. It is bordered on the eastern side by Tonto Creek and is surrounded by the Tonto National Forest, which is believed to be the largest stand of Ponderosa Pines in the world. Kohl’s Ranch consists of 66 units. Forty-one of the units are at the main lodge, 20 units consist of one- and two-bedroom freestanding cabins along Tonto Creek, three units are in a triplex cabin and two are in a duplex cabin overlooking the creek, including the Horton House which is a luxury unit that sleeps eight and features a large deck with a barbecue, two full bedrooms and baths and a library.
Kohl’s Ranch offers a variety of common area amenities including an outdoor heated pool, outdoor whirlpool spa, exercise room, putting green, bocce ball court, children’s playground, gazebos, sport court and pole barn. Each unit at the resort offers a mini-kitchenette or full kitchen, and many have a fireplace. In addition, Kohl’s Ranch offers a unique pet resort facility. Kohl’s Ranch is an II resort.
As of December 31, 2009, Kohl’s Ranch contained 3,432 Vacation Ownership Interests, of which approximately 18.0 remained available for sale (excluding 2,998 Vacation Ownership Interests annexed into Premiere Vacation Club).
The Historic Crag’s Lodge at the Golden Eagle Resort. The Historic Crag’s Lodge at the Golden Eagle Resort (“Golden Eagle”) is a four-acre property located in the town of Estes Park, Colorado, within three miles of Rocky Mountain National Park and approximately 70 miles from Denver, Colorado. This resort consists of 33 units and is bounded generally by undeveloped forested mountainside land, which provides excellent mountain views from the resort.
Golden Eagle is centered around the historic Crag’s Lodge, a four-story wood frame building constructed in the early 1900s, which is listed on the National Registry of Historic Places by the United States Department of the Interior, and serves as the resort’s main lodge. Amenities offered at this resort include a restaurant, bar and a gathering and recreation area with a stone fireplace, as well as six guest rooms in a freestanding building. Each unit at Golden Eagle features a kitchenette, and living and dining areas. Additional amenities at this resort include a heated pool and spa as well as local outdoor attractions. Golden Eagle is both an RCI and an II resort.
As of December 31, 2009, Golden Eagle contained 1,683 one-week Vacation Ownership Interests, of which eight were available for sale (excluding 1,212 Vacation Ownership Interests annexed into Premiere Vacation Club). The Company could construct a minimum of two additional units in the future, which would yield an additional 102 Vacation Ownership Interests.
Sea of Cortez Premiere Vacation Club. Sea of Cortez Premiere Vacation Club is an ocean front property on the Sea of Cortez in San Carlos, Sonora, Mexico. The Company, through Premiere Vacation Club, has acquired 1,500 one-week 25-year right-to-use Vacation Ownership Interests in 30 studio, one- and two- bedroom units in the Sea of Cortez Premiere Vacation Club. The Company has the option to extend the right-to-use period for an additional 25-year period provided it is not in default under the right-to-use agreement. The option is exercisable by the Company during the last five years of the initial term, at terms to be negotiated by the parties at that date. The Company markets such Vacation Ownership Interests exclusively through Premiere Vacation Club.
Sea of Cortez Premiere Vacation Club has a swimming pool, outdoor whirlpool spa, outdoor restaurant and lounge, beach access, and each unit has an ocean view, a separate living area, bedroom(s), full kitchen and balcony or patio. In addition, water sports equipment, golf, horseback riding and other outdoor activities are easily accessible. Sea of Cortez Premiere Vacation Club is an II resort.
All 1,500 Sea of Cortez Premiere Vacation Club Vacation Ownership Interests have been annexed into Premiere Vacation Club.
Premiere Vacation Club at Bell Rock. Premiere Vacation Club at Bell Rock, in the Village of Oak Creek, Arizona is located approximately six miles south of Los Abrigados Resort & Spa. The resort consists of 85 studio, one and two-bedroom units, most of which include a fireplace and full or mini-kitchen facilities on approximately four acres of land. Premiere Vacation Club at Bell Rock has two heated pools, a whirlpool spa and outdoor fireplaces. Premiere Vacation Club at Bell Rock is an II resort.
As of December 31, 2009, Premiere Vacation Club at Bell Rock contained 4,420 Vacation Ownership Interests, all of which are annexed into Premiere Vacation Club.
Rancho Mañana Resort. Rancho Mañana Resort is located in Cave Creek, Arizona, approximately 25 miles from Phoenix, Arizona. Surrounded by the high Sonoran desert, this resort offers 14 luxuriously appointed and spacious casitas on approximately two acres. The casitas are 1,500 square feet and include two bedrooms, two bathrooms, a whirlpool tub in the master bathroom, a fireplace and a full kitchen. Amenities at the resort include a lagoon style pool and hot tub, outdoor gas barbeque grills and an adobe fireplace. The property is adjacent to a European style spa and athletic club (currently closed), an 18-hole championship golf course and a full service restaurant and lounge (all operated by third parties). Rancho Mañana is an II resort.
The casitas and spa at Rancho Mañana both are temporarily closed as both are operated by a third party which is currently unable to fund the operations.
As of December 31, 2009, Rancho Mañana contained 728 Vacation Ownership Interests, 717 of which are annexed into Premiere Vacation Club.
Premiere Vacation Club at the Roundhouse Resort. Premiere Vacation Club at the Roundhouse Resort is located in Pinetop/Lakeside Arizona. The resort consists of 21 two-bedroom log-sided cabins on four acres of land in the White Mountains of northeastern Arizona, approximately 190 miles from Phoenix. The resort also contains a miniature golf course. Guests at Premiere Vacation Club at the Roundhouse Resort have use privileges of the recreation center at the adjacent Roundhouse Resort. The recreation center contains an indoor pool, racquetball and basketball courts and other recreational opportunities. The resort is an II resort and is proximate to golf courses, skiing and snowboarding, horseback riding and other outdoor activities.
As of December 31, 2009, Premiere Vacation Club at the Roundhouse Resort contains 1,092 Vacation Ownership Interests, all of which are annexed to Premiere Vacation Club.
Roundhouse Resort. The Roundhouse Resort is a fully sold out 59-unit timeshare resort located on 5.42 acres adjacent to Premiere Vacation Club at the Roundhouse Resort. The resort is an RCI resort. At an elevation of 7,200 feet, the Roundhouse Resort is set in a location that offers four seasons, a distinct contrast to Arizona’s arid lowlands.
As of December 31, 2009, 194 Vacation Ownership Interests in the Roundhouse Resort acquired by the Company have been annexed into Premiere Vacation Club.
VCA–South Bend. The Company’s first Varsity Clubs facility is an approximately four acre property located three miles from the University of Notre Dame and Notre Dame Stadium in South Bend, Indiana, which is 90 miles from Chicago, Illinois. VCA–South Bend offers 86 units consisting of one- and two-bedroom suites.
Each one- and two-bedroom suite at VCA–South Bend includes a king master bedroom, living room with sofa sleeper, kitchenette and whirlpool spa. Common areas at the resort include the Stadium Sports Lounge, which offers a variety of food and beverages and features a theater-wall television in a stadium-type setting, fitness center with whirlpool spa, indoor/outdoor heated pool, bocce ball, children’s playground, billiards room, putting green, library, gift shop, business center and special events facilities. VCA–South Bend is an II resort.
As of December 31, 2009, this resort contained 4,472 one-week Vacation Ownership Interests, of which 322.5 were available for sale (excluding 3,028.5 Vacation Ownership Interests annexed into Premiere Vacation Club).
VCA–Tucson. The second Varsity Clubs resort is a two-acre property located in Tucson, Arizona, approximately three miles from the University of Arizona and 110 miles from Phoenix, Arizona. VCA–Tucson offers 60 units, consisting of studio, one- and two-bedroom suites. This resort has an on-site sales office.
VCA–Tucson was designed in accordance with the VCA–South Bend prototype, with certain modifications for operating efficiencies and to reflect the regional style. Each of the suites includes a king master bedroom, living room with sofa sleeper, kitchenette and whirlpool spa. Amenities at this resort include a Sports Lounge designed similar to that at VCA–South Bend, the Twenty-Four Hour Sports Ticker, Joey Pizza (a restaurant theme originally introduced at Los Abrigados), billiards room, putting green, library, gift shop, fitness center, outdoor heated pool, whirlpool spa, steam room, children’s playground and special events facilities. VCA–Tucson is an II resort.
At December 31, 2009, this resort contained 3,120 one-week Vacation Ownership Interests, of which 49.5 were available for sale (excluding 2,906.5 Vacation Ownership Interests annexed into Premiere Vacation Club).
The Carriage House
In 2001, the Company acquired 600 Vacation Ownership Interests in the Carriage House in Las Vegas, Nevada and annexed these weeks into Premiere Vacation Club. During 2001 to 2008, the Company purchased additional inventory in the Carriage House and annexed or plans to annex the interests into Premiere Vacation Club. At December 31, 2009, the Company holds 2,241 Vacation Ownership Interests, 2,233 of which have been annexed into Premiere Vacation Club.
The Carriage House is a non-gaming suite hotel located one block off the “Strip” in Las Vegas. The property contains a heated pool, whirlpool, tennis court and basketball court. The Carriage House is an II resort.
Scottsdale Camelback Resort
In 2004, the Company purchased 150 two-bedroom Vacation Ownership Interests in Scottsdale Camelback Resort in Scottsdale, Arizona and annexed those weeks into Premiere Vacation Club. The Company has since purchased additional Vacation Ownership Interests and at December 31, 2009 holds 176, 174 of which have been annexed into Premiere Vacation Club.
Scottsdale Camelback Resort is located in the foothills of Camelback Mountain. The property contains spacious villas that include full kitchens, fireplaces and garden style bathtubs. The resort’s amenities include a pool, spa, tennis and racquetball courts, fire pit, fitness center and a restaurant. Scottsdale Camelback Resort is an II resort.
Premiere Vacation Club
In January 1998, the Company recorded in Maricopa County, Arizona its proprietary Premiere Vacation Club Membership Plan and in May 1998 annexed a total of 5,000 Vacation Ownership Interests into the Club and received Department of Real Estate approval in the State of Arizona to commence selling Vacation Ownership Interests in Premiere Vacation Club. The Company has since annexed additional units and as of December 31, 2009, Premiere Vacation Club included a total of 25,700 Vacation Ownership Interests. The 25,700 Vacation Ownership Interests annexed into the Club consist of 4,884.5 Vacation Ownership Interests in Los Abrigados (including the Celebrity House and the Winner’s Circle suites), 340.5 Vacation Ownership Interests in the Inn at Los Abrigados, 2,998 Vacation Ownership Interests in Kohl’s Ranch Lodge, 1,212 Vacation Ownership Interests in the Golden Eagle Resort, 1,500 Vacation Ownership Interests in the Sea of Cortez Premiere Vacation Club, 3,028.5 Vacation Ownership Interests in VCA–South Bend, 2,906.5 Vacation Ownership Interests in VCA–Tucson, 1,092 Vacation Ownership Interests in Premiere Vacation Club at the Roundhouse Resort, 194 Vacation Ownership Interests in the Roundhouse Resort, 2,233 Vacation Ownership Interests in the Carriage House, 4,420 Vacation Ownership Interests in Premiere Vacation Club at Bell Rock, 717 Vacation Ownership Interests in Rancho Mañana Resort and 174 Vacation Ownership Interests in the Scottsdale Camelback Resort.
At December 31, 2009, 7,464 of the 25,700 Premiere Vacation Club Vacation Ownership Interests were available for sale. Premiere Vacation Club is affiliated with II and memberships in Premiere Vacation Club are offered for sale at each of the Company’s sales offices. If the Joint Plan is confirmed, the Company would sell its rights with respect to interests in Premiere Vacation Club.
In June 2005, the Company acquired approximately 2.1 acres of land in Puerto Peñasco (“Rocky Point”), Mexico. The Company intends to sell this land as part of the Joint Plan.
The Company, together with James Bruno Enterprises LLC (“Bruno”), formed ILX-Bruno in August 2005 to purchase and develop three parcels approximating 22 acres of land in Sedona, Arizona. The Company holds an 85% interest in ILX–Bruno. In October 2005, ILX–Bruno completed the acquisition of two parcels of the land and acquired the third parcel in June 2006. The Company would surrender this land to lenders as part of the Joint Plan and Plan.
The Company’s operating strategy seeks to emphasize the following characteristics, which management believes provide ILX with certain competitive advantages within the vacation ownership industry.
Flexible Vacation Ownership Interest Purchase Options. The Company believes the flexibility associated with its inventory of Vacation Ownership Interests provides a uniquely appealing opportunity for ILX owners. Substantially all of the Company’s inventory of Vacation Ownership Interests at the ILX resorts are intended to be used on dates specified from time to time by the ILX owner within a broad range of available dates and not fixed at the time of purchase. Purchasers of a Vacation Ownership Interest in the Company’s proprietary branded Premiere Vacation Club are entitled to use their Vacation Ownership Interest at a single resort in Premiere Vacation Club or may split up their Vacation Ownership Interest according to the owner’s needs and preferences at one or more of any number of participating resorts, as well as thousands of other resorts through the domestic and international exchange programs in which ILX owners participate. In addition, Vacation Ownership Interests at Varsity Clubs may be purchased for highly desirable single-day uses, a collection of single days (such as designated days during an entire football or other sports season) or other packages suited to meet each ILX owner’s preferences.
Customer Satisfaction. The Company believes that its inventory of highly desirable resorts with extensive amenities, combined with flexible purchase options have resulted in a high level of customer satisfaction. Each of the ILX resorts is located in an area with unique tourist attractions and most offer food, beverage and other amenities comparable to full-service commercial lodging facilities, with discounted prices extended to ILX owners at the facilities it operates. As a result, the Company believes ILX owners generally have a high level of satisfaction, resulting in additional purchases and increased goodwill. The Company capitalizes upon this by directing a portion of its marketing efforts towards sales of Vacation Ownership Interests to existing ILX owners.
Enhanced Amenities. Each of the ILX resorts (except the Premiere Vacation Club at the Roundhouse Resort and the Premiere Vacation Club at Bell Rock) has at least one full-service restaurant and other food and beverage facilities in addition to a range of other amenities typically found at high quality resorts. Many resorts offering Vacation Ownership Interests have none or only limited restaurant and other food and beverage facilities. As a result, management believes ILX owners appreciate the ability to enjoy traditional full-service commercial hotel amenities and also maintain the option to use more economical in-room facilities. See “The Resorts.”
Demonstrated Ability to Acquire and Develop Properties. The Company has historically been successful at acquiring resorts in settings of natural beauty at relatively low costs. The Company’s acquisition strategy is to identify underutilized or distressed properties in locations with high tourist appeal and access to major metropolitan centers. Thereafter, the Company’s redevelopment efforts are primarily targeted at improving the amenities and appointments of such properties. The Company has successfully developed its prototype Varsity Clubs of America resort, VCA–South Bend, and a second Varsity Clubs facility, VCA–Tucson. The Company believes that its acquisition and development strategies have resulted in a portfolio of desirable properties with a relatively low cost of product as a percentage of sales.
Convenient Access Resorts. The Company’s CARs are located within a two-hour drive of many ILX owners’ principal residences, which accommodates a demand for more frequent and convenient “short-stay” vacations without the costs and difficulties of air travel. This proximity also facilitates marketing of the Company’s Premiere Vacation Club, which permits members to divide their Vacation Ownership Interest into shorter stays at the various properties included in Premiere Vacation Club (including Varsity Clubs) or exchange their entire interest during any year through an exchange network. In addition to the use of their Vacation Ownership Interest, owners who have purchased from ILX are also entitled to day-use of the offered amenities and discounted food, beverage and other services at their individual ILX resort or, in the case of Premiere Vacation Club members, at ILX resorts included in Premiere Vacation Club, with some exceptions, thereby facilitating use and enhancing the benefits of ownership by ILX owners.
Standard Design, Lower Construction and Operating Costs of Varsity Clubs. The Company’s Varsity Clubs concept is based upon its VCA–South Bend prototype. While each Varsity Club may have aspects uniquely tailored to its targeted customer base, the Company believes that its standard architectural and interior designs for Varsity Clubs will significantly reduce associated development and construction costs. Standardization will also allow the Company to develop new Varsity Clubs and integrate new resorts in response to demand. The Company anticipates that new Varsity Clubs, where entitlements are in place, can be constructed within one year from acquisition of the underlying real property.
Premium Locations. The Company believes that the variety and natural beauty of the surroundings for its CARs enhance their attraction to customers. Substantially all of the ILX resorts are located in the western United States, in part because of the numerous locations in that region which are attractive to tourists and convenient to major metropolitan areas. Due to the resort amenities and attractive seasons, the Company’s inventory of Vacation Ownership Interests trade well in exchange networks such as II and RCI.
Integrated In-House Operations. Substantially all of the Company’s marketing, sales, development, property management, and financing operations are conducted internally, except certain minimal marketing functions and processing of customer payments and certain collection activities related to promissory notes given by ILX owners as partial payment for a Vacation Ownership Interest (“Customer Notes”). In addition, the Company operates all of the ILX resorts on a centralized basis, with operating and maintenance costs paid from ILX owners’ dues as well as hotel rental revenues. The Company believes that its internal capabilities result in greater control and consistency of all phases of its operations that may result in lower overall costs and/or customer satisfaction than generally associated with outsourcing such operations. Such integration also facilitates the Company’s Premiere Vacation Club and the ILX resorts’ qualification in the II and RCI exchange networks, among others.
Directed Marketing. The Company’s marketing strategy with respect to its Premiere Vacation Club is to target potential customers who have a demonstrated interest in the location of its ILX resorts or a likelihood of frequent travel. The Company’s marketing activities primarily offer travel-related inducements (such as discounted or complimentary vacations at nearby ILX resorts or at non-affiliated hotels in popular destinations or discounted or complimentary area activities to visitors to its resort destinations). By offering travel-related inducements, the Company believes it is better able to identify customers who like to travel, which results in a higher percentage of sales per contact than other promotions. In addition, the Company developed its proprietary Varsity Clubs of America concept to capitalize upon affinity marketing strategies. The Company believes that a high-quality “city club” experience combined with the traditional benefits associated with Vacation Ownership Interests, such as the opportunity to participate in exchange networks, will appeal to consumers in the local markets of each Varsity Club. Further, the Varsity Clubs concept is intended to take advantage of a marketing base of alumni, sports enthusiasts, parents of students, corporate sponsors and others affiliated with each university next to which a Varsity Clubs will be developed. The Company believes that these marketing strategies permit it to take advantage of existing affinities, resulting in a positive impact on closings per customer contacts.
Premiere Vacation Club
Sales of Vacation Ownership Interests in Premiere Vacation Club commenced in June 1998. Purchasers are offered deeded membership interests that provide rights to accommodations which may be used each use year in their entirety at one time or may be divided into shorter stays at one or a variety of the Company’s resorts or may be exchanged through a participating exchange network. The Company’s Premiere Vacation Club emphasizes CARs (i) that facilitate short-stay vacations with relatively low cost and time associated with travel to the ILX resort, (ii) located near settings of natural beauty, (iii) with high quality amenities and resort services and (iv) that facilitate flexible use options. The Company also markets membership interests in its Premiere Vacation Club to existing ILX owners, thereby expanding its sales volume without increasing its sales and marketing costs in the same proportion as generally associated with sales to first-time buyers.
Initially, the Company’s Premiere Vacation Club inventory consisted of Vacation Ownership Interests in the ILX resorts. New resorts could be added through the Company’s pursuit of selected acquisition opportunities, as occurred with the addition of the 1,500 one-week 25-year right-to-use Vacation Ownership Interests in Sea of Cortez Premiere Vacation Club in San Carlos, Mexico, the 717 Vacation Ownership Interests in Rancho Mañana Resort, 2,233 Vacation Ownership Interests in the Carriage House in Las Vegas and 174 Vacation Ownership Interests in Scottsdale Camelback Resort. By marketing its inventory of Vacation Ownership Interests through Premiere Vacation Club, the Company believes it has greater flexibility with respect to potential acquisition opportunities than generally associated with the sale of Vacation Ownership Interests in a single vacation resort, to the extent that small or remote resorts which may be inefficient to market as a single location resort may enhance the consumer appeal of a membership interest in Premiere Vacation Club. With its existing resorts in Arizona, Nevada and Mexico, the Company has built a critical mass of CARs within driving distance of the Phoenix and Tucson metropolitan markets. Further capitalizing on the flexibility of Premiere Vacation Club, the Company has an agreement with Scottsdale Camelback Resort whereby Premiere Vacation Club members may utilize the resort’s facilities on a day-use basis, thereby enhancing the benefits of ownership in Premiere Vacation Club, particularly to members residing in metropolitan Phoenix.
Sales and Marketing
Marketing is the process by which the Company attracts potential customers to visit and tour an ILX resort or attend a sales presentation. Sales is the process by which the Company seeks to sell a Vacation Ownership Interest to a potential customer once he or she arrives for a tour at an ILX resort or attends a sales presentation. The Company believes it has the marketing and sales infrastructure necessary to sell Vacation Ownership Interests on a competitive basis. All of the Company’s sales and the majority of the Company’s marketing functions are currently performed in-house and the Company invests significant resources in attracting, training and seeking to retain its sales and marketing employees. The Company believes this strategy provides it with greater control over these critical functions, resulting in greater consistency of customer relations and improved customer satisfaction. In addition, management believes that its practice of hiring employees to staff the majority of its sales and marketing functions, as opposed to using independent contractors as has been often used in the industry, results in a higher retention rate among its sales force and provides a pool of experienced staff from which to draw upon. The Company expends substantial resources identifying, attracting and training its sales and marketing personnel and offers a package of employment benefits to its sales and marketing personnel. Management believes that consistency and high quality in its sales and marketing operations is crucial to its success. The Company believes that the package of benefits offered to its sales and marketing employees helps it to attract high quality personnel and provides an incentive for their performance.
Marketing. The Company’s marketing activities are devoted primarily toward (i) hotel guests at the ILX resorts, (ii) II and RCI exchange program participants staying at the ILX resorts, (iii) off-premise contacts with visitors to the local surroundings of the ILX resorts and in the metropolitan areas within driving distances of the ILX resorts (iv) inbound telemarketing, direct mail, electronic and other contact with residents of metropolitan areas within driving distance of the ILX resorts (v) its existing customer base and (vi) referrals from existing owners. The Company’s marketing strategy seeks to target prospective buyers who respond favorably to travel-related inducements because the Company believes such consumers are more likely to travel and therefore have a greater likelihood of purchasing a Vacation Ownership Interest. The Company identifies potential purchasers through internally developed marketing techniques, and presently sells Vacation Ownership Interests through sales offices located at two ILX resorts. For its sales offices, the Company primarily targets customers who live within driving distance of the ILX resort or who are vacationing at or near the ILX resort. This practice allows the Company to invite potential purchasers to experience the ILX resorts and avoid the more expensive marketing costs of subsidized airfare and lodging which have been associated with the vacation ownership industry. In addition, the Company believes that its marketing strategy results in a higher percentage of sales per prospective customer contacts than other approaches because its targeted customer base has a demonstrated interest in the locale of an ILX resort and/or a greater likelihood to take vacations. The Company also targets local residents to its VCA-Tucson sales office by offering these prospective customers travel incentives and other premiums in exchange for their attendance at the sales presentation. The Company believes that prospective customers who respond to such travel offers have stronger sales potential because of the attractiveness of the convenient access of the ILX resorts to their homes, and because of their interest in travel. The Company also directs its marketing efforts to current ILX owners. Marketing costs to existing owners are generally lower than costs associated with first time buyers.
Similar to branding techniques utilized by some of its competitors, the Company also seeks to capitalize upon affinity marketing concepts in attracting prospective buyers to its Varsity Clubs concept by seeking to develop a branded “city club” experience for flexible use by local residents. In addition, marketing of Varsity Clubs may focus on alumni, parents of university students and other persons or entities who have a preexisting affiliation with or other attraction to the local university. All of the Company’s marketing activities emphasize the convenience of the ILX resorts, coupled with the opportunity to participate in exchange networks, as well as the quality and breadth of amenities available at each of the ILX resorts.
Sales. The Company actively sells its inventory of Vacation Ownership Interests primarily through a sales staff of approximately 80 employees at December 31, 2009, including approximately 40 sales agents at ILX’s sales offices. Prospective first-time purchasers at sales offices located at an ILX resort participate in a tour of the facilities as well as its related amenities, guided by a salesperson. At the conclusion of the tour, the terms of making a purchase, including financing alternatives, are explained to the customer. Approximately 20% of the Company’s sales have historically been made on a cash basis with the percentage of cash sales increasing to approximately 35% in the past two years. For those customers seeking financing, the Company conducts credit pre-approval research. The Company’s point-of-sale credit pre-approval process typically includes a review of the customer’s credit history, and may include verification of employment. The Company waits until expiration of the applicable statutory waiting period, generally from three to seven days, prior to recognizing a sale as complete.
In addition to generating sales to first-time buyers, the Company’s sales force seeks to generate sales of additional Vacation Ownership Interests or Upgrades to ILX owners. Sales to ILX owners generally have lower marketing costs associated with them as these buyers tend to be more familiar with the nature of purchasing a Vacation Ownership Interest and the amenities offered at the ILX resorts. Sales to ILX owners accounted for 20.9% of Vacation Ownership Interest sales by the Company during 2009. During 2008, sales to ILX owners accounted for 24.7% of the Company’s total sales.
Prior to June 1998, the Company’s inventory of Vacation Ownership Interests had historically consisted of a one-week interval that could be used on an annual or an alternate-year basis in a specified ILX resort during a specified range of dates. ILX owners could also participate in exchange networks such as II and RCI. Commencing in June 1998, the Company began offering deeded membership interests in its Premiere Vacation Club, which permit a member to stay at one or more of the participating ILX resorts for up to one week on an annual or alternate-year basis. Premiere Vacation Club members may divide their stays into shorter vacations at any time between a specified period of time, enjoy unlimited day-use and discounted goods and services at certain ILX resorts, as well as a variety of other benefits. The Company believes that the variety and flexibility of use options associated with its inventory of Vacation Ownership Interests are uniquely attractive to customers.
The Company currently provides financing for approximately 65% of its Vacation Ownership Interest sales. On financed sales, the Company receives at least 10% of the aggregate sales price of Vacation Ownership Interests plus the cost of any incentives given at the time of sale as a down payment. The Company typically makes financing for the remainder available to the buyer for a term of seven years at a fixed rate of interest, which is currently approximately 11.9% to 17.9% per annum. The Company also offers reduced rates of interest on shorter financing terms and with larger down payment requirements. At December 31, 2009, the Company had a portfolio of retained Customer Notes with an aggregate principal amount of $20.0 million, of which $17.5 million were serviced by one outside vendor and had a weighted average yield of 15.5% per annum, which compared favorably to the Company’s weighted average cost of borrowings for such Customer Notes of 4.7% per annum.
The Company believes that providing available financing is essential to the successful sales and marketing of its Vacation Ownership Interest inventory. However, the Company seeks to minimize the risks associated with its financing activities by emphasizing the credit pre-approval process. In addition, the Company expends significant resources negotiating alternative repayment programs for past due accounts, so as to minimize its actual losses. Collection activities with respect to Customer Notes that the Company has hypothecated are managed internally and serviced by a third party on behalf of the lenders and the Company. In addition, the Company utilizes third party collection agencies for difficult accounts.
Although the terms of each Customer Note vary, typically such notes are deemed past due when a scheduled payment is 30 days or more past due. In addition, a delinquency occurs when an account becomes more than 90 days past due. The Company seeks to avoid defaults by working closely with the lender and its collection agent with respect to ILX owners who become delinquent. The first collection contact typically occurs within 16 to 30 days of a payment’s due date.
The Company’s agreement with a financial institution for a commitment of $30.0 million, under which the Company sold certain of its Customer Notes expired in June 2008. The agreement provided for sales on a recourse basis with a purchase rate of prime plus 2.75%. Customer Notes were sold at discounts or premiums to the principal amount in order to yield the purchase rate, with the premium held back by the financial institution as additional collateral. The Company also had a financing commitment in the aggregate amount of $20.0 million, pursuant to which the Company hypothecated Customer Notes that were pledged to the lender as collateral. This borrowing bears interest at prime plus 1.5%, had a draw period through December 2009, and a maturity date of 2013. The Company did not borrow on this facility after its March 2009 filing under Chapter 11 of the United States Bankruptcy Code. The Company currently reserves approximately 5.8% of gross sales (including cash sales) as an allowance for doubtful accounts. At December 31, 2008 and 2009, the aggregate amount of these reserves was $2.8 million and $5.7 million, respectively. During the third quarter 2008, the Company recorded an increase in its estimated uncollectible revenue of $14.5 million and a reduction in cost of Vacation Ownership Interests sold in the amount of $3.3 million to record the reduction in its expectation of collectibility of both past due and currently performing Customer Notes and consumer notes sold with recourse and the recovered Vacation Ownership Interests as a result. In conjunction with these entries the Company wrote off Customer Notes in excess of 90 days delinquent in the amount of $16.4 million. The reduction in expectation of collectibility was based upon recent economic, financial and credit conditions. In December 2009, estimated uncollectible revenue was increased by $2.3 million for current and anticipated delinquencies to reflect in part the Company’s inability to send accounts becoming delinquent after the bankruptcy to third party collections. In 2009, the Company’s allowance for uncollectible notes exceeded actual write-offs by approximately $2.7 million. The Company generally writes off receivables only at such time as it accepts back a deed to the underlying property and determines the remainder uncollectible or as beneficial for income tax purposes. To the extent that the Company’s losses as a result of bad debt exceed its corresponding reserves, its financial condition and results of operations may be materially adversely affected.
Resort Operations. The Company also receives revenues from (i) the rental of unsold or unused inventory of units at the ILX resorts, (ii) the sale of food, beverages and other amenities at such resorts and (iii) the management and operation of the ILX resorts and for the operating portion of homeowners’ dues paid by owners of Vacation Ownership Interests. During 2009, the Company received $19.2 million in net revenues from these operations, consisting of $14.8 million in room rental and vacation interval owner dues revenue, $2.9 million in food and beverage revenue and $1.5 million in other revenue. Of these amounts, Los Abrigados contributed $8.6 million, or 44.9% of the Company’s total resort operations revenues in 2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Sedona Spa. The Company’s operations include the sale of personal care products. The personal care products are marketed under its proprietary brand name “Sedona Spa.” Sedona Spa products have, and continue to be, utilized at the ILX resorts as in-room amenities and are also offered for retail sale in the resort gift shops and at the Sedona Spa at Los Abrigados. The Company uses electronic mail to market Sedona Spa products to resort customers and others who have previously used the products and on a limited basis engages in other marketing and sales efforts. The Company anticipates continuing to utilize Sedona Spa products for in-room amenities, and in its retail outlets, as well as continuing to maintain marketing efforts outside the Company.
Land Sales. Since l993, the Company has also received revenues from the sale of primarily unimproved real property. These operations originated as a result of the Company’s acquisition of its wholly owned subsidiary, Genesis Investment Group, Inc. (“Genesis”), in November 1993. The sale of real property is not a core business function for the Company and, as such, the Company has not historically and does not intend in the future to devote a material portion of its resources to these operations. Typically, the Company has sold these assets as subdivided lots or large unimproved parcels. The Company intends to sell the remaining assets as soon as reasonably practical. Following the sale of these assets, management does not expect to regularly engage in the sale of real property.
Participation in Exchange Networks
The Company believes that consumers are more likely to purchase Vacation Ownership Interests as a result of the Company’s participation in one of the Vacation Ownership Interest leading exchange networks which are operated by II and RCI. ILX currently enrolls new purchasers in the II exchange network. Membership in II or RCI allows ILX owners to exchange in a particular year their occupancy right in the unit in which they own a Vacation Ownership Interest for an occupancy right at the same time or a different time in another participating resort, based upon availability and the payment of a variable exchange fee. A participating ILX owner may exchange his or her Vacation Ownership Interest for an occupancy right in another participating resort by listing the Vacation Ownership Interest as available with the exchange network operator and by requesting occupancy at another participating resort, indicating the particular resort or geographic area to which the owner desires to travel, the size of the unit desired and the period during which occupancy is desired. The exchange network assigns a rating to each listed Vacation Ownership Interest, based upon a number of factors, including the location and size of the unit, the quality of the resort and the period of the year during which the Vacation Ownership Interest is available, and attempts to satisfy the exchange request by providing an occupancy right in another Vacation Ownership Interest with a similar rating. The high rating of, and demand for, the ILX resorts enhance the exchange opportunities available to ILX owners. If the exchange network is unable to meet the member’s initial request, the network operator may suggest alternative resorts, based on availability. ILX also offers purchasers enrollment in a cruise exchange program in which the customer may exchange his or her Vacation Ownership Interest for or receive discounts on cruises worldwide. Exchanges and discounts through this program are offered on a variety of cruise lines to a broad selection of destinations. In addition, ILX’s Centralized Owner Services Department has established arrangements with additional resorts and smaller exchange networks through which it offers exchange opportunities and discounted vacation getaways to ILX owners. The Company believes that its direct participation in the exchange process, coupled with these additional services, provides ILX with a competitive advantage and tends to increase customer satisfaction.
ILX’s Vacation Ownership Interest plans compete both with other Vacation Ownership Interest plans as well as hotels, motels, condominium developments and second homes. ILX considers the direct competitors of individual resorts to also include alternative accommodations, including hotels, motels, bed-and-breakfasts and small vacation ownership operators located within the immediate geographic vicinity of such resort. This is particularly true with respect to its CARs that tend to attract purchasers whose decision to buy a Vacation Ownership Interest is likely to be influenced by the convenience of the resort to their principal residence.
The vacation ownership industry consists of local and regional resort developers and operators as well as some of the world’s most widely-recognized lodging, hospitality and entertainment companies which sell Vacation Ownership Interests under their brand names, including Marriott Ownership Resorts, The Walt Disney Company, Hilton Hotels Corporation, Hyatt Corporation, Four Seasons Hotels & Resorts, Starwood Hotels & Resorts Worldwide, Inc., Wyndham Worldwide Corporation, and their subsidiaries and affiliates. In addition, Diamond Resorts Corporation and other non publicly traded companies currently compete or may compete in the future with the Company. Furthermore, significant competition exists in other markets in which the Company currently operates. Many entities with which the Company competes have significantly greater access to financial, sales and marketing and other resources than those of the Company and may be able to grow at a more rapid rate or more profitably as a result. In recent years there has been significant consolidation in the industry and in addition several entities have encountered challenges, resulting in their attempt to reorganize through either consolidation or bankruptcy. Management anticipates strong competition in the future as a result of consolidation in the vacation ownership industry. If the Company does not sell the majority of its assets to a third party, there can be no assurance that the Company will be able to successfully compete with such companies.
General. The Company’s marketing and sales activities and other resort operations are subject to extensive regulation by the federal government and the states in which the Company’s resorts are located and in which its Vacation Ownership Interests are marketed and sold. Federal legislation to which the Company is or may be subject includes the Federal Trade Commission Act, the Fair Housing Act, the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Equal Credit Opportunity Act, the Interstate Land Sales Full Disclosure Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Civil Rights Acts of 1964, 1968 and 1991. Many states have adopted legislation as well as specific laws and regulations regarding the sale of Vacation Ownership Interests. The laws of most states, including Arizona, require a designated state authority to approve a detailed offering statement describing the Company and all material aspects of the resort and sale of Vacation Ownership Interests at such resort. In addition, the laws of Arizona where the Company sells Vacation Ownership Interests grant the purchaser of a Vacation Ownership Interest the right to rescind a contract of purchase at any time within a statutory rescission period. Furthermore, most states have other laws which regulate the Company’s activities, such as real estate licensure laws, travel sales licensure laws, anti-fraud laws, consumer protection laws, telemarketing laws, prize, gift and sweepstakes laws, and labor laws. The Company believes that it is in material compliance with all applicable federal, state, local and foreign laws and regulations to which it is currently subject.
Environmental Matters. Under applicable federal, state and local environmental laws and regulations, a current or previous owner or operator of real estate may be required to investigate, remediate and remove hazardous or toxic substances at such property, and may be held liable for property damage and for investigation, remediation and removal costs incurred by such parties in connection with the contamination. Such laws typically impose such liability without regard to whether the owner or operator knew of or caused the presence of the contaminants, and the liability under such laws has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The costs associated with compliance with such regulations may be substantial, and the presence of such substances, or the failure to properly remediate the contamination on such property, may adversely affect the owner’s or operator’s ability to sell or rent such property or to borrow against such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances at a disposal or treatment facility also may be liable for the costs of removal or remediation of a release of hazardous or toxic substances at such disposal or treatment facility, whether or not such facility is owned or operated by such person. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. Finally, the owner or operator of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. In connection with its ownership and operation of its properties, the Company may be potentially liable for such costs.
The Company does not always conduct environmental assessments at the ILX resorts, properties under development and properties subject to acquisition. Because many of the Company’s resorts are typically found in remote locations, it does not consider the risks of environmental liabilities significant enough to warrant the performance of assessments at such locations. Failure to obtain such reports may result in the Company acquiring or developing unusable property or assuming certain liabilities which could have been avoided if the Company had the information typically discovered in an environmental report. However, when appropriate, the Company has in the past and will in the future obtain environmental reports. To date, the Company has obtained environmental reports with respect to four of the ILX resorts. In addition, the Company does conduct significant in-house due diligence prior to the acquisition of any real property interests. To date, the Company’s investigations of its properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company, its business, assets, financial condition or results of operations, nor is the Company aware of any such material environmental liability.
The Company believes that its properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. The Company has not been notified by any governmental authority or any third party, and is not otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances or petroleum products in connection with any of its present properties.
Other Regulations. Under various state and federal laws governing housing and places of public accommodation, the Company is required to meet certain requirements related to access and use by disabled persons. Although management believes that the Company’s resorts are substantially in compliance with present requirements of such laws, the Company may incur additional costs of compliance in connection with the conversion or renovation of ILX resorts. Future legislation may impose additional requirements on owners with respect to access by disabled persons. The aggregate costs associated with compliance with such regulations are not currently known, and, while such costs are not expected to have a material effect on the Company, such costs could be substantial. Limitations or restrictions on the completion of certain renovations may limit opportunity for growth in certain instances or reduce profit margins on the Company’s operations.
As of December 31, 2009, the Company had approximately 520 employees, of which approximately 360 were employed on a full-time basis. The Company believes relations with its employees are good and none of its employees are represented by labor unions.
The Company carries comprehensive liability, business interruption, title, fire and storm insurance with respect to the ILX resorts, with policy specifications, insured limits and deductibles customarily carried for similar properties, which the Company believes are adequate. There are, however, certain types of losses (such as losses caused by floods, acts of terrorism, or acts of war) that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Company could lose its capital invested in a resort, as well as the anticipated future revenues from such resort and would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any such loss could have a material adverse effect on the Company.
The Company leases 8,437 square feet for its corporate offices in Phoenix, Arizona, under a lease that expires on January 31, 2011.
Item 3. Legal Proceedings>
As discussed earlier, the Company and certain of its subsidiaries and limited liability companies are debtors in possession in the Chapter 11 case.
Other litigation has arisen in the normal course of the Company’s business, none of which is deemed to be material.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(A) The following table sets forth, for the periods indicated, the range of high and low sales prices for the common stock. The information is as reported by the NYSE AMEX, which listed the common stock of the Company on February 11, 1998. The Company was delisted from the Exchange on March 13, 2009 and there is currently no established public trading market for the Company’s common stock. As of December 31, 2009, the common stock was held by approximately 750 holders of record.
(B) Not applicable
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
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,” “expects,” “may,” “should” 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.
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 the unused or unsold inventory of units at the ILX resorts, from the operating portion of homeowners’ association dues from owners of Vacation Ownership Interests, and from the sale of food, beverages or other services at such resorts. The Company currently owns seven resorts in Arizona, one resort in Indiana, one resort in Colorado, holds interests in 1,500 Vacation Ownership Interests in a resort in San Carlos, Mexico, in 194 weeks at a resort in Pinetop, Arizona, in 2,241 Vacation Ownership Interests in a resort in Las Vegas, Nevada and in 176 weeks at a resort in Scottsdale, Arizona. On March 2, 2009, the Company and certain of its subsidiaries and limited liability companies filed for relief under Chapter 11 of the United States Bankruptcy Court for the District of Arizona as discussed under Chapter 11 Filings and Chapter 11 Bankruptcy process earlier in this Report on Form 10-K. The Company anticipates filing a Joint Plan with its primary lender whereby most of its assets would be sold to a third party.
Significant Accounting Policies
The following discussion of the Company’s financial condition and results of operations is based on the accompanying consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles. A detailed explanation of significant accounting policies is contained in the consolidated financial statements. The preparation of which requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities and the related disclosure of commitments and contingencies. The Company evaluates its estimates, including those that relate to its allowance for possible credit losses and the estimate of contingent liabilities on an ongoing basis. The Company bases its estimates on historical experience, current economic factors and legal guidance, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not apparent from other sources. Actual results may differ materially from these estimates under different assumptions and conditions.
Results Of Operations
Non-GAAP Financial Measures
The following table of certain operating information for the Company is presented with information both inclusive and exclusive of an adjustment to increase the allowance for uncollectible notes and write-off certain Customer Notes in the third quarter 2008. See a discussion below of the allowance adjustment. In presenting these comparative operating results, the Company has included a column which excludes the effect of the allowance adjustment as the Company believes this information is reflective of the Company’s operations for the year ended December 31, 2008. The following comparison of the year ended December 31, 2008 with the year ended December 31, 2009 is based on the 2008 results prior to the allowance adjustment.
Comparison of Year Ended December 31, 2008 to December 31, 2009
In the third quarter 2008, the Company recorded an increase in its estimated uncollectible revenue of $14,549,432 and a reduction in cost of Vacation Ownership Interests owned in the amount of $3,281,615, the “allowance adjustment,” to record the reduction in its expectation of collectibility of both past due and currently performing Customer Notes and consumer notes sold with recourse and the recovered Vacation Ownership Interests as a result. In conjunction with these entries the Company wrote off Customer Notes in excess of 90 days delinquent in the amount of $16,420,471, increased resort property held for sale by $3,281,615 and recognized an income tax benefit of $4,507,127. The reduction in expectation of collectibility was based upon recent economic, financial and credit conditions.
Sales of Vacation Ownership Interests exclusive of the allowance adjustment discussed above decreased 33.0% or $6.2 million in 2009 to $12.6 million from $18.8 million in 2008. The decrease reflects a reduction in scale of sales operations. As part of a comprehensive expense reduction program, the Company closed three of its sales offices in January 2009, and continues to operate two sales offices in Sedona and Tucson at a reduced scale. The decreased revenue is the result of the closures, a reduction in tours to the Sedona and Tucson sales offices during the Chapter 11 proceedings, as well as decreased average sales prices discussed below and lower closing rates at the Tucson sales office due to general economic conditions and the impact of the Chapter 11 filing by the Company. Upgrade revenue decreased 42.9% to $2.7 million in 2009 from $4.7 million in 2008. The decrease reflects decreased marketing efforts to existing owners in Sedona and Tucson. The average sales price per Vacation Ownership Interest sold (excluding Upgrades) decreased 14.4% to $14,459 in 2009 compared to $16,895 in 2008 due to a change in the product mix sold and special promotional pricing following the Company’s Chapter 11 filing. The average sales price per Vacation Ownership Interest sold including Upgrades decreased 18.5% to $18,288 in 2009 from $22,444 in 2008 due to the decrease in average sales price per Vacation Ownership Interest sold (excluding upgrades) described above together with the reduction in upgrade revenue.
The number of Vacation Ownership Interests sold decreased 17.2% to 708 in 2009 from 855 in 2008. Sales of Vacation Ownership Interests in 2009 included 591 biennial Vacation Ownership Interests (counted as 295.5 annual Vacation Ownership Interests) and 412 annual Vacation Ownership Interests compared to 974 biennial Vacation Ownership Interests (counted as 489 annual Vacation Ownership Interests) and 368 annual Vacation Ownership Interests in 2008. The decrease is due to the closure of the three sales offices and decreases at the Sedona and Tucson sales offices discussed above.
Resort operating revenues decreased 6.2% from $20.4 million in 2008 to $19.2 million in 2009, reflecting the closure of the Los Abrigados Lodge, decreased occupancy at the Company’s resorts and decreased average daily rate at certain of the Company’s Arizona and South Bend resorts. The cost of resort operations decreased 18.5% to $14.6 million in 2009 from $17.9 million in 2008. Cost of resort operations as a percentage of resort operating revenue decreased to 76.0% in 2009 from 87.5% in 2008. These decreases reflect expense reduction measures put in place in the first quarter 2009 as well as the closure of Los Abrigados Lodge in March 2009. The Los Abrigados Lodge operated under a long term lease agreement that was rejected as part of the Chapter 11 proceedings and was mainly used to house tour guests and had minimal revenue from other sources. Further, both resort operating revenue and cost of resort operations were negatively impacted in 2009 by the effects of natural disasters and calamity at several of the Company’s resorts including flooding, a hurricane and a gas leak.
Interest and finance income decreased 29.6% to $1.9 million in 2009 from $2.7 million in 2008 reflecting decreased Customer Note balances, a reduction in notes sold at a premium due to the expiration of the agreement in June 2008 with a financial institution to sell Customer Notes, a greater portion of Customer Notes being a lower overall portfolio weighted average maturity and special interest rates on certain products following the Chapter 11 filing.
Cost of Vacation Ownership Interests recovered of $3,281,615 was recorded in 2008 in conjunction with the write off of consumer notes receivable discussed above. Cost of Vacation Ownership Interests sold exclusive of the Vacation Ownership Interest recovered as a percentage of Vacation Ownership Interest sales was consistent at 13.3% in 2009 and 13.8% in 2008.
Sales and marketing as a percentage of sales of Vacation Ownership Interests decreased to 66.8% in 2009 compared to 78.6% in 2008 reflecting lower marketing costs per tour and reduced sales office expenses, mostly related to the rejection of leases for less effective marketing venues and other cost cutting strategies.
General and administrative expenses decreased 23.8% to $4.8 million in 2009 from $6.3 million in 2008. General and administrative expenses decreased between years as a percentage of total revenues from 15.1% in 2008 to 14.3% in 2009. The decreases reflect reductions in professional fees related to the Greens of Las Vegas lawsuit settled in 2008 and employee benefit plans, a decrease in salaries and related benefits as a result of a reduction in force and comprehensive salary reductions in January 2009 as well as a decrease in rent and other expenses resulting from the rejection of a lease as part of the Bankruptcy filing discussed in Note 1.
Income from land and other, net for 2008 includes a net gain of $100,990 on the sale of Vacation Ownership Interests to Premiere Vacation Club.
Interest expense increased 7.2% from $2.6 million in 2008 to $2.8 million in 2009, reflecting reductions in rate on variable rate borrowings and lower outstanding balances, net of reduced capitalized interest.
Reorganization items include loss on disposal of facilities and other and professional fees and include items of income, expense, gain or loss that are realized or incurred by the Company because it is in reorganization. The loss on disposal of facilities and other includes estimated uncollectible revenue, the write-off of lease acquisition costs, deposits, leasehold improvements and other items related to the rejection of seven unexpired leases, loss on extinguishment of HOA receivables and trustee fees. Professional fees are expenses for legal and expert counsel.
Liquidity and Capital Resources
Sources of Cash
The Company requires funds to make capital improvements and support current operations. Cash provided by operating activities was $3.9 million in 2009 and $1.3 million in 2008. The increase in cash provided by operations from 2008 to 2009 reflects a reduction in net loss, inclusive of reorganization items, and the resultant smaller income tax benefit, a net decrease in resort property under development and resort property held for Vacation Ownership Interest sales due to greater additions in 2008 for the expansion of Premiere Vacation Club at Bell Rock and the Winner’s Circle suites at Los Abrigados, and an increase in accounts payable due to non payment of pre-petition amounts. These are offset by a reduction in estimated uncollectible revenue due to the 2008 increased allowance and write-off of uncollectible Customer Notes receivable, an increase in other assets for a cash reserve retained by the Company’s credit card processor, and a decrease in accrued and other liabilities due to a timing difference in payroll and payroll related accruals.
The Company generates cash primarily from the sale of Vacation Ownership Interests (including Upgrades), the financing of Customer Notes from such sales and resort operations. Because the Company uses significant amounts of cash in the development and marketing of Vacation Ownership Interests, but collects the cash on the Customer Notes receivable over a long period of time, borrowing against and/or selling receivables is necessary to provide sufficient cash to fund its normal operations. As discussed earlier, the Company’s credit facility expired in December 2009. The Company was unable to borrow under its facility after its Chapter 11 filing, but does have the use of cash collateral generated by customer payments under a motion granted by the Bankruptcy Court.
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 the Company receives cash either in the form of a down payment, as an installment payment or from proceeds from the sale of the Customer Note. The deferral of income tax liability conserves cash resources on a current basis. Interest may be imposed, however, on the amount of tax attributable to the installment payments for the period beginning on the date of sale and ending on the date the related tax is paid. If the Company is otherwise not subject to tax in a particular year, no interest is imposed since the interest is based on the amount of tax paid in that year. The consolidated financial statements do not contain an accrual for any interest expense that would be paid on the deferred taxes related to the installment method, as the interest expense is not estimable.
Uses of Cash
Investing activities typically reflect a net use of cash because of capital additions. Net cash used in investing activities in 2008 and 2009 was $2.0 million and $0.1 million, respectively. The decrease in net cash used in investing activities is due to reduced ILX-Bruno capital expenditures for projects in Sedona.
Net cash used in financing activities was $0.6 million in 2008 and $2.0 million in 2009. The increase in cash used in financing activities in 2009 is due to the post petition discontinuation of advances against new consumer notes, net of the repayment in 2008 of a note payable to affiliates and the post petition use of cash collateral for operations rather than for debt service.
Customer defaults typically 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. However, under the stay discussed in Part I, the Company is not currently repaying borrowings against such notes.
Credit Facilities and Capital
The Company’s agreement with a financial institution for a commitment of $30.0 million under which the Company sold certain of its Customer Notes expired in June 2008. The agreement provided for sales on a recourse basis with a purchase rate of prime plus 2.75%. Customer Notes were sold at discounts or premiums to the principal amount in order to yield the purchase rate, with the premium held back by the financial institution as additional collateral.
The Company also had a financing commitment for $20.0 million whereby the Company could borrow against notes receivable pledged as collateral. The Company was unable to borrow under this commitment after its Chapter 11 filing in March 2009. These borrowings bear interest at a rate of prime plus 1.5%, had a draw period through December 2009 and a maturity date of 2013.
In January 2008, the Company amended an existing note payable due March 1, 2008 with a principal balance of $214,350 to extend the maturity date to March 1, 2010. All other terms remain unchanged.
In February 2008, the Company amended an existing construction loan to provide for an additional $1.9 million in financing, increase the interest rate by 1.0% to 10.0% and extend the maturity date to February 2013. All other terms remained the same.
In October 2008, the Company amended an existing line of credit with a borrowing limit of $1,750,000 to extend the maturity date to September 30, 2009, and in January 2009 reduced the borrowing limit to $750,000 and changed the interest rate to libor plus 3.84%, but not less than 4.25%, from prime plus 1%. The outstanding balance of this line of credit is currently stayed due to the Company’s Chapter 11 filing.
In December 2008, the Company amended an existing $1.0 million line of credit to extend the maturity date to May 31, 2009. The outstanding balance of this line of credit is currently stayed due to the Company’s Chapter 11 filing.
In July 2007, the Company sold land and a building in Sedona, Arizona for approximately $0.9 million. The note payable secured by the property with a balance of $257,344 was paid in full as part of the transaction. The Company is leasing the property back under a five year lease agreement at $6,667 per month and had an option to and had agreed to repurchase the property for $1.1 million at the end of the lease term. As consideration for the option, the Company would pay $20,000 each year beginning August 1, 2007 for five years, all of which would apply to the purchase price. In April 2008, the Company paid an advance deposit of $200,000 in satisfaction of the remaining option payments and the repurchase price was reduced to $800,000.
In October 2007, ILX-Bruno entered into a promissory note to borrow $2.0 million for working capital including planning, development and carrying costs of the 22 acres of land in Sedona. The note bears interest at prime plus 1.5% with a minimum interest rate of 8.0% payable monthly. The principal balance on the note was due October 4, 2009. In conjunction with this promissory note, the Company entered into a guaranty agreement with the lender under which the Company guarantees performance of the terms of the promissory note. The outstanding balance of this line of credit is currently stayed due to the Company’s Chapter 11 filing.
On March 1, 2009, a Loan and Security Agreement in the original amount of $5.0 million with Textron Financial Corporation (the “Lender”) was terminated. The loan’s original maturity date was December 31, 2008 but was extended to February 28, 2009 by two separate letter agreements. The outstanding principal balance on the loan was $4,577,874 as of March 1, 2009. The Company and the Lender were unable to reach a mutually acceptable longer term extension of the loan. The loan is secured by an assignment of a Promissory Note to the Company and a Deed of Trust from ILX-Bruno securing approximately 14 acres of land in Sedona, Arizona.
The Company is not in compliance with certain of its loan covenants which include Debt Service Coverage Ratios and a Tangible Net Worth ratio. In addition, the March 2009 Chapter 11 filing constitutes an event of default under the Company’s loan agreements.
Under the contemplated Joint Plan, material additional credit facilities are not anticipated to be required. Under the Plan or otherwise, as part of its reorganization, the Company may negotiate additional credit facilities, including leases, issue corporate debt, issue equity securities, or any combination of the above. Any debt incurred or issued by the Company may be secured or unsecured, may bear interest at fixed or variable rates of interest, and may be subject to such terms as management and the Bankruptcy Court 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 continues to assess its liquidity position due to its reorganization status, the scarcity of capital and uncertainty of the credit markets, current economic conditions, sales challenges as a result of the foregoing and the expenses associated with the Chapter 11 Bankruptcy proceedings.
Off-Balance Sheet Arrangements
In April 2008, the Sedona Vacation Club Incorporated homeowners’ association (“SVC”) and the Premiere Vacation Club homeowners’ association (“PVC”) entered into loan agreements to borrow up to $350,000 and $900,000, respectively, at an interest rate of 6.15% to finance renovations and the purchase of certain equipment for resort operations. The borrowings have a maturity date of March 31, 2011. The Company has guaranteed the borrowings, including interest, for both SVC and PVC and has entered into a Guarantee Fee Agreement with SVC and PVC under which it received a guarantee fee of 1.0% of the maximum principal amount under the loan agreements. The amounts outstanding under the loan agreements as of December 31, 2009 were $833,333.
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 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 two 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 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company typically derives a portion of income from the spread between the interest rates charged to customers and the interest rates at which it borrows against customer notes or at which it sold customer notes. The Company’s indebtedness bears interest at variable rates while the retained customer notes bear interest at fixed rates. As a result, increases in interest rates could cause interest expense to exceed interest income on the Company’s portfolio of retained customer notes. The Company does not currently engage in interest rate hedging transactions. Therefore, any change in the prime interest rate could have a material effect on results of operations, liquidity and financial position. If there were a one-percentage point change in the prevailing prime rate at December 31, 2009, then based on the $17.6 million balance of variable rate debt at December 31, 2009, interest expense would increase or decrease by approximately $176,000 (before income taxes) per annum.
Item 8. Financial Statements and Supplementary Data
See the information set forth on Index to Consolidated Financial Statements appearing on page F-1 of this Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
The Company is neither a large accelerated filer nor an accelerated filer as those terms are defined in Rule 126-2 of the Exchange Act, therefore information is in Item 9A.(T).
Item 9A(T). Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company has established disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) to ensure that material information relating to the Company is made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's (“SEC”) rules and forms. Under the supervision and with the participation of management, including the principal executive officer and principal financial officer an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2009 was completed based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are functioning effectively.
Management's Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s principal executive officer and principal financial officer to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements and, even when determined to be effective, can only provide reasonable, not absolute, assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate as a result of changes in conditions or deterioration in the degree of compliance.
At December 31, 2009, management assessed the effectiveness of the Company’s internal control over financial reporting based on COSO framework. Based on the assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2009 and provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles.
This annual report on internal control over financial reporting (“Annual Report”) does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Certain information concerning the directors as of February 28, 2010 is set forth below. Except as set forth herein, none of the directors are officers or directors of any other publicly owned corporation or entity.
Steven R. Chanen >has served as a director of the Company since July 1995 when he was elected as an independent director. Mr. Chanen has served as President of Chanen Construction Company, Inc., Phoenix, Arizona, since 1989. Chanen Construction, formed in 1955, is a premier builder in the Southwest with such projects as Terminals 2 and 4 at Phoenix Sky Harbor International Airport, the 535-room Sheraton Hotel at Fisherman’s Wharf in San Francisco, California and the Midwestern University Medical School campuses in Glendale, Arizona and Chicago, Illinois. Prior thereto, Mr. Chanen served as shareholder and director of Wentworth & Lundin law firm from 1980 to 1986, practicing in the areas of corporate finance and securities. Mr. Chanen received B.S. and J.D. degrees from Arizona State University.
Wayne M. Greenholtz >has served as a director of the Company since April 2003 when he was elected as an independent director. Mr. Greenholtz is President of Nedra Capital, an independent specialty finance and consulting company which he founded in January 2000. From 1995 until 2000, Mr. Greenholtz served as Senior Vice President of Litchfield Financial Corporation, overseeing the operations of their Denver, Colorado facility until the company was acquired by Textron Financial Corporation. For twelve years prior to 1995, Mr. Greenholtz was Senior Vice President and Chief Operating Officer for Government Employees Financial Corporation, a subsidiary of GEICO Corporation that specialized in banking, finance and resort development, marketing and finance. Overall, Mr. Greenholtz has in excess of 30 years experience in financial services, with emphasis in serving the resort/hospitality industry. Mr. Greenholtz attended the University of Maryland.
Joseph P. Martori >has served as a director of the Company since its inception and as Chairman of the Board since 1991. Mr. Martori served as President from November 1993 through 1995 and has served as Chief Executive Officer since 1994. Prior thereto, Mr. Martori was engaged in the private practice of law since 1967 with the New York City law firm of Sullivan & Cromwell; the Phoenix law firms of Snell & Wilmer; Martori, Meyer, Hendricks & Victor, P.A. (of which he was a founding member); and Brown & Bain, P.A. (of which he was the Chairman of the Corporate, Real Estate and Banking Department). Mr. Martori was a founder of Firstar Metropolitan Bank & Trust in Phoenix and served on its Board of Directors from 1983 to 2001. Mr. Martori is Chairman of the Board of MEI, an investment company that holds 16.8% of the Company’s outstanding Common Stock. Mr. Martori is a member of the Board of Trustees of The Lawyers’ Committee for Civil Rights under Law. Mr. Martori received a B.S. degree and an M.B.A. degree in finance from New York University and a J.D. degree from the University of Notre Dame Law School. Mr. Martori is the father of Joseph P. Martori, II.
Joseph P. Martori, II >has served as Vice Chairman of the Company since March 2007 and as a director since July 1999. He has been employed by the Company since October 1995, has been a Vice President since June 1996, a Senior Vice President since June 2000, an Executive Vice President since June 2001 and Chief Sales and Marketing Officer since March 2007. From September 1993 until August 1995, Mr. Martori attended the University of New Mexico in the Anderson School of Management MBA program. Mr. Martori holds a B.S. degree in Agriculture from the University of Arizona. Joseph P. Martori, II is the son of Joseph P. Martori.
Patrick J. McGroder III >has served as a director of the Company since June 1997 when he was elected as an independent director. Mr. McGroder has been a trial lawyer engaged in the practice of law since 1970, currently with the law firm of Gallagher & Kennedy, P.A. Prior thereto, Mr. McGroder served as a member of the law firm of Goldstein & McGroder, Ltd. of Phoenix, Arizona (which he co-founded) from 1990 through 2001. Mr. McGroder received a B.A. degree from the University of Notre Dame and a J.D. degree from the University of Arizona School of Law.
James W. Myers> has served as director of the Company since June 2004 when he was elected as an independent director and from July 1995 through December 2002. Mr. Myers has served as Chief Executive Officer of Myers Management and Capital Group, Inc., a management consulting firm he founded, since December 1995 and was also Chief Executive Officer for CMC Golf, Inc. from 2003 through December 2007. Effective January 2008, Mr. Myers moved from Chief Executive Officer to Chairman of CMC Golf, Inc. From 1986 to 1995, Mr. Myers was President and Chief Executive Officer of Myers Craig Vallone Francois, Inc., an investment banking and management advisory firm he also founded. Prior thereto, Mr. Myers held executive positions with a variety of public and private companies from 1956 to 1986. Mr. Myers also serves as a director of China Mist Tea, CMC Golf, Inc., Landiscor, Inc., and Science Care. Mr. Myers received a B.S. degree from Northwestern University and an M.B.A. degree from the University of Chicago.
Nancy J. Stone >has served as Vice Chairman of the Company since March 2007 and as a director of the Company since April 1989, and as President and Chief Operating Officer since January 1996. Ms. Stone served as Chief Financial Officer of the Company from July 1993 to December 1997, as well as from January 1990 to April 1992, and as Executive Vice President from July 1993 to December 1995. Ms. Stone also served as Vice President of Finance and Secretary of the Company from April 1987 to December 1989. She is a Certified Public Accountant in the State of Arizona. Ms. Stone received a B.A. degree in accounting and finance from Michigan State University and an M.B.A. degree from Arizona State University.
Steven A. White >has served as a director of the Company since September 2001 when he was elected as an independent director. Mr. White has served as Chief Executive Officer of The Boston Financial Corporation, a financial consulting and real estate finance company, since 1974.
Edward S. Zielinski >has served as a director and Executive Vice President of the Company since January 1996, and as President and Chief Operating Officer of Varsity Clubs of America Incorporated since July 1997. Mr. Zielinski served as Senior Vice President of the Company from January 1994 to December 1995 and as General Manager of Los Abrigados Resort & Spa from December 1992 until January 1994, and in various other executive positions with the Company since November 1988. Mr. Zielinski has more than twenty-five years of resort management and marketing experience in both domestic and international markets.
The following table sets forth certain information concerning the Company’s executive officers and certain key employees. Except as otherwise noted, none of the executive officers are directors or officers of any other publicly owned corporation or entity.
Joseph P. Martori >has served as a director of the Company since its inception and as Chairman of the Board since 1991. Mr. Martori served as President from November 1993 through 1995 and has served as Chief Executive Officer since 1994. Prior thereto, Mr. Martori was engaged in the private practice of law since 1967 with the New York City law firm of Sullivan & Cromwell; the Phoenix law firms of Snell & Wilmer; Martori, Meyer, Hendricks & Victor, P.A. (of which he was a founding member); and Brown & Bain, P.A. (of which he was the Chairman of the Corporate, Real Estate and Banking Department). Mr. Martori was a founder of Firstar Metropolitan Bank & Trust in Phoenix and served on its Board of Directors from 1983 to 2001. Mr. Martori is Chairman of the Board of MEI, an investment company that holds 16.8% of the Company’s outstanding Common Stock. Mr. Martori is a member of the Board of Trustees of The Lawyers’ Committee for Civil Rights under Law. Mr. Martori received a B.S. degree and an M.B.A. degree in finance from New York University and a J.D. degree from the University of Notre Dame Law School. Mr. Martori is the father of board member and executive officer Joseph P. Martori, II.
Nancy J. Stone >has served as Vice Chairman since March 2007 and as a director of the Company since April 1989 and as President and Chief Operating Officer since January 1996. Ms. Stone served as Chief Financial Officer of the Company from July 1993 to December 1997, as well as from January 1990 to April 1992, and as Executive Vice President from July 1993 to December 1995. Ms. Stone also served as Vice President of Finance and Secretary of the Company from April 1987 to December 1989. She is a Certified Public Accountant in the State of Arizona. Ms. Stone received a B.A. degree in accounting and finance from Michigan State University and an M.B.A. degree from Arizona State University.
Joseph P. Martori, II >has served as Vice Chairman since March 2007 and as a director of the Company since July 1999. He has been employed by the Company since October 1995, has been a Vice President since June 1996, a Senior Vice President since June 2000, an Executive Vice President since June 2001 and Chief Sales and Marketing Officer since March 2007. From September 1993 until August 1995, Mr. Martori attended the University of New Mexico in the Anderson School of Management MBA program. Mr. Martori holds a B.S. degree in Agriculture from the University of Arizona. Joseph P. Martori, II is the son of Joseph P. Martori.
Edward S. Zielinski >has served as a director and Executive Vice President of the Company since January 1996, and as President and Chief Operating Officer of Varsity Clubs of America Incorporated since July 1997. Mr. Zielinski served as Senior Vice President of the Company from January 1994 to December 1995 and as General Manager of Los Abrigados Resort & Spa from December 1992 until January 1994, and in various other executive positions with the Company since November 1988. Mr. Zielinski has more than twenty-five years of resort management and marketing experience in both domestic and international markets.
Margaret M. Eardley >has served as Executive Vice President and Chief Financial Officer of the Company since October 2001 and from March 2000 to July 2000 and Secretary since December 2004. Ms. Eardley was Vice President, Chief Financial Officer and Chief Operating Officer of Republic Western Insurance Company from August 2000 to 2001. Ms. Eardley received a B.S. degree in Finance from Arizona State University and an M.B.A. from the University of Phoenix.
Thomas F. Dunlap> has served as Executive Vice President since September 2002. Mr. Dunlap oversees certain of the Company’s sales and marketing operations. Prior thereto, Mr. Dunlap served as Vacation Ownership Director for London Bridge Resort from June 1990 to July 2001. Mr. Dunlap has more than twenty-five years of sales and marketing experience in the vacation ownership industry.
Ty D. Krehbiel> has served as Executive Vice President since April 2006. He served as Senior Vice President of the Company since February 2006 and as a Vice President since June of 1998. Mr. Krehbiel's direct responsibilities within the organization have included management of sales and marketing of vacation ownership interests at multiple locations, as well as overseeing resort operations, sales and marketing at Kohl’s Ranch. Mr. Krehbiel has more than fifteen years of management tenure with the Company in sales and marketing of vacation ownership interests.
The Company has adopted a code of ethics that applies to the registrant’s executive officers. The code can be viewed on the Corporate Governance section of the Company’s website, www.ilxresorts.com.
Board of Directors and Committees of the Board of Directors Meetings
The Board of Directors of the Company met six times during the fiscal year ended December 31, 2009. All directors attended a minimum of 75% of the meetings of the Board of Directors, during the period they served as a director, and the Committees of the Board of Directors, if any, upon which such director served during the 2009 fiscal year. The Company does not have a policy regarding board members’ attendance at annual meetings; however, all directors but one were present at the 2009 annual meeting.
Shareholders may send communications to the Board of Directors at: Board of Directors, ILX Resorts Incorporated, 2111 E. Highland Avenue, Suite 200, Phoenix, Arizona 85016. Please specify individual director’s name on envelope if appropriate. All communications from shareholders are sent directly to the directors.
The Company does not have a policy regarding consideration of director candidates recommended by shareholders, but it does consider director recommendations from all sources. Recommendations for director candidates submitted to the Secretary of the Company will be provided to the Board of Directors.
For purposes of determining independence, the Board observes all criteria for independence established by the SEC.
The Board of Directors maintains an audit committee (“Audit Committee”), a compensation committee (“Compensation Committee”), and an executive committee.
The Audit Committee, which consists of Messrs. Greenholtz, McGroder and White, met four times during fiscal year 2009. The Audit Committee is responsible for appointing, compensating and overseeing the work of the Company’s independent auditors, reviewing with the independent auditors the scope and results of the audit engagement, establishing and monitoring the Company’s financial policies and control procedures, and engaging, reviewing and monitoring the provision of non-audit services by the Company’s auditors. The Audit Committee operates under a written charter, a copy of which is available in the Corporate Governance section of the Company’s website, www.ilxresorts.com, or by writing to Attention: Corporate Secretary, 2111 E. Highland Ave., Suite 200, Phoenix, AZ 85016.
The Compensation Committee, which consists of Messrs. Chanen, McGroder, and White met once during fiscal year 2009. The Committee does not have a charter, but the function of the Committee is to provide recommendations to the Board of Directors regarding the compensation of executive officers of the Company and regarding the compensation policies and practices of the Company. The Compensation Committee also administers the Company’s Stock Bonus Plan.
Compensation Committee Interlocks and Insider Participation
None of the members of the Compensation Committee during 2009 and continuing through 2010 is or has been an officer or employee of the Company. There are no Compensation Committee interlock relationships with respect to ILX.
AUDIT COMMITTEE REPORT
The Board of Directors maintains an Audit Committee comprised of three of the Company’s independent directors.
The Audit Committee oversees the Company’s financial process on behalf of the Board of Directors. Management has the primary responsibility for the consolidated financial statements and the reporting process including the systems of internal controls. The Audit Committee has reviewed and discussed the audited financial statements with management.
The Audit Committee has also reviewed the audited financial statements with the independent auditors and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing standards, including Statement on Auditing Standards No. 61 as may be modified or supplemented. In addition the Audit Committee has discussed with the independent auditors the auditors’ independence from management and the Company including the matters in the written disclosures and the letter from the independent auditors required by the Independence Standards Board Standard No. 1 as may be modified or supplemented.
Based on the reviews and discussions above, the Audit Committee has recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
THE ILX RESORTS INCORPORATED AUDIT COMMITTEE
Wayne M. Greenholtz
Patrick J. McGroder III
Steven A. White
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, the Company’s directors, its executive officers, and any persons holding more than ten percent of the Company’s Common Stock are required to report their initial ownership of the Company’s Common Stock and any subsequent changes in that ownership to the Securities and Exchange Commission. Based solely upon the written representations of the Company’s directors, executive officers and ten percent holders and review of Forms 3, 4, and 5 and amendments thereto furnished to the Company, the Company is not aware of any late filing for the year ended December 31, 2009.
Item 11. Executive Compensation
Compensation Discussion and Analysis
We rely on our executives’ judgment, initiative and effort in order to operate successfully. Therefore, we strive to compensate our executives in order to align their interests with our long-term interests and those of our shareholders. Our compensation plan is designed to attract and retain qualified senior executives and reward them for their contribution to our leadership, growth and profitability. The Chief Executive Officer and President provide input to the members of the Compensation Committee to set compensation programs. Our compensation components include a mix of base salary, discretionary bonuses, discretionary equity based grants and retirement programs for all executives and, for certain executives who oversee our sales operations, compensation may also include commission as a percentage of vacation ownership interest sales.
The base salary component, as noted in column (c) of the Summary Compensation Table, is the principal component of all executive compensation except for certain executives who oversee our sales operations. We consider each executive’s position compared to other executives, their areas of responsibility, their performance and achievement of past performance objectives. We also informally gather salary information from our peer group or similar companies. In 2008, the base salary component remained equal at $200,000 for all Executive Vice Presidents, except for certain executives whose primary responsibility is the sale of vacation ownership interests, in order to foster a teamwork atmosphere and communicate that we are all equally responsible for the success of our objectives. In addition, the President’s base salary remained at $125,000 more than that of the Executive Vice Presidents’ as compensation for her additional leadership and responsibility. In January 2008, the Chief Executive Officer voluntarily reduced his salary from $450,000 to $325,000. In response to the continued difficult economic climate and its impact on our business, in January 2009 all Executive Vice Presidents’ currently payable base salaries (except for those executives whose primary responsibility is the sale of vacation ownership interests) were reduced to $150,000, the President’s currently payable base salary was reduced to $225,000 and the Chief Executive Officer’s currently payable base salary was reduced to $150,000, with the difference between their prior salaries and the currently paid portion being deferred compensation covered under the Executive Retention Deferred Compensation Plan (“Retention Plan”). The Retention Plan is administered by the Compensation Committee and was designed to retain senior executives through challenging economic times. Senior executives covered by the Retention Plan shall vest in their deferred compensation at a schedule established by the Compensation Committee. Confirmation of the Plan or Joint Plan shall result in full vesting for senior executives employed at the date of confirmation. The Compensation Committee may also grant cash bonuses in an amount to cover the payroll taxes on the payment of deferred compensation. The Compensation Committee has approved the grant of such payroll taxes in an amount not to exceed $48,000 to the Chief Financial Officer. The Summary Compensation Table indicates only the salary portion paid in cash and excludes the deferred salary and reflects additional compensation as there was one additional pay period in 2009 due to our third party payroll processor’s inability to process payroll on January 1, 2010.
The Executive Vice President’s whose primary responsibility is the sale of vacation ownership interests are principally compensated on commissions as a percentage of vacation ownership interest sales. The commission component is indicated in column (d) of the Summary Compensation Table. The percentage is confidential and could result in competitive harm if disclosed. We determine the percentage by analyzing profit margins of sales of vacation ownership interests.
We adopted the Stock Bonus Plan, after shareholder approval, in 2005. The Stock Bonus Plan encourages and enables executives and certain other employees to acquire and retain common stock ownership, aids in retention and compensates them for contributions to our growth and profits. We evaluate the Company’s overall results as well as each executive’s annual performance in December and typically issue shares under the Stock Bonus Plan in January. The shares normally vest in three years and require the recipient to be employed on the vesting date in order to encourage longevity. We did not issue any shares to Executive Officers in 2008 or 2009. The breakdown of the value of shares issued to each named executive officer is noted in column (e) of the Summary Compensation Table. The value is determined as 80% of our stock price on the date of issuance. The expense is deferred and recognized pro-rata over the vesting period. The unrecognized portion for shares issued in 2007 is in deferred compensation on our balance sheet. Each named executive’s number and value of unvested shares issued under the Stock Bonus Plan in 2007 are listed in the Outstanding Equity Awards At Fiscal Year-End table under the Stock Awards columns. The value of each executive’s stock will be added to their taxable earnings in the year in which their shares are fully vested.
We had an Employee Stock Ownership Plan for the benefit of all employees, including executives which was terminated in December 2009. We previously determined total contributions to the Plan based on overall profitability and allocations to individuals were based on participant earnings and formulas defined in the Plan that comply with Internal Revenue Service regulations. No contribution was made to the Employee Stock Ownership Plan for the years ended December 31, 2008 or December 31, 2009.
We have no employment contracts with any of our executives. However, certain senior executives are covered by the Retention Plan as previously described. In addition, the Compensation Committee and Board of Directors have approved the payment of $200,000 severance to the President payable upon confirmation of the Joint Plan. In addition, the Compensation Committee has approved payment to the CFO of $5,000 per month for nine months payable commencing on the closing date of the Joint Plan in exchange for her continued employment through such period as the Company requires to wind up its business affairs.
We comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (“Tax Code”). The Tax Code limits the corporate deduction for aggregate compensation paid to Named Executive Officers to $1,000,000 per year, unless certain requirements are met. We have reviewed the impact of the Tax Code provision on the current compensation package for the Named Executive Officers and none of the Named Executive Officers will exceed the applicable limit. We will continue to review the impact of this Tax Code Section and make appropriate recommendations to shareholders in the future.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K with management and has recommended to the Board of Directors that it be included in the Company’s Form 10-K.
The ILX RESORTS INCORPORATED COMPENSATION COMMITTEE
Steven R. Chanen
Patrick J. McGroder, III
Steven A. White
The table below summarizes the total compensation paid or earned by the Chief Executive Officer, the Chief Financial Officer and the other most highly compensated executive officers for the fiscal years ended December 31, 2007, December 31, 2008 and December 31, 2009.
SUMMARY COMPENSATION TABLE
Stock Bonus Plan
The Company’s Stock Bonus Plan is administered by the Compensation Committee which selects the persons to whom stock is granted and determines the terms and conditions of each grant.
The purpose of the Stock Bonus Plan is to advance the interests of the Company and its shareholders, by encouraging and enabling selected officers, directors, consultants and key employees upon whose judgment, initiative and effort the Company is largely dependent for the successful conduct of its business, to acquire and retain a proprietary interest in the Company by ownership of its stock, to keep personnel of experience and ability in the employ of the Company and to compensate them for their contributions to the growth and profits of the Company and thereby induce them to continue to make such contributions in the future.
The Stock Bonus Plan provided for establishment of a Bonus Share Reserve to which 600,000 shares of the Company’s common stock were credited, 250,000 of which to be authorized and unissued shares of the Company's common stock or treasury stock, and 350,000 of which to be purchased by the Company on the open market or from affiliates of the Company, including from MEI, an entity controlled by Joseph P. Martori. Through December 31, 2009, 216,685 remain in the authorized and unissued shares of the Company or treasury stock and 266,000 shares remain available to purchase on the open market or from affiliates. All purchases by the Company on the open market or from affiliates are approved by a majority of the Company's independent directors. The price of shares acquired from affiliates is determined by a majority of the Company's independent directors, but may not exceed the fair market value of such shares at the time of purchase, and, if such shares are then listed on the NYSE AMEX Exchange or other recognized exchange or Nasdaq, the fair market value of such shares is the average of the mean between the opening and closing price as reported by such exchange or Nasdaq for each trading day over the 30 day period ending on the date of such purchase (“Agreement Date”). Pursuant to Section 16 under the Exchange Act of 1934, the affiliate may not acquire shares of the Company's common stock, except pursuant to a transaction exempt from Section 16(b), within the six-month period preceding or following the Agreement Date. Any Bonus Shares forfeited by Recipients are credited back to the Bonus Share Reserve. There were no shares issued to Named Executive Officers for the years ended December 31, 2008 and December 31, 2009.
Outstanding Equity Awards at Fiscal Year End
The following table summarizes stock awards that vested during the year ended December 31, 2009.
Option Exercises and Stock Vested